<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-11680
LEVIATHAN GAS PIPELINE PARTNERS, L.P.
(Exact name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 76-0396023
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
EL PASO ENERGY BUILDING
1001 LOUISIANA STREET
HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (713) 420-2131
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The registrant had 26,737,465 Common Units and 291,299 Preference Units
outstanding as of November 12, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
GLOSSARY
The following abbreviations, acronyms or defined terms used in this Form
10-Q are defined below:
ANR........................ ANR Pipeline Company, a subsidiary of The Coastal
Corporation
Bcf........................ Billion cubic feet
Deepwater Holdings......... Deepwater Holdings, L.L.C., a Delaware limited
liability company in which Leviathan owns a 50
percent member interest
East Breaks................ East Breaks Gathering Company, L.L.C., a Delaware
limited liability company and wholly owned
subsidiary of Western Gulf Holdings, L.L.C.
El Paso Energy............. El Paso Energy Corporation, a Delaware Corporation
and the indirect parent of the General Partner
EPFS....................... El Paso Field Services Company, a Delaware
Corporation and wholly owned subsidiary of El Paso
Energy Corporation
Equity Investees........... Collectively refers to POPCO, Manta Ray Offshore,
Nautilus, Nemo, and Deepwater Holdings and its
subsidiaries including East Breaks, Stingray, West
Cameron Dehy, HIOS and UTOS, and prior to June 1,
1999, Viosca Knoll
Ewing Bank 958 Unit........ A non-producing oil and natural gas property
comprised of Ewing Bank Blocks 958, 959, 1002 and
1003, formerly referred to as the Sunday Silence
property
General Partner............ Leviathan Gas Pipeline Company, a Delaware
corporation and wholly owned indirect subsidiary of
El Paso Energy Corporation and general partner of
Leviathan
Gulf....................... Gulf of Mexico
HIOS....................... High Island Offshore System, L.L.C., a Delaware
limited liability company and wholly owned
subsidiary of Western Gulf Holdings, L.L.C.
Leviathan.................. Leviathan Gas Pipeline Partners, L.P., a publicly
held Delaware master limited partnership, and its
subsidiaries, unless the context otherwise requires
Manta Ray Offshore......... Manta Ray Offshore Gathering Company, L.L.C., a
Delaware limited liability company in which
Leviathan owns an indirect 25.67 percent member
interest
Mcf........................ Thousand cubic feet
MMcf....................... Million cubic feet
MMbtu...................... Million British thermal units
Nautilus................... Nautilus Pipeline Company, L.L.C., a Delaware
limited liability company in which Leviathan owns
an indirect 25.67 percent member interest
Nemo....................... Nemo Gathering Company, LLC, a Delaware limited
liability company in which Leviathan owns a 33.92
percent member interest
NYMEX...................... New York Mercantile Exchange
POPCO...................... Poseidon Oil Pipeline Company, L.L.C., a Delaware
limited liability company in which Leviathan owns a
36 percent member interest
2
<PAGE> 3
Stingray................... Stingray Pipeline Company, L.L.C., a Delaware
limited liability company, wholly owned by
Deepwater Holdings, L.L.C.
UTOS....................... U-T Offshore System, L.L.C., a Delaware limited
liability company, wholly owned by Deepwater
Holdings, L.L.C.
West Cameron Dehy.......... West Cameron Dehydration Company, L.L.C., a
Delaware limited liability company, wholly owned by
Deepwater Holdings, L.L.C.
Western Gulf............... Western Gulf Holdings, L.L.C., a Delaware limited
liability company, wholly owned by Deepwater
Holdings, L.L.C.
Viosca Knoll............... Viosca Knoll Gathering Company, a Delaware general
partnership in which Leviathan owns a 99 percent
member interest
3
<PAGE> 4
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue............................................... $ 25,617 $18,230 $ 71,467 $54,317
-------- ------- -------- -------
Costs and expenses
Operating expenses.................................. 2,405 3,013 7,429 8,558
Depreciation, depletion and amortization............ 7,967 7,052 21,694 21,897
Impairment, abandonment and other................... -- (1,131) -- (1,131)
General and administrative expenses and management
fee.............................................. 5,412 6,433 11,321 13,937
-------- ------- -------- -------
15,784 15,367 40,444 43,261
-------- ------- -------- -------
Operating income...................................... 9,833 2,863 31,023 11,056
Gain on sale of assets................................ 10,103 311 10,103 311
Other................................................. 39 84 306 241
Interest and other financing costs.................... (10,799) (5,281) (24,667) (13,711)
Minority interest..................................... (97) 15 (176) 12
-------- ------- -------- -------
Income (loss) before income taxes..................... 9,079 (2,008) 16,589 (2,091)
Income tax benefit.................................... 178 202 355 371
-------- ------- -------- -------
Net income (loss)..................................... $ 9,257 $(1,806) $ 16,944 $(1,720)
======== ======= ======== =======
Weighted average number of units outstanding.......... 27,029 24,367 25,556 24,367
======== ======= ======== =======
Basic and diluted net income (loss) per unit.......... $ 0.28 $ (0.06) $ 0.54 $ (0.06)
======== ======= ======== =======
</TABLE>
The accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
4
<PAGE> 5
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 9,156 $ 3,108
Accounts receivable....................................... 6,981 8,588
Other current assets...................................... 291 247
-------- --------
Total current assets.............................. 16,428 11,943
Property and equipment, net................................. 375,286 241,992
Equity investments.......................................... 190,178 186,079
Other noncurrent assets..................................... 11,762 2,712
-------- --------
Total assets...................................... $593,654 $442,726
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable and accrued liabilities.................. $ 22,669 $ 11,167
Notes payable............................................. -- 338,000
-------- --------
Total current liabilities......................... 22,669 349,167
Notes payable............................................... 272,000 --
Long-term debt.............................................. 175,000 --
Other noncurrent liabilities................................ 12,223 11,661
-------- --------
Total liabilities................................. 481,892 360,828
Commitments and contingencies
Minority interest........................................... (328) (998)
Partners' capital........................................... 112,090 82,896
-------- --------
Total liabilities and partners' capital........... $593,654 $442,726
======== ========
</TABLE>
The accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
5
<PAGE> 6
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities
Net income (loss)......................................... $ 16,944 $ (1,720)
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation, depletion and amortization............... 21,694 21,897
Gain on sale of assets................................. (10,103) (311)
Impairment, abandonment and other...................... -- (1,131)
Distributions in excess of equity earnings............. 8,339 1,699
Other noncash items.................................... 3,454 484
Working capital changes, net of effects of acquisitions... 7,700 (9,281)
--------- --------
Net cash provided by operating activities......... 48,028 11,637
--------- --------
Cash flows from investing activities
Additions to pipelines, platforms and facilities.......... (23,267) (15,437)
Investments in Equity Investees........................... (4,899) (4,516)
Acquisition of additional interests in Equity Investees... (53,835) --
Net cash flow impact of acquisition of Viosca Knoll....... (19,900) --
Proceeds from sale of interest in Deepwater Holdings...... 26,122 --
Distributions related to the formation of Deepwater
Holdings............................................... 20,000 --
Acquisition and development of oil and natural gas
properties............................................. (3,224) (828)
Other..................................................... (115) 650
--------- --------
Net cash used in investing activities............. (59,118) (20,131)
--------- --------
Cash flows from financing activities
Net proceeds from issuance of notes payable............... 113,126 86,073
Net proceeds from issuance of long-term debt.............. 168,896 --
Repayments of notes payable............................... (216,850) (34,000)
Distributions to partners................................. (48,637) (46,818)
General Partner's contribution............................ 603 --
--------- --------
Net cash provided by financing activities......... 17,138 5,255
--------- --------
Increase (decrease) in cash and cash equivalents............ 6,048 (3,239)
Cash and cash equivalents
Beginning of period....................................... 3,108 6,430
--------- --------
End of period............................................. $ 9,156 $ 3,191
========= ========
</TABLE>
The accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
6
<PAGE> 7
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERENCE PREFERENCE COMMON COMMON GENERAL
UNITS UNITHOLDERS UNITS UNITHOLDERS PARTNER TOTAL
---------- ----------- ------ ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Partners' capital at December
31, 1998.................... 1,017 $ 7,351 23,350 $ 90,972 $(15,427) $ 82,896
Net income for the nine months
ended September 30, 1999
(unaudited)................. -- 174 -- 13,534 3,236 16,944
Issuance of common units for
acquisition of additional
interest in Viosca Knoll
(unaudited)................. -- -- 2,662 59,792 -- 59,792
General Partner contribution
related to issuance of
common units (unaudited).... -- -- -- -- 603 603
Conversion of preference units
into common units
(unaudited)................. (726) (4,740) 726 4,740 -- --
Cash distributions
(unaudited)................. -- (839) -- (38,174) (9,132) (48,145)
----- ------- ------ -------- -------- --------
Partners' capital at September
30, 1999 (unaudited)........ 291 $ 1,946 26,738 $130,864 $(20,720) $112,090
===== ======= ====== ======== ======== ========
</TABLE>
The accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
7
<PAGE> 8
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION:
Leviathan provides integrated energy services, including natural gas and
oil gathering, transportation, midstream and other related services in the Gulf.
Through its subsidiaries and joint ventures, Leviathan owns interests in (i)
nine natural gas pipeline systems (the "Gas Pipelines"), (ii) two oil pipeline
systems, (iii) six multi-purpose platforms, (iv) production handling and
dehydration facilities, (v) four producing oil and natural gas properties and
(vi) an overriding royalty interest in the Ewing Bank 958 Unit. The General
Partner performs all management and operational functions for Leviathan and its
subsidiaries.
As of September 30, 1999, Leviathan had 26,737,465 common units and 291,299
preference units outstanding. The public owns 291,299 preference units and
17,783,701 common units representing an effective 65.5 percent limited partner
interest in Leviathan. El Paso Energy, through its subsidiaries, owns an
effective 34.5 percent economic interest in Leviathan, consisting of 8,953,764
common units, a one percent general partner interest and its approximate one
percent nonmanaging member interest in certain subsidiaries of Leviathan.
The 1998 Annual Report on Form 10-K for Leviathan includes a summary of
significant accounting policies and other disclosures and should be read in
conjunction with this Quarterly Report on Form 10-Q. The condensed consolidated
financial statements at September 30, 1999, and for the quarters and nine months
ended September 30, 1999 and 1998, are unaudited. The condensed consolidated
balance sheet at December 31, 1998, is derived from audited consolidated
financial statements at that date. These financial statements do not include all
disclosures required by generally accepted accounting principles, but have been
prepared pursuant to the rules and regulations of the United States Securities
and Exchange Commission. In the opinion of management, all material adjustments
necessary to present fairly the consolidated financial position and results of
operations for such periods have been included. All such adjustments are of a
normal recurring nature. Results of operations for any interim period are not
necessarily indicative of the results of operations for the entire year due to
the seasonal nature of Leviathan's businesses. Financial statements for the
previous periods include certain reclassifications which were made to conform to
the current presentation. Such reclassifications have no effect on reported net
income, cash flows or partners' capital. See the glossary on pages 2 and 3 for a
listing of defined terms used in this Quarterly Report.
NOTE 2 -- ACQUISITIONS AND DISPOSITIONS:
Viosca Knoll
In January 1999, Leviathan entered into an agreement with EPFS to acquire
49 percent of Viosca Knoll from EPFS. The acquisition was completed on June 1,
1999. In the transaction, EPFS contributed $33.4 million to Viosca Knoll and
then sold a 49 percent interest in Viosca Knoll to Leviathan in exchange for
$19.9 million and 2,661,870 common units. Leviathan paid closing costs of $0.9
million in connection with the acquisition and the General Partner contributed
$0.6 million to Leviathan in order to maintain its one percent capital account
balance. In addition, during the six months commencing June 1, 2000, Leviathan
has an option to acquire EPFS's remaining one percent interest in profits and
capital of Viosca Knoll for $1.6 million plus any additional distributions which
would have been paid, accrued or been in arrears if Leviathan had acquired the
remaining one percent of Viosca Knoll on June 1, 1999. As a result of the
acquisition, Leviathan began consolidating Viosca Knoll effective June 1999.
The acquisition of Viosca Knoll was accounted for as a purchase and the
purchase price was assigned to the assets and liabilities acquired based upon
the estimated fair value of those assets and liabilities as of the
8
<PAGE> 9
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition date. These fair value allocations are preliminary and may be
revised after the completion of an independent appraisal. The following is
summary information related to the acquisition (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired.......................... $ 83,105
Cash acquired.......................................... 434
Fair value of liabilities assumed...................... (2,962)
--------
Total purchase price......................... 80,577
Issuance of common units............................... (59,792)
--------
Net cash paid................................ $ 20,785
========
</TABLE>
The following selected unaudited pro forma information represents
Leviathan's consolidated results of operations on a pro forma basis for the nine
month periods ended September 30, 1999 and 1998, assuming the Viosca Knoll
acquisition had occurred on January 1, 1998:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1999 1998
-------- --------
(IN THOUSANDS, EXCEPT
PER UNIT AMOUNTS)
<S> <C> <C>
Revenue..................................................... $79,946 $68,885
Operating income............................................ $36,292 $19,844
Net income.................................................. $19,598 $ 2,227
Basic and diluted net income per unit....................... $ 0.59 $ 0.07
</TABLE>
Deepwater Holdings
In September 1999, Leviathan and ANR formed Deepwater Holdings to
reorganize their interests in certain joint venture pipelines. As a result of
the reorganization, Deepwater Holdings owns 100 percent of UTOS, West Cameron
Dehy, Stingray, and Western Gulf, which owns 100 percent of HIOS and East
Breaks, all of which were contributed by Leviathan and ANR. Leviathan initially
held a 59.66 percent interest in Deepwater Holdings and subsequently sold 9.66
percent of its member interest to ANR for $26.1 million to effect a 50/50
ownership position. Leviathan realized a $10.1 million gain associated with the
sale. In conjunction with the transaction, Leviathan will become the operator of
UTOS, HIOS, and East Breaks no later than July 1, 2000.
In connection with its formation, Deepwater Holdings established a $175
million credit facility to retire existing Stingray and Western Gulf debt, fund
a one-time distribution of $20 million to each of the equity partners, provide
funds for the remaining construction costs of the East Breaks system and any
future system expansions, and provide for other working capital needs of
Deepwater Holdings.
In June 1999, Leviathan acquired all of the outstanding stock of Natoco,
Inc. and Naloco, Inc., along with an ownership interest in certain lateral
pipelines located in the Gulf, for approximately $51 million. The acquired
entities held interests in the HIOS, East Breaks and UTOS systems and the
acquisition increased Leviathan's interests therein. As part of the transaction,
Leviathan also assumed operations of Stingray, the Stingray Offshore Separation
facility and the West Cameron Dehydration facility in November 1999. The
purchase price exceeded the book value of net assets acquired by approximately
$48 million. This excess cost will be amortized on a straight line basis over 30
years.
