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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K\A
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the fiscal year ended December 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
Commission File Number 1-10874
MESA Inc.
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(Exact Name of Registrant as Specified In Its Charter)
Texas 75-2394500
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1400 Williams Square West
5205 North O'Connor Boulevard
Irving, Texas (972) 444-9001 75039-3746
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(Address of Principal (Registrant's (Zip Code)
Executive Offices) Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $.01 par value......................... New York Stock Exchange
Series A 8% Cumulative Convertible Preferred Stock... New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
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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.
Number of common shares outstanding as of the close of business on March
24, 1997: 64,279,568
Aggregate market value of 62,686,137 common shares held by non-affiliates
of Registrant at the closing price on April 28, 1997, of $4.875: approximately
$305.6 million.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures
2
PART I
Item 1. Business
MESA
MESA Inc. ("MESA" or the "Company"), is one of the largest independent oil
and gas companies in the United States and has undergone a transformation over
the last twelve months that positions it for renewed growth. From 1991 through
1996, significant leverage and weak commodity prices forced MESA to focus on
servicing and restructuring its debt rather than expanding its business. In
mid-1996, MESA completed a recapitalization (the "Recapitalization") led by
Richard E. Rainwater who, along with existing shareholders, injected $265
million of equity into MESA. This equity infusion enabled MESA to substantially
reduce its overall debt level and debt service requirements. The
Recapitalization has enhanced MESA's ability to compete in the oil and gas
industry by substantially increasing its cash flow available for investment, as
well as improving its ability to attract capital.
Having completed a successful financial turnaround, MESA's Board of
Directors elected a new management team led by Jon Brumley, MESA's Chairman and
Chief Executive Officer. MESA is now positioned to increase its reserve base,
production and cash flows by pursuing strategic acquisitions, increasing
exploration activities, exploiting its existing and acquired properties, and
expanding its processing facilities to accommodate increased third party
processing arrangements. MESA's highly developed, long lived reserve base
provides it with a long-term stable source of cash flow to fund this strategy.
As a first step, MESA has entered into an agreement to purchase all of the
outstanding capital stock of Greenhill Petroleum Corporation ("Greenhill") for
$270 million (the "Greenhill Acquisition") and has acquired additional
condensate and natural gas liquid ("NGL") interests in the West Panhandle field
of Texas from MAPCO, Inc. and affiliates ("MAPCO") for $66 million (the
"Liquids Acquisition").
MESA had approximately 1.6 Tcfe of proved reserves as of December 31, 1996
with a net present value before income taxes, discounted at 10%, of
approximately $1.8 billion. Approximately 93% of MESA's estimated proved
reserves are proved developed producing with an estimated reserve life in
excess of 12 years. MESA operates the wells attributable to 95% of its
reserves. Currently, about 95% of MESA's reserves are concentrated in the
Hugoton field in southwest Kansas and the West Panhandle field in Texas. These
fields are considered to be among the premier natural gas properties in the
United States and are characterized by long lived reserves and stable, high
margin production. MESA owns and operates substantially all of the gas
processing facilities that service its reserves in the two fields and
substantially all of the gathering assets related to its Hugoton reserves. MESA
also has a significant and growing presence offshore in the Gulf of Mexico
where it has operated since the early 1970's. MESA currently has interests in
56 blocks in the Gulf of Mexico, covering an aggregate of approximately 141,000
net acres, much of which is covered by 3-D seismic data. The Greenhill and
Liquids Acquisitions further strengthen MESA's asset base as well as provide
MESA with a new core area in the inland waters of
3
Louisiana. After giving effect to the Greenhill and Liquids Acquisitions,
approximately 60% of MESA's total equivalent proved reserves will be natural
gas, 30% will be NGLs and 10% will be oil and condensate. See
"Business -- Properties" and "Management's Discussion and Analysis - Capital
Resources and Liquidity."
MESA is a holding company and conducts its operations through its
subsidiaries; primarily though its direct subsidiary, Mesa Operating Co.
("MOC"). Unless the context otherwise requires, the term "MESA" means MESA Inc.
and its subsidiaries taken as a whole and includes MESA's predecessors. MESA
was formed as a public corporation in 1964. MESA reorganized its business as a
publicly traded limited partnership in 1985 and subsequently converted back to
corporate form in 1991. MESA maintains its principal offices at 1400 Williams
Square West, 5205 North O'Connor Boulevard, Irving, Texas 75039-3746, where its
telephone number is (972) 444-9001. At December 31, 1996 MESA employed 321
employees.
Business Strategy
MESA's goal is to increase shareholder value by expanding its reserve base
and increasing its production and cash flow. To achieve this goal, MESA has
adopted a strategy which includes the following key elements:
Pursue Strategic Acquisitions - MESA seeks to acquire producing properties
which provide one or more of the following characteristics: (i) opportunities
to increase production and reserves through both exploitation and exploration
activities, (ii) geographic diversity, (iii) a greater percentage of oil
reserves in order to diversify MESA's current reserve and production mix and
commodity price exposure and (iv) a high degree of operational control. The
Greenhill Acquisition will provide MESA with 30 million barrels of oil
equivalents ("MMBOE") of proved reserves and has each of these characteristics.
Increase Exploration Efforts - MESA is increasing its exploration program
to provide exposure to selected higher risk projects with higher potential
rates of return such as those in the Gulf of Mexico. MESA's exploratory
drilling program provides for the drilling of eight exploratory wells on its
existing properties and two wells on the Greenhill properties. The 1997
exploratory drilling budget of $24 million represents a four-fold increase over
1996's $6 million expenditures.
Exploit Assets - MESA will seek to maximize the value of its existing and
acquired properties by increasing production and recoverable reserves through
active exploitation activities. MESA contemplates spending approximately $86
million on exploitation activities in 1997 on approximately 100 development
wells (including 22 on the Greenhill properties) and 30 recompletions
(including 22 on the Greenhill properties).
Expand Gas Processing Business - In 1997, MESA intends to spend
approximately $12 million to expand and enhance the processing capabilities of
its state of the art gas processing facilities in the Hugoton and West
Panhandle fields. By owning and operating these processing facilities, MESA is
able to retain the processing margin on the gas it produces as well as capture
fees for processing gas produced by third-parties.
4
Maintain Financial Flexibility - MESA intends to continue to improve its
financial flexibility in order to avail itself of the optimal forms of capital
required to meet the Company's growth objectives.
Subsequent Events
Proposed Merger with Parker & Parsley
On April 6, 1997, MESA and Parker & Parsley Petroleum Company, a Delaware
corporation ("Parker & Parsley"), entered into an agreement and plan of merger
("Merger Agreement") to merge and create Pioneer Natural Resources Company
("Pioneer"), a Delaware corporation (the "Pioneer Merger"). The consummation of
the transactions contemplated in the Merger Agreement is subject to the
approval of the shareholders of each of MESA and Parker & Parsley. If the
Merger Agreement is approved, when the business combination is completed, (i)
each seven outstanding shares of MESA Common Stock will be converted into the
right to receive one share of Pioneer Common Stock ("MESA Conversion Number"),
(ii) each seven outstanding shares of MESA's Series A 8% Cumulative Convertible
Preferred Stock and MESA's Series B 8% Cumulative Convertible Preferred Stock
will be converted into the right to receive either (a) 1.25 shares of Pioneer
Common Stock ("MESA Common Consideration") or (b) one share of Pioneer's Series
A 8% Cumulative Convertible Preferred Stock ("MESA Preferred Consideration), in
each case as the holder thereof shall elect or be deemed to elect (provided
that if the holders of a majority of the outstanding MESA Series A Preferred
Stock or MESA Series B Preferred Stock, each voting as a separate class, vote
in favor of the Merger Agreement, then all holders of the series for which the
vote has been obtained will receive the MESA Common Consideration) and (iii)
each outstanding share of Parker & Parsley Common Stock will be converted into
the right to receive one share of Pioneer Common Stock ("Parker & Parsley
Conversion Number").
In reaching a conclusion to recommend the Merger Agreement, MESA
considered a number of strategic, financial and other factors, including:
GROWTH STRATEGY - MESA considered how the various aspects of combining
with Parker and Parsley to form Pioneer would achieve the expansion and growth
strategies that MESA had established, particularly, increasing reserves,
production and cash flow by expanding into new core areas that would provide a
large inventory of reinvestment projects. MESA believes that the complementary
nature of the two companies will provide a strong foundation for a successful
growth strategy that will produce superior returns to Pioneer's stockholders.
PROPERTY CHARACTERISTICS - MESA considered many aspects of the Parker &
Parsley properties to be attractive in the context of a merger with MESA,
specifically the high level of operational control, the concentration of
reserves, the domestic location of the properties and their long life nature.
MESA believes these four factors combine to give reinvestment projects on these
properties a better chance of success.
BENEFITS OF A LARGER ENTERPRISE - MESA considered that the Pioneer Merger
would create a substantial pool of reserves and production capacity, and
considered the benefits of the potential economies of scale that might arise.
In particular, MESA considered the benefits of purchasing power and operational
synergies and the fact that the combined entity should produce significantly
greater cash flows than MESA, which should allow MESA's stockholders to
participate in opportunities that might not otherwise be available to MESA for
growth through acquisitions, development and exploration, and that would have
different risk and reward characteristics.
IMPROVED CAPITAL STRUCTURE - MESA considered the potential benefits of a
simpler capital structure and larger public equity float, particularly that the
conversion of all of the MESA Series B Preferred Stock and all or a portion of
the MESA Series A Preferred Stock into Pioneer Common Stock in the Pioneer
Merger would lead to a better understanding of the combined entity's equity
value in the investment community. MESA also considered that MESA's
stockholders should enjoy enhanced liquidity as a result of Pioneer's
5
larger stockholder base and the increased visibility resulting from heightened
market research and institutional investor focus on a larger combined entity.
MANAGEMENT - MESA also considered the depth and breadth of management of
Parker & Parsley, including Scott Sheffield, who will serve as Pioneer's Chief
Executive Officer, whom MESA considers to be among the most experienced and
successful builders of independent oil and gas companies in the United States.
FINANCIAL - MESA reviewed a financial analysis of the impact of the
Pioneer Merger on the balance sheet and cash flow of the combined company which
showed, among other things, that discretionary cash flow per share would be
accretive to MESA's shareholders in 1998.
MERGER AGREEMENT - MESA considered the terms and conditions of the Merger
Agreement, including, without limitation, the consideration to be received by
each class of MESA stockholders in the Pioneer Merger (which is anticipated to
be a tax free reorganization) and the stockholder approval requirements of the
Merger Agreement.
Greenhill Acquisition
On April 15, 1997, MESA acquired all of the outstanding capital stock of
Greenhill from Western Mining Corporation (USA) for $267 million. The Greenhill
properties, which are concentrated in four producing areas, had estimated
proved reserves of 30 MMBOE as of December 31, 1996, with a net present value
of estimated future net cash flows before income taxes, discounted at 10%, of
approximately $300 million. These properties have had cumulative historical
production of over 930 MMBOE.
MESA believes that the Greenhill Acquisition satisfies each of the four
characteristics MESA seeks in making strategic acquisitions.
RESERVE AND PRODUCTION GROWTH OPPORTUNITIES - To date, MESA has identified
45 development wells and over 130 recompletion projects it plans to undertake
on the Greenhill properties, including 44 projects MESA plans to initiate in
1997 and at least 25 more it expects to initiate in 1998. The Greenhill
properties also have significant exploration potential, including a number of
subsalt and deeper zone prospects, for which MESA plans to use the extensive
3-D seismic data that it will obtain as part of the Greenhill Acquisition.
GEOGRAPHIC DIVERSITY - The Greenhill reserves are located in the inland
waters of the Louisiana Gulf Coast, the Texas Gulf Coast, offshore in the Gulf
of Mexico and in the Permian Basin. As a result of the Greenhill Acquisition,
the onshore Gulf Coast will become a new core area of operation for MESA.
OIL RESERVES - Greenhill's December 31, 1996, estimated proved reserves
include approximately 23 million barrels ("MMBbls") of oil and condensate and
42 billion cubic feet ("Bcf") of gas. Following the Greenhill Acquisition,
MESA's percentage of total reserves consisting of oil and condensate will
increase from approximately 3% to approximately 10%.
6
OPERATIONAL CONTROL - MESA will operate over 90% of the Greenhill
properties, which include 522 producing wells, allowing MESA to control the
amount and timing of capital expenditures and production.
The closing of the Greenhill Acquisition was financed by borrowings under
the Company's bank credit facility (the "Credit Facility").
Liquids Acquisition
On February 6, 1997 MESA purchased all of MAPCO's condensate and NGL
production interests in the West Panhandle field for $66 million. The Liquids
Acquisition, effective as of January 1, 1997, increases MESA's interest in NGLs
produced from the West Panhandle field properties that MESA operates to
approximately 96%. MESA has been recovering such NGLs at its Fain plant since
December 1996 and MESA believes that the Liquids Acquisition is an important
step in MESA's strategic objective of expanding its NGL and gas processing
business. The transaction is expected to result in 850,000 barrels ("Bbls") of
additional production in 1997 and the addition of an estimated 11 MMBbls of
proved reserves in 1997.
Recent Lease Sale
At the March 5, 1997 Central Gulf of Mexico lease sale, MESA was the high
bidder on 4 of the 10 blocks on which it bid. MESA exposed $2.3 million and
will spend $0.7 million if the Minerals Management Service ("MMS") awards all
four leases to MESA. These blocks are: Eugene Island 207, South Marsh Island
120, Vermilion 206 and West Cameron 627. If the bids are approved by the MMS,
MESA's offshore lease inventory, which now covers 56 blocks on nearly 141,000
net acres, would increase to 60 blocks and 158,000 net acres.
Properties
Approximately 95% of MESA's estimated proved reserves as of December 31,
1996, were concentrated in the Hugoton field of southwest Kansas and the West
Panhandle field of Texas. These fields, which produce gas from depths of 3,500
feet or less, are characterized by stable, long lived, low cost production.
MESA's Gulf of Mexico properties have significant exploitation and exploration
potential.
7
Reserves
The following table summarizes the estimated proved reserves and estimated
future cash flows associated with MESA's oil and gas properties, by major areas
of operations, as of December 31, 1996, as estimated in accordance with
Securities and Exchange Commission ("Commission") guidelines:
<TABLE>
<CAPTION>
------------------------------------------------
West Gulf of
Hugoton Panhandle Mexico Other Total
--------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Proved reserves:
Natural gas (MMcf)...... 691,412 288,444 27,332 30,534 1,037,722
Natural gas liquids
(MBbls)................ 45,418 42,498 120 15 88,051
Oil and condensate
(MBbls)................ -- 3,971 2,188 704 6,863
Natural gas
equivalents (MMcfe).... 963,920 567,258 41,180 34,848 1,607,206
% Developed............ 99.9% 91.8% 82.1% 34.2% 95.2%
% Natural gas.......... 71.7% 50.8% 66.4% 87.6% 64.6%
Present value of future
net cash flows, before
income taxes,
discounted at 10%
(in millions).......... $1,129.7 $611.4 $67.6 $26.9 $1,835.6
Present value of future
net cash flows, after
income taxes,
discounted at 10%
(in millions).......... $857.8 $464.2 $51.3 $20.4 $1,393.7
</TABLE>
The estimates of MESA's proved reserves as of December 31, 1996 are based
upon (i) the report of Williamson Petroleum Consultants, Inc. ("Williamson"),
independent reserve engineers, with respect to MESA's reserves in the Hugoton
and West Panhandle fields, which represents approximately 95% of MESA's total
proved reserves, and (ii) the report of MESA's internal reserve engineers with
respect to MESA's Gulf of Mexico and other properties. The Hugoton and West
Panhandle field reserve estimates as of December 31, 1996, are qualified in
their entirety by the summary reserve report of Williamson, which is filed as
an exhibit to this Form 10-K.
Information relating to MESA's proved oil and gas reserves is based upon
engineering estimates. Estimates of economically recoverable oil and gas
reserves and of future net revenues depend upon a number of factors and
assumptions, such as historical production performance, the assumed effects of
regulations by governmental agencies and assumptions concerning future oil and
gas prices, future operating costs, severance and excise taxes, development
costs and workover costs, all of which may in fact vary considerably from
actual future conditions. The accuracy of any reserve
8
estimate is a function of the quality of the available data, of engineering and
geological interpretation and of subjective judgment. For these reasons,
estimates of the economically recoverable quantities of oil and gas reserves
attributable to any particular group of properties, classifications of such
reserves based on risk of recovery and estimates of future net revenues
expected therefrom prepared by different engineers or by the same engineers at
different times may vary materially. Actual production, revenues, and
expenditures with respect to MESA's reserves will likely vary from estimates,
and such variances may be material.
Each year MESA files reserve estimates as of the end of the preceding
fiscal year with the Energy Information Administration of the Department of
Energy (the "EIA"). During 1996, MESA filed Form EIA-23, which included reserve
estimates as of December 31, 1995, with the EIA. Such reserve estimates did not
vary from MESA's reserve estimates at December 31, 1995, contained herein by
more than 5%.
The estimated quantities of proved oil and gas reserves, the standardized
measure of future net cash flows from proved oil and gas reserves (the
"Standardized Measure") and the changes in the Standardized Measure for each of
the three years in the period ended December 31, 1996, are included under
"Supplemental Financial Data" in the notes to the consolidated financial
statements of MESA located elsewhere in this Form 10-K.
Hugoton Field
The Hugoton field in southwest Kansas is one of the largest producing gas
fields in the continental United States. MESA's Hugoton properties represent
approximately 13% of the proved reserves in the field and are located on over
237,000 net acres, covering approximately 400 square miles. MESA's properties
are concentrated in the central fairway of the field and benefit from better
reservoir characteristics, including thicker productive zones, higher porosity
and higher permeability than properties on the edges of the field. Management
believes that, as a result, MESA's Hugoton properties will have a longer
productive life and higher natural gas recoveries than properties located near
the edge of the Hugoton field. MESA has working interests in approximately
1,100 wells in the Hugoton field, 950 of which it operates, and royalty
interests in approximately 800 wells. MESA owns substantially all of the
gathering and processing facilities which service its production from the
Hugoton field, which allows MESA to control the production, gathering,
processing and sale of its gas and associated natural gas liquids to various
major intrastate and interstate pipelines through its direct interconnects.
MESA's Hugoton properties are capable of producing approximately 200 MMcf
of wet gas per day (i.e., gas production at the wellhead before processing and
before reduction for royalties). Substantially all of MESA's Hugoton production
is processed through its Satanta plant. Production in the Hugoton field is
subject to allowables set by state regulators. MESA estimates that it and other
major producers in the Hugoton field produced at or near full capacity in 1996
and expects such practice to continue.
9
MESA's Hugoton properties accounted for approximately 60% of its
equivalent proved reserves and 62% of the present value of estimated future net
cash flows determined as of December 31, 1996, in accordance with Commission
guidelines. The Hugoton properties accounted for approximately 49%, 47%, and
53% of MESA's oil and gas revenues for the years ended December 31, 1996, 1995,
and 1994, respectively. The percentage of revenues from the Hugoton field has
been less than the percentage of equivalent proved reserves due primarily to
the longer life of the Hugoton properties compared to MESA's other properties.
MESA has invested over $78 million in capital expenditures in its
Hugoton properties since 1992 to construct the Satanta Plant and related
facilities, and to upgrade gathering and compression facilities, production
equipment and pipeline interconnects in order to maintain production
capacity and marketing flexibility. See "Production--Hugoton Field."
West Panhandle Field
The West Panhandle properties are located in the Texas panhandle. Natural
gas from these properties is produced from approximately 600 wells, all of
which MESA operates, on over 185,000 net acres. All of MESA's West Panhandle
production is processed through MESA's Fain natural gas processing plant.
MESA's West Panhandle reserves are owned and produced pursuant to
contracts with Colorado Interstate Gas Company ("CIG"), the first of which was
executed in 1928 by predecessors of both companies. An amendment to these
contracts, the Production Allocation Agreement ("PAA"), allocates 77% of the
production from the West Panhandle field properties to MESA and 23% to CIG,
effective as of January 1, 1991. Under the associated agreements, MESA operates
the wells and production equipment and CIG owns and operates the gathering
system by which MESA and CIG's production is delivered to the Fain Plant. CIG
also performs certain administrative functions. Each party reimburses the other
for certain costs and expenses incurred for the joint account.
As of December 31, 1996, MESA's West Panhandle properties represented
approximately 35% of MESA's equivalent proved reserves, and approximately 33%
of the present value of estimated future net cash flows, determined in
accordance with Commission guidelines. Production from the West Panhandle
properties accounted for approximately 31%, 33%, and 36% of MESA's oil and gas
revenues for the years ended December 31, 1996, 1995, and 1994, respectively.
MESA has identified over 100 locations that have additional production
potential in new areas or deeper zones, of which MESA plans to redrill 58 in
1997 and the balance in 1998. See "Production--West Panhandle Field."
Gulf of Mexico
MESA's Gulf of Mexico properties are located offshore Texas and Louisiana
and represent approximately 3% of MESA's equivalent proved reserves and
approximately 4% of the present value of estimated future net cash flows as
determined in accordance with Commission guidelines at
10
December 31, 1996. The Gulf of Mexico properties accounted for approximately
9%, 13% and 20% of MESA's oil and gas revenues for the years ended December 31,
1994, 1995 and 1996, respectively.
MESA has owned and operated properties in the Gulf of Mexico since 1970.
Beginning in late 1994, MESA began to direct a greater portion of its capital
spending towards exploration and development in the Gulf of Mexico. Since that
time, MESA has successfully completed 21 out of 24 wells adding 63 Bcfe to
proved reserves. As a result, MESA's offshore production increased by
approximately 50% on a thousand cubic feet of natural gas equivalent ("Mcfe")
basis from 1994 to 1995, and by an additional 58% on an Mcfe basis from 1995 to
1996. MESA currently plans to drill up to seven exploratory wells on its
existing properties in the remainder of 1997. Because MESA has existing
production facilities offshore, it has been able to bring new wells on
production quickly and at a lower cost than could be achieved otherwise. MESA
currently owns interests in 56 blocks in the Gulf of Mexico, which cover an
aggregate of approximately 141,000 net acres.
The Company owns approximately 600 square miles of 3-D seismic data in and
around its existing Gulf of Mexico properties. MESA plans to acquire an
additional 100 square miles of 3-D seismic data covering these properties in
1997. After the procurement of additional 3-D seismic data, MESA will have 3-D
seismic data covering approximately 90% of its existing Gulf of Mexico
properties. Application of 3-D seismic technology to MESA's Gulf of Mexico
acreage represents a significant future opportunity to increase reserves and
cash flow through exploratory and development drilling.
MESA currently anticipates spending approximately $53 million on currently
identified development and exploration projects on its existing Gulf of Mexico
properties during 1997. In 1996, MESA purchased 11 blocks covering 57,340 gross
(39,685 net) acres in the Gulf of Mexico. MESA paid $1.7 million for its share
of the 11 blocks, 6 of which are located in areas where MESA has producing
interests. MESA was apparent high bidder on four blocks covering 17,500 acres
in the March 1997 federal lease sale in the Gulf of Mexico, but there can be no
assurance that MESA will be awarded these blocks by the MMS. MESA will spend
approximately $0.7 million if the MMS awards all four leases to MESA.
See "Drilling Prospects" for a discussion of MESA's drilling activities
since year end.
Other
MESA's other producing properties are located in the Rocky Mountain area
of the United States, which accounted for less than 1% of MESA's total
production in 1996.
Production
MESA's Hugoton and West Panhandle fields are both mature reservoirs
that are substantially developed and have long life production profiles.
Natural gas production is subject to numerous state and federal laws and
Federal Energy Regulatory Commission (the "FERC") regulations. See
11
"Regulation and Prices" below. Certain other factors affecting production in
MESA's various fields are discussed in greater detail below.
Hugoton Field
The Kansas Corporation Commission (the "KCC") is the state regulatory
agency that regulates oil and gas production in Kansas. The KCC is responsible
for the determination of market demand (allowables) for the Hugoton field and
the allocation of allowables among the more than 9,000 wells in the field.
Twice each year, the KCC sets the fieldwide allowable production at a
level estimated to be necessary to meet the Hugoton market demand for the
summer and winter production periods. The fieldwide allowable is then allocated
among individual wells determined by a series of calculations that are
principally based on each well's pressure, deliverability and acreage. The
allowables assigned to individual wells are affected by the relative
production, testing, and drilling practices of all producers in the field, as
well as the relative pressure and deliverability performance of each well.
Generally, fieldwide allowables are influenced by overall gas market
supply and demand in the United States as well as specific nominations for gas
from the parties who produce or purchase gas from the field. Since 1987,
fieldwide allowables have increased in each year except 1991. The total Hugoton
field allowable in 1996 was 600 Bcf of wellhead gas. MESA's share of the field
allowable averaged 13% in 1996.
MESA's net Hugoton field production decreased to approximately 67 Bcfe in
1996 compared with 70 Bcfe in 1995 as a result of equipment maintenance in
1996. MESA expects its Hugoton field production will decline slightly from 1996
levels each year through 1998. Beginning in 1999, MESA expects annual
production declines due to normal depletion.
West Panhandle Field
MESA's production of wellhead gas from the West Panhandle field is
governed by the PAA and other contracts with CIG. MESA was contractually
limited to take wellhead gas production up to a maximum of 32 Bcf in 1996, but
actually took only 27 Bcf primarily due to a weather-related decrease in demand
in 1996. Beginning in 1997, MESA is not subject to annual contractual
production limitations and will have the right to take and market as much gas
as it can produce, subject to specific CIG seasonal and daily entitlements as
provided for under the contracts. Assuming continuation of existing economic
and operating conditions, MESA expects production from its existing West
Panhandle properties will be 37 Bcf of wellhead gas in 1997.
See "-- Production Allocation Agreement" in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" located
elsewhere in this Form 10-K.
12
Natural Gas Processing
Through its natural gas processing plants, MESA extracts raw NGLs and
crude helium from the wellhead natural gas stream. The NGLs are then
transported and fractionated into their constituent hydrocarbons such as
ethane, propane, normal butane, isobutane, and natural gasolines. The NGLs and
helium are then sold pursuant to contracts providing for market-based prices.
MESA processes its natural gas production for the extraction of NGLs and
helium to enhance the market value of the gas stream. In recent years MESA has
made substantial capital investments to enhance its natural gas processing and
helium extraction capabilities in the Hugoton and West Panhandle fields. MESA
owns and operates its processing facilities, which allows MESA to (i) capture
the processing margin, as third-party processing agreements generally available
in the industry result in retention of a significant portion of the processing
margin by the contract processor, (ii) control the quality of the residue gas
stream, permitting it to deliver gas directly to pipelines for sales to local
distribution companies, marketing companies, and end users, and (iii) realize
value from premium products such as crude helium. MESA believes that the
ability to control its production stream from the wellhead through its
processing facilities to disposition at central delivery points enhances its
marketing opportunities and competitive position in the industry.
Satanta Natural Gas Processing Plant
The Satanta Plant was built in 1993 and has the capacity to process 250
MMcf of natural gas per day, enabling MESA to extract NGLs from substantially
all of the gas produced from its Hugoton field properties as well as third
party producers' gas. The Satanta Plant also has the ability to extract helium
from the gas stream. In 1996 the Satanta Plant averaged 193 MMcf per day of
inlet gas and produced a daily average of 10.6 MBbls of NGLs, 706 Mcf of
contained helium, and 144 MMcf of residue natural gas.
In November 1996 MESA commenced a natural gas processing alliance with
Anadarko Petroleum Corporation ("Anadarko") and Western Resources
Mid-Continent Market Center which provides for MESA to process up to 55 MMcf
per day of Anadarko's gas at MESA's Satanta Plant. Such agreement filled excess
capacity at the Satanta Plant. MESA is also focusing its efforts on obtaining
additional dedications of third-party natural gas to the Satanta plant and, if
successful, plans to expand the plant's processing capacity.
Fain Natural Gas Processing Plant
The Fain plant, which was built in the 1960s and had its most recent
substantial upgrade in 1993, currently has inlet capacity of 140 MMcf per day.
In 1996 the Fain plant averaged 77 MMcf per day of inlet gas and produced a
daily average of 8.2 MMbls of NGLs and condensate, 14 Mcf of contained helium
and 59 MMcf of residue natural gas.
