<PAGE>
As filed with the Securities and Exchange Commission on December 9, 1994
Registration No. 33-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
NEW ENSERCH EXPLORATION, INC.
(Exact name of registrant as specified in its charter)
Texas 1311 75-2556975
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Number) Identification Number)
incorporation or
organization)
-----------------------------
New Enserch Exploration, Inc. M.G. Fortado
4849 Greenville Avenue, Suite 1500 300 S. St. Paul
Dallas, Texas 75206-4186 Dallas, Texas 75201
(214) 748-1110 (214) 670-2649
(Address, including zip code, and (Name, address, including zip code
telephone number, including area and telephone number, including
code, of registrant's principal area code, of agent for service)
executive offices)
-----------------------------
COPIES TO:
William T. Satterwhite Fred W. Fulton
Executive Vice President, General Counsel Jackson & Walker, L.L.P.
ENSERCH Corporation 901 Main Street, Suite 6000
300 S. St. Paul Dallas, Texas 75202
Dallas, Texas 75201 (214) 953-5894
(214) 670-2175
-----------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
as soon as practicable after the effective date of this Registration Statement.
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If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: [ ]
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CALCULATION OF REGISTRATION FEE
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===================================================================================================================
Proposed Proposed Maximum
Title of Each Class of Securities Amount To Be Maximum Offering Aggregate Offering Amount of
To Be Registered/(1)/ Registered Price Per Share/(2)/ Price/(2)/ Registration Fee
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Common Stock, par
value $1.00 per share.............. 104,581,242 shs $9.625 $1,006,594,454 $347,102
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</TABLE>
(1) This Registration Statement relates to securities of the Registrant
issuable to holders of publicly traded limited partnership units of Enserch
Exploration Partners, Ltd. ("EP") in connection with the Reorganization (as
defined in the Prospectus/Information Statement that forms a part of this
Registration Statement).
(2) Pursuant to Rule 457(f)(1), the registration fee was computed on the basis
of the market value of the publicly traded limited partnership units of EP
to be exchanged in the Reorganization, computed in accordance with Rule
457(c) on the basis of the average of the high and low prices per unit of
such units quoted on the New York Stock Exchange on December 5, 1994.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file an amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
NEW ENSERCH EXPLORATION, INC.
Cross Reference Sheet
Pursuant to Item 501(b) of Regulation S-K
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LOCATION IN
ITEM NO. CAPTION PROSPECTUS/INFORMATION STATEMENT
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A. Information About the Transaction
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1. Forepart of the Registration Forepart of Registration Statement;
Statement and Outside Front Cover Outside Front Cover Page of
Page of Prospectus/Information Prospectus/Information Statement
Statement
2. Inside Front and Outside Back Cover Inside Front Cover Pages of
Pages of Prospectus/Information Prospectus/Information Statement
Statement
3. Risk Factors, Ratio of Earnings to Summary; Special Considerations;
Fixed Charges and Other Information Selected Financial Data
4. Terms of the Transaction Summary; The Reorganization;
Description of the Capital Stock
5. Pro Forma Financial Information Federal Income Tax Considerations;
Financial Statements
6. Material Contacts with the Company Relationship Between Newco and EC
Being Acquired
7. Additional Information Required for *
Reoffering By Persons and Parties
Deemed to be Underwriters
8. Interests of Named Experts and *
Counsel
9. Disclosure of Commission Position on *
Indemnification for Securities Act
Liabilities
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B. Information About the Registrant
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10. Information with Respect to S-3 *
Registrants
11. Incorporation of Certain Information *
by Reference
12. Information with Respect to S-2 or *
S-3 Registrants
13. Incorporation of Certain Information *
by Reference
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14. Information with Respect to Dividend Policy of Newco; Selected Financial
Registrants other than S-3 or S-2 and Operating Data; Management's
Registrants Discussion and Analysis of Financial
Condition and Results of Operations;
Business
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C. Information About the Company Being Acquired
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15. Information with Respect to S-3 Special Considerations; The Reorganization;
Registrants Relationship Between Newco and EC;
Business
16. Information with Respect to S-2 or *
S-3 Registrants
17. Information with Respect to *
Registrants other than S-3 or S-2
Registrants
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D. Voting and Management Information
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18. Information if Proxies, Consents or *
Authorizations are to be Solicited
19. Information if Proxies, Consents or Outside Front Cover Page of
Authorizations are not to be Prospectus/Information Statement;
Solicited or in an Exchange Offer The Reorganization; Relationship Between
Newco and EC
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</TABLE>
* Item inapplicable or answer is negative and omitted from
Prospectus/Information Statement.
<PAGE>
PROSPECTUS/INFORMATION STATEMENT
NEW ENSERCH EXPLORATION, INC.
ENSERCH EXPLORATION PARTNERS, LTD.
104,581,242 Shares of Common Stock
This Prospectus/Information Statement is being sent to holders of
Depositary Units Representing Limited Partnership Interests ("EP Depositary
Units") of Enserch Exploration Partners, Ltd. ("EP"). Enserch Exploration, Inc.,
a Delaware corporation ("EEI"), as Managing General Partner of EP, is proposing
a plan of reorganization (the "Reorganization"). EEI is a wholly owned
subsidiary of ENSERCH Corporation ("EC"). EC and its controlled corporate
subsidiaries and their controlled partnerships (including EEI, but not EP and
EPO (as defined below)) are collectively referred to herein as the "EC
Companies." Pursuant to the Reorganization a newly organized Texas corporation,
also to be named Enserch Exploration, Inc. ("Newco"), will acquire all of the
outstanding partnership interests of EP Operating Limited Partnership ("EPO"),
which is a limited partnership in which EP has a 99% limited partner interest
and which holds EP's gas and oil properties, in exchange for shares of common
stock of Newco, par value $1.00 per share ("Common Stock"). EPO will then be
merged into Newco. Thereafter EP will be liquidated, with all partners of EP
receiving shares of Common Stock, and the EC Companies also receiving EP's
interests in and assuming EP's obligations under certain equipment lease
arrangements (the equipment will be subleased to Newco) and assuming
approximately $395 million principal amount of EP's indebtedness, plus accrued
interest. Upon the liquidation of EP and the distribution of Common Stock, the
EC Companies and the other holders (the "Public Unitholders") of outstanding
limited partnership interests ("Units") will receive one share of Common Stock
for each Unit then held. Public Unitholders will receive an aggregate of 805,914
shares of Common Stock pursuant to the Reorganization and the EC Companies,
collectively, will receive 103,775,328 shares of Common Stock pursuant to the
Reorganization. The ratio of exchange to be used in the Reorganization does not
result in any change in the relative holdings of the Public Unitholders and the
EC Companies with respect to their ownership interests in EP. The ratio of
exchange was not changed as a result of the assumption of EP debt by the EC
Companies or the assignment and assumption of the equipment leases. Consummation
of the Reorganization is expected to commence on December 30, 1994. Prior to
this time there has been no public market for the Common Stock. However, the New
York Stock Exchange (the "NYSE") has indicated to Newco that the Common Stock to
be distributed to the Public Unitholders pursuant to the Reorganization will be
approved for listing on the NYSE, subject to official notice of issuance, under
the symbol "EEX."
The Reorganization must be approved by the holders of a majority of the
outstanding Units. Since the EC Companies own an aggregate of approximately
99.2% of the outstanding Units, and intend to consent to the steps necessary to
consummate the Reorganization, the approval of the proposal is assured without
the consent of any other holder of Units.
<PAGE>
ACCORDINGLY, EP IS NOT SOLICITING YOUR CONSENT TO THE REORGANIZATION, AND YOU
ARE REQUESTED NOT TO SEND EP A CONSENT OR PROXY WITH RESPECT TO THE
REORGANIZATION.
All Public Unitholders of record at the close of business on December 5,
1994 will receive this Prospectus/Information Statement.
_______________
For a discussion of certain special factors that should be considered, see
"Special Considerations." In particular, Public Unitholders should consider the
following factors:
. EEI may be viewed as having a potential conflict of interest with the
Public Unitholders with respect to the determination of the terms of the
Reorganization.
. The terms of the Reorganization were evaluated and determined by EEI
without independent representation of the Public Unitholders.
. Unlike EP, Newco will be subject to corporate tax, and its earnings and
profits distributed to shareholders will also be subject to taxation to
the shareholders.
. Public Unitholders will have no dissenters' rights in the Reorganization
and therefore cannot elect to receive cash for their EP Depositary Units
based on an appraisal.
. Immediately following the consummation of the Reorganization, the EC
Companies will own over 99% of the outstanding Common Stock.
. Newco, like EP, will be subject to all of the business and operating
risks inherent in gas and oil exploration and production activities.
_______________
EP IS NOT ASKING YOU FOR A CONSENT OR PROXY AND YOU ARE REQUESTED NOT TO
SEND EP A CONSENT OR PROXY.
_______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/INFORMATION STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
_______________
The date of this Prospectus/Information Statement is December 9, 1994.
<PAGE>
TABLE OF CONTENTS
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Page
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SUMMARY..................................................................... 1
Introduction............................................................. 1
Business................................................................. 2
Special Considerations................................................... 3
The Reorganization.................................................... 3
Conflicts of Interest of EEI....................................... 3
Shareholder Rights Differ from Limited Partner
Rights............................................................ 3
No Previous Market for Common Stock................................ 4
Double Taxation.................................................... 4
Newco................................................................. 4
Control of Newco by EC............................................. 4
Lack of Termination Date........................................... 4
Future Dilution of Common Stock.................................... 4
Elimination of General Partner Liability........................... 4
No Dissenters', Appraisal or Similar Rights for
Public Unitholders................................................ 4
Reserve Development and Production Risks........................... 5
Volatility of Gas and Oil Markets.................................. 5
Developments of Additional Reserves................................ 5
Uncertainties in Estimating Reserves and Future
Net Cash Flows.................................................... 5
The Reorganization....................................................... 5
Reorganization Steps............................................... 5
No Public Unitholder Consent Required.............................. 6
Calculation of Exchange Ratio...................................... 6
Reasons to Convert EP into Corporate Form.......................... 7
Fairness Opinion................................................... 8
Delivery of EP Depositary Unit Certificates........................ 9
Comparison of EP Depositary Units and Common Stock....................... 9
Summary of Material Federal Income Tax Consequences...................... 10
SPECIAL CONSIDERATIONS...................................................... 12
The Reorganization....................................................... 12
Potential Conflicts of Interest.................................... 12
No Independent Representation...................................... 12
Shareholder Rights Differ from Limited Partner
Rights............................................................ 12
No Previous Market for Common Stock................................ 13
Double Taxation.................................................... 13
Newco.................................................................... 13
Control of Newco by EC............................................. 13
Lack of Termination Date........................................... 14
Future Dilution of Common Stock.................................... 14
Elimination of General Partner Liability........................... 15
No Dissenters', Appraisal or Similar Rights for
Public Unitholders................................................ 15
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<TABLE>
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Differing Fiduciary Duties......................................... 15
Reserve Development and Production Risks........................... 16
Volatility of Gas and Oil Markets.................................. 16
Development of Additional Reserves................................. 17
Uncertainties in Estimating Reserves and Future
Net Cash Flows.................................................... 17
Competition........................................................ 17
Governmental Regulation............................................ 17
Hedging............................................................ 18
Transaction Costs.................................................. 18
THE REORGANIZATION.......................................................... 19
Background............................................................... 19
Calculation of Exchange Ratio............................................ 24
Reorganization Steps..................................................... 25
The Plan of Liquidation.................................................. 26
Contribution of EPO Interests to Newco............................. 26
EP's Plan of Liquidation........................................... 26
Comparison of EP Depositary Units and Common Stock....................... 28
Reasons to Convert EP into Corporate Form................................ 34
Absence of Distributions........................................... 34
Tax Consequences and Tax Reporting................................. 35
Expansion of Potential Investor Base and Greater Access to
Equity Markets
Acquisition Currency............................................... 35
Reduced Legal Costs and Uncertainty................................ 36
Fairness Opinion......................................................... 36
Review of Certain Assumptions of the
Reorganization Proposal........................................... 37
Comparison of EP and Freeport-McMoRan Energy
Partners.......................................................... 38
Historical Review of EP and Pro Forma Analysis
of EP and Newco................................................... 38
Analysis of MLP Marketplace........................................ 38
Analysis of Capital Markets for Gas and Oil Exploration and
Production Companies.............................................. 39
Analysis of Selected Gas and Oil Exploration and Production
Companies......................................................... 39
Analysis of Certain Financial Ratios Derived from Financial and
Operating Data Provided by EEI Management......................... 40
Review of Market Prices of EP, Comparable Companies and Various
Related Indices................................................... 40
Analysis of Equity Research Coverage............................... 40
No Public Unitholder Consent Required.................................... 41
Procedure for Delivery of EP Depositary Unit Certificates................ 42
</TABLE>
(ii)
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RELATIONSHIP BETWEEN NEWCO AND THE EC COMPANIES............................. 42
Ownership of Shares................................................... 42
Conflicts of Interest................................................. 42
DIVIDEND POLICY OF NEWCO.................................................... 44
CAPITALIZATION.............................................................. 45
SELECTED FINANCIAL AND OPERATING DATA....................................... 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................. 49
Results of Operations................................................. 49
Pro Forma Results of Operations of Newco.............................. 52
Capital Resources and Liquidity....................................... 52
New Accounting Standards.............................................. 54
BUSINESS.................................................................... 55
Glossary.............................................................. 55
Operations............................................................ 56
Gulf of Mexico........................................................ 57
1993 Onshore.......................................................... 58
1994 Onshore.......................................................... 59
Competition........................................................... 60
Regulation............................................................ 60
Legal Proceedings..................................................... 61
Properties............................................................ 62
MANAGEMENT.................................................................. 67
Directors and Executive Officers...................................... 67
Director Compensation................................................. 68
Committees of the Board of Directors.................................. 69
Executive Compensation................................................ 69
Compensation Table................................................. 69
Employee Benefit Plans............................................. 70
The Stock Option Plan.............................................. 70
SECURITY OWNERSHIP.......................................................... 71
CERTAIN TRANSACTIONS........................................................ 71
Allocations........................................................... 71
Restructuring of Equipment Leases..................................... 72
Other................................................................. 74
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(iii)
<PAGE>
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FEDERAL INCOME TAX CONSIDERATIONS........................................... 75
Introduction.......................................................... 75
Public Unitholders.................................................... 75
Pre-Reorganization Operations of EP................................ 75
Pre-Reorganization Sale of Units................................... 75
Reorganization Consequences........................................ 77
Newco................................................................. 80
The Newco Contribution and Merger.................................. 80
Post-Reorganization Operations..................................... 80
Other Taxation........................................................ 80
DESCRIPTION OF THE CAPITAL STOCK............................................ 81
Common Stock.......................................................... 81
Preferred Stock....................................................... 81
Stock Ownership Restrictions.......................................... 83
No Previous Market for Common Stock................................... 84
LEGAL MATTERS............................................................... 84
EXPERTS..................................................................... 84
INDEX TO FINANCIAL STATEMENTS............................................... 86
</TABLE>
EXHIBITS
- --------
A. Fairness Opinion of Dean Witter
B. Amendment to EPO Partnership Agreement/Contribution of
Partnership Interests Agreement
C. Amendment to EP Partnership Agreement/EP Plan of Liquidation
D. Newco Restated Articles of Incorporation
(iv)
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS/INFORMATION
STATEMENT IN CONNECTION WITH THE ACTIONS TO BE TAKEN OR THE OFFERING OF
SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY NEWCO, EP OR ANY OTHER
PERSON. THIS PROSPECTUS/INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO
OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS/INFORMATION STATEMENT NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF NEWCO OR EP SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
EP is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). The reports, proxy statements and other
information filed by EP with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at Judiciary Plaza,
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission at Seven World Trade Center, 13th Floor, New York, New
York 10048, and Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Units held by Public Unitholders are listed on the
NYSE. Reports, proxy statements and other information concerning EP can also be
inspected at the offices of the NYSE at 20 Broad Street, New York, New York
10005.
Newco has filed a Registration Statement with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
distribution of securities described herein (the "Registration Statement"). This
Prospectus/Information Statement does not contain all of the information set
forth in or incorporated by reference in the Registration Statement. Copies of
the Registration Statement and the exhibits thereto are on file at the offices
of the Commission and may be obtained upon payment of a prescribed fee or may be
examined without charge at the public reference facility of the Commission in
Washington, D.C.
(v)
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed with the Commission by EP,
are incorporated herein by reference and made a part hereof:
(i) Annual Report on Form 10-K for the year ended December 31, 1993;
(ii) Quarterly Report on Form 10-Q for the quarter ended March 31, 1994;
(iii) Quarterly Report on Form 10-Q for the quarter ended June 30, 1994;
and
(iv) Quarterly Report on Form 10-Q for the quarter ended September 30,
1994.
This Prospectus/Information Statement incorporates documents by reference
that are not presented herein or delivered herewith. Such documents are
available without charge to any person to whom a copy of this
Prospectus/Information Statement is delivered, upon the written or oral request
of such person. Written or telephonic requests for copies should be directed to
Enserch Exploration Partners, Ltd., 300 S. St. Paul, Dallas, TX 75201,
Attention: Michael G. Fortado.
[CURRENT OWNERSHIP STRUCTURE APPEARS HERE]
(vi)
<PAGE>
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Prospectus/Information Statement. This summary is not intended to be
complete and is qualified in all respects by reference to the more detailed
information appearing elsewhere in this Prospectus/Information Statement. Public
Unitholders are urged to review carefully this Prospectus/Information Statement
in its entirety. Capitalized terms used herein without definition have the
meanings ascribed to them elsewhere in this Prospectus/Information Statement.
In this Prospectus/Information Statement, (i) Enserch Exploration Partners,
Ltd., a publicly traded Texas limited partnership, is referred to as "EP," (ii)
Enserch Exploration, Inc., a Delaware corporation and Managing General Partner
of EP, is referred to as "EEI," (iii) EP Operating Limited Partnership, a Texas
limited partnership which holds all of EP's gas and oil properties, is referred
to as "EPO," (iv) New Enserch Exploration, Inc., a newly organized Texas
corporation that will change its name to Enserch Exploration, Inc., is referred
to as "Newco," (v) ENSERCH Corporation, a Texas corporation ("EC"), and its
controlled corporate subsidiaries and their controlled partnerships (other than
EP and EPO) are referred to collectively as the "EC Companies," and (vi) the
limited partnership interests in EP, including those evidenced by EP Depositary
Units, are referred to as "Units."
Introduction
Following the Reorganization, the business now conducted by EP, a limited
partnership, will be conducted by Newco, a corporation. EP, EC and EEI will
contribute their partnership interests in EPO to Newco in exchange for shares of
Common Stock. EPO will then be merged into Newco. Soon thereafter, EP will be
liquidated, with (i) Common Stock being distributed to the Public Unitholders
and the EC Companies that are partners of EP pro rata in relation to their
interests in EP, (ii) EEI receiving EP's interests in, and assuming EP's
obligations under, certain equipment lease arrangements relating to the Garden
Banks Block 388 Project and the Mississippi Canyon Block 441 Project (together
with certain associated assets, the "Equipment Leases") and the equipment will
be subleased to Newco (see "CERTAIN TRANSACTIONS") and (iii) the EC Companies
assuming approximately $395 million in aggregate principal amount of debt of EP
($86 million of which is debt owed by EP to EPO and thus does not appear on EP's
consolidated financial statements) owed to certain EC Companies and to Newco,
plus accrued interest.
Currently, the EC Companies own approximately 99.2% of EP. The remaining
approximate .8% limited partner interest in EP is represented by EP Depositary
Units that are traded on the NYSE, and are owned by the Public Unitholders.
The EC Companies own the following interests in EP:
(1) The Managing General Partner of EP is EEI, which owns a 1% general
partner interest in EP. EEI is a wholly-owned corporate subsidiary of
EC.
<PAGE>
(2) Enserch Processing Partners, Ltd., a Texas limited partnership
("EPPL") in which EC directly or indirectly owns all of the general
and limited partner interests, owns a 98.2% limited partner interest
in EP.
EP owns a 99% limited partner interest in EPO, which holds EP's
various gas and oil exploration and production assets. EEI owns a .99% general
partner interest in EPO, and EC owns a .01% general partner interest in EPO. As
part of the Reorganization, all of these interests in EPO will be contributed to
Newco in exchange for Common Stock.
Business
EP, through EPO, is engaged in the exploration for and the development,
production and marketing of natural gas and crude oil throughout Texas, offshore
in the Gulf of Mexico, onshore in the Gulf Coast and in various other areas of
the United States. Activities include geological and geophysical studies;
acquisition of domestic gas and oil leases; drilling of exploratory wells;
development and operation of producing properties; acquisition of interests in
developed or partially developed properties; and the marketing of natural gas,
crude oil and condensate. Production offices are maintained in Dallas, Houston,
Athens, Bridgeport, Longview and Midland, Texas. The address of each of EP and
Newco is 4849 Greenville Avenue, Suite 1500, Dallas, Texas 75206-4186 and the
telephone number of each is (214) 748-1110. See "BUSINESS."
It is expected that EC will conduct all of its domestic gas and oil
exploration and production business through Newco, and, therefore, EC intends to
make any acquisition of domestic gas and oil properties through Newco. There may
be circumstances, however, in which it is either necessary or appropriate for EC
to make an acquisition or undertake domestic operations without Newco's
participation. EP has not conducted international gas and oil operations and EC
will continue to conduct these through affiliates other than Newco. After the
Reorganization, Newco will be provided the opportunity to purchase the remainder
of EC's domestic gas and oil properties, which are presently believed by EEI to
have a fair market value of $1.4 million. The book value of these properties is
$5.3 million. Therefore, EC would receive $3.9 million less than the carrying
value of the properties. The $1.4 million proceeds would be credited to EC's
property account under full-cost accounting rules and no gain or loss would be
recognized for accounting purposes. For tax purposes, since it has no tax basis
in the properties EC would realize a gain equal to the proceeds and would pay
current income taxes of $.5 million. The Board of Directors of Newco will
consider such decision in the ordinary course of its deliberations. No EC
Company intends to conduct any domestic gas and oil exploration and production
activities following the Reorganization.
Newco will conduct substantially the same business as was conducted by EP
prior to the reorganization. For information regarding reserves, if any, for
obligations not paid prior to liquidation of EP see "THE REORGANIZATION--THE
PLAN OF LIQUIDATION." There are not expected to be any material differences
between the business plans, cash distribution policies or management
compensation policies of Newco and EP. Pursuant to a change in EC's
- 2 -
<PAGE>
corporate practice that was effective before the Reorganization was initiated,
certain costs incurred by EC are being allocated to Newco in the amount of
approximately $1 million annually. Prior to 1994, management fees were not
allocated to EP by EC because they were not material. See "DIVIDEND POLICY OF
NEWCO", "MANAGEMENT" and "CERTAIN TRANSACTIONS."
Certain conflicts of interest could arise as a result of the relationships
between the EC Companies and Newco. For example, the EC Companies will purchase
and market natural gas produced from Newco's properties. These transactions
create the potential for conflicts over pricing, terms of delivery and other
matters. A number of transactions and relationships between Newco and the EC
Companies are contemplated and specifically authorized by Article Eleven of
Newco's Restated Articles of Incorporation. For example, Article Eleven
authorizes Newco to enter into contracts with any EC Company (including entities
in which EC has a direct or indirect interest) as long as the transaction is
authorized or ratified by a majority of the Board of Directors of Newco. Except
as set forth in Article Eleven, Newco does not have any policy or procedure in
effect for approving transactions between Newco and EC Companies. See
"RELATIONSHIP BETWEEN NEWCO AND THE EC COMPANIES--CONFLICTS OF INTEREST."
Special Considerations
Public Unitholders should carefully consider the following factors in
addition to the other information included in this Prospectus/Information
Statement. These factors are summarized below and described in more detail under
"SPECIAL CONSIDERATIONS."
The Reorganization
Conflicts of Interest of EEI. There is a potential conflict of interest
between EEI and the Public Unitholders with respect to the determination of the
exchange ratio in the Reorganization. A benefit to each of EEI and EC which is
not shared by all Public Unitholders is the elimination of their liability as
general partners for the obligations and liabilities of Newco that occur after
the Reorganization. Additionally, Public Unitholders were not represented in
establishing the terms of the Reorganization. Such representation might have
caused the terms of the Reorganization to be different in some respects from
those described herein, including the number of shares of Common Stock, or the
percentage of Common Stock, to be allocated to the Public Unitholders in
connection with the Reorganization.
Shareholder Rights Differ from Limited Partner Rights. As a result of the
Reorganization, Public Unitholders will lose certain rights associated with
their ownership of Units, including without limitation the right to receive
distributions, if any, free from any income tax at the partnership level, and
will acquire certain rights associated with their ownership of Common Stock,
including without limitation the right to vote in the election of directors.
- 3 -
<PAGE>
No Previous Market for Common Stock. At present there is no trading market
for the Common Stock. There can be no assurance that holders of the Common Stock
will be able to sell their shares at favorable prices or that the trading price
for a share of Common Stock will be comparable to the trading price for an EP
Depositary Unit immediately before the Reorganization is consummated.
Double Taxation. Unlike EP, Newco's taxable income will be subject to
taxation at the corporate level, and its earnings and profits distributed to
shareholders will also be subject to taxation at the shareholder level.
Newco
There are several factors to be considered because Newco will be operating
in corporate form. In addition, Newco will conduct the same business as was
conducted by EP. Accordingly, the same risks inherent in the gas and oil
exploration and production business present in EP will be present in Newco.
Control of Newco by EC. Immediately following the consummation of the
Reorganization, the EC Companies will own over 99% of the outstanding Common
Stock. So long as EC directly or indirectly continues to own more than 50% of
the Common Stock, EC will be able to elect all of the members of the Board of
Directors of Newco, and thus be able to control Newco. In addition, certain
conflicts of interest could arise as a result of the relationship between the EC
Companies and Newco.
Lack of Termination Date. Newco will have an indefinite life, whereas EP
has a definite termination date of December 31, 2035. Investors in Newco may
have to sell their shares of Common Stock in order to liquidate their
investment.
Future Dilution of Common Stock. Newco will be permitted to issue
additional equity or debt securities, including shares of preferred stock.
Issuances of additional shares of Common Stock or shares of preferred stock
could adversely affect shareholders' equity interest in Newco and the market
price of the Common Stock, and the interests in the assets, liabilities, cash
flow and results of operations of Newco represented by the shares of Common
Stock issued pursuant to the Reorganization may be diluted. Newco intends to
increase the level of minority ownership in Newco. Such an increase would have
the effect of diluting the percentage of Newco owned by the Public Unitholders
and the EC Companies.
Elimination of General Partner Liability. If the Reorganization is
consummated, EEI will be a shareholder of Newco instead of a general partner,
and will not have liability for the debts and obligations of Newco that it
previously had because it was the Managing General Partner of EP.
No Dissenters', Appraisal or Similar Rights for Public Unitholders. Public
Unitholders who object to the Reorganization will have no appraisal, dissenters'
or similar rights. Therefore,
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Public Unitholders will not be entitled to receive cash payments from EP for the
value of their Units if they disagree with the Reorganization. Public
Unitholders who object to the Reorganization should, however, be able to sell
either their Units or shares of Common Stock, as the case may be, on the NYSE
either before or after the Reorganization. The lack of dissenters', appraisal or
similar rights in connection with the transaction will not prevent a Public
Unitholder from challenging the fairness of the Reorganization through
appropriate legal proceedings.
Reserve Development and Production Risks. Newco's gas and oil exploration,
development and production operations will involve numerous risks that could
result in the failure to find new reserves or fully produce existing and
discovered reserves.
Volatility of Gas and Oil Markets. The operating results of Newco will be
dependent to a substantial degree on prices for natural gas and oil, both of
which are affected by many factors beyond the control of producers and have
demonstrated a high degree of volatility.
Developments of Additional Reserves. Newco's future success will depend on
its ability to find or acquire additional reserves that are economically
recoverable. There can be no assurance that Newco's acquisition, development and
exploration activities will result in significant additional reserves or that
Newco will continue to be able to drill productive wells at acceptable costs.
Uncertainties in Estimating Reserves and Future Net Cash Flows. There are
numerous uncertainties inherent in estimating quantities and values of proved
gas and oil reserves and in projecting future rates of production and the timing
of development expenditures. The historical and pro forma reserve data included
in this Prospectus/Information Statement represent estimates only and should not
be construed as being exact. Any downward adjustment to Newco's reserve
estimates could adversely affect its future prospects and the market value of
its securities.
The Reorganization
Reorganization Steps. EP, EC and EEI will contribute their partnership
interests in EPO to Newco in exchange for shares of Common Stock. EPO will then
be merged into Newco. Soon thereafter, EP will be liquidated, with (i) Common
Stock being distributed to the Public Unitholders and the EC Companies that are
partners of EP pro rata in relation to their interests in EP, (ii) EEI receiving
EP's interests in, and assuming EP's obligations under, the Equipment Leases and
the equipment will be subleased to Newco (see "CERTAIN TRANSACTIONS") and (iii)
the EC Companies assuming approximately $395 million in aggregate principal
amount of debt of EP ($86 million of which is debt owed by EP to EPO and thus
does not appear on EP's consolidated financial statements) owed to certain EC
Companies and to Newco, plus accrued interest. The Second Amended and Restated
Agreement of Limited Partnership of EP dated as of April 30, 1985, as amended by
Amendment No. 1 thereto dated as of September 1, 1992 and Amendment No. 2
thereto dated as of August 30, 1994 (the "EP Partnership Agreement"), will be
amended to the extent required to provide for these actions. See "THE
REORGANIZATION
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- -- BACKGROUND" for a discussion of the Reorganization, its background and
reasons for its structure.
As a result of the Reorganization, both EP and EPO will cease to exist. The
Public Unitholders will own approximately .8% of the outstanding Common Stock,
and the EC Companies will own approximately 99.2% of the outstanding Common
Stock. See "CAPITALIZATION."
No Public Unitholder Consent Required. The consent of holders of a majority
of the Units is necessary to approve the Reorganization. The EC Companies own
approximately 99.2% of the outstanding Units. Therefore, since the EC Companies
intend to consent to the Reorganization, approval of the Reorganization will be
effected without the consent of any of the Public Unitholders being required or
solicited.
Each Public Unitholder who notifies EEI of a proper purpose related to such
Public Unitholder's interest in EP is entitled to receive a list of the names
and amounts in interest of all limited partners of EP as of the date specified
in the request. The list will be furnished at the expense of the person
requesting it. The partners in EPO are EP, its limited partner, with a 99%
interest, EEI, its Managing General Partner, with a 0.99% interest, and EC, its
Special General Partner, with a 0.01% interest.
Calculation of Exchange Ratio. The Board of Directors of EEI proposed the
ratio of exchange to be used in the Reorganization because it does not result in
any change in the proportionate holdings of the Public Unitholders and the EC
Companies with respect to their ownership interests in the underlying business
as EP is converted into Newco. Such ratio and the number of shares of Common
Stock to be issued in the Reorganization were calculated as follows: (i)
1,045,812 shares were attributed to EEI and EC in recognition of their 1%
general partner interest in EPO, (ii) 1,035,354 shares were attributed to EEI in
recognition of its 1% general partner interest in EP and (iii) 102,500,076
shares were attributed to the limited partner interests in EP. The Public
Unitholders, in recognition of their 805,914 Units (.786% of the Units), were
allocated 805,914 shares (.771%) of the Common Stock to be issued in the
Reorganization. The .015% difference in the Public Unitholders' ownership of
Units and Common Stock is due to the shares of Common Stock attributable to the
general partner interests in EPO and EP.
In determining the exchange ratio, EEI considered other factors, including
the assumption by the EC Companies of approximately $395 million principal
amount of outstanding indebtedness of EP ($86 million of which is debt owed by
EP to EPO and thus does not appear on EP's consolidated financial statements)
owed to certain EC Companies and to Newco, plus accrued interest, the tax
consequences of the Reorganization to the EC Companies and the Public
Unitholders and the assignment and assumption of the Equipment Leases, but did
not alter the exchange ratio as a result of those factors. See "THE
REORGANIZATION--BACKGROUND."
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<PAGE>
Reasons to Convert EP into Corporate Form. The Reorganization will convert
EP into corporate form, replacing partnership interests presently held by Public
Unitholders and limited and general partner interests held by EC Companies with
stock of Newco, a corporation. EEI, as Managing General Partner of EP, believes
there are several advantages of converting into corporate form at this time:
Absence of Distributions. EP's recent results and current business plan
required it to conserve cash resources by discontinuing distributions to holders
of Units after January 1994. EP's capital expenditures have consistently
exceeded its cash flow, which has been depressed because gas and oil prices
continue to be below the levels that existed at the time EP was organized.
Historically, funds for cash distributions were provided from investment in
additional Units by EC or from borrowings. The dilution created by the
investment and the level of borrowings required to support the cash
distributions increased to a point that the Board of Directors of EEI, the
Managing General Partner, determined that cash distributions should be
eliminated in order to continue EP as a nonliquidating entity. See "THE
REORGANIZATION--BACKGROUND." The EP Partnership Agreement presently provides
that EEI, as Managing General Partner, will review EP's accounts quarterly to
determine whether distributions are appropriate. EEI, as Managing General
Partner, has full discretion whether or not to make current distributions and as
to the source of funds for such distributions. The ability to distribute cash
free of a second level of income tax, combined with the expectation that EP
could sustain a policy of making large cash distributions, were the principal
reasons EP adopted the partnership form in 1985. Thus, as a result of the
discontinuation of distributions, the principal advantage of operating in
partnership form is not being realized by EP or holders of Units, and is not
likely to be realized in the foreseeable future. See "DIVIDEND POLICY OF NEWCO."
EEI believes that there are no significant advantages of operating as a
partnership that warrant continuing EP's operations in that form.
Tax Consequences and Tax Reporting. If EP retained its partnership
structure, holders of Units would be required to pay income taxes on income of
EP despite the fact that no substantial cash distributions are expected to be
made by EP in the foreseeable future, and, under current law, holders of Units
may be unable to use operating losses of EP to offset either income from other
sources or investment income of EP, because of basis, at risk or passive loss
limitations, although such operating losses could be used to offset EP
partnership income. Because a corporation is a distinct taxable entity apart
from its shareholders, Newco's operating losses cannot be used to offset the
shareholders' income, including dividend income, if any, received from Newco. In
addition, EEI believes that the complexities of tax reporting associated with
partnership investments are regarded as unduly burdensome for most Public
Unitholders under current conditions. The ownership of stock rather than
partnership units will greatly simplify tax reporting with respect to an
investment in EP on each Public Unitholder's individual federal and state income
tax returns for future years. Newco, however, will be subject to income taxes on
its taxable income at the corporate level.
Expansion of Potential Investor Base and Greater Access to Equity Markets.
EEI anticipates that the Reorganization will expand EP's potential investor base
to include
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<PAGE>
institutional and other investors who do not typically invest in limited
partnership securities because of various tax and administrative reasons.
Furthermore, EP expects that Newco will have greater access to the public and
private equity capital markets than EP, potentially enabling it to raise capital
on more favorable terms than are now available to EP. This greater access may be
of particular benefit if Newco proposes to issue equity securities to seek
additional funds for capital expenditures or to expand its business. Although
the issuance of additional equity by Newco would have the effect of diluting the
equity interest of the former Public Unitholders in EP, it could also result in
the Common Stock receiving additional investor interest through increased review
by research analysts. Newco intends to increase the level of minority ownership
in Newco, with the view of enabling the public market to value directly and more
effectively its gas and oil assets. However, it currently has no definitive
plans to issue additional equity securities.
Acquisition Currency. EEI believes that current industry conditions may
provide opportunities for EP to grow through the acquisition of businesses and
assets which are complementary to its existing business at attractive prices. In
certain cases, EP may want to be able to issue equity interests as payment of
the purchase price for such acquisitions. EEI believes that an equity interest
in a corporation will be a more attractive acquisition currency than an interest
in a partnership. The issuance of additional equity by Newco would have the
effect of diluting the equity interest of the former Public Unitholders in EP.
Reduced Legal Costs and Uncertainty. While there is an extensive body of
legal guidance with respect to corporations and their governance, there is no
comparable body of legal guidance for publicly traded limited partnerships. The
Reorganization should reduce legal costs inherent in maintaining EP as a
publicly traded limited partnership and provide greater certainty to management
with respect to a number of legal issues that are generally more settled with
respect to corporations than publicly traded limited partnerships, although EC
would owe fiduciary duties to Newco and its minority shareholders .
Fairness Opinion. EEI, in its capacity as Managing General Partner of EP,
has retained Dean Witter Reynolds Inc. ("Dean Witter") to render an opinion to
its Board of Directors as to the fairness of the Reorganization, taken as a
whole, to the Public Unitholders from a financial point of view. Management of
EEI met with counsel and representatives of Dean Witter on several occasions
commencing on August 24, 1994 to review generally the issues involved in
determining the fairness of the Reorganization from a financial point of view.
Dean Witter has delivered its written opinion, dated November 15, 1994, to
the Board of Directors of EEI, to the effect that, as of the date of its
opinion, the Reorganization, taken as a whole, is fair to the Public Unitholders
from a financial point of view.
A copy of Dean Witter's opinion, which sets forth the assumptions made,
matters considered and procedures followed by Dean Witter in rendering its
opinion, is attached to this Prospectus/Information Statement as Exhibit A and
should be read in its entirety. See "THE REORGANIZATION -- FAIRNESS OPINION."
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<PAGE>
Delivery of EP Depositary Unit Certificates. Each Public Unitholder is
urged to fill out the Letter of Transmittal enclosed with the
Prospectus/Information Statement and to return it along with all certificates
representing EP Depositary Units possessed by the Public Unitholder to Harris
Trust Company of New York, c/o Harris Trust and Savings Bank, 11th Floor,
Shareholder Services, 311 West Monroe Street, Chicago, Illinois 60606-4607.
Comparison of EP Depositary Units and Common Stock
After consummation of the Reorganization, the business of Newco will be the
same business conducted by EP. However, the rights and limitations to which
holders of Common Stock will be subject will be similar in some respects and
will differ in other respects from those to which they are subject as holders of
Units. These rights and limitations include, but are not limited to, the
following:
Units Common Stock
----- ------------
. Units are freely . The Common Stock will
transferable (subject be freely transferable
to certain (subject to certain
restrictions on restrictions on
foreign ownership foreign ownership
required by applicable required by applicable
law) and trade on the law) and Common Stock
NYSE. will be approved for
listing on the NYSE.
The transferability
rights of the
shareholders will be
comparable to those of
Public Unitholders.
. EP files reports . Newco will file
required by the reports required under
Exchange Act and the Exchange Act and
provides Public provide its
Unitholders with shareholders with
reports required under reports required under
the rules of the the rules of the
Commission and the Commission and the
NYSE. NYSE. The reporting
requirements of Newco
are comparable to
those of EP.
. Public Unitholders . Holders of the Common
have limited voting Stock are entitled to
rights on issues such elect all of the
as certain amendments members of the Board
of the EP Partnership of Directors and vote
Agreement, dissolution upon all corporate
of EP or EPO, sale of matters. Shareholders
substantially all of of Newco will have the
their assets, removal right to vote on a
and replacement of the wider range of matters
general partners and than those on which
mergers or Public Unitholders may
consolidations. vote and, as a general
matter, will have a
greater opportunity to
participate in the
affairs of Newco.
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<PAGE>
Units Common Stock
----- ------------
. Meetings of Public . Newco is required by
Unitholders are not law to hold annual
held annually, and meetings, where its
Public Unitholders do shareholders will be
not vote for EP's entitled to elect the
management. members of its Board
of Directors and to
vote on any other
matters properly
before the meeting.
. EP, as a partnership, . Newco, as a
is not a taxable corporation, is a
entity, and Public taxable entity
Unitholders report and separate from its
pay taxes on their shareholders, and it
distributive share of will report and pay
EP's taxable income, taxes on its income,
gains, losses, gains, losses,
deductions and credits deductions and
(whether or not any credits. Shareholders
cash is distributed to pay tax only on
them). taxable dividends
actually distributed
to them. Amounts
available for
dividends may be
reduced by taxes at
the corporate level.
. EEI, as Managing . Members of Newco's
General Partner, is Board of Directors are
not subject to required to be elected
re-election at any at each annual meeting
time. EEI can be of shareholders.
removed as Managing Directors may be
General Partner by the removed by the vote of
limited partners only the holders of a
by the affirmative majority of the
vote of holders of 66 outstanding Common
2/3% of the Units. Stock present and
entitled to vote at a
meeting at which
quorum is present.
Since the former
Public Unitholders
will own less than 1%
of the outstanding
Common Stock, they
will be unable to
elect or remove any
directors.
. The EP Partnership . Newco's Restated
Agreement provides for Articles of
EP to continue in Incorporation provide
existence until for perpetual
December 31, 2035, existence, subject to
unless earlier Texas law. Therefore,
terminated in investors in Newco
accordance with the EP would have to sell
Partnership Agreement. their shares of Common
Stock in order to
liquidate their
investment.
See "DESCRIPTION OF THE CAPITAL STOCK."
Summary of Material Federal Income Tax Consequences
Public Unitholders will not recognize any taxable gain or loss in
connection with the Reorganization, unless immediately prior to each
contribution by EP to Newco of limited partnership interests in EPO (i) EP's tax
basis in its limited partnership interest is less than EP's share of EPO's
liabilities transferred to Newco or Newsub (as defined herein) or (ii) a Public
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<PAGE>
Unitholder's tax basis in his Units is less than his share of EPO's liabilities.
In the opinion of Jackson & Walker, L.L.P., special tax counsel to EP, based on
representations of EEI, the Managing General Partner of EP and EPO, neither of
the exceptions set forth in (i) and (ii) above exists; hence Public Unitholders
will not recognize taxable gain or loss in connection with the Reorganization.
This section summarizes such counsel's opinion that is more fully discussed
under "FEDERAL INCOME TAX CONSIDERATIONS."
After the Reorganization, Newco will be subject to tax on any net taxable
income subsequently derived. Shareholders of Newco will realize taxable income
from the ownership of stock in Newco to the extent that Newco pays dividends to
shareholders that are made out of Newco's current or accumulated earnings and
profits. In addition, shareholders of Newco will realize taxable gain to the
extent Newco does not have current or accumulated earnings and profits and makes
distributions that are in excess of a shareholder's basis in his stock.
After EP's distribution of Common Stock to the Public Unitholders, each
Public Unitholder will have a tax basis in the Common Stock received in the
distribution equal to the Public Unitholder's tax basis in his Units immediately
before the liquidation, as adjusted (i) for 1994 operations, (ii) for any gain
recognized on the Reorganization, and (iii) by excluding any share of EP debts
that a Public Unitholder had previously included in his basis in his Units. This
basis will be prorated among all shares of Common Stock received by the Public
Unitholder. To the extent any Common Stock distributed to a Public Unitholder
ends up with a tax basis lower than its fair market value, gain will be
recognized upon the subsequent sale or other taxable disposition of that Common
Stock. Correspondingly, to the extent any Common Stock distributed to a Public
Unitholder ends up with a tax basis greater than its fair market value, loss
will be recognized upon the subsequent sale or other taxable disposition of that
Common Stock. Common Stock held by a Public Unitholder will have both a short
term and a long term holding period even though the Public Unitholder may have
owned his Units for more than one year. See "FEDERAL INCOME TAX CONSIDERATIONS--
HOLDING PERIOD."
The passive loss limitations generally provide that individuals, estates,
trusts, certain closely held corporations and personal service corporations can
only deduct losses from passive activities (activities in which the taxpayer
does not materially participate) that are not in excess of the taxpayer's income
from such passive activities or investments. A shareholder can utilize suspended
passive losses upon the sale of all of his Common Stock to an unrelated person
in a transaction in which all gain or loss is recognized. Recently issued
regulations also indicate that some portion of a shareholder's passive losses
can be utilized to offset gain on the sale of Common Stock if the shareholder
sells substantially all of his stock to an unrelated party. Jackson & Walker,
L.L.P., special counsel to EP, is of the opinion that such losses cannot be used
to offset dividend income from Newco. The treatment of suspended passive losses
now appears to be consistent with the treatment of suspended passive losses and
sales of Units before the Reorganization.
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<PAGE>
For an expanded discussion of tax considerations, Public Unitholders should
carefully review the information contained in "FEDERAL INCOME TAX
CONSIDERATIONS" and "THE REORGANIZATION -- BACKGROUND." PUBLIC UNITHOLDERS ARE
URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX
CONSEQUENCES TO THEM, INCLUDING THE APPLICATION AND EFFECT OF FOREIGN, STATE OR
LOCAL INCOME TAX AND OTHER LAWS.
SPECIAL CONSIDERATIONS
Each Public Unitholder should carefully examine this Prospectus/Information
Statement and the Exhibits hereto. Public Unitholders should give particular
consideration to the facts set forth below.
The Reorganization
Potential Conflicts of Interest. EEI is proposing the Reorganization
because it believes that it is in the best interests of both the Public
Unitholders and the EC Companies. EEI may, however, be viewed as having a
potential conflict of interest with the Public Unitholders with respect to the
determination of the terms of the Reorganization. The EC Companies, as holders
of over 99% of the outstanding Units, together with EEI, acting as Managing
General Partner, have the ability acting unilaterally to determine the terms of
the Reorganization. In addition, the EC Companies expect to receive benefits
from the Reorganization that will not be available to all holders of Units
generally involving (i) the elimination of their general partner liability for
obligations and liabilities of EP and EPO under partnership law and (ii) the
reduction of the EC Companies' deferred income tax liabilities by approximately
$55 million. See "THE REORGANIZATION -- BACKGROUND." If certain of these
potential conflicts of interest did not exist, it is possible that the terms of
the Reorganization might be different than the terms approved by the Board of
Directors of EEI. For additional information concerning the potential conflicts
of interest between EEI and the Public Unitholders in the Reorganization, see
"RELATIONSHIP BETWEEN NEWCO AND THE EC COMPANIES."
No Independent Representation. The terms of the Reorganization were
evaluated and determined by EEI without independent representation of the Public
Unitholders. Such separate representation might have caused the terms of the
Reorganization to be different in some respect from those described herein,
including the number of shares of Common Stock, or the percentage of Common
Stock, to be allocated to the Public Unitholders in connection with the
Reorganization.
Shareholder Rights Differ from Limited Partner Rights. As a result of the
Reorganization, Public Unitholders will lose certain rights associated with
their ownership of Units, including without limitation the right to receive
distributions, if any, free from income tax at the partnership level, and will
acquire certain rights associated with their ownership of Common Stock,
including without limitation the right to vote in the election of directors. A
further
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<PAGE>
comparison of these factors, which may relate to investment objectives of Public
Unitholders, is set forth in "DESCRIPTION OF THE CAPITAL STOCK--COMPARISON OF
UNITS AND COMMON STOCK."
No Previous Market for Common Stock. At present there is no trading market
for the Common Stock. However, the NYSE has indicated to Newco that the Common
Stock to be distributed to the Public Unitholders pursuant to the Reorganization
will be approved for listing on the NYSE, subject to official notice of
issuance. There can be no assurance that holders of Common Stock will be able to
sell their shares at favorable prices or that the trading price for a share of
Common Stock will be comparable to the trading price for an EP Depositary Unit
immediately before the Reorganization is consummated.
Double Taxation. The principal tax disadvantage of converting EP into
corporate form is that a corporation pays taxes on its taxable income, and its
shareholders generally pay taxes on any dividends from the corporation out of
current or accumulated earnings and profits. In contrast, a partnership pays no
tax and its partners pay tax on their distributive share of the partnership's
taxable income, gain, loss, deductions and credits. Because there is no current
plan to make distributions to Newco's shareholders, this distinction is not
expected to have any immediate or near term economic effect, but could have
economic effects on Newco and its shareholders (i) at such time as Newco makes a
distribution to shareholders out of Newco's current or accumulated earnings and
profits, or (ii) if Newco disposes of its assets in a taxable transaction,
whether by sale or otherwise, at a time when the value of its assets exceeds its
basis in such assets and thereafter distributes the proceeds to its
shareholders. As a result of a conversion of EP into corporate form, holders of
Units will forego the potential future tax benefits associated with operating in
partnership form, including the receipt of cash distributions free of corporate
income tax. Furthermore, holders of Units will not be able to use their
suspended passive losses to offset dividend income received from Newco, whereas
such losses could be used to offset their distributive share of operating income
from EP.
Newco
There are several factors to be considered because Newco will be operating
in corporate form. In addition, Newco will conduct the same business as was
conducted by EP. Accordingly, the same risks inherent in the gas and oil
exploration and production business present in EP will be present in Newco.
Control of Newco by EC. Immediately following the consummation of the
Reorganization, the EC Companies will own over 99% of the outstanding Common
Stock. So long as EC directly or indirectly continues to own more than 50% of
the Common Stock, EC will be able to elect all of the members of the Board of
Directors of Newco, and thus be able to control Newco. Certain of Newco's
directors and officers are also directors and/or officers of EC or its other
subsidiaries. Newco and the EC Companies expect to engage in future
transactions, the terms of which will be determined through negotiations between
Newco and the EC Companies. The officers and employees of EEI will become the
officers and employees
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<PAGE>
of Newco and will be compensated by Newco (except for certain officers that
are compensated by EC). Previously the costs of these officers and
employees were charged to EP by EEI and thus there will be no change in the
cost of these officers and employees charged to Newco as a result of the
Reorganization. The management cost allocation payable by Newco to EC of
approximately $1 million annually, which became effective July 1, 1994, is
not related to the Reorganization and will not be altered as a result of
EEI officers and employees becoming officers and employees of Newco because
such cost allocation relates to costs incurred solely by EC with respect to
EC personnel, not EEI personnel. Certain officers of EC will also serve as
officers of Newco but they will receive no direct compensation from Newco.
See "CERTAIN TRANSACTIONS."
EC intends to conduct all of its domestic gas and oil exploration and
production business through Newco, and, therefore, EC intends to make any
acquisition of domestic gas and oil properties through Newco. There may be
circumstances, however, in which it is either necessary or appropriate for EC to
make an acquisition or undertake domestic operations without Newco's
participation.
Certain conflicts of interest could arise as a result of the relationships
between the EC Companies and Newco. For example, the EC Companies will purchase
and market natural gas produced from Newco's properties. These transactions
create the potential for conflicts over pricing, terms of delivery and other
matters. A number of transactions and relationships between Newco and the EC
Companies are contemplated and specifically authorized by Article Eleven of
Newco's Restated Articles of Incorporation. For example, Article Eleven
authorizes Newco to enter into contracts with any EC Company (including entities
in which EC has a direct or indirect interest) as long as the transaction is
authorized or ratified by a majority of the Board of Directors of Newco. In
determining whether this majority vote has been achieved, the vote of a director
of EC who is also a director of Newco may be counted toward the authorization or
ratification. In addition, under Article Eleven an EC Company may engage in
direct competition with Newco without first being obligated to offer the
transaction or other opportunity to Newco. Except as set forth in Article
Eleven, Newco does not have any policy or procedure in effect for approving
transactions between Newco and EC Companies. See "RELATIONSHIP BETWEEN NEWCO AND
THE EC COMPANIES--CONFLICTS OF INTEREST."
Lack of Termination Date. Newco will have an indefinite life, whereas EP
has a definite termination date of December 31, 2035. Consequently, were EP to
remain in partnership form, it would be required to dissolve by December 31,
2035 (unless extended by an amendment to the EP Partnership Agreement), whereas
if EP converts into corporate form, Newco could continue in existence
indefinitely. Therefore, investors in Newco may have to sell their shares of
Common Stock in order to liquidate their investment.
Future Dilution of Common Stock. Newco will be permitted to issue
additional equity or debt securities, including shares of preferred stock. Under
the current rules of the NYSE, Newco may not issue shares of Common Stock equal
to 20% or more of the then outstanding
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<PAGE>
shares in connection with any single future transaction without shareholder
approval. Issuances of additional shares of Common Stock or shares of preferred
stock could adversely affect shareholders' equity interest in Newco and the
market price of the Common Stock, and the interests in the assets, liabilities,
cash flow and results of operations of Newco represented by the shares of Common
Stock issued pursuant to the Reorganization may be diluted. Issuances of
additional shares may be more likely after the Reorganization because EEI, as
the Managing General Partner of EP, believes that one of the advantages of the
Reorganization is that the corporate form will expand the potential investor
base, provide greater access to equity markets and permit the use of capital
stock as acquisition currency. Newco intends to increase the level of minority
ownership in Newco. Such an increase would have the effect of diluting the
percentage of Newco owned by both the Public Unitholders and the EC Companies.
Elimination of General Partner Liability. EEI, as the Managing General
Partner of each of EP and EPO, and EC, as a general partner of EPO, will each
receive a benefit from the Reorganization that is not shared by all holders of
Units generally in the elimination of their liability for obligations and
liabilities of EP and EPO that may occur after the Reorganization. Under Texas
law, as a general partner of a partnership, each of EEI and EC is liable to the
extent of its assets for the debts and obligations of EP (in the case of EEI)
and EPO. If the Reorganization is consummated, EEI and EC would be shareholders
of Newco and would not have liability for the debts and obligations of Newco.
No Dissenters', Appraisal or Similar Rights for Public Unitholders. Under
the EP Partnership Agreement, the action by the holders of a majority of the
outstanding Units as of the record date, December 5, 1994, to approve the
Reorganization will bind all holders of Units. Under Texas law and the terms of
the EP Partnership Agreement, holders of Units will have no dissenters',
appraisal or similar rights in connection with the Reorganization, nor will such
rights be voluntarily accorded to holders of Units by EP or Newco. Therefore,
holders of Units will have no opportunity to dissent and demand to receive cash
payment from EP for the fair value of their Units after the Reorganization is
approved and consummated. The Units held by the Public Unitholders are listed on
the NYSE. The Common Stock to be distributed to the Public Unitholders pursuant
to the Reorganization will be listed on the NYSE. Thus, any Public Unitholders
who object to the Reorganization should be able to sell their Units or shares of
Common Stock, as the case may be, on the NYSE either before or after the
Reorganization. The lack of dissenters', appraisal or similar rights in
connection with the transaction will not prevent a Public Unitholder from
challenging the fairness of the Reorganization through appropriate legal
proceedings.
Differing Fiduciary Duties. The fiduciary duties owed by the directors of
Newco after the Reorganization may be less than the fiduciary duties owed by the
general partners of EP prior to the Reorganization. EEI's fiduciary duties to
the Public Unitholders include duties of loyalty and care. The general duties
owed by directors of Newco to its shareholders are similar to those applicable
to EEI in respect of EP's limited partners. At least one Texas court has stated
that the fiduciary duties of a general partner to limited partners are
comparable to those of a director to shareholders. Other courts, however, have
indicated that the fiduciary duties
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<PAGE>
of a general partner are greater than those of a director to shareholders.
Therefore, although it is unclear whether or to what extent there are any
differences in such fiduciary duties, it is possible that the fiduciary duties
of directors of Newco to its shareholders could be less than those of EEI to the
Public Unitholders. The remedy of shareholders for a breach of fiduciary duty of
directors is to request that the corporation bring suit against the directors
or, if the corporation fails to act, to initiate a shareholder derivative
lawsuit against the directors in the name of the corporation.
Reserve Development and Production Risks. Newco's gas and oil exploration,
development and production operations will involve numerous risks that could
result in the failure to find new reserves or fully produce discovered and
existing reserves. Gas and oil exploration, development and production
operations involve numerous risks, including depositional or trapping
uncertainties, encountering unusual or unexpected formations and pressures or
other conditions that may result in dry holes, failure to produce gas or oil in
commercial quantities or inability to fully produce discovered reserves. Gas and
oil drilling may involve unprofitable efforts, not only from dry wells, but from
wells that are productive but do not produce sufficient net revenues to return a
profit after drilling, operating and other costs. Completion of a well does not
assure a profit on the investment or recovery of drilling, completion and
operating costs. In addition, drilling hazards or environmental damage could
greatly increase the cost of operations, and various field operating conditions
may adversely affect Newco's production from successful wells. While close well
supervision and effective maintenance operations can contribute to maximizing
production rates over time, production delays and declines from normal field
operating conditions cannot be eliminated and can be expected to adversely
affect revenue and cash flow levels to varying degrees. Furthermore, various
wells can be expected to require recompletions or workovers at some point in
their productive lives. While the gradual depletion of producing reserves and
the need for recompletion of wells that have multiple reservoirs with limited
volume or workover of wells that develop mechanical problems is neither unusual
nor unexpected in the gas and oil industry, the timing and extent of production
declines and recompletion requirements for wells in which Newco will own
interests after the Reorganization cannot be predicted with any certainty.
Volatility of Gas and Oil Markets. The revenues generated by Newco's
operations are highly dependent upon the prices of, and demand for, gas and oil.
For the last several years, prices of these products have reflected a worldwide
surplus of supply over demand for oil. The price received by Newco for its
natural gas and crude oil will depend upon numerous factors beyond Newco's
control, including economic conditions in the United States and elsewhere and
the world political situation as it affects OPEC, the Middle East (including the
current embargo of Iraqi crude oil from worldwide markets) and other producing
countries, the actions of OPEC and governmental regulation. The fluctuation in
world oil prices continues to reflect market uncertainty regarding OPEC's
ability to control member country production and underlying concern about the
balance of world demand for and supply of gas and oil.
Since 1985, when EP received an average sales price of $2.94 per Mcf for
natural gas, a nationwide deliverability surplus of natural gas has prompted a
decrease in sales under higher
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<PAGE>
priced, long term contracts with traditional pipeline customers. Lower priced
gas sold in the spot market has been made readily available to end-users because
of gas-to-gas competition, lower oil prices and improved transportation
opportunities. Gas sales prices were higher in 1993 and through September 30,
1994; however, recent prices are lower due to unseasonably warm weather and
above average storage levels.
Decreases in the prices of gas and oil have had, and could have in the
future, an adverse effect on development and exploration programs, proved
reserves, revenues, profitability, cash flow and dividend levels.
Development of Additional Reserves. Newco's future success will depend not
only on developing existing gas and oil reserves but also on its ability to find
or acquire additional reserves that are economically recoverable. The rate of
production from gas and oil properties generally declines as reserves are
depleted. Without successful exploration and development activities or reserve
acquisitions, the proved reserves of Newco will decline as gas and oil is
produced from its proved developed reserves. There can be no assurance that
Newco's acquisition, development and exploration activities will result in
significant additional reserves or that Newco will continue to be able to drill
productive wells at acceptable costs. If prevailing gas and oil prices were to
increase significantly, Newco's costs to add reserves could also be expected to
increase.
Uncertainties in Estimating Reserves and Future Net Cash Flows. There are
numerous uncertainties inherent in estimating quantities and values of proved
gas and oil reserves and in projecting future rates of production and the timing
of development expenditures, including factors involving reservoir engineering,
pricing and both operating and regulatory constraints. The reserve data included
in this Prospectus/Information Statement represent estimates only and should not
be construed as being exact. Reserve assessment is a subjective process of
estimating the recovery from underground accumulations of natural gas and other
hydrocarbons that cannot be measured in an exact way. Accordingly, reserve
estimates are often different from the quantities of natural gas and other
hydrocarbons ultimately recovered. Any downward adjustment could adversely
affect Newco's future prospects and the market value of its securities.
Competition. The gas and oil industry is highly competitive. Newco will
compete with major and other independent gas and oil companies for the
acquisition of additional properties as well as the equipment and labor required
to develop and operate its properties. Many of these competitors have
substantially greater financial and other resources than Newco.
Governmental Regulation. The gas and oil business is subject to broad
federal and state regulations which, among other things, control the rate of gas
and oil production and establish the maximum price at which gas is sold. Newco
will also be required to comply with federal and state laws and regulations
relating to environmental matters. There can be no assurance that present and
future regulation of the gas and oil industry will not adversely affect the
operations of Newco.
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<PAGE>
Hedging. Newco may hedge some of its projected gas and oil production from
time to time through a variety of financial arrangements designed to protect
against price declines, including swaps, collar agreements and futures
agreements. To the extent Newco engages in such activities, it may be prevented
from benefiting from price increases above the levels of the hedges.
Transaction Costs. Transaction costs of approximately $1,000,000 will be
paid by EP, including the fee and expenses of Dean Witter, whether or not the
Reorganization is completed.
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<PAGE>
THE REORGANIZATION
Background
EP was formed in 1985 to succeed to substantially all of the domestic gas
and oil exploration and production business of EC. In April 1985, EC contributed
to EP substantially all of its domestic developed and undeveloped gas and oil
properties and EP assumed certain liabilities in connection with such
contribution, including approximately $230 million of long-term debt. In
exchange, EP issued Units to EC. At the same time, EP sold 11,250,000 Units to
the public at a price of $21.50 per Unit. After this offering EC held
approximately 85% of the Units and 15% of the Units were held by Public
Unitholders. Proceeds of the offering were used by EP to repay debt assumed from
EC.
In offering Units to the public in April 1985, EP stated its intent to
distribute $.60 per Unit on a quarterly basis through 1986 and indicated its
belief that the annual distribution rates per Unit for 1987 through 1989 would
be at least equal to the anticipated annual distribution rate for 1986, but that
there could be no assurance that future conditions would permit distributions at
such levels during such years or thereafter. EC stated that it intended, but
that it was not obligated, to invest, directly or indirectly, amounts in EP to
the extent necessary to provide funds through 1989 both to support cash
distributions to Public Unitholders and to support EP's exploration and
development expenditures at anticipated levels. EC anticipated that such funds
would be provided through loans and purchases of additional Units. EP also
stated that if its exploration and development capital expenditure budgets and
anticipated revenues over such periods remained at projected levels, it was
probable that without substantial investment by EC, EP would be unable to fund
both its anticipated cash distributions and all of its planned capital
expenditures, although EP believed that it could make up a significant portion
of any shortfall with sales of additional Units to others, borrowing or other
financings.
During the latter half of 1985 and continuing into 1986, gas and oil prices
declined severely. This was reflected in a similar decline in EP's revenues and
net cash flows from operations. As a result, capital expenditures and
distributions to holders of Units exceeded aggregate net cash flows from EP's
operations. The cash shortfall was funded principally by additional EC
investment through purchasing Units and making loans and advances.
In July 1986, due to the reduction in revenues and cash flow, EP announced
a reduction in quarterly distributions from $.60 per Unit to $.30 per Unit,
beginning in the first quarter of 1987. This reduction in distributions preceded
the changes in federal tax law that adversely affected the tax treatment of
publicly traded limited partnerships.
From April 30, 1985 through October 2, 1987, EC supported EP's cash
distributions and exploration and development expenditures through the purchase
of additional Units. In accordance with the terms of the EP Partnership
Agreement, the price of Units purchased by EC was the average of the last
reported sales prices per Unit, regular way, for the five trading days
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<PAGE>
immediately preceding the date of determination. The following table summarizes
the purchases of Units from EP by EC.
<TABLE>
<CAPTION>
Date Number of Units Per Unit Price
---- --------------- --------------
<S> <C> <C>
August 31, 1985 2,299,354 $ 20.10
November 13, 1985 2,380,346 20.00
December 30, 1985 2,819,000 17.40
January 2, 1986 554,229 /1/ 17.25
March 31, 1986 991,600 14.90
April 1, 1986 556,085 /1/ 14.40
June 30, 1986 4,105,000 12.675
July 1, 1986 557,962 /1/ 12.65
September 30, 1986 3,946,600 13.90
January 5, 1987 2,081,800 13.75
April 2, 1987 1,646,000 17.775
July 2, 1987 1,990,300 14.95
October 2, 1987 2,321,800 13.075
</TABLE>
- ------------
/1/ These Units were subsequently distributed to EC shareholders.
In October 1989, EC exchanged one-half share of EC common stock (market
value $10.00) plus $1.00 in cash for each of the 12,112,362 Units. An additional
$3.42 per Unit, plus interest, was paid in 1994 as the result of litigation
relating to the exchange.
In January 1988, EC announced that it would not continue to invest
distributions on the Units it owned by purchasing additional Units at then
prevailing market rates but instead would lend funds to EP in amounts necessary
to support distributions and capital expenditures and indicated that future
investment would be influenced by the market price of Units and other factors.
Although the precise effects could not be predicted, the change in debt
financing was not expected to have a material effect on the market price for
Units. In the short run, any effect was expected to be somewhat favorable since
on the basis of then prevailing interest rates and Unit prices the reduction in
earnings per Unit resulting from debt financing was expected to be somewhat less
than would result from the dilution caused by the issuance of additional Units
to EC.
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<PAGE>
In February 1988, EP made an in-place sale of approximately 133 billion
cubic feet ("Bcf") of natural gas reserves to Encogen One Partners, Ltd.
("Encogen"), a partnership formed to own and operate a cogeneration plant in
Sweetwater, Texas. An EC Company holds a 1% general partner interest in Encogen.
EP received $158 million ($156 million net of the general partners' interests),
which was used to repay EP's and EPO's then outstanding debts to EC of $115
million incurred to finance previous capital expenditures and to fund
distributions to Public Unitholders.
In February 1989, EP publicly announced that quarterly distributions on
Units would be reduced to $.075 per Unit and that EC would make an exchange
offer for Units at .5 share of EC common stock per Unit. EC also stated that if
more than half of the publicly held Units were tendered in response to its
exchange offer, the tendering would be treated as a vote favoring liquidation of
EP and that EC would liquidate EP if the Public Unitholders so voted. During the
succeeding months the exchange offer was modified to drop the proposed
liquidation of EP and add $1.00 in cash for each Unit exchanged.
In September 1989, an exchange offer commenced which offered .5 share of EC
common stock and $1.00 in cash for each Unit. Upon completion of this exchange
offer, 805,914 Units, or .8% of the outstanding Units, remained held by the
Public Unitholders.
On April 12, 1989 a class action complaint was filed in the Court of
Chancery of the State of Delaware, seeking damages in connection with the
exchange offer. Following a trial of the case, the court found that the exchange
offer prospectus did not disclose adequately the basis of the exchange ratio,
that the structure and timing of the transaction were unfair to holders of Units
and that the price paid was not a fair price. Damages of $3.42 per Unit were
awarded to the plaintiff class. The award ultimately included $41 million
additional consideration for the Units and $21 million in prejudgment and post-
judgment interest. The judgment was paid by EC in January 1994.
In February 1994, EP announced that it would discontinue distributions to
holders of Units. EP's capital expenditures had consistently exceeded EP's cash
flow, which had remained depressed because gas and oil prices continued to be
below their levels at the time EP was organized, and borrowings to support
distributions were causing EP's debt to grow inappropriately. Thus, a principal
advantage of operating in partnership form was no longer being realized by EP or
the Public Unitholders.
As noted above, EC initially stated that it intended, but that it was not
obligated, to invest, directly or indirectly, amounts in EP to support its cash
distributions and exploration and development expenditures at anticipated
levels. Through December 1987 the EC Companies had invested cash distributions
of approximately $387 million in return for additional Units; as a result the
number of Units outstanding had increased approximately 34% to the current level
of 102,500,076. In January 1988, in a move to halt the growth in the number of
Units outstanding, the EC Companies began to support EP's cash flow requirements
by lending funds to EP. Through September 1994 the EC Companies had loaned EP
approximately $309 million to
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<PAGE>
support its cash flow requirements. This debt amounts to approximately 33% of
EP's capitalization.
Under these circumstances EEI considered whether to continue the operations
of EP. EC and its predecessors have a long history of conducting gas and oil
exploration and production activities. EEI considered that it was in the best
interests of the EC Companies and the other partners of EP to continue in the
business of owning and operating the business and properties of EP, and to
remain as part of an integrated natural gas operation. EEI also considered the
fact that it did not have any duty or obligation to offer or sell to any third
party such business and properties. EEI determined that it wanted the ownership
of the properties of EP and EPO to remain in the EC Companies, which own over a
99% interest therein through EP and EPO. EEI considered the possibility of a
liquidation of EP such that the Public Unitholders would receive cash for their
Units and the EC Companies would receive all of the properties of EP and EPO in
liquidation of their partnership interests. EEI determined that it did not want
to force the Public Unitholders to take cash for their Units because it wanted
the Public Unitholders to have the option to continue as equityholders of the
business and it wanted to maintain a publicly traded entity, and determined that
there were enough advantages to be obtained from converting EP into a
corporation to justify doing so. See "Reasons to Convert EP Into Corporate
Form." Therefore, in August 1994 EEI announced that it intended to convert EP
into a publicly traded corporation. No third party offers were solicited, made
or considered.
In reviewing the various structures available under state law for effecting
the conversion of EP into a corporation, it was recognized that a merger of EP,
EPO and the new corporation would be the most efficient structure for
transferring ownership of EPO's assets. Merger structures other than the
structure used in the Reorganization, however, could have resulted in materially
adverse financial accounting and income tax consequences to the EC Companies,
the Public Unitholders and the new corporation. For example, the EC Companies
and the Public Unitholders could have been taxed immediately upon formation of
the new corporation on a significant amount of gain resulting from assumption of
debt of EP by the new corporation, EPPL or EPO. The income taxes that the EC
Companies and the Public Unitholders would have incurred could have been
substantial. In addition, because the EC Companies would not have assumed $395
million in principal amount of debt ($86 million of which is debt owed by EP to
EPO and thus does not appear on EP's consolidated financial statements) owed to
certain EC Companies and to Newco, plus accrued interest, under these other
merger structures, the new corporation would have had less equity capital and
substantially more debt outstanding than Newco will have after the
Reorganization, so that it would have had significantly less financial strength
and flexibility than Newco will have.
The final structure for the Reorganization avoids the adverse consequences
described above. Approximately $395 million principal amount of debt of EP,
including approximately $86 million owed to EPO that does not appear on EP's
consolidated financial statements, plus accrued interest, will be assumed by EC
Companies, resulting in a strong financial structure and improved financial
flexibility for Newco in funding its growth. The elimination of interest expense
on $309 million of debt and the receipt of interest income on $86 million will
enhance
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<PAGE>
Newco's operating results and cash flows by an estimated $27 million per year
before income taxes. The EC Companies expect the following substantial favorable
tax consequences to result from the structure chosen for the Reorganization: (i)
the avoidance of tax that could have resulted under the other merger structures
from the assumption of the EP debt by the new corporation, EPPL or EPO, and (ii)
the preservation of the EC Companies' tax basis in EP through the substitution
of such tax basis into the assets distributed to the EC Companies upon the
liquidation of EP, as required by the Internal Revenue Code of 1986. It is
estimated that the Reorganization will result, under SFAS No. 109, in the
reduction of the EC Companies' deferred income tax liability by approximately
$55 million, which reflects the fact that the EC Companies are expected to pay
less in federal income taxes in the future than they would have paid if the
Reorganization had not occurred. These consequences are not available to the
Public Unitholders.
In addition, the Public Unitholders will receive the benefit of a special
allocation in the EP Partnership Agreement that accommodates the assumption by
the EC Companies of all of EP's approximately $395 million principal amount of
outstanding indebtedness of EP ($86 million of which is debt owed by EP to EPO
and thus does not appear on EP's consolidated financial statements) owed to
certain EC Companies and to Newco, plus accrued interest, including that portion
of EP's indebtedness otherwise allocable to the Public Unitholders. This special
allocation allows the Public Unitholders to receive one share of Common Stock
for each Unit they own and will be tax free to them. See "FEDERAL INCOME TAX
CONSIDERATIONS."
The Board of Directors of EEI proposed the ratio of exchange to be used in
the Reorganization because it does not result in any change in the relative
holdings of the Public Unitholders and the EC Companies with respect to their
ownership interests in EP. The EC Companies do not receive any additional
relative holdings as a result of assuming the $395 million of EP debt, plus
accrued interest. In addition, the Board of Directors retained Dean Witter to
render an opinion as to the fairness, from a financial point of view, of the
Reorganization, taken as a whole, to the Public Unitholders. Through these
actions EEI sought to minimize the extent to which the consideration of the
Reorganization was subject to the conflict of interest between the EC Companies
and the Public Unitholders. Nevertheless, the interests of the Public
Unitholders were not separately represented in establishing the terms of the
Reorganization. Such representation might have caused the terms of the
Reorganization to be different in some respects from those described herein.
EEI, as the Managing General Partner of EP, believes the Reorganization,
taken as a whole, is fair to and in the best interests of EP and all of its
general and limited partners, including without limitation the Public
Unitholders. This belief is principally based upon the opinion of Dean Witter,
the fact that the relative ownership interests of the EC Companies and the
Public Unitholders with respect to EP are not changed, and the fact that the EC
Companies are assuming approximately $395 million principal amount of debt ($86
million of which is debt owed by EP to EPO and thus does not appear on EP's
consolidated financial statements) owed to certain EC Companies and to Newco,
plus accrued interest, and receiving the Equipment
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<PAGE>
Leases. EEI also considered the fact that it will no longer have any
liability for the obligations and liabilities of EP after the
Reorganization and will no longer have a fiduciary duty to EP and its
partners. EEI also considered the advantages of operating in corporate
form mentioned above and the tax consequences to the EC Companies and to
the Public Unitholders. No particular weight was assigned to any one
factor in arriving at its decision.
Newco was organized on September 1, 1994 under the laws of the State
of Texas for the initial purpose of becoming the successor to EP in
corporate form in accordance with the Reorganization. Upon consummation of
the Reorganization, Newco will acquire all partnership interests in EPO and
will merge EPO into Newco. In this manner Newco will acquire EPO's assets
and liabilities. Newco intends to continue EP's business of gas and oil
exploration, development and production. Newco has conducted no business
to date and currently has no significant assets and no employees or
operating history. Newco will not acquire any material assets until
consummation of the Reorganization and has no material arrangements with EP
other than pursuant to the Reorganization.
Calculation of Exchange Ratio.
The Board of Directors of EEI proposed the ratio of exchange to be
used in the Reorganization because it does not result in any change in the
proportionate holdings of the Public Unitholders and the EC Companies with
respect to their ownership interests in EP. Such ratio and the number of
shares of Common Stock to be issued in the Reorganization were calculated
as follows: (i) 1,045,812 shares were attributed to EEI and EC in
recognition of their 1% general partner interest in EPO, (ii) 1,035,354
shares were attributed to EEI in recognition of its 1% general partner
interest in EP and (iii) 102,500,076 shares were attributed to the limited
partner interests in EP. The Public Unitholders, in recognition of their
805,914 Units (.786% of the Units), were allocated 805,914 shares (.771%)
of the Common Stock to be issued in the Reorganization. The .015%
difference in the Public Unitholders' ownership of Units and Common Stock
is due to the shares of Common Stock attributable to the general partner
interests in EPO and EP.
In calculating the exchange ratio, only the above analysis was
considered. However, in determining whether the exchange ratio, as so
calculated, was fair, the following factors were also considered: (i) the
elimination of all general partner liability of EC Companies with respect
to EP and EPO and the elimination of EEI's general partner fiduciary
duties; (ii) the assumption by the EC Companies, and the related discharge
of EP's liability for, the $309 million indebtedness, plus accrued
interest; (iii) the tax consequences of the Reorganization to the EC
Companies and to the Public Unitholders; (iv) the EC Companies assuming
approximately $86 million of intercompany debt, plus accrued interest, owed
by EP to EPO; and (v) the assignment to and assumption by EEI of the
Equipment Leases and the corresponding subleasing of the related equipment
to Newco. EEI believes that the exchange ratio is fair to all of the
partners of EP principally because it does not change the proportionate
holdings of the Public Unitholders and the EC Companies with respect to
their ownership interests in EP. EEI did not alter the exchange ratio
after considering the listed factors because, after considering these
factors as a
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<PAGE>
whole, EEI continued to conclude that the exchange ratio was fair to and in
the best interests of EP and all of its general and limited partners
because the cumulative effect of such factors and their impact on the
Reorganization was not detrimental to any of the parties such that an
adjustment to the exchange ratio was necessary.
Reorganization Steps
The Reorganization of EP involves the following steps:
1. Capitalization of Newco. EP, EC and EEI will contribute their
-----------------------
partnership interests in EPO to Newco in exchange for shares of Common
Stock. EPO will then be merged into Newco. As a result, Newco will have
all of the assets of EPO (including gas and oil properties, associated
operating assets and working capital) and all of EPO's liabilities and
obligations (other than the Equipment Leases and the assumed liabilities as
described herein). As a result of these transactions, the shareholders'
equity of Newco will be enhanced by $395 million (before recording deferred
federal income taxes) plus accrued interest when contrasted with the equity
of EP, because Newco will not assume indebtedness in the principal amount
of $309 million now owed by EP to EC Companies, and, in addition, Newco
will hold an $86 million note receivable from EP that will be assumed by EC
Companies. At the end of this step, EP will hold approximately 99% of the
Common Stock and the EC Companies will hold approximately 1% of the Common
Stock.
2. Liquidation of EP. After the merger of EPO into Newco, EP will
-----------------
be liquidated, with (i) Common Stock being distributed to each of the
Public Unitholders, EPPL and EEI, (ii) EC Companies assuming approximately
$395 million in aggregate principal amount of debt of EP owed to certain EC
Companies and to Newco ($86 million of which is debt owed by EP to EPO and
thus does not appear on EP's consolidated financial statements) owed to
certain EC Companies and to Newco, together with accrued interest thereon
and (iii) EEI receiving EP's interests in, and assuming EP's obligations
under, the Equipment Leases. See "CERTAIN TRANSACTIONS." The portion of
the assumed $395 million principal amount of EP debt, excluding accrued
interest, that corresponds with the Public Unitholders' pro rata interest
in EP, as an economic matter, is approximately $3.1 million.
As a result of the Reorganization, both EP and EPO will cease to
exist. The Public Unitholders will own approximately .8% of the
outstanding Common Stock, and the EC Companies will own approximately 99.2%
of the outstanding Common Stock. See "CAPITALIZATION."
Neither EP nor Newco has any definitive plans with respect to the sale
of any material assets, the purchase of any material assets or the making
of any borrowings, other than in the ordinary course of its business.
The initial Board of Directors of Newco will be as set forth in
"MANAGEMENT." The officers and employees of EEI will become the officers
and employees of Newco and will be
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<PAGE>
compensated by Newco (except for certain officers that are compensated by
EC). Previously the costs of these officers and employees were charged to
EP by EEI and thus there will be no change in the cost of these officers
and employees charged to Newco as a result of the Reorganization. The
management cost allocation payable by Newco to EC, which became effective
July 1, 1994, is not related to the Reorganization and will not be altered
as a result of EEI officers and employees becoming officers and employees
of Newco because such cost allocation relates to costs incurred solely by
EC with respect to EC personnel, not EEI personnel. Certain officers of EC
will also serve as officers of Newco but they will receive no direct
compensation from Newco. See "CERTAIN TRANSACTIONS." Before the
consummation of the Reorganization, EEI will change its name to avoid
confusion with Newco.
The Plan of Liquidation
Contribution of EPO Interests to Newco. The contribution of EPO
interests to Newco will be effected pursuant to an amendment to the EPO
Partnership Agreement substantially in the form attached as Exhibit B (the
"EPO Partnership Agreement Amendment"). The EPO Partnership Agreement
Amendment has been authorized by the Board of Directors of EEI as Managing
General Partner of EP and EPO. The EPO Partnership Agreement Amendment
will be deemed to have been adopted and will be effective on the date it is
approved by certain EC Companies holding approximately 99% of the
outstanding Units. Such actions will constitute the approval by EP that is
required by the EP Partnership Agreement and the EPO Partnership Agreement.
The Public Unitholders will not be asked to vote on the EPO Partnership
Agreement Amendment.
The structure described below saves the complexities and costs
associated with EPO transferring to Newco 13,308 gas and oil leases in 467
counties and parishes in 17 states, plus numerous federal onshore and
offshore leases, plus associated rights-of-way, easements, contracts and
other interests.
EP, EC and EEI will contribute their partnership interests in EPO to
Newco in exchange for shares of Common Stock in stages pursuant to a
Contribution of Interests Agreement attached as Appendix EPO-1 to Exhibit
B, and EPO will merge into Newco. The first stage will involve the
transfer by EP through Newco of a 1% limited partnership interest in EPO to
the capital of Enserch Newsub, Inc. ("Newsub"), a newly formed Texas
corporation wholly owned by Newco. Then EP will contribute the remaining
98% limited partner interest in EPO to Newco for more Common Stock, and EC
and EEI will contribute their general partner interests in EPO to Newco in
exchange for Common Stock. These transfers will be accomplished serially
and will result in EPO continuing as a limited partnership owned by Newco
and Newsub. EPO and Newsub then will merge into Newco. EPO and Newsub
will no longer exist and EPO's properties will have passed by merger into
Newco.
EP's Plan of Liquidation. EP's proposed Plan of Liquidation (the "EP
Plan of Liquidation") and the related proposed amendments to the EP
Partnership Agreement are attached as Exhibit C. EEI, the Managing General
Partner of EP, has elected to dissolve EP
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and has determined that the complete liquidation of EP following
dissolution is in the best interests of EP and its partners. EEI
recommends that EP be liquidated following its dissolution in accordance
with the provisions of the EP Plan of Liquidation some time after the
merger of EPO into Newco. The EP Plan of Liquidation will be deemed to
have been adopted, and will be effective, on the date it is approved by EEI
and EP, as the general partners of EP, and by certain EC Companies holding
approximately 99% of the outstanding Units.
After the effective date of the EP Plan of Liquidation, EP will engage
only in those activities that are necessary or proper to wind up its
business and affairs and to distribute its assets in accordance with the EP
Plan of Liquidation. Subject to the order of priorities set forth in the
EP Partnership Agreement, upon the payment or assumption of obligations and
the establishment of reserves as provided below, EEI, as the Managing
General Partner, will distribute all of the Common Stock then held by or
for the account of EP to the holders of record of Units and general partner
interests in EP at the close of business on the liquidation record date
selected by EEI. The liquidating distribution of Common Stock and related
transactions will be made as and when specified by EEI in the following
manner:
(a) Shares of Common Stock will be distributed in kind to all
partners of EP as follows:
(i) to the Public Unitholders, one share of Common
Stock for each Unit held (an aggregate of 805,914 shares) pro
rata in relation to their capital account balances on the
liquidation record date (the distribution is designed to result
in the Public Unitholders receiving shares of Common Stock at an
exchange rate of one share for each Unit held, and will be made
to the Public Unitholders at or prior to the time any
distribution of Common Stock is made to any EC Companies on
account of the liquidation of EP), and
(ii) to EEI, EC and EPPL, an aggregate of 103,775,328
shares, which will give them the same aggregate pro rata
ownership in Newco as their general and limited partnership
interests in EP and EPO represent (as a general partner of EPO,
EC receives its shares when it contributes its EPO interest to
Newco).
(b) EEI and EPPL will assume an aggregate of approximately $395
million principal amount of indebtedness of EP ($86 million of which
is debt owed by EP to EPO and thus does not appear on EP's
consolidated financial statements) owed to certain EC Companies and to
Newco, plus accrued interest thereon.
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<PAGE>
(c) EEI will receive EP's interests in and will assume EP's
obligations under, the Equipment Leases. EEI will sublease the
equipment covered by the Equipment Leases to Newco. See "CERTAIN
TRANSACTIONS."
Prior to commencing the liquidating distributions, EP will pay or
discharge all known and admitted debts, liabilities and expenses of EP to
the fullest extent practicable and to the extent not assumed as described
above, and will establish reserves for any other obligations, including
unascertained or contingent liabilities and expenses. EEI, as the Managing
General Partner, does not currently believe that any such reserves will be
necessary. Any assets remaining in EP after satisfaction of all
obligations of EP, including payment of expenses of the Reorganization
(which remaining assets, if any, are expected to consist of a de minimis
amount of cash and cash equivalents), will be contributed to the capital of
Newco for no additional consideration.
The liquidation of EP may be terminated by EEI at any time EEI deems
the termination to be in the best interests of EP or its partners, without
the consent or approval of any other partners, even though the
Reorganization already may have been implemented in part. If the
Reorganization were terminated, EP would still be responsible for the
expenses incurred in connection with the Reorganization, currently
estimated to be $1,000,000. EP expects that the Reorganization will be
consummated within one day after it commences on December 30, 1994.
Comparison of EP Depositary Units and Common Stock
The following provides a comparison of the rights associated with EP
Depositary Units and the Common Stock:
Units Common Stock
----- ------------
Taxation
Under current law, EP is not a Newco is a taxable entity with
taxpaying entity. Rather, respect to its income and gains
each holder of Units includes after allowable deductions and
his share of the income and credits. Shareholders will have
gain and, subject to certain taxable income from Newco only
limitations, the losses, to the extent taxable dividends
deductions and credits of EP and other distributions are
in computing taxable income declared and paid on the Common
without regard to the cash Stock. Shareholders will not be
distributed to the holder. able to take advantage of the
Generally, cash distributions tax benefits associated with the
to holders of Units are not partnership form.
taxable, unless distributions
exceed the holder's basis in
his Units.
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<PAGE>
Units Common Stock
----- ------------
A tax-exempt holder's share of No portion of the earnings of,
EP's taxable income constitutes or any dividends received from,
unrelated business taxable Newco will constitute unrelated
income to the tax-exempt holder. business taxable income to tax-
exempt shareholders, except to
the extent their investment in
stock of Newco is considered
debt-financed. Shareholders will
have taxable income from Newco's
operations only to the extent
that taxable dividends and other
distributions are declared and
paid on the Common Stock.
Distributions and Dividends
In general, EEI, as Managing The Board of Directors of Newco
General Partner, may make such has the discretion to determine
distributions as it in its whether or not and when to
discretion may determine from declare and pay dividends and
time to time. EEI, as the the amount of any dividend.
Managing General Partner, Holders of Common Stock will
believes that the need to fund have no contractual right to
exploration and development receive dividends.
activities would leave EP
without sufficient cash for
distributions for the
foreseeable future if EP were to
continue in existence.
If EP were to continue in Newco does not expect to pay
existence, it would not expect substantial dividends on the
to pay substantial distributions Common Stock until Newco's
on Units until EP's earnings and earnings and the current
the current industry outlook industry outlook improve.
improve. Dividends may be paid if, as and
when declared by the Board of
Directors in its discretion,
subject to legal and contractual
limitations. Accordingly, in the
short term the Reorganization
will not affect the ability of
Newco to make distributions.
Management
The business and affairs of EP The business and affairs of
are managed by the Managing Newco are managed by and under
General Partner of EP, currently the direction of the Board of
EEI. Directors of Newco.
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<PAGE>
Units Common Stock
----- ------------
The Managing General Partner may Shareholders of Newco will have
be removed only by vote of rights to elect and remove
66 2/3% of the outstanding Units directors that are greater than
held by limited partners. those currently held by holders
of Units with respect to the
Managing General Partner.
Voting Rights
Under applicable law and the EP Generally, holders of Common
Partnership Agreement, limited Stock will have the right to
partners have voting rights with vote on matters specified by
respect to (i) the removal and Texas law affecting the
replacement of the Managing corporate structure of Newco,
General Partner (but not the including the right to elect all
election thereof), (ii) the of the members of the Board of
merger of EP, (iii) the sale of Directors. Shareholders of Newco
all or substantially all of the will have the right to vote on a
assets owned, directly or wider range of matters than
indirectly, by EP, (iv) the those on which holders of Units
dissolution of EP or EPO, (v) may vote and, as a general
material amendments to the EP matter, will have a greater
Partnership Agreement, and (vi) opportunity to participate in
taking material actions with the affairs of Newco.
respect to EPO.
Each Unit entitles each holder Each share of Common Stock
thereof who is admitted as a entitles its holder to cast one
limited partner of EP to cast vote on each matter presented to
one vote on all matters shareholders.
presented to holders of Units.
Approval of any matters Approval of any matter submitted
submitted to EP's limited to shareholders generally
partners generally requires the requires the affirmative vote of
affirmative vote of limited holders of more than 50% of the
partners holding more than 50% Common Stock outstanding and
of the Units then outstanding. entitled to vote. Certain other
Certain other matters require matters (e.g., amendments to the
the approval of at least 66 2/3% Articles of Incorporation and
and, in certain instances, 95% certain mergers) require the
of the outstanding units held by approval of at least 66 2/3% of
limited partners (e.g., removal the Common Stock outstanding and
of the Managing General Partner, entitled to vote.
amendment of the EP Partnership
Agreement resulting in the loss
of limited liability of any
limited partner or EP being
treated as an association
taxable as a corporation or the
reduction of limited partner
voting rights).
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<PAGE>
Units Common Stock
----- ------------
Any action that may be taken at Any action that may be taken at
a meeting of limited partners a meeting of shareholders may be
may be taken by written consent taken by a written consent in
in lieu of a meeting executed by lieu of a meeting if such
limited partners sufficient to consent is executed by
authorize such action at a shareholders holding a number of
meeting of limited partners. shares sufficient to authorize
such action at a meeting of
shareholders.
Special Meetings
Special meetings of limited Holders of at least 25% of all
partners may be called by EEI or shares entitled to vote at a
by limited partners holding at proposed special meeting may
least 20% of the outstanding call a special meeting of
Units. shareholders.
Conversion Rights
The Units are not convertible The Common Stock is not
into any other securities. convertible into any other
securities.
Redemption
Units are not subject to The Common Stock is not subject
mandatory redemption. EP may, to mandatory redemption.
however, redeem certain units However, the Bylaws of Newco
owned by (i) non-citizens of the that may be necessary or
United States or (ii) holders appropriate to avoid violation
who have not provided EP with of the restrictions on the
citizenship information, to the ownership of Common Stock by
extent necessary to avoid non-United States citizens
violation of the restrictions on imposed by applicable law.
the ownership of Units by non-
United States citizens imposed
by applicable law.
Liquidation Rights
In the event of the liquidation In the event of a liquidation of
of EP, the assets of EP Newco, the holders of Common
remaining after the payment of Stock would be entitled to share
all debts and liabilities of EP, ratably in any assets remaining
the payment of expenses of the after satisfaction of
liquidation of EP and the obligations to creditors and any
establishment of a reasonable liquidation preferences on any
reserve in connection therewith, series of preferred stock of
are distributed to holders of Newco that may then be
Units and the general partners outstanding.
pro rata in proportion to the
positive balances, if any, in
their capital accounts.
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<PAGE>
Units Common Stock
----- ------------
Right to Compel Dissolution
Holders of Units have no right Under Texas law, shareholders
to compel dissolution of EP. EP may compel dissolution of Newco,
may be dissolved at the election absent prior action by the Board
of EEI, as Managing General of Directors, only if all
Partner, which election is shareholders consent in writing.
approved by limited partners A plan of dissolution adopted by
holding more than 50% of the the Board of Directors must be
outstanding Units. approved by 66 2/3% of the
Common Stock outstanding and
entitled to vote.
Limited Liability
In general, holders of Units are Shares of Common Stock will be
limited partners in a Texas fully paid and nonassessable.
limited partnership, and do not Shareholders generally will not
have personal liability for have personal liability for
obligations of EP. obligations of Newco.
Liquidity and Marketability
Subject to the restrictions Subject to the transfer
relating to foreign ownership restrictions relating to foreign
described below, the EP ownership described below, the
Depositary Units are freely Common Stock will be freely
transferable and are listed and transferable and the Common
traded on the NYSE. After the Stock has been approved for
Reorganization, the Units will listing on the NYSE.
cease to be traded.
Restrictions on Transfer; Foreign Ownership
In order to comply with the The Bylaws of Newco restrict
restrictions imposed by transfers of Newco shares to
applicable law, the EP persons who are not Eligible
Partnership Agreement limits Citizens, suspend voting,
ownership of units by persons dividend and distribution rights
who are qualified under of persons who are not Eligible
applicable law to hold interests Citizens and provide for the
on gas and oil leases on federal redemption of shares held by
lands. Purchasers of Units are such persons in certain
required to provide information circumstances. See "DESCRIPTION
at the time of purchase as to OF CAPITAL STOCK --STOCK
status as an "Eligible Citizen." OWNERSHIP RESTRICTIONS."
EP may redeem Units held by
persons who are not Eligible
Citizens or who have failed to
provide such information to EP.
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<PAGE>
Units Common Stock
----- ------------
Continuity of Existence
The EP Partnership Agreement Newco's Restated Articles of
provides for EP to continue in Incorporation provide for
existence until December 31, perpetual existence, subject to
2035, unless earlier terminated Texas law. Therefore, investors
in accordance with the EP in Newco would have to sell
Partnership Agreement or their shares of Common Stock in
extended by amendment. order to liquidate their
investment.
Financial Reporting
EP is subject to the reporting Newco will be subject to the
requirements of the Exchange Act reporting requirements of the
and files annual and quarterly Exchange Act and will file
reports thereunder. EP also annual and quarterly reports
provides annual and quarterly thereunder. Newco also will
reports to Public Unitholders. provide annual and quarterly
reports to its shareholders.
Certain Legal Rights
Texas law allows a holder of Texas law affords shareholders
Units to institute legal action of a corporation similar rights
on behalf of the partnership (a to bring shareholder derivative
partnership derivative action) actions when the board of
to recover damages from a third directors has failed to
party or a general partner where institute an action against
the general partner has failed third parties or directors of
to institute the action. In the corporation, and class
addition, a limited partner may actions to recover damages from
institute legal action on behalf directors for violations of
of himself or all other their fiduciary duties.
similarly situated holders of Shareholders may also have
Units (a class action) to rights to bring actions in
recover damages from a general federal courts to enforce
partner for violations of his federal rights. These rights are
fiduciary duties to the comparable to the rights of the
unitholders. Holders of Units holders of Units.
may also have rights to bring
actions in federal courts to
enforce federal rights.
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<PAGE>
Units Common Stock
----- ------------
Right to List of Holders; Inspection of Books and Records
Upon reasonable demand, at his Under Texas law, upon written
own expense and for a purpose request, at reasonable times and
reasonably related to his for a proper purpose, any
interest in EP, a holder of shareholder of record who has
Units may have access, at been a shareholder for at least
reasonable times, to certain six months or is the holder of
information regarding the status at least 5% of all of the
of the business and financial outstanding shares has the right
condition of EP, including tax to examine and copy Newco's
returns, financial statements, relevant books and records of
governing instruments of EP and account, minutes and share
a current list of the partners transfer records, including a
of EP, provided that EEI may list of current stockholders. In
keep confidential any trade certain circumstances, such as
secrets or any other information shareholders who own less than
the disclosure of which could 5% of Newco or have owned their
damage or violate any agreement shares for less than six months,
or applicable law. under Texas corporation law
shareholders may not have the
same right to information
regarding Newco that they
currently have under the EP
Partnership Agreement with
respect to information regarding
EP.
Reasons to Convert EP into Corporate Form
The Reorganization will convert EP into corporate form, replacing
all outstanding partnership interests with stock of a corporation. EEI, as
Managing General Partner of EP, believes there are several advantages of
converting into corporate form at this time:
Absence of Distributions. EP's recent results and current
business plan required it to conserve cash resources by discontinuing
distributions to holders of Units after January 1994. EP's capital
expenditures have consistently exceeded its cash flow, which has been
depressed because gas and oil prices continue to be below the levels that
existed at the time EP was organized. Historically, funds for cash
distributions were provided from investment in additional Units by EC or
from borrowings. The dilution created by the investment and the level of
borrowings required to support the cash distributions increased to a point
that the Board of Directors of EEI, the Managing General Partner,
determined that cash distributions should be eliminated in order to
continue EP as a nonliquidating entity. See "THE REORGANIZATION--
BACKGROUND." The EP Partnership Agreement presently provides that EEI, as
Managing General Partner, will review EP's accounts quarterly to determine
whether distributions are appropriate. EEI, as Managing General Partner,
has full discretion whether or not to make current distributions and as to
the source of funds for such distributions. The ability to distribute cash
free of a second level of income tax, combined with the expectation that EP
could sustain a policy of making large cash distributions, were the
principal reasons EP adopted the
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<PAGE>
partnership form in 1985. Thus, as a result of the discontinuation of
distributions, the principal advantage of operating in partnership form is
not being realized by EP or holders of Units, and is not likely to be
realized in the foreseeable future. See "DIVIDEND POLICY OF NEWCO." EEI
believes that there are no significant advantages of operating as a
partnership that warrant continuing EP's operations in that form.
Tax Consequences and Tax Reporting. If EP retained its
partnership structure, holders of Units would be required to pay income
taxes on income of EP despite the fact that no substantial cash
distributions are expected to be made by EP in the foreseeable future, and,
under current law, holders of Units may be unable to use operating losses
of EP to offset either income from other sources or investment income of
EP, because of basis, at risk or passive loss limitations, although such
operating losses could be used to offset EP partnership income. Because a
corporation is a distinct taxable entity apart from its shareholders,
Newco's operating losses may be used to offset Newco's operating income.
In addition, EEI believes that the complexities of tax reporting associated
with partnership investments are regarded as unduly burdensome for most
Public Unitholders under current conditions. The ownership of stock rather
than partnership units will greatly simplify tax reporting with respect to
an investment in EP on each Public Unitholder's individual federal and
state income tax returns for future years. Newco, however, will be subject
to income taxes on its taxable income at the corporate level.
Expansion of Potential Investor Base and Greater Access to Equity
Markets. EEI anticipates that the Reorganization will expand EP's
potential investor base to include institutional and other investors who do
not typically invest in limited partnership securities because of various
tax and administrative reasons. Furthermore, EP expects that Newco will
have greater access to the public and private equity capital markets than
EP, potentially enabling it to raise capital on more favorable terms than
are now available to EP. This greater access may be of particular benefit
if Newco proposes to issue equity securities to seek additional funds for
capital expenditures or to expand its business. Although the issuance of
additional equity by Newco would have the effect of diluting the equity
interest of the former Public Unitholders, it could also result in the
Common Stock receiving additional investor interest through increased
review by research analysts. Newco intends to increase the level of
minority ownership in Newco, with the view of enabling the public market to
value directly and more effectively its gas and oil assets. However, it
currently has no definitive plans to issue additional equity securities.
Acquisition Currency. EEI believes that current industry
conditions may provide opportunities for EP to grow through the acquisition
of businesses and assets which are complementary to its existing business
at attractive prices. In certain cases, EP may want to be able to issue
equity interests as payment of the purchase price of such acquisitions.
EEI believes that an equity interest in a corporation will be a more
attractive acquisition currency than an interest in a partnership. The
issuance of additional equity by Newco would have the effect of diluting
the existing equity interest of the former Public Unitholders.
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Reduced Legal Costs and Uncertainty. While there is an extensive
body of legal guidance with respect to corporations and their governance,
there is no comparable body of legal guidance for publicly traded limited
partnerships. The Reorganization should reduce legal costs inherent in
maintaining EP as a publicly traded limited partnership and provide greater
certainty to management with respect to a number of legal issues that are
generally more settled with respect to corporations than publicly traded
limited partnerships, although EC would owe fiduciary duties to Newco and
its minority shareholders.
Fairness Opinion
EEI, in its capacity as Managing General Partner of EP, retained
Dean Witter in August 1994 to render an opinion to its Board of Directors
as to the fairness of the Reorganization, taken as a whole, to the Public
Unitholders from a financial point of view. Management of EEI met with
counsel and representatives of Dean Witter on several occasions commencing
on August 24, 1994 to review generally the issues involved in determining
the fairness of the Reorganization from a financial point of view.
Dean Witter was not requested to and did not make any
recommendation to the EEI Board of Directors as to the structure or the
terms of the Reorganization. No limitations were imposed by the EEI Board
of Directors upon Dean Witter with respect to the investigations made or
procedures followed by it in rendering its opinion.
At a meeting of the EEI Board of Directors on November 15, 1994,
Dean Witter delivered its written opinion to the Board of Directors of EEI
to the effect that the terms of the Reorganization, taken as a whole, were
fair, from a financial point of view, to the Public Unitholders. A copy of
the opinion, which sets forth the assumptions made, matters considered and
procedures followed by Dean Witter in rendering its opinion, is attached
hereto as Exhibit A and incorporated herein by reference. The summary of
the opinion of Dean Witter set forth in this Prospectus/Information
Statement is qualified in its entirety by reference to the full text of its
opinion.
In connection with the preparation of its opinion, Dean Witter,
among other things: (i) reviewed a draft of the Registration Statement on
Form S-4 to be filed by Newco with the Commission related to the
Reorganization; (ii) reviewed EP's Annual Reports on Form 10-K since
inception through December 31, 1993 and Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1994, June 30, 1994 and September 30, 1994;
(iii) reviewed and discussed EP's Reserve Report (dated January 1, 1994)
with representatives of DeGolyer and MacNaughton, EP's independent
petroleum engineering firm that prepared such report (the "Reserve
Report"); (iv) reviewed historic financial and operating results of EP
(since its original public offering on April 23, 1985) and discussed with
senior management of EEI and EC their business plans for Newco, including
(a) their intention to increase the percentage ownership of Newco held by
the public, (b) their intention to reinvest Newco's cash flow in its
business and (c) their intention to maintain a significant ownership
interest in Newco; (v) reviewed and discussed with management financial and
operating projections, including certain reserve
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<PAGE>
economic forecasts, provided by EEI regarding the business plans and
prospects for Newco, including its capital expenditure program and dividend
policy; (vi) reviewed certain financial ratios, derived from financial and
operating data provided by EEI management, of EP and Newco on a pro forma
basis giving effect to the Reorganization; (vii) reviewed the historical
market prices, distributions and trading volumes of the Units; (viii)
reviewed and contrasted the distribution rights of the Public Unitholders
to those of certain other publicly traded partnerships offered subsequent
to EP's original offering; (ix) analyzed the current marketplace
receptivity for natural resource publicly traded partnerships; (x) analyzed
the financial and operating results of certain oil and gas exploration and
production companies which Dean Witter deemed to be reasonably similar to
EP, and studied the marketplace for the securities, including common stock,
of such issuers; and (xi) reviewed such other financial studies, analyses
and investigations as Dean Witter deemed appropriate.
In rendering its opinion, Dean Witter relied on the accuracy and
completeness of all information supplied or otherwise made available to
Dean Witter by EC and EEI, and Dean Witter did not independently verify
such information or undertake an independent appraisal of the assets of EP.
Dean Witter also relied upon the management of EEI as to the reasonableness
of and the ability to achieve the financial forecasts (which include the
reserve economic forecasts) of Newco provided to Dean Witter, and assumed
that such forecasts have been reasonably prepared on a basis reflecting the
best currently available estimates and judgments of EEI's management as to
the future operating performance of Newco. Dean Witter assumed that the
Reserve Report has been reasonably prepared and reflects the best currently
available estimates and judgments of DeGolyer and MacNaughton as to the
reserves and future production volumes of EP. Dean Witter also relied on
the determination of EEI and its legal counsel as to the federal income tax
consequences of the Reorganization as to the Public Unitholders, which is
described in this Prospectus/Information Statement.
At the meeting of the EEI Board of Directors on November 15,
1994, Dean Witter presented certain quantitative and qualitative analyses
with respect to the Reorganization, which presentation was accompanied by
written materials. Such analyses are summarized below. The summary set
forth below does not purport to be a complete description of the subjects
discussed or the written materials presented by Dean Witter in its
presentation to the Board in connection with the Reorganization.
Review of Certain Assumptions of the Reorganization Proposal.
Dean Witter reviewed certain considerations and assumptions relating to the
Reorganization proposal, including the following: (i) the Reorganization
will result in EEI receiving EP's interests in, and assuming its
liabilities under, the Equipment Leases and the EC Companies assuming $395
million in aggregate principal amount of debt of EP owed to EC Companies
and to Newco, plus accrued interest; (ii) shares of Common Stock
distributed to the Public Unitholders will trade on the New York Stock
Exchange; (iii) Common Stock will be distributed to each of the Public
Unitholders and the EC Companies pro rata in relation to their interests in
EP prior to the Reorganization; (iv) management intends to increase the
percentage ownership of Newco held by the public; (v) it is the intention
of EEI and EC management to cause Newco to utilize substantially all of
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<PAGE>
its internally generated cash flow in connection with the growth of the
corporation, although the Board of Directors may consider declaration of a
nominal dividend primarily to increase Newco's attractiveness to certain
institutional investors; and (vi) EC intends to maintain a significant
ownership interest in Newco.
Comparison of EP and Freeport-McMoRan Energy Partners. The
written materials included a comparison of terms, market performance and
dividend history for EP and Freeport-McMoRan Energy Partners ("FMP"), which
were two exploration and production master limited partnerships or publicly
traded partnerships ("MLPs") offered within four days of each other in
April 1985. Freeport-McMoRan Inc., the corporate sponsor and general
partner of FMP, provided strong distribution support to FMP's public
unitholders, committing for a five year period to reinvest its
distributions for partnership units in order to support the public's
indicated distribution rate and stating its intention to cut its
exploration program first before curtailing the public unitholders'
distributions. EP did not provide Public Unitholders a distribution
support mechanism similar to, or as strong as, that provided by FMP. While
the financial, operating and asset characteristics differed between the two
MLPs, the structure of the FMP distribution support mechanism was primarily
responsible for FMP achieving a lower offering yield, or cost, at offering
compared to EP. This analysis was included to provide a better
understanding of the market for exploration and production MLPs in 1985
when EP was initially offered as well as the market receptivity at that
time to alternative partnership security structures.
Historical Review of EP and Pro Forma Analysis of EP and Newco.
Dean Witter's written materials also provided a historical financial review
of EP since its initial public offering through September 30, 1994 and
reserve information through January 1, 1994. Dean Witter also prepared a
comparable analysis with financial forecasts for EP and Newco from 1994
through 1997 based on information supplied by EC and EEI. A comparison of
the projected income statements for EP and Newco indicated that Newco would
generate higher earnings compared to EP in each period analyzed. In
addition, comparisons of net operating cash flow indicated that Newco
would, in the aggregate, generate a greater amount of operating cash flow
compared to EP over the periods reviewed. Newco would also have a more
conservative capital structure due to the reduction in aggregate debt and a
projected ratio of current assets to current liabilities in 1995 of 0.81x
compared to EP's projected ratio of current assets to current liabilities
of 0.11x in 1995. In this analysis, Dean Witter also made adjusted net
worth (adjusted book value) calculations on a per share basis in corporate
and MLP form. Adjusted net worth was calculated to value EP's proved
reserves as of January 1, 1994 based on reported private sales of oil and
gas assets using various pricing assumptions and to exclude deferred taxes.