9
<PAGE> 10
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following selected unaudited pro forma information represents
Leviathan's consolidated results of operations on a pro forma basis for the nine
month periods ended September 30, 1999 and 1998, assuming the transactions
related to Deepwater Holdings discussed above had occurred on January 1, 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
------- -------
(IN THOUSANDS, EXCEPT
PER UNIT AMOUNTS)
<S> <C> <C>
Revenue..................................................... $68,575 $52,887
Operating income............................................ $27,834 $ 9,329
Net income (loss)........................................... $ 3,158 $(4,606)
Basic and diluted net income (loss) per unit................ $ 0.10 $ (0.15)
</TABLE>
NOTE 3 -- PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Property and equipment, at cost
Pipelines................................................ $218,089 $ 64,464
Platforms and facilities................................. 132,869 123,912
Oil and natural gas properties........................... 155,974 152,750
-------- --------
506,932 341,126
Less accumulated depreciation, depletion, amortization and
impairment............................................... 131,646 99,134
-------- --------
Property and equipment, net........................... $375,286 $241,992
======== ========
</TABLE>
NOTE 4 -- EQUITY INVESTMENTS:
In August 1999, Leviathan and Tejas Offshore Pipelines, LLC ("Tejas"), a
subsidiary of Shell Oil Company, formed Nemo, a joint venture owned 66.08
percent by Tejas and 33.92 percent by Leviathan, to construct, own and operate a
natural gas gathering system. The Nemo system will deliver natural gas
production from the Shell-operated Brutus and Glider deepwater development
properties to Manta Ray Offshore. As of September 30, 1999, Leviathan had
contributed $0.3 million to Nemo for the construction of this pipeline which is
anticipated to be in service in late 2001.
10
<PAGE> 11
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized historical operating results relating to Leviathan's ownership
interest in each of the Equity Investees is included in the summarized financial
information that follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------------------------------
WEST
VIOSCA CAMERON
HIOS(a) UTOS(a) KNOLL(b) STINGRAY(a) DEHY(a) POPCO
-------- ------- -------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue........ $27,370 $3,233 $12,338 $13,322 $1,934 $54,884
Other income............. 143 52 31 1,898 23 273
Operating expenses....... (13,212) (1,544) (925) (7,932) (210) (5,935)
Depreciation............. (3,475) (420) (1,752) (5,699) (12) (4,231)
Interest expense......... -- -- (1,973) (1,516) -- (6,584)
------- ------ ------- ------- ------ -------
Net earnings (loss)...... $10,826 $1,321 $ 7,719 $ 73 $1,735 $38,407
======= ====== ======= ======= ====== =======
Leviathan's share........ $ 4,780 $ 614 $ 3,860 $ 37 $ 868 $13,827
Adjustments(c)........... 92 (25) -- 1,223 -- (90)
------- ------ ------- ------- ------ -------
Equity in earnings....... $ 4,872 $ 589 $ 3,860 $ 1,260 $ 868 $13,737
======= ====== ======= ======= ====== =======
Distributions............ $ 6,900 $1,000 $ 6,350 $ 2,501 $ 800 $12,971
======= ====== ======= ======= ====== =======
End of period ownership
interest................ 50% 50% 99% 50% 50% 36%
======= ====== ======= ======= ====== =======
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
-----------------------------------------------
MANTA RAY DEEPWATER
OFFSHORE(A) NAUTILUS(A) HOLDINGS TOTAL
----------- ----------- --------- -------
<S> <C> <C> <C> <C>
Operating revenue........ $11,926 $6,927 $ --
Other income............. 1,804 (82) --
Operating expenses....... (2,805) (1,034) --
Depreciation............. (3,832) (4,417) --
Interest expense......... (37) (289) (26)
------- ------ ----
Net earnings (loss)...... $ 7,056 $1,105 $(26)
======= ====== ====
Leviathan's share........ $ 1,811 $ 284 $(13)
Adjustments(c)........... (617) (57) --
------- ------ ----
Equity in earnings....... $ 1,194 $ 227 $(13) $26,594
======= ====== ==== =======
Distributions............ $ 3,324 $1,087 $ -- $34,933
======= ====== ==== =======
End of period ownership
interest................ 25.67% 25.67% 50%
======= ====== ====
</TABLE>
- ---------------
(a) These investments are indirect investees of Leviathan. However, because
Leviathan believes separate data on each of these investees is more
meaningful, results have been reflected separately.
(b) Information on Viosca Knoll is through May 31, 1999. On June 1, 1999,
Leviathan began consolidating Viosca Knoll as a result of acquiring an
additional 49 percent interest therein.
(c) Adjustments result primarily from purchase price adjustments made in
accordance with Accounting Principles Board ("APB") Opinion No. 16,
"Business Combinations," except for $0.9 million on Stingray which results
from changes in prior period estimates of reserves for uncollectible
revenue.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------------------------------------------------------------------
WEST
VIOSCA CAMERON MANTA RAY
HIOS UTOS KNOLL STINGRAY DEHY POPCO OFFSHORE(a) NAUTILUS(a) TOTAL
-------- ------- ------- -------- ------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue....... $ 31,801 $ 3,840 $21,216 $ 17,237 $1,945 $30,477 $ 7,039 $ 3,992
Other income............ 180 86 34 606 7 245 219 57
Operating expenses...... (13,249) (1,893) (1,916) (11,517) (136) (3,066) (2,671) (1,284)
Depreciation............ (3,576) (419) (2,907) (5,131) (12) (6,590) (3,235) (4,369)
Interest expense........ -- -- (3,131) (1,083) -- (6,552) -- --
-------- ------- ------- -------- ------ ------- ------- -------
Net earnings (loss)..... $ 15,156 $ 1,614 $13,296 $ 112 $1,804 $14,514 $ 1,352 $(1,604)
======== ======= ======= ======== ====== ======= ======= =======
Leviathan's share....... $ 6,062 $ 537 $ 6,648 $ 56 $ 902 $ 5,225 $ 347 $ (412)
Adjustments(b).......... 493 38 -- 402 3 (90) (261) (769)
-------- ------- ------- -------- ------ ------- ------- -------
Equity in earnings
(loss)................ $ 6,555 $ 575 $ 6,648 $ 458 $ 905 $ 5,135 $ 86 $(1,181) $19,181
======== ======= ======= ======== ====== ======= ======= ======= =======
Distributions........... $ 7,640 $ 333 $ 7,450 $ 1,000 $ 825 $ 3,132 $ 500 $ -- $20,880
======== ======= ======= ======== ====== ======= ======= ======= =======
End of period ownership
interest.............. 40% 33.3% 50% 50% 50% 36% 25.67% 25.67%
======== ======= ======= ======== ====== ======= ======= =======
</TABLE>
- ---------------
(a) These investments are indirect investees of Leviathan. However, because
Leviathan believes separate data on each of these investees is more
meaningful, results have been reflected separately.
(b) Adjustments result from purchase price adjustments made in accordance with
APB Opinion No. 16, except for the $0.8 million reduction on Nautilus
related to a revision of the allowance for funds used during construction
("AFUDC") which represents the estimated costs, during the construction
period, of funds used for construction purposes.
11
<PAGE> 12
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- BUSINESS SEGMENT INFORMATION:
The following table summarizes certain financial information for each
business segment (in thousands):
<TABLE>
<CAPTION>
GATHERING,
TRANSPORTATION
AND PLATFORM OIL AND EQUITY
SERVICES NATURAL GAS INVESTMENTS TOTAL
-------------- ----------- ----------- --------
<S> <C> <C> <C> <C>
QUARTER ENDED SEPTEMBER 30, 1999:
Revenue from external customers......... $ 10,847 $ 8,129 $ 6,641 $ 25,617
Intersegment revenue.................... 3,635 -- -- 3,635
Depreciation, depletion and
amortization......................... (4,323) (3,644) -- (7,967)
Operating income (loss)................. 6,013 (567) 4,387 9,833
Net cash flows.......................... 12,586 3,077 8,571 24,234
Segment assets.......................... 305,983 74,588 192,091 572,662
QUARTER ENDED SEPTEMBER 30, 1998:
Revenue from external customers......... $ 5,084 $ 6,536 $ 6,610 $ 18,230
Intersegment revenue.................... 2,656 -- -- 2,656
Depreciation, depletion and
amortization......................... (1,904) (5,148) -- (7,052)
Impairment, abandonment and other....... 1,131 -- -- 1,131
Operating income (loss)................. 2,238 (3,629) 4,254 2,863
Net cash flows.......................... 3,012 1,519 5,226 9,757
Segment assets.......................... 147,524 60,371 187,514 395,409
NINE MONTHS ENDED SEPTEMBER 30, 1999:
Revenue from external customers......... $ 21,645 $ 23,228 $ 26,594 $ 71,467
Intersegment revenue.................... 9,645 -- -- 9,645
Depreciation, depletion and
amortization......................... (8,566) (13,128) -- (21,694)
Operating income (loss)................. 13,655 (4,610) 21,978 31,023
Net cash flows.......................... 24,471 8,518 30,317 63,306
Segment assets.......................... 305,983 74,588 192,091 572,662
NINE MONTHS ENDED SEPTEMBER 30, 1998:
Revenue from external customers......... $ 12,866 $ 22,270 $ 19,181 $ 54,317
Intersegment revenue.................... 7,731 -- -- 7,731
Depreciation, depletion and
amortization......................... (5,423) (16,474) -- (21,897)
Impairment, abandonment and other....... 1,131 -- -- 1,131
Operating income (loss)................. 5,367 (8,738) 14,427 11,056
Net cash flows.......................... 9,659 7,736 16,125 33,520
Segment assets.......................... 147,524 60,371 187,514 395,409
</TABLE>
NOTE 6 -- FINANCING TRANSACTIONS:
Senior Subordinated Notes
In May 1999, Leviathan entered into an indenture with Chase Bank of Texas,
under which it issued $175 million in aggregate principal amount of Senior
Subordinated Notes (the "Subordinated Notes"). Leviathan capitalized $6.1
million of debt issue costs related to the issuance and registration of the
Subordinated Notes. The Subordinated Notes bear interest at a rate of 10 3/8%
per annum, payable semi-annually, on June 1 and December 1, and mature on June
1, 2009. Leviathan's subsidiaries have guaranteed the obligations under the
Subordinated Notes. In addition, Leviathan could be required to repurchase the
Subordinated Notes under certain circumstances. The terms of the Subordinated
Notes include, among other things, certain financial tests and covenants, all of
which Leviathan currently meets. In
12
<PAGE> 13
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 1999, Leviathan exchanged all of its Subordinated Notes for registered
debt securities with identical terms.
Leviathan Credit Facility
In September 1999, Leviathan amended and restated its $375 million credit
facility (the "Leviathan Credit Facility") to, among other things, extend its
maturity to May 2002. Leviathan incurred approximately $3.1 million of costs
related to the amendment and restatement of the credit facility. The Leviathan
Credit Facility provides for up to $375 million of available credit, subject to
certain limitations and financial conditions that Leviathan currently meets. The
Leviathan Credit Facility is guaranteed by the General Partner and each of
Leviathan's subsidiaries, and is collateralized by (i) the management agreement
between the General Partner and a subsidiary of El Paso Energy, (ii)
substantially all of the assets of Leviathan and its subsidiaries and (iii) the
General Partner's one percent general partner interest and an approximate one
percent nonmanaging member interest in certain subsidiaries of Leviathan. The
Leviathan Credit Facility has no scheduled amortization prior to maturity in May
2002. As of September 30, 1999, Leviathan had $272.0 million outstanding under
its credit facility bearing interest at an average floating rate of 7.9% per
annum and $74.5 million available.
NOTE 7 -- PARTNERS' CAPITAL INCLUDING CASH DISTRIBUTIONS:
Cash distributions
Leviathan paid cash distributions of $0.275 per preference unit and $0.525
per common unit in February 1999, May 1999 and August 1999, for each of the
quarters ended December 31, 1998, March 31, 1999 and June 30, 1999,
respectively. The General Partner received incentive distributions of $3.2
million and $8.8 million for the quarter and nine months ended September 30,
1999, respectively. At the current distribution rates, the General Partner
receives approximately 19 percent of total cash distributions paid by Leviathan.
On October 19, 1999, Leviathan declared a cash distribution of $0.275 per
preference unit and $0.525 per common unit for the quarter ended September 30,
1999, which was paid on November 12, 1999, to holders of record as of October
29, 1999.
Conversion of Preference Units into Common Units
On May 14, 1999, Leviathan notified its preference unitholders of their
opportunity to submit 1,016,906 outstanding preference units for conversion into
an equal number of common units. During the conversion period, 725,607
preference units were converted into common units. The remaining 291,299
preference units will retain their distribution preferences until each
preference unitholder has received the minimum quarterly distribution of $0.275
per unit plus any arrearages. Holders of the common units and the General
Partner are entitled to distributions in excess of $0.275 per unit, if any.
Preference units are not entitled to any such excess distributions. Holders of
preference units will have a final conversion opportunity in May 2000.
Thereafter, any remaining preference units may, in certain circumstances, be
subject to mandatory redemption at below market trading prices.
Deficit Capital Account Balances
Pursuant to the terms of Leviathan's partnership agreement, no partner will
have any obligation to restore a negative balance in its capital account upon
liquidation of Leviathan. Therefore, any net proceeds from the liquidation of
Leviathan's assets would be allocated first to any then-outstanding deficit
capital account balance before any of the remaining net proceeds would be
distributed to the partners in accordance with the partnership agreement.
13
<PAGE> 14
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- NET INCOME (LOSS) PER UNIT:
Basic and diluted net income (loss) per unit is presented below (in
thousands, except per unit amounts):
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30,
-----------------------------------------------------------
1999 1998
---------------------------- ----------------------------
LIMITED GENERAL LIMITED GENERAL
PARTNERS PARTNER TOTAL PARTNERS PARTNER TOTAL
-------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)(a)........................... $ 9,164 $ 93 $ 9,257 $(1,788) $ (18) $(1,806)
Allocation to General Partner(b)............... (1,685) 1,685 -- 324 (324) --
------- ------ ------- ------- ----- -------
Allocation of net income (loss) as adjusted for
incentive distributions...................... $ 7,479 $1,778 $ 9,257 $(1,464) $(342) $(1,806)
======= ====== ======= ======= ===== =======
Weighted average number of units
outstanding(c)............................... 27,029 24,367
======= =======
Basic and diluted net income (loss) per unit... $ 0.28 $ (0.06)
======= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------
1999 1998
---------------------------- ----------------------------
LIMITED GENERAL LIMITED GENERAL
PARTNERS PARTNER TOTAL PARTNERS PARTNER TOTAL
-------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)(a)........................... $16,775 $ 169 $16,944 $(1,703) $ (17) $(1,720)
Allocation to General Partner(b)............... (3,067) 3,067 -- 309 (309) --
------- ------ ------- ------- ----- -------
Allocation of net income (loss) as adjusted for
incentive distributions...................... $13,708 $3,236 $16,944 $(1,394) $(326) $(1,720)
======= ====== ======= ======= ===== =======
Weighted average number of units
outstanding(c)............................... 25,556 24,367
======= =======
Basic and diluted net income (loss) per unit... $ 0.54 $ (0.06)
======= =======
</TABLE>
- ---------------
(a) Net income (loss) is initially allocated 99 percent to the limited partners
as holders of the preference and common units and one percent to the
General Partner.