13
In December 1996, MESA entered into a natural gas processing agreement
with CIG and MAPCO, which provides for MESA to initially process approximately
8.5 Bcf of natural gas per year of third party gas at the Fain Plant. The
agreement has a primary term through December 2009. Effective January 1, 1997,
MESA purchased from MAPCO and its affiliates all of their liquids attributable
to the processing agreement above as well as the rights to condensate from
CIG's gathering system. It is expected that this purchase will increase MESA's
condensate and NGL production by approximately 850 MBbls in 1997. Such
arrangements have filled excess capacity at the Fain plant. MESA plans to
install a nitrogen rejection unit at the Fain plant in 1998 to improve the
quality of the residue natural gas stream and increase NGL and helium
recoveries.
Other Properties
MESA's non-oil and gas tangible properties include buildings, leasehold
improvements, and office equipment, primarily in Amarillo and Irving, Texas,
and certain other assets. Non-oil and gas tangible properties represent
approximately 1% of the net book value of MESA's properties.
Sales and Marketing
Following the processing of wellhead gas, MESA sells the dry (or residue)
natural gas, helium, condensate, and NGLs pursuant to various short-term and
long-term sales contracts. Substantially all of MESA's gas and NGL sales are
made under short-term contracts at market prices, with the exception of certain
West Panhandle field volumes. Due to a number of market forces, including the
seasonal demand for natural gas, both sales volumes from MESA's properties and
sales prices received vary on a seasonal basis. Sales volumes and price
realizations for natural gas are generally higher during the first and fourth
quarters of each calendar year.
See "Revenues" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" located elsewhere in this Form 10-K for a
table showing production and prices by area for the past three years.
West Panhandle Gas Sales Contracts
Most of MESA's West Panhandle field residue natural gas is sold pursuant
to gas purchase contracts with two major customers in the Texas panhandle area.
Approximately 9 Bcf per year of residue natural gas is sold to a gas
utility that serves residential and commercial customers in Amarillo, Texas,
under the terms of a long-term agreement dated January 2, 1993, which
supersedes the original contract that was in effect since 1949. The agreement
contains a pricing formula for the five-year period from 1993 through 1997
whereby 70% of the volumes sold to the gas utility are sold at fixed prices and
the other 30% of volumes sold are priced at a regional market index based on
spot prices plus $.10 per Mcf. The fixed portion of the price formula was $3.21
per Mcf in 1996 escalating to $3.45 per Mcf in 1997. Prices for 1998 and beyond
will be determined by renegotiation. MESA
14
provides the gas utility with peaking service, granting it the right to take,
on a daily basis, residue gas attributable to 100 MMcf per day of MESA's
production under the PAA. The average price received by MESA for natural gas
sales to the gas utility in 1996 was $2.94 per Mcf.
Effective January 1, 1996, MESA entered into a four-year contract with a
marketing company which serves the local electric power-generation facility and
various other markets within and outside Amarillo, Texas. The contract provides
for the sale of MESA's West Panhandle field gas which is in excess of the
volumes sold to the gas utility and other existing industrial customers. The
price for gas sold under this contract is a regional market index determined
monthly based on spot prices plus $0.02 per MMBtu. In 1996, MESA sold
approximately 8 Bcf of residue natural gas to the pipeline for an average of
$1.95 per Mcf.
NGL and Helium Sales
NGL production from both the Satanta and Fain plants are sold by component
pursuant to a contractual arrangement with MAPCO, a major transporter and
marketer of NGLs, through 2008 at the greater of Midcontinent or Gulf of Mexico
prices at the time of sale. Crude helium is sold to an industrial gas company
under a long-term agreement that provides for annual price adjustments based on
market prices.
Major Customers
See Note 10 to the consolidated financial statements of MESA located
elsewhere in this Form 10-K for information on sales to major customers.
15
Production Costs
The table below presents MESA's total production costs (lease operating
expenses and production and other taxes) by area of operation for each of the
last three years ended December 31 (in thousands, except per Mcf of natural gas
equivalent data):
<TABLE>
<CAPTION>
1996 1995 1994
---------------- ---------------- ----------------
Total Per Mcfe Total Per Mcfe Total Per Mcfe
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Lease Operating Expense:
Hugoton............... $13,545 $ .20 $12,703 $ .18 $12,549 $ .17
West Panhandle........ 28,896 .75 25,989 .67 26,910 .60
Gulf of Mexico........ 10,476 .46 9,848 .68 11,136 1.15
Other................. 1,530 3.79 907 2.57 623 2.00
------- ------- -------
54,447 .42 49,447 .40 51,218 .40
------- ------- -------
Production and Other
Taxes:
Hugoton............... 16,297 .24 15,004 .21 17,505 .24
West Panhandle........ 3,472 .09 3,216 .08 3,099 .07
Gulf of Mexico........ 19 .00 34 .00 68 .01
Other................. 283 .70 149 .42 634 2.04
------- ------- -------
20,071 .16 18,403 .15 21,306 .17
------- ------- -------
Total Production Costs... $74,518 $ .58 $67,850 $ .55 $72,524 $ .57
======= ======= =======
</TABLE>
MESA's lease operating expenses consist of lease maintenance, gathering
and processing costs and have a significant fixed-cost component. As a result,
the production cost per Mcfe in the table above is affected by changes in the
volume of oil and gas produced. Production tax rates in Kansas, where MESA's
Hugoton field properties are located, are assessed on wellhead value. These
rates were reduced from 6% in 1994 to 5% in 1995 and 5% in the first half of
1996 and 4.33% in the last half of 1996.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operating."
16
Net Margins
The table below presents MESA's net margin (revenue less production costs)
by area of operation for each of the years ended December 31 (in thousands,
except per Mcf of natural gas equivalent data):
<TABLE>
<CAPTION>
1996 1995 1994
---------------- ---------------- ----------------
Total Per Mcfe Total Per Mcfe Total Per Mcfe
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Hugoton................ $122,345 $1.83 $81,490 $1.16 $92,888 $1.28
West Panhandle......... 62,138 1.62 43,904 1.13 51,406 1.16
Gulf of Mexico......... 52,333 2.29 20,323 1.40 8,913 .92
Other.................. 160 .40 2,330 6.62 1,796 5.79
</TABLE>
Drilling Activities
The following table shows the results of MESA's drilling activities for
the last five years:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Gross Net Gross Net Gross Net Gross Net Gross Net
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory
Wells:
Productive.... 1 1.0 1 .3 -- -- -- -- 5 4.1
Dry........... -- -- 4 4.0 -- -- 1 1.0 1 .4
Development
Wells:
Productive.... 48 35.5 20 14.0 31 24.5 43 29.1 22 16.5
Dry........... -- -- -- -- 1 .8 -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total....... 49 36.5 25 18.3 32 25.3 44 30.1 28 21.0
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
MESA's net interests in certain wells drilled in the Gulf of Mexico blocks
are subject to a net profits interest owned by the MESA Offshore Trust.
At December 31, 1996, MESA was participating in the drilling of 2 gross
(.9 net) wells.
Significant 1996 Drilling & Leasing Activities
During 1996, MESA participated in 49 (36.5 net) wells, 48 development
wells and one exploratory well, a 96% increase over 1995's well total of 25. The
Company's 1996 drilling programs achieved an overall success rate of 100%. A
summary of significant 1996 activities follows.
Gulf of Mexico. At December 31, 1996, MESA had a 56.2% average interest in
56 offshore blocks and ownership in 32 platforms of which it operates 15.
The South Marsh Island 155/156 (MESA 37%) blocks are located 90 miles
offshore Louisiana in 250 feet of water. Discovered in 1979, these leases have
recorded 61.6 Bcf of natural gas and 4.8 MMBbls of oil and condensate cumulative
production. Prior to the 1996 drilling program, production had declined to 4
MMcf of natural gas and 300 barrels of condensate per day. Five new development
wells were drilled and completed from the existing platform. Production was
immediately brought on-line as the necessary facilities were already in place.
The combined gross producing rate as of December 31, 1996 for this block was 27
MMcf of natural gas and 650 Bbls of condensate per day.
The South Pass 78 (MESA 25%) federal lease is situated 10 miles off
Louisiana's Mississippi River delta in water depth of 225 feet. It has been
producing since 1981 with cumulative gross production through 1996 of 225 Bcfe.
A four-well development program on this offshore block was initiated in 1995,
and all of the wells were successfully completed in 1996. With the platform and
production facilities already in existence, production commenced immediately
after completion of the wells. As of December 31, 1996, these four wells alone
produced 13 Bcf of gas and had a combined gross production rate of 29 MMcf of
natural gas per day. Additional drilling on the South Pass 78 block is planned
for 1997.
The East Cameron 322/323 (MESA 100%) federal leases, located 95 miles
offshore Louisiana in 220 feet of water, are another mature field being further
developed. Cumulative production from these blocks from 1975 through year-end
1996 totaled 6.4 MMBbls of oil and condensate and 17.9 Bcf of natural gas.
Drilling began January 23, 1997 on the first of five Phase II development wells.
Target depths range from 3,600 feet to 5,200 feet. The initial three wells were
successful in finding multiple productive sands and have been cased to total
depth in preparation for completion after the remaining two wells are drilled.
The complete program should be finalized by the end of the second quarter. Phase
I took place in 1994 with the drilling of four successful wells that produced up
to a combined gross daily rate of 4 MMcf of gas and 3,200 barrels of oil. Total
drilling and completion costs were recovered in 13 months. Similar results are
anticipated for this new phase of development which has potential reserves of 19
Bcfe.
MESA, bidding alone and with partners, was the successful bidder on 11 out
of 15 offshore blocks for which it submitted bids in two 1996 Gulf of Mexico
(GOM) outer continental shelf lease sales. The MMS awarded Mesa six blocks in
the Central GOM Lease Sale held on April 24, 1996 and five blocks in the Western
GOM Lease Sale on September 25, 1996. These new leases cover 57,340 gross acres
(39,685 net) and were acquired at a net cost of $1,664,760, or $41.95 per net
acre. Six blocks are located near production facilities in which MESA has an
interest, thereby providing an opportunity to expedite production. Of the eleven
tracts, five are located offshore Texas in the High Island and Galveston areas,
and six are offshore Louisiana in the Eugene Island, West Delta and South Pass
areas. MESA has 100% interest in the five leases off Texas and the one at Eugene
Island. MESA's interest is 25% in the remaining five blocks which offset South
Pass 78 discussed above. It is anticipated that drilling will begin on one or
more of these blocks during 1997.
West Panhandle Field. During 1996, 24 Brown Dolomite wells and 12 Red Cave
wells were drilled. By year-end, 34 of these wells were completed and producing,
increasing initial deliverability approximately 20 MMcf per day. The two
remaining wells were completed in January 1997.
Significant 1997 Drilling & Leasing Activities
17
MESA anticipates spending roughly $118 million on currently identified
development and exploration projects during 1997, of which approximately $40
million will be allocated toward properties acquired in the Greenhill
Acquisition. MESA is planning to drill 10 exploratory wells and approximately
100 development wells.
Phase II drilling began at East Cameron 322/323 (MESA 100%) in late
January 1997 on the first of five development wells. All five wells have been
drilled and cased for completion after encountering multiple oil and gas sands
between 3,700 and 5,300 feet. East Cameron 322/323 is a mature field that began
production for MESA in 1975, and has benefited from application of new
exploration and drilling technology to identify and develop remaining reserves.
MESA successfully completed Phase I of East Cameron 322/323 in 1995. The
completion phase of Phase II of the program should be concluded by the end of
the second quarter.
Drilling began at Vermilion 348 (MESA 75%) in early January 1997. This
well tested objectives to a depth of 14,900 feet on the northeast flank of a
salt dome. It logged 170 net feet of sand, but found an insufficient
accumulation of hydrocarbons to support commercial development. The well was
consequently plugged and abandoned. Findings are being incorporated into MESA's
3-D seismic interpretation to evaluate remaining potential on the lease.
At the March 5, 1997 Central Gulf of Mexico lease sale, MESA was high
bidder on 4 of 10 blocks. The company exposed $2.3 million and will spend $0.7
million if the Minerals Management Service (MMS) awards all 4 leases to MESA.
These blocks are: Eugene Island 207, South Marsh Island 120, Vermilion 206 and
West Cameron 627. If the bids are approved by the MMS, MESA's offshore lease
inventory, which now covers 56 blocks on nearly 141,000 net acres, would
increase to 60 blocks and 158,000 net acres.
1997 Exploration Outlook
MESA's exploration strategy is to expand geographically and to identify
potential prospects with the likelihood of significant follow-up development
drilling. MESA is seeking such opportunities in the Gulf Coast, Midcontinent,
Permian Basin and Rocky Mountain regions. MESA will grow in these areas in
conjunction with its reserve acquisition program. In-house prospect generation
will be supplemented with joint ventures, seismic options and farm-in
opportunities.
MESA has a large inventory of Gulf of Mexico prospects under evaluation.
MESA has 100% interest in 15 blocks and 25% interest in five others, all
acquired since 1994 in federal lease sales. Additional undrilled exploratory
prospects are located on 10 producing leases where MESA's interest varies from
5% to 100%.
The 1997 exploration budget is $32 million, a 129% increase over 1996. This
amount includes $8 million for acquisition of leases and seismic data and $24
million for exploratory drilling.
Blocks budgeted for drilling in 1997 include High Island A-299 (MESA 100%),
High Island A-326 (MESA 100%) High Island A-546 (MESA 100%), South Pass 57/58
(MESA 33%), South Pass 78 area (MESA 25%) and West Delta 61 (MESA 10%). Each of
these plays is based on interpretation of 3-D seismic data.
From time to time, MESA will seek to fund high-risk exploration through
joint ventures, giving up a percentage interest in a project to a partner who
agrees to fund a portion of the costs incurred from exploratory drilling or from
the acquisition and interpretation of 3-D seismic surveys. These arrangements
allow MESA to share the risk of an exploratory play with another party while
benefiting from any success of the project.
Producing Acreage and Wells, Undeveloped Acreage
MESA's interest in oil and gas acreage held by production, producing wells
and undeveloped oil and gas acreage as of December 31, 1996, is set forth in
the following table:
18
<TABLE>
<CAPTION>
Producing Producing Undeveloped
Acreage Wells Acreage
---------------- ------------- ----------------
Gross Net Gross Net Gross Net
------- ------- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Onshore U.S.:
Kansas.............. 258,801 231,312 1,432 990.0 5,880 5,880
Texas............... 241,218 185,550 616 463.9 480 156
Wyoming............. 11,477 4,365 2 -- 14,570 9,035
North Dakota........ 4,661 3,532 20 3.8 3,771 2,488
Other............... 2,564 2,142 13 1.3 16,123 6,518
------- ------- ----- ------- ------- -------
Total Onshore.... 518,721 426,901 2,083 1,459.0 40,824 24,077
------- ------- ----- ------- ------- -------
Offshore U.S.:
Louisiana........... 82,024 45,180 192 43.4 48,750 30,783
Texas............... 73,808 18,848 68 12.4 46,080 46,080
------- ------- ----- ------- ------- -------
Total Offshore... 155,832 64,028 260 55.8 94,830 76,863
------- ------- ----- ------- ------- -------
Grand Total.............. 674,553 490,929 2,343 1,514.8 135,654 100,940
======= ======= ===== ======= ======= =======
</TABLE>
MESA has interests in 2,167 gross (1,492.7 net) producing gas wells and
176 gross (22.1 net) producing oil wells in the United States. MESA also owns
approximately 84,722 net acres of producing minerals and 43,568 net acres of
nonproducing minerals in the United States.
Organizational Structure
MESA owns and operates its oil and gas properties and other assets
through its direct subsidiary and indirect subsidiaries. Its direct wholly
owned subsidiary is Mesa Operating Co. ("MOC").
MOC
At December 31, 1996, MOC owned all of MESA's oil and gas properties in
the Hugoton field of Kansas, West Panhandle field of Texas and MESA's interests
in the Gulf of Mexico and the Rocky Mountain area.
MOC is MESA's principal operating subsidiary. Most of MESA's employees are
employed by MOC, and MOC is generally responsible for all of MESA's operations,
administration, and marketing.
Competition
The oil and gas business is highly competitive in the search for,
acquisition of, and sale of, oil and gas. MESA's competitors in these endeavors
include the major oil and gas companies, independent oil and gas concerns, and
individual producers and operators, as well as major pipeline companies, many
of which have financial resources greatly in excess of those of MESA.
19
MESA is one of the largest owners of natural gas reserves in the United
States. Production from MESA's properties can be delivered to a substantial
portion of the major metropolitan markets in the United States through numerous
pipelines and other purchasers. MESA is not dependent upon any single purchaser
or small group of purchasers.
MESA believes that its competitive position is enhanced by its
substantial long-life reserve holdings and related deliverability, its
flexibility to sell such reserves in a diverse number of markets, and its
ability to produce its reserves at a low cost. MESA further believes that its
competitive position is affected by, among other things, price, contract terms
and quality of service.
Operating Hazards and Uninsured Risks
MESA's oil and gas activities are subject to all of the risks normally
incident to exploration for and production of oil and gas, including blowouts,
cratering, and fires, each of which could result in damage to life and
property. Offshore operations are subject to a variety of operating risks, such
as hurricanes and other adverse weather conditions, and lack of access to
existing pipelines or other means of transporting production. Furthermore,
offshore oil and gas operations are subject to extensive governmental
regulations, including certain regulations that may, in certain circumstances,
impose absolute liability for pollution damages, and to interruption or
termination by governmental authorities based on environmental or other
considerations. In accordance with customary industry practices, MESA carries
insurance against some, but not all, of these risks. Losses and liabilities
resulting from such events would reduce revenues and increase costs to MESA to
the extent not covered by insurance.
Regulation and Prices
MESA's operations are affected from time to time in varying degrees by
political developments and federal, state, and local laws and regulations. In
particular, oil and gas production operations and economics are affected by
taxes, conservation, safety, environmental, and other laws relating to the
petroleum industry, by changes in such laws and by constantly changing
administrative regulations.
FERC Regulation
The FERC has recently required interstate pipeline companies to "unbundle"
their services. To the extent a pipeline company or its sales affiliate makes
gas sales as a merchant in the future, it does so pursuant to private contracts
in direct competition with all other sellers, such as MESA. In recent years the
FERC also has pursued a number of other policy initiatives which could
significantly affect the marketing of natural gas. Several of these initiatives
are intended to enhance competition in natural gas markets, although some, such
as "spin-downs," may have the adverse effect of increasing the cost of doing
business on some in the industry. As to all of these recent FERC initiatives,
the on-going, or, in some instances, preliminary evolving
20
nature of these regulatory initiatives makes it impossible at this time to
predict their ultimate impact on MESA's business.
State and Other Regulation
All of the jurisdictions in which MESA owns producing oil and gas
properties have statutory provisions regulating the exploration for and
production of crude oil and natural gas. Such regulations require permits for
drilling wells, drilling and operating bonds, and reports concerning operations
and impose other requirements relating to the exploration and production of oil
and gas. Such states also have statutes addressing conservation matters
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from wells, and the regulation
of spacing, plugging and abandonment of such wells.
State regulation of gathering facilities generally includes various
safety, environmental, and in some circumstances, non-discriminatory take
requirements, but does not generally entail rate regulation. Natural gas
gathering has received greater regulatory scrutiny at both the state and
federal levels. For example, Oklahoma recently enacted a prohibition against
discriminatory gathering rates, and certain Texas and Kansas regulatory
officials have expressed interest in evaluating similar rules in their
respective states.
Federal Royalty Matters
By a letter dated May 3, 1993, directed to thousands of producers holding
interests in federal leases, the United States Department of the Interior (the
"DOI") announced its interpretation of existing federal leases to require the
payment of royalties on past natural gas contract settlements which were
entered into in the 1980s and 1990s to resolve, among other things, take-or-pay
and minimum take claims by producers against pipelines and other buyers. The
DOI's letter set forth various theories of liability, all founded on the DOI's
interpretation of the term "gross proceeds" as used in federal leases and
pertinent federal regulations. In an effort to ascertain the amount of such
potential royalties, the DOI sent a letter to producers on June 18, 1993,
requiring producers to provide all data on all natural gas contract
settlements, regardless of whether gas produced from federal leases was
involved in the settlement. MESA received a copy of this information demand
letter. In response to the DOI's action, in July 1993 various industry
associations and others filed suit in the United States District Court for the
Northern District of West Virginia seeking an injunction to prevent the
collection of royalties on natural gas contract settlement amounts under the
DOI's theories. The lawsuit, styled "Independent Petroleum Association v.
Babbitt," was transferred to the United States District Court in Washington,
D.C. On June 14, 1995, the Court issued a ruling in this case holding that
royalties are payable to the United States on gas contract settlement proceeds
in accordance with the Minerals Management Service's May 3, 1993, letter to
producers. The D.C. Circuit Court of Appeals, on August 27, 1996, issued a
decision in favor of the producers. The DOI's claim in a bankruptcy proceeding
against a producer based upon an interstate pipeline's earlier buy-out of the
producer's gas sale contract was rejected by the Federal Bankruptcy Court in
Lexington, Kentucky, in a proceeding styled "Century Offshore Management
Corp.". While the facts of the Court's decision do not
21
involve all of the DOI's theories, the Court found on those at issue that DOI's
theories were without legal merit, and the Court's reasoning suggests that the
DOI's other claims are similarly deficient. This decision was upheld in the
District Court and is now on appeal in the Sixth Circuit Court of Appeals.
Because the "Independent Petroleum Association v. Babbitt" decision has been
appealed, and because of the complex nature of the calculations necessary to
determine potential additional royalty liability under the DOI's theories, it
is impossible to predict what, if any, additional or different royalty
obligation the DOI may assert or ultimately be entitled to recover with respect
to any of MESA's prior natural gas contract settlements.
Environmental Matters
MESA's operations are subject to numerous federal, state, and local laws
and regulations controlling the discharge of materials into the environment or
otherwise relating to the protection of the environment, including the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Federal Superfund Law." Such laws and
regulations, among other things, impose absolute liability upon the lessee
under a lease for the cost of clean-up of pollution resulting from a lessee's
operations, subject the lessee to liability for pollution damages, may require
suspension or cessation of operations in affected areas, and impose
restrictions on the injection of liquids into subsurface aquifers that may
contaminate groundwater. MESA maintains insurance against costs of clean-up
operations, but it is not fully insured against all such risks. A serious
incident of pollution may, as it has in the past, also result in the DOI
requiring lessees under federal leases to suspend or cease operation in the
affected area. In addition, the recent trend toward stricter standards in
environmental legislation and regulation may continue. For instance,
legislation has been proposed in Congress from time to time that would
reclassify certain oil and gas production wastes as "hazardous wastes" which
would make the reclassified exploration and production wastes subject to much
more stringent handling, disposal, and clean-up requirements. If such
legislation were to be enacted, it could have a significant impact on MESA's
operating costs, as well as the oil and gas industry in general. State
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 MESA.
The Oil Pollution Act of 1990 ("OPA") and regulations thereunder impose a
variety of regulations on "responsible parties" (which include owners and
operators of offshore facilities) related to the prevention of oil spills and
liability for damages resulting from such spills in United States waters. In
addition, OPA imposes ongoing requirements on responsible parties, including
proof of financial responsibility to cover at least some costs in a potential
spill. On August 25, 1993, the Minerals Management Service (the "MMS")
published an advance notice of its intention to adopt a rule under OPA that
would require owners and operators of offshore oil and gas facilities to
establish $150 million in financial responsibility. On October 19, 1996,
President Clinton signed legislation that amended the OPA and lowered the
financial responsibility to $35 million.
Under current federal regulations concerning offshore operations, the MMS
is authorized to require lessees to post supplemental bonds to cover their
potential leasehold abandonment costs. By letter dated November 9, 1995, MESA
22
was advised by the MMS that it does not qualify for a waiver from supplemental
bond requirements and that MESA may be required to post supplemental bonds
covering its potential obligations with respect to offshore operations. MESA
Inc. executed a guaranty of abandonment liability (areawide) with the MMS on
April 26, 1996, in satisfaction of these obligations.
In 1993 a number of companies in New Mexico, including MESA, were named in
a preliminary information request from the Environmental Protection Agency (the
"EPA") as persons who may be potentially responsible for costs incurred in
connection with the Lee Acres Landfill site. Although MESA did not directly
dispose of any materials at the site, it may have contracted to transport
materials from its operations with certain trucking companies also named in the
information request. To the extent any materials produced by MESA may have been
transported to the site, MESA believes that such materials were rainwater
and/or water produced from natural gas wells, which MESA believes are exempt or
excluded from the definitions of "hazardous waste" or "hazardous substance"
under applicable Federal environmental laws, although the EPA may assert a
contrary position. Since submitting its response to the information request in
April 1994, MESA has not received any additional inquiries or information from
the EPA concerning the site, including whether MESA is, in fact, asserted to be
a responsible party for the site or what potential liability, if any, MESA may
face in connection with this matter.
MESA is not involved in any other administrative or judicial proceedings
arising under federal, state, or local environmental protection laws and
regulations which would have a material adverse effect on MESA's financial
position or results of operations.
Item 2. Properties
Reference is made to Item 1 of this Form 10-K for a description of MESA's
properties.
Item 3. Legal Proceedings
Masterson
In February 1992 the current lessors of an oil and gas lease (the "Gas
Lease") dated April 30, 1955, between R. B. Masterson, et al., as lessor, and
Colorado Interstate Gas Company ("CIG"), as lessee, sued CIG in Federal
District Court in Amarillo, Texas, claiming that CIG had underpaid royalties
due under the Gas Lease. Under the agreements with CIG, MESA has an entitlement
to gas produced from the Gas Lease. In August 1992 CIG filed a third-party
complaint against MESA for any such royalty underpayments which may be
allocable to MESA. Plaintiffs alleged that the underpayment was the result of
CIG's use of an improper gas sales price upon which to calculate royalties and
that the proper price should have been determined pursuant to a
"favored-nations" clause in a July 1, 1967, amendment to the Gas Lease (the
"Gas Lease Amendment"). The plaintiffs also sought a declaration by the court
as to the proper price to be used for calculating future royalties.
The plaintiffs alleged royalty underpayments of approximately $500 million
(including interest at 10%) covering the period from July 1, 1967, to
23
the present. In March 1995 the court made certain pretrial rulings that
eliminated approximately $400 million of the plaintiffs' claims (which related
to periods prior to October 1, 1989), but which also reduced a number of MESA's
defenses. MESA and CIG filed stipulations with the court whereby MESA would
have been liable for between 50% and 60%, depending on the time period covered,
of an adverse judgment against CIG for post-February 1988 underpayments of
royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury
returned its verdict. Among its findings, the jury determined that CIG had
underpaid royalties for the period after September 30, 1989, in the amount of
approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at the
highest price voluntarily paid by CIG to any other lessor, the jury determined
that the plaintiffs were estopped from claiming that the "favored-nations"
clause provides for other than a pricing-scheme to pricing-scheme comparison.
In light of this determination, and the plaintiffs' stipulation that a
pricing-scheme to pricing-scheme comparison would not result in any "trigger
prices" or damages, defendants asked the court for a judgment that plaintiffs
take nothing. The court, on June 7, 1995, entered final judgment that
plaintiffs recover no monetary damages. The plaintiffs have filed a motion for
new trial on which the court has not yet ruled. MESA cannot predict whether the
court will grant such motion or, if it does not, whether the plaintiffs will
appeal the court's final judgment.
On June 7, 1996, the plaintiffs filed a separate suit against CIG and MESA
in state court in Amarillo, Texas, similarly claiming underpayment of royalties
under the "favored-nations" clause, but based upon the above-described
pricing-scheme to pricing-scheme comparison on a well-by-well monthly basis.
The plaintiffs also claim underpayment of royalties since June 7, 1995 under
the "favored-nations" clause based upon either the pricing-scheme to
pricing-scheme method or their previously alleged higher price method. MESA
believes it has several defenses to this action and intends to contest it
vigorously. MESA has not yet determined the amount of damages, if any, that
would be payable if such action were determined adversely to MESA.
The federal court in the above-referenced first suit issued an order on
July 29, 1996 which stayed the state suit pending a decision by the court on
plaintiff's motion for new trial.