Due to the planned reduction in aggregate debt and the improvement in the
ratio of current assets to current liabilities, the per share adjusted net
worth values were higher in corporate than MLP form.
Analysis of MLP Marketplace. Dean Witter presented analyses
pertaining to the MLP marketplace from its inception in 1982 through
November 9, 1994, including offering statistics for each of the 127 MLP
public offerings completed since 1982. Dean Witter reviewed and compared
financial characteristics of various MLPs at their initial public offerings
and contrasted the current distribution rights of the Public Unitholders
with those of certain other publicly
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traded partnerships offered subsequent to EP's initial public offering.
Dean Witter noted that the MLP market has evolved to a point where any
potential MLP security offering must provide terms, including distribution
rights, which are substantially more restrictive to the issuer and
therefore more generous to the investor than those terms provided to the
Public Unitholders. Dean Witter also discussed the appropriateness of such
more generous distribution rights in the context of a commodity based
business, like EP, which needs to reinvest most, if not all, of its cash
flow in its operations. Dean Witter concluded that it would be very
difficult, if not impossible, for EP to sell MLP units in any meaningful
amount to the public in their current structure and at their current price
in today's marketplace.
Analysis of Capital Markets for Gas and Oil Exploration and
Production Companies. Dean Witter analyzed and compared the capital
raising efforts of gas and oil exploration and production companies
structured in limited partnership form with those in corporate form. Dean
Witter noted that since 1990, exploration and production companies in
corporate form have completed 99 public equity offerings that raised over
$8.8 billion, compared with three offerings by exploration and production
companies in limited partnership form that raised $113 million. Further
analysis also indicated that a substantial majority of exploration and
production MLPs previously offered have either been converted into
corporate form or have been liquidated. Dean Witter concluded that an
exploration and production company in today's marketplace would have a much
higher chance of successfully completing a public equity offering in
corporate form than in MLP form.
Analysis of Selected Gas and Oil Exploration and Production
Companies. Using publicly available information, Dean Witter analyzed
certain financial information of selected publicly traded gas and oil
exploration and production companies (including both limited partnerships
and corporations) which it deemed to be reasonably similar to EP. These
companies included five corporations (Anadarko Petroleum Corporation,
Apache Corporation, Noble Affiliates, Inc., Parker Parsley Petroleum
Company and Seagull Energy Corporation) and four MLPs (Kelley Oil and Gas
Partners, Ltd., Sun Energy Partners, Hallwood Energy Partners and Samson
Energy Co.). Dean Witter also compared the financial attributes of EP and
Newco to an index composed of the exploration and production companies
followed by Dean Witter Equity Research, which included the following:
Anadarko Petroleum Corporation, Apache Corporation, Burlington Resources,
Inc., Cabot Oil and Gas Corporation, Enron Oil and Gas Company, The
Louisiana Land and Exploration Co., Maxus Energy Corporation, Noble
Affiliates, Inc., Oryx Energy Company, Parker and Parsley Petroleum
Company, Santa Fe Energy Resources, Inc. and Vintage Petroleum, Inc.
Financial data on EP was presented in these analyses based on its market
price one day prior to the Reorganization announcement and as of November
9, 1994. Analysis of certain ratios indicated that EP's assets may achieve
a higher valuation in corporate form. For example, EP's market value to
pre-tax SEC-10 value was 0.76x based on the pre-announcement unit price of
$8.125 compared with the average of 1.17x for the five comparable
corporations. Market value and aggregate value (market value plus long-
term debt) per barrel of oil equivalent of proved reserves was $6.25 and
$8.51, respectively, for the five comparable corporations versus $3.84 and
$5.24, respectively, for EP. While the analysis of certain other ratios
might indicate that EP's assets could achieve a higher valuation in limited
partnership
- 39 -
<PAGE>
form, Dean Witter concluded that a purely financial comparison between
exploration and production MLPs and exploration and production corporations
was not meaningful since there are only four publicly traded exploration
and production MLPs other than EP, each of which has a small public float
and small traded volume compared to the publicly traded exploration and
production corporations; and two of those MLPs recently announced their own
restructuring plans to convert to corporate form. Dean Witter believes
that a complete understanding of such comparable company analysis involves
qualitative as well as quantitative judgments concerning similarities and
differences between the financial operating characteristics of companies
under review.
Analysis of Certain Financial Ratios Derived from Financial and
Operating Data Provided by EEI Management. Dean Witter analyzed certain
financial ratios and prepared other financial analyses that were derived
from projections specifically prepared by EEI management in connection with
the Reorganization. Dean Witter noted that due to the reduction of $309
million of long term debt and the creation of lease obligations resulting
from the restructuring of the Equipment Leases as a result of the
Reorganization, Newco would have a long term debt to capitalization ratio
of 14%, compared to EP's long term debt to capitalization ratio of 33%
without the Reorganization. As a result of the lower interest expense due
to the reduction in long term obligations and the receipt of interest
income on the $86 million note receivable from an EC Company, Newco's
projected cash flow from operations and net income would be similar to or
greater than projected cash flow from operations and net income without the
Reorganization over the periods analyzed. Although various book value
computations were made under different asset pricing assumptions, the
majority of the analyses prepared by Dean Witter assumed EC would maintain
a significant ownership interest in Newco.
Review of Market Prices of EP, Comparable Companies and Various
Related Indices. Dean Witter compared the price performance of EP on an
absolute basis and relative to indices of comparable publicly traded
limited partnerships, including some that have either been liquidated or
converted into corporate form, Standard & Poor's Energy Composite Index and
an index of comparable publicly traded exploration and production companies
followed by Dean Witter Equity Research. The review focused on two periods
it considered relevant: (i) April 26, 1985 (the date of EP's initial
public offering) to November 9, 1994 and (ii) July 1, 1994 (four weeks
immediately preceding the public announcement of the Reorganization) to
November 9, 1994. This review indicated that on a relative basis EP's
price appreciation exceeded the price appreciation of comparable
exploration and production companies and the selected market indices for
the period from July 1, 1994 through November 9, 1994. Further, this
review indicated that as of November 9, 1994, the Unit price had increased
approximately 29% from the closing price of $8.125 on the day immediately
preceding EP's public announcement of the Reorganization.
Analysis of Equity Research Coverage. Dean Witter compared
equity research coverage for EP and the four remaining publicly traded
exploration and production MLPs and a selected group of other well-known
master limited partnerships with selected exploration and production
corporations. This analysis indicated that exploration and production
corporations receive more
- 40 -
<PAGE>
research coverage than entities structured as MLPs. The potential for
greater research coverage, which would increase investor awareness of
Newco's securities, would improve Newco's ability to offer its securities
in the public marketplace in corporate rather than limited partnership
form.
Dean Witter believes that its analyses must be considered as a
whole and that selecting portions of its analyses and of the factors
considered by it, without considering all factors and analyses, could
create a misleading view of the processes underlying its opinion. The
preparation of a fairness opinion is a complex process and not necessarily
susceptible to summary description. In its analyses, Dean Witter made
numerous assumptions with respect to industry performance, general business
and economic conditions and other matters. Any estimates contained therein
are not necessarily indicative of actual values, which may be significantly
more or less favorable than as set forth therein. Because such estimates
are inherently subject to uncertainty, none of EC, EEI, Dean Witter or any
other person assumes responsibility for their accuracy.
EEI selected Dean Witter to give the opinion referred to above
primarily because of Dean Witter's reputation as an investment banking firm
with substantial experience in evaluating gas and oil companies and
transactions. As a part of its business, Dean Witter is continually
engaged in the valuation of businesses and their securities in connection
with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements, and
valuations for estate, corporate, and other purposes. Dean Witter has not
provided any material investment banking services to any of the EC
Companies in the past two years.
Pursuant to a letter agreement dated August 29, 1994, Dean Witter
has been paid a fee of $100,000 for its services. The fee was not
contingent upon the consummation of the Reorganization or any other
occurrence. In addition, EEI and EC have agreed to reimburse Dean Witter
for its reasonable out-of-pocket expenses and to indemnify Dean Witter
against certain liabilities, including liabilities under the Securities Act
and the Exchange Act, arising out of or in conjunction with its rendering
of services pursuant to its engagement.
No Public Unitholder Consent Required
The consent of holders of a majority of the outstanding Units is
necessary to approve the Reorganization. The EEI Board of Directors has
fixed the close of business on December 5, 1994 as the record date for the
determination of holders entitled to notice of and to consent to the
Reorganization. As of that date, there were outstanding 102,500,076 Units.
Since the EC Companies held approximately 99.2% of such Units on that date
and intend to approve the Reorganization, approval of the Reorganization is
assured without the consent of any other holder of Units. ACCORDINGLY, EP
IS NOT SOLICITING YOUR CONSENT TO THE REORGANIZATION, AND YOU ARE REQUESTED
NOT TO SEND EP A CONSENT OR PROXY WITH RESPECT TO THE REORGANIZATION.
- 41 -
<PAGE>
Procedure for Delivery of EP Depositary Unit Certificates
Enclosed with this Prospectus/Information Statement is a Letter
of Transmittal, which should be filled out by each Public Unitholder and
returned to Harris Trust Company of New York, c/o Harris Trust and Savings
Bank, 11th Floor, Shareholder Services, 311 West Monroe Street, Chicago,
Illinois 60606-4607, along with all certificates representing EP Depositary
Units possessed by such Public Unitholder. Common Stock certificates will
be issued in accordance with the information supplied by the Public
Unitholder in the completed Letter of Transmittal. The Letter of
Transmittal contains detailed instructions regarding its completion on its
reverse side.
Until surrender of certificates representing their EP Depositary
Units for exchange, Public Unitholders will not be entitled to receive any
dividends that may be declared and payable to holders of record of Common
Stock. Any such dividends will be remitted to the Public Unitholders
entitled thereto, without interest, at the time that such certificates
representing EP Depositary Units are surrendered for exchange, subject to
applicable abandoned property, escheat or similar law. After consummation
of the Reorganization, however, certificates representing EP Depositary
Units will be deemed for all other corporate purposes to evidence ownership
of Common Stock distributable with respect thereto.
RELATIONSHIP BETWEEN NEWCO AND THE EC COMPANIES
Ownership of Shares
After consummation of the Reorganization, the EC Companies will
own over 99% of the outstanding Common Stock. Through this ownership, EC
will have the ability, directly or indirectly, to control Newco. EC, as
the majority shareholder of Newco, will have a fiduciary obligation under
Texas law to act in good faith and to exercise its control of Newco in a
manner that is fair and reasonable to the other shareholders.
Conflicts of Interest
Certain conflicts of interest could arise as a result of the
relationships between the EC Companies and Newco. See "BUSINESS." For
example, EC Companies will purchase and market natural gas produced from
Newco's properties. These transactions create the potential for conflicts
over pricing, terms of delivery and other matters. Other conflicts may
include the purchase of goods and services from EC Companies and involve
operational matters such as the availability of personnel and the
allocation of costs. See Note 4 of the Notes to Financial Statements for
the year ended December 31, 1993.
A number of transactions and relationships between Newco and the
EC Companies are contemplated and specifically authorized by Article Eleven
("Article Eleven") of Newco's Restated Articles of Incorporation attached
hereto as Exhibit D, including the following:
- 42 -
<PAGE>
. Any EC Company may lend funds to Newco at an interest rate that
is not greater than the lesser of the EC Company's actual
interest cost of the funds or the rate that Newco would be
charged by unrelated lenders on comparable loans. Newco may lend
funds to EC Companies so long as Newco does not charge interest
at a rate less than would be charged by unrelated lenders on
comparable loans.
. Officers, directors, employees, attorneys and agents of Newco may
also serve as officers, directors, employees, attorneys and
agents of EC Companies. In those situations, each party using
the services will be responsible for compensation in respect of
the services performed for it.
. An EC Company may provide Newco with certain services that
include, but are not limited to, the following: accounting and
treasury, internal audit, human resources (such as training,
employment and salary and benefit plan administration), tax
planning and compliance, legal, financial management, corporate
development and planning, investor relations, information
systems, materials management, risk and claims management, office
services and the management of these functions. Newco will
reimburse each EC Company for the direct and indirect costs
incurred in connection with the furnishing of the services to
Newco. Costs will be determined on a basis reasonably calculated
to reflect the actual costs of the services performed by such EC
Company and may include allocations based on such factors as net
capital employed, the number of employees or percentage of time
spent on projects and services.
. EC Companies may sell gas, oil, goods and services to, and may
purchase gas, oil, goods and services from, Newco in conformity
with the provisions of Article Eleven discussed below. EC
Companies are authorized to effect sales to and purchases from
Newco on terms that have not been determined to be fair as long
as the transaction is authorized or ratified by the Newco Board
of Directors.
Other transactions not specifically provided for above may occur.
Article Eleven provides that a contract or other transaction between Newco
and any EC Company will not be invalid because of the relationship between
Newco and the EC Companies or because of the presence of a director,
officer or securityholder of an EC Company at the meeting authorizing the
contract or transaction, or such person's participation or vote in the
meeting or authorization or in a unanimous or other written consent
thereto, if (1) the material facts of the relationship or interest of each
EC Company or such director, officer or security holder are known and
disclosed, either (a) to the Board of Directors of Newco, or a committee of
the Board of Directors, and it nevertheless authorizes or ratifies the
contract by a majority of the directors present or (b) to the shareholders
of Newco, and they nevertheless authorize or ratify the contract or
transaction by a majority of the shares present, or (2) the contract or
transaction is fair to Newco as of the time it is authorized or ratified by
the Board of Directors or shareholders of Newco.
- 43 -
<PAGE>
Article Eleven is intended to validate transactions between Newco and
EC Companies effected in conformity with Article Eleven. The effect of
Article Eleven on the Newco directors' fiduciary duties of loyalty and
care, however, is unclear under Texas law.
Any EC Company may have business interests and engage in business
activities in addition to those relating to Newco, may engage in the
acquisition, ownership, operation and management of working,
nonparticipating or other interests or royalties in gas and oil properties,
and any other business or activities, including business interests and
activities in direct competition with Newco, for their own account and for
the account of others, and may own interests in the same properties as
those in which Newco owns an interest, without having or incurring any
obligation to offer any interest in those properties, business or
activities to Newco. However, it is expected that EC will conduct all of
its domestic gas and oil exploration and production business through Newco,
and therefore, EC intends to make any acquisition of domestic gas and oil
properties through Newco. There may be circumstances, however, in which it
is either necessary or appropriate for EC to make an acquisition or
undertake domestic operations without Newco's participation. The Restated
Articles of Incorporation of Newco provide that EC and the other EC
Companies may at any time engage in gas and oil activities for their own
accounts. EP has not conducted international gas and oil operations and EC
will continue to conduct these operations through affiliates other than
Newco. After the Reorganization, Newco will be provided the opportunity to
purchase the remainder of EC's domestic gas and oil properties, which are
presently believed by EEI to have a fair market value of $1.4 million. The
book value of these properties is $5.3 million. Therefore, EC would
receive $3.9 million less than the carrying value of the properties. The
$1.4 million proceeds would be credited to EC's property account under
full-cost accounting rules and no gain or loss would be recognized for
accounting purposes. For tax purposes, since it has no tax basis in the
properties EC would realize a gain equal to the proceeds and would pay
current income taxes of $.5 million. The Board of Directors of Newco will
consider such decision in the ordinary course of its deliberations. No EC
Company intends to conduct any domestic gas and oil exploration and
production activities following the Reorganization.
See "CERTAIN TRANSACTIONS" for additional discussion of transactions
between Newco and the EC Companies.
DIVIDEND POLICY OF NEWCO
It is the intention of Newco to utilize substantially all of its
internally generated cash flow in connection with the growth of the
corporation. Internally generated cash flow may not be sufficient to
sustain this growth in the future, and borrowings may be utilized to fund
cash deficiencies. Nevertheless, the Board of Directors may consider
declaration of a nominal dividend primarily in order to increase Newco's
attractiveness to certain institutional investors.
- 44 -
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of EP and
reflects the pro forma adjustments described in the Notes to the Pro Forma
Financial Statements to arrive at the pro forma capitalization of Newco.
<TABLE>
<CAPTION>
September 30, 1994
---------------------------------------
Adjustments
EP Increase Newco
Historical (Decrease)(a) Pro Forma
----------- ------------- -----------
(In thousands)
<S> <C> <C> <C>
Temporary Advances - affiliated companies $ 54,742 $ 221(b) $ 54,963(c)
======== ========= ==========
Long-term Debt - affiliated companies $309,000 $(309,000) $
Capital Lease Obligations (includes 156,000 156,000
current portion)
Partners' Capital:
General Partners' 1% interest 14,612 (14,612)
Limited Partners' 99% interest 603,645 (603,645)
(102,500,076 Units outstanding)
Common Shareholders' Equity
(Authorized: 200,000,000 shares; to
be outstanding 104,581,242 shares) (d) 735,405 735,405
-------- --------- --------
Total Capitalization $927,257 $ (35,852) $891,405
======== ========= ========
</TABLE>
- 45 -
<PAGE>
(a) Reconciliation of Partners' Capital of EP to Common Shareholders' Equity of
Newco (in thousands):
<TABLE>
<CAPTION>
EP Partners' Capital:
<S> <C>
General Partners.......................... $ 14,612
Limited Partners.......................... 603,645
---------
Total................................. 618,257
1% General Partners' interest in EPO:
Temporary advances -
affiliated companies.................... 557
Other..................................... 9,729
---------
Total................................. 10,286
EP Balances not assumed by Newco:
Long-term debt - affiliated companies..... 309,000
Note receivable - affiliated companies.... 85,217
Net assets related to lease arrangements.. (7,762)
Other..................................... 5,693
---------
Total................................. 392,148
Deferred federal income taxes............... (285,286)
---------
Common Shareholders' Equity of Newco........ $ 735,405
=========
<CAPTION>
(b) Consists of:
<S> <C>
1% General Partners' interest
in temporary advances..................... $ 557
EP Note Receivable balance
not assumed by Newco...................... (336)
-----
$221
=====
</TABLE>
(c) At September 30, 1994, Newco also has a note receivable from an affiliated
company of $86,080.
(d) The aggregate number of shares of Common Stock to be issued in the
Reorganization was calculated as follows:
<TABLE>
<CAPTION>
<S> <C>
General Partners' Interest in EPO 1,045,812
General Partners' Interest in EP 1,035,354
Limited Partners' Interest in EP 102,500,076
-----------
Total shares of Common Stock
to be issued 104,581,242
===========
</TABLE>
Public Unitholders hold 805,914 Units (.786% of the Units outstanding)
and will hold 805,914 shares of Common Stock (.771% of the Common
Stock to be outstanding).
The EC Companies will receive 103,775,328 shares of Common Stock
pursuant to the Reorganization.
- 46 -
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The historical selected financial information of EP set forth below is
derived from the historical financial statements of EP. The pro forma
information includes adjustments as explained in the unaudited pro forma
financial statements of Newco and the notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
Nine Months Ended September 30 Year Ended December 31
------------------------------ ---------------------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Financial data in thousands except ratios and per Unit/Share amounts)
HISTORICAL INCOME STATEMENT DATA OF EP
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Natural gas............... $ 110,731 $ 104,191 $ 144,889 $ 117,418 $ 122,164 $ 141,287 $ 137,778
Oil and condensate........ 21,416 26,078 33,920 41,179 49,344 58,721 47,928
Natural gas liquids....... 1,137 3,430 3,790 6,037 1,503 1,695 1,590
Other..................... 256 1,403 2,393 1,274 1,479 332 3,778
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total.................. $ 133,540 $ 135,102 $ 184,992 $ 165,908 $ 174,490 $ 202,035 $ 191,074
========== ========== ========== ========== ========== ========== ==========
Operating Income (Loss).... $ 23,082 $ 21,545 $ 26,386 $ (70) $ (30,185) $ 36,457 $ 50,830
Net Income (Loss).......... 8,020 2,651 (3,881) (20,265) (49,644) 25,993 42,720
Net Income (Loss) per
Unit (a).................. .08 .03 (0.04) (.20) (.48) .25 .41
Distributions Declared per
Unit...................... .225 .30 .30 .30 .30 .30
Weighted Average Units
Outstanding............... 102,500 102,500 102,500 102,500 102,500 102,500 102,500
Ratio of earnings to fixed
charges (b)............... 1.15 1.05 0.86 0.18 (0.94) 2.08 3.09
<CAPTION>
HISTORICAL CASH FLOW DATA OF EP
<S> <C> <C> <C> <C> <C> <C> <C>
Net increase (decrease) in
cash and cash
equivalents............... $ 2,368 $ (555) $ (628) $ 848 $ (37) $ 30 $ (805)
Net cash provided by
operating
activities................ 87,352 73,556 76,364 88,501 75,702 81,294 108,031
Net cash used for investing
activities................ (96,469) (93,089) (124,140) (68,866) (105,175) (116,905) (96,774)
Net cash flows (required
for) from
operating and investing
activities............... (9,117) (19,533) (47,776) 19,635 (29,473) (35,611) 11,257
Distributions.............. (7,765) (23,295) (31,061) (31,061) (31,061) (31,061) (54,356)
<CAPTION>
HISTORICAL BALANCE SHEET DATA OF EP
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents.. $ 2,677 $ 382 $ 309 $ 937 $ 89 $ 126 $ 96
Property, Plant and
Equipment-Gross........... 1,913,996 1,787,009 1,809,528 1,742,490 1,811,204 1,776,642 1,675,327
Property, Plant and
Equipment-Net............. 1,091,767 1,018,543 1,030,311 993,038 1,030,653 1,043,673 995,326
Total Assets............... 1,144,376 1,062,059 1,086,303 1,039,185 1,077,619 1,109,203 1,041,266
Total Liabilities
(including long term debt) 526,119 437,523 476,066 394,006 381,114 331,993 258,988
Capitalization
Long-term debt -
affiliated companies..... $ 309,000 $ 290,000 $ 298,000 $ 266,000 $ 234,000 $ 202,000 $ -
General and limited
partners' equity
General partners........ 14,612 14,676 14,532 14,882 15,396 16,203 16,254
Limited partners........ 603,645 609,860 595,705 630,297 681,109 761,007 766,024
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total.................. $ 927,257 $ 914,536 $ 908,237 $ 911,179 $ 930,505 $ 979,210 $ 782,278
========== ========== ========== ========== ========== ========== ==========
Book Value per Unit (a).. $ 5.97 $ 6.03 $ 5.89 $ 6.23 $ 6.73 $7.51 $7.56
<CAPTION>
PRO FORMA INFORMATION OF NEWCO
<S> <C> <C> <C> <C> <C>
Net Income (Loss).......... $ 18,550 $ 15,450 $ 16,274 $ 1,061 $ (23,042)
Income (Loss) per Share.... .18 .15 .16 .01 (.22)
Book Value per Share....... 7.03
Shares Outstanding......... 104,581 104,581 104,581 104,581 104,581
</TABLE>
- 47 -
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30 Year Ended December 31
------------------------------ ---------------------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Financial data in thousands except ratios and per Unit/Share amounts)
HISTORICAL OPERATING DATA OF EP
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Volumes
Natural gas (MMcf)........ 51,141 50,983 69,318 64,509 69,326 75,983 75,464
Oil and condensate (MBbl). 1,413 1,477 1,972 2,147 2,424 2,635 2,767
Natural gas liquids (MBbl) 109 276 313 452 80 95 125
Average Sales Price
Natural gas (per Mcf)..... $ 2.17 $ 2.04 $ 2.09 $ 1.82 $ 1.76 $ 1.86 $ 1.83
Oil and condensate (per
Bbl)..................... 15.16 17.66 17.20 19.18 20.36 22.29 17.32
Natural gas liquids (per
Bbl)..................... 10.43 12.43 12.11 13.36 18.79 17.84 12.72
Net Wells
Drilled................... 48 62 79 19 66 53 18
Productive................ 30 52 64 8 52 42 14
Data in Equivalent Energy
Content (MMBtu) (c).......
Average sales price....... $ 2.15 $ 2.12 $ 2.14 $ 2.02 $ 2.00 $ 2.12 $ 1.97
Average production costs.. .51 .54 .54 .53 .56 .50 .48
Amortization.............. .93 .91 .91 .91 .83 .75 .67
</TABLE>
- -----------------------
(a) Net Income (Loss) and Book Value per Unit are after deduction of the general
partners' 1% interest.
(b) For the years ended December 31, 1993, 1992 and 1991, "fixed charges"
exceeded "earnings" by $5 million, $23 million and $53 million,
respectively. Results for 1991 included a $51 million noncash write-down of
gas and oil properties and 1992 included a $16 million noncash write-off of
an idle pipeline and shallow-water production facility from an abandoned
offshore project.
(c) For purposes of providing a common unit of measure, natural gas, oil and
natural gas liquids are converted to an approximate equivalent unit on the
basis of relative energy content: one Mcf of natural gas equals 1.05 MMBtu,
one barrel of oil equals 5.6 MMBtu and one barrel of natural gas liquids
equals 4.2 MMBtu.
- 48 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Operating income for EP closely follows fluctuations in product prices
and volumes that are shown in the table of Selected Financial and Operating
Data. As an independent gas and oil producer, EP's results of operations
are dependent upon the difference between the prices received for gas and
oil produced and the costs of finding and producing such resources. See
"SPECIAL CONSIDERATIONS--NEWCO--VOLATILITY OF GAS AND OIL MARKETS." Gas
reserves at December 31, 1993 constitute approximately 84% of EP's reserves
and gas production accounts for approximately 85% of its production for the
year 1993 on an energy equivalent basis. Accordingly, variations in gas
prices have a more significant impact on EP than variations in oil prices.
The average gas prices received by EP for its production ranged from a high
of $2.32 per Mcf in the quarter ended March 31, 1994 to a low of $1.52 per
Mcf in the quarter ended September 30, 1991.
Oil and condensate and natural gas liquids volumes have declined since
1989 as the result of the natural decline in production from older
producing fields. Projected oil production in 1995 and future years,
because of the Garden Banks 388 project, are expected to be significantly
above current levels. The decline in natural gas liquids production results
from EPO's election not to extract natural gas liquids when allowed by
contract due to low product prices and the decline in production from a
major South Texas field. Natural gas production in 1994 should approximate
1993 production, while 1995 production is expected to decline moderately.
For the nine months ended September 30, 1994, EP had net income of
$8.0 million, compared with $2.7 million for the 1993 period, reflecting a
decrease in operating expenses and a 20% reduction in interest costs. Nine-
month operating income of $23 million was 7% higher than the same period of
1993. Year-to-date revenues were slightly less than the year ago period.
Natural gas revenues were up 6% due to improvement in the average sales
price, as sales volumes were virtually the same as the year-earlier period.
Oil revenues decreased 18% due to declines in both prices and sales
volumes. Costs and expenses for the first nine months were $3.1 million
less than the 1993 period, with 1994 results reflecting a $2.0 million
credit associated with the reversal by an appellate court of an adverse
lower court judgment and settlements of other litigation. The decrease in
interest expense for the nine months was primarily due to the refinancing
of the affiliated debt at a lower interest rate.
EP had a net loss of $4 million for the full year 1993, compared with
a loss of $20 million in 1992 and a loss of $50 million in 1991. The 1992
loss included a $16 million write-off of an idle pipeline and shallow-water
production facility from an abandoned offshore project, and 1991 results
included a $51 million noncash charge for a write-down under the "ceiling
test" for the "full cost" method of accounting. Excluding the write-downs,
EP's 1993 net loss was about the same as in 1992 and compares with income
of $1.8 million in 1991.
- 49 -
<PAGE>
Excluding the write-downs, operating income for 1993 was $26 million
versus $16 million in 1992 and $21 million in 1991. The improvement
resulted from significantly increased natural gas prices and higher sales
volumes. Revenues for 1993 of $185 million were 12% higher than 1992 and 6%
above 1991.
Natural gas revenues were $145 million in 1993, compared with $117
million for 1992 and $122 million for 1991. The average natural gas price
per thousand cubic feet ("Mcf") in 1993 was $2.09, up 15% from $1.82 in
1992 and 19% from $1.76 in 1991. Natural gas sales volumes in 1993 of 69
billion cubic feet increased 7% from the 1992 level and were virtually the
same as in 1991. The increase in volumes for 1993 was principally due to
accelerated natural gas development drilling in East Texas and offshore
production from Mississippi Canyon Block 441 in the Gulf of Mexico, which
went on stream in the second quarter of 1993.
Variable-priced sales, which include monthly and long-term contract
sales, covered about 75% of 1993 gas sales, compared with 80% in 1992 and
80% in 1991. During the first nine months of 1994, the percentage of
variable-priced gas sales was about 75%, and the percentage is expected to
continue in this proportion for the remainder of the year.
Oil revenues were $34 million in 1993, compared with $41 million in
1992 and $49 million in 1991. The average sales price per barrel for 1993
of $17.20 was 10% below 1992 and 16% under 1991. Oil sales volumes for 1993
were 2.0 million barrels ("MMBbls"), an 8% decline from the 1992 level
which was down 11% from the 1991 level. The lower volumes in 1993 were
primarily the result of declining production from several North Texas
reservoirs.
Excluding the previously noted write-downs, costs and expenses for
1993 were $159 million, compared with $150 million in 1992 and $153 million
in 1991. The increase in expenses for 1993 reflects provisions totaling
$7.1 million for pending litigation. Also, depreciation and amortization
expense for 1993 of $77 million was $1.6 million higher than 1992,
primarily due to increased production. The overall rate of amortization was
$.91 per million British thermal units ("MMBtu") produced for both 1993 and
1992, compared with $.83 in 1991. Costs of additional offshore projects and
increased development costs associated with older fields largely account
for the increase from 1991. Average production cost per MMBtu in 1993 was
$.54, compared with $.53 in 1992 and $.56 in 1991.
Interest expense in 1993 of $30 million was approximately $10 million
higher than both 1992 and 1991. The increase reflects a $6 million
provision for interest due royalty owners. A higher level of debt and less
interest capitalized also contributed to the 1993 increase.
EP's natural gas reserves at January 1, 1994, were 1.09 trillion cubic
feet ("Tcf"), compared with 1.10 Tcf the year earlier, as estimated by
DeGolyer and MacNaughton, independent petroleum consultants. Oil and
condensate reserves, including natural gas liquids attributable to
leasehold interest, were 38 MMBbls, virtually the same as the year-ago
level.
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<PAGE>
At January 1, 1994, estimated future net cash flows from EP's owned
proved gas and oil reserves, based on average prices and contracts in
effect in December 1993, were $2.0 billion, about the same as the year
earlier. The net present value of such cash flows, discounted at the SEC-
prescribed 10%, was $1.1 billion, virtually the same as the prior year.
These discounted cash flow amounts are the basis for the SEC-prescribed
cost-center ceiling under the full-cost accounting method. The margin
between the cost-center ceiling and the unamortized capitalized costs of
U.S. gas and oil properties was approximately $150 million at December 31,
1993, and at September 30, 1994, had declined to approximately $16 million,
based on average prices and contracts in effect in September 1994. Product
prices are subject to seasonal and other fluctuations. A significant
decline in prices from September 30, 1994 or other factors, without
mitigating circumstances, could cause a future write-down of capitalized
costs and a noncash charge against earnings.
EP uses gas and oil swaps, collars and futures agreements to hedge
volatile product prices for a portion (normally 30 to 70 percent) of
anticipated future monthly gas and oil production. The purpose of these
hedging activities is to fix the prices to be received. Under these
agreements, EP receives or makes payments based on the differential between
a fixed and a variable product price. These agreements are typically
settled in cash at or prior to expiration or exchanged for physical
delivery contracts. Realized gains and losses on hedging activities are
deferred and included in income during the month that the related physical
sale occurs.
At December 31, 1993, EP had outstanding swap and collar agreements
extending through December 1994 to exchange payments on 4,970,000 MMBtu's
of gas and 121,000 barrels of oil on which EP had $1.4 million of net
unrealized gains based on the difference between the strike price and the
NYMEX futures price for the applicable trading month. At December 31, 1993
realized gains on hedging activities of $1.4 million were deferred. The
weighted average strike price and market price per MMBtu of natural gas was
$2.21 and $1.99, respectively, and the weighted average strike price and
market price per barrel of oil was $17.15 and $14.25, respectively, at
December 31, 1993. Natural gas hedge transactions reduced gas revenues $4.1
million in 1993 and $0.8 million in 1992. In 1993 oil hedges resulted in a
$0.4 million increase of oil revenues.
At September 30, 1994, EP had outstanding swaps, collars and futures
agreements extending through December 1995 to exchange payments on
11,250,000 MMBtu's of gas and 1,650,000 barrels of oil on which EP had $.4
million of net unrealized gains based on the difference between the strike
price and the NYMEX futures price for the applicable trading month. At
September 30, 1994 realized gains on hedging activities of $1.3 million
were deferred. The weighted average strike price and market price per MMBtu
of natural gas was $2.02 and $1.92, respectively, and the weighted average
strike price and market price per barrel of oil was $17.81 and $18.48,
respectively, at September 30, 1994. Hedge transactions in the first nine
months of 1994 increased gas and decreased oil revenues $2.1 million and
$0.6 million, respectively, and in the first nine months of 1993 reduced
gas revenues $3.9 million.
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Pro Forma Results of Operations of Newco
Newco will conduct substantially the same business as was conducted by
EP prior to the Reorganization. In the table below, EP's results of
operations are adjusted to include the effects of (i) the assumption by EC
Companies of $395 million in aggregate principal amount of debt of EP ($86
million of which is debt owed by EP to EPO and thus does not appear on EP's
consolidated financial statements) owed to certain EC Companies and to
Newco, plus accrued interest, (ii) the 1% general partner interest in EPO,
(iii) the changes in equipment lease terms and (iv) the allocation of
additional management costs to Newco. EP's results are also adjusted for
corporate income taxes that were not payable by EP, but that would have
been paid by Newco. A summary reconciliation of EP's reported net income
(loss) to Newco's pro forma net income (loss) is presented below.
<TABLE>
<CAPTION>
Nine Months Ended September 30 Year Ended December 31
------------------------------ ---------------------------------
1994 1993 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net income (loss) reported by EP.............. $ 8,020 $ 2,651 $(3,881) $(20,265) $(49,644)
Pro forma adjustments:
Decrease in interest costs by
assumption of debt by EC Companies.......... $19,899 21,218 29,034 22,863 16,070
1% General Partner Interest in EPO.......... 238 214 216 10 (338)
Effect of changes in equipment lease terms.. 881 436 668
Management cost allocation from EC.......... (500) (750) (1,000) (1,000) (1,000)
------- ------- ------- -------- --------
Pro forma income (loss) before income taxes... 28,538 23,769 25,037 1,608 (34,912)
Pro forma income (tax) benefit................ (9,988) (8,319) (8,763) (547) 11,870
------- ------- ------- -------- --------
Pro forma net income (loss) of Newco.......... $18,550 $15,450 $16,274 $ 1,061 $(23,042)
======= ======= ======= ======== ========
</TABLE>
In connection with the Reorganization, Newco will enter into three
sublease agreements with respect to the equipment underlying the Equipment
Leases. Pro forma combined future minimum lease payments for the three
subleases are as follows (in thousands): $37,133 for 1995; $40,361 for
1996; $41,338 for 1997; $41,764 for 1998; and $41,957 for 1999. Over the
life of the subleases, the costs to Newco of the assignment and assumption
of the Equipment Leases, and the subleasing of the related equipment to
Newco, will not be materially different from the costs that would have been
incurred under the Equipment Leases. See "CERTAIN TRANSACTIONS."
Capital Resources and Liquidity
Net cash flows from operating activities for the first nine months of
1994 were $87 million, up 19% from $74 million a year earlier. Investing
activities required net cash flows of $96 million, compared with $93
million for the same period of 1993, with an $8 million increase in
property additions. For the nine months ended September 30, 1994, net cash
of $9
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<PAGE>
million was required for investing activities after cash provided by
operations. In addition, there was an $8 million requirement for
distributions to unitholders, and disbursements for the Garden Banks Block
388 facilities under construction exceeded advances under leasing
arrangements by $19 million. These requirements were provided by an
increase in temporary advances from EC Companies.
Net cash flows from operating activities for the full year 1993 were
$76 million, $12 million lower than 1992 primarily due to less cash
provided by changes in net current operating assets and liabilities, and
were virtually the same as in 1991. Investing activities required net cash
flows of $124 million, compared with $69 million in 1992 and $105 million
in 1991. The increase in 1993 is primarily due to a higher level of
capital spending for natural gas and oil exploration and development
programs. In 1993, $48 million was required for investing activities after
cash provided by operations, and cash of $31 million was required for the
payment of distributions to holders of Units. The total requirement of $79
million was provided by an increase in borrowings from EC Companies and
advances under leasing arrangements that temporarily exceeded disbursements
for the facilities under construction.
Planned property, plant and equipment additions for 1994 total $114
million. In addition, construction of the offshore platform and related
facilities associated with EP's interest in the Garden Banks Block 388
development project in the Gulf of Mexico is being financed through an
operating lease arrangement as noted below.
In 1992, EP entered into operating lease arrangements to provide
financing for its portion of the offshore platforms and related facilities
for the Mississippi Canyon Block 441 (37.5% owned) and Garden Banks Block
388 (100% owned) projects. A total of $34 million was required for the
Mississippi Canyon Block 441 project, which was completed in early 1993;
the lease was renewed in the second quarter of 1994 under terms that
resulted in capital lease accounting treatment. An operating lease
arrangement is providing financing for up to $235 million for the equipment
and facilities associated with the Garden Banks project. The cost for the
equipment and facilities will be greater than the amount of the current
lease financing because of costs not originally covered by the lease, the
addition of equipment, higher-than-expected costs for both labor and
materials, design modifications and other factors. Financing options for
the additional costs are currently being evaluated, including an addition
to the current operating lease arrangement. The total cost of the
equipment and facilities is expected to be approximately $280 million.
On January 3, 1994, EP paid a quarterly distribution of $.075 per
unit. In February 1994, EP discontinued quarterly distributions to holders
of Units.
Even though inflation has abated considerably from the levels of the
early 1980s, and was only about 2.5% in 1993, it continues to have some
influence on EP's operations. Most notable is that allowances for
depreciation and amortization based on the historical cost of fixed assets
may be insufficient to cover the replacement of some long-lived fixed
assets.
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<PAGE>
The impact of the Clean Air Act Amendments of 1990 (the "Clean Air
Act") on EP cannot be fully ascertained until the regulations that
implement the Clean Air Act have been approved and adopted. Management
currently believes that operating costs that will be incurred under the new
permit fee structure, any capital expenditures associated with equipment
modifications, and any other miscellaneous permitting costs required under
the Clean Air Act will not have a material adverse effect on EP's results
of operations. Management expects the provisions of the Clean Air Act will
increase the attractiveness of natural gas as compared with certain
alternative fuels; however, it is impossible to quantify any increase in
demand for natural gas, if any, that may be created by the Clean Air Act.
New Accounting Standards
SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other
than Pensions," which mandates the accounting for medical and life
insurance and other nonpension benefits provided to retired employees, was
adopted by EP effective January 1, 1993.
SFAS No. 112, "Employer's Accounting for Postemployment Benefits,"
became effective for EP in 1994. This standard covers the accounting for
estimated costs of benefits provided to former or inactive employees before
their retirement. EP receives an allocation of these benefits from EC
which currently accrues costs of benefits to former or inactive employees
by varying methods. The new standard did not have a significant effect on
results of operations or financial condition.
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<PAGE>
BUSINESS
Glossary
Barrel - The unit of volume measurement used for petroleum products.
1 barrel (Bbl) = 42 U.S. gallons.
Barrel Equivalent - A measure used to equate an amount of natural gas with
the same amount of energy in a barrel of oil. Six thousand cubic feet of
natural gas have approximately the same energy content as one barrel of
oil. For the purpose of providing a common unit of measure, natural gas,
oil and natural gas liquids are converted to an approximate equivalent unit
on the basis of relative energy content: One Mcf of natural gas equals
1.05 MMBtu, one barrel of oil equals 5.6 MMBtu, and one barrel of natural
gas liquids equals 4.2 MMBtu.
Basin - A synclinal structure in the subsurface, once the bed of a
prehistoric sea. Regarded as a good prospect for gas and oil exploration.
Block - Numerical designation of a specific location in an offshore area.
Btu - British thermal unit, the quantity of heat required to raise the
temperature of one pound of water by one degree Fahrenheit.
Condensate - A hydrocarbon mixture that becomes liquid and separates from
natural gas when the gas is produced; similar to crude oil.
Cubic Foot - The amount of gas that occupies one cubic foot under standard
temperature and pressure conditions; standard volume measurement for
natural gas.
Mcf: thousand cubic feet
MMcf: million cubic feet
Bcf: billion cubic feet
Tcf: trillion cubic feet
Development Drilling - The drilling-related activities to recover gas and
oil after initial discovery.
Development Well - A well drilled in a reservoir of gas or oil that
contains proved reserves.
Exploratory Well - A well drilled in a previously untested geologic
structure or formation to determine the presence of gas or oil.
Gross Acres/Gross Wells - Total acreage or total wells in which a company
holds varying interests.
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<PAGE>
Leasehold - Property or acreage offered under contract for the exploration
and production of gas, oil or other minerals.
Net Acres/Net Wells - Proportionate company interest in gross acres or
gross wells.
Operator - The individual or company responsible for the exploration and
production of a gas or oil well or lease. The operator typically holds the
largest working interest in the well or lease.
Production - The phase of the petroleum industry that deals with bringing
the well fluids and gas to the surface, with the separating them and with
storing, gauging, and otherwise preparing the product for the pipeline.
Also, the amount of gas or oil produced in a given period.
Reserves - Amount of gas or oil believed to be economically recoverable
under existing conditions.
Royalty - Mineral owner's share of the gross gas or oil production on his
property.
Standardized Measure of Discounted Future Net Cash Flows After Tax - Net
present value of the estimated future revenue stream from proved gas and
oil reserves using current period prices plus contractual escalations, less
future costs to develop and produce the reserves, discounted at the
prescribed 10% rate and adjusted for income-tax effects.
Working Interest - Represents a share of the ownership in drilling and
production of gas and oil.
Operations
EP was formed in 1985 to succeed to substantially all of the domestic
gas and oil exploration and production business of EC. After the
Reorganization, Newco will continue the same business as EP.
EP operates through EPO, in which EP holds a 99% limited partner
interest and the general partners own a 1% interest. EEI is the Managing
General Partner and EC is the Special General Partner of EP and EPO.
EP is engaged in the exploration for and the development, production
and marketing of natural gas and crude oil throughout Texas, offshore in
the Gulf of Mexico, onshore in the Gulf Coast and in various other areas in
the United States. Activities include geological and geophysical studies;
acquisition of gas and oil leases; drilling of exploratory wells;
development and operation of producing properties; acquisition of interests
in developed or partially developed properties; and the marketing of
natural gas, crude oil and condensate. Production offices are maintained
in Dallas, Houston, Athens, Bridgeport, Longview and Midland, Texas.
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<PAGE>
EP has no officers, directors or employees. Instead, officers,
directors and employees of EEI perform all management and operating
functions for EP. At September 30, 1994, EEI employed 378 persons,
including 33 geologists, 21 geophysicists and 19 land representatives who
investigate prospective areas, generate drilling prospects, review
submitted prospects and acquire leasehold acreage in prospective areas. In
addition, EEI maintains a staff of 55 engineers and 45 technologists who
plan and supervise the drilling and completion of wells, evaluate
prospective gas and oil reservoirs, plan the development and management of
fields, and manage the daily production of gas and oil. All of the
employees of EEI will become employees of Newco effective January 1, 1995.
Until that time, Newco will pay EEI for the services of the employees. No
employee will receive an increase in compensation as a result of the
Reorganization.
Variable-priced sales, which include monthly and long-term contract
sales, covered about 75% of 1993 gas sales, compared with 80% in 1992 and
1991. During the first nine months of 1994, the percentage of variable-
priced gas sales was about 75% and is expected to continue in this
proportion for the remainder of the year. Approximately 75% of EP's
natural gas sales volumes (75% of gas revenues) for the year ended December
31, 1993 and 81% of natural gas sales volumes (79% of gas revenues) during
the first nine months of 1994 was sold to affiliated customers. Effective
March 1, 1993, affiliated revenues include gas sales under new contracts
with Enserch Gas Company, a wholly owned subsidiary of EC, covering
essentially all gas production not committed under then existing contracts.
Affiliated purchasers do not have a preferential right to purchase natural
gas produced by EP other than under existing contracts. See "SELECTED
FINANCIAL AND OPERATING DATA" for a discussion of EP's aggregate annual
production of natural gas, oil and condensate.
Following is a summary of EP's exploration and development activity
during 1993 and the first nine months of 1994:
Gulf of Mexico. Offshore exploration provides EP the opportunity to
improve its ratio of production to reserve base by the addition of gas and
oil wells with relatively higher production rates. State-of-the-art
technology, including three-dimensional ("3-D") seismic, specialized
seismic processing, and innovative well completion and production
techniques, are being used to help accomplish these objectives.
Mississippi Canyon Block 441, the first development project in the
Gulf of Mexico that EP has operated, is indicative of this approach. A 3-D
seismic program, prior to field development, confirmed that the majority of
the reservoir lies beneath a shipping fairway. A production program was
developed that involved drilling highly deviated wells under the shipping
fairway, subsea completing the deep-water wells, and tying the wells back
to a conventional shallow-water production platform using bundled
flowlines. The high-angle wells required special gravel-pack completion
techniques. After 17 months of production, the field has been essentially
maintenance free, and currently produces some 63 million cubic feet
("MMcf") of natural gas and more than 350 barrels ("Bbls") of condensate
per day from six wells. The 3-D seismic on Mississippi Canyon Block 441 is
being reprocessed, using depth
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<PAGE>
migration and other state-of-the-art techniques to aid in the
identification of deeper exploratory targets, which, if successfully
drilled, could add to the field reserves. EP has a 37.5% working interest
in this project.
The Garden Banks Block 388 project in the Gulf of Mexico remains on
schedule, with initial production anticipated in mid-1995. Completion of
three pre-drilled wells (two oil and one gas condensate) will commence as
soon as the floating facility is properly moored on location. These
operations should be completed by the end of 1995, followed by the drilling
of new development wells. Initial daily oil production rates from each
pre-drilled oil well should be between 2,500 and 5,000 barrels of oil. In
July 1994, the tow out and placement of the subsea drilling and production
template was completed.
Also in July 1994, EP completed an agreement with Mobil Corporation
under which Mobil has conducted an additional 3-D seismic survey over the
unit and is participating in an exploratory well currently drilling on
Garden Banks Block 387, which was spudded in August 1994. Mobil has an
option to acquire, for additional consideration, a 40% interest in the
Garden Banks unit and in the production system. EP, which currently owns
100% of the project, will remain the project operator.
A successful delineation well on Green Canyon Block 254 offshore
Louisiana was drilled in 1994, which encountered more than 400 feet of net
gas and oil pay below 12,000 feet. The delineation well is an appraisal
well to a discovery drilled in 1991 that encountered multiple sands with a
combined thickness of more than 300 feet of net oil pay. EP has a 25%
working interest in prior work in the project and assumed a 100% working
interest and operation of the sidetrack well. EP also has a 25% working
interest in three adjacent blocks.
1993 Onshore. EP participated in 78 development wells (62 net) in 1993,
with the majority completed as gas producers in East Texas. In East Texas,
EP is positioned in a prolific gas-prone area which, despite its maturity,
provides growth opportunities. EP is one of the oldest and most active
operators in this basin, which includes the Opelika, Tri-Cities, Whelan,
Willow Springs, North Lansing and Freestone fields.
In early 1993, EP initiated a 26-well program in East Texas to
accelerate the development of natural gas reserves from the Travis Peak
formation in the Opelika field. The program was targeted to test new
techniques for shortening the average life of its reserve base. The
project was completed in seven months yielding initial daily per well
production rates of up to 1.8 MMcf of gas and 48 Bbls of oil. EP has a
100% working interest in these wells.
EP performed additional development drilling in the Freestone field,
where seven well completions flowed at daily rates ranging from 1.0 MMcf to
2.3 MMcf of gas per well. EP has 50% to 100% working interest in these
wells.
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<PAGE>
In the Bralley field in West Texas, the combined daily oil production
rate from six wells increased to 800 Bbls from 500 Bbls following
production optimization work. EP owns a 50% working interest in each of
these wells.
In South Texas, seven wells drilled and completed in the Fashing field
flowed at daily rates of 1.2 MMcf to 2.6 MMcf of gas and 14 Bbls to 30 Bbls
of oil per well. Twelve wells drilled and completed in the Boonsville
field in north central Texas resulted in daily production of .4 MMcf to 1.5
MMcf of gas per well.
1994 Onshore. In the Hardeman Basin in North Texas, EP has acquired over
120 square miles of 3-D seismic data in Hardeman and Wilbarger counties
since December 1992, including projects currently being shot or processed.
Since December 1993, EP has drilled four 8,000-foot producers based on this
technology, with all wells being drilled in EP's Weatherman Area in
Hardeman County. The four wells potentialed at rates between 226 and 294
Bbls of oil per day from the Mississippian formation. EP has nearly a 100%
working interest in these four wells. In addition, EP participated with a
20% working interest in a well based on 2-D seismic, which flowed at rates
of approximately 100 Bbls of oil per day early in 1994. For the remainder
of 1994, EP plans to acquire an additional 30 square miles of 3-D data and
drill seven more wells. EP controls 81,000 gross acres and 74,000 net
acres in the Hardeman Basin and has further 3-D shoots planned for 1995.
In Shackelford County in Central Texas, EP has acquired approximately
115 square miles of 3-D seismic data since mid-1993, including projects
currently being shot and processed. Since December 1993, EP has drilled
five 5,000-foot Mississippian Reef producers. The oil wells potentialed at
rates between 22 and 160 Bbls of oil per day. One gas well potentialed for
2.4 MMcf and 33 barrels of condensate per day. Initial sales from these
wells commenced early in the third quarter of 1994, when the pipeline
connection was completed. EP has a 75% working interest in the wells. For
the remainder of 1994, EP plans to acquire an additional 30 square miles of
3-D data and drill an additional nine wells in the area. EP controls some
44,000 gross and 33,000 net acres in the area and has additional 3-D
seismic shoots planned for 1995.
EP drilled and completed nine development wells (7.6 net) in the first
six months of 1994. Four wells were in the Boonsville field in north
central Texas, two gas and two oil wells. Daily gas production ranged from
0.7 MMcf to 1.0 MMcf and daily oil production from 42 to 89 barrels. EP
has a 100% working interest in these wells.
EP continued development in the Freestone field where three well
completions potentialed at daily rates ranging from 1.9 MMcf to 2.6 MMcf of
gas per well. EP has a 73% to 82% working interest in these wells.
Planned onshore development activity for the remainder of 1994
includes drilling approximately 15 wells including eight outside East
Texas.
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<PAGE>
Competition
Competition in the natural gas and oil exploration and production
business is intense and is present from a large number of firms of varying
sizes and financial resources, some of which are much larger than EP.
Competition involves all aspects of marketing products (including terms,
prices, volumes and length of contracts), terms relating to lease bonus and
royalty arrangements, and the schedule of future development activity.
Regulation
Environmental Protection Agency ("EPA") rules, regulations and orders
affect the operations of EP. EPA regulations promulgated under the
Superfund Amendments and Reauthorization Act of 1986 require EP to report
on locations and estimates of quantities of hazardous chemicals used in
EP's operations. The EPA has determined that most gas and oil exploration
and production wastes are exempt from the hazardous waste management
requirements of the Resource Conservation Recovery Act. However, the EPA
determined that certain exploration and production wastes resulting from
the maintenance of production equipment and transportation are not exempt,
and these wastes must be managed and disposed of as hazardous waste. Also,
regulations issued by the EPA under the Clean Water Act require a permit
for "contaminated" stormwater discharges from exploration and production
facilities.
The Oil Pollution Act of 1990 ("OPA 90") requires responsible parties
to provide evidence of financial responsibility in the amount of
$150,000,000 to clean up oil spills into the navigable waters of the United
States. The financial responsibility requirements apply to offshore
facilities and possibly to onshore facilities in, on or under navigable
waters. The Mineral Management Service ("MMS") is the agency charged with
the administration and enforcement of OPA 90. The ultimate impact of the
financial responsibility requirements cannot be determined until final
regulations are issued by the MMS. Further Congressional action on these
requirements is also possible, and the final MMS regulations could be
challenged in court. The $150,000,000 requirement will not become
effective until regulations under OPA 90 are issued, probably in 1996. The
insurance industry has indicated that insurance will not be available to
evidence financial responsibility under OPA 90 as currently written.
However, EP has qualified as a self-insurer using the "identified assets"
test under the current $35,000,000 financial responsibility requirement
using EP's interest in Tri-Cities Field as the identified assets. It is
believed that EP has sufficient assets to qualify as a self-insurer for
$150,000,000 under the identified assets test if the current self-insurance
test is included in the OPA 90 regulations. However, the transfer of EP's
assets to a publicly traded corporation might affect the ability to self-
insure under OPA 90. Currently the certification of self-insurance is made
by EC on behalf of EP. It is unclear whether the new regulations will
allow EC to provide certification of self-insurance on behalf of a new
publicly traded corporation which is controlled by EC, or whether Newco
will qualify as a self-insurer on its own behalf. Alternatively, Newco
believes it could meet the current OPA 90 financial responsibility
requirements by the purchase of a surety bond, although the cost of such
bonds is generally much higher than insurance. The availability of surety
bonds generally could also be affected by the requirements of the final MMS
regulations.
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<PAGE>
Many states have issued new regulations under authority of the Clean
Air Act, and such regulations are in the process of being implemented.
These regulations may require certain gas and oil related installations to
obtain federally enforceable operating permits and may require the
monitoring of emissions; however, the impact of these regulations on EP is
expected to be minor.
Several states have adopted regulations on the handling,
transportation, storage, and disposal of naturally occurring radioactive
materials that are found in gas and oil operations. Although applicable to
certain EP facilities, it is not believed that such regulations will
materially impact current or future operations.
In the aggregate, compliance with federal and state environmental
rules and regulations is not expected to have a material effect on EP's
operations.
The Railroad Commission of Texas regulates the production of natural
gas and oil by EP in Texas. Similar regulations are in effect in all
states in which EP explores for and produces natural gas and oil. These
regulations generally require permits for the drilling of gas and oil wells
and regulate the spacing of the wells, the prevention of waste, the rate of
production, and the prevention and cleanup of pollution and other
materials.
Legal Proceedings
A lawsuit was filed against EEI, EC, its utility division and EPO in
the 348th Judicial District Court of Tarrant County, Texas in May 1989.
Plaintiffs seek unspecified actual damages and punitive damages in the
amount of $5 million. Plaintiffs allege royalties were not fully paid,
certain expenses were improperly charged against the amount of royalties
due, negligence in the venting of gas and liquid hydrocarbons into the air,
and breach of the duty of good faith and fair dealing by wrongfully
concealing certain material facts concerning sales of gas from the subject
leases to the utility division. No environmental claim has been made by
plaintiffs or any environmental agency with respect to the facts underlying
this matter, nor is any such claim expected.
A lawsuit was filed on February 24, 1987, in the 112th Judicial
District of Sutton County, Texas, against subsidiaries and affiliates of
EC, as well as its utility division. The plaintiffs have claimed that
defendants failed to make certain production and minimum purchase payments
under a gas-purchase contract. In this connection, the plaintiffs have
alleged a conspiracy to violate purchase obligations, improper accounting
of amounts due, fraud, misrepresentation, duress, failure to properly
market gas and failure to act in good faith. In this case, plaintiffs seek
actual damages in excess of $5 million and punitive damages in an amount
equal to 0.5% of the consolidated gross revenues of EC for the years 1982
through 1986 (approximately $85 million), interest, costs and attorneys'
fees.
On December 26, 1989, a lawsuit was filed against EEI and EPO in the
130th Judicial District Court of Matagorda County, Texas. The plaintiff
claims that the defendants breached
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an alleged contract to sell a working interest and net revenue interest in
two leases located in Matagorda County. Trial of the case resulted in a
jury verdict in favor of the plaintiff. Judgment was entered by the trial
court on October 8, 1992, ordering EEI and EPO to convey the leases to the
plaintiff and to pay damages of $3.1 million, which includes principal,
prejudgment interest, attorneys' fees and costs. In an opinion issued June
23, 1994, the Corpus Christi Court of Appeals reversed the decision of the
trial court. The plaintiff has filed an application for writ of error with
the Texas Supreme Court.
In addition, EP is a party to lawsuits arising in the ordinary course
of its business. EEI believes, based on its current knowledge and the
advice of counsel, that all lawsuits and claims would not have a material
adverse effect on EP's financial condition.
Properties
The following table sets forth a summary of certain information
relating to EP's gas and oil properties:
<TABLE>
<CAPTION>
At December 31
----------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Proved Developed and
Undeveloped Reserves:
Gas (Bcf)(1)................... 1,085.5 1,100.4 1,167.3 1,223.2 1,221.3
Oil (MMBbl)(1)(2).............. 38.2 37.9 38.0 28.7 23.1
Estimated Future Net Cash Flows
from Proved Reserves
(in millions).................. $1,988.8 $2,017.1 $2,061.1 $2,606.8 $2,299.9
Present Value of Future Net Cash
Flows from Proved Reserves
(before income taxes and
discounted at 10% per annum)
(in millions).................. $1,102.4 $1,108.4 $1,060.4 $1,229.3 $1,089.3
</TABLE>
------------------
Note: Billion cubic feet ("Bcf"), million barrels ("MMBbl").
(1) Estimated by DeGolyer and MacNaughton, independent petroleum
consultants.
(2) Includes oil, condensate and natural gas liquids attributable to
leasehold interests.
The 1994 capital spending budget has been set at $114 million, about
the same as 1993 actual capital expenditures. More than half of 1994
capital expenditures is earmarked for domestic onshore projects. Through
September 30, 1994, $91 million has been expended. The exploration program
includes a balanced mix of projects with regard to reserve potential and
risk, focusing on as many core area opportunities as possible
- 62 -
<PAGE>
During 1994, EP filed Form EIA-23 with the Department of Energy
reflecting reserve estimates for the year 1993.
For a summary of EP's average sales prices, average production costs
and amortization see "SELECTED FINANCIAL AND OPERATING DATA".
- 63 -
<PAGE>
EP owned leasehold interests or licenses in 17 states and offshore
Texas and Louisiana, as of June 30, 1994, as follows:
<TABLE>
<CAPTION>
Gross Acres Net Acres/(1)/
--------------------------------- -------------------------------
Developed Undeveloped Total Developed Undeveloped Total
<S> <C> <C> <C> <C> <C> <C>
Alabama 75 1,805 1,880 37 1,029 1,066
Arkansas - 19,892 19,892 - 11,283 11,283
Colorado 10,989 23,142 34,131 3,641 15,070 18,711
Idaho - 14,730 14,730 - 14,730 14,730
Kansas 400 11,568 11,968 200 5,937 6,137
Louisiana 1,710 35,772 37,482 643 17,937 18,580
Mississippi 3,863 43,267 47,130 1,949 15,001 16,950
Montana 6,415 59,213 65,628 3,201 35,083 38,284
Nebraska 160 480 640 160 480 640
Nevada - 105,303 105,303 - 49,497 49,497
New Mexico 2,680 5,827 8,507 1,902 4,196 6,098
North Dakota 1,560 9,334 10,894 1,246 5,327 6,573
Ohio 102 14,950 15,052 - - -
Oklahoma 32,366 22,605 54,971 17,730 9,582 27,312
Texas 263,912 444,201 708,113 201,342 185,576 386,918
Utah 3,719 109,742 113,461 533 54,081 54,614
Wyoming 3,558 56,237 59,795 1,641 44,220 45,861
U. S. Offshore 56,800 281,490 338,290 12,860 116,341 129,201
------- --------- --------- ------- ------- -------
Total 388,309 1,259,558 1,647,867 247,085 585,370 832,455
======= ========= ========= ======= ======= =======
- --------------
</TABLE>
(1) Represents the proportionate interest of EP in the gross acres under
lease.
EP purchased about 220,000 net acres of leasehold interests in 1993,
26,000 of which were in the Gulf of Mexico. In the first six months of
1994, EP purchased about 100,000 net acres, 39,000 of which were in the
Gulf of Mexico. At June 30, 1994 EP's Gulf of Mexico holdings totaled some
129,000 net acres, with an average working interest of 43% in 60 leases and
an overriding royalty interest in seven other leases. EP operates 24
leases. EP also canceled and/or allowed to expire nineteen Gulf of Mexico
leases during 1994. These either had been condemned by drilling on or near
them, or had been judged, after geophysical and geological studies, to have
insufficient potential to merit drilling.
EP plans further drilling on undeveloped acreage but at this time
cannot specify the extent of the drilling or predict how successful it will
be in establishing commercial reserves sufficient to justify retention of
the acreage. The primary terms under which the undeveloped acreage can be
retained by the payment of delay rentals without the establishment of gas
and oil reserves expire 8% in 1994, 17% in 1995, 34% in 1996, 15% in 1997,
7% in 1998, 10% in 1999 and 9% thereafter. A portion of the undeveloped
acreage may be allowed to expire prior to the
- 64 -
<PAGE>
expiration of primary terms specified in this schedule by nonpayment of
delay rentals. Aside from Texas and the Gulf of Mexico, EP has no material
concentration of undeveloped acreage in single areas at this time.
EP participated in 109 wells (79 net) during 1993. Of these wells, 83
(64 net) were successfully completed, resulting in a net success rate of
81%. Of the successful wells, seven wells (four net) were exploratory and
76 wells (60 net) were development.
In the first nine months of 1994, EP participated in 69 wells (48
net). Of these wells, 38 (30 net) were successfully completed, resulting
in a net success rate of 63%. Of the successful wells, 10 wells (9 net)
were exploratory and 28 wells (21 net) were development. At September 30,
1994, EP was participating in 30 wells (18 net), which were either being
drilled or in some stage of completion.
In the 1993 drilling program, 16 wells (4.9 net) were offshore. Of
these wells, nine (2.6 net) gas wells and one (.1 net) oil well were
successfully completed. During 1992, four (1.6 net) offshore wells were
drilled of which two (.8 net) gas wells were successfully completed. In
the first six months of 1994, three wells (0.8 net) were offshore. Of
these wells one (0.1 net) gas well and one (0.4 net) oil well were
successfully completed.
At December 31, 1993, EP owned working interests in 1,303 (980 net)
gas wells and 1,121 (277 net) oil wells. Of these, 173 (141 net) gas wells
and 37 (32 net) oil wells were dual completions in single boreholes.
- 65 -
<PAGE>
Drilling activity for the nine months ended September 30, 1994
and for each of the years 1993, 1992 and 1991 is set forth below:
<TABLE>
<CAPTION>
Exploratory Development
Drilling Drilling
----------- -----------
<S> <C> <C>
Productive Wells
----------------
1994:
Gross Wells........ 10.0 28.0
Net Wells.......... 8.2 21.3
1993:
Gross Wells........ 7.0 76.0
Net Wells.......... 3.8 60.1
1992:
Gross Wells........ 3.0 12.0
Net Wells.......... 2.2 6.3
1991:
Gross Wells........ 11.0 54.0
Net Wells.......... 5.9 46.2
Nonproductive Wells
-------------------
1994:
Gross Wells........ 30.0 1.0
Net Wells.......... 17.1 1.0
1993:
Gross Wells........ 24.0 2.0
Net Wells.......... 13.0 1.8
1992:
Gross Wells........ 13.0 5.0
Net Wells.......... 8.1 2.6
1991:
Gross Wells........ 15.0 10.0
Net Wells.......... 7.8 6.1
</TABLE>
--------------------
Note: Productive wells are either producing wells or wells capable of
commercial production, although currently shut-in.
The number of wells drilled is not a significant measure or indicator
of the relative success or value of a drilling program because the
significance of the reserves and economic potential may vary widely for
each project. It is also important to recognize that reported completions
may not necessarily track capital expenditures, since the Commission's
guidelines do not allow a well to be reported as complete until it is ready
for production. In the case of offshore wells, this may be several years
following initial drilling because of construction of platforms, pipelines
and other necessary facilities.
- 66 -
<PAGE>
Additional information relating to the gas and oil activities of EP is
set forth in Note 7 of the Notes to Financial Statements for the year ended
December 31, 1993.
MANAGEMENT
Directors and Executive Officers
EP is managed by EEI, as Managing General Partner, and Public
Unitholders have no power to direct or participate in the management of
either EP or EPO. EP does not have any directors, officers or employees.
In place of directors, officers and employees, EEI and EC perform all
management functions for EP. The executive officers of EEI will be the
executive officers of Newco upon completion of the Reorganization.
Newco's initial Board of Directors currently consists of two members,
described below, who will serve until the first annual meeting of Newco's
shareholders. Officers are elected annually by the Board of Directors.
The initial directors and executive officers of Newco are:
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
D.W. Biegler 48 Chairman, Chief Executive
Officer, Director
G.J. Junco 44 President, Chief
Operating
Officer, Director
S.R. Singer 64 Senior Vice President,
Chief Financial Officer
R.L. Kincheloe 64 Senior Vice President
B.K. Irani 43 Vice President
F.S. Addy 62 (1)
B.A. Bridgewater, Jr. 60 (1)
</TABLE>
---------------
(1) Messrs. Addy and Bridgewater have agreed to become members of the
Board of Directors and members of the Compensation Committee upon
consummation of the Reorganization.
Shortly after consummation of the Reorganization, one other director
will be elected to the Board of Directors who is not an officer or employee
of the EC Companies or Newco. The new director will also be a member of
the Compensation Committee of the Board of Directors, together with Messrs.
Addy and Bridgewater.
- 67 -
<PAGE>
D.W. Biegler has been Chairman and Chief Executive Officer of EEI
since January 1992 and a Director since September 1991. Since May 1993 he
has been Chairman and President, Chief Executive Officer of EC. He served
as President and Chief Operating Officer of EC from 1991 until 1993. He
was President of Lone Star Gas Company, the utility division of EC, from
1985 until 1993 and was Chairman from 1989 until 1993. Mr. Biegler is a
Director of Texas Commerce Bancshares, Inc. and Trinity Industries, Inc.
G.J. Junco has been President and Chief Operating Officer of EEI since
January 1991 and a Director since 1985. He was Senior Vice President of
the Land and Marketing Division from 1985 until December 1990.
S.R. Singer has served as a Senior Vice President, Finance and
Corporate Development and as Chief Financial Officer of EC since 1968.
R.L. Kincheloe has served as Senior Vice President, Offshore and
International of EEI since January 1992. Prior to that, he served as
Senior Vice President, Drilling and Production Operations of EEI from 1985
until January 1992.
B.K. Irani has served as Vice President, Production and Engineering of
EEI since September 1988. He has been a Vice President of EEI since August
1984.
F.S. Addy is the retired Executive Vice President and Chief Financial
Officer, and Director of Amoco Corporation, an international integrated oil
and gas company. Mr. Addy was elected to such position with Amoco in 1990
and retired as an officer and Director effective April 1, 1994. He
previously served Amoco as Vice President, Finance, from 1983 to 1990, and
before that served in various executive positions. He is a Director of EC;
Baker, Fentress & Company; and The Pierpont Funds.
B.A. Bridgewater, Jr. is Chairman, President and Chief Executive
Officer, and a Director of Brown Group, Inc., a consumer products company
with operations in footwear and specialty retailing. Mr. Bridgewater has
been a Director of EC since 1987, where he serves as Chairman of the Policy
and Conflicts of Interest Committee and is a member of the Audit Committee.
He is a Director of Boatmen's Bancshares, Inc.; FMC Corporation; and
McDonnell Douglas Corporation.
Director Compensation
Directors will be compensated by an annual retainer fee of $16,000
plus $1,000 for each board or committee meeting attended, with a maximum of
$1,500 if more than one meeting is held on the same day. In addition, a
$1,500 per annum fee is paid for services on a committee of the Board of
Directors, with an additional $750 per annum paid to the chairman of a
committee. Directors who are also officers of Newco do not receive any
fees.
- 68 -
<PAGE>
Committees of the Board of Directors
The Board of Directors of Newco will have an Audit Committee and a
Compensation Committee to devote attention to specific subjects and to
assist it in the discharge of its responsibilities.
The functions of the Audit Committee will include meeting periodically
with the independent and internal auditors; reviewing annual financial
statements and the independent auditors' work and report thereon; reviewing
the independent auditors' report on internal controls and related matters;
selecting and recommending to the Board of Directors the appointment of the
independent auditors, subject to ratification by the shareholders;
reviewing the letter of engagement and statement of fees which pertain to
the scope of the annual audit and certain special audit and non-audit work
which may be required or suggested by the independent auditors; receiving
and reviewing information pertaining to internal audits; directing and
supervising special investigations; reviewing transactions between Newco
and EC Companies and taking such action as it deems appropriate in order to
provide reasonable assurances of fair dealings between such entities; and
performing any other function deemed appropriate by the Board of Directors.
The function of the Compensation Committee will be to establish,
approve, or recommend to the Board of Directors, in those instances where
their approval is required, the compensation and major items related to
compensation of directors and of officers and other employees whose annual
base compensation exceeds a certain amount as determined by the Board of
Directors. The Committee also administers the Enserch Exploration, Inc.
1994 Stock Option Plan (the "Plan").
Newco does not have a nominating committee. The functions customarily
attributable to a nominating committee will be performed by the Board of
Directors as a whole.
Executive Compensation
Compensation Table
The following table sets forth the initial annual salary that Newco
will pay to its Chief Operating Officer and the other executive officers
who will devote substantially their full time to Newco and whose annual
compensation exceeds $100,000.
<TABLE>
<CAPTION>
Name Salary
---- ------
<S> <C>
G.J. Junco $275,000
R.L. Kincheloe 240,000
B.K. Irani 177,000
</TABLE>
- 69 -
<PAGE>
Any bonus, stock option, long-term compensation or other compensation
to be paid by Newco to Messrs. Junco, Kincheloe and Irani after the
Reorganization will be determined by the Compensation Committee of the
Newco Board of Directors after the Reorganization. Such items of
compensation have not been determined at this time. During 1994, Messrs.
Junco, Kincheloe and Irani received bonuses for services rendered during
1993 to EEI, of $95,000, $66,000 and $13,736, respectively.
D.W. Biegler, Chairman and Chief Executive Officer of Newco and S.R.
Singer, Chief Financial Officer of Newco, each are employed and will
continue to be employed in identical positions with EC and each are
directly paid all of their compensation by EC. It is not presently
anticipated that D.W. Biegler or S.R. Singer will receive any direct
compensation from Newco in 1995. The current salaries of D.W. Biegler and
S.R. Singer are $550,000 and $347,000, respectively. All other cash
compensation (including bonus) paid by EC during 1994 under plans currently
in effect for services rendered in 1993 for D.W. Biegler and S.R. Singer
totaled $218,489 and $102,636, respectively. It is anticipated that in
1995 none of D.W. Biegler's compensation and less than $100,000 of S.R.
Singer's compensation will be allocated from EC to Newco under the
management cost allocation or under any other arrangement.
None of the executive officers of Newco listed above, or any other
officer or employee of Newco, will receive an increase in his total
compensation as a result of the Reorganization.
Employee Benefit Plans
Directors and executive officers of EEI have previously been included
in employee benefit plans of EC. It is anticipated that those individuals
will remain under the EC employee benefit plans immediately following the
Reorganization. Newco does not currently have any employee benefit plans,
other than the Plan, which is described below. It is possible that after
the Reorganization Newco will adopt other employee benefit plans sponsored
by EC.
The Stock Option Plan
The Plan provides for the issuance of stock options ("Options") to
officers and other key employees to purchase shares of Common Stock and the
award to officers of shares that are subject to vesting based on the
achievement of performance criteria ("Restricted Stock"). Under the Plan,
(a) the option price may not be less than the fair market value of the
shares on the date of grant, (b) options are exercisable in stages of 25%
after one year to 100% after four years and (c) options may not be
exercised after ten years from the date of grant.
The Plan covers a maximum of 2,000,000 shares of Common Stock, subject
to adjustment in the event of certain changes in the capital structure of
Newco. Such shares may be authorized but unissued shares or shares held in
Newco's treasury. If an Option or an award of Restricted Stock is
forfeited (where the forfeiting participant received no benefits of
ownership), expires or terminates before being exercised, the shares
covered thereby will be
- 70 -
<PAGE>
available for subsequent Option or Restricted Stock awards within the
maximum number stated above.
An award of Restricted Stock may be granted under the Plan, either at
no cost to the recipient or for such cost as may be required by law or
otherwise as determined by the Compensation Committee of the Board of
Directors. The terms and conditions of the Restricted Stock will be
specified at the time of the grant. Restricted Stock may not be disposed
of by the recipient until the restrictions specified in the award expire.
The Compensation Committee will determine at the time of the award what
rights, if any, the person to whom an award of Restricted Stock is made
will have with respect to Restricted Stock during the restriction period,
including the right to vote the shares and the right to receive any
dividends or other distributions applicable to the shares.
SECURITY OWNERSHIP
The following table sets forth information regarding the beneficial
ownership of EP. No director or executive officer of EC or EEI owns any
Units.
<TABLE>
<CAPTION>
Percent Percent
Title of Class Name/(1)/ Number of Units of EP of Class
-------------- --------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
General Partner Interests EEI/(2)/ N/A 1% 100%
EC/(3)/ N/A 1% 100%
Limited Partner Interests EPPL/(4)/ 101,694,162 98.2% 99.2%
EC/(5)/ 101,694,162 98.2% 99.2%
</TABLE>
------------
(1) The address for all entities is 300 S. St. Paul, Dallas, Texas 75201.
(2) The general partner of EP does not have the right to vote on matters
submitted to holders of Units. However, the general partner does have the
ability to determine what matters are submitted to a vote and has wide
discretion with respect to other matters regarding governance of EP.
(3) Represents a 1% general partner interest held by EEI, which is a wholly
owned subsidiary of EC.
(4) EPPL is a Texas limited partnership in which Enserch Processing, Inc., a
wholly owned subsidiary of EC, owns a .99% general partner interest, Lone Star
Energy Company, a wholly owned subsidiary of EC, owns a .01% general partner
interest, and EC owns a 99% limited partner interest. These Units may be
exchanged at any time for EP Depositary Units.
(5) Represents 101,694,162 Units owned by EPPL, which is wholly owned, either
directly or indirectly, by EC.
CERTAIN TRANSACTIONS
Allocations
Prior to July 1, 1994, EP was charged for the general and
administrative staff costs incurred by EC in performing accounting, treasury,
internal audit, income tax planning and compliance, legal and other functions,
but was not charged for the cost of higher level management (i.e. all of the
elected officers of EC) of these functions. The staff costs are allocated to
EP on such factors as net capital employed, the number of employees and
percentage
- 71 -
<PAGE>
of time spent. Such charges by EC amounted to approximately $1.8 million,
$1.9 million, $2.0 million and $1.1 million in 1991, 1992, 1993 and the nine
months ended September 30, 1994, respectively. Effective July 1, 1994, EC
began charging all of its affiliates, including EP, for the cost of management
by higher level EC personnel of these functions, and such cost allocation to
EP from EC was $.2 million for the third quarter of 1994. Prior to 1994, EC
did not charge its affiliates for the allocated cost of management from EC
because the amounts involved were not considered material to any specific
business segment since they involved management of several business segments.
During 1993, EEI and the other affiliates of EC eliminated positions that had
performed management of these functions, which are now undertaken by EC
management personnel. Also, a reorganization of EC, the last step of which
was only recently concluded, resulted in divestment of two major business
segments as well as elimination of several foreign operations. Thus, EC had
fewer business segments over which to spread management costs, and the costs
became material to the remaining segments. The management cost allocation to
Newco (currently estimated to be approximately $1 million annually) is
calculated in accordance with the guidelines set forth in Article Eleven of
Newco's Restated Articles of Incorporation. There is no written agreement
regarding this arrangement or any other services to be provided. See
"MANAGEMENT--EXECUTIVE COMPENSATION."
This management cost allocation would be charged to EP regardless of
whether the Reorganization were proposed. The EP Partnership Agreement
presently provides that EEI is entitled to reimbursement for its direct and
allocated expenses incurred in connection with EP, although it is not entitled
to compensation for its services as Managing General Partner. The EP
Partnership Agreement presently provides that all items of gain, loss and
deduction, for purposes of maintaining the partners' capital accounts, are
allocated in accordance with partnership interests. The EP Partnership
Agreement also presently provides that current distributions, if made, are
made in accordance with partnership interests. Allocations and distributions
are made according to partnership interests, and do not take into account the
management functions of EEI.
There will be no cash or other distributions made by Newco to any of
the EC Companies that are not made to the other shareholders of Newco.
Restructuring of Equipment Leases
The equipment and facilities being used by EP in developing and
producing reserves in the Mississippi Canyon Block 441 Project ("MC 441") and
Garden Banks Block 388 Project ("GB 388") are being financed under (i) a
Master Lease Agreement dated as of April 30, 1992, between CIBC Leasing, Inc.,
certain financial institutions and EPO, relating to offshore production and
related equipment for the MC 441 project, and (ii) the Master Lease Agreement
dated as of September 30, 1992, between State Street Bank and Trust Company of
Connecticut, National Association, Trustee, and EPO, relating to offshore
production and related equipment for the GB 388 project (such leases, together
with approximately $12.2 million of associated equipment to be financed
pursuant to a modification thereof, the "Equipment Leases"). The lessors' net
book value of the leased equipment at September 30, 1994 under the Equipment
- 72 -
<PAGE>
Leases is approximately $32 million for MC 441 and $235 million for GB 388.
EC fully guarantees EPO's obligations under these arrangements. In connection
with the Reorganization, all rights and obligations under the Equipment Leases
will be assigned to and assumed by EEI, with Newco entering into sublease
arrangements, with purchase options, with EEI. The net economic benefit to
EEI of the assignment of the Equipment Leases is estimated to be approximately
$12.2 million. The portion of this sum attributable to the Public
Unitholders, as an economic matter, is approximately $96,000. These assets
will be assigned to EEI in connection with the assignment and assumption of
the Equipment Leases to EEI and will be subleased to Newco as part of the
subleases described below.
The total cost for the GB 388 equipment and facilities will be greater
than the amount of the current lease financing because of costs not originally
covered by the Equipment Lease, the addition of equipment, higher than
expected costs for both labor and materials, design modifications and other
factors. The EC Companies and EPO are currently evaluating financing options
for the additional costs, including an addition to the existing lease
arrangement. The total cost of the equipment and facilities is expected to be
approximately $280 million.
The equipment and facilities needed to develop MC 441 and GB 388 will
be utilized by Newco under new sublease arrangements with EEI (collectively,
the "Equipment Subleases"). The Equipment Subleases will provide Newco with
more financial flexibility for longer terms than the Equipment Leases. Newco
will have options under the Equipment Subleases to (i) purchase the subleased
equipment at fixed prices based on projected fair market value as of the end
of the Equipment Sublease term or (ii) extend the Equipment Subleases, for
additional five year periods, on terms set at fair market value determined as
of the date of extension. The Equipment Leases and Equipment Subleases each
contain fixed price purchase options and options to extend the lease on terms
set at fair market value determined at the dates of extension (new leases), or
each can be terminated at the expiration of the lease term. The Equipment
Subleases also provide that in the event the Equipment Subleases terminate
without Newco having exercised its renewal or purchase options, or as a result
of Newco's default thereunder, EEI will have the option to purchase Newco's
interest in the MC 441 and GB 388 units at a purchase price equal to the fair
market value thereof as of the date of purchase. The Equipment Leases, if
terminated, require a guaranteed residual payment while the Equipment
Subleases do not. A component of the payments to be made by Newco under the
Equipment Subleases will be based on a floating interest rate of LIBOR plus
1.75% per annum (the "Applicable Rate"), which includes a charge of 1% per
annum to compensate the EC Companies for (i) the use of their credit, (ii) the
fact that the terms of the Equipment Subleases will be longer than the terms
of the Equipment Leases, and (iii) the assumption by EEI of residual value
risk in connection with Newco's options to purchase the subleased equipment.
The MC 441 Equipment Sublease will provide for payments by Newco of
approximately $4.5 million annually for five years, based on an estimate of
the Applicable Rate. Newco will have an option to purchase the subleased
equipment for approximately $5 million at the end of the five-year term.
- 73 -
<PAGE>
The GB 388 equipment will be subleased under two Equipment Subleases,
one covering the floating production facility (the "FPF Sublease") and the
other covering the subsea equipment, pipeline and shallow water production
facility (the "Subsea Sublease"). The FPF Sublease will have a term of 20
years and will provide for payments by Newco of approximately $12.6 million
annually, based on an estimate of the Applicable Rate. At the end of the
fifth year of the FPF Sublease, Newco will have an option to purchase the
subleased equipment for its then fair market value, estimated to be
approximately $124 million, and at the end of the seventh year EEI will have
the right to require Newco to purchase the subleased equipment for its then
fair market value, estimated to be approximately $117 million. If neither of
the events referred to in the preceding sentence has occurred by the end of
the twenty-year term, Newco will have an option to purchase the subleased
equipment for approximately $34 million. The Subsea Sublease will have an
initial term of 12 years and will provide for payments by Newco of
approximately $19 million annually, based on an estimate of the Applicable
Rate. Newco will have an option to purchase the subleased equipment for
approximately $46 million at the end of the sublease term.
Newco believes that the assignment and assumption of the Equipment
Leases, and the subleasing of the related equipment to Newco, including the
costs associated with the Applicable Rate, are on terms no less favorable than
could be obtained from unrelated parties.
Other
Both EP and EPO maintain separate short-term borrowing arrangements
with EC to meet operating needs. Under these arrangements, EC may advance
funds to EP or EPO, and EP or EPO may advance funds to EC. EPO further
maintains a short-term borrowing arrangement with EEI by which EEI may advance
funds to EPO and EPO may advance funds to EEI. Under all these arrangements,
the aggregate amount of short-term loans available between the parties is at
the lender's sole discretion, and any amounts advanced under the arrangements
mature within 12 months from the date the advance is made. The interest rate
is the 30-day commercial paper rate available for similar amounts on
commercial paper borrowings by EC. Interest is payable monthly. These
arrangements are renewed annually. At December 31, 1993 and September 30,
1994, there were approximately $27 million and $55 million of net short-term
borrowings outstanding under these arrangements, respectively.
The EC Companies have provided long-term debt financing to EP at EC's
borrowing cost. The amount of such long-term debt at September 30, 1994 was
$309 million.
Net interest costs incurred by EP on affiliated borrowings were
approximately $23 million, $25 million, $27 million and $18 million in 1991,
1992, 1993 and the nine months ended September 30, 1994, respectively.
EP had sales to affiliated companies of approximately $33 million, $33
million, $109 million and $87 million in 1991, 1992, 1993 and the nine months
ended September 30, 1994, respectively. In 1993, affiliated revenues included
gas sales of $91 million under new contracts
- 74 -
<PAGE>
effective March 1, 1993 with Enserch Gas Company covering essentially all gas
production not committed under existing contracts.
Newco believes that all transactions described herein are on terms no
less favorable than could be obtained with unrelated parties.
FEDERAL INCOME TAX CONSIDERATIONS
Introduction
The following section summarizes the opinion of Jackson & Walker,
L.L.P., special tax counsel to EP, regarding the material federal income tax
consequences of the Reorganization that should be considered by the Public
Unitholders. The opinion and this summary do not, however, address or
otherwise comment on all of the tax aspects of the Reorganization. The
opinion is based on the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed regulations thereunder, current
administrative rulings and court decisions, and certain factual
representations by EC Companies and assumptions set forth herein. There can
be no assurance that the legal authorities on which this discussion is based
will not change, perhaps retroactively, or that the factual representations
and assumptions underlying the opinion will be accurate. Counsel has relied
upon the representations of the EC Companies without independent verification.
Furthermore, there can be no assurance that the Internal Revenue Service (the
"Service") will not disagree with conclusions described below, and no ruling
from the Service on any aspect of the Reorganization has been or will be
requested. ACCORDINGLY, PUBLIC UNITHOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISORS AS TO THE TAX CONSEQUENCES OF THE REORGANIZATION TO THEM.
Public Unitholders
Pre-Reorganization Operations of EP. The income and deductions of EP
that accrue during the portion of 1994 prior to the Reorganization will be
allocated among its partners, and these allocations and adjustments will be
made in essentially the same manner as they would have been made absent the
Reorganization. Each Public Unitholder's capital account and tax basis in his
Units will be adjusted by these allocations. Each Public Unitholder will
receive a Schedule K-1 for 1994 reflecting the income and deductions allocated
to him for the portion of 1994 during which he was a Unitholder, even if he
sells his Units prior to the Reorganization.
Pre-Reorganization Sale of Units. The tax consequences to a Public
Unitholder who sells Units prior to the Reorganization will not be affected by
the Reorganization. The tax consequences of any such sale are as follows:
(a) Character and Amount of Gain or Loss. A Public Unitholder will
recognize both ordinary income and capital gain or loss on a sale of
Units. The ordinary income component will be equal to the amount of
ordinary income that would have been
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allocated to the Public Unitholder in respect of the Units that are
sold if EP and EPO had sold all of their assets. The ordinary income
element if EP and EPO had sold all of their assets would be that
amount of gain which is attributable to Section 751 assets (unrealized
receivables and substantially appreciated inventory), including
recapture of depreciation and intangible drilling and development
costs. The capital gain or loss amount will equal the difference
between the amount realized from the sale of the Units (reduced by the
portion resulting in ordinary income) and the Public Unitholder's
adjusted tax basis in the Units that are sold (reduced by the portion
allocable to the ordinary income component). If the ordinary income
element realized on the sale of his Units reduces the amount realized
on the sale of his Units below his tax basis, a Public Unitholder will
realize a capital loss on the sale portion of his Units. A Public
Unitholder's capital gain or loss will be treated as long-term capital
gain or loss if the Public Unitholder owned the Units that were sold
for more than one year prior to the sale and the Public Unitholder
held his Units as capital assets. If the Unitholder had a holding
period of one year or less, the Public Unitholder's capital gain or
loss will be treated as short-term capital gain or loss. If a Public
Unitholder sells less than all of his Units, for purposes of
determining gain or loss on the Units sold, his adjusted basis in all
of his Units held immediately prior to the sale must be allocated
among the Units sold and Units retained based on the ratio of the fair
market value of the Units sold over the fair market value of all his
Units immediately before the sale.
(b) Suspended Deductions.
A Public Unitholder may be limited in his ability to utilize
previously suspended deductions and losses on a sale of his Units prior to
the Reorganization. Utilization of previously suspended deductions and
losses is discussed below:
(i) Any losses previously allocated to a Public Unitholder
which he has not been allowed to use through the date of
sale of his Units because of the Code Section 704(d) basis
limitation rule will be lost and cannot be utilized to
offset any gain realized on the sale. Section 704(d)
limits the use of partnership losses to a partner's
adjusted basis in his partnership interest.
(ii) Any losses previously allocated to a Public Unitholder
that he has not been allowed to use because of the at-risk
limitations can (subject to (b)(iii) below), under
Proposed Regulation Sections 1.465-66 and 1.465-12, be
used to the extent of any gain recognized on the sale of
Units.
(iii) Any losses previously allocated to a Public Unitholder
that are not subject to the limitations set forth in (i)
or (ii) above but that he has not been allowed to use
because of the passive loss limitations ("suspended
passive losses") can be used in full if the Public
Unitholder sells all his Units to an unrelated person in a
transaction in which all gain or loss is recognized.
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(iv) A Public Unitholder who sells less than all of his Units
will be entitled to deduct suspended passive losses to the
extent of any gain recognized on the sale, if the Public
Unitholder is a calendar year taxpayer and sells either a
portion or substantially all of his Units before the
effective date of the Reorganization in 1994. Final
regulations recently issued indicate that for taxable
years beginning after October 4, 1994, a Public Unitholder
will have to sell substantially all of his Units in order
to utilize any suspended passive losses. In addition, a
Public Unitholder's suspended passive losses are only
deductible to the extent that the gain recognized on such
a partial sale is allocable to passive activities. The
portion of any such gain that is allocable to passive
activities will be equal to the amount determined by
multiplying the Public Unitholder's gain by a fraction,
the numerator of which is the net gain that would have
been allocated to the Public Unitholder if EPO had sold
all of its appreciated trade or business and rental
activities for their fair market value and the denominator
of which is the amount of net gain that would have been
allocated to the Public Unitholder if EPO had sold all of
its appreciated activities, including investment
activities, for their fair market value. Based upon
representations of EEI, as Managing General Partner of EP,
all of the Public Unitholder's gain will be properly
allocable to passive activities because all of EPO's
appreciated assets are used in business or rental
activities and not investment activities.
Reorganization Consequences. The material federal income tax
consequences to a Public Unitholder who receives shares of Common Stock as
a result of the Reorganization will be as follows:
(a) General Non-Recognition. Public Unitholders will not recognize
any gain or loss on the Reorganization, except as otherwise stated
below.
(b) Non-Recognition on Newco Contribution. EP, EEI and EC's
contribution of all of their partnership interests in EPO to Newco
(the "Newco Contribution") will be tax free and will be tax-free to
the Public Unitholders unless (i) EP's tax basis in its partnership
interest in EPO is less than EP's share of EPO's liabilities
transferred to Newco, as determined pursuant to Section 752 of the
Code, in which case EP will recognize gain which will be partially
allocated to the Public Unitholders or (ii) a Public Unitholder's tax
basis in his Units is less than his share of EPO's liabilities, as
determined pursuant to Section 752 of the Code, immediately before the
Newco Contribution. Based upon representations of EEI, as Managing
General Partner of EP, no Public Unitholder will recognize gain on the
Newco Contribution or the Reorganization.
(c) Liquidation Premium Allocation. In connection with the
Reorganization, the EP Partnership Agreement is being amended to
include a special allocation to the Public
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Unitholders of unrealized appreciation in EP's partnership interest in
EPO (the "Liquidation Premium Allocation"), which results in positive
capital account adjustments but has no effect on a Public Unitholder's
tax basis. Because of the increased value attributable to the Public
Unitholders' Units, the assumption by the EC Companies of all of EP's
liabilities will not reduce the Public Unitholders' exchange ratio of
one share of Common Stock for each Unit held. See "THE
REORGANIZATION." This Liquidation Premium Allocation does not result
in any material tax consequences and will not cause the Public
Unitholders to recognize any gain in connection with the
Reorganization. The assumption by the EC Companies as part of the
Reorganization of $395 million of EP liabilities will have no tax
consequences to the Public Unitholders or the EC Companies.
(d) Tax Basis. A Public Unitholder's aggregate tax basis in all
shares of Common Stock received in the Reorganization will equal the
Public Unitholder's aggregate tax basis in his Units, as adjusted (i)
for 1994 operations to the date of the Reorganization and (ii) by
excluding any share of EP debts that a Public Unitholder had
previously included in his basis in his Units. This basis will be
prorated among all shares of Common Stock received by the Public
Unitholder. To the extent any Common Stock distributed to a Public
Unitholder results in a tax basis lower than its fair market value,
gain will be recognized upon the subsequent sale or other taxable
disposition of that Common Stock. Correspondingly, to the extent any
Common Stock distributed to a Public Unitholder results in a tax basis
greater than its fair market value, loss may be recognized upon the
subsequent sale or other taxable disposition of that Common Stock.
(e) Holding Period. For holding period purposes, each share of Common
Stock will be divided into two parts. One part will be the portion of
the value of the share that is attributable to EPO's Code Section 751
assets that are neither capital assets nor Section 1231 assets
(ordinary income assets). The holding period for this part will begin
on the day following the transfer of EPO's partnership interests. The
other part will include the holding period EP has in its partnership
interest in EPO. This other part will have satisfied the long-term
capital gain requirement for a holding period of more than one year
and will therefore qualify a portion of each share attributable to
this other part for a long-term capital gain treatment when sold
(assuming that the Common Stock is held as a capital asset). As a
result of this multiple holding period rule, a Public Unitholder who
receives Common Stock in the Reorganization has to hold each share for
at least one year to insure that all gain upon its sale will be long
term capital gain. The holding period that a Public Unitholder has
for his Units is totally disregarded in determining the Public
Unitholder's holding period for Common Stock received in the
Reorganization.
(f) Suspended Deductions. Any operating loss allocated to a Public
Unitholder in prior years or during 1994 that has not been used
because of the at-risk limitations cannot be used since no taxable
gain will be recognized on the Reorganization. A Public Unitholder
also will not be entitled to deduct suspended passive losses since no
gain will be recognized by the Public Unitholders as a result of the
Reorganization. Any passive losses not used may be used thereafter
only as provided below under "Sale of Shares."
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Any suspended at-risk loss not so used, and any unused loss suspended
by a basis limitation, will be eliminated and be unavailable to Public
Unitholders thereafter in connection with a sale of Common Stock
received in the Reorganization.
(g) Sale of Shares. A Public Unitholder who receives shares of Common
Stock in the Reorganization and thereafter sells those shares will
recognize gain or loss equal to the difference between the amount
realized on the sale and the Public Unitholder's tax basis in the
shares sold. A shareholder will be able to utilize the entire amount
of his suspended passive losses upon the sale of all of his Common
Stock to an unrelated person in a transaction in which all gain or
loss is recognized. Recently issued regulations also indicate that a
pro rata portion of a shareholder's passive losses can be utilized to
offset gain on the sale of Common Stock if the shareholder sells
substantially all of his stock to an unrelated party. Depending on
the holding period of the Common Stock (see "Holding Period" above), a
shareholder will realize long or short term gain or loss upon a sale
of shares.
(h) Ownership of Shares. After the Reorganization, a shareholder will
be taxed only on distributions received from Newco, if any.
Nonliquidating distributions will be taxable as dividends to the
extent of any current or accumulated earnings and profits of Newco.
Any nonliquidating distributions in excess of the current or
accumulated earnings and profits of Newco and any liquidating
distributions will be treated as a tax free return of capital to the
extent of the shareholder's basis in his shares of Common Stock and as
capital gain to the extent of the excess, assuming that the shares are
held as capital assets. Any losses incurred by Newco will not flow
through to shareholders for use on their income tax returns, but
instead will be used by Newco in filing its corporate income tax
returns. Although, there are no statutory regulations, rulings or
cases covering the point, counsel is of the opinion that a former
Public Unitholder will not be entitled to use any suspended passive
losses allocable to his shares to offset any dividends received from
Newco.
(i) Legislation. Under current law, a partner recognizes gain to the
extent that money distributed by a partnership exceeds the basis of
his partnership interest immediately before the distribution.
Congress, however, has recently passed legislation that will, under
certain circumstances, treat a portion of the value of the common
stock distributed to a partner as a distribution of money. Absent any
adverse regulations which apply retroactively, it appears that this
legislation will not apply to EP's liquidating distribution of Common
Stock to the Public Unitholders because the legislation does not apply
to publicly traded partnership liquidations, such as the one
constituting a part of the Reorganization, until after 1997. No
assurance can be given, however, that the regulations, when issued,
will not be retroactive and apply in a materially adverse way.
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Newco
The Newco Contribution and Merger. The contribution by EP of a 1%
limited partnership interest in EPO to Newco and Newco's contribution of
that partnership interest to Newsub will both be tax free to Newco and
Newsub. Thereafter, the contribution by EP, EEI and EC of the remaining
partnership interests in EPO to Newco will also be tax free to Newco
although such contribution will constitute a constructive termination of
EPO for federal tax purposes. As a result of such constructive
termination, EPO will be deemed to have distributed all of its assets and
liabilities pro rata to Newco and Newsub, and Newco and Newsub will be
deemed to have recontributed such assets and liabilities to a new
partnership. The constructive termination and re-contribution will have no
material adverse tax consequences unless the amount of cash constructively
distributed to Newco and Newsub exceeds their respective tax bases in their
partnership interests. If the cash distributed does exceed their
respective tax bases, gain will be recognized to Newco and Newsub to the
extent of such excess.
The merger of EPO and Newsub into Newco will be treated as a transfer
of assets and liabilities from EPO to Newco and from Newsub to Newco and
the aggregate tax basis of Newco in the assets transferred will be equal to
the tax basis that Newco and Newsub had in their respective partnership
interests in EPO. Newco's tax basis in a substantial portion of its assets
will generate future tax deductions for Newco.Although Public Unitholders
with relatively higher bases in their Units than other Public Unitholders
may be viewed (through EP's and EPO's Code Section 754 election) as having
a greater share of such basis, no consideration has been given to this
expected future tax benefit in arriving at the number of shares of Common
Stock received by each Public Unitholder. Newco's holding period for each
asset acquired in the Merger will equal the holding period that EPO had in
its assets prior to the constructive termination of EPO. See "THE
REORGANIZATION--BACKGROUND."
Post-Reorganization Operations. Following the Newco Contribution, the
income and deductions attributable to the assets and liabilities previously
held by EPO will be included in the corporate tax return filed by Newco,
and Newco will pay taxes on any taxable profits it recognizes from time to
time. Additionally, net operating losses incurred by Newco after the Newco
Contribution and Merger will be available to offset Newco's income in
subsequent years.
Other Taxation
After the Newco Contribution and Merger, Newco will also be subject to
state and local taxes. Counsel has not independently attempted to:
(i) determine the state or local tax that may be imposed on EP, EPO,
or Newco as a result of the Reorganization; or
(ii) determine any tax that may be imposed on a Public Unitholder by
the country, state or other jurisdiction in which he resides or
is a citizen.
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THE FOREGOING DISCUSSION IS INTENDED ONLY TO BE A SUMMARY OF THE
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION. PUBLIC
UNITHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE SPECIFIC
FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES OF THE REORGANIZATION TO
THEM.
DESCRIPTION OF THE CAPITAL STOCK
The following description of the capital stock does not purport to be
complete and is subject to, and is qualified in its entirety by reference
to, the more complete statements thereof set forth in Newco's Restated
Articles of Incorporation, which have been attached as Exhibit D to this
Prospectus/Information Statement. Newco is currently authorized by its
Restated Articles of Incorporation to issue 200,000,000 shares of Common
Stock, par value $1 per share, and 2,000,000 shares of Preferred Stock of
no par value.
Common Stock
Currently, 1,000 shares of Common Stock are outstanding in the name of
EPO, solely for the purpose of authorizing Newco to do business under Texas
law, which will be canceled in connection with the merger of EPO into
Newco.
Subject to the rights of the holders of any Preferred Stock that may
be outstanding from time to time, holders of Common Stock are entitled to
receive such dividends as are declared by the Board of Directors from any
funds legally available therefor, to one vote for each share on all matters
voted upon by shareholders, including election of directors (cumulative
voting being prohibited), and to share ratably in assets available for
distribution upon any liquidation. Common Stock has no preemptive rights
and is not subject to redemption or to any further call or assessment.
Generally, holders of the Common Stock are entitled to elect all
members of the Board of Directors and vote upon all corporate matters.
However, any Preferred Stock that may be issued in the future may have
voting rights. Cumulative voting is prohibited by Newco's Restated
Articles of Incorporation.
The Transfer Agent and Registrar of the Common Stock will be Harris
Trust Company of New York, New York.
Preferred Stock
The Common Stock will be subject and subordinate to the rights,
privileges and preferences of any series of Preferred Stock to the extent
set forth in the resolutions adopted by the Board of Directors establishing
the series. The Preferred Stock may be divided into and issued in one or
more series as the Board of Directors of Newco may determine pursuant to
authority vested in it by the Articles of Incorporation. The Board of
Directors may establish
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series of Preferred Stock by fixing and determining the designations,
preferences, limitations and relative rights of the shares of the series,
subject to and within the limitations of the Texas Business Corporation Act
(the "TBCA") and the Restated Articles of Incorporation, including without
limitation the following:
(a) the number of shares constituting the series and the distinctive
designation of that series;
(b) the dividend rate on shares of the series, the dividend payment
dates, whether dividends shall be cumulative (and, if so, from
which date or dates), non-cumulative or partially cumulative, and
the relative rights of priority, if any, of payment of dividends
on the shares of the series;
(c) the amount payable to the holders of shares of the series upon
any voluntary or involuntary liquidation of Newco;
(d) the preference in the assets of Newco over any other class,
classes or series of shares upon the voluntary or involuntary
liquidation of Newco;
(e) the redemption terms, if any, for the shares of the series;
(f) the provisions of the sinking fund, if any, for the redemption or
purchase of shares of the series;
(g) the voting rights, if any, of the shares of the series;
(h) the conversion rights, if any, of the shares of the series;
(i) the exchange rights, if any, of the shares of the series; and
(j) any other special rights and qualifications, limitations or
restrictions permitted by the TBCA to be granted to or imposed on
the series.
Any of the designations, preferences, limitations and relative rights
of the shares of any series may be made dependent upon facts ascertainable
outside the Restated Articles of Incorporation, which facts may include
future acts of Newco, provided that the manner in which such facts shall
operate upon the designations, preferences, limitations and relative rights
of the shares of any series shall be set forth in the resolution or
resolutions establishing the series.
All shares within the same series of Preferred Stock will be identical
except as to the date of issue and the dates from which dividends on shares
of the series issued on different dates will cumulate, if cumulative. The
Board of Directors will have the authority to increase or decrease the
number of shares within each series but may not decrease the number of
shares within a
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series to less than the number of shares within that series that are then
issued. Preferred Stock has no preemptive rights and is not subject to any
further call or assessment.
Stock Ownership Restrictions
The Mineral Leasing Act of 1920, as amended (the "Mineral Act"),
provides that citizens of another country, the laws, customs, or
regulations of which deny similar or like privileges to citizens or
corporations of the United States, shall not by stock ownership, stock
holding, or stock control, own any interest in any gas, oil or other
mineral lease acquired thereunder.
In order to comply with the Mineral Act and any other laws which may
from time to time be applicable, Article Eight of Newco's Restated Articles
of Incorporation (attached as Exhibit D) authorizes the Board of Directors
of Newco to adopt, alter, or amend the Bylaws of Newco to add or amend such
provisions as in their judgment may be necessary or appropriate to ensure
that Newco and its shareholders satisfy the citizenship or other
requirements imposed by any federal or state law for the ownership,
possession or leasing of gas, oil or other minerals, land, or any other
property, licenses, or rights of any nature whatsoever in which Newco or
any of its subsidiaries may have or hereafter have, or seek to have, any
right or interest.
Article XV of the Bylaws of Newco restricts transfers of Newco capital
stock to persons who are not "Eligible Citizens" (as defined), suspends
voting, dividend and distribution rights of persons who are not Eligible
Citizens and provides for the redemption of capital stock held by such
persons in certain circumstances.
"Eligible Citizen" is defined in the Bylaws as any person whose
ownership, holding or control of Newco capital stock would not, by reason
of such person's citizenship or the citizenship of its members or owners or
otherwise, (i) disqualify Newco or any of its subsidiaries from owning,
acquiring, holding, possessing or leasing oil and gas and other minerals,
mineral deposits, lands, vessels, or other property, licenses, or rights of
any nature whatsoever in federal lands or leases under federal laws and
regulations in effect from time to time or (ii) violate any other
qualifications as the Board of Directors deems in its reasonable discretion
are necessary or appropriate to permit Newco and its subsidiaries to engage
in any other business activities for which there may be qualifications or
restrictions on shareholders of Newco or any of its subsidiaries under
federal or state laws. A person is an Eligible Citizen if the applicable
following requirement is met: (1) for an individual, that he is native-
born, naturalized or a derivative citizen of the United States; (2) for a
corporation, that it is organized or existing under the laws of the United
States, a state, the District of Columbia or a United States territory or
possession, that at least 75% of the ownership interest in, and the voting
power over, the corporation is held by Eligible Citizens, that the
corporation's president or other chief executive officer and the chairman
of its board of directors are United States citizens and that no more than
a minority of the number of directors required to constitute a quorum are
non-United States Citizens; (3) for a partnership, that all of the
interests in the partnership are owned by Eligible Citizens; (4) for a
trust, that each of its trustees and each of its beneficiaries is an
Eligible Citizen; and (5) for an association, joint venture or other
entity, that all members, venturers or
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other equity participants are Eligible Citizens and that such association,
joint venture or other entity is capable of holding leases or other
interests in federal minerals or lands under the laws of the United States.
The Bylaws further provide that any transfer, or attempted or
purported transfer, of any Newco capital stock or interests or rights
therein which would result in the ownership or control thereof by one or
more non-Eligible Citizens will be void and ineffective as against Newco,
and Newco will not recognize the transfer, provided that the shares may be
transferred to a person who is an Eligible Citizen. Newco capital stock
held by non-Eligible Citizens is not entitled to dividends or other
distributions or to vote so long as they are so held. Further, if in the
opinion of the Board of Directors the ability of Newco to hold any of its
properties, leases, rights or licenses would be prohibited or restricted,
or if Newco is named or threatened to be named in any judicial or
administrative proceeding, because of the nationality, citizenship,
residence or other status of any shareholder, Newco may redeem the shares
held by the shareholder at the then current market price and upon such
terms as shall be determined by Newco's Board of Directors.
No Previous Market for Common Stock
At present, there is no trading market for the Common Stock. However,
the NYSE has indicated to Newco that the Common Stock to be distributed to
the Public Unitholders pursuant to the Reorganization will be approved for
listing on the NYSE, subject to official notice of issuance. There can be
no assurance that an active trading market for the Common Stock will
develop, that holders of Common Stock will be able to sell their shares at
favorable prices or that the trading price for a share of Common Stock will
be comparable to the trading price for an EP Depositary Unit immediately
before the Reorganization.