(b) Represents allocation of net income (loss) to General Partner proportionate
to its share of each period's cash distributions, which includes incentive
distributions.
(c) Diluted weighted average number of units outstanding for 1999 is less than
1,000 units higher than basic weighted average units outstanding as a
result of unit options included in the diluted weighted average.
NOTE 9 -- RELATED PARTY TRANSACTIONS:
Management fees
Leviathan's partnership agreement provides for reimbursement of expenses
incurred by the General Partner and its affiliates, including expenses incurred
by El Paso Energy in providing management services to Leviathan, its
subsidiaries and the General Partner. The General Partner charged Leviathan
management fees of $2.3 million, $2.4 million, $7.0 million and $7.2 million for
the quarters and nine months ended September 30, 1999 and 1998, respectively.
Additionally, Leviathan reimburses affiliates of the General Partner for costs
related to insurance and personnel dedicated to the operations of Leviathan.
During the quarter and nine months ended September 30, 1999, Leviathan
reimbursed $0.6 million and $1.7 million, respectively, to these affiliates.
Farmout
In October 1999, Leviathan executed an agreement with El Paso Production
Company ("EPP"), formerly Sonat Exploration Company, to farm out its working
interest in the Ewing Bank 958 Unit. Under the terms of the farmout agreement,
Leviathan increased its overriding royalty interest in the Ewing Bank
14
<PAGE> 15
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
958 Unit, convertible at its option, into an undivided working interest once EPP
has recouped the costs associated with its drilling and completion activities on
the Ewing Bank 958 Unit.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES:
In July 1999, Leviathan entered into a contract with MODEC International,
L.L.C., ("MODEC") for the design, construction, fabrication and installation of
the hull, tendons, pilings and production risers for a tension-leg platform
("TLP") to be used as part of the Ewing Bank 958 Unit development. Upon the farm
out of the Ewing Bank 958 Unit, Leviathan suspended the construction of the TLP
and is currently discussing its use at a different location with several major
producers. Leviathan expects to incur up to $10 million of costs related to the
TLP which is expected to be recovered through the Ewing Bank 958 Unit farmout
agreement. As a result, management does not expect the ultimate resolution of
this matter to have a material adverse effect on Leviathan's consolidated
financial position, results of operations or cash flows.
Leviathan is involved from time to time in various claims, actions,
lawsuits and regulatory matters that have arisen in the ordinary course of
business, including various rate cases and other proceedings before the Federal
Energy Regulatory Commission.
Leviathan and several subsidiaries of El Paso Energy have been named
defendants in actions brought by Jack Grynberg on behalf of the United States
Government under the False Claims Act. Generally, the complaints allege an
industry-wide conspiracy to underreport the heating value as well as the volumes
of the natural gas produced from federal and Indian lands, thereby depriving the
United States Government of royalties. Leviathan and El Paso Energy believe the
complaint is without merit, and will not have a material adverse effect on
Leviathan's consolidated financial position, results of operations or cash
flows.
Leviathan is a defendant in a lawsuit filed by Transco Gas Pipe Line
Corporation ("Transco"). Transco alleges that a platform space agreement entered
into on June 28, 1994, with Leviathan grants Transco the right to expand its
facilities and operations. Leviathan has denied Transco's request to expand and
asserts that the lease agreement prohibits such expansion. Transco has requested
a declaratory judgment and is seeking damages of a least $13 million plus
attorney's fees and interest. The case is set for trial in February 2000. It is
the opinion of management that adequate defenses exist and that the final
disposition of this suit will not have a material adverse effect on Leviathan's
consolidated financial position, results of operations or cash flows.
Leviathan is a named defendant in several lawsuits and a named party in
several governmental proceedings arising in the ordinary course of business.
While the outcome of such lawsuits or other proceedings against Leviathan cannot
be predicted with certainty, management currently does not expect these matters
to have a material adverse effect on Leviathan's consolidated financial
position, results of operations or cash flows.
Commodity Price Risk
Leviathan hedges a portion of its oil and natural gas production to reduce
its exposure to fluctuations in the market prices of these commodities.
Leviathan uses commodity price swap transactions whereby monthly settlements are
based on differences between the prices specified in the swap agreements and the
prices of certain futures contracts quoted on the NYMEX or certain other
indices. Upon settlement of the agreements, Leviathan receives the positive
difference or pays the negative difference between the applicable settlement
price and the price specified in the contract. The credit risk from Leviathan's
price swap contracts is derived from the counterparty to the transaction,
typically a major financial institution. Leviathan does not require collateral
and does not anticipate nonperformance by this counterparty, which does not
transact a sufficient volume of transactions with Leviathan to create a
significant concentration of credit risk. Gains or losses resulting from hedging
activities and the termination of any hedging instruments are initially deferred
and
15
<PAGE> 16
LEVIATHAN GAS PIPELINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
included as an increase or decrease to oil and natural gas sales in the period
in which the hedged production is sold. For the quarters and nine months ended
September 30, 1999 and 1998, Leviathan recorded a net gain (loss) of $(0.6)
million, $(1.3) million, $0.6 million and $2.0 million, respectively, related to
hedging activities.
As of September 30, 1999, Leviathan had two open sales swap transactions on
a total of 20,000 MMbtu's of natural gas per day maturing in December 2000 and
open crude oil hedges on 500 barrels per day for the remainder of calendar 1999.
If Leviathan had settled its open oil and natural gas hedging positions as of
September 30, 1999, based on the applicable settlement prices of the NYMEX
futures contracts, Leviathan would have recognized a loss of approximately $2.0
million.
Interest Rate Risk
Leviathan utilizes both fixed and variable rate long-term debt. Leviathan
is exposed to market risk due to the floating interest rate under its credit
facility. Under the Leviathan Credit Facility, as amended, the remaining
principal and the final interest payment are due in May 2002. As of November 8,
1999, Leviathan's Credit Facility had a principal balance of $282 million at an
average floating interest rate of 7.9% per annum. A 1.0% increase in interest
rates would result in a $2.8 million annual increase in interest expense on the
existing principal balance. Leviathan is exposed to similar risk under the
various joint venture credit facilities and loan agreements.
NOTE 11 -- NEW ACCOUNTING PRONOUNCEMENT NOT YET ADOPTED:
In June 1998, Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued by the
Financial Accounting Standards Board to establish accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This pronouncement
requires that an entity classify all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically
designated as (i) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (ii) a hedge
of the exposure to variable cash flows of a forecasted transaction, or (iii) a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction. The accounting for the
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. This standard was amended by Statement
of Financial Accounting Standards No. 137 issued in June 1999. The amendment
defers the effective date to fiscal years beginning after June 15, 2000.
Leviathan is currently evaluating the effects of this pronouncement.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in Item 2 updates, and should be read in
conjunction with, information set forth in Part II, Items 7, 7A and 8 in the
Leviathan Annual Report on Form 10-K for the year ended December 31, 1998, in
addition to the interim condensed consolidated financial statements and
accompanying notes presented in Item 1 of this Quarterly Report on Form 10-Q.
Unless the context otherwise requires, all references herein to Leviathan with
respect to the operations and ownership of Leviathan's assets are also
references to its subsidiaries.
In November 1999, Leviathan announced that it will change its name to El
Paso Energy Partners, L.P. effective December 1, 1999. At that date, Leviathan's
trading symbol for common units will change to EPN, and the symbol for
preference units will change to EPN.P on the New York Stock Exchange. Leviathan
also announced that its Board of Directors has accepted the resignation of chief
executive officer Grant E. Sims. Robert G. Phillips, currently president of EPFS
and a director of Leviathan, will assume the additional role of chief executive
officer of Leviathan. His appointment has been approved by Leviathan's Board of
Directors. Leviathan's growth strategy, while remaining committed to the
deepwater trend, will incorporate the acquisition and development of energy
infrastructure assets in areas that previously had not been in Leviathan's core
geographic areas of operation.
OVERVIEW
Leviathan provides integrated energy services, including natural gas and
oil gathering, transportation, midstream and other related services in the Gulf.
Through its subsidiaries and joint ventures, Leviathan owns interests in (i) the
Gas Pipelines, (ii) two oil pipeline systems, (iii) six multi-purpose platforms,
(iv) production handling and dehydration facilities, (v) four producing oil and
natural gas properties and (vi) an overriding royalty interest in the Ewing Bank
958 Unit.
In May 1999, Leviathan issued $175 million of Subordinated Notes and
amended and restated the Leviathan Credit Facility. On June 1, 1999, Leviathan
and EPFS closed the Viosca Knoll acquisition in which Leviathan acquired an
additional 49 percent ownership interest in Viosca Knoll and, on June 30, 1999,
Leviathan acquired an additional effective 20 percent ownership interest in each
of HIOS and East Breaks, a 33.33 percent ownership interest in UTOS, and
ownership in certain lateral pipelines located offshore in the Gulf.
In September 1999, Leviathan and ANR effectively restructured and
reorganized their Western Gulf assets by forming Deepwater Holdings, a joint
venture owned 50 percent by each partner. Through a series of transactions,
Leviathan and ANR contributed all of their respective ownership interests in
each of the entities that own HIOS, UTOS, Stingray, East Breaks and West Cameron
Dehy to Deepwater Holdings, and Deepwater Holdings established a $175 million
credit facility. Leviathan operates or will operate all of the assets owned by
Deepwater Holdings and its subsidiaries.
For a further discussion of these transactions, see Notes 2 and 6.
RESULTS OF OPERATIONS
Third Quarter Ended September 30, 1999 Compared With Third Quarter Ended
September 30, 1998
Net income for the quarter ended September 30, 1999, totaled $9.3 million,
or $0.28 per unit, as compared with a net loss of $1.8 million, or $0.06 per
unit, for the quarter ended September 30, 1998, as a result of the items
discussed below.
Oil and natural gas sales totaled $8.1 million for the quarter ended
September 30, 1999, as compared with $6.5 million for the same period in 1998.
The increase was a result of higher realized oil and natural gas prices along
with increased natural gas sales volumes, partially offset by lower oil sales
volumes. During the quarter ended September 30, 1999, Leviathan produced and
sold 2,824 MMcf of natural gas and 86,000 barrels of oil at average prices of
$2.40 per Mcf and $15.14 per barrel, respectively, as compared to 2,562 MMcf of
natural
17
<PAGE> 18
gas and 116,000 barrels of oil at average prices of $1.87 per Mcf and $14.73 per
barrel, respectively, during the same period of 1998.
Revenue from gathering, transportation and platform services totaled $10.8
million for the quarter ended September 30, 1999, compared with $5.1 million for
the same period in 1998. The increase was primarily a result of additional
revenue related to the acquisition of an additional 49 percent interest in and
the consolidation of Viosca Knoll beginning in June 1999.
Earnings from Equity Investees for the quarter ended September 30, 1999, as
compared with the same period in 1998 were approximately equal. Increases in
earnings from POPCO, Nautilus and Manta Ray Offshore as a result of increased
throughput were offset by decreased throughput on HIOS, UTOS and Stingray, and
the effect of consolidating Viosca Knoll during the quarter. Total natural gas
throughputs for the Equity Investees, exclusive of Viosca Knoll, decreased
approximately 9 percent for the quarter ended September 30, 1999, as compared to
the same period in 1998 primarily due to decreased throughput on HIOS, UTOS and
Stingray as a result of normal production declines of wells attached to those
systems partially offset by increased throughput on Manta Ray Offshore and
Nautilus systems. Oil volumes from Poseidon totaled 14.7 million barrels and 9.0
million barrels for the quarter ended September 30, 1999 and 1998, respectively
as a result of production from new discoveries in the area.
Operating expenses totaled $2.4 million for the quarter ended September 30,
1999, as compared to $3.0 million for the same period in 1998. The decrease is
primarily related to cost reductions associated with Leviathan's oil and natural
gas properties and platform operations offset by increased operating costs
resulting from the consolidation of Viosca Knoll commencing in June 1999.
Depreciation, depletion and amortization totaled $8.0 million for the
quarter ended September 30, 1999, as compared to $7.1 million for the same
period in 1998. The increase was a result of depreciation from the consolidation
of Viosca Knoll offset by decreased depletion and abandonment rates related to
Leviathan's oil and natural gas wells.
Impairment, abandonment and other for the quarter ended September 30, 1998,
was due to the excess of estimated costs over actual costs incurred associated
with the abandonment of certain Leviathan flowlines.
General and administrative expenses, including the General Partner's
management fee, totaled $5.4 million for the quarter ended September 30, 1999,
as compared to $6.4 million for the same period in 1998. The decrease is
primarily related to the accelerated vesting in August 1998 of a unit rights
compensation plan which was terminated in October 1998, offset by an accrual of
certain costs relating to various outstanding regulatory and operational issues
during the current quarter.
Gain on sale of assets totaled $10.1 million for the quarter ended
September 30, 1999, as compared to $0.3 million for the same period in 1998. The
gain of $10.1 million is related to the sale of a portion of Leviathan's
interest in Deepwater Holdings in September 1999.
Interest and other financing costs, excluding capitalized interest, for the
quarter ended September 30, 1999, totaled $10.8 million as compared with $5.3
million for the same period in 1998 as a result of higher average debt
outstanding and higher average interest rates for the 1999 period.
Nine Months Ended September 30, 1999 Compared With Nine Months Ended September
30, 1998
Net income for the nine months ended September 30, 1999, totaled $16.9
million, or $0.54 per unit, as compared with a net loss of $1.7 million, or
$0.06 per unit, for the nine months ended September 30, 1998, as a result of the
items discussed below.
Oil and natural gas sales totaled $23.2 million for the nine months ended
September 30, 1999, as compared with $22.3 million for the same period in 1998.