Based on the jury verdict and final judgment, MESA does not expect the
ultimate resolution of either of these lawsuits to have a material adverse
effect on its financial position or results of operations.
Lease Termination
In 1991 MESA sold certain producing oil and gas properties to Seagull
Energy Company ("Seagull"). In 1994 two lawsuits were filed against Seagull in
the 100th District Court in Carson County, Texas, by certain land and royalty
owners claiming that certain of the oil and gas leases owned by Seagull have
terminated due to cessation in production and/or lack of production in paying
quantities occurring at various times from first production through 1994. In
the third quarter of 1995 Seagull filed
24
third-party complaints against MESA claiming breach of warranty and false
representation in connection with the sale of such properties to Seagull. MESA
believes it has several defenses to these lawsuits including a two-year
limitation on indemnification set forth in the purchase and sale agreement.
Seagull filed a similar third-party complaint June 29, 1995, against MESA
covering a different lease in the 69th District Court in Moore County, Texas.
MESA believes it has similar defenses in this case.
The plaintiffs in the cases against Seagull are seeking to terminate the
leases. Seagull, in its complaint against MESA, is seeking unspecified damages
relating to any leases which are terminated.
In February 1997, MESA entered a settlement agreement with Seagull whereby
MESA has been released from all claims associated with the third-party claims.
Shareholder Litigation
On July 3, 1995, Robert Strougo filed a class action and derivative action
in the District Court of Dallas County, Texas, 160th Judicial District, against
T. Boone Pickens, Paul W. Cain, John L. Cox, John S. Herrington, Wales H.
Madden, Jr., Fayez S. Sarofim, Robert L. Stillwell, and J. R. Walsh, Jr. (the
"Director Defendants"), each of whom is a present or former director of MESA.
The class action is purportedly brought on behalf of a class of MESA
shareholders and alleges, inter alia, that the Board infringed upon the
suffrage rights of the class and impaired the ability of the class to receive
tender offers by adoptions of the shareholder rights plan. The lawsuit is also
brought derivatively on behalf of MESA and alleges, inter alia, that the Board
breached fiduciary duties to MESA by adopting the shareholder rights plan and
by failing to consider the sale of MESA. The lawsuit seeks unspecified damages,
attorneys' fees, and injunctive and other relief. Two other lawsuits filed by
Herman Krangel, Lilian Krangel, Jacquelyn A. Cady, and William A. Montagne,
Jr., in the District Court of Dallas County have been consolidated into this
lawsuit. A third lawsuit filed by Deborah M. Eigen and Adele Brody as a
derivative lawsuit in the U.S. District Court for the Northern District of
Texas, Dallas Division, intervened in this lawsuit.
On February 5, 1996, the Court denied Defendants' Motion to Dismiss. A
trial date has been set for September 15, 1997. The case has been stayed
pending a Special Litigation Committee investigation by MESA to decide whether
the case should be dismissed.
Other
MESA is also a defendant in other lawsuits and has assumed liabilities
relating to its predecessors. MESA does not expect the resolution of any of
these matters to have a material adverse effect on its financial position or
results of operations.
Contingencies
See Note 9 to the consolidated financial statements of MESA included
elsewhere in this Form 10-K for discussion of the above legal proceedings and
25
the estimated effect, if any, on MESA's results of operations and financial
position.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The following table sets forth, for the periods indicated, the high and
low closing prices for MESA's common stock as reported by the New York Stock
Exchange:
<TABLE>
<CAPTION>
Common Stock
--------------
High Low
------ ------
<S> <C> <C>
1997:
First Quarter........................................ $6-1/2 $5
1996:
First Quarter........................................ $4 $2-5/8
Second Quarter....................................... 5-1/2 2-5/8
Third Quarter........................................ 5-1/2 2-7/8
Fourth Quarter....................................... 5-1/2 4
1995:
First Quarter........................................ $6-1/8 $4-5/8
Second Quarter....................................... 6-1/8 3-1/2
Third Quarter........................................ 5-1/2 3-7/8
Fourth Quarter....................................... 4-7/8 3
</TABLE>
- ----------
* MESA's common stock is listed on the New York Stock Exchange under the
symbol MXP. At December 31, 1996, there were 64,279,568 common shares
outstanding.
* MESA has not paid any dividends with respect to its common stock and does
not expect to pay dividends in the future unless and until there is a
material and sustained increase in natural gas prices and adequate
provision has been made for further reduction of debt. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and Note 4 to the consolidated financial statements of the
Company included elsewhere in this Form 10-K for a discussion of
restrictions on the payment of dividends.
At March 24, 1997, there were 20,006 record holders of MESA's common
shares.
26
Item 6. Selected Financial Data
The following table sets forth selected financial information of MESA as
of the dates or for the periods indicated. This table should be read in
conjunction with the consolidated financial statements of MESA and related
notes thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
As of or for the Years Ended December 31
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues ............................... $ 311,411 $ 234,959 $ 228,737 $ 222,204 $ 237,112
=========== =========== =========== =========== ===========
Operating income ....................... $ 96,688 $ 47,965 $ 28,683 $ 22,012 $ 26,221
=========== =========== =========== =========== ===========
Net loss from continuing operations
attributable to common ................ $ (1,183) $ (57,568) $ (83,353) $ (102,448) $ (89,232)
=========== =========== =========== =========== ===========
Net loss from continuing operations
per common share ...................... $ (.02) $ (.90) $ (1.42) $ (2.61) $ (2.31)
=========== =========== =========== =========== ===========
Total assets ........................... $ 1,213,879 $ 1,486,824 $ 1,483,959 $ 1,533,382 $ 1,676,523
=========== =========== =========== =========== ===========
Long-term debt, including
current maturities .................... $ 808,077 $ 1,236,743 $ 1,223,293 $ 1,241,294 $ 1,286,155
=========== =========== =========== =========== ===========
</TABLE>
Net loss from continuing operations for 1996 excludes an extraordinary
loss on debt extinguishment of $59.4 million and includes dividends on
preferred stock of $9.5 million.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Disclosure Regarding Forward-Looking Statements
This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange
Act"). All statements other than statements of historical facts included in
this Form 10-K, including without limitation, the statements under "Business,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Capital Resources and Liquidity" and Notes 2 and 4 to the
consolidated financial statements of MESA regarding MESA's financial
27
position and liquidity, oil and gas production levels, acquisition,
exploitation, exploration and other growth plans, its ability to make debt
service payments and other matters are forward-looking statements. Although
MESA believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results
to differ materially from MESA's expectations ("Cautionary Statements") are
disclosed in this Form 10-K, including without limitation in conjunction with
the forward-looking statements included in this Form 10-K. All subsequent
written and oral forward-looking statements attributable to MESA or persons
acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements.
Subsequent Events
On April 6, 1997, MESA issued the Press Release announcing that it and
Parker & Parsley had entered into a Merger Agreement to merge and create
Pioneer. The consummation of the transactions contemplated in the Merger
Agreement is subject to the approval of the shareholders of each of MESA and
Parker & Parsley. If the Merger Agreement is approved, when the business
combination is completed, (i) each seven outstanding shares of MESA Common
Stock will be converted into the right to receive one share of Pioneer Common
Stock ("MESA Conversion Number"), (ii) each seven outstanding shares of MESA's
Series A 8% Cumulative Convertible Preferred Stock and MESA's Series B 8%
Cumulative Convertible Preferred Stock will be converted into the right to
receive either (a) 1.25 shares of Pioneer Common Stock ("MESA Common
Consideration") or (b) one share of Pioneer's Series A 8% Cumulative
Convertible Preferred Stock ("MESA Preferred Consideration), in each case as
the holder thereof shall elect or be deemed to elect (provided that if the
holders of a majority of the outstanding MESA Series A Preferred Stock or MESA
Series B Preferred Stock, each voting as a separate class, vote in favor of the
Merger Agreement, then all holders of the series for which the vote has been
obtained will receive the MESA Common Consideration) and (iii) each outstanding
share of Parker & Parsley Common Stock will be converted into the right to
receive one share of Pioneer Common Stock ("Parker & Parsley Conversion
Number").
On February 7, 1997, MESA entered into a stock purchase agreement to
purchase 100% of the outstanding capital stock of Greenhill. MESA paid $267
million for Greenhill at the closing of the transaction on April 15, 1997, net
of cash received. The Greenhill Acquisition will be accounted for under the
purchase method of accounting. However, because the purchase agreement provides
for an effective date of January 1, 1997, MESA received the benefits of all
Greenhill production and cash flow from the effective date to the closing date
as part of the assets acquired. Under the purchase agreement, MESA will pay
interest on the $270 million purchase price (less the $15 million deposit) at
an annual rate of 10% from the effective date to the closing date. The purchase
price was subject to adjustment for certain title and environmental matters.
On February 6, 1997, MESA purchased all of MAPCO's condensate and natural
gas liquids production in the West Panhandle field for $66 million, effective
as of January 1, 1997. The Liquids Acquisition has been accounted for under the
purchase method of accounting.
For additional discussion of these acquisitions, see "Business -- Subsequent
Events."
28
Results of Operations
The following table presents a summary of the results of operations of
MESA for the years indicated:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------
1996 1995 1994
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Revenues.............................. $ 311,411 $ 234,959 $ 228,737
Operating and administrative costs.... (111,422) (101,203) (106,330)
Depreciation, depletion and
amortization........................ (103,301) (85,791) (93,724)
--------- --------- ---------
Operating income...................... 96,688 47,965 28,683
Interest expense, net of
interest income..................... (113,386) (132,708) (131,300)
Other................................. 25,037 27,175 19,264
--------- --------- ---------
Net income(loss) before
extraordinary item.................. $ 8,339 $ (57,568) $ (83,353)
Extraordinary loss on debt
extinguishment...................... (59,386) -- --
--------- --------- ---------
Net loss............................ $ (51,047) $ (57,568) $ (83,353)
========= ========= =========
</TABLE>
29
Revenues, Production and Average Price Data
The table below presents, for the years indicated, the revenues,
production and average prices received from sales of natural gas, natural gas
liquids and oil and condensate.
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues (in thousands):
Natural gas......................... $184,595 $129,534 $139,580
Natural gas liquids................. 97,561 75,321 72,771
Oil and condensate.................. 18,180 19,594 7,877
Helium and other.................... 11,075 10,510 8,509
-------- -------- --------
Total.......................... $311,411 $234,959 $228,737
======== ======== ========
Natural Gas Production (MMcf):
Hugoton............................. 46,821 48,871 51,986
West Panhandle...................... 19,268 20,357 22,983
Gulf of Mexico...................... 17,909 8,073 7,359
Other............................... 3 11 11
-------- -------- --------
Total.......................... 84,001 77,312 82,339
======== ======== ========
Natural Gas Liquids Production (MBbls):
Hugoton............................. 3,315 3,524 3,430
West Panhandle...................... 2,978 2,994 3,423
Gulf of Mexico...................... 163 48 53
Other............................... 4 5 5
-------- -------- --------
Total.......................... 6,460 6,571 6,911
======== ======== ========
Oil and Condensate Production (MBbls):
Hugoton............................. -- -- --
West Panhandle...................... 211 118 164
Gulf of Mexico...................... 665 1,025 337
Other............................... 63 52 45
-------- -------- --------
Total.......................... 939 1,195 546
======== ======== ========
</TABLE>
30
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
Weighted average sales price:
Natural gas (per Mcf)
Hugoton............................... $ 2.06 $ 1.32 $ 1.57
West Panhandle........................ 2.23 1.83 1.80
Gulf of Mexico ....................... 2.58 1.59 1.81
Other................................. .77 .54 1.29
------ ------ ------
Average*......................... $ 2.19 $ 1.65 $ 1.67
====== ====== ======
Natural gas liquids (per Bbl)
Hugoton............................... $14.60 $10.76 $10.03
West Panhandle........................ 16.06 12.33 11.06
Gulf of Mexico........................ 15.51 11.37 11.52
Other................................. 13.96 8.77 8.58
------ ------ ------
Average.......................... $15.21 $11.48 $10.55
====== ====== ======
Oil and condensate (per Bbl)
Hugoton............................... $ -- $ -- $ --
West Panhandle........................ 18.74 14.13 13.38
Gulf of Mexico........................ 19.95 16.57 15.18
Other................................. 20.07 16.48 14.43
------ ------ ------
Average.......................... $19.39 $16.32 $14.58
====== ====== ======
</TABLE>
* Includes the effects of hedging activities. See "Natural Gas Prices"
below.
Total revenues from sales of natural gas, NGLs and oil and condensate
increased from 1995 to 1996 primarily due to increased prices received in 1996.
The increase in total revenues from sales of natural gas, NGL, and oil and
condensate from 1994 to 1995 is primarily attributable to increased oil and
condensate production in 1995, increased liquids prices in 1995 and
approximately $12.7 million of natural gas hedge gains recognized in 1995.
These factors offset the decrease in natural gas and natural gas liquids
production and the lower market prices for natural gas production in 1995.
Natural Gas Revenues
Natural gas revenues increased by 42% from 1995 to 1996. Average prices
were significantly higher in 1996 than in 1995. The average price received for
market price-based production was $.81 per Mcf, or 61%, higher in 1996 than in
1995. MESA's hedge losses decreased the reported prices for such production by
$.02 per Mcf in 1996. The higher market prices in 1996 were the result of
increased demand primarily due to a colder than normal 1995/1996 winter.
Natural gas production from the Gulf of Mexico increased 122% from 1995 to 1996
due to the South Marsh Island drilling program. Natural gas revenues decreased
by 7% from 1994 to 1995. In 1995 production was lower in both the Hugoton and
West Panhandle fields due to timing and duration of
31
equipment maintenance and weather-related reduction in demand, respectively.
Average natural gas prices were slightly lower in 1995 than in 1994. The
average price received for market price-based production was $.22 per Mcf, or
14%, lower in 1995 than in 1994. MESA's hedge gains increased the reported
prices for such production by $.20 per Mcf in 1995. The lower market prices in
1995 were a function of a surplus supply of natural gas. (See "Natural Gas
Prices" below.)
NGL Revenues
NGL revenues increased by 29% from 1995 to 1996. Average prices in 1996
were 32% higher than in 1995 due to improved market conditions. The increase in
prices was partially offset by a 2% decline in production. NGL revenues
increased by 4% in 1995 compared to 1994. Hugoton field NGL production was
slightly higher despite lower natural gas production reflecting improved yields
from the Satanta Plant. West Panhandle field NGL production decreased in 1995
in proportion to the lower natural gas production. The lower production was
offset by higher average prices in 1995 due to improved market conditions for
NGLs.
Oil and Condensate Revenues
Oil and condensate revenues were slightly lower in 1996 than in 1995. Oil
production in the Gulf of Mexico was down 35% due to natural oil production
decline from the successful drilling in 1994. The production decrease was
offset by an increase of 19% in average prices received in 1996 than 1995 due
to improved market conditions. Oil and condensate revenues increased
approximately 150% from 1994 to 1995. Gulf of Mexico production increased in
late 1994 due to successful drilling results. Average oil and condensate prices
were also higher in 1995 by $1.74 per Bbl.
Natural Gas Prices
Substantially all of MESA's natural gas production is sold under short or
long-term sales contracts. The following table shows MESA's natural gas
production sold under fixed price contracts and production sold at market
prices:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Natural Gas Production (MMcf):
Sold under fixed price contracts.......... 5,198 15,212 13,935
Sold at market prices..................... 78,803 62,100 68,404
------ ------ ------
Total production..................... 84,001 77,312 82,339
====== ====== ======
Percent sold at market prices............. 94% 80% 83%
====== ====== ======
</TABLE>
32
In addition to its fixed price contracts, MESA will, when circumstances
warrant, hedge the price received for its market-sensitive production through
natural gas futures contracts, swaps and other financial instruments as well as
physical sales arrangements. The following table shows the effects of MESA's
fixed price contracts and hedging activities on its natural gas prices:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Average Natural Gas Prices (per Mcf):
Fixed price contracts..................... $ 3.21 $ 2.12 $ 2.16
Market prices received.................... 2.14 1.33 1.55
Hedge gains (losses)...................... (.02) .20 .01
------ ------ ------
Total market prices.................. 2.12 1.53 1.56
------ ------ ------
Total average prices...................... $ 2.19 $ 1.65 $ 1.67
====== ====== ======
</TABLE>
The average natural gas prices under fixed price contracts increased in
1996 due to the expiration of certain lower priced contracts in 1995.
Gains and losses from hedging activities are included in natural gas
revenues when the applicable hedged natural gas is produced. MESA recognized
losses from hedging activities of $1.8 million in 1996, and gains of $12.7
million in 1995 and $895,000 in 1994.
Costs and Expenses
MESA's aggregate costs and expenses increased by approximately 15% from
1995 to 1996. Lease operating expenses increased 10% from 1995 to 1996 due to
higher production and fuel costs in the West Panhandle and Hugoton fields and
slightly higher overall production. Production and other taxes increased 9%
from 1995 to 1996 due to increased revenues partially offset by lower tax rates
for Hugoton field production. Exploration charges in 1996 were lower than in
1995 due to a greater emphasis being placed on lower risk development drilling
throughout 1996. General and administrative ("G&A") expenses increased in 1996
due to a $9.3 million charge relating to a reduction in personnel associated
with the Recapitalization, partially offset by lower costs resulting from the
personnel reduction and lower legal expenses. Depreciation, depletion and
amortization ("DD&A") expense, which is calculated quarterly on a
unit-of-production basis, was higher primarily due to a decrease in estimated
reserves and an impairment of long-lived assets of approximately $6.8 million
in connection with the adoption of a new accounting standard (SFAS No. 121).
MESA's aggregate costs and expenses declined by approximately 7% from 1994
to 1995. Lease operating expenses declined marginally due to decreased
production. Production and other taxes decreased 14% from 1994 to 1995 due to
decreased production in the Hugoton and West Panhandle fields and lower tax
rates for Hugoton field production in 1995. Exploration charges in 1995 were
greater than in 1994 reflecting increased exploration activities in the Gulf
33
of Mexico and consist primarily of exploratory dry-hole expense. G&A expenses
were lower in 1995 than in 1994 primarily due to lower legal expenses and a
reduction in employee benefit expenses. DD&A expense was lower in 1995 than in
1994 primarily due to lower equivalent production in 1995, oil and gas reserve
increases in the Hugoton and West Panhandle fields in the fourth quarters of
1994 and 1995, and additional reserve discoveries in the Gulf of Mexico in 1994
and 1995. (See "Supplemental Financial Data" in the notes to the consolidated
financial statements of MESA located elsewhere in this Form 10-K for discussion
of oil and gas reserves.)
See "Production Costs" in the business section located elsewhere in this
Form 10-K.
The table below presents MESA's total production costs (lease operating
expenses and production and other taxes) by area of operation for each of the
years ended December 31 (in thousands, except per Mcf of natural gas equivalent
data):
<TABLE>
<CAPTION>
1996 1995 1994
---------------- ---------------- ----------------
Total Per Mcfe Total Per Mcfe Total Per Mcfe
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Lease Operating Expense:
Hugoton............... $13,545 $ .20 $12,703 $ .18 $12,549 $ .17
West Panhandle........ 28,896 .75 25,989 .67 26,910 .60
Gulf of Mexico........ 10,476 .46 9,848 .68 11,136 1.15
Other................. 1,530 3.79 907 2.57 623 2.00
------- ------- -------
54,447 .42 49,447 .40 51,218 .40
------- ------- -------
Production and Other
Taxes:
Hugoton............... 16,297 .24 15,004 .21 17,505 .24
West Panhandle........ 3,472 .09 3,216 .08 3,099 .07
Gulf of Mexico........ 19 .00 34 .00 68 .01
Other................. 283 .70 149 .42 634 2.04
------- ------- -------
20,071 .16 18,403 .15 21,306 .17
------- ------- -------
Total Production Costs... $74,518 $ .58 $67,850 $ .55 $72,524 $ .57
======= ======= =======
</TABLE>
Other Income (Expense)
Interest expense in 1996 was $27.5 million lower than in 1995 due to lower
average aggregate debt outstanding at lower average interest rates. Average
aggregate debt outstanding and average interest rates fell to $1,036.0 million
and 11.34%, respectively, from $1,246.9 million and 11.64% in 1995. Interest
expense in 1995 was not materially different from 1994 as average aggregate
debt outstanding and average interest rates did not change materially. Non-cash
interest expense representing accretion of discount on long-term debt totaled
$8 million, $39 million and $79 million in 1996, 1995 and 1994, respectively.
34
Interest income decreased $8.2 million from 1995 to 1996 due to lower
average cash balances in 1996. Interest income increased from $13.5 million in
1994 to $15.9 million in 1995 as a result of higher average cash balances and
higher average interest rates earned on these cash balances in 1995.
Results of operations for the years 1996, 1995, and 1994 include certain
items which are either non-recurring or are not directly associated with MESA's
oil and gas producing operations. The following table sets forth the amounts of
such items (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Gains from investments........................ $ 9,418 $18,420 $ 6,698
Gains from collections from Bicoastal
Corporation................................. 2,548 6,352 16,577
Gain from adjustment of contingency reserve... 15,000 -- --
Other......................................... (1,929) 2,403 (4,011)
------- ------- -------
Total other income.................... $25,037 $27,175 $19,264
======= ======= =======
</TABLE>
The gains from investments relate primarily to energy futures contracts,
which include New York Mercantile Exchange ("NYMEX") futures contracts,
commodity price swaps and options that are not accounted for as hedges of
future production. MESA's investments in marketable securities and futures
contracts are valued at market prices at each reporting date with gains and
losses included in the statement of operations for such reporting period
whether or not such gains or losses have been realized. Gains from collections
from Bicoastal Corporation represent returns on MESA's investment in Bicoastal
subsequent to the confirmation of its bankruptcy plan. No additional payments
from Bicoastal are expected. In the second quarter of 1996, MESA revalued
certain contingencies associated primarily with contracts which were settled in
the mid-to-late 1980s. As a result of the revaluation, MESA recorded a gain of
$15 million in the second quarter of 1996.
Production Allocation Agreement
Effective January 1, 1991, MESA entered into the PAA with CIG which
allocates 77% of the production from the West Panhandle field to MESA and 23%
to CIG. During 1996, 1995, and 1994, MESA produced and sold 72%, 71%, and 69%,
respectively, of total production from the field; the balance of field
production was sold by CIG. MESA records its 77% ownership interest in natural
gas production as revenue. The difference between the net value of production
sold by MESA and the net value of its 77% entitlement is accrued as a gas
balancing receivable. The revenues and costs associated with such accrued
production are included in results of operations.
The following table presents the incremental effect on production and
results of operations from entitlement production recorded in excess of actual
sales as a result of the PAA (dollars in thousands):
35
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues accrued............... $ 8,112 $ 4,260 $ 8,662
Costs and expenses accrued..... (2,766) (1,576) (3,075)
------- ------- -------
Recorded to receivable......... 5,346 2,684 5,587
------- ------- -------
Depreciation, depletion
and amortization............. (2,546) (1,680) (3,713)
------- ------- -------
Total..................... $ 2,800 $ 1,004 $ 1,874
======= ======= =======
Production Accrued:
Natural gas (MMcf)........ 1,734 1,155 2,386
Natural gas liquids
(MBbls)................. 269 171 355
</TABLE>
At December 31, 1996, the long-term gas balancing receivable under the PAA
due from CIG was $47.9 million net of accrued costs which is included in other
assets in the consolidated balance sheet. Approximately $18 million of the
long-term gas balancing receivable relating to the PAA is attributable to
MAPCO's interest in liquids purchased by MESA pursuant to the Liquids
Acquisition. The provisions of the PAA allow for periodic and ultimate cash
balancing to occur. The PAA also provides that CIG may not take in excess of
its 23% share of ultimate production.
Capital Resources and Liquidity
In August of 1996, MESA completed a recapitalization of its balance sheet
by issuing new equity and repaying and refinancing substantially all of its
then existing long-term debt. The Recapitalization included (i) a sale by
private placement of approximately 58.8 million shares of a new class of Series
B Preferred Stock for $133 million to DNR-MESA Holdings L.P., a Texas limited
partnership ("DNR"), whose sole general partner is Rainwater, Inc., a Texas
corporation owned by Richard E. Rainwater, and (ii) the issuance to MESA's then
existing stockholders of rights (the "Rights Offering") to purchase a new class
of Series A Preferred Stock. The Rights Offering was substantially over
subscribed and resulted in such stockholders' purchase of approximately 58.6
million shares of Series A Preferred Stock for $132 million. In addition, as
part of the Recapitalization, MESA entered into the new seven-year $525 million
Credit Facility with a group of banks, issued and sold $475 million of senior
subordinated notes consisting of $325 million of 10-5/8% senior subordinated
notes (the "Senior Subordinated Notes") due in 2006 and $150 million initial
accreted value of 11-5/8% senior subordinated discount notes (the "Senior
Discount Notes") due in 2006.
The Recapitalization enhances MESA's ability to compete in the oil and gas
industry by substantially increasing its cash flow available for investment and
improving its ability to attract capital. The ability to redirect cash flow to
acquisition, exploitation and exploration activities and plant expansion rather
than debt service allows MESA to pursue its aggressive
36
growth strategy. Specifically, MESA's financial condition improved
significantly as a result of the Recapitalization due to (i) a significant
reduction in total debt outstanding (see table below), (ii) a reduction in
annual cash interest expense through lower debt balances and lower interest
rates, and (iii) the extension of maturities on its long-term debt.
Mesa Operating Co., a Delaware corporation and a wholly-owned subsidiary
of MESA, is the borrower under the Credit Facility and the issuer under the
Senior Subordinated Notes and the Senior Discount Notes. MESA is the guarantor
on the Credit Facility and on both the Senior Subordinated Notes and the Senior
Discount Notes.
The Credit Facility is secured by liens on substantially all of MESA's
assets and matures on June 30, 2003. Borrowings under the Credit Facility bear
interest, at MESA's option, at Interbank Eurodollar rates plus 1-1/2%, CD rates
plus 1-1/2%, Fed Funds rates plus 1% or the prime rate plus 1/2%. MESA has
entered into a two-year interest rate swap ending on August 28, 1998, that
fixes the interest rate on $250 million of borrowings under the Credit Facility
at approximately 7-3/4%. The borrowing base for the Credit Facility is
determined based on the value of MESA's proved oil and gas reserves and was
initially set at $525 million. The borrowing base at December 31, 1996 was $525
million and, as of such date, $319 million was outstanding under the Credit
Facility. MESA currently has a commitment letter from The Chase Manhattan Bank,
N.A. to amend and restate the Credit Facility to increase the total amount of
the Credit Facility to $650 million in connection with the Greenhill
Acquisition. Borrowings under the Credit Facility will be used to fund the
Greenhill Acquisition. The Credit Facility restricts, among other things,
MESA's ability to incur additional indebtedness, create liens, pay dividends,
acquire stock or make investments, loans or advances.
The amounts outstanding under the Senior Subordinated Notes and the Senior
Discount Notes at December 31, 1996 were approximately $325 million and $159
million, respectively, and both the Senior Subordinated Notes and the Senior
Discount Notes are unsecured and mature in 2006. The Senior Subordinated Notes
bear interest at a rate of 10-5/8%, payable semiannually. The Senior Discount
Notes do not accrue interest until July 1, 2001, however, the accreted value of
such notes will increase at a rate of 11-5/8% compounded semiannually until
such date. Beginning July 1, 2001, the Senior Discount Notes will bear interest
at a rate of 11-5/8% compounded semiannually. Prior to July 1, 1999, MESA may,
at its option, on any one or more occasions, redeem up to 33-1/3% of the
aggregate principal amount of each of the Senior Subordinated Notes and the
Senior Discount Notes at a redemption price equal to 110% of the principal
amount or accreted value thereof with proceeds of equity offerings.
The indentures governing the Senior Subordinated Notes and the Senior
Discount Notes contain certain covenants that, among other things, limit the
ability of MESA and its restricted subsidiaries to incur additional
indebtedness and issue redeemable stock, pay dividends, make investments, make
certain other restricted payments, enter into certain transactions with
affiliates, dispose of assets, incur liens and engage in mergers and
consolidations.