LEGAL MATTERS
The validity of the Common Stock to be issued in connection with the
Reorganization will be passed upon for Newco by Jackson & Walker, L.L.P.,
Dallas, Texas.
EXPERTS
The financial statements as of December 31, 1993 and 1992 and for each
of the three years in the period ended December 31, 1993 of EP and the
financial statement as of September 1, 1994 of Newco included in this
Prospectus/Information Statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein, and
are included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The estimates of the proved reserves of gas and oil of EP and EPO made
by DeGolyer and MacNaughton, independent petroleum consultants, have been
included herein in reliance
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upon such estimates and appraisal given upon such firm's authority as
experts with respect to the matters contained therein.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Newco Pro forma Financial Statements (Unaudited):
Pro forma Balance Sheet, September 30, 1994...................... F-2
Pro forma Statements of Operations for the Nine Months
Ended September 30, 1994 and 1993 and for the
Years Ended December 31, 1993, 1992 and 1991............ F-3
Notes to Pro forma Financial Statements.......................... F-4
Enserch Exploration Partners, Ltd.:
Condensed Statements of Income for the Nine Months
Ended September 30, 1994 and 1993....................... F-7
Condensed Statements of Cash Flows for the Nine Months
Ended September 30, 1994 and 1993....................... F-8
Condensed Balance Sheets, September 30, 1994..................... F-9
Notes to Condensed Financial Statements.......................... F-10
As of December 31, 1993:
Independent Auditors' Report..................................... F-11
Statements of Operations for the Three Years Ended
December 31, 1993....................................... F-12
Statements of Cash Flows for the Three Years Ended
December 31, 1993....................................... F-13
Balance Sheets, December 31, 1993 and 1992....................... F-14
Statements of Changes in Partners' Capital for the
Three Years Ended December 31, 1993..................... F-15
Notes to Financial Statements.................................... F-16
New Enserch Exploration, Inc.
Independent Auditors' Report..................................... F-27
Balance Sheet, September 1, 1994................................. F-28
Note to Balance Sheet............................................ F-28
</TABLE>
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NEWCO
PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
The pro forma financial statements are presented based on the historical
financial statements of EP, after certain eliminations and adjustments as
described below. Newco is a recently formed Texas corporation which will have
no substantial assets, liabilities or operations until it succeeds to the gas
and oil exploration and production business of EPO.
EPO is the operating entity underlying EP and is 99% owned by EP. EP's
financial statements include the operations of EPO combined with financing
activities of EP, principally related to borrowings from EC Companies for
capital expenditures and payment of distributions to Unitholders. Newco
represents EPO in corporate form and does not include transactions relating to
EP's financing activities.
For financial accounting purposes, the Reorganization will be treated as a
reorganization of affiliated entities. Accordingly, the assets and liabilities
transferred to Newco from EPO will be recorded at their historical amounts.
The pro forma balance sheet as of September 30, 1994 has been presented as if
the EPO assets and liabilities were conveyed to Newco on that date. The pro
forma statements of operations assumes that the Reorganization occurred at the
beginning of each period presented.
It is also contemplated that Newco will acquire, at fair value, all other
domestic gas and oil properties of the EC Companies.
The Reorganization is more fully discussed elsewhere in this
Prospectus/Information Statement. These unaudited pro forma financial
statements of Newco should be read in conjunction with the historical financial
statements of EP, Selected Financial and Operating Data and Managements'
Discussion and Analysis of Financial Condition and Results of Operations. The
unaudited pro forma financial statements are not necessarily indicative of the
financial results that would have occurred had the Reorganization been
consummated on the above indicated dates, nor are they necessarily indicative of
future results.
F-1
<PAGE>
NEWCO
PROFORMA BALANCE SHEET
September 30, 1994
<TABLE>
<CAPTION>
Pro Forma Adjustments
----------------------------------------------------------------
EC Companies EP Balances
Historical 1% interest Not Assumed Other
EP in EPO(a) by Newco (b) Adjustments Newco
---------- ---------- ----------- ------------- ----------
(In thousands except per Unit/Share amounts)
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
Current Assets
Cash $ 2,677 $ 27 $ (6) $ $ 2,698
Accounts receivable:
Trade 15,741 159 15,900
EC companies 9,422 104 9,526
Note receivable -
affiliated companies 863 85,217 86,080
Other 2,587 27 2,614
---------- ---------- --------- --------- ----------
Total current assets 30,427 1,180 85,211 116,818
---------- ---------- --------- --------- ----------
Net property, plant
and equipment 1,091,767 11,026 (32,980) 156,000 (c) 1,225,813
Other Assets 22,182 222 (19,531) 1,000 (e) 3,873
---------- -------- --------- --------- ----------
Total $1,144,376 $12,428 $ 32,700 $ 157,000 $1,346,504
========== ======== ========= ========= ==========
LIABILITIES
- -----------------------------------
Current Liabilities
Accounts payable-trade $ 57,897 $ 584 $ (104) $ $ 58,377
Accounts payable-
affiliated companies 26,524 215 (5,259) 21,480
Temporary advances-
affiliated companies 54,742 557 (336) 54,963
Current portion of capital lease
obligations 5,556 (c) 5,556
Payable under leasing
arrangements 44,302 447 (44,749)
Other 5,996 60 1,000 (e) 7,056
---------- ------- -------- --------- ----------
Total current
liabilities 189,461 1,863 (50,448) 6,556 147,432
Long-term Debt-
EC Companies 309,000 (309,000)
Capital Lease Obligations
(noncurrent portion) 150,444 (c) 150,444
Deferred Income Taxes 285,286 (d) 285,286
Other Liabilities 27,658 279 27,937
Partners' Capital/
Shareholders Equity (f,g) 618,257 10,286 392,148 (285,286)(d,e) 735,405
---------- ------- -------- --------- ----------
Total $1,144,376 $12,428 $ 32,700 $ 157,000 $1,346,504
========== ======= ======== ========= ==========
Book Value per Unit/
Share $ 5.97 $ 7.03
========== ==========
</TABLE>
F-2
<PAGE>
NEWCO
PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30 December 31
------------------------ ----------------------------------
1994 1993 1993 1992 1991
----- ------ ------ ------ ------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
Natural gas...................... $111,849 $105,244 $146,352 $118,604 $123,398
Oil and condensate............... 21,632 26,341 34,263 41,595 49,843
Natural gas liquids.............. 1,149 3,465 3,828 6,098 1,518
Other............................ 259 1,417 2,418 1,287 1,494
-------- -------- -------- -------- --------
Total.......................... 134,889 136,467 186,861 167,584 176,253
-------- -------- -------- -------- --------
Costs and Expenses:
Operating expenses............... 27,887 26,404 35,273 37,436 42,597
Revenue related taxes............ 5,550 7,335 9,710 9,223 10,215
Depreciation and amortization.... 59,287 58,696 78,163 75,824 72,912
Write-down of gas and oil
properties.................... 16,500 52,000
General, administrative and
other......................... 18,583 22,061 36,621 29,666 30,013
-------- -------- -------- -------- --------
Total.......................... 111,307 114,496 159,767 168,649 207,737
-------- -------- -------- -------- --------
Operating Income (Loss)............ 23,582 21,971 27,094 (1,065) (31,484)
Other Income (Expense) - Net....... 26 4 (3) 2
Interest Income.................... 5,285 4,440 6,147 2,795 440
Interest Expense................... (355) (2,646) (8,204) (119) (3,870)
-------- -------- -------- -------- --------
Income (Loss) before Income Taxes.. 28,538 23,769 25,037 1,608 (34,912)
Income Tax (Benefit)............... 9,988 8,319 8,763 547 (11,870)
-------- -------- -------- -------- --------
Net Income (Loss).................. $ 18,550 $ 15,450 $ 16,274 $ 1,061 $(23,042)
======== ======== ======== ======== ========
Net Income (Loss) per share of
Common Stock of Newco............ $ .18 $ .15 $ .16 $ .01 $ (.22)
======== ======== ======== ======== ========
Average Common Shares Outstanding... 104,581 104,581 104,581 104,581 104,581
======== ======== ======== ======== ========
</TABLE>
See note (h) for a reconciliation of net income of EP to pro forma net income of
Newco.
F-3
<PAGE>
NEWCO
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(a) Adjustment to transfer the EC Companies 1% general partners' interest in
the assets and liabilities of EPO in exchange for shares of Common Stock
of Newco.
(b) Adjustment for certain EP assets and liabilities not being assumed by
Newco. The principal items are $309 million of long-term debt payable to
EC Companies, $85 million of Notes Receivable from affiliated companies
and the assets and obligations relating to leased properties (See "THE
REORGANIZATION").
(c) Effective on the transfer of EPO assets and obligations to Newco, Newco
will enter into subleasing arrangements for offshore production
facilities with EC Companies. One of the lease agreements will be
accounted for as an operating lease, while two leases will be accounted
for as capital leases with the lease obligations and related assets of
approximately $156 million. Pro forma combined future minimum lease
payments for the three leases are as follows (in thousands): $37,133 for
1995; $40,361 for 1996; $41,338 for 1997; $41,764 for 1998; and $41,957
for 1999. The operating lease has a lease term of twelve years and an
option to purchase the equipment under lease at the end of the lease term
at estimated fair value.
(d) To reflect deferred income taxes attributable to Newco. Since EP is a
partnership, its income or loss for tax purposes is reported in the tax
return of the individual partners. Newco, as a corporation, will be a
taxable entity. Accordingly, the deferred tax effect of the difference in
financial accounting basis and income tax basis of Newco's assets and
liabilities will be recorded upon the formation of Newco.
(e) To reflect the organization costs and related estimated liability for
the expenses of the Reorganization of $1,000.
(f) Reconciliation of Partners Capital of EP to Common Shareholders' Equity
of Newco (in thousands):
<TABLE>
<CAPTION>
<S> <C>
EP Partners' Capital:
General Partners $ 14,612
Limited Partners 603,645
---------
Total 618,257
1% General Partners' Interest in EPO:
Temporary advances - EC Companies 557
Other 9,729
---------
Total 10,286
EP Balances Not Assumed by Newco:
Long-term debt - EC Companies 309,000
Note receivable - affiliated companies 85,217
Net assets under operating lease (7,762)
Other 5,693
---------
Total 392,148
Deferred Federal Income Taxes (285,286)
---------
Common Shareholders' Equity of Newco $ 735,405
=========
</TABLE>
(g) The number of shares of Common Stock to be issued in the reorganization
was calculated as follows:
<TABLE>
<CAPTION>
<S> <C>
General Partners' Interest in EPO 1,045,812
General Partners' Interest in EP 1,035,354
Limited Partnership Interest in EP 102,500,076
-----------
Total shares of Common Stock to be issued 104,581,242
-----------
</TABLE>
Public Unitholders hold 805,914 Units of EP (.79% of Units
outstanding) and will hold 805,914 shares of Common Stock (.77% of
Common Stock to be outstanding.)
F-4
<PAGE>
(h) The following table reconciles net income (loss) of EP to pro forma net
income (loss) of Newco:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30 December 31,
-------------------------- ------------------------------------
1994 1993 1993 1992 1991
-------- -------- ------- ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net income (loss) reported
by EP $ 8,020 $ 2,651 $(3,881) $(20,265) $(49,644)
Add 1% Minority interest in EPO(1):
Revenues 1,349 1,365 1,869 1,676 1,763
Cost and expenses 1,113 1,143 1,597 1,671 2,062
------- ------- ------- -------- --------
Operating income (loss) adjustment 236 222 272 5 (299)
Interest income (expense)-net 2 (8) (56) 5 (39)
Effect of change in lease terms(2) 881 436 668
Management cost allocation from EC(3) (500) (750) (1,000) (1,000) (1,000)
Interest income on note
receivable-affiliated companies(4) 4,597 3,029 4,209 2,213 440
Eliminate interest expense
on debt of EP(5) 15,302 18,189 24,825 20,650 15,630
------- ------- ------- -------- --------
Pro forma income (loss) before
income taxes 28,538 23,769 25,037 1,608 (34,912)
Pro forma provision for income tax
(benefit)(6) 9,988 8,319 8,763 547 (11,870)
------- ------- ------- -------- --------
Pro forma net income (loss) of Newco $18,550 $15,450 $16,274 $ 1,061 $(23,042)
======= ======= ======= ======== ========
</TABLE>
(1) To include revenues and costs attributable to EC Companies' 1%
interest in EPO.
(2) The EC Companies will assume EPO's interests in and liabilities of
certain offshore equipment lease arrangements, and Newco will enter
into sublease arrangements for the offshore production facilities with
the EC Companies. One of the lease agreements will be accounted for as
an operating lease, while the other two leases will be accounted for
as capital leases with the lease obligations and related assets of
approximately $156 million. (See "CERTAIN TRANSACTIONS-Restructuring
of Equipment Leases").
(3) To provide for the management cost allocation to be charged by EC for
management of certain corporate services. EP was charged and Newco
will be charged for indirect costs (principally general and
administrative costs) applicable to gas and oil operations. Prior to
July 1, 1994, EP was not charged for management by EC of its
operations including supervision of finance, accounting, tax and legal
functions. As a separate company Newco will be charged approximately
$1,000,000 annually to cover the cost of those functions. EP was
charged $250 thousand for management cost allocation in the third
quarter of 1994. (See "CERTAIN TRANSACTIONS-Allocations").
(4) To include interest income on the note receivable-affiliated companies
at average balances at 7.5% interest per annum.
F-5
<PAGE>
(5) To eliminate interest expense on long-term borrowings from an
affiliated company which is not being assumed by Newco. Newco will
benefit in that interest expense will not be incurred as a result of
the assumption of $309 million of EP debt by EC companies in the
Reorganization. EP incurred interest expense of $15.3 million and
$18.2 million in the nine months ended September 30, 1994 and 1993,
respectively, and $24.8 million for the year ended December 31, 1993
related to such borrowings.
(6) To provide for income taxes on pro forma income before taxes at the
applicable statutory federal rate.
F-6
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------------
1994 1993
------ -------
(In thousands except
per Unit amount)
<S> <C> <C>
Revenues:
Natural gas........................ $110,731 $104,191
Oil and condensate................. 21,416 26,078
Natural gas liquids................ 1,137 3,430
Other.............................. 256 1,403
-------- --------
Total............................ 133,540 135,102
-------- --------
Costs and Expenses:
Operating expenses................. 28,306 27,537
Revenue related taxes.............. 5,494 7,261
Depreciation and amortization...... 58,753 57,656
General, administrative and other.. 17,905 21,103
-------- --------
Total............................ 110,458 113,557
-------- --------
Operating Income.................... 23,082 21,545
Other Income-Net.................... 26 4
Interest Expense.................... (15,088) (18,898)
-------- --------
Net Income.......................... 8,020 2,651
Less 1% General Partners' Interest.. 80 27
-------- --------
Income Applicable to
Limited Partners' Interest........ $ 7,940 $ 2,624
======== ========
Net Income Per Unit................. $ 0.08 $ .03
======== ========
Weighted Average Units Outstanding.. 102,500 102,500
======== ========
Distributions Declared Per Unit..... $ $ .225
======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------
1994 1993
------ ------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income......................................... $ 8,020 $ 2,651
Adjustment to reconcile net income to net cash
flows from operating activities-
Depreciation and amortization.................... 58,753 57,656
Cash effect of changes in current operating
assets and liabilities........................... 20,579 13,249
-------- --------
Net cash flows from operating activities....... 87,352 73,556
-------- --------
INVESTING ACTIVITIES
Property, plant and equipment additions............ (90,820) (82,321)
Other.............................................. (5,649) (10,768)
-------- --------
Net cash flows used for investing activities.. (96,469) (93,089)
-------- --------
Net cash flows used for operating and
investing activities....................... (9,117) (19,533)
-------- --------
FINANCING ACTIVITIES
Change in temporary advances with affiliated
companies......................................... 27,526 8,937
Proceeds from long-term notes payable to
affiliated companies.............................. 11,000 24,000
Advances under leasing arrangements................ (19,276) 9,336
Cash distributions paid............................ (7,765) (23,295)
-------- --------
Net cash flows from financing activities........ 11,485 18,978
-------- --------
Net Increase (Decrease) in Cash...................... 2,368 (555)
Cash at Beginning of Period.......................... 309 937
-------- --------
Cash at End of Period................................ $ 2,677 $ 382
======== ========
</TABLE>
See accompanying notes.
F-8
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
CONDENSED BALANCE SHEETS
(September 30, 1994 Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1994 1993
----------- ----------
(In thousands)
<S> <C> <C>
ASSETS
Current Assets
Cash............................................ $ 2,677 $ 309
Accounts receivable-trade....................... 15,741 17,120
Accounts receivable-affiliated companies........ 9,422 13,952
Materials and supplies, at average cost......... 1,842 1,749
Other........................................... 745 272
---------- ----------
Total current assets........................ 30,427 33,402
---------- ----------
Property, Plant and Equipment (at cost)
Gas and oil properties (full-cost method)....... 1,907,726 1,803,581
Other........................................... 6,270 5,947
---------- ----------
Total....................................... 1,913,996 1,809,528
Less accumulated depreciation and amortization.. 822,229 779,217
---------- ----------
Net property, plant and equipment........... 1,091,767 1,030,311
---------- ----------
Other Assets..................................... 22,182 22,590
---------- ----------
Total....................................... $1,144,376 $1,086,303
---------- ----------
LIABILITIES
Current Liabilities
Accounts payable-trade.......................... $ 57,897 $ 67,693
Accounts payable-affiliated companies........... 26,524 3,531
Temporary advances-affiliated companies......... 54,742 27,216
Payables under leasing arrangements............. 44,302 30,928
Distributions payable to unitholders............ 7,765
Other........................................... 5,996 2,690
---------- ----------
Total current liabilities...................... 189,461 139,823
---------- ----------
Long-term Debt-Affiliated Companies.............. 309,000 298,000
Deferred Royalties............................... 26,188 28,554
Other Liabilities................................ 1,470 9,689
Partners' Capital................................ 618,257 610,237
---------- ----------
Total....................................... $1,144,376 $1,086,303
========== ==========
</TABLE>
See accompanying notes.
F-9
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
Notes to Condensed Financial Statements
1. Enserch Exploration Partners, Ltd. issued 5-year promissory notes for $8
million and $3 million on January 3 and August 17, 1994, respectively
payable to affiliates of ENSERCH Corporation.
2. In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair statement of the results of
operations for the interim periods included herein have been made.
F-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of Enserch Exploration Partners, Ltd.:
We have audited the accompanying balance sheets of Enserch Exploration
Partners, Ltd. as of December 31, 1993 and 1992, and the related statements of
operations, cash flows and changes in partners' capital for each of the three
years in the period ended December 31, 1993. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership at December 31, 1993 and
1992, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 7, 1994
F-11
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
1993 1992 1991
---------- ---------- -----------
(In thousands except per unit amounts)
<S> <C> <C> <C>
Revenues:
Natural gas (Notes 2 and 4).................. $144,889 $117,418 $122,164
Oil and condensate (Note 2).................. 33,920 41,179 49,344
Natural gas liquids.......................... 3,790 6,037 1,503
Other........................................ 2,393 1,274 1,479
---------- ----------- ----------
Total 184,992 165,908 174,490
---------- ----------- ----------
Costs and Expenses:
Operating expenses........................... 37,022 37,062 42,171
Revenue related taxes........................ 9,613 9,131 10,113
Depreciation and amortization (Note 2)....... 76,700 75,066 72,183
Write-down of gas and oil properties (Note 2) 16,335 51,480
General, administrative and other............ 35,271 28,384 28,728
---------- ----------- ----------
Total 158,606 165,978 204,675
---------- ----------- ----------
Operating Income (Loss)........................... 26,386 (70) (30,185)
Other Income (Expense) - Net...................... (3) 2
Interest Expense (Notes 4 and 6).................. 30,267 20,192 19,461
---------- ----------- ----------
Net Loss.......................................... (3,881) (20,265) (49,644)
Less 1% General Partners' Interest................ (39) (203) (496)
---------- ----------- ----------
Loss Applicable to
Limited Partners' Interest.................... $ (3,842) $(20,062) $(49,148)
========== =========== ==========
Net Loss Per Unit................................. $(.04) $(.20) $( .48)
========== =========== ==========
Weighted Average Units Outstanding................ 102,500 102,500 102,500
========== =========== ==========
Distributions Declared Per Unit................... $.30 $.30 $.30
========== =========== ==========
See Notes to Financial Statements.
</TABLE>
F-12
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1993 1992 1991
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................. $ (3,881) $(20,265) $(49,644)
Adjustments to reconcile net loss to net cash flows:
Depreciation and amortization (Note 2).................. 76,700 75,066 72,183
Writedown of gas and oil properties (Note 2)............ 16,335 51,480
Cash effect of changes in current operating assets and
liabilities (Note 6).................................... 3,545 17,365 1,683
----------- ---------- ----------
Net cash flows from operating activities.............. 76,364 88,501 75,702
----------- ---------- ----------
INVESTING ACTIVITIES
Property, plant and equipment additions.................. (113,380) (63,223) (115,131)
Other.................................................... (10,760) (5,643) 9,956
----------- ---------- ----------
Net cash flows used for investing activities.......... (124,140) (68,866) (105,175)
----------- ---------- ----------
Net cash flow (required for) from operating and
investing activities.................................. (47,776) 19,635 (29,473)
----------- ---------- ----------
FINANCING ACTIVITIES
Change in temporary advances with affiliated companies... 32,756 (37,201) 28,497
Proceeds from long-term notes payable to an affiliated
company................................................. 32,000 32,000 32,000
Advances under leasing arrangements (Note 5)............. 13,453 17,475
Cash distributions paid.................................. (31,061) (31,061) (31,061)
----------- ---------- ----------
Net cash flows from (used for) financing activities.. 47,148 (18,787) 29,436
----------- ---------- ----------
Net (Decrease) Increase in Cash........................... (628) 848 (37)
Cash at Beginning of Year................................. 937 89 126
----------- ---------- ----------
Cash at End of Year....................................... $ 309 $ 937 $ 89
=========== ========== ==========
Interest Paid (Net of Amounts Capitalized)................ $ 24,791 $ 20,192 $ 17,047
=========== ========== ==========
See Notes to Financial Statements.
</TABLE>
F-13
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------------------
1993 1992
------------- -------------
ASSETS (In thousands)
<S> <C> <C>
Current Assets:
Cash................................................................ $ 309 $ 937
Accounts receivable - trade (net of allowance for possible losses of
$699 and $953)...................................................... 17,120 21,679
Accounts receivable - affiliated companies (Note 4)................. 13,952 7,011
Temporary advances - affiliated companies (net) (Notes 3 and 4)..... 5,540
Materials and supplies, at average cost............................. 1,749 3,431
Other............................................................... 272 335
---------- ----------
Total current assets............................................. 33,402 38,933
---------- ----------
Property, Plant and Equipment (at cost) (Notes 2 and 7):
Gas and oil properties (full - cost method) 1,803,581 1,737,708
($82,236 and $86,005 excluded from amortization base)
Other............................................................... 5,947 4,782
---------- ----------
Total............................................................ 1,809,528 1,742,490
Less accumulated depreciation and amortization...................... 779,217 749,452
---------- ----------
Net property, plant and equipment................................ 1,030,311 993,038
---------- ----------
Other Assets.......................................................... 22,590 7,214
---------- ----------
Total............................................................ $1,086,303 $1,039,185
========== ==========
LIABILITIES
Current Liabilities:
Accounts payable - trade............................................ $ 67,693 $ 58,865
Accounts payable - affiliated companies (Note 4).................... 3,531 7,455
Temporary advances - affiliated companies (net) (Notes 3 and 4)..... 27,216
Distributions payable to unitholders................................ 7,765 7,765
Advances under leasing arrangements (Note 5)........................ 30,928 17,475
Other............................................................... 2,690 5,826
---------- ----------
Total current liabilities........................................ 139,823 97,386
---------- ----------
Long-term Debt - Affiliated Companies (Note 3)........................ 298,000 266,000
Deferred Royalties.................................................... 28,554 26,150
Other Liabilities..................................................... 9,689 4,470
Commitments and Contingent Liabilities (Note 5).......................
Partners' Capital..................................................... 610,237 645,179
---------- ----------
Total............................................................ $1,086,303 $1,039,185
========== ==========
See Notes to Financial Statements.
</TABLE>
F-14
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
---------------- ------------- ----------
(In thousands)
<S> <C> <C> <C>
Balance, December 31, 1990.......... $16,203 $761,007 $777,210
Net Loss............................ (496) (49,148) (49,644)
Distributions Declared.............. (311) (30,750) (31,061)
---------------- --------------- --------------
Balance, December 31, 1991.......... 15,396 681,109 696,505
Net Loss............................ (203) (20,062) (20,265)
Distributions Declared.............. (311) (30,750) (31,061)
---------------- --------------- --------------
Balance, December 31, 1992.......... 14,882 630,297 645,179
Net Loss............................ (39) (3,842) (3,881)
Distributions Declared.............. (311) (30,750) (31,061)
---------------- --------------- --------------
Balance, December 31, 1993.......... $14,532 $595,705 $610,237
================ ================ ==============
See Notes to Financial Statements.
</TABLE>
F-15
<PAGE>
ENSERCH EXPLORATION PARTNERS, LTD.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND CONTROL
Enserch Exploration Partners, Ltd. ("EP"), a Texas limited partnership, was
formed in 1985 to succeed to substantially all of the domestic gas and oil
exploration and production business of ENSERCH Corporation ("ENSERCH"). At
December 31, 1993, ENSERCH and Enserch Processing Partners, Ltd. ("Processing")
owned 3,112,362 (3.0%) and 98,581,800 (96.2%), respectively, of EP's limited
partnership units outstanding. The balance of 805,914 (.8%) of EP's units
outstanding is held by the public. For administrative convenience, EP operates
through EP Operating Limited Partnership, a Texas limited partnership ("EPO"),
formerly EP Operating Company, in which EP holds a 99% limited partner's
interest and the general partners own a 1% interest. Enserch Exploration, Inc.
("EEI") is the managing general partner and ENSERCH is the special general
partner of EP and EPO.
EP has no officers, directors or employees. Instead, officers, directors and
employees of EEI perform all management and operating functions for EP. Neither
ENSERCH nor EEI, as general partners of EP, receives any carried interests,
promotions, back-ins or other compensation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The financial statements of EP have been prepared in
conformity with generally accepted accounting principles but will not be the
basis for reporting taxable income to unitholders. The proportional
consolidation method is used whereby the financial statements reflect EP's 99%
interest in EPO's assets, liabilities and operations. All dollar amounts except
per unit amounts in the notes to financial statements are stated in thousands
unless otherwise indicated.
Natural Gas and Oil Hedging Contracts - Gains and losses from transactions
to hedge against volatile product prices are deferred and included in revenues
in the statements of operations during the month that the related physical sale
occurs.
Gas and Oil Properties - The full-cost method, as prescribed by the
Securities and Exchange Commission (SEC), is used whereby the costs of proved
and unproved gas and oil properties, together with successful and unsuccessful
exploration and development costs, are capitalized. The carrying value is
limited to the present value of estimated future net revenues of proved
reserves, the cost of excluded properties and the lower of cost or market value
of unproved properties being amortized ("full-cost ceiling"). The full-cost
ceiling is calculated quarterly under current SEC rules. In March 1991, EP
recorded a $51 million noncash write-down of the carrying value of its gas and
oil properties due to the full-cost center ceiling limitation test.
Dry-hole costs resulting from exploration activities are classified as
evaluated costs and are included in the amortization base. Costs directly
associated with the acquisition and
F-16
<PAGE>
evaluation of unproved properties are excluded from the amortization base until
the related properties are evaluated. Such unproved properties are assessed
periodically and a provision for impairment is made to the full-cost
amortization base when appropriate. Sales of gas and oil properties are
credited to capitalized costs unless the sale would have a significant impact on
the amortization rate.
In December 1992, EP recorded a $16 million noncash write-off of an idle
pipeline and shallow-water production facility from an abandoned offshore
project.
As a full cost company, EP assesses future site restoration, dismantlement
and abandonment costs on an overall cost center basis. At December 31, 1993,
estimates of future salvage values exceed the estimated costs of site
restoration, dismantlement and abandonment costs. Therefore, no accruals are
required.
Depreciation and Amortization - Amortization of evaluated gas and oil
properties is computed on the unit-of-production method using estimated proved
gas and oil reserves quantified on the basis of their equivalent energy content.
Depreciation of other property, plant and equipment is provided principally by
the straight-line method over the estimated service lives of the related assets.
Income Taxes - EP is a partnership and, as a result, the income or loss of
the partnership, which reflects differences in the timing of the deduction of
certain gas and oil drilling and development costs for federal income tax
purposes, is includable in the tax returns of the individual partners.
Accordingly, no recognition has been given to income taxes in the financial
statements of EP. The assets and liabilities reported in the financial
statements of EP exceeded the federal income-tax bases by approximately $704
million and $720 million at December 31, 1993 and 1992, respectively.
Retirement Plan - Substantially all personnel who are associated with EP are
covered by an ENSERCH retirement plan and are eligible for certain health care
and life insurance benefits upon retirement. Total pension costs allocated to
EP were $867, $1,054, and $929 in 1993, 1992 and 1991, respectively. Post-
retirement health care and life insurance benefit costs allocated to EP were
$821, $550, and $577 in 1993, 1992 and 1991, respectively. Postretirement
benefits in 1993 reflect the impact of SFAS No. 106 "Employer's Accounting for
Postretirement Benefits Other Than Pensions", effective in January 1993. This
new standard requires the accrual of these benefits over the working life of the
employee rather than charging to expense on a cash basis.
Fair Value of Financial Instruments - The fair values of financial
instruments has been estimated using valuation methodologies in accordance with
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments".
Determinations of fair value are based on subjective data and significant
judgment relating to timing of payments and collections and the amounts to be
realized. Accordingly, the estimates presented are not necessarily indicative of
the amounts that EP could realize in a current market exchange.
F-17
<PAGE>
Management believes that the fair value of financial instruments, other than
long-term debt, is not materially different than the related carrying value.
The estimated fair value for long-term debt is presented in Note 3.
3. LINE OF CREDIT AND BORROWINGS
Short-term Borrowing Arrangements - Both EP and EPO maintain separate short-
term borrowing arrangements with ENSERCH to meet operating needs. Under these
arrangements, ENSERCH may advance funds to EP or EPO, and EP or EPO may advance
funds to ENSERCH. EPO further maintains a short-term borrowing arrangement with
EEI by which EEI may advance funds to EPO and EPO may advance funds to EEI.
Under all these arrangements, the aggregate amount of short-term loans available
between the parties is at the respective lender's sole discretion, and any
amounts advanced under the arrangements mature within 12 months from the date
the advance is made. The interest rate is the 30-day commercial paper rate
available for similar amounts on commercial paper borrowings by ENSERCH.
Interest is payable monthly. These arrangements are renewed annually. At
December 31, 1993, there were $27,216 of net short-term borrowings outstanding
under these arrangements at an interest rate of 3.28%.
Long-term Notes Payable - Long-term notes payable to Processing are
summarized below:
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
9.2% Notes due 2000................... $ 16,000 $ 16,000
9.95% Notes due 2000.................. 16,000 16,000
9.9% Notes due 2000................... 170,000 170,000
9.9% Notes due 2001................... 8,000 8,000
9.8% Notes due 2001................... 16,000 16,000
9.0% Note due 2001.................... 8,000 8,000
8.5% Notes due 2002................... 16,000 16,000
9.05% Notes due 2002.................. 8,000 8,000
8.75% Notes due 2002.................. 8,000 8,000
8.35% Notes due 2003.................. 8,000
6.35% Notes due 1998.................. 8,000
6.30% Notes due 1998.................. 8,000
5.30% Notes due 1998.................. 8,000
---------- ----------
Total $298,000 $266,000
========== ==========
</TABLE>
F-18
<PAGE>
Interest on the above notes is payable semiannually on June 30 and December
31. The estimated fair value of these notes was $352 million at December 31,
1993 and $300 million at December 31, 1992. The calculation was made using a
discounted cash flow approach based on the interest rates currently available to
ENSERCH for debt with similar terms and remaining maturities.
4. RELATED PARTY TRANSACTIONS
In the ordinary course of business, EP engages in various transactions with
ENSERCH and its affiliates. All such transactions are subject to review by the
Policy and Conflicts of Interest Committee of ENSERCH, a committee composed
solely of outside directors. The Committee has found no unfair dealings between
and among such parties. EP is charged for direct costs incurred by ENSERCH and
EEI that are associated with managing EP's business and operations.
Additionally, indirect costs (principally general and administrative costs)
applicable to EP are allocated to EP by ENSERCH. Such charges amounted to
$2,026, $1,927 and $1,798 in 1993, 1992 and 1991, respectively.
EP had sales to affiliated companies (Enserch Gas Company, Lone Star Gas
Company and Processing) of $108,916, $32,508 and $32,710 in 1993, 1992 and 1991,
respectively. In 1993, affiliated revenues include gas sales of $91,000 under
new contracts effective March 1, 1993 with Enserch Gas Company covering
essentially all gas production not committed under existing contracts.
Net interest costs incurred on affiliated borrowings were $27,120, $25,336,
and $22,872 in 1993, 1992 and 1991, respectively.
5. COMMITMENTS AND CONTINGENT LIABILITIES
Advances Under Leasing Arrangements - In May 1992, EP entered into an
operating leasing arrangement to provide financing for its portion of the
offshore platform and related facilities for the 37 1/2% owned Mississippi
Canyon Block 441 project. A total of $34 million was required for the project,
which was completed in early 1993. EP leased the facilities for an initial
period through May 20, 1994, with an option to renew the lease, with the consent
of the lessor, for up to 10 successive six-month periods. The lease has been
renewed through November 20, 1994 and EP expects to renew the lease for all
renewal periods. EP has the option to purchase the facilities throughout the
lease periods and as of December 31, 1993, has guaranteed an estimated residual
value for the facilities of approximately $27 million should the lease not be
renewed. Expenses incurred under the lease in 1993 were $2.1 million. The
estimated future minimum net rentals for the Mississippi Canyon operating lease
are $6.3 million for 1994.
In September 1992, EP entered into an operating lease arrangement to
provide financing for the offshore platform and related facilities of its 100%
owned Garden Banks Block 388 project. The lessor will fund the construction
cost of the facilities quarterly, up to a maximum of $235 million. As of
December 31, 1993, a total of $60 million had been advanced to EP
F-19
<PAGE>
under the lease as agent for the lessors, $31 million of which was unexpended
and reflected as a current liability. EP will lease the facilities for an
initial period through March 31, 1997, with the option to renew the lease, with
the consent of the lessor, for up to three successive two-year periods. EP, as
agent for the lessor, will acquire, construct and operate the units of leased
property and has guaranteed completion of construction of the facilities. EP
has the option to purchase the facilities throughout the lease periods and has
guaranteed an estimated residual value for the facilities of approximately $188
million, assuming the full lease amounts are advanced and expended, should the
lease not be renewed. The estimated future minimum net rentals for the Garden
Banks operating lease are as follows: $4.8 million for 1994; $9.1 million for
1995; $9.1 million for 1996; and $2.3 million for 1997. Lease payments are
being deferred during the construction period and will be amortized when
production begins.
At December 31, 1993, EEI had several noncancelable operating leases,
principally for buildings and office space, that expire at various dates through
1998. EP bears an allocated share of rental expenses incurred by EEI under
noncancelable operating leases. EP's allocated share of rental expenses (99% of
EEI's rental expenses) totaled $4,985, $3,547 and $2,938 in 1993, 1992 and 1991,
respectively. Future minimum rentals under such leases, of which EP would bear
its proportionate share, are as follows: $1.3 million for 1994; $1.3 million
for 1995; $1.4 million for 1996; $1.5 million for 1997; and $1.4 million for
1998.
Legal Proceedings - A lawsuit was filed against EEI, ENSERCH, its utility
division and EPO in the 348th Judicial District Court of Tarrant County in May
1989. Plaintiffs seek unspecified actual damages and punitive damages in the
amount of $5 million. Plaintiffs allege royalties were not fully paid, certain
expenses were improperly charged against the amount of royalties due, negligence
in the venting of gas and liquid hydrocarbons into the air, and breach of duty
of good faith and fair dealing by wrongfully concealing certain material facts
concerning sales of gas from the subject leases to the utility division.
A lawsuit was filed on February 24, 1987, in the 112th Judicial District of
Sutton County, Texas, against subsidiaries and affiliates of ENSERCH, as well as
its utility division. The plaintiffs have claimed that defendants failed to
make certain production and minimum purchase payments under a gas-purchase
contract. In this connection, the plaintiffs have alleged a conspiracy to
violate purchase obligations, improper accounting of amounts due, fraud,
misrepresentation, duress, failure to properly market gas and failure to act in
good faith. In this case, plaintiffs seek actual damages in excess of $5
million and punitive damages in an amount equal to 0.5% of the consolidated
gross revenues of ENSERCH for the years 1982 through 1986 (approximately $85
million), interest, costs and attorneys' fees.
On December 26, 1989, a lawsuit was filed against EEI and EPO in the 130th
Judicial District Court of Matagorda County, Texas. The plaintiff claims that
the defendants breached an alleged contract to sell a working interest and net
revenue interest in two leases located in Matagorda County. Trial of the case
resulted in a jury verdict in favor of the plaintiff. Judgment was entered by
the trial court on October 8, 1992, ordering EEI and EPO to convey the leases to
the plaintiff and to pay damages of $3.1 million, which includes principal,
prejudgment interest, attorneys' fees and costs. This judgment was appealed to
the Corpus
F-20
<PAGE>
Christi Court of Appeals on September 2, 1992. Counsel has advised that there
is a reasonable basis to believe that the decision of the trial court will be
reversed.
On October 25, 1991, a lawsuit was filed against EEI, EPO and ENSERCH in
the 111th District Court of Webb County Texas. Other parties have intervened.
The plaintiffs and intervenors claim that the defendants' failure to reassign
part of a gas and oil lease covering approximately 33,000 net mineral acres in
breach of defendants' contractual reassignment obligations entitles them to
recover the fair market value of the lost leasehold estate and lost overriding
royalty interests. Plaintiffs and intervenors claim actual damages of
approximately $3.1 million for the lost leasehold estate, and approximately $2.2
million for the lost overriding royalty interests. They also seek pre-judgment
interest, attorney's fees and costs.
Management believes that the named defendants have meritorious defenses to
the claims made in these and other actions. In the opinion of management, EP
will incur no liability from these and all other pending claims and suits that
would be considered material for financial reporting purposes.
6. SUPPLEMENTAL FINANCIAL INFORMATION
Quarterly Results (Unaudited) - The results of operations by quarters are
summarized below. In the opinion of EP's management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
have been made.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
1993:
Revenues............................................................. $39,755 $47,709 $47,638 $49,890
Operating Income..................................................... 5,118 9,160 7,267 4,841 (a)
Net Income (Loss).................................................... (640) 2,743 548 (6,532) (a)
Net Income (Loss) Per Unit........................................... (.01) .03 .01 (.06)
1992:
Revenues............................................................. $41,333 $39,454 $41,224 $ 43,897
Operating Income (Loss).............................................. 4,228 1,538 4,346 (10,182) (b)
Net Loss............................................................. (610) (3,267) (862) (15,526)
Net Income Per Unit.................................................. (.01) (.03) (.01) (.15)
</TABLE>
____________________
(a) Fourth quarter 1993 operating income is after a charge of $7.1 million for
pending litigation. The net loss for the fourth quarter of 1993 reflects
the $7.1 million provision for litigation and, in addition, includes a $6
million provision for interest due royalty owners.
(b) Includes a $16,335 noncash write-off of an idle pipeline and shallow-water
production facility from an abandoned offshore project.
F-21
<PAGE>
Decrease (Increase) in Current Operating Assets and Liabilities by Components
is summarized below:
<TABLE>
<CAPTION>
1993 1992 1991
---------------- -------------- --------------
<S> <C> <C> <C>
Accounts Receivable.................................................... $ (2,382) $ 10,737 $ 16,580
Materials and Supplies................................................. 1,682 833 (187)
Other Current Assets................................................... 63 891 (1,105)
Accounts Payable....................................................... 7,318 5,437 (14,654)
Other Current Liabilities.............................................. (3,136) (533) 1,049
---------------- -------------- --------------
Total................................................................ $ 3,545 $ 17,365 $ 1,683
================ ============== ==============
Interest Costs are summarized below:
1993 1992 1991
---------------- -------------- --------------
Interest Capitalized................................................... $ 4,214 $ 5,262 $ 6,871
Interest Charged to Expense............................................ 30,267(a) 20,192 19,461
---------------- -------------- --------------
Interest Costs Incurred.............................................. $ 34,481 $ 25,454 $ 26,332
================ ============== ==============
</TABLE>
(a) Includes $6 million provision for interest due royalty owners
7. SUPPLEMENTAL GAS AND OIL INFORMATION
Gas and Oil Producing Activities - The following tables set forth information
relating to gas and oil producing activities. Reserve data for natural gas
liquids attributable to leasehold interests owned by EP are included in oil and
condensate.
<TABLE>
<CAPTION>
December 31
-------------------------------------
1993 1992
------------ ------------
<S> <C> <C>
Capitalized Costs:
Proved gas and oil properties....................................................... $1,721,345 $1,651,703
Unproved gas and oil properties..................................................... 82,236 86,005
------------ ------------
Total........................................................................... $1,803,581 $1,737,708
============ ============
Accumulated depreciation and amortization............................................. $ 775,570 $ 746,657
============ ============
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------
1993 1992 1991
----------------- ----------------- ------------------
<S> <C> <C> <C>
Costs Incurred:
Property acquisition costs:
Proved........................................ $ 8,179 $ 886 $ 659
Unproved...................................... 12,429 8,969 9,527
Exploration costs................................ 36,397 35,030 46,901
Developments costs............................... 62,401 16,355 62,586
----------------- ----------------- ------------------
Total $119,406 $61,240 $119,673
================= ================= ==================
Amortization (per MMBtu)(a)........................ $ .91 $ .91 $ .83
================= ================= ==================
(a) Amortization expense per unit of production converted to a common unit of measure,
millions of British thermal units (MMBtu).
</TABLE>
Excluded Costs - The following table sets forth the composition of
capitalized costs excluded from the amortizable base as of December 31, 1993:
<TABLE>
<CAPTION>
Amounts Incurred In
---------------------------------------------------
Total as of
Prior December 31,
1993 1992 1991 Years 1993
---------- --------- --------- -------- ------------
<S> <C> <C> <C> <C> <C>
Property Acquisition Costs.. $12,311 $ 5,260 $ 3,792 $18,539 $39,902
Exploration Costs........... 5,498 10,864 9,337 3,148 28,847
Interest Capitalized........ 3,990 4,367 2,895 2,235 13,487
---------- --------- --------- -------- ------------
Total..................... $21,799 $20,491 $16,024 $23,922 $82,236
========== ========= ========= ======== ============
</TABLE>
At December 31, 1993, approximately 43% of excluded costs relates to offshore
activities in the Gulf of Mexico and the remainder relates to domestic onshore
exploration activities. The anticipated timing of the inclusion of these costs
in the amortization computation will be determined by the rate at which
exploratory and development activities continue, which is expected to be
accomplished within ten years.
Gas and Oil Reserves (Unaudited) - The following table of estimated proved and
proved developed reserves of gas and oil has been prepared utilizing estimates
of year end reserve quantities provided by DeGolyer and MacNaughton, independent
petroleum consultants. Reserve
F-23
<PAGE>
estimates are inherently imprecise and estimates of new discoveries are more
imprecise than those of producing gas and oil properties. Accordingly, the
reserve estimates are expected to change as additional performance data becomes
available. Oil reserves (which include condensate and natural gas liquids
attributable to leasehold interests) are stated in thousands of barrels (MBbl).
Gas reserves are stated in million cubic feet (MMcf). All reserves are located
in the United States.
<TABLE>
<CAPTION>
Oil Gas
MBbl MMcf
---------- ----------
<S> <C> <C>
Proved Reserves:
Balance, January 1, 1991....................................... 28,725 1,223,180
Revisions of previous estimates................................ (117) (54,709)
Extensions, discoveries and additions.......................... 1,478 57,081
Purchase of minerals in place.................................. 10,516 12,307
Sale of minerals in place...................................... (36) (549)
Production..................................................... (2,529) (70,026)
---------- ----------
Balance, December 31, 1991..................................... 38,037 1,167,284
Revisions of previous estimates................................ 1,023 (7,054)
Extensions, discoveries and additions.......................... 1,444 20,817
Purchase of minerals in place.................................. 102 198
Sale of minerals in place...................................... (42) (15,665)
Production..................................................... (2,625) (65,161)
---------- ----------
Balance, December 31, 1992..................................... 37,939 1,100,419
Revisions of previous estimates................................ 1,331 20,179
Extensions, discoveries and additions.......................... 1,292 34,549
Purchase of minerals in place.................................. 3 4,379
Sale of minerals in place...................................... (40) (4,042)
Production..................................................... (2,307) (70,018)
---------- ----------
Balance, December 31, 1993..................................... 38,218 1,085,466
Less 1% general partners' interest in EPO...................... 382 10,855
---------- ----------
Net........................................................... 37,836 1,074,611
========== ==========
Proved Developed Reserves:
January 1, 1991................................................ 19,245 1,035,898
December 31, 1991.............................................. 17,763 974,031
December 31, 1992.............................................. 13,552 675,844
December 31, 1993.............................................. 14,249 734,077
Less 1% general partners' interest in EPO...................... 142 7,341
---------- ----------
Net........................................................... 14,107 726,736
========== ==========
</TABLE>
F-24
<PAGE>
Included in oil reserve estimates are natural gas liquids for leasehold
interest of 931 MBbl for 1993; 789 MBbl for 1992; and 743 MBbl for 1991.
Results of Operations for Producing Activities (excluding corporate overhead
and interest costs) - are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................. $186,224 $164,634 $173,011
Production Costs.......................... 45,684 43,132 48,374
Exploration Costs (1)..................... 6,276 8,128 9,752
Depreciation and Amortization............. 75,917 74,378 71,599
Write-down of Gas and Oil Properties (2).. 51,480
-------- -------- --------
Net..................................... $ 58,347 $ 38,996 $ (8,194)
======== ======== ========
- ------------------
</TABLE>
(1) Includes internal costs that cannot be directly identified with
acquisition, exploration or development activities.
(2) Excludes a $16,335 noncash write-off in 1992 of an idle pipeline and
shallow water production facility from an abandoned offshore project that
was not a gas and oil producing activity.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Gas and Oil Reserve Quantities (Unaudited) - has been prepared by EP using
estimated future production rates and associated production and development
costs. Continuation of economic conditions existing at the balance sheet date
was assumed. Accordingly, estimated future net cash flows were computed by:
applying prices in contracts in effect in December to estimated future
production of proved gas and oil reserves; estimating future expenditures to
develop proved reserves; and estimating costs to produce the proved reserves
based on average costs for the year. Average prices used in the computations
were:
<TABLE>
<CAPTION>
1993 1992 1991
------ -------- ---------
<S> <C> <C> <C>
Natural Gas (per Mcf).......................$ 2.38 $ 2.18 $ 2.03
Oil (per Bbl)............................... 11.68 18.16 18.35
</TABLE>
Because of the imprecise nature of reserve estimates and the unpredictable
nature of other variables used, the standardized measure should be interpreted
as indicative of the order of magnitude only and not as precise amounts.
F-25
<PAGE>
<TABLE>
<CAPTION>
1993 1992 1991
-------------- ----------- ---------
(In millions)
<S> <C> <C> <C>
Future Cash Inflows........................ $3,031.6 $3,056.4 $3,041.7
Future Production and Development Costs.... 1,042.8 1,039.3 980.6
-------------- ----------- ---------
Future Net Cash Flows...................... 1,988.8 2,017.1 2,061.1
Less 10% Annual Discount................... 886.4 908.7 1,000.7
-------------- ----------- ---------
Standardized Measure of Discounted Future 1,102.4 1,108.4 1,060.4
Net Cash Flows........................
Less 1% General Partners' Interest in EPO.. 11.0 11.1 10.6
-------------- ----------- ---------
Net................................... $1,091.4 $1,097.3 $1,049.8
============== =========== =========
</TABLE>
The following table sets forth an analysis of changes in the standardized
measure of discounted future net cash flows from proved gas and oil reserves:
<TABLE>
<CAPTION>
1993 1992 1991
--------------- ----------- ---------
(In millions)
<S> <C> <C> <C>
Sales and Transfers of Gas and Oil Produced, Net
of Production Costs............................. $(135.6) $(114.5) $(116.0)
Changes in Prices, Net of Production and Future
Development Costs............................... 3.6 20.7 (252.4)
Extensions, Discoveries, and Improved Recovery,
Less Related Costs.............................. 41.4 22.3 47.4
Purchase of Minerals in Place..................... 9.4 .9 84.8
Revisions of Previous Quantity Estimates.......... (29.6) 16.4 (38.3)
Sale of Minerals in Place......................... (4.9) (.7)
Accretion of Discount............................. 105.1 102.4 110.3
Other............................................. (.3) 4.7 (4.0)
Less 1% General Partners' Interest in EPO......... (.1) .5 (1.7)
--------------- ----------- ---------
Net.................................... $ (5.9) $ 47.5 $(167.2)
=============== =========== =========
</TABLE>
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
NEW ENSERCH EXPLORATION, INC.:
We have audited the accompanying balance sheet of New Enserch Exploration,
Inc. as of September 1, 1994. This financial statement is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Company at September 1, 1994, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
September 1, 1994
F-27
<PAGE>
NEW ENSERCH EXPLORATION, INC.
BALANCE SHEET
September 1, 1994
Cash ........................................................ $1,000
======
Shareholder's equity - Common Stock, $1.00 par value;
200,000,000 shares authorized, 1,000 shares outstanding...... $1,000
======
See note below.
________________
NOTE TO BALANCE SHEET
New Enserch Exploration, Inc. ("Newco") was formed on September 1, 1994 to
succeed to the gas and oil exploration and production business of EPO. Newco
has had no operations to date and will not have significant assets, liabilities
or operations until the merger with EPO is completed.
Newco also has authorized 2,000,000 shares of Preferred Stock. See
"DESCRIPTION OF THE CAPITAL STOCK."
F-28
<PAGE>
EXHIBIT A
---------
[Letterhead of Dean Witter
appears here]
November 15, 1994
Board of Directors
Enserch Exploration, Inc.
ENSERCH Center
300 South St. Paul Street
Dallas, TX 75201
Gentlemen:
We understand that Enserch Exploration, Inc. ("EEI"), as Managing General
Partner of Enserch Exploration Partners, Ltd. ("EP" or the "Partnership") is
proposing a plan of reorganization (the "Reorganization"), pursuant to which (i)
New Enserch Exploration, Inc., a newly organized Texas corporation that will
change its name to Enserch Exploration, Inc. ("Newco"), will acquire all of the
outstanding partnership interests of EP Operating Limited Partnership ("EPO"),
which is the limited partnership in which EP has a 99% limited partner interest
and which holds EP's gas and oil properties, in exchange for shares of common
stock of Newco, par value $1.00 per share ("Common Stock"); (ii) EPO will then
be merged into Newco and (iii) EP then will be liquidated, with all partners
receiving shares of Common Stock, and with ENSERCH Corporation ("EC") and its
corporate subsidiaries and affiliated partnerships (collectively with EC, the
"EC Companies") also receiving certain leases and the concomitant obligations of
EP and retaining approximately $395 million of EP's liabilities upon the
liquidation of EP. Upon the liquidation of EP and the distribution of Common
Stock, holders of outstanding limited partnership interests ("Units") other than
the EC Companies (the "Public Unitholders") will receive one share of Common
Stock for each Unit then held, which shares of Common Stock will be traded on
the New York Stock Exchange.
You have asked us to render our opinion as to the fairness of the
Reorganization to the Public Unitholders from a financial point of view.
In arriving at our opinion, we have, among other things:
(1) Reviewed a draft of the Registration Statement to be filed by Newco
with the Securities and Exchange Commission;
(2) Reviewed the Partnership's Annual Reports on Form 10-K since
inception through December 31, 1993 and Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1994, June 30, 1994 and September 30,
1994;
(3) Reviewed and discussed the Partnership's Reserve Report (dated January
1,
<PAGE>
Page 2
1994) with representatives of DeGolyer and MacNaughton, the
Partnership's independent petroleum engineering firm that prepared
such report (the "Reserve Report");
(4) Reviewed historic financial and operating results of the Partnership
(since its original public offering on April 23, 1985) and discussed
with senior management of EEI and EC their business plans for Newco,
including (i) their intention to increase the percentage ownership of
Newco held by the public, (ii) their intention to reinvest Newco's
cash flow in its business and (iii) their intention to maintain a
significant ownership interest in Newco;
(5) Reviewed and discussed with management financial and operating
projections, including certain reserve economic forecasts, provided by
EEI regarding the business plans and prospects for Newco, including
its capital expenditure program and dividend policy;
(6) Reviewed certain financial ratios, derived from financial and
operating data provided by EEI management, of (i) the Partnership and
(ii) Newco on a pro forma basis giving effect to the Reorganization;
(7) Reviewed the historical market prices, distributions and trading
volumes of the EP units;
(8) Reviewed and contrasted the distribution rights of the Public
Unitholders to those of certain other publicly traded partnerships
offered subsequent to EP's original offering;
(9) Analyzed the current marketplace receptivity for natural resource
publicly traded partnerships;
(10) Analyzed the financial and operating results of certain oil and gas
exploration and production corporations which we deemed to be
reasonably similar to the Partnership, and studied the marketplace for
the securities, including common stock, of such prospective issuers;
and
(11) Reviewed such other financial studies, analyses and investigations as
we deemed appropriate.
In our review, and in arriving at our opinion, we have relied on the
accuracy and completeness of all information supplied or otherwise made
available to us by EC and EEI, and we have not independently verified such
information or undertaken an independent appraisal of the assets of the
Partnership. We have also relied upon the management of EEI as to the
reasonableness of and the ability to achieve the financial forecasts (which
include the reserve
<PAGE>
Page 3
economic forecasts) of Newco and EP as provided to us, and we have assumed that
such forecasts have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of such management as to the future
operating performance of Newco and EP. We have assumed that the Reserve Report
has been reasonably prepared and reflects the best currently available estimates
and judgments of DeGolyer and MacNaughton as to the reserves and future
production volumes of EP. We have also relied on the determination of EEI and
its legal counsel as to the federal income tax consequences of the
Reorganization to the Public Unitholders, which is described in the
Prospectus/Information Statement.
On the basis of, and subject to the foregoing, we are of the opinion that
the proposed Reorganization, taken as a whole, is fair to the Public Unitholders
from a financial point of view.
Sincerely,
DEAN WITTER REYNOLDS INC.
<PAGE>
EXHIBIT B
---------
AMENDMENT NO. 5
TO
AMENDED AND RESTATED
AGREEMENT
OF
LIMITED PARTNERSHIP
OF
EP OPERATING LIMITED PARTNERSHIP
This AMENDMENT NO. 5 TO AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP (this "Amendment") is executed on December 30, 1994, to be effective
as of December 30, 1994, by ENSERCH EXPLORATION HOLDINGS, INC. (the "Managing
General Partner"), a Delaware corporation formerly named Enserch Exploration,
Inc., ENSERCH CORPORATION (the "Special General Partner"), a Texas corporation,
ENSERCH EXPLORATION PARTNERS, LTD. (the "Limited Partner"), a Texas limited
partnership.
RECITALS:
A. EP Operating Limited Partnership, formerly EP Operating Company,
Ltd. and EP Operating Company (the "Partnership"), was organized as a Texas
limited partnership pursuant to the provisions of the Texas Uniform Limited
Partnership Act (Article 6132a, Vernon's Texas Statutes) (the "Uniform Act")
upon the filing with the Secretary of State of the State of Texas on March 7,
1985 of a Certificate of Limited Partnership for the Partnership and pursuant to
an original Agreement of Limited Partnership. The original Agreement of Limited
Partnership was amended and restated as of April 30, 1985 and was thereafter
amended by Amendment No. 1 dated as of September 1, 1992, Amendment No. 2 dated
as of October 23, 1992, Amendment No. 3 dated as of July 9, 1993 and Amendment
No. 4 dated as of December 8, 1994 (as so amended, the "Agreement").
B. The Managing General Partner has determined that it is in the best
interests of the Partnership and the Partners that the Agreement be further
amended as set forth herein and has proposed this Amendment to the Agreement.
The Special General Partner and the Limited Partner have consented to this
Amendment.
NOW, THEREFORE, Managing General Partner, Special General Partner and
Limited Partner hereby amend the Agreement as set forth below pursuant to
Section 14.1(a) of the Agreement:
1. Article X of the Agreement is amended by adding the following
Section 10.4 thereto:
"10.4 Contributions to Newco. Any other provision of
this Agreement notwithstanding, the Managing General Partner,
Special
1
<PAGE>
General Partner, and Limited Partner may assign, contribute
and transfer their Partnership Interests to New Enserch
Exploration, Inc., a Texas corporation organized in 1994 as
New Enserch Exploration, Inc. ("Newco") whose name will be
changed to Enserch Exploration, Inc. in the merger with the
Partnership authorized below, in exchange for shares of Newco
common stock pursuant to a Contribution of Partnership
Interests Agreement substantially in the form of APPENDIX
`EPO-1' hereto, the execution and delivery of which on behalf
of the Partnership are hereby authorized. Newco may assign,
contribute and transfer a portion of such Partnership
Interests to a wholly owned subsidiary of Newco and the
Partnership may merge with Newco and that subsidiary pursuant
to a plan of merger adopted for the Partnership by Newco as
successor Managing General Partner of the Partnership, with
Newco being the surviving entity of such merger. The
permission to transfer Partnership Interests contained in this
Section 10.4 does not otherwise affect or amend the
restrictions on transfer contained in Section 10.1(b), which
is hereby ratified."
2. Article XIII of the Agreement is amended to amend Section 13.4 in
its entirety to read as follows:
"13.4 Distribution in Kind. Notwithstanding the provisions
of Section 13.3 which require the liquidation of the assets of
the Partnership, but subject to the order of priorities set
forth therein, if on dissolution of the Partnership the
Liquidator determines that an immediate sale of part or all of
the Partnership's assets would be impractical or would cause
undue loss to the Partners, the Liquidator may, in its
absolute discretion, defer for a reasonable time the
liquidation of any assets except those necessary to satisfy
liabilities of the Partnership (other than those to Partners)
and may, in its absolute discretion, distribute to the
Partners, in lieu of cash, in accordance with the provisions
of Sections 13.3(c) and 13.3(d), such Partnership assets as
the Liquidator deems appropriate, including non pro rata
distributions. Any distributions in kind shall be subject to
such conditions relating to the disposition and management
thereof as the Liquidator deems reasonable and equitable and
to any joint operating agreements or other agreements
governing the operation of such properties at such time. The
Liquidator shall determine the fair market value of any
property distributed in kind using such reasonable method of
valuation as it may adopt."
3. Except as specifically amended hereby, the Agreement remains in full
force and effect as written.
IN WITNESS HEREOF, Managing General Partner, Special General Partner and
2
<PAGE>
Limited Partner have caused this Amendment to be executed by their duly
authorized officers on and as of the dates first above written.
MANAGING GENERAL PARTNER:
ENSERCH EXPLORATION HOLDINGS, INC.
a Delaware corporation formerly
named Enserch Exploration, Inc.
300 South St. Paul
Dallas, Texas 75201
By:__________________________________
Its:_________________________________
SPECIAL GENERAL PARTNER:
ENSERCH CORPORATION
300 South St. Paul
Dallas, Texas 75201
By:__________________________________
Its:_________________________________
LIMITED PARTNER:
ENSERCH EXPLORATION PARTNERS, LTD.
300 South St. Paul
Dallas, Texas 75201
By: Enserch Exploration Holdings, Inc.,
Managing General Partner
300 South St. Paul
Dallas, Texas 75201
By:_____________________________
Its:____________________________
3
<PAGE>
APPENDIX "EPO-1"
CONTRIBUTION OF PARTNERSHIP INTERESTS AGREEMENT
(EP, EC AND EEI TO NEWCO)
THIS CONTRIBUTION OF PARTNERSHIP INTERESTS AGREEMENT ("Contribution
Agreement") is executed this 30th day of December, 1994 by ENSERCH EXPLORATION
HOLDINGS, INC. ("EEI"), a Delaware corporation formerly named Enserch
Exploration, Inc., ENSERCH CORPORATION ("EC"), a Texas corporation, ENSERCH
EXPLORATION PARTNERS, LTD. ("EP"), a Texas limited partnership, NEW ENSERCH
EXPLORATION, INC. ("Newco"), a Texas corporation organized in 1994 whose name is
to be changed to Enserch Exploration, Inc. in the merger authorized in paragraph
7 below, and ENSERCH NEWSUB, INC. ("Newsub"), a Texas corporation which is a
wholly owned subsidiary of Newco.
RECITALS:
A. EP Operating Limited Partnership, formerly EP Operating Company,
Ltd. and EP Operating Company ("EPO"), is a Texas limited partnership existing
pursuant an Amended and Restated Agreement of Limited Partnership dated as of
April 30, 1985, as amended by Amendment No. 1 dated as of September 1, 1992,
Amendment No. 2 dated as of October 23, 1992, Amendment No. 3 dated as of July
9, 1993, Amendment No. 4 dated as of December 8, 1994 and Amendment No. 5 dated
as of December 30, 1994 (as so amended, the "EPO Partnership Agreement"). Terms
used in this Contribution Agreement have the same meanings given in the EPO
Partnership Agreement, unless a different definition is given in this
Contribution Agreement.
B. EEI is the Managing General Partner of EPO and EEI's Percentage
Interest as Managing General Partner in EPO is 0.99%. EC is the Special General
Partner of EPO and EC's Percentage Interest as Special General Partner in EPO is
0.01%. EP is the Limited Partner of EPO and EP's Percentage Interest as Limited
Partner in EPO is 99%.
C. EEI, EC and EP wish to contribute and assign their Partnership
Interests in EPO to Newco in exchange for the issuance to them of Common Stock,
par value $1.00 per share, of Newco ("Newco Common Stock").
D. Newco wishes to contribute and assign a portion of the Partnership
Interest in EPO assigned to it by EP to Newsub as a capital contribution to
Newsub.
E. Newco wishes to accept the contribution and assignment of EEI's,
EC's and EP's Partnership Interests and Newsub wishes to accept the contribution
and assignment of a portion of the Partnership Interest in EPO assigned to Newco
by EP.
1
<PAGE>
NOW, THEREFORE, for valuable consideration, the parties agree as follows:
1. ASSIGNMENTS OF PARTNERSHIP INTERESTS. The parties hereby make the
following contributions and assignments of Partnership Interests in EPO. The
contributions and assignments are made serially, in the order set forth in this
Paragraph 1. Each contribution and assignment is deemed completed before the
subsequent assignment is made. The parties specifically disclaim any intention
that the contributions and assignments described in this Contribution Agreement
occur simultaneously. It is the intention of the parties that the Partnership
Interests assigned and contributed by this Contribution Agreement not all be
owned by Newco at any one time but that at all times there be at least two
persons owning such Partnership Interests.
a. In exchange for the issuance of 1,045,812 shares of Newco Common
Stock by Newco to EP, EP by these presents does CONTRIBUTE, ASSIGN,
TRANSFER AND CONVEY unto Newco a one percent (1%) Partnership Interest as
Limited Partner in EPO.
b. As a contribution to the capital of Newsub, Newco by these presents
does CONTRIBUTE, ASSIGN, TRANSFER AND CONVEY unto Newsub a one percent
(1%) Partnership Interest as Limited Partner in EPO.
c. In exchange for the issuance of an aggregate of 103,535,430 shares
of Newco Common Stock by Newco to EP, EEI and EC, EP, EEI and EC by these
presents do CONTRIBUTE, ASSIGN, TRANSFER AND CONVEY unto Newco all of (i)
EP's remaining Partnership Interest as Limited Partner in EPO and (ii)
EEI's Partnership Interest as Managing General Partner of EPO and EC's
Partnership Interest as Special General Partner of EPO. The aggregate of
103,535,430 shares of Newco Common Stock so issued shall be apportioned
between EP, EC and EEI so that the entire 104,581,242 shares of Newco
Common Stock issued in connection with this Contribution Agreement are
apportioned among EP, EC and EEI in accordance with the balances in their
respective capital accounts in EPO at such time.
2. ACCEPTANCE OF ASSIGNMENTS. Each assignee of a Partnership Interest
hereby accepts the contribution and assignment to it of such Partnership
Interest.
3. ISSUANCE OF SHARES. Newco hereby agrees to issue shares of Newco
Common Stock in consideration of the assignments and contributions described in
Paragraph 1, in the amounts, at the times and with respect to the assignments
and contributions described in Paragraph 1. Newco shall promptly deliver
certificates representing such shares to the persons entitled thereto.
4. WARRANTIES AND REPRESENTATIONS OF ASSIGNORS. EP, EEI and EC each
warrants and represents to Newco that it has granted no other assignments or
security interests in its respective Partnership Interests contributed,
assigned, transferred and conveyed by this
2
<PAGE>
Contribution Agreement, that it has the full right, power and authority to
execute this Contribution Agreement, that all consents required for this
Contribution Agreement have been obtained and that, immediately prior to its
assignment thereof, it was the owner of the Partnership Interests assigned by
it.
5. WARRANTIES AND REPRESENTATIONS OF ASSIGNEES. Newco and Newsub each
warrants, represents and certifies to EP, EEP, EC and Newco and to EPO that it
is an Eligible Citizen.
6. ADMISSION OF NEWCO AND NEWSUB TO THE PARTNERSHIP. Newco is hereby
admitted to EPO as Managing General Partner, Special General Partner and Limited
Partner, each to the extent of the Partnership Interests assigned to Newco in
paragraph 1 in full substitution of EEI, EC and EP as to such interests. Newsub
is hereby admitted to EPO as the Limited Partner. From and after this
Assignment, EEI is no longer the Managing General Partner of EPO, EC is no
longer the Special General Partner of EPO and EP is no longer the Limited
Partner of EPO, and each is deemed to have withdrawn from EPO as a result of
this Assignment and the admission of Newco and Newsub in their respective places
as Partners.
7. MERGER OF EPO, NEWSUB AND NEWCO. Promptly after the contributions to
Newco and Newsub described in paragraph 1 and the admission of Newco and Newsub
to the Partnership as described in paragraph 6, EPO and Newsub shall merge with
Newco pursuant to a plan of merger adopted for the Partnership by Newco, with
Newco being the surviving entity of such merger (the "Merger") and with the name
of Newco being changed to Enserch Exploration, Inc. in the Merger. In the Merger
the 1,000 shares of Newco Common Stock originally issued to EPO in the
organization of Newco shall be cancelled.
8. FURTHER ASSURANCES. Each party shall execute such further
documentation that may reasonably be required in order to effect the
contributions, assignments and issuances of shares of stock described herein.
EXECUTED on the date set forth above.
ENSERCH EXPLORATION HOLDINGS, INC.
a Delaware corporation formerly
named Enserch Exploration, Inc.
300 South St. Paul
Dallas, Texas 75201
By:___________________________________
Its:__________________________________
3
<PAGE>
ENSERCH CORPORATION
300 South St. Paul
Dallas, Texas 75201
By:__________________________________
Its:_________________________________
ENSERCH EXPLORATION PARTNERS, LTD.
300 South St. Paul
Dallas, Texas 75201
By: Enserch Exploration Holdings, Inc.,
Managing General Partner
300 South St. Paul
Dallas, Texas 75201
By:______________________________
Its:_____________________________
ENSERCH EXPLORATION, INC.
a Texas corporation organized
in 1994 as New Enserch Exploration, Inc.
300 South St. Paul
Dallas, Texas 75201
By:___________________________________
Its:__________________________________
4
<PAGE>
ENSERCH NEWSUB, INC.
300 South St. Paul
Dallas, Texas 75201
By:___________________________________
Its:__________________________________
5
<PAGE>
EXHIBIT C
---------
AMENDMENT NO. 3
TO
AMENDED AND RESTATED
AGREEMENT
OF
LIMITED PARTNERSHIP
OF
ENSERCH EXPLORATION PARTNERS, LTD.
This AMENDMENT NO. 3 TO AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP is executed on December 30, 1994, to be effective as of December 30,
1994, by ENSERCH EXPLORATION HOLDINGS, INC., a Delaware corporation formerly
named Enserch Exploration, Inc., as the Managing General Partner and as the
Special General Partner.
RECITALS:
A. Enserch Exploration Partners, Ltd. (the "Partnership") was organized
as a Texas limited partnership pursuant to the provisions of the Texas Uniform
Limited Partnership Act (Article 6132a, Vernon's Texas Statutes) (the "Uniform
Act") upon the filing with the Secretary of State of the State of Texas on March
7, 1985 of a Certificate of Limited Partnership for the Partnership and pursuant
to an original Agreement of Limited Partnership. The original Agreement of
Limited Partnership was amended and restated as of April 30, 1985 and thereafter
was amended by Amendment No. 1 dated as of September 1, 1992 and Amendment No. 2
dated as of August 30, 1994 (as so amended, the "Agreement").
B. It is in the best interests of the Partnership and the Partners that
the Agreement be further amended as set forth herein.
NOW, THEREFORE, the General Partners do hereby amend the Agreement as set
forth below pursuant to Section 15.1 of the First Restated Agreement:
1. Article II of the Agreement is amended to add to the definition of the
term "Operating Partnership" the following sentence:
"The `Operating Partnership' also means all successors and assigns of the
Operating Partnership, whether or not such successors and assigns are
partnerships or other entities, specifically including New Enserch
Exploration, Inc. (`Newco'), a Texas corporation organized in 1994 whose
name is to be changed to Enserch Exploration, Inc. in the merger with the
Operating Partnership contemplated in Article XVI."
2. Article III of the Agreement is amended by adding the following
sentence at the end thereof:
1
<PAGE>
"In addition to the foregoing, the purpose and business of the Partnership
shall include owning the Newco Common Stock (as defined in Section 5.5(a))
and exercising all rights connected with the ownership of the Newco Common
Stock."
3. Article IV of the Agreement is amended to amend Section 4.6(a) in its
entirety as follows:
"4.6 Capital Accounts. (a) The Partnership shall maintain for each
Partner a separate Capital Account. Such Capital Account shall be increased
by (i) the cash amount or Net Agreed Value of all Capital Contributions
made by such Partner to the Partnership pursuant to this Agreement, (ii)
all items of Partnership income and gain computed in accordance with
Section 4.6(b) and allocated to such Partner pursuant to Section 5.1, (iii)
Unrealized Gain computed in accordance with, and allocated to such Partner
pursuant to, Section 4.6(d), and decreased by (iv) the cash amount or Net
Agreed Value of all actual and deemed distributions of cash or property
made to such Partner pursuant to this Agreement, (v) all items of
Partnership deduction and loss computed in accordance with Section 4.6(b)
and allocated to such Partner pursuant to Section 5.1, and (vi) Unrealized
Loss computed in accordance with, and allocated to such Partner pursuant
to, Section 4.6(d)."
9. Article IV of the Agreement is further amended to amend Section
4.6(d)(iii) in its entirety as follows:
"(iii) In addition, immediately prior to the distribution of any
Partnership property pursuant to Section 5.3(a) or Section 14.3 or 14.4,
the Capital Accounts of all Partners (and the Carrying Values of all
Partnership properties) shall, immediately prior to any such distribution,
be adjusted (consistent with the provisions hereof and Section 704 of the
Code) upwards or downwards to reflect any Unrealized Gain or Unrealized
Loss attributable to all Partnership properties (as if such Unrealized Gain
or Unrealized Loss had been recognized upon an actual sale of such
properties, immediately prior to such distribution, and was allocated to
the Partners, at such time, pursuant to Section 5.1). In determining such
Unrealized Gain or Unrealized Loss attributable to the properties, the fair
market value of Partnership properties shall be determined by the Managing
General Partner using such reasonable methods of valuation as it may
adopt."
5. Article V of the Agreement is amended to amend Section 5.3 in its
entirety as follows:
"5.3 Current Distributions. (a) The Managing General Partner shall
review the Partnership's accounts at the end of each calendar quarter to
determine whether distributions are appropriate. The Managing General
Partner may make such distributions, including non pro rata distributions,
as it in its discretion may determine, without being limited to current or
accumulated income or gains. Such distributions may be made from
Partnership revenues, Capital Contributions
2
<PAGE>
or Partnership borrowings. The Managing General Partner may in its sole
discretion distribute to the Partners other Partnership property."
6. Article V of the Agreement is further amended by adding the following
Section 5.5:
"5.5 Additional Special Allocation. (a) Terms used in this Section
5.5 have the following meanings, notwithstanding any contrary definitions
given in the Agreement:
"(i) `Affiliate Holders' means (i) EPPL and each other
corporation or partnership that is an Affiliate of ENSERCH and is a
Record Holder of Units, and (ii) the Managing General Partner and the
Special General Partner as the holders of general partner interests in
the Partnership.
"(ii) `Newco' means New Enserch Exploration, Inc., a Texas
corporation organized in 1994 whose name is to be changed to Enserch
Exploration, Inc. in the merger with the Operating Partnership
contemplated in Article XVI.
"(iii) `Newco Common Stock' means the common stock of Newco, par
value $1.00 per share.
"(iv) `Public Unitholder' means a Record Holder of Units that
is not an Affiliate Holder.
"(b) Notwithstanding any contrary provisions of Section 5.1 or 5.2,
all items of income and gain (computed in accordance with Section 4.6(b))
shall be allocated to the Public Unitholders until the aggregate amount of
income and gain equals the excess of (i) the product obtained by
multiplying (A) the Public Unitholders' aggregate Percentage Interest times
(B) the fair market value of the Newco Common Stock held by the Partnership
immediately prior to its liquidation (as determined by the Managing General
Partner), over (ii) the Public Unitholders' aggregate capital account
balance at such time (adjusted for all other allocations of income, gain,
deduction or loss)."
7. Article XIV of the Agreement is amended to amend Section 14.4 to read
in its entirety as follows:
"14.4 Distribution in Kind. Notwithstanding the provisions of
Section 14.3 which require the liquidation of the assets of the
Partnership, but subject to the order of priorities set forth therein, the
Liquidator may, in its absolute discretion, defer for a reasonable time the
liquidation of any assets except those necessary to satisfy liabilities of
the Partnership (other than those to Partners) and may, in its absolute
discretion, distribute to the Partners, in lieu of cash, in accordance with
the provisions of Sections 14.3(c) and 14.3(d), such Partnership
3
<PAGE>
assets as the Liquidator deems appropriate, including non-prorata
distributions. Any distributions in kind shall be subject to such
conditions relating to the disposition and management thereof as the
Liquidator deems reasonable and equitable and to any joint operating
agreements or other agreements governing the operation of such properties
at such time. The Liquidator shall determine the fair market value of any
property distributed in kind using such reasonable method of valuation as
it may adopt."
8. Article XIV of the Agreement is further amended by adding the
following Section 14.7.
"14.7 Plan of Liquidation. The Partnership has adopted the Plan of
Liquidation attached hereto as APPENDIX `EP-1' and incorporated herein by
reference. The Managing General Partner is the Liquidator for the purpose
of effecting the Plan of Liquidation, and, as such, the Managing General
Partner has the authority, and is hereby directed, to carry out the Plan of
Liquidation and to take all actions required thereby or that the Managing
General Partner believes to be in the best interests of the Partnership and
in accordance with the Plan of Liquidation. To the extent the Plan of
Liquidation requires or permits actions to be taken that are not otherwise
authorized by Article XIV of this Agreement, the Plan of Liquidation
controls and the Managing General Partner is authorized to take such
actions. Without limiting the generality of the foregoing grant of
authority, the Managing General Partner is authorized to make distributions
of Partnership assets in kind to the Partners in accordance with the Plan
of Reorganization even though the allocation may not be proportionate to
the interests of the Partners."
9. Article XVI of the Agreement is amended to amend Section 16.1(b) to
add the following:
"A Majority Interest has consented to certain amendments to the Operating
Partnership Agreement and to the contribution and assignment of the
partnership interests of EEI, EC and the Partnership in the Operating
Partnership to Newco in exchange for Newco Common Stock, and the subsequent
merger of the Operating Partnership and a subsidiary of Newco with Newco,
in which Newco will be the surviving entity of such merger and the name of
Newco will be changed to Enserch Exploration, Inc."
10. Except as specifically amended hereby, the Agreement remains in full
force and effect as written.
IN WITNESS HEREOF, the General Partners have caused this Amendment to be
executed by their respective officers thereunto duly authorized on and as of the
dates first above written.
4
<PAGE>
MANAGING GENERAL PARTNER:
ENSERCH EXPLORATION HOLDINGS, INC.
300 South St. Paul
Dallas, Texas 75201
By:
-----------------------------
Its:
-----------------------------
SPECIAL GENERAL PARTNER:
ENSERCH EXPLORATION HOLDINGS, INC.
300 South St. Paul
Dallas, Texas 75201
By:
-----------------------------
Its:
-----------------------------
5
<PAGE>
APPENDIX "EP-1"
ENSERCH EXPLORATION PARTNERS, LTD.
PLAN OF COMPLETE LIQUIDATION
The following is the Plan of Complete Liquidation ("Plan") of ENSERCH
EXPLORATION PARTNERS, LTD. (the "Partnership"), a Texas limited partnership,
which will accomplish the dissolution and complete liquidation of the
Partnership in conformity with the Internal Revenue Code of 1986 (the "Code")
and Article XIV of the Partnership's Second Amended and Restated Agreement of
Limited Partnership (as subsequently amended, the "Agreement").
1. DEFINITIONS. Terms defined in the Agreement have the same meanings
when used in this Plan unless otherwise specified herein. In addition, the
following definitions apply to terms used in this Plan:
a. "Affiliate Holders" means (i) EPPL and each other corporation or
partnership that is an Affiliate of ENSERCH and is a Record Holder of
EP Units, and (ii) EEI and ENSERCH as the holders of general partner
interests in the Partnership.
b. "EEI" means Enserch Exploration Holdings, Inc., a Delaware
corporation, formerly named Enserch Exploration, Inc., and a wholly
owned subsidiary of ENSERCH.
c. "Effective Date" means the date of Unitholder Approval of the Plan.
d. "EPPL" means Enserch Processing Partners, Ltd., a Texas limited
partnership in which ENSERCH directly or indirectly owns all of the
general and limited partner interests.
e. "EP-to-EPPL Note" means that certain promissory note dated as of March
11, 1994 made payable by the Partnership to EPPL in the original
principal amount of $306 million.
f. "Leases" means (i) the Master Lease Agreement dated as of September
30, 1992, between State Street Bank and Trust Company of Connecticut,
National Association, Trustee, and the Operating Partnership, relating
to offshore production and related equipment for use on the Garden
Banks 388 offshore mineral tract, (ii) a certain Master Lease
Agreement dated as of April 30, 1992, between CIBC Leasing, Inc.,
certain financial institutions and the Operating Partnership, relating
to offshore production and related equipment for use on the
Mississippi Canyon 441 offshore mineral tract and (iii) any equipment
acquired by or on behalf of the Partnership or the Operating
Partnership under the terms of either of the Master Lease Agreements
referred to in (i) or (ii) or with a view to ultimately being made
subject thereto or to a modification thereof.
1
<PAGE>
g. "Lease Rights" means the right, title and interest of the lessee in,
to or under the Leases.
h. "Liquidation Record Date" means the date set by the Managing General
Partner (which may be the Effective Date) on which the holders of
record of Units and general partner interests in the Partnership are
determined for purposes of making the liquidating distribution of the
Partnership's assets in the manner contemplated by Paragraph 8.
i. "Newco" means New Enserch Exploration, Inc., a Texas corporation
organized in 1994 whose name is being changed to Enserch Exploration,
Inc. in a merger with the Operating Partnership.
j. "Newco Common Stock" means the shares of common stock of Newco, par
value $1.00 per share.
k. "Public Unit" means a Unit held by a Public Unitholder.
l. "Public Unitholder" means a Record Holder of Units that is not an
Affiliate Holder.
m. "Unit" means a Depositary Unit or an EP Unit that is not on deposit
with the Depositary pursuant to the Deposit Agreement.
n. "Unitholder Approval" means the approval by a Majority Interest at a
meeting of Record Holders of Units held pursuant to Article XV of the
Agreement.
2. ELECTION BY MANAGING GENERAL PARTNER. EEI, the Managing General
Partner of the Partnership, has elected to dissolve the Partnership pursuant to
Section 14.1(d) of the Agreement and has determined that the complete
liquidation of the Partnership following dissolution is advisable, expedient and
in the best interests of the Partnership and its Partners. The Managing General
Partner recommends that the Partnership be liquidated following its dissolution
in accordance with the provisions of this Plan.
3. ADOPTION OF PLAN. This Plan will be deemed to have been adopted upon
Unitholder Approval.
4. EFFECTIVE DATE. This Plan will be effective as of the Effective Date.
The Partnership shall be dissolved on the date selected by Managing General
Partner, which date shall be on or after the Effective Date.
5. NEWCO. The Operating Partnership has formed Newco. The Partnership,
the Managing General Partner and the Special General Partner have contributed
all of their interests as limited and general partners in the Operating
Partnership to Newco in exchange for an aggregate of 104,581,242 shares of Newco
Common Stock.
2
<PAGE>
6. WINDING UP; CESSATION OF BUSINESS. After the Effective Date, the
Partnership shall engage only in those activities that are necessary or proper
to wind up its business and affairs and to distribute its assets in accordance
with the Plan. The Managing General Partner shall wind up the Partnership's
business and affairs, commencing on the Effective Date.
7. PAYMENT OF OBLIGATIONS; RESERVES.
a. The Managing General Partner shall assume all of the Partnership's
obligations in respect of the Leases.
b. The Managing General Partner and EPPL shall each assume a portion of
the remaining obligations and indebtedness of the Partnership in
amounts determined by the Managing General Partner.
c. The Partnership shall pay or discharge all known and admitted debts,
liabilities and expenses of the Partnership (not otherwise assumed by
the Managing General Partner or EPPL) to the fullest extent
practicable, and shall establish reserves for all other obligations,
including unascertained or contingent liabilities and expenses. The
Managing General Partner, in its best judgment and in good faith in
the light of all facts known by it at the time, shall establish
reserves in the amounts the Managing General Partner considers to be
sufficient to pay and discharge all remaining claims, debts,
liabilities, expenses and obligations of the Partnership, including
unascertained or contingent liabilities and expenses.
8. LIQUIDATING DISTRIBUTION OF ASSETS.
a. Notwithstanding Sections 14.3 and 14.4 of the Agreement, but subject
to the order of priorities set forth in Section 14.3 of the Agreement,
upon the assumption or payment of obligations and the establishment of
reserves as provided in Paragraph 7 above, the Managing General
Partner shall make the following distributions to the Partners:
(1) The Managing General Partner shall distribute 805,914 shares of
Newco Common Stock to the Public Unitholders of record at the
close of business on the Liquidation Record Date. The 805,914
shares of Newco Common Stock shall be distributed in kind to all
such holders pro rata in relation to the number of Units held by
each. Such distribution is designed to result in the Public
Unitholders receiving Newco Common Stock at an exchange ratio of
one share for each Unit held on the Liquidation Record Date and
shall be made to the Public Unitholders at or prior to the time
any distribution of Newco Common Stock is made to the Affiliate
Holders on account of the liquidation of the Partnership. No
fractional shares of Newco Common Stock will be distributed;
Public Unitholders are instead entitled to cash payments in lieu
of any fractional share equivalents.
(2) The Managing General Partner shall distribute the Lease Rights to
EEI, subject to the Lease obligations with respect thereto.
3
<PAGE>
(3) The Managing General Partner shall distribute all of the
remaining Newco Common Stock not distributed or distributable
pursuant to (1) above then held by or for the account of the
Partnership to EEI and EPPL in relation to their respective
Capital Accounts, adjusted for the liabilities assumed by them in
Paragraphs 7 and 8a(2) and the Lease Rights distributed to EEI in
Paragraph 8a(2).
b. Any assets remaining in the Partnership after the distribution of
Newco Common Stock referred to in a. above shall be contributed to the
capital of Newco by the Managing General Partner after the payment of
the obligations of the Partnership as provided in Paragraph 7.
c. The transfer books of the Partnership will be permanently closed at
the close of business on the Liquidation Record Date. Units will not
be assignable or transferable on the books of the Partnership after
the Liquidation Record Date except by will, intestate succession or
operation of law.
d. The Newco Common Stock to be distributed to Public Unitholders will be
delivered to the Depositary to hold for delivery to each Public
Unitholder entitled thereto upon the surrender to the Depositary by
such Person of (i) Depositary Receipts or (ii) certificates
representing the Units, registered in the name of such Person as of
the close of business on the Liquidation Record Date. Any Newco Common
Stock which Public Unitholders have the right to receive, but which
have not been distributed to Public Unitholders because Depositary
Receipts or Certificates representing such Units have not been
surrendered to the Depositary, will be held by the Depositary until
Depositary Receipts or Certificates representing such Units have been
surrendered to the Depositary or until the Depositary has received
evidence satisfactory to it, in the Depositary's sole discretion, or
the Depositary has received other security or indemnity as it may
require, in the Depositary's sole discretion, at which time the
Depositary shall deliver to such Persons the Newco Common Stock to
which the Persons are entitled. The Newco Common Stock Affiliate
Holders have the right to receive will be delivered upon the surrender
to the Managing General Partner of certificates representing the Units
and general partner's interests held by the Affiliate Holders on the
Liquidation Record Date.
e. No Partner is entitled to receive assets as a liquidating distribution
from the Partnership other than specified in a. above. The Managing
General Partner is not required to make any distribution other than in
accordance with the provisions of this Paragraph 8 and is not liable
for implementing the Plan of Liquidation (including without limitation
making the liquidating distribution in accordance with this Paragraph
8).
9. AUTHORITY AND AUTHORIZATIONS. Notwithstanding any other provisions of
the Agreement and for purposes of this Plan, Unitholder Approval (a) constitutes
approval of an election to dissolve the Partnership by the Managing General
Partner as permitted by Section 14.1(c) of the Agreement and (b) constitutes
approval and adoption of, and the due
4
<PAGE>
authorization of implementation of, this Plan in accordance with its terms.
Additionally, Unitholder Approval: (x) empowers and authorizes the Managing
General Partner (and its officers) to put this Plan into effect and to do and
perform any and all acts and things and to make, execute, deliver and file any
and all agreements, acquisitions (including the acquisition of Newco Common
Stock), transfers, certificates, information returns, tax returns and other
papers and documents of every kind and character as the officers of the Managing
General Partner deem necessary or appropriate to implement and carry out the
provisions of the Plan, including, without limitation, requiring the surrender
of all Depositary Receipts or certificates representing Units or pursuant to the
Plan, executing a certificate of cancellation pursuant to, and in conformity
with, the provisions of the Texas Act, and causing such certificate of
cancellation to be filed in the office of the Secretary of State of the State of
Texas, withdrawing the authority of the Partnership to do business as a foreign
limited partnership in states in which it has such authority, and doing all
other things necessary or appropriate to the winding up of the Partnership
including all those things provided in Sections 14.3 and 14.4 of the Agreement;
and (y) constitutes a power of attorney permitting the Managing General Partner
to execute on behalf of the Partners any documents that may be necessary or
appropriate to accomplish any of the foregoing and any matters related thereto.
The Managing General Partner has the power to authorize such variations from or
amendments of the provisions of this Plan that may be necessary or appropriate
to effectuate the complete liquidation of the Partnership and the distribution
of its assets to the holders of Units in accordance with the applicable sections
of the Code, the Texas Act and all other applicable laws. The Partnership shall
indemnify the Managing General Partner and its shareholders, officers and
directors and the liability of the Managing General Partner and its
shareholders, directors and officers is limited, in the manner and to the extent
provided in the Agreement or in this Plan.
10. RETURNS AND REPORTS. Without limitation of the foregoing provisions,
the Managing General Partner shall cause the final income tax returns of the
Partnership to be executed and filed along with all other returns, reports and
other instruments, together with the additional information required by the
applicable regulations, and all other related documents and information required
to be filed by reason of, or determined by the managing general Partner, in its
sole discretion, to be necessary or appropriate in connection with, the Plan and
the complete liquidation of the Partnership.
11. REGULATORY APPROVALS. Implementation and completion of the Plan by the
Managing General Partner is subject to any regulatory approvals for the Plan
having been obtained.
12. TERMINATION. The Plan may be terminated by the Managing General
Partner at any time that it deems the termination to be in the best interests of
the Partnership or the partners, even though the Plan already may have been
implemented in part and without the consent or approval of any other partner.
5
<PAGE>
EXHIBIT D
---------
RESTATED ARTICLES OF INCORPORATION
OF
NEW ENSERCH EXPLORATION, INC.
SECTION ONE
New Enserch Exploration, Inc., pursuant to the provisions of Article 4.07
of the Texas Business Corporation Act, hereby adopts Restated Articles of
Incorporation which accurately copy the Articles of Incorporation and all
amendments thereto that are in effect to date and as further amended by such
Restated Articles of Incorporation as hereinafter set forth and which contain no
other change in any provision thereof.
SECTION TWO
The Restated Articles of Incorporation restate and integrate and further
amend the Articles of Incorporation heretofore in effect by substituting for the
provisions of such Articles of Incorporation in their entirety the provisions of
the Restated Articles of Incorporation, the text of which is set forth below in
SECTION FIVE of these Restated Articles of Incorporation. The further
amendments effected by the Restated Articles of Incorporation affect the
following articles of the Restated Articles of Incorporation: Article Four
(authorized shares); Article Eight (bylaws); and Article Eleven (interested
directors, officers and security holders).
SECTION THREE
Each such amendment made by these Restated Articles of Incorporation has
been effected in conformity with the provisions of the Texas Business
Corporation Act and such Restated Articles of Incorporation and each such
amendment made by the Restated Articles of Incorporation were duly adopted by
the shareholders of the Company on October 3, 1994.
SECTION FOUR
The number of share outstanding was 1,000, and the number of shares
entitled to vote on the Restated Articles of Incorporation as so amended was
1,000, the holders of all of which have signed a written consent to the adoption
of such Restated Articles of Incorporation as so amended.
SECTION FIVE
The Articles of Incorporation and all amendments and supplements thereto
are hereby superseded by the following Restated Articles of Incorporation which
accurately copy the entire text thereof and as amended as above set forth:
1
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ARTICLE ONE
The name of the Company is NEW ENSERCH EXPLORATION, INC.
ARTICLE TWO
The period of its duration is perpetual.
ARTICLE THREE
The purposes for which the Company is organized are:
(1) To engage in all phases of the oil and gas business and related
activities, including, but not by way of limitation, engaging in
exploration, drilling, development, and production of oil and gas
properties;
(2) To store, transport, buy and sell, oil, gas, salt, brine and
other mineral solutions and liquefied minerals;
(3) To explore for, produce, purchase and sell, store, process and
manufacture, transport and distribute oil, gas and all other minerals;
(4) To manufacture, produce, purchase or otherwise acquire, sell or
dispose of, distribute, mortgage, pledge, lease, repair, install, operate,
deal in and with, whether as principal or agent, products, goods,
appliances, wares, merchandise, fixtures, plants, structures, machinery,
and materials of every kind and description, to lend money for the carrying
out of such purposes, and to take and hold real and personal property for
the payment of such funds so loaned; and
(5) To transact any or all lawful business for which corporations
may be incorporated under the Texas Business Corporation Act, as amended
and in effect from time to time (the "TBCA").
ARTICLE FOUR
(A) Authorized Capital Stock: The aggregate number of shares of all
classes of stock which the Company shall have authority to issue is 202,000,000
consisting of and divided into:
(i) one class of 200,000,000 shares of Common Stock, par value $1.00
per share (the "Common Stock"); and
(ii) one class of 2,000,000 shares of Preferred Stock, of no par value
(the "Preferred Stock"), which may be divided into and issued in
one or more series, as hereinafter provided.
2
<PAGE>
(B) Series: The Preferred Stock may be divided into and issued in, at any
time and from time to time, one or more series as the Board of Directors of the
Company shall determine pursuant to the authority hereby vested in it. The Board
of Directors shall have the authority to establish series of unissued shares of
Preferred Stock, at any time and from time to time, by fixing and determining
the designations, preferences, limitations and relative rights of the shares of
the series, subject to and within the limitations of the TBCA and the Articles
of Incorporation, including without limitation the following:
(a) the number of shares constituting the series and the distinctive
designation of that series;
(b) the dividend rate on shares of the series, the dividend payment
dates, whether dividends shall be cumulative (and, if so, from
which date or dates), non-cumulative, or partially cumulative, and
the relative rights of priority, if any, of payment of dividends on
the shares of the series;
(c) the amount payable to the holders of shares of the series upon any
voluntary or involuntary liquidation of the Company;
(d) the preference in the assets of the Company over any other class,
classes or series of shares upon the voluntary or involuntary
liquidation of the Company;
(e) whether the shares of the series are redeemable at the option of
the Company, the shareholder or another person or upon occurrence
of a designated event and, if so, the price payable upon redemption
of shares of the series and the terms and conditions on which such
shares are redeemable;
(f) the provisions of the sinking fund, if any, for the redemption or
purchase of shares of the series;
(g) the voting rights, if any, of the shares of the series;
(h) the terms and conditions, if any, on which such shares may be
converted, at the option of the Company, the shareholder or another
person or upon occurrence of a designated event, into shares of any
other class or series;
(i) the terms and conditions, if any, on which such shares may be
exchanged, at the option of the Company, the shareholder or another
person or upon occurrence of a designated event, for shares,
obligations, indebtedness, evidences of ownership, rights to
purchase securities or other securities of the Company or one or
more other domestic or foreign corporations or other entities or
for other property or for any combination of the foregoing; and
(j) any other special rights and qualifications, limitations or
restrictions permitted by the TBCA to be granted to or imposed on
the series.
3
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Any of the designations, preferences, limitations and relative rights of
the shares of any series so established may be made dependent upon facts
ascertainable outside the Articles of Incorporation, which facts may include
future acts of the Company, provided that the manner in which such facts shall
operate upon the designations, preferences, limitations and relative rights of
the shares of any series shall be set forth in the resolution or resolutions
establishing the series.
All shares within the same series of Preferred Stock shall be identical
except as to the date of issue and the dates from which dividends on shares of
the series issued on different dates will cumulate, if cumulative. The Board of
Directors shall have the authority to increase or decrease the number of shares
within each series of Preferred Stock; provided, however, that the Board of
Directors may not decrease the number of shares within a series to less than the
number of shares within such series that are then issued.
(C) Preemptive Rights. No shareholder of the Company shall by reason of
the shareholder's holding shares of any class or series have any preemptive or
preferential right to purchase or subscribe to any shares of any class or series
of the Company, now or hereafter to be authorized, or any notes, debentures,
bonds or other securities convertible into or carrying options or warrants to
purchase shares of any class or series, now or hereafter to be authorized,
whether or not the issuance of any such shares, or such notes, debentures, bonds
or other securities, would adversely affect the dividend or voting rights of
such shareholders, other than such rights, if any, as the Board of Directors in
its discretion may fix; and the Board of Directors may issue shares of any class
or series of the Company, or any notes, debentures, bonds or other securities
convertible into or carrying options or warrants to purchase shares of any class
or series, without offering any such shares of any class or series, either in
whole or in part, to the existing shareholders of any class or series.
(D) Subordination of Common Stock: The Common Stock shall be subject and
subordinate to the rights, privileges and preferences of any series of Preferred
Stock to the extent set forth in the resolution adopted by the Board of
Directors establishing the series.
(E) Other Provisions Applicable to Capital Stock:
(a) Each outstanding share of Common Stock shall be entitled to one vote
on each matter submitted to a vote at a meeting of shareholders,
except as otherwise provided by the TBCA or as set forth in the
resolutions adopted by the Board of Directors establishing any series
of Preferred Stock.
(b) At each election for directors, every shareholder entitled to vote at
such election shall have the right to vote the number of shares owned
by him for as many persons as there are directors to be elected and
for whose election he has a right to vote; provided that cumulative
voting in the election for directors is prohibited.
(c) In the event of any dissolution, liquidation or winding up of the
Company, but subject to the rights of the holders of any series of
Preferred Stock, holders of
4
<PAGE>
Common Stock shall be entitled to receive pro rata all of the
remaining assets of the Company available for distribution to its
shareholders.
(d) Any action required by the TBCA to be taken at any annual or special
meeting of shareholders, or any action which may be taken at any
annual or special meeting of shareholders, may be taken without a
meeting, without prior notice, and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be
signed by the holder or holders or shares having not less than the
minimum number of votes that would be necessary to take such action
at a meeting at which the holders of all shares entitled to vote on
the action were present and voted.
(e) Subject to the rights of the holders of Preferred Stock as set forth
in the resolutions adopted by the Board of Directors establishing any
series of Preferred Stock, dividends may be paid upon Common Stock to
the exclusion of Preferred Stock out of any assets of the Company
available therefor.
ARTICLE FIVE
The Company will not commence business until it has received for the
issuance of its shares consideration of the value of at least One Thousand
Dollars ($1,000.00) consisting of money, labor done, or property actually
received.
ARTICLE SIX
The street address of its initial registered office is 300 South St. Paul,
Dallas, Texas 75201, and the name of its initial registered agent at such
address is Michael G. Fortado.
ARTICLE SEVEN
Subject to the provisions of Article Four, the number of directors
constituting the initial Board of Directors is two (2), subject to being
increased or decreased as the Bylaws of the Company may provide. The names and
addresses of the persons who are to serve as directors until the first annual
meeting of the shareholders or until their successors be elected and qualified
are:
D. W. Biegler 300 South St. Paul
Dallas, Texas 75201
G. J. Junco Energy Square II
4849 Greenville Avenue
Dallas, Texas 75206
5
<PAGE>
ARTICLE EIGHT
(A) Power to Alter, Amend or Repeal Bylaws. The power to alter, amend or
repeal the Bylaws or to adopt new Bylaws shall be vested in the Board of
Directors; provided however that any Bylaw or amendment thereto as adopted by
the Board of Directors may be altered, amended or repealed by vote of the
shareholders entitled to vote for the election of directors or a new Bylaw in
lieu thereof may be adopted by vote of such shareholders. No Bylaw that has
been altered, amended or adopted by such a vote of the shareholders may be
altered, amended or repealed by vote of the directors until two years shall have
expired since such action by vote of such shareholders.
(B) Stock Ownership Restrictions. The Board of Directors of the Company
shall have the power and authority, from time to time, to adopt, alter or amend
the Bylaws of the Company to add or amend such provisions as in their judgment
may be necessary or appropriate to ensure that the Company and its shareholders
satisfy the citizenship or other requirements imposed by any federal or state
law relating to the ownership, possession or leasing of gas, oil or other
minerals, land, vessels or any other property, licenses or rights of any nature
whatsoever in which the Company or any of its subsidiaries may have or hereafter
have, or seek to have, any right or interest. Without limiting such general
powers, the Board of Directors shall have the power and authority, from time to
time, to adopt, alter or amend the Bylaws to add or amend provisions which for
such purpose impose restrictions on the transfer or registration of transfer of
the shares of the Company, including, without limitation, restrictions which:
(1) obligate the holders of the restricted shares to offer to the
Company or to any other holders of shares of the Company or to any other
person or to any combination of the foregoing, a prior opportunity, to be
exercised within a reasonable time, to acquire the restricted shares;
(2) provide that the Company or the holders of any class of shares of
the Company must consent to any proposed transfer of the restricted shares
or approve the proposed transferee of the restricted shares before the
transfer may be effected;
(3) prohibit the transfer of the restricted shares to designated
persons or classes of persons; or
(4) maintain any tax or other status or advantage to the Company.
ARTICLE NINE
To the fullest extent permitted by law, a director of the Company shall not
be liable to the Company or its shareholders for monetary damages for any act or
omission in his capacity as a director. Any repeal or modification of this
Article shall be prospective only and shall not adversely affect any limitation
of the personal liability of a director of the Company existing at the time of
the repeal or modification.
6
<PAGE>
ARTICLE TEN
The name and address of the incorporator are:
W. T. Satterwhite..............................300 South St. Paul
Dallas, Texas 75201
ARTICLE ELEVEN
INTERESTED DIRECTORS, OFFICERS AND SECURITYHOLDERS
(A) Validity. A contract or other transaction between the Company and
ENSERCH Corporation ("EC"), or any subsidiary or other corporation, partnership,
limited liability company or other entity in which EC is directly or indirectly
interested (collectively with EC, an "EC Person"), shall not be invalid because
of this relationship or because of the presence of a director, officer or
securityholder of an EC Person at the meeting authorizing the contract or
transaction, or such person's participation or vote in the meeting or
authorization or in a unanimous or other written consent thereto, if the
contract or other transaction is effected in accordance with any of paragraphs
(B), (C), (D), (E), (F), (G), or (H) below.
(B) Disclosure; Approval; Fairness. Paragraph (A) shall apply if:
(1) the material facts of the relationship or interest of each EC
Person or such director, officer or securityholder are known or disclosed:
(a) to the Board of Directors of the Company, or a
committee of the Board of Directors, and it nevertheless authorizes
or ratifies the contract or transaction by a majority of the
directors present; or
(b) to the shareholders of the Company and they
nevertheless authorize or ratify the contract or transaction by a
majority of the shares present, each such EC Person or other
interested person to be counted for quorum and voting purposes; or
(2) the contract or transaction is fair to the Company as of the
time it is authorized or ratified by the Board of Directors or the
shareholders of the Company.
(C) Loans from or to an EC Person.
(1) Any EC Person may lend to the Company funds needed by the
Company for such periods of time as may be determined by the Board of
Directors of the Company or otherwise in accordance with the Bylaws of the
Company; provided, however, that such EC Person may not charge the Company
interest at a rate greater than the lesser of (i) the EC Person's actual
average interest cost (including points or other financing charges or fees,
if any), or (ii) the rate (including points or other financing charges or
7
<PAGE>
fees) that would be charged the Company (without reference to the Company's
financial abilities or guaranties) by unrelated lenders on comparable
loans. The Company shall reimburse the EC Person for any costs incurred by
the EC Person in connection with the borrowing of funds obtained by the EC
Person and loaned to the Company.
(2) The Company may lend funds to any EC Person; provided however
that the Company may not charge interest at a rate lesser than the rate
(including points or other financing charges or fees) that would be charged
the EC Person (without reference to third parties' financial abilities or
guaranties) by unrelated lenders on comparable loans.
(D) Common Personnel. Officers, directors, employees, attorneys and
agents of the Company may also serve as directors, officers, employees,
attorneys or agents of an EC Person, provided that the Company and the EC
Person shall each compensate its directors, officers, employees, attorneys and
agents in respect of the services performed for it, unless a compensation
sharing arrangement has been effected in accordance with paragraph (B).
(E) IntraCompany Transactions. EC Persons may sell gas, oil, goods and
services to, and may purchase gas, oil, goods and services from, the Company,
provided that such transactions shall be (i) on terms comparable to those
effected with unaffiliated persons or (ii) effected in accordance with paragraph
(B).
(F) Services Provided by an EC Person. An EC Person may provide the
Company with certain services including, but not limited to, the following:
accounting and treasury, internal audit, human resources (such as training,
employment and salary and benefit plan administration), tax planning and
compliance, legal, financial management, corporate development and planning,
investor relations, information systems, materials management, risk and claims
management and office services and the management of these functions. The
Company shall reimburse each EC Person for the direct and indirect costs
incurred in connection with the furnishing of such services to the Company.
Costs shall be determined on a basis reasonably calculated to reflect the actual
costs of the services performed by such EC Person and may include allocations
based on such factors as net capital employed, the number of employees or the
percentage of time spent on projects or services.
(G) Purchase or Sale of Shares. An EC Person may purchase or otherwise
acquire and sell or otherwise dispose of shares or other securities of the
Company for its own account (i) in transactions with persons other than the
Company or (ii) in transactions with the Company effected in accordance with
paragraph (B).
(H) Outside Activities. Any EC Person shall be entitled to and may have
business interests and engage in business activities in addition to those
relating to the Company, may engage in the acquisition, ownership, operation and
management of working, nonparticipating or other interests or royalties in gas
and oil properties, and any other businesses or activities, including business
interests and activities in direct competition with the Company, for their own
account and for the account of others, and may own interests in the same
properties as those in which the Company owns an interest, without having or
incurring any obligation to offer any
8
<PAGE>
interest in such properties, businesses or activities to the Company. Neither
the Company nor any of its shareholders shall have any preferential or other
right to acquire any interest or participate in any business venture of any EC
Person.
(I) Non-Exclusive. This provision shall not be construed to invalidate a
contract or transaction that would be valid in the absence of this provision.
Dated this 31st day of October, 1994.
NEW ENSERCH EXPLORATION, INC.
By:/s/ Gary J. Junco,
President
9
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Newco's Articles of Incorporation provide that, to the fullest extent
permitted by Texas law, directors of Newco will not be liable to Newco or
its shareholders for monetary damages for any act or omission occurring in
their capacity as a director. Texas law does not currently authorize the
elimination or limitation of the liability of a director to the extent the
director is found liable for (i) any breach of the director's duty of
loyalty to Newco or its shareholders, (ii) acts or omissions not in good
faith that constitute a breach of duty of the director of Newco or which
involve intentional misconduct or a knowing violation of law, (iii)
transactions from which the director received an improper benefit, whether
or not the benefit resulted from an action taken within the scope of the
director's office or (iv) acts or omissions for which the liability of a
director is expressly provided by law.