The increase is attributable to higher gas volumes associated with the purchase
of an additional 25 percent working interest in Viosca Knoll Block 817 and a 38
percent working interest in the West Delta Block 35, and the effects of two
tropical storms and hurricane Georges passing through the Gulf during 1998,
offset by decreased oil production and lower realized oil and natural gas
prices. During the nine months ended September 30, 1999, Leviathan produced and
sold
18
<PAGE> 19
9,701 MMcf of natural gas and 279,000 barrels of oil at average prices of $2.00
per Mcf and $13.45 per barrel, respectively, as compared to 7,435 MMcf of
natural gas and 424,000 barrels of oil at average prices of $2.06 per Mcf and
$16.04 per barrel, respectively, in the same period of 1998.
Revenue from gathering, transportation and platform services totaled $21.6
million for the nine months ended September 30, 1999, as compared with $12.9
million for the same period in 1998. The increase was primarily due to the
consolidation of Viosca Knoll beginning in June 1999.
Earnings from Equity Investees totaled $26.6 million for the nine months
ended September 30, 1999, as compared with $19.2 million for the same period in
1998. The increase is primarily related to higher earnings of POPCO, Nautilus
and Manta Ray Offshore as a result of increased throughput, offset by decreased
throughput on HIOS, UTOS and Stingray. The increase was further offset by the
consolidation of Viosca Knoll in June 1999. Oil volumes from Poseidon totaled
44.2 million barrels and 24.7 million barrels for the nine months ended
September 30, 1999 and 1998, respectively, as a result of production from new
discoveries in the area.
Operating expenses totaled $7.4 million for the nine months ended September
30, 1999, as compared to $8.6 million for the same period in 1998. The decrease
is primarily a result of decreased costs associated with Leviathan's oil and
natural gas properties and platform operations offset by higher operating
expenses resulting from the consolidation of Viosca Knoll commencing in June
1999.
Depreciation, depletion and amortization totaled $21.7 million for the nine
months ended September 30, 1999, compared with $21.9 million for the same period
in 1998. The decrease was a result of a decrease in depreciation and depletion
of oil and natural gas wells and facilities as a result of decreased depletion
and abandonment accrual rates offset by additional depreciation on Viosca Knoll.
Impairment, abandonment and other for the nine months ended September 30,
1998, represented the excess of estimated costs over actual costs incurred
associated with the abandonment of certain Leviathan flowlines.
General and administrative expenses, including the General Partner's
management fee, totaled $11.3 million for the nine months ended September 30,
1999, as compared with $13.9 million for the same period in 1998. The decrease
is primarily related to the accelerated vesting in August 1998 of a unit rights
compensation plan which was terminated in October 1998, offset by an accrual of
certain costs relating to various outstanding regulatory and operational issues
during the current period.
Gain on sale of assets totaled $10.1 million for the nine months ended
September 30, 1999, as compared to $0.3 million for the same period in 1998. The
increase was a result of the sale of a portion of Leviathan's interest in
Deepwater Holdings in September 1999.
Interest and other financing costs, excluding capitalized interest, for the
nine months ended September 30, 1999, totaled $24.7 million as compared with
$13.7 million for the same period in 1998 as a result of higher average debt
outstanding and higher average interest rates in the 1999 period.
LIQUIDITY AND CAPITAL RESOURCES
Leviathan intends to satisfy its capital requirements and other working
capital needs primarily from cash on hand, cash from operations and borrowings
under the Leviathan Credit Facility. However, depending on the marketplace and
other factors, Leviathan may issue additional debt or equity to raise cash or
acquire assets.
Net cash provided by operating activities for the nine months ended
September 30, 1999, totaled $48.0 million as compared to $11.6 million for the
same period in 1998. The increase in cash from operations resulted primarily
from higher earnings, increased distributions from Equity Investees relative to
their respective earnings, and changes in working capital over 1998 levels.
Net cash used in investing activities was $59.1 million for the nine months
ended September 30, 1999, due to Leviathan's acquisition of additional interests
in HIOS, UTOS, and East Breaks, the acquisition of an
19
<PAGE> 20
additional 49 percent interest in Viosca Knoll and increased capital
expenditures, primarily related to the construction of the Allegheny oil line
and the TLP. In addition, Leviathan received proceeds from the sale of a portion
of Leviathan's interest in Deepwater Holdings coupled with a distribution from
Deepwater Holdings.
Net cash flows provided by financing activities totaled $17.1 million for
the nine months ended September 30, 1999. During the nine month period,
Leviathan received proceeds from its Subordinated Notes, and partially repaid
amounts outstanding under the Leviathan Credit Facility. Leviathan also made
distributions to its unitholders and the General Partner.
For a discussion of risk factors affecting Leviathan and other items that
may impact Leviathan's ability to generate cash from operations, generate
capital for investing purposes and obtain financing, see "Uncertainty of
Forward-Looking Statements and Information" presented below.
In May 1999, Leviathan entered into an indenture with Chase Bank of Texas,
under which it issued $175 million in aggregate principal amount of Subordinated
Notes. Leviathan capitalized $6.1 million of debt issue costs related to the
issuance and registration of the Subordinated Notes. Approximately $19.9 million
of the proceeds were used to pay the remaining balance of the Viosca Knoll
acquisition, $33.4 million was contributed to Viosca Knoll to repay the
remaining unpaid balance of the Viosca Knoll credit facility and the remaining
proceeds were used to reduce the balance of the Leviathan Credit Facility.
Concurrent with the closing of the offering of the Subordinated Notes, Leviathan
amended and restated the Leviathan Credit Facility to, among other things,
extend its maturity from December 1999 to May 2002. As of November 8, 1999,
Leviathan had $282.0 million outstanding at an average floating rate of 7.9% per
annum and $64.5 million available.
In connection with its formation, Deepwater Holdings assumed Western Gulf's
obligations under its $100 million revolving credit facility entered into in
February 1999, and amended and restated that facility to, among other things,
increase the commitment amount to $175 million (the "Deepwater Credit
Facility"). Proceeds from the Deepwater Credit Facility were or may be used to
retire debt associated with Stingray of $21.2 million, thereby paying off and
cancelling Stingray's credit facility, fund a one-time distribution of $20.0
million to each of the equity partners of Deepwater Holdings, provide funds for
the remaining construction costs of the East Breaks system and other future
system expansions, and provide for other working capital needs of Deepwater
Holdings. The ability of Deepwater Holdings to borrow money under its credit
facility is subject to certain customary terms and conditions, including
borrowing base limitations. The credit facility is collateralized by
substantially all of the material contracts and agreements of East Breaks, West
Cameron Dehy and Deepwater Holdings, including Deepwater Holdings' ownership in
Stingray, UTOS, West Cameron Dehy, and Western Gulf, and its subsidiaries HIOS
and East Breaks, and matures in February 2004. As of November 8, 1999, Deepwater
Holdings had $119.0 million outstanding under its credit facility bearing
interest at an average floating rate of 6.6% and $41.1 million available.
East Breaks is currently constructing a natural gas pipeline system which
will connect the Diana and Hoover prospects in Alaminos Canyon Block 25 in the
Gulf with the HIOS system. The majority of the construction of the East Breaks
system will occur in 1999 and the system is anticipated to be in service by
mid-2000 at an estimated cost of approximately $90 million. East Breaks entered
into long-term agreements with Exxon Company USA and BP Amoco Plc involving the
commitment, gathering and processing of production from the Diana and Hoover
prospects. Construction costs of the East Breaks system totaling approximately
$53.1 million were funded by the Western Gulf credit facility and the remaining
costs will be funded by the Deepwater Holdings Credit Facility. All of the
natural gas to be produced from 11 blocks in the East Breaks and Alaminos Canyon
areas will be dedicated for transportation services on the HIOS system.
As of September 30, 1999 and November 8, 1999, POPCO had $150 million
outstanding at an average floating rate of 6.7% per annum under its $150 million
credit facility.
20
<PAGE> 21
Leviathan's capital requirements consist primarily of (i) quarterly
distributions to holders of preference and common units and to the General
Partner, (ii) expenditures for the maintenance of its pipelines and related
infrastructure and the acquisition and construction of additional energy-related
infrastructure, (iii) expenditures related to its producing oil and natural gas
properties, (iv) working capital requirements, (v) contributions to Equity
Investees as required to fund capital expenditures for new facilities and (vi)
debt service on its outstanding indebtedness.
On October 19, 1999, Leviathan declared a cash distribution of $0.275 per
preference unit and $0.525 per common unit covering the quarter ended September
30, 1999. The distributions were paid on
November 12, 1999, to all holders of record of common units and preference units
at the close of business on October 29, 1999, and included an incentive
distribution to the General Partner of $3.2 million.
Leviathan anticipates that its capital expenditures and equity investments
for the remainder of 1999 will relate to continuing acquisition, construction
and development activities, including contributions to Nemo and Manta Ray
Offshore for construction of pipelines. Leviathan anticipates funding such cash
requirements primarily with available cash flow, borrowings under the Leviathan
Credit Facility and, depending on the capital requirements and related market
conditions, issuing additional debt and/or equity. In addition, capital
expenditures by Leviathan's equity investments are, in some cases, derived from
borrowings under separate joint venture credit facilities.
YEAR 2000
The Year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the year. Leviathan has established
a project team and works with the El Paso Energy Year 2000 executive steering
committee to coordinate the phases of its Year 2000 project to ensure that
Leviathan's key automated systems and related processes will remain functional
through Year 2000. Those phases include: (i) awareness, (ii) assessment, (iii)
remediation, (iv) testing, (v) implementation of the necessary modifications and
(vi) contingency planning (which was previously included as a component of
Leviathan's implementation phase). Leviathan has previously utilized outside
consultants and is involved in several industry trade-groups to supplement
Leviathan's project team.
The awareness phase recognizes the importance of Year 2000 issues and its
potential impact on Leviathan. Through the project team, Leviathan has
established an awareness program which includes participation of management in
each business area. The awareness phase is substantially completed, although
Leviathan will continually update awareness efforts for the duration of the Year
2000 project.
The assessment phase consists of conducting an inventory of Leviathan's key
automated systems and related processes, analyzing and assigning levels of
criticality to those systems and/or processes, identifying and prioritizing
resource requirements, developing validation strategies and testing plans, and
evaluating business partner relationships. Leviathan has substantially completed
the assessment phase to determine the nature and impact of the Year 2000 date
change for hardware and equipment, embedded chip systems, and third-party
developed software. The assessment phase of the project involves, among other
things, efforts to obtain representations and assurances from third parties,
including equity investees, partners and third party customers and vendors, that
their hardware and equipment products, embedded chip systems and software
products being used by or impacting Leviathan are, or will be modified to be
Year 2000 compliant. Although Leviathan intends to interact only with those
third parties that have Year 2000 compliant computer systems, it is impossible
for Leviathan to monitor all such systems. As a result, Leviathan cannot predict
the potential consequences if any of its equity investees, partners, customers
or vendors are not Year 2000 compliant. Leviathan will continue to evaluate the
exposure associated with such business partner relationships.
The remediation phase involves converting, modifying, replacing or
eliminating selected key automated systems identified in the assessment phase.
The testing phase involves the validation of the identified key automated
systems. Leviathan is utilizing test tools and written procedures to document
and validate, as necessary, its unit, system, integration and acceptance
testing. The implementation phase involves placing the converted or replaced key
automated systems into operation. In some cases, the implementation phase will
also involve the implementation of contingency plans needed to support business
functions and processes that
21
<PAGE> 22
may be interrupted by Year 2000 failures that are outside Leviathan's control.
As of September 30, 1999, each phase was substantially completed.
The contingency planning phase consists of developing a risk profile of
Leviathan's critical business processes and then providing for actions Leviathan
will pursue to keep such processes operational in the event of Year 2000
disruptions. The focus of such contingency planning is on prompt response to any
Year 2000 events, and a plan for subsequent resumption of normal operations. The
plan is expected to assess the risk of significant failure to critical processes
performed by Leviathan, and to address the mitigation of those risks. The plan
will also consider any significant failures in the event the most reasonably
likely worst case scenario develops, as discussed below. In addition, the plan
is expected to factor in the severity and duration of the impact of a
significant failure. As of September 30, 1999, the contingency plan was
substantially complete, with Leviathan conducting contingency plan drills and
mock outages and completing desk top testing of its contingency plan. This Year
2000 contingency plan will continue to be modified and adjusted through the year
as additional information from key external business partners becomes available.
Leviathan's goal is to ensure that all of its critical systems and
processes that are under its direct control remain functional. Certain systems
and processes may be interrelated with or dependent upon systems outside
Leviathan's control and systems within Leviathan's control may have unpredicted
problems. Accordingly, there can be no assurance that significant disruptions
will be avoided. Leviathan's present analysis of its most reasonably likely,
worst case scenario for Year 2000 disruptions includes Year 2000 failures in the
telecommunications and electricity industries, as well as interruptions from
suppliers that might cause disruptions in Leviathan's operations, thus causing
temporary financial losses and an inability to meet its obligations to
customers. A significant portion of the oil and natural gas transported through
the pipelines is owned by third parties. Accordingly, failures of the producers
of oil and natural gas to be ready for the Year 2000 could significantly disrupt
the flow of the hydrocarbons for customers. In many cases, the producers have no
direct contractual relationship with Leviathan, and Leviathan relies on its
customers to verify the Year 2000 readiness of the producers from whom they
purchase oil and natural gas. A portion of Leviathan's revenue for the
transportation of oil and natural gas is based upon fees paid by its customers
for the reservation of capacity and a portion of the revenue is based upon the
volume of actual throughput. As such, short-term disruptions in throughput
caused by factors beyond Leviathan's control may have a financial impact on
Leviathan and could cause operational problems for Leviathan's customers.
Longer-term disruptions could materially impact Leviathan's operations,
financial condition, and cash flows.
Leviathan estimates that the costs to be incurred in 1999 and 2000
associated with assessing, remediating and testing hardware and equipment,
embedded chip systems, and third-party developed software will not exceed $1.0
million, all of which will be expensed. As of September 30, 1999, Leviathan had
incurred less than $0.1 million related to such costs. Leviathan has previously
only tracked incremental expenses related to its Year 2000 project. The costs of
the Year 2000 project related to salaried employees of El Paso Energy, including
their direct salaries and benefits, are not available and have not been included
in the estimated costs of the project. The management fee charged to Leviathan
by the General Partner includes such incremental expenses.
Presently, Leviathan intends to reassess its estimate of Year 2000 costs in
the event Leviathan completes an acquisition of, or makes a material investment
in, substantial facilities or another business entity.