37
Summarized long-term debt (in thousands) and year-end interest rates are as
follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------- -----------------------
Average Average
Interest Interest
Balance Rate Balance Rate
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
Fixed Rate Debt..... $483,772 10.95% $1,170,307 11.7%
Variable Rate Debt.. 319,000 7% 61,131 8.25%
Other............... 5,305 N/A 5,305 N/A
-------- ----------
Total............... $808,077 $1,236,743
======== ==========
</TABLE>
Business Strategy
A primary component of MESA's strategy is to expand its development and
exploration activities. MESA has budgeted $130 million for development,
exploration and gas processing in 1997, an increase of 160% over 1996
expenditures of $50 million. Of the 1997 total, $86 million is planned for
development, $32 million for exploratory drilling, seismic and lease
acquisition, and $12 million for gas plant and facility expansions. The 1997
budget includes work planned for the Greenhill properties. The timing of most
of MESA's capital expenditures is discretionary with no material long-term
capital expenditure commitments. Consequently, MESA has a significant degree of
flexibility to adjust the level of such expenditures as circumstances warrant.
In addition to developing its existing reserves, MESA will attempt to
increase its reserve base, production and operating cash flow by engaging in
strategic acquisitions of oil and natural gas properties. MESA does not have a
specific acquisition budget because of the unpredictability of the timing and
size of forthcoming acquisition activities. There is no assurance that MESA
will be able to identify suitable acquisition candidates in the future, or that
MESA will be successful in the acquisition of producing properties. Further,
there can be no assurances that any future acquisitions made by the Company
will be integrated successfully into the Company's operations or will achieve
desired profitability objectives.
Management believes that cash from operating activities, together with the
availability under the Credit Facility will be sufficient for MESA to meet its
debt service obligations and scheduled capital expenditures, to fund the
Greenhill Acquisition and to fund its working capital needs for the next
several years. In order to finance any possible future acquisitions, MESA will
either use borrowings available under the Credit Facility or MESA may seek to
obtain additional debt or equity financing in the public or private capital
markets. In February 1997, MESA filed a shelf registration statement for $500
million of debt securities and/or common stock with the Commission. In
addition, MESA may seek to use its equity securities as an acquisition
currency. The availability and attractiveness of these sources of financing
will depend upon a number of factors, some of which will relate to the
38
financial condition and performance of MESA, and some of which will be beyond
MESA's control, such as prevailing interest rates, oil, natural gas and NGL
prices, the availability of properties for acquisition and other market
conditions. There can be no assurance that additional debt or equity financing
will be available or be available on terms attractive to MESA. In addition, the
ability of MESA to incur any additional indebtedness and grant security
interests with respect thereto will be subject to the terms of the Credit
Facility and the indentures governing its Senior Subordinated Notes and Senior
Discount Notes.
Price Risk Management
In order to mitigate the potential negative effects of volatile commodity
prices, MESA entered into over-the-counter commodity and natural gas basis swap
agreements with financial institutions and gas marketing companies. A commodity
swap has the effect of fixing the absolute price or setting a trading range for
a specific product. A natural gas basis swap "fixes" the differential between
MESA's physical gas delivery points and the NYMEX Henry Hub.
Through financial swaps and fixed price sales contracts MESA fixed the
price on approximately 90% of its first quarter 1997 natural gas production at
$2.90 per MMBtu. As a result of physical sales contracts and other hedging
arrangements, MESA's estimated fixed price profile for the balance of 1997 is
as follows: 37 percent of expected natural gas production is hedged at an
average of $2.27 per MMBtu; 11 percent of expected natural gas liquids
production is hedged at an average $17.15 per Bbl; and 27 percent of expected
oil and condensate production is hedged at an average of $22.10 per Bbl.
In connection with acquisitions, MESA has and expects to continue to enter
into hedging arrangements for all or a portion of the production on the
acquired properties. Regarding the Greenhill acquisition, MESA hedged
approximately 100% of its 1997 expected natural gas production at approximately
$2.60 per MMBtu and approximately 30% of Greenhill's projected crude oil
production at approximately $22.60 per barrel. Through the use of a collar,
MESA created a $19.25 floor and a $25.50 cap for approximately 20% of the 1997
expected Greenhill crude oil production. For the year 1998, MESA fixed
approximately 40% of the projected Greenhill natural gas production around
$2.35. With respect to the Liquids acquisition, MESA sold approximately 100% of
the crude oil and natural gas liquids at a net price of $21.00 per barrel and
$18.66 per barrel, respectively, for the first three quarters of 1997.
In addition to these hedges, MESA entered into an eight year agreement for
13,000 MMBtus of natural gas per day beginning in early 1997. Under this
agreement, MESA will receive NYMEX Henry Hub plus $0.52 per MMBtu for the first
two years and 10% of the NYMEX WTI crude oil price for the remaining six years.
39
Other
See Note 8 to the consolidated financial statements of MESA included
elsewhere in this Form 10-K for information regarding the status of certain
pending litigation.
MESA intends to continue to improve its financial flexibility generated
from the Recapitalization in order to avail itself of the optimal forms of
capital required to meet the Company's growth objectives. MESA may pursue the
exchange of its currently outstanding classes of Preferred Stock for Common
Stock. Before such an exchange can occur, certain terms must be met, including,
among others, the required approval of the holders of Common Stock and each
class of Preferred Stock. There is no assurance that such exchange will take
place or of the timing and terms of such exchange.
Management does not anticipate that inflation will have a significant
effect on MESA's operations.
Net Operating Loss Carryforwards
At December 31, 1996, MESA had a regular tax net operating loss ("NOL")
carryforward of approximately $560 million. Additionally, MESA had an
alternative minimum tax loss carryforward available to offset future
alternative minimum taxable income of approximately $535 million. If not used,
these carryforwards will expire between 2007 and 2011. As a result of the
Recapitalization, MESA's ability to carry forward its NOLs is subject to the
limitations of the Internal Revenue Code of 1986 (the "Code") Section 382
(which, in general, limits the utilization of NOL carryforwards subsequent to a
substantial change (generally more than 50%) in corporate stock ownership). In
particular, under Code Section 382, MESA's ability to carryforward its existing
NOLs at the time of the Recapitalization ("Pre-change NOLs") to offset future
taxable income and gain will be limited to the sum of (i) an annual allowance
determined, in part, by reference to MESA's "value" immediately prior to the
issuance of the Series B Preferred stock ("Valuation Date") and (ii) the amount
of any net unrealized gain inherent in MESA's assets as of the Valuation Date
("Built In Gain") recognized over a five year period. The imposition of the
above restrictions on MESA's Pre-change NOLs could result in a portion of those
NOLs expiring before MESA is able to utilize them.
Cash Flow from Operating Activities
Net cash provided by operating activities increased 46% from 1995 to 1996
primarily as a result of sales of investments and a reduction in net loss as
compared to 1995 before extraordinary, non-operating, loss on debt
extinguishment. Net cash provided by operating activities increased 30% from
1994 to 1995 primarily as a result of the $43 million litigation settlement in
1994.
40
Item 8. Consolidated Financial Statements and Supplementary Data
The consolidated financial statements of MESA, and notes thereto, together
with the report of Arthur Andersen LLP, MESA's independent public accountants,
dated February 27, 1997, and supplementary data are included in this Form 10-K
under Item 14 on pages F-2 through F-8.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
41
PART III
Item 10. Directors and Executive Officers of the Registrant
Set forth below is certain information concerning the directors and
officers of MESA.
Name Age Position
- ---------------------------- --- ---------------------------------------
I. Jon Brumley (a)........... 58 Chairman of the Board, Chief Executive
Officer, President and Director
Dennis E. Fagerstone........ 48 Executive Vice President and Chief
Operating Officer
Stephen K. Gardner.......... 37 Senior Vice President and Chief Financial
Officer
Edwin E. Hance.............. 47 Senior Vice President-Operations
Henry F. Galpin............. 50 Vice President-Natural Gas Processing
G. Michael Prescott, III.... 47 Vice President-Legal and Corporate
Secretary
Kenneth H. Sheffield, Jr.... 36 Vice President-Acquisitions and Development
M. Garrett Smith............ 35 Vice President-Corporate Acquisitions
Edgar E. St. James.......... 50 Vice President-Exploration
John V. Sobchak............. 37 Treasurer
Wayne A. Stoerner........... 44 Controller
John S. Herrington.......... 57 Director
Kenneth A. Hersh (a)........ 34 Director
Boone Pickens............... 68 Director
Richard E. Rainwater (a).... 52 Director
Philip B. Smith (a)......... 45 Director
Robert L. Stillwell......... 60 Director
(a) Indicates the Series B Preferred Stock Directors.
42
MR. BRUMLEY has served as Chairman of the Board of Directors and Chief
Executive Officer of MESA since August 1996. From 1986 to mid-1996, Mr. Brumley
founded and served as Chairman of the Board of Directors of Cross Timbers Oil
Company and from 1974 to 1985, Mr. Brumley served as President and Chief
Executive Officer of Southland Royalty Company.
MR. FAGERSTONE has served as Executive Vice President and Chief Operating
Officer since March 1, 1997. From October 1996 to February 1997, Mr.
Fagerstone served as Senior Vice President and Chief Operating Officer and
from May 1991 to October 1996, Mr. Fagerstone served as Vice President -
Exploration and Production. From June 1988 to May 1991, Mr. Fagerstone served
as Vice President - Operations.
MR. GARDNER has served as Senior Vice President and Chief Financial
Officer since October 1996. From June 1994 to October 1996, Mr. Gardner
served as Vice President and Chief Financial Officer. Mr. Gardner was
employed by BTC Partners, Inc. (a former financial consultant to MESA) from
January 1992 to May 1994 as Vice President and from May 1988 to December 1991
as Financial Analyst. From June 1987 to April 1988, Mr. Gardner served as
Financial Analyst to Mesa, L.P., a predecessor of MESA. Mr. Gardner is a
director of Bicoastal Corporation.
MR. HANCE has served as Senior Vice President - Operations since March
1997. From October 1996 to March 1997 he served as Vice President Production.
From January 1991 to October 1996, Mr. Hance served as Manager Engineering and
Development and from 1986 to 1991, he served as Supervisor Drilling of MESA.
MR. GALPIN has served as Vice President - Natural Gas Processing since
March 1997. From October 1996 to March 1997, he served as Manager - Gas
Processing, from February 1986 to October 1996 as a Supervisor - Gas
Processing, and in various other capacities in the gas processing division of
MESA from December 1980 until February 1986.
MR. PRESCOTT has served as Vice President - Legal and Corporate Secretary
since March 1997. From August 1994 to March 1997, he served as Acting General
Counsel and Corporate Secretary, from February 1991 to August 1994 as Associate
General Counsel and Corporate Secretary and from March 1987 to February 1991 as
Senior Attorney.
MR. SHEFFIELD has served as Vice President - Acquisitions and Development
since March 1997. He served as Manager - Acquisitions and Engineering from
October 1996 to March 1997, as Area Engineering Supervisor from January 1991 to
October 1996 and in various other capacities in engineering since he joined
MESA in June 1982.
MR. SMITH (M. Garrett) has served as Vice President - Corporate
Acquisitions since January 1997. From October 1996 to December 1996, Mr.
Smith served as Vice President - Finance and from 1994 to 1996, he served as
Director of Financial Planning. Mr. Smith was employed by BTC Partners, Inc.
(a former financial advisor to MESA) as Vice President and other capacities
from 1989 to 1994.
MR. ST. JAMES has served as Vice President - Exploration since October
1996. From 1990 to October 1996, he served as Manager of Exploration and from
43
1986 to 1990 as Geological Supervisor. From 1978 to 1986, he served as a
geologist for MESA in the Gulf Coast region.
MR. SOBCHAK has served as Treasurer since October 1996. From 1994 to
October 1996, Mr. Sobchak served as Director of Treasury Operations and from
1988 to 1994, as Business Development Analyst.
MR. STOERNER has served as Controller since October 1996. From June 1996
to September 1996, he served as Manager - Accounting. From May 1991 to May
1996, he served as Supervisor - Financial and General Accounting and from
January 1989 to April 1991, he served as Supervisor - Financial Reporting.
MR. HERRINGTON has served as a director of MESA since January 1992.
Since December 1991, Mr. Herrington has been involved in personal investments
and real estate activities. He was Chairman of the Board of Harcourt Brace
Jovanovich, Inc. (publishing) from May 1990 to November 1991 and served as a
director from May 1989 to May 1990. Mr. Herrington served as the Secretary of
the Department of Energy of the United States from February 1985 to May 1990.
MR. HERSH has served as a director of MESA since July 1996. Since 1994,
he has served as Chief Investment Officer and director of Rainwater, Inc. and
as a Managing Partner of Natural Gas Partners investment funds. From 1989 to
1994, he served as a Managing Partner of Natural Gas Partners, L.P. and from
1985 to 1987, as a member of the energy group of Morgan Stanley & Co.
investment banking division. Mr. Hersh is a director of HS Resources, Inc.
and Titan Exploration Inc.
MR. PICKENS, the founder of MESA, has served as a director of MESA since
its inception. From January 1992 to August 1996, he served as Chairman of the
Board of Directors and Chief Executive Officer. From October 1985 to December
1991, Mr. Pickens served as General Partner of Mesa, L.P., predecessor of MESA,
and as Director of Pickens Operating Co. (the corporate general partner of
Mesa, L.P.). From 1964 to January 1987, Mr. Pickens served as Chairman of the
Board and President of MESA in its original corporate form. Mr. Pickens is
currently the Chairman of the Board of BP Capital LLC and Pickens Fuel Corp.
MR. RAINWATER has served as a director of MESA since July 1996. Since
1986, Mr. Rainwater has been an independent investor and the sole shareholder,
President and a director of Rainwater, Inc. Mr. Rainwater was the founder of
Crescent Real Estate Equities, Inc. in 1994 and since that time has served as
Chairman of the Board. He was the co-founder of Mid Ocean Limited in 1991,
the founder of Columbia Hospital Corporation (predecessor to Columbia/HCA
Healthcare Corporation) in 1987 and the founder of ENSCO International, Inc.
in 1986. From 1970 to 1986, Mr. Rainwater served as the Chief Investment
Advisor to the Bass Family of Texas.
MR. SMITH (Philip B.) has served as a director of MESA since July 1996.
Mr. Smith has served as President, Chief Executive Officer and a director of
Tide West Oil Company since 1991. In 1996, Mr. Smith founded PRIZE Petroleum,
L.L.C. From 1991 to 1996, Mr. Smith served as President, Chief Executive
Officer and a director of Tide West Oil Company. From 1986 to 1991, he served
as Senior Vice President of Mega Natural Gas Company and from 1980 to 1986, he
held executive positions with two small exploration and production companies.
From 1976 to 1980, Mr. Smith held various positions with Samson Resources
44
Company and from 1974 to 1976, he was a production engineer with Texaco, Inc.
Mr. Smith is a director of HS Resources, Inc.
MR. STILLWELL has served as a director of MESA since January of 1992, as
a member of the Advisory Committee of Mesa, L.P., a predecessor MESA, from
December 1985 to December 1991 and as a director of MESA in its original
corporate form from 1969 to January 1987. Mr. Stillwell has been a partner in
the law firm of Baker & Botts, L.L.P. for more than the last five years.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires MESA's
officers and directors, and persons who own more than 10% of a registered class
of MESA's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (SEC) and the New York
Stock Exchange. Officers, directors and holders of more than 10% of MESA's
equity securities are required by SEC regulation to furnish MESA with copies of
all Section 16(a) forms they file.
Based on its review of the copies of such forms received by it, or written
representations from certain reporting persons, MESA believes that, during the
past year, all filing requirements applicable to the officers, directors and
greater than 10% beneficial owners of MESA were complied with, except that one
Form 4 filing by Mr. Pickens inadvertently omitted one day's transactions. Upon
discovery of the error, a corrected Form 4 was immediately filed.
45
Item 11. Executive Compensation
The table set forth below contains certain information regarding
compensation earned by, awarded to, or paid to the Chief Executive Officer, the
other four most highly compensated executive officers of MESA and other former
executive officers, as required, for services rendered to MESA during the years
1996, 1995 and 1994.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------
Other Annual
Name and Principal Position Year Salary Bonus Compensation(1)
- -------------------------------- ---- -------- -------- ------------
<S> <C> <C> <C> <C>
I. Jon Brumley, Chairman of the 1996(2) $180,142 $ -- $ --
Board of Directors and Chief 1995 -- -- --
Executive Officer 1994 -- -- --
Boone Pickens, Former 1996 947,596 -- --
Chairman of the Board of 1995 675,000 175,000 --
Directors and Chief Executive 1994 675,000 -- --
Officer
Paul W. Cain, Former 1996 246,672 -- --
President and Chief Operating 1995 400,020 150,000 --
Officer 1994 400,020 225,000 --
Dennis E. Fagerstone, Executive 1996 212,490 90,000 --
Vice President and Chief 1995 199,980 50,000 --
Operating Officer 1994 199,980 100,000 --
Stephen K. Gardner, Senior 1996 187,515 210,000 --
Vice President and Chief 1995 175,020 40,000 --
Financial Officer 1994(3) 92,095 60,000 --
M. Garrett Smith, Vice 1996(4) 137,490 200,000 --
President-Corporate 1995 -- -- --
Acquisitions 1994 -- -- --
Edwin E. Hance, Senior Vice 1996(4) 131,235 40,000 --
President-Operations 1995 -- -- --
1994 -- -- --
46
</TABLE>
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards-Number
of Shares
Underlying All Other
Name and Principal Position Year Options/SARs Compensation(5)
- -------------------------------- ---- --------------- ---------------
<S> <C> <C> <C>
I. Jon Brumley, Chairman of the 1996(2) 1,600,000 $ 18,014(6)
Board of Directors and Chief 1995 -- --
Executive Officer 1994 -- --
Boone Pickens, Former 1996 -- 15,000(7)
Chairman of the Board of 1995 -- 35,914
Directors and Chief Executive 1994 200,000 1,094,500(8)
Officer
Paul W. Cain, Former 1996 -- 415,020(9)
President and Chief 1995 -- 22,165
Operating Officer 1994 150,000 93,503
Dennis E. Fagerstone, Executive 1996 500,000 30,249(10)
Vice President and Chief 1995 -- 14,663
Operating Officer 1994 85,000 50,997
Stephen K. Gardner, Senior 1996 450,000 39,752(11)
Vice President and Chief 1995 -- 12,915
Financial Officer 1994(3) 135,000 25,856
M. Garrett Smith, Vice 1996(4) 350,000 33,749(12)
President-Corporate 1995 -- --
Acquisitions 1994 -- --
Edwin E. Hance, Senior Vice 1996(4) 200,000 20,624(13)
President-Operations 1995 -- --
1994 -- --
</TABLE>
(1) Apart from the compensation set forth in the summary compensation table
and under the plans and pursuant to the transactions described below,
other compensation paid for services during the years ended December 31,
1996, 1995, and 1994, respectively, to each individual named in the
summary compensation table aggregated less than 10% of the total salary
and bonus reported for such individual in the summary compensation table,
or $50,000, if lower.
(2) Mr. Brumley became an officer of MESA in August 1996.
(3) Mr. Gardner became an officer of MESA in June 1994.
(4) Mr. Smith and Mr. Hance became officers of MESA in October 1996.
(5) Except as reflected in other notes, "All Other Compensation" consists of
the following items. First, MESA maintains an Employees Premium Plan and a
Profit Sharing Plan, both of which are retirement plans (the
47
"Retirement Plans"), for all employees (see separate discussion below).
MESA declared contributions to the Retirement Plans of 10%, 5% and 17% of
each employee's compensation in 1996, 1995 and 1994, respectively.
However, total employer contributions to the Retirement Plans for the
account of a participant in any calendar year are limited as specified by
the Internal Revenue Code (the "Code") and the Retirement Plans. See
"Limitation on Contributions to Benefit Plans" below. The maximum annual
amount of employer contributions to a participant's accounts in the
Retirement Plans totaled $15,000 in 1996, $7,500 in 1995 and $25,500 in
1994. Second, to the extent that 10% of an employee's total compensation
exceeded $15,000 in 1996, that 5% of an employee's total compensation
exceeded $7,500 in 1995, and that 17% of an employee's total compensation
exceeded $25,500 in 1994 (in each case, all employees with total
compensation in excess of $150,000), MESA, as a matter of policy, paid the
excess amount in cash to such employee. Third, in 1995 there was a
reallocation to participant accounts of forfeitures in the Profit Sharing
Plan from unvested balances in the accounts of employees who terminated
during 1994.
(6) Includes the following: a $15,000 Retirement Plans contribution and a
$3,014 payment in lieu of a Retirement Plans contribution in excess of the
contribution limitation as described in Note 5 above.
(7) Includes the following: a $15,000 Retirement Plans contribution.
(8) Includes the following: a $25,500 Retirement Plans contribution; a
$119,000 payment in lieu of a Retirement Plans contribution in excess of
the contribution limitation as described in Note 5 above; a $950,000 bonus
payment that has been deferred until Mr. Pickens' retirement and that was
subject to his continued employment (except in certain events) through
December 31, 1995, with respect to MESA's 1994 commodities and securities
investment activities managed by him.
(9) Includes the following: a $15,000 Retirement Plans contribution; a
$400,020 severance payment.
(10) Includes the following: a $15,000 Retirement Plans contribution; a $15,249
payment in lieu of a Retirement Plans contribution in excess of the
contribution limitation as described in Note 5 above.
(11) Includes the following: a $15,000 Retirement Plans contribution; a $24,752
payment in lieu of a Retirement Plans contribution in excess of the
contribution limitation as described in Note 5 above.
(12) Includes the following: a $15,000 Retirement Plans contribution; a $18,749
payment in lieu of a Retirement Plans contribution in excess of the
contribution limitation as described in Note 5 above.
(13) Includes the following: a $15,000 Retirement Plans contribution; a $5,624
payment in lieu of a Retirement Plans contribution in excess of the
contribution limitation as described in Note 5 above.
48
Employees Premium and Profit Sharing Plans
MESA maintains the Retirement Plans for the benefit of its employees. Each
year, the Company is required to contribute to the Employees Premium Plan 5% of
the total compensation (as defined in the plan) paid to participants and may
also contribute up to 12% of total compensation (as defined) to the Profit
Sharing Plan. MESA declared contributions of 10%, 5% and 17% to the Retirement
Plans in 1996, 1995 and 1994, respectively.
Participants become 30% vested in their account balances in the Retirement
Plans after three years of service and 40% vested after four years of service.
Participants become vested an additional 20% for each additional year of
service through year seven. Effective December 31, 1996, in conjunction with
participant changes associated with the Company's recapitalization, all
participants were fully vested in their account balances in the Retirement
Plans as of that date. Previously, effective December 31, 1991, in conjunction
with the conversion of the Partnership to the Company (the "Corporate
Conversion"), all participants were fully vested in their account balances in
the Retirement Plans as of that date as a result of certain property
dispositions consummated in 1990 and 1991. Participants remain fully vested in
their 1996 balances, but contributions in 1997 and later years under the
Retirement Plans are subject to the vesting schedule described above.
Prior years of service with the Company's predecessors are counted in the
vesting schedule. Amounts accumulated and vested are distributable only under
certain circumstances, including termination of the Retirement Plans.
Employees' 401K Plan
In February 1997, MESA's Board of Directors approved a 401K plan for the
MESA's employees which would be comprised of a voluntary 10% pre-tax
contribution by the employees which would be matched by MESA on a 2-for-1 basis
up to 5% (MESA would contribute up to 10%). In addition, MESA would maintain a
discretionary profit sharing contribution of up to 5%. Rollout was scheduled
for the summer of 1997, but has been put on hold pending the outcome of the
shareholder votes on the Pioneer Merger.
Limitation on Contributions to Benefit Plans
Total employer contributions to the Retirement Plans for the account of a
participant in any calendar year are limited to the lesser of what is specified
by the Code or by the Retirement Plans. The Code provides that annual additions
to a participant's account may not exceed the lesser of $30,000 or 25% of the
amount of the participant's annual compensation. The Retirement Plans provide
that aggregate annual additions to a participant's account may not exceed 17%
of eligible compensation as defined by the Retirement Plans. The eligible
compensation per the Code was limited to $150,000 in 1996, $150,000 in 1995,
and $150,000 in 1994. The Company, in its discretion, may determine to make
cash payments of amounts attributable to an employee's participation in the
Retirement Plans to the extent such amounts exceed the Code limitations. As a
matter of general policy for employees of the Company, the Company makes annual
cash payments directly to employees to the extent that the annual additions to
the account of each such employee pursuant to the Retirement Plans would exceed
the Code limitations.
MESA 1996 INCENTIVE PLAN
The description set forth below represents a summary of the principal terms
and conditions of the Incentive Plan and does not purport to be complete. Such
description is qualified in its entirety by reference to the 1996 Incentive Plan
of MESA (the "Mesa Incentive Plan").
General
On August 22, 1996, MESA's Board of Directors approved the Mesa Incentive
Plan. The objectives of the Mesa Incentive Plan are to attract and retain key
employees of MESA, to encourage the sense of proprietorship of such employees
and to stimulate the active interest of such persons in the development and
financial success of MESA. These objectives are to be accomplished by making
awards ("Awards") under the Mesa Incentive Plan and thereby providing
participants with a proprietary interest in the growth and performance of MESA.
Key employees eligible for Awards under the Mesa Incentive Plan (the "Mesa
Employees") are those who hold positions of responsibility and whose performance
can have a significant effect on the success of MESA.
Awards to Mesa Employees under the Mesa Incentive Plan may be made in the
form of grants of stock options ("Options"), stock appreciation rights ("SARs"),
restricted or non-restricted Common Stock or units denominated in Common Stock
("Stock Awards"), cash awards ("Cash Awards"), performance awards ("Performance
Awards") or any combination of the foregoing.
The Mesa Incentive Plan provides for future Awards to be made in respect of
a maximum of 9,000,000 shares of MESA Common Stock. Shares of MESA Common Stock
which are the subject of Awards that are forfeited or terminated, expire
unexercised, are settled in cash in lieu of MESA Common Stock or in a manner
such that all or some of the shares covered thereby are not issued or are
exchanged for Awards that do not involve MESA Common Stock will again
immediately become available for Awards under the Mesa Incentive Plan.
The Mesa Incentive Plan will be administered by the Stock Option Committee
of MESA's Board of Directors (the "Committee").
The Committee will have the exclusive power to administer the Mesa
Incentive Plan and to take all actions which are specifically contemplated
thereby or are necessary or appropriate in connection with the administration
thereof. The Committee will also have the exclusive power to interpret the Mesa
Incentive Plan and to adopt such rules, regulations and guidelines for carrying
out the purposes of the Mesa Incentive Plan as it may deem necessary or proper
in keeping with the objectives thereof. The Committee may, in its discretion,
provide for the extension of the exercisability of an Award, accelerate the
vesting or exercisability of an Award, eliminate or make less restrictive any
restrictions contained in an Award, waive any restriction or other provision of
the Mesa Incentive Plan or an Award or otherwise amend or modify an Award in any
manner that is either (i) not adverse to the Mesa Employee holding the Award or
(ii) consented to by such Employee.
The Committee may delegate to the Chief Executive Officer and to other
senior officers of MESA its duties under the Mesa Incentive Plan.
Awards
The Committee will determine the type or types of Awards made under the
Mesa Incentive Plan and will designate the Employees who are to be recipients of
such Awards. Each Award will be embodied in an agreement, which will contain
such terms, conditions and limitations as determined by the Committee and will
be signed by or on behalf of MESA and the Mesa Employee. Awards may be granted
singly, in combination or in tandem. Awards may also be made in combination or
in tandem with, in replacement of, or as alternatives to, grants or rights under
the Mesa Incentive Plan or any other employee plan of MESA or any of its
subsidiaries, including any acquired entity. All or part of an Award may be
subject to conditions established by the Committee, which may include continuous
service with MESA and its subsidiaries, achievement of specific business
objectives, increases in specified indices, attainment of specified growth rates
and other comparable measurements of performance.