Newco's Articles of Incorporation and its Bylaws grant mandatory
indemnification to directors and officers of Newco to the fullest extent
authorized under the Texas Business Corporation Act. In general, a Texas
corporation may indemnify a director or officer who was, is or is
threatened to be made a named defendant or respondent in a proceeding by
virtue of his position in the corporation if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in the case of criminal proceedings, had
no reasonable cause to believe his conduct was unlawful. A Texas
corporation may indemnify a director or officer in an action brought by or
in the right of the corporation only if such director or officer was not
found liable to the corporation, unless or only to the extent that a court
finds him to be fairly and reasonably entitled to indemnity for such
expenses as the court deems proper.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted
to directors, officers or persons controlling Newco pursuant to the
foregoing provisions, Newco has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
Item 21. Exhibits and Financial Statement Schedules.
The following is a list of all exhibits filed as a part of this
Registration Statement on Form S-4, including those incorporated herein by
reference as noted.
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------ -----------------------
<S> <C>
2.1 EPO Plan of Complete Liquidation (included as Appendix
"EPO-1" to Exhibit B to the Prospectus/Information Statement
that forms a part of this Registration Statement)
2.2 EP Plan of Complete Liquidation (included as Appendix "EP-1"
to Exhibit C to the Prospectus/Information Statement that
forms a part of this Registration Statement)
3.1 Restated Articles of Incorporation of the Registrant
3.2 Bylaws of the Registrant
4.1 Form of Common Stock Certificate
5 Opinion of Jackson & Walker, L.L.P.
8.1 Opinion of Jackson & Walker, L.L.P.
10.1 Enserch Exploration, Inc. 1994 Stock Incentive Plan
10.2 Assignment and Conveyance from EP Operating Limited
Partnership, "Grantor", to Encogen One Partners, Ltd.,
"Grantee", dated February 29, 1988, filed as Exhibit 10.1 to
EP's Form 10-K for the fiscal year ended December 31,
1987(1)
10.3 Lease Agreement for Garden Banks 388-1 between Registrant
and Enserch Exploration, Inc.
10.4 Lease Agreement for Garden Banks 388-2 between Registrant
and Enserch Exploration, Inc.
10.5 Lease Agreement for Mississippi Canyon 441 between
Registrant and Enserch Exploration, Inc.
10.6 Participation Agreement between EP Operating Limited
Partnership and Mobil Producing Texas & New Mexico Inc.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Jackson & Walker, L.L.P. (included in its
opinions filed as Exhibits 5 and 8 to this Registration
Statement)
23.3 Consent of Dean Witter
23.4 Consent of DeGolyer and MacNaughton
23.5 Consent of Future Director F.S. Addy
23.6 Consent of Future Director B.A. Bridgewater, Jr.
24 Powers of Attorney
99.1 Opinion of Dean Witter (included as Exhibit A to the
Prospectus/Information Statement that forms a part of this
Registration Statement)
</TABLE>
------------------------
(1) Incorporated herein by reference and made a part hereof.
II-2
<PAGE>
Item 22. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such information
in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the information required to be included in a post-
effective amendment by those paragraphs is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section
15(d) of the Exchange Act that are incorporated by reference in this
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(b)(1) The undersigned Registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration statement,
by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Securities Act and is used
in connection with an offering of securities subject to Rule 415,
II-3
<PAGE>
will be filed as part of an amendment to the Registration Statement and
will not be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act, each such post-
effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(d) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
Prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date
of the Registration Statement through the date of responding to the
request.
(e) The undersigned Registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of
and included in the Registration Statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-4 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Dallas, State of
Texas on the 8th day of December, 1994.
NEW ENSERCH EXPLORATION, INC.
By: /s/ S. R. Singer
-----------------------------------
Name: S. R. Singer
---------------------------------
Title: Senior Vice President, Chief Financial Officer
----------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
Chairman, Chief
* Executive Officer
- ------------------- and Director
David W. Biegler (Principal Executive Officer) December 8, 1994
Senior Vice President
* and Chief Financial
- ------------------- Officer
Sanford R. Singer (Principal Financial Officer) December 8, 1994
* Vice President and Chief
- ------------------- Accounting Officer
J.W. Pinkerton (Principal Accounting Officer) December 8, 1994
* President, Chief December 8, 1994
- ------------------- Operating Officer and
Gary J. Junco Director
</TABLE>
* By: /s/ S. R. Singer
------------------------------------
Individually and as attorney in fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit Page
------- ---------------------- ----
<S> <C> <C>
2.1 EPO Plan of Complete Liquidation (included as Appendix
"EPO-1" to Exhibit B to the Prospectus/Information
Statement that forms a part of this Registration Statement)
2.2 EP Plan of Complete Liquidation (included as Appendix
"EP-1" to Exhibit C to the Prospectus/Information Statement
that forms a part of this Registration Statement)
3.1 Restated Articles of Incorporation of the Registrant
3.2 Bylaws of the Registrant
4.1 Form of Common Stock Certificate
5 Opinion of Jackson & Walker, L.L.P.
8.1 Opinion of Jackson & Walker, L.L.P.
10.1 Enserch Exploration, Inc. 1994 Stock Incentive Plan
10.2 Assignment and Conveyance from EP Operating Limited
Partnership, "Grantor", to Encogen One Partners, Ltd.,
"Grantee", dated February 29, 1988, filed as Exhibit 10.1
to EP's Form 10-K for the fiscal year ended December 31,
1987(1)
10.3 Lease Agreement for Garden Banks 388-1 between Registrant
and Enserch Exploration, Inc.
10.4 Lease Agreement for Garden Banks 388-2 between Registrant
and Enserch Exploration, Inc.
10.5 Lease Agreement for Mississippi Canyon 441 between
Registrant and Enserch Exploration, Inc.
10.6 Participation Agreement between EP Operating Limited
Partnership and Mobil Producing Texas & New Mexico Inc.
23.1 Consent of Deloitte & Touche LLP
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit Page
------- ---------------------- ----
<S> <C> <C>
23.2 Consent of Jackson & Walker, L.L.P. (included in its
opinions filed as Exhibits 5 and 8 to this Registration
Statement)
23.3 Consent of Dean Witter Reynolds Inc.
23.4 Consent of DeGolyer and MacNaughton
23.5 Consent of Future Director F.S. Addy
23.6 Consent of Future Director B.A. Bridgewater, Jr.
24 Powers of Attorney
99.1 Opinion of Dean Witter Reynolds Inc. (included as Exhibit A to the
Prospectus/Information Statement that forms a part of this
Registration Statement)
</TABLE>
- --------------------
(1) Incorporated herein by reference and made a part hereof.
II-7
<PAGE>
GRAPHICS APPENDIX LIST
----------------------
EDGAR Version
- -------------
Current Ownership Structure
Newco is 100% owned by EPO, which is 1% owned by EC (.01%) and EEI (.99%) as
general partners and 99% owned by EP as limited partner. EP is .79% owned by the
public limited partnership interests and 99.21% owned (EPPL--98.21% limited
partnership interest and EEI--1% general partnership interest) by the EC
Companies.
Ownership Structure After Reorganization
Newco is 99.23% owned by the EC Companies and .77% owned by public shareholders.
<PAGE>
Exhibit 3.1
RESTATED ARTICLES OF INCORPORATION
OF
NEW ENSERCH EXPLORATION, INC.
SECTION ONE
New Enserch Exploration, Inc., pursuant to the provisions of Article 4.07
of the Texas Business Corporation Act, hereby adopts Restated Articles of
Incorporation which accurately copy the Articles of Incorporation and all
amendments thereto that are in effect to date and as further amended by such
Restated Articles of Incorporation as hereinafter set forth and which contain no
other change in any provision thereof.
SECTION TWO
The Restated Articles of Incorporation restate and integrate and further
amend the Articles of Incorporation heretofore in effect by substituting for the
provisions of such Articles of Incorporation in their entirety the provisions of
the Restated Articles of Incorporation, the text of which is set forth below in
SECTION FIVE of these Restated Articles of Incorporation. The further
amendments effected by the Restated Articles of Incorporation affect the
following articles of the Restated Articles of Incorporation: Article Four
(authorized shares); Article Eight (bylaws); and Article Eleven (interested
directors, officers and security holders).
SECTION THREE
Each such amendment made by these Restated Articles of Incorporation has
been effected in conformity with the provisions of the Texas Business
Corporation Act and such Restated Articles of Incorporation and each such
amendment made by the Restated Articles of Incorporation were duly adopted by
the shareholders of the Company on October 3, 1994.
SECTION FOUR
The number of share outstanding was 1,000, and the number of shares
entitled to vote on the Restated Articles of Incorporation as so amended was
1,000, the holders of all of which have signed a written consent to the adoption
of such Restated Articles of Incorporation as so amended.
SECTION FIVE
The Articles of Incorporation and all amendments and supplements thereto
are hereby superseded by the following Restated Articles of Incorporation which
accurately copy the entire text thereof and as amended as above set forth:
ARTICLE ONE
The name of the Company is NEW ENSERCH EXPLORATION, INC.
<PAGE>
ARTICLE TWO
The period of its duration is perpetual.
ARTICLE THREE
The purposes for which the Company is organized are:
(1) To engage in all phases of the oil and gas business and related
activities, including, but not by way of limitation, engaging in
exploration, drilling, development, and production of oil and gas
properties;
(2) To store, transport, buy and sell, oil, gas, salt, brine and
other mineral solutions and liquefied minerals;
(3) To explore for, produce, purchase and sell, store, process and
manufacture, transport and distribute oil, gas and all other minerals;
(4) To manufacture, produce, purchase or otherwise acquire, sell or
dispose of, distribute, mortgage, pledge, lease, repair, install, operate,
deal in and with, whether as principal or agent, products, goods,
appliances, wares, merchandise, fixtures, plants, structures, machinery,
and materials of every kind and description, to lend money for the carrying
out of such purposes, and to take and hold real and personal property for
the payment of such funds so loaned; and
(5) To transact any or all lawful business for which corporations may
be incorporated under the Texas Business Corporation Act, as amended and in
effect from time to time (the "TBCA").
ARTICLE FOUR
(A) Authorized Capital Stock: The aggregate number of shares of all
classes of stock which the Company shall have authority to issue is 202,000,000
consisting of and divided into:
(i) one class of 200,000,000 shares of Common Stock, par value $1.00 per
share (the "Common Stock"); and
(ii) one class of 2,000,000 shares of Preferred Stock, of no par value (the
"Preferred Stock"), which may be divided into and issued in one or
more series, as hereinafter provided.
(B) Series: The Preferred Stock may be divided into and issued in, at any
time and from time to time, one or more series as the Board of Directors of the
Company shall determine pursuant to the authority hereby vested in it. The
Board of Directors shall have the authority to establish series of unissued
shares of Preferred Stock, at any time and from time to time, by fixing and
determining the designations, preferences, limitations and relative rights of
the shares of the series, subject to and within the limitations of the TBCA and
the Articles of Incorporation, including without limitation the following:
(a) the number of shares constituting the series and the distinctive
designation of that series;
2
<PAGE>
(b) the dividend rate on shares of the series, the dividend payment
dates, whether dividends shall be cumulative (and, if so, from which
date or dates), non-cumulative, or partially cumulative, and the
relative rights of priority, if any, of payment of dividends on the
shares of the series;
(c) the amount payable to the holders of shares of the series upon any
voluntary or involuntary liquidation of the Company;
(d) the preference in the assets of the Company over any other class,
classes or series of shares upon the voluntary or involuntary
liquidation of the Company;
(e) whether the shares of the series are redeemable at the option of the
Company, the shareholder or another person or upon occurrence of a
designated event and, if so, the price payable upon redemption of
shares of the series and the terms and conditions on which such shares
are redeemable;
(f) the provisions of the sinking fund, if any, for the redemption or
purchase of shares of the series;
(g) the voting rights, if any, of the shares of the series;
(h) the terms and conditions, if any, on which such shares may be
converted, at the option of the Company, the shareholder or another
person or upon occurrence of a designated event, into shares of any
other class or series;
(i) the terms and conditions, if any, on which such shares may be
exchanged, at the option of the Company, the shareholder or another
person or upon occurrence of a designated event, for shares,
obligations, indebtedness, evidences of ownership, rights to purchase
securities or other securities of the Company or one or more other
domestic or foreign corporations or other entities or for other
property or for any combination of the foregoing; and
(j) any other special rights and qualifications, limitations or
restrictions permitted by the TBCA to be granted to or imposed on the
series.
Any of the designations, preferences, limitations and relative rights of
the shares of any series so established may be made dependent upon facts
ascertainable outside the Articles of Incorporation, which facts may include
future acts of the Company, provided that the manner in which such facts shall
operate upon the designations, preferences, limitations and relative rights of
the shares of any series shall be set forth in the resolution or resolutions
establishing the series.
All shares within the same series of Preferred Stock shall be identical
except as to the date of issue and the dates from which dividends on shares of
the series issued on different dates will cumulate, if cumulative. The Board of
Directors shall have the authority to increase or decrease the number of shares
within each series of Preferred Stock; provided, however, that the Board of
Directors may not decrease the number of shares within a series to less than the
number of shares within such series that are then issued.
(C) Preemptive Rights. No shareholder of the Company shall by reason of
the shareholder's holding shares of any class or series have any preemptive or
preferential right to purchase or subscribe
3
<PAGE>
to any shares of any class or series of the Company, now or hereafter to be
authorized, or any notes, debentures, bonds or other securities convertible into
or carrying options or warrants to purchase shares of any class or series, now
or hereafter to be authorized, whether or not the issuance of any such shares,
or such notes, debentures, bonds or other securities, would adversely affect the
dividend or voting rights of such shareholders, other than such rights, if any,
as the Board of Directors in its discretion may fix; and the Board of Directors
may issue shares of any class or series of the Company, or any notes,
debentures, bonds or other securities convertible into or carrying options or
warrants to purchase shares of any class or series, without offering any such
shares of any class or series, either in whole or in part, to the existing
shareholders of any class or series.
(D) Subordination of Common Stock: The Common Stock shall be subject and
subordinate to the rights, privileges and preferences of any series of Preferred
Stock to the extent set forth in the resolution adopted by the Board of
Directors establishing the series.
(E) Other Provisions Applicable to Capital Stock:
(a) Each outstanding share of Common Stock shall be entitled to one vote
on each matter submitted to a vote at a meeting of shareholders,
except as otherwise provided by the TBCA or as set forth in the
resolutions adopted by the Board of Directors establishing any series
of Preferred Stock.
(b) At each election for directors, every shareholder entitled to vote at
such election shall have the right to vote the number of shares owned
by him for as many persons as there are directors to be elected and
for whose election he has a right to vote; provided that cumulative
voting in the election for directors is prohibited.
(c) In the event of any dissolution, liquidation or winding up of the
Company, but subject to the rights of the holders of any series of
Preferred Stock, holders of Common Stock shall be entitled to receive
pro rata all of the remaining assets of the Company available for
distribution to its shareholders.
(d) Any action required by the TBCA to be taken at any annual or special
meeting of shareholders, or any action which may be taken at any
annual or special meeting of shareholders, may be taken without a
meeting, without prior notice, and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be
signed by the holder or holders or shares having not less than the
minimum number of votes that would be necessary to take such action at
a meeting at which the holders of all shares entitled to vote on the
action were present and voted.
(e) Subject to the rights of the holders of Preferred Stock as set forth
in the resolutions adopted by the Board of Directors establishing any
series of Preferred Stock, dividends may be paid upon Common Stock to
the exclusion of Preferred Stock out of any assets of the Company
available therefor.
ARTICLE FIVE
The Company will not commence business until it has received for the
issuance of its shares consideration of the value of at least One Thousand
Dollars ($1,000.00) consisting of money, labor done, or property actually
received.
4
<PAGE>
ARTICLE SIX
The street address of its initial registered office is 300 South St. Paul,
Dallas, Texas 75201, and the name of its initial registered agent at such
address is Michael G. Fortado.
ARTICLE SEVEN
Subject to the provisions of Article Four, the number of directors
constituting the initial Board of Directors is two (2), subject to being
increased or decreased as the Bylaws of the Company may provide. The names and
addresses of the persons who are to serve as directors until the first annual
meeting of the shareholders or until their successors be elected and qualified
are:
D. W. Biegler 300 South St. Paul
Dallas, Texas 75201
G. J. Junco Energy Square II
4849 Greenville Avenue
Dallas, Texas 75206
ARTICLE EIGHT
(A) Power to Alter, Amend or Repeal Bylaws. The power to alter, amend or
repeal the Bylaws or to adopt new Bylaws shall be vested in the Board of
Directors; provided however that any Bylaw or amendment thereto as adopted by
the Board of Directors may be altered, amended or repealed by vote of the
shareholders entitled to vote for the election of directors or a new Bylaw in
lieu thereof may be adopted by vote of such shareholders. No Bylaw that has been
altered, amended or adopted by such a vote of the shareholders may be altered,
amended or repealed by vote of the directors until two years shall have expired
since such action by vote of such shareholders.
(B) Stock Ownership Restrictions. The Board of Directors of the Company
shall have the power and authority, from time to time, to adopt, alter or amend
the Bylaws of the Company to add or amend such provisions as in their judgment
may be necessary or appropriate to ensure that the Company and its shareholders
satisfy the citizenship or other requirements imposed by any federal or state
law relating to the ownership, possession or leasing of gas, oil or other
minerals, land, vessels or any other property, licenses or rights of any nature
whatsoever in which the Company or any of its subsidiaries may have or hereafter
have, or seek to have, any right or interest. Without limiting such general
powers, the Board of Directors shall have the power and authority, from time to
time, to adopt, alter or amend the Bylaws to add or amend provisions which for
such purpose impose restrictions on the transfer or registration of transfer of
the shares of the Company, including, without limitation, restrictions which:
(1) obligate the holders of the restricted shares to offer to the
Company or to any other holders of shares of the Company or to any other
person or to any combination of the foregoing, a prior opportunity, to be
exercised within a reasonable time, to acquire the restricted shares;
(2) provide that the Company or the holders of any class of shares of
the Company must consent to any proposed transfer of the restricted shares
or approve the proposed transferee of the restricted shares before the
transfer may be effected;
(3) prohibit the transfer of the restricted shares to designated
persons or classes of persons; or
5
<PAGE>
(4) maintain any tax or other status or advantage to the Company.
ARTICLE NINE
To the fullest extent permitted by law, a director of the Company shall not
be liable to the Company or its shareholders for monetary damages for any act or
omission in his capacity as a director. Any repeal or modification of this
Article shall be prospective only and shall not adversely affect any limitation
of the personal liability of a director of the Company existing at the time of
the repeal or modification.
ARTICLE TEN
The name and address of the incorporator are:
W. T. Satterwhite.............................300 South St. Paul
Dallas, Texas 75201
ARTICLE ELEVEN
INTERESTED DIRECTORS, OFFICERS AND SECURITYHOLDERS
(A) Validity. A contract or other transaction between the Company and
ENSERCH Corporation ("EC"), or any subsidiary or other corporation, partnership,
limited liability company or other entity in which EC is directly or indirectly
interested (collectively with EC, an "EC Person"), shall not be invalid because
of this relationship or because of the presence of a director, officer or
securityholder of an EC Person at the meeting authorizing the contract or
transaction, or such person's participation or vote in the meeting or
authorization or in a unanimous or other written consent thereto, if the
contract or other transaction is effected in accordance with any of paragraphs
(B), (C), (D), (E), (F), (G), or (H) below.
(B) Disclosure; Approval; Fairness. Paragraph (A) shall apply if:
(1) the material facts of the relationship or interest of each EC
Person or such director, officer or securityholder are known or disclosed:
(a) to the Board of Directors of the Company, or a committee of
the Board of Directors, and it nevertheless authorizes or ratifies the
contract or transaction by a majority of the directors present; or
(b) to the shareholders of the Company and they nevertheless
authorize or ratify the contract or transaction by a majority of the
shares present, each such EC Person or other interested person to be
counted for quorum and voting purposes; or
(2) the contract or transaction is fair to the Company as of the time
it is authorized or ratified by the Board of Directors or the shareholders
of the Company.
(C) Loans from or to an EC Person.
(1) Any EC Person may lend to the Company funds needed by the Company
for such periods of time as may be determined by the Board of Directors of
the Company or otherwise in accordance with the Bylaws of the Company;
provided, however, that such EC Person may
6
<PAGE>
not charge the Company interest at a rate greater than the lesser of (i)
the EC Person's actual average interest cost (including points or other
financing charges or fees, if any), or (ii) the rate (including points or
other financing charges or fees) that would be charged the Company (without
reference to the Company's financial abilities or guaranties) by unrelated
lenders on comparable loans. The Company shall reimburse the EC Person for
any costs incurred by the EC Person in connection with the borrowing of
funds obtained by the EC Person and loaned to the Company.
(2) The Company may lend funds to any EC Person; provided however
that the Company may not charge interest at a rate lesser than the rate
(including points or other financing charges or fees) that would be charged
the EC Person (without reference to third parties' financial abilities or
guaranties) by unrelated lenders on comparable loans.
(D) Common Personnel. Officers, directors, employees, attorneys and
agents of the Company may also serve as directors, officers, employees,
attorneys or agents of an EC Person, provided that the Company and the EC
Person shall each compensate its directors, officers, employees, attorneys and
agents in respect of the services performed for it, unless a compensation
sharing arrangement has been effected in accordance with paragraph (B).
(E) IntraCompany Transactions. EC Persons may sell gas, oil, goods and
services to, and may purchase gas, oil, goods and services from, the Company,
provided that such transactions shall be (i) on terms comparable to those
effected with unaffiliated persons or (ii) effected in accordance with paragraph
(B).
(F) Services Provided by an EC Person. An EC Person may provide the
Company with certain services including, but not limited to, the following:
accounting and treasury, internal audit, human resources (such as training,
employment and salary and benefit plan administration), tax planning and
compliance, legal, financial management, corporate development and planning,
investor relations, information systems, materials management, risk and claims
management and office services and the management of these functions. The
Company shall reimburse each EC Person for the direct and indirect costs
incurred in connection with the furnishing of such services to the Company.
Costs shall be determined on a basis reasonably calculated to reflect the actual
costs of the services performed by such EC Person and may include allocations
based on such factors as net capital employed, the number of employees or the
percentage of time spent on projects or services.
(G) Purchase or Sale of Shares. An EC Person may purchase or otherwise
acquire and sell or otherwise dispose of shares or other securities of the
Company for its own account (i) in transactions with persons other than the
Company or (ii) in transactions with the Company effected in accordance with
paragraph (B).
(H) Outside Activities. Any EC Person shall be entitled to and may have
business interests and engage in business activities in addition to those
relating to the Company, may engage in the acquisition, ownership, operation and
management of working, nonparticipating or other interests or royalties in gas
and oil properties, and any other businesses or activities, including business
interests and activities in direct competition with the Company, for their own
account and for the account of others, and may own interests in the same
properties as those in which the Company owns an interest, without having or
incurring any obligation to offer any interest in such properties, businesses or
activities to the Company. Neither the Company nor any of its shareholders
shall have any preferential or other right to acquire any interest or
participate in any business venture of any EC Person.
7
<PAGE>
(I) Non-Exclusive. This provision shall not be construed to invalidate a
contract or transaction that would be valid in the absence of this provision.
Dated this 31st day of October, 1994.
NEW ENSERCH EXPLORATION, INC.
By: /s/ Gary J. Junco,
President
8
<PAGE>
Exhibit 3.2
BYLAWS OF NEW ENSERCH EXPLORATION, INC., A
CORPORATION INCORPORATED UNDER
THE LAWS OF THE STATE OF TEXAS
----------------------------------------------------------
PURPOSE AND SCOPE OF BYLAWS
These Bylaws shall constitute the private laws of NEW ENSERCH
EXPLORATION, INC., a corporation duly incorporated under the laws of the State
of Texas (herein called the "corporation"), for the administration and
regulation of the affairs of the corporation.
In the event any provision of these Bylaws is or may be in conflict
with any applicable law of the United States or the State of Texas, or of any
order, rule, regulation, decree or judgment of any governmental body or power or
court having jurisdiction over this corporation, or over the subject matter to
which such provision of these Bylaws applies or may apply, such provision of
these Bylaws shall be inoperative to the extent only that the operation thereof
unavoidably conflicts with such law or order, rule, regulation, decree or
judgment, and shall in all other respects be in full force and effect.
ARTICLE I
OFFICES
Section 1. The registered office of the corporation shall be at
ENSERCH Center, 300 South St. Paul, in the City of Dallas, County of Dallas,
State of Texas, and the registered agent of the corporation at such address
shall be such person as the Board of Directors may from time to time designate.
Section 2. The corporation may also have offices at such other places
both within and without the State of Texas as the Board of Directors may from
time to time determine or the business of the corporation may require.
<PAGE>
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. All meetings of the shareholders shall be held at the
registered office of the corporation or at such other place either within or
without the State of Texas as shall be designated from time to time by the Board
of Directors.
Section 2. The annual meeting of the shareholders shall be held on
the second Tuesday of May in each year, at 2:00 P.M., for the election of a
Board of Directors and the transaction of such other business as may properly be
brought before the meeting.
Section 3. Special meetings of the shareholders may be called by the
Chairman, the Board of Directors, or the holders of not less than one-tenth of
all the shares entitled to vote at the meetings. Business transacted at all
special meetings shall be confined to the objects stated in the notice of
meeting.
Section 4. Written or printed notice stating the place, day and hour
of the meeting, and, in case of a special meeting, the purpose or purposes for
which the meeting is called, shall be delivered not less than ten (10) nor more
than sixty (60) days before the date of the meeting, either personally or by
mail, by or at the direction of the Chairman, the Corporate Secretary, or the
officer or person calling the meeting, to each shareholder of record entitled to
vote at such meeting. If mailed, such notice shall be deemed to be delivered
when deposited in the United States mail addressed to the shareholder at his
address as it appears on the stock transfer books of the corporation, with
postage thereon prepaid.
Section 5. The officer or agent having charge of the stock transfer
books for shares of the corporation shall make, at least ten (10) days before
each meeting of shareholders, a
2
<PAGE>
complete list of the shareholders entitled to vote at such meeting or any
adjournment thereof, arranged in alphabetical order, with the address of and the
number of shares held by each, which list, for a period of ten (10) days prior
to such meeting, shall be kept on file at the registered office of the
corporation and shall be subject to inspection by any shareholder at any time
during usual business hours. Such list shall also be produced and kept open at
the time and place of the meeting and shall be subject to the inspection of any
shareholder during the whole time of the meeting. The original stock transfer
books shall be prima-facie evidence as to who are the shareholders entitled to
examine such list or transfer books or to vote at any meeting of shareholders.
Section 6. The holders of a majority of the shares issued and
outstanding and entitled to vote thereat, present in person or represented by
written proxy, shall constitute a quorum at all meetings of the shareholders for
the transaction of business. If, however, such quorum shall not be present or
represented at any meeting of the shareholders, the shareholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified.
Section 7. Each outstanding share, of any class, shall be entitled to
as many votes per share as the Articles of Incorporation shall provide, on each
matter submitted to a vote at a meeting of shareholders, except to the extent
that the voting rights of the shares of any class or classes are limited or
denied by the Articles of Incorporation or these Bylaws. The vote for the
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election of Directors and, upon demand by any shareholder, the vote upon any
question before the meeting shall be by ballot. Cumulative voting is expressly
prohibited.
Section 8. At any meeting of the shareholders, every shareholder
having the right to vote shall be entitled to vote in person or by proxy
executed in writing by such shareholder or by his duly authorized attorney-in-
fact. No proxy shall be valid after eleven (11) months from the date of its
execution unless otherwise provided in the proxy. All proxies shall be
revocable unless expressly provided therein to be irrevocable and are coupled
with an interest and shall be filed with the Corporate Secretary of the
corporation prior to or at the time of the meeting at which they are to be
voted.
Section 9. When a quorum is present at any meeting, matters brought
before the meeting shall be determined by the shareholders in the following
manner: (a) with respect to any matter, other than the election of Directors or
a matter for which the affirmative vote of a specified portion of the shares
entitled to vote is required by the statutes, the act of the shareholders shall
be the affirmative vote of the holders of a majority of the shares entitled to
vote on, and voted for or against, that matter at a meeting of shareholders at
which a quorum is present and (b) with respect to the election of Directors, the
act of the shareholders electing the Directors shall be a plurality of the votes
cast by the holders of shares entitled to vote in the election of Directors at a
meeting of shareholders at which a quorum is present, unless the question is one
upon which, by express provision of the statutes or of the Articles of
Incorporation or of these Bylaws, a different vote is required, in which case
such express provision shall govern and control the decision of such question.
The shareholders present at a duly organized meeting may
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continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders to leave less than a quorum.
Section 10. The Chairman shall preside at all meetings of the
shareholders. In his absence, the President or an officer of the corporation
designated by the Board of Directors shall preside and perform the duties of the
Chairman at such meeting. He shall appoint two inspectors of voting to serve at
each such meeting. Before acting at any meeting, the inspectors shall be sworn
faithfully to execute their duties with strict impartiality and according to the
best of their ability. The inspectors shall determine the number of shares
outstanding, the voting power of each, the shares represented at the meeting,
the existence of a quorum, the qualification of the voters, the authenticity,
validity and effect of proxies, receive votes and ballots, hear and determine
all challenges and questions in any way arising in connection with the vote,
count and tabulate all votes and determine and announce the result of the
voting.
Section 11. At an annual meeting of the shareholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board, otherwise properly brought before the meeting by or
at the direction of the Board, or otherwise properly brought before the meeting
by a shareholder. In addition to any other applicable requirements, for
business to be properly brought before an annual meeting by a shareholder, the
shareholder must have given timely notice thereof in writing to the Corporate
Secretary. To be timely, a shareholder's notice must be delivered to or mailed
and received at the principal executive offices of the corporation, not less
than fifty (50) days nor more than seventy-five (75) days prior to the meeting;
provided,
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however, that in the event that less than sixty-five (65) days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be so received not later than the
close of business on the 15th day following the day on which such notice of the
date of the annual meeting was mailed or such public disclosure was made. A
shareholder's notice to the Corporate Secretary shall set forth as to each
matter the shareholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and record address of the shareholder proposing such business, (iii) the class
and number of shares of the corporation which are beneficially owned by the
shareholder, and (iv) any material interest of the shareholder in such business.
Notwithstanding anything in the Bylaws to the contrary, no business
shall be conducted at the annual meeting except in accordance with the
procedures set forth in this Section 11; provided, however, that nothing in this
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Section 11 shall be deemed to preclude discussion by any shareholder of any
business properly brought before the annual meeting in accordance with said
procedure.
The Chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 11, and if
he should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted.
Section 12. Only persons who are nominated in accordance with the
following procedures shall be eligible for election as Directors. Nominations
of persons for election to the Board of the corporation may be made at a meeting
of shareholders by or at the direction of the
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Board of Directors by any nominating committee or person appointed by the Board
or by any shareholder of the corporation entitled to vote for the election of
Directors at the meeting who complies with the notice procedures set forth in
this Section 12. Such nominations, other than those made by or at the direction
of the Board, shall be made pursuant to timely notice in writing to the
Corporate Secretary. To be timely, a shareholder's notice shall be delivered to
or mailed and received at the principal executive offices of the corporation not
less than fifty (50) days nor more than seventy-five (75) days prior to the
meeting; provided, however, that in the event that less than sixty-five (65)
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days' notice or prior public disclosure of the date of the meeting is given or
made to shareholders, notice by the shareholder to be timely must be so received
not later than the close of business on the 15th day following the date on which
such notice of the date of the meeting was mailed or such public disclosure was
made. Such shareholder's notice to the Corporate Secretary shall set forth (a)
as to each person whom the shareholder proposes to nominate for election or re-
election as a Director, (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class and number of shares of capital stock of the corporation
which are beneficially owned by the person, and (iv) any other information
relating to the person that is required to be disclosed in solicitations for
proxies for election of Directors pursuant to Rule 14a under the Securities
Exchange Act of 1934 as amended; and (b) as to the shareholder giving the notice
(i) the name and record address of shareholder and (ii) the class and number of
shares of capital stock of the corporation which are beneficially owned by the
shareholder. The corporation may require any proposed nominee to furnish such
other information as may reasonably be required by the corporation to determine
the eligibility of such proposed nominee
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to serve as Director of the corporation. No person shall be eligible for
election as a Director of the corporation unless nominated in accordance with
the procedures set forth herein.
The Chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
ARTICLE III
DIRECTORS
Section 1. The business and affairs of the corporation shall be
managed by its Board of Directors who may exercise all such powers of the
corporation and do all such lawful acts and things as are not by statute or by
the Articles of Incorporation or by these Bylaws directed or required to be
exercised or done by the shareholders.
Section 2. The Board of Directors shall consist of not less than two
Directors, none of whom need be shareholders or residents of the State of Texas;
the exact number of Directors to be determined from time to time by resolution
adopted by the Board of Directors. A person shall be ineligible to be a
Director of the corporation after the date of the annual meeting of shareholders
of the corporation in the year in which such person's seventieth birthday
occurs. The Directors shall be elected at the annual meeting of the
shareholders, except as provided in Section 4 of this Article III. Unless he
shall resign or become ineligible, each Director shall hold office until his
successor shall be elected and shall qualify.
Section 3. Any Director may resign at any time either by oral tender
of resignation at any meeting of the Board of Directors or by giving written
notice thereof to the Corporate
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Secretary. Resignations shall take effect when tendered or at the time
specified in the tender and, unless otherwise specified, the acceptance of a
resignation shall not be necessary to make it effective.
Section 4. Any Director may be removed either for or without cause,
at any special meeting of shareholders by the affirmative vote of the holders of
record of a majority of the shares present in person or by proxy at such meeting
and entitled to vote for such removal, if notice of the intention to act upon
such matter shall have been given in the notice calling for such meeting. Any
vacancy occurring in the Board of Directors may be filled by the affirmative
vote of a majority of the remaining Directors even though such remaining
Directors shall be less than a quorum of the Board of Directors. A Director
elected to fill a vacancy shall be elected for the unexpired term of his
predecessor in office. Any directorship to be filled by reason of an increase
in the number of directors may be filled by election at an annual meeting or at
a special meeting of shareholders called for that purpose or may be filled by
the Board of Directors for a term of office continuing until the next election
of one or more Directors by the shareholders; provided that the Board of
Directors may not fill more than two such directorships between any two
successive annual meetings of shareholders.
Section 5. The Board of Directors, by resolution adopted by a
majority of the full Board of Directors, may designate from among its members
one or more committees, each of which shall be comprised of one or more of its
members, and may designate one or more of its members as alternate members of
any committee, who may, subject to any limitations imposed by the Board of
Directors, replace absent or disqualified members at any meeting of that
committee. Any such committee, to the extent provided in such resolutions or in
the Articles
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of Incorporation or the Bylaws, shall have and may exercise all of the authority
of the Board of Directors, provided that no committee of the Board of Directors
shall have the authority of the Board of Directors in reference to: (1)
amending the Articles of Incorporation, except that a committee may, to the
extent provided in the resolution designating that committee or in the Articles
of Incorporation or the Bylaws, exercise the authority of the Board of Directors
vested in it in accordance with Article 2.13 of the Texas Business Corporation
Act ("Act"); (2) proposing a reduction of the stated capital of the Corporation
in the manner permitted by Article 4.12 of the Act; (3) approving a plan of
merger or share exchange of the Corporation; (4) recommending to the
shareholders the sale, lease, or exchange of all or substantially all of the
property and assets of the Corporation otherwise than in the usual and regular
course of its business; (5) recommending to the shareholders a voluntary
dissolution of the Corporation or a revocation thereof; (6) amending, altering,
or repealing the Bylaws of the Corporation or adopting new Bylaws of the
Corporation; (7) filling vacancies in the Board of Directors; (8) filling
vacancies in or designating alternate members of any such committee; (9) filling
any directorship to be filled by reason of an increase in the number of
Directors; (10) electing or removing officers of the Corporation or members or
alternate members of any such committee; (11) fixing the compensation of any
member or alternate members of such committee; or (12) altering or repealing any
resolution of the Board of Directors that by its terms provides that it shall
not be so amendable or repealable; and, unless such resolution designating a
particular committee, the Articles of Incorporation, or the Bylaws expressly so
provide, no committee of the Board of Directors shall have the authority to
authorize a distribution or to authorize the issuance of shares of the
Corporation.
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MEETINGS OF THE BOARD OF DIRECTORS
Section 6. The Directors of the corporation may hold their meetings,
both regular and special, either within or without the State of Texas.
Section 7. The first meeting of each newly elected Board of Directors
shall be held without further notice immediately following the annual meeting of
shareholders, and at the same place, unless by unanimous consent of the
Directors then elected and serving such time or place shall be changed.
Section 8. Regular meetings of the Board of Directors may be held
with or without notice at such time and place as shall from time to time be
determined by the Board of Directors.
Section 9. Special meetings of the Board of Directors may be called
on twenty-four (24) hours' notice to each Director, or such shorter period of
time as the person calling the meeting deems appropriate in the circumstances,
either personally, or by mail, or by telegram; special meetings shall be called
by the Chairman or, in the event of the inability of the Chairman to act, the
President or the Corporate Secretary in like manner and on like notice on the
written request of two Directors. Neither the business to be transacted at, nor
the purpose of, any special meeting need be specified in a notice or waiver of
notice.
Section 10. At all meetings of the Board of Directors the presence of
a majority of the Directors shall constitute a quorum for the transaction of
business and the act of a majority of the Directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors. Any action
required or permitted to be taken at a meeting of the Board of Directors may be
taken without a meeting if a consent in writing, setting forth the action so
taken, is
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signed by all members of the Board of Directors. If a quorum shall not be
present at any meeting of Directors, the Directors present thereat may adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Section 11. COMPENSATION OF DIRECTORS. The Board of Directors shall
have authority to establish, from time to time, the amount of compensation which
shall be paid to its members for their services as Directors.
ARTICLE IV
NOTICES
Section 1. Whenever under the provisions of the statutes or of the
Articles of Incorporation or of these Bylaws, notice is required to be given to
any Director or shareholder, and no provision is made as to how such notice
shall be given, it shall not be construed to mean personal notice, but any such
notice may be given in writing, by mail, postage prepaid, addressed to such
Director or shareholder at such address as appears on the books of the
corporation. Any notice required or permitted to be given by mail shall be
deemed to be given at the time when the same shall be thus deposited in the
United States mails as aforesaid.
Section 2. Whenever any notice is required to be given to any
shareholder or Director of the corporation under the provisions of the statutes
or of the Articles of Incorporation, or of these Bylaws, a waiver thereof in
writing signed by the person or persons entitled to such notice, whether before
or after the time stated in such notice, shall be equivalent to the giving of
such notice. Attendance of a Director at a meeting shall constitute a waiver of
notice of such meeting, except when a Director attends a meeting for the express
purpose, in writing filed at
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the meeting, of objecting to the transaction of any business on the grounds that
the meeting is not lawfully called or held.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be a Chairman, a
President, one or more Executive Vice Presidents, Senior Vice Presidents or Vice
Presidents, a General Counsel, a Controller, a Corporate Secretary and a
Treasurer, all of whom shall be elected by the Board of Directors. Any two or
more offices may be held by the same person. Each such officer shall have such
authority and perform such duties in the management of the corporation as may be
determined by resolution of the Board of Directors.
Section 2. The Board of Directors may elect or appoint such other
officers and agents as it shall deem necessary, who shall hold their offices for
such term and who shall have such authority and perform such duties as may be
prescribed by the Board of Directors or the Chairman. The power to appoint such
other officers and agents may be delegated by the Board of Directors to the
Chairman to the extent the Board may delineate by resolution.
Section 3. Each officer of the corporation shall hold office until
his successor is chosen and qualified in his stead or until his death or until
his resignation, retirement or removal from office. Any officer or agent
elected or appointed by the Board of Directors may be removed by the Board of
Directors whenever in its judgment the best interests of the corporation will be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an officer
or agent shall not of itself create contract rights.
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Section 4. THE CHAIRMAN. The Chairman shall be the chief executive
officer of the corporation. He shall, subject to the direction and control of
the Board of Directors, be their representative and medium of communication. He
shall see that all orders, resolutions and policies adopted by the Board of
Directors are carried into effect. He shall preside at all meetings of
shareholders and at all meetings of the Board of Directors. He shall be in
complete charge with attendant responsibility and accountability of the entire
corporation and its affairs.
Section 5. THE PRESIDENT. The President shall be the chief operating
officer of the corporation. He shall, subject to the direction of the Chairman,
have responsibility for such operations and functions assigned to him; and in
the absence of the Chairman, shall preside at all meetings of shareholders and
at all meetings of the Board of Directors.
Section 6. EXECUTIVE VICE PRESIDENTS. Each Executive Vice President
shall have such powers and responsibilities, and shall perform such duties, as
delineated by the Board or by the President. They shall be directly responsible
to such officer as the President may from time to time prescribe.
Section 7. SENIOR VICE PRESIDENTS. Each Senior Vice President shall
have such powers and responsibilities, and shall perform such duties, as
delineated by the Board or by the President. They shall be directly responsible
to such officer as the President may from time to time prescribe.
Section 8. THE GENERAL COUNSEL. The General Counsel shall have
general control over all matters of a legal nature concerning the corporation
and shall perform such duties as delineated by the Board or by the President.
He shall be directly responsible to the President in said performance.
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Section 9. VICE PRESIDENTS. Each Vice President shall have such
powers and responsibilities, and shall perform such duties, as may be delineated
by the Board or the President. They shall be directly responsible to such
officer as the President may from time to time prescribe.
Section 10. THE CONTROLLER. The Controller shall be in general
control of the accounts of the corporation, shall be responsible for the making
of adequate audits, shall prepare and interpret required accounting, financial
and statistical statements, and shall be directly responsible to such officer
and shall perform such other duties as the Board or President may from time to
time prescribe.
Section 11. THE CORPORATE SECRETARY. The Corporate Secretary shall
attend all meetings of the Board of Directors and shareholders and act as
secretary thereof and shall record all votes and the minutes of all proceedings
of the Board of Directors and shareholders in a book for that purpose maintained
and kept in his custody. He shall keep in his custody the seal of the
corporation and shall in general perform all the duties incident to the office
of Secretary of a corporation. He shall act as Transfer Agent of the
corporation and/or Registrar of its capital stock and other securities; provided
that the Board of Directors may by resolution appoint one or more other persons
or corporations as Transfer Agents and/or Registrars or as Co-Transfer Agents
and/or Co-Registrars. He shall be directly responsible to such officer and
shall perform such other duties as the Board or President may from time to time
prescribe.
Section 12. THE TREASURER. The Treasurer shall have custody of all
the funds and securities of the corporation and shall keep full and accurate
accounts of receipts and disbursements. He may endorse checks, notes and other
obligations on behalf of the corporation
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for collection and shall deposit the same, together with all monies and other
valuable effects, to the credit of the corporation in banks or depositories as
the Board of Directors may designate by resolution or as may be established in
accordance with Article VIII of these Bylaws. He shall be directly responsible
to such officer as the President may from time to time designate and shall
perform all duties incident to the office of Treasurer of a corporation or as
the Board or President shall designate.
Section 13. ASSISTANT CORPORATE SECRETARY, ASSISTANT TREASURER,
ASSISTANT CONTROLLER. The Board of Directors may appoint one or more Assistant
Corporate Secretaries, Assistant Treasurers and Assistant Controllers and such
other appointive officers as may be appropriate and required. They shall be
directly responsible to such officer and shall perform such duties as the Board
or President may from time to time designate.
ARTICLE VI
CERTIFICATES REPRESENTING SHARES
Section 1. The shares of stock of this corporation shall be deemed
personal estate, and shall be transferable only on the books of the corporation
in such manner as these Bylaws prescribe.
Section 2. Every shareholder in the corporation shall be entitled to
have a certificate or certificates representing the number of shares owned by
him. The certificates of shares of stock of the corporation shall be numbered
and shall be entered in the books of the corporation as they are issued. They
shall exhibit the holder's name and number of shares, and shall be signed by the
Chairman, the President or a Vice President, and the Treasurer or an Assistant
Treasurer and bear the corporate seal; but the signatures of such officers and
the seal of the corporation
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upon such certificates may be facsimiles, engraved or printed where such
certificate is signed by a duly authorized Transfer Agent or Co-Transfer Agent
and a Registrar or Co-Registrar.
Section 3. The Board of Directors may make such rules and regulations
as it may deem expedient concerning the issue, transfer, conversion, and
registration of certificates for shares of the capital stock of the corporation.
Section 4. LOST CERTIFICATES. The Board of Directors may direct a
new certificate representing shares to be issued in place of any certificate
theretofore issued by the corporation alleged to have been lost or destroyed,
upon the making of an affidavit of that fact by the person claiming the
certificate to be lost or destroyed. When authorizing such issue of a new
certificate, the Board of Directors, in its discretion and as a condition
precedent to the issuance thereof, may require the owner of such lost or
destroyed certificate, or his legal representative, to advertise the same in
such manner as it shall require and/or give the corporation a bond in such form,
in such sum, and with such surety or sureties as it may direct as indemnity
against any claim that may be made against the corporation and its Transfer
Agents and Registrars and its Co-Transfer Agents and Co-Registrars with respect
to the certificate alleged to have been lost or destroyed.
Section 5. TRANSFER OF SHARES. Transfers of shares of stock shall be
made on the books of the corporation only by the person named in the certificate
or by attorney, lawfully constituted in writing, and upon surrender of the
certificate therefor.
Section 6. The Board of Directors may close the stock transfer books
of the corporation for a period not to exceed sixty (60) days for the purpose of
determining shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or entitled
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to receive payment of any distribution and share dividend, or in order to make a
determination of shareholders for any purpose, provided that if such books shall
be closed for the purpose of determining shareholders entitled to notice of or
to vote at a shareholders' meeting, such books shall be closed for at least ten
(10) days immediately preceding such meeting. In lieu of so closing the stock
transfer books, the Board of Directors may fix a date in advance, not exceeding
sixty (60) days preceding the date of any meeting of shareholders, or the date
for the payment of any distribution and share dividend or the date for the
allotment of rights, or the date when any change or conversion or exchange of
capital stock shall go into effect, as a record date for the respective
determination of the shareholders entitled to notice of, and to vote at, any
such meeting, or entitled to receive payment of any such distribution and share
dividend, or to any such allotment of rights, or to exercise rights in respect
of any such change, conversion or exchange of capital stock and in such case
such shareholders and only such shareholders as shall be shareholders of record
on the date so fixed shall be entitled to such notice of, and to vote at, such
meeting, or to receive payment of such distribution and share dividend, or to
receive such allotment of rights, or to exercise such rights, as the case may
be, notwithstanding any transfer of any shares of stock on the books of the
corporation after any such record date fixed as aforesaid. In the absence of
any designation with respect thereto by the Board of Directors, the date upon
which the notice of a meeting is mailed or resolutions declaring a distribution
and share dividend are adopted shall be the record date for such determination
in regard to meetings of shareholders or declarations of distributions and share
dividends.
Section 7. The corporation shall be entitled to treat the holder of
record of any share or shares of stock as the holder in fact thereof and,
accordingly, shall not be bound to recognize
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any equitable or other claim to or interest in such share on the part of any
other person, whether or not it shall have express or other notice thereof, save
as expressly provided by the laws of Texas.
Section 8. BONDS, DEBENTURES AND EVIDENCES OF INDEBTEDNESS. Bonds,
debentures and other evidence of indebtedness of the corporation shall be signed
by the Chairman, the President or any Vice President and the Treasurer or an
Assistant Treasurer and shall bear the corporate seal and when so executed shall
be binding upon the corporation, but not otherwise. The seal of the corporation
thereon may be facsimile, engraved or printed, and where any such bond,
debenture or other evidence of indebtedness is authenticated with the manual
signature of an authorized officer of the corporation or trustee appointed or
named by an indenture of trust or other agreement under which such security is
issued, the signature of any of the corporation's officers authorized to execute
such security may be facsimile.
Section 9. SIGNATURES ON SHARE CERTIFICATES, BONDS, DEBENTURES AND
EVIDENCES OF INDEBTEDNESS. In case any officer who signed, or whose facsimile
signature has been placed on any certificate representing shares of stock, bond,
debenture or evidence of indebtedness of this corporation shall cease to be an
officer of the corporation for any reason before the same has been issued or
delivered by the corporation, such certificate, bond, debenture or evidence of
indebtedness may nevertheless be issued and delivered as though the person who
signed it or whose facsimile signature had been placed thereon had not ceased to
be such officer.
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ARTICLE VII
DEEDS AND OTHER INSTRUMENTS OF CONVEYANCE
Section 1. Deeds and other instruments of the corporation conveying
land or any interest in land shall be signed by the Chairman, the President or a
Vice President or attorney-in-fact of the corporation when authorized by
appropriate resolution of the Board of Directors or shareholders, and when
required by law, shall be attested by the Corporate Secretary or an Assistant
Corporate Secretary and shall bear the corporate seal, and when so executed
shall be binding upon the corporation, but not otherwise.
ARTICLE VIII
CHECKS, DRAFTS AND BILLS OF EXCHANGE
Section 1. The Chairman or the President of the corporation may from
time to time establish General Bank Accounts, Depository Bank Accounts, and such
Special Bank Accounts as in the judgment of either of them may be needed in
carrying on and dispatching the business of the corporation. All checks, drafts
and bills of exchange issued in the name of the corporation and calling for the
payment of money out of said General Accounts, Depository Accounts, or Special
Accounts of the corporation shall be signed by the Controller or Assistant
Controller, or such agents and employees as the Chairman or the President may
from time to time designate and authorize to sign for the Controller, and
countersigned by the Treasurer or any Assistant Treasurer, or such agents and
employees as the Chairman or the President may from time to time designate and
authorize to sign for the Treasurer; and when so designated by the Chairman or
the President, the signature of the Treasurer or an Assistant Treasurer may be
affixed by the use of a check-signing machine; provided that for the purpose of
transferring
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funds from any bank or depository at which the corporation has funds on deposit
to any other bank or depository of the corporation for credit to the
corporation's account, a form of check having plainly printed upon its face
"DEPOSITORY TRANSFER CHECK," and being by its wording payable to a bank or
depository for credit to the account of the corporation, is hereby authorized,
and such checks shall require no signature other than the name of the
corporation printed at the lower right corner; and further provided that checks,
drafts and bills of exchange issued in the name of the corporation in the amount
of $5,000.00 or less need bear only one signature and that being the signature
of the Treasurer or an Assistant Treasurer, affixed either manually or by the
use of a check-signing machine, or the manual signature of such agents and
employees as the Chairman or the President may from time to time designate and
authorize to sign for the Treasurer; and provided further that checks and drafts
issued in the name of the corporation and calling for the payment of production
revenue or royalties need bear only one signature and that being the signature
of the Treasurer or an Assistant Treasurer, affixed either manually or by the
use of a check-signing machine, or the manual signature of such agents and
employees as the Chairman or the President may from time to time designate and
authorize to sign for the Treasurer; and provided further that checks and drafts
issued in the name of the corporation and calling for payment of money out of
Special Bank Accounts established for the payment of dividends need bear only
one signature and that being the signature of the Treasurer or an Assistant
Treasurer, affixed either manually or by the use of a check-signing machine, or
the manual signature of such agents and employees as the Chairman or the
President may from time to time designate and authorize to sign for the
Treasurer; and further provided that no person authorized to sign checks or
drafts may sign a check or draft payable to himself. When
21
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signed in such applicable manner, but not otherwise, every check, draft or bill
of exchange issued in the name of the corporation and calling for the payment of
money out of the General Bank Accounts, Depository Bank Accounts, and Special
Bank Accounts of the corporation shall be valid and enforceable according to its
wording, tenor and effect, but not otherwise. Provided, however, that for the
purpose of transferring funds between accounts of the corporation, from accounts
of the corporation to accounts of subsidiaries and affiliates, from accounts of
the corporation for the purpose of investment of corporate funds, and from
accounts of the corporation for the payment of dividends, the Treasurer or an
Assistant Treasurer, or such agents and employees as the Chairman or the
President may from time to time designate and authorize, may make such transfer
of funds by bank wire transfers through oral or written instructions; and for
the purpose of transferring funds from accounts of the corporation to accounts
of other third parties, such funds may be transferred by bank wire transfers but
only upon written instructions from the Treasurer or an Assistant Treasurer, or
such agents and employees as the Chairman or the President may from time to time
designate and authorize to sign for the Treasurer, and countersigned by the
Controller or Assistant Controller, or such agents and employees as the Chairman
or the President may from time to time designate and authorize to sign for the
Controller.
Section 2. The Treasurer of the corporation may establish special
bank accounts designated as Agent's Account in such bank or banks as in his
judgment may be needed in carrying on and dispatching the business of the
corporation, provided that the Treasurer in establishing and maintaining such
accounts shall keep only such funds therein and in such amount as may be
required for the local needs of such accounts and provided that checks or
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drafts issued against or drawn on such accounts shall be valid and binding on
the corporation according to their wording, tenor and effect when signed by
either the Treasurer of the corporation or by such agent or employee of the
corporation as may be designated by the Treasurer in writing to such bank or
when signed in such manner and by such agent or employee of the corporation as
may be designated by the Chairman or the President of the corporation; and
further provided that checks and drafts issued in the name of the corporation
against funds in such Agent's Account in the amount of $1,000.00 or more must be
countersigned by two persons authorized to sign such checks or drafts.
ARTICLE IX
FISCAL YEAR
Section 1. The fiscal year shall begin on the first day of January in
each year.
ARTICLE X
DISTRIBUTIONS AND SHARE DIVIDENDS
Section 1. Distributions and share dividends upon the outstanding
shares of the corporation, subject to the provisions of the Articles of
Incorporation, if any, may be declared by the Board of Directors at any regular
or special meeting. Distributions may be paid in cash or property, and share
dividends may be paid in shares of the authorized but unissued shares or in
treasury shares, of the corporation subject to the provisions of the Articles of
Incorporation.
ARTICLE XI
RESERVES
Section 1. There may be created by resolution of the Board of
Directors out of the earned surplus of the corporation such reserve or reserves
as the Directors from time to time,
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in their discretion, think proper to provide for contingencies, or to equalize
dividends, or to repair or maintain any property of the corporation, or for such
other purpose as the Directors shall think beneficial to the corporation, and
the Directors may modify or abolish any such reserve in the manner in which it
was created.
ARTICLE XII
SEAL
Section 1. The corporation's seal shall have inscribed thereon the
name of the corporation, the year of the organization and the words "Corporate
Seal, Texas." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE XIII
INDEMNIFICATION
Section 1. The corporation shall indemnify, and advance or reimburse
reasonable expenses incurred by, any person who (1) is or was a director,
officer, employee or agent of the corporation, or (2) while a director,
officer, employee or agent of the corporation, its divisions or subsidiaries, is
or was serving at the request of the corporation, pursuant to a resolution
adopted by the Board of Directors, as a director, officer, partner, venturer,
proprietor, trustee, employee, agent or similar functionary of another foreign
or domestic corporation, partnership, joint venture, sole proprietorship, trust,
employee benefit plan or other enterprise, to the fullest extent that a
corporation may or is required to grant indemnification to a director under the
Texas Business Corporation Act. The corporation, pursuant to a resolution
adopted by the Board of Directors, may indemnify any such persons to such
further extent as permitted by law.
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ARTICLE XIV
AMENDMENTS
Section 1. The power to alter, amend, suspend or repeal the Bylaws or
to adopt new Bylaws shall be vested in the Board of Directors; provided,
however, that any Bylaw or Amendment thereto as adopted by the Board of
Directors may be altered, amended, suspended or repealed by vote of the
shareholders entitled to vote for the election of Directors or a new Bylaw in
lieu thereof may be adopted by vote of such shareholders. No Bylaw which has
been altered, amended or adopted by such a vote of the shareholders may be
altered, amended, suspended or repealed by vote of the Directors until two years
after such action by vote of the shareholders.
ARTICLE XV
RESTRICTIONS ON FOREIGN OWNERSHIP
Section 1. PURPOSE AND EFFECTIVENESS. The purpose of this Article XV
is to limit ownership and control of shares of any class of capital stock of the
corporation by persons who are not Eligible Citizens in order to permit the
corporation or any of its Subsidiaries to conduct its business as a U.S. Mineral
Lessee. The Board of Directors is hereby authorized to adopt such resolutions,
and to effect any and all other measures reasonably necessary or desirable
(consistent with applicable law and the provisions of the Articles of
Incorporation) to fulfill the purpose and implement the restrictions of this
Article XV, including without limitation, requiring, as a condition precedent to
the transfer of shares on the records of the corporation, representations and
other proof as to the identity of existing or prospective shareholders and
persons on whose behalf of shares of any class of capital stock of the
corporation or any interest therein or right thereof are or are to be held and
as to whether or not such persons are Eligible Citizens.
25
<PAGE>
Section 2. RESTRICTION ON TRANSFERS. Any transfer, or attempted or
purported transfer, of any shares of any class of capital stock issued by the
corporation or any interest therein or right thereof, which would result in the
ownership or control by one or more non-Eligible Citizens of the shares of any
class of capital stock of the corporation or of any interest or right therein
will, until such condition no longer exists, be void and will be ineffective as
against the corporation and the corporation will not recognize the purported
transferee as a shareholder of the corporation for any purpose other than the
transfer of such shares to a person who is an Eligible Citizen; provided,
however, that such shares may nevertheless be deemed to be shares held or owned
by non-Eligible Citizens for the purposes of this Article XV.
Section 3. SUSPENSION OF VOTING, DIVIDEND AND DISTRIBUTION RIGHTS.
No shares of the outstanding capital stock of the corporation or any class
thereof transferred to, or acquired or held by, a non-Eligible Citizen shall be
entitled to receive or accrue any rights with respect to any dividends or other
distributions of assets declared payable or paid to the holders of such capital
stock during such period. Furthermore, no shares held by or for the benefit of
any non-Eligible Citizen will be entitled to vote with respect to any matter
submitted to stockholders of the corporation so long as such condition exists.
Section 4. REDEMPTION. If at any time (i) the corporation is named,
or is threatened to be named, as a party in a judicial or administrative
proceeding that seeks the cancellation or forfeiture of any property, lease,
right or license in which the corporation has an interest or (ii) if, in the
opinion of the Board of Directors, the corporation's ability to hold any
property, lease, right or license would be prohibited or restricted because of
the nationality, citizenship, residence, or other status, of any shareholder of
the corporation (or, in the case of a shareholder which is a corporation,
partnership or association, of any shareholder, owner, partner or member of such
shareholder), the corporation may redeem the shares held by such shareholder at
the then
26
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Current Market Price and upon such terms as shall be determined by the Board of
Directors, in their sole discretion.
Section 5. DEFINITIONS. "Current Market Price" per share of capital
stock of the corporation on any date is the average of the Quoted Prices of such
class of capital stock during the four trading weeks before the date in
question. In the absence of one or more such quotations, the Board of Directors
shall determine the current market price on the basis of such quotations as it
considers appropriate.
"Eligible Citizen" means any person (including a corporation,
partnership or other entity) whose ownership, holding or control of shares in
the corporation would not, by reason of such person's citizenship or the
citizenship of its members or owners or otherwise, (1) disqualify the
corporation or any of its Subsidiaries from owning, acquiring, holding,
possessing, or leasing oil, gas or other minerals, mineral deposits, land,
vessels or any other property, licenses, or rights of any nature whatsoever in
federal lands or leases under federal laws and regulations in effect from time
to time, (2) violate any other qualifications as the Board of Directors deems in
its reasonable discretion are necessary or appropriate to permit the corporation
and its Subsidiaries to engage in any other business activities for which there
may be qualifications or restrictions on shareholders of the corporation or any
of its Subsidiaries applicable under federal or state law. A person is an
Eligible Citizen if the applicable following requirement is met: (1) for an
individual, that he is native-born, naturalized or a derivative Citizen of the
United States or otherwise qualifies as a United States citizen; (2) for a
corporation, that is organized or existing under the laws of the United States,
a state, the District of Columbia or United States territory or possession, that
at least 75% of the ownership interest in, and the voting power over, the
corporation is held by Eligible Citizens, that the corporation's president or
other chief executive officer and the chairman of its board of directors are
United States citizens and that
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no more than a minority of the number of directors required to constitute a
quorum are non-United States citizens; (3) for a partnership, that all of the
interests in the partnership, are owned by Eligible Citizens; (4) for a trust,
that each of its trustees and each of its beneficiaries is an Eligible Citizen;
and (5) for an association, joint venture, or other entity, that all members,
venturers or other equity participants are Eligible Citizens and that such
association, joint venture or other entity is capable of holding leases or other
interest in federal minerals or lands under the laws of the United States.
"Quoted Price" means, with respect to any class of capital stock of
the corporation, the last reported sales price regular way or, in case no such
reported sale takes place on such day, the average of the closing bid and asked
prices regular way for such day, in each case on the principal national
securities exchange on which the shares of such class of capital stock are
listed or admitted to trading or, if not listed or admitted to trading, the last
sale price regular way for such shares as published by NASDAQ, or if such last
price is not so published by NASDAQ or if no such sale takes place on such day,
the mean between the closing bid and asked prices for such shares as published
by NASDAQ or in the absence of any of the foregoing, the fair market value as
determined by the Board of Directors.
"Subsidiary" means any corporation more than 50% of the outstanding
capital stock of which is owned by the corporation or any Subsidiary of the
corporation.
"U.S. Mineral Lessee" means any corporation or other entity directly
or indirectly owning, acquiring, holding, possessing, or leasing oil, gas or
other minerals, mineral deposits, lands, vessels or any other property,
licenses, or rights of any nature whatsoever in federal lands or leases under
federal laws and regulations in effect from time to time, including, without
limitation, the Mineral Leasing Act of 1920, as amended, 30 U.S.C.A. (S) 181 et
seq.
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EXHIBIT 4.1
(FACE OF CERTIFICATE)
Incorporated Under the Laws Common Stock
of the State of Texas (Par Value $1.00)
Enserch Exploration, Inc.
NUMBER SHARES
- ------ ------
CUSIP 29356V 10 0
This Certificate is transferable See reverse for certain
in New York, New York and restrictions on preemptive,
Chicago, Illinois transfer and other rights.
This is to certify that _______________________________ is the owner of
_________________________________ fully paid and non-assessable shares of the
Common Stock of Enserch Exploration, Inc. transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney, upon
surrender of this Certificate properly endorsed.
This Certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
Witness, the seal of the Corporation and the signatures of its duly
authorized officers.
Dated
Treasurer Enserch Exploration, Inc. Chairman
Corporate Seal
Texas
1994
Countersigned and registered.
Harris Trust Company of New York
Transfer Agent and Registrar
By
Authorized Signature
<PAGE>
(REVERSE OF CERTIFICATE)
Enserch Exploration, Inc.
Article Four of the Restated Articles of Incorporation of the Corporation
sets forth (a) the authorized amounts, designations, preferences, limitations
and relative rights of each class of capital stock authorized to be issued, (b)
a denial to shareholders of preemptive rights to acquire unissued or treasury
shares of the Corporation and (c) a denial to shareholders of the right of
cumulative voting. In addition, under Article Eight (B) of the Restated
Articles of Incorporation and Article XV of the Bylaws, stock transfer, voting,
distribution and ownership rights of certain non-United States citizens are
restricted and stock may be redeemed by the Corporation in order to satisfy the
citizenship or other requirements imposed by laws relating to the oil and gas
business of the Corporation. The Corporation will furnish to any shareholder
without charge upon written request to the Corporation at its principal place of
business or registered office, and there is on file in the office of the
Secretary of State of Texas, (i) a full statement of all of the designations,
preferences, limitations and relative rights of the shares of each class of
stock authorized to be issued, (ii) the variations in the relative rights and
preferences of the shares of any preferred or special class in series of stock
which the Corporation is authorized to issue so far as the same have been fixed
and determined and the authority of the Board of Directors to fix and determine
the relative rights and preferences of any subsequent series, (iii) a full
statement of the denial of preemptive rights contained in the Articles of
Incorporation and (iv) a full statement of the provisions of the Restated
Articles of Incorporation, the Bylaws and any resolutions adopted by the
Corporation that restrict stock ownership.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right
of survivorship and not as
tenants in common
UNIF GIFT MIN ACT - _______ Custodian _______
(Cust) (Minor)
under Uniform Gifts to Minor
Act _______
(State)
Additional abbreviations may also be used though not in the above list.
<PAGE>
For value received,______ hereby sell, assign and transfer unto
Please insert Social Security
or other Identifying Number
if Assignee________________
_____________________________________________________________________
(Please print or typewrite name and address, including
Zip Code, of Assignee)
shares of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint __________________________ Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated___________________
X_________________________
(Signature)
X_________________________
(Signature)
NOTICE: The signature(s) to this assignment must correspond with the name(s) as
written upon the face of the Certificate in every particular without alteration
or enlargement or any change whatever.
_______________________________
Street or P.O. Box
_______________________________
City State Zip Code
The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
membership in an approved signature guarantee Medallion Program), pursuant to
S.E.C. Rule 17Ad-15.
Signature(s) Guaranteed By:
<PAGE>
[LETTERHEAD OF JACKSON & WALKER, L.L.P. APPEARS HERE]
EXHIBIT 5
December 9, 1994
New Enserch Exploration, Inc.
300 S. St. Paul
Dallas, Texas 75201
Re: Reorganization of Enserch Exploration Partners, Ltd.
Gentlemen:
We have acted as counsel for New Enserch Exploration, Inc., a Texas
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended (the "Act"), by the Company of the offering
of 104,581,242 shares of Common Stock, par value $1.00 per share (the "Shares"),
of the Company to be issued to holders of partnership interests of Enserch
Exploration Partners, Ltd. pursuant to the terms of that certain Enserch
Exploration Partners, Ltd. Plan of Complete Liquidation (the "Plan of
Liquidation"). A registration statement on Form S-4 (the "Registration
Statement") has been filed with the Securities and Exchange Commission (the
"Commission") concurrent with the delivery of this opinion.
In connection with the rendering of this opinion, we have examined and
relied upon the originals or copies, certified to our satisfaction, of such
documents, certificates and instruments as we have deemed necessary for the
expression of the opinions expressed herein, including the Articles of
Incorporation, as amended, and the Bylaws of the Company, the Plan of
Liquidation, copies of resolutions of the Board of Directors of the Company
authorizing the offering and the issuance of the Shares and the Registration
Statement, as amended, and all exhibits thereto. In making the foregoing
examinations, we have assumed the genuineness of all signatures on original
documents, the authenticity of all documents submitted to us as originals and
the conformity to original documents of all copies submitted to us.
Based upon the foregoing examination, subject to the comments and
exceptions herein stated, and limited in all respects to the laws of the State
of Texas and the laws of the United States of America, and subject to
confirmation that the Commission has declared the Registration Statement
effective, it is our opinion that the Shares have been duly and validly
authorized by the Company, and when issued in accordance with the terms of the
Plan of Liquidation, the Shares will be legally issued, fully paid and
nonassessable.
<PAGE>
New Enserch Exploration, Inc.
December 9, 1994
Page 2
Our opinions are subject to (i) the effect of applicable bankruptcy,
reorganization, insolvency, moratorium, arrangement and other laws affecting
creditors' rights generally, including without limitation the effect of
statutory or other laws regarding fraudulent conveyances, fraudulent transfers
and preferential transfers; and (ii) the limitations imposed by general
principles of equity (regardless of whether such limitations are considered in a
proceeding at law or in equity).
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to all references to our Firm in the Registration
Statement. In giving this consent we do not thereby admit that we come within
the category of persons whose consent is required under Section 7 of the Act or
the rules and regulations of the Commission promulgated thereunder.
Very truly yours,
JACKSON & WALKER, L.L.P.
<PAGE>
[LETTERHEAD OF JACKSON & WALKER, L.L.P. APPEARS HERE]
Exhibit 8.1
LARRY L. BEAN
(214) 953-5864
December 9, 1994
Enserch Exploration Partners, Ltd.
300 South St. Paul
Dallas, Texas 75201
Gentlemen:
We have acted as special counsel to Enserch Exploration Partners, Ltd., a
Texas limited partnership ("EP"), in connection with the federal income tax
consequences of a proposed reorganization and restructuring of EP (the
"Reorganization") to members of the public (collectively) that own partnership
interests in EP ("Public Unitholders"). The Reorganization also involves EP
Operating Limited Partnership, a Texas limited Partnership ("EPO"), ENSERCH
Corporation, a Texas corporation ("EC"), and its controlled corporate
subsidiaries and their controlled partnerships, including but not limited to,
Enserch Exploration, Inc., a Delaware corporation ("EEI"), but not EP and EPO
(collectively with EC, the "EC Companies"). The Reorganization contemplates,
among other things, the formation of two new Texas corporations ("Newco") and
("Newsub"), the transfer of EPO partnership interests to Newco and Newsub, the
merger and dissolution of EPO and Newsub into Newco followed by the liquidation
and dissolution of EP. As a result, the Public Unitholders will receive shares
of Newco Common Stock in exchange for their outstanding partnership interests,
which are represented by depositary units reflecting limited partnership
interests in EP (the "Units"). The opinion that follows addresses the federal
income tax consequences of the Reorganization that should be considered by the
Public Unitholders. It does not address or otherwise comment upon all of the
federal tax aspects of the Reorganization and does not set forth any of the
federal income tax consequences as they may affect any of the EC Companies.
Capitalized terms used herein but not defined have the meanings ascribed to them
in the Prospectus/Information Statement (the "Information Statement") of Newco
filed on December 9, 1994, under the Securities Act of 1933, as amended (the
"Act").
The opinions hereinafter set forth are based on the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury Regulations (the "Regulations") thereunder, current administrative
rulings and court decisions, and certain factual representations made by EC
Companies and assumptions that are set forth herein. There can
<PAGE>
Enserch Exploration Partners, Ltd.
December 9, 1994
Page 2
be no assurance that the legal authorities upon which this opinion is based will
not change, perhaps retroactively, that the representations and factual
assumptions underlying this opinion will be accurate, or that there will not be
future changes in circumstances which affect this opinion. This opinion is
subject to and conditioned upon the receipt, prior to the effective date of the
Reorganization, of certain written representations by certain EC Companies
satisfactory to counsel (the "Representation Letter"). The initial and
continuing accuracy of the representations in the Representation Letter
constitutes an integral basis for this opinion and this opinion is conditioned
upon the initial and continued accuracy of these representations. We have not
independently undertaken verification of these representations. There can be no
assurance that the Internal Revenue Service (the "Service") will not disagree
with the conclusions herein expressed and no ruling from the Service on any
aspect of the Reorganization has or will be requested.
In rendering this opinion, we have examined such documents as we have
deemed relevant or necessary, including (i) various financial analyses of the
Reorganization, (ii) the Amended and Restated Agreement of Limited Partnership
of Enserch Exploration Partners, Ltd., including any amendments thereto, (the
"EP Partnership Agreement"), (iii) the Amended and Restated Agreement of Limited
Partnership of EP Operating Company, including any amendments thereto (the "EPO
Partnership Agreement"), (iv) the plan of liquidation of EP, (v) the Information
Statement, and (vi) such other documents as we have deemed necessary or
appropriate in order to enable us to render this opinion. In our examination,
we have assumed the genuineness of all signatures, the due execution and
delivery of all documents, the legal capacity of all natural persons and the
authenticity of all documents. We have also assumed and relied upon the initial
and continuing accuracy of the representations set forth in the Representation
Letter. We, however, have not independently verified the representations
contained in the Representation Letter. This opinion is given at the date
hereof and we undertake no responsibility to advise you of future developments
in the application or interpretation of relevant federal income tax laws.
EP is a publicly traded Texas limited partnership which is approximately
99.2 percent owned in various proportions by the EC Companies. EEI is the
Managing General Partner of EP and EPO and holds a 1 percent general partnership
interest in EP and a .99 percent general partnership interest in EPO. EEI is a
wholly-owned corporate subsidiary of EC. EC holds a .01 percent Special General
Partnership interest in EPO. Enserch Processing Partners, Ltd., a Texas limited
partnership ("EPPL") in which EC directly or indirectly owns all of the general
and limited partner interests, owns a 98.2 percent limited partner interest in
EP. The Public Unitholders own an approximate .8 percent limited partnership
interest in EP, which is represented by the Units. The Public Unitholders are
not affiliated with EC or any of the EC Companies. EP owns a 99 percent limited
partnership interest in EPO. Under the Reorganization, the partnership
structure of EP and EPO will be converted from a tiered
<PAGE>
Enserch Exploration Partners, Ltd.
December 9, 1994
Page 3
partnership into a corporation in the form of Newco. The significant steps in
the Reorganization as it relates to the Public Unitholders are as follows:
1. EP will transfer a 1 percent limited partnership interest in EPO to the
capital of Newco for Newco Common Stock, which in turn will contribute that
interest to Newsub in exchange for all of the issued stock of Newsub.
2. Thereafter, EP will contribute its remaining 98 percent limited
partnership interest in EPO to Newco for additional Newco Common Stock and EC
and EEI will contribute their general partnership interests in EPO to Newco in
exchange for Newco Common Stock.
3. EPO and Newsub will merge into Newco pursuant to the applicable
provisions of the Texas Revised Limited Partnership Act and the Texas Business
Corporations Act.
4. Thereafter, EP will be completely liquidated and will distribute Newco
Common Stock to the Public Unitholders and distribute Newco Common Stock and
other assets to the EC Companies that hold partnership interests in EP.
Immediately before the liquidation of EP, the capital accounts of its
partners, including the Public Unitholders, will be adjusted to reflect their
share of any unrealized gain in EP's assets, including the Newco Common Stock EP
received upon the transfer of its 99 percent limited partnership interest in EPO
to the capital of Newco. The partnership agreement of EP was amended to include
a special allocation to the Public Unitholders of unrealized appreciation in
EP's partnership interest in EPO. Pursuant to EP's plan of liquidation, EP will
be liquidated, with (i) Newco Common Stock being distributed to the Public
Unitholders and the EC Companies that are partners of EP pro rata in relation to
their interest in EP, (ii) EEI receiving EP's interest in, and assuming EP's
obligations under, the Equipment Leases, and (iii) the EC Companies assuming
approximately $395 million in aggregate principal amount of debt of EP owed to
certain EC Companies and to Newco, plus accrued interest. Any assets (including
cash) remaining after satisfaction of all obligations of EP will be contributed
to the capital of Newco. EPO and EP will both file federal partnership tax
returns for 1994 beginning January 1, 1994, and ending upon the effective date
of the merger of EPO and the effective date of the liquidation of EP,
respectively.
Based on the foregoing, it is our opinion that the material federal income
tax consequences with respect to the Public Unitholders and Newco are as
follows:
1. Pre-Reorganization Operations of EP. The income and deductions of EP
that accrue during the portion of 1994 prior to the Reorganization will be
allocated among its partners, and these allocations and adjustments will be made
in essentially the same manner as
<PAGE>
Enserch Exploration Partners, Ltd.
December 9, 1994
Page 4
they would have been made absent the Reorganization. Each Public Unitholder's
capital account and tax basis in his Units will be adjusted by these
allocations. Each Public Unitholder will receive a Schedule K-1 for 1994
reflecting the income and deductions allocated to him for the portion of 1994
during which he was a Unitholder, even if he sells his Units prior to the
Reorganization.
2. Pre-Reorganization Sale of Units. The tax consequences to a Public
Unitholder who sells Units prior to the Reorganization will not be affected by
the Reorganization. The tax consequences of any such sale are as follows:
a. Character and Amount of Gain or Loss. A Public Unitholder will
recognize both ordinary income and capital gain or loss on a sale of Units.
The ordinary income component will be equal to the amount of ordinary
income that would have been allocated to the Public Unitholder in respect
of the Units that are sold if EP and EPO had sold all of their assets. The
ordinary income element if EP and EPO had sold all of their assets would be
that amount of gain which is attributable to Section 751 assets (unrealized
receivables and substantially appreciated inventory), including recapture
of depreciation and intangible drilling and development costs. The capital
gain or loss amount will equal the difference between the amount realized
from the sale of the Units (reduced by the portion resulting in ordinary
income) and the Public Unitholder's adjusted tax basis in the Units that
are sold (reduced by the portion allocable to the ordinary income
component). If the ordinary income element realized on the sale of his
Units reduces the amount realized on the sale of his Units below his tax
basis, a Public Unitholder will realize a capital loss on the sale portion
of his Units. A Public Unitholder's capital gain or loss will be treated
as long-term capital gain or loss if the Public Unitholder owned the Units
that were sold for more than one year prior to the sale and the Public
Unitholder held his Units as capital assets. If the Unitholder had a
holding period of one year or less, the Public Unitholder's capital gain or
loss will be treated as short-term capital gain or loss. If a Public
Unitholder sells less than all of his Units, for purposes of determining
gain or loss on the Units sold, his adjusted basis in all of his Units held
immediately prior to the sale must be allocated among the Units sold and
the Units retained based on the ratio of the fair market value of the Units
sold over the fair market value of all his Units immediately before the
sale.
b. Suspended Deductions. A Public Unitholder may be limited in his
ability to utilize previously suspended deductions and losses on a sale of
his Units prior to the Reorganization. Utilization of previously suspended
deductions and losses is discussed below:
<PAGE>
Enserch Exploration Partners, Ltd.
December 9, 1994
Page 5
(1) Any losses previously allocated to a Public Unitholder that he
has not been allowed to use through the date of sale of his Units
because of the Code Section 704(d) basis limitation rule will be
lost and cannot be utilized to offset any gain realized on the
sale. Code Section 704(d) limits the use of partnership losses
to a partner's adjusted basis in his partnership interest.
(2) Any losses previously allocated to a Public Unitholder that he
has not been allowed to use because of the at-risk limitations
can (subject to (b)(3) below), under Proposed Regulation Sections
1.465-66 and 1.465-12, be used to the extent of any gain
recognized on the sale of the Units.
(3) Any losses previously allocated to a Public Unitholder that are
not subject to the limitations set forth in (1) or (2) above but
that he has not been allowed to use because of the passive loss
limitations ("suspended passive losses") can be used in full if
the Public Unitholder sells all his Units to an unrelated person
in a transaction in which all gain or loss is recognized.
(4) A Public Unitholder who sells less than all of his Units will be
entitled to deduct suspended passive losses to the extent of any
gain recognized on the sale, if the Public Unitholder is a
calendar year taxpayer and sells either a portion or
substantially all of his Units before the effective date of the
Reorganization in 1994. Final Regulations recently issued
indicate that for taxable years beginning after October 4, 1994,
a Public Unitholder will have to sell substantially all of his
Units in order to utilize any suspended passive losses. In
addition, a Public Unitholder's suspended passive losses are only
deductible to the extent that the gain recognized on such a
partial sale is allocable to passive activities. The portion of
any such gain that is allocable to passive activities will be
equal to the amount determined by multiplying the Public
Unitholder's gain by a fraction, the numerator of which is the
net gain that would have been allocated to the Public Unitholder
if EPO had sold all of its appreciated trade or business and
rental activities for their fair market value and the denominator
of which is the amount of net gain that would have been allocated
to the Public Unitholder if EPO had sold all of its appreciated
activities, including investment activities, for their fair
market value. Based upon representations of EEI, as Managing
General Partner of EP, all of the Public Unitholder's gain will
be properly allocable to passive activities
<PAGE>
Enserch Exploration Partners, Ltd.
December 9, 1994
Page 6
because all of EPO's appreciated assets are used in its business
or rental activities and not investment activities.
3. Reorganization Consequences. The material federal income tax
consequences to a Public Unitholder who receives shares of Newco Common Stock as
a result of the Reorganization will be as follows:
a. General Non-Recognition. Public Unitholders will not recognize any
gain or loss on the Reorganization, except as otherwise stated below.
b. Non-Recognition on Newco Contribution. EP, EEI and EC's contribution
of all of their partnership interests in EPO to Newco (the "Newco
Contribution") will be tax-free and will be tax-free to the Public
Unitholders unless (i) EP's tax basis in its partnership interest in EPO is
less than EP's share of EPO's liabilities transferred to Newco, as
determined pursuant to Section 752 of the Code, in which case EP will
recognize gain which will be partially allocated to the Public Unitholders
or (ii) a Public Unitholder's tax basis in his Units is less than his share
of EPO's liabilities, as determined pursuant to Section 752 of the Code,
immediately before the Newco Contribution. Based upon representations of
EEI, as Managing General Partner of EP, no Public Unitholder will recognize
gain on the Newco Contribution or the Reorganization.
c. Liquidation Premium Allocation. In connection with the Reorganization,
the EP Partnership Agreement is being amended to include a special
allocation to the Public Unitholders of unrealized appreciation in EP's
partnership interest in EPO (the "Liquidation Premium Allocation") which
results in positive capital account adjustments but has no effect on a
Public Unitholder's tax basis. Because of the increased value attributable
to the Public Unitholders' Units, the assumption by the EC Companies of all
of EP's liabilities will not reduce the Public Unitholders' exchange ratio
of one share of Newco Common Stock for each Unit held. This Liquidation
Premium Allocation does not have any material tax consequences and will not
cause the Public Unitholders to recognize any gain in connection with the
Reorganization. The assumption by the EC Companies as part of the
Reorganization of $395 million of EP liabilities will have no tax
consequences to the Public Unitholders or the EC Companies.
d. Tax Basis. A Public Unitholder's aggregate tax basis in all shares of
Newco Common Stock received in the Reorganization will equal the Public
Unitholder's aggregate tax basis in his Units, as adjusted (i) for 1994
operations to the date of the Reorganization and (ii) by excluding any
share of EP debts a Public Unitholder had previously included in his basis
in his Units. This basis will be prorated among all
<PAGE>
Enserch Exploration Partners, Ltd.
December 9, 1994
Page 7
shares of Newco Common Stock received by the Public Unitholder. To the
extent any Newco Common Stock distributed to a Public Unitholder results in
a tax basis lower than its fair market value, gain will be recognized upon
the subsequent sale or other taxable disposition of that Newco Common
Stock. Correspondingly, to the extent any Newco Common Stock distributed
to a Public Unitholder results in a tax basis greater than its fair market
value, loss may be recognized upon the subsequent sale or other taxable
disposition of that Newco Common Stock.
e. Holding Period. For holding period purposes, each share of Newco
Common Stock will be divided into two parts. One part will be the portion
of the value of the share that is attributable to EPO's Code Section 751
assets that are neither capital assets nor Section 1231 assets (ordinary
income assets). The holding period for this part will begin on the day
following the Newco Contribution. The other part will include the holding
period EP has in its partnership interest in EPO. This other part will
have satisfied the long-term capital gain requirement for a holding period
of more than one year and will therefore qualify a portion of each share
attributable to this other part for long-term capital gain treatment when
sold (assuming that the Newco Common Stock is held as a capital asset). As
a result of this multiple holding period rule, a Public Unitholder who
receives Newco Common Stock in the Reorganization has to hold each share
for at least one year to insure that all gain upon its sale will be long-
term capital gain. The holding period that a Public Unitholder has for his
Units is totally disregarded in determining the Public Unitholder's holding
period for Newco Common Stock received in the Reorganization.
f. Suspended Deductions. Any operating loss allocated to a Public
Unitholder in prior years or during 1994 that has not been used because of
the at-risk limitations cannot be used since no taxable gain will be
recognized on the Reorganization. A Public Unitholder also will not be
entitled to deduct suspended passive losses since no gain will be
recognized by the Public Unitholders as a result of the Reorganization.
Any passive losses not so used may be used thereafter only as provided
below under "Sale of Shares." Any suspended at-risk loss not so used, and
any unused loss suspended by a basis limitation, will be eliminated and be
unavailable to Public Unitholders thereafter in connection with a sale of
Newco Common Stock received in the Reorganization.
g. Sale of Shares. A Public Unitholder who receives shares of Newco
Common Stock in the Reorganization and thereafter sells those shares will
recognize gain or loss equal to the difference between the amount realized
on the sale and the Public Unitholder's tax basis in the shares sold. A
shareholder will be able to utilize the entire amount of his suspended
passive losses upon the sale of all of his Newco Common Stock to an
unrelated person in a transaction in which all gain or loss is recognized.
Recently
<PAGE>
Enserch Exploration Partners, Ltd.
December 9, 1994
Page 8
issued Regulations also indicate that a pro rata portion of a shareholder's
passive losses can be utilized to offset gain on the sale of Newco Common
Stock if the shareholder sells substantially all of his stock to an
unrelated party. Depending on the holding period of the Newco Common Stock
(see "Holding Period" above), a shareholder will realize long or short term
gain or loss or both upon a sale of shares.
h. Ownership of Shares. After the Reorganization, a shareholder will be
taxed only on distributions received from Newco, if any. Nonliquidating
distributions will be taxable as dividends to the extent of any current or
accumulated earnings and profits of Newco. Any nonliquidating
distributions in excess of the current or accumulated earnings and profits
of Newco and any liquidating distributions will be treated as a tax free
return of capital to the extent of the shareholder's basis in his shares of
Newco Common Stock and as capital gain to the extent of the excess,
assuming that the shares are held as capital assets. Any losses incurred
by Newco will not flow through to shareholders for use on their income tax
returns, but instead will be used by Newco in filing its corporate income
tax returns. Although there are no Regulations, rulings or cases covering
the point, counsel is of the opinion that a former Public Unitholder will
not be entitled to use any suspended passive losses allocable to his shares
to offset any dividends received from Newco.
i. Legislation. Under current law, a partner recognizes gain to the
extent that money distributed by a partnership exceeds the basis of his
partnership interest immediately before the distribution. Congress,
however, has recently passed legislation that will, under certain
circumstances, treat a portion of the value of the common stock distributed
to a partner as a distribution of money. Absent any adverse Regulations
which apply retroactively, it appears that this legislation will not apply
to EP's liquidating distribution of Newco Common Stock to the Public
Unitholders because the legislation does not apply to publicly traded
partnership liquidations like EP until after 1997. No assurance can be
given, however, that the Regulations, when issued, will not be retroactive
and apply in a materially adverse way.
4. Newco Consequences.
a. The Newco Contribution and Merger. The contribution by EP of a 1
percent limited partnership interest in EPO to Newco and Newco's
contribution of that partnership interest to Newsub will both be tax-free
to Newco and Newsub. Thereafter, the contribution by EP, EEI and EC of the
remaining partnership interests in EPO to Newco will also be tax-free to
Newco although such contribution will constitute a constructive termination
of EPO for federal tax purposes. As a result of such constructive
termination, EPO will be deemed to have distributed all of its assets and
<PAGE>
Enserch Exploration Partners, Ltd.
December 9, 1994
Page 9
liabilities pro rata to Newco and Newsub, and Newco and Newsub will be
deemed to have recontributed such assets and liabilities to a new
partnership. The constructive termination and re-contribution will have no
material adverse tax consequences unless the amount of cash constructively
distributed to Newco and Newsub exceeds their respective tax bases in their
partnership interests. If the cash distributed does exceed their
respective tax bases, gain will be recognized by Newco and Newsub to the
extent of such excess.
The merger of EPO and Newsub into Newco (the "Merger") will be treated
as a transfer of assets and liabilities from EPO to Newco and from Newsub
to Newco and the aggregate tax basis of Newco in the assets transferred
will be equal to the tax basis that Newco and Newsub had in their
respective partnership interests in EPO. Newco's tax basis in a
substantial portion of its assets will generate future tax deductions for
Newco. Although Public Unitholders with relatively higher bases in their
Units than other Public Unitholders may be viewed (through EP's and EPO's
Code Section 754 election) as having a greater share of such basis, no
consideration has been given to this expected future tax benefit in
arriving at the number of shares of Newco Common Stock received by each
Public Unitholder. Newco's holding period for each asset acquired in the
Merger will equal the holding period that EPO had in its assets prior to
the constructive termination of EPO.
b. Post-Reorganization Operations. Following the Newco Contribution, the
income and deductions attributable to the assets and liabilities previously
held by EPO will be included in the corporate tax return filed by Newco,
and Newco will pay taxes on any taxable profits it recognizes from time to
time. Additionally, net operating losses incurred by Newco after the Newco
Contribution and the Merger will be available to offset Newco's income in
subsequent years.
5. Other Taxation. The above opinions deal exclusively with federal
income tax consequences. We have not attempted to and give no opinion with
respect to any state or local tax that may be imposed on the Public Unitholders,
the EC Companies or Newco as a result of (i) any sale of Units prior to the
Reorganization, (ii) the Reorganization, or (iii) sales or other dispositions of
Newco Common Stock subsequent to the Reorganization.
This opinion is provided to you and no other person or entity can rely upon
this opinion except you and the Public Unitholders. We hereby consent to the
use of this opinion as an exhibit to the Information Statement and to the
reference to this Firm in the Information Statement under the captions "SUMMARY-
- -SUMMARY OF MATERIAL FEDERAL INCOME TAX CONSEQUENCES" and "FEDERAL INCOME TAX
CONSIDERATIONS". In giving this consent we do not thereby admit that we come
within the category of persons whose consent
<PAGE>
Enserch Exploration Partners, Ltd.
December 9, 1994
Page 10
is required under Section 7 of the Act or the rules and regulations of the
Securities and Exchange Commission promulgated thereunder. Without our prior
written consent, this opinion may not otherwise be quoted or referred to in
whole or in part in any report or document or furnished to any other person or
entity other than your counsel, your employees, your affiliates and their
employees, except in response to a valid subpoena or other lawful process.
Sincerely yours,
JACKSON & WALKER, L.L.P.
<PAGE>
EXHIBIT 10.1
NEW ENSERCH EXPLORATION, INC.
1994 STOCK INCENTIVE PLAN
ARTICLE I. PURPOSE
The purpose of the 1994 Stock Incentive Plan (the "Plan") is to promote the
long-term success of New Enserch Exploration, Inc. (the "Company," which
includes its subsidiaries and affiliates) by providing a means through which the
Company can attract and retain key officers and employees who can contribute
materially to that success. Such purpose shall be accomplished under the Plan
by the (a) grants of stock Options ("Options") to purchase shares of the Common
Stock of the Company ("Shares"), (b) awards of Restricted Stock ("Restricted
Stock"), or (c) a combination of both.
ARTICLE II. EFFECTIVE DATE
The Plan shall become effective on November 15, 1994, (the "Effective
Date") subject to approval of the Plan by the affirmative vote of the holders of
a majority of the Shares outstanding and entitled to vote.
ARTICLE III. ADMINISTRATION
The Compensation Committee (the "Committee") of the Board of Directors of
the Company (the "Board"), shall have the sole responsibility for the
administration of the Plan. The Committee shall establish any Administrative
Guidelines necessary or advisable for the administration of the Plan. The
Committee shall have the authority to amend or rescind the Administrative
Guidelines and shall have full authority with regard to the interpretation of
the Administrative Guidelines or any other matters relating to the Plan. The
Committee shall act by vote or consent of a majority of its members. All acts,
determinations and decisions of the Committee shall be final and conclusive as
to the parties concerned.
ARTICLE IV. ELIGIBILITY
Eligibility for participation in the Plan shall be confined to a limited
number of persons whom the Committee, in its sole discretion, shall select who
can make a meaningful contribution to the Company's success and who are (a)
officers of the Company, whether or not such officers are directly compensated
by the Company for their services, (including an officer who may also be a
director of the Company) or (b) persons in managerial or other key positions in
the Company. No Option or award of Restricted Stock shall be granted to any
member of the Committee. The Committee shall, from time to time and in its sole
discretion, select from such eligible persons, those to whom Options shall be
granted and awards of Restricted Stock shall be made and shall determine the
number of shares to be subject to each Option or award of Restricted Stock.
ARTICLE V. RESERVE OF SHARES
(a) A total of 2,000,000 Shares is the maximum number of Shares reserved
for the Plan, subject to the adjustments authorized by Subparagraphs (b) and (c)
below. Shares available under the Plan for grants of Options or awards of
Restricted Stock may consist either in whole or in part of authorized but
unissued Shares or Shares held in the treasury of the Company.
<PAGE>
(b) The number of Shares held in reserve for the Plan, the number of
Shares subject to Option that may be granted to any individual in any calendar
year, the number of shares of Restricted Stock that may be awarded to an
Executive Officer with respect to all performance periods beginning in any
calendar year, the number of Shares and the Option price for Shares covered by
each outstanding Option, and the number of Shares covered by each outstanding
award of Restricted Stock shall be proportionately adjusted for any increase or
decrease in the number of issued Shares resulting from a subdivision or
consolidation of the issued Shares and may, in the absolute discretion of the
Board, be similarly adjusted for any other capital adjustment (including the
reclassification of Shares or recapitalization or reorganization of the
Company), the payment of a stock dividend or the distribution to holders of the
Shares of rights, warrants, assets or evidences of indebtedness.
(c) If an Option as to any Shares expires, terminates, ceases to be
exercisable or is surrendered before being exercised in full, or an award of
Restricted Stock is forfeited (where the forfeiting participant received no
benefits of ownership), the number of Shares that were subject to the Option but
that were not transferred pursuant to the Option or the number of Shares covered
by the forfeited award of Restricted Stock shall, unless the Plan shall have
been terminated, again be available for the granting of Options or the award of
Restricted Stock, subject to the aggregate maximum stated in Subparagraph (a)
above.
ARTICLE VI. TERMS AND CONDITIONS OF OPTIONS
One or more Options can be granted to any person eligible to receive such a
grant under Article IV. The maximum number of Shares subject of Options that
can be granted to any one individual during any calendar year shall not exceed
80,000 shares (subject to adjustment pursuant to Article V hereof). Each Option
granted pursuant to the Plan shall be evidenced by a stock option agreement (the
"Agreement") between the Company and the person to whom the Option is granted
(the "Optionee"), which Agreements need not be identical to each other but shall
comply with and be subject to the following terms and conditions:
(a) Option Price: The Option price per Share shall be set at the date of
grant ("Date of Grant") by the Committee but shall in no instance be less than
the Fair Market Value on the date the Option is granted. As used in the Plan
(unless a different method of calculation is required by applicable law), "Fair
Market Value" on any date shall mean (i) the average of the high and low prices
per share of the Shares as reported in the New York Stock Exchange Composite
Transactions Report (or any other consolidated transactions reporting system
which subsequently may replace such Composite Transactions Report) (the
"Consolidated Tape") for the New York Stock Exchange (the "NYSE") on the date as
of which the determination is being made or, if there are no sales on such date,
in accordance with applicable Internal Revenue Service Regulations relating to
the determination of fair market value of stock options or (ii) in the event
that the Shares are not listed for trading on the NYSE, an amount determined in
accordance with standards adopted by the Committee.
(b) Duration of Options: Unless Subparagraph (f) of this Article VI
applies, each Option granted under the Plan shall expire and all rights to
purchase Shares pursuant thereto shall cease on the tenth anniversary of the
Date of Grant of the Option (the "Expiration Date").
(c) Vesting of Options: Each Option granted hereunder may only be
exercised to the extent that the Optionee is vested in such Option. An Optionee
shall vest separately in each Option granted hereunder in accordance with a
schedule determined by the Committee, in its sole discretion, which will
2
<PAGE>
be incorporated in the Agreement. Unless otherwise determined by the Committee,
each Agreement will provide that the Option vests in accordance with the
following schedule:
<TABLE>
<CAPTION>
Number of years the Optionee has remained
in the employ of the Company Extent to which the
following the of the Option Option is vested
- ----------------------------------------- -------------------
<S> <C>
Under one .................................................... 0%
At least one but less than two ............................... 25%
At least two but less than three ............................. 50%
At least three but less than four ............................ 75%
Four or more ................................................. 100%
</TABLE>
Anything contained in this Subparagraph to the contrary notwithstanding, an
Optionee shall become fully (100%) vested in each of his or her Options upon his
or her termination of employment with the Company for reasons of death,
Disability or Retirement at or after age 60, upon the sale of a Subsidiary of
the Company to an unaffiliated company such that he or she no longer remains in
the employ of the Company or, if in the sole discretion of the Committee, the
Committee determines that acceleration of the Option vesting schedule would be
desirable for the Company.
(d) Merger, Consolidation, Etc.: In the event that the Company shall,
pursuant to action by its Board, at any time propose to merge into, consolidate
with or sell or otherwise transfer all or substantially all of its assets to
another corporation and provision is not made pursuant to the terms of such
transaction for the assumption by the surviving, resulting or acquiring
corporation of outstanding Options, or for the substitution of new Options with
substantially equivalent benefit therefor, each outstanding Option shall become
fully (100%) vested. The Committee shall advise each Optionee, in writing, of
the manner and terms under which such fully vested Options shall be exercised.
(e) Exercise of Options:
(i) Unless otherwise prohibited by Subparagraph (f) or the terms of
this Plan, an Optionee may exercise, in whole or in part, the vested
portion of an Option at any time by delivering to the Corporate Secretary
of the Company written notice specifying the number of Shares with respect
to which the Option is being exercised, together with payment in full of
the purchase price of such Shares plus any federal, state or local taxes
for which the Company has a withholding obligation in connection with such
exercise. In addition to payment in cash, payment may be made by the
exchange of Common Stock of the Company previously acquired by the Optionee
and held for at least six months and having a Fair Market Value on the date
of exercise equal to the price for which the Shares may be purchased
pursuant to the Option. The Committee may, in its sole discretion,
authorize such payment, in whole or in part, in any other form as may be
approved by the Board and in a manner authorized by law.
(ii) An Optionee may elect to satisfy any withholding due on the
exercise of an Option either (a) in cash (the "cash method") or (b) by the
retention by the Company of a number of Shares out of the Shares being
purchased having a Fair Market Value equal to the amount to be withheld
(the "Share retention method"). The Compensation Committee shall
determine, from time to time, the amount to be withheld and the time and
manner in which an Optionee may elect
3
<PAGE>
to satisfy such withholding obligation. Such amount shall be not less than
the minimum withholding obligation of the Company or not more than the
amount determined by application of the maximum tax in effect for
individuals under applicable federal, state or local tax law. Under the
"Share retention method," the amount to be withheld, subject to the
discretion of the Committee, shall be the amount designated by such
Optionee within such maximum and minimum amounts.
(f) Termination of Employment: Unless otherwise determined by the
Committee, the following rules shall apply in the event of an Optionee's
termination of employment with the Company:
(i) In the event of an Optionee's termination of employment with the
Company either (1) for cause or (2) voluntarily on the part of the
Optionee, without the written consent of the Company and for reasons other
than death, Disability or Retirement (as such terms are defined in
Subparagraphs (f)(iv) and (v) hereof), his or her Options shall immediately
terminate.
(ii) In the event of an Optionee's termination of employment with the
Company under circumstances other than those specified in Subparagraph
(f)(i) hereof and for reasons other than death, Disability or Retirement
(as defined in Subparagraphs (f)(iv) and (v) hereof), such Options shall
terminate on the earlier of 90 days after the date of such termination of
employment or the Option's Expiration Date.
(iii) In the event of the death of an Optionee while he or she is
employed by the Company or during a period when Subparagraph (f)(ii),
(f)(iv) or (f)(v) hereof is applicable, such Options shall terminate on the
earlier of the first anniversary of the Optionee's death or the Option's
Expiration Date.
(iv) In the event of the Optionee's termination of employment with
the Company on account of a Disability, as defined in the Internal Revenue
Code, such Options shall terminate on the earlier of the first anniversary
of the Optionee's termination of employment or the Option's Expiration
Date.
(v) In the event of the termination of employment of an Optionee,
other than discharge for cause, after age 65 or on or after age 60 pursuant
to the terms of any retirement plan maintained by the Company in which the
Optionee participates (either of which terminations shall constitute
"Retirement"), such Options shall terminate on the earlier of three years
after the date of such termination of employment or the Option's Expiration
Date, unless the retiring Optionee remains a director of the Company. In
that event, this provision will be triggered when such directorship
terminates.
(vi) Anything contained in this Subparagraph (f) to the contrary
notwithstanding, an Option may only be exercised following the Optionee's
termination of employment with the Company for reasons other than death,
Disability or Retirement if and to the extent that such Option was
exercisable immediately prior to such termination of employment.
(vii) An Optionee's transfer of employment between the Company and
(a) its subsidiaries or affiliates or (b) ENSERCH Corporation and its
subsidiaries and affiliates shall not constitute a termination of
employment. An Optionee that ceases to be an officer or employee of the
Company while remaining an employee of ENSERCH Corporation, its
subsidiaries or affiliates,
4
<PAGE>
is deemed not to have terminated his or her employment with the Company
until such time as there is a termination of employment with ENSERCH
Corporation, its subsidiaries or affiliates; and the Committee shall
determine in each case whether an authorized leave of absence for military
service or otherwise shall constitute a termination of employment.
(g) Nontransferability: Options shall not be transferable other than by
will or the laws of descent and distribution, and no Option may be exercised by
anyone other than the Optionee except that, should the Optionee die or become
incapacitated, the Option may be exercised by his or her estate, legal
representative or beneficiary subject to all other terms and conditions
contained in the Plan.
(h) Change in Control: Anything contained herein to the contrary
notwithstanding, an Optionee shall become fully (100%) vested in each of his or
her Options upon the occurrence of a change in control, and no Option held by an
Optionee at the time a change in control occurs or at any time thereafter shall
terminate for any reason before the Option's Expiration Date. For this purpose,
"change in control" means one or more of the following events:
(i) any person within the meaning of Section 13(d) and 14(d) of the
Securities Exchange Act of 1934 (the "1934 Act"), other than the Company or
ENSERCH Corporation (including its subsidiaries and affiliates), has become
the beneficial owner, within the meaning of Rule 13d-3 under the 1934 Act,
of 50% or more of the combined voting power of the Company's then
outstanding Common Stock or equivalent in voting power of any class or
classes of the Company's outstanding securities ordinarily entitled to vote
in elections of directors ("voting securities"), or
(ii) Shares representing 50% or more of the combined voting power of
the Company's voting securities are purchased pursuant to a tender offer
or exchange offer (other than an offer by the Company, ENSERCH Corporation
or its subsidiaries or affiliates, or
(iii) the Shareholders of the Company have:
(A) approved an agreement to merge or consolidate with or into
another corporation or an agreement to sell or otherwise dispose of
all or substantially all of the Company's assets (including a plan of
liquidation), or
(B) elected two or more persons to serve as directors of the
Company who were not nominated and approved by the Board or a
committee of the Board, or
(iv) a "change in control" of ENSERCH Corporation shall occur and
for this purpose, a "change in control" of ENSERCH Corporation means one or
more of the following events:
(A) any person within the meaning of Section 13(d) and 14(d) of
the Securities Exchange Act of 1934 (the "1934 Act"), other than
ENSERCH Corporation, has become the beneficial owner, within the
meaning of Rule 13d-3 under the 1934 Act, of 20% or more of the
combined voting power of ENSERCH Corporation's then outstanding Common
Stock or equivalent in voting power of any class or classes of ENSERCH
Corporation's outstanding securities ordinarily entitled to vote in
elections of directors ("voting securities"), or
5
<PAGE>
(B) shares representing 20% or more of the combined voting power
of ENSERCH Corporation's voting securities are purchased pursuant to a
tender offer or exchange offer (other than an offer by ENSERCH
Corporation), or
(C) the Shareholders of ENSERCH Corporation have:
(x) approved an agreement to merge or consolidate with or
into another corporation or an agreement to sell or otherwise
dispose of all or substantially all of ENSERCH Corporation's
assets (including a plan of liquidation), or
(y) elected two or more persons to serve as directors of
ENSERCH Corporation who were not nominated and approved by the
ENSERCH Corporation Directors' Nominating Committee and approved
by the ENSERCH Corporation Board of Directors.
ARTICLE VII. ISSUANCE OF SHARES: RESTRICTIONS
Subject to the conditions and restrictions provided in this Article VII,
the Company shall, as soon as practicable after an Option has been exercised in
whole or in part, deliver to the Optionee a certificate, registered in the name
of such Optionee, for the number of Shares with respect to which the Option has
been exercised less any Shares which are to be retained in accordance with
Article VI(e) to satisfy tax withholding requirements. The Company may legend
any stock certificate issued hereunder to reflect any restrictions necessary
under the terms of any federal or state laws or regulations thereunder.
ARTICLE VIII. RIGHTS AS SHAREHOLDER AND EMPLOYEE
No Optionee shall have any rights as a Shareholder of the Company with
respect to any Shares prior to the date of issuance to him or her of the
certificate or certificates for such Shares. Neither the Plan nor any Option
granted or Restricted Stock awarded under the Plan shall confer upon the
Optionee any right to continue in the employment of the Company.
ARTICLE IX. SUBSTITUTE OPTIONS
Anything contained herein to the contrary not withstanding, Options may, at
the discretion of the Committee, be granted under the Plan in substitution for
Options to purchase Shares of capital stock of another corporation which is
merged into, consolidated with, or all or a substantial portion of the property
or stock which is acquired by, the Company. The terms, provisions and benefits
to Optionees of such substitute Options may be identical in all respects to the
terms, provisions and benefits to Optionees of the Options of the other
corporation on the date of substitution, except that such substitute Options
shall provide for the purchase of Shares instead of shares of such other
corporation.
ARTICLE X. RESTRICTED STOCK
(a) Awards to Eligible Participants: The Committee may make awards of
Restricted Stock to any eligible participant, for no cash consideration, for
such minimum consideration as may be required by applicable law, or for such
other consideration as may be specified by the award (an "Award"). The
6
<PAGE>
terms and conditions of Restricted Stock, including the terms of the release of
restrictions which may be performance-based, time-based, or a combination of
both, shall be specified by the Award. The Committee, in its sole discretion,
shall determine what rights, if any, the person to whom an award of Restricted
Stock is made shall have in the Restricted Stock during the restriction period
and the restrictions applicable to the particular Award, including whether the
holder of the Restricted Stock shall have the right to vote the shares or
receive all dividends and other distributions applicable to the Shares. The
Committee shall determine when the restrictions shall lapse, or expire and the
conditions, if any, under which the Restricted Stock will be forfeited or sold
back to the Company. Each award of Restricted Stock may have different
restrictions and conditions. The Committee, in its discretion, may
prospectively change the restriction period and the restrictions applicable to
any particular award of Restricted Stock. Restricted Stock may not be
transferred or sold by the recipient until the restrictions specified in the
Award expire.