Management does not expect the costs of Leviathan's Year 2000 project will
have a material adverse effect on Leviathan's financial position, results of
operations, or cash flows. However, based on information available at this time,
Leviathan cannot conclude that disruption caused by internal or external Year
2000 related failures will not adversely affect Leviathan. Specific factors
which may affect the success of Leviathan's Year 2000 efforts and the frequency
or severity of a Year 2000 disruption or amount of any expense include failure
of Leviathan or its outside consultants to properly identify deficient systems,
the failure of the selected remedial action to adequately address the
deficiencies, the failure of Leviathan's outside consultants to complete the
remediation in a timely manner (due to shortages of qualified labor or other
factors), the failure of other parties to joint ventures in which Leviathan is
involved to meet their obligations, both financial and operational under the
relevant joint venture agreements to remediate assets used by the
22
<PAGE> 23
joint venture, unforeseen expenses related to the remediation of existing
systems or the transition to replacement systems, and the failure of third
parties, including Leviathan's investees, to become Year 2000 compliant or to
adequately notify Leviathan of potential noncompliance.
The above disclosure is a "Year 2000 Readiness Disclosure" made with the
intention to comply fully with the Year 2000 Information and Readiness
Disclosure Act of 1998, Pub. L. No. 105-271, 112 Stat, 2386, signed into law
October 19, 1998. All statements made herein shall be construed within the
confines of the Act. To the extent that any reader of the above Year 2000
Readiness Disclosure is other than an investor or potential investor in
Leviathan's or an affiliate's equity or debt securities, this disclosure is made
for the sole purpose of communicating or disclosing information aimed at
correcting, helping to correct and/or avoiding Year 2000 failures.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION
This Quarterly Report contains forward-looking statements and information
within the meaning of the Private Securities Litigation Reform Act of 1995 and
are based on management's beliefs as well as assumptions made by and information
currently available to management. Such statements are typically punctuated by
words or phrases such as "anticipate," "estimate," "project," "should," "may,"
"management believes," and words or phrases of similar import. Although
management believes that such statements and expressions are reasonable and made
in good faith, it can give no assurance that such expectations will prove to
have been correct. Such statements are subject to certain risks, uncertainties
and assumptions. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. Among the key factors
that may have a direct bearing on Leviathan's financial position, results of
operations, and cash flows are:
- competitive practices in the industry in which Leviathan competes,
- the impact of current and future laws and government regulations
affecting the industry in general and Leviathan's operations in
particular,
- effectiveness of implementing Leviathan's new strategy including assuming
operations of certain Equity Investees,
- environmental liabilities to which Leviathan may become subject in the
future that are not covered by an indemnity or insurance,
- the throughput levels achieved by any pipelines in which Leviathan owns
(now or in the future) an interest,
- the ability to access additional reserves to offset the natural decline
in production from existing wells connected to such pipelines,
- changes in gathering, transportation, processing, handling and other
rates due to changes in government regulation and/or competitive factors,
- the impact of oil and natural gas price fluctuations,
- the production rates and reserve estimates associated with Leviathan's
producing oil and natural gas properties,
- significant changes from expectations of capital expenditures and
operating expenses and unanticipated project delays,
- the ability of Equity Investees to make distributions to Leviathan,
- the effect of the Year 2000 date change,
- the ability to economically raise capital (debt and equity) to satisfy
planned and unanticipated needs, and
- other factors discussed more completely in Leviathan's other filings with
the United States Securities and Exchange Commission.
23
<PAGE> 24
Leviathan disclaims any obligation to update any forward-looking statements
to reflect events or circumstances after the date hereof.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in Item 3 updates, and should be read in
conjunction with information set forth in Part II, Item 7A in the Leviathan's
Annual Report on Form 10-K for the year ended December 31, 1998, in addition to
the interim consolidated financial statements, accompanying notes, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations presented in Item 1 and 2 of this Quarterly Report on Form 10-Q.
There are no material changes in market risks faced by Leviathan from those
reported in Leviathan's Annual Report on Form 10-K for the year ended December
31, 1998.
24
<PAGE> 25
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I -- Financial Information, Note 10, which is incorporated herein
by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Each exhibit identified below is filed as part of this quarterly report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.15 -- Farmout Agreement dated October 25, 1999 by and between
Flextrend Development Company, L.L.C. and El Paso
Production GOM, Inc.
27. -- Financial Data Schedule.
</TABLE>
(b) Report on Form 8-K
Leviathan filed a Current Report on Form 8-K with the Securities and
Exchange Commission on July 15, 1999, regarding its June 30, 1999, acquisition
from Natural Gas Pipeline Company of America of all of the outstanding stock of
Natoco, Inc. and Naloco, Inc. and an ownership interest in certain lateral
pipelines located in the Gulf.
Leviathan filed an Amended Current Report on Form 8-K/A with the Securities
and Exchange Commission on August 26, 1999, regarding its June 30, 1999,
acquisition from Natural Gas Pipeline Company of America of all of the
outstanding stock of Natoco, Inc. and Naloco, Inc. and an ownership interest in
certain lateral pipelines located in the Gulf.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned and thereunto duly authorized.
LEVIATHAN GAS PIPELINE
PARTNERS, L.P.
By: LEVIATHAN GAS PIPELINE COMPANY,
its General Partner
Date: November 12, 1999 By: /s/ KEITH B. FORMAN
----------------------------------
Keith B. Forman
Chief Financial Officer
Date: November 12, 1999 By: /s/ D. MARK LELAND
----------------------------------
D. Mark Leland
Vice President and Controller
(Principal Accounting Officer)
26
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.15 -- Farmout Agreement dated October 25, 1999 by and between
Flextrend Development Company, L.L.C. and El Paso
Production GOM, Inc.
27. -- Financial Data Schedule.
</TABLE>
<PAGE> 1
FARMOUT AGREEMENT
This Farmout Agreement (the "Agreement") dated effective October 25,
1999 (the "Effective Date"), is made by and between FLEXTREND DEVELOPMENT
COMPANY, L.L.C. ("Farmor") and EL PASO PRODUCTION GOM INC. f/k/a Sonat
Exploration GOM Inc. ("Farmee").
WHEREAS, Farmee desires to acquire from Farmor a farmout covering all
of Farmor's interest in Ewing Bank 958 (OCS-G 6921); Ewing Bank 959 (OCS-G
6922); and Ewing Bank 1003 (OCS-G 13091); and all of the East Half (E/2) of
Ewing Bank 1002 (OCS-G 13996B), Offshore Louisiana, Outer Continental Shelf, as
more specifically described in Article I, hereinbelow, the foregoing being
herein referred to as the "Farmout Acreage";
WHEREAS, the Farmout Acreage includes that certain Ewing Bank Block
1003 Federal Unit, Agreement No. 754398001 (the "Unit"); and
WHEREAS, Farmor and Farmee desire to define their respective rights,
interests and obligations with respect to the conduct of exploration,
development and producing operations on the Farmout Acreage;
NOW, THEREFORE, for a good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Farmor does hereby farmout to
Farmee the Farmout Acreage, subject to the terms, provisions and conditions set
forth herein (including, but not limited to, the Earning Requirements set forth
in Section 3.1) and the Additional Covenants, Agreements, Terms and Conditions
as set forth in EXHIBIT "A", attached hereto, without any warranty or
representation, except for a limited warranty of title, by, through, and under
Farmor, but not otherwise. Upon Farmee's fulfillment of the Earning
Requirements, Farmor shall execute and furnish Farmee with a recordable
assignment all of Farmor's interest (the "Assignment") in the Farmout Acreage,
effective as of the date that Farmee has satisfied such Earning Requirements and
containing the aforementioned limited warranty of title.
ARTICLE I
1.1 The Farmout Acreage. The Farmout Acreage is described as the
acreage and depths covered as of the Effective Date by the following described
Oil and Gas Leases:
Oil and Gas Lease of Submerged Lands under the Outer Continental Shelf
Lands Act, dated effective July 1, 1984, from the United States of
America, as Lessor, to Sohio Petroleum Company and Kerr-McGee
Corporation, as Lessees, designated with Serial No. OCS-G 6921,
covering all of Block 958, Ewing Bank, OCS Official Protraction
Diagram NH 15-12, containing approximately 5,760 acres.
Oil and Gas Lease of Submerged Lands under the Outer Continental Shelf
Lands Act, dated effective July 1, 1984, from the United States of
America, as Lessor, to Sohio Petroleum Company, et al., as Lessees,
designated with Serial No. OCS-G 6922, covering all of Block 959, Ewing
Bank, OCS Official Protraction Diagram NH 15-12, containing
approximately 5,760 acres.
<PAGE> 2
Oil and Gas Lease of Submerged Lands under the Outer Continental Shelf
Lands Act, dated effective May 1, 1993, from the United States of
America, as Lessor, to EP Operating Limited Partnership, et al., as
Lessees, designated with Serial No. OCS-G 13996B, covering all of the
East Half of Block 1002, Ewing Bank, OCS Official Protraction Diagram
NH 15-12, containing approximately 2,880 acres, as limited in depth
from the surface down to 40,000' TVD.
Oil and Gas Lease of Submerged Lands under the Outer Continental Shelf
Lands Act, dated effective May 1, 1991, from the United States of
America, as Lessor, to Tatham Offshore, Inc., as Lessee, designated
with Serial No. OCS-G 13091, covering all of Block 1003, Ewing Bank,
OCS Official Protraction Diagram NH 15-12, containing approximately
5,760 acres.
The foregoing Oil and Gas Leases are referred to individually as a "Lease" and
collectively as the "Leases".
1.2 The Unit. The Unit is described as the acreage and depths covered
as of the Effective Date by the following described federal unit agreement:
That certain federal unit designated as the Ewing Bank Block 1003
Federal Unit, Agreement No. 754398001 covering the following described
acreage: the South Half of Ewing Bank Block 958; the South Half of
Ewing Bank Block 959; the East Half of Ewing Bank Block 1002; and all
of Ewing Bank Block 1003.
1.3 Representations and Warranties. Farmor represents and warrants that
it owns one hundred percent (100%) of the record title interest in the Farmout
Acreage, with the exception of the East Half (E/2) of Ewing Bank 1002, in which
Farmor represents and warrants that it owns (or has the right to own) one
hundred percent (100%) of the operating rights interest from the surface down to
and including 40,000 feet TVD. As to any interest in the Farmout Acreage that
Farmor, has the right to own, but does not presently own according to the
records of the United States Department of the Interior-Minerals Management
Service ("MMS"), Farmor will secure and file with the MMS appropriate
assignments into Farmor, within thirty (30) days of the date of complete
execution of that certain Letter Agreement dated September 28, 1999, made by and
between Farmor and Farmee (the "Letter Agreement").
1.4 It is agreed and understood that Farmor's interest in the Farmout
Acreage may be subject to, and burdened by, certain overriding royalty
interests, net profits interests or other burdens, other than lessor's royalty,
that predate the Letter Agreement (the "Prior Burdens").
1.5 Incorporation of Letter Agreement Terms. The terms of the Letter
Agreement are incorporated herein by reference; provided, however, that should a
provision of this Agreement conflict with a provision in the Letter Agreement,
this Agreement shall prevail.
1.6 Binding Obligations. Except as otherwise specified in this
Agreement, the rights and obligations of the parties hereto are absolute and
unconditional; specifically, the parties
2
<PAGE> 3
hereto acknowledge and confirm that the conditions set forth in Paragraph 20 of
the Letter Agreement have been fully satisfied. In connection therewith, Farmee
has (i) conducted due diligence with respect to Farmor's ownership of and title
to the Farmout Acreage and is fully satisfied with the results thereof and (ii)
reviewed the existing contracts, agreements, government orders and/or
restrictions affecting the Farmout Acreage and agreed to be bound thereby.
ARTICLE II
2.1 Test Well. On or before November 30, 1999, and subject to receipt
of all necessary regulatory approvals (which Farmee agrees to pursue with
reasonable commercial diligence), Farmee, at its sole cost, risk and expense,
shall commence, or cause the commencement of, operations for the drilling of a
test well ("Test Well") at a location of Farmee's choice on the Unit and
thereafter diligently drill such well to a depth (the "Objective Depth") equal
to the statigraphic equivalent of the PB-1 Sand as seen at a depth of -10,225'
TVD Subsea in the Ewing Bank 1003 #1 Well, or a depth of -10,030' TVD Subsea,
whichever is lesser. The Objective Depth shall be a minimum depth, and Farmee
shall have the right, but not the obligation, to drill the Test Well to deeper
depths. In order to expedite the commencement of the Test Well, Farmor has or
shall immediately make available for Farmee's use, Farmor's shallow hazard
survey(s) over the Farmout Acreage, as well as any permitting information
pertaining to the Farmout Acreage. In addition, Farmor shall allow Farmee access
to its personnel to discuss the Farmout Acreage and any and all well data or
information pertaining to the Farmout Acreage. In the event that a condition
which qualifies as Force Majeure under Section 5.13, below, prevents Farmee from
commencing the drilling of the Test Well on or before November 30, 1999, then
Farmee shall apply for and diligently pursue a further extension of the existing
Suspension of Production ("SOP") from the MMS so as to permit the drilling of
the Test Well at a later date. In the event Farmee does not commence the
drilling of the Test Well on or before November 30, 1999, for any reason other
than (i) the inability to obtain all necessary permits and regulatory approvals
(which Farmee shall have diligently pursued) or (ii) a condition that qualifies
as Force Majeure under Section 5.13, below, Farmee shall be deemed to be in
breach of its obligations hereunder, unless Farmee has applied for and been
granted a further extension of the SOP from the MMS and drills, or causes to be
drilled, the Test Well in accordance with such extension.
2.2 Substitute Well. If during the drilling of the Test Well, Farmee
encounters mechanical difficulties, heaving shale, rock salt, excessive
saltwater flow, practicably impenetrable formations or other conditions in the
hole that would cause a reasonably prudent operator under the same or similar
circumstances to discontinue drilling and to plug and abandon such well, Farmee
shall have the right, but not the obligation, to commence actual drilling
operations on another well, or sidetracking operation on such well or actual
drilling operations on another well (hereinafter referred to as the "Substitute
Well") at a location of its choice on the Unit and to a minimum depth equal to
the Objective Depth within ninety (90) days after the date of rig release for
the last operation on the Test Well. If such Substitute Well is timely and
properly commenced and drilled to Objective Depth in compliance with all terms
and conditions provided herein for the Test Well, then such Substitute Well
shall in all respects be considered as if it was the Test Well and any reference
in this Agreement to the Test Well shall also include any such Substitute Well.
Farmee shall have a continuing option to drill additional Substitute
3
<PAGE> 4
Wells on the Farmout Acreage, provided that no more than ninety (90) days elapse
between the date the rig was released from the last operation on such Substitute
Well and the date of commencement of drilling operations for the next successive
Substitute Well drilled therefor.