The types of Awards that may be made under the Mesa Incentive Plan are as
follows:
Options. Options are rights to purchase a specified number of shares of
MESA Common Stock at a specified price. An option granted pursuant to the Mesa
Incentive Plan may consist of either an incentive stock option ("ISO") that
complies with the requirements of Section 422 of the Code or a nonqualified
stock option ("NQSO") that does not comply with such requirements. Under the
Mesa Incentive Plan, both ISOs and NQSOs must have an exercise price per share
that is not less than 100% of the fair market value of the MESA Common Stock on
the date of grant. In either case, the exercise price must be paid in full at
the time an Option is exercised in cash or, if the Mesa Employee so elects, by
means of tendering MESA Common Stock or surrendering another Award or any
combination of cash, MESA Common Stock or other Awards. The Committee will
determine acceptable methods for tendering MESA Common Stock or other Awards by
a Mesa Employee to exercise an Option. The Committee may also provide for
procedures to permit the exercise of Options by use of proceeds to be received
from the sale of MESA Common Stock issuable pursuant to an Option. Subject to
the foregoing, the terms, conditions and limitations applicable to any Options,
including the term of any Options and the date or dates upon which they become
exercisable, will be determined by the Committee.
SARs. SARs are rights to receive a payment, in cash or MESA Common Stock,
equal to the excess of the fair market value or other specified valuation of a
specified number of shares of MESA Common Stock on the date the rights are
exercised over a specified strike price. An SAR may be granted under the Mesa
Incentive Plan to the holder of an Option with respect to all or a portion of
the shares of MESA Common Stock subject to such Option or may be granted
separately. The terms, conditions and limitations applicable to any SARs,
including the term of any SARs and the date or dates upon which they become
exercisable, will be determined by the Committee.
Stock Awards. Stock Awards consist of restricted and non-restricted grants
of MESA Common Stock or units denominated in MESA Common Stock. The terms,
conditions and limitations applicable to any Stock Awards will be determined by
the Committee. Without limiting the foregoing, rights to dividends or dividend
equivalents may be extended to and made part of any Stock Award in the
discretion of the Committee.
Cash Awards. Cash Awards consist of grants denominated in cash. The terms,
conditions and limitations applicable to any Cash Awards will be determined by
the Committee.
Performance Awards. Performance Awards consist of grants made to a Mesa
Employee subject to the attainment of one or more performance goals. A
Performance Award will be paid, vested or otherwise deliverable solely upon the
attainment of one or more pre-established, objective performance goals
established by the Committee. A performance goal may be based upon one or more
business criteria that apply to the Mesa Employee, one or more subsidiaries of
MESA or MESA as a whole, and may include any of the following: increased
revenue, net income, stock price, market share, earnings per share, return on
equity, return on assets, or decrease in costs. Subject to the foregoing, the
terms, conditions and limitations applicable to any Performance Awards will be
determined by the Committee.
Other Provisions
With the approval of the Committee, payments in respect of Awards may be
deferred, either in the form of installments or a future lump sum payment, by
any Mesa Employee. At the discretion of the Committee, a Mesa Employee may be
offered an election to substitute an Award for another Award or Awards of the
same or different type.
MESA will have the right to deduct applicable taxes from any Award payment
and withhold, at the time of delivery or vesting of cash or shares of Mesa
Common Stock under this Plan, an appropriate amount of cash or number of shares
of MESA Common Stock, or combination thereof, for the payment of taxes. The
Committee may also permit withholding to be satisfied by the transfer to MESA of
shares of MESA Common Stock previously owned by the holder of the Award for
which withholding is required.
MESA's Board of Directors may amend, modify, suspend or terminate the Mesa
Incentive Plan for the purpose of addressing any changes in legal requirements
or for any other purpose permitted by law, except that no amendment that would
impair the rights of any Mesa Employee with respect to any Award may be made
without the consent of such Mesa Employee.
In the event of any subdivision or consolidation of outstanding shares of
MESA Common Stock, declaration of a stock dividend payable in shares of Mesa
Common Stock or other stock split, the Mesa Incentive Plan provides for the
Committee to make appropriate adjustments to (i) the number of shares of Mesa
Common Stock reserved under the Mesa Incentive Plan, (ii) the number of shares
of MESA Common Stock covered by outstanding Awards in the form of MESA Common
Stock or units denominated in MESA Common Stock, (iii) the exercise or other
price in respect of such Awards and (iv) the appropriate fair market value and
other price determinations for Awards in order to reflect such transactions.
Furthermore, in the event of any other recapitalization or capital
reorganization of MESA, any consolidation or merger of MESA with another
corporation or entity, the adoption by MESA of any plan of exchange affecting
the MESA Common Stock or any distribution to holders of MESA Common Stock of
securities or property (other than normal cash dividends or stock dividends),
MESA's Board of Directors will make appropriate adjustments to the amounts or
other items referred to in clauses (ii), (iii) and (iv) above to give effect to
such transactions, but only to the extent necessary to maintain the
proportionate interest of the holders of the Awards and to preserve, without
exceeding, the value thereof.
49
Tax Implications of Awards
Set forth below is a summary of the federal income tax consequences to Mesa
Employees and Mesa as a result of the grant and exercise of Awards under the
Mesa Incentive Plan. This summary is based on statutory provisions, Treasury
regulations thereunder, judicial decisions and IRS rulings in effect on the date
hereof.
Nonqualified Stock Options; Stock Appreciation Rights; Incentive Stock
Options. Mesa Employees will not realize taxable income upon the grant of a NQSO
or a SAR. Upon the exercise of a SAR or NQSO, the Mesa Employee will recognize
ordinary income (subject to withholding by MESA) in an amount equal to the
excess of (i) the amount of cash and the fair market value of the MESA Common
Stock received, over (ii) the exercise price (if any) paid therefor. The Mesa
Employee will generally have a tax basis in any shares of MESA Common Stock
received pursuant to the exercise of a SAR, or pursuant to the cash exercise of
a NQSO, that equals the fair market value of such shares on the date of
exercise. Subject to the discussion under "-- Tax Code Limitations on
Deductibility" below, MESA (or a subsidiary) will be entitled to a deduction for
federal income tax purposes that corresponds as to timing and amount with the
compensation income recognized by the Mesa Employee under the foregoing rules.
Employees will not have taxable income upon the grant of an ISO. Upon the
exercise of an ISO, the Mesa Employee will not have taxable income, although the
excess of the fair market value of the shares of MESA Common Stock received upon
exercise of the ISO ("ISO Stock") over the exercise price will increase the
alternative minimum taxable income of the Mesa Employee, which may cause such
Mesa Employee to incur alternative minimum tax. The payment of any alternative
minimum tax attributable to the exercise of an ISO would be allowed as a credit
against the Employee's regular tax liability in a later year to the extent the
Mesa Employee's regular tax liability is in excess of the alternative minimum
tax for that year.
Upon the disposition of ISO Stock that has been held for the requisite
holding period (generally, at least two years from the date of grant and one
year from the date of exercise of the ISO), the Mesa Employee will generally
recognize capital gain (or loss) equal to the excess of the amount received in
the disposition over the exercise price paid by the Mesa Employee for the ISO
Stock. However, if a Mesa Employee disposes of ISO Stock that has not been held
for the requisite holding period (a "disqualifying disposition"), the Mesa
Employee will recognize ordinary income in the year of the disqualifying
disposition in an amount equal to the amount by which the fair market value of
the ISO Stock at the time of exercise of the ISO (or, if less, the amount
realized in the case of an arm's length disqualifying disposition to an
unrelated party) exceeds the exercise price paid by the Mesa Employee for such
ISO Stock. The Mesa Employee would also recognize capital gain to the extent the
amount realized in the disqualifying disposition exceeds the fair market value
of the ISO stock on the exercise date. If the exercise price paid for the ISO
Stock exceeds the amount realized (in the case of an arm's-length disposition to
an unrelated party), such excess would ordinarily constitute a capital loss.
MESA will generally not be entitled to any federal income tax deduction
upon the grant or exercise of an ISO, unless the Mesa Employee makes a
disqualifying disposition of the ISO Stock. If a Mesa Employee makes such a
disqualifying disposition, MESA (or a subsidiary) will then, subject to the
discussion below under "-- Tax Code Limitations on Deductibility," be entitled
to a tax deduction that corresponds as to timing and amount with the
compensation income recognized by the Mesa Employee under the rules described
in the preceding paragraph.
Under current rulings, if a Mesa Employee transfers previously held shares
of MESA Common Stock (other than ISO Stock that has not been held for the
requisite holding period) in satisfaction of part or all of the exercise price
of an NQSO or ISO, no additional gain will be recognized on the transfer of such
previously held shares in satisfaction of the NQSO or ISO exercise price
(although the Employee would still recognize ordinary compensation income upon
exercise of an NQSO in the manner described above). Moreover, that number of
shares of MESA Common Stock received upon exercise which equals the number of
shares of previously held MESA Common Stock surrendered therefor in satisfaction
of the NQSO or ISO exercise price will have a tax basis that equals, and a
holding period that includes, the tax basis and holding period of the previously
held shares of MESA Common Stock surrendered in satisfaction of the NQSO or ISO
exercise price. Any additional shares of MESA Common Stock received upon
exercise will have a tax basis that equals the amount of cash (if any) paid by
the Mesa Employee, plus the amount of compensation income recognized by the
Mesa Employee under the rules described above.
Cash Awards; Stock Unit Awards; Stock Awards. A Mesa Employee will
recognize ordinary compensation income upon receipt of cash pursuant to a Cash
Award or Performance Award or, if earlier, at the time such cash is otherwise
made available for the Mesa Employee to draw upon it. A Mesa Employee will not
have taxable income at the time of grant of a Stock Award in the form of units
denominated in MESA Common Stock ("Stock Unit Award") but rather, will generally
recognize ordinary compensation income at the time he receives MESA Common Stock
in satisfaction of such Stock Unit Award in an amount equal to the fair market
value of the MESA Common Stock received. In general, a Mesa Employee will
recognize ordinary compensation income as a result of the receipt of MESA Common
Stock pursuant to a Stock Award or Performance Award in an amount equal to the
fair market value of the MESA Common Stock when such stock is received;
provided, however, that if the stock is not transferable and is subject to a
substantial risk of forfeiture when received, the Mesa Employee will recognize
ordinary compensation income in an amount equal to the fair market value of the
MESA Common Stock (a) when the MESA Common Stock first becomes transferable or
is no longer subject to a substantial risk of forfeiture in cases where the Mesa
Employee does not make an valid election under Section 83(b) of the Code or (b)
when the MESA Common Stock is received in cases where the Mesa Employee makes a
valid Section 83(b) election.
A Mesa Employee will be subject to withholding for federal, and generally
for state and local, income taxes at the time he recognizes income under the
rules described above with respect to MESA Common Stock or cash received.
Dividends that are received by a Mesa Employee prior to the time that the Mesa
Common Stock is taxed to the Mesa Employee under the rules described in the
preceding paragraph are taxed as additional compensation, not as dividend
income. The tax basis of a Mesa Employee in the MESA Common Stock received will
equal the amount recognized by him as compensation income under the rules
described in the preceding paragraph, and the Mesa Employee's holding period in
such shares will commence on the date of receipt of the shares.
Tax Code Limitations on Deductibility. In order for the amounts described
above to be deductible by MESA (or a subsidiary), such amounts must constitute
reasonable compensation for services rendered or to be rendered and must be
ordinary and necessary business expenses. The ability of Mesa (or a subsidiary)
to obtain a deduction for future payments under the Mesa Incentive Plan could
also be limited by the golden parachute payment rules of Section 280G of the
Code, which prevent the deductibility of certain excess parachute payments made
in connection with a change in control of an employer-corporation. Finally, the
ability of MESA (or a subsidiary) to obtain a deduction for amounts paid under
the Mesa Incentive Plan could be limited by Section 162(m) of the Code, which
limits the deductibility, for federal income tax purposes, of compensation paid
to certain employees of MESA to $1 million with respect to any such employee
during any taxable year of MESA. However, an exception applies to this
limitation in the case of certain performance-based compensation. It is intended
that the approval of the Mesa Incentive Plan by the common stockholders of Mesa
and the description of the Mesa Incentive Plan contained herein will satisfy
certain requirements for the performance-based exception and Mesa will endeavor
to comply with the requirements of the Code and Treasury Regulation Section
1.162-27 with respect to the grant and payment of performance-based awards under
the Mesa Incentive Plan so as to be eligible for the performance-based
exception. However, it may not be possible in all cases to satisfy the
requirements for the exception and MESA may, in its sole discretion, determine
that in one or more cases it is in its best interests to not satisfy the
requirements for the performance-based exception.
As of April 25, 1997, 3,570,000 shares are subject to issuance upon the
exercise of outstanding options under the Mesa Incentive Plan.
On April 29, 1997, the last reported sales price of MESA Common Stock on
the New York Stock Exchange was $5 per share.
The following table summarizes certain information covering cumulative
options granted, before consideration of forfeitures and exercises, pursuant to
the Mesa Incentive Plan to each executive officer, each person who has received
5% of the options reserved for issuance, all current executive officers as a
group, and all current employees, including all current officers who are not
executive officers, as a group, from inception of the Mesa Incentive Plan
through April 25, 1997:
MESA INCENTIVE PLAN
SUMMARY OF GRANTS AS OF APRIL 25, 1997
<TABLE>
<CAPTION>
CUMULATIVE AVERAGE
OPTIONS PER SHARE
NAME GRANTED EXERCISE PRICE
---- ---------- --------------
<S> <C> <C>
I. Jon Brumley, Chief Executive Officer..................... 800,000 $ 3.25
Dennis E. Fagerstone, Executive Vice President and
Chief Operating Officer................................... 500,000 $4.0625
Stephen K. Gardner, Senior Vice President and Chief
Financial Officer......................................... 450,000 $4.0625
Edwin E. Hance, Senior Vice President -- Operations......... 200,000 $4.0625
M. Garrett Smith, Vice President -- Corporate
Acquisitions.............................................. 350,000 $4.0625
John V. Sobchak, Treasurer.................................. 50,000 $4.0625
Edgar E. St. James, Vice President -- Exploration........... 200,000 $4.0625
Wayne A. Stoerner, Controller............................... 50,000 $4.0625
Henry Galpin, Vice President -- Natural Gas Processing...... 75,000 $4.0625
Gary M. Prescott, Vice President -- Legal................... 50,000 $5.6875
Kenneth H. Sheffield, Jr., Vice President -- Acquisitions
and Development........................................... 100,000 $4.0625
All current executive officers as a group................... 2,825,000 $3.8612
All other current employees as a group...................... 745,000 $4.6967
</TABLE>
Approximately 29 employees have outstanding options as of April 25, 1997. As of
such date, Mesa has 412 employees.
Stock Options
The options granted and outstanding at December 31, 1996 have exercise
prices and vesting schedules as set forth in the following table:
<TABLE>
<CAPTION>
Exercise Vesting Schedule
Number of Price Per --------------------------------------------
Options Share 30% 55% 80% 100%
- --------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1,126,000 $ 6.8125 07/10/92 01/10/93 01/10/94 01/10/95
132,500 11.6875 04/02/93 10/02/93 10/02/94 10/02/95
100,850 5.8125 11/18/93 05/18/94 05/18/95 05/18/96
475,000 7.3750 05/10/94 11/10/94 11/10/95 06/26/96
75,000 6.1875 12/06/94 06/06/95 06/06/96 06/26/96
20,000 5.6875 11/12/95 05/12/96 -- 06/26/96
2,000,000 3.2500 02/21/97 08/21/97 -- 08/21/98
2,150,000 4.0625 03/30/97 09/30/97 -- 09/30/98
- ---------
6,079,350
=========
</TABLE>
The options and SARs granted in 1996 for the Chief Executive Officer, the
other four most highly compensated executive officers of MESA and other former
executive officers are as follows:
<TABLE>
<CAPTION>
Number of Percent of
Securities Total Options/ Grant
Underlying SARs Granted to Date
Options/SARs Employees in Exercise or Expiration Present
Granted Fiscal Year Base Price Date Value
------------ -------------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C>
I. Jon Brumley......... 1,600,000 39% 3.2500 08/21/06 3,264,000
Boone Pickens.......... -- -- -- -- --
Paul W. Cain........... -- -- -- -- --
Dennis E. Fagerstone... 500,000 12% 4.0625 09/30/06 1,265,000
Stephen K. Gardner..... 450,000 11% 4.0625 09/30/06 1,138,500
M. Garrett Smith....... 350,000 8% 4.0625 09/30/06 885,500
Edwin E. Hance......... 200,000 5% 4.0625 09/30/06 506,000
</TABLE>
* MESA used the Black-Scholes pricing model to estimate the fair value of the
options at the date of grant. The following weighted-average assumptions were
used in the valuation: a risk-free interest rate of 6.58%; a volatility factor
of the expected market price of MESA's common Stock of .6816; no expected
dividends; and weighted average expected option lives of five years. Using
these assumptions, the weighted average Black-Scholes value for each option
granted on August 21, 1996 and September 30, 1996 was $2.04 and $2.53,
respectively.
Options exercised in 1996 and the number and value of exercisable and
unexercisable options at December 31, 1996, for the Chief Executive Officer,
the other four most highly compensated executive officers of MESA and other
former executive officers are as follows:
50
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year End
<TABLE>
<CAPTION>
Option/SAR Values
-----------------------------------------------------------------------
Year Ended December 31, 1996
----------------------------------------------
Number of Shares Acquired
Name on Exercise (1) Value Realized
- ------------------------- ------------------------- --------------
<S> <C> <C>
I. Jon Brumley -- $ --
Boone Pickens 38,095 200,000
Paul W. Cain 28,571 150,000
Dennis E. Fagerstone 16,190 85,000
Stephen K. Gardner 16,190 85,000
M. Garrett Smith 5,714 30,000
Edwin E. Hance 9,524 50,000
</TABLE>
(1) The number of shares acquired on exercise is the net realized by
exercising the SARs on the following underlying stock options:
Mr. Pickens, 200,000; Mr. Cain, 150,000; Mr. Fagerstone, 85,000;
Mr. Gardner, 85,000; Mr. Smith, 30,000; Mr. Hance, 50,000.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Shares Underlying In-the-Money
Unexercised Options/SARs at Options/SARs at
December 31, 1996 December 31, 1996
--------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
I. Jon Brumley -- 1,600,000 $ -- $ 3,200,000
Boone Pickens 1,075,000 -- -- --
Paul W. Cain 250,000 -- -- --
Dennis E. Fagerstone 60,000 500,000 -- 593,750
Stephen K. Gardner 50,000 450,000 -- 534,375
M. Garrett Smith 25,000 350,000 -- 415,625
Edwin E. Hance 23,000 200,000 -- 237,500
</TABLE>
At December 31, 1996, the final trading day of the year, MESA's Common
Stock closed at $5.25 per share. The exercise price of the grants of stock
options reflected in the aggregate in the above tables are $11.6875, $7.375,
$6.8125, $6.1875, $5.8125, $4.0625 and $3.2500, respectively, per share.
On April 4, 1997, the Stock Option Committee of MESA's Board of Directors
passed a resolution providing for the acceleration of the vesting of all stock
options issued pursuant to MESA stock option plans upon a MESA Change of
Control, as defined in the MESA Severance Plan. The Pioneer Merger will
constitute a MESA Change of Control and all options granted will become
immediately exercisable in full. The aggregate number of shares of MESA Common
Stock that are covered by options that are held by all officers as a group is
4,935,850 shares and by the executive officers of MESA are as follows:
1,600,000 shares for Jon Brumley; 560,000 shares for Dennis E. Fagerstone;
500,000 shares for Stephen K. Gardner; 223,000 shares for Edwin E. Hance; and
375,000 shares for M. Garrett Smith. The exercise prices of these stock options
range from $3.25 to $11.6875 per share. By approving the adoption of the MESA
1996 Incentive Plan, MESA stockholders will approve certain of these options
granted to the current officers of MESA, all of which will become fully vested
upon consummation of the Pioneer Merger.
Common Stock Purchase Plan
The Company has established a Common Stock purchase program whereby
employees can buy Common Stock through after-tax payroll deductions. All
full-time employees, except officers, of MESA and its participating affiliates
are eligible to participate. MESA pays the brokerage fees for these open-market
transactions.
51
Other
There were no awards made under any long-term incentive plans (as defined
in Item 402(a)(7)(iii) of Regulation S-K of the Securities Act of 1933 to
exclude stock options and SARs) from January 1, 1996, through December 31,
1996; therefore, no disclosure is required in the Long-Term Incentive Plan
Awards table. From January 1, 1996, through December 31, 1996, no options or
stock appreciation rights were repriced (as defined in Item 402(i) of
Regulation S-K of the Securities Act of 1933).
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
Brumley Employment Agreement
Mr. Brumley, is a party to an Employment Agreement, dated as of
August 22, 1996 (the "Employment Agreement"), with MESA. The Employment
Agreement provides that if Mr. Brumley's employment is terminated prior to the
expiration of the two-year term other than for "cause" (as defined in the
Employment Agreement) or if Mr. Brumley terminates his employment for "good
reason," then Mr. Brumley shall be entitled, in addition to the payment of his
salary, to a severance payment of $1.6 million if the termination occurs within
one year of the date of the agreement, $1.2 million if the termination occurs
more than one year but less than 18 months after the date of the agreement or
$800,000 if the termination occurs after 18 months after the date of the
agreement. "Good reason" is defined in the Employment Agreement as (i) a
reduction or diminution of his position, titles, offices, duties,
responsibilities or status with MESA without cause and without his express
written consent, (ii) a reduction by MESA in his base salary in effect at the
time, (iii) relocation of MESA's executive offices to a site outside Dallas
County or Tarrant County, Texas or (iv) any other breach by MESA of its
obligations under the Employment Agreement, which MESA fails to cure within a
reasonable period of time. Upon consummation of the Pioneer Merger, there will
be "good reason" because Mr. Brumley will no longer be chief executive
officer.
Incentive Payment for Mr. Brumley
Brumley Partners, a Texas general partnership consisting of Mr. Brumley,
and a family member, was admitted as a limited partner with a profits interest
in DNR pursuant to the Amended and Restated Agreement of Limited Partnership of
DNR-MESA Holdings, L.P. dated November 8, 1996 (the "DNR Agreement"). The
profits interest held by Brumley Partners entitles it to receive approximately
3.76% of the profits of DNR after the occurrence of "payout" (which is the
receipt by the other partners of partnership distributions equal to such
partners' original capital contributions plus an 8% rate of return). The
profits interest issued to Brumley Partners is the post-payout equivalent of a
$5 million capital contribution to DNR, but will be increased or decreased upon
the occurrence of certain events, which include the termination of Mr.
Brumley's employment or MESA's consummation of a substantial transaction before
certain dates. The consummation of the proposed Pioneer Merger will result in
an increase in the Brumley Partners' profits interest in DNR. The profits
interest will be approximately 5.64% (the post payout equivalent of a $7.5
million capital contribution to DNR) if the closing of the Pioneer Mergers
occurs before August 22, 1997, or 4.89% (the post payout equivalent of a $6.5
million capital contribution to DNR) if the closing of the Pioneer Merger
occurs after August 22, 1997, but before August 22, 1998.
Pickens Severance Package
Mr. Pickens' employment with MESA terminated on December 31, 1996. Mr.
Pickens was not covered by a formal severance policy, but received a severance
payment of $4,875,178, in January 1997. Such amount is not included in All
Other Compensation in the Summary Compensation Table above. Also, while such
amount is close to the amount that would have been paid to Mr. Pickens under
The formuals used to provide severancee benefits to MESA employees terminated
in reductions in force completed in recent years, the amount was calculated to
fall below certain safe harbors under Internal Revenue Code Section 280G with
respect to "excess parachute" payments.
Employee Retention Provisions
In April 1997, MESA's Board of Directors adopted the Management Severance
Plan ("MESA Severance Plan") which covers 26 officers and other employees
("MESA Participants") of MESA. The MESA Severance Plan provides for severance
benefits in the event that (i) any time prior to a MESA Change in Control (as
hereinafter defined), the MESA Participant's employment is involuntarily
terminated, other than for Cause (as hereinafter defined) or there is a
Constructive Termination (as hereinafter defined) or a death or disability,
(ii) at any time at least six months but not more than one year after a MESA
Change in Control, the voluntary termination of a MESA Participant other than
because of Constructive Termination and (iii) at any time within one year of a
MESA Change in Control, the MESA Participant is involuntarily terminated or
subject to Constructive Termination, other than for Cause. In the event of (i)
and (ii) above, the MESA Participant will be entitled to, among other benefits,
a severance payment equal to one year of such participant's highest base
salary, and in the event of (iii) above, the MESA Participant will be entitled
to, among other benefits, a severance payment equal to 2.99 times total pay
(including bonus) or two times such participant's highest base salary depending
on the level of the participant. MESA Participants will also be entitled to
additional payments for certain tax liabilities that may apply to severance
payments following a MESA Change of Control.
"MESA Change of Control" means (i) the acquisition by a person of 35% or
more of the common stock or voting power of MESA, unless the transaction is
approved by MESA's Board of Directors, (ii) a change in the majority of the
composition of MESA's Board of Directors, (iii) the consummation of a
reorganization, merger or consolidation or sale or other disposition of all or
substantially all of the assets of MESA, except if the owners of the
outstanding common stock or voting stock of MESA immediately prior to the
transaction beneficially own more than 65% of the outstanding common stock or
voting power of the outstanding voting securities of the surviving corporation
immediately after the transaction, no person owns more than 35% of the
outstanding common stock or voting power of the surviving corporation
immediately after the transaction and the composition of MESA's Board of
Directors is maintained at certain levels or (iv) the approval of a plan of
liquidation or dissolution of MESA. The consummation of the Pioneer Merger will
result in a MESA Change of Control because MESA's current stockholders will own
less than 65% of the voting power of Pioneer outstanding capital stock. "Cause"
means the failure of the MESA Participant to perform such participant's duties
with MESA or engaging in illegal conduct or gross misconduct. "Constructive
Termination" means the voluntary termination of a MESA Participant within 30
days following (i) a material reduction in the MESA Participant's authority,
power, functions, duties or responsibilities; (ii) a reduction in the MESA
Participant's base salary to less than 80% of the highest base salary ever paid
to such participant, (iii) the MESA Participant's required relocation following
a MESA Change in Control or (iv) a successor's failure to honor the MESA
Severance Plan after a MESA Change in Control.
Director Compensation and Certain Relationships
Each director of MESA serving throughout 1996 who was not also an employee
of MESA or its subsidiaries received compensation of $20,000 allocated
quarterly in 1996. Directors who are also employees of MESA receive no
remuneration for their services as directors.
Mr. Pickens, a director and former Chairman of the Board of Directors and
Chief Executive Officer of MESA, entered into a one year consulting
arrangement, effective January 1, 1997, with MESA whereby Mr. Pickens will
provide commodity market consulting in return for an annual fee of $400,000
payable quarterly.
Mr. Stillwell, a director, is a partner in the law firm of Baker & Botts,
L.L.P. MESA retained Baker & Botts, L.L.P., and incurred legal fees for such
52
services in 1996. Baker & Botts, L.L.P., has been retained to provide legal
services in 1997.
Fayez Sarofim, a former director and a former member of the Compensation
and Stock Option Committees, is Chairman of the Board, President, and owner of
a majority of the outstanding capital stock of Fayez Sarofim & Co., which acts
as an investment adviser to certain employee benefit plans of MESA. For the
year ended December 31, 1996, Fayez Sarofim & Co. received fees, paid by the
employee benefit plans, of $215,627 for such services and has been retained to
provide such services in 1997.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee is composed of Messrs. Smith and Herrington.
The Stock Option Committee, which administers the 1991 Stock Option Plan and
which will administer the 1996 Incentive Plan of MESA Inc. if it is approved
by shareholders, is also composed of Messrs. Smith and Herrington.