(b) Issuance of Stock: Any Restricted Stock awarded hereunder may be
evidenced in such manner as the Committee, in its sole discretion, shall deem
appropriate, including, without limitation, book-entry registration or issuance
of a stock certificate or certificates. In the event any stock certificate is
issued in respect of shares of Restricted Stock awarded hereunder, such
certificate shall bear an appropriate legend with respect to the restrictions
applicable to such Award. The Compensation Committee may also require as a
condition to the issuance of any such certificate the delivery of an agreement
in writing between the Company and the recipient in form and substance as shall
be approved by the Compensation Committee (a "Restricted Stock Agreement"). The
Company may retain, at its option, the physical custody of the Restricted Stock
during the restriction period or require that the Restricted Stock be placed in
an escrow or trust, along with a stock power endorsed in blank, until all
restrictions are removed or expire.
(c) Awards to Executive Officers of Performance-Based Stock: The
following provisions shall apply to any performance-based awards of Restricted
Stock made under this Plan to any person who has been designated by the Board of
Directors as an Executive Officer of the Company:
(i) the performance criteria upon which vesting of the Restricted
Stock is contingent shall be such objective performance goals as the
Compensation Committee shall establish in writing prior to the expiration
of 90 days after the commencement of the performance period to which the
performance goal or goals relate and while the outcome is substantially
uncertain, and shall be based on total shareholder return, total
shareholder return compared to a group of peer companies specified by the
Compensation Committee, earnings per shares, operating unit income, or
reserve finding effectiveness; and
(ii) the maximum number of Shares that may be awarded to any
Executive Officer with respect to all performance periods beginning in a
calendar year shall not exceed 50,000 Shares (subject to adjustment
pursuant to Article V hereof); provided, however, that the Compensation
Committee may retain the discretion to reduce an award during or at the
conclusion of the performance period.
(d) Merger, Consolidation, Etc.: In the event that the Company shall,
pursuant to action by its Board, at any time propose to merge into, consolidate
with or sell or otherwise transfer all or substantially all of its assets to
another corporation, the restriction on transferability of the Restricted Stock
shall be lifted and the certificate(s) for the Restricted Stock shall be
delivered as soon as practicable.
7
<PAGE>
(e) Change in Control: In the event of a Change in Control of the Company
as defined in Article VI(h) hereof, the restriction on transferability of the
Restricted Stock shall be lifted and the certificate(s) for the Restricted Stock
shall be delivered as soon as practicable.
ARTICLE XI. TERM OF THE PLAN
Barring any action of the Board to the contrary, the Plan shall terminate
on, and no Options shall be granted or award of Restricted Stock made after, the
tenth anniversary of the Effective Date. The provisions of the Plan, however,
shall continue thereafter to govern all Options theretofore granted until the
exercise, expiration or cancellations of such Options and to govern all awards
of Restricted Stock until all restrictions have lapsed or such Shares have been
forfeited.
ARTICLE XII. AMENDMENT AND TERMINATION OF PLAN
The Plan may be amended or terminated at any time by the Board except that
Article X may not be amended more than once every six months, other than to
comport with changes in the Internal Revenue Code, or the rules thereunder.
However, without further approval of the Shareholders of the Company by the
affirmative vote of the majority of the Shares entitled to vote, no amendment
shall (i) increase the maximum aggregate number of Shares with respect to which
Options may be granted or awards of Restricted Stock made under the Plan and the
limitations on individual Option grants under Article VI hereof and Restricted
Stock Awards under Article X hereof, except in accordance with Article V hereof,
(ii) materially increase the benefits accruing to the participants under the
Plan, including changing the Option price provided for in Article VI(a) hereof,
or (iii) change the eligibility provisions of Article IV hereof. Subject to the
provisions of Article VI hereof, no termination of or amendment to the Plan
shall adversely affect the rights of an Optionee or other person holding an
Option previously granted hereunder or a holder of a Restricted Stock Award
without the consent of such person.
ARTICLE XIII. CONSTRUCTION
The Plan and Agreements shall be interpreted and administered under the
laws of the State of Texas.
8
<PAGE>
EXHIBIT 10.3
GARDEN BANKS 388 - 1
------------------------------------------------
LEASE AGREEMENT
Dated as of
Between
ENSERCH EXPLORATION, INC.,
as the Lessor
and
NEW ENSERCH EXPLORATION, INC.,
as the Lessee
------------------------------------------------
THIS LEASE HAS BEEN MANUALLY EXECUTED IN COUNTERPARTS NUMBERED
CONSECUTIVELY FROM 1 TO 5. TO THE EXTENT, IF ANY, THAT THIS LEASE
CONSTITUTES CHATTEL PAPER (AS SUCH TERM IS DEFINED IN THE UNIFORM
COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION), NO
SECURITY INTEREST IN THIS LEASE MAY BE CREATED THROUGH THE TRANSFER
OR POSSESSION OF ANY COUNTERPART OF THIS LEASE OTHER THAN COUNTERPART
NUMBER 1.
This is Counterpart Number ______
<PAGE>
<TABLE>
<CAPTION>
Table of Contents Page
----------------- ----
<C> <S> <C>
Section 1. Certain Defined Terms. ...................................................... 1
---------------------
Section 2. Lease of Leased Property. ................................................... 12
------------------------
Section 3. Payments. ................................................................... 12
--------
Section 4. Agency Agreement. ........................................................... 15
----------------
Section 5. Leased Property Records. .................................................... 15
-----------------------
Section 6. Title to Remain in the Lessor. .............................................. 15
-----------------------------
Section 7. Maintenance and Replacement of the Leased Property; Operations. ............. 16
--------------------------------------------------------------
Section 8. Removals Without Replacement. ............................................... 17
----------------------------
Section 9. Required and Optional Alterations; Title to Alterations. .................... 18
-------------------------------------------------------
Section 10. Compliance with Legal Requirements and Insurance Requirements: Related
----------------------------------------------------------------------
Contracts. .................................................................. 19
---------
Section 11. Condition and Use of Leased Property; Assignment of Warranties, Etc.; Quiet
---------------------------------------------------------------------------
Enjoyment. .................................................................. 19
---------
Section 12. Liens. ...................................................................... 21
------
Section 13. Permitted Contests. ......................................................... 22
------------------
Section 14. Insurance, etc. ............................................................. 22
---------------
Section 15. Termination; Surrender of Leased Property. .................................. 24
-----------------------------------------
Section 16. Lessee's Renewal Option. .................................................... 24
-----------------------
Section 17. Events of Default and Remedies. ............................................. 24
------------------------------
Section 18. Purchase by Lessee. ......................................................... 29
------------------
Section 19. Inspection; Right to Enter Premises of the Lessee. .......................... 29
--------------------------------------------------
Section 20. Right to Perform the Lessee's Covenants. .................................... 30
---------------------------------------
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Table of Contents Page
----------------- ----
<C> <S> <C>
Section 21. Participation by Co-Lessees or Sublessees. .................................. 30
-----------------------------------------
Section 22. Notices. .................................................................... 31
-------
Section 23. Amendments and Waivers. ..................................................... 31
----------------------
Section 24. Severability. ............................................................... 31
------------
Section 25. INTENTIONALLY OMITTED. ...................................................... 31
Section 26. True Lease. ................................................................. 31
----------
Section 27. No Merger. ................................................................. 32
---------
Section 28. Miscellaneous. .............................................................. 32
-------------
Section 29. Survival of Representations, Warranties, Indemnities, Etc. .................. 34
---------------------------------------------------------
Section 30. Further Assurances. ......................................................... 34
------------------
Section 31. Lessee's Representations and Warranties. ................................... 34
----------------------------------------
Section 32. Affirmative Covenants. ...................................................... 38
---------------------
Section 33. Negative Covenants. ......................................................... 40
------------------
Section 34. Lessor's Representations and Warranties. .................................... 42
---------------------------------------
Section 35. Application of Certain Payments. ............................................ 43
-------------------------------
</TABLE>
-ii-
<PAGE>
LEASE AGREEMENT
This Lease Agreement dated as of ________________________ (as the same may
be amended or supplemented from time to time, the "Lease") is between Enserch
Exploration, Inc., a Delaware corporation, ("the Lessor"), and New Enserch
Exploration, Inc., a Texas corporation (together with its successors and
permitted assigns, "the Lessee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Lessee has acquired certain interests in the Garden Banks 344,
386, 387 and 388 tracts located offshore of the State of Louisiana in federal
waters on the outer continental shelf in the Gulf of Mexico (the "Leased
Tracts");
WHEREAS, the Lessee has explored the Leased Tracts and determined that they
are capable of producing oil and gas; and
WHEREAS, subject to the terms and conditions of this Lease, the Lessee
desires to lease from the Lessor and the Lessor is willing to acquire and lease
to the Lessee the Leased Property (as hereinafter defined) for the purpose of
developing the Leased Tracts and operating the Leased Property in accordance
with the terms and conditions set forth in this Lease.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the Lessor and the
Lessee hereby agree as follows:
Section 1. Certain Defined Terms.
---------------------
(a) In this lease, the terms "Lease", "Leased Tracts", "Lessee" and
"Lessor" shall have the meanings indicated above.
(b) As used in this Lease, the following terms shall have the following
meanings (all terms defined in this Lease in the singular to have the same
meanings when used in the plural and vice versa):
"Additional Rent" - as defined in Section 3(b) hereof.
---------------
"Affiliate" - with respect to any Person, any other Person that,
---------
directly or indirectly, through one or more intermediaries, controls, or is
controlled by, or is under common control with such Person. For purposes
of the foregoing definition, "control" means the direct or indirect
ownership of more than 50% of the outstanding capital stock or other equity
interests having ordinary voting power.
"Agency Agreement" - the Agency Agreement between the Lessor and
----------------
the Lessee of even date with this Lease, as the same may be amended or
supplemented from time to time.
"Alterations" - alterations, modifications, additions and
-----------
improvements to the Leased Property, whether Severable or Nonseverable.
<PAGE>
"Authorized Officers" - relative to the Lessee, the officers of
-------------------
New Enserch Exploration, Inc. whose signatures and incumbency shall have
been certified to the Lessor in a certificate certified by the Secretary or
Assistant Secretary of New Enserch Exploration, Inc. in form and substance
satisfactory to the Lessor.
"Base Rate" - as referred to in the Funding Agreement.
---------
"Basic Term" - the period commencing on the Lease Commencement Date
----------
and ending on the date twenty years thereafter, or such shorter period as
may result from earlier termination in accordance with the provisions
hereof.
"Billing Period" - each of the periods (i) in the case of the first
--------------
such period, commencing on the Lease Commencement Date and ending on
January 15, 1995 and (ii) in the case of each succeeding period, commencing
on the first day following the last day of the immediately preceding
Billing Period and ending on the day which numerically corresponds to the
last day of the immediately preceding Billing Period three (3) months
thereafter.
"Business Day" - (a) for all purposes other than as covered by
------------
clause (b) below, any day except Saturday, Sunday and any day which shall
be in Dallas, Texas, Houston, Texas, Boston, Massachusetts, London, England
or New York, New York a legal holiday or a day on which banking
institutions are authorized or required by law or other government action
to close, and (b) with respect to all notices and determinations in
connection with, and payments of rent and interest based on, the Rental
Balance, any day which is a Business Day described in clause (a) above and
which is also a day for trading by and between banks in the London
interbank eurodollar market.
"Casualty Occurrence" - any of the following events in respect of
-------------------
any Unit of Leased Property: (i) the total loss of Leased Property, the
Constructive Total Loss of Leased Property, the total loss of use thereof
due to theft, disappearance, destruction, damage beyond repair or rendition
of Leased Property permanently unfit for normal use for any reason
whatsoever; (ii) any damage to Leased Property which results in an
insurance settlement with respect to such Leased Property on the basis of a
total loss; or (iii) the permanent condemnation, confiscation or seizure
of, or requisition of title to or use of, any Leased Property.
"Claims" - any and all liabilities, obligations, losses, damages
------
(including consequential damages), penalties, fines, assessments (whether
criminal or civil), claims (including claims involving liability in tort,
strict or otherwise), actions, injuries, suits, judgments, costs, expenses
(including without limitation, reasonable legal fees and expenses and costs
of investigation), disbursements or demands whatsoever, howsoever arising,
including any costs of the foregoing pertaining to health, safety of the
environment or otherwise.
"Code" - the Internal Revenue Code of 1986, as amended from time
----
to time.
"Co-Lessee" - as defined in Section 21(b).
---------
-2-
<PAGE>
"Completion" - as defined in Schedule 1 hereto.
----------
"Completion Date" - December 31, 1996.
---------------
"Constructive Total Loss" - a permanent taking by eminent domain of
-----------------------
such scope that the untaken portion of Leased Property is insufficient to
permit the restoration of such Leased Property for continued use in the
Lessee's business or that causes the remaining portion of the Leased
Property to be incapable of being restored to a condition that would permit
the remaining portion of the Leased Property (without the portion of the
Leased Property taken by eminent domain) to continue to have the capacity
and functional ability to perform on a continuing basis (subject to normal
interruptions in the ordinary course of business for maintenance,
inspection, service, repair and testing) and in commercial operation, the
function for which the Leased Property (as a whole) was designed as
specified in the Project Plan.
"Daily Rent Charge" - for any day (whether or not a Business Day)
-----------------
during the term of this Lease an accrual for such day of all rental of
Leased Property calculated on the Rental Balance at a rate per annum of
LIBOR + 1.75% for the Basic Term.
"Default" - any event which with the giving of notice or the lapse
-------
of time or both would constitute an Event of Default.
"Delivery Date" - for any Unit of Leased Property, the date such
-------------
Unit of Leased Property is delivered to the Lessee under an ILR.
"Development Plan" - the Development Operations Coordination
----------------
Document filed as of May 27, 1992 with the Minerals Management Service,
United States Department of the Interior in the form furnished to the
Lessor, as such document may be amended or supplemented from time to time
with the approval of the Minerals Management Service, United States
Department of the Interior.
"Environmental Laws" - as to any Person, any and all laws, statutes,
------------------
ordinances, rules, regulations, orders or determinations of any
Governmental Authority pertaining to health or the environment in effect
from time to time in any and all jurisdictions in which such Person is
conducting or at any time has conducted business, or where any Property of
such Person is located now or in the future, or where any hazardous
substances generated or disposed of by such Person are located now or in
the future, including, without limitation, the Oil Pollution Act of 1990
("OPA"), the Clean Air Act, as amended, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended,
the Federal Water Pollution Control Act, as amended, the Occupational
Safety and Health Act of 1970, as amended, the Resource Conservation and
Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as
amended, the Toxic Substances Control Act, as amended, the Superfund
Amendments and Reauthorization Act of 1986, as amended, and other
environmental conservation or protection laws. The terms "hazardous
substance" and "release" (or "threatened release") have the meanings
specified in CERCLA, the terms "solid waste" and "disposal" (or "disposed")
have the meanings specified in RCRA and the term "oil" has the meaning
specified in OPA; provided, however, that (i) in the event either CERCLA,
RCRA or OPA is amended so as to broaden the meaning of any term
-3-
<PAGE>
defined thereby, such broader meaning shall apply subsequent to the
effective date of such amendment, (ii) to the extent the laws of the state
or other jurisdiction in which any Property of any applicable Person is
located establish a meaning for "hazardous substance," "release," "solid
waste" or "disposal" which is broader than that specified in either CERCLA
or RCRA, such broader meaning shall apply, and (iii) the terms "hazardous
substance" and "solid waste" shall include all oil and gas exploration and
production wastes that may present an endangerment to public health or
welfare or the environment, even if such wastes are specifically exempt
from classification as hazardous substances or solid wastes pursuant to
CERCLA, RCRA or OPA or the state analogs to those statutes.
"Event of Default" - as defined in Section 17 hereof.
----------------
"Fair Market Renewal Term" - as defined in Section 16.
------------------------
"Fair Market Rental Value" - in respect of any property as of any
------------------------
date, the rent price that would be obtained in an arm's-length lease
between an informed and willing lessee and an informed and willing lessor
under no compulsion to lease and neither of which is related to lessor or
lessee of the property in question; and in case of the Leased Property,
such value is to be determined on the basis that the Leased Property has
been maintained in accordance with, and Lessee has complied with, the
requirements of this Lease.
"Fair Value of Leased Property" - at the time such value is to be
-----------------------------
determined, whether for a Unit of Leased Property or all Leased Property as
the context hereof may require, either of the following valuation methods
as determined by the Lessor in its sole discretion: (i) the value of the
applicable Unit or Units of Leased Property, whether positive or negative,
as determined by an appraisal using industry standards (using an appraiser,
a method of appraisal and assumptions acceptable to the Lessor), the cost
of any such appraisal to be paid by the Lessee; or (ii) the value of a unit
or units of property similar in all material respects to the Unit or Units
of Leased Property being valued as listed in a trade publication acceptable
to the Lessor, if available. In the event all Leased Property is being
valued, any appraisal will reflect the value of the Leased Property taken
as a whole. The Fair Value of Leased Property shall be net of any actual
or projected expenses of removal, preparation for sale, storage,
transportation, clean-up and any other actions as may be required by Legal
Requirements and Insurance Requirements.
"Fixed Charge" - the quarterly portion of the Fixed Charge Balance
------------
which applies to the current Billing Period as shown on Schedule 2B.
"Fixed Charge Balance" - an amount as of the Lease Commencement
--------------------
Date of $121,500,000, as adjusted from time to time pursuant to this
Lease.
"Floating Production Facility" - the offshore oil and gas deepwater
----------------------------
floating drilling and production platform as described in the Project Plan
which is to be included in the Leased Property.
"Funding Agreement" - the Funding Agreement dated as of September
-----------------
30, 1992 herewith among EP Operating Company Limited Partnership, ENSERCH
Corporation, the Trustee, the Chase Manhattan Bank (in its individual
capacity and as agent for the Lenders)
-4-
<PAGE>
and all the Lenders signatory thereto, as the same may be amended or
supplemented from time to time.
"Funding Sources" - means the financial institutions and other
---------------
funding sources which have purchased, or may purchase during the Term, the
Notes and Certificates issued pursuant to the Funding Agreement or
otherwise provide capital to the Lessor for the Project.
"GAAP" - generally accepted accounting principles and policies
----
(including principles of consolidation), in effect from time to time,
consistently applied.
"Governmental Authority" - any nation or government, any state or
----------------------
other political subdivision thereof and any Person exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Impositions" - as to any Person: (i) all Taxes, assessments,
-----------
levees, fees, water and sewer rents and charges, inspection fees and other
authorization fees and all other governmental charges, general and special,
ordinary and extraordinary, foreseen and unforeseen, of every character
(including all penalties and interest thereon) which, at any time prior or
subsequent to the date hereof are imposed or levied upon or assessed
against or may be or constitute a Lien upon such Person or such Person's
Property, or which arise in respect of the ownership, operation, occupancy,
possession, use, non-use, condition, leasing or subleasing of such Person's
Property; (ii) all charges, levies, fees, rents or assessments for or in
respect of utilities, communications and other services rendered or used on
or about such Person's Property; and (iii) payments required in lieu of any
of the foregoing, but excluding any penalties or fines imposed on any
Lender for violation of any banking laws or securities laws.
"Individual Leasing Record" or "ILR" - a record with respect to a
------------------------- ---
Unit of Leased Property, prepared by the Lessor, in such form as the Lessee
and the Lessor may agree from time to time, dated as of the Delivery Date
and executed and delivered by the Lessee to the Lessor on the Delivery
Date, updating the Leased Property Inventory Schedule and the Rent
Schedule, amending the purchase price to be paid by the Lessee pursuant to
Section 18(c) to reflect the residual value of such additional Leased
Property and providing for each Unit of Leased Property described in the
ILR a full description, the Leased Property Cost and a Stipulated Loss
Value Schedule in the form of Schedule 2 hereto.
As between the Lessor and the Lessee, the signature of the Lessee
on an Individual Leasing Record shall constitute acknowledgment by the
Lessee that the Leased Property has been inspected by the Lessee and
delivered in good condition, free and clear of all Liens and defects and
accepted for lease by the Lessee as of the Delivery Date and, in the case
of Leased Property that was not first delivered to the Lessor, has been so
inspected by the Lessee as agent for the Lessor and the Lessor's Funding
Sources. The Individual Leasing Record shall contain a short form of lease
to be executed by each of the parties reading substantially as follows:
"The undersigned Lessor hereby leases to the undersigned Lessee and
Lessee acknowledges delivery to it in good condition of the Leased
Property described above. The covenants, terms and conditions of
-5-
<PAGE>
this lease are those appearing in that certain Garden Banks 388-1
Lease Agreement between Lessor and Lessee, dated as of November __,
1994, as amended, modified or otherwise supplemented from time to
time, which covenants, terms and conditions are hereby incorporated
by reference."
Each ILR shall also include a certification that the Unit of Leased
Property does not constitute "limited use property," which shall state that
it is reasonable to conclude, as of the Delivery Date, that the use of the
Unit of Leased Property after the end of the Term by Lessor or some other
Person unrelated to Lessor that could lease or purchase the Leased Property
from the Lessor is commercially feasible, that the useful life of such
Leased Property at the end of the Term will be at least 10% of the useful
life of the Leased Property determined as of the Delivery Date, and that
the Fair Value of such Unit of Leased Property at the end of the Term
determined as of the Delivery Date will be approximately 10% or greater of
the Property Cost or greater (determined (i) without including in such fair
value any increase or decrease for inflation or deflation during the Term
and (ii) after subtracting from such fair value any cost to Lessor for
delivery of possession of the Unit of Leased Property to Lessor at the end
of the Term), which certification shall be signed by the manufacturer,
engineer, property manager or the appraiser which determines the Stipulated
Loss Value Schedule for such Unit of Leased Property. The cost of
establishing that the Leased Property does not constitute "limited use
property" shall be paid by the Lessee within five Business Days after
Lessor accepts and executes the ILR with respect to a Unit of Leased
Property.
"Insurance Requirements" - all terms of any insurance policy
----------------------
covering or applicable to any Unit of Leased Property and all requirements
of the issuer of any such policy.
"Judgment" - any judgment, decree or order of any court or other
--------
Governmental Authority.
"Lease Commencement Date" - means November ____, 1994.
-----------------------
"Leased Property" - Units of Leased Property that are subject to
---------------
this Lease and identified on Leased Property Inventory Schedules delivered
to the Lessor from time to time, and all accessories, equipment, parts and
devices necessary to achieve Completion affixed or placed on any Unit of
Leased Property, all plans, specifications, warranties and related rights
and operating, maintenance and repair manuals related thereto, all
replacements of any of the above and any additional Units of Leased
Property added during the Term of this Lease.
"Leased Property Inventory Schedule" - a schedule substantially in
----------------------------------
the form of Schedule 3A hereto, which at the time of delivery shall list
all of the Leased Property subject to this Lease and any outstanding
contracts entered into by the Lessee on behalf of the Lessor to acquire
Leased Property. Any Leased Property Inventory Schedule once delivered to
the Lessor shall become a part of this Lease and shall supersede all
previous Leased Property Inventory Schedules.
"Leased Tracts" - as defined in the recitals hereof.
-------------
-6-
<PAGE>
"Legal Requirements" - as to any Person, (i) all laws (including,
------------------
without limitation, Environmental Laws), statutes, rules, regulations,
ordinances, orders, directives, codes, Judgments, decrees, injunctions,
writs, determinations, awards, permits, licenses, authorizations,
directions, requirements or decisions of and agreements with or by any
Governmental Authority or arising from any restriction of record or
otherwise, now or at any time hereafter in effect, applicable to such
Person or any of its Property or the ownership, construction, operation,
mortgaging, occupancy, possession, use, non-use or condition of such
Person's Property; and (ii) all agreements (including without limitation,
all covenants and restrictions) applicable to such Person or any of its
Property, or the ownership, construction, operation, mortgaging, occupancy,
possession, use, non-use or condition thereof.
"Lien" - any mortgage, attachment, lien (including, without
----
limitation, any tax lien or lien arising in connection with any
Imposition), charge, security interest, conditional sale or other title
retention agreement or other encumbrance on, in or with respect to any
Property.
"Major Components of the Project" - the Floating Production
-------------------------------
Facility.
"Master Lease" - as defined in Section 28(k).
------------
"Material Adverse Change" - any material adverse change in the
-----------------------
business, financial position or results of operations of the affected
party, taken as a whole, which makes it unable to perform its obligations
under this Agreement and the other Operative Documents.
"Nonseverable" - with respect to any Alteration, any Alteration
------------
that is not a Severable Alteration.
"Permit" - any approval, consent, waiver, exemption, variance,
------
franchise, order, permit, authorization, right or license of or from any
Governmental Authority.
"Permitted Liens" - with respect to the Leased Property, but only
---------------
to the extent applicable thereto, any of the following:
(i) rights reserved to or vested in any public authority by the
terms of any right, power, franchise, grant, license, permit
or provision of law affecting the Leased Property to (a)
terminate such right, power, franchise, grant, license, permit
or provision of law, provided that such termination does not
have a material adverse effect on the Leased Property or any
portion thereof or (b) purchase, condemn, appropriate or
recapture, or designate a purchaser of, the Leased Property;
(ii) any Liens thereon for Impositions and any Liens of mechanics,
materialmen and laborers and any Liens arising under the
operating agreement covering the Leased Tracts for work or
services performed or materials furnished in connection with
the Leased Property which (a) are not due and payable, or (b)
are being contested in good faith pursuant to Section 13
hereof;
-7-
<PAGE>
(iii) rights reserved to or vested in any municipality or public
authority to control or regulate the use of the Leased
Property or to use the Leased Property in any manner;
(iv) this Lease, and the other Operative Documents and any
financing statements filed in connection therewith.
(v) overriding royalty interest on the Leased Tracts consistent
with the requirements in Section 12(b) that the net revenue
interest of the Lessee in the Leased Tracts, shall never be
less than 70% of the Lessee's working interest.
"Person" - any natural person, corporation, firm, association,
------
government, governmental agency or any other entity, whether acting in an
individual, fiduciary or other capacity.
"Post-Default Rate" - Base Rate plus 1%.
-----------------
"Project" - the Floating Production Facility, including, without
-------
limitation, each Major Component of the Project pursuant to the Funding
Agreement, in each case to be comprised of the Units of Leased Property to
be leased by the Lessee pursuant to this Lease for the purpose of
developing and producing oil and gas from the Leased Tracts in accordance
with the Development Plan and the Project Plan.
"Project Plan" - each of the documents listed on Schedule 1 to the
------------
Funding Agreement, as the same may be amended or supplemented from time to
time.
"Property" - any interest in any kind of property or asset, whether
--------
real, personal or mixed, or tangible or intangible.
"Property Cost" - with respect to any Unit of Leased Property, the
-------------
purchase price or any part of the purchase price paid by the Lessor for
such Unit of Leased Property or the amount advanced by the Lessor to the
Lessee for the purchase of such Unit of Leased Property, including, without
limitation, any sales Taxes and any other costs associated with the
acquisition, fabrication, preparation for, and delivery and installation,
as applicable, of such Unit of Leased Property and any other property costs
associated with Completion of the Project, but not to include normal
operating and maintenance expenses and costs associated with the financing
of the Property Costs.
"Purchase Price" - as of any purchase date, an amount equal to the
--------------
fair market value of the Leased Property determined by applying a
discounted cash flow methodology to the rental stream under this Lease and
residual value of the Leased Property at the end of the remaining Term,
taking into account the remaining Term and purchase options, as determined
by an independent appraiser as of the purchase date; provided, however,
that if Noble, Denton & Associates, Inc. (or a substitute qualified
independent party selected by Lessor) determines as of the purchase date
that there has been no material change in the market for or condition
(except normal wear and tear) of the Leased Property since the Lease
Commencement Date, and that no such change is anticipated then for purposes
of
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<PAGE>
determining the Purchase Price on the purchase date it shall be assumed
that the residual value of the Leased Property at the end of the Basic Term
would equal the amount specified as the purchase price in Section 18(c), as
adjusted from time to time. The discount rate used for the foregoing
valuation shall be equal to the average of the Lessor's and Lessee's cost
of funds for short-term borrowings; provided, that in no event shall such
rate as applied exceed 10% per annum or be less than 5% per annum.
"Purchase Schedule" - a schedule substantially in the form of
-----------------
Schedule 4 hereto.
"Quarterly Rent Charge" - for any Billing Period, the sum of the
---------------------
Daily Rent Charges for that Billing Period.
"Quarterly Expense Charge" - for any Billing Period, the sum of the
------------------------
accruals for each day (whether or not a Business Day) during such Billing
Period with respect to all liabilities of the Lessor for commitment and
other fees accruing for such day pursuant to the Funding Agreement.
"Related Contract" - any agreement for the purchase, construction or
----------------
installation of Units of Leased Property or the provision of
refurbishments, enhancements and improvements to Units of Leased Property,
made pursuant to the Agency Agreement by the Lessee on behalf of the Lessor
or by the Lessee and assigned to the Lessor, with one or more Vendors.
"Removal Schedule" - a schedule substantially in the form of
----------------
Schedule 5 hereto.
"Renewal Term" - the Fair Market Renewal Term.
------------
"Rent" - with respect to any Billing Period, the sum of (a) the
----
Quarterly Rent Charge for such Billing Period and (b) the aggregate Fixed
Charges for each quarterly period during such Billing Period for all Leased
Property subject to this Lease during such Billing Period.
"Rent Payment Date" - the last day of any Billing Period (or, if
-----------------
such last day is not a Business Day, the next Business Day).
"Rental Balance" - an amount as of the Lease Commencement Date of
--------------
$135,000,000, as adjusted from time to time pursuant to this Lease.
"Rent Schedule" - a schedule attached as Schedule 2B hereto, as
-------------
updated from time to time, delivered pursuant to the terms of this Lease,
which provides the components of Rent for any Billing Period up to and
including the Stated Lease Termination Date. Such Rent Schedule shall set
forth the portion of each payment of Rent attributable to the application
of the Quarterly Rent Charge and the reduction in the Fixed Charge Balance
and Rental Balance resulting from the payment of such Rent.
"Repair and Replacement Schedule" - a schedule substantially in the
-------------------------------
form of Schedule 6 hereto.
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<PAGE>
"Restoration Account" - an account maintained by the Lessor and
-------------------
styled the "Restoration Account."
"Severable" - with respect to any Alteration, any Alteration that
---------
can be readily removed from the Leased Property without damaging it in any
material respect or without diminishing or impairing the value, utility,
useful life or condition that the Leased Property would have had if such
Alteration had not been made (assuming the Leased Property would have been
in compliance with this Lease without such Alteration), and without causing
the Leased Property to become "limited use property" within the meaning of
Rev. Proc. 76-30, 1976-2 C.B. 647. Notwithstanding the foregoing, an
Alteration shall not be considered Severable if such Alteration is
necessary to render the Leased Property complete for its intended use by
Lessee (other than Alterations consisting of ancillary items of equipment
of a kind customarily furnished by lessees or purchasers of property
comparable to the Leased Property).
"Stated Lease Termination Date" - the last day of the Term, whether
-----------------------------
occurring by reason of a termination of the Lease or the expiration of the
Term.
"Stipulated Loss Value" - with respect to any Unit of Leased
---------------------
Property, an amount equal to the product of (i) the Fair Value of Leased
Property as of the date such Unit of Leased Property was first subject to
this Lease multiplied by (ii) the "Stipulated Loss Value Percentage"
specified in Schedule 3A hereto for the Rent Payment Date immediately
preceding the date of such determination.
"Stipulated Loss Value Schedule" - for each Unit of Leased
------------------------------
Property, either a schedule attached as Schedule 3A hereto, or a schedule
attached to an ILR in the form of Schedule 3B hereto, which provides the
Stipulated Loss Value for such of Leased Property.
"Sublessee" - as defined in Section 21(c).
---------
"Taxes" - any fee (including license, filing and registration fees),
-----
foreign, federal, state or local tax (including any income, gross receipts,
franchise, sales, use, real, personal, tangible or intangible property tax
other than income taxes payable by the Lessor under the Lease, or payable
by the Agent or the Lenders under the Master Lease on their respective
income), interest equalization or stamp tax, assessment (including any
maintenance charge, owner association dues or charges), levy, impost, duty,
charge or withholding of any kind or nature whatsoever, imposed or assessed
by any foreign, federal, state or local government or agency, together with
any penalty, fine or interest thereon.
"Technical Consultant" - Sea Engineering Associates, Inc. or any
--------------------
successor selected by the Agent.
"Term" - the term of the Lease, including the Basic Term and any
----
Fair Market Renewal Term, if applicable.
"Third Parties" - any Person other than (i) the Lessor, (ii) the
-------------
Lessee, or (iii) any Affiliate of any of the foregoing.
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<PAGE>
"UCC" - the Uniform Commercial Code as enacted in the State of New
---
York and any other jurisdiction whose laws may be mandatorily applicable.
"Unit of Leased Property" - each Unit of Leased Property as listed
-----------------------
on Leased Property Inventory Schedules delivered to Lessor from time to
time including any Units of Leased Property that are under a contract to be
manufactured or assembled.
"Vendor" - any supplier or manufacturer of, or provider of services
------
with respect to, any Unit of Leased Property or part thereof.
(c) As used in this Lease, capitalized terms not otherwise defined herein
shall have the same meanings as in the Master Lease and the Funding Agreement
(all such terms defined in the singular to have the same meanings when used in
the plural and vice versa).
Section 2. Lease of Leased Property.
------------------------
Subject to the terms and conditions of this Lease, on the Lease
Commencement Date, and subsequently upon the Delivery Date of any additional
Units of Leased Property, Lessor agrees to lease to Lessee, and Lessee agrees to
lease from Lessor, the Leased Property as identified from time to time in the
Leased Property Inventory Schedule, for the Basic Term, and subject to the
exercise by Lessee of its rights provided in Section 16 hereof, for the Fair
Market Renewal Term.
Section 3. Payments.
--------
(a) The Lessee shall pay to the Lessor on the Rent Payment Date for each
Billing Period the amount of Rent and the Quarterly Expense Charge, if any, due
for such Billing Period. At least three (3) Business Days before the Rent
Payment Date for each Billing Period, the Lessor shall deliver to the Lessee a
Lessor Payment Notice, in the form of Schedule 2A) reflecting the Rent and the
Quarterly Expense Charge, if any, due for such Billing Period. If the Quarterly
Rent Charge as of any Rent Payment Date differs from the rate applied on the
immediately preceding Rent Payment Date, the Lessor shall deliver to the Lessee
an amended Rent Schedule which shall reflect the effect of such Quarterly Rent
Charge for all remaining payments of Rent up to and including the expiration
date of the current Term. The Lessee shall complete the Leased Property
Inventory Schedule for such Billing Period and deliver the same to the Lessor on
the Rent Payment Date and shall pay to the Lessor on the Rent Payment Date the
amount of Rent and the Quarterly Expense Charge, if any, specified by Lessor in
its notice to the Lessee, unless Lessor shall have notified Lessee that a
different amount of Rent and the Quarterly Expense Charge, if any, is due, in
which case Lessee shall pay such corrected amount of Rent within two (2)
Business Days of the date of the updated notice. Failure to deliver such
written notice or inaccuracies in such notice will not excuse the Lessee from
payment of the amount of Rent and the Quarterly Expense Charge, if any, due;
provided that if Lessee makes timely payment to Lessor in accordance with such
notice and the payment amount submitted by Lessor to Lessee is determined to be
inaccurate, the incorrect payment shall not constitute an Event of Default, as
long as the correct amount is paid in full within two (2) Business Days of the
date of an updated notice of Rent due.
(b) In addition to the Rent and Quarterly Expense Charge, if any, the
Lessee will also pay, from time to time, upon demand of the Lessor, as
additional rent ("Additional Rent") to the
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Lessor the following (but without duplication of any amounts included in the
calculation of Rent or otherwise paid by the Lessee):
(i) All out-of-pocket costs and expenses reasonably incurred by
the Lessor in connection with the preparation, negotiation,
execution, delivery, performance and administration of this
Lease and the other Operative Documents (including, without
limitation, reasonable attorneys' fees and expenses). The
Lessee also shall pay all amounts payable by the Lessor with
respect to the transactions contemplated hereby and by the
Funding Agreement and the other Operative Documents in respect
of the following; (A) fees and expenses of the Lessor,
including, without limitation, reasonable attorneys' fees and
expenses; (B) all other amounts, including, without
limitation, fees, indemnities, expenses and compensation in
respect of increased costs, capital adequacy or breakage of
any kind or description payable under the Funding Agreement or
any other Operative Document; (C) out-of-pocket costs and
expenses incurred by the Lessor after the date of this Lease
(including, without limitation, reasonable attorneys' fees and
expenses and other expenses and disbursements reasonably
incurred) associated with (x) negotiating and entering into,
or the giving or withholding of, any future amendments,
supplements, waivers or consents with respect to this Lease;
(y) any Casualty Occurrence or termination of this Lease; and
(z) any Event of Default and the enforcement of the rights or
remedies of the Lessor under this Lease and the other
Operative Documents.
(ii) All other amounts that the Lessee agrees herein to pay other
than Rent and amounts described in clause (i) above.
(c) This Lease is a completely net lease, and Rent, Additional Rent and all
other sums payable by the Lessee hereunder shall be paid without notice except
as otherwise expressly provided herein, and the Lessee shall not be entitled to
any abatement, reduction, setoff, counterclaim, defense or deduction with
respect to any Rent, Additional Rent or other sum payable hereunder. The
obligations of the Lessee to pay Rent, Additional Rent and all other sums
payable hereunder shall not be affected by any circumstance whatsoever,
including without limitation: (a) any damage to or destruction of the Leased
Property or any part thereof by any cause whatsoever (including, without
limitation, fire, casualty or act of God or enemy or any other force majeure
event); (ii) any condemnation, including, without limitation, a temporary
condemnation of the Leased Property or any portion thereof; (iii) any
prohibition, limitation, restriction or prevention of the Lessee's use,
occupancy or enjoyment of the Leased Property or any part thereof by any Person;
(iv) any matter affecting title to the Leased Property or any portion thereof;
(v) any eviction of the Lessee from, or loss of possession by the Lessee of, the
Leased Property or any portion thereof, by reason of title paramount or
otherwise; (vi) any default by the Lessor hereunder or under any other
agreement; (vii) the invalidity or unenforceability of any provision hereof or
the impossibility or illegality of performance by the Lessor or the Lessee or
both; (viii) any action of any federal, state or local governmental authority;
or (ix) any other cause or occurrence whatsoever, whether similar or dissimilar
to the foregoing. The Lessee shall remain obliged under this Lease in
accordance with its terms and shall not take any action to terminate, rescind or
avoid this Lease, notwithstanding any bankruptcy, insolvency, reorganization,
liquidation, dissolution or other proceeding affecting the Lessor or any action
with respect to this Lease which may be taken by any trustee, receiver or
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<PAGE>
liquidator or by any court. The Lessee waives all rights to terminate or
surrender this Lease, or to any abatement or deferment of Rent, Additional Rent
or other sums payable hereunder. The Lessee hereby waives any and all rights
now or hereafter conferred by law or otherwise to modify or to avoid strict
compliance with its obligations under this Lease. All payments made to the
Lessor hereunder as required hereby shall be final and irrevocable, absent
manifest error, and the Lessee shall not seek to recover any such payment or any
part thereof for any reason whatsoever, absent manifest error. All covenants
and agreements of Lessee herein shall be performed at its cost, expense and risk
unless expressly otherwise stated. Nothing herein shall be construed as a
guaranty by the Lessee of any residual value in the Leased Property nor to
prevent the Lessee from asserting in any legal action any mandatory
counterclaim.
(d) The Lessee agrees that it will promptly pay all Impositions imposed
upon or levied or assessed against or relating to (i) this Lease or any future
amendment, supplement, waiver or consent requested by Lessee with respect
thereto, or the execution, delivery or performance of any thereof or the
issuance, acquisition or subsequent transfer thereto, (ii) the Leased Property
or any portion thereof, (iii) the manufacture, financing, construction,
purchase, acceptance, possession, rejections, ownership, delivery, nondelivery,
use, operation, leasing, subleasing, condition, maintenance, repair, sale,
control, return, transfer, abandonment, redelivery or other disposition of the
Leased Property, (iv) the Lessor (and its predecessors and its and their
successors and permitted assigns and their respective partners, officers,
directors, employees and agents) in connection with the transactions
contemplated by this Lease and the Master Lease (including all obligations of
Lessor in respect of payments or otherwise hereunder or thereunder) or imposed
or levied upon, assessed against or measured by any Rent or other sum payable
hereunder, and will furnish to the Lessor upon request copies of official
receipts or other proof evidencing such payments; provided, however, that the
-------- -------
Lessee shall not be obligated to pay (A) any sales Taxes or other Impositions to
the extent paid by the Lessor as part of the Property Cost of any Unit of Leased
Property and financed under the Funding Agreement, (B) any Impositions which
are based upon or measured by the Lessor's net income, or which are in
substitution for, or relieve the Lessor from, any actual Imposition based upon
or measured by the Lessor's net income (excluding, however, Impositions imposed
with respect to the payment, receipt or accrual of any indemnity payment under
this Lease), or (C) Impositions characterized under local law as franchise Taxes
(excluding, however, any value-added, license, property or similar Imposition).
The Lessee further agrees that, subject to its rights under Section 13 hereof,
it will, at its expense, do all things required to be done by the Lessor in
connection with the levy, assessment, billing or payment of any such
Impositions, and is hereby authorized by the Lessor to act for and on behalf of
the Lessor in any and all such respects and to prepare and file, on behalf of
the Lessor all tax returns and reports required to be filed by the Lessor (other
than federal income tax returns and documents related thereto) concerning the
Leased Property. The Lessee's payment obligations under this Section 3(d) shall
survive the termination of this Lease. In the event that any withholding or
deduction from any payment to be made by the Lessee hereunder is required in
respect of any Imposition pursuant to any Legal Requirement, then the Lessee
will
(x) pay directly to the relevant authority the full amount
required to be so withheld or deducted;
(y) promptly forward to the Lessor an official receipt or other
documentation satisfactory to the Lessor evidencing such
payment to such authority; and
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<PAGE>
(z) pay to the Lessor such additional amount or amounts as is
necessary to ensure that the net amount actually received by
the Lessor will equal the full amount the Lessor would have
received had no such withholding or deduction been required.
(e) Unless otherwise expressly provided, all payments by the Lessee
pursuant to this Lease shall be made by the Lessee to the Lessor. All such
payments required to be made to the Lessor shall be made not later than 11:00
a.m., New York, New York time, on the date due, in immediately available funds,
to such account as the Lessor shall specify from time to time by notice to the
Lessee. Funds received after that time shall be deemed to have been received by
the Lessor on the next succeeding Business Day. Whenever any payment to be made
shall otherwise be due on a day which is not a Business Day, except as otherwise
expressly provided herein, such payment shall be made on the next succeeding
Business Day and such extension shall be included in computing Rent, interest
and fees, if any, in connection with such payment.
Section 4. Agency Agreement.
----------------
The Lessee is entering into the Agency Agreement with the Lessor pursuant
to which the Lessee will act as the construction agent for the Lessor in causing
the completion of certain refurbishments, enhancements and improvements to, and
the purchase, construction and installation of, the Units of Leased Property.
Title to all components of each Unit of Leased Property funded shall be and
remain in the Lessor or its Funding Sources, and all such Units of Leased
Property shall be subject to the terms and conditions of this Lease. Certain of
the Units of Leased Property shall be purchased, manufactured or assembled
pursuant to Related Contracts entered into by the Lessee pursuant to the Agency
Agreement. After a funding pursuant to the Funding Agreement of an initial
payment under any Related Contract, the rights of the Lessee held for the
benefit of the Lessor under such Related Contract shall become subject to the
provisions of this Lease.
Section 5. Leased Property Records.
-----------------------
The Lessee shall maintain, on a current basis, books of proper record and
account in conformity with GAAP (to the extent applicable) which books shall
include, without limitation, (a) copies of all Related Contracts and any
amendments thereto, (b) the manufacturer, model and identification number, as
applicable, of each Unit of Leased Property, (c) the location of each Unit of
Leased Property, (d) the Property Cost of each Unit of Leased Property, and (e)
a copy of the purchase invoice for each Unit of Leased Property.
Section 6. Title to Remain in the Lessor.
-----------------------------
Except as otherwise specified in Sections 7(b), 8(a) (in respect of
removals) and Section 9(c) (in respect of certain Alterations), the Lessor or
its Funding Sources shall own 100% of the legal and beneficial interest in each
Unit of Leased Property, and all accessories, equipment, parts and devices
affixed or placed on any Unit of Leased Property from time to time by the Lessee
if required to achieve Completion shall be and become part of such Unit of
Leased Property for the purposes of this Lease and shall be property of the
Lessor or its Funding Sources subject to the terms of this Lease.
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<PAGE>
Section 7. Maintenance and Replacement of the Leased Property; Operations.
--------------------------------------------------------------
(a) The Lessee shall, and it shall require and cause any and all
employees, contractors, subcontractors, agents, representatives, affiliates,
consultants and occupants at the Lessee's own cost and expense to (i) cause the
Leased Property to be maintained in good operating order, repair and condition,
in accordance with prudent industry practice and any applicable manufacturer's
manuals or warranties, subject to normal wear and tear, and will take all
action, and will make all changes and repairs, structural and non-structural,
foreseen and unforeseen, ordinary and extraordinary, which are required pursuant
to any Legal Requirement or Insurance Requirement at any time in effect to
assure full compliance therewith; and (ii) cause the Leased Property to continue
to have at all times the capacity and functional ability to perform, on a
continuing basis (subject to normal interruption in the ordinary course of
business for maintenance, inspection, service, repair and testing) and in
commercial operation, the functions for which it was designed as specified in
the Project Plan.
(b) The Lessee shall, and it shall require and cause any and all
employees, contractors, subcontractors, agents, representatives, affiliates,
consultants and occupants at the Lessee's own cost and expense to, promptly
replace, or cause to be replaced, all Units of Leased Property or parts thereof
which may from time to time be incorporated or installed in or attached to the
Leased Property and which may from time to time become worn out, lost, stolen,
destroyed, seized, confiscated, damaged beyond repair, obsolete or permanently
rendered unfit for use for any reason whatsoever. All replacement Units of
Leased Property or parts thereof shall be free and clear of all Liens other than
Permitted Liens, shall be of a type customarily used in the industry at such
time for such purpose, shall be in as good operating condition as, and shall
have a utility and useful life at least equal to, the Units of Leased Property
or parts replaced (assuming such replaced Units of Leased Property or parts were
in the condition and repair required to be maintained by the terms hereof) and
shall have a value at least equal to the Units of Leased Property or parts
replaced (assuming such replaced Units of Leased Property or parts were in the
condition and repair required to be maintained by the terms hereof). Each Unit
of Leased Property or part thereof at any time removed shall remain the property
of (and title thereto shall remain in) Lessor or its Funding Sources, no matter
where located, until such time as such Unit of Leased Property or part shall be
replaced by a replacement Unit of Leased Property or part and that meets the
requirements for replacement Units of Leased Property or parts thereof specified
above. Immediately upon any replacement Unit of Leased Property or part thereof
becoming incorporated or installed in or attached to the Leased Property as
above provided, without further act or instrument, subject to Permitted Liens,
(i) title to the removed Unit of Leased Property or part thereof shall thereupon
vest in Lessee, free and clear of all rights of Lessor, and shall no longer be
deemed a Unit of Leased Property or part thereof hereunder; (ii) title to such
replacement Unit of Leased Property or part thereof shall thereupon vest in
Lessor; and (iii) such replacement Unit of Leased Property or part thereof shall
become subject to this Lease and be deemed a part of the Leased Property for all
purposes hereof to the same extent as the Unit of Leased Property or part
thereof originally incorporated or installed in or attached to the Leased
Property. Within ten Business Days of the end of each calendar quarter, an
Authorized Officer of the Lessee shall deliver to the Lessor a Repair and
Replacement Schedule certifying to Lessor's satisfaction (i) the nature of
repairs and replacements of Units of Leased Property or any component that has a
cost of at least $1,000,000 at the time of replacement or repair made during
such calendar quarter and the Units of Leased Property so repaired or replaced
and (ii) that the Project continues to have the capacity and functional ability
to perform on a continuing basis (subject to normal interruption in the ordinary
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course of business for maintenance, inspection, service, repair and testing) and
in commercial operation, the functions for which it was designed as specified in
the Project Plan.
(c) Notwithstanding the provisions of Section 8 and the foregoing
provisions of this Section 7, the Lessee shall not remove, replace or alter any
Unit of Leased Property or affix or place any accessory, equipment, part or
device on any Unit of Leased Property, if such removal, replacement, alteration
or addition would impair the originally intended function or use of such Unit of
Leased Property so as to materially reduce the value of any Unit of Leased
Property or the value of all of the Leased Property taken as a whole.
(d) The Lessor shall not be required in any way to maintain, repair or
rebuild any Unit of Leased Property or any portion thereof and the Lessee waives
any right it may now or hereafter have to make any repairs at the expense of the
Lessor pursuant to any Legal Requirement at any time in effect or otherwise.
(e) The Lessee shall, and it shall require and cause any and all
employees, contractors, subcontractors, agents, representatives, affiliates,
consultants and occupants at the Lessee's own cost and expense to, (i) comply in
all material respects with all applicable Environmental Laws with regard to the
Leased Property and (ii) use, employ, process, emit, generate, store, handle,
transport, dispose of and/or arrange for the disposal of, any and all hazardous
substances in, on or, directly or indirectly, related to or in connection with
the Leased Property or any part thereof in a manner consistent with prudent
industry practice and in compliance in all material respects with any applicable
Environmental Law, and in a manner which does not have a material adverse effect
on the use, occupancy, possession, value or condition of the Leased Property or
any Unit of Leased Property and does not give rise to continuing liability to
the Lessee or the Lessor. The Lessor and the Lessee hereby acknowledge and agree
that the Lessee's obligations hereunder with respect to Environmental Laws are
intended to bind the Lessee with respect to matters and conditions involving the
Leased Property or any part thereof. The Lessee, at its expense, will register
and re-register the Leased Property when necessary under applicable Legal
Requirements.
Section 8. Removals Without Replacement.
----------------------------
(a) The Lessee may, unless a Default or an Event of Default shall
occur and be continuing, upon at least five Business Days' prior written notice
to the Lessor, remove any Unit of Leased Property or part thereof, at its own
expense without replacing it; provided that such Unit of Leased Property or part
thereof is not a Major Component of the Project and is no longer necessary for
the performance of the Project on a continuing basis in commercial operation of
the functions for which the Project was designed as specified in the Project
Plan; and provided, further, that such removal and nonreplacement do not in any
material respect (i) diminish or impair the value, utility and useful life of
the Leased Property (subject to normal interruption in the ordinary course of
business for maintenance, inspection, service, repair and testing) or (ii)
result in the Leased Property becoming "limited use property" within the meaning
of Rev. Proc. 76-30, 1976-2 C.B. 647 (assuming, in each case, the Leased
Property was then of the value, utility and useful life required to be
maintained hereunder). Title to any such removed Unit of Leased Property or part
thereof shall vest in Lessee, free and clear of all rights of Lessor.
(b) If the Lessee determines that any Unit of Leased Property or part
thereof may be removed in accordance with Section 8(a) hereof, then the Lessee
shall give the Lessor at least 30
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<PAGE>
days' notice of such determination and shall not remove any such Unit of Leased
Property unless and until the Lessor has received written confirmation from the
Technical Consultant of the Lessee's determination that such Unit of Leased
Property is no longer necessary for the performance of the Project on a
continuing basis in commercial operation of the function for which the Project
was designed as specified in the Project Plan; provided, however, that the
Lessee may remove from this Lease Units of Leased Property determined to be no
longer necessary for the performance of the Project as aforesaid at any one time
having aggregate book values not exceeding $5,000,000 or at all times during the
term of this Lease having aggregate book values not exceeding $10,000,000. Any
Unit of Leased Property removed in accordance with Section 8(a) hereof, which
has a de minimis value, may be disposed of by the Lessee without any obligation
or liability to the Lessor. Except as provided in the immediately preceding
sentence, any Unit of Leased Property removed by the Lessee in accordance with
Section 8(a) hereof shall remain the property of the Lessor and shall be
delivered to the Lessor as soon as practicable.
Section 9. Required and Optional Alterations; Title to Alterations.
-------------------------------------------------------
(a) Except as otherwise provided in Section 14 hereof, Lessee at its
own cost and expense, shall make (or cause to be made) all Alterations to the
Leased Property as may be required from time to time to meet in all material
respects all Legal Requirements (regardless of the Person upon whom such
requirements, by their terms, are nominally imposed), except to the extent being
contested in accordance with Section 10 hereof.
(b) Unless an Event of Default shall have occurred and be continuing,
Lessee, at its own cost and expense, may from time to time make, subject to
obtaining all necessary authorization, consents or approvals of any Governmental
Authority and consents of third parties, such Alterations to the Leased Property
that are not required pursuant to Section 9(a) as Lessee may deem desirable in
the proper conduct of its business, provided that (i) such Alternation shall not
diminish or impair in any material respect the value, utility or useful life of
the Leased Property (subject to normal interruption, in the ordinary course of
business for maintenance, inspection, service, repair and testing), (ii) such
Alteration shall not cause the Leased Property to constitute "limited use
property" within the meaning of Rev. Proc. 76-30, 1976-2 C.B. 647 and (iii) no
Alterations, taken together or separately, shall violate the provisions of Rev.
Proc. 75-21, 1975-1 C.B. 715 or 79-48, 1979-1 C.B. 529.
(c) Title to each Alteration shall without further act or instrument
vest in the Lessor and be deemed to constitute a part of the Leased Property and
be subject to this Lease, provided that any such Alteration is required pursuant
to Section 9(a) hereof or is a Nonseverable Alteration. Title to all other
Alterations shall vest in the Lessee or such other Person as the Lessee shall
select, and the Lessee may finance the acquisition thereof in whatever manner it
elects, secured or unsecured, provided that such financing does not and will not
result in any Lien (other than Permitted Liens) on or with respect to the Leased
Property or any part thereof. Any such Alteration may be removed by the Lessee
or any Person having a Lien thereon, at its own cost and expense, at any time
prior to the Stated Lease Termination Date if the conditions set forth in
clauses (i) and (ii) of the proviso contained in Section 9(b) hereof are met and
such removal will not cause any of the Leased Property to be in violation of any
applicable Legal Requirement. Any such Alteration may also be removed at the
Stated Lease Termination Date upon not less than 90 days' prior written notice
to Lessor, so long as the Leased Property is restored substantially to its
condition (normal wear and tear excepted) prior to the making of such
Alteration, provided that such removal does not diminish or impair the
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required performance of the Leased Property (as specified in the Project Plan)
at such time; and provided, further, that any Severable Alterations that are not
removed from the Leased Property at the time of its surrender by the Lessee
shall become the property of the Lessor.
Section 10. Compliance with Legal Requirements and Insurance Requirements:
--------------------------------------------------------------
Related Contracts.
-----------------
The Lessee at its expense, except as otherwise permitted by the last
sentence of this Section 10, will comply with all Legal Requirements applicable
to the Leased Property or any portion thereof or the ownership, construction,
operation, mortgaging, occupancy, possession, use, non-use or condition of the
Leased Property or any portion thereof, all Insurance Requirements, and all
instruments, contracts or agreements affecting title to or ownership of the
Leased Property or any portion thereof. In addition, the Lessee, so long as no
Default or Event of Default has occurred and is continuing, is hereby authorized
by the Lessor to, and shall, fully and promptly keep, observe, perform and
satisfy on behalf of the Lessor any and all obligations, conditions, covenants
and restrictions of or on the Lessor or the Lessee under any and all Related
Contracts so that there will be no default thereunder and so that the other
parties thereunder shall be and remain at all times obliged to perform their
obligations thereunder, and the Lessee, to the extent within its control, shall
not permit to exist any condition, event or fact that could allow or serve as a
basis or justification for any such Person to avoid such performance.
Notwithstanding the first sentence of this Section 10, if (i) a test, challenge,
appeal or proceeding for review of any applicable Legal Requirement relating to
the use, operation or maintenance of the Leased Property shall be prosecuted in
good faith by Lessee or (ii) compliance with such Legal Requirement shall have
been excused or exempted by a nonconforming use permit, waiver, extension or
forbearance excusing or exempting Lessee from such Legal Requirement, Lessee
shall not be required to comply with such Legal Requirement so long as such
test, challenge, appeal, proceeding or noncompliance shall not involve any
material risk of (A) the sale, forfeiture or loss of, or imposition of any Lien
(other than a Permitted Lien or Lien being contested pursuant to Section 13) on,
any part of the Leased Property, title thereto or any interest therein or in
this Lease or impairment of the use or operation of any part of the Leased
Property as required by the Project Plan, (B) any material Claim not indemnified
against by Lessee against Lessor or the Leased Property or (C) the nonpayment of
Rent.
Section 11. Condition and Use of Leased Property; Assignment of Warranties,
---------------------------------------------------------------
Etc.; Quiet Enjoyment.
---------------------
(a) THE LEASED PROPERTY IS LEASED AS IS, WHERE IS, AND WITH ALL FAULTS
AND IN THE CONDITION THEREOF AND SUBJECT TO THE RIGHTS OF ANY PARTIES IN
POSSESSION THEREOF, THE STATE OF THE TITLE THERETO, AND THE RIGHTS OF OWNERSHIP
THEREIN, IN EACH CASE AS IN EXISTENCE WHEN THE SAME FIRST BECOMES SUBJECT TO
THIS LEASE, WITHOUT REPRESENTATIONS AND WARRANTIES OF ANY KIND AS TO TITLE BY
THE LESSOR, OR ANY PERSON ACTING ON BEHALF OF ANY OF THEM. THE LESSEE
ACKNOWLEDGES AND AGREES THAT THE LESSOR IS NOT A MANUFACTURER OF, OR VENDOR OF,
OR MERCHANT WITH RESPECT TO, ANY OF SUCH EQUIPMENT OR ANY PROPERTY OF SUCH KIND
AND HAS NOT MADE NOR IS MAKING ANY WARRANTY, EXPRESS OR IMPLIED, RELATING TO THE
LEASED PROPERTY, INCLUDING WITHOUT LIMITATION, WITH RESPECT TO MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE, THE DESIGN, CONDITION, QUALITY OF
MATERIAL OR WORKMANSHIP, CONFORMITY TO
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SPECIFICATIONS, FREEDOM FROM PATENT OR TRADEMARK INFRINGEMENT, ABSENCE OF ANY
LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE WHETHER ARISING PURSUANT TO
THE UCC OR ANY OTHER PRESENT OR FUTURE LAW OR OTHERWISE, OR (v) SHALL NOT BE
LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING LIABILITY IN TORT,
STRICT OR OTHERWISE). IN THE EVENT OF ANY DEFECT OR DEFICIENCY OF ANY NATURE IN
THE LEASED PROPERTY OR ANY EQUIPMENT OR FIXTURE OR OTHER ITEM CONSTITUTING A
PORTION THEREOF, WHERE PATENT OR LATENT, THE LESSOR SHALL NOT HAVE ANY
RESPONSIBILITY OR LIABILITY WITH RESPECT THERETO. THE PROVISIONS OF THIS SECTION
11 HAVE BEEN NEGOTIATED AND ARE INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION
OF ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, BY THE LESSOR, WITH RESPECT TO
THE LEASED PROPERTY OR ANY EQUIPMENT, FIXTURE OR OTHER ITEM CONSTITUTING A
PORTION THEREOF, WHETHER ARISING PURSUANT TO THE UCC OR ANY OTHER LAW NOW OR
HEREAFTER IN EFFECT.
(b) The Lessor hereby assigns to the Lessee until the termination
hereof or the occurrence of a Default or Event of Default hereunder any and all
warranties and indemnities of and claims against any manufacturers or Vendors
relating to any Unit of Leased Property (including any labor, equipment or parts
supplied therewith), and to the extent assignment of the same is prohibited or
precludes enforcement of any such warranty or undertaking, the Lessor hereby
subrogates the Lessee to its rights in respect thereof. The Lessor hereby
authorizes the Lessee, at the Lessee's expense, to assert any and all claims and
to prosecute any and all suits, actions and proceedings, in its own name or in
the name of the Lessor, in respect of any such warranty or undertaking and prior
to the termination hereof or the occurrence of a Default or Event of Default
hereunder, to retain the proceeds received, and after the termination of this
Lease or the occurrence of a Default or Event of Default to pay the same in the
form received (with any necessary endorsement) to the Lessor.
(c) The Lessee may use the Leased Property for any lawful purpose
consistent with the Development Plan and the Project Plan provided that the
value of the Leased Property is not diminished by any such use other than as a
result of normal wear and tear in the ordinary course of business. During the
term of this Lease, the Lessor covenants that unless a Default or an Event of
Default has occurred and is continuing, the Lessor will not, and will not permit
any party claiming by, through or under the Lessor to, interfere with the
peaceful and quiet possession and enjoyment of the Leased Property by the
Lessee; provided, however, that the Lessor and its successors, assigns,
representatives and agents may, upon reasonable notice to the Lessee enter upon
and examine the Leased Property or any part thereof at reasonable times, subject
to the provisions of Section 19 hereof. Any failure by the Lessor to comply
with the foregoing provisions of this Section 11(c) shall not give the Lessee
any right to cancel or terminate this Lease, or to abate, reduce or make
reduction from or offset against any Rent, Additional Rent or other sum payable
under this Lease, or to fail to perform or observe any other covenant, agreement
or obligation hereunder. The Lessee will not do or fail to do, or permit or
suffer to exist any act or thing, which action or thing or failure might impair
the value or usefulness of the Leased Property for the production and safe and
lawful handling of hydrocarbons and other functions contemplated by the design
of such Leased Property, ordinary wear and tear excepted.
Section 12. Liens.
-----
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(a) The Lessee will not directly or indirectly create or permit to be
created or to remain, and will discharge promptly, at the Lessee's expense, any
Lien upon the Lease or the Leased Property except (i) any Lien being contested
as permitted by Section 13 hereof, or (ii) Permitted Liens. The Lessor agrees
that the Lessee shall have during the term of this Lease the exclusive right (so
long as no Default or Event of Default has occurred and is continuing) to grant,
create or suffer to exist Permitted Liens in accordance with prudent industry
practices, provided that the fair market value or use of the Leased Property or
the applicable portion thereof is not materially lessened thereby. The Lessor
agrees to execute such documents and take all other actions as shall be
reasonably necessary, and otherwise to cooperate with the Lessee in connection
with the matters described above, provided that all reasonable out-of-pocket
costs and expenses (including, without limitation, reasonable attorneys' fees
and expenses) incurred by the Lessor in connection therewith shall be borne by
the Lessee, and the Lessor shall not be required to execute any document which
would, in the opinion of the Lessor, materially adversely affect the value or
use of the Leased Property or otherwise materially adversely affect the
interests of the Lessor.
(b) The Lessee will not directly or indirectly sell, transfer, or
otherwise dispose of, or create or permit to be created or to remain, and will
discharge, any Lien of any nature whatsoever on, in or with respect to, its
interest in the Leased Tracts, except Permitted Liens, sales of hydrocarbons
produced from the Leased Tracts in the ordinary course of business and sales or
other dispositions of interests in the Leased Tracts; provided that the Lessee
shall retain at least 25% of the working interest and maintain a net revenue
interest at least equal to 70% of its working interest in the Leased Tracts. The
Lessee shall at all times remain the operator under any operating agreement
governing operation on the Leased Tracts except that a Co-Lessee permitted by
the terms of this Lease and qualified under all Legal Requirements may serve as
the operator.
(c) The Lessee acknowledges and agrees that this Lease is subsequent,
inferior, junior and subordinate in all respects to the Security Instruments as
defined in the Funding Agreement. The Lessee will not contest or otherwise
challenge through litigation or by any other means the superior right, title and
interest of the Lessor and its Funding Sources as the secured parties under the
Security Instruments as defined in the Funding Agreement in and to the Leased
Property to the right, title and interest of the Lessee under this Lease.
Section 13. Permitted Contests.
------------------
After prior notice to the Lessor and provided there is no material risk of
sale, forfeiture or loss of any Unit of Leased Property, the Lessee may at its
expense contest any Imposition which it is required to pay hereunder, by
appropriate proceedings conducted in good faith and with due diligence, so long
as such proceedings are effective to prevent the collection of such Imposition
from the Lessor or any Funding Source (as it relates to any financing in
connection with the Funding Agreement) or against the Leased Property or any
portion thereof; provided, however, that the actions of the Lessee as authorized
by this Section 13 shall be subject to the express written consent of the Lessor
if such actions would subject the Lessor or any Funding Source to any liability
or sanction, criminal or otherwise, for failure to pay any such Imposition. The
Lessee will pay, and save the Lessor and each such Funding Source harmless
against, all losses, Judgments, decrees and reasonable costs, including
attorneys' fees and expenses, in connection with any such contest and will,
promptly after the final determination of such contest, pay and discharge the
amounts which shall be imposed or determined to be payable therein, together
with all penalties, costs and expenses incurred in connection therewith. The
Lessee shall prevent any foreclosure, judicial sale or
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<PAGE>
forfeiture of the Leased Property or any portion thereof, or any interference
with or deductions from any Rent, Additional Rent or any other sum required to
be paid by the Lessee hereunder by reason of such nonpayment or nondischarge of
an Imposition. The Lessor shall cooperate with the Lessee in any contest and
shall allow the Lessee to conduct such contest (in the name of the Lessor, if
necessary) at the Lessee's sole cost and expense. The Lessee shall notify the
Lessor of each such proceeding within 10 days after the commencement thereof,
which notice shall describe such proceeding in reasonable detail.
Section 14. Insurance, etc.
--------------
(a) The Lessee will, at its own expense, purchase and maintain or cause to
be purchased and maintained throughout the term of this Lease insurance with
respect to its business and the Leased Property in accordance with the
requirements of Schedule 7 hereto.
(b) The Lessee shall bear all risk of loss, whether by casualty, theft,
taking or other confiscation, with respect to each Unit of Leased Property or
any portion thereof, at all times during the term of this Lease until possession
of any Unit of Leased Property has been accepted by the Lessor upon the return
of any such Unit of Leased Property to Lessor pursuant to Section 17 hereof.
(c) So long as no Default or Event of Default has occurred and is
continuing, any payments, whether constituting insurance proceeds, amounts paid
by any Governmental Authority or otherwise, received by the Lessee or the Lessor
upon the occurrence of any loss with respect to any Unit of Leased Property or
portion thereof (other than a Casualty Occurrence), whether as a result of
casualty, theft, taking or other confiscation, shall be applied in payment for
necessary repairs and replacement to the Leased Property in accordance with
Section 7 hereof or, to the extent the costs of such repairs and replacement
shall have been paid by the Lessee, to reimburse the Lessee. The Lessee shall
be entitled to retain any excess funds remaining after necessary repairs and
replacements have been completed and all costs therefor paid in full.
(d) Upon a Casualty Occurrence, the Lessee shall give prompt notice
thereof to the Lessor and shall within 30 days of the date of such Casualty
Occurrence provide the Lessor with a plan acceptable to the Technical Consultant
setting forth how the Lessee shall replace, or cause to be replaced, at the
Lessee's own cost and expense, within 180 days after the date of such Casualty
Occurrence, any Unit of Leased Property the subject of a Casualty Occurrence;
provided, however, that the Lessee may remove from this Lease any Unit of Leased
Property the subject of a Casualty Occurrence if following such removal the
Lessee would be in compliance with Section 9(b) as if an Alteration were being
made. Within 60 days of the date of the Casualty Occurrence, the Lessee shall
have commenced repairs or replacements as specified in such a plan. After
completion of the repairs and replacements, the Lessee shall demonstrate to the
satisfaction of the Technical Consultant that operations and production from the
Project have been restored. This test must be satisfactorily completed within
180 days after the date of such Casualty Occurrence. All replacement Units of
Leased Property shall be free and clear of all Liens except Permitted Liens, and
shall be in as good operating condition as, and shall have a value and utility
at least equal to, the Unit of Leased Property replaced immediately prior to the
Casualty Occurrence to which such Unit of Leased Property was subject. For
purposes of this Lease (including without limitation this Section 14(d) and
Section 7), Fixed Charges paid, the Property Cost, and the Stipulated Loss Value
of the replacement Unit of Leased Property shall be deemed to equal the Fixed
Charges paid, the Property Cost and the Stipulated Loss Value of the Unit of
Leased Property replaced thereby. All Units of
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<PAGE>
Leased Property at any time removed from this Lease pursuant to this Section
14(d) and Section 7 shall remain the property of the Lessor, no matter where
located, until such time as insurance proceeds have been received by the Lessor
at least equal to the Stipulated Loss Value of such Units of Leased Property or
such Units of Leased Property shall be replaced by Units of Leased Property
which have been incorporated or installed on or attached to Leased Property
located on the Project and which meet the requirements specified above.
Immediately upon any replacement Unit of Leased Property becoming incorporated
or installed on or attached to Leased Property located on the Project as
provided above, without further act, such replacement Unit of Leased Property
shall become subject to this Lease and be deemed part of the Leased Property for
all purposes hereof to the same extent as any other Units of Leased Property.
All amounts of insurance proceeds for property losses and all other proceeds
(whether resulting from damage or destruction or from condemnation, confiscation
or seizure) relating to the applicable Unit or Units of Leased Property shall be
deposited into the Restoration Account from any losses exceeding $5,000,000 per
occurrence and held and released as hereinafter provided. So long as no Default
or Event of Default shall have occurred and be continuing, and provided that the
Lessor shall have received a written application of the Lessee accompanied by a
certificate of an Authorized Officer of the Lessee showing in reasonable detail
the nature of any necessary repair, rebuilding and restoration, the actual cash
expenditures necessary for such repair, rebuilding and restoration, the expected
total expenditures required to complete such work and evidence that sufficient
funds are available to complete such work on a timely basis (such certificate to
be acceptable to the Lessor in all respects), then the amounts available in the
Restoration Account shall be released by the Lessor from time to time on each
Rent Payment Date during the period of repair, rebuilding and restoration in
payment therefor against presentation to the Lessor of a certificate executed by
an Authorized Officer of the Lessee to the effect that expenditures have been
made, or costs incurred, by or for the account of the Lessee or are reasonably
anticipated to be made during the immediately following Billing Period in a
specified amount for the purposes of making repairs, rebuilding and restoration
in the amounts specified, that no Default or Event of Default exists and all
conditions precedent herein provided relating to such withdrawal and payment
have been satisfied. Upon the occurrence of any Event of Default, the Lessor
shall be entitled to retain all amounts in the Restoration Account for
application to the obligations of the Lessee hereunder.
Section 15. Termination; Surrender of Leased Property.
-----------------------------------------
(a) In addition to any other rights provided to Lessor hereunder, Lessor
shall have the right to terminate this Lease upon delivery to Lessee of a notice
that Lessor has determined to exercise its rights to purchase the Leased Tracts
under that certain lease agreement, dated as of even date herewith, between
Lessor and Lessee relating to Garden Banks 388 Lease No. 2. Following the
delivery of such notice the Term shall be deemed to have ended upon the date of
exercise of the foregoing option.
(b) Unless all right, title and interest in the Leased Property shall have
been or is being transferred to Lessee or unless Lessee shall have paid
Stipulated Loss Value with respect to the Leased Property, in each case,
pursuant to this Lease, Lessee shall, upon the expiration of the Term or the
earlier termination of the Lease as provided herein, return the Leased Property
to Lessor or to any transferee or assignee of Lessor and deliver therewith a
complete set, current as of the date of such return, of all customary operating
manuals, logs and plans and specifications necessary or appropriate for the
proper operation and maintenance of the Leased Property, together with all
maintenance and repair reports prepared during the Term in respect of such
Leased Property. At the
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<PAGE>
time of such return, the Leased Property (i) shall be, at a minimum, in the
condition required by Section 7, (ii) shall be in good working order and shall
include all Alterations made by Lessee to the extent such Alterations become the
property of Lessor pursuant to Section 9, and (iii) shall not be "limited use
property" within the meaning of Rev. Proc. 76-30, 1976-2 C.B. 647. Lessee shall
assign to Lessor all warranties, registrations, licenses and permits, to the
extent permitted under Applicable Law, required to be possessed by Lessee or
Lessor with respect to the Leased Property.
Section 16. Lessee's Renewal Option.
-----------------------
Upon expiration of the Basic Term, if no Event of Default, Casualty
Occurrence or Constructive Total Loss shall have occurred and be continuing,
Lessee may, upon at least 60 days' irrevocable prior written notice to Lessor,
elect to renew the Lease upon the same terms and conditions for a period of five
years (the "Fair Market Renewal Term"); provided that Rent during such Fair
Market Renewal Term shall be determined by reference to a Fixed Charge Balance
which reflects the Fair Market Rental Value as determined at the commencement of
such Fair Market Renewal Term.
Section 17. Events of Default and Remedies.
------------------------------
(a) Each of the following acts or occurrences shall constitute an "Event
of Default" hereunder:
(i) default by the Lessee in the payment of any Rent, Additional
Rent, Stipulated Loss Value, or the amount of any Indemnified
Risk (as defined in the Funding Agreement) hereunder when due
and the continuance of such default for 5 days thereafter; or
default in the payment of any other amount due under this Lease
and the continuance of such default for 30 days thereafter; or
(ii) default by the Lessee in the performance of any term, covenant
or agreement contained herein and the continuance of such
default for a period of 30 days after the earlier of (y) the
Lessee becoming aware of such default or (z) Lessor's giving
notice thereof to the Lessee; or
(iii) any representation or warranty made by the Lessee herein, in any
other document or certificate furnished by the Lessee in
connection with or pursuant to this Lease shall be false or
misleading in any material adverse respect on the date as of
which made or reaffirmed; or
(iv) the Lessee shall (A) voluntarily commence any proceeding or file
any petition seeking relief under Title 11 of the United States
Code or any other federal or state bankruptcy, insolvency,
reorganization or similar law now or hereafter in effect, (B)
consent to the institution of any such proceeding or the filing
of any such petition or fail to controvert the same in a timely
and appropriate manner, (C) apply for or consent to the
appointment of a receiver, trustee, custodian, sequestrator or
similar official for the Lessee or for a substantial part of its
property, (D) file an answer admitting the material allegations
of a petition filed against it in any such proceeding, (E) make
a
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general assignment for the benefit of creditors, (F) admit in
writing its inability or fail generally to pay its debts as they
become due, or (G) take partnership or corporate action for the
purpose of effecting any of the foregoing; or
(v) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction
seeking (A) relief in respect of the Lessee or of a substantial
part of its property under Title 11 of the United States Code or
any other federal or state bankruptcy, insolvency,
reorganization or composition of debts or similar law, (B) the
appointment of a receiver, trustee, custodian, sequestrator or
similar official for the Lessee or for a substantial part of its
property or (C) the winding-up, reorganization, dissolution or
liquidation of the Lessee or the composition of its debts; and
such proceeding or petition shall continue undismissed for 60
days or an order or decree approving or ordering any of the
foregoing shall continue unstayed and in effect for 60 days; or
(vi) the Lessee shall default in the payment when due of any
principal or interest on any Debt in excess of $25,000,000, or a
default or an event of default, as defined in any mortgage,
lease, indenture, instrument, loan agreement or similar document
evidencing Debt under which at the time of such default or event
of default there has been issued, or by which there has been
secured or evidenced, any Debt of the Lessee shall occur, the
effect of which, with the giving of notice or the lapse of time
or both, is to permit the holder or holders (or a trustee or
agent on behalf of such holder or holders) of any such Debt in
excess of $25,000,000 to cause such Debt to become due and
payable prior to the due date thereof; or
(vii) the Lessee shall incur a final, unstayed Judgment or Judgments
for the payment of money in excess of $50,000,000 in the
aggregate on a consolidated basis which is unpaid and as to
which a bond for payment of the full amount due has not been
obtained or similar provision for payment of the full amount due
has not been made; or
(viii) Completion shall not have occurred on or before the Completion
Date; or
(ix) the Lessee shall cease to diligently pursue the acquisition,
construction and development of the Project in accordance with
the Development Plan and the Project Plan or shall otherwise
abandon the Project; or
(x) ENSERCH Corporation shall cease to own, directly or indirectly,
the majority of the outstanding shares of the Lessee.
(b) If an Event of Default shall have occurred and be continuing, Lessor
may, at its option, by notice to Lessee declare this Lease to be in default, and
at any time thereafter Lessor may exercise one or more of the following as
Lessor in its sole discretion shall elect:
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<PAGE>
(i) Lessor may, by notice to Lessee, rescind or terminate this Lease
and all rights of Lessee hereunder to the use and possession of the Leased
Property;
(ii) Lessor may (A) demand that Lessee, and thereupon Lessee shall,
return the Leased Property promptly to Lessor in the manner and condition
required by, and otherwise in accordance with the provisions of, this Lease
as if the Leased Property were being returned at the end of the Term and
Lessor shall not be liable for the reimbursement of Lessee for any costs
and expenses incurred by Lessee in connection therewith, and (B) take
immediate possession of (to the exclusion of Lessee) the Leased Property,
by summary proceedings or otherwise, all without liability of Lessor to
Lessee (or to any Person claiming by, through or under Lessee) for or by
reason of such entry or taking of possession, whether for the restoration
of damage to property caused by such taking or otherwise, except damage
caused by Lessor's negligence or willful misconduct;
(iii) Whether or not any action has been taken under clause (i) or
(ii) above, Lessor may sell the Leased Property or any part thereof at
public or private sale, as Lessor may determine, with or without notice to
Lessee, advertisement or publication, free and clear of any rights of
Lessee or of any Person claiming by, through or under Lessee and without
any duty to account to Lessee with respect to such sale or any proceeds
with respect thereto (except to the extent required by clause (v) or (vi)
below if Lessor shall elect to exercise its rights thereunder), in which
event Lessee's obligation to pay Rent hereunder for periods commencing
after the date of such sale shall be terminated (except to the extent that
Rent is to be included in computations under clause (v) or (vi) below if
Lessor shall elect to exercise its rights thereunder);
(iv) Lessor may hold, keep idle, use, operate or lease to others all
or any part of the Leased Property as Lessor in its sole discretion may
determine, free and clear of any rights of Lessee (or any Person claiming
by, through or under Lessee) and without any duty to account to Lessee or
to any Person claiming by, through or under Lessee with respect to such
action or inaction or for any proceeds with respect to such action or
inaction, except that Lessee's obligation to pay Rent for periods
commencing after Lessee shall have been deprived of use of the Leased
Property pursuant to this clause (iv) shall be reduced by the net proceeds,
if any, received by Lessor from leasing the Leased Property to any Person
other than Lessee for the same periods or any portion thereof;
(v) Lessor may, whether or not Lessor shall have exercised or shall
thereafter at any time exercise its rights under clause (ii), (iii) or (iv)
above, demand, by written notice to Lessee specifying a payment date which
shall be a Rent Payment Date not earlier than 10 days after the date of
such notice, that Lessee pay to Lessor, and Lessee shall pay to Lessor, on
the Rent Payment Date specified in such notice, as liquidated damages for
loss of a bargain and not as a penalty (in lieu of Rent due after the Rent
Payment Date specified in such notice), any unpaid Rent due through the
Rent Payment Date specified in such notice plus whichever of the following
amounts Lessor, in its sole discretion, shall specify in such notice
(together with interest on such amount at the Post-Default Rate from the
Rent Payment Date specified in such notice to the date of actual payment);
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<PAGE>
(A) if Lessor takes possession of the Leased Property, an
amount equal to the excess, if any, of such Stipulated Loss Value over
the Fair Value of Leased Property as of the Rent Payment Date
specified in such notice;
(B) if Lessor takes possession of the Leased Property, an
amount equal to the excess of (1) the present value as of the Rent
Payment Date specified in such notice of all remaining installments of
Rent until the end of the Basic Term or the Fair Market Renewal Term,
as the case may be, discounted semiannually at a rate of 10% per
annum, over (2) the present value as of such payment date of the Fair
Market Rental Value of the Leased Property until the end of the Basic
Term or the Fair Market Renewal Term, as the case may be, discounted
semiannually at a rate of 10% per annum; or
(C) an amount equal to the Stipulated Loss Value, computed as of
the Rent Payment Date specified in such notice, and upon payment
thereof and all other amounts then due by Lessee hereunder, Lessor
shall transfer all of its right, title and interest in the Leased
Property to Lessee, free and clear of all Liens (except Permitted
Liens), but otherwise without representations or warranties, expressed
or implied;
(vi) If Lessor shall have sold all the Leased Property pursuant to
clause (iii) above, Lessor, in lieu of exercising its rights under clause
(v) above with respect to the Leased Property, may (but shall not be
obligated to) demand that Lessee pay to Lessor and Lessee shall pay to
Lessor on the date of such sale, as liquidated damages for loss of a
bargain and not as a penalty (in lieu of Rent due for periods commencing
after the next Rent Payment Date following the date of such sale), any
unpaid Rent due through such Rent Payment Date, plus the amount of any
deficiency between Stipulated Loss Value, computed as of such Rent Payment
Date, and the net proceeds of such sale, together with interest at the
Post-Default Rate on the amount of such Rent and such deficiency from the
date of such sale until the date of actual payment; or
(vii) Lessor may exercise any other right or remedy that may be
available to it under applicable law or proceed by appropriate court action
to enforce the terms hereof or to recover damages for the breach hereof.
(c) In addition to the foregoing, Lessee shall be and remain liable for
paying or reimbursing Lessor for (i) any and all Rent and other amounts due and
payable under this Lease prior to any such Event of Default, and (ii) all costs
and expenses incurred by Lessor (including reasonable fees and expenses of
counsel) in connection with any exercise of its remedies provided in Section
17(b).
(d) No rescission or termination of this Lease, in whole or in part, or
repossession of the Leased Property or exercise of any remedy under Section
17(b) shall, except as specifically provided therein, relieve Lessee of any of
its liabilities and obligations hereunder. In addition, Lessee shall be liable,
except as otherwise provided above, for any and all unpaid Rent due hereunder
before, after or during the exercise of any of the foregoing remedies, including
all reasonable legal fees and other costs and expenses incurred by Lessor by
reason of the occurrence of any Event of Default or the exercise of Lessor's
remedies with respect thereto and including all costs and expenses incurred
- 26 -
<PAGE>
in connection with the return of the Leased Property in the manner and condition
required by, and otherwise in accordance with the provisions of, this Lease as
if the Leased Property were being returned at the end of the Term. At any sale
of the Leased Property or any part thereof pursuant to Section 17(b), Lessor may
bid for and purchase such property.
(e) To the extent permitted by, and subject to the mandatory requirements
of, applicable law, each and every right, power and remedy under Section 17(b)
or otherwise available to Lessor shall be cumulative and shall be in addition to
every other right, power and remedy, and each and every right, power and remedy
may be exercised from time to time and as often and in such order as may be
deemed expedient by Lessor, and the exercise or the beginning of exercise of any
such right, power or remedy shall not exhaust the same or be construed to be a
waiver of the right to exercise at the same time or thereafter the same or any
other right, power or remedy. No delay or omission by Lessor in the exercise of
any right, power or remedy shall restrict Lessor from exercising the same or any
other right, power or remedy thereafter nor be construed to be a waiver of any
Event of Default or to be an acquiescence therein. No express or implied waiver
by Lessor of any Event of Default shall in any way be, or be construed to be, a
waiver of any future or subsequent Event of Default.
Section 18. Purchase by Lessee.
------------------
(a) Unless a Default, Event of Default, Casualty Occurrence or
Constructive Total Loss shall have occurred and be continuing, Lessee shall have
the right, upon at least 30 and not more than 60 days' irrevocable prior written
notice to Lessor, to purchase at the Purchase Price all of the Leased Property
---
upon the fifth anniversary date of the Lease Commencement Date.
(b) Unless a Default, Event of Default, Casualty Occurrence or
Constructive Total Loss shall have occurred and be continuing, Lessee shall have
the obligation, upon at least 30 and not more than 60 days' irrevocable prior
written notice from Lessor, to purchase at the Purchase Price all of the Leased
---
Property upon the seventh anniversary of the Lease Commencement Date.
(c) Unless a Default, Event of Default, Casualty Occurrence or
Constructive Total Loss shall have occurred, Lessee shall have the right, upon
at least 30 and not more than 60 days' irrevocable prior written notice to
Lessor, to purchase for $34,300,000, or such increased amount as adjusted
pursuant to this Lease, all of the Leased Property upon the expiration of the
---
Basic Term.
(d) Lessee shall pay the amount due under (a), (b) or (c) above, to the
Lessor on the date fixed for such purchase, and Lessee shall simultaneously pay
to Lessor all Rent and all other amounts, if any, due or accrued through such
purchase date, whereupon Lessor shall transfer Lessor's right, title and
interest in and to the property constituting the Leased Property, free and clear
of all Liens (except for Permitted Liens), but otherwise without representation,
recourse or warranty and the Term shall end.
Section 19. Inspection; Right to Enter Premises of the Lessee.
-------------------------------------------------
The Lessor, or its respective authorized representatives may (but without
any obligation to do so) (i) enter upon the Leased Property or any premises of
the Lessee at reasonable times upon reasonable advance notice in order to
inspect the Leased Property (subject to the availability thereof for inspection)
and to inspect, audit and make copies of all documents and instruments in the
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<PAGE>
possession of the Lessee that are reasonably necessary or appropriate for the
Lessor or such authorized representatives to determine the truth and accuracy of
any schedule, annex, exhibit or representation delivered or made hereunder, or
compliance by the Lessee with any of the agreements herein contained, and (ii)
discuss the condition and performance of the Leased Property with the
responsible officers of the Lessor. Such inspections of the Leased Property
located in the Gulf of Mexico shall be subject to Lessee's reasonable discretion
as operator to bar access to the Units of Leased Property for safety reasons.
Such inspections of Leased Property located in the Gulf of Mexico shall be
performed under Lessee's supervision as operator.
Section 20. Right to Perform the Lessee's Covenants.
---------------------------------------
Subject to Section 13 hereof, if the Lessee shall fail to make any payment
or perform any act required to be made or performed by it hereunder, the Lessor,
upon notice to or demand upon the Lessee but without waiving or releasing any
obligation or default, may (but shall be under no obligation to) at any time
thereafter make such payment or perform such act (other than entering upon the
Leased Property) for the account and at the expense of the Lessee as, at the
Lessor's sole discretion, may be necessary or appropriate therefor and, upon the
occurrence and during the continuance of a Triggering Event, may enter upon the
Leased Property for such purpose and take all such action thereon as, at the
Lessor's sole discretion, may be necessary or appropriate therefor. No such
entry shall be deemed an eviction of the Lessee. All sums so paid by the Lessor
and all costs and expenses (including, without limitation, reasonable attorneys'
fees and expenses so incurred) shall be paid by the Lessee to the Lessor on
demand as Additional Rent.
Section 21. Participation by Co-Lessees or Sublessees.
-----------------------------------------
(a) Except as otherwise permitted in this Section 21 or in the
Declaration, the Lessee may not assign its rights or obligations under this
Lease without the prior consent of the Lessor. The Lessor has granted a Lien on
this Lease to its Funding Sources to secure the obligation of the Lessor under
the Funding Agreement.
(b) The Lessor and the Lessee may from time to time, so long as no Default
or Event of Default shall have occurred and be continuing, enter into
documentation amending this Lease and, as necessary, the Operative Documents, to
evidence the undertaking of a Person (a "Co-Lessee") to be responsible for
certain obligations of the Lessee and the attendant reduction in the obligations
of the Lessee hereunder, subject in every case to the prior written approval of
the Lessor acting in its sole and unfettered discretion in approving said Co-
Lessee and the documentation amending this Lease and the Operative Documents, it
being understood that the Lessor may for any reason whatsoever elect not to
grant such approval, in which case this Lease shall not be amended.
(c) The Lessee may from time to time with the written consent of Lessor,
so long as no Default or Event of Default shall have occurred and be continuing,
enter into a sublease and such other documentation as may be necessary with one
or more Persons (each a "Sublessee"). In any event, any documentation executed
by the Lessee in connection with the subletting of the Leased Property (i) shall
expressly state that such sublease is subject and subordinate to the terms of
this Lease and the Security Instruments and (ii) shall not provide for a
sublease term ending after the then current Stated Lease Termination Date. Upon
request of the Lessor, the Lessee will furnish to the Lessor copies of all
subleases and related documentation entered into by the Lessee from time to
time. No sublease permitted by the terms hereof will reduce in any respect the
obligations of the
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<PAGE>
Lessee hereunder, it being the intent of the Lessee and the Lessor that the
Lessee be and remain directly and primarily liable as a principal for its
obligations hereunder. Any sublease made otherwise than as expressly permitted
by this Section 21(c) shall be null and void and of no force or effect.
Section 22. Notices.
-------
All notices, demands, instructions and other communications required or
permitted hereunder to be given to or made upon any party to this Lease shall be
effective (i) when received in writing, by prepaid telex or by telecopy, (ii)
when personally delivered or otherwise actually received, or (iii) five days
after the same shall have been deposited in the United States mail, registered
or certified, postage prepaid, addressed as follows:
To Lessee: New Enserch Exploration, Inc.
1817 Wood Street
Dallas, Texas 75201
Attention: Treasurer
Telecopy: (214) 573-3351
To the Lessor: Enserch Exploration, Inc.
1817 Wood Street
Dallas, Texas 75201
Attention: Controller
Telecopy: (214) 573-3351
or in each case at such other address as the party concerned may designate by
notice duly given in accordance with this Section 22.
Section 23. Amendments and Waivers.
----------------------
The provisions of this Lease may from time to time be amended, modified or
waived only if such amendment, modification or waiver is in writing and
consented to by the Lessee and the Lessor and, if applicable, in accordance with
Section 21.
Section 24. Severability.
------------
Any provision of this Lease which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
Section 25. INTENTIONALLY OMITTED.
Section 26. True Lease.
----------
This Lease is an agreement of lease and does not convey to Lessee any
right, title or interest in the Leased Property except as a lessee.
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<PAGE>
Section 27. No Merger.
---------
There shall be no merger of this Lease or of the leasehold interest hereby
created with the title to the Leased Property or any portion thereof or interest
therein by reason of the fact that the same Person may acquire or hold directly
or indirectly this Lease or the leasehold interest created hereby, or any
interest in this Lease or in any such leasehold interest, as well as title to
the Leased Property.
Section 28. Miscellaneous.
-------------
(a) The terms and provisions of this Lease supersede all prior agreements,
negotiations, understandings, and discussions, if any, whether oral or written,
between the Lessor and the Lessee with respect to the transactions contemplated
hereby.
(b) Notwithstanding anything to the contrary contained in this Lease, the
execution of this Lease and any other instrument or document executed in
connection herewith shall not impose upon any director, officer or employee of
the Lessee or the Lessor personal liability for the Lessee's and the Lessor's
respective obligations under this Lease or any other instrument or document
executed in connection herewith; provided the foregoing shall not relieve any
such director, officer or employee of personal liability for his or her fraud or
intentional misconduct.
(c) The captions and the Table of Contents in this Lease are for
convenience of reference only and shall not define or limit any of the terms or
provisions hereof.
(d) THIS LEASE SHALL IN ALL RESPECTS BE GOVERNED BY, AND BE CONSTRUED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK EXCEPT TO THE EXTENT
THE LAW OF THE STATE OF LOUISIANA OR FEDERAL LAW IS MANDATORILY APPLICABLE, IN
WHICH CASE THIS LEASE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH SUCH
LAW.
(e) Nothing in this Lease, express or implied, shall give to any Person,
other than the parties hereto and their respective successors and permitted
assigns, any benefit or any legal or equitable right, remedy or claim under this
Lease including, without limitation, under any provision of this Lease regarding
the priority or application of any amounts payable hereunder.
(f) This Lease may be executed in two or more counterparts and by the
different parties on separate counterparts, each of which shall constitute an
original but which, when taken together, shall constitute but one instrument.
(g) THIS WRITTEN LEASE AND THE OTHER OPERATIVE DOCUMENT REPRESENT THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
(h) EACH OF THE LESSEE AND THE LESSOR WAIVES, TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, ANY RIGHT TO A TRIAL BY JURY IN ANY
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<PAGE>
ACTION OR PROCEEDING TO ENFORCE OR TO DEFEND ANY RIGHTS UNDER THIS LEASE OR ANY
RELATED DOCUMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT
DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR
THEREWITH OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS
LEASE OR ANY RELATED DOCUMENT AND AGREES THAT ANY SUCH ACTION OR PROCEEDING
SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
(i) Any amounts owing under this Lease by the Lessee shall bear interest
(to the fullest extent permitted by law) from and including the date due to but
excluding the date of payment thereof at the Post-Default Rate, payable on
demand. Notwithstanding anything to the contrary contained in this Lease or any
of the Operative Documents, the amounts which the Lessee is obliged to pay
pursuant to this Lease and the other Operative Documents, and the amounts which
the Lessor is entitled to receive pursuant to this Lease and the other Operative
Documents, are subject to the limitations set forth in Section 12.15 of the
Funding Agreement.
(j) Time is of the essence in connection with the payment of Rent,
Additional Rent and all other amounts payable hereunder and the performance of
the Lessee's other obligations hereunder.
(k) THIS LEASE IS SUBJECT AND SUBORDINATE TO THE TERMS, OBLIGATIONS,
CONDITIONS AND DEFINITIONS OF THAT CERTAIN MASTER LEASE AGREEMENT, DATED AS OF
SEPTEMBER 30, 1992 BETWEEN STATE STREET BANK AND TRUST COMPANY OF CONNECTICUT,
NATIONAL ASSOCIATION, AS TRUSTEE FOR GARDEN BANKS TRUST, AS THE LESSOR, AND EP
OPERATING COMPANY LIMITED PARTNERSHIP, AS THE LESSEE, AS IT MAY BE AMENDED FROM
TIME TO TIME (THE "MASTER LEASE"), AND THAT CERTAIN SECURITY AGREEMENT, DATED AS
OF SEPTEMBER 30, 1992 AMONG STATE STREET BANK AND TRUST COMPANY OF CONNECTICUT,
NATIONAL ASSOCIATION, AS TRUSTEE AND THE CHASE MANHATTAN BANK, N.A. AS AGENT.
THE LESSEE ACKNOWLEDGES FOR THE BENEFIT OF THE LESSOR AND ITS FUNDING SOURCES
THAT, IN THE EVENT THAT THE MASTER LEASE SHALL BE TERMINATED OR CANCELLED PRIOR
TO THE STATED LEASE TERMINATION DATE AS A RESULT OF A DEFAULT BY THE LESSEE
UNDER THIS LEASE, LESSOR MAY IN ITS DISCRETION, TERMINATE THIS LEASE. THE
LESSEE ACKNOWLEDGES THAT THE LESSOR SHALL BE SUBJECT TO NO OBLIGATION OR
LIABILITY TO THE LESSEE AS A RESULT OF SUCH TERMINATION OR CANCELLATION.
(l) Lessor and Lessee hereby acknowledge that Mobil Producing Texas & New
Mexico Inc. ("Mobil") has an option to participate in the Project pursuant to
that certain Participation Agreement with EP Operating Limited Partnership,
dated June 15, 1994. Notwithstanding any provision of this Lease to the
contrary, Lessor and Lessee hereby agree to cooperate fully in the event that
such option is exercised. Lessor, insofar as Lessor and its Funding Sources are
the owners of the Leased Property, and Lessee, insofar as Lessee has rights
hereunder and is the operator of the Project, hereby ratify and assume the
obligations of EP Operating Limited Partnership pursuant to the Participation
Agreement insofar as such agreement grants to Mobil the right to participate in
the Master Lease upon the approval of Lessor's Funding Sources. Lessor and
Lessee acknowledge that Mobil's participation in the Project may reduce both
Lessor's and Lessee's interests hereunder on an equal basis by up to 40%.
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<PAGE>
Section 29. Survival of Representations, Warranties, Indemnities, Etc.
----------------------------------------------------------
All representations, warranties and indemnities of the parties hereto
provided for in this Lease, including without limitation the obligations of the
Lessee pursuant to Section 3(d) hereof in respect of the Impositions, shall
survive the execution and delivery hereof and any disposition of any interest of
Lessor in the Leased Property and shall be and continue in effect
notwithstanding any investigation by any such parties. The obligations of
Lessee shall survive the expiration or termination of this Lease to the extent
such obligations relate to periods prior to the date of such expiration or
termination.
Section 30. Further Assurances.
------------------
(a) The Lessee, at its expense, shall execute, acknowledge and deliver
from time to time such further counterparts of this Lease or such affidavits,
certificates, certificates of title, bills of sale, financing and continuation
statements, consents and other instruments as may be required by applicable law
or reasonably requested by the Lessor in order to evidence the Lessor's or its
Funding Sources' title to the Units of Leased Property and the Lessor's or its
Funding Sources' interests in this Lease, and shall at the Lessee's expense
cause such documents to be recorded, filed or registered in such places as the
Lessor may request and to be re-recorded, refiled or re-registered in such
places required by applicable law or at such times as may be required by
applicable law in order to maintain and continue in effect the recordation,
filing or registration thereof. Unless an Event of Default shall have occurred
and shall be continuing, the Lessor shall not grant or create any Lien on any
Unit of Leased Property to any Person except Permitted Liens, Liens in favor of
the Funding Sources and Liens pursuant to this Lease, the Security Instruments
and the other Operative Documents.
(b) Lessor and Lessee will promptly, upon reasonable request and at their
sole expense, execute and deliver all such other documents and take such other
action as may be reasonable and necessary to fully effectuate the provisions of
this Lease.
Section 31. Lessee's Representations and Warranties. The Lessee represents
---------------------------------------
and warrants to the Lessor that:
(a) Existence. (i) The Lessee is a corporation duly organized and validly
---------
existing under the laws of the State of Texas; (ii) the Lessee has all
requisite corporate power, and all material governmental licenses,
authorizations, consents and approvals necessary, to own its Property and carry
on its business as now being or as proposed to be conducted and is in material
compliance with all Legal Requirements; (iii) Lessee is qualified to do business
in all jurisdictions in which the nature of the business conducted by it makes
such qualification necessary and where failure to so qualify would result in a
Lessee Material Adverse Change; and (iv) Lessee is in good standing in the
jurisdiction of its organization and each such jurisdiction in which it is
qualified to do business except where the failure to be in good standing would
not result in a Lessee Material Adverse Change.
(b) Financial Condition. (i) The unaudited consolidated balance sheet of
-------------------
the Lessee as of June 30, 1994 and the related consolidated statements of
operations or stockholders' equity and cash flow with the opinion thereon of an
independent certified public accountant are complete and correct and fairly
present in all material respects the consolidated financial condition of the
Lessee
- 32 -
<PAGE>
as at said date and the consolidated results of operations and cash flows for
the fiscal year and six-month period, all in accordance with GAAP.
(ii) On the date hereof the Lessee has no material advances,
investments, liabilities (direct or contingent), liabilities for taxes, unusual
forward or long-term commitments or unrealized or anticipated losses from any
unfavorable commitments, except (y) those referred to or reflected or provided
for in the Financial Statements that the Lessor has received prior to the date
of this Agreement and (z) those permitted by this Agreement.
(iii) Since the date of the Financial Statements, there has occurred
no Lessee Material Adverse Change.
(c) Litigation. Except as disclosed to the Lessor, there are no legal or
----------
arbitral proceedings or any proceedings by or before any Governmental Authority,
now pending or (to the knowledge of the Lessee) threatened against the Lessee
which, if adversely determined, could result in a Lessee Material Adverse
Change.
(d) No Breach. Except as set forth herein, the execution and delivery of
---------
this Agreement and the other Operative Documents, the transactions herein
contemplated and compliance with the terms and provisions hereof will not
conflict with or result in a breach of, or require any consent of any Person not
already obtained, under the bylaws of Lessee, or any applicable Legal
Requirement, or any agreement or instrument to which the Lessee is a party or by
which it is bound or to which it is subject, or constitute a default under any
such agreement or instrument, or result in the creation or imposition of any
Lien (except under the Operative Documents) upon any of the revenues or Property
of the Lessee or the Leased Property pursuant to the terms of any such agreement
or instrument.
(e) Action. The Lessee has all necessary corporate power and authority to
------
execute, deliver and perform its obligations under this Agreement and the other
Operative Documents to which it is a party, and the execution, delivery and
performance by it of this Agreement and the other Operative Documents to which
it is a party have been duly authorized by all necessary corporate action on its
part; and the other Operative Documents to which it is a party have been duly
authorized by all necessary corporate action on its part; and this Agreement and
the other Operative Documents constitute the legal, valid and binding obligation
of each of the parties thereto, enforceable in accordance with their terms,
subject to bankruptcy, insolvency, reorganization, moratorium or similar laws of
general application relating to or affecting creditor's rights and to general
principles of equity.
(f) Approvals. Except as set forth herein, no authorizations, approvals or
---------
consents of, and no filings or registrations with, any Governmental Authority
are necessary for the execution, delivery or performance by the Lessee of this
Agreement and the other Operative Documents to which they respectively are
parties, or for the validity or enforceability thereof.
(g) ERISA. (i) the Lessee and each ERISA Affiliate have complied in all
-----
material respects with ERISA and, where applicable, the Code regarding each
Plan.
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<PAGE>
(ii) No act, omission or transaction has occurred which could result
in imposition on the Lessee or any ERISA Affiliate (whether directly or
indirectly) of (i) either a material civil penalty assessed pursuant to
subsections (c), (i) or (l) of Section 502 of ERISA or a material tax imposed
pursuant to Chapter 43 of Subtitle D of the Code or (ii) breach of fiduciary
duty liability damages under section 409 of ERISA.
(iii) No liability to the PBGC (other than for the payment of current
premiums which are not past due) by the Lessee or any ERISA Affiliate has been
or is expected by the Lessee or any ERISA Affiliate to be incurred with respect
to any Plan.
(iv) Full payment has been made of all amounts which the Lessee or
any ERISA Affiliate is required under the terms of each Plan or applicable law
to have paid to such Plan as of the date hereof, and no accumulated funding
deficiency (as defined in section 302 of ERISA and section 412 of the Code),
whether or not waived, exists with respect to any Benefit Plan.
(v) The actuarial present value of the benefit liabilities under
each Benefit Plan which is subject to Title IV of ERISA does not, as of the end
of each such Benefit Plan's most recently ended plan year, materially exceed the
current value of the assets (computed on a plan termination basis in accordance
with Title IV of ERISA) of such Benefit Plan allocable to such benefit
liabilities. The term "actuarial present value of the benefit liabilities" shall
have the meaning specified in section 4041 of ERISA.
(vi) As of the execution of this Agreement, neither the Lessee nor
any ERISA Affiliate (1) has received any notification that any Multiemployer
Plan is in reorganization or has been terminated, within the meaning of Title IV
of ERISA, or (2) is aware of any reason to expect that any Multiemployer Plan is
to be in reorganization or to be terminated.
(h) No Material Misstatements. No information, exhibit or report furnished
-------------------------
to the Lessor in connection with the negotiation and administration of this
Agreement contains any material misstatement of fact or omits to state a
material fact necessary in order to make the statements contained therein not
misleading.
(i) Investment Company Act. The Lessee is not an "investment company" or a
----------------------
company "controlled" by an "investment company", within the meaning of the
Investment Company Act of 1940, as amended.
(j) Public Utility Holding Company Act. The Lessee is not a "holding
----------------------------------
company," or a "subsidiary company" of a "holding company" or an "affiliate" of
a "holding company" or of a "subsidiary company" of a "holding company," within
the meaning of the Public Utility Holding Company Act of 1935, as amended.
(k) Articles of Incorporation. The Articles of Incorporation of Lessee
-------------------------
have not been terminated, and are in full force and effect as of the date
hereof and no default has occurred and is in continuance thereunder.
(l) Location of Business and Offices. The principal place of business and
--------------------------------
chief executive offices of the Lessee are located at the address set forth
herein.
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<PAGE>
(m) Regulatory Matters. The Lessee has not violated any provisions of any
------------------
Legal Requirement which would result in a Lessee Material Adverse Change, and
the Lessee, except as provided herein, made all necessary filings, certificate
applications, report filings, and any other filings or certifications, and have
received all necessary regulatory authorizations required under said laws and
regulations with respect to all of their respective operations and Properties so
as not to result in a Lessee Material Adverse Change. Said material filings,
certificate applications, report filings, and other filings and certifications
contain no untrue statements of material facts nor do they omit any statements
of material facts necessary in said filings.
(n) Environmental Matters. Except as disclosed herein:
---------------------
(i) Neither any Property of the Lessee nor the Leased Property nor
the operations conducted thereon violate any Environmental Laws or any
Legal Requirement of any Governmental Authority with respect to
Environmental Laws which violation would result in a Lessee Material
Adverse Change.
(ii) Without limitation of clause (i) above, no Property of the
Lessee nor the Leased Property nor the operations currently conducted
thereon or by any prior owner or operator of such Property or the Leased
Property or operation, are in violation of or subject to any existing,
pending or threatened action, suit, investigation, inquiry or proceeding by
or before any Governmental Authority or to any on-site or off-site remedial
obligations under Environmental Laws which would result in a Lessee
Material Adverse Change.
(iii) All Permits or similar authorizations, if any, required to be
obtained or filed in connection with the operation or use of any Property
of the Lessee or the Leased Property have been duly obtained or filed, and
the Lessee has been, is now, and expects to continue to be in compliance
with the terms and conditions of all such Permits and similar
authorizations so as not to result in a Lessee Material Adverse Change.