2.3 Well Take-Over. If, prior to earning an Assignment in and to the
Farmout Acreage as hereinafter provided, Farmee elects to: (i) plug and abandon
the Test Well drilled hereunder; and (ii) not drill a Substitute Well therefor
then Farmee shall give written notice thereof and a copy of such well's final
electric log and a copy of the results of any production tests conducted thereon
to Farmor. Within forty-eight (48) hours after Farmor's receipt of such notice,
log and results, Farmor shall give notice if it elects to take over such well,
and succeed to Farmee's interest therein and conduct such further operations as
Farmor may wish to conduct within such Farmout Acreage. Farmor shall thereupon,
at its sole cost, risk and expense, take immediate possession of such well and
of materials, equipment, and facilities owned or controlled by Farmee located at
the well site and which may be useful in connection with further operations on
such well. To the extent that Farmor uses any such materials and equipment in
its testing, deepening, sidetracking, evaluating or completion operations in
connection with such Test Well, Farmor will reimburse Farmee as follows:
(a) The reasonable net salvage value of pipe and any other
materials in the well that could have been recovered by
Farmee, if Farmor had not taken over such well.
(b) A reasonable charge for the use of Farmee's drill pipe,
machinery and equipment, to compensate Farmee for the normal
wear and tear resulting from Farmor's use thereof.
(c) A reasonable compensation for any of Farmee's materials
located at the well site, which will have no salvage value
after being used by Farmor.
Upon taking over the well, Farmor shall proceed to conduct all subsequent
operations in and on such well and, as of the date of such notice of takeover,
shall (i) own one hundred percent (100%) of the working interest in such well;
and (ii) be responsible for and bear the entire risk and expense of further
operations in connection with such well, including, but not limited to, the cost
of completion or abandonment of such well and its associated facilities and
equipment. If Farmor completes such well as a producer, Farmee shall assign to
Farmor, and Farmor will own exclusively, subject to the applicable terms and
provisions of this Agreement, all of Farmee's right, title and interest in and
to the well, wellbore, all associated facilities and equipment and all
production therefrom, regardless of the depth of the well, and Farmee shall,
upon request from Farmor, furnish Farmor with such documents in recordable form
as may be required to perfect title to such well, wellbore, and all associated
facilites and equipment and production therefrom, regardless of the depth of the
well. Nothwithstanding the foregoing, in the event that Farmor completes such
well as a producer, Farmee shall relinquish to Farmor all of Farmee's right,
title and interest in and to the Farmout Acreage. The provisions of this Section
2.3 shall not apply to operations proposed by Farmee to plug back and/or
sidetrack a well drilled pursuant to this Agreement. If Farmor does not complete
the well as a producer, then Farmee shall have the renewed right to drill a
Substitute Well (in accordance with the terms of this Agreement) in an attempt
to earn an Assignment in and to the Farmout Acreage pursuant to Article III.
4
<PAGE> 5
2.4 Farmout Operations. Farmout Operations (as defined in EXHIBIT "A")
shall be commenced and prosecuted with reasonable diligence and in a workmanlike
manner at Farmee's sole risk, cost and expense. Farmee shall conduct all
operations hereunder as would a reasonably prudent operator in accordance with
industry standards and all applicable laws and regulations of governmental
authorities having jurisdiction thereof. All wells drilled hereunder shall
conform to the appropriate API standards. As long as this Agreement remains in
effect, Farmee shall, at its sole expense, provide and maintain in force the
insurance coverage referenced in Section 5.14 of this Agreement as to Farmout
Operations. Farmor, with Farmee's permission, which permission shall not be
unreasonably withheld, shall be furnished access to the premises and permanent
rights of ingress and egress over same. Said access shall be at Farmor's sole
risk, liability and expense, and Farmor will be required to comply with Farmee's
safety and environmental policies during such occurrences. As concerns Farmout
Operations, Farmor shall be given all information obtained as set forth in
EXHIBIT "B", attached hereto.
2.5 Additional Operations. Within sixty (60) days following the date of
rig release from the Test Well, Farmee shall evaluate the results of the Test
Well (and those of the three (3) existing well bores located on the Farmout
Acreage) and, based upon such results, Farmee shall elect one of the following
options with regard to future operations on the Farmout Acreage:
(a) Farmee shall proceed with development of the Farmout Acreage
pursuant to the terms provided for herein; or
(b) Farmee shall turn over to Farmor the Test Well and all rights
to the Farmout Acreage as provided in Section 2.3, or, in the
event Farmor elects not to take over such well and rights as
provided in Section 2.3, Farmee shall plug and abandon the
Test Well, in which case, this Agreement and the Letter
Agreement shall terminate. In such event, Farmee shall have no
further obligations to Farmor with regard to the Test Well and
Farmout Acreage.
In the event that Farmee elects to proceed with the development of the Farmout
Acreage pursuant to the terms provided for herein, any and all cost, risk and
expense associated with such operations shall be solely for Farmee's account,
unless and until the effective time of Farmor's conversion of its Reserved ORRI
(as hereinbelow defined) to a working interest as provided for in Section 3.3,
below.
ARTICLE III
3.1 Rights Earned. If (i) the Test Well is timely and properly
commenced and drilled and complies in all material respects with the terms and
conditions of this Agreement (including, without limitation, the evaluation of
the three (3) existing well bores located on the Farmout Acreage in accordance
with Section 2.5 and an election by Farmee to proceed with development of the
Farmout Acreage pursuant to Section 2.5(a)); (ii) such well meets criteria that
determine that it is a well capable of producing hydrocarbons in "paying
quantities" pursuant to the provisions of 30 CFR Section 250.111 (which
determination by the MMS Farmee agrees to diligently pursue) or if not meeting
these qualifications, Farmee commits to complete the well for
5
<PAGE> 6
production; and (iii) Farmee has supplied to Farmor evidence of same and a
request for an Assignment in and to the Farmout Acreage as provided below;
Farmee shall earn for the drilling of such well (hereinafter referred to as an
"Earning Well") an Assignment in and to the Farmout Acreage as set forth in this
Article III. The requirements set forth in this Section 3.1 are herein referred
to as the "Earning Requirements".
3.2 Assignment of Interest. In the event that Farmee satisfies all of
the Earning Requirements set forth in Section 3.1, Farmee shall, within thirty
(30) days of Farmee's written request, receive (and Farmor and Farmee shall
thereafter execute, acknowledge, deliver between them and record) a mutually
acceptable Assignment, with warranty of title by, through and under Farmor, but
not otherwise, of one hundred percent (100%) of Farmor's record title interest
in and to Ewing Bank 958 (OCS-G 6921); Ewing Bank 959 (OCS-G 6922); and Ewing
Bank 1003 (OCS-G 13091) and one hundred percent (100%) of Farmor's operating
rights interest in and to East Half (E/2) of Ewing Bank 1002 (OCS-G 13996B) from
the surface down to and including 40,000 feet TVD (collectively, the "Assigned
Interests"). The Assigned Interests shall be burdened by the lessor's royalty,
the Prior Burdens (as herein defined) and the interests retained herein by
Farmor (as described in Section 3.3), but shall be free and clear of any liens,
claims, or other burdens encumbering Farmor's interest in the Farmout Acreage,
including, but not limited to, any other overriding royalty interests, net
profits interests, production payments and, except as provided in this Agreement
and/or the Letter Agreement, any commitments for any one or more of the
transportation, processing or marketing of production therefrom or attributable
thereto. Such Assignment shall be effective as of the date that Farmee has
satisfied the Earning Requirements for same. Upon earning the Assignment, Farmee
shall proceed in a diligent and workmanlike manner to complete all commercial
existing wells on the Farmout Acreage, and shall thereafter proceed pursuant to
the term of the SOP.
3.3 Interests Retained by Farmor. In such Assignment to Farmee, Farmor
shall reserve an overriding royalty interest equal to ten percent (10.000000%)
of 8/8(ths) of all oil, gas and other liquid or gaseous hydrocarbons produced
and saved and marketed from the Farmout Acreage ("Reserved ORRI"), with the
option at Project Payout to either (x) retain the Reserved ORRI; or (y) convert
said Reserved ORRI to an undivided working interest equal to thirty percent
(30%) of the working interest conveyed in the Assignment, subject to the
provisions of a mutually acceptable Offshore Operating Agreement entered into by
the parties hereto pursuant to Section 3.7. Should Farmor elect to convert its
Reserved ORRI to a working interest as provided herein, Farmee shall, upon
request from Farmor, proportionately reassign to Farmor its respective share of
all of its right, title and interest in and to the Farmout Acreage resulting
from such election. The assignment and/or any additional assignment(s) between
the parties contemplated herein will be in a form acceptable to the MMS.
3.4 Prior Burdens. Notwithstanding anything contained herein or in the
Letter Agreement to the contrary, regardless of whether the interest retained by
Farmor is the Reserved ORRI or a working interest, Farmor shall be responsible
for payment of and shall bear one hundred percent (100%) the Prior Burdens and
shall RELEASE, DEFEND, INDEMNIFY and HOLD HARMLESS Farmee for the non-payment or
improper payment of such Prior Burdens. Should the Prior Burdens exceed the
Reserved ORRI provided for herein, Farmor shall bear such excess burdens, and
hold Farmee harmless from same. Notwithstanding anything herein or in the
6
<PAGE> 7
Letter Agreement to the contrary, during such time as the interest retained
herein by Farmor is the Reserved ORRI, any lessor's royalty due under the Leases
shall be for the sole account of Farmee. Should Farmor elect to convert its
Reserved ORRI to a working interest (as provided in Section 3.3), then upon the
effective date of such conversion, Farmor shall be responsible for its working
interest share of lessor's royalty.
3.5 Determination of Project Payout. As used herein, "Project Payout"
shall be defined as that point in time when Farmee has recouped from the value
of production from all wells located on the Farmout Acreage (after deducting
lessor's royalty, operating expenses, overhead, Farmor's Reserved ORRI provided
for herein, as well, as any additional burdens on production, and taxes on
production, including windfall profits tax, if any), the costs of drilling,
deepening, sidetracking, plugging back, coring, testing, logging, completing and
equipping for production all wells located on the Farmout Acreage (but excluding
all costs expended prior to the effective date of the Letter Agreement),
including, without limitation, all costs associated with any and all platforms,
wellhead facilities, storage tanks, separators, flow lines, salt water disposal
equipment, production facilities, whether located on the Farmout Acreage, or
outside the Farmout Acreage, pipelines, plugging and abandoning costs, surface
restoration costs and all other capital costs in connection with drilling,
production, or other operations on the Farmout Acreage.
3.6 Proportionate Reduction. In the event that Farmor owns less than
one hundred percent (100%) of the right, title and interest in the Farmout
Acreage, Farmor's interests retained herein shall be proportionately reduced.
3.7 Deepwater Offshore Operating Agreement. If Farmee earns an interest
in the Farmout Acreage and Farmor elects at Project Payout to convert its
Reserved ORRI to a working interest pursuant to Section 3.3, then Farmee and
Farmor shall enter into a mutually agreeable AAPL Deepwater Offshore Operating
Agreement ("Offshore Operating Agreement") to govern operations on the Farmout
Acreage, which Offshore Operating Agreement shall name Farmee as Operator. If
there is any conflict between the provision of this Agreement and the provisions
of such Offshore Operating Agreement, the provisions of this Agreement shall
prevail.
3.8 Production Statements. Farmee shall deliver to Farmor an itemized
statement of all costs incurred on the Farmout Acreage within sixty (60) days
after completion of the Earning Well and quarterly statements thereafter of all
costs, income and the monthly/cumulative production obtained from and/or
attributable to Farmout Acreage.
3.9 Third Party Participation. Notwithstanding anything contained in
this Agreement or the Letter Agreement to the contrary, the parties hereto agree
that, through October 25, 1999, Farmor shall have the exclusive right to solicit
third-party participation in the Farmout Acreage in an effort to seek a
bona-fide offer of terms and conditions from a third party that Farmor (in its
sole discretion) deems more favorable than those set forth herein. In connection
therewith, notwithstanding this Agreement or the Letter Agreement, Farmor may
farmout its interest in the Farmout Acreage to a third party subject to the
following:
(a) Should a third party seek to farm-in to an undivided working
interest equal to one
7
<PAGE> 8
hundred percent (100%) of Farmor's interest in the Farmout Acreage on
terms that Farmor (in its sole discretion) deems to be more favorable
than those set forth herein, Farmee shall have the right, but not the
obligation, to farm-in up to fifty percent (50%) of Farmor's working
interest by matching such favorable terms, and this Agreement and the
Letter Agreement shall be amended to include such favorable terms.
(b) Should a third party seek to farm-in to an undivided working
interest greater than fifty five percent (55%), but less than one
hundred percent (100%), of Farmor's interest in the Farmout Acreage on
terms that Farmor (in its sole discretion) deems to be more favorable
than those set forth herein, Farmor shall be allowed to enter into such
transaction; provided, however, that in such event, Farmee shall have
the right, but not the obligation, to maintain a farmout on the
remaining interest pursuant to the terms and conditions set forth
herein, and this Agreement and the Letter Agreement shall be amended
accordingly to reflect Farmee's remaining interest in the Farmout
Acreage.
(c) Should a third party seek to farm-in to an undivided working
interest equal to or less than fifty-five percent (55%) of Farmor's
interest (but in no event shall Farmor farmout less than twenty percent
(20%) of its interest to any one third party pursuant to Section
3.9(c)) in the Farmout Acreage on terms that Farmor (in its sole
discretion) deems to more favorable than those set forth herein, Farmor
shall be allowed to enter into such transaction; provided, however,
that in such event, Farmee shall have the obligation to maintain a
farmout on the remaining interest pursuant to the terms and conditions
set forth herein, and this Agreement and the Letter Agreement shall be
amended accordingly to reflect Farmee's remaining interest in the
Farmout Acreage.
In the event that Farmor exercises its option to farmout the Farmout Acreage to
a third party, final acceptance of the terms and conditions of such agreement
shall be at the sole discretion of Farmor, provided, however, that any such
agreement shall provide for the reimbursement by such third party of the
proportionate share of all direct out-of-pocket expenses, obligations and
commitments incurred by Farmee reasonably associated with the Farmout Acreage
during the period of time between the execution of the Letter Agreement and the
effective date of such third party's participation.
3.10 Operatorship. Should a third party seek to farm-in to an undivided
working interest equal to or greater than fifty-five percent (55%) of Farmor's
interest in the Farmout Acreage, such third party shall be entitled to
operatorship of the Farmout Acreage (provided that such third party is qualified
by the MMS to operate in the Gulf of Mexico). In connection therewith, Farmor
and Farmee agree to file any instruments, documents or agreements with any
governmental agency necessary or convenient to designate such third party as
operator of Farmout Acreage.