Indemnification Arrangements
MESA has entered into Indemnification Agreements (the "MESA
Indemnification Agreements") with its directors and certain of its officers
(the "MESA Indemnitees"). Under the terms of the MESA Indemnification
Agreements, MESA has generally agreed to indemnify, and advance expenses to,
each MESA Indemnitee to the fullest extent permitted by applicable law on the
date of such agreements and to such greater extent as applicable law may
thereafter permit. In addition, the MESA Indemnification Agreements contain
specific provisions pursuant to which MESA has agreed to indemnify each MESA
Indemnitee (i) if such person is, by reason of his or her status as a director,
officer, employee, agent or fiduciary of MESA or of any other corporation,
partnership, joint venture, sole proprietorship, trust, employee benefit plan
or other enterprise with which such person was serving at the request of MESA
(any such status being hereinafter referred to as a "MESA Corporate Status"),
made or threatened to be made a party to any threatened, pending or completed
action, suit, arbitration, investigation, alternative dispute resolution
mechanism, administrative hearing or other proceeding (each, a "MESA
Proceeding"), except that no indemnification shall be made in respect of any
claim, issue or matter in such MESA Proceeding as to which such MESA Indemnitee
shall have been adjudged to be liable to MESA for willful or intentional
misconduct in the performance of his duty to MESA unless applicable law so
permits (unless and only to the extent that a court shall otherwise determine),
(ii) against reasonable expenses actually incurred by such person or on his or
her behalf in connection with any Proceeding to which such Indemnitee was or is
a party by reason of his or her MESA Corporate Status and in which such MESA
Indemnitee is successful, on the merits or otherwise, (iii) against expenses
actually and reasonably incurred by such person or on his or her behalf in
connection with a MESA Proceeding to the extent that such MESA Indemnitee is,
by reason of his or her MESA Corporate Status, a witness or otherwise
participates in any MESA Proceeding at a time when such person is not a party
in the MESA Proceeding, and (iv) against expenses actually and reasonably
incurred by such person in any judicial adjudication of or any award in
arbitration to enforce his or her rights under the MESA Indemnification
Agreements.
Furthermore, under the terms of the MESA Indemnification Agreements, MESA
has agreed to pay all reasonable expenses incurred by or on behalf of a MESA
Indemnitee in connection with any MESA Proceeding in advance of any
determination with respect to entitlement to indemnification and within ten days
after the receipt by MESA of a written request from such Indemnitee for such
payment. In the MESA Indemnification Agreements, each MESA Indemnitee has agreed
that he or she will reimburse and repay MESA for any expenses so advanced to the
extent that it shall ultimately be determined that he or she is not entitled to
be indemnified by MESA against such expenses.
The MESA Indemnification Agreements also include provisions that specify
the procedures and presumptions which are to be employed to determine whether a
MESA Indemnitee is entitled to indemnification thereunder. In some cases, the
nature of the procedures specified in the Indemnification Agreements varies
depending on whether there has occurred a "change in control" (as defined in the
MESA Indemnification Agreements) of MESA. The Pioneer Merger will constitute a
change of control under the MESA Indemnification Agreements.
Registration Rights Agreement
MESA and DNR have entered into a Registration Rights Agreement (the
"Registration Rights Agreement") covering (i) the shares of MESA Series A
Preferred Stock issuable in exchange for shares of MESA Series B Preferred
Stock held by DNR, (ii) the shares of MESA Common Stock issuable upon
conversion or redemption of shares of MESA Series A Preferred Stock and MESA
Series B Preferred Stock and (iii) any securities issued or issuable in respect
of any such shares by way of any stock split or stock dividend (including
dividends paid in kind in accordance with the terms of the MESA Series B
Preferred Stock) or in connection with any combination of shares,
recapitalization, merger, consolidation, reorganization or otherwise (the
"Registrable Securities"). Shares of Pioneer Common Stock to be received by DNR
in the Pioneer Merger will be Registrable Securities and the Registration
Rights Agreement will be binding on Pioneer.
The Registration Rights Agreement provides that the holders of at least a
majority of the Registrable Securities outstanding may at any time (subject to
customary "black-out" periods) require MESA to effect the registration under
the Securities Act of Registrable Securities by means of a "shelf" registration
statement for an offering to be made on a continuous basis under the Securities
Act, subject to certain limitations. The Registration Rights Agreement also
provides certain "piggyback" registration rights to the holders of Registrable
Securities whenever MESA proposes to register an offering of any of its capital
stock under the Securities Act (including on behalf of any stockholder of MESA
other than a holder of Registrable Securities), subject to certain exceptions,
including pro rata reduction if, in the reasonable opinion of the managing
underwriter(s) of the offering, such a reduction is necessary to prevent an
adverse effect on the marketability or offering price of all the securities
proposed to be offered in the offering.
The Registration Rights Agreement contains customary provisions regarding
the payment of expenses by MESA and regarding mutual indemnification agreements
between MESA and the holders of Registrable Securities for certain securities
law violations.
53
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number and percentage of the
outstanding shares of Common Stock that is beneficially owned by the Directors
and Executive Officers of MESA, as well as by each person or entity known by
MESA to beneficially own more than 5% of the Common Stock as of April 28, 1997.
Except as otherwise indicated below, MESA believes that each individual or
entity named has sole investment and voting power with respect to shares of
Common Stock indicated as beneficially owned by them.
<TABLE>
<CAPTION>
Number of Shares Beneficially Owned
as of April 28, 1997 (1)
---------------------------------------
Fully Diluted
Number(2) Percentage Percentage
------------ ---------- -------------
<S> <C> <C> <C>
DNR-MESA Holdings L.P. (3).......... 62,424,436 49.28% 33.14%
777 Main Street, Suite 2700
Fort Worth, Texas 76102
FMR Corp. (4)....................... 8,213,201 11.93% 4.36%
82 Devonshire Street
Boston, Massachusetts 02109
The Prudential Insurance Company
of America (5)................. 7,870,843 11.68% 4.18%
751 Broad Street
Newark, New Jersey 07102-3777
BKP Partners L.P. (6)............... 4,738,900 7.04% 2.52%
One Sansome Street, Suite 3900
San Francisco, CA 90071
Caxton International Limited (7).... 4,095,537 6.17% 2.17%
c/o Leeds Management Services
Limited
129 Front Street, Penthouse
Hamilton HM12, Bermuda
The Capital Group Companies, Inc.
and Capital Research and
Management Co. (8)............. 3,801,035 5.74% 2.02%
333 South Hope Street
Los Angeles, CA 90071
I. Jon Brumley (9).................. 480,000 * *
John S. Herrington.................. 27,571 * *
Kenneth A. Hersh.................... -- * *
Boone Pickens (10).................. 7,713,742 10.95% 4.07%
Richard E. Rainwater (3)............ 62,424,436 49.28% 33.14%
Philip B. Smith..................... -- * *
Robert L. Stillwell................. 25,434 * *
Dennis E. Fagerstone................ 241,729 * *
Henry F. Galpin..................... 27,726 * *
Stephen K. Gardner.................. 261,485 * *
Edwin E. Hance...................... 87,878 * *
G. Michael Prescott, III............ 41,899 * *
Kenneth H. Sheffield, Jr............ 41,788 * *
M. Garrett Smith.................... 135,005 * *
John V. Sobchak..................... 20,017 * *
Edgar E. St. James.................. 112,631 * *
Wayne A. Stoerner................... 23,650 * *
Directors and Officers as a group
(17 persons)................... 71,664,990 53.35% 38.05%
</TABLE>
54
* Less than 1.0%
(1) Includes shares of Common Stock issuable upon conversion of Series A and
Series B Preferred Stock. In accordance with the rules of the Commission,
the "Percentages" set forth above include, for each person, options or
shares of Preferred Stock assuming exercise or exchange only by that
person. The "Fully Diluted Percentage" assumes all holders of options and
Preferred Stock exercise or convert such securities.
(2) Includes shares issuable upon the exercise of options that are
exercisable within sixty days of April 28, 1997, as follows: 1,075,000
shares for Mr. Pickens; 480,000 for Mr. Brumley; 210,000 for
Mr. Fagerstone; 27,400 for Mr. Galpin; 185,000 for Mr. Gardner; 83,000
for Mr. Hance; 28,000 for Mr. Prescott; 83,000 for Mr. St. James; 41,500
for Mr. Sheffield; 130,000 for Mr. Smith; 19,900 for Mr. Sobchak; 20,550
for Mr. Stoerner; and 2,373,350 for all current directors and officers as
a group.
(3) Represents shares of Common Stock issuable upon conversion of shares of
Series B Preferred Stock held by DNR. Mr. Rainwater is the sole
shareholder and President of Rainwater, Inc., the sole general partner of
DNR, and, as such, may be deemed to beneficially own the shares of stock
to be held by DNR.
(4) The Schedule 13G filed with the Commission on February 12, 1997, by FMR
Corp. states that as of December 31, 1996, Fidelity Management & Research
Company ("Fidelity"), a wholly owned subsidiary of FMR Corp. and an
investment adviser registered under Section 203 of the Investment Advisers
Act of 1940, is the beneficial owner of 8,123,844 shares or 11.82% of
Common Stock as a result of acting as investment adviser to various
investment companies registered under Section 8 of the Investment Company
Act of 1940. The ownership of one investment company, Fidelity Capital &
Income Fund ("Fund"), amounted to 5,011,840 shares or 7.29% of Common
Stock outstanding. The foregoing share totals are as of December 31, 1996
and exclude the March 31, 1997 preferred stock dividend. Edward C.
Johnson, III, chairman of FMR Corp., FMR Corp., through its control of
Fidelity, and the Fund each has power to dispose of the 8,179,343 shares
owned by the Fund. Abigail Johnson is a director of and owns 24.5% of the
aggregate outstanding voting stock of FMR Corp. and has entered into a
shareholders' voting agreement with other holders of FMR Corp. stock and
accordingly the Johnson family may be deemed, under the Investment Company
Act of 1940, to be a controlling group with respect to FMR Corp. The total
number of shares beneficially owned by FMR Corp. includes 2,830,439 shares
of Common Stock issuable upon the conversion of Series A Preferred Stock.
(5) Includes 3,125,723 shares of Common Stock issuable upon the conversion of
Series A Preferred Stock.
(6) Mr. Bob K. Pryt is the sole stockholder of BKP Capital Management
("BKPCM") BKPCM and Mr. Pryt are the general partners of BKP Partners,
L.P., which is an investment partnership. As a result of the foregoing,
Mr. Pryt may be deemed to beneficially own the MESA Common Stock owned by
BKP Partners, L.P. Includes 3,009,000 shares of MESA Common Stock issuable
upon the conversion of MESA Series A Preferred Stock.
(7) Includes 2,095,537 shares of Common Stock issuable upon the conversion of
Series A Preferred Stock. Mr. Bruce S. Kovner is the Chairman and sole
shareholder of Caxton Corporation, the manager and majority owner of
Caxton Associates, LLC. As trading advisor to Caxton International,
55
Caxton Associates, LLC has voting and dispositive power with respect to
investments made by Caxton International. As a result of the foregoing,
Mr. Kovner may be deemed to beneficially own the Common Shares owned by
Caxton International.
(8) Includes 1,926,035 shares of Common Stock issuable upon the conversion of
Series A Preferred Stock.
(9) Mr. Brumley is a general partner of Brumley Partners, a Texas general
partnership and a limited partner of DNR. Mr. Brumley disclaims
beneficial ownership of any of the shares of stock held by DNR.
(10) Includes 7,103 shares of Common Stock owned by several trusts for Mr.
Pickens' children of which he is a trustee, and over which shares he has
sole voting and investment power, although he has no economic interest
therein. Excludes 5,538 shares of Common Stock owned by Mrs. Pickens as
her separate property, as to which Mr. Pickens disclaims beneficial
ownership and with respect to which he does not have or share voting or
investment power. Includes 5,138,742 shares of Common Stock issuable upon
the conversion of Series A Preferred Stock.
Changes in Control
On April 6, 1997, MESA issued a press release (the "Press Release")
announcing that it and Parker & Parsley Petroleum Company, a Delaware
corporation ("Parker & Parsley"), had entered into an Agreement and Plan of
Merger ("Merger Agreement") to merge and create Pioneer Natural Resources
Company, a Delaware corporation. The consummation of the transactions
contemplated in the Merger Agreement is subject to the approval of the
shareholders of each of MESA and Parker & Parsley. For additional information
regarding the transactions contemplated in the Merger Agreement, reference is
made to MESA's Form 8-K dated April 6, 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(3) Exhibits
(Asterisk indicates exhibits are incorporated by reference herein)
*2.1 - Stock Purchase Agreement dated February 7, 1997, by and
between Western Mining Corporation (USA) and Mesa Operating Co
(Exhibit 10 to MESA's Form 8-K dated February 7, 1997).
*2.2 - Agreement and Plan of Merger dated as of April 6, 1997 among
MESA Inc., Mesa Operating Co., MXP Reincorporation Corp., and
Parker & Parsley Petroleum Company (Exhibit 2.1 to MESA's Form
8-K dated April 6, 1997).
*2.3 - Shareholders Agreement dated as of April 6, 1997 by and
between MESA Inc. and DNR-MESA Holdings, L.P. (Exhibit 2.2 to
MESA's Form 8-K dated April 6, 1997).
*2.4 - Letter Agreement dated April 6, 1997 between Parker & Parsley
Petroleum Company and DNR-MESA Holdings, L.P. (Exhibit 2.3
to MESA's Form 8-K dated April 6, 1997).
56
*2.5 - Shareholders Agreement dated as of April 6, 1997 by and
between Boone Pickens and Parker & Parsley Petroleum Company
(Exhibit 2.4 to MESA's Form 8-K dated April 6, 1997).
*3.1 - Amended and Restated Articles of Incorporation of MESA Inc.
dated December 31, 1991 (Exhibit 3 to MESA's Form 10-K dated
December 31, 1991).
*3.2 - Statement of Resolution establishing Series A 8% Cumulative
Convertible Preferred Stock and Series B 8% Cumulative
Convertible Preferred Stock. (Exhibit 4 to MESA's Form 8-K dated
April 29, 1996).
*3.3 - Amended and Restated Bylaws of MESA Inc. dated July 2, 1996
(Exhibit 3.3 to MESA's Form 10-Q dated August 13, 1996).
*4.1 - Credit Agreement dated as of July 2, 1996, among MESA
Operating Co., as Borrower, MESA Inc. and the Banks listed as
lenders in the Credit Agreement and The Chase Manhattan
Bank, N.A., as Administrative Agent, Bankers Trust Company,
as Syndication Agent, and Society Generale, Southwest Agency,
as Documentation Agent (Exhibit No. 4.16 to MESA's Form 10-Q
dated August 13, 1996).
*4.2 - Indenture dated July 2, 1996, among Mesa Operating Co., as
Issuer, MESA Inc., as a Guarantor, and Harris Trust and Savings
Bank as Trustee relating to 11-5/8% Senior Subordinated Discount
Notes Due 2006 (Exhibit No. 4.17 to MESA's Form 10-Q dated
August 13, 1996).
*4.3 - Indenture dated July 2, 1996, among Mesa Operating Co., as
Issuer, MESA Inc., as a Guarantor, and Harris Trust and Savings
Bank as Trustee relating to 10-5/8% Senior Subordinated Notes
Due 2006 (Exhibit No. 4.18 to MESA's Form 10-Q dated August 13,
1996).
The Registrant agrees to furnish to the Commission upon request
any instruments defining the right of holders of long-term debt
with respect to which the total amount outstanding does not
exceed 10% of the total assets of the Registrant and its
subsidiaries on a consolidated basis.
*10.1 - Stock Purchase Agreement, dated April 26, 1996, between MESA
and DNR-MESA Holdings, L.P. (Exhibit No. 10 to MESA's
Form 8-K filed on April 29, 1996).
*10.2 - Contract dated January 3, 1928, between Colorado Interstate
Gas Company and Amarillo Oil Company (the "B" Contract) (Exhibit
10.1 to Pioneer Corporation's Form 10-K dated December 31,
1985).
*10.3 - Amendments to the "B" Contract (Exhibit 10.2 to Pioneer
Corporation's Form 10-K dated December 31, 1985).
57
*10.4 - Gathering Charge Agreement dated January 20, 1984, as amended,
with respect to the "B" Contract (Exhibit 10.3 to Pioneer
Corporation's Form 10-K dated December 31, 1985).
*10.5 - Agreement of Compromise and Settlement dated May 29, 1987,
between the Partnership and Colorado Interstate Gas Company
(Confidential Treatment Requested) (Exhibit 10 to the
Partnership's Form 10-K dated December 31, 1987).
*10.6 - Agreement of Sale between Pioneer Corporation and Cabot
Corporation dated August 29, 1984 (Exhibit 10.5 to Pioneer
Corporation's Form 10-K dated December 31, 1985).
*10.7 - Settlement Agreement dated March 15, 1989, by and among MESA
Operating Limited Partnership and MESA Limited Partnership, et
al, Energas Company and the City of Amarillo (Exhibit 10 to
the Partnership's Form 10-K dated December 31, 1990).
*10.8 - Gas Purchase Agreement dated December 1, 1989, between
Williams Natural Gas Company and MESA Operating Limited
Partnership acting on behalf of itself and as agent for MESA
Midcontinent Limited Partnership (Exhibit 10.1 to Registration
Statement of the Partnership on Form S-3,
Registration No. 33-32978).
*10.9 - "B" Contract Production Allocation Agreement dated July 29,
1991, and effective as of January 1, 1991, between Colorado
Interstate Gas Company and Mesa Operating Limited Partnership
(Exhibit 10 to MESA's Form 10-K dated
December 31, 1991).
*10.10 - Amendment to "B" Contract Production Allocation Agreement
effective as of January 1, 1993, between Colorado Interstate Gas
Company and Mesa Operating Limited Partnership (Exhibit 10.24 to
MESA's Registration Statement on Form S-1, Registration No.
033-51909).
*10.11 - Amended Supplemental Stipulation and Agreement between
Colorado Interstate Gas Company and Mesa Operating Limited
Partnership dated June 19, 1991 (Exhibit 10 to the
Partnership's Registration Statement on Form S-4, Registration
No. 33-42102).
*10.12 - Amended Peak Day Gas Purchase Agreement dated effective June
19, 1991, between Colorado Interstate Gas Company and Mesa
Operating Limited Partnership (Exhibit 10 to MESA's Form 10-K
dated December 31, 1991).
*10.13 - Omnibus Amendment to Collateral Instruments to Supplemental
Stipulation and Agreement dated June 19, 1991, between Colorado
Interstate Gas Company and Mesa Operating Limited Partnership
(Exhibit 10 to MESA's Form 10-K dated December 31, 1991).
*10.14 - Amarillo Supply Agreement between Mesa Operating Limited
Partnership, Seller, and Energas Company, a division of Atmos
Energy Corporation, Buyer, dated effective January 2, 1993
(Exhibit 10.14 to MESA's Form 10-K dated December 31, 1995).
58
*10.15 - Gas Gathering Agreement-Interruptible between Colorado
Interstate Gas Company, Transporter, and Mesa Operating Limited
Partnership, Shipper, dated effective October 1, 1993, as
amended by agreements dated January 1, 1994, January 5, 1994,
and June 1, 1994 (Exhibit 10.15 to MESA's Form 10-K dated
December 31, 1995).
*10.16 - Gas Supply Agreement dated May 11, 1994, between Mesa
Operating Co., as successor to Mesa Operating Limited
Partnership, acting on behalf of itself and as agent for
Hugoton Capital Limited Partnership, and Williams Gas
Marketing Company, and Gas Supply Guarantee dated May 11,
1994 (Exhibit 10.16 to MESA's Form 10-K dated December 31,
1995).
*10.17 - Gas Transportation Agreement dated June 14, 1994, between
Western Resources, Inc. and Mesa Operating Co., acting on behalf
of itself and as agent for Hugoton Capital Limited Partnership
(Exhibit 10.24 to MESA's Form 10-K dated
December 31, 1994).
*10.18 - Incentive Bonus Plan of Mesa Operating Limited Partnership, as
amended, dated effective January 1, 1986 (Exhibit 10 to the
Partnership's Form 10-K dated December 31, 1990).
*10.19 - Performance Bonus Plan of Mesa Operating Limited Partnership
dated effective January 1, 1990 (Exhibit 10 to the
Partnership's Form 10-K dated December 31, 1990).
*10.20 - 1991 Stock Option Plan of MESA (Exhibit 10 to MESA's Form
10-K dated December 31, 1991).
*10.21 - Interruptible Gas Transportation and Sales Agreement dated
January 1, 1991, between Mesa Operating Limited Partnership and
Energas Company and Amendment dated January 1, 1995 (Exhibit
10.22 to MESA's Form 10-K dated December 31, 1995).
*10.22 - "B" Contract Operating Agreement dated January 1, 1988,
between Mesa Operating Limited Partnership and Colorado
Interstate Gas Company (Exhibit 10.23 to MESA's Form 10-K dated
December 31, 1995).
*10.23 - "B" Contract Agreement of Compromise and Settlement dated May
29, 1987, between Mesa Operating Limited Partnership and
Colorado Interstate Gas Company, and Amendment to Gathering
Agreement dated July 15, 1990 (Exhibit 10.24 to MESA's Form 10-K
dated December 31, 1995).
59
*10.24 - Gas Purchase Agreement dated January 1, 1996, between Mesa
Operating Co., as Seller, and KN Marketing L.P., as Buyer, and
Amendment dated August 1, 1995 (Exhibit 10.25 to MESA's Form
10-K dated December 31, 1995).
*10.25 - Change in Control Retention/Severance Plan adopted August 22,
1995, and Amendment dated October 20, 1995 (Exhibit 10.26 to
MESA's Form 10-K dated December 31, 1995).
*10.26 - Employment Agreement dated as of August 21, 1996, between MESA
Inc., a Texas corporation, and Ira Jon Brumley, a Texas
resident. (Exhibit 10.26 to MESA's Form 10-K dated December 31,
1996).
*10.27 - 1996 Incentive Plan of MESA Inc.(Exhibit 10.27 to MESA's
Form 10-K/A dated December 31, 1996).
*10.28 - Mesa Management Severance Plan including Schedule of
Participants (Exhibit 10.28 to MESA's Form 10-K/A dated
December 31, 1996).
*20 - Summary Report on MESA's Hugoton and West Panhandle field
properties relating to proved oil and gas reserves at December
31, 1996, as prepared by Williamson Petroleum Consultants, Inc.
(Exhibit 20 to MESA's Form 10-K dated December 31, 1996).
*21 - List of Subsidiaries of MESA. (Exhibit 21 to MESA's Form 10-K
dated December 31, 1996).
*27 - Article 5 of Regulation S-X Financial Data Schedule for
Year-End 1996 Form 10-K. (Exhibit 27 to MESA's Form 10-K dated
December 31, 1996).
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MESA INC.
By: /s/ Jon Brumley
------------------------------------
Date: May 7, 1997 (Jon Brumley,
Chief Executive Officer)
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Jon Brumley
- ------------------------- Chief Executive Officer and May 7, 1997
(Jon Brumley) Chairman of the Board of
Directors
(Principal Executive Officer)
/s/ Dennis E. Fagerstone
- ------------------------- Executive Vice President and May 7, 1997
(Dennis E. Fagerstone) Chief Operating Officer
/s/ Stephen K. Gardner
- ------------------------- Senior Vice President and May 7, 1997
(Stephen K. Gardner) Chief Financial Officer
(Principal Financial Officer)
/s/ Wayne A. Stoerner
- ------------------------- Controller May 7, 1997
(Wayne A. Stoerner) (Principal Accounting Officer)
/s/ John S. Herrington
- ------------------------- Director May 7, 1997
(John S. Herrington)
/s/ Kenneth A. Hersh
- ------------------------- Director May 7, 1997
(Kenneth A. Hersh)
/s/ Boone Pickens
- ------------------------- Director May 7, 1997
(Boone Pickens)
/s/ Richard E. Rainwater
- ------------------------- Director May 7, 1997
(Richard E. Rainwater)
/s/ Philip B. Smith
- ------------------------- Director May 7, 1997
(Philip B. Smith)
/s/ Robert L. Stillwell
- ------------------------- Director May 7, 1997
(Robert L. Stillwell)
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page in Form 10-K
-----------------
Report of Independent Public Accountants................ F-2
Consolidated Statements of Operations................... F-3
Consolidated Balance Sheets............................. F-4
Consolidated Statements of Cash Flows................... F-5
Consolidated Statements of Changes
in Stockholders' Equity............................... F-6
Notes to Consolidated Financial Statements.............. F-7
Supplemental Financial Data............................. F-8
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MESA Inc.:
We have audited the accompanying consolidated balance sheets of MESA Inc. (a
Texas corporation) and subsidiaries as of December 31, 1996, and 1995, and the
related consolidated statements of operations, cash flows and changes in
stockholders' equity for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of MESA's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MESA Inc. and
subsidiaries as of December 31, 1996, and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Dallas, Texas
February 27, 1997 (except with respect to
the matter discussed in Note 12, as to which
the date is April 6, 1997)
F-2
MESA Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Natural gas ............................... $ 184,595 $ 129,534 $ 139,580
Natural gas liquids ....................... 97,561 75,321 72,771
Oil and condensate ........................ 18,180 19,594 7,877
Other ..................................... 11,075 10,510 8,509
--------- --------- ---------
311,411 234,959 228,737
--------- --------- ---------
Costs and Expenses:
Lease operating ........................... 54,447 49,447 51,218
Production and other taxes ................ 20,071 18,403 21,306
Exploration charges ....................... 5,431 6,604 5,157
General and administrative ................ 31,473 26,749 28,649
Depreciation, depletion and
amortization ............................ 103,301 85,791 93,724
--------- --------- ---------
214,723 186,994 200,054
--------- --------- ---------
Operating Income ............................... 96,688 47,965 28,683
--------- --------- ---------
Other Income (Expense):
Interest income ........................... 7,749 15,922 13,457
Interest expense .......................... (121,135) (148,630) (144,757)
Gains from investments .................... 9,418 18,420 6,698
Gains from collections from
Bicoastal Corporation ................... 2,548 6,352 16,577
Gain from adjustment of contingency
reserve ................................. 15,000 -- --
Other ..................................... (1,929) 2,403 (4,011)
--------- --------- ---------
(88,349) (105,533) (112,036)
--------- --------- ---------
Net income (loss) before extraordinary item .... 8,339 (57,568) (83,353)
Extraordinary loss on debt extinguishment ...... (59,386) -- --
--------- --------- ---------
Net loss ....................................... $ (51,047) $ (57,568) $ (83,353)
========= ========= =========
Dividends on preferred stock ................... (9,522) -- --
Net loss applicable to common stock ............ $ (60,569) $ (57,568) $ (83,353)
========= ========= =========
Loss per common share before
extraordinary item ........................ (.02) (.90) (1.42)
Loss per common share on
extraordinary item ........................ (.92) -- --
--------- --------- ---------
Net loss per common share ...................... $ (.94) $ (.90) $ (1.42)
========= ========= =========
Weighted Average Shares Outstanding:
Common .................................... 64,164 64,050 58,860
Series A Preferred......................... 29,309 -- --
Series B Preferred......................... 29,720 -- --
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-3
MESA Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31
----------------------
ASSETS 1996 1995
---------- ----------
<S> <C> <C>
Current Assets:
Cash and cash investments..................... $ 16,681 $ 149,143
Investments................................... -- 38,280
Accounts and notes receivable................. 63,410 44,734
Other......................................... 4,186 4,590
---------- ----------
Total current assets..................... 84,277 236,747
---------- ----------
Property, Plant and Equipment:
Oil and gas properties, wells
and equipment, using the successful
efforts method of accounting................ 1,975,684 1,930,879
Office and other.............................. 36,740 41,603
Accumulated depreciation, depletion
and amortization............................ (966,040) (867,665)
---------- ----------
1,046,384 1,104,817
---------- ----------
Other Assets:
Restricted cash of subsidiary partnership..... -- 57,731
Gas balancing receivable...................... 61,204 56,020
Other......................................... 22,014 31,509
---------- ----------
83,218 145,260
---------- ----------
$1,213,879 $1,486,824
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities on long-term debt.......... $ 5,305 $ 101,413
Accounts payable and accrued liabilities...... 43,045 31,068
Interest payable.............................. 21,150 60,465
---------- ----------
Total current liabilities................ 69,500 192,946
---------- ----------
Long-Term Debt..................................... 802,772 1,135,330
---------- ----------
Deferred Revenue................................... 14,977 17,578
---------- ----------
Other Liabilities.................................. 61,136 73,966
---------- ----------
Contingencies
Stockholders' Equity:
8% Cumulative convertible preferred stock,
$.01 par value ($2.26 liquidation
preference), authorized 500,000,000
shares outstanding 121,643,686 shares
and 0 shares, respectively.................. 1,216 --
Common stock, $.01 par value, authorized
600,000,000 shares; outstanding 64,279,568
shares and 64,050,009 shares, respectively.. 643 640
Additional paid-in capital.................... 656,805 398,965
Accumulated deficit........................... (393,170) (332,601)
---------- ----------
265,494 67,004
---------- ----------
$1,213,879 $1,486,824
========== ==========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-4
MESA Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss .................................... $ (51,047) $ (57,568) $ (83,353)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Depreciation, depletion and
amortization ......................... 103,301 85,791 93,724
Accreted interest on discount notes .... 7,603 38,957 79,352
Litigation settlement .................. -- -- (42,750)
Gain from adjustment of
contingency reserves ................. (15,000) -- --
Decrease (increase) in gas
balancing receivables ................ (5,086) 1,516 (7,840)
Decrease in deferred natural gas
revenue .............................. (2,686) (4,219) (785)
Natural gas hedging activities ......... -- (9,715) 9,715
Sales of investments ................... 47,698 48,555 18,771
Purchases of investments ............... -- (49,003) (19,866)
Gains from investments ................. (9,418) (18,420) (6,698)
(Increase) decrease in
accounts receivable .................. (18,209) (12,047) 5,934
Increase (decrease) in payables
and accrued liabilities .............. (26,103) 45,243 (3,142)
Debt prepayment premium ................ 51,612 -- --
Other .................................. 18,648 151 5,535
----------- --------- ---------
Net cash provided by
operating activities ................. 101,313 69,241 48,597
----------- --------- ---------
Cash Flows From Investing Activities:
Capital expenditures ........................ (50,223) (42,297) (32,590)
Other ....................................... 5,188 860 (7,660)
----------- --------- ---------
Net cash used in investing
activities ........................... (45,035) (41,437) (40,250)
----------- --------- ---------
Cash Flows From Financing Activities:
Issuance of stock ........................... 248,431 -- 93,067
Repayments of long-term debt ................ (1,406,366) (25,507) (175,107)
Long-term borrowings ........................ 970,097 -- 77,754
Debt issuance costs ......................... (19,109) -- --
Debt prepayment premium ..................... (51,612) -- --
Restricted cash of subsidiary partnership ... 57,731 -- --
Other ....................................... 12,088 3,424 652
----------- --------- ---------
Net cash used in
financing activities ................. (188,740) (22,083) (3,634)
----------- --------- ---------
Net Increase (Decrease) in Cash and
Cash Investments ............................... (132,462) 5,721 4,713
Cash and Cash Investments
at Beginning of Year ........................... 149,143 143,422 138,709
----------- --------- ---------
Cash and Cash Investments at End of Year ......... $ 16,681 $ 149,143 $ 143,422
=========== ========= =========
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-5
MESA Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
8% Cumulative 8% Cumulative
Series A Series B
Common Stock Preferred Stock Preferred Stock Additional
---------------- ----------------- ---------------- Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------ ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 ........ 46,511 $465 -- $-- -- $-- $303,344 $(191,680)
Net loss ........................ -- -- -- -- -- -- -- (83,353)
Common stock issued for the
conversion of the remaining
General Partner minority
interest ..................... 1,251 13 -- -- -- -- 2,716 --
Common stock issued in
secondary public offering ..... 16,288 162 -- -- -- -- 92,905 --
------ ---- ------ ---- ------ ---- -------- ---------
Balance, December 31, 1994 ........ 64,050 640 -- -- -- -- 398,965 (275,033)
Net loss ........................ -- -- -- -- -- -- -- (57,568)
------ ---- ------ ---- ------ ---- -------- ---------
Balance, December 31, 1995 ........ 64,050 640 -- -- -- -- 398,965 (332,601)
Net Loss ........................ -- -- -- -- -- -- -- (51,047)
Stock Options Exercised ......... 211 3 -- -- -- -- 1,103 --
8% Cumulative Convertible
Preferred Stock Issued ....... -- -- 58,599 586 58,850 588 247,257 --
8% Cumulative Convertible
Preferred Stock Dividends .... -- -- 1,863 18 2,351 24 9,480 (9,522)
8% Cumulative Convertible
Preferred Stock Converted
to Common Stock .............. 19 -- (19) -- -- -- -- --
------ ---- ------ ---- ------ ---- -------- ---------
Balance, December 31, 1996 ........ 64,280 $643 60,443 $604 61,201 $612 $656,805 $(393,170)
</TABLE>
(See accompanying notes to consolidated financial statements.)