(iv) All hazardous substances or solid waste generated at any and all
Property of the Lessee and the Leased Property have at all times been
transported, treated and disposed of in compliance with Environmental Laws
except where failure to comply would not result in a Lessee Material
Adverse Change.
(v) There is no known environmental condition which would materially
adversely affect the ability of the Lessee to conduct its business as it is
currently conducted and to meet its financial obligations, and no
environmental conditions exist with respect to any of its Properties which
would result in a Lessee Material Adverse Change; and
(vi) The Lessee has no contingent liability in connection with any
release or threatened release of any hazardous substance or solid waste
into the environment which would result in a Lessee Material Adverse
Change.
(o) Project Plan. The Project Plan has been prepared in good faith on the
------------
basis of reasonable assumptions and accurately includes all costs currently
anticipated to be incurred in connection with achieving Completion of the
Project. The Project Plan sets forth the Lessee's good faith estimation of the
schedule for achieving Completion of the Project.
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<PAGE>
(p) Leased Tracts. As of the date of execution of this Agreement, the
-------------
Lessee owns legal and beneficial title to 100% of the record title interest in
and to the Leased Tracts, free and clear of all Liens except Permitted Liens and
except as otherwise identified herein.
(q) Operating Lease Obligations. On the date of the execution of this
---------------------------
Agreement, Lessee has no Operating Lease Obligations except as identified
herein.
Section 32. Affirmative Covenants.
---------------------
The Lessee agrees that during the term of this Agreement:
(a) Financial Statements and Reports. The Lessee shall deliver or cause
---------------------------------
to be delivered:
(i) To the Lessor, as soon as available and in any event within 90
days after the end of each fiscal year of the Lessee (if applicable),
audited consolidated statements of operations, partners' or stockholders'
equity and cash flow statements of the Lessee (if available), and the
related consolidated audited balance sheet as at the end of such year,
setting forth in each case in comparative form the corresponding figures
for the preceding fiscal year, and accompanied by an opinion thereon of
independent certified public accountants of recognized national standing,
which opinion shall state that said financial statements fairly present the
consolidated financial condition and consolidated results of operations and
cash flows of the Lessee (if such financial statements are available), as
at the end of, and for, such fiscal year and a certificate of such
accountants stating that, in making the examination necessary for their
opinion, they obtained no knowledge, except as specifically stated, of any
Default.
To the Lessor, as soon as available and in any event within 45 days
after the end of each of the first three fiscal quarters of each fiscal
year of the Lessor, consolidated statements of operations and of
stockholders' equity of the Lessor (if available) for such period and for
the period from the beginning of the fiscal year to the end of such period,
the related consolidated balance sheet as of the end of such period,
setting forth in each case in comparative form the corresponding figures to
the extent available for the corresponding period in the preceding fiscal
year, accompanied by a certificate of the chief financial officer or chief
accounting officer of the Lessor which certificate shall state that said
financial statements fairly present the consolidated financial condition
and consolidated results of operations and cash flows of the Lessor (if
such financial statements are available) , in accordance with GAAP as at
the end of, and for, such period (subject to normal year-end audit
adjustments).
(ii) To the Lessor, promptly upon there becoming available, copies of
all registration statements, proxy statements and regular periodic reports,
if any, which the Lessee shall have filed with the Securities and Exchange
Commission (or any governmental agency substituted therefor) or any
national securities exchange.
(iii) To the Lessor, promptly after the Lessee knows or has reason to
know of any event or condition having a Lessee Material Adverse Change or
that any Default has occurred, a notice of such event, condition or
Default, describing the same in reasonable detail.
- 36 -
<PAGE>
(iv) To the Lessor, at the time it furnishes each set of financial
statements pursuant to clause (a) above, a compliance certificate of the
chief financial officer or chief accounting officer of the Lessee
certifying as to the truth and accuracy of such statement.
(v) To the Lessor, promptly upon obtaining the same, copies of any
environmental assessment or other study undertaken with regard to the
Project or any portion of the Leased Property.
(vi) To the Lessor, within 10 Business Days after the end of each
Quarterly Date a Progress Report through the period ending on each
Quarterly Date and dated as of such Quarterly Date.
(vii) To the Lessor from time to time such other reasonable
information regarding the business, operations, Property, affairs or
financial conditions of the Lessee, including, without limitation, the
acquisition, development, construction and installation of the Project, as
the Lessor may reasonably request.
(b) Litigation. The Lessee shall promptly give to the Lessor notice of
----------
all legal or arbitral proceedings, and of all proceedings before any
governmental or regulatory authority or agency, affecting the Lessee except
proceedings which, if adversely determined, would not result in a Material
Adverse Change.
(c) Existence, Etc. The Lessee shall preserve and maintain its corporate
---------------
existence; and shall preserve and maintain all of its material rights,
privileges and franchises and comply with the requirements of all applicable
Legal Requirements if failure to comply with such requirements would result in a
Lessee Material Adverse Change; and the Lessee shall pay and discharge all
Impositions on the Lessee and the Leased Property prior to the date on which
penalties attach thereto, except for any such Imposition which is being
contested in good faith in accordance with the Lease.
(d) Environmental Covenant. The Lessee shall promptly notify the Lessor
----------------------
in writing of any existing, pending or threatened action, investigation or
inquiry by any Governmental Authority concerning the Lessee in connection with
any Environmental Laws involving the Leased Property which could result in a
Material Adverse Change.
(e) Further Assurances. The Lessee will cure promptly any defects in the
------------------
execution and delivery of the Operative Documents, including this Agreement.
The Lessee at its expense will promptly execute and deliver to the Lessor upon
request all such other and further documents, agreements and instruments (or
cause the other Partners to take such action) in compliance with or
accomplishment of the covenants and agreements of the Lessee in this Agreement.
(f) Performance of Obligations. The Lessee will pay and otherwise do and
--------------------------
perform every act and discharge all of the obligations required to be performed
and discharged by the Lessee, as applicable, under this Lease Agreement.
Section 33. Negative Covenants. The Lessee agrees that for the term of this
------------------
Agreement:
- 37 -
<PAGE>
(a) Nature of Business. The Lessee will not make any material change in
-------------------
the character of its business as carried on at the date hereof.
(b) Mergers, Etc. The Lessee will not merge or consolidate with, or
-------------
sell, assign, lease or otherwise dispose of (whether in one transaction or in a
series of transactions) all or substantially all of its Properties (whether now
owned or hereafter acquired) to any Person, except that, any entity may
consolidate with or merge into the Lessee if the Lessee shall be the surviving
Person and if, immediately after giving effect to such transaction, (a) Enserch
Corporation shall continue to own, directly or indirectly, the majority of the
issued and outstanding common stock in the Lessee, (b) the Lessee shall have
assets the fair market value of which exceed the amount of its liabilities
including contingent liabilities and (c) no condition or event shall exist which
constitutes, or upon consummation of such transaction would constitute, an Event
of Default or Default.
(c) ERISA Compliance. The Lessee will not at any time:
----------------
(i) Engage in, or permit any ERISA Affiliate to engage in, any
transaction in connection with which Special General Partner, the Lessee or
any ERISA Affiliate could be subjected to either a civil penalty assessed
pursuant to section 502(c), (i) or (l) of ERISA or a tax imposed by Chapter
43 of Subtitle D of the Code;
(ii) Terminate, or permit any ERISA Affiliate to terminate, any
Benefit Plan other than pursuant to a standard termination (within the
meaning of Section 4041 of ERISA);
(iii) Fail to make, or permit any ERISA Affiliate to fail to make,
full payment when due of all amounts which, under the provisions of any
Plan, agreement relating thereto or applicable law, the Lessee or any ERISA
Affiliate is required to pay as contributions thereto;
(iv) Permit to exist, or allow any ERISA Affiliate to permit to
exist, any accumulated funding deficiency within the meaning of Section 302
of ERISA or section 412 of the Code, whether or not waived, with respect to
any Benefit Plan;
(v) Permit, or allow any ERISA Affiliate to permit, the occurrence
of any ERISA Event with respect to a Benefit Plan for which there is an
Insufficiency;
(vi) Incur, or permit any ERISA Affiliate to incur, a liability
under sections 4062, 4063 or 4064 of ERISA;
(vii) Incur, or permit any ERISA Affiliate to incur, a Withdrawal
Liability to a Multiemployer Plan; or
(viii) Incur, or permit any ERISA Affiliate to incur, an increase in
the aggregate annual contributions to a Multiemployer Plan on account of
the reorganization or termination of such Multiemployer Plan;
provided, however, that the transactions, events and occurrences described
in clauses (i), (v), (vi), (vii) and (viii) of this Section 33(c) shall be
permitted so long as such transactions,
- 38 -
<PAGE>
events and occurrences (individually and in the aggregate) will not result
in a Material Adverse Change.
(d) Environmental Matters. The Lessee shall not cause or permit any of
----------------------
its Property or the Leased Property to be in violation of, or do anything or
permit anything to be done which would subject any of its Property or the Leased
Property to any remedial obligations under any Environmental Laws, assuming
disclosure to the applicable Governmental Authority of all relevant facts,
conditions and circumstances, if any, pertaining to such Property or the Leased
Property where such violations or remedial obligations would result in a
Material Adverse Change. The Lessee shall not allow use of any of its Property
or the Leased Property in a manner which will result in (i) violation of any
order or requirement of any Governmental Authority or any Environmental Laws,
(ii) the disposal or other release of any solid waste, petroleum, pollutant, or
contaminant except in compliance with Environmental Laws, (iii) a release of a
hazardous substance in a quantity equal to or exceeding the quantity which
requires reporting pursuant to Section 103 of CERCLA, or (iv) the release of any
hazardous substance so as to pose an imminent and substantial endangerment to
public health or welfare or the environment, in the case of any Property of the
Lessee, which would result in a Material Adverse Change, and in the case of the
Leased Property.
(e) Project Plan. The Lessee shall not amend or revise the Project Plan
-------------
in any manner which would materially and adversely affect the operation, design
or capacity of the Project without the prior written consent of the Lessor as
advised by the Technical Consultant. The Lessee shall not under any
circumstance undertake to develop or otherwise initiate the production of
hydrocarbons from the Leased Tracts except by means of the Project in accordance
with the Project Plan.
Section 34. Lessor's Representations and Warranties. The Lessor represents
---------------------------------------
and warrants to the Lessee that:
(a) Existence. (i) The Lessor is a corporation duly organized and validly
---------
existing under the laws of the State of Texas; (ii) the Lessor has all
requisite corporate power, and all material governmental licenses,
authorizations, consents and approvals necessary, to own its Property and carry
on its business as now being or as proposed to be conducted and is in material
compliance with all Legal Requirements; (iii) Lessor is qualified to do business
in all jurisdictions in which the nature of the business conducted by it makes
such qualification necessary and where failure to so qualify would result in a
Material Adverse Change; and (iv) Lessor is in good standing in the jurisdiction
of its organization and each such jurisdiction in which it is qualified to do
business except where the failure to be in good standing would not result in a
Lessor Material Adverse Change.
(b) Litigation. Except as disclosed to the Lessee, there are no legal or
----------
arbitral proceedings or any proceedings by or before any Governmental Authority,
now pending or (to the knowledge of the Lessor) threatened against the Lessor
which, if adversely determined, could result in a Lessor Material Adverse
Change.
(c) No Breach. Except as set forth herein, the execution and delivery of
---------
this Agreement and the other Operative Documents, the transactions herein
contemplated and compliance with the terms and provisions hereof will not
conflict with or result in a breach of, or require any consent of any Person not
already obtained, under the bylaws of Lessor, or any applicable Legal
Requirement, or any agreement or instrument to which the Lessor is a party or by
which it is bound or to which it is subject, or constitute a default under any
such agreement or instrument.
- 39 -
<PAGE>
(d) Action. The Lessor has all necessary corporate power and authority to
------
execute, deliver and perform its obligations under this Agreement and the other
Operative Documents to which it is a party, and the execution, delivery and
performance by it of this Agreement and the other Operative Documents to which
it is a party have been duly authorized by all necessary corporate action on its
part; and this Agreement and the other Operative Documents constitute the
legal, valid and binding obligation of each of the parties thereto, enforceable
in accordance with their terms, subject to bankruptcy, insolvency,
reorganization, moratorium or similar laws of general application relating to or
affecting creditor's rights and to general principles of equity.
(e) Approvals. Except as set forth herein, no authorizations, approvals
---------
or consents of, and no filings or registrations with, any Governmental Authority
are necessary for the execution, delivery or performance by the Lessor of this
Agreement and the other Operative Documents to which they respectively are
parties, or for the validity or enforceability thereof.
(f) No Material Misstatements. No information, exhibit or report furnished
-------------------------
to the Lessee in connection with the negotiation and administration of this
Agreement contains any material misstatement of fact or omits to state a
material fact necessary in order to make the statements contained therein not
misleading.
(g) Regulatory Matters. The Lessor has not violated any provisions of any
------------------
Legal Requirement which would result in a Lessor Material Adverse Change, and
the Lessor, except as provided herein, made all necessary filings, certificate
applications, report filings, and any other filings or certifications, and have
received all necessary regulatory authorizations required under said laws and
regulations with respect to all of their respective operations and Properties so
as not to result in a Material Adverse Change. Said material filings,
certificate applications, report filings, and other filings and certifications
contain no untrue statements of material facts nor do they omit any statements
of material facts necessary in said filings.
Section 35. Application of Certain Payments.
-------------------------------
(a) Application of Payments Not Relating to a Casualty Occurrence.
-------------------------------------------------------------
Payments received at any time by Lessor or Lessee pursuant to Section 11(b) or
from any Governmental Authority, or other Person other than an insurer with
respect to any destruction, damage, loss, condemnation, confiscation, theft or
seizure of or requisition of title to the Leased Property or any part thereof
during the Term not constituting a Casualty Occurrence or with respect to any
and all indemnification rights and warranties assigned pursuant to Section 11(b)
shall be applied to pay or to reimburse Lessee for repairs to or restoration or
replacement of property in respect of which such payment was received and, after
completion of such repairs, restoration or replacement, the balance, if any, of
such payments shall be divided between Lessor and Lessee as their interests may
appear.
(b) Application of Certain Taking Payments. Notwithstanding the provisions
--------------------------------------
of Section 35(a), payments received at any time by Lessor or Lessee from any
Governmental Authority as a result of the taking of the use of the Leased
Property or any part thereof during the Term not constituting a Constructive
Total Loss shall be applied in payment of repairs to or restoration or
replacement of property in accordance with Section 7 or 9, as applicable (or to
reimburse Lessee therefor), and any balance remaining after Lessee shall be in
compliance with Section 7 or 9, as applicable, shall be paid to or retained by
Lessee.
- 40 -
<PAGE>
INTENTIONALLY LEFT BLANK
-41-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Lease to be executed by
their respective officers thereunto duly authorized as of the date first above
written.
LESSEE:
NEW ENSERCH EXPLORATION, INC.
a Texas Corporation
WITNESS:
- -----------------------------
By: -----------------------------
Name:
Title:
- -----------------------------
LESSOR:
ENSERCH EXPLORATION, INC.,
a Delaware corporation
WITNESS:
- -----------------------------
By:
-----------------------------
Name:
Title:
- -----------------------------
-42-
<PAGE>
SCHEDULE 1
----------
REQUIREMENTS FOR COMPLETION
Completion shall require that all of the major components have been designed,
constructed, installed and are capable of performing according to the design and
performance requirements of the Project Plan. In addition, all test results
will be subject to the acceptance and approval of the relevant Governmental
Authority which has jurisdiction over such tests. Completion shall be met upon
satisfaction of: (1) all of the following tests for each of the main components
of the Project; (2) the overall system requirements and (3) the additional
conditions precedent to Completion.
1. Each component should perform according to design and performance criteria
of the Project Plan by submittal and evidence of the following, all of
which shall be reviewed by and be acceptable to the Technical Consultant.
Floating Production Facility ("FPF") - The Lessee will provide office space
to the Technical Consultant in the Lessee's Project office where items (1),
(2) (3) and (5) can be reviewed.
.(1) Detailed Engineering and Design reports of the FPF and mooring system
including Model and Wind Tunnel Tests.
.(2) Copies of all certificates and third party inspections of equipment.
.(3) Design, fabrication, and installation Certified Verification Authority
(CVA) reports.
.(4) Demonstration of mooring system rig move ability to move from one end
of the template to the other extreme end. This will be done when FPF
is installed over the template.
.(5) Copies of all completed and approved commissioning tests required by
regulatory and statutory authorities.
.(6) Successful drilling of one template well drilled simultaneous to
production. To be done after completion of the existing pre-drilled
wells that the template will be installed over.
Template and Well Control System - Items (1), (3) and (4) to be
available for review in the Lessee's Project office.
.(1) Detailed Engineering and Design reports of the template and subsea
equipment.
.(2) Full land testing of the template to demonstrate fit, function and
load (pressure) of all components. Technical Consultant to be advised
of Factory Acceptance Test's and Systems Integration Test's dates and
locations.
.(3) Design, fabrication and installation CVA reports.
.(4) Copies of all completed and approved commissioning tests required by
regulatory and statutory authorities.
<PAGE>
.(5) Successful tie-in and production from one template well.
Production Riser - Items (1) - (4) to be available for review in the
Lessee's Project office.
.(1) Detailed Engineering and Design reports.
.(2) Design, fabrication and installation CVA reports.
.(3) Copies of all certificates and third party inspections of equipment.
.(4) Copies of all completed and approved commissioning test reports
required by regulatory and statutory authorities.
Pipelines - Items (1) - (4) to be available for review in the Lessee's
Project office.
.(1) Detailed Engineering and Design reports.
.(2) Design, fabrication and installation CVA reports.
.(3) Copies of all certificates and third party inspections of equipment.
.(4) Copies of all completed and approved commissioning test reports
required by regulatory and statutory authorities.
Shallow Water Facilities - Items (1) - (4) to be available for review
in the Lessee's Project office.
.(1) Detailed Engineering and Design reports.
.(2) Design, fabrication and installation CVA reports.
.(3) Copies of all certificates and third party inspections of equipment.
.(4) Copies of all completed and approved commissioning test reports
required by regulatory and statutory authorities.
2. Overall System
The project must deliver and consummate sale to a third party, gross
production derived from at least two wells located on the Leased Tracts
whose individual production each exceeds two thousand barrels per day of
crude oil and one million cubic feet per day of natural gas for each day of
30 consecutive days and whose total gross production exceeds four thousand
barrels per day of crude oil and three million cubic feet per day of
natural gas for each day of 30 consecutive days.
The project must have rated capacity to deliver to point of sale at least
40 thousand barrels per day of crude oil and at least 120 million cubic
feet per day of natural gas.
<PAGE>
Verification of the overall system requirements shall be satisfactory to
the Technical Consultant.
3. Additional Conditions Precedent to Completion
. The Lessor and its Funding Sources shall have title to all
Leased Property necessary to meet Completion.
. The Note Holders and Certificate Holders shall have a valid,
perfected, first priority Lien in all Leased Property necessary to
meet Completion, subject to Permitted Liens.
. The Lessee shall have obtained, as Agent for the Lessor, all
necessary Permits for the construction and installation of the Leased
Property.
. The Lessee shall have obtained all necessary Permits for the
operation of the Leased Property.
. The Lessee shall supply an updated Schedule 3 to the Master
Lease Agreement showing all Units of Leased Property (whether funded
under the Funding Agreement or with the Lessee's own monies) needed to
satisfy the requirements for Completion.
. The Leased Property shall be in compliance with all Legal
Requirements.
. No Default or Event of Default shall exist.
. No Liens shall exist on any of the Leased Property other than
under the Operative Documents and Permitted Liens.
. No Uncured Deficiencies shall exist.
<PAGE>
SCHEDULE 2A
LESSOR PAYMENT NOTICE
[Date]
For Billing Period Ended
--------------------------
In accordance with the terms of Section 3 of the Lease Agreement, dated as
of November ___, 1994, between Enserch Exploration, Inc. ("Lessor") and New
Enserch Exploration, Inc. ("Lessee"), the following amounts shall be paid by
Lessee to Lessor on the Rental Payment Date:
(1) Rent attributable to the Quarterly Rent Charge
--------------
(2) Rent attributable to the Fixed Charge
Balance/Rental Balance
--------------
(3) Quarterly Expense Charge
--------------
(4) Additional Rent
--------------
Total:
--------------
Attached as Exhibit A is an updated Rent Schedule which reflects a change
in Quarterly Rent Charge, if applicable.
ENSERCH EXPLORATION, INC.
---------------------------------
Name:
Title:
<PAGE>
SCHEDULE 2B
RENT SCHEDULE
(see attached)
<PAGE>
SCHEDULE 3A
LEASED PROPERTY INVENTORY SCHEDULE AND STIPULATED LOSS VALUE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5) (6) (7)
<S> <C> <C> <C> <C> <C> <C>
Contractor/ Stipulated Loss
Vendor Construction Value (Original
Description of Description of Status Lease Amount Less Leased
Unit of Contract (In Progress/ Unpaid Fixed Property Cost
----- ----
Leased Property Book Value in Progress Completed) Location Charge)
- --------------- ---------- ----------- ---------- -------- -------
TOTAL $
</TABLE>
NEW ENSERCH EXPLORATION, INC.
By:
--------------------------
Name:
Title:
Date:
<PAGE>
SCHEDULE 3B
INDIVIDUAL LEASING RECORD
(for newly acquired Leased Property)
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Description of Unit of
Delivery Date Leased Property Leased Property Cost Stipulated Loss Value
- ------------- --------------- -------------------- ---------------------
<S> <C> <C> <C>
</TABLE>
I certify that the Unit of Leased Property does not constitute "limited use
property." It is reasonable to conclude, as of the Delivery Date, that the use
of the Unit of Leased Property after the end of the Term by Lessor or some other
Person unrelated to Lessor that could lease or purchase the Leased Property from
the Lessor is commercially feasible, that the useful life of such Leased
Property at the end of the Term is at least 10% of the useful life of the Leased
Property determined as of the Delivery Date, and that the Fair Value of such
Unit of Leased Property at the end of the Term determined as of the Delivery
Date is at least 10% of the Leased Property Cost.
Dated this ___ day of __________________, ______.
--------------------------------------
By:
----------------------------
Title:
----------------------------
................................................................................
The undersigned Lessor hereby leases to the undersigned Lessee and Lessee
acknowledges delivery to it in good condition of the Leased Property described
above. The covenants, terms and conditions of this lease are those appearing in
the Lease Agreement between Lessor and Lessee dated as of November __, 1994, as
amended, modified or otherwise supplemented from time to time, which covenants,
terms and conditions are hereby incorporated by reference.
LESSEE: LESSOR:
New Enserch Exploration, Inc. Enserch Exploration, Inc.
- --------------------------------- ------------------------------------
By: By:
-------------------------- ----------------------------
Title: Title:
-------------------------- ----------------------------
<PAGE>
SCHEDULE 4
PURCHASE SCHEDULE TO THE MASTER LEASE
Dated as of:
Lessee hereby certifies that, as agent of Lessor under the Agency
Agreement, it has acquired or will acquire for the account of Agent for the
benefit of Lessor certain Units of Leased Property specified in Annex I annexed
hereto or as provided in the Master Lease Agreement dated as of September 30,
1992 (the "Lease"). Such Units of Leased Property shall be subject to the
Lease. The aggregate Book Value of such Units of Leased Property is
$_____________.
IN WITNESS WHEREOF, Lessee has caused this Certificate to be executed by
one of its Authorized Officers, as of the date specified above.
NEW ENSERCH EXPLORATION, INC.
By:
-----------------------
Name:
Title:
<PAGE>
SCHEDULE 5
REMOVAL SCHEDULE TO THE MASTER LEASE
Dated
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Description Fair Value
of Unit of Other of Unit of Net Cash
Leased Date Book Amounts Leased Residual Sales Removal
Property of Sale Value Due Property Guarantee Proceeds Payment Deficiency
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
Total $
Note:
1. If Lessee elects to remove a Unit of Leased Property by the
purchase of such Unit of Leased Property, the Removal Payment will
equal the Book Value plus Other Amounts Due (per Section 8(b) of
the Master Lease Agreement).
2. If the Lessee elects to remove a Unit of Leased Property by sale to
a Third Party then:
(i) Residual Guarantee shall equal (x) during the primary period,
80% of Book Value and (y) during any Renewal Period, the Book
Value less 20% of the Fair Value of such Unit of Leased
Property calculated in accordance with the Master Lease
Agreement.
(ii) Removal Payment shall equal the lesser of (x) Book Value plus
Other Amounts Due or (y) the sum of Residual Guarantee plus
Net Cash Sales Proceeds in accordance with the Master Lease
Agreement.
(iii) Deficiency shall equal the positive difference, if any,
between (x) the Book Value plus Other Amounts Due less (y)
the Removal Payment.
NEW ENSERCH EXPLORATION, INC.
By:
----------------------------
Name:
<PAGE>
Title:
SCHEDULE 6
REPAIR AND REPLACEMENT SCHEDULE TO THE MASTER LEASE
<TABLE>
<CAPTION>
Description of Unit Aggregate Aggregate Repair or Repaired Description of
of Leased Property Book Value Replacement Cost or Replaced Repairs
- ------------------ ---------- ---------------- ----------- -------
<S> <C> <C> <C> <C>
</TABLE>
TOTALS
I have reviewed the above repairs and replacements and certify that the
Project continues to comply with the requirements of Section 7(b) of the
Master Lease Agreement.
NEW ENSERCH EXPLORATION, INC.
By:
--------------------------
Name:
Title:
<PAGE>
SCHEDULE 7
INSURANCE
---------
The Lessee will provide, or cause to be provided, insurance in accordance with
the terms of this Schedule, which insurance shall be placed and maintained with
Permitted Insurers.
(a) Construction and Installation Phase - From the date the Lessee first bears
the risk of loss with respect to any of the Leased Property until and including
the Completion Date, the Lessee will provide, or cause to be provided, the
following coverages for the Project:
(i) all-risk builders' risk insurance for physical loss or damage to the
Project with limits equal to the sum of the replacement cost thereof plus
expenses following a covered loss related to the reconstruction of the Project
including, but not limited to, Permit fees, attorneys' fees and engineering
and consulting costs, which limits shall be not less than $235,000,000
(provided, however, that such insurance shall provide for replacement cost
coverage whether or not the insured property is replaced and, provided
further, that the insurance shall not have the effect of causing the Lessee or
any of its Affiliates to be deemed a co-insurer), with respect to the Lessee
(and, at the Lessee's option, its Partners) and any of its Affiliates
providing services with respect to the Project and all contractors and
subcontractors in any tier involved in the construction of the Project, such
insurance to include, without limitation, coverage for floods, windstorms,
hurricanes, tornados, earthquakes, collapse, terrorist risks, boiler and
machinery property damage and other perils (including, without limitation,
removal of debris and cleanup) and such insurance to cover onshore fabrication
and prefabrication, transit by any means, installation, existence, hook-up and
commissioning, partial operating, sue and labor claims, additional work claims
and claims resulting from increased repair costs, in each case associated with
the Project, and such insurance to include coverage for all other risks and
occurrences customarily included under all-risk policies available with
respect to Property similar in construction, location, occupancy and operation
to the Project;
(ii) statutory workers' compensation and occupational disease insurance
(including, without limitation, coverage under the U.S. Longshoremen's and
Harbor Workers' Act, the Outercontinental Shelf Lands Act, the Jones Act, the
Death on the High Seas Act and general maritime law, and for "in rem" claims
treated as "in personam" claims and borrowed servant claims) in accordance
with applicable state and federal law, and employer's liability insurance with
limits complying with the underlying requirements of the excess liability
policy required by Paragraph (a)(v) with a limit of not less than $5,000,000,
with respect to (x) the Lessee (and, at the Lessee's option, its Partners) and
any of its Affiliates providing services with respect to the Project and (y)
all other existing and future contractors and subcontractors in any tier
involved in the construction of the Project;
(iii) commercial general liability insurance, including protection and
indemnity coverage, maritime employers' liability coverage, contractual
liability coverage, contingent liability coverage, towage liability coverage,
excess debris removal and clean-up coverage, cross-liabilities coverage,
sudden and accidental seepage and pollution coverage, and other coverage for
hazards customarily insured with respect to Property similar in construction,
location, occupancy and operation to the Project and including completed
operations coverage with respect to all insureds which shall be extended to
provide coverage for a minimum period of one year after written
<PAGE>
acceptance of the Project by the Lessee, with limits complying with the
underlying requirements of the excess liability policy required by Paragraph
(a)(v), with respect to (x) the Lessee (and, at the Lessee's option, its
Partners) and any of its Affiliates providing services with respect to the
Project and (y) all existing and future contractors and subcontractors in any
tier involved in the construction of the Project;
(iv) well control insurance, including coverage for control of any well,
firefighting expenses, unlimited re-drilling expenses, extended re-drilling
expenses, seepage and pollution, clean-up and containment, deliberate well-
firing, underground blowouts, contingent joint venture coverage, care, custody
and control coverage, evacuation expenses and such other coverage for risks
and hazards customarily insured with respect to oil and gas wells similar in
construction, location and operation to the wells related to the Project, such
coverage to include a make well safe endorsement, to be in compliance with the
Outer Continental Shelf Lands Act Amendment 1978, to provide for Oil Pollution
Act buyback rights (limited form), and to have limits of not less than
$100,000,000 for each occurrence.
(v) (x) excess commercial liability insurance (including, without
limitation, completed operations coverage as required by Paragraph (a)(iii)
hereof) in excess of the liability policies described in Paragraph (a) (ii)
and (iii) to bring to limits of not less than $200,000,000 for each occurrence
and in the aggregate per year with respect to the Lessee (and, at the Lessee's
option, its Partners) and any of its Affiliates providing services with
respect to the Project and, if the Lessee elects to effect the coverage
required by this Paragraph under a "blanket" policy, Special General Partner
and its other Affiliates insured thereby, and (y) excess commercial liability
insurance in excess of the liability policies described in Paragraph (a)(ii)
and (iii) with limits of not less than $5,000,000 for each occurrence and in
the aggregate per year with respect to all existing and future contractors and
subcontractors in any tier involved in the construction of the Project;
(vi) marine cargo property insurance covering the shipment of materials
and equipment from overseas with limits equal to 110% of the invoice amount
for such materials or equipment;
(vii) the policy or policies providing the coverages required by
Paragraphs (a)(i), (iii), (iv), (v) and (vi) may include deductible amounts
for the account of the Lessee or its Affiliates, as the case may be, not to
exceed $5,000,000 in the aggregate for all such coverages provided by the
Company, Special General Partner, and any of its Affiliates providing services
with respect the Project.
(b) Operating Phase - At all times subsequent to the Completion Date, the
Lessee shall provide, or cause to be provided, the following property and
liability coverages with respect to the Project:
(i) all-risk property coverage, with limits of coverage at least equal to
the replacement cost (which limits shall be not less than $235,000,000 for the
Project), which insurance coverage may, at the Lessee's option, be included
under any "blanket" policy maintained by Special General Partner so long as
such "blanket" policy provides for all-risk property coverage with respect to
the Project and any other Property covered thereby, with limits of coverage at
least equal to the aggregate replacement cost of the Project and all such
other Property insured thereby (provided, however, that such insurance, in
either case, shall provide for replacement cost coverage whether or not the
insured property is replaced, and, provided further, that the insurance shall
not have the effect of causing the Lessee or any of its Affiliates to be
deemed a co-insurer), with respect to the Lessee (and, at the Lessee's option,
its Partners) and any Affiliate of the Lessee providing services
<PAGE>
with respect to the Project, or if the Lessee elects to effect the coverage
required by this Paragraph under a "blanket" policy, Lessee, Special General
Partner and its Affiliates insured thereby, such insurance to include, without
limitation, coverage for (x) floods, windstorms, hurricanes, tornados,
earthquakes, collapse, terrorist risks, strikes, riots and civil commotions
and other perils (including, without limitation, debris removal and cleanup)
and such insurance to cover equipment separated from the Project, transit of
equipment and consumables to and from shore bases, sue and labor claims,
general average coverage and salvage charges, in each case with respect to the
Project, and such insurance to include coverage for all other risks and
occurrences customarily included under all-risk policies available with
respect to Property similar in construction, location, occupancy and operation
to the Project (or the Project and all other Property insured thereby if all
are covered under a "blanket" policy), and (y) "boiler and machinery" property
damage insurance on a comprehensive basis with respect to damage to the
machinery, plants, equipment or similar apparatus (including production
machinery) included in the Project (or the Project and all other Property
insured thereby if all are covered under a "blanket" policy), from risks and
in amounts normally insured against under machinery policies.
(ii)
(1) statutory workers' compensation and occupational disease insurance
(including, without limitation, coverage under the U.S. Longshoremen's and
Harbor Workers' Act) in accordance with applicable state and federal law, and
employer's liability insurance with limits complying with the underlying
requirements of the excess liability policy described in Paragraph (b)(ii)(4)
with a limit of not less than $5,000,000, with respect to (x) the Lessee (and
at the Lessee's option, its Partners,) and any Affiliate of the Lessee
providing services with respect to the Project, and (y) any contractor or
subcontractor in any tier involved in the operation of, or any construction
with respect to, the Project;
(2) commercial general liability insurance covering operations of the
Lessee, including protection and indemnity coverage, maritime employers'
liability coverage, contractual liability coverage, contingent liability
coverage, towage liability coverage, excess debris removal and clean-up
coverage, cross-liabilities coverage, sudden and accidental seepage and
pollution coverage, and other coverage for hazards customarily insured with
respect to Property similar in construction, location, occupancy and
operation to the Project, with limits complying with the underlying
requirements of the excess liability policy described in Paragraph
(b)(ii)(4), with respect to (x) the Lessee (and at the Lessee's option, its
Partners) and any Affiliate of the Lessee providing services with respect to
the Project, and (y) any contractor or subcontractor in any tier involved in
the operation of, or any construction with respect to, the Project;
(3) well control insurance, including coverage for control of any well,
firefighting expenses, unlimited re-drilling expenses, extended re-drilling
expenses, seepage and pollution, clean-up and containment, deliberate well-
firing, underground blowouts, contingent joint venture coverage, care,
custody and control coverage, evacuation expenses and such other coverage for
risks and hazards customarily insured with respect to oil and gas wells
similar in construction, location and operation to the wells related to the
Project, such coverage to include a make well safe endorsement, to be in
compliance with the Outer Continental Shelf Lands Act Amendment 1978, to
provide for Oil Pollution Act buyback rights (limited form), and to have
limits of not less than $100,000,000 for each occurrence;
(4) (x) excess commercial liability insurance in excess of the liability
policies described in Paragraphs (b)(ii)(1) and (2) to bring to limits of not
less than $200,000,000 for each
<PAGE>
occurrence and in the aggregate per year with respect to the Lessee, Special
General Partner and its Affiliates, (y) excess commercial liability insurance
in excess of the liability policies described in Paragraphs (b)(ii)(1) and
(2) with limits of not less than $5,000,000 for each occurrence and in the
aggregate per year with respect to any contractor or subcontractor in any
tier involved in the operation of, or any construction with respect to, the
Project.
(iii) The policy or policies providing the coverage required by
paragraphs (b)(i) and (b)(ii)(2), (b)(ii)(3) and (b)(ii)(4) may include
deductible amounts for the account of the Lessee or its Affiliates, as the
case may be, not to exceed $5,000,000 in the aggregate for all such coverages.
(c) Insurance Endorsements - Any insurance carried in accordance herewith
shall, except as hereinafter permitted, provide or be endorsed to provide that:
(i) the Lessor and the Agent on behalf of the Lenders, as their interests
may appear, shall be included as additional insureds or named as loss payees
except as respects coverages required by Paragraphs (a)(ii), (a)(iv),
(b)(ii)(1) and (b)(ii)(3), with the understanding that any obligation imposed
upon the insured (including, without limitation, the liability to pay
premiums) under any policy required by this Schedule shall be the obligation
of the Lessee (or, if appropriate, Special General Partner and its Affiliates)
and not that of the Lessor, the Agent or any Lender;
(ii) losses, if any, under any property insurance with respect to the
Project shall be adjusted as provided in Paragraph (d), and insurance proceeds
with respect to losses, if any, in excess of $5,000,000 per occurrence
(including such amount) in respect of the Project shall be paid into the
Restoration Account, and insurance proceeds with respect to other losses in
respect of the Facility shall be payable to the Lessee;
(iii) except with respect to the coverage required by Paragraphs (a)(i),
(a)(ii), (a)(iv), (a)(vi), (b)(i), (b)(ii)(1) and (b)(ii)(3), a cross-
liability and severability of interest endorsement providing that to the
extent the policy is written to cover more than one insured, all terms,
conditions, insuring agreements and endorsements, with the exception of limits
of liability and deductibles, shall operate in the same manner as if there
were a separate policy covering each insured;
(iv) the insurer thereunder waives all rights of subrogation against the
Lessor, the Agent or the Lenders;
(v) such insurance shall be primary without right of contribution of any
other insurance carried by or on behalf of the Lessor, the Agent or the
Lenders with respect to its or their interests in the Project;
(vi) if such insurance is cancelled for any reason whatsoever (including,
without limitation, nonpayment of premium) or any material change is made in
the coverage that affects the interests of the Lessor, the Agent or the
Lenders, such cancellation or change shall not be effective as to the Lessor,
the Agent and the Lenders for 10 days for nonpayment of premiums and otherwise
for 45 days, in both cases after receipt by the Lessor and the Agent (at the
address provided pursuant to Section 22 of the Lease) of written notice sent
by certified mail from such insurer of such cancellation or change; and
(vii) Any insurance carried in accordance with clauses (a)(ii)(y),
(a)(iii)(y) and (a)(v)(y) of this Schedule shall contain essentially the same
endorsements as are set forth in clauses (c)(i), (c)(iv), (c)(v) and (c)(vi)
in favor of the Lessee rather than the Lessor, the Agent and the Lenders.
<PAGE>
(d) Adjustment of Property Losses - The loss, if any, under any property
insurance covering the Project required to be carried by this Schedule shall be
adjusted with the insurance companies or otherwise collected, including, without
limitation, the filing of appropriate proceedings, by the Lessee in consultation
with the Lessor and the Agent.
(e) Reinstatement of Limits - The Lessee shall, or shall cause its insurance
broker to, notify promptly the Lessor and the Agent at any time when the limits
of the excess commercial liability insurance required by Paragraphs (a)(v) or
(b)(ii)(4) shall have been reduced, either by reason of payments of, or the
establishment of reserves for the ultimate payment of, claims which have been
asserted during the term of such insurance, by an aggregate amount in excess of
$10,000,000. At such time, the Lessee shall, if so requested by the Lessor, use
its best efforts to reinstate such insurance so as to comply with the requisite
limits prescribed herein.
(f) Upon request, the Lessee will furnish the Lessor and the Agent copies of
all insurance policies, binders and cover notes or other evidence of such
insurance relating to the Project, as the case may be.
(g) Additional Insurance by the Lenders or the Lessee - Nothing in this
Schedule shall prohibit the Lessor, the Agent, any Lender or the Lessee or any
of its Partners, as their respective interests may appear, from maintaining for
its own account, at the expense of the Person purchasing such insurance,
additional insurance on or with respect to the Project, or any part thereof,
with coverage exceeding that otherwise required under this Schedule, unless such
insurance would conflict with or limit the insurance otherwise required under
this Schedule.
<PAGE>
AGENCY AGREEMENT AND
LIMITED POWER OF ATTORNEY
Dated as of _________________________
Between
ENSERCH EXPLORATION, INC.
and
NEW ENSERCH EXPLORATION, INC.
Project Agent
-------------
<PAGE>
AGENCY AGREEMENT AND LIMITED POWER OF ATTORNEY, dated as of
_________________________ (as it may be amended from time to time, this
"Agreement"), by and between New Enserch Exploration, Inc., a Texas corporation
(the "Company") and Enserch Exploration, Inc., a Delaware corporation (the
"Lessor"). All capitalized terms used in this Agreement and not otherwise
defined herein shall have the meanings assigned thereto in the Lease Agreement
dated as of _________________________ by and between the Company, as Lessee, and
Enserch Exploration, Inc., as Lessor, as the same may be amended from time to
time ("Lease").
R E C I T A L S
---------------
A. The Company has requested that the Lessor acquire and lease to the Company
the Leased Property pursuant to the Lease.
B. The Company has requested that the Lessor appoint the Company as agent to
purchase, refurbish, assemble and install the Leased Property in compliance with
the Project Plan.
NOW, THEREFORE, in consideration of the agreements herein and intending to be
legally bound by this Agreement, the parties hereby agree to be bound as
follows:
1. Appointment of Project Agent. The Lessor hereby appoints the Company as
----------------------------
its agent and Attorney-in-Fact (the Company, in such capacity is herein called
the "Project Agent"), and the Project Agent hereby agrees to act as the Lessor's
agent, to perform certain of the obligations and responsibilities of the Lessor
and to cause the Leased Property to be constructed in accordance with the
Project Plan and to undertake such other powers, duties and obligations as are
set forth herein.
2. Term of Agency Relationship. The agency relationship created herein
---------------------------
between the Project Agent and the Lessor shall commence as of the date hereof
and shall end upon expiration of the Lease Term, as it may be extended from time
to time. The Lessor may, but is not obligated to, revoke the Company's right
and obligation to act as Project Agent hereunder upon a Default by the Lessees
under the Lease.
3. Powers, Duties and Obligations. The Project Agent shall have the following
------------------------------
powers, duties and obligations:
(a) To perform all acts which the Project Agent may deem necessary on
behalf of the Lessor, but only in the name of the Project Agent, in connection
with the Completion of the Project, including, without limitation, the
purchasing, manufacturing, refurbishing, assembling and transporting of the
Leased Property;
(b) To perform or cause to be performed all work in connection with the
Completion of the Project to be done in a good and workmanlike manner and in
compliance with all Legal Requirements, Insurance Requirements, the Project
Plan and the Development Plan;
<PAGE>
(c) To take all actions as it would take as a reasonably prudent operator
in the management and operation of its own properties and to construct the
Project in a manner necessary to meet Completion on or before the Completion
Date.
(d) To pay, or cause to be paid, in accordance with prudent industry
practices all costs and expenses of the Completion of the Project and perform
all obligations of such Completion of the Project, including, without
limitation, the performance of all contracts and other agreements it entered
into on behalf of the Lessor and to preserve the Lessor's rights in any Leased
Property subject to any contract;
(e) To keep the Leased Property free of all Liens except Permitted Liens;
(f) To transfer and hold all of the evidence of ownership of the Leased
Property for the benefit of the Lessor regardless of whether such Leased
Property was purchased with money funded under the Funding Agreement;
(g) To cause all contracts and other agreements entered into by the Project
Agent on behalf of the Lessor to be assignable;
(h) To avoid purchasing Property from or entering into any contract with
Affiliates of the Project Agent in connection with the Project unless upon
fair and reasonable terms that are not less favorable to the Lessor than those
which might be obtained in an arm's-length transaction between unaffiliated
Persons in the same business at the time such terms are agreed upon;
(i) To grant, bargain, sell, convey or contract for the sale or conveyance
of the Leased Property in connection with the Lessee's duties pursuant to the
Lease; and
(j) To contract with all vendors, contractors and suppliers for supplies,
materials and services affecting the Leased Property;
(k) To pay for, exchange or otherwise settle accounts for the acquisition
of supplies, materials or services affecting the Leased Property;
(l) To ask for, demand, collect, recover, and receive all moneys which may
become due and owing by reason of conveyances, whether by deed, contract, Bill
of Sale or other instruments or to pay for, exchange or otherwise settle
accounts for the acquisition of supplies, materials or services affecting the
Leased Property;
(m) To ask for, demand, collect, and recover, each in the name of Lessee,
any and all sums that may be due on account of any damage to any of the Leased
Property; and
(n) To manage correspondence and conduct communications with Federal, state
and local government agencies with regard to matters affecting the Leased
Property, including, but not limited to, the acquisition of all permits,
licenses, rights of way and easement, if any, affecting the Leased Property.
<PAGE>
4. Disclosure. The Development Plan and the Project Plan were developed
----------
solely by the Company or its predecessors. The Project Agent shall act in its
sole discretion in choosing the Leased Property and hiring any contractors and
subcontractors to work on the Leased Property. The Lessor and its Funding
Sources have no liability for the Leased Property and shall be indemnified and
held harmless as provided in the Lease, the Master Lease, the Funding Agreement
and the other Operative Documents.
5. Miscellaneous.
-------------
(a) Assignment. Neither party hereto shall assign or delegate all or any
----------
part of this Agreement or any of its rights hereunder, without the prior
written consent of the other party hereto.
(b) Successors. This Agreement shall be fully binding upon the parties and
----------
their respective successors, assigns and legal representatives.
(c) Notices. Any notice, request, approval, consent, order, instruction,
-------
direction, report or other communication under this Agreement given by either
party to the other party shall be in writing and shall be delivered in the
manner set forth in the Lease.
(d) Time; Non-Waiver. The failure or delay of any party to insist upon
----------------
strict performance of any of the provisions of this Agreement, to exercise any
rights or remedies provided under this Agreement or by law, or to notify the
other party in the event of breach or default under this Agreement, shall not
release or relieve any party from any of its obligations under this Agreement
and shall not be deemed a waiver of any right to insist upon strict
performance of this Agreement or any of the rights or remedies hereunder, nor
shall any purported oral modification or rescission of this Agreement operate
as a wavier of any of the provisions of this Agreement.
(e) Amendments. No change, waiver, amendment or modification of any of the
----------
provisions of this Agreement shall be valid unless set forth in a written
instrument signed by the party to be bound thereby, and consented to in
writing by the Lessor.
(f) Interpretation. All section, subsection and paragraph captions are for
--------------
convenience of reference only and shall not affect the construction of any
provisions hereof. This Agreement is subject to the Master Lease and the
Lease, and if there is a conflict between the terms of this Agreement and the
terms of the Master Lease or the Lease, the terms of the Master Lease or Lease
shall control, as applicable.
(g) Applicable Law. This Agreement and the rights and obligations of the
--------------
parties hereunder shall be interpreted, construed and enforced in all respects
in accordance with the laws of the State of New York.
(h) Further Assurances. The parties hereto agree that they will promptly
------------------
and duly execute and deliver to the other such documents and assurances and
take such further action as the other party may from time to time reasonably
request to carry out more effectively the intent and purpose of this
Agreement, or to establish and protect the rights and remedies created or
intended to be created hereunder in favor of any party.
<PAGE>
(i) Counterparts. This Agreement may be executed in multiple counterparts,
------------
each of which, taken together, shall constitute a single fully executed
original.
(j) Headings and Table of Contents. The table of contents and the headings
------------------------------
of the various paragraphs of this Agreement have been inserted for reference
only and shall not to any extent have the effect of modifying, amending or
changing the expressed terms and provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agency Agreement to be
duly executed by their respective duly authorized officers as of the day and
year first above written.
ENSERCH EXPLORATION, INC.
a Delaware corporation
WITNESSES: By:
------------------------ -----------------------------
------------------------ Gary J. Junco
President
NEW ENSERCH EXPLORATION, INC.
a Texas corporation
WITNESSES: By:
------------------------ ------------------------------
------------------------ Name:
Title:
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
Before me, a notary public in and for the State of Texas, on this day
personally appeared ___________________________, known to me to be the person
whose name is subscribed to the foregoing instrument, and known to me to be the
President of Enserch Exploration, Inc., a corporation, and acknowledged to me
that he executed said instrument for the purposes and consideration therein
expressed, and as the act of said corporation. Given under my hand and seal of
office this ______ day of ___________________, 1994.
-------------------------------------------------------
Notary Public in and for the State of Texas.
My Commission expires:
---------------------------------
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
Before me, a notary public in and for the State of Texas, on this day
personally appeared ___________________________, known to me to be the person
whose name is subscribed to the foregoing instrument, and known to me to be the
President of New Enserch Exploration, Inc., a corporation, and acknowledged to
me that he executed said instrument for the purposes and consideration therein
expressed, and as the act of said corporation. Given under my hand and seal of
office this ______ day of ___________________, 1994.
-------------------------------------------------------
Notary Public in and for the State of Texas.
My Commission expires:
---------------------------------
<PAGE>
EXHIBIT 10.4
GARDEN BANKS 388 - 2
-------------------------------------------
LEASE AGREEMENT
Dated as of
Between
ENSERCH EXPLORATION, INC.,
as the Lessor
and
NEW ENSERCH EXPLORATION, INC.,
as the Lessee
-------------------------------------------
THIS LEASE HAS BEEN MANUALLY
EXECUTED IN COUNTERPARTS NUMBERED
CONSECUTIVELY FROM 1 TO 5. TO THE
EXTENT, IF ANY, THAT THIS LEASE
CONSTITUTES CHATTEL PAPER (AS SUCH
TERM IS DEFINED IN THE UNIFORM
COMMERCIAL CODE AS IN EFFECT IN ANY
APPLICABLE JURISDICTION), NO SECURITY
INTEREST IN THIS LEASE MAY BE CREATED
THROUGH THE TRANSFER OR POSSESSION
OF ANY COUNTERPART OF THIS LEASE
OTHER THAN COUNTERPART NUMBER 1.
This is Counterpart Number ______
<PAGE>
<TABLE>
<CAPTION>
Table of Contents Page
----------------- ----
<S> <C> <C>
Section 1. Certain Defined Terms.................................................... 1
---------------------
Section 2. Lease of Leased Property................................................. 11
------------------------
Section 3. Payments................................................................. 12
--------
Section 4. Agency Agreement......................................................... 15
----------------
Section 5. Leased Property Records.................................................. 15
-----------------------
Section 6. Title to Remain in the Lessor............................................ 15
-----------------------------
Section 7. Maintenance and Replacement of the Leased Property; Operations........... 15
--------------------------------------------------------------
Section 8. Removals Without Replacement............................................. 17
----------------------------
Section 9. Required and Optional Alterations; Title to Alterations.................. 18
-------------------------------------------------------
Section 10. Compliance with Legal Requirements and Insurance Requirements: Related
----------------------------------------------------------------------
Contracts................................................................ 19
---------
Section 11. Condition and Use of Leased Property; Assignment of Warranties, Etc.;
---------------------------------------------------------------------
Quiet Enjoyment.......................................................... 19
---------------
Section 12. Liens.................................................................... 21
-----
Section 13. Permitted Contests....................................................... 21
------------------
Section 14. Insurance, etc........................................................... 22
--------------
Section 15. Surrender of Leased Property............................................. 23
----------------------------
Section 16. Lessee's Renewal Option; Purchase Options of Lessee and Lessor........... 24
--------------------------------------------------------------
Section 17. Events of Default and Remedies........................................... 25
------------------------------
Section 18. INTENTIONALLY OMITTED.................................................... 29
Section 19. Inspection; Right to Enter Premises of the Lessee........................ 29
-------------------------------------------------
Section 20. Right to Perform the Lessee's Covenants.................................. 30
---------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Table of Contents Page
----------------- ----
<S> <C> <C>
Section 21. Participation by Co-Lessees or Sublessees................................ 30
-----------------------------------------
Section 22. Notices.................................................................. 31
-------
Section 23. Amendments and Waivers................................................... 31
----------------------
Section 24. Severability............................................................. 31
------------
Section 25. INTENTIONALLY OMITTED.................................................... 31
Section 26. True Lease............................................................... 31
----------
Section 27. No Merger................................................................ 32
---------
Section 28. Miscellaneous............................................................ 32
-------------
Section 29. Survival of Representations, Warranties, Indemnities, Etc................ 34
---------------------------------------------------------
Section 30. Further Assurances....................................................... 34
------------------
Section 31. Lessee's Representations and Warranties.................................. 34
---------------------------------------
Section 32. Affirmative Covenants.................................................... 38
---------------------
Section 33. Negative Covenants....................................................... 40
------------------
Section 34. Lessor's Representations and Warranties.................................. 42
---------------------------------------
Section 35. Application of Certain Payments.......................................... 43
-------------------------------
</TABLE>
<PAGE>
LEASE AGREEMENT
This Lease Agreement dated as of ________________________ (as the same
may be amended or supplemented from time to time, the "Lease") is between
Enserch Exploration, Inc., a Delaware corporation, ("the Lessor"), and New
Enserch Exploration, Inc., a Texas corporation (together with its successors and
permitted assigns, "the Lessee").
W I T N E S S E T H:
- --- - - - - - - -
WHEREAS, the Lessee has acquired certain interests in the Garden Banks
344, 386, 387 and 388 tracts located offshore of the State of Louisiana in
federal waters on the outer continental shelf in the Gulf of Mexico (the "Leased
Tracts");
WHEREAS, the Lessee has explored the Leased Tracts and determined that
they are capable of producing oil and gas; and
WHEREAS, subject to the terms and conditions of this Lease, the Lessee
desires to lease from the Lessor and the Lessor is willing to acquire and lease
to the Lessee the Leased Property (as hereinafter defined) for the purpose of
developing the Leased Tracts and operating the Leased Property in accordance
with the terms and conditions set forth in this Lease.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Lessor and the Lessee hereby agree as follows:
Section 1. Certain Defined Terms.
---------------------
(a) In this lease, the terms "Lease", "Leased
Tracts", "Lessee" and "Lessor" shall have the meanings indicated above.
(b) As used in this Lease, the following terms shall have the
following meanings (all terms defined in this Lease in the singular to have the
same meanings when used in the plural and vice versa):
"Additional Rent" - as defined in Section 3(b) hereof.
---------------
"Affiliate" - with respect to any Person, any other Person that,
---------
directly or indirectly, through one or more intermediaries, controls, or is
controlled by, or is under common control with such Person. For purposes of the
foregoing definition, "control" means the direct or indirect ownership of more
than 50% of the outstanding capital stock or other equity interests having
ordinary voting power.
"Agency Agreement" - the Agency Agreement between the Lessor and the
----------------
Lessee of even date with this Lease, as the same may be amended or supplemented
from time to time.
"Alterations" - alterations, modifications, additions and
-----------
improvements to the Leased Property, whether Severable or Nonseverable.
<PAGE>
"Authorized Officers" - relative to the Lessee, the officers of New
-------------------
Enserch Exploration, Inc. whose signatures and incumbency shall have been
certified to the Lessor in a certificate certified by the Secretary or Assistant
Secretary of New Enserch Exploration, Inc. in form and substance satisfactory to
the Lessor.
"Base Rate" - as referred to in the Funding Agreement.
---------
"Basic Term" - the period commencing on the Lease Commencement Date
----------
and ending on the date twelve years thereafter, or such shorter period as may
result from earlier termination in accordance with the provisions hereof.
"Billing Period" - each of the periods (i) in the case of the first
--------------
such period, commencing on the Lease Commencement Date and ending on January 15,
1995 and (ii) in the case of each succeeding period, commencing on the first day
following the last day of the immediately preceding Billing Period and ending on
the day which numerically corresponds to the last day of the immediately
preceding Billing Period three (3) months thereafter.
"Business Day" - (a) for all purposes other than as covered by
------------
clause (b) below, any day except Saturday, Sunday and any day which shall be in
Dallas, Texas, Houston, Texas, Boston, Massachusetts, London, England or New
York, New York a legal holiday or a day on which banking institutions are
authorized or required by law or other government action to close, and (b) with
respect to all notices and determinations in connection with, and payments of
rent and interest based on, the Rental Balance, any day which is a Business Day
described in clause (a) above and which is also a day for trading by and between
banks in the London interbank eurodollar market.
"Casualty Occurrence" - any of the following events in respect of
-------------------
any Unit of Leased Property: (i) the total loss of Leased Property, the
Constructive Total Loss of Leased Property, the total loss of use thereof due to
theft, disappearance, destruction, damage beyond repair or rendition of Leased
Property permanently unfit for normal use for any reason whatsoever; (ii) any
damage to Leased Property which results in an insurance settlement with respect
to such Leased Property on the basis of a total loss; or (iii) the permanent
condemnation, confiscation or seizure of, or requisition of title to or use of,
any Leased Property.
"Claims" - any and all liabilities, obligations, losses, damages
------
(including consequential damages), penalties, fines, assessments (whether
criminal or civil), claims (including claims involving liability in tort, strict
or otherwise), actions, injuries, suits, judgments, costs, expenses (including
without limitation, reasonable legal fees and expenses and costs of
investigation), disbursements or demands whatsoever, howsoever arising,
including any costs of the foregoing pertaining to health, safety of the
environment or otherwise.
"Code" - the Internal Revenue Code of 1986, as amended from time
----
to time.
"Co-Lessee" - as defined in Section 21(b).
---------
-2-
<PAGE>
"Completion" - as defined in Schedule 1 hereto.
----------
"Completion Date" - December 31, 1996.
---------------
"Constructive Total Loss" - a permanent taking by eminent domain of
-----------------------
such scope that the untaken portion of Leased Property is insufficient to permit
the restoration of such Leased Property for continued use in the Lessee's
business or that causes the remaining portion of the Leased Property to be
incapable of being restored to a condition that would permit the remaining
portion of the Leased Property (without the portion of the Leased Property taken
by eminent domain) to continue to have the capacity and functional ability to
perform on a continuing basis (subject to normal interruptions in the ordinary
course of business for maintenance, inspection, service, repair and testing) and
in commercial operation, the function for which the Leased Property (as a whole)
was designed as specified in the Project Plan.
"Daily Rent Charge" - for any day (whether or not a Business Day)
-----------------
during the term of this Lease an accrual for such day of all rental of Leased
Property calculated on the Rental Balance at a rate per annum of LIBOR + 1.75%
for the Basic Term.
"Default" - any event which with the giving of notice or the lapse
-------
of time or both would constitute an Event of Default.
"Delivery Date" - for any Unit of Leased Property, the date such
-------------
Unit of Leased Property is delivered to the Lessee under an ILR.
"Development Plan" - the Development Operations Coordination
----------------
Document filed as of May 27, 1992 with the Minerals Management Service, United
States Department of the Interior in the form furnished to the Lessor, as such
document may be amended or supplemented from time to time with the approval of
the Minerals Management Service, United States Department of the Interior.
"Environmental Laws" - as to any Person, any and all laws, statutes,
------------------
ordinances, rules, regulations, orders or determinations of any Governmental
Authority pertaining to health or the environment in effect from time to time in
any and all jurisdictions in which such Person is conducting or at any time has
conducted business, or where any Property of such Person is located now or in
the future, or where any hazardous substances generated or disposed of by such
Person are located now or in the future, including, without limitation, the Oil
Pollution Act of 1990 ("OPA"), the Clean Air Act, as amended, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as
amended, the Federal Water Pollution Control Act, as amended, the Occupational
Safety and Health Act of 1970, as amended, the Resource Conservation and
Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as
amended, the Toxic Substances Control Act, as amended, the Superfund Amendments
and Reauthorization Act of 1986, as amended, and other environmental
conservation or protection laws. The terms "hazardous substance" and "release"
(or "threatened release") have the meanings specified in CERCLA, the terms
"solid waste" and "disposal" (or "disposed") have the meanings specified in RCRA
and the term "oil" has the meaning specified in OPA; provided, however, that (i)
in the event either CERCLA, RCRA or OPA is amended so as to broaden the meaning
of any term
-3-
<PAGE>
defined thereby, such broader meaning shall apply subsequent to the effective
date of such amendment, (ii) to the extent the laws of the state or other
jurisdiction in which any Property of any applicable Person is located establish
a meaning for "hazardous substance," "release," "solid waste" or "disposal"
which is broader than that specified in either CERCLA or RCRA, such broader
meaning shall apply, and (iii) the terms "hazardous substance" and "solid waste"
shall include all oil and gas exploration and production wastes that may present
an endangerment to public health or welfare or the environment, even if such
wastes are specifically exempt from classification as hazardous substances or
solid wastes pursuant to CERCLA, RCRA or OPA or the state analogs to those
statutes.
"Event of Default" - as defined in Section 17 hereof.
----------------
"Fair Market Renewal Term" - as defined in Section 16.
------------------------
"Fair Market Rental Value" - in respect of any property as of any
------------------------
date, the rent price that would be obtained in an arm's-length lease between an
informed and willing lessee and an informed and willing lessor under no
compulsion to lease and neither of which is related to lessor or lessee of the
property in question; and in case of the Leased Property, such value is to be
determined on the basis that the Leased Property has been maintained in
accordance with, and Lessee has complied with, the requirements of this Lease.
"Fair Value of Leased Property" - at the time such value is to be
-----------------------------
determined, whether for a Unit of Leased Property or all Leased Property as the
context hereof may require, either of the following valuation methods as
determined by the Lessor in its sole discretion: (i) the value of the applicable
Unit or Units of Leased Property, whether positive or negative, as determined by
an appraisal using industry standards (using an appraiser, a method of appraisal
and assumptions acceptable to the Lessor and Lessee), the cost of any such
appraisal to be paid by the Lessee; or (ii) the value of a unit or units of
property similar in all material respects to the Unit or Units of Leased
Property being valued as listed in a trade publication acceptable to the Lessor
or Lessee, if available. In the event all Leased Property is being valued, any
appraisal will reflect the value of the Leased Property taken as a whole. The
Fair Value of Leased Property shall be net of any actual or projected expenses
of removal, preparation for sale, storage, transportation, clean-up and any
other actions as may be required by Legal Requirements and Insurance
Requirements.
"Fixed Charge" - the quarterly portion of the Fixed Charge Balance
------------
which applies to the current Billing Period as shown on Schedule 2B.
"Fixed Charge Balance" - an amount as of the Lease Commencement Date
--------------------
of $125,000,000, as adjusted from time to time pursuant to this Lease.
"Funding Agreement" - the Funding Agreement dated as of September
-----------------
30, 1992 herewith among EP Operating Company Limited Partnership, ENSERCH
Corporation, the Trustee, the Chase Manhattan Bank (in its individual capacity
and as agent for the Lenders) and all the Lenders signatory thereto, as the same
may be amended or supplemented from time to time.
-4-
<PAGE>
"Funding Sources" - means the financial institutions and other
---------------
funding sources which have purchased, or may purchase during the Term, the Notes
and Certificates issued pursuant to the Funding Agreement or otherwise provide
capital to the Lessor for the Project.
"GAAP" - generally accepted accounting principles and policies
----
(including principles of consolidation), in effect from time to time,
consistently applied.
"Governmental Authority" - any nation or government, any state or
----------------------
other political subdivision thereof and any Person exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Impositions" - as to any Person: (i) all Taxes, assessments,
-----------
levees, fees, water and sewer rents and charges, inspection fees and other
authorization fees and all other governmental charges, general and special,
ordinary and extraordinary, foreseen and unforeseen, of every character
(including all penalties and interest thereon) which, at any time prior or
subsequent to the date hereof are imposed or levied upon or assessed against or
may be or constitute a Lien upon such Person or such Person's Property, or which
arise in respect of the ownership, operation, occupancy, possession, use, non-
use, condition, leasing or subleasing of such Person's Property; (ii) all
charges, levies, fees, rents or assessments for or in respect of utilities,
communications and other services rendered or used on or about such Person's
Property; and (iii) payments required in lieu of any of the foregoing, but
excluding any penalties or fines imposed on any Lender for violation of any
banking laws or securities laws.
"Individual Leasing Record" or "ILR" - a record with respect to a
------------------------- ---
Unit of Leased Property, prepared by the Lessor, in such form as the Lessee and
the Lessor may agree from time to time, dated as of the Delivery Date and
executed and delivered by the Lessee to the Lessor on the Delivery Date,
updating the Leased Property Inventory Schedule and the Rent Schedule, amending
the purchase price to be paid by Lessee pursuant to Section 16(b) to reflect the
residual value of such additional Leased Property and providing for each Unit of
Leased Property described in the ILR, a full description, the Leased Property
Cost and a Stipulated Loss Value Schedule in the form of either Schedule 3A or
Schedule 3B hereto.
As between the Lessor and the Lessee, the signature of the Lessee on
an Individual Leasing Record shall constitute acknowledgment by the Lessee that
the Leased Property has been inspected by the Lessee and delivered in good
condition, free and clear of all Liens and defects and accepted for lease by the
Lessee as of the Delivery Date and, in the case of Leased Property that was not
first delivered to the Lessor, has been so inspected by the Lessee as agent for
the Lessor and the Lessor's Funding Sources. The Individual Leasing Record shall
contain a short form of lease to be executed by each of the parties reading
substantially as follows:
"The undersigned Lessor hereby leases to the undersigned Lessee and
Lessee acknowledges delivery to it in good condition of the Leased
Property described above. The covenants, terms and conditions of
this lease are those appearing in that certain Garden Banks 388-2
Lease Agreement between Lessor and Lessee, dated as of November __,
1994, as amended, modified or otherwise
-5-
<PAGE>
supplemented from time to time, which covenants, terms and
conditions are hereby incorporated by reference."
Each ILR shall also include a certification that the Unit of Leased
Property does not constitute "limited use property," which shall state that it
is reasonable to conclude, as of the Delivery Date, that the use of the Unit of
Leased Property after the end of the Term by Lessor or some other Person
unrelated to Lessor that could lease or purchase the Leased Property from the
Lessor is commercially feasible, that the useful life of such Leased Property at
the end of the Term will be at least 20% of the useful life of the Leased
Property determined as of the Delivery Date, and that the Fair Value of such
Unit of Leased Property at the end of the Term determined as of the Delivery
Date will be approximately 20% or greater of the Property Cost (determined (i)
without including in such fair value any increase or decrease for inflation or
deflation during the Term and (ii) after subtracting from such fair value any
cost to Lessor for delivery of possession of the Unit of Leased Property to
Lessor at the end of the Term), which certification shall be signed by the
manufacturer, engineer, property manager or the appraiser which determines the
Stipulated Loss Value Schedule for such Unit of Leased Property. The cost of
establishing that the Leased Property does not constitute "limited use property"
shall be paid by the Lessee within five Business Days after Lessor accepts and
executes the ILR with respect to a Unit of Leased Property.
"Insurance Requirements" - all terms of any insurance policy
----------------------
covering or applicable to any Unit of Leased Property and all requirements of
the issuer of any such policy.
"Judgment" - any judgment, decree or order of any court or other
--------
Governmental Authority.
"Lease Commencement Date" - means November ____, 1994.
-----------------------
"Leased Property" - Units of Leased Property that are subject to
---------------
this Lease and identified on Leased Property Inventory Schedules delivered to
the Lessor from time to time, and all accessories, equipment, parts and devices
necessary to achieve Completion affixed or placed on any Unit of Leased
Property, all plans, specifications, warranties and related rights and
operating, maintenance and repair manuals related thereto and all replacements
of any of the above.
"Leased Property Inventory Schedule" - a schedule substantially in
----------------------------------
the form of Schedule 3A hereto, which at the time of delivery shall list all of
the Leased Property subject to this Lease and any outstanding contracts entered
into by the Lessee on behalf of the Lessor to acquire Leased Property. Any
Leased Property Inventory Schedule once delivered to the Lessor shall become a
part of this Lease and shall supersede all previous Leased Property Inventory
Schedules.
"Leased Tracts" - as defined in the recitals hereof.
-------------
"Legal Requirements" - as to any Person, (i) all laws (including,
------------------
without limitation, Environmental Laws), statutes, rules, regulations,
ordinances, orders, directives, codes, Judgments, decrees, injunctions, writs,
determinations, awards, permits, licenses, authorizations, directions,
requirements or decisions of and agreements with or by any
-6-
<PAGE>
Governmental Authority or arising from any restriction of record or otherwise,
now or at any time hereafter in effect, applicable to such Person or any of its
Property or the ownership, construction, operation, mortgaging, occupancy,
possession, use, non-use or condition of such Person's Property; and (ii) all
agreements (including without limitation, all covenants and restrictions)
applicable to such Person or any of its Property, or the ownership,
construction, operation, mortgaging, occupancy, possession, use, non-use or
condition thereof.
"Lessee Purchase Option" - as defined in Section 16.
----------------------
"Lessor Purchase Option" - as defined in Section 16.
----------------------
"Lien" - any mortgage, attachment, lien (including, without
----
limitation, any tax lien or lien arising in connection with any Imposition),
charge, security interest, conditional sale or other title retention agreement
or other encumbrance on, in or with respect to any Property.
"Major Components of the Project" - individually, the offshore oil
-------------------------------
and gas deepwater riser, subsea templates, pipeline and shallow water facility
as described in the Project Plan.
"Master Lease" - as defined in Section 28(k).
------------
"Material Adverse Change" - any material adverse change in the
-----------------------
business, financial position or results of operations of the affected party,
taken as a whole, which makes it unable to perform its obligations under this
Agreement and the other Operative Documents.
"Nonseverable" - with respect to any Alteration, any Alteration that
------------
is not a Severable Alteration.
"Permit" - any approval, consent, waiver, exemption, variance,
------
franchise, order, permit, authorization, right or license of or from any
Governmental Authority.
"Permitted Liens" - with respect to the Leased Property, but only to
---------------
the extent applicable thereto, any of the following:
(i) rights reserved to or vested in any public authority by the
terms of any right, power, franchise, grant, license, permit or
provision of law affecting the Leased Property to (a) terminate
such right, power, franchise, grant, license, permit or
provision of law, provided that such termination does not have a
material adverse effect on the Leased Property or any portion
thereof or (b) purchase, condemn, appropriate or recapture, or
designate a purchaser of, the Leased Property;
(ii) any Liens thereon for Impositions and any Liens of mechanics,
materialmen and laborers and any Liens arising under the
operating agreement covering the Leased Tracts for work or
services performed or materials furnished in connection with the
Leased Property which (a) are not due and payable, or (b) are
being contested in good faith pursuant to Section 13 hereof;
-7-
<PAGE>
(iii) rights reserved to or vested in any municipality or public
authority to control or regulate the use of the Leased Property
or to use the Leased Property in any manner;
(iv) this Lease, and the other Operative Documents and any financing
statements filed in connection therewith.
(v) overriding royalty interest on the Leased Tracts consistent with
the requirements in Section 12(b) that the net revenue interest
of the Lessee in the Leased Tracts, shall never be less than 70%
of the Lessee's working interest.
"Person" - any natural person, corporation, firm, association,
------
government, governmental agency or any other entity, whether acting in an
individual, fiduciary or other capacity.
"Post-Default Rate" - Base Rate plus 1%.
-----------------
"Production Facilities" - collectively, the offshore oil and gas
---------------------
deepwater riser, subsea templates, pipeline and shallow water facility as
described in the Project Plan which is to be included in the Leased Property.
"Project" - the Production Facilities including, without limitation,
-------
each Major Component of the Project pursuant to the Funding Agreement, in each
case to be comprised of the Units of Leased Property to be leased by the Lessee
pursuant to this Lease for the purpose of developing and producing oil and gas
from the Leased Tracts in accordance with the Development Plan and the Project
Plan.
"Project Plan" - each of the documents listed on Schedule 1 to the
------------
Funding Agreement, as the same may be amended or supplemented from time to time.
"Property" - any interest in any kind of property or asset, whether
--------
real, personal or mixed, or tangible or intangible.
"Property Cost" - with respect to any Unit of Leased Property, the
-------------
purchase price or any part of the purchase price paid by the Lessor for such
Unit of Leased Property or the amount advanced by the Lessor to the Lessee for
the purchase of such Unit of Leased Property, including, without limitation, any
sales Taxes and any other costs associated with the acquisition, fabrication,
preparation for, and delivery and installation, as applicable, of such Unit of
Leased Property and any other property costs associated with Completion of the
Project, but not to include normal operating and maintenance expenses and costs
associated with the financing of the Property Costs.
"Purchase Schedule" - a schedule substantially in the form of
-----------------
Schedule 4 hereto.
"Quarterly Expense Charge" - for any Billing Period the sum of the
------------------------
accruals for each day (whether or not a Business Day) during such Billing Period
with respect to all liabilities
-8-
<PAGE>
of the Lessor for commitment and other fees accruing for such day pursuant to
the Funding Agreement.
"Quarterly Rent Charge" - for any Billing Period, the sum of the
---------------------
Daily Rent Charges for that Billing Period.
"Related Contract" - any agreement for the purchase, construction or
----------------
installation of Units of Leased Property or the provision of refurbishments,
enhancements and improvements to Units of Leased Property, made pursuant to the
Agency Agreement by the Lessee on behalf of the Lessor or by the Lessee and
assigned to the Lessor, with one or more Vendors.
"Removal Schedule" - a schedule substantially in the form of
----------------
Schedule 5 hereto.
"Renewal Term" - the Fair Market Renewal Term.
------------
"Rent" - with respect to any Billing Period, the sum of (a) the
----
Quarterly Expense Charge for such Billing Period and (b) the aggregate Fixed
Charges for each quarterly period during such Billing Period for all Leased
Property subject to this Lease during such Billing Period.
"Rent Payment Date" - the last day of any Billing Period (or, if
-----------------
such last day is not a Business Day, the next Business Day).
"Rent Schedule" - a schedule attached as Schedule 2B hereto, as
-------------
updated from time to time, delivered pursuant to the terms of this Lease, which
provides the components of Rent for any Billing Period up to and including the
Stated Lease Termination Date. Such Rent Schedule shall set forth the portion
of each payment of Rent attributable to the application of the Quarterly Rent
Charge and the reduction in the Fixed Charge Balance and Rental Balance
resulting from the payment of such Rent.
"Rental Balance" - an amount as of the Lease Commencement Date of
--------------
$165,000,000, as adjusted from time to time pursuant to this Lease.
"Repair and Replacement Schedule" - a schedule substantially in the
-------------------------------
form of Schedule 6 hereto.
"Restoration Account" - an account maintained by the Lessor and
-------------------
styled the "Restoration Account."
"Severable" - with respect to any Alteration, any Alteration that
---------
can be readily removed from the Leased Property without damaging it in any
material respect or without diminishing or impairing the value, utility, useful
life or condition that the Leased Property would have had if such Alteration had
not been made (assuming the Leased Property would have been in compliance with
this Lease without such Alteration), and without causing the Leased Property to
become "limited use property" within the meaning of Rev. Proc. 76-30, 1976-2
C.B. 647. Notwithstanding the foregoing, an Alteration shall not be considered
Severable if such Alteration is necessary to render the Leased Property complete
for its
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<PAGE>
intended use by Lessee (other than Alterations consisting of ancillary items of
equipment of a kind customarily furnished by lessees or purchasers of property
comparable to the Leased Property).
"Stated Lease Termination Date" - the last day of the Term, whether
-----------------------------
occurring by reason of a termination of the Lease or the expiration of the Term.
"Stipulated Loss Value" - with respect to any Unit of Leased
---------------------
Property, an amount equal to the product of (i) the amount equal to the Fair
Value of such Unit of Leased Property as of the date such Unit of Leased
Property was first subject to this Lease multiplied by (ii) the "Stipulated Loss
Value Percentage" specified in Schedule 3A hereto for the Rent Payment Date
immediately preceding the date of such determination.
"Stipulated Loss Value Schedule" - for each Unit of Leased Property,
------------------------------
either a schedule attached as Schedule 3A hereto, or a schedule attached to an
ILR in the form of Schedule 3B hereto which provides the Stipulated Loss Value
for such Unit of Leased Property.
"Sublessee" - as defined in Section 21(c).
---------
"Taxes" - any fee (including license, filing and registration fees),
-----
foreign, federal, state or local tax (including any income, gross receipts,
franchise, sales, use, real, personal, tangible or intangible property tax other
than income taxes payable by the Lessor under the Lease, or payable by the Agent
or the Lenders under the Master Lease on their respective income), interest
equalization or stamp tax, assessment (including any maintenance charge, owner
association dues or charges), levy, impost, duty, charge or withholding of any
kind or nature whatsoever, imposed or assessed by any foreign, federal, state or
local government or agency, together with any penalty, fine or interest thereon.
"Technical Consultant" - Sea Engineering Associates, Inc. or any
--------------------
successor selected by the Agent.
"Term" - the term of the Lease, including the Basic Term and any
----
Fair Market Renewal Term, if applicable.
"Third Parties" - any Person other than (i) the Lessor, (ii) the
-------------
Lessee, or (iii) any Affiliate of any of the foregoing.
"UCC" - the Uniform Commercial Code as enacted in the State of New
---
York and any other jurisdiction whose laws may be mandatorily applicable.
"Unit of Leased Property" - each Unit of Leased Property as listed
-----------------------
on Leased Property Inventory Schedules delivered to Lessor from time to time
including any Units of Leased Property that are under a contract to be
manufactured or assembled.
"Vendor" - any supplier or manufacturer of, or provider of services
------
with respect to, any Unit of Leased Property or part thereof.
-10-
<PAGE>
(c) As used in this Lease, capitalized terms not otherwise defined
herein shall have the same meanings as in the Master Lease and the Funding
Agreement (all such terms defined in the singular to have the same meanings when
used in the plural and vice versa).
Section 2. Lease of Leased Property.
------------------------
Subject to the terms and conditions of this Lease, on the Lease
Commencement Date, and subsequently upon the Delivery Date of any additional
Units of Leased Property, Lessor agrees to lease to Lessee, and Lessee agrees to
lease from Lessor, the Leased Property as identified from time to time in the
Leased Property Inventory Schedule, for the Basic Term, and subject to the
exercise by Lessee of its rights provided in Section 16 hereof, for the Fair
Market Renewal Term.
Section 3. Payments.
--------
(a) The Lessee shall pay to the Lessor on the Rent Payment Date for
each Billing Period the amount of Rent and the Quarterly Expense Charge, if any,
due for such Billing Period. At least three (3) Business Days before the Rent
Payment Date for each Billing Period, the Lessor shall deliver to the Lessee a
Lessor Payment Notice, in the form of Schedule 2A, reflecting the Rent and the
Quarterly Expense Charge, if any, due for such Billing Period. If the Quarterly
Rent Charge as of any Rent Payment Date differs from the rate applied on the
immediately preceding Rent Payment Date, the Lessor shall deliver to the Lessee
an amended Rent Schedule which shall reflect the effect of such Quarterly Rent
Charge on all remaining payments of Rent up to and including the expiration date
of the current Term. The Lessee shall complete the Leased Property Inventory
Schedule for such Billing Period and deliver the same to the Lessor on the Rent
Payment Date and shall pay to the Lessor on the Rent Payment Date the amount of
Rent and the Quarterly Expense Charge, if any, specified by Lessor in its notice
to the Lessee, unless Lessor shall have notified Lessee that a different amount
of Rent and the Quarterly Expense Charge, if any, is due, in which case Lessee
shall pay such corrected amount of Rent within two (2) Business Days of the date
of the updated notice. Failure to deliver such written notice or inaccuracies
in such notice will not excuse the Lessee from payment of the amount of Rent and
the Quarterly Expense Charge, if any, due; provided that if Lessee makes timely
payment to Lessor in accordance with such notice and the payment amount
submitted by Lessor to Lessee is determined to be inaccurate, the incorrect
payment shall not constitute an Event of Default, as long as the correct amount
is paid in full within two (2) Business Days of the date of an updated notice.
(b) In addition to the Rent and Quarterly Expense Charge, if any, the
Lessee will also pay, from time to time, upon demand of the Lessor, as
additional rent ("Additional Rent") to the Lessor the following (but without
duplication of any amounts included in the calculation of Rent or otherwise paid
by the Lessee):
(i) All out-of-pocket costs and expenses reasonably incurred by the
Lessor in connection with the preparation, negotiation,
execution, delivery, performance and administration of this
Lease and the other Operative Documents (including, without
limitation, reasonable attorneys' fees and expenses). The Lessee
also shall pay all amounts payable by the Lessor with respect to
the transactions contemplated hereby and by the Funding
Agreement and the other Operative Documents in respect of the
following; (A) fees and expenses of the Lessor, including,
without limitation, reasonable
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<PAGE>
attorneys' fees and expenses; (B) all other amounts, including,
without limitation, fees, indemnities, expenses and compensation
in respect of increased costs, capital adequacy or breakage of
any kind or description payable under the Funding Agreement or
any other Operative Document; (C) out-of-pocket costs and
expenses incurred by the Lessor after the date of this Lease
(including, without limitation, reasonable attorneys' fees and
expenses and other expenses and disbursements reasonably
incurred) associated with (x) negotiating and entering into, or
the giving or withholding of, any future amendments,
supplements, waivers or consents with respect to this Lease; (y)
any Casualty Occurrence or termination of this Lease; and (z)
any Event of Default and the enforcement of the rights or
remedies of the Lessor under this Lease and the other Operative
Documents.
(ii) All other amounts that the Lessee agrees herein to pay other
than Rent and amounts described in clause (i) above.
(c) This Lease is a completely net lease, and Rent, Additional Rent
and all other sums payable by the Lessee hereunder shall be paid without notice
except as otherwise expressly provided herein, and the Lessee shall not be
entitled to any abatement, reduction, setoff, counterclaim, defense or deduction
with respect to any Rent, Additional Rent or other sum payable hereunder. The
obligations of the Lessee to pay Rent, Additional Rent and all other sums
payable hereunder shall not be affected by any circumstance whatsoever,
including without limitation: (a) any damage to or destruction of the Leased
Property or any part thereof by any cause whatsoever (including, without
limitation, fire, casualty or act of God or enemy or any other force majeure
event); (ii) any condemnation, including, without limitation, a temporary
condemnation of the Leased Property or any portion thereof; (iii) any
prohibition, limitation, restriction or prevention of the Lessee's use,
occupancy or enjoyment of the Leased Property or any part thereof by any Person;
(iv) any matter affecting title to the Leased Property or any portion thereof;
(v) any eviction of the Lessee from, or loss of possession by the Lessee of, the
Leased Property or any portion thereof, by reason of title paramount or
otherwise; (vi) any default by the Lessor hereunder or under any other
agreement; (vii) the invalidity or unenforceability of any provision hereof or
the impossibility or illegality of performance by the Lessor or the Lessee or
both; (viii) any action of any federal, state or local governmental authority;
or (ix) any other cause or occurrence whatsoever, whether similar or dissimilar
to the foregoing. The Lessee shall remain obliged under this Lease in
accordance with its terms and shall not take any action to terminate, rescind or
avoid this Lease, notwithstanding any bankruptcy, insolvency, reorganization,
liquidation, dissolution or other proceeding affecting the Lessor or any action
with respect to this Lease which may be taken by any trustee, receiver or
liquidator or by any court. The Lessee waives all rights to terminate or
surrender this Lease, or to any abatement or deferment of Rent, Additional Rent
or other sums payable hereunder. The Lessee hereby waives any and all rights
now or hereafter conferred by law or otherwise to modify or to avoid strict
compliance with its obligations under this Lease. All payments made to the
Lessor hereunder as required hereby shall be final and irrevocable, absent
manifest error, and the Lessee shall not seek to recover any such payment or any
part thereof for any reason whatsoever, absent manifest error. All covenants
and agreements of Lessee herein shall be performed at its cost, expense and risk
unless expressly otherwise stated. Nothing herein shall be construed as a
guaranty by the Lessee of any residual value in the Leased Property nor to
prevent the Lessee from asserting in any legal action any mandatory
counterclaim.
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<PAGE>
(d) The Lessee agrees that it will promptly pay all Impositions imposed
upon or levied or assessed against or relating to (i) this Lease or any future
amendment, supplement, waiver or consent requested by Lessee with respect
thereto, or the execution, delivery or performance of any thereof or the
issuance, acquisition or subsequent transfer thereto, (ii) the Leased Property
or any portion thereof, (iii) the manufacture, financing, construction,
purchase, acceptance, possession, rejections, ownership, delivery, nondelivery,
use, operation, leasing, subleasing, condition, maintenance, repair, sale,
control, return, transfer, abandonment, redelivery or other disposition of the
Leased Property, (iv) the Lessor (and its predecessors and its and their
successors and permitted assigns and their respective partners, officers,
directors, employees and agents) in connection with the transactions
contemplated by this Lease and the Master Lease (including all obligations of
Lessor in respect of payments or otherwise hereunder or thereunder) or imposed
or levied upon, assessed against or measured by any Rent or other sum payable
hereunder, and will furnish to the Lessor upon request copies of official
receipts or other proof evidencing such payments; provided, however, that the
-------- -------
Lessee shall not be obligated to pay (A) any sales Taxes or other Impositions to
the extent paid by the Lessor as part of the Property Cost of any Unit of Leased
Property and financed under the Funding Agreement, (B) any Impositions which are
based upon or measured by the Lessor's net income, or which are in substitution
for, or relieve the Lessor from, any actual Imposition based upon or measured by
the Lessor's net income (excluding, however, Impositions imposed with respect to
the payment, receipt or accrual of any indemnity payment under this Lease), or
(C) Impositions characterized under local law as franchise Taxes (excluding,
however, any value-added, license, property or similar Imposition). The Lessee
further agrees that, subject to its rights under Section 13 hereof, it will, at
its expense, do all things required to be done by the Lessor in connection with
the levy, assessment, billing or payment of any such Impositions, and is hereby
authorized by the Lessor to act for and on behalf of the Lessor in any and all
such respects and to prepare and file, on behalf of the Lessor all tax returns
and reports required to be filed by the Lessor (other than federal income tax
returns and documents related thereto) concerning the Leased Property. The
Lessee's payment obligations under this Section 3(d) shall survive the
termination of this Lease. In the event that any withholding or deduction from
any payment to be made by the Lessee hereunder is required in respect of any
Imposition pursuant to any Legal Requirement, then the Lessee will
(x) pay directly to the relevant authority the full amount required
to be so withheld or deducted;
(y) promptly forward to the Lessor an official receipt or other
documentation satisfactory to the Lessor evidencing such payment to
such authority; and
(z) pay to the Lessor such additional amount or amounts as is
necessary to ensure that the net amount actually received by the
Lessor will equal the full amount the Lessor would have received had
no such withholding or deduction been required.
(e) Unless otherwise expressly provided, all payments by the Lessee
pursuant to this Lease shall be made by the Lessee to the Lessor. All such
payments required to be made to the Lessor shall be made not later than 11:00
a.m., New York, New York time, on the date due, in immediately available funds,
to such account as the Lessor shall specify from time to time by notice to the
Lessee. Funds received after that time shall be deemed to have been received by
the Lessor on the next succeeding Business Day. Whenever any payment to be made
shall otherwise be due on a day which is not a Business Day, except as otherwise
expressly provided herein, such payment
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shall be made on the next succeeding Business Day and such extension shall be
included in computing Rent, interest and fees, if any, in connection with such
payment.
Section 4. Agency Agreement.
----------------
The Lessee is entering into the Agency Agreement with the Lessor
pursuant to which the Lessee will act as the construction agent for the Lessor
in causing the completion of certain refurbishments, enhancements and
improvements to, and the purchase, construction and installation of, the Units
of Leased Property. Title to all components of each Unit of Leased Property
funded shall be and remain in the Lessor or its Funding Sources, and all such
Units of Leased Property shall be subject to the terms and conditions of this
Lease. Certain of the Units of Leased Property shall be purchased, manufactured
or assembled pursuant to Related Contracts entered into by the Lessee pursuant
to the Agency Agreement. After a funding pursuant to the Funding Agreement of an
initial payment under any Related Contract, the rights of the Lessee held for
the benefit of the Lessor under such Related Contract shall become subject to
the provisions of this Lease.
Section 5. Leased Property Records.
-----------------------
The Lessee shall maintain, on a current basis, books of proper record
and account in conformity with GAAP (to the extent applicable) which books shall
include, without limitation, (a) copies of all Related Contracts and any
amendments thereto, (b) the manufacturer, model and identification number, as
applicable, of each Unit of Leased Property, (c) the location of each Unit of
Leased Property, (d) the Property Cost of each Unit of Leased Property, and (e)
a copy of the purchase invoice for each Unit of Leased Property.
Section 6. Title to Remain in the Lessor.
-----------------------------
Except as otherwise specified in Sections 7(b), 8(a) (in respect of
removals) and Section 9(c) (in respect of certain Alterations), the Lessor or
its Funding Sources shall own 100% of the legal and beneficial interest in each
Unit of Leased Property, and all accessories, equipment, parts and devices
affixed or placed on any Unit of Leased Property from time to time by the Lessee
if required to achieve Completion shall be and become part of such Unit of
Leased Property for the purposes of this Lease and shall be property of the
Lessor or its Funding Sources subject to the terms of this Lease.
Section 7. Maintenance and Replacement of the Leased Property; Operations.
--------------------------------------------------------------
(a) The Lessee shall, and it shall require and cause any and all
employees, contractors, subcontractors, agents, representatives, affiliates,
consultants and occupants at the Lessee's own cost and expense to (i) cause the
Leased Property to be maintained in good operating order, repair and condition,
in accordance with prudent industry practice and any applicable manufacturer's
manuals or warranties, subject to normal wear and tear, and will take all
action, and will make all changes and repairs, structural and non-structural,
foreseen and unforeseen, ordinary and extraordinary, which are required pursuant
to any Legal Requirement or Insurance Requirement at any time in effect to
assure full compliance therewith; and (ii) cause the Leased Property to
continue to have at all times the capacity and functional ability to perform,
on a continuing basis (subject to normal interruption in the ordinary course of
business for maintenance, inspection, service, repair and
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testing) and in commercial operation, the functions for which it was designed as
specified in the Project Plan.
(b) The Lessee shall, and it shall require and cause any and all
employees, contractors, subcontractors, agents, representatives, affiliates,
consultants and occupants at the Lessee's own cost and expense to, promptly
replace, or cause to be replaced, all Units of Leased Property or parts thereof
which may from time to time be incorporated or installed in or attached to the
Leased Property and which may from time to time become worn out, lost, stolen,
destroyed, seized, confiscated, damaged beyond repair, obsolete or permanently
rendered unfit for use for any reason whatsoever. All replacement Units of
Leased Property or parts thereof shall be free and clear of all Liens other
than Permitted Liens, shall be of a type customarily used in the industry at
such time for such purpose, shall be in as good operating condition as, and
shall have a utility and useful life at least equal to, the Units of Leased
Property or parts replaced (assuming such replaced Units of Leased Property or
parts were in the condition and repair required to be maintained by the terms
hereof) and shall have a value at least equal to the Units of Leased Property or
parts replaced (assuming such replaced Units of Leased Property or parts were
in the condition and repair required to be maintained by the terms hereof).
Each Unit of Leased Property or part thereof at any time removed shall remain
the property of (and title thereto shall remain in) Lessor or its Funding
Sources, no matter where located, until such time as such Unit of Leased
Property or part shall be replaced by a replacement Unit of Leased Property or
part and that meets the requirements for replacement Units of Leased Property or
parts thereof specified above. Immediately upon any replacement Unit of Leased
Property or part thereof becoming incorporated or installed in or attached to
the Leased Property as above provided, without further act or instrument,
subject to Permitted Liens, (i) title to the removed Unit of Leased Property or
part thereof shall thereupon vest in Lessee, free and clear of all rights of
Lessor, and shall no longer be deemed a Unit of Leased Property or part thereof
hereunder; (ii) title to such replacement Unit of Leased Property or part
thereof shall thereupon vest in Lessor; and (iii) such replacement Unit of
Leased Property or part thereof shall become subject to this Lease and be deemed
a part of the Leased Property for all purposes hereof to the same extent as the
Unit of Leased Property or part thereof originally incorporated or installed in
or attached to the Leased Property. Within ten Business Days of the end of each
calendar quarter, an Authorized Officer of the Lessee shall deliver to the
Lessor a Repair and Replacement Schedule certifying to Lessor's satisfaction
(i) the nature of repairs and replacements of Units of Leased Property or any
component that has a cost of at least $1,000,000 at the time of replacement or
repair made during such calendar quarter and the Units of Leased Property so
repaired or replaced and (ii) that the Project continues to have the capacity
and functional ability to perform on a continuing basis (subject to normal
interruption in the ordinary course of business for maintenance, inspection,
service, repair and testing) and in commercial operation, the functions for
which it was designed as specified in the Project Plan.
(c) Notwithstanding the provisions of Section 8 and the foregoing
provisions of this Section 7, the Lessee shall not remove, replace or alter any
Unit of Leased Property or affix or place any accessory, equipment, part or
device on any Unit of Leased Property, if such removal, replacement, alteration
or addition would impair the originally intended function or use of such Unit of
Leased Property so as to materially reduce the value of any Unit of Leased
Property or the value of all of the Leased Property taken as a whole.
(d) The Lessor shall not be required in any way to maintain, repair or
rebuild any Unit of Leased Property or any portion thereof and the Lessee waives
any right it may now or hereafter
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have to make any repairs at the expense of the Lessor pursuant to any Legal
Requirement at any time in effect or otherwise.
(e) The Lessee shall, and it shall require and cause any and all
employees, contractors, subcontractors, agents, representatives, affiliates,
consultants and occupants at the Lessee's own cost and expense to, (i) comply in
all material respects with all applicable Environmental Laws with regard to the
Leased Property and (ii) use, employ, process, emit, generate, store, handle,
transport, dispose of and/or arrange for the disposal of, any and all hazardous
substances in, on or, directly or indirectly, related to or in connection with
the Leased Property or any part thereof in a manner consistent with prudent
industry practice and in compliance in all material respects with any applicable
Environmental Law, and in a manner which does not have a material adverse effect
on the use, occupancy, possession, value or condition of the Leased Property or
any Unit of Leased Property and does not give rise to continuing liability to
the Lessee or the Lessor. The Lessor and the Lessee hereby acknowledge and
agree that the Lessee's obligations hereunder with respect to Environmental Laws
are intended to bind the Lessee with respect to matters and conditions involving
the Leased Property or any part thereof. The Lessee, at its expense, will
register and re-register the Leased Property when necessary under applicable
Legal Requirements.
Section 8. Removals Without Replacement.
----------------------------
(a) The Lessee may, unless a Default or an Event of Default shall occur
and be continuing, upon at least five Business Days' prior written notice to the
Lessor, remove any Unit of Leased Property or part thereof, at its own expense
without replacing it; provided that such Unit of Leased Property or part thereof
is not a Major Component of the Project and is no longer necessary for the
performance of the Project on a continuing basis in commercial operation of the
functions for which the Project was designed as specified in the Project Plan;
and provided, further, that such removal and nonreplacement do not in any
material respect (i) diminish or impair the value, utility and useful life of
the Leased Property (subject to normal interruption in the ordinary course of
business for maintenance, inspection, service, repair and testing) or (ii)
result in the Leased Property becoming "limited use property" within the meaning
of Rev. Proc. 76-30, 1976-2 C.B. 647 (assuming, in each case, the Leased
Property was then of the value, utility and useful life required to be
maintained hereunder). Title to any such removed Unit of Leased Property or part
thereof shall vest in Lessee, free and clear of all rights of Lessor.
(b) If the Lessee determines that any Unit of Leased Property or part
thereof may be removed in accordance with Section 8(a) hereof, then the Lessee
shall give the Lessor at least 30 days' notice of such determination and shall
not remove any such Unit of Leased Property unless and until the Lessor has
received written confirmation from the Technical Consultant of the Lessee's
determination that such Unit of Leased Property is no longer necessary for the
performance of the Project on a continuing basis in commercial operation of the
function for which the Project was designed as specified in the Project Plan;
provided, however, that the Lessee may remove from this Lease Units of Leased
Property determined to be no longer necessary for the performance of the Project
as aforesaid at any one time having aggregate book values not exceeding
$5,000,000 or at all times during the term of this Lease having aggregate book
values not exceeding $10,000,000. Any Unit of Leased Property removed in
accordance with Section 8(a) hereof, which has a de minimis value, may be
disposed of by the Lessee without any obligation or liability to the Lessor.
Except as provided in the immediately preceding sentence, any Unit of Leased
Property removed
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by the Lessee in accordance with Section 8(a) hereof shall remain the property
of the Lessor and shall be delivered to the Lessor as soon as practicable.
Section 9. Required and Optional Alterations; Title to Alterations.
-------------------------------------------------------
(a) Except as otherwise provided in Section 14 hereof, Lessee at its
own cost and expense, shall make (or cause to be made) all Alterations to the
Leased Property as may be required from time to time to meet in all material
respects all Legal Requirements (regardless of the Person upon whom such
requirements, by their terms, are nominally imposed), except to the extent being
contested in accordance with Section 10 hereof.
(b) Unless an Event of Default shall have occurred and be continuing,
Lessee, at its own cost and expense, may from time to time make, subject to
obtaining all necessary authorization, consents or approvals of any Governmental
Authority and consents of third parties, such Alterations to the Leased Property
that are not required pursuant to Section 9(a) as Lessee may deem desirable in
the proper conduct of its business, provided that (i) such Alternation shall not
diminish or impair in any material respect the value, utility or useful life of
the Leased Property (subject to normal interruption, in the ordinary course of
business for maintenance, inspection, service, repair and testing), (ii) such
Alteration shall not cause the Leased Property to constitute "limited use
property" within the meaning of Rev. Proc. 76-30, 1976-2 C.B. 647 and (iii) no
Alterations, taken together or separately, shall violate the provisions of Rev.
Proc. 75-21, 1975-1 C.B. 715 or 79-48, 1979-1 C.B. 529.
(c) Title to each Alteration shall without further act or instrument
vest in the Lessor and be deemed to constitute a part of the Leased Property and
be subject to this Lease, provided that any such Alteration is required pursuant
to Section 9(a) hereof or is a Nonseverable Alteration. Title to all other
Alterations shall vest in the Lessee or such other Person as the Lessee shall
select, and the Lessee may finance the acquisition thereof in whatever manner it
elects, secured or unsecured, provided that such financing does not and will not
result in any Lien (other than Permitted Liens) on or with respect to the Leased
Property or any part thereof. Any such Alteration may be removed by the Lessee
or any Person having a Lien thereon, at its own cost and expense, at any time
prior to the Stated Lease Termination Date if the conditions set forth in
clauses (i) and (ii) of the proviso contained in Section 9(b) hereof are met and
such removal will not cause any of the Leased Property to be in violation of any
applicable Legal Requirement. Any such Alteration may also be removed at the
Stated Lease Termination Date upon not less than 90 days' prior written notice
to Lessor, so long as the Leased Property is restored substantially to its
condition (normal wear and tear excepted) prior to the making of such
Alteration, provided that such removal does not diminish or impair the required
performance of the Leased Property (as specified in the Project Plan) at such
time; and provided, further, that any Severable Alterations that are not removed
from the Leased Property at the time of its surrender by the Lessee shall become
the property of the Lessor.
Section 10. Compliance with Legal Requirements and Insurance Requirements:
--------------------------------------------------------------
Related Contracts.
-----------------
The Lessee at its expense, except as otherwise permitted by the last
sentence of this Section 10, will comply with all Legal Requirements applicable
to the Leased Property or any portion thereof or the ownership, construction,
operation, mortgaging, occupancy, possession, use, non-use or condition of the
Leased Property or any portion thereof, all Insurance Requirements, and
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all instruments, contracts or agreements affecting title to or ownership of the
Leased Property or any portion thereof. In addition, the Lessee, so long as no
Default or Event of Default has occurred and is continuing, is hereby authorized
by the Lessor to, and shall, fully and promptly keep, observe, perform and
satisfy on behalf of the Lessor any and all obligations, conditions, covenants
and restrictions of or on the Lessor or the Lessee under any and all Related
Contracts so that there will be no default thereunder and so that the other
parties thereunder shall be and remain at all times obliged to perform their
obligations thereunder, and the Lessee, to the extent within its control, shall
not permit to exist any condition, event or fact that could allow or serve as a
basis or justification for any such Person to avoid such performance.
Notwithstanding the first sentence of this Section 10, if (i) a test, challenge,
appeal or proceeding for review of any applicable Legal Requirement relating to
the use, operation or maintenance of the Leased Property shall be prosecuted in
good faith by Lessee or (ii) compliance with such Legal Requirement shall have
been excused or exempted by a nonconforming use permit, waiver, extension or
forbearance excusing or exempting Lessee from such Legal Requirement, Lessee
shall not be required to comply with such Legal Requirement so long as such
test, challenge, appeal, proceeding or noncompliance shall not involve any
material risk of (A) the sale, forfeiture or loss of, or imposition of any Lien
(other than a Permitted Lien or Lien being contested pursuant to Section 13) on,
any part of the Leased Property, title thereto or any interest therein or in
this Lease or impairment of the use or operation of any part of the Leased
Property as required by the Project Plan, (B) any material Claim not indemnified
against by Lessee against Lessor or the Leased Property or (C) the nonpayment of
Rent.
Section 11. Condition and Use of Leased Property; Assignment of Warranties,
---------------------------------------------------------------
Etc.; Quiet Enjoyment.
---------------------
(a) THE LEASED PROPERTY IS LEASED AS IS, WHERE IS, AND WITH ALL FAULTS
AND IN THE CONDITION THEREOF AND SUBJECT TO THE RIGHTS OF ANY PARTIES IN
POSSESSION THEREOF, THE STATE OF THE TITLE THERETO, AND THE RIGHTS OF OWNERSHIP
THEREIN, IN EACH CASE AS IN EXISTENCE WHEN THE SAME FIRST BECOMES SUBJECT TO
THIS LEASE, WITHOUT REPRESENTATIONS AND WARRANTIES OF ANY KIND AS TO TITLE BY
THE LESSOR, OR ANY PERSON ACTING ON BEHALF OF ANY OF THEM. THE LESSEE
ACKNOWLEDGES AND AGREES THAT THE LESSOR IS NOT A MANUFACTURER OF, OR VENDOR OF,
OR MERCHANT WITH RESPECT TO, ANY OF SUCH EQUIPMENT OR ANY PROPERTY OF SUCH KIND
AND HAS NOT MADE NOR IS MAKING ANY WARRANTY, EXPRESS OR IMPLIED, RELATING TO THE
LEASED PROPERTY, INCLUDING WITHOUT LIMITATION, WITH RESPECT TO MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE, THE DESIGN, CONDITION, QUALITY OF
MATERIAL OR WORKMANSHIP, CONFORMITY TO SPECIFICATIONS, FREEDOM FROM PATENT OR
TRADEMARK INFRINGEMENT, ABSENCE OF ANY LATENT OR OTHER DEFECTS, WHETHER OR NOT
DISCOVERABLE WHETHER ARISING PURSUANT TO THE UCC OR ANY OTHER PRESENT OR FUTURE
LAW OR OTHERWISE, OR (v) SHALL NOT BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL
DAMAGES (INCLUDING LIABILITY IN TORT, STRICT OR OTHERWISE). IN THE EVENT OF ANY
DEFECT OR DEFICIENCY OF ANY NATURE IN THE LEASED PROPERTY OR ANY EQUIPMENT OR
FIXTURE OR OTHER ITEM CONSTITUTING A PORTION THEREOF, WHERE PATENT OR LATENT,
THE LESSOR SHALL NOT HAVE ANY RESPONSIBILITY OR LIABILITY WITH RESPECT THERETO.
THE PROVISIONS OF THIS SECTION 11 HAVE BEEN NEGOTIATED AND ARE INTENDED TO BE A
COMPLETE EXCLUSION AND NEGATION OF ANY AND ALL WARRANTIES,
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EXPRESS OR IMPLIED, BY THE LESSOR, WITH RESPECT TO THE LEASED PROPERTY OR ANY
EQUIPMENT, FIXTURE OR OTHER ITEM CONSTITUTING A PORTION THEREOF, WHETHER ARISING
PURSUANT TO THE UCC OR ANY OTHER LAW NOW OR HEREAFTER IN EFFECT.
(b) The Lessor hereby assigns to the Lessee until the termination
hereof or the occurrence of a Default or Event of Default hereunder any and all
warranties and indemnities of and claims against any manufacturers or Vendors
relating to any Unit of Leased Property (including any labor, equipment or parts
supplied therewith), and to the extent assignment of the same is prohibited or
precludes enforcement of any such warranty or undertaking, the Lessor hereby
subrogates the Lessee to its rights in respect thereof. The Lessor hereby
authorizes the Lessee, at the Lessee's expense, to assert any and all claims and
to prosecute any and all suits, actions and proceedings, in its own name or in
the name of the Lessor, in respect of any such warranty or undertaking and prior
to the termination hereof or the occurrence of a Default or Event of Default
hereunder, to retain the proceeds received, and after the termination of this
Lease or the occurrence of a Default or Event of Default to pay the same in the
form received (with any necessary endorsement) to the Lessor.
(c) The Lessee may use the Leased Property for any lawful purpose
consistent with the Development Plan and the Project Plan provided that the
value of the Leased Property is not diminished by any such use other than as a
result of normal wear and tear in the ordinary course of business. During the
term of this Lease, the Lessor covenants that unless a Default or an Event of
Default has occurred and is continuing, the Lessor will not, and will not permit
any party claiming by, through or under the Lessor to, interfere with the
peaceful and quiet possession and enjoyment of the Leased Property by the
Lessee; provided, however, that the Lessor and its successors, assigns,
representatives and agents may, upon reasonable notice to the Lessee enter upon
and examine the Leased Property or any part thereof at reasonable times, subject
to the provisions of Section 19 hereof. Any failure by the Lessor to comply
with the foregoing provisions of this Section 11(c) shall not give the Lessee
any right to cancel or terminate this Lease, or to abate, reduce or make
reduction from or offset against any Rent, Additional Rent or other sum payable
under this Lease, or to fail to perform or observe any other covenant, agreement
or obligation hereunder. The Lessee will not do or fail to do, or permit or
suffer to exist any act or thing, which action or thing or failure might impair
the value or usefulness of the Leased Property for the production and safe and
lawful handling of hydrocarbons and other functions contemplated by the design
of such Leased Property, ordinary wear and tear excepted.
Section 12. Liens.