3.11 Farmee's Right to Take In-Kind. Farmor shall receive the proceeds
attributable to the Reserved ORRI until such time as Farmor, as it has the
right to do, elects, from time to time, in writing to take such Reserved ORRI
production in-kind. Upon thirty (30) days advance written notice to Farmee,
Farmor may elect to take in-kind and separately dispose of its share of Reserved
ORRI production. Farmor may, from time to time, withdraw its prior election to
take
8
<PAGE> 9
such production in-kind by furnishing Farmee thirty (30) days advance written
notification. In the event Farmor receives proceeds for its share of production
under the terms of this provision, the value of said production shall be
calculated on a price equal to the price Farmee receives for its share of like
production, provided such price is comparable to an "arms length" transaction
price (i.e., as if purchasing party is not associated with, an affiliate/parent
company of, or a subsidiary of Farmee).
ARTICLE IV
4.1 Assignability of Interest in the Agreement. The terms and
conditions hereof shall extend to and be binding upon the parties' successors,
legal representatives and assigns.
4.2 Commitment of Oil Production. The parties hereto commit any
production from the Farmout Acreage for movement on the Poseidon Pipeline for
the life of reserves on the following terms and conditions:
(a) Subject to approval of the governing body of Poseidon Oil
Pipeline Company, L.L.C. ("Poseidon"), crude oil delivered into
Poseidon's existing pipeline system shall be moved by Poseidon to
the terminal at Houma, Louisiana, or to the terminal at St.
James, Louisiana, for a non-escalating purchase and sale
differential of $1.35 per barrel or $1.40 per barrel,
respectively. If Poseidon does not approve of the foregoing
terms, the parties hereto will be released of any obligation to
deliver oil to, or move oil on, Poseidon's pipeline system.
(b) In the event Farmee elects to process crude oil at BP Amoco's
platform on Ewing Bank, Block 826, or another location that does
not have immediate access to Poseidon's existing pipeline system,
Farmor and Farmee shall negotiate in good faith an arrangement
whereby Farmor (or its designee) constructs a line from such
platform or location to Poseidon's existing pipeline system on
terms and conditions which provide an adequate rate of return on
invested capital. Should Farmor and Farmee be unable to agree on
the terms and conditions of such arrangement, Farmee shall, at
its sole expense, construct (or cause to be constructed) such
line from the processing platform or location.
(c) If Farmee is transporting oil on the Poseidon pipeline system,
Farmee shall be obligated to participate in Poseidon's market
based quality bank.
4.3 Gas Production. Manta Ray Gathering Company, L.L.C. ("Manta Ray")
shall have a right of first refusal with respect to the gathering and
transportation of natural gas; provided, however, that Manta Ray offers terms
and conditions no less favorable than those offered by a third party.
9
<PAGE> 10
4.4 Notices. Except as otherwise provided in Exhibit "B" hereof, the
parties hereto agree to utilize the following addresses for any notice required
under this Agreement:
El Paso Production GOM Inc. Flextrend Development Company, L.L.C.
Four Greenway Plaza, Suite 400 1001 Louisiana Street, Suite 2600
Houston, Texas 77046 Houston, Texas 77002
Attn.: Lynne Hackedorn Attn: James Lytal
Office Telephone: (713) 850-6457 Office Telephone: (713) 420-5221
Facsimile Number: (713) 402-4500 Facsimile Number: (713) 420-5602
Home Telephone: (713) 630-0563
4.5 Termination. This Agreement shall terminate upon: (i) the mutual
agreement of the parties; (ii) failure to commence and prosecute the drilling of
the Test Well within the time specified and under the terms stated in Section
2.1; (iii) failure to commence and prosecute the drilling of a Substitute Well
within the time specified and under the terms stated in Section 2.2; (iv)
Farmee's election pursuant to Section 2.5(b); or (v) the bankruptcy or
insolvency of Farmee. In the event of termination of this Agreement, within
thirty (30) days thereof, Farmee will assign or reconvey to Farmor all unearned
and/or terminated rights in and to the Farmout Acreage, per the terms included
herein, as the same may have previously been conveyed to Farmee.
4.6 Further Assurances. Farmee and Farmor shall work in good faith to
execute, approve, submit, and record (as applicable) any assignment instruments,
unitization agreements and other documents as may be reasonably desired by
Farmee or required by regulation or governmental agency to conduct operations
pursuant to this Agreement. During the term of this Agreement, Farmee shall
have the exclusive right to conduct earning operations on the Farmout Acreage
through the rights and interests of Farmor and Farmor shall not enter into any
contract or agreement providing for a farmout or other similar agreement pending
completion of earning operations hereunder by Farmee; provided, however, nothing
herein shall reduce, impair or hinder the right of Farmor to consummate a
transaction with a third party with respect to Farmout Acreage on the terms and
conditions set forth in Section 3.9.
4.7 Tax Matters. Notwithstanding any provisions herein, the rights and
liabilities hereunder are several and not joint or collective, and each party
shall be responsible only for its share of the costs and liabilities incurred as
provided hereunder, and this Agreement and the operations hereunder shall not
constitute a partnership. For federal income tax purposes each party hereto
elects to be excluded from application of all or any part of the provisions of
Subchapter K, Chapter 1, Subtitle A, Internal Revenue Code of 1986 as amended,
as permitted and authorized by Section 761 of said Code and the regulations
promulgated thereunder.
4.8 Applicable Law. THE CONSTRUCTION, PERFORMANCE, EXECUTION AND
ENFORCEMENT OF THIS AGREEMENT AND ANY DISPUTE, WHETHER IN CONTRACT OR TORT, OF
WHATSOEVER NATURE ARISING IN CONNECTION WITH AGREEMENT OR PERFORMANCE UNDER IT,
INCLUDING ANY REMEDY THEREOF, SHALL BE GOVERNED EXCLUSIVELY BY THE LAWS OF THE
STATE OF TEXAS, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
10
<PAGE> 11
ARTICLE V
5.1 Audit. Farmor shall have the continuing right, upon reasonable
request and during normal business hours, to audit Farmee's records with
respect to operations on the Farmout Acreage.
5.2 Commencement of Drilling Operations. For the purposes of this
Agreement, operations for the drilling of a well shall be deemed to have
commenced on the date the well is spudded.
5.3 Captions. The captions in this Agreement are for convenience only
and shall not be considered a part hereof or affect the construction or
interpretation of any provision of this Agreement.
5.4 References. Unless otherwise indicated, references to Article or
Section numbers pertain to this Agreement, and references to Exhibits pertain to
the Exhibits attached hereto and made a part hereof.
5.5 Lease Burdens. Except as provided herein to the contrary, any
assignment or reassignment of acreage tendered to Farmor pursuant to the terms
hereof shall be free and clear of all lease burdens, overriding royalty
interests, payments out of production or any further encumbrances in excess of
or in addition to those owed as lessor's royalty under the Leases covering the
Farmout Acreage that may have been created by Farmee.
5.6 Waiver; Remedies. The parties hereto stipulate that any provision
contained herein, and more specifically those providing for the termination of
this Agreement or of any transfer of interest executed pursuant hereto, shall
not be construed as precluding, nor shall the same preclude either party from
asserting, its respective rights to damages or any other rights or remedies to
which such party may be entitled. Further, that non-enforcement by either party
of a remedy for any particular breach and/or violation of the provisions of this
Agreement shall not constitute a waiver, nor shall the same prevent the exercise
by such party of any remedy or remedies under this Agreement for any other
violation or for the same violation occurring at any other time or times.
Additionally, the parties hereto agree that the termination of this Agreement,
in whole or in part for any reason whatsoever, shall not relieve Farmee of an
obligation theretofore incurred or which may subsequently occur as a result of
its acceptance of this Agreement, any operations hereunder, or the noncompliance
with any of the provisions of this Agreement.
5.7 Additional Covenants, Agreements, Terms and Conditions. The terms
and conditions of Exhibit "A", attached hereto, are incorporated herein for all
necessary purposes.
5.8 Gas Contracts; Oil/Gas Calls. Farmor represents that, to the best
of its knowledge, the Farmout Acreage is not subject to any binding gas contract
or oil/gas call.
5.9 Certificate of Financial Responsibility. Farmee shall reimburse
Farmor for the additional out-of-pocket costs (e.g., insurance premiums)
incurred by Farmor in providing
11
<PAGE> 12
evidence of oil spill financial responsibility for the Farmout Acreage, in
accordance with applicable MMS regulations promulgated pursuant to the Oil
Pollution Act of 1990, as amended, 33 U.S.C. Section 2701, et seq.
5.10 Suspension of Production. Should a well drilled hereunder be
completed as a well capable of producing oil and/or gas as previously provided
herein, Farmee will apply for and diligently seek approval of any requisite SOP
(or such other documents, applications and requisite governmental permits)
covering the Farmout Acreage, if same is necessary to maintain the Leases and
the Unit in full force and effect.
5.11 Diligence of Operations. All of Farmee's operations with respect
to the Test Well shall be conducted in a diligent, safe and workmanlike manner,
and in accordance with all applicable federal, state and local laws and
regulations.
5.12 Assignments Subject to this Agreement. Any Assignment earned by
Farmee shall be made subject to all of the terms and conditions of this
Agreement, and to the Letter Agreement as herein provided.
5.13 Force Majeure. All obligations imposed by this Agreement on each
party, except for payment of money, shall be suspended and all periods of time
for exercising any rights hereunder shall be extended while compliance is
prevented, in whole or in part, by Force Majeure. "Force Majeure" shall mean a
labor dispute; explosion; fire; storm; flood; war; civil disturbance; act of
God; laws; governmental rules, regulations, orders, action or delay; inability
to secure a drilling rig or materials after diligent commercially reasonable
efforts; or any other similar cause beyond the reasonable control of the party
claiming relief hereunder; provided, however, that such party shall promptly
take all reasonable action to remove the Force Majeure, and provided further,
that no party shall be required against its will to settle any labor dispute.
5.14 Insurance. At all times while operations are being conducted
hereunder, Farmee shall provide or cause to be provided insurance in accordance
with EXHIBIT "C", attached hereto, and incorporated herein. Farmee shall use
commercially reasonable efforts to require its contractors and subcontractors or
third parties performing work on the Farmout Acreage to provide such insurance
as Farmee deems to be reasonable and consistent with requirements set forth in
EXHIBIT "C" in relation to the work to be performed by said contractors,
subcontractors or third parties.
5.15 Exhibits. The following Exhibits are attached hereto and made a
part of this Agreement:
Exhibit "A" Additional Covenants, Agreements, Terms and Conditions
Exhibit "B" Data Requirements
Exhibit "C" Insurance Requirements
12
<PAGE> 13
IN WITNESS WHEREOF, the parties have executed this Agreement, effective as of
the date first above written.
FARMOR:
FLEXTREND DEVELOPMENT COMPANY, L.L.C.
By: /s/ JAMES H. LYTAL
--------------------------------
James H. Lytal
President
FARMEE:
EL PASO PRODUCTION GOM INC.
By: /s/ J.A. MILLS
--------------------------------
J.A. Mills
Vice President
13
<PAGE> 14
EXHIBIT "A"
ATTACHED TO AND MADE A PART OF THAT CERTAIN
FARMOUT AGREEMENT ("AGREEMENT") DATED EFFECTIVE OCTOBER 25, 1999,
BETWEEN FLEXTREND DEVELOPMENT COMPANY, L.L.C., AS FARMOR, AND
EL PASO PRODUCTION GOM INC., AS FARMEE
ADDITIONAL COVENANTS, AGREEMENTS, TERM AND CONDITIONS
Any term not otherwise defined in this Exhibit shall have the meaning given such
term in the Agreement.
A. Rentals and Minimum Royalty Payments. Prior to the earlier of the
termination of the Agreement or Farmee's earning of the assignment
contemplated therein, Farmor shall pay or tender (or cause to be paid or
tendered) all rentals and minimum royalties, if any, that may hereafter
become due under the terms of a Lease, but shall have no liability to
Farmee for failure to make any such payment or tender or to make same
timely or properly; and Farmee shall, within thirty (30) days after receipt
of invoice therefor, reimburse Farmor for 100% of such rentals or minimum
royalties so paid or tendered and attributable to such Lease.
B. Farmout Operations. As to the Famout Acreage, "Farmout Operations" shall be
defined as all operations conducted thereon or for the benefit thereof by,
through or under Farmee by reason of the Agreement save and except those,
if any, that (i) are conducted by, through or under Farmor under a specific
right or obligation to do so as provided herein and which operations shall
be performed, as between Farmor and Farmee, at Farmor's sole cost, risk and
expense, or (ii) are conducted on or after the effective date of the
Offshore Operating Agreement that may be entered into between Farmor and
Farmee as provided herein with respect to such Farmout Acreage, which
operations (and the cost, risk and expense thereof) shall be governed by
the provisions of such Offshore Operating Agreement. Farmout Operations
shall be performed, as between Farmor and Farmee, at Farmee's sole cost,
risk and expense.
C. Indemnification.
(1) Farmee agrees to (i) maintain Farmor's retained overriding royalty
interest in the Farmout Acreage (as applicable) free of, and (ii) RELEASE,
DEFEND, INDEMNIFY and HOLD HARMLESS Farmor Group (as herein defined) from
and against, any and all debts, charges, liens or other like encumbrances
associated with Farmout Operations. Farmee shall RELEASE, DEFEND,
INDEMNIFY, and HOLD HARMLESS Farmor, its parent, subsidiary and affiliated
companies, its and their joint owners, co-lessees, partners, joint
venturers, and the officers, directors, agents, consultants, insurers and
employees of all of the foregoing (individually and collectively referred
to as the "Farmor Group") from and against any and all claims, demands,
causes of action and judgments of whatsoever nature (together with all
costs and fees in connection with same) arising in
<PAGE> 15
favor of any party (including Farmee, its employees, Farmor's employees and
any other party whomsoever) for or on account of personal injury, death, or
property damage, incident to or arising in connection with Farmout
Operations and EXPRESSLY INCLUDING THE SOLE, JOINT OR CONCURRENT
NEGLIGENCE, FAULT OR STRICT LIABILITY, OF FARMOR GROUP, provided, however,
that in no event shall Farmee be liable under this Paragraph C(1) for any
claims, demands, causes of action or judgments that are the result of the
gross negligence or willful misconduct of any member of the Farmor Group.
(2) Farmor agrees to (i) maintain such Farmout Acreage free of, and (ii)
RELEASE, DEFEND, INDEMNIFY and HOLD HARMLESS Farmee Group (as herein
defined) from and against, any and all debts, charges, liens or other like
encumbrances associated with operations conducted on or for the benefit of
such Farmout Acreage by or for any one or more of Farmor and its
predecessor(s)-in-interest. Farmor shall RELEASE, DEFEND, INDEMNIFY, and
HOLD HARMLESS Farmee, its parent, subsidiary and affiliated companies, its
and their joint owners, co-lessees, partners, joint venturers, and the
officers, directors, agents, consultants, insurers and employees of all of
the foregoing (individually and collectively referred to as the "Farmee
Group") from and against any and all claims, demands, causes of action and
judgments of whatsoever nature (together with all costs and fees in
connection with same) arising in favor of any party (including Farmor, its
employees, Farmee's employees and any other party whomsoever) for or on
account of personal injury, death, or property damage, incident to or
arising in connection with operations by Farmor (or by Farmor's
predecessor-in-interest) on the Farmout Acreage, and EXPRESSLY INCLUDING
THE SOLE, JOINT OR CONCURRENT NEGLIGENCE, FAULT OR STRICT LIABILITY, OF
FARMEE GROUP, provided, however, that in no event shall Farmor be liable
under this Paragraph C(2) for any claims, demands, causes of action or
judgments that are the result of the gross negligence or willful misconduct
of any member of the Farmee Group.