F-6
MESA Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Summary of Significant Accounting Policies
MESA Inc., a Texas corporation, was formed in 1991 to reorganize the
business of Mesa Limited Partnership. Unless the context otherwise requires, as
used herein the term "MESA" refers to MESA Inc. and its subsidiaries taken as a
whole and includes its predecessor.
MESA is primarily in the business of acquiring, exploring for, developing,
producing, processing and selling natural gas and oil in the United States.
Over 65% of MESA's annual equivalent production is natural gas and the balance
is principally natural gas liquids. MESA's primary producing areas are the
Hugoton field of southwest Kansas, the West Panhandle field of Texas and the
Gulf of Mexico offshore Texas and Louisiana. Production from MESA's properties
has access to a substantial portion of the major metropolitan markets in the
United States, primarily in the midwest and northeast, through numerous
pipelines and other purchasers.
Principles of Consolidation
The accompanying consolidated financial statements reflect the
consolidated accounts of MESA and its subsidiaries after elimination of
intercompany transactions. Certain reclassifications have been made to amounts
reported in previous years to conform to 1996 presentation.
Statements of Cash Flows
For purposes of the statements of cash flows, MESA classifies all highly
liquid investments with original maturities of three months or less as cash and
cash investments.
Oil and Gas Properties
Under the successful efforts method of accounting, all costs of acquiring
unproved oil and gas properties and drilling and equipping exploratory wells
are capitalized pending determination of whether the properties have proved
reserves. If an exploratory well is determined to be nonproductive, the
drilling and equipment costs of the well are expensed at that time. All
development drilling and equipment costs are capitalized. Capitalized costs of
proved properties and estimated future dismantlement and abandonment costs are
amortized on a property-by-property basis using the unit-of-production method
whereby the ratio of quarterly production to beginning of period proved oil and
gas reserves is applied to the remaining net book value of such properties. Oil
and gas reserve quantities represent estimates only and there are numerous
uncertainties inherent in the estimation process. Actual future production may
be materially different from amounts estimated and such differences could
materially affect future amortization of proved properties. Geological and
geophysical costs and delay rentals are expensed as incurred.
In 1996 MESA adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," ("SFAS No. 121") which establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles and
goodwill. SFAS No. 121 requires a review for impairment whenever circumstances
indicate that the carrying amount of an asset may not be recoverable. In
performing the review for recoverability, MESA estimates future cash flows
(undiscounted and without interest charges) expected to result from use of an
asset and its eventual disposition. Impairment is recognized only if the
carrying amount of an asset is greater than the expected future cash flows. The
amount of impairment is based on the fair value of the asset. Under SFAS No.
121, each property is individually evaluated for impairment. Depreciation,
depletion and amortization expense for 1996 includes $6.8 million resulting
from impairment of long-term assets in accordance with SFAS No. 121. Such
impairment relates primarily to a Gulf of Mexico oil and gas property.
Income (Loss) Per Common Share
The computations of loss per common share are based on the weighted
average number of common shares outstanding during each period after deducting
amounts attributable to dividends on preferred stock.
Fair Value of Financial Instruments
The carrying values of cash, marketable securities, notes receivable,
short-term trade receivables and payables, and restricted cash approximate fair
value. The carrying values of the commodity price and interest rate swaps,
futures and options represent their required cash deposits, if any, plus or
minus unrealized gains and losses, if acquired for trading purposes. The fair
value of commodity price and interest rate swaps, futures and options is
estimated based on the market value of the underlying instruments (see Note 3).
The fair value of long-term debt is estimated based on the market prices for
MESA's publicly traded debt and on current rates available for similar debt
with similar maturities and security for MESA's remaining debt (see Note 4).
Gas Revenues
MESA recognizes its ownership interest in natural gas production as
revenue. Actual production quantities sold may be different from MESA's
ownership share of production in a given period. MESA records these differences
as gas balancing receivables or as deferred revenue. Net gas balancing
underproduction represented approximately 3% of total equivalent production for
the year ended December 31, 1996, compared with 2% during the same period in
1995 and 5% in 1994. The gas balancing receivable or deferred revenue component
of natural gas and natural gas liquids revenues in future periods is dependent
on future rates of production, field allowables and the amount of production
taken by MESA or by its joint interest partners.
MESA periodically utilizes financial and physical energy markets as a
hedge against natural gas price fluctuations. Gains or losses on hedges are
deferred and recognized as natural gas revenue when the hedged production
occurs. MESA recognized net losses of $1.8 million in 1996 and net gains of
$12.7 million and $895,000 in 1995 and 1994, respectively, related to hedging
activities.
Taxes
MESA provides for income taxes using the asset and liability method under
which 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 bases of existing assets and liabilities. The effect on deferred
taxes of a change in tax laws or tax rates is recognized in income in the
period that includes the enactment date.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from the estimates.
(2) Recapitalization
In August of 1996, MESA completed a recapitalization of its balance sheet
that entailed issuing $265 million in new preferred equity and repaying and
refinancing substantially all of its $1.2 billion of then existing long-term
debt (the "Recapitalization"). The structure and effects of the
Recapitalization are described below.
Series A & B Preferred Equity Sales
On April 26, 1996, MESA entered into a stock purchase agreement with
DNR-MESA Holdings L.P., a Texas limited partnership ("DNR"), whose sole general
partner is Rainwater Inc., a Texas corporation owned by Richard E. Rainwater.
The sale of shares to DNR and certain other matters were approved by MESA's
stockholders at a special meeting on June 25, 1996. On July 2, 1996, DNR
purchased, in a private placement, approximately 58.8 million shares of a new
class of Series B 8% Cumulative Convertible Preferred Stock ("Series B
Preferred"). On July 5, 1996, MESA commenced a rights offering for
approximately 58.6 million shares of a new class of Series A 8% Cumulative
Convertible Preferred Stock ("Series A Preferred") to its existing stockholders
(the "Rights Offering"). Stockholders received .912 rights in respect of each
share of common stock held. Each full right was exercisable for one share of
Series A Preferred at an exercise price of $2.26 per share, the same per share
price at which DNR purchased shares of Series B Preferred. The Rights Offering
was substantially oversubscribed and on August 8, 1996, MESA issued
approximately 58.6 million shares of Series A Preferred to rights holders who
exercised their rights.
As a result of the stock issuances and the subsequent pay-in-kind
quarterly dividends on the Series A and Series B Preferred, at December 31,
1996, DNR owned approximately 32.92% of MESA's fully diluted common shares
(excluding outstanding stock options). (See Note 6 for a more detailed
description of the preferred shares.)
New Debt
In conjunction with the issuance of Series A and B Preferred, MESA entered
into a new seven-year $525 million secured revolving credit facility ("the
Credit Facility") with a group of banks. MESA also issued and sold $475 million
of senior subordinated notes consisting of $325 million of 10-5/8% senior
subordinated notes due in 2006 (the "Senior Subordinated Notes") and $150
million of 11-5/8% senior subordinated discount notes due in 2006 (the "Senior
Discount Notes"). (See Note 4 for a more detailed description of the new debt.)
Use of Proceeds
The total proceeds from the issuance of the new equity and new long-term
debt, together with certain cash and investments on hand, were used to repay
and refinance then existing long-term debt and pay transaction costs.
The fees associated with the Series A and B Preferred stock have been
offset against the proceeds of the issuance of the shares and reflected in
additional paid-in capital on the consolidated balance sheet. The fees relating
to the issuance of new debt have been capitalized and are being amortized over
the term of the associated debt.
An extraordinary loss totaling approximately $59.4 million on the
extinguishment of long-term debt was recognized in the third quarter of 1996.
The loss consists primarily of the $51.6 million prepayment premium on the $616
million of secured notes (the "Secured Notes") issued in 1991 by a former
subsidiary in a private placement with a group of institutional lenders and
approximately $11.2 million of unamortized debt issuance costs and premiums
associated with the debt that was repaid and refinanced, partially offset by
$3.4 million in gains from cash deposits associated with the Secured Notes.
Effect of the Recapitalization
The Recapitalization enhances MESA's ability to compete in the oil and gas
industry by substantially increasing its cash flow available for investment and
improving its ability to attract capital. The ability to redirect cash flow to
reinvestment rather than debt service allows MESA to pursue an aggressive
growth strategy. Specifically, MESA's financial condition improved
significantly as a result of the Recapitalization due to (i) a significant
reduction in total debt outstanding, (ii) a reduction in annual cash
interest expense through lower debt balances and lower interest rates, and
(iii) the extension of maturities on its long-term debt.
In conjunction with the recapitalization of MESA on July 2, 1996, all of
MESA's principal subsidiaries were merged into Mesa Operating Co. ("MOC"). As a
result, MOC now owns substantially all of MESA's assets and liabilities,
including all of MESA's oil and gas properties and all of its long-term debt.
(3) Investments
The value of investments are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
--------------------
1996 1995
------- -------
<S> <C> <C>
Equity securities:
Cost...................................... $ -- $10,719
Unrealized loss........................... -- (162)
NYMEX Futures Contracts:
Margin Cash............................... -- 17,498
Unrealized gain in trading contracts...... -- 7,558
Commodity Price Swaps:
Margin Cash............................... -- 2,434
Unrealized loss in price swaps............ -- (811)
Natural Gas Options:
Premiums.................................. -- 66
Unrealized gain in trading options........ -- 978
------- -------
Total market value........................ $ -- $38,280
======= =======
</TABLE>
In 1996 MESA recognized net gains of approximately $9.4 million from its
investments compared with net gains in 1995 of $18.4 million and in 1994 of
$6.7 million. These gains do not include gains or losses from natural gas
futures contracts accounted for as a hedge of natural gas production. Hedge
gains or losses are included in natural gas revenue in the period in which the
hedged production occurs (see Note 1).
The following table sets forth the fair value of the financial instruments
accounted for as hedges(in thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
---------------------- ----------------------
Book Value Fair Value Book Value Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest rate swaps....... $ (167) $ (1,200) $ -- $ --
Commodity price swaps..... -- 687 -- --
</TABLE>
The net investment gains and losses recognized during a period include
both realized and unrealized gains and losses. MESA realized net gains from
investments of $16.9 million in 1996, $12.3 million in 1995, and $4.7 million
in 1994. At December 31, 1995 MESA had recognized but not realized
approximately $7.6 million of gains associated primarily with natural gas
futures. In 1996 MESA realized $3.8 in gains on these investments. There were
no unrealized gains on investments at December 31, 1996.
Since April 10, 1996, MESA has made no investments in commodity futures
contracts. Speculative investments are expected to be limited in the future.
(4) Long-term Debt
Long-term debt and current maturities are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------- ------------
<S> <C> <C>
10-5/8% Senior Subordinated Notes........... $ 325,000 $ --
11-5/8% Senior Discount Notes............... 158,772 --
Credit Facility............................. 319,000 --
Secured Notes............................... -- 504,674
Former Credit Agreement..................... -- 61,131
12-3/4% secured discount notes.............. -- 618,518
12-3/4% unsecured discount notes............ -- 39,725
13-1/2% subordinated notes.................. -- 7,390
Other....................................... 5,305 5,305
---------- ----------
808,077 1,236,743
Current maturities.......................... (5,305) (101,413)
---------- ----------
Long-term debt.............................. $ 802,772 $1,135,330
========== ==========
</TABLE>
Credit Facility
MOC is the borrower under the Credit Facility and all borrowings are fully
and unconditionally guaranteed by MESA Inc. The Credit Facility, which is
secured by liens on substantially all of MESA's assets, matures on June 30,
2003. The borrowing base for the Credit Facility is determined annually based
on the value of MESA's proved oil and gas reserves. Initially the borrowing
base was set at $525 million. As of December 31, 1996, the Credit Facility
supports Letters of Credit totaling $11.0 million and MESA has $195 million of
unused borrowing capacity. Borrowings bear interest, at MESA's option, at
Interbank Eurodollar rates plus 1-1/2%, CD rates plus 1-1/2%, Fed Funds rates
plus 1% or the prime rate plus 1/2%. MESA has entered into an interest rate
swap for two years that fixes the interest rate on $250 million of borrowings
at approximately 7-3/4%.
The Credit Facility restricts, among other things, MESA's ability to incur
additional indebtedness, create liens, pay dividends, acquire stock or make
investments, loans and advances.
Senior Notes
The 10-5/8% Senior Subordinated Notes are unsecured and mature in 2006.
MOC is the issuer of such notes and such notes are fully and unconditionally
guaranteed by MESA Inc. Interest is payable semiannually in cash.
The 11-5/8% Senior Discount Notes are unsecured and mature in 2006. MOC is
the issuer of such notes and such notes are fully and unconditionally
guaranteed by MESA Inc. Through June 30, 2001, interest will not accrue;
however, the accreted value, as defined, of such notes will increase at a rate
of 11-5/8% per year, compounded semiannually. Thereafter, through maturity,
interest will be payable semiannually in cash.
The indentures governing the Senior Subordinated Notes and the Senior
Discount Notes contain certain covenants that, among other things, limit the
ability of MESA and its restricted subsidiaries to incur additional
indebtedness and issue redeemable stock, pay dividends, make investments, make
certain other restricted payments, enter into certain transactions with
affiliates, dispose of assets, incur liens and engage in mergers and
consolidations.
Refinanced Debt
As part of the Recapitalization described in Note 2, substantially all of
MESA's then existing debt was repaid. Such debt included (i) the Secured Notes;
(ii) the $82.5 million bank credit facility, as amended (the "Former Credit
Agreement"); (iii) the 12-3/4% secured discount notes due June 30, 1998 and the
12-3/4% unsecured discount notes due June 30, 1996 (together, the "Discount
Notes"), and (iv) the 13-1/2% subordinated notes due in 1999.
Interest and Maturities
The aggregate interest payments, net of amounts capitalized, made during
the years ended December 31, 1996, 1995 and 1994, were $149.7 million, $63.8
million and $62.1 million, respectively. The interest payments in the year
ended December 31, 1996, included a $42 million interest payment made on
January 2, 1996, paid pursuant to the terms of the 12-3/4% Discount Notes, in
respect of the regular December 31, 1995 interest payment. Payment of
approximately $8.5 million, $39.0 million, and $70.6 million of interest
expense incurred during 1996, 1995 and 1994, respectively, was deferred under
the terms of the Discount Notes until the repayment dates of the Discount
Notes. Such interest is included in interest expense in the 1996, 1995 and 1994
consolidated statements of operations.
There are no scheduled principal payments under the terms of the Credit
Facility, the Senior Subordinated Notes or the Senior Discount Notes in the
next five years. However, MESA may have to pay the $5.3 million of other
long-term debt within the next five years and therefore classifies such debt in
current maturities.
Fair Value of Long-term Debt
The following is a summary of estimated fair value of MESA's long-term
debt as of the years ended (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
10-5/8% Senior Subordinated Notes $325,000 $354,250 $ -- $ --
11-5/8% Senior Discount Notes.... 158,772 183,480 -- --
Credit Facility.................. 319,000 319,000 -- --
Secured Notes.................... -- -- 504,674 568,641
Former Credit Agreement.......... -- -- 61,131 61,131
12-3/4% secured discount notes... -- -- 618,518 541,905
12-3/4% unsecured discount notes. -- -- 39,725 35,262
13-1/2% subordinated notes....... -- -- 7,390 7,390
</TABLE>
The fair value of long-term debt is estimated based on the market prices
for MESA's publicly traded debt and on current rates available for similar debt
with similar maturities and security for MESA's remaining debt.
(5) Income Taxes
MESA provides for income taxes using the asset and liability method under
which deferred tax assets and liabilities are recognized by applying the
enacted statutory tax rates applicable to future years to temporary differences
between the financial statement and tax bases of existing assets and
liabilities. The tax basis of MESA's consolidated net assets is greater than
the financial basis of those net assets; therefore a net deferred tax asset has
been recorded. However, due to MESA's history of net operating losses, a
valuation allowance has been recorded which offsets the entire net deferred tax
asset. A summary of MESA's net deferred tax asset is as follows (in millions):
<TABLE>
<CAPTION>
December 31
---------------
1996 1995
------ ------
<S> <C> <C>
Deferred tax asset................................... $ 285 $ 261
Deferred tax liability............................... (12) --
Valuation allowance.................................. (273) (261)
------ ------
Net deferred tax asset.......................... $ -- $ --
====== ======
</TABLE>
The principal components of MESA's net deferred tax asset (utilizing a
combined federal and state income tax rate of 38% and 39% as of December 31,
1996 and 1995, respectively) and the valuation allowance are as follows (in
millions):
<TABLE>
<CAPTION>
December 31
---------------
1996 1995
------ ------
<S> <C> <C>
Tax basis of oil and gas properties in
excess of financial basis.......................... $ 71 $ 75
Regular tax net operating loss carryforward.......... 214 184
Other, net........................................... (12) 2
------ ------
Total................................................ 273 261
Valuation allowance.................................. (273) (261)
------ ------
Net deferred tax asset.......................... $ -- $ --
====== ======
</TABLE>
At December 31, 1996, MESA had a regular tax net operating loss
carryforward of approximately $560 million. Additionally, MESA had an
alternative minimum tax loss carryforward available to offset future
alternative minimum taxable income of approximately $535 million. If not used,
these carryforwards will expire between 2007 and 2011.
The Internal Revenue Code of 1986 (the "Code") contains numerous
provisions which restrict or limit the use of corporate tax attributes in
conjunction with corporate acquisitions, dispositions, and reorganizations.
Included among these restrictive provisions is Code Section 382 which, in
general, limits the utilization of net operating loss ("NOL") carryforwards
subsequent to a substantial change (generally more than 50%) in corporate stock
ownership. The Section 382 ownership change (as defined for tax purposes) is
considered on a cumulative basis over a specified time period, normally three
years.
The issuance of Series B Preferred stock in the Recapitalization (see Note
2) has caused the NOL carryforward limitations of Section 382 to apply to MESA.
As a result, MESA's ability to carry forward its NOLs existing at the time of
the Recapitalization ("Pre-change NOLs") to offset future taxable income and
gain will be limited to the sum of (i) an annual allowance ("Annual NOL
Allowance") determined, in part, by reference to MESA's "value" immediately
prior to the issuance of the Series B Preferred stock ("Valuation Date") and
(ii) the amount of any net unrealized gain inherent in MESA's assets as of the
Valuation Date ("Built In Gain") recognized over a five year period. The
imposition of the above restrictions on MESA's Pre-change NOLs could result in
a portion of those NOLs expiring before MESA is able to utilize them. Any
unused Annual NOL Allowance amounts as well as any tax operating losses
generated subsequent to the Change Date will carryforward for use in future
years without regard to the Section 382 limitations described above.
(6) Stockholders' Equity
Common Stock
At December 31, 1996, MESA had outstanding 64,279,568 shares of common
stock. In late 1993 and 1994 MESA issued a total of approximately 1.7 million
shares of common stock in exchange for the General Partner's 4.14% interest in
the subsidiary partnerships of MESA. In 1994 MESA completed an equity offering
which resulted in the issuance of an additional 16.3 million shares of common
stock. Proceeds from the Equity Offering increased stockholders' equity by
approximately $93 million and were used to reduce long-term debt.
Preferred Stock
At December 31, 1996, MESA had authorized 600,000,000 shares of preferred
stock. The preferred stock issues outstanding at December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Shares Issued
and Outstanding
---------------
<S> <C>
Series A 8% Cumulative Convertible Preferred....... 60,443,259
Series B 8% Cumulative Convertible Preferred....... 61,200,427
-----------
121,643,686
===========
</TABLE>
The preferred stock was issued pursuant to the Recapitalization. (See
Note 2.)
Each share of Series A and B Preferred is convertible into one share of
MESA common stock at any time prior to mandatory redemption in 2008. After
2006, at the option of MESA's non-series B directors, MESA has the right to
redeem any outstanding Series A and Series B Preferred shares for common stock
or cash unless such shares were previously converted to common stock.
Similarly, at mandatory redemption in 2008, the remaining Series A and B
Preferred shares will be converted into common stock or cash at the option of
MESA's non-series B directors. An annual 8% pay-in-kind dividend will be paid
quarterly on the shares during the first four years following issuance.
Thereafter, the 8% dividend may, at the option of MESA, be paid in cash or
additional preferred shares, depending on whether certain financial tests are
met and subject to any limitations in MESA's debt agreements.
The Series A and B Preferred represented 64.6% of the fully diluted common
shares at the time of issuance and will represent 71.5% of such shares after
the mandatory four-year pay-in-kind period, excluding stock options and
assuming no other stock issuance by MESA. The Series A and B Preferred have a
liquidation preference per share equal to $2.26 plus accrued and unpaid
dividends. The terms of the Series A and Series B Preferred are substantially
identical except for certain voting rights and certain provisions relating to
transferability. The Series A and B Preferred will vote with the common stock
as a single class on all matters, except as otherwise required by law and
except for (i) the right of the holders of the Series B Preferred to nominate
and elect a majority of MESA's Board of Directors for so long as DNR and its
affiliates meet certain minimum stock ownership requirements, and (ii) the
right of the holders of the Series A Preferred to elect two directors in the
event of certain dividend arrearages.
(7) Other Income
The gains from collection of interest from Bicoastal Corporation relate to
a note receivable from such company, which was in bankruptcy. MESA's claims in
the bankruptcy exceeded its recorded receivable. As of year-end 1996 MESA had
collected the full amount of its allowed claim plus a portion of the interest
due on such claims.
In the second quarter of 1996, MESA revalued certain contingencies
associated primarily with contracts which were settled in the mid-to-late
1980's. As a result of the revaluation, MESA recorded a gain of $15 million in
the second quarter of 1996.
(8) Contingencies
Masterson
In February 1992 the current lessors of an oil and gas lease (the "Gas
Lease") dated April 30, 1955, between R. B. Masterson, et al., as lessor, and
Colorado Interstate Gas Company ("CIG"), as lessee, sued CIG in Federal
District Court in Amarillo, Texas, claiming that CIG had underpaid royalties
due under the Gas Lease. Under the agreements with CIG, MESA has an entitlement
to gas produced from the Gas Lease. In August 1992 CIG filed a third-party
complaint against MESA for any such royalty underpayments which may be
allocable to MESA. Plaintiffs alleged that the underpayment was the result of
CIG's use of an improper gas sales price upon which to calculate royalties and
that the proper price should have been determined pursuant to a
"favored-nations" clause in a July 1, 1967, amendment to the Gas Lease (the
"Gas Lease Amendment"). The plaintiffs also sought a declaration by the court
as to the proper price to be used for calculating future royalties.
The plaintiffs alleged royalty underpayments of approximately $500 million
(including interest at 10%) covering the period from July 1, 1967, to the
present. In March 1995 the court made certain pretrial rulings that eliminated
approximately $400 million of the plaintiffs' claims (which related to periods
prior to October 1, 1989), but which also reduced a number of MESA's defenses.
MESA and CIG filed stipulations with the court whereby MESA would have been
liable for between 50% and 60%, depending on the time period covered, of an
adverse judgment against CIG for post-February 1988 underpayments of royalties.
On March 22, 1995, a jury trial began and on May 4, 1995, the jury
returned its verdict. Among its findings, the jury determined that CIG had
underpaid royalties for the period after September 30, 1989, in the amount of
approximately $140,000. Although the plaintiffs argued that the
"favored-nations" clause entitled them to be paid for all of their gas at the
highest price voluntarily paid by CIG to any other lessor, the jury determined
that the plaintiffs were estopped from claiming that the "favored-nations"
clause provides for other than a pricing-scheme to pricing-scheme comparison.
In light of this determination, and the plaintiffs' stipulation that a
pricing-scheme to pricing-scheme comparison would not result in any "trigger
prices" or damages, defendants asked the court for a judgment that plaintiffs
take nothing. The court, on June 7, 1995, entered final judgment that
plaintiffs recover no monetary damages. The plaintiffs have filed a motion for
new trial on which the court has not yet ruled. MESA cannot predict whether the
court will grant such motion or, if it does not, whether the plaintiffs will
appeal the court's final judgment.