-----
(a) The Lessee will not directly or indirectly create or permit to be
created or to remain, and will discharge promptly, at the Lessee's expense, any
Lien upon the Lease or the Leased Property except (i) any Lien being contested
as permitted by Section 13 hereof, or (ii) Permitted Liens. The Lessor agrees
that the Lessee shall have during the term of this Lease the exclusive right (so
long as no Default or Event of Default has occurred and is continuing) to grant,
create or suffer to exist Permitted Liens in accordance with prudent industry
practices, provided that the fair market value or use of the Leased Property or
the applicable portion thereof is not materially lessened thereby. The Lessor
agrees to execute such documents and take all other actions as shall be
reasonably necessary, and otherwise to cooperate with the Lessee in connection
with the matters described above, provided that all reasonable out-of-pocket
costs and expenses (including, without limitation, reasonable attorneys' fees
and expenses) incurred by the Lessor in connection therewith
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shall be borne by the Lessee, and the Lessor shall not be required to execute
any document which would, in the opinion of the Lessor, materially adversely
affect the value or use of the Leased Property or otherwise materially adversely
affect the interests of the Lessor.
(b) The Lessee will not directly or indirectly sell, transfer, or
otherwise dispose of, or create or permit to be created or to remain, and will
discharge, any Lien of any nature whatsoever on, in or with respect to, its
interest in the Leased Tracts, except Permitted Liens, sales of hydrocarbons
produced from the Leased Tracts in the ordinary course of business and sales or
other dispositions of interests in the Leased Tracts; provided that the Lessee
shall retain at least 25% of the working interest and maintain a net revenue
interest at least equal to 70% of its working interest in the Leased Tracts.
The Lessee shall at all times remain the operator under any operating agreement
governing operation on the Leased Tracts except that a Co-Lessee permitted by
the terms of this Lease and qualified under all Legal Requirements may serve as
the operator.
(c) The Lessee acknowledges and agrees that this Lease is subsequent,
inferior, junior and subordinate in all respects to the Security Instruments as
defined in the Funding Agreement. The Lessee will not contest or otherwise
challenge through litigation or by any other means the superior right, title and
interest of the Lessor and its Funding Sources as the secured parties under the
Security Instruments as defined in the Funding Agreement in and to the Leased
Property to the right, title and interest of the Lessee under this Lease.
Section 13. Permitted Contests.
------------------
After prior notice to the Lessor and provided there is no material
risk of sale, forfeiture or loss of any Unit of Leased Property, the Lessee may
at its expense contest any Imposition which it is required to pay hereunder, by
appropriate proceedings conducted in good faith and with due diligence, so long
as such proceedings are effective to prevent the collection of such Imposition
from the Lessor or any Funding Source (as it relates to any financing in
connection with the Funding Agreement) or against the Leased Property or any
portion thereof; provided, however, that the actions of the Lessee as authorized
by this Section 13 shall be subject to the express written consent of the Lessor
if such actions would subject the Lessor or any Funding Source to any liability
or sanction, criminal or otherwise, for failure to pay any such Imposition. The
Lessee will pay, and save the Lessor and each such Funding Source harmless
against, all losses, Judgments, decrees and reasonable costs, including
attorneys' fees and expenses, in connection with any such contest and will,
promptly after the final determination of such contest, pay and discharge the
amounts which shall be imposed or determined to be payable therein, together
with all penalties, costs and expenses incurred in connection therewith. The
Lessee shall prevent any foreclosure, judicial sale or forfeiture of the Leased
Property or any portion thereof, or any interference with or deductions from any
Rent, Additional Rent or any other sum required to be paid by the Lessee
hereunder by reason of such nonpayment or nondischarge of an Imposition. The
Lessor shall cooperate with the Lessee in any contest and shall allow the Lessee
to conduct such contest (in the name of the Lessor, if necessary) at the
Lessee's sole cost and expense. The Lessee shall notify the Lessor of each such
proceeding within 10 days after the commencement thereof, which notice shall
describe such proceeding in reasonable detail.
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Section 14. Insurance, etc.
--------------
(a) The Lessee will, at its own expense, purchase and maintain or cause
to be purchased and maintained throughout the term of this Lease insurance with
respect to its business and the Leased Property in accordance with the
requirements of Schedule 7 hereto.
(b) The Lessee shall bear all risk of loss, whether by casualty, theft,
taking or other confiscation, with respect to each Unit of Leased Property or
any portion thereof, at all times during the term of this Lease until possession
of any Unit of Leased Property has been accepted by the Lessor upon the return
of any such Unit of Leased Property to Lessor pursuant to Section 17 hereof.
(c) So long as no Default or Event of Default has occurred and is
continuing, any payments, whether constituting insurance proceeds, amounts paid
by any Governmental Authority or otherwise, received by the Lessee or the Lessor
upon the occurrence of any loss with respect to any Unit of Leased Property or
portion thereof (other than a Casualty Occurrence), whether as a result of
casualty, theft, taking or other confiscation, shall be applied in payment for
necessary repairs and replacement to the Leased Property in accordance with
Section 7 hereof or, to the extent the costs of such repairs and replacement
shall have been paid by the Lessee, to reimburse the Lessee. The Lessee shall
be entitled to retain any excess funds remaining after necessary repairs and
replacements have been completed and all costs therefor paid in full.
(d) Upon a Casualty Occurrence, the Lessee shall give prompt notice
thereof to the Lessor and shall within 30 days of the date of such Casualty
Occurrence provide the Lessor with a plan acceptable to the Technical Consultant
setting forth how the Lessee shall replace, or cause to be replaced, at the
Lessee's own cost and expense, within 180 days after the date of such Casualty
Occurrence, any Unit of Leased Property the subject of a Casualty Occurrence;
provided, however, that the Lessee may remove from this Lease any Unit of Leased
Property the subject of a Casualty Occurrence if following such removal the
Lessee would be in compliance with Section 9(b) as if an Alteration were being
made. Within 60 days of the date of the Casualty Occurrence, the Lessee shall
have commenced repairs or replacements as specified in such a plan. After
completion of the repairs and replacements, the Lessee shall demonstrate to the
satisfaction of the Technical Consultant that operations and production from the
Project have been restored. This test must be satisfactorily completed within
180 days after the date of such Casualty Occurrence. All replacement Units of
Leased Property shall be free and clear of all Liens except Permitted Liens, and
shall be in as good operating condition as, and shall have a value and utility
at least equal to, the Unit of Leased Property replaced immediately prior to the
Casualty Occurrence to which such Unit of Leased Property was subject. For
purposes of this Lease (including without limitation this Section 14(d) and
Section 7), Fixed Charges paid, the Property Cost, and the Stipulated Loss Value
of the replacement Unit of Leased Property shall be deemed to equal the Fixed
Charges paid, the Property Cost and the Stipulated Loss Value of the Unit of
Leased Property replaced thereby. All Units of Leased Property at any time
removed from this Lease pursuant to this Section 14(d) and Section 7 shall
remain the property of the Lessor, no matter where located, until such time as
insurance proceeds have been received by the Lessor at least equal to the
Stipulated Loss Value of such Units of Leased Property or such Units of Leased
Property shall be replaced by Units of Leased Property which have been
incorporated or installed on or attached to Leased Property located on the
Project and which meet the requirements specified above. Immediately upon any
replacement Unit of Leased Property becoming incorporated or installed on or
attached to Leased Property located on the Project as provided above, without
further act, such replacement Unit of Leased Property shall
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become subject to this Lease and be deemed part of the Leased Property for all
purposes hereof to the same extent as any other Units of Leased Property. All
amounts of insurance proceeds for property losses and all other proceeds
(whether resulting from damage or destruction or from condemnation, confiscation
or seizure) relating to the applicable Unit or Units of Leased Property shall be
deposited into the Restoration Account from any losses exceeding $5,000,000 per
occurrence and held and released as hereinafter provided. So long as no Default
or Event of Default shall have occurred and be continuing, and provided that the
Lessor shall have received a written application of the Lessee accompanied by a
certificate of an Authorized Officer of the Lessee showing in reasonable detail
the nature of any necessary repair, rebuilding and restoration, the actual cash
expenditures necessary for such repair, rebuilding and restoration, the expected
total expenditures required to complete such work and evidence that sufficient
funds are available to complete such work on a timely basis (such certificate to
be acceptable to the Lessor in all respects), then the amounts available in the
Restoration Account shall be released by the Lessor from time to time on each
Rent Payment Date during the period of repair, rebuilding and restoration in
payment therefor against presentation to the Lessor of a certificate executed by
an Authorized Officer of the Lessee to the effect that expenditures have been
made, or costs incurred, by or for the account of the Lessee or are reasonably
anticipated to be made during the immediately following Billing Period in a
specified amount for the purposes of making repairs, rebuilding and restoration
in the amounts specified, that no Default or Event of Default exists and all
conditions precedent herein provided relating to such withdrawal and payment
have been satisfied. Upon the occurrence of any Event of Default, the Lessor
shall be entitled to retain all amounts in the Restoration Account for
application to the obligations of the Lessee hereunder.
Section 15. Surrender of Leased Property.
----------------------------
Unless all right, title and interest in the Leased Property shall have
been or is being transferred to Lessee or unless Lessee shall have paid
Stipulated Loss Value with respect to the Leased Property, in each case,
pursuant to this Lease, Lessee shall, upon the expiration of the Term or the
earlier termination of the Lease as provided herein, return the Leased Property
to Lessor or to any transferee or assignee of Lessor and deliver therewith a
complete set, current as of the date of such return, of all customary operating
manuals, logs and plans and specifications necessary or appropriate for the
proper operation and maintenance of the Leased Property, together with all
maintenance and repair reports prepared during the Term in respect of such
Leased Property. At the time of such return, the Leased Property (i) shall be,
at a minimum, in the condition required by Section 7, (ii) shall be in good
working order and shall include all Alterations made by Lessee to the extent
such Alterations become the property of Lessor pursuant to Section 9, and (iii)
shall not be "limited use property" within the meaning of Rev. Proc. 76-30, 1976
2 C.B. 647. Lessee shall assign to Lessor all warranties, registrations,
licenses and permits, to the extent permitted under Applicable Law, required to
be possessed by Lessee or Lessor with respect to the Leased Property.
Section. 16. Lessee's Renewal Option; Purchase Options of Lessee and Lessor.
--------------------------------------------------------------
(a) Lessee's Renewal Option.
-----------------------
Upon the expiration of the Basic Term, and if no Event of Default,
Casualty Occurrence or Constructive Total Loss shall have occurred and be
continuing, Lessee may, upon at least 30 and not more than 60 days' irrevocable
prior written notice to Lessor, elect to renew the Lease upon the same terms and
conditions for a period of five years (the "Fair Market Renewal Term"); provided
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that Rent during such Fair Market Renewal Term shall be determined by reference
to a Fixed Charge Balance which reflects the Fair Market Rental Value as
determined at the commencement of such Fair Market Renewal Term.
(b) Lessee's Purchase Option.
------------------------
(i) Unless a Default, Event of Default, Casualty Occurrence or
Constructive Total Loss shall have occurred and be continuing, Lessee
shall have the right, upon at least 30 and not more than 60 days'
irrevocable prior written notice to Lessor, to purchase from Lessor (the
"Lessee Purchase Option") all of the Leased Property upon the expiration
of the Basic Term for an amount equal to $46,170,000, such amount to be
adjusted to account for any Leased Property added to the Lease after the
Lease Commencement Date.
(ii) Lessee shall pay the purchase price to Lessor on the date
fixed for such purchase and Lessee shall simultaneously pay to Lessor
all Rent and all other amounts, if any, due or accrued through such
purchase date, whereupon Lessor shall transfer its right, tile and
interest to the Leased Property to Lessee free and clear of all Liens
(except Permitted Liens) but otherwise without representation or
warranty, expressed or implied, and the Term shall end.
(c) Lessor Purchase Option.
----------------------
(i) (x) Upon expiration of the Basic Term in the event that either
(A) Lessee has not provided notice of its intention to exercise the
Lessee Renewal Option in accordance with Section 16(a) or (B) that
Lessee has not provided notice of its intention to exercise the Lessee
Purchase Option in accordance with Section 16(b), (y) upon the expiry of
the Fair Market Renewal Term, or (z) upon the termination of the Lease
or the repossession of Leased Property by Lessor following an Event of
Default, Lessor shall have the right to purchase (the "Lessor Purchase
Option") in accordance with the Facilities Agreements, Lessee's interest
in the Garden Banks Block 388 Unit as identified in Schedules F, G and H
hereto at a purchase price equal to the fair market value of such
interest as of the date of such purchase, as determined in accordance
with accepted industry standards by an independent appraiser having a
national reputation and experience in appraising the value of oil and
gas reserves and offshore production facilities, chosen by mutual
agreement between Lessor and Lessee. The parties hereby agree to use
their best efforts to obtain such appraisal as soon as is reasonably
practical after the occurrence of either of the events in clauses (x),
(y) or (z) above.
(ii) Lessor shall pay the amount due to Lessee on the date fixed for
such purchase after deducting from such amount Rent and all other
amounts, if any, due or accrued through such purchase date, whereupon
Lessee shall transfer its interest in the Garden Banks Block 388 Unit to
Lessor as identified in Schedules F, G and H hereto free and clear of
all Liens (except Permitted Liens) but otherwise without representation
or warranty, expressed or implied, and the Term shall end.
Section 17. Events of Default and Remedies.
------------------------------
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(a) Each of the following acts or occurrences shall constitute an "Event
of Default" hereunder:
(i) default by the Lessee in the payment of any Rent, Additional
Rent, Stipulated Loss Value, or the amount of any Indemnified
Risk (as defined in the Funding Agreement) hereunder when due
and the continuance of such default for 5 days thereafter; or
default in the payment of any other amount due under this Lease
and the continuance of such default for 30 days thereafter; or
(ii) default by the Lessee in the performance of any term, covenant
or agreement contained herein and the continuance of such
default for a period of 30 days after the earlier of (y) the
Lessee becoming aware of such default or (z) Lessor's giving
notice thereof to the Lessee; or
(iii) any representation or warranty made by the Lessee herein, in
any other document or certificate furnished by the Lessee in
connection with or pursuant to this Lease shall be false or
misleading in any material adverse respect on the date as of
which made or reaffirmed; or
(iv) the Lessee shall (A) voluntarily commence any proceeding or file
any petition seeking relief under Title 11 of the United States
Code or any other federal or state bankruptcy, insolvency,
reorganization or similar law now or hereafter in effect, (B)
consent to the institution of any such proceeding or the filing
of any such petition or fail to controvert the same in a timely
and appropriate manner, (C) apply for or consent to the
appointment of a receiver, trustee, custodian, sequestrator or
similar official for the Lessee or for a substantial part of its
property, (D) file an answer admitting the material allegations
of a petition filed against it in any such proceeding, (E) make
a general assignment for the benefit of creditors, (F) admit in
writing its inability or fail generally to pay its debts as they
become due, or (G) take partnership or corporate action for the
purpose of effecting any of the foregoing; or
(v) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction
seeking (A) relief in respect of the Lessee or of a substantial
part of its property under Title 11 of the United States Code or
any other federal or state bankruptcy, insolvency,
reorganization or composition of debts or similar law, (B.) the
appointment of a receiver, trustee, custodian, sequestrator or
similar official for the Lessee or for a substantial part of its
property or (C) the winding-up, reorganization, dissolution or
liquidation of the Lessee or the composition of its debts; and
such proceeding or petition shall continue undismissed for 60
days or an order or decree approving or ordering any of the
foregoing shall continue unstayed and in effect for 60 days; or
(vi) the Lessee shall default in the payment when due of any
principal or interest on any Debt in excess of $25,000,000, or a
default or an event of default, as
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defined in any mortgage, lease, indenture, instrument, loan
agreement or similar document evidencing Debt under which at the
time of such default or event of default there has been issued,
or by which there has been secured or evidenced, any Debt of the
Lessee shall occur, the effect of which, with the giving of
notice or the lapse of time or both, is to permit the holder or
holders (or a trustee or agent on behalf of such holder or
holders) of any such Debt in excess of $25,000,000 to cause such
Debt to become due and payable prior to the due date thereof; or
(vii) the Lessee shall incur a final, unstayed Judgment or Judgments
for the payment of money in excess of $50,000,000 in the
aggregate on a consolidated basis which is unpaid and as to
which a bond for payment of the full amount due has not been
obtained or similar provision for payment of the full amount due
has not been made; or
(viii) Completion shall not have occurred on or before the Completion
Date; or
(ix) the Lessee shall cease to diligently pursue the acquisition,
construction and development of the Project in accordance with
the Development Plan and the Project Plan or shall otherwise
abandon the Project; or
(x) ENSERCH Corporation shall cease to own, directly or indirectly,
the majority of the outstanding shares of the Lessee.
(b) If an Event of Default shall have occurred and be continuing, Lessor
may, at its option, by notice to Lessee declare this Lease to be in default, and
at any time thereafter Lessor may exercise one or more of the following as
Lessor in its sole discretion shall elect:
(i) Lessor may, by notice to Lessee, rescind or terminate this Lease
and all rights of Lessee hereunder to the use and possession of the
Leased Property;
(ii) Lessor may (A) demand that Lessee, and thereupon Lessee shall,
return the Leased Property promptly to Lessor in the manner and
condition required by, and otherwise in accordance with the provisions
of, this Lease as if the Leased Property were being returned at the end
of the Term and Lessor shall not be liable for the reimbursement of
Lessee for any costs and expenses incurred by Lessee in connection
therewith, and (B) take immediate possession of (to the exclusion of
Lessee) the Leased Property, by summary proceedings or otherwise, all
without liability of Lessor to Lessee (or to any Person claiming by,
through or under Lessee) for or by reason of such entry or taking of
possession, whether for the restoration of damage to property caused by
such taking or otherwise, except damage caused by Lessor's negligence or
willful misconduct;
(iii) Whether or not any action has been taken under clause (i) or
(ii) above, Lessor may sell the Leased Property or any part thereof at
public or private sale, as Lessor may determine, with or without notice
to Lessee, advertisement or publication, free and clear of any rights of
Lessee or of any Person claiming by, through or under Lessee and without
any duty to account to Lessee with respect to such sale or any proceeds
with respect thereto (except to the extent required by clause (v) or
(vi) below if Lessor shall elect to exercise its
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rights thereunder), in which event Lessee's obligation to pay Rent hereunder
for periods commencing after the date of such sale shall be terminated (except
to the extent that Rent is to be included in computations under clause (v) or
(vi) below if Lessor shall elect to exercise its rights thereunder);
(iv) Lessor may hold, keep idle, use, operate or lease to others all
or any part of the Leased Property as Lessor in its sole discretion may
determine, free and clear of any rights of Lessee (or any Person claiming by,
through or under Lessee) and without any duty to account to Lessee or to any
Person claiming by, through or under Lessee with respect to such action or
inaction or for any proceeds with respect to such action or inaction, except
that Lessee's obligation to pay Rent for periods commencing after Lessee shall
have been deprived of use of the Leased Property pursuant to this clause (iv)
shall be reduced by the net proceeds, if any, received by Lessor from leasing
the Leased Property to any Person other than Lessee for the same periods or any
portion thereof;
(v) Lessor may, whether or not Lessor shall have exercised or shall
thereafter at any time exercise its rights under clause (ii), (iii) or (iv)
above, demand, by written notice to Lessee specifying a payment date which shall
be a Rent Payment Date not earlier than 10 days after the date of such notice,
that Lessee pay to Lessor, and Lessee shall pay to Lessor, on the Rent Payment
Date specified in such notice, as liquidated damages for loss of a bargain and
not as a penalty (in lieu of Rent due after the Rent Payment Date specified in
such notice), any unpaid Rent due through the Rent Payment Date specified in
such notice plus whichever of the following amounts Lessor, in its sole
discretion, shall specify in such notice (together with interest on such amount
at the Post-Default Rate from the Rent Payment Date specified in such notice to
the date of actual payment);
(A) if Lessor takes possession of the Leased Property, an amount
equal to the excess, if any, of such Stipulated Loss Value over the Fair
Value of Leased Property as of the Rent Payment Date specified in such
notice;
(B) if Lessor takes possession of the Leased Property, an amount
equal to the excess of (1) the present value as of the Rent Payment Date
specified in such notice of all remaining installments of Rent until the
end of the Basic Term or the Fair Market Renewal Term, as the case may be,
discounted semiannually at a rate of 20% per annum, over (2) the present
value as of such payment date of the Fair Market Rental Value of the Leased
Property until the end of the Basic Term or the Fair Market Renewal Term,
as the case may be, discounted semiannually at a rate of 20% per annum; or
(C) an amount equal to the Stipulated Loss Value, computed as of the
Rent Payment Date specified in such notice and upon payment thereof and all
other amounts then due by Lessee hereunder, Lessor shall transfer all of
its right, title and interest in the Leased Property to Lessee, free and
clear of all Liens (except Permitted Liens), but otherwise without
representations or warranties, expressed or implied;
(vi) If Lessor shall have sold all the Leased Property pursuant to
clause (iii) above, Lessor, in lieu of exercising its rights under clause (v)
above with respect to the
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Leased Property, may (but shall not be obligated to) demand that Lessee pay
to Lessor and Lessee shall pay to Lessor on the date of such sale, as
liquidated damages for loss of a bargain and not as a penalty (in lieu of
Rent due for periods commencing after the next Rent Payment Date following
the date of such sale), any unpaid Rent due through such Rent Payment Date,
plus the amount of any deficiency between Stipulated Loss Value, computed
as of such Rent Payment Date, and the net proceeds of such sale, together
with interest at the Post-Default Rate on the amount of such Rent and such
deficiency from the date of such sale until the date of actual payment; or
(vii) Lessor may exercise any other right or remedy that may be
available to it under applicable law or proceed by appropriate court
action to enforce the terms hereof or to recover damages for the breach
hereof.
(c) In addition to the foregoing, Lessee shall be and remain liable
for paying or reimbursing Lessor for (i) any and all Rent and other amounts due
and payable under this Lease prior to any such Event of Default, and (ii) all
costs and expenses incurred by Lessor (including reasonable fees and expenses of
counsel) in connection with any exercise of its remedies provided in Section
17(b).
(d) No rescission or termination of this Lease, in whole or in part,
or repossession of the Leased Property or exercise of any remedy under Section
17(b) shall, except as specifically provided therein, relieve Lessee of any of
its liabilities and obligations hereunder. In addition, Lessee shall be liable,
except as otherwise provided above, for any and all unpaid Rent due hereunder
before, after or during the exercise of any of the foregoing remedies, including
all reasonable legal fees and other costs and expenses incurred by Lessor by
reason of the occurrence of any Event of Default or the exercise of Lessor's
remedies with respect thereto and including all costs and expenses incurred in
connection with the return of the Leased Property in the manner and condition
required by, and otherwise in accordance with the provisions of, this Lease as
if the Leased Property were being returned at the end of the Term. At any sale
of the Leased Property or any part thereof pursuant to Section 17(b), Lessor may
bid for and purchase such property.
(e) To the extent permitted by, and subject to the mandatory Section
17(b) or otherwise available to Lessor shall be cumulative and shall be in
addition to every other right, power and remedy, and each and every right, power
and remedy may be exercised from time to time and as often and in such order as
may be deemed expedient by Lessor, and the exercise or the beginning of exercise
of any such right, power or remedy shall not exhaust the same or be construed to
be a waiver of the right to exercise at the same time or thereafter the same or
any other right, power or remedy. No delay or omission by Lessor in the exercise
of any right, power or remedy shall restrict Lessor from exercising the same or
any other right, power or remedy thereafter nor be construed to be a waiver of
any Event of Default or to be an acquiescence therein. No express or implied
waiver by Lessor of any Event of Default shall in any way be, or be construed to
be, a waiver of any future or subsequent Event of Default.
Section 18. INTENTIONALLY OMITTED.
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Section 19. Inspection; Right to Enter Premises of the Lessee.
-------------------------------------------------
The Lessor, or its respective authorized representatives may (but
without any obligation to do so) (i) enter upon the Leased Property or any
premises of the Lessee at reasonable times upon reasonable advance notice in
order to inspect the Leased Property (subject to the availability thereof for
inspection) and to inspect, audit and make copies of all documents and
instruments in the possession of the Lessee that are reasonably necessary or
appropriate for the Lessor or such authorized representatives to determine the
truth and accuracy of any schedule, annex, exhibit or representation delivered
or made hereunder, or compliance by the Lessee with any of the agreements herein
contained, and (ii) discuss the condition and performance of the Leased Property
with the responsible officers of the Lessor. Such inspections of the Leased
Property located in the Gulf of Mexico shall be subject to Lessee's reasonable
discretion as operator to bar access to the Units of Leased Property for safety
reasons. Such inspections of Leased Property located in the Gulf of Mexico
shall be performed under Lessee's supervision as operator.
Section 20. Right to Perform the Lessee's Covenants.
---------------------------------------
Subject to Section 13 hereof, if the Lessee shall fail to make any
payment or perform any act required to be made or performed by it hereunder, the
Lessor, upon notice to or demand upon the Lessee but without waiving or
releasing any obligation or default, may (but shall be under no obligation to)
at any time thereafter make such payment or perform such act (other than
entering upon the Leased Property) for the account and at the expense of the
Lessee as, at the Lessor's sole discretion, may be necessary or appropriate
therefor and, upon the occurrence and during the continuance of a Triggering
Event, may enter upon the Leased Property for such purpose and take all such
action thereon as, at the Lessor's sole discretion, may be necessary or
appropriate therefor. No such entry shall be deemed an eviction of the Lessee.
All sums so paid by the Lessor and all costs and expenses (including, without
limitation, reasonable attorneys' fees and expenses so incurred) shall be paid
by the Lessee to the Lessor on demand as Additional Rent.
Section 21. Participation by Co-Lessees or Sublessees.
-----------------------------------------
(a) Except as otherwise permitted in this Section 21 or in the
Declaration, the Lessee may not assign its rights or obligations under this
Lease without the prior consent of the Lessor. The Lessor has granted a Lien on
this Lease to its Funding Sources to secure the obligation of the Lessor under
the Funding Agreement.
(b) The Lessor and the Lessee may from time to time, so long as no
Default or Event of Default shall have occurred and be continuing, enter into
documentation amending this Lease and, as necessary, the Operative Documents, to
evidence the undertaking of a Person (a "Co-Lessee") to be responsible for
certain obligations of the Lessee and the attendant reduction in the obligations
of the Lessee hereunder, subject in every case to the prior written approval of
the Lessor acting in its sole and unfettered discretion in approving said Co-
Lessee and the documentation amending this Lease and the Operative Documents, it
being understood that the Lessor may for any reason whatsoever elect not to
grant such approval, in which case this Lease shall not be amended.
(c) The Lessee may from time to time with the written consent of
Lessor, so long as no Default or Event of Default shall have occurred and be
continuing, enter into a sublease and such other documentation as may be
necessary with one or more Persons (each a "Sublessee"). In any
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event, any documentation executed by the Lessee in connection with the
subletting of the Leased Property (i) shall expressly state that such sublease
is subject and subordinate to the terms of this Lease and the Security
Instruments and (ii) shall not provide for a sublease term ending after the then
current Stated Lease Termination Date. Upon request of the Lessor, the Lessee
will furnish to the Lessor copies of all subleases and related documentation
entered into by the Lessee from time to time. No sublease permitted by the terms
hereof will reduce in any respect the obligations of the Lessee hereunder, it
being the intent of the Lessee and the Lessor that the Lessee be and remain
directly and primarily liable as a principal for its obligations hereunder. Any
sublease made otherwise than as expressly permitted by this Section 21(c) shall
be null and void and of no force or effect.
Section 22. Notices.
-------
All notices, demands, instructions and other communications required
or permitted hereunder to be given to or made upon any party to this Lease shall
be effective (i) when received in writing, by prepaid telex or by telecopy, (ii)
when personally delivered or otherwise actually received, or (iii) five days
after the same shall have been deposited in the United States mail, registered
or certified, postage prepaid, addressed as follows:
To Lessee: New Enserch Exploration, Inc.
1817 Wood Street
Dallas, Texas 75201
Attention: Treasurer
Telecopy: (214) 573-3351
To the Lessor: Enserch Exploration, Inc.
1817 Wood Street
Dallas, Texas 75201
Attention: Controller
Telecopy: (214) 573-3351
or in each case at such other address as the party concerned may designate by
notice duly given in accordance with this Section 22.
Section 23. Amendments and Waivers.
----------------------
The provisions of this Lease may from time to time be amended,
modified or waived only if such amendment, modification or waiver is in writing
and consented to by the Lessee and the Lessor and, if applicable, in accordance
with Section 21.
Section 24. Severability.
------------
Any provision of this Lease which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
Section 25. INTENTIONALLY OMITTED.
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Section 26. True Lease.
----------
This Lease is an agreement of lease and does not convey to Lessee any
right, title or interest in the Leased Property except as a lessee.
Section 27. No Merger.
---------
There shall be no merger of this Lease or of the leasehold interest
hereby created with the title to the Leased Property or any portion thereof or
interest therein by reason of the fact that the same Person may acquire or hold
directly or indirectly this Lease or the leasehold interest created hereby, or
any interest in this Lease or in any such leasehold interest, as well as title
to the Leased Property.
Section 28. Miscellaneous.
-------------
(a) The terms and provisions of this Lease supersede all prior
agreements, negotiations, understandings, and discussions, if any, whether oral
or written, between the Lessor and the Lessee with respect to the transactions
contemplated hereby.
(b) Notwithstanding anything to the contrary contained in this Lease,
the execution of this Lease and any other instrument or document executed in
connection herewith shall not impose upon any director, officer or employee of
the Lessee or the Lessor personal liability for the Lessee's and the Lessor's
respective obligations under this Lease or any other instrument or document
executed in connection herewith; provided the foregoing shall not relieve any
such director, officer or employee of personal liability for his or her fraud or
intentional misconduct.
(c) The captions and the Table of Contents in this Lease are for
convenience of reference only and shall not define or limit any of the terms or
provisions hereof.
(d) THIS LEASE SHALL IN ALL RESPECTS BE GOVERNED BY, AND BE CONSTRUED
IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK EXCEPT TO THE
EXTENT THE LAW OF THE STATE OF LOUISIANA OR FEDERAL LAW IS MANDATORILY
APPLICABLE, IN WHICH CASE THIS LEASE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH SUCH LAW.
(e) Nothing in this Lease, express or implied, shall give to any
Person, other than the parties hereto and their respective successors and
permitted assigns, any benefit or any legal or equitable right, remedy or claim
under this Lease including, without limitation, under any provision of this
Lease regarding the priority or application of any amounts payable hereunder.
(f) This Lease may be executed in two or more counterparts and by the
different parties on separate counterparts, each of which shall constitute an
original but which, when taken together, shall constitute but one instrument.
(g) THIS WRITTEN LEASE AND THE OTHER OPERATIVE DOCUMENT REPRESENT THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
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THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
(h) EACH OF THE LESSEE AND THE LESSOR WAIVES, TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING TO ENFORCE OR TO DEFEND ANY RIGHTS UNDER THIS LEASE OR ANY RELATED
DOCUMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR
WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR
ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS LEASE OR ANY
RELATED DOCUMENT AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED
BEFORE A COURT AND NOT BEFORE A JURY.
(i) Any amounts owing under this Lease by the Lessee shall bear
interest (to the fullest extent permitted by law) from and including the date
due to but excluding the date of payment thereof paid at the Post-Default Rate,
payable on demand. Notwithstanding anything to the contrary contained in this
Lease or any of the Operative Documents, the amounts which the Lessee is obliged
to pay pursuant to this Lease and the other Operative Documents, and the amounts
which the Lessor is entitled to receive pursuant to this Lease and the other
Operative Documents, are subject to the limitations set forth in Section 12.15
of the Funding Agreement.
(j) Time is of the essence in connection with the payment of Rent,
Additional Rent and all other amounts payable hereunder and the performance of
the Lessee's other obligations hereunder.
(k) THIS LEASE IS SUBJECT AND SUBORDINATE TO THE TERMS, OBLIGATIONS,
CONDITIONS AND DEFINITIONS OF THAT CERTAIN MASTER LEASE AGREEMENT, DATED AS OF
SEPTEMBER 30, 1992 BETWEEN STATE STREET BANK AND TRUST COMPANY OF CONNECTICUT,
NATIONAL ASSOCIATION, AS TRUSTEE FOR GARDEN BANKS TRUST, AS THE LESSOR, AND EP
OPERATING COMPANY LIMITED PARTNERSHIP, AS THE LESSEE, AS IT MAY BE AMENDED FROM
TIME TO TIME (THE "MASTER LEASE"), AND THAT CERTAIN SECURITY AGREEMENT, DATED AS
OF SEPTEMBER 30, 1992 AMONG STATE STREET BANK AND TRUST COMPANY OF CONNECTICUT,
NATIONAL ASSOCIATION, AS TRUSTEE AND THE CHASE MANHATTAN BANK, N.A. AS AGENT.
THE LESSEE ACKNOWLEDGES FOR THE BENEFIT OF THE LESSOR AND ITS FUNDING SOURCES
THAT, IN THE EVENT THAT THE MASTER LEASE SHALL BE TERMINATED OR CANCELLED PRIOR
TO THE STATED LEASE TERMINATION DATE AS A RESULT OF A DEFAULT BY THE LESSEE
UNDER THIS LEASE, LESSOR MAY IN ITS DISCRETION, TERMINATE THIS LEASE. THE
LESSEE FURTHER ACKNOWLEDGES THAT THE LESSOR SHALL BE SUBJECT TO NO OBLIGATION OR
LIABILITY TO THE LESSEE AS A RESULT OF SUCH TERMINATION OR CANCELLATION.
(l) Lessor and Lessee hereby acknowledge that Mobil Producing Texas &
New Mexico Inc. ("Mobil") has an option to participate in the Project pursuant
to that certain Participation Agreement with EP Operating Limited Partnership,
dated June 15, 1994. Notwithstanding any provision of this Lease to the
contrary, Lessor and Lessee hereby agree to cooperate fully in the event that
such option is exercised. Lessor, insofar as Lessor and its Funding Sources are
the owners of the Leased Property, and Lessee, insofar as Lessee has rights
hereunder and is the operator of the
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<PAGE>
Project, hereby ratify and assume the obligations of EP Operating Limited
Partnership pursuant to the Participation Agreement insofar as such agreement
grants to Mobil the right to participate in the Master Lease upon the approval
of Lessor's Funding Sources. Lessor and Lessee acknowledge that Mobil's
participation in the Project may reduce both Lessor's and Lessee's interests
hereunder on an equal basis by up to 40%.
Section 29. Survival of Representations, Warranties, Indemnities, Etc.
----------------------------------------------------------
All representations, warranties and indemnities of the parties hereto
provided for in this Lease, including without limitation the obligations of the
Lessee pursuant to Section 3(d) hereof in respect of the Impositions, shall
survive the execution and delivery hereof and any disposition of any interest of
Lessor in the Leased Property and shall be and continue in effect
notwithstanding any investigation by any such parties. The obligations of
Lessee shall survive the expiration or termination of this Lease to the extent
such obligations relate to periods prior to the date of such expiration or
termination.
Section 30. Further Assurances.
------------------
(a) The Lessee, at its expense, shall execute, acknowledge and deliver
from time to time such further counterparts of this Lease or such affidavits,
certificates, certificates of title, bills of sale, financing and continuation
statements, consents and other instruments as may be required by applicable law
or reasonably requested by the Lessor in order to evidence the Lessor's or its
Funding Sources' title to the Units of Leased Property and the Lessor's or its
Funding Sources' interests in this Lease, and shall at the Lessee's expense
cause such documents to be recorded, filed or registered in such places as the
Lessor may request and to be re-recorded, refiled or re-registered in such
places required by applicable law or at such times as may be required by
applicable law in order to maintain and continue in effect the recordation,
filing or registration thereof. Unless an Event of Default shall have occurred
and shall be continuing, the Lessor shall not grant or create any Lien on any
Unit of Leased Property to any Person except Permitted Liens, Liens in favor of
the Funding Sources and Liens pursuant to this Lease, the Security Instruments
and the other Operative Documents.
(b) Lessor and Lessee will promptly, upon reasonable request and at
their sole expense, execute and deliver all such other documents and take such
other action as may be reasonable and necessary to fully effectuate the
provisions of this Lease.
Section 31. Lessee's Representations and Warranties. The Lessee represents
---------------------------------------
and warrants to the Lessor that:
(a) Existence. (i) The Lessee is a corporation duly organized and
---------
validly existing under the laws of the State of Texas; (ii) the Lessee has all
requisite corporate power, and all material governmental licenses,
authorizations, consents and approvals necessary, to own its Property and carry
on its business as now being or as proposed to be conducted and is in material
compliance with all Legal Requirements; (iii) Lessee is qualified to do business
in all jurisdictions in which the nature of the business conducted by it makes
such qualification necessary and where failure to so qualify would result in a
Lessee Material Adverse Change; and (iv) Lessee is in good standing in the
jurisdiction of its organization and each such jurisdiction in which it is
qualified to do business
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<PAGE>
except where the failure to be in good standing would not result in a Lessee
Material Adverse Change.
(b) Financial Condition. (i) The unaudited consolidated balance sheet
-------------------
of the Lessee as of June 30, 1994 and the related consolidated statements of
operations or stockholders' equity and cash flow with the opinion thereon of an
independent certified public accountant are complete and correct and fairly
present in all material respects the consolidated financial condition of the
Lessee as at said date and the consolidated results of operations and cash flows
for the fiscal year and six-month period, all in accordance with GAAP.
(ii) On the date hereof the Lessee has no material advances,
investments, liabilities (direct or contingent), liabilities for taxes, unusual
forward or long-term commitments or unrealized or anticipated losses from any
unfavorable commitments, except (y) those referred to or reflected or provided
for in the Financial Statements that the Lessor has received prior to the date
of this Agreement and (z) those permitted by this Agreement.
(iii) Since the date of the Financial Statements, there has
occurred no Lessee Material Adverse Change.
(c) Litigation. Except as disclosed to the Lessor, there are no legal
----------
or arbitral proceedings or any proceedings by or before any Governmental
Authority, now pending or (to the knowledge of the Lessee) threatened against
the Lessee which, if adversely determined, could result in a Lessee Material
Adverse Change.
(d) No Breach. Except as set forth herein, the execution and delivery
---------
of this Agreement and the other Operative Documents, the transactions herein
contemplated and compliance with the terms and provisions hereof will not
conflict with or result in a breach of, or require any consent of any Person not
already obtained, under the bylaws of Lessee, or any applicable Legal
Requirement, or any agreement or instrument to which the Lessee is a party or by
which it is bound or to which it is subject, or constitute a default under any
such agreement or instrument, or result in the creation or imposition of any
Lien (except under the Operative Documents) upon any of the revenues or Property
of the Lessee or the Leased Property pursuant to the terms of any such agreement
or instrument.
(e) Action. The Lessee has all necessary corporate power and
------
authority to execute, deliver and perform its obligations under this Agreement
and the other Operative Documents to which it is a party, and the execution,
delivery and performance by it of this Agreement and the other Operative
Documents to which it is a party have been duly authorized by all necessary
corporate action on its part; and the other Operative Documents to which it is
a party have been duly authorized by all necessary corporate action on its part;
and this Agreement and the other Operative Documents constitute the legal, valid
and binding obligation of each of the parties thereto, enforceable in accordance
with their terms, subject to bankruptcy, insolvency, reorganization, moratorium
or similar laws of general application relating to or affecting creditor's
rights and to general principles of equity.
(f) Approvals. Except as set forth herein, no authorizations,
---------
approvals or consents of, and no filings or registrations with, any Governmental
Authority are necessary for the execution,
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<PAGE>
delivery or performance by the Lessee of this Agreement and the other
Operative Documents to which they respectively are parties, or for the
validity or enforceability thereof.
(g) ERISA. (i) the Lessee and each ERISA Affiliate have complied in
-----
all material respects with ERISA and, where applicable, the Code regarding each
Plan.
(ii) No act, omission or transaction has occurred which could
result in imposition on the Lessee or any ERISA Affiliate (whether directly or
indirectly) of (i) either a material civil penalty assessed pursuant to
subsections (c), (i) or (l) of Section 502 of ERISA or a material tax imposed
pursuant to Chapter 43 of Subtitle D of the Code or (ii) breach of fiduciary
duty liability damages under section 409 of ERISA.
(iii) No liability to the PBGC (other than for the payment of
current premiums which are not past due) by the Lessee or any ERISA Affiliate
has been or is expected by the Lessee or any ERISA Affiliate to be incurred
with respect to any Plan.
(iv) Full payment has been made of all amounts which the Lessee
or any ERISA Affiliate is required under the terms of each Plan or applicable
law to have paid to such Plan as of the date hereof, and no accumulated funding
deficiency (as defined in section 302 of ERISA and section 412 of the Code),
whether or not waived, exists with respect to any Benefit Plan.
(v) The actuarial present value of the benefit liabilities
under each Benefit Plan which is subject to Title IV of ERISA does not, as of
the end of each such Benefit Plan's most recently ended plan year, materially
exceed the current value of the assets (computed on a plan termination basis in
accordance with Title IV of ERISA) of such Benefit Plan allocable to such
benefit liabilities. The term "actuarial present value of the benefit
liabilities" shall have the meaning specified in section 4041 of ERISA.
(vi) As of the execution of this Agreement, neither the Lessee
nor any ERISA Affiliate (1) has received any notification that any Multiemployer
Plan is in reorganization or has been terminated, within the meaning of Title IV
of ERISA, or (2) is aware of any reason to expect that any Multiemployer Plan is
to be in reorganization or to be terminated.
(h) No Material Misstatements. No information, exhibit or report
-------------------------
furnished to the Lessor in connection with the negotiation and administration of
this Agreement contains any material misstatement of fact or omits to state a
material fact necessary in order to make the statements contained therein not
misleading.
(i) Investment Company Act. The Lessee is not an "investment company"
----------------------
or a company "controlled" by an "investment company", within the meaning of the
Investment Company Act of 1940, as amended.
(j) Public Utility Holding Company Act. The Lessee is not a "holding
----------------------------------
company," or a "subsidiary company" of a "holding company" or an "affiliate" of
a "holding company" or of a "subsidiary company" of a "holding company," within
the meaning of the Public Utility Holding Company Act of 1935, as amended.
-34-
<PAGE>
(k) Articles of Incorporation. The Articles of Incorporation of
-------------------------
Lessee have not been terminated, and are in full force and effect as of the
date hereof and no default has occurred and is in continuance thereunder.
(l) Location of Business and Offices. The principal place of business
--------------------------------
and chief executive offices of the Lessee are located at the address set forth
herein.
(m) Regulatory Matters. The Lessee has not violated any provisions of
------------------
any Legal Requirement which would result in a Lessee Material Adverse Change,
and the Lessee, except as provided herein, made all necessary filings,
certificate applications, report filings, and any other filings or
certifications, and have received all necessary regulatory authorizations
required under said laws and regulations with respect to all of their respective
operations and Properties so as not to result in a Lessee Material Adverse
Change. Said material filings, certificate applications, report filings, and
other filings and certifications contain no untrue statements of material facts
nor do they omit any statements of material facts necessary in said filings.
(n) Environmental Matters. Except as disclosed herein:
---------------------
(i) Neither any Property of the Lessee nor the Leased Property
nor the operations conducted thereon violate any Environmental Laws or
any Legal Requirement of any Governmental Authority with respect to
Environmental Laws which violation would result in a Lessee Material
Adverse Change.
(ii) Without limitation of clause (i) above, no Property of the
Lessee nor the Leased Property nor the operations currently conducted
thereon or by any prior owner or operator of such Property or the Leased
Property or operation, are in violation of or subject to any existing,
pending or threatened action, suit, investigation, inquiry or proceeding
by or before any Governmental Authority or to any on-site or off-site
remedial obligations under Environmental Laws which would result in a
Lessee Material Adverse Change.
(iii) All Permits or similar authorizations, if any, required to be
obtained or filed in connection with the operation or use of any
Property of the Lessee or the Leased Property have been duly obtained or
filed, and the Lessee has been, is now, and expects to continue to be in
compliance with the terms and conditions of all such Permits and similar
authorizations so as not to result in a Lessee Material Adverse Change.
(iv) All hazardous substances or solid waste generated at any and
all Property of the Lessee and the Leased Property have at all times
been transported, treated and disposed of in compliance with
Environmental Laws except where failure to comply would not result in a
Lessee Material Adverse Change.
(v) There is no known environmental condition which would
materially adversely affect the ability of the Lessee to conduct its
business as it is currently conducted and to meet its financial
obligations, and no environmental conditions exist with respect to any
of its Properties which would result in a Lessee Material Adverse
Change; and
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<PAGE>
(vi) The Lessee has no contingent liability in connection with any
release or threatened release of any hazardous substance or solid
waste into the environment which would result in a Lessee Material
Adverse Change.
(o) Project Plan. The Project Plan has been prepared in good faith on
------------
the basis of reasonable assumptions and accurately includes all costs currently
anticipated to be incurred in connection with achieving Completion of the
Project. The Project Plan sets forth the Lessee's good faith estimation of the
schedule for achieving Completion of the Project.
(p) Leased Tracts. As of the date of execution of this Agreement, the
-------------
Lessee owns legal and beneficial title to 100% of the record title interest in
and to the Leased Tracts, free and clear of all Liens except Permitted Liens and
except as otherwise identified herein.
(q) Operating Lease Obligations. On the date of the execution of this
---------------------------
Agreement, Lessee has no Operating Lease Obligations except as identified
herein.
Section 32. Affirmative Covenants.
---------------------
The Lessee agrees that during the term of this Agreement:
(a) Financial Statements and Reports. The Lessee shall deliver or
--------------------------------
cause to be delivered:
(i) To the Lessor, as soon as available and in any event within 90
days after the end of each fiscal year of the Lessee (if applicable),
audited consolidated statements of operations, partners' or
stockholders' equity and cash flow statements of the Lessee (if
available), and the related consolidated audited balance sheet as at the
end of such year, setting forth in each case in comparative form the
corresponding figures for the preceding fiscal year, and accompanied by
an opinion thereon of independent certified public accountants of
recognized national standing, which opinion shall state that said
financial statements fairly present the consolidated financial condition
and consolidated results of operations and cash flows of the Lessee (if
such financial statements are available), as at the end of, and for,
such fiscal year and a certificate of such accountants stating that, in
making the examination necessary for their opinion, they obtained no
knowledge, except as specifically stated, of any Default.
To the Lessor, as soon as available and in any event within 45
days after the end of each of the first three fiscal quarters of each
fiscal year of the Lessor, consolidated statements of operations and of
stockholders' equity of the Lessor (if available) for such period and
for the period from the beginning of the fiscal year to the end of such
period, the related consolidated balance sheet as of the end of such
period, setting forth in each case in comparative form the corresponding
figures to the extent available for the corresponding period in the
preceding fiscal year, accompanied by a certificate of the chief
financial officer or chief accounting officer of the Lessor which
certificate shall state that said financial statements fairly present
the consolidated financial condition and consolidated results of
operations and cash flows of the Lessor (if such financial statements
are available), in accordance with GAAP as at the end of, and for, such
period (subject to normal year-end audit adjustments).
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<PAGE>
(ii) To the Lessor, promptly upon there becoming available,
copies of all registration statements, proxy statements and regular
periodic reports, if any, which the Lessee shall have filed with the
Securities and Exchange Commission (or any governmental agency
substituted therefor) or any national securities exchange.
(iii) To the Lessor, promptly after the Lessee knows or has
reason to know of any event or condition having a Lessee Material
Adverse Change or that any Default has occurred, a notice of such
event, condition or Default, describing the same in reasonable detail.
(iv) To the Lessor, at the time it furnishes each set of
financial statements pursuant to clause (a) above, a compliance
certificate of the chief financial officer or chief accounting officer
of the Lessee certifying as to the truth and accuracy of such statement.
(v) To the Lessor, promptly upon obtaining the same, copies
of any environmental assessment or other study undertaken with regard
to the Project or any portion of the Leased Property.
(vi) To the Lessor, within 10 Business Days after the end of
each Quarterly Date a Progress Report through the period ending on
each Quarterly Date and dated as of such Quarterly Date.
(vii) To the Lessor from time to time such other reasonable
information regarding the business, operations, Property, affairs or
financial conditions of the Lessee, including, without limitation, the
acquisition, development, construction and installation of the Project,
as the Lessor may reasonably request.
(b) Litigation. The Lessee shall promptly give to the Lessor notice
----------
of all legal or arbitral proceedings, and of all proceedings before any
governmental or regulatory authority or agency, affecting the Lessee except
proceedings which, if adversely determined, would not result in a Material
Adverse Change.
(c) Existence, Etc. The Lessee shall preserve and maintain its
---------------
corporate existence; and shall preserve and maintain all of its material
rights, privileges and franchises and comply with the requirements of all
applicable Legal Requirements if failure to comply with such requirements would
result in a Lessee Material Adverse Change; and the Lessee shall pay and
discharge all Impositions on the Lessee and the Leased Property prior to the
date on which penalties attach thereto, except for any such Imposition which is
being contested in good faith in accordance with the Lease.
(d) Environmental Covenant. The Lessee shall promptly notify the
----------------------
Lessor in writing of any existing, pending or threatened action, investigation
or inquiry by any Governmental Authority concerning the Lessee in connection
with any Environmental Laws involving the Leased Property which could result in
a Material Adverse Change.
(e) Further Assurances. The Lessee will cure promptly any defects in
------------------
the execution and delivery of the Operative Documents, including this Agreement.
The Lessee at its expense will promptly execute and deliver to the Lessor upon
request all such other and further documents,
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<PAGE>
agreements and instruments (or cause the other Partners to take such action)
in compliance with or accomplishment of the covenants and agreements of the
Lessee in this Agreement.
(f) Performance of Obligations. The Lessee will pay and otherwise do
--------------------------
and perform every act and discharge all of the obligations required to be
performed and discharged by the Lessee, as applicable, under this Lease
Agreement.
Section 33. Negative Covenants. The Lessee agrees that for the term of this
------------------
Agreement:
(a) Nature of Business. The Lessee will not make any material change
------------------
in the character of its business as carried on at the date hereof.
(b) Mergers, Etc. The Lessee will not merge or consolidate with, or
-------------
sell, assign, lease or otherwise dispose of (whether in one transaction or in a
series of transactions) all or substantially all of its Properties (whether now
owned or hereafter acquired) to any Person, except that, any entity may
consolidate with or merge into the Lessee if the Lessee shall be the surviving
Person and if, immediately after giving effect to such transaction, (a) Enserch
Corporation shall continue to own, directly or indirectly, the majority of the
issued and outstanding common stock in the Lessee, (b) the Lessee shall have
assets the fair market value of which exceed the amount of its liabilities
including contingent liabilities and (c) no condition or event shall exist which
constitutes, or upon consummation of such transaction would constitute, an Event
of Default or Default.
(c) ERISA Compliance. The Lessee will not at
----------------
any time:
(i) Engage in, or permit any ERISA Affiliate to engage in, any
transaction in connection with which Special General Partner, the Lessee
or any ERISA Affiliate could be subjected to either a civil penalty
assessed pursuant to section 502(c), (i) or (l) of ERISA or a tax
imposed by Chapter 43 of Subtitle D of the Code;
(ii) Terminate, or permit any ERISA Affiliate to terminate, any
Benefit Plan other than pursuant to a standard termination (within the
meaning of Section 4041 of ERISA);
(iii) Fail to make, or permit any ERISA Affiliate to fail to make,
full payment when due of all amounts which, under the provisions of any
Plan, agreement relating thereto or applicable law, the Lessee or any
ERISA Affiliate is required to pay as contributions thereto;
(iv) Permit to exist, or allow any ERISA Affiliate to permit to
exist, any accumulated funding deficiency within the meaning of
Section 302 of ERISA or section 412 of the Code, whether or not waived,
with respect to any Benefit Plan;
(v) Permit, or allow any ERISA Affiliate to permit, the
occurrence of any ERISA Event with respect to a Benefit Plan for which
there is an Insufficiency;
(vi) Incur, or permit any ERISA Affiliate to incur, a liability
under sections 4062, 4063 or 4064 of ERISA;
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<PAGE>
(vii) Incur, or permit any ERISA Affiliate to incur, a Withdrawal
Liability to a Multiemployer Plan; or
(viii) Incur, or permit any ERISA Affiliate to incur, an increase in
the aggregate annual contributions to a Multiemployer Plan on account
of the reorganization or termination of such Multiemployer Plan;
provided, however, that the transactions, events and occurrences
described in clauses (i), (v), (vi), (vii) and (viii) of this Section
33(c) shall be permitted so long as such transactions, events and
occurrences (individually and in the aggregate) will not result in a
Material Adverse Change.
(d) Environmental Matters. The Lessee shall not cause or permit any
---------------------
of its Property or the Leased Property to be in violation of, or do anything or
permit anything to be done which would subject any of its Property or the Leased
Property to any remedial obligations under any Environmental Laws, assuming
disclosure to the applicable Governmental Authority of all relevant facts,
conditions and circumstances, if any, pertaining to such Property or the Leased
Property where such violations or remedial obligations would result in a
Material Adverse Change. The Lessee shall not allow use of any of its Property
or the Leased Property in a manner which will result in (i) violation of any
order or requirement of any Governmental Authority or any Environmental Laws,
(ii) the disposal or other release of any solid waste, petroleum, pollutant, or
contaminant except in compliance with Environmental Laws, (iii) a release of a
hazardous substance in a quantity equal to or exceeding the quantity which
requires reporting pursuant to Section 103 of CERCLA, or (iv) the release of any
hazardous substance so as to pose an imminent and substantial endangerment to
public health or welfare or the environment, in the case of any Property of the
Lessee, which would result in a Material Adverse Change, and in the case of the
Leased Property.
(e) Project Plan. The Lessee shall not amend or revise the Project
------------
Plan in any manner which would materially and adversely affect the operation,
design or capacity of the Project without the prior written consent of the
Lessor as advised by the Technical Consultant. The Lessee shall not under any
circumstance undertake to develop or otherwise initiate the production of
hydrocarbons from the Leased Tracts except by means of the Project in accordance
with the Project Plan.
Section 34. Lessor's Representations and Warranties. The Lessor represents
---------------------------------------
and warrants to the Lessee that:
(a) Existence. (i) The Lessor is a corporation duly organized and
---------
validly existing under the laws of the State of Texas; (ii) the Lessor has all
requisite corporate power, and all material governmental licenses,
authorizations, consents and approvals necessary, to own its Property and carry
on its business as now being or as proposed to be conducted and is in material
compliance with all Legal Requirements; (iii) Lessor is qualified to do business
in all jurisdictions in which the nature of the business conducted by it makes
such qualification necessary and where failure to so qualify would result in a
Material Adverse Change; and (iv) Lessor is in good standing in the jurisdiction
of its organization and each such jurisdiction in which it is qualified to do
business except where the failure to be in good standing would not result in a
Lessor Material Adverse Change.
(b) Litigation. Except as disclosed to the Lessee, there are no legal
----------
or arbitral proceedings or any proceedings by or before any Governmental
Authority, now pending or (to the
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<PAGE>
knowledge of the Lessor) threatened against the Lessor which, if adversely
determined, could result in a Lessor Material Adverse Change.
(c) No Breach. Except as set forth herein, the execution and delivery
---------
of this Agreement and the other Operative Documents, the transactions herein
contemplated and compliance with the terms and provisions hereof will not
conflict with or result in a breach of, or require any consent of any Person not
already obtained, under the bylaws of Lessor, or any applicable Legal
Requirement, or any agreement or instrument to which the Lessor is a party or by
which it is bound or to which it is subject, or constitute a default under any
such agreement or instrument.
(d) Action. The Lessor has all necessary corporate power and
------
authority to execute, deliver and perform its obligations under this Agreement
and the other Operative Documents to which it is a party, and the execution,
delivery and performance by it of this Agreement and the other Operative
Documents to which it is a party have been duly authorized by all necessary
corporate action on its part; and this Agreement and the other Operative
Documents constitute the legal, valid and binding obligation of each of the
parties thereto, enforceable in accordance with their terms, subject to
bankruptcy, insolvency, reorganization, moratorium or similar laws of general
application relating to or affecting creditor's rights and to general principles
of equity.
(e) Approvals. Except as set forth herein, no authorizations,
---------
approvals or consents of, and no filings or registrations with, any Governmental
Authority are necessary for the execution, delivery or performance by the Lessor
of this Agreement and the other Operative Documents to which they respectively
are parties, or for the validity or enforceability thereof.
(f) No Material Misstatements. No information, exhibit or report
-------------------------
furnished to the Lessee in connection with the negotiation and administration of
this Agreement contains any material misstatement of fact or omits to state a
material fact necessary in order to make the statements contained therein not
misleading.
(g) Regulatory Matters. The Lessor has not violated any provisions of
------------------
any Legal Requirement which would result in a Lessor Material Adverse Change,
and the Lessor, except as provided herein, made all necessary filings,
certificate applications, report filings, and any other filings or
certifications, and have received all necessary regulatory authorizations
required under said laws and regulations with respect to all of their respective
operations and Properties so as not to result in a Material Adverse Change.
Said material filings, certificate applications, report filings, and other
filings and certifications contain no untrue statements of material facts nor do
they omit any statements of material facts necessary in said filings.
Section 35. Application of Certain Payments.
-------------------------------
(a) Application of Payments Not Relating to a Casualty Occurrence.
-------------------------------------------------------------
Payments received at any time by Lessor or Lessee pursuant to Section 11(b) or
from any Governmental Authority, or other Person other than an insurer with
respect to any destruction, damage, loss, condemnation, confiscation, theft or
seizure of or requisition of title to the Leased Property or any part thereof
during the Term not constituting a Casualty Occurrence or with respect to any
and all indemnification rights and warranties assigned pursuant to Section 11(b)
shall be applied to pay or to reimburse Lessee for repairs to or restoration or
replacement of property in respect of which such
-40-
<PAGE>
payment was received and, after completion of such repairs, restoration or
replacement, the balance, if any, of such payments shall be divided between
Lessor and Lessee as their interests may appear.
(b) Application of Certain Taking Payments. Notwithstanding the
--------------------------------------
provisions of Section 35(a), payments received at any time by Lessor or Lessee
from any Governmental Authority as a result of the taking of the use of the
Leased Property or any part thereof during the Term not constituting a
Constructive Total Loss shall be applied in payment of repairs to or restoration
or replacement of property in accordance with Section 7 or 9, as applicable (or
to reimburse Lessee therefor), and any balance remaining after Lessee shall be
in compliance with Section 7 or 9, as applicable, shall be paid to or retained
by Lessee.
INTENTIONALLY LEFT BLANK
-41-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Lease to be executed
by their respective officers thereunto duly authorized as of the date first
above written.
LESSEE:
NEW ENSERCH EXPLORATION, INC.
a Texas Corporation
WITNESS:
- -----------------------------
By:
------------------------------
Name:
Title:
- -----------------------------
LESSOR:
ENSERCH EXPLORATION, INC.,
a Delaware corporation
WITNESS:
- -----------------------------
By:
-------------------------------
Name:
Title:
- -----------------------------
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<PAGE>
SCHEDULE 1
----------
REQUIREMENTS FOR COMPLETION
Completion shall require that all of the major components have been designed,
constructed, installed and are capable of performing according to the design and
performance requirements of the Project Plan. In addition, all test results
will be subject to the acceptance and approval of the relevant Governmental
Authority which has jurisdiction over such tests. Completion shall be met upon
satisfaction of: (1) all of the following tests for each of the main components
of the Project; (2) the overall system requirements and (3) the additional
conditions precedent to Completion.
1. Each component should perform according to design and performance criteria
of the Project Plan by submittal and evidence of the following, all of
which shall be reviewed by and be acceptable to the Technical Consultant.
Floating Production Facility ("FPF") - The Lessee will provide office space
to the Technical Consultant in the Lessee's Project office where items (1),
(2) (3) and (5) can be reviewed.
.(1) Detailed Engineering and Design reports of the FPF and mooring system
including Model and Wind Tunnel Tests.
.(2) Copies of all certificates and third party inspections of equipment.
.(3) Design, fabrication, and installation Certified Verification Authority
(CVA) reports.
.(4) Demonstration of mooring system rig move ability to move from one end
of the template to the other extreme end. This will be done when FPF
is installed over the template.
.(5) Copies of all completed and approved commissioning tests required by
regulatory and statutory authorities.
.(6) Successful drilling of one template well drilled simultaneous to
production. To be done after completion of the existing pre-drilled
wells that the template will be installed over.
Template and Well Control System - Items (1), (3) and (4) to be
available for review in the Lessee's Project office.
.(1) Detailed Engineering and Design reports of the template and subsea
equipment.
.(2) Full land testing of the template to demonstrate fit, function and
load (pressure) of all components. Technical Consultant to be advised
of Factory Acceptance Test's and Systems Integration Test's dates and
locations.
.(3) Design, fabrication and installation CVA reports.
.(4) Copies of all completed and approved commissioning tests required by
regulatory and statutory authorities.
<PAGE>
.(5) Successful tie-in and production from one template well.
Production Riser - Items (1) - (4) to be available for review in the
Lessee's Project office.
.(1) Detailed Engineering and Design reports.
.(2) Design, fabrication and installation CVA reports.
.(3) Copies of all certificates and third party inspections of equipment.
.(4) Copies of all completed and approved commissioning test reports
required by regulatory and statutory authorities.
Pipelines - Items (1) - (4) to be available for review in the Lessee's
Project office.
.(1) Detailed Engineering and Design reports.
.(2) Design, fabrication and installation CVA reports.
.(3) Copies of all certificates and third party inspections of equipment.
.(4) Copies of all completed and approved commissioning test reports
required by regulatory and statutory authorities.
Shallow Water Facilities - Items (1) - (4) to be available for review
in the Lessee's Project office.
.(1) Detailed Engineering and Design reports.
.(2) Design, fabrication and installation CVA reports.
.(3) Copies of all certificates and third party inspections of equipment.
.(4) Copies of all completed and approved commissioning test reports
required by regulatory and statutory authorities.
2. Overall System
The project must deliver and consummate sale to a third party, gross
production derived from at least two wells located on the Leased Tracts
whose individual production each exceeds two thousand barrels per day of
crude oil and one million cubic feet per day of natural gas for each day of
30 consecutive days and whose total gross production exceeds four thousand
barrels per day of crude oil and three million cubic feet per day of
natural gas for each day of 30 consecutive days.
The project must have rated capacity to deliver to point of sale at least
40 thousand barrels per day of crude oil and at least 120 million cubic
feet per day of natural gas.
<PAGE>
Verification of the overall system requirements shall be satisfactory to
the Technical Consultant.
3. Additional Conditions Precedent to Completion
. The Lessor and its Funding Sources shall have title to all Leased
Property necessary to meet Completion.
. The Note Holders and Certificate Holders shall have a valid,
perfected, first priority Lien in all Leased Property necessary to
meet Completion, subject to Permitted Liens.
. The Lessee shall have obtained, as Agent for the Lessor, all necessary
Permits for the construction and installation of the Leased Property.
. The Lessee shall have obtained all necessary Permits for the operation
of the Leased Property.
. The Lessee shall supply an updated Schedule 3 to the Master Lease
Agreement showing all Units of Leased Property (whether funded under
the Funding Agreement or with the Lessee's own monies) needed to
satisfy the requirements for Completion.
. The Leased Property shall be in compliance with all Legal
Requirements.
. No Default or Event of Default shall exist.
. No Liens shall exist on any of the Leased Property other than under
the Operative Documents and Permitted Liens.
. No Uncured Deficiencies shall exist.
<PAGE>
SCHEDULE 2A
LESSOR PAYMENT NOTICE
[Date]
For Billing Period Ended __________________
In accordance with the terms of Section 3 of the Lease Agreement, dated as
of November ___, 1994, between Enserch Exploration, Inc. ("Lessor") and New
Enserch Exploration, Inc. ("Lessee"), the following amounts shall be paid by
Lessee to Lessor on the Rental Payment Date:
(1) Rent attributable to the Quarterly Rent Charge __________
(2) Rent attributable to the Fixed Charge
Balance/Rental Balance __________
(3) Quarterly Expense Charge __________
(4) Additional Rent __________
Total: __________
Attached as Exhibit A is an updated Rent Schedule which reflects a change
in Quarterly Rent Charge, if applicable.
ENSERCH EXPLORATION, INC.
------------------------------------
Name:
Title:
<PAGE>
SCHEDULE 2B
RENT SCHEDULE
(see attached)
<PAGE>
SCHEDULE 3A
LEASED PROPERTY INVENTORY SCHEDULE AND STIPULATED LOSS VALUE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5) (6) (7)
Contractor/ Stipulated Loss
Vendor Construction Value (Original
Description of Description of Status Lease Amount Leased
Unit of Contract (In Progress/ Less Unpaid Property
Leased Property Book Value in Progress Completed) Location Fixed Charge) Cost
- --------------- ---------- --------------- ------------- -------- --------------- ----
<S> <C> <C> <C> <C> <C> <C>
TOTAL $
</TABLE>
NEW ENSERCH EXPLORATION, INC.
By:
-----------------------------
Name:
Title:
Date:
<PAGE>
SCHEDULE 3B
INDIVIDUAL LEASING RECORD
(for newly acquired Leased Property)
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Description of
Unit of Leased Stipulated
Delivery Date Leased Property Property Cost Loss Value
------------- --------------- ------------- ----------
<S> <C> <C> <C>
</TABLE>
I certify that the Unit of Leased Property does not constitute "limited use
property." It is reasonable to conclude, as of the Delivery Date, that the use
of the Unit of Leased Property after the end of the Term by Lessor or some other
Person unrelated to Lessor that could lease or purchase the Leased Property from
the Lessor is commercially feasible, that the useful life of such Leased
Property at the end of the Term is at least 20% of the useful life of the Leased
Property determined as of the Delivery Date, and that the Fair Value of such
Unit of Leased Property at the end of the Term determined as of the Delivery
Date is at least 20% of the Leased Property Cost.
Dated this ___ day of __________________, ______.
-------------------------------------
By:
------------------------------
Title:
------------------------------
................................................................................
The undersigned Lessor hereby leases to the undersigned Lessee and Lessee
acknowledges delivery to it in good condition of the Leased Property described
above. The covenants, terms and conditions of this lease are those appearing in
the Lease Agreement between Lessor and Lessee dated as of November __, 1994, as
amended, modified or otherwise supplemented from time to time, which covenants,
terms and conditions are hereby incorporated by reference.
LESSEE: LESSOR:
New Enserch Exploration, Inc. Enserch Exploration, Inc.
- ----------------------------------- --------------------------------------
By: By:
---------------------------- -------------------------------
Title: Title:
---------------------------- -------------------------------
<PAGE>
SCHEDULE 4
PURCHASE SCHEDULE TO THE MASTER LEASE
Dated as of:
Lessee hereby certifies that, as agent of Lessor under the Agency
Agreement, it has acquired or will acquire for the account of Agent for the
benefit of Lessor certain Units of Leased Property specified in Annex I annexed
hereto or as provided in the Master Lease Agreement dated as of September 30,
1992 (the "Lease"). Such Units of Leased Property shall be subject to the
Lease. The aggregate Book Value of such Units of Leased Property is
$_____________.
IN WITNESS WHEREOF, Lessee has caused this Certificate to be executed by
one of its Authorized Officers, as of the date specified above.
NEW ENSERCH EXPLORATION, INC.
By:
---------------------------------
Name:
Title:
<PAGE>
SCHEDULE 5
REMOVAL SCHEDULE TO THE MASTER LEASE
Dated
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Fair Value
Description Other of Unit of Net Cash
of Unit of Leased Date Book Amounts Leased Residual Sales Removal
Property of Sale Value Due Property Guarantee Proceeds Payment Deficiency
- ------------------- ------- ----- ------- ---------- --------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total $
</TABLE>
Note:
1. If Lessee elects to remove a Unit of Leased Property by the purchase of
such Unit of Leased Property, the Removal Payment will equal the Book
Value plus Other Amounts Due (per Section 8(b) of the Master Lease
Agreement).
2. If the Lessee elects to remove a Unit of Leased Property by sale to a
Third Party then:
(i) Residual Guarantee shall equal (x) during the primary period, 80%
of Book Value and (y) during any Renewal Period, the Book Value
less 20% of the Fair Value of such Unit of Leased Property
calculated in accordance with the Master Lease Agreement.
(ii) Removal Payment shall equal the lesser of (x) Book Value plus
Other Amounts Due or (y) the sum of Residual Guarantee plus Net
Cash Sales Proceeds in accordance with the Master Lease Agreement.
(iii) Deficiency shall equal the positive difference, if any, between
(x) the Book Value plus Other Amounts Due less (y) the Removal
Payment.
NEW ENSERCH EXPLORATION, INC.
By:
--------------------------
Name:
Title:
<PAGE>
SCHEDULE 6
REPAIR AND REPLACEMENT SCHEDULE TO THE MASTER LEASE
<TABLE>
<CAPTION>
Aggregate
Repair or Repaired
Description of Unit of Aggregate Replacement or Description
Leased Property Book Value Cost Replaced of Repairs
--------------- ---------- ---- -------- ----------
<S> <C> <C> <C> <C>
</TABLE>
TOTALS
I have reviewed the above repairs and replacements and certify that the Project
continues to comply with the requirements of Section 7(b) of the Master Lease
Agreement.
NEW ENSERCH EXPLORATION, INC.
By:
-------------------------------
Name:
Title:
<PAGE>
SCHEDULE 7
INSURANCE
---------
The Lessee will provide, or cause to be provided, insurance in accordance
with the terms of this Schedule, which insurance shall be placed and maintained
with Permitted Insurers.
(a) Construction and Installation Phase - From the date the Lessee first
bears the risk of loss with respect to any of the Leased Property until and
including the Completion Date, the Lessee will provide, or cause to be
provided, the following coverages for the Project:
(i) all-risk builders' risk insurance for physical loss or damage to the
Project with limits equal to the sum of the replacement cost thereof plus
expenses following a covered loss related to the reconstruction of the Project
including, but not limited to, Permit fees, attorneys' fees and engineering and
consulting costs, which limits shall be not less than $235,000,000 (provided,
however, that such insurance shall provide for replacement cost coverage
whether or not the insured property is replaced and, provided further, that the
insurance shall not have the effect of causing the Lessee or any of its
Affiliates to be deemed a co-insurer), with respect to the Lessee (and, at the
Lessee's option, its Partners) and any of its Affiliates providing services
with respect to the Project and all contractors and subcontractors in any tier
involved in the construction of the Project, such insurance to include, without
limitation, coverage for floods, windstorms, hurricanes, tornados, earthquakes,
collapse, terrorist risks, boiler and machinery property damage and other
perils (including, without limitation, removal of debris and cleanup) and such
insurance to cover onshore fabrication and prefabrication, transit by any
means, installation, existence, hook-up and commissioning, partial operating,
sue and labor claims, additional work claims and claims resulting from
increased repair costs, in each case associated with the Project, and such
insurance to include coverage for all other risks and occurrences customarily
included under all-risk policies available with respect to Property similar in
construction, location, occupancy and operation to the Project;
(ii) statutory workers' compensation and occupational disease insurance
(including, without limitation, coverage under the U.S. Longshoremen's and
Harbor Workers' Act, the Outercontinental Shelf Lands Act, the Jones Act, the
Death on the High Seas Act and general maritime law, and for "in rem" claims
treated as "in personam" claims and borrowed servant claims) in accordance with
applicable state and federal law, and employer's liability insurance with
limits complying with the underlying requirements of the excess liability
policy required by Paragraph (a)(v) with a limit of not less than $5,000,000,
with respect to (x) the Lessee (and, at the Lessee's option, its Partners) and
any of its Affiliates providing services with respect to the Project and (y)
all other existing and future contractors and subcontractors in any tier
involved in the construction of the Project;
(iii) commercial general liability insurance, including protection and
indemnity coverage, maritime employers' liability coverage, contractual
liability coverage, contingent liability coverage, towage liability coverage,
excess debris removal and clean-up coverage, cross-liabilities coverage, sudden
and accidental seepage and pollution coverage, and other coverage for hazards
customarily insured with respect to Property similar in construction, location,
occupancy and operation to the Project and including completed operations
coverage with respect to all insureds which shall be extended to provide
coverage for a minimum period of one year after written
<PAGE>
acceptance of the Project by the Lessee, with limits complying with the
underlying requirements of the excess liability policy required by Paragraph
(a)(v), with respect to (x) the Lessee (and, at the Lessee's option, its
Partners) and any of its Affiliates providing services with respect to the
Project and (y) all existing and future contractors and subcontractors in any
tier involved in the construction of the Project;
(iv) well control insurance, including coverage for control of any well,
firefighting expenses, unlimited re-drilling expenses, extended re-drilling
expenses, seepage and pollution, clean-up and containment, deliberate well-
firing, underground blowouts, contingent joint venture coverage, care, custody
and control coverage, evacuation expenses and such other coverage for risks and
hazards customarily insured with respect to oil and gas wells similar in
construction, location and operation to the wells related to the Project, such
coverage to include a make well safe endorsement, to be in compliance with the
Outer Continental Shelf Lands Act Amendment 1978, to provide for Oil Pollution
Act buyback rights (limited form), and to have limits of not less than
$100,000,000 for each occurrence.
(v) (x) excess commercial liability insurance (including, without
limitation, completed operations coverage as required by Paragraph (a)(iii)
hereof) in excess of the liability policies described in Paragraph (a) (ii) and
(iii) to bring to limits of not less than $200,000,000 for each occurrence and
in the aggregate per year with respect to the Lessee (and, at the Lessee's
option, its Partners) and any of its Affiliates providing services with respect
to the Project and, if the Lessee elects to effect the coverage required by
this Paragraph under a "blanket" policy, Special General Partner and its other
Affiliates insured thereby, and (y) excess commercial liability insurance in
excess of the liability policies described in Paragraph (a)(ii) and (iii) with
limits of not less than $5,000,000 for each occurrence and in the aggregate per
year with respect to all existing and future contractors and subcontractors in
any tier involved in the construction of the Project;
(vi) marine cargo property insurance covering the shipment of materials
and equipment from overseas with limits equal to 110% of the invoice amount for
such materials or equipment;
(vii) the policy or policies providing the coverages required by Paragraphs
(a)(i), (iii), (iv), (v) and (vi) may include deductible amounts for the
account of the Lessee or its Affiliates, as the case may be, not to exceed
$5,000,000 in the aggregate for all such coverages provided by the Company,
Special General Partner, and any of its Affiliates providing services with
respect the Project.
(b) Operating Phase - At all times subsequent to the Completion Date, the
Lessee shall provide, or cause to be provided, the following property and
liability coverages with respect to the Project:
(i) all-risk property coverage, with limits of coverage at least equal
to the replacement cost (which limits shall be not less than $235,000,000 for
the Project), which insurance coverage may, at the Lessee's option, be included
under any "blanket" policy maintained by Special General Partner so long as
such "blanket" policy provides for all-risk property coverage with respect to
the Project and any other Property covered thereby, with limits of coverage at
least equal to the aggregate replacement cost of the Project and all such other
Property insured thereby (provided, however, that such insurance, in either
case, shall provide for replacement cost coverage whether or not the insured
property is replaced, and, provided further, that the insurance shall not have
the effect of causing the Lessee or any of its Affiliates to be deemed a co-
insurer), with respect to the Lessee (and, at the Lessee's option, its
Partners) and any Affiliate of the Lessee providing services
<PAGE>
with respect to the Project, or if the Lessee elects to effect the coverage
required by this Paragraph under a "blanket" policy, Lessee, Special General
Partner and its Affiliates insured thereby, such insurance to include, without
limitation, coverage for (x) floods, windstorms, hurricanes, tornados,
earthquakes, collapse, terrorist risks, strikes, riots and civil commotions and
other perils (including, without limitation, debris removal and cleanup) and
such insurance to cover equipment separated from the Project, transit of
equipment and consumables to and from shore bases, sue and labor claims,
general average coverage and salvage charges, in each case with respect to the
Project, and such insurance to include coverage for all other risks and
occurrences customarily included under all-risk policies available with respect
to Property similar in construction, location, occupancy and operation to the
Project (or the Project and all other Property insured thereby if all are
covered under a "blanket" policy), and (y) "boiler and machinery" property
damage insurance on a comprehensive basis with respect to damage to the
machinery, plants, equipment or similar apparatus (including production
machinery) included in the Project (or the Project and all other Property
insured thereby if all are covered under a "blanket" policy), from risks and in
amounts normally insured against under machinery policies.
(ii)
(1) statutory workers' compensation and occupational disease insurance
(including, without limitation, coverage under the U.S. Longshoremen's and
Harbor Workers' Act) in accordance with applicable state and federal law, and
employer's liability insurance with limits complying with the underlying
requirements of the excess liability policy described in Paragraph (b)(ii)(4)
with a limit of not less than $5,000,000, with respect to (x) the Lessee (and
at the Lessee's option, its Partners,) and any Affiliate of the Lessee
providing services with respect to the Project, and (y) any contractor or
subcontractor in any tier involved in the operation of, or any construction
with respect to, the Project;
(2) commercial general liability insurance covering operations of the Lessee,
including protection and indemnity coverage, maritime employers' liability
coverage, contractual liability coverage, contingent liability coverage, towage
liability coverage, excess debris removal and clean-up coverage, cross-
liabilities coverage, sudden and accidental seepage and pollution coverage, and
other coverage for hazards customarily insured with respect to Property similar
in construction, location, occupancy and operation to the Project, with limits
complying with the underlying requirements of the excess liability policy
described in Paragraph (b)(ii)(4), with respect to (x) the Lessee (and at the
Lessee's option, its Partners) and any Affiliate of the Lessee providing
services with respect to the Project, and (y) any contractor or subcontractor
in any tier involved in the operation of, or any construction with respect to,
the Project;
(3) well control insurance, including coverage for control of any well,
firefighting expenses, unlimited re-drilling expenses, extended re-drilling
expenses, seepage and pollution, clean-up and containment, deliberate well-
firing, underground blowouts, contingent joint venture coverage, care, custody
and control coverage, evacuation expenses and such other coverage for risks and
hazards customarily insured with respect to oil and gas wells similar in
construction, location and operation to the wells related to the Project, such
coverage to include a make well safe endorsement, to be in compliance with the
Outer Continental Shelf Lands Act Amendment 1978, to provide for Oil Pollution
Act buyback rights (limited form), and to have limits of not less than
$100,000,000 for each occurrence;
(4) (x) excess commercial liability insurance in excess of the liability
policies described in Paragraphs (b)(ii)(1) and (2) to bring to limits of not
less than $200,000,000 for each
<PAGE>
occurrence and in the aggregate per year with respect to the Lessee, Special
General Partner and its Affiliates, (y) excess commercial liability insurance
in excess of the liability policies described in Paragraphs (b)(ii)(1) and (2)
with limits of not less than $5,000,000 for each occurrence and in the
aggregate per year with respect to any contractor or subcontractor in any tier
involved in the operation of, or any construction with respect to, the Project.
(iii) The policy or policies providing the coverage required by paragraphs
(b)(i) and (b)(ii)(2), (b)(ii)(3) and (b)(ii)(4) may include deductible amounts
for the account of the Lessee or its Affiliates, as the case may be, not to
exceed $5,000,000 in the aggregate for all such coverages.
(c) Insurance Endorsements - Any insurance carried in accordance herewith
shall, except as hereinafter permitted, provide or be endorsed to provide that:
(i) the Lessor and the Agent on behalf of the Lenders, as their interests
may appear, shall be included as additional insureds or named as loss payees
except as respects coverages required by Paragraphs (a)(ii), (a)(iv),
(b)(ii)(1) and (b)(ii)(3), with the understanding that any obligation imposed
upon the insured (including, without limitation, the liability to pay premiums)
under any policy required by this Schedule shall be the obligation of the
Lessee (or, if appropriate, Special General Partner and its Affiliates) and not
that of the Lessor, the Agent or any Lender;
(ii) losses, if any, under any property insurance with respect to the
Project shall be adjusted as provided in Paragraph (d), and insurance proceeds
with respect to losses, if any, in excess of $5,000,000 per occurrence
(including such amount) in respect of the Project shall be paid into the
Restoration Account, and insurance proceeds with respect to other losses in
respect of the Facility shall be payable to the Lessee;
(iii) except with respect to the coverage required by Paragraphs (a)(i),
(a)(ii), (a)(iv), (a)(vi), (b)(i), (b)(ii)(1) and (b)(ii)(3), a cross-liability
and severability of interest endorsement providing that to the extent the
policy is written to cover more than one insured, all terms, conditions,
insuring agreements and endorsements, with the exception of limits of liability
and deductibles, shall operate in the same manner as if there were a separate
policy covering each insured;
(iv) the insurer thereunder waives all rights of subrogation against the
Lessor, the Agent or the Lenders;
(v) such insurance shall be primary without right of contribution of any
other insurance carried by or on behalf of the Lessor, the Agent or the Lenders
with respect to its or their interests in the Project;
(vi) if such insurance is cancelled for any reason whatsoever (including,
without limitation, nonpayment of premium) or any material change is made in
the coverage that affects the interests of the Lessor, the Agent or the
Lenders, such cancellation or change shall not be effective as to the Lessor,
the Agent and the Lenders for 10 days for nonpayment of premiums and otherwise
for 45 days, in both cases after receipt by the Lessor and the Agent (at the
address provided pursuant to Section 22 of the Lease) of written notice sent by
certified mail from such insurer of such cancellation or change; and
(vii) Any insurance carried in accordance with clauses (a)(ii)(y),
(a)(iii)(y) and (a)(v)(y) of this Schedule shall contain essentially the same
endorsements as are set forth in clauses (c)(i), (c)(iv), (c)(v) and (c)(vi) in
favor of the Lessee rather than the Lessor, the Agent and the Lenders.
<PAGE>
(d) Adjustment of Property Losses - The loss, if any, under any property
insurance covering the Project required to be carried by this Schedule shall be
adjusted with the insurance companies or otherwise collected, including,
without limitation, the filing of appropriate proceedings, by the Lessee in
consultation with the Lessor and the Agent.
(e) Reinstatement of Limits - The Lessee shall, or shall cause its insurance
broker to, notify promptly the Lessor and the Agent at any time when the limits
of the excess commercial liability insurance required by Paragraphs (a)(v) or
(b)(ii)(4) shall have been reduced, either by reason of payments of, or the
establishment of reserves for the ultimate payment of, claims which have been
asserted during the term of such insurance, by an aggregate amount in excess of
$10,000,000. At such time, the Lessee shall, if so requested by the Lessor,
use its best efforts to reinstate such insurance so as to comply with the
requisite limits prescribed herein.
(f) Upon request, the Lessee will furnish the Lessor and the Agent copies of
all insurance policies, binders and cover notes or other evidence of such
insurance relating to the Project, as the case may be.
(g) Additional Insurance by the Lenders or the Lessee - Nothing in this
Schedule shall prohibit the Lessor, the Agent, any Lender or the Lessee or any
of its Partners, as their respective interests may appear, from maintaining for
its own account, at the expense of the Person purchasing such insurance,
additional insurance on or with respect to the Project, or any part thereof,
with coverage exceeding that otherwise required under this Schedule, unless
such insurance would conflict with or limit the insurance otherwise required
under this Schedule.
AGENCY AGREEMENT AND
LIMITED POWER OF ATTORNEY
Dated as of _________________________
Between
ENSERCH EXPLORATION, INC.
<PAGE>
and
NEW ENSERCH EXPLORATION, INC.
Project Agent
-------------
<PAGE>
AGENCY AGREEMENT AND LIMITED POWER OF ATTORNEY, dated as of
_________________________ (as it may be amended from time to time, this
"Agreement"), by and between New Enserch Exploration, Inc., a Texas corporation
(the "Company") and Enserch Exploration, Inc., a Delaware corporation (the
"Lessor"). All capitalized terms used in this Agreement and not otherwise
defined herein shall have the meanings assigned thereto in the Lease Agreement
dated as of _________________________ by and between the Company, as Lessee,
and Enserch Exploration, Inc., as Lessor, as the same may be amended from time
to time ("Lease").
R E C I T A L S
---------------
A. The Company has requested that the Lessor acquire and lease to the
Company the Leased Property pursuant to the Lease.
B. The Company has requested that the Lessor appoint the Company as agent
to purchase, refurbish, assemble and install the Leased Property in compliance
with the Project Plan.
NOW, THEREFORE, in consideration of the agreements herein and intending to
be legally bound by this Agreement, the parties hereby agree to be bound as
follows:
1. Appointment of Project Agent. The Lessor hereby appoints the Company
----------------------------
as its agent and Attorney-in-Fact (the Company, in such capacity is herein
called the "Project Agent"), and the Project Agent hereby agrees to act as the
Lessor's agent, to perform certain of the obligations and responsibilities of
the Lessor and to cause the Leased Property to be constructed in accordance
with the Project Plan and to undertake such other powers, duties and
obligations as are set forth herein.
2. Term of Agency Relationship. The agency relationship created herein
---------------------------
between the Project Agent and the Lessor shall commence as of the date hereof
and shall end upon expiration of the Lease Term, as it may be extended from
time to time. The Lessor may, but is not obligated to, revoke the Company's
right and obligation to act as Project Agent hereunder upon a Default by the
Lessees under the Lease.
3. Powers, Duties and Obligations. The Project Agent shall have the
------------------------------
following powers, duties and obligations:
(a) To perform all acts which the Project Agent may deem necessary on
behalf of the Lessor, but only in the name of the Project Agent, in
connection with the Completion of the Project, including, without
limitation, the purchasing, manufacturing, refurbishing, assembling and
transporting of the Leased Property;
(b) To perform or cause to be performed all work in connection with the
Completion of the Project to be done in a good and workmanlike manner and
in compliance with all Legal Requirements, Insurance Requirements, the
Project Plan and the Development Plan;
<PAGE>
(c) To take all actions as it would take as a reasonably prudent
operator in the management and operation of its own properties and to
construct the Project in a manner necessary to meet Completion on or before
the Completion Date.
(d) To pay, or cause to be paid, in accordance with prudent industry
practices all costs and expenses of the Completion of the Project and
perform all obligations of such Completion of the Project, including,
without limitation, the performance of all contracts and other agreements
it entered into on behalf of the Lessor and to preserve the Lessor's rights
in any Leased Property subject to any contract;
(e) To keep the Leased Property free of all Liens except Permitted
Liens;
(f) To transfer and hold all of the evidence of ownership of the Leased
Property for the benefit of the Lessor regardless of whether such Leased
Property was purchased with money funded under the Funding Agreement;
(g) To cause all contracts and other agreements entered into by the
Project Agent on behalf of the Lessor to be assignable;
(h) To avoid purchasing Property from or entering into any contract
with Affiliates of the Project Agent in connection with the Project unless
upon fair and reasonable terms that are not less favorable to the Lessor
than those which might be obtained in an arm's-length transaction between
unaffiliated Persons in the same business at the time such terms are agreed
upon;
(i) To grant, bargain, sell, convey or contract for the sale or
conveyance of the Leased Property in connection with the Lessee's duties
pursuant to the Lease; and
(j) To contract with all vendors, contractors and suppliers for
supplies, materials and services affecting the Leased Property;
(k) To pay for, exchange or otherwise settle accounts for the
acquisition of supplies, materials or services affecting the Leased
Property;
(l) To ask for, demand, collect, recover, and receive all moneys which
may become due and owing by reason of conveyances, whether by deed,
contract, Bill of Sale or other instruments or to pay for, exchange or
otherwise settle accounts for the acquisition of supplies, materials or
services affecting the Leased Property;
(m) To ask for, demand, collect, and recover, each in the name of
Lessee, any and all sums that may be due on account of any damage to any of
the Leased Property; and
(n) To manage correspondence and conduct communications with Federal,
state and local government agencies with regard to matters affecting the
Leased
<PAGE>
Property, including, but not limited to, the acquisition of all permits,
licenses, rights of way and easement, if any, affecting the Leased
Property.
4. Disclosure. The Development Plan and the Project Plan were developed
----------
solely by the Company or its predecessors. The Project Agent shall act in its
sole discretion in choosing the Leased Property and hiring any contractors and
subcontractors to work on the Leased Property. The Lessor and its Funding
Sources have no liability for the Leased Property and shall be indemnified and
held harmless as provided in the Lease, the Master Lease, the Funding Agreement
and the other Operative Documents.
5. Miscellaneous.
-------------
(a) Assignment. Neither party hereto shall assign or delegate all or
----------
any part of this Agreement or any of its rights hereunder, without the
prior written consent of the other party hereto.
(b) Successors. This Agreement shall be fully binding upon the parties
----------
and their respective successors, assigns and legal representatives.
(c) Notices. Any notice, request, approval, consent, order,
-------
instruction, direction, report or other communication under this Agreement
given by either party to the other party shall be in writing and shall be
delivered in the manner set forth in the Lease.
(d) Time; Non-Waiver. The failure or delay of any party to insist upon
----------------
strict performance of any of the provisions of this Agreement, to exercise
any rights or remedies provided under this Agreement or by law, or to
notify the other party in the event of breach or default under this
Agreement, shall not release or relieve any party from any of its
obligations under this Agreement and shall not be deemed a waiver of any
right to insist upon strict performance of this Agreement or any of the
rights or remedies hereunder, nor shall any purported oral modification or
rescission of this Agreement operate as a wavier of any of the provisions
of this Agreement.
(e) Amendments. No change, waiver, amendment or modification of any
----------
of the provisions of this Agreement shall be valid unless set forth in a
written instrument signed by the party to be bound thereby, and consented
to in writing by the Lessor.
(f) Interpretation. All section, subsection and paragraph captions
--------------
are for convenience of reference only and shall not affect the construction
of any provisions hereof. This Agreement is subject to the Master Lease and
the Lease, and if there is a conflict between the terms of this Agreement
and the terms of the Master Lease or the Lease, the terms of the Master
Lease or Lease shall control, as applicable.
<PAGE>
(g) Applicable Law. This Agreement and the rights and obligations of
--------------
the parties hereunder shall be interpreted, construed and enforced in all
respects in accordance with the laws of the State of New York.
(h) Further Assurances. The parties hereto agree that they will
------------------
promptly and duly execute and deliver to the other such documents and
assurances and take such further action as the other party may from time to
time reasonably request to carry out more effectively the intent and
purpose of this Agreement, or to establish and protect the rights and
remedies created or intended to be created hereunder in favor of any party.
(i) Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which, taken together, shall constitute a single
fully executed original.
(j) Headings and Table of Contents. The table of contents and the
------------------------------
headings of the various paragraphs of this Agreement have been inserted for
reference only and shall not to any extent have the effect of modifying,
amending or changing the expressed terms and provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agency Agreement to
be duly executed by their respective duly authorized officers as of the day and
year first above written.
ENSERCH EXPLORATION, INC.
a Delaware corporation
WITNESSES: By:
------------------------ -----------------------------
------------------------ Gary J. Junco
President
NEW ENSERCH EXPLORATION, INC.
a Texas corporation
WITNESSES: By:
------------------------ -----------------------------
------------------------ Name:
Title:
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
Before me, a notary public in and for the State of Texas, on this day
personally appeared ___________________________, known to me to be the person
whose name is subscribed to the foregoing instrument, and known to me to be the
President of Enserch Exploration, Inc., a corporation, and acknowledged to me
that he executed said instrument for the purposes and consideration therein
expressed, and as the act of said corporation. Given under my hand and seal of
office this ______ day of ___________________, 1994.
--------------------------------------------
Notary Public in and for the State of Texas.
My Commission expires:
---------------------
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
Before me, a notary public in and for the State of Texas, on this day
personally appeared ___________________________, known to me to be the person
whose name is subscribed to the foregoing instrument, and known to me to be the
President of New Enserch Exploration, Inc., a corporation, and acknowledged to
me that he executed said instrument for the purposes and consideration therein
expressed, and as the act of said corporation. Given under my hand and seal of
office this ______ day of ___________________, 1994.
--------------------------------------------
Notary Public in and for the State of Texas.
My Commission expires:
---------------------
<PAGE>
EXHIBIT 10.5
MISSISSIPPI CANYON 441
- --------------------------------------------------------------------------------
LEASE AGREEMENT
Dated as of November _____, 1994
Between
ENSERCH EXPLORATION, INC.
as Lessor,
and
NEW ENSERCH EXPLORATION, INC.
as Lessee,
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
Section 1. Defined Terms................................................ 1
-------------
Section 2. Lease of Equipment........................................... 10
------------------
Section 3. Payments..................................................... 10
--------
Section 4. Equipment Records and Schedules.............................. 14
-------------------------------
Section 5. True Lease; Power of Attorney................................ 15
-----------------------------
Section 6. Removals Without Replacements................................ 15
-----------------------------
Section 7. Payment of Impositions; Further Assurances................... 15
------------------------------------------
Section 8. Compliance with Insurance Requirements and Facility
---------------------------------------------------
Agreements................................................... 16
----------
Section 9. Condition and Use of Equipment; Assignment of Warranties,
---------------------------------------------------------
Etc.; Quiet Enjoyment; Leasehold and Other Interests......... 17
----------------------------------------------------
Section 10. Maintenance and Replacement of the Equipment; Operations..... 19
--------------------------------------------------------
Section 11. Liens........................................................ 21
-----
Section 12. Permitted Contests........................................... 21
------------------
Section 13. Insurance.................................................... 22
---------
Section 14. Required and Optional Alterations; Title to Alterations...... 24
-------------------------------------------------------
Section 15. Events of Default and Remedies............................... 25
------------------------------
Section 16. Lessee's Renewal Option; Purchase Options of Lessee and
-------------------------------------------------------
Lessor; Surrender of Equipment............................... 32
------------------------------
Section 17. Information: Financial Information........................... 33
----------------------------------
Section 18. Inspection; Right to Enter Premises of Lessee................ 35
---------------------------------------------
Section 19. Right to Perform Lessee's Covenants.......................... 36
-----------------------------------
Section 20. Representations and Warranties of Lessee..................... 36
----------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
(continued)
Page
----
Section 21. Indemnification by Lessee.................................... 40
-------------------------
Section 22. No Merger.................................................... 41
---------
Section 23. Notices...................................................... 42
-------
Section 24. Amendments and Waivers....................................... 42
----------------------
Section 25. Severability................................................. 43
------------
Section 26. INTENTIONALLY OMITTED........................................ 43
Section 27. Limited Power of Attorney.................................... 43
-------------------------
Section 28. Confidentiality.............................................. 43
---------------
Section 29. Miscellaneous................................................ 44
-------------
Section 30. Lessor's Representations and Warranties...................... 46
---------------------------------------
Section 31. Application of Certain Payments.............................. 48
-------------------------------
<PAGE>
ANNEXES AND SCHEDULES
SCHEDULE A - INTENTIONALLY OMITTED
SCHEDULE B - Removal Schedule
SCHEDULE C - Lessor Payment Notice
SCHEDULE D - Rent Schedule
SCHEDULE E - Equipment Inventory Schedule and Individual Leasing Record
SCHEDULE F - Reserves
SCHEDULE G - Units of Equipment
SCHEDULE H - Facility Agreements
SCHEDULE I - INTENTIONALLY OMITTED
SCHEDULE J - Form of Special Power of Attorney
<PAGE>
LEASE AGREEMENT
This Lease Agreement dated as of November _____, 1994 (the "Lease") is
between Enserch Exploration, Inc., a Delaware corporation ("Lessor") and New
Enserch Exploration, Inc., a Texas corporation ("Lessee").
The Lessor and the Lessee hereby agree as follows:
Section 1. Defined Terms.
-------------
Additional terms used in this Lease shall have the meanings assigned to
such terms in the Master Lease Agreement.
Unless the context otherwise requires, references herein in the singular
shall include the plural and vice versa, and the following terms shall have the
following meanings:
"Additional Rent" - as defined in Section 3(b) hereof.
---------------
"Alterations" - alterations, modifications, additions and improvements
-----------
to Equipment, whether Severable or Nonseverable.
"Authorized Officers" - relative to Lessee, those of its officers
-------------------
whose signatures and incumbency shall have been certified to the Lessor.
"Basic Term" - the period commencing on the Lease Commencement Date
----------
and ending on the date five years thereafter, or such shorter period as may
result from early termination in accordance with the provisions hereof.
"Billing Period" - each of the periods (i) in the case of the first
--------------
such period, commencing on the Lease Commencement Date and ending on
January 31, 1995 and (ii) in the case of each succeeding period, commencing
on the first day following the last day of the immediately preceding
Billing Period and ending on the day which numerically corresponds to the
last day of the immediately preceding Billing Period three (3) months
thereafter.
"Business Day" - (a) any day other than a day on which banking
------------
institutions in Dallas, Texas; Houston, Texas; London, England or New York,
New York are authorized by law to close; and (b) relative to a payment of
LIBO Rate Rent or the determination of the LIBO Rate, any day on which
dealings in dollars are carried on in the New York interbank eurodollar
market.
"Casualty Occurrence" - any of the following events in respect of the
-------------------
Equipment: (i) the total loss of Equipment, the Constructive Total Loss of
Equipment, the total loss of use thereof due to theft, disappearance,
destruction, damage beyond repair or rendition of
<PAGE>
Equipment permanently unfit for normal use for any reason whatsoever; (ii)
any damage to Equipment which results in an insurance settlement with
respect to such Equipment on the basis of a total loss; (iii) the permanent
condemnation, confiscation or seizure of, or requisition of title to or use
of, Equipment or any Site; or (iv) as a result of any rule, regulation,
order or other action by any regulatory authority having jurisdiction, the
use of Equipment or any Site in the normal course of the business of Lessee
shall have been prohibited, directly or indirectly, for a period of 180
consecutive days, unless Lessee, prior to the expiration of such 180-day
period, shall have undertaken and shall be diligently carrying forward all
steps which are reasonably necessary or desirable to permit the normal use
of Equipment which materially impairs the use of the Equipment, taken as a
whole, and the Sites by Lessee or, in any event, if use of the Equipment or
any Site shall have been prohibited, directly or indirectly, for a period
of 24 consecutive months.
"CERCLA" - the Comprehensive Environmental Response, Compensation and
------
Liability Act of 1980, as amended.
"Claims" - any and all liabilities, obligations, losses, damages
------
(including consequential damages), penalties, fines, assessments (whether
criminal or civil), claims (including claims involving liability in tort,
strict or otherwise), actions, injuries, suits, judgments, costs, expenses
(including without limitation, reasonable legal fees and expenses and costs
of investigation), disbursements or demands whatsoever, howsoever arising,
including any costs of the foregoing pertaining to health, safety of the
environment or otherwise.
"Code" - the Internal Revenue Code of 1986, as amended from time to
----
time.
"Constructive Total Loss" - a permanent taking by eminent domain of
-----------------------
such scope that the untaken portion of Equipment or any Site is
insufficient to permit the restoration of such Equipment for continued use
in Lessee's business or that deprives the remaining portion of the
Equipment of adequate access or egress or that causes the remaining portion
of the Equipment to be incapable of being restored to a condition that
would permit its continued use in Lessee's business immediately prior to
such taking, materially in compliance with laws, ordinances, rules,
regulations and orders of any regulatory authority.
"Daily Rent Charge" - for any day (whether or not a Business Day)
-----------------
during the term of this Lease an accrual for such day of all Equipment
calculated on the Rental Balance at a rate per annum as determined in
accordance with Annex I of the Master Lease:
(i) on the Rental Balance designated from time to time as payable at
the Alternate Base Rate, equal to the Alternate Base Rate from
time to time in effect; or
2
<PAGE>
(ii) on the Rental Balance designated from time to time as payable at
the LIBO Rate, during each LIBO Rate Period applicable thereto,
equal to the sum of the LIBO Rate (Reserve Adjusted) for such
LIBO Rate Period plus a margin of 1.75%.
"Delivery Date" - for any Unit of Equipment, the date such Unit of
-------------
Equipment is delivered to the Lessee under an ILR.
"Environmental Laws" - all applicable federal, state or local
------------------
statutes, laws, ordinances, codes, rules, regulations and guidelines
(including consent decrees and administrative orders) relating to public
health and safety and protection of the environment.
"Equipment" - an undivided 37-1/2% interest in units of equipment that
---------
are subject to this Lease and identified on the Equipment Inventory
Schedules delivered to Lessor from time to time, and all plans,
specifications and operating, maintenance and repair manuals and records
relating thereto.
"Equipment Cost" - with respect to any Unit of Equipment, the purchase
--------------
price or any part of the purchase price paid by Lessor for such Unit of
Equipment or the amount advanced by Lessor to Lessee for the purchase of
such Unit of Equipment, including, without limitation, any sales taxes and
any other costs associated with the acquisition, fabrication, preparation
for, and delivery and installation, as applicable, of such Unit of
Equipment.
"Equipment Inventory Schedule" - one or more schedules substantially
----------------------------
in the form of Schedule E hereto, which at any time shall list all of the
Equipment subject to this Lease and any outstanding contracts entered into
by Lessee on behalf of Lessor to acquire Equipment. Any Equipment Inventory
Schedule once delivered to Lessor shall become part of this Lease and shall
supersede all previous Equipment Inventory Schedules.
"Equipment Management" - the selection, contracting for, determination
--------------------
of the price and terms of acquisition of, management and other activities
in connection with the acquisition, utilization and disposition of any Unit
of Equipment, including, without limitation, the removal of any Unit of
Equipment pursuant to Section 6.
"Event of Default" - as defined in Section 15 hereof.
----------------
"Facility Agreements" - the Operating Agreements and the other
-------------------
contracts identified on Schedule H hereto.
"Fair Market Renewal Term" - as defined in Section 16.
------------------------
"Fair Market Rental Value" - in respect of any property as of any
------------------------
date, the rent price that would be obtained in an arm's-length lease
between an informed and willing lessee and an informed and
3
<PAGE>
willing lessor under no compulsion to lease and neither of which is related
to Lessor or Lessee of the property in question; and in the case of the
Equipment, such value is to be determined on the basis that the Equipment
has been maintained in accordance with, and Lessee has complied with, the
requirements of this Lease.
"Fair Value of Equipment" - at the time such value needs to be
-----------------------
determined, whether for a Unit of Equipment or all Equipment, the value of
a similar Unit of Equipment listed in a trade publication (acceptable to
Lessor) or, in the absence of any such trade publication, the value of such
Unit of Equipment as determined by an appraiser in an appraisal requested
by the Lessor (using an appraiser, a method of appraisal and assumptions
acceptable to Lessor), the cost of any such appraisal to be paid by Lessee.
"Fixed Charge" - the quarterly portion of the Fixed Charge Balance
------------
which applies to the current Billing Period as shown on Schedule D.
"Fixed Charge Balance" - an amount as of the Lease Commencement Date
--------------------
of $16,684,000, as adjusted from time to time pursuant to this Lease.
"Funding Sources" - the financial institutions and other funding
---------------
sources which have provided capital to the Lessor pursuant to the Master
Lease Agreement.
"Hazardous Material" -
------------------
(a) any "hazardous substance", as defined by CERCLA;
(b) any "hazardous waste", as defined by the Resource Conservation and
Recovery Act, as amended;
(c) any petroleum product; or
(d) any pollutant or contaminant or hazardous, dangerous or toxic
chemical, material or substance within the meaning of any other
applicable federal, state or local law, regulation, ordinance or
requirement (including consent decrees and administrative orders)
relating to or imposing liability or standards of conduct
concerning any hazardous, toxic or dangerous waste, substance or
material, all as amended or hereafter amended.
"Impositions" - all payments required by any public or governmental
-----------
authority with respect to any Unit of Equipment, any transaction
contemplated by this Lease or any right or interest held by Lessor or
Lessee pursuant to this Lease.
"Indemnified Party" - as defined in Section 21 hereof.
-----------------
"Indemnified Risk" - as defined in Section 21 hereof.
----------------
4
<PAGE>
"Individual Leasing Record" or "ILR" - a record with respect to a Unit
------------------------- ---
of Equipment, prepared by Lessor, in such form as Lessee and Lessor may
agree from time to time, dated as of the Delivery Date and executed and
delivered by Lessee to Lessor on the Delivery Date, updating the Equipment
Inventory Schedule and the Rent Schedule, amending the purchase price to be
paid by the Lessee pursuant to Section 16(b) to reflect the residual value
of such additional Equipment, and providing for each Unit of Equipment
described in the ILR, a full description, the Equipment Cost and Stipulated
Loss Value in the form of Schedule E(ii) hereto, and a Fixed Charge
Schedule in the form of Schedule E(ii) hereto.
As between Lessor and Lessee, the signature of Lessee on an Individual
Leasing Record shall constitute acknowledgment by Lessee that the Equipment
has been inspected by Lessee and delivered in good condition, free and
clear of all Liens and defects and accepted for lease by Lessee as of the
Delivery Date and, in the case of Equipment that was not first delivered to
Lessor, has been so inspected by Lessee as agent for Lessor and the
Lessor's Funding Sources. The Individual Leasing Record shall contain a
short form of lease to be executed by each of the parties reading
substantially as follows:
"The undersigned Lessor hereby leases to the undersigned Lessee and
Lessee acknowledges delivery to it in good condition of the Equipment
described above. The covenants, terms and conditions of this lease are
those appearing in the Mississippi Canyon Lease Agreement between
Lessor and Lessee dated as of November __, 1994, as amended, modified
or otherwise supplemented from time to time, which covenants, terms
and conditions are hereby incorporated by reference."
Each ILR shall also include a certification that the Unit of Equipment
does not constitute "limited use property," which shall state that it is
reasonable to conclude, as of the Delivery Date, that the use of the Unit
of Equipment after the end of the Term by Lessor or some other Person
unrelated to Lessor that could lease or purchase the Equipment from Lessor
is commercially feasible, that the useful life of such Equipment at the end
of the Term will be at least 20% of the useful life of the Equipment
determined as of the Delivery Date, and that the Fair Value of such Unit of
Equipment at the end of the Term determined as of the Delivery Date will be
approximately 20% or greater of the Equipment Cost (determined (i) without
including in such fair value any increase or decrease for inflation or
deflation during the Term and (ii) after subtracting from such fair value
any cost to Lessor for delivery of possession of the Unit of Equipment to
Lessor at the end of the Term), which certification shall be signed by the
manufacturer, engineer, property manager or the appraiser which determines
the Stipulated Loss Value Schedule for such Unit of Equipment. The cost of
establishing that the Equipment does not constitute "limited use
5
<PAGE>
property" shall be paid by Lessee within five Business Days after Lessor
accepts and executes the ILR with respect to a Unit of Equipment.