D. Lease Termination. Subsequent to Farmee's receipt of an Assignment in and
to the Farmout Acreage, should Farmee at any time intend to release,
surrender, abandon or allow to terminate (whether by nonpayment of rentals
or otherwise) such rights, Farmee shall give written notice thereof to
Farmor at least sixty (60) days prior to the date of any such intended
release, surrender or abandonment, or the date on which same would
terminate. Farmor shall, within fifteen (15) days after receipt of any such
notice, notify Farmee whether or not Farmor desires to receive a
reassignment of such rights. If Farmor so notifies Farmee of its desire to
receive such reassignment, Farmee shall execute and deliver to Farmor such
reassignment in form and substance reasonably satisfactory to Farmor. No
such reassignment shall, however, relieve Farmee (1) of the obligation to
plug and abandon any wells drilled by Farmee on the premises covered by
such reassignment, at Farmee's sole risk and cost (unless such wells are
subject to the terms of the Offshore Operating Agreement in which case
Farmor and Farmee shall each bear their working interest share of said
costs) and in strict accordance with all applicable laws and applicable
rules, regulations and orders of governmental authorities, or (2) of any
other obligation imposed upon Farmee by the Agreement, unless Farmor
specifically agrees in writing to assume such obligations.
<PAGE> 16
E. Lease Covenants. Except as may be otherwise specifically set forth in the
Agreement, Farmee hereby assumes and agrees to comply with all applicable
covenants and obligations of the Leases (including, without limitation, the
payment of lessor's royalty), together with any prior assignments thereof,
agreements and/or other instruments pertaining to the Farmout Acreage,
insofar as such covenants and obligations relate to such lands and the
rights earned thereunder by Farmee.
F. Permits and Licenses: Governmental Compliance. Farmee shall obtain and pay
for all permits and licenses, if any, required for conducting Farmout
Operations and performing Farmee's obligations and duties hereunder and
shall comply in all material respects with all applicable laws and
ordinances and all applicable governmental rules, regulations and orders
in connection with qualifying for and conducting operations and performing
its obligations and duties hereunder, including, without limitation, the
Fair Labor Standards Act, the Occupational Safety and Health Act, the Oil
Pollution Act of 1990, together with all other applicable pollution control
laws, ordinances, rules, regulations and orders pertaining to the
environment and applicable securities laws and regulations, including Blue
Sky laws (as all of same have been or may hereafter be amended). Farmee
shall also, unless exempt, comply with Executive Order 11246 (Equal
Employment Opportunity) effective October 24, 1965, as same may have been
heretofore or hereafter amended or superseded, together with all relevant
governmental rules, regulations and orders promulgated pursuant thereto.
Farmee agrees that all provisions of said laws, ordinances, rules,
regulations and orders shall be deemed incorporated herein by reference and
shall be binding upon Farmee to the same extent as if copied in full
herein.
G. Plugging and Abandonment. Except as otherwise provided in Article II. of
the Agreement or in the Offshore Operating Agreement referenced in Article
III. of the Agreement, in the event that a well referenced herein is not
capable of producing oil or gas in paying quantities, Farmee shall promptly
plug and abandon the same.
H. Confidentiality. The parties agree that all geophysical, geological,
engineering, technical, and production tests or other data obtained from
all wells drilled under the Agreement shall be the property of the parties
to the Agreement and shall be maintained as confidential information for a
period of two (2) years from the effective date of the Agreement, or until
such information is made public by an appropriate governmental authority,
or unless all parties agree in writing to a lesser period of time.
Notwithstanding any provision of the Agreement to the contrary, any party
may disclose without the consent of the other party any information (1) to
an outside party with which it is engaged in a bona fide negotiation to
contract for gas sales agreements, (2) to a governmental agency when
required by such agency, (3) to reputable financial institutions or similar
entities in connection with a bona fide financial transaction, (4) to
accredited engineering firms for the purpose of evaluation on a
confidential basis, (5) to parent, subsidiary and affiliated companies,
limited partners and any other owners of an interest in such wells, and (6)
to reputable and financially responsible third parties with whom a party is
engaged in a bona fide effort to (i) sell, trade or farmout all or a
portion of the property subject to the Agreement, (ii) effect a merger or
consolidation or other
<PAGE> 17
transaction in which such third party proposes to acquire all or a
controlling share of the stock in a party hereto or (iii) purchase all or
substantially all of the assets of a party hereto or affiliates of parties
hereto; provided that any third party permitted access to confidential data
shall agree in writing not to communicate such information to anyone and
shall further agree to make no use of such information adverse to the
parties hereto within the area covered by such information during the
period of time such information remains confidential hereunder.
I. Further Assurances. From and after the execution hereof, each of the
parties hereto, without further consideration, shall use commercially
reasonable efforts to execute, deliver, submit, gain approvals of, and
record (or cause to be executed, delivered, submitted and recorded) good
and sufficient permits, designations, other regulatory documents, and
instruments of conveyance and transfer (as applicable), and take such other
action as may be reasonably required to carry out the purposes of the
Agreement and to give effect to the covenants, stipulations and obligations
of the parties hereto. Accordingly, Farmor shall provide its good faith and
reasonable assistance to Farmee (i) in curing any title defects or
irregularities which may be discovered during Farmee's title examination or
otherwise and (ii) providing "no objection" letters and other waivers or
approvals as may be required by the MMS or other regulatory body having
jurisdiction over the Farmout Acreage.
J. Press Releases. It is agreed that no press releases shall be made
pertaining to this Agreement or the Farmout Acreage without the mutual
consent of the parties hereto, which consent shall not be reasonably
withheld.
<PAGE> 18
EXHIBIT "B"
ATTACHED TO AND MADE A PART OF THAT CERTAIN
FARMOUT AGREEMENT ("AGREEMENT") DATED EFFECTIVE OCTOBER 25,1999,
BETWEEN FLEXTREND DEVELOPMENT COMPANY, L.L.C., AS FARMOR, AND
EL PASO PRODUCTION GOM INC., AS FARMEE
DATA REQUIREMENTS
WELL NAME
OCS-G 13091 #2
Ewing Bank Block 1003
The following information should be mailed to:
Flextrend Development Company, L.L.C
1001 Louisiana Street, Suite 2600
Houston, Texas 77002
Attention: James Lytal
Log Run Notification (24 hour notice requested)
James Lytal
Office: (713) 420-5221
Telecopier: (713) 420-5602
Log Prints, etc, (as applicable):
Daily Mud and MWD Logs 2 Prints
Final Mud Logs 4 Prints
Core Analysis 2 Prints
Lognet Prints 2 Prints
Field Prints 4 Prints
Final Prints 6 Prints
Drilling Operations
Decisions on deepening, sidetracking, casing point elections, abandonments, etc.
James Lytal
Office: (713) 420-5221
Telecopier: (713) 420-5602
<PAGE> 19
EXHIBIT "C"
ATTACHED TO AND MADE A PART OF THAT CERTAIN
FARMOUT AGREEMENT ("AGREEMENT") DATED EFFECTIVE OCTOBER 25, 1999,
BETWEEN FLEXTREND DEVELOPMENT COMPANY, L.L.C., AS FARMOR, AND
EL PASO PRODUCTION GOM INC., AS FARMEE
INSURANCE REQUIREMENTS
Any term not otherwise defined in this Exhibit shall have the meaning given such
term in the Agreement.
To the extent of the liabilities assumed by Farmee under the attached Agreement,
Farmee shall carry and maintain (or cause to be carried and maintained) the
following minimum insurance coverage throughout the period of the Agreement in
reliable insurance companies acceptable to Farmor:
WORKERS COMPENSATION INSURANCE to fully comply with all applicable laws of the
jurisdiction where operations are performed and Employers' Liability Insurance
with a minimum limit of not less than $1,000,000 each accident. Where
applicable, such policy or policies shall be endorsed to include the following:
Coverage under the U.S. Longshore and Harbor Workers' Compensation Act,
including its extension for operations on Outer Continental Shelf Lands;
Maritime Liability including, but not limited to, liability for
transportation, wages, maintenance and cure, claim under the Jones Act and
Death on the High Seas Act with a minimum limit of not less than $1,000,000
each accident;
Endorsement to provide that a claim "in rem" will be treated the same as a
claim "in personam"; and
Borrowed Servant and/or Alternate Employer Endorsements.
COMPREHENSIVE GENERAL LIABILITY INSURANCE with a minimum combined single limit
of not less than $1,000,000 each occurrence for bodily injury/personal injury
and/or property damage. Such insurance shall include, but not be limited to
Products/Completed Operations, Broad Form Property Damage Coverage and Blanket
Contractual Liability Coverage to insure the indemnity and hold harmless
provisions of the Agreement. If operations in any way involve vessels or
maritime activities or activities on or over navigable waters, the watercraft
exclusion under both the Comprehensive General and Contractual Liability
coverage parts shall be deleted to the extent that coverage is not provided
under a Protection and Indemnity policy.
AUTOMOBILE LIABILITY INSURANCE covering all automotive equipment (whether owned,
nonowned or hired) with a minimum combined single limit of not less than
$ 1,000,000 each accident for bodily injury and/or property damage.
<PAGE> 20
WATERCRAFT INSURANCE. IF THE PERFORMANCE OF THE AGREEMENT REQUIRES THE USE OF
WATERCRAFT, Farmee shall carry or require the owner of the watercraft to carry:
Hull & Machinery Insurance (including Collision Liability) with minimum
limits of not less than the declared value of vessels used in performing
operations. Such insurance shall apply to all watercraft owned, operated,
leased or chartered by Farmee (or its contractors and subcontractors, if
any).
Full Form Protection & Indemnity Insurance (including Collision Liability
and Tower's Liability) with a limit of not less than $1,000,000 each
accident or occurrence for all watercraft, owned, operated, leased or
chartered by Farmee (or its contractors, if any). The Protection &
Indemnity policy shall be endorsed as follows:
(a) to include removal of wreck/removal of debris coverage (with a minimum
limit of liability of not less than $1,000,000);
(b) to delete any language in any policy which reduces coverage for
Farmor, its parent, subsidiary and affiliated companies, its and their
joint owners, co-lessees, partners, joint venturers, officers,
directors, agents, consultants, insurers and employees of all of the
foregoing (individually and collectively referred to as the "Farmor
Insured Group") in the event of limitation of liability; and
(c) to provide full coverage for Farmor Insured Group without regard to
liability "as owner" of the vessel and to delete any "as owner" clause
and any other language which limits or purports to limit the coverage
afforded to an insured or an additional insured who is not a ship
owner, and to include coverage for all additional insureds in any
capacity in which they may be held liable.
AIRCRAFT INSURANCE. IF THE PERFORMANCE OF THE AGREEMENT REQUIRES THE USE OF
AIRCRAFT, including helicopters, Farmee shall carry or require the owners of the
aircraft to carry Aircraft Liability Insurance (including passengers) covering
all aircraft used in performing operations with a combined single limit of not
less than $1,000,000 any one accident or occurrence for bodily injury and/or
property damage.
EXCESS LIABILITY INSURANCE. Excess Liability Insurance serving to increase
primary limits to not less than $25,000,000 any one accident or occurrence.
OPERATOR'S EXTRA EXPENSE INDEMNITY INSURANCE including, without limitation,
coverage for well control, underground blowout, redrilling expenses, removal of
wreck or debris, seepage and pollution and cleanup and containment. The limit of
such insurance for the joint account (to include Farmee and any and all working
interest partners or joint venturers associated with Farmee in the Farmout
Operations) shall never be less than $25,000,000 for any one occurrence.
<PAGE> 21
GENERAL REQUIREMENTS. All insurance policies of Farmee (except for Workers
Compensation coverage), including, but not limited to, those set forth in this
Exhibit "C", shall include Farmor Insured Group as additional insureds with
respect to operations performed under the Agreement and shall be primary to any
other insurance coverage in favor of Farmor Insured Group to the extent of
the specific risks and liabilities assumed by Farmee hereunder. The "owned
property" exclusion contained in insurance policies maintained by Farmee shall
not be applicable to Farmor Insured Group. All insurance policies, including but
not limited to those set forth in this Exhibit "C", shall include a waiver of
subrogation in favor of Farmor Insured Group. Prior to commencing operations
under the Agreement, Farmee shall furnish Farmor with an insurance certificate
or certificates as evidence of the above coverages and requirements and
containing provisions that thirty (30) days prior written notice will be given
to the certificate holder in the event of cancellation or material change in
coverage. Neither Farmor's acceptance of an incomplete or improper certificate,
nor commencement of Farmout Operations without Farmee having previously
furnished to Farmor a properly completed insurance certificate shall constitute
a waiver of Farmee's obligations hereunder. The insurance certificate should be
mailed to the following address:
FLEXTREND DEVELOPMENT COMPANY, L.L.C.
1001 LOUISIANA STREET, SUITE 2600
HOUSTON, TEXAS 77002
ATTENTION: INSURANCE DEPARTMENT
The specification by Farmor of a minimum amount of insurance specified above
shall not be considered as a limitation of Farmee's liability under the
Agreement (except to the extent mandated by applicable law) nor an agreement by
Farmor to assume liability in excess of said amounts or for risks not insured
against. In the event that Farmee voluntarily obtains additional insurance,
Farmor Insured Group shall be entitled to the benefits thereof (except to the
extent mandated by applicable law).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEETS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,156
<SECURITIES> 0
<RECEIVABLES> 6,981
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,428
<PP&E> 506,932
<DEPRECIATION> 131,646
<TOTAL-ASSETS> 593,654
<CURRENT-LIABILITIES> 22,669
<BONDS> 447,000
0
0
<COMMON> 0
<OTHER-SE> 112,090
<TOTAL-LIABILITY-AND-EQUITY> 593,654
<SALES> 0
<TOTAL-REVENUES> 71,467
<CGS> 0
<TOTAL-COSTS> 40,444
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,667
<INCOME-PRETAX> 16,589
<INCOME-TAX> (355)
<INCOME-CONTINUING> 16,944
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,944
<EPS-BASIC> 0.54<F1>
<EPS-DILUTED> 0.54
<FN>
<F1>Represents basis earnings per unit.
</FN>
</TABLE>