On June 7, 1996, the plaintiffs filed a separate suit against CIG and MESA
in state court in Amarillo, Texas, similarly claiming underpayment of royalties
under the "favored-nations" clause, but based upon the above-described
pricing-scheme to pricing-scheme comparison on a well-by-well monthly basis.
The plaintiffs also claim underpayment of royalties since June 7, 1995 under
the "favored-nations" clause based upon either the pricing-scheme to
pricing-scheme method or their previously alleged higher price method. MESA
believes it has several defenses to this action and intends to contest it
vigorously. MESA has not yet determined the amount of damages, if any, that
would be payable if such action were determined adversely to MESA.
The federal court in the above-referenced first suit issued an order on
July 29, 1996, which stayed the second suit pending a decision by the court on
plaintiff's motion for new trial in the first suit.
However, based on the jury verdict and final judgment, MESA does not
expect the ultimate resolution of these lawsuits to have a material adverse
effect on its financial position or results of operations.
Lease Termination
In 1991 MESA sold certain producing oil and gas properties to Seagull
Energy Company ("Seagull"). In 1994, two lawsuits were filed against Seagull in
the 100th District Court in Carson County, Texas, by certain land and royalty
owners claiming that certain of the oil and gas leases owned by Seagull
have terminated due to cessation in production and/or lack of production
in paying quantities occurring at various times from first production
through 1994. In the third quarter of 1995, Seagull filed third-party
complaints against MESA claiming breach of warranty and false representation
in connection with the sale of such properties to Seagull. Seagull filed a
similar third-party complaint June 29, 1995, against MESA covering a
different lease in the 69th District Court in Moore County, Texas.
The plaintiffs in the cases against Seagull are seeking to terminate the
leases. Seagull, in its complaint against MESA, is seeking unspecified damages
relating to any leases which are terminated. MESA believes it has several
defenses to these lawsuits, including a two-year limitation on indemnification
set forth in the purchase and sale agreement pursuant to which MESA sold the
properties.
In February 1997, MESA entered a settlement agreement with Seagull whereby
MESA has been released from all claims associated with the third-party claims.
Shareholder Litigation
On July 3, 1995, Robert Strougo filed a class action and derivative action
in the District Court of Dallas County, Texas, 160th Judicial District, against
T. Boone Pickens, Paul W. Cain, John L. Cox, John S. Herrington, Wales H.
Madden, Jr., Fayez S. Sarofim, Robert L. Stillwell, and J. R. Walsh, Jr. (the
"Director Defendants"), each of whom is a present or former director of MESA.
The class action is purportedly brought on behalf of a class of MESA
shareholders and alleges, inter alia, that the Board infringed upon the
suffrage rights of the class and impaired the ability of the class to receive
tender offers by adoptions of the shareholder rights plan. The lawsuit is also
brought derivatively on behalf of MESA and alleges, inter alia, that the Board
breached fiduciary duties to MESA by adopting the shareholder rights plan and
by failing to consider the sale of MESA. The lawsuit seeks unspecified damages,
attorneys' fees, and injunctive and other relief. Two other lawsuits filed by
Herman Krangel, Lilian Krangel, Jacquelyn A. Cady, and William A. Montagne,
Jr., in the District Court of Dallas County have been consolidated into this
lawsuit. A third lawsuit filed by Deborah M. Eigen and Adele Brody as a
derivative lawsuit in the U.S. District Court for the Northern District of
Texas, Dallas Division, intervened in this lawsuit.
On February 5, 1996, the Court denied Defendants' Motion to Dismiss. A
trial date has been set for September 15, 1997. The case has been stayed
pending a Special Litigation Committee investigation by MESA to decide whether
the case should be dismissed.
Other
MESA is also a defendant in other lawsuits and has assumed liabilities
relating to its predecessors. MESA does not expect the resolution of any of
these matters to have a material adverse effect on its financial position or
results of operations.
(9) Employee Benefit Plans
Retirement Plans
MESA maintains two defined contribution retirement plans for the benefit
of its employees. MESA expensed $1.8 million in 1996, $.8 million in 1995, and
$3.3 million in 1994 in connection with these plans.
Option Plans
In December 1991 the stockholders of MESA approved the 1991 Stock Option
Plan of MESA (the "Option Plan"), which authorized the grant of options to
purchase up to two million shares of common stock to officers and key
employees. In May 1994 the stockholders of MESA approved an amendment to the
Option Plan which increased the number of shares of common stock authorized to
four million from two million. The exercise price for each share of common
stock placed under option cannot be less than 100% of the fair market value of
the common stock on the date the option is granted. Upon exercise, the grantee
may elect to receive either shares of common stock or, at the discretion of the
Option Committee of the Board of Directors, cash or certain combinations of
stock and cash in an amount equal to the excess of the fair market value of the
common stock at the time of exercise over the exercise price. At December 31,
1996, the following stock options were outstanding under this plan:
<TABLE>
<CAPTION>
Number of
Options
---------
<S> <C>
Outstanding at December 31, 1995......................... 2,932,390
Granted............................................. 1,000,000
Exercised........................................... (1,000,000)
Forfeited........................................... (3,040)
---------
Outstanding at December 31, 1996......................... 2,929,350
=========
</TABLE>
The outstanding options under this plan at December 31, 1996, are detailed
as follows:
<TABLE>
<CAPTION>
Number of Date of Exercise Price
Options Grant Per Share Exercisable
--------- -------- -------------- -----------
<S> <C> <C> <C> <C>
1,126,000 .................. 01/10/92 $ 6.8125 1,126,000
132,500 .................. 10/02/92 11.6875 132,500
100,850 .................. 05/18/93 5.8125 100,850
475,000 .................. 11/10/93 7.3750 475,000
75,000 .................. 06/06/94 6.1875 75,000
20,000 .................. 05/12/95 5.6875 20,000
1,000,000 .................. 08/21/96 3.2500 --
--------- ---------
2,929,350 1,929,350
========= =========
</TABLE>
On June 26, 1996, all existing options granted under this plan on this
date were 100% vested by MESA's board of directors. The options issued on
August 21, 1996, are exercisable as follows: after six months, 30%; after one
year, 55%; after two years, 80%; and after three years, 100%. At December 31,
1996, options for 7,930 shares were available for grant under this plan.
In August 1996 the 1996 Incentive Plan of MESA (the "Incentive Plan") was
created. This plan will be presented to MESA's stockholders for approval at
MESA's 1997 stockholders' meeting in the summer of 1997. If approved, the
Incentive Plan will authorize grants of options to purchase up to 9 million
shares of common stock to officers and key employees. The exercise price for
each share of common stock placed under option will be determined by the type
of option granted. Upon exercise, the grantee may elect to receive either
shares of common stock or, at the discretion of the Option Committee of the
Board of Directors, cash or certain combinations of stock and cash in an amount
equal to the excess of the fair market value of the common stock at the time of
exercise over the exercise price. If the Incentive Plan is approved, the
following options will be included in the outstanding options of this plan:
<TABLE>
<CAPTION>
Number of Date of Exercise Price
Options Grant Per Share Exercisable
--------- -------- -------------- -----------
<S> <C> <C> <C> <C>
1,000,000................... 08/21/96 $ 3.2500 --
2,150,000................... 09/30/96 4.0625 --
--------- --------
3,150,000 --
========= ========
</TABLE>
These options are exercisable as follows: after six months, 30%; after
one year, 55%, and after two years, 100%.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock-Based Compensation, which is effective for
MESA's fiscal year beginning January 1, 1996. SFAS No. 123 establishes
financial accounting and reporting standards for stock-based employee
compensation plans. It defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans and include the cost in the income statement as compensation expense.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees. MESA accounts for compensation cost for stock option plans in
accordance with APB Opinion No. 25.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if MESA had accounted for
its employee stock options under the fair value method as provided therein. The
fair value for the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: risk-free interest
rates of 6.58% and 6.80%; a volatility factor of the expected market price of
MESA's common stock of .6816 and .6326; no expected dividends; and
weighted-average expected option lives of five years. If the fair value based
method of accounting in SFAS 123 had been applied, MESA's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1995
------------ ------------
(in thousands, except per share data)
<S> <C> <C>
Net Loss -- as reported.................... $(60,569) $(57,568)
Net Loss -- pro forma...................... (63,572) (57,600)
Net Loss per Common Share -- as reported... (.94) (.90)
Net Loss per Common Share -- pro forma..... (.99) (.90)
</TABLE>
The fair value of stock options included in the pro forma amounts for the
years 1995 and 1996 is not necessarily indicative of future effects on net
income and earnings per share.
A summary of the status of the Company's stock options as of December 31,
1996, 1995, and 1994, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- --------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- -------------------------- -------------------- --------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> utstanding at
beginning of year....... 2,932,390 $ 6.20 2,926,460 $ 6.21 1,933,050 $ 7.26
Granted................... 4,150,000 3.80 20,000 5.69 1,075,000 4.39
Exercised................. (1,000,000) 4.25 - - (41,720) 6.26
Forfeited................. (3,040) 9.68 (14,070) 8.39 (39,870) 8.00
--------- ------ --------- ------ --------- ------
Outstanding at
end of year.............. 6,079,350 $ 4.88 2,932,390 $ 6.20 2,926,460 $ 6.21
========= ========= =========
Options exercisable at
year-end................. 1,929,350 $ 7.20 2,319,262 $ 6.53 1,357,928 $ 7.28
========= ========= =========
Weighted-average fair
value of options
granted during the year.. $2.30 $ 3.42 N/A
</TABLE>
The following table summarizes information regarding stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Weighted-
Number of Average Weighted- Weighted-
Options Remaining Average Number Average
Outstanding Exercise Contractual Exercise Exercisable Exercise
at 12/31/96 Price Life Price at 12/31/96 Price
- ------------ -------- ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
1,126,000 $ 6.8125 5.0 years $ 6.8125 1,126,000 $ 6.8125
132,500 11.6875 5.8 years 11.6875 132,500 11.6875
100,850 5.8125 6.4 years 5.8125 100,850 5.8125
475,000 7.3750 6.9 years 7.3750 475,000 7.3750
75,000 6.1875 7.4 years 6.1875 75,000 6.1875
20,000 5.6875 8.4 years 5.6875 20,000 5.6875
1,000,000 3.2500 9.6 years 3.2500 -- --
1,000,000 3.2500 9.6 years 3.2500 -- --
2,150,000 4.0625 9.8 years 4.0625 -- --
--------- ---------
6,079,350 $ 4.8800 8.4 years $ 4.8800 1,929,350 $ 7.2000
========= =========
</TABLE>
Postretirement Benefits
Effective January 1, 1993, MESA adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which requires
that the costs of such benefits be recorded over the periods of employee
service to which they relate. For MESA, this standard primarily applies to
postretirement medical benefits for retired and current employees. The
liability for benefits existing at the date of adoption (the "Transition
Obligation") will be amortized over the remaining life of the retirees or 20
years, whichever is shorter.
MESA maintains two separate plans for providing postretirement medical
benefits. One plan covers MESA's retirees and current employees (the "MESA
Plan"). The other plan, which relates to the retirees of Pioneer, acquired by
MESA in 1986 (the "Pioneer Plan"). Under the MESA Plan, employees who retire
from MESA and who have had at least ten years of service with MESA after
attaining age 45 are eligible for postretirement health care benefits. These
benefits may be subject to deductibles, copayment provisions, retiree
contributions and other limitations, and MESA has reserved the right to change
the provisions of the plan. The Pioneer Plan is maintained for Pioneer retirees
and dependents only and is subject to deductibles, copayment provisions and
certain maximum payment provisions. MESA does not have the right to change the
Pioneer Plan or to require retiree contributions. Both plans are self-insured
indemnity plans and both coordinate benefits with Medicare as the primary
payer. Neither plan is funded.
The following table reconciles the status of the two plans with the amount
included under other liabilities in the consolidated balance sheet at December
31, 1996, (in thousands):
<TABLE>
<CAPTION>
MESA Pioneer
Plan Plan(a) Total
------- ------- -------
<S> <C> <C> <C>
Accumulated Postretirement Benefit
Obligation ("APBO"):
Retirees and dependents............ $ 1,449 $ 9,647 $11,096
Actives - fully eligible........... 599 -- 599
Other actives...................... 637 -- 637
------- ------- -------
Total APBO.................... 2,685 9,647 12,332
Unrecognized Transition Obligation....... (1,337) (2,117) (3,454)
Unrecognized Net Gain (Loss)............ (291) 1,732 1,441
------- ------- -------
Accrued Postretirement
Benefit Obligation.................... $ 1,057 $ 9,262 $10,319
======= ======= =======
</TABLE>
- ----------
(a) MESA established an accrued liability associated with the Pioneer
Plan in conjunction with its acquisition of Pioneer in 1986.
For measurement purposes, the 1996 annual rate of increase in per capita
cost of covered health care benefits was assumed to be 10% for those
participants under age 65 and 9% for those participants over age 65. The rates
were assumed to decrease gradually to 5.0% by the year 2000 and to remain at
that level thereafter. The health care cost trend rate assumption affects the
amount of the Transition Obligation and periodic cost reported. An increase in
the assumed health care cost trend rates by 1% in each year would increase the
APBO as of December 31, 1996, by approximately $1,018,000 and the net periodic
postretirement benefit cost for the year ended December 31, 1996, by
approximately $117,000. The net periodic postretirement benefit cost for the
year ended December 31, 1996, was approximately $1.5 million based on the
assumptions used.
The discount rate used in determining the APBO as of December 31, 1996,
was 7.5%.
The following table presents MESA's cost of postretirement benefits other
than pensions for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net periodic postretirement benefit cost:
Service cost............................ $ 142 $ 124 $ 110
Interest cost........................... 1,040 1,005 988
Amortization of Transition Obligation... 276 276 276
------ ------ ------
$1,458 $1,405 $1,374
====== ====== ======
Actual costs of providing benefits:
MESA Plan............................... $ 78 $ 4 $ 120
Pioneer Plan............................ 784 918 666
------ ------ ------
$ 862 $ 922 $ 786
====== ====== ======
</TABLE>
(10) Major Customers
In 1996 revenues include sales to MAPCO Natural Gas Liquids, Inc.
("MAPCO") of $95.1 million (30.8%) and Western Resources, Inc. ("WRI") of $48.5
million (15.7%). In 1995 revenues included sales to MAPCO of $75.0 million
(34.4%), and WRI of $21.9 million (10.0%). In 1994 revenues included sales to
MAPCO of $70.9 million (31.4%), WRI of $37.4 million (16.6%) and Energas
Company of $22.8 million (10.1%). MESA does not anticipate that the loss of any
of these customers would result in a material adverse effect because the
volumes could be sold to other customers.
(11) Concentrations of Credit Risk
Substantially all of MESA's accounts receivable at December 31, 1996,
result from oil and gas sales and joint interest billings to third party
companies in the oil and gas industry. This concentration of customers and
joint interest owners may impact MESA's overall credit risk, either positively
or negatively, in that these entities may be similarly affected by changes in
economic or other conditions. In determining whether or not to require
collateral from a customer or joint interest owner, MESA analyzes the entity's
net worth, cash flows, earnings, and credit ratings. Receivables are generally
not collateralized. Historical credit losses incurred by MESA on receivables
have not been significant.
(12) Subsequent Events
On April 6, 1997, MESA issued the Press Release announcing that it and
Parker & Parsley had entered into a Merger Agreement to merge and create
Pioneer. The consummation of the transactions contemplated in the Merger
Agreement is subject to the approval of the shareholders of each of MESA and
Parker & Parsley. If the Merger Agreement is approved, when the business
combination is completed, (i) each seven outstanding shares of MESA Common
Stock will be converted into the right to receive one share of Pioneer Common
Stock ("MESA Conversion Number"), (ii) each seven outstanding shares of MESA's
Series A 8% Cumulative Convertible Preferred Stock and MESA's Series B 8%
Cumulative Convertible Preferred Stock will be converted into the right to
receive either (a) 1.25 shares of Pioneer Common Stock ("MESA Common
Consideration") or (b) one share of Pioneer's Series A 8% Cumulative
Convertible Preferred Stock ("MESA Preferred Consideration), in each case as
the holder thereof shall elect or be deemed to elect (provided that if the
holders of a majority of the outstanding MESA Series A Preferred Stock or MESA
Series B Preferred Stock, each voting as a separate class, vote in favor of the
Merger Agreement, then all holders of the series for which the vote has been
obtained will receive the MESA Common Consideration) and (iii) each outstanding
share of Parker & Parsley Common Stock will be converted into the right to
receive one share of Pioneer Common Stock ("Parker & Parsley Conversion
Number").
On February 7, 1997, MESA entered into a Stock Purchase Agreement to
purchase 100% of the outstanding capital stock of Greenhill for a total
purchase price of $270 million. As of December 31, 1996, Greenhill's properties
had estimated proved reserves of approximately 23.4 MMBbls (unaudited) of oil,
and 41.9 Bcf (unaudited) of gas, or an aggregate of approximately 30.4 MMBOE
(unaudited). The closing of the Greenhill Acquisition is expected to occur on
April 15, 1997. The Greenhill Acquisition will be accounted for under the
purchase method of accounting. However, because the purchase agreement provides
for an effective date of January 1, 1997, MESA will receive the benefits of all
Greenhill production and cash flow from the effective date to the closing date
as additional assets acquired. Under the purchase agreement, MESA will pay
interest on the $270 million purchase price (less the $15 million deposit) at
an annual rate of 10% from the effective date to the closing date. The purchase
price is subject to adjustment for certain title and environmental matters.
On February 6, 1997, MESA purchased all of MAPCO's natural gas liquids and
condensate production in the West Panhandle field for $66 million, effective as
of January 1, 1997. The NGL Acquisition has been accounted for under the
purchase method of accounting.
F-7
SUPPLEMENTAL FINANCIAL DATA
Oil and Gas Reserves and Cost Information
(Unaudited)
Net proved oil and gas reserves as of December 31, 1996, associated with
MESA's two most significant natural gas producing fields were estimated by
independent petroleum engineering consultants. These two fields, the Hugoton
and West Panhandle fields, represented over 95% of MESA's net proved equivalent
natural gas reserves as of the date estimated by the independent petroleum
engineers. Net proved oil and gas reserves as of December 31, 1995 and 1994,
were estimated by MESA engineers. All of MESA's reserves at December 31, 1996,
1995, and 1994, were in the United States. In accordance with regulations
established by the Commission, the reserve estimates were based on economic and
operating conditions existing at the end of the respective years.
Future prices for natural gas were based on market prices as of each year
end and contract terms, including fixed and determinable price escalations.
Market prices received as of each year end were used for future sales of oil,
condensate and natural gas liquids. Future operating costs, production and ad
valorem taxes and capital costs were based on current costs as of each year
end, with no escalation.
Approximately 65% of MESA's equivalent proved reserves (based on a factor
of six thousand cubic feet of gas per barrel of liquids) at December
31, 1996, were natural gas. The natural gas prices in effect at December 31,
1996 (having a weighted average of $3.37 per Mcf), were used in accordance with
Commission regulations but may not be the most appropriate or representative
prices to use for estimating reserves since such prices were influenced by the
seasonal demand for natural gas and contractual arrangements at that date. The
average price received by MESA for sales of natural gas in 1996 was $2.21 per
Mcf. At December 31, 1996, MESA's standardized measure of future net cash flows
from proved reserves (the "Standardized Measure") and the pretax Standardized
Measure were greater than the net book value of oil and gas properties by
approximately $359 million and $801 million, respectively.
Oil and gas reserve quantities estimated as of December 31, 1996, reflect
a net decrease over 1995, after production, of approximately 279 Bcfe of
natural gas. The proved reserves as of December 31, 1996, were prepared by
MESA's engineers and Williamson Petroleum Consultants, MESA's independent
petroleum engineering firm ("Williamson"). Williamson engineers determined
reserve quantities for the Hugoton and West Panhandle areas which represent
approximately 95% of MESA's net reserves. Reserves for the Gulf Coast and other
areas were determined by MESA engineers.
Reserve quantities for the Hugoton properties as determined by Williamson
engineers as of December 31, 1996, are approximately 8% lower than reserves
estimated by MESA engineers at December 31, 1995 after giving effect to 1996
production. Substantially all of the reduction was attributable to proved
reserve estimate differences in the Hugoton field of Kansas.
In the West Panhandle field, reserves were revised upward to reflect the
development drilling results over the past year and the restructuring of its
contractual arrangements in the field. In the Gulf of Mexico, reserve additions
resulted from exploratory and development drilling in 1994, 1995 and 1996.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting the future rates of production and timing of
development expenditures. Reserve data represent estimates only and should not
be construed as being exact. Estimates prepared by other engineers might be
materially different from those set forth herein. Moreover, the Standardized
Measure should not be construed as the current market value of the proved oil
and gas reserves or the costs that would be incurred to obtain equivalent
reserves. A market value determination would include many additional factors
including (i) anticipated future changes 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 present, which may be
recovered as a result of further exploration and development activities; and
(iv) other business risks.
Capitalized Costs and Costs Incurred
(Unaudited)
Capitalized costs relating to oil and gas producing activities at December
31, 1996, 1995, and 1994 and the costs incurred during the years then ended are
set forth below (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Capitalized Costs:
Proved properties................ $1,971,026 $1,897,168 $1,865,004
Unproved properties.............. 4,658 2,995 2,838
Accumulated depreciation,
depletion and amortization..... (941,266) (834,304) (753,827)
---------- ---------- ----------
Net......................... $1,034,418 $1,065,859 $1,114,015
========== ========== ==========
Costs Incurred:
Exploration and development:
Proved properties........... $ 11 $ 269 $ 523
Unproved properties......... 1,863 157 2,425
Exploration costs........... 11,996 8,167 5,157
Development costs........... 27,624 14,572 14,043
---------- ---------- ----------
Total exploration and
development.......... 41,494 23,165 22,148
---------- ---------- ----------
Plants and facilities:
Processing plants........... 4,400 1,850 3,248
Field compression facilities 2,975 10,561 3,129
Other....................... 1,367 3,354 5,168
---------- ---------- ----------
Total plants and
facilities........... 8,742 15,765 11,545
---------- ---------- ----------
Total costs incurred............. $ 50,236 $ 38,930 $ 33,693
========== ========== ==========
Depreciation, depletion
and amortization............... $ 98,382 $ 80,513 $ 89,413
========== ========== ==========
</TABLE>
Estimated Quantities of Reserves
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------
Natural Gas (MMcf) 1996 1995 1994
- ----------- ---------- ---------- ----------
<S> <C> <C> <C>
Proved Reserves:
Beginning of year................ 1,218,029 1,303,187 1,202,444
Extensions and discoveries.. 12,543 29,728 6,211
Purchases of producing
properties................ -- 1,000 822
Revisions of previous
estimates................. (108,902) (38,574) 176,049
Improved recovery........... 53 -- --
Production.................. (84,001) (77,312) (82,339)
---------- ---------- ----------
End of year...................... 1,037,722 1,218,029 1,303,187
========== ========== ==========
Proved Developed Reserves:
Beginning of year................ 1,160,751 1,257,883 1,159,453
========== ========== ==========
End of year...................... 992,523 1,160,751 1,257,883
========== ========== ==========
Years Ended December 31
Natural Gas Liquids, Oil ------------------------------------
and Condensate (MBbls) 1996 1995 1994
- ------------------------ ---------- ---------- ----------
Proved Reserves:
Beginning of year................ 111,418 89,428 82,446
Extensions and discoveries.. 2,034 3,121 491
Purchases of producing
properties................ -- 5 1
Revisions of previous
estimates................. (11,510) 26,630 13,947
Improved recovery........... 371 -- --
Production.................. (7,399) (7,766) (7,457)
---------- ---------- ----------
End of year...................... 94,914 111,418 89,428
========== ========== ==========
Proved Developed Reserves:
Beginning of year................ 105,197 85,656 79,294
========== ========== ==========
End of year...................... 89,499 105,197 85,656
========== ========== ==========
</TABLE>
* Proved natural gas liquids, oil and condensate reserve quantities include
oil and condensate reserves at December 31 of the respective years as
follows: 1996, 6,863 MBbls; 1995, 9,521 MBbls; and 1994, 5,031 MBbls.
* In addition to the proved reserves disclosed above, MESA owned proved helium
reserves at December 31 of the respective years as follows: 1996, 4,771
MMcf; 1995, 3,670 MMcf; and 1994, 4,457 MMcf.
Standardized Measure of Future Net Cash Flows from Proved Reserves
(Unaudited)
<TABLE>
<CAPTION>
December 31
------------------------------------
1996 1995 1994
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Future cash inflows................... $5,957,298 $3,804,371 $3,513,282
Future production and
development costs:
Operating costs and
production taxes............... (1,390,897) (1,257,957) (1,192,005)
Development and
abandonment costs.............. (139,015) (96,594) (95,441)
Future income taxes................... (1,095,353) (296,987) (211,076)
---------- ---------- ----------
Future net cash flows................. 3,332,033 2,152,833 2,014,760
Discount at 10% per annum........ (1,938,318) (1,186,644) (1,080,578)
---------- ---------- ----------
Standardized Measure.................. $1,393,715 $ 966,189 $ 934,182
========== ========== ==========
Future net cash flows
before income taxes................. $4,427,386 $2,449,820 $2,225,836
========== ========== ==========
Standardized Measure
before income taxes................. $1,835,608 $1,040,413 $ 988,325
========== ========== ==========
</TABLE>
- ----------
* The estimate of future income taxes is based on the future net cash flows
from proved reserves adjusted for the tax basis of the oil and gas
properties but without consideration of general and administrative and
interest expenses.
Changes in Standardized Measure
(Unaudited)
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------
1996 1995 1994
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Standardized Measure at
beginning of year................... $ 966,189 $ 934,182 $ 986,931
---------- ---------- ----------
Revisions of reserves proved
in prior years:
Changes in prices and
production costs............... 1,132,709 52,724 (121,300)
Changes in quantity estimates.... (215,046) 71,673 151,538
Changes in estimates of
future development and
abandonment costs.............. (54,334) (18,424) (27,343)
Net change in income taxes....... (367,669) (20,081) 27,666
Accretion of discount............ 104,041 98,833 106,874
Other, primarily timing
of production.................. (32,784) (94,511) (80,650)
---------- ---------- ----------
Total revisions............. 566,917 90,214 56,785
Extensions, discoveries and
other additions, net of future
production and development costs.... 41,622 61,259 8,075
Purchases of proved properties........ -- 1,692 463
Sales of oil and gas produced,
net of production costs............. (225,818) (154,231) (146,267)
Sales of producing properties......... -- -- --
Previously estimated development
and abandonment costs incurred
during the period................... 44,805 33,073 28,195
---------- ---------- ----------
Net changes in Standardized Measure... 427,526 32,007 (52,749)
---------- ---------- ----------
Standardized Measure at end of year... $1,393,715 $ 966,189 $ 934,182
========== ========== ==========
</TABLE>
Quarterly Results
(Unaudited)
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1996:
- ----
Revenues............ $ 80,643 $ 71,322 $ 66,752 $ 92,694
======== ======== ======== ========
Gross profit(1)..... $ 31,451 $ 32,284 $ 26,173 $ 43,684
======== ======== ======== ========
Net income (loss)... $ 1,057 $ 4,547 $(72,912) $ 16,261
======== ======== ======== ========
Net income (loss)
per common share
and common share
equivalent........ $ .02 $ .07 $ (1.20) $ .17
======== ======== ======== ========
Net income (loss)
per common share
assuming full
dilution.......... $ .02 $ .07 $ (1.20) $ .09
======== ======== ======== ========
1995:
- ----
Revenues............ $ 62,247 $ 59,174 $ 48,967 $ 64,571
======== ======== ======== ========
Gross profit(1)..... $ 23,922 $ 23,776 $ 10,253 $ 23,367
======== ======== ======== ========
Net loss............ $ (7,894) $(13,953) $(32,473) $ (3,248)
======== ======== ======== ========
Net loss per
common share...... $ (.12) $ (.22) $ (.51) $ (.05)
======== ======== ======== ========
</TABLE>
- ----------
(1) Gross profit consists of total revenues less lease operating
expenses, production and other taxes and DD&A.
F-8