"Instrument" - as defined in Section 9(c) hereof.
----------
"Insurance Requirements" - all terms of any insurance policy covering
----------------------
or applicable to any Unit of Equipment and all requirements of the issuer
of any such policy.
"Judgment" - any judgment, decree or order of any court or other
--------
governmental authority with respect to (a) any Unit of Equipment, (b)
Lessor's or Lessee's respective interests hereunder in any Unit of
Equipment, or (c) any sum payable by Lessee or by Lessor hereunder.
"Lease Commencement Date" - November __, 1994.
-----------------------
"Lessee Purchase Option" - as defined in Section 16.
----------------------
"Lessor Payment Notice" - a schedule substantially in the form of
---------------------
Schedule C hereto.
"Lessor Purchase Option" - as defined in Section 16.
----------------------
"Lien" - subject to Section 11 hereof, any mortgage, attachment, lien
----
(including, without limitation, any tax lien or lien arising in connection
with any Imposition), charge, security interest, conditional sale or other
title retention agreement or other encumbrance of any nature whatsoever on,
in or with respect to (a) any Unit of Equipment, (b) Lessor's or Lessee's
respective interests hereunder in any Unit of Equipment, or (c) any sum
payable by Lessee or Lessor hereunder.
"Master Lease Agreement" - as defined in Section 29(l).
----------------------
"Nonseverable" - with respect to any Alteration, any Alteration that
------------
is not a Severable Alteration.
"Operating Agreements" - those certain offshore operating agreements
--------------------
as identified on Schedule H hereto, as the same may be amended,
supplemented, restated or otherwise modified from time to time in
accordance with this Lease.
"Operator's Lien" - the lien and security interest granted to the
---------------
Operator (as defined in the Facility Agreements) and Non-Operators (as
defined in the Facility Agreements) in the Facility Agreements that secures
payment of the costs and expenses of oil and gas exploration, development
and production operations.
"Overdue Rate" - the sum of 2-1/2% plus the LIBO Rate (Reserve
------------ ----
Adjusted) then in effect or, if no Rent is being maintained by
6
<PAGE>
reference to the LIBO Rate, the sum of 2-1/2% plus the LIBO Rate (Reserve
Adjusted) calculated using a one month LIBO Rate Period.
"Permanent Abandonment Date" - the date upon which Lessee files an
--------------------------
application with the Minerals Management Service, U.S. Department of the
Interior (or any successor thereto), to permanently cease production
operations and commence plugging and abandonment of all wells on
Mississippi Canyon 441, 485 and Ewing Bank 482.
"Permitted Liens" - as defined in Section 11(a).
---------------
"Person" - any natural person, corporation, firm, association,
------
government, governmental agency or any other entity, whether acting in an
individual, fiduciary or other capacity.
"Quarterly Expense Charge" - for any Billing Period the sum of the
------------------------
accruals for each day (whether or not a Business Day) during such Billing
Period with respect to all taxes, costs, reasonable fees and other
reasonable expenses of the Lessor relating to the transactions contemplated
hereby, including, without limitation, amounts due pursuant to the Master
Lease Agreement and expenses in connection with the filing, recording,
refiling or rerecording of Uniform Commercial Code financing statements and
all amendments, supplements and modifications to any thereof and any and
all other documents or instruments of further assurance required or
requested to be filed or recorded or refiled or rerecorded by the terms
hereof or thereof.
"Quarterly Rent Charge" - for any Billing Period the sum of Daily Rent
---------------------
Charges during such Billing Period.
"Rent" - with respect to any Billing Period, the sum of (a) the
----
Quarterly Rent Charge for such Billing Period and (b) the aggregate Fixed
Charges for each quarterly period during such Billing Period for all
Equipment subject to this Lease during such Billing Period.
"Rental Balance" - an amount as of the Lease Commencement Date of
--------------
$20,855,000, as adjusted from time to time pursuant to this Lease.
"Rent Payment Date" - the last day of any Billing Period or, if such
-----------------
last day is not a Business Day, the next preceding Business Day.
"Rent Schedule" - a schedule attached as Schedule "D" hereto, or an
-------------
updated schedule in the form of Schedule "D" hereto delivered pursuant to
the terms of this Lease, which provides the components of Rent for any
Billing Period up to and including the Stated Lease Termination Date. Such
Rent Schedule shall set forth the portion of each payment of Rent
attributable to the application of the
7
<PAGE>
Quarterly Rent Charge and the reduction in the Fixed Charge Balance and
Rental Balance resulting from the payment of such Rent.
"Reserves" - as defined in Section 17(d) and more fully described in
--------
Schedule F hereto.
"Resource Conservation and Recovery Act" - the Resource Conservation
--------------------------------------
and Recovery Act, 42 U.S.C. Section 690, et seq., as in effect from time to
-- ---
time.
"Severable" - with respect to any Alteration, any Alteration that can
---------
be readily removed from the Equipment without damaging it in any material
respect or without diminishing or impairing the value, utility, useful life
or condition that the Equipment would have had if such Alteration had not
been made (assuming the Equipment would have been in compliance with this
Lease without such Alteration), and without causing the Equipment to become
"limited use property" within the meaning of Rev. Proc. 76-30, 1976-2 C.B.
647. Notwithstanding the foregoing, an Alteration shall not be considered
Severable if such Alteration is necessary to render the Equipment complete
for its intended use by Lessee (other than Alterations consisting of
ancillary items of equipment of a kind customarily furnished by lessees or
purchasers of property comparable to the Equipment).
"Sites" - the interests subject of the Instruments referred to in
-----
Section 9(c).
"Special Power of Attorney" - the Special Limited Power of Attorney
-------------------------
executed by Lessor and Lessee substantially in the form of Schedule J
hereto, as amended, supplemented, restated or otherwise modified from time
to time.
"Stated Lease Termination Date" - the last day of the Term, whether
-----------------------------
occurring by reason of a termination of the Lease or the expiration of the
Term.
"Stipulated Loss Value" - with respect to any Unit of Equipment, an
---------------------
amount equal to the product of (i) the amount equal to the Fair Value of
such Unit of Equipment as of the date such Unit of Equipment was first
subject to this Lease multiplied by (ii) the "Stipulated Loss Value
Percentage" specified in Schedule E(i) hereto for the Rent Payment Date
immediately preceding the date of such determination.
"Stipulated Loss Value Schedule" - for each Unit of Equipment, either
------------------------------
a schedule attached as Schedule E(i) hereto, or a schedule attached to an
ILR in the form of Schedule E(ii) hereto, which provides the Stipulated
Loss Value for each Unit of Equipment.
"Taxes" - as defined in Section 3(d) hereof.
-----
8
<PAGE>
"Term" - the term of the Lease, including the Basic Term and the Fair
----
Market Renewal Term, if applicable.
"Third Parties" - any Person other than (i) a Lessor, (ii) Lessee, or
-------------
(iii) any affiliate of any of the foregoing.
"Transfer" - the transfer, by bill of sale or otherwise, by any Person
--------
of all such Person's right, title and interest in and to the property being
transferred, free and clear of all Liens (except Permitted Liens), but
otherwise without representation or warranty, express or implied.
"Unit of Equipment" - each Unit of Equipment as listed on the
-----------------
Equipment Inventory Schedule.
"Vendor" - any supplier of any Unit of Equipment or part thereof.
------
Section 2. Lease of Equipment.
------------------
(a) Subject to the terms and conditions of this Lease, on the Lease
Commencement Date, and subsequently upon the delivery of any ILR, Lessor agrees
to lease to Lessee, and Lessee agrees to lease from Lessor, the Equipment as
identified from time to time in the Equipment Inventory Schedule, for the Basic
Term, and subject to the exercise by Lessee of its rights provided in Section 16
hereof, for the Fair Market Renewal Term.
Section 3. Payments.
--------
(a) Lessee covenants to pay to Lessor on the Rent Payment Date for each
Billing Period the amount of Rent and the Quarterly Expense Charge, if any, due
for such Billing Period. At least 10 Business Days before the Rent Payment Date
for each Billing Period, Lessor shall deliver to Lessee a true and complete
Lessor Expense Schedule showing the amount of Rent and the Quarterly Expense
Charge, if any, attributable to such Billing Period and if the Quarterly Rent
Charge as of any Rent Payment Date differs from the rate applied on the
immediately preceding Rent Payment Date, the Lessor shall deliver to the Lessee
an amended Rent Schedule which shall reflect the effect of such Quarterly Rent
Rate on the Fixed Charge Balance for all remaining payments of Rent up to and
including the expiration date of the current Term. Upon receipt of such
schedule(s), Lessee shall complete and deliver to Lessor the Equipment Inventory
Schedule for such Billing Period. Payment by Lessee of the Rent indicated on the
Rent Schedule shall be deemed to be payment of the Rent due on the applicable
Rent Payment Date; provided, however, that any errors in the computation of Rent
-------- -------
may be corrected by submission of a revised Lessor Expense Schedule or a revised
Rent Schedule, and overpayments or underpayments of Rent shall be credited or
debited, respectively, to the Rent due on the next Rent Payment Date. On or
before the applicable Rent Payment Date, Lessee shall deliver to Lessor one copy
of the signed and completed Rent Schedule and Equipment
9
<PAGE>
Inventory Schedule. All schedules, annexes and exhibits delivered by Lessee
pursuant to the provisions of this Lease constitute representations of Lessee as
to the accuracy of the matters contained therein.
(b) In addition to the Rent and the Quarterly Expense Charge, if
applicable, Lessee will also pay, from time to time, as provided in this Lease,
on demand of Lessor, as additional rent ("Additional Rent") to Lessor or other
Persons entitled to receive the same the following:
(i) Lessee also shall pay out-of-pocket costs and expenses incurred
by Lessor after the date hereof (including, without limitation,
reasonable legal fees, expenses and disbursements reasonably
incurred) associated with (A) negotiating and entering into, or
giving or withholding of, any future amendments, supplements,
waivers or consents with respect to this Lease, (B) any Casualty
Occurrence or termination of this Lease and (C) any Event of
Default and the enforcement of the rights or remedies of Lessor
under this Lease. Nothing herein shall reduce or otherwise limit
Lessee's obligations to Lessor pursuant to the indemnity
provisions contained in Section 21 of this Lease.
(ii) All other amounts that Lessee agrees herein to pay, including
without limitation, interest at the Overdue Rate on any amounts
not paid when due.
In the event of any failure by Lessee to pay any Additional Rent hereunder,
Lessor shall have all the rights, powers and remedies as in the case of failure
to pay Rent.
(c) This Lease is a completely net lease and Rent, Additional Rent and all
other sums payable by Lessee hereunder shall be paid without notice, demand,
counterclaim, setoff, deduction or defense and without abatement, suspension,
deferment, diminution or reduction of any kind whatsoever, except as herein
expressly otherwise provided. The preceding sentence shall not be construed as a
waiver of any counterclaim or defense which Lessee may be able to assert in a
proceeding at law or in equity. The obligations of Lessee to pay Rent,
Additional Rent and all other sums payable hereunder shall be absolute,
unconditional and irrevocable and shall continue unaffected by any event or
circumstance whatsoever including, without limitation: (i) any damage to or
loss, theft or destruction of the Equipment or any part thereof by any cause
whatsoever (including, without limitation, fire, casualty or act of God or enemy
or any other force majeure event); (ii) any requisition, taking or condemnation,
including, without limitation, a temporary requisition, taking or condemnation
of the Equipment or any part thereof; (iii) any prohibition, limitation,
interference, restriction or prevention of the Lessee's use, occupancy or
enjoyment of the Equipment or any part thereof by any Person; (iv) any matter
affecting title to, or merchantability, condition, design, compliance with
specifications, operation or fitness
10
<PAGE>
for use of, the Equipment or any part thereof; (v) any eviction of the Lessee
from, or loss of possession by the Lessee of, the Equipment or any part thereof,
by reason of title paramount or otherwise; (vi) any default by the Lessor
hereunder; (vii) the invalidity or unenforceability of any provision hereof or
the impossibility or illegality of performance by Lessor or the Lessee or both;
(viii) any action of any Federal, state or local governmental authority; (ix)
any removal, abandonment, shutdown, salvage, or scrapping of the Equipment or
any part thereof; (x) to the maximum extent permitted by law, any insolvency,
bankruptcy, reorganization or similar proceeding by or against Lessee or Lessor
or any other Person; (xi) any lack of right, power or authority of Lessor or
Lessee to enter into this Lease or to perform the obligations hereunder, or any
doctrine of force majeure, impossibility, frustration, failure of consideration,
or any similar legal or equitable doctrine that Lessee's obligation to pay Rent
and all other sums payable by Lessee hereunder is excused because Lessee has not
received or will not receive the benefit for which it bargained, it being the
intent of Lessee to assume all risks from all causes whatsoever that it does not
receive such benefit; (xii) the breach or failure of any warranty,
representation or certification made in this Lease or any other instrument,
document or certificate delivered or to be delivered in connection herewith by
Lessor; or (xiii) any other cause or occurrence whatsoever, whether similar or
dissimilar to the foregoing, and shall be separate and independent covenants and
agreements, and all sums payable by Lessee hereunder shall be payable
unconditionally in all events, unless the requirement to pay or perform the same
shall have been modified or terminated pursuant to an express provision of this
Lease. Except as expressly provided herein, Lessee waives all rights now or
hereafter conferred by statute or otherwise to quit, terminate, modify or
surrender this Lease or any portion thereof, or to any abatement, suspension,
deferment, diminution or reduction of any sum payable by Lessee hereunder. All
covenants and agreements of the Lessee herein shall be performed at its cost,
expense and risk unless expressly otherwise stated. Nothing herein shall be
construed as a guaranty by the Lessee of any residual value in the Equipment nor
prevent the Lessee from asserting in any legal action any mandatory
counterclaim.
(d) Lessee agrees that it will promptly pay all Impositions, including any
sales taxes and any net income, excess profits or with holding or franchise
taxes against Lessor on or measured by any monies payable hereunder or the net
income therefrom (including, without limitation, any payments made pursuant to
this sentence or pursuant to this Lease hereof and including, without
limitation, any personal property taxes on the Equipment and all other costs
assessed against Lessor on account of its acquisition, ownership, leasing or
disposing of the Equipment) (such Impositions other than those excluded by
clauses (i), (ii) and (iii) of the following proviso being called "Taxes");
provided, however, that Lessee shall not be obligated to pay (i) any Impositions
- -------- -------
paid by Lessor as part of the Equipment Cost of any Unit of Equipment, (ii) any
Impositions which are based upon or measured by Lessor's net income, or which
are in substitution for, or relieve Lessor from, any actual Imposition based
upon or measured by Lessor's net income (excluding, however, Impositions imposed
with respect to the payment,
11
<PAGE>
receipt or accrual of any indemnity payment under this Lease) or (iii)
Impositions characterized under local law as franchise taxes (excluding,
however, any value-added, license, property or similar Impositions). Lessee
further agrees that, subject to its rights under Section 12 hereof, it will, at
its expense, do all things required to be done by Lessor in connection with the
levy, assessment, billing or payment of any such Impositions, and is hereby
authorized by Lessor to act for and on behalf of Lessor in any and all such
respects and to file, on behalf of Lessor, all tax returns and reports required
to be filed by Lessor (other than Federal income tax returns and documents
related thereto) concerning the Equipment. Lessee's payment obligations under
this Section 3(d) shall survive the termination of this Lease.
(e) (i) In the event that any withholding or deduction from any payment
to be made by the Lessee hereunder is required in respect of any Taxes pursuant
to any applicable law, rule or regulation, then the Lessee will
(x) pay directly to the relevant authority the full amount required to
be so withheld or deducted;
(y) promptly forward to the Lessor an official receipt or other
documentation satisfactory to the Lessor evidencing such payment to
such authority; and
(z) pay to the Lessor such additional amount or amounts as is
necessary to ensure that the net amount actually received by Lessor
will equal the full amount Lessor would have received had no such
withholding or deduction been required.
Moreover, if any Taxes are directly asserted against the Lessor with respect to
any payment received by the Lessor hereunder, the Lessor may pay such Taxes and
the Lessee will promptly pay such additional amounts (including any penalties,
interest or expenses) as is necessary in order that the net amount received by
such Person after the payment of such Taxes (including any Taxes on such
additional amount) shall equal the amount such Person would have received had
not such Taxes been asserted.
(ii) If the Lessee fails to pay any Taxes when due to the appropriate
taxing authority or fails to remit to the Lessor the required receipts
or other required documentary evidence, the Lessee shall indemnify the
Lessor for any incremental Taxes, interest or penalties that may
become payable by Lessor as a result of any such failure.
(f) Unless otherwise expressly provided, all payments by the Lessee
pursuant to this Lease shall be made by Lessee to the Lessor. All such payments
required to be made to the Lessor shall be made, without setoff, deduction or
counterclaim, not later than 11:00 a.m., New York, New York time, on the date
due, in immediately available funds, to such account as the Lessor shall specify
from time to time by notice to Lessee. Funds received after that time shall be
deemed to have been received by the Lessor on the next succeeding Business Day.
Whenever any
12
<PAGE>
payment to be made shall otherwise be due on a day which is not a Business Day,
such payment shall be made on the next succeeding Business Day and such
extension shall be included in computing Rent, Additional Rent, interest and
fees, if any, in connection with such payment.
(g) Any payment of Rent or the Quarterly Expense Charge that is not paid
when due shall (to the fullest extent permitted by law) bear interest from and
including the date when due to but excluding the date of payment thereof at a
rate per annum equal to the Overdue Rate, payable upon demand.
Section 4. Equipment Records and Schedules.
-------------------------------
Lessee shall maintain, on a current basis, books of proper record and
account in conformity with GAAP (to the extent applicable) which books shall
include, without limitation, (a) copies of all related contracts and any
amendments thereto, (b) the manufacturer, model and identification number, as
applicable, of each Unit of Equipment, (c) the location of each Unit of
Equipment, (d) the Equipment Cost of each Unit of Equipment, and (e) a copy of
the purchase invoice for each Unit of Equipment.
Section 5. True Lease; Power of Attorney.
-----------------------------
(a) This Lease is an agreement of lease and does not convey to Lessee any
right, title or interest in the Equipment except as a lessee.
(b) Pursuant to the terms of the Special Power of Attorney, Lessor or its
Funding Sources has designated Lessee as its attorney-in-fact for Equipment
Management and in respect of certain matters under the Facility Agreements.
Such Special Power of Attorney shall not amend, modify or supersede any of the
terms or provisions of this Lease in any way and, except as expressly permitted
by the terms of this Lease, does not and shall not be deemed to permit Lessee
(i) to abandon, salvage, dispose, bargain, sell, convey or contract for the sale
or conveyance of Units of Equipment, (ii) to demand, sue for, collect, recover
or receive any moneys or sums in the name of Lessor or any Person, or (iii)
execute any instrument or document on behalf of Lessor or any Person.
Section 6. Removals Without Replacements.
-----------------------------
Unless, an Event of Default shall occur and be continuing, Lessee may, upon
at least 10 Business Days' prior written notice to Lessor, remove any Unit of
Equipment or part thereof at its own expense without replacing it (provided that
such Unit of Equipment or part thereof is inappropriate or no longer
functionally useful to Lessee for the intended use of the Equipment by Lessee),
and title to such Unit of Equipment or part thereof shall vest in Lessee free
and clear of all rights of Lessor, provided that such removal and nonreplacement
does not in any material respect (i) diminish or impair the value, utility and
useful life of the Equipment (subject to normal interruption in the ordinary
course of business for maintenance, inspection, service, repair and testing) or
13
<PAGE>
(ii) result in the Equipment becoming "limited use property" within the meaning
of Rev. Proc. 76-30, 1976-2 C.B. 647 (assuming, in each case, the Equipment was
then of the value, utility and useful life required to be maintained hereunder).
Lessee shall give prompt notice to Lessor of any warranty claim made by Lessee
against any manufacturer, supplier, contractor, or Vendor of any Unit of
Equipment.
Section 7. Payment of Impositions; Further Assurances.
------------------------------------------
(a) Subject to Section 12 hereof, Lessee will pay all Impositions before
any fine, penalty, interest or cost may be added thereto for nonpayment and
before nonpayment might result in a Lien or Judgment, and will furnish to
Lessor, upon request, copies of official receipts or other satisfactory proof
evidencing such payment.
(b) Lessee, at its expense, shall execute, acknowledge and deliver from
time to time such further counterparts of this Lease or such affidavits,
certificates, certificates of title, bills of sale, financing and continuation
statements, consents and other instruments as may be reasonably requested by
Lessor in order to evidence Lessor's or its Funding Sources' title to the Units
of Equipment and Lessor's interests in this Lease, and shall at Lessor's request
and at Lessee's expense cause such documents to be recorded, filed or registered
in such places as Lessor may request and to be re-recorded, refiled or re-
registered in such places at such times as may be required by applicable law in
order to maintain and continue in effect the recordation, filing or registration
thereof. Unless an Event of Default shall have occurred and be continuing,
Lessor or its Funding Sources shall not grant or create any Lien on any Unit of
Equipment to any Person, except the Operator's Lien under the Facility
Agreements securing amounts not then due and payable.
(c) Lessee shall keep all Units of Equipment in the Mississippi Canyon
Blocks 441, 442 and 485 and Ewing Bank Block 482 Offshore Louisiana, Gulf of
Mexico, or in Lessee's facility located in LaFourche Parish, Louisiana (except
for Units of Equipment that are in transit to such Blocks in the Gulf of Mexico
or to such facility of Lessee); and except for Units of Equipment having an
aggregate value (such value being the Stipulated Loss Value of such Unit of
Equipment), as to Lessor's or its Funding Sources' interest, of less than
$375,000, and any parts of any Units of Equipment having an individual value
(such value being the original cost of such part), as to Lessor's or its Funding
Sources' interest, of less than $75,000, that are removed from such Blocks for
repairs in the ordinary course of business), or, upon 30 days' prior written
notice to the Lessor, at such other places such that all action required or
requested pursuant to Section 7(b) shall have been taken with respect to the
Equipment; provided, however, that no Equipment shall be located in, on or above
-------- -------
or used in connection with any oil or gas reserves other than the Reserves,
except that the foregoing proviso shall not prohibit the Equipment being used to
produce additional reserves other than the Reserves so long as such production
does not interfere
14
<PAGE>
with production of the Reserves and such production of the Reserves continues.
Section 8. Compliance with Insurance Requirements and Facility Agreements.
--------------------------------------------------------------
Lessee at its expense will promptly comply with all Insurance Requirements,
and any other instruments, contracts or agreements affecting title to or
ownership of the Equipment. The Lessee shall, and (so long as no Event of
Default has occurred) is hereby authorized by Lessor to, fully and promptly
keep, observe, perform and satisfy, on behalf of Lessor, and on behalf of itself
as Operator under the Operating Agreements and as a party thereto, any and all
obligations, conditions, covenants and restrictions of or on the Lessor or
itself, as the case may be, under any and all Facility Agreements so that there
will be no breach or default thereunder and so that the other parties thereunder
shall be and remain at all times obliged to perform their obligations
thereunder, and the Lessee, to the extent within its control, shall not permit
to exist any condition, event or fact that could allow or serve as a basis or
justification for any such Person to avoid such performance. Lessee shall
further pay all costs, taxes and amounts from time to time required to be paid
under or pursuant to any of the Facility Agreements and will not amend any
Facility Agreement in any way which would have a material adverse effect upon
the ability of Lessor or Lessee to perform its respective agreements under this
Lease or in any way which would have a material adverse effect on the rights of
the Lessor under this Lease or in any way which would create or purport to
create any liability on the part of the Lessor under any Facility Agreement
without the prior written consent of the Lessor.
Section 9. Condition and Use of Equipment; Assignment of Warranties, Etc.;
---------------------------------------------------------------
Quiet Enjoyment; Leasehold and Other Interests.
----------------------------------------------
(a) The Equipment is leased AS IS, WHERE IS, AND WITH ALL FAULTS and in
the condition thereof and subject to the rights of any parties in possession
thereof, the state of the title thereto, and the rights of ownership therein,
including, without limitation, pursuant to the Facility Agreements, in each case
as in existence when the same first becomes subject to this Lease, without
representations and warranties of any kind as to title by Lessor, its Funding
Sources or any Person acting on behalf of any of them. LESSEE ACKNOWLEDGES AND
AGREES THAT LESSOR HAS LEASED TO LESSEE AN UNDIVIDED PERCENTAGE INTEREST IN THE
EQUIPMENT AND THAT LESSOR (i) IS NOT A MANUFACTURER OF, OR VENDOR OF, OR
MERCHANT WITH RESPECT TO, ANY OF THE EQUIPMENT OR ANY PROPERTY OF SUCH KIND,
(ii) HAS NOT MADE NOR IS MAKING ANY WARRANTY, EXPRESS OR IMPLIED, RELATING TO
THE EQUIPMENT, INCLUDING WITHOUT LIMITATION, WITH RESPECT TO MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE, DESIGN, CONDITION, QUALITY OF
MATERIAL OR WORKMANSHIP, CONFORMITY TO SPECIFICATIONS, FREEDOM FROM PATENT OR
TRADEMARK INFRINGEMENT, ABSENCE OF ANY LATENT OR OTHER DEFECTS, WHETHER OR NOT
DISCOVERABLE, WHETHER ARISING PURSUANT TO THE UNIFORM COMMERCIAL CODE OR ANY
OTHER PRESENT OR FUTURE LAW OR OTHERWISE, AND
15
<PAGE>
(iii) SHALL NOT BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING
LIABILITY IN TORT, STRICT OR OTHERWISE). LESSEE ACKNOWLEDGES AND AGREES THAT (a)
EACH UNIT OF EQUIPMENT IS OF A SIZE, DESIGN, CAPACITY AND MANUFACTURE
SATISFACTORY TO LESSEE, AND (b) LESSEE IS SATISFIED THAT THE SAME IS SUITABLE
FOR ITS PURPOSES.
(b) Lessor hereby assigns to Lessee any and all warranties and indemnities
of and claims against any manufacturers or Vendors relating to any Unit of
Equipment (including any equipment or parts supplied therewith), and to the
extent assignment of the same is prohibited or precludes enforcement of any such
warranty or undertaking, Lessor hereby subrogates Lessee to its rights in
respect thereof; provided, that such assignment shall remain in effect only so
--------
long as no Event of Default has occurred and is continuing and no condition,
occurrence or event exists or has occurred which, after notice or lapse of time
or both, would constitute an Event of Default. Lessor hereby authorizes Lessee,
at Lessee's expense, to assert any and all claims, to prosecute any and all
suits, actions and proceedings, in its own name or in the name of Lessor, in
respect of any such warranty or undertaking and to retain the proceeds received.
Notwithstanding anything else in this Section 9(b), Lessor shall have the rights
conferred on Lessee in this Section 9(b) if Lessor incurs any unindemnified
damage or liability relating to or in connection with any manufacturer's or
Vendor's warranty or undertaking.
(c) The following provisions relate to each contract, permit and license
(an "Instrument") necessary in connection with the ownership and operation of
the Equipment:
(i) The Lessee covenants and agrees to perform and to observe all of
the terms, covenants, provisions, conditions and agreements of
the underlying Instruments including, without limitation,
payment of all rent, additional rent and other charges payable
under the Instrument.
(ii) Lessee covenants and agrees that it will not do, or cause to be
done or suffer or permit, any act or thing to be done which
would or might cause such Instrument to be terminated or make
the Lessor liable for any losses, costs, liabilities, damages,
claims, penalties or other expenses arising out of or related to
such Instrument.
(iii) If any Instrument shall expire, terminate or otherwise be
extinguished, the Lessee shall notify Lessor of any such
occurrence, describing the nature, scope, and extent of the
Instrument so expired, terminated or extinguished, then the
Lessee shall promptly replace, at its sole cost and expense,
such Instrument with a new instrument granting, in all material
respects, the same rights under the expired, terminated or
extinguished Instrument.
16
<PAGE>
(d) As between Lessee and Lessor, so long as no Event of Default shall
have occurred and be continuing and no condition, occurrence or event exists or
has occurred which, after notice or lapse of time or both, would constitute an
Event of Default, Lessee shall have the right, subject to the terms and
provisions of the Facility Agreements, to exclusive possession and use of the
Equipment as to its proportionate interest therein.
(e) Lessee will not do or fail to do, or knowingly permit, any act or
thing which action or thing or failure might impair the value or usefulness of
the Equipment as an integrated system for the production and safe and lawful
handling of hydrocarbons and other functions contemplated by the design of such
Equipment, ordinary wear and tear excepted.
Section 10. Maintenance and Replacement of the Equipment; Operations.
--------------------------------------------------------
(a) Lessee, at its own expense, will cause the Equipment to be maintained
in good operating order, repair and condition, in accordance with prudent
industry practice and any applicable manufacturers' manuals or warranties,
subject to normal wear and tear, and will use best efforts to comply with all
governmental laws, rules and regulations from time to time applicable to the
maintenance and operation of the Equipment and will comply with all governmental
laws, rules and regulations from time to time applicable to the maintenance and
operation of the Equipment the noncompliance with which would result in any
material liability of Lessor or any criminal liability of any of Lessor, or any
of Lessor's officers, directors, incorporators, shareholders, controlling
Persons, employees or agents. Lessee shall maintain the Units of Equipment at
its own expense as a prudent operator in the same or similar circumstances and
in accordance with its obligations under the Facility Agreements. Lessee at its
own expense will cause the Equipment to continue to have at all times the
capacity and functional ability to perform, on a continuing basis (subject to
normal interruption in the ordinary course of business for maintenance,
inspection, service, repair and testing) and in commercial operation, the
functions for which it was designed.
(b) Lessee, at its own cost and expense, will promptly replace, or cause
to be replaced, all Units of Equipment or parts thereof which may from time to
time be incorporated or installed in or attached to the Equipment and which may
from time to time become worn out, lost, stolen, destroyed, seized, confiscated,
damaged beyond repair or permanently rendered unfit for use for any reason
whatsoever. All replacement Units of Equipment or parts thereof shall be free
and clear of all Liens (other than Permitted Liens), shall be in as good
operating condition as, and shall have a utility at least equal to, the Units of
Equipment or parts thereof replaced (assuming such replaced parts were in the
condition and repair required to be maintained by the terms hereof) and shall
have a value at least equal to the Units of Equipment or parts replaced
(assuming such replaced parts and the Equipment were in the condition and repair
required to be maintained by the terms hereof).
17
<PAGE>
(c) All Units of Equipment or parts at any time removed from the Equipment
shall remain the property of (and title thereto shall remain in) Lessor or its
Funding Sources, no matter where located, until such time as such Units of
Equipment or parts shall be replaced by replacement Units of Equipment or parts
which have been incorporated or installed in or attached to the Equipment and
which meet the requirements for replacement Units of Equipment or parts
specified above. Immediately upon any replacement part becoming incorporated or
installed in or attached to the Equipment as above provided, without further act
or instrument, (i) title to the removed Equipment or part thereof shall
thereupon vest in Lessee, free and clear of all rights of Lessor, and shall no
longer be deemed Equipment hereunder; (ii) title to such replacement Equipment
or part shall thereupon vest in Lessor; and (iii) such replacement Unit of
Equipment or part shall become subject to this Lease and be deemed part of the
Equipment for all purposes hereof to the same extent as the Units of Equipment
or parts thereof originally incorporated or installed in or attached to the
Equipment prior thereto.
(d) The Lessee shall, and it shall require and ensure that any and all
employees, contractors, subcontractors, agents, representatives, affiliates,
consultants, occupants and any and all other Persons, at Lessee's expense, (i)
comply in all material respects with all applicable Environmental Laws, and (ii)
use, employ, process, emit, generate, store, handle, transport, dispose of
and/or arrange for the disposal of, any and all Hazardous Materials in, on or,
directly or indirectly, related to or in connection with the Equipment or any
part thereof in a manner consistent with prudent industry practice and in
compliance in all material respects with any applicable Environmental Law, and
in a manner which does not pose a significant risk to human health or the
environment. Lessor and Lessee hereby acknowledge and agree that Lessee's
obligations hereunder with respect to Hazardous Materials and Environmental Laws
are intended to bind the Lessee with respect to matters and conditions in, on,
under, beneath, with respect to, affecting, related to, in connection with or
involving the Equipment or any part thereof. Lessee, at its expense, will
register and re-register the Equipment when necessary under applicable law.
(e) Lessee will, at its expense, maintain or cause to be maintained and
shall permit Lessor to inspect any records, logs and other materials required by
any Facility Agreement or any governmental authority having jurisdiction to be
maintained or filed in respect of the Equipment.
(f) Notwithstanding the provisions of Section 6 and the foregoing
provisions of this Section 10, Lessee shall not remove, replace or alter any
Unit of Equipment or affix or place any accessory, equipment or device on any
Unit of Equipment, if such removal, replacement, alteration or addition would
impair the originally intended function or use of such Unit of Equipment so as
to materially reduce the value of the Equipment, taken as a whole.
18
<PAGE>
Section 11. Liens.
-----
(a) Lessee will not directly or indirectly create or permit to be created
or to remain, and will discharge promptly, at Lessee's expense, any Lien (other
than a Permitted Lien) or Judgment. For purposes of this Lease, the term
"Permitted Lien" shall include (i) this Lease and any assignment hereof, (ii)
any Lien being contested as permitted by Section 12 hereof, (iii) Liens of
mechanics, laborers, material men, suppliers, vendors, workmen, carriers and any
other statutory or common law possessory Liens created in the ordinary course of
business for sums of money (other than borrowed money) which under the terms of
the related contracts are not at the time due, or (iv) the Operator's Lien
pursuant to the Facility Agreements securing amounts not yet due and payable.
(b) Lessee will not directly or indirectly create or permit to be created
or to remain, and will discharge, any mortgage, attachment, lien (including
without limitation, any tax lien or lien arising in connection with any payments
required by any public or governmental authority), charge, security interest,
conditional sale or other title retention agreement or other encumbrance of any
nature whatsoever on, in or with respect to its interest in the Reserves except
liens of the type described in clause (a)(iii) above and the Operator's Lien
pursuant to the Facility Agreements securing amounts not yet due and payable.
Section 12. Permitted Contests.
------------------
After prior notice to Lessor and provided there is no material risk of
sale, forfeiture or loss of any Unit of Equipment, Lessee may at its expense
contest, by appropriate proceedings conducted in good faith and with due
diligence, any Imposition (other than Impositions of the type described in
clauses (ii) and (iii) of the proviso of the penultimate sentence of Section
3(d)) or any Lien of the type described in Section 11(a)(iii) hereof; provided,
--------
however, that the actions of Lessee as authorized by this Section 12 shall be
- -------
subject to the express written consent of Lessor if such actions would subject
Lessor or its Funding Sources to any criminal liability or sanction for failure
to pay any such Imposition or Lien. Lessee will pay, and save Lessor and its
Funding Sources harmless against, all losses, judgments, decrees and reasonable
costs, including attorneys' fees and expenses, in connection with any such
contest and will, promptly after the final determination of such contest, pay
and discharge the amounts which shall be imposed or determined to be payable
therein, together with all penalties, reasonable costs and expenses incurred in
connection therewith.
Section 13. Insurance.
---------
(a) Lessee will, at its own expense, and for and to the extent of its
working interest as set forth in the Operating Agreement, purchase and maintain,
or cause to be purchased and maintained, and in effect throughout the term of
this Lease insurance with respect to public liability and with respect to the
Equipment of the following types and in the following amounts:
19
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(i) Property Insurance: Insurance against physical damage to the
------------------
Equipment caused by "all risks" perils with a limit equal to the
replacement cost of the Equipment but in no event less than the
Rental Balance, or, if greater, in a sufficient amount to
prevent Lessor and Lessee from becoming co-insurers of any loss,
subject, however, to the exclusions in such coverage;
(ii) "All Risk", Builder's Risk Insurance: Insurance against "all
------------------------------------
risk" of physical loss or damage to the Equipment, subject,
however, to the exclusions in such coverage, while in the course
of construction, fabrication and installation with a limit equal
to the replacement cost of the Equipment but in no event less
than the Rental Balance, or, if greater, in a sufficient amount
to prevent Lessor and Lessee from becoming co-insurers of any
loss;
(iii) General Public Liability Insurance: Insurance against third-
----------------------------------
party claims for bodily injury (including death) and property
damage occurring on, in or about the Equipment or resulting from
activities on the Equipment, in the combined single limit amount
of $25,000,000, for each occurrence;
(iv) Workers' Compensation Insurance: Workers' compensation insurance
-------------------------------
at statutory levels and employers' liability insurance, with a
limit of $25,000,000 in the aggregate annually; and
(v) Other Insurance: Such other insurance, in such amounts and
---------------
against such risks, as is reasonably requested from time to time
by Lessor and agreed to in writing by Lessee;
provided, however, Lessee may in any event self-insure any portion or all of the
- -------- -------
foregoing coverages in a manner and to the extent such self-insurance is
consistent with the self-insurance practices of other companies of the same size
or credit rating of Lessee in the off-shore energy exploration and production
industry.
If self-insurance is not utilized, such insurance shall be written by
companies selected by the Lessee and acceptable to the Lessor and, with respect
to the insurance specified in clause (iii) shall include Lessor and its Funding
Sources as additional insureds to the extent Lessee has agreed to indemnify such
herein, and with respect to the insurance specified in clauses (i) and (ii)
shall include Lessor and its Funding Sources as loss payees as their interests
may appear.
(b) The property insurance referred to in subparagraph (a)(i) for the
Equipment and builder's risk insurance referred to in subparagraph (a)(ii) may
be a blanket policy and (i) shall at all times be in an amount at least equal to
the Stipulated Loss Value for each Unit of Equipment and (ii) any loss or damage
under such property insurance
20
<PAGE>
policy and builder's risk insurance policy other than proceeds representing
compensation for business interruption shall be payable to the Lessor to be held
and applied pursuant to the terms of this Lease. Every policy required under
paragraph (a) shall (i) expressly provide that it will not be canceled or
terminated due to a lapse for non-payment of premium except upon thirty (30)
days' written notice to the Lessor and the Lessee; (ii) intentionally omitted;
(iii) intentionally omitted; (iv) include a waiver of all rights of subrogation
against the Lessor and its Funding Sources and any recourse against Lessor and
its Funding Sources for payment of any premiums or assessments under any policy;
and (v) not contain a provision relieving the insurer thereunder of liability
for any loss by reason of the existence of other policies of insurance covering
the Equipment or any part thereof against the peril involved (unless Lessee
shall not have any such other policies), whether collectible or not, if such
other policies do not name Lessor and its Funding Sources as additional
insureds. The Lessee shall advise the Lessor promptly of any policy cancellation
or any change adversely affecting the coverage provided thereby.
(c) On or before the Lease Commencement Date (or such other later date as
Lessee and Lessor shall agree upon in writing), where self-insurance is not
utilized, Lessee will provide Lessor with insurance certificates from insurance
brokers in respect of the insurance required by Section 13(a), and thereafter,
as appropriate, Lessee will give notice as to any material change in the nature
of such coverage. The Lessee shall notify Lessor of any nonrenewal of any policy
required hereunder. The Lessee shall not obtain or carry separate insurance
concurrent in form, or contributing in the event of loss, with that required by
Section 13(a)(i) or (ii) unless the Lessor is included as additional loss payee
therein, with loss payable as provided in this Lease. The Lessee shall
immediately notify the Lessor whenever any such separate insurance is obtained
and shall deliver to the Lessor the certificates of insurance evidencing the
same as is required hereunder. Any insurance required hereunder may be provided
under Lessee's blanket policies; provided that the coverage allocable to the
Equipment is not less than the coverage required by this Section as separately
stated.
Section 14. Required and Optional Alterations; Title to Alterations.
-------------------------------------------------------
(a) Lessee at its own cost and expense, shall make (or cause to be made)
all Alterations to the Equipment as may be required from time to time to meet in
all material respects all requirements under applicable law (regardless of the
Person upon whom such requirements, by their terms, are nominally imposed),
except to the extent being contested in accordance with Section 12 hereof.
(b) Unless an Event of Default shall have occurred and be continuing,
Lessee, at its own cost and expense, may from time to time make, subject to
obtaining all necessary authorizations, consents or approvals of any
governmental authority and consents of Third Parties, such Alterations to the
Equipment that are not required pursuant to Section 14(a) hereof as Lessee may
deem desirable in the proper conduct
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<PAGE>
of its business, provided that (i) such Alteration shall not diminish or impair
in any material respect the value, utility or useful life of the Equipment
(subject to normal interruption, in the ordinary course of business for
maintenance, inspection, service, repair and testing), (ii) such Alteration
shall not cause the Equipment to constitute "limited use property" within the
meaning of Rev. Proc. 76-30, 1976-2 C.B. 647 and (iii) no Alterations, taken
together or separately, shall violate the provisions of Rev. Proc. 75-21, 1975-1
C.B. 715 or 79-48, 1979-1 C.B. 529.
(c) Title to each Alteration shall without further act or instrument vest
in the Lessor and be deemed to constitute a part of the Equipment and be subject
to this Lease, provided that any such Alteration is required pursuant to Section
14(a) hereof or is a Nonseverable Alteration. Title to all other Alterations
shall vest in the Lessee or such other Person as the Lessee shall select, and
the Lessee may finance the acquisition thereof in whatever manner it elects,
secured or unsecured, provided that such financing does not and will not result
in any Lien (other than Permitted Liens) on or with respect to the Equipment or
any part thereof. Any such Alteration may be removed by the Lessee or any Person
having a Lien thereon, at its own cost and expense, at any time prior to the
Stated Lease Termination Date if the conditions set forth in clauses (i) and
(ii) of the proviso contained in Section 14(b) hereof are met and such removal
will not cause any of the Equipment to be in violation of any applicable legal
requirement. Any such Alteration may also be removed at the Stated Lease
Termination Date upon not less than 90 days' prior written notice to Lessor, so
long as the Equipment is restored substantially to its condition (normal wear
and tear excepted) prior to the making of such Alteration, provided that such
removal does not diminish or impair the performance of the Equipment at such
time; and provided, further, that any Severable Alterations that are not removed
from the Equipment at the time of its surrender by the Lessee shall become the
property of the Lessor.
Section 15. Events of Default and Remedies.
------------------------------
(a) Each of the following acts or occurrences shall constitute an "Event
of Default" hereunder:
(i) default in the payment of Rent and Additional Rent when due and
the continuance of such default for 5 days thereafter (the
Lessor shall use reasonable efforts to give notice to Lessee of
such default, but failure by the Lessor to give such notice
shall in no way constitute a default by the Lessor under this
Lease); or
(ii) default in the payment of any other amount payable by Lessee to
Lessor hereunder for 15 days after notice to Lessee of such
default; or
(iii) default by Lessee in the performance of any other covenant,
liability or obligation of Lessee to Lessor
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<PAGE>
and the continuance of such default for 30 days after notice to
Lessee of such default from Lessor; or
(iv) any representation or warranty made by Lessee herein or
otherwise in writing in connection with or pursuant to this
Lease shall be false or misleading in any material adverse
respect on the date as of which made or reaffirmed and not cured
for 30 days after any such representation or warranty is
discovered by Lessee to have been false or misleading on the
date made or reaffirmed; or
(v) Lessee shall (A) voluntarily commence any proceeding or file any
petition seeking relief under Title 11 of the United States Code
or any other Federal or state bankruptcy, insolvency or similar
law, (B) consent to the institution of any such proceeding or
the filing of any such petition, (C) apply for or consent to the
appointment of a receiver, trustee, custodian, sequestrator or
similar official for Lessee or for a substantial part of its
property, (D) file an answer admitting the material allegations
of a petition filed against it in any such proceeding, (E) make
a general assignment for the benefit of creditors, (F) admit in
writing its inability or fail generally to pay its debts as they
become due, or (G) take partnership or corporate action for the
purpose of effecting any of the foregoing; or
(vi) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction
seeking (A) relief in respect of Lessee or of a substantial part
of its property, under Title 11 of the United States Code or any
other Federal or state bankruptcy, insolvency or similar law,
(B) the appointment of a receiver, trustee, custodian,
sequestrator or similar official for Lessee or for a substantial
part of its property or (C) the winding-up or liquidation of
Lessee; and such proceeding or petition shall continue
undismissed for 60 days and the Lessor determines in its sole
discretion that such proceeding or petition is not frivolous and
notifies the Lessee of such determination (it being understood
that Lessor need not make any investigation), or an order or
decree approving or ordering any of the foregoing shall continue
unstayed and in effect for 60 days; or
(vii) an event of default as defined in any mortgage, indenture,
instrument, or loan agreement under which at the time of such
event of default there has been issued, or by which there has
been secured or evidenced, any indebtedness of Lessee for money
borrowed or for the deferred purchase price of
23
<PAGE>
property, shall occur and shall result in indebtedness in excess
of $25,000,000 in the aggregate becoming due and payable prior
to the due date thereof, or any such event of default shall
occur thereunder (including the giving of notice and lapse of
grace period, if any) which would permit the holder of such
indebtedness to declare the same due and payable prior to its
stated maturity or due date and such event shall continue for
more than the period of grace, if any, therein specified and a
valid waiver shall not be in effect; or
(viii) Lessee shall default in the payment when due (subject to any
applicable grace period) whether by acceleration or otherwise,
of any obligations (a) for borrowed money or (b) for the
deferred purchase price of property, or a default shall occur in
the performance or observance of any covenant, agreement or
condition with respect to any of the obligations described in
clauses (a)or (b) above if the effect of such default is to
accelerate the maturity or term of any such obligation or such
default shall continue unremedied for any applicable period of
time sufficient to permit the holder or holders of such
obligation, or any trustee or agent for such holders, to cause
such obligation to become due and payable prior to its expressed
maturity or term; or
(ix) Lessee shall receive notice from the Pension Benefit Guaranty
Corporation indicating that it has made a determination that it
will invoke its right under Section 4042(a) of the Employee
Retirement Income Security Act of 1974 ("ERISA") to terminate
any employee pension benefit plan ("Plan") maintained by Lessee
for its employees and covered by Title IV of ERISA and such
determination is not being contested in good faith and by proper
proceedings by Lessee within 60 days following the receipt of
such notice, or the Pension Benefit Guaranty Corporation
institutes proceedings to terminate, or in connection with
proceedings to terminate has a trustee appointed to administer
any Plan maintained by Lessee, and such proceedings to terminate
are not stayed or dismissed within 60 days following their
institution, or Lessee becomes subject to employer liability
under Sections 4062, 4063 or 4064 of ERISA in connection with a
Plan maintained by Lessee; or
(x) The occurrence of any environmental event involving, or the
discovery of any environmental condition in, on, beneath or
involving, any Unit of the Equipment (including, but not limited
to, the presence, emission or release of Hazardous Materials or
the violation of any applicable Environmental Law) that
24
<PAGE>
would have a material adverse effect on the use, occupancy,
possession, value or condition of any Unit of Equipment or which
would reasonably be expected to have a material adverse effect
on the financial condition, operations, assets, business,
properties or prospects of Lessee and which is not remedied
within sixty days after the occurrence or discovery of such
event or condition; or
(xi) INTENTIONALLY OMITTED
(xii) Lessee shall cease for any reason to be the operator under each
of the Operating Agreements; or
(xiii) An application is filed with the Minerals Management Service,
U.S. Department of Interior (or any successor thereto), to
abandon any Unit of Equipment; or
(xiv) Lessee shall withdraw from any Operating Agreement; or
(xv) Any party to any Operating Agreement shall commence enforcement
of a lien granted by Lessee in its capacity as operator or
interest owner pursuant to such Operating Agreement; or
(xvi) Lessee's Articles of Incorporation or Bylaws shall be amended,
supplemented or otherwise modified, or any provision thereof
shall be waived, or Lessee shall attempt to amend, supplement
or otherwise modify its Articles of Incorporation or Bylaws or
waive any provision thereof, which amendment, supplement,
modification or waiver would, in the reasonable opinion of
Lessor, have a material adverse effect on the Lessee's ability
to perform its obligations under and in connection with this
Lease; or
(xvii) Any Operating Agreement shall be amended, supplemented or
otherwise modified, or any provision thereof shall be waived,
which amendment, supplement, modification or waiver would, in
the reasonable opinion of Lessor, (a) have a material adverse
effect on the Lessee's ability to perform its obligations under
and in connection with this Lease or (b) create or purport to
create, any liability in respect of Lessor or its Funding
Sources.
(b) If an Event of Default shall have occurred and be continuing, Lessor
may, at its option, by notice to Lessee declare this Lease to be in default, and
at any time thereafter Lessor may exercise one or more of the following as
Lessor in its sole discretion shall elect:
25
<PAGE>
(i) Lessor may, by notice to Lessee, rescind or terminate this Lease
and all rights of Lessee hereunder to the use and possession of the
Equipment;
(ii) Lessor may (A) demand that Lessee, and thereupon Lessee shall,
return the Equipment promptly to Lessor in the manner and condition
required by, and otherwise in accordance with the provisions of, this Lease
as if the Equipment were being returned at the end of the Term and Lessor
shall not be liable for the reimbursement of Lessee for any costs and
expenses incurred by Lessee in connection therewith, (B) take immediate
possession of (to the exclusion of Lessee) the Equipment, by summary
proceedings or otherwise, all without liability of Lessor to Lessee (or to
any Person claiming by, through or under Lessee) for or by reason of such
entry or taking of possession, whether for the restoration of damage to
property caused by such taking or otherwise, except damage caused by
Lessor's negligence or willful misconduct, and (C) have the option to
exercise the Lessor Purchase Option (and any amounts owed to Lessee
pursuant to such exercise shall be, at Lessor's option, either remitted to
Lessee or applied by Lessor to offset amounts owed by Lessee hereunder);
(iii) Whether or not any action has been taken under clause (i) or
(ii) above, Lessor may sell the Equipment or any part thereof at public or
private sale, as Lessor may determine, with or without notice to Lessee,
advertisement or publication, free and clear of any rights of Lessee or of
any Person claiming by, through or under Lessee and without any duty to
account to Lessee with respect to such sale or any proceeds with respect
thereto (except to the extent required by clause (v) or (vi) below if
Lessor shall elect to exercise its rights thereunder), in which event
Lessee's obligation to pay Rent hereunder for periods commencing after the
date of such sale shall be terminated (except to the extent that Rent is to
be included in computations under clause (v) or (vi) below if Lessor shall
elect to exercise its rights thereunder);
(iv) Lessor may hold, keep idle, use, operate or lease to others all
or any part of the Equipment as Lessor in its sole discretion may
determine, free and clear of any rights of Lessee (or any Person claiming
by, through or under Lessee) and without any duty to account to Lessee or
to any Person claiming by, through or under Lessee with respect to such
action or inaction or for any proceeds with respect to such action or
inaction, except that Lessee's obligation to pay Rent for periods
commencing after Lessee shall have been deprived of use of the Equipment
pursuant to this clause (iv) shall be reduced by the net proceeds, if any,
received by Lessor from leasing the Equipment to any Person other than
Lessee for the same periods or any portion thereof;
(v) Lessor may, whether or not Lessor shall have exercised or shall
thereafter at any time exercise its rights under clause (ii), (iii) or (iv)
above, demand, by written notice to Lessee specifying a payment date which
shall be a Rent Payment Date not earlier than 10 days after the date of
such notice, that Lessee
26
<PAGE>
pay to Lessor, and Lessee shall pay to Lessor, on the Rent Payment Date
specified in such notice, as liquidated damages for loss of a bargain and
not as a penalty (in lieu of Rent due after the Rent Payment Date specified
in such notice), any unpaid Rent due through the Rent Payment Date
specified in such notice plus whichever of the following amounts Lessor, in
its sole discretion, shall specify in such notice (together with interest
on such amount at the Overdue Rate from the Rent Payment Date specified in
such notice to the date of actual payment);
(A) if Lessor takes possession of the Equipment, an amount equal
to the excess, if any, of such Stipulated Loss Value over the Fair
Value of the Equipment as of the Rent Payment Date specified in such
notice;
(B) if Lessor takes possession of the Equipment, an amount equal
to the excess of (1) the present value as of the Rent Payment Date
specified in such notice of all remaining installments of Rent until
the end of the Basic Term or Fair Market Renewal Term, as the case may
be, discounted semiannually at a rate of 10% per annum, over (2) the
present value as of such payment date of the Fair Market Rental Value
of the Equipment until the end of the Basic Term or the Fair Market
Renewal Term, as the case may be, discounted semiannually at a rate of
10% per annum; or
(C) an amount equal to the Stipulated Loss Value, computed as of
the Rent Payment Date specified in such notice, and upon payment
thereof and all other amounts then due by Lessee hereunder, Lessor
shall Transfer the Equipment to Lessee;
(vi) If Lessor shall have sold all the Equipment pursuant to clause
(iii) above, Lessor, in lieu of exercising its rights under clause (v)
above with respect to the Equipment, may (but shall not be obligated to)
demand that Lessee pay to Lessor and Lessee shall pay to Lessor on the date
of such sale, as liquidated damages for loss of a bargain and not as a
penalty (in lieu of Rent due for periods commencing after the next Rent
Payment Date following the date of such sale), any unpaid Rent due through
such Rent Payment Date, plus the amount of any deficiency between
Stipulated Loss Value, computed as of such Rent Payment Date, and the net
proceeds of such sale, together with interest at the Overdue Rate on the
amount of such Rent and such deficiency from the date of such sale until
the date of actual payment; or
(vii) Lessor may exercise any other right or remedy that may be
available to it under applicable law or proceed by appropriate court action
to enforce the terms hereof or to recover damages for the breach hereof.
(c) In addition to the foregoing, Lessee shall be and remain liable for
paying or reimbursing Lessor for (i) any and all Rent and other amounts due and
payable under this Lease prior to any such Event
27
<PAGE>
of Default, and (ii) all costs and expenses incurred by Lessor (including
reasonable fees and expenses of counsel) in connection with any exercise of its
remedies provided in this Section 15(c).
(d) No rescission or termination of this Lease, in whole or in part, or
repossession of the Equipment or exercise of any remedy under Section 15(b)
shall, except as specifically provided therein, relieve Lessee of any of its
liabilities and obligations hereunder. In addition, Lessee shall be liable,
except as otherwise provided above, for any and all unpaid Rent due hereunder
before, after or during the exercise of any of the foregoing remedies, including
all reasonable legal fees and other costs and expenses incurred by Lessor by
reason of the occurrence of any Event of Default or the exercise of Lessor's
remedies with respect thereto and including all costs and expenses incurred in
connection with the return of the Equipment in the manner and condition required
by, and otherwise in accordance with the provisions of, this Lease as if the
Equipment were being returned at the end of the Term. At any sale of the
Equipment or any part thereof pursuant to Section 15(b), Lessor may bid for and
purchase such property.
(e) To the extent permitted by, and subject to the mandatory requirements
of, applicable law, each and every right, power and remedy under Section 15(b)
or otherwise available to Lessor shall be cumulative and shall be in addition to
every other right, power and remedy, and each and every right, power and remedy
may be exercised from time to time and as often and in such order as may be
deemed expedient by Lessor, and the exercise or the beginning of exercise of any
such right, power or remedy shall not exhaust the same or be construed to be a
waiver of the right to exercise at the same time or thereafter the same or any
other right, power or remedy. No delay or omission by Lessor in the exercise of
any right, power or remedy shall restrict Lessor from exercising the same or
any other right, power or remedy thereafter nor be construed to be a waiver of
any Event of Default or to be an acquiescence therein. No express or implied
waiver by Lessor of any Event of Default shall in any way be, or be construed to
be, a waiver of any future or subsequent Event of Default.
Section 16. Lessee's Renewal Option; Purchase Options of Lessee and Lessor;
---------------------------------------------------------------
Surrender of Equipment.
----------------------
(a) Lessee's Renewal Option.
-----------------------
Upon the expiration of the Basic Term, if no Event of Default, Casualty
Occurrence or Constructive Total Loss shall have occurred and be continuing,
Lessee may, upon at least 30 and not more than 60 days' irrevocable prior
written notice to Lessor, elect to renew the Lease upon the same terms and
conditions for a period of five years (the "Fair Market Renewal Term"); provided
that the Rent obligation during such Fair Market Renewal Term shall be
determined by reference to a Fixed Charge Balance which reflects the Fair Market
Rental Value as determined at the commencement of such Fair Market Renewal Term.
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(b) Lessee's Purchase Option.
------------------------
(i) Unless a Default, Event of Default, Casualty Occurrence or
Constructive Total Loss shall have occurred and be continuing, Lessee shall
have the right, upon at least 30 and not more than 60 days' irrevocable
prior written notice to Lessor, to purchase from Lessor (the "Lessee
Purchase Option") all of the Equipment upon the expiration of the Basic
---
Term for an amount equal to $5,370,000 or such other increased amount as
adjusted pursuant to this Lease.
(ii) Lessee shall pay the purchase price to Lessor on the date fixed
for such purchase and Lessee shall simultaneously pay to Lessor all Rent
and all other amounts, if any, due or accrued through such purchase date,
whereupon Lessor shall Transfer the Equipment and the Term shall end.
(c) Lessor Purchase Option.
----------------------
(i) (x) Upon expiration of the Basic Term in the event that either
(A) Lessee has not provided notice of its intention to exercise the Lessee
Purchase Option in accordance with Section 16(b) or (B) that Lessee has not
provided notice of its intent to exercise its option in Section 16(a), (y)
upon expiration of the Fair Market Renewal Term, if elected, or (z) upon
the termination of the Lease or the repossession of Equipment by Lessor
following an Event of Default, Lessor shall have the right to purchase (the
"Lessor Purchase Option") in accordance with the Facilities Agreements,
Lessee's interest in the Mississippi Canyon Block 441 Unit as identified in
Schedules F, G and H hereto at a purchase price equal to the fair market
value of such interest as of the date of such purchase, as determined in
accordance with accepted industry standards by an independent appraiser
having a national reputation and experience in appraising the value of oil
and gas reserves and offshore production facilities, chosen by mutual
agreement between Lessor and Lessee. The parties hereby agree to use their
best efforts to obtain such appraisal as soon as is reasonably practical
after the occurrence of any of the events in clause (x), (y) or (z) above.
(ii) Lessor shall pay the purchase price to Lessee on the date fixed
for such purchase after deducting from such amount Rent and all other
amounts, if any, due or accrued through such purchase date, whereupon
Lessee shall Transfer its interest in the Mississippi Canyon Block 411 Unit
as identified in Schedules F, G and H hereto and the Term shall end.
(d) Surrender of Equipment.
----------------------
Unless all right, title and interest in the Equipment shall have been or is
being transferred to Lessee or unless Lessee shall have paid Stipulated Loss
Value with respect to the Equipment, in each case, pursuant to this Lease,
Lessee shall, upon the expiration of the Term or the earlier termination of the
Lease as provided herein, return the
29
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Equipment to Lessor or to any transferee or assignee of Lessor and deliver
therewith a complete set, current as of the date of such return, of all
customary operating manuals, logs and plans and specifications necessary or
appropriate for the proper operation and maintenance of the Equipment, together
with all maintenance and repair reports prepared during the Term in respect of
such Equipment. At the time of such return, the Equipment (i) shall be, at a
minimum, in the condition required by Section 10, (ii) shall be in good working
order and shall include all Alterations made by Lessee to the extent such
Alterations become the property of Lessor pursuant to Section 14, (iii) shall be
free and clear of all Liens, except Permitted Liens, and (iv) shall not be
"limited use property" within the meaning of Rev. Proc. 76-30, 1976-2 C.B. 647.
Lessee shall assign to Lessor all warranties, registrations, licenses and
permits, to the extent permitted under applicable law, required to be possessed
by Lessee or Lessor with respect to the Equipment.
Section 17. Information: Financial Information.
----------------------------------
(a) Lessee will deliver to Lessor (in as many copies as to provide one for
Lessor and its Funding Sources and as otherwise may be reasonably requested),
(i) within 90 days after the end of each quarter of each fiscal year of Lessee,
a statement, executed by an Authorized Officer of Lessee, certifying (A) the
dates to which the sums payable hereunder have been paid, that this Lease is
unmodified and in full force and effect (or, if there have been modifications
thereto, that this Lease is in full force and effect as modified), (B) that no
Event of Default and, to the best of the knowledge of Lessee, no event which,
with the giving of notice or the lapse of time, or both, would become such an
Event of Default, has occurred and is continuing (or specifying the nature and
period of existence of any thereof and what action Lessee is taking or proposes
to take with respect thereto), and (C) that the representations and warranties
of Lessee set forth in Section 20 hereof are true with the same effect as though
such representations and warranties had been made on the date of such statement
(except for any such representations and warranties which expressly relate to an
earlier date), it being intended that any such statement may be relied upon by
Lessor, and (ii) promptly upon acquiring actual knowledge of the occurrence of
an Event of Default or the occurrence or existence of any condition, occurrence
or event which, after notice or lapse of time or both, would constitute an Event
of Default, written notice specifying the nature and period of existence thereof
and what action Lessee is taking or proposes to take with respect thereto.
(b) Lessee will deliver to Lessor (in as many copies as to provide one for
Lessor and its Funding Sources and as Lessor may otherwise reasonably request)
with all reasonable promptness, such other information respecting the condition
or operations, financial or otherwise, of the Lessee, as the Lessor may from
time to time reasonably request in order to evaluate the Lessee's ability from
time to time to fulfill its obligations under the Lease so long as the Lessor
states at the time that the Lessor believes the Lessee may be unable ultimately
to fulfill such obligations.
30
<PAGE>
(c) Lessee shall deliver to Lessor with all reasonable promptness any
reports made to any governmental authorities by Lessee as operator under any
Facility Agreement in respect of the Equipment and any other information
regarding the Equipment or the operations thereof that Lessor may reasonably
request and that Lessee either possesses or can acquire with reasonable effort
or expense and which Lessee is not prohibited from disclosing by confidentiality
restrictions of the type customarily entered into in the industry.
(d) On or before March 31 of each year, Lessee shall deliver to Lessor
copies (so as to provide a copy to Lessor and its Funding Sources) of the
relevant portions of the annual reserve report required by Lessee for corporate
accounting purposes. Such reserve report shall be dated as of January 1 of the
current year, commencing January 1, 1995 and shall be prepared by DeGolyer and
McNaughton or such other independent petroleum engineering firm as may be
satisfactory to both Lessor and Lessee. The report shall set forth separately
the proved producing and proved non-producing oil and gas reserves (the
"Reserves") attributable to the oil and gas leases and the lands affected
thereby (as more fully described on Schedule F hereto) on which any Unit of
Equipment is located or in connection with which any Unit of Equipment is
purchased, leased or used and a projection of future production, associated
costs, future net revenue and present value in respect of such Reserves; such
projections shall be adjusted to include the effects, if any, which non-
participation elections by Lessee under any Operating Agreement have on future
production, associated costs, future net revenue and present value.
(e) Lessee shall deliver annually to Lessor a report of an authorized
officer of Lessee as to the status of the Equipment, containing a brief
description and the value of any Units of Equipment replaced, or any part
thereof removed or replaced (with a value in excess of the amount set forth in
Section 7(c) herein on the Equipment since the Lease Commencement Date, or
since the date of the prior report delivered by Lessor to its Funding Sources
and certifying that the Equipment is in good operating order, repair and
condition and that Lessee has complied with all other covenants and agreements
of Lessee set forth in Section 10 hereof.
(f) Lessor shall use reasonable efforts to deliver to Lessee, upon
Lessee's request (such request to be made no more than once to Lessor in any
calendar year) a certificate substantially in the form of Schedule K hereto;
provided, however, that failure by Lessor to deliver such certificate shall in
- -------- -------
no way constitute a default by Lessor hereunder and shall in no way relieve
Lessee of its obligations hereunder.
(g) Lessee shall deliver to Lessor concurrently with the annual report
referred to in Section 17(e) above, (1) certificates of insurance (or other
evidence acceptable to Lessor) setting forth the nature and extent of insurance
maintained by Lessee in accordance with Section 13 and (2) a certificate from
Lessee's insurance broker to the effect that all insurance (except for self-
insurance) listed in such certificate or such evidence is written by
responsible, financially sound insurance companies.
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Section 18. Inspection; Right to Enter Premises of Lessee.
---------------------------------------------
Lessor and its Funding Sources or their authorized representatives may (i)
enter, at its own risk, the premises of Lessee at reasonable times upon
reasonable advance notice in order to inspect the Equipment (subject to the
availability thereof for inspection) and to inspect, audit and make copies of
all documents and instruments in the possession of Lessee that are reasonably
necessary or appropriate for Lessor or such authorized representatives to
determine the truth and accuracy of any schedule, annex, exhibit or
representation delivered or made hereunder or compliance by Lessee with any of
the agreements herein contained and (ii) discuss the condition and performance
of the Equipment with the responsible officers of the Lessee, and Lessee agrees
to take such reasonable and customary steps as are appropriate to facilitate
such inspections and discussions. Lessor and its Funding Sources shall not incur
any liability or obligation for not making any such inspection or for not
conducting any such discussion. Notwithstanding the provisions of Section 18,
such inspections of the Equipment located in the Gulf of Mexico shall be at the
sole cost, risk and expense of Lessor and its Funding Sources and subject to
Lessee's discretion as operator to bar access to the Units of Equipment for
safety reasons. Such inspections of Equipment located in the Gulf of Mexico
shall be performed under Lessee's supervision as operator.
Section 19. Right to Perform Lessee's Covenants.
-----------------------------------
Subject to Section 12 hereof, if Lessee shall fail to make any payment or
perform any act required to be made or performed by it hereunder, Lessor, upon
notice to or demand upon Lessee but without waiving or releasing any obligation
or default, may (but shall be under no obligation to) at any time thereafter
make such payment or perform such act for the account and at the expense of
Lessee. All payments and expenses (including, without limitation, reasonable
attorneys' fees and expenses) made or incurred by Lessor in connection with such
payment or performance shall be remitted by Lessee to Lessor upon its demand
therefor.
Section 20. Representations and Warranties of Lessee.
----------------------------------------
Lessee represents and warrants as follows:
(a) Lessee is a corporation duly formed, validly existing and in good
standing under the laws of the State of Texas. Lessee has all requisite
corporate power and corporate authority to own its properties and assets and to
carry on its business as now conducted and as presently proposed to be
conducted. Lessee is duly qualified and in good standing in each United States
jurisdiction in which the failure so to qualify would have a material adverse
effect on Lessee.
(b) Lessee has all necessary corporate power and corporate authority to
execute and deliver this Lease and to carry out the provisions hereof. All
corporate action on the part of Lessee which is required for the valid and
binding execution and delivery of, and compliance with, this Lease by Lessee has
been duly and effectively
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taken. This Lease constitutes a legal, valid and binding obligation of Lessee,
enforceable in accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, reorganization or other laws relating to or affecting
the enforcement of creditors' rights generally and by general principles of
equity.
(c) To the best of its knowledge, Lessee has filed all tax returns,
statements, filings, notices and reports required to be filed by it and, except
for permitted contests pursuant to Section 12 hereof, has paid all taxes shown
due on such returns, statements, filings, notices and reports as well as all
other taxes, assessments and governmental charges which have become due (other
than tax assessments and charges payable without being deemed delinquent).
(d) Except as otherwise previously disclosed to Lessor in writing, there
is no action, suit, or proceeding, or, to the knowledge of Lessee,
investigation, now pending or, to the knowledge of Lessee, threatened, at law or
in equity or by or before any court, agency, board, commission, governmental
instrumentality or other tribunal (i) in which it is not probable that Lessee's
position will prevail or that a settlement for less than $25,000,000 can be
reached, and (ii) if determined adversely to Lessee, would materially adversely
affect the financial condition of Lessee or the ability of Lessee to carry on
its business or to perform its obligations under this Lease. Lessee, to the
best of its knowledge after reasonable investigation, is not in, and following
consummation of the transactions contemplated hereby will not be in, breach of
or default under any provision of any indenture, mortgage, agreement,
instrument, undertaking for the payment of money, deed of trust, evidence of
debt or instrument to which it is a party or by which it is bound or, to the
best of its knowledge after reasonable investigation, in violation of any
provision of any law, rule or regulation, or in violation of any decree, ruling,
judgment, order or injunction applicable to it or in violation of its
Certificate of Incorporation or Bylaws.
(e) To the best of Lessee's knowledge after reasonable investigation,
neither Lessee nor any of its properties or assets is subject to any contract or
agreement (including, without limitation, any Operating Agreement), any
provision of its Certificate of Incorporation or Bylaws or other corporate
restriction, any law or any order, rule, ruling, certificate, license,
regulation, judgment, injunction or demand of any country, state, territory or
political subdivision thereof or of any court, agency, board, commission,
governmental instrumentality or other tribunal which materially adversely
affects the ability of Lessee to carry on its business as presently conducted or
to perform its obligations under this Lease or under any Facility Agreement. The
execution and delivery of, and performance and compliance with, this Lease by
Lessee (i) do not and will not under currently applicable laws and regulations
(except for routine matters of compliance involving licensing, registering,
operating and disposing of any Unit of Equipment which Lessee has no reason to
believe will not be obtained, when necessary in the ordinary course of business
and which, if not obtained, would not affect the validity or enforceability of
this Lease) require the consent, approval, authorization of any Person or
governmental authority, body or agency except any consent, approval or
authorization
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that has been duly obtained or will have been duly obtained as required, (ii) do
not and will not contravene any provision of any law, rule, regulation, decree,
ruling, judgment, order or injunction currently applicable to or binding upon
Lessee, and (iii) do not and will not contravene, or result in the creation or
imposition of any Lien on any property of Lessee or on any Unit of Equipment
pursuant to the provisions of, result in the acceleration of any obligation of
Lessee under, or result in a condition or event which constitutes an event of
default under or breach of, any indenture, mortgage, agreement, undertaking for
the payment of money, deed of trust, evidence of debt or instrument or any
Facility Agreement now applicable to or binding upon Lessee or any Unit of
Equipment.
(f) Lessee is not an "investment company" or a company controlled by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
(g) Lessee is not a "holding company," or a "subsidiary company" of a
"holding company," or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company" within the meaning of the Public Utility Holding
Company Act of 1935, as amended.
(h) To the best of Lessee's knowledge, after reasonable investigation, (i)
all facilities and property (including underlying groundwater) owned, leased, or
operated by Lessee have been, and continue to be, owned, leased or operated by
Lessee in material compliance with all Environmental Laws as they exist on the
date hereof such that any event or occurrence of non-compliance with any
Environmental Law, singly or in the aggregate, does not have, and may not
reasonably be expected to have, a material adverse effect on the financial
condition, operations, assets, business, properties or prospects of Lessee, (ii)
there have been no past, and there are no pending or threatened, claims,
complaints, notices or inquiries to, or requests for information received by,
Lessee with respect to any alleged violation of, or regarding potential
liability under, any Environmental Law which has, or which may reasonably be
expected to have, a material adverse effect on the financial condition,
operations, assets, business, properties or prospects of Lessee, and (iii) no
environmental condition exists which would have a material adverse effect on the
financial condition, operations, assets, business, properties or prospects of
Lessee.
(i) All factual information heretofore or contemporaneously furnished by
or on behalf of Lessee in writing to Lessor for purposes of or in connection
with this Lease or any transaction contemplated hereby is, and all other such
factual information hereafter furnished by or on behalf of Lessee or any to
Lessor will be, true and accurate in every material respect on the date as of
which such information is dated or certified and as of the date of execution and
delivery of this Lease by Lessor, and such information is not, or shall not be,
as the case may be, incomplete by omitting to state any material fact necessary
to make such information not misleading.
(j) Lessee will, after giving effect to the acquisition of each Unit of
Equipment by the Lessor and the leasing of such Equipment by
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Lessor to Lessee pursuant hereto, be in possession of and operating in material
compliance with the rules and regulations of the Federal, state and local
governmental authorities having jurisdiction over oil and gas exploration and
production operations on the Outer Continental Shelf in the Gulf of Mexico.
Without limiting the foregoing, Lessee will conduct its operations of the Units
of Equipment in compliance with the rules, regulations and orders of the
Minerals Management Service, U.S. Department of the Interior or any successor
thereto and Lessee will comply with the requirements of the affected oil and gas
leases and all permits, rights-of-way, easements, consents, certificates and
licenses affecting the Units of Equipment and the Reserves. Without limiting the
generality of the foregoing, all insurance and other evidence of financial
responsibility maintained by Lessee meets or exceeds all Federal, State and
local laws, rules and regulations applicable to Lessee and its business. The
Lessee has delivered to the Lessor on the date hereof a list setting forth
substantially all of the consents that may be required as provided in the
preceding sentence which have not been obtained as of the date hereof.
(k) The Lessee is not in default or breach of any material term, covenant
or provision of any Facility Agreement.
(l) Except as contemplated by Section 20(e) hereof, the Lessee is not
required to obtain the consent, approval or authorization of, or make
declaration or filing with any governmental authority for the valid execution
and delivery and performance of this Lease or the acquisition or operation of
any Unit of Equipment in accordance with the terms and provisions hereof.
(m) The execution and delivery of, and performance and compliance with,
this Lease and the acquisitions and ownership of the Equipment by Lessor do not
and will not under currently applicable laws and regulations require the
consent, approval or authorization of any Person or governmental authority, body
or agency other than those consents, approvals or authorizations required to be
obtained by a Lessor as a result of Lessor's legal or regulatory status.
(n) Lessee is not engaged in the business of extending credit for the
purposes of purchasing or carrying margin stock, and no advances by Lessor to
Lessee pursuant to this Lease will be used for a purpose which violates, or
would be inconsistent with, Regulation G, U or X of the Board of Governors of
the Federal Reserve System or any successor thereto. Terms for which meanings
are provided in Regulation G, U or X or any regulations substituted therefor, as
from time to time in effect, are used in this Section with such meanings.
(o) The Operating Agreements and other contracts identified on Schedule H
hereto constitute all of the material contracts relating to or affecting the
Units of Equipment and the exploration, development and production of the
Reserves, other than contracts relating to the acquisition, use, construction or
fabrication of the Equipment entered into with one or more Vendors and other
than contracts relating to the transportation or marketing of oil and gas.
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Section 21. Indemnification by Lessee.
-------------------------
Lessee shall pay, and shall protect, indemnify and save harmless Lessor and
its officers, directors, partners, employees and agents (individually an
"Indemnified Party" and collectively, the "Indemnified Parties") from and
against all liabilities, taxes, losses, obligations, claims, damages, penalties,
causes of action, suits, costs and expenses (including, without limitation,
reasonable attorneys' fees and expenses), including liabilities, taxes, losses,
obligations, claims, damages, penalties, causes of action, suits, costs, and
expenses arising from their own negligence, and judgments of any nature,
irrespective of whether any such Indemnified Party is a party to the action for
which indemnification hereunder is sought, (collectively the "Indemnified
Risks") arising from or relating to (i) Lessee's respective agreements or
obligations contained in this Lease or the Master Lease Agreement (including all
obligations in respect of payments or otherwise hereunder or thereunder), (ii)
Lessor's and its Funding Sources' ownership and leasing of any and all Units of
Equipment during the term of this Lease, (iii) all acts or omissions of Lessee
or any sublessee or bailee of any Unit of Equipment, (iv) any failure by Lessee
to comply with all govern mental rules and regulations applicable to the
maintenance and operation of the Equipment, (v) any investigation, litigation or
proceeding related to any environmental cleanup, audit, compliance or other
matter relating to the protection of the environment or the release of any
Hazardous Material or the presence on or under, or the escape, seepage, leakage,
spillage, discharge, emission, discharging or releases from, any Unit of
Equipment or any property related to or associated with the use of any Unit of
Equipment (including, without limitation, the property in Mississippi Canyon
Blocks 441, 442 and 485 and Ewing Bank Block 482), of any Hazardous Material
(including any losses, liabilities, damages, injuries, costs, expenses or claims
asserted or arising under any Environmental Law) regardless of whether caused
by, or within the control of, Lessee, (vii) the Operator's Lien or any
enforcement thereof, (viii) any Imposition, Lien, Judgment, tax, or other
payment which Lessee is obligated to discharge or pay to any Person other than
Lessor, or (ix) any action or omission of Lessee pursuant to the Special Power
of Attorney, except to the extent that a court of competent jurisdiction in a
final judgment determines that an Indemnified Risk resulted from the gross
negligence or willful misconduct of such Indemnified Party and except that this
Section 21 shall not limit the effect of the proviso in Section 3(d) hereof. If
any claim, action, suit or proceeding arising from any of the foregoing is
brought against Lessor or any other Indemnified Party, Lessee will have the
right, at Lessee's expense, to resist and defend such action, suit or proceeding
or cause the same to be resisted and defended, provided, that (a) counsel
--------------
designated by Lessee is reasonably acceptable to the Indemnified Party, (b)
Lessee will have acknowledged in writing that this Section 21 will cover any
Indemnified Risks in any such claim, action, suit or proceeding, (c) in the sole
determination of such Indemnified Party, Lessee has the financial ability to pay
such Indemnified Risks and (d) Lessee shall thereafter consult with the
Indemnified Party upon such party's request for consultation from time to time
with respect to such claim, action, suit or proceeding, but such Indemnified
Party shall be entitled (but not obligated) to participate jointly in such
defense, in which case (x) if all conditions
36
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in clauses (a), (b), (c), and (d) of the foregoing proviso have been satisfied
(as determined by the Indemnified Party in its discretion), then such
Indemnified Party will be responsible for its own legal fees or other expenses,
if any, related to such defense incurred subsequent to the joint participation
by such party in such defense other than the reasonable costs of investigation,
or (y) if any condition in clause (a), (b), (c) or (d) of the foregoing proviso
has not been satisfied (as determined by the Indemnified Party in its
discretion), then Lessee will be responsible for the Indemnified Party's
reasonable legal fees and other expenses, if any, related to such defense
incurred subsequent to the joint participation by such Indemnified Party in such
defense, including the reasonable costs of investigation. If an Indemnified Risk
shall be fully covered by valid and collectible insurance provided pursuant to
Section 13 hereof, Lessee or its counsel shall have full power and authority to
litigate, compromise or settle such Risk; provided that Lessee or its counsel
shall not enter into any compromise or settlement of any non-monetary claims
without the Indemnified Party's prior written consent. The obligations of Lessee
under this Section 21 shall survive any termination of this Lease, in whole or
in part.
Section 22. No Merger.
---------
There shall be no merger of this Lease or of the leasehold interest created
by this Lease with the absolute ownership interest in the Equipment by reason of
the fact that the same entity may acquire or own or hold, directly or indirectly
(a) this Lease or the leasehold interest created by this Lease or any interest
in this Lease or in such leasehold interest and (b) the absolute ownership or
any other interest in any Equipment, and no such merger shall occur unless and
until all entities having any interest in (i) this Lease or the leasehold
interest created by this Lease and (ii) the absolute ownership or other interest
in the Equipment shall join in an instrument effecting such merger and shall
duly record the same.
Section 23. Notices.
-------
All notices, demands, instructions and other communications required
or permitted hereunder to be given to or made upon any party to this Lease shall
be effective when received in writing, by prepaid telex or by telecopy, and
shall be deemed to have been duly given when personally delivered or otherwise
actually received, or five days after it shall have been deposited in the United
States mail, registered or certified, postage prepaid, addressed as follows:
To Lessee: New Enserch Exploration, Inc.
1817 Wood Street
Dallas, Texas 75201-5699
Attention: Controller
Telecopy: 214-573-3005
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To Lessor: Enserch Exploration, Inc.
1817 Wood Street
Dallas, Texas 75201-5699
Attention: Controller
Telecopy: 214-573-3005
or in each case at such other address as the party concerned may designate by
notice duly given in accordance with this Section 23.
Section 24. Amendments and Waivers.
----------------------
The provisions of this Lease and of each other document executed in
connection herewith may from time to time be amended, modified or waived, if
such amendment, modification or waiver is in writing and consented to by Lessee
and Lessor.
No failure or delay on the part of the Lessor in exercising any power or right
under this Lease or any other document executed in connection herewith shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power or right preclude any other or further exercise thereof or the
exercise of any other power or right. No notice to or demand on the Lessee in
any case shall entitle it to any notice or demand in similar or other
circumstances. No waiver or approval by the Lessor under this Lease or any other
document executed in connection herewith shall, except as may be otherwise
stated in such waiver or approval, be applicable to subsequent transactions. No
waiver or approval hereunder shall require any similar or dissimilar waiver or
approval thereafter to be granted hereunder.
Section 25. Severability.
------------
Any provision of this Lease which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
Section 26. INTENTIONALLY OMITTED.
Section 27. Limited Power of Attorney.
-------------------------
The power of attorney granted by Lessor to Lessee in the Special Limited
Power of Attorney is to be construed and interpreted as a special, limited power
of attorney. The Lessee is authorized to take action only in connection with
the matters described in this Lease and the Special Power of Attorney. Any of
these powers of attorney may be revoked at any time by the Lessor giving the
Lessee written notice of such revocation.
Section 28. Confidentiality.
---------------
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Subject to Section 3(c) hereof, the definition of Daily Rent Charge, the
information contained in Annex I to the Master Lease and the information in
Section 3 hereof, shall not be disclosed by Lessee during the term of this Lease
and for one year after the expiration or termination of this Lease except any
such information which:
(i) has been disclosed to the public by a Lessor;
(ii) is in or becomes part of the public domain through no fault of
Lessee; or
(iii) is required to be disclosed by operation of law.
Upon application to any court having jurisdiction, Lessor shall be entitled to a
decree against Lessee requiring specific performance of the covenants herein.
Lessor agrees to maintain the confidentiality of information provided by
Lessee hereunder in accordance with Annex II to the Master Lease.
Section 29. Miscellaneous.
-------------
(a) The terms and provisions of this Lease supersede all prior agreements,
negotiations, understandings, and discussions, if any, whether oral or written,
between Lessor and Lessee with respect to the transactions contemplated hereby.
(b) Notwithstanding anything to the contrary contained in this Lease, the
execution of this Lease and any other instrument or document executed in
connection herewith shall not impose upon any director, officer or employee of
Lessee or Lessor or Lessor's Funding Sources' personal liability for the
Lessee's, Lessor's or Lessor's Funding Sources' respective obligations under
this Lease or any other instrument or document executed in connection herewith;
provided the foregoing shall not relieve any such director, officer or employee
of personal liability for his or her fraud or intentional misconduct.
(c) The captions and the Table of Contents in this Lease are for
convenience of reference only and shall not define or limit any of the terms or
provisions hereof.
(d) THIS LEASE SHALL IN ALL RESPECTS BE GOVERNED BY, AND BE CONSTRUED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF TEXAS (WITHOUT REFERENCE TO
ANY CONFLICT OR CHOICE OF LAW PRINCIPLES), INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE.
(e) ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION
WITH, THIS LEASE, ANY RELATED DOCUMENT OR ANY OTHER AMENDMENT, INSTRUMENT,
AGREEMENT OR DOCUMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN
CONNECTION HEREWITH OR THEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF LESSOR OR LESSEE SHALL BE
BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK OR IN
THE UNITED STATES DISTRICT
39
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COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT
-------- -------
SEEKING ENFORCEMENT AGAINST ANY EQUIPMENT OR OTHER PROPERTY MAY BE BROUGHT, AT
THE LESSOR'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH EQUIPMENT OR
OTHER PROPERTY MAY BE FOUND. LESSEE HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO
THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH
LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT
RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. LESSEE FURTHER IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY
PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. LESSEE HEREBY
EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY
OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY
SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT
ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT
THAT LESSEE HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY
COURT OF FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT
PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO
ITSELF OR ITS PROPERTY, LESSEE HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN
RESPECT OF ITS OBLIGATIONS UNDER THIS LEASE, ANY RELATED DOCUMENTS AND ANY
AMENDMENT, INSTRUMENT, AGREEMENT OR DOCUMENT DELIVERED OR WHICH MAY IN THE
FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH.
(f) Nothing in this Lease, express or implied, shall give to any Person,
other than the parties hereto and their respective successors and permitted
assigns, any benefit or any legal or equitable right, remedy or claim under this
Lease.
(g) So long as no Event of Default has occurred, to the extent that Lessor
has by the terms of the Special Limited Power of Attorney and Sections 3(d),
3(e), 6, 7(b) and 10(b) of this Lease authorized Lessee to take any action for
or on their behalf, granted Lessee a limited power of attorney or designated
Lessee to be Lessor's lawful representative, such authorization, grant, and
designation shall be construed as the grant by Lessor to Lessee of an express
limited power of attorney coupled with an interest.
(h) This Lease may be executed in two or more counterparts and by the
different parties on separate counterparts, each of which shall constitute an
original but which, when taken together, shall constitute but one instrument,
and shall become effective when copies hereof or facsimile copies of the
signature page hereof which, when taken together, bear the signatures of each of
the parties hereto shall be delivered to Lessor.
(i) LESSEE HEREBY WAIVES ALL PROVISIONS OF THE TEXAS DECEPTIVE TRADE
PRACTICES ACT, AS AMENDED, (OTHER THAN SECTION 17.555, PERTAINING TO
CONTRIBUTION AND INDEMNITY) TO THE EXTENT APPLICABLE TO THE TRANSACTIONS
CONTEMPLATED HEREBY. LESSEE FURTHER REPRESENTS AND WARRANTS TO LESSOR THAT
LESSEE (1) HAS ASSETS OF $5,000,000 OR MORE, (2) HAS KNOWLEDGE AND EXPERIENCE IN
FINANCIAL AND BUSINESS MATTERS THAT ENABLE LESSEE TO EVALUATE THE MERITS AND
RISKS OF THE TRANSACTIONS CONTEMPLATED
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BY THIS LEASE, (3) IS REPRESENTED BY LEGAL COUNSEL IN CONNECTION WITH THIS LEASE
AND SUCH TRANSACTIONS AND (4) IS NOT IN A DISPARATE BARGAINING POSITION RELATIVE
TO THE LESSOR.
(j) THIS WRITTEN LEASE AND THE SPECIAL POWER OF ATTORNEY REPRESENT THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
(k) EACH OF LESSEE AND LESSOR WAIVES, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO
ENFORCE OR TO DEFEND ANY RIGHTS UNDER THIS LEASE OR ANY RELATED DOCUMENT OR
UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN
THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY
RELATIONSHIP EXISTING IN CONNECTION WITH THIS LEASE OR ANY RELATED DOCUMENT AND
AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT
BEFORE A JURY.
(l) THIS LEASE IS SUBJECT AND SUBORDINATE TO THE TERMS, OBLIGATIONS,
CONDITIONS AND DEFINITIONS OF THAT CERTAIN MASTER LEASE AGREEMENT, DATED AS OF
APRIL 30, 1992 AMONG CERTAIN INSTITUTIONS, AS LESSORS, EP OPERATING COMPANY
LIMITED PARTNERSHIP, AS LESSEE, AND CIBC LEASING INC., AS AGENT, AS IT MAY BE
AMENDED FROM TIME TO TIME (THE "MASTER LEASE AGREEMENT")
__________________________________________. THE LESSEE ACKNOWLEDGES FOR THE
BENEFIT OF THE LESSOR AND ITS FUNDING SOURCES THAT, IN THE EVENT THAT THE MASTER
LEASE SHALL BE TERMINATED OR CANCELLED PRIOR TO THE STATED LEASE TERMINATION
DATE AS A RESULT OF DEFAULT BY THE LESSEE UNDER THIS LEASE, LESSOR MAY IN ITS
DISCRETION, TERMINATE THIS LEASE. THE LESSEE FURTHER ACKNOWLEDGES THAT THE
LESSOR SHALL BE SUBJECT TO NO OBLIGATION OR LIABILITY TO THE LESSEE AS A RESULT
OF SUCH TERMINATION OR CANCELLATION.
Section 30. Lessor's Representations and Warranties.
---------------------------------------
The Lessor represents and warrants to the Lessee that:
(a) Existence. (i) The Lessor is a corporation duly organized and validly
---------
existing under the laws of the State of Delaware; (ii) the Lessor has all
requisite corporate power, and all material governmental licenses,
authorizations, consents and approvals necessary, to own its Property and carry
on its business as now being or as proposed to be conducted and is in material
compliance with all requirements under applicable law; (iii) Lessor is qualified
to do business in all jurisdictions in which the nature of the business
conducted by it makes such qualification necessary and where failure to so
qualify would result in a material adverse change; and (iv) Lessor is in good
standing in the jurisdiction of its organization and each such jurisdiction in
which it is qualified to do business except where the failure to be in good
standing would not result in a material adverse change.
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(b) Litigation. Except as disclosed to the Lessee, there are no legal or
----------
arbitral proceedings or any proceedings by or before any Governmental Authority,
now pending or (to the knowledge of the Lessor) threatened against the Lessor
which, if adversely determined, could result in a material adverse change.
(c) No Breach. Except as set forth herein, the execution and delivery of
---------
this Agreement and the other Operative Documents, the transactions herein
contemplated and compliance with the terms and provisions hereof will not
conflict with or result in a breach of, or require any consent of any Person not
already obtained, under the bylaws of Lessor, or any applicable Legal
Requirement, or any agreement or instrument to which the Lessor is a party or by
which it is bound or to which it is subject, or constitute a default under any
such agreement or instrument.
(d) Action. The Lessor has all necessary corporate power and authority to
------
execute, deliver and perform its obligations under this Agreement and the other
Operative Documents to which it is a party, and the execution, delivery and
performance by it of this Agreement and the other Operative Documents to which
it is a party have been duly authorized by all necessary corporate action on its
part; and this Agreement and the other Operative Documents constitute the
legal, valid and binding obligation of each of the parties thereto, enforceable
in accordance with their terms, subject to bankruptcy, insolvency,
reorganization, moratorium or similar laws of general application relating to or
affecting creditor's rights and to general principles of equity.
(e) Approvals. Except as set forth herein, no authorizations, approvals or
---------
consents of, and no filings or registrations with, any governmental authority
are necessary for the execution, delivery or performance by the Lessor of this
Agreement and the other Operative Documents to which they respectively are
parties, or for the validity or enforceability thereof.
(f) No Material Misstatements. No information, exhibit or report furnished
-------------------------
to the Lessor in connection with the negotiation and administration of this
Agreement contains any material misstatement of fact or omits to state a
material fact necessary in order to make the statements contained therein not
misleading.
(g) Regulatory Matters. The Lessor has not violated any provisions of any
------------------
requirement under applicable law which would result in a material adverse
change, and the Lessor, except as provided herein, made all necessary filings,
certificate applications, report filings, and any other filings or
certifications, and have received all necessary regulatory authorizations
required under said laws and regulations with respect to all of their respective
operations and properties so as not to result in a material adverse change. Said
material filings, certificate applications, report filings, and other filings
and certifications contain no untrue statements of material facts nor do they
omit any statements of material facts necessary in said filings.
42
<PAGE>
Section 31. Application of Certain Payments.
-------------------------------
Payments received at any time by Lessor or Lessee pursuant to Section 9(b)
or from any governmental authority, insurer or other Person with respect to any
destruction, damage, loss, condemnation, confiscation, theft or seizure of or
requisition of title to the Equipment or any part thereof during the Term
whether or not constituting a Casualty Occurrence or with respect to a
Constructive Total Loss or any and all indemnification rights and warranties
assigned pursuant to Section 9(b) shall be applied to pay or to reimburse Lessee
for repairs to or restoration or replacement of property in respect of which
such payment was received and, after completion of such repairs, restoration or
replacement, the balance, if any, of such payments shall be divided between
Lessor and Lessee as their interests may appear.
INTENTIONALLY LEFT BLANK
43
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Lease to be executed by
their respective officers thereunto duly authorized as of the date first above
written.
LESSOR:
Enserch Exploration, Inc.,
By:___________________________
GARY J. JUNCO
President
LESSEE:
New Enserch Exploration, Inc.
By:___________________________
Name:_________________________
Title:________________________
44
<PAGE>
SCHEDULE A
INTENTIONALLY OMITTED
<PAGE>
SCHEDULE B
REMOVAL SCHEDULE TO THE MASTER LEASE
Dated
<TABLE>
<CAPTION>
Only Shown for
Equipment Removed by
Third Party Sale as to
which there is a
Deficiency
--------------------------
<S> <C> <C> <C> <C> <C>
(1) (2) (3) (4) (5) (6)
Fair Value
Description Date of Undepreciated Removal Unguaranteed of
of Equipment Sale Cost Payment Value Equipment
- ------------ ------- ------------- ------- ------------ -----------
Totals ------------- ------- ------------ ----------
$ $ $ $
</TABLE>
Payment to accompany schedule shall be from totals shown above:
A. Aggregate Undepreciated Cost
(column (3) total)
B. Aggregate Deficiency
(column (5) total minus
column (6) total) $
-------------------------
AGGREGATE REMOVAL PAYMENT (A minus B) $
-------------------------
NEW ENSERCH EXPLORATION, INC.
By:
------------------------------
Title:
---------------------------
<PAGE>
SCHEDULE C(i)
LESSOR PAYMENT NOTICE
[Date]
For Billing Period Ended
-------------------------
In accordance with the terms of Section 3 of the Lease Agreement, dated as
of November ___, 1994, between Enserch Exploration, Inc. ("Lessor") and New
Enserch Exploration, Inc. ("Lessee"), the following amounts shall be paid by
Lessee to Lessor on the Rental Payment Date:
(1) Rent attributable to the Quarterly Rent Charge
---------------
(2) Rent attributable to the Fixed Charge
Balance/Rental Balance
---------------
(3) Quarterly Expense Charge
---------------
(4) Additional Rent
---------------
Total:
---------------
Attached as Schedule D is an updated Rent Schedule which reflects a change
in Quarterly Rent Charge, if applicable.
NEW ENSERCH EXPLORATION, INC.
-------------------------------
Name:
Title:
<PAGE>
SCHEDULE D
RENT SCHEDULE
(See Attached)
<PAGE>
SCHEDULE E(i)
EQUIPMENT INVENTORY SCHEDULE AND STIPULATED LOSS VALUE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5) (6) (7)
Stipulated
Contractor/ Loss Value
Vendor Construction (Original
Description Description Status (In Lease Amount
of Unit of of Contract Progress/ Less Unpaid Equipment
Equipment Book Value in Progress Completed) Location Fixed Charge) Cost
- ----------- ---------- ----------- ------------ -------- ------------- ----
<S> <C> <C> <C> <C> <C> <C>
TOTAL $
</TABLE>
NEW ENSERCH EXPLORATION, INC.
By:
------------------------------
Name:
Title:
Date:
<PAGE>
SCHEDULE E(ii)
INDIVIDUAL LEASING RECORD
(for newly acquired Equipment)
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Description of
Delivery Date Unit of Equipment Equipment Cost Stipulated Loss Value
- --------------- ----------------- -------------- ---------------------
<S> <C> <C> <C>
</TABLE>
I certify that the Unit of Equipment does not constitute "limited use
property." It is reasonable to conclude, as of the Delivery Date, that the use
of the Unit of Equipment after the end of the Term by Lessor or some other
Person unrelated to Lessor that could lease or purchase the Equipment from the
Lessor is commercially feasible, that the useful life of such Equipment at the
end of the Term is at least 20% of the useful life of the Equipment determined
as of the Delivery Date, and that the Fair Value of such Unit of Equipment at
the end of the Term determined as of the Delivery Date is at least 20% of the
Equipment Cost.
Dated this ___ day of __________________, ______.
---------------------------------
By:
---------------------------
Title:
---------------------------
................................................................................
The undersigned Lessor hereby leases to the undersigned Lessee and Lessee
acknowledges delivery to it in good condition of the Equipment described above.
The covenants, terms and conditions of this lease are those appearing in the
Lease Agreement between Lessor and Lessee dated as of November __, 1994, as
amended, modified or otherwise supplemented from time to time, which covenants,
terms and conditions are hereby incorporated by reference.
LESSEE: LESSOR:
New Enserch Exploration, Inc. Enserch Exploration, Inc.
- --------------------------------- ---------------------------------
By: By:
------------------------------ ---------------------------
Title: Title:
--------------------------- ---------------------------
<PAGE>
SCHEDULE F
RESERVES
Reserves shall refer to Lessee's interest in the proved producing and proved
non-producing oil and gas reserves attributable to the following oil and gas
leases and the lands affected thereby:
Oil and Gas Leases
- ------------------
1. Oil and Gas Lease effective as of April 1, 1982, from the United States of
America, as Lessor, to Conoco Inc., Getty Oil Company, and Oxy Petroleum,
Inc., as Lessees bearing Serial No. OCS-G 5080, and covering all of Block
441, Mississippi Canyon, OCS Official Protraction Diagram NH 16-10.
2. Oil and Gas Lease effective as of August 1, 1988, from the United States of
America, as Lessor, to Petrofina Delaware, Incorporated, and EP Operating
Company, as Lessees, bearing Serial No. OCS-G 9814, and covering all of
Block 485, Mississippi Canyon, OCS Official Protraction Diagram NH 16-10.
3. Oil and Gas Lease effective as of August 1, 1988, from the United States of
America, as Lessor, to Petrofina Delaware, Incorporated, and EP Operating
Company, as Lessees, bearing Serial No. OCS-G 9762, and covering all of
Block 482, Ewing Bank, OCS Official Protraction Diagram NH 15-12.
<PAGE>
SCHEDULE G
UNITS OF EQUIPMENT
DESCRIPTION
OF EQUIPMENT
------------
SHALLOW WATER FACILITY
----------------------
FIRE WATER PUMP
ENGINE GENERATOR SETS
PRODUCTION SKID
HEAT MEDIUM SYSTEM
AIR COMPRESSOR
PIG LAUNCHER/REC HEATER
PRODUCTION MANIFOLD
WATER TREATMENT
VENT SCRUBBER
MASTER CONTROL PANEL
FIRE FIGHTING EQUIPMENT
SEWAGE TREATMENT SKID
METHANOL STORAGE TANK
CONTROL BLDG MCC/SWITCHGEAR
JACKET/JACKET SYSTEMS
DECK/DECK SYSTEMS
PIGGING GAS COMPRESSOR
CONDENSATE SURGE TANK
QUARTERS HELIDECK
INTERCONNECT PIPING SYSTEM
SUBSEA SYSTEM
-------------
DRILL/PRODUCTION TEMPLATE A&B
TREE A1
TREE A2
TREE A3
TREE B1
TREE B2
TREE B3
WELL CONTROL SYSTEM
FLOWLINES
---------
"A" BUNDLE
"B" BUNDLE
"A" CONNECTOR SLEDS
"B" CONNECTOR SLEDS
"A" FLOWLINE RISER
"B" FLOWLINE RISER
<PAGE>
SCHEDULE H
FACILITY AGREEMENTS
Operating Agreements
- --------------------
1. Offshore Operating Agreement, dated May 1, 1982, between Conoco, Inc. and
Getty Oil Company, et al. governing operations conducted on Mississippi
Canyon 441, Outer Continental Shelf, Gulf of Mexico, as amended June 1,
1985 between Conoco, Inc. and Texaco Producing Inc. et al., and as further
amended in January and February, 1986, and as amended and ratified, October
25, 1990 between EP Operating Company, as Operator, and Agip Petroleum co.
Inc. and-Petrofina Delaware, Incorporated, as Non-Operators.
2. Offshore Operating Agreement dated September 30, 1988, but effective
October 15, 1987, between EP Operating Company, as Operator, and Petrofina
Delaware, Incorporated, Non-Operator, governing operations conducted on
Mississippi Canyon 485, Outer Continental Shelf, Gulf of Mexico, as
accepted by Agip Petroleum co. Inc pursuant to that certain Assignment of
Interest in Oil and Gas Lease dated February 12, 1990 between EP Operating
Company, Assignor, and Agip Petroleum co. Inc., Assignee.
3. Offshore Operating Agreement dated September 30, 1988, but effective
October 15, 1987, between EP Operating Company, as Operator, and Petrofina
Delaware, Incorporated, Non-Operator governing operations conducted on
Ewing Bank 482, Outer Continental Shelf, Gulf of Mexico, as accepted by
Agip Petroleum co. Inc pursuant to that certain Assignment of Interest in
Oil and Gas Lease dated February 12, 1990 between EP Operating Company,
Assignor, and Agip Petroleum co. Inc., Assignee.
4. Unit Operating Agreement and Unit Agreement, dated ______________, between
EP Operating Company, as Operator, Agip Petroleum co. Inc. and Petrofina
Delaware, Incorporated as Non-Operators, unitizing and governing operations
conducted on Mississippi Canyon 441, 485 and Ewing Bank 482. (Upon
execution, the Unit Operating Agreement and Unit Agreement will supersede
the Operating Agreements identified above in items 1, 2 and 3.)
Other Facility Agreements
- -------------------------
5. Offshore Gas Gathering Agreement, dated April 23, 1992, between EP
Operating Company, Agip Petroleum co. Inc. and Petrofina Delaware
Incorporated, as Producers, and Koch Hydrocarbon Company, as Gatherer.
<PAGE>
SCHEDULE I
INTENTIONALLY OMITTED
<PAGE>
SCHEDULE J
SPECIAL LIMITED POWER OF ATTORNEY
---------------------------------
STATE OF LOUISIANA (S)
(S)
PARISHES OF PLAQUEMINES, (S)
LAFOURCHE, JEFFERSON (S)
In accordance with the terms of that certain Lease Agreement ("Lease"),
dated as of __________________, Enserch Exploration, Inc., a Delaware
corporation, 1817 Wood Street, Dallas, Texas ("Lessor") has leased to New
Enserch Exploration, Inc., a Texas corporation, 4849 Greenville Avenue, Suite
1200, Dallas, Texas ("Lessee") an undivided 37.5% interest in and to certain
equipment ("Units of Equipment") described in Exhibit "A" for use in Lessee's
oil and gas operations. Definitions contained in the Lease are incorporated by
reference herein. The Units of Equipment are to be operated by Lessee in
accordance with the terms of those certain Facilities Agreements ("Facilities
Agreements") identified in Exhibit "A."
Pursuant to and in accordance with the terms of the Lease, Lessor hereby
appoints Lessee as its Attorney-In-Fact for the following purposes:
To perform all acts which Lessee may deem necessary for the acquisition,
construction, fabrication, management, operation, modification,
abandonment, salvage and disposal of the Units of Equipment;
To contract with all vendors, contractors and suppliers for supplies,
materials and services affecting the Units of Equipment;
To contract for, purchase or otherwise acquire the Units of Equipment or to
grant, bargain, sell, convey or contract for the sale or conveyance of the
Units of Equipment;
To effect any of the above described transactions to any person or entity
for such price or prices, and on such terms as Lessee may deem proper and
to make, execute, acknowledge, deliver or accept, a good and sufficient
deed of conveyance or Bill of Sale for the Units of Equipment;
To pay for, exchange or otherwise settle accounts for the acquisition of
supplies, materials or services affecting the Units of Equipment;
To ask for, demand, collect, recover, and receive all moneys which may
become due and owing by reason of such conveyances, whether by deed,
contract, Bill of Sale or other instruments or to pay for,
2
<PAGE>
exchange or otherwise settle accounts for the acquisition of supplies,
materials or services affecting the Units of Equipment;
To ask for, demand, collect, and recover, each in the name of Lessee, any
and all sums that may be due on account of any damage that may have arisen
by reason of trespass or other damage to any of the Units of Equipment;
To maintain records and manage accounts affecting the Units of Equipment;
To manage correspondence and conduct communications with parties owning
interests in the Units of Equipment;
To manage correspondence and conduct communications with Federal, state and
local government agencies with regard to matters affecting the Units of
Equipment, including, but not limited to, the acquisition of all permits,
licenses, rights of way, easements and mineral leases (other than the
Lease), if any, affecting the Units of Equipment;
To perform acts deemed necessary by Lessee, in its sole discretion, to
fulfill its obligations and responsibilities regarding the operation of the
Units of Equipment, and to perform acts necessary to be done in and about
the premises, as amply and fully and to all intents and purposes as Lessor
could do if acting on its own behalf.
This Special Limited Power of Attorney and the Lease do not convey nor
otherwise vest in Lessor any interest in, or rights under, the Facilities
Agreements and Lessor shall not be deemed a party to the Facilities Agreements.
Lessee retains all rights of ownership of a working interest owner under the
Facility Agreements and such rights are unaffected by this Special Limited Power
of Attorney and the Lease. Lessor assumes no liability or responsibility
whatsoever for payment obligations incurred by Lessee nor shall Lessor be liable
in any manner for acts or omissions of Lessee under the Facilities Agreement or
acts or omissions outside of the scope of this Special Limited Power of
Attorney.
Except as to persons having actual or constructive knowledge of a
modification or termination of this Special Limited Power of Attorney, the
recordation of this instrument in the appropriate records of Plaquemine,
LaFourche and Jefferson Parishes, Louisiana shall be conclusive as to the
authority of the Lessee to perform the functions and exercise the powers herein
granted. The authority of the within-appointed Attorney-in-Fact to exercise any
powers herein shall remain in force and effect until termination of the Lease or
until recordation of a Notice of Termination of this Special Limited Power of
Attorney in the records of Plaquemines, LaFourche and Jefferson Parishes,
Louisiana, whichever occurs first.
3
<PAGE>
This Special Limited Power of Attorney is executed as of the
________________________________.
WITNESSES: ENSERCH EXPLORATION, INC.
______________________________ By:___________________________
______________________________ Title:________________________
"LESSOR"
WITNESSES: NEW ENSERCH EXPLORATION, INC.
______________________________
By:___________________________
______________________________ GARY J. JUNCO
President
"LESSEE"
4
<PAGE>
STATE OF (S)
(S)
COUNTY OF (S)
BEFORE ME, the undersigned Notary Public, on this day personally
appeared _______________________, to me personally known, who, being by me duly
sworn did say that he is the _______________________ of ENSERCH EXPLORATION,
INC., a Delaware Corporation, and that the instrument was signed in behalf of
the corporation by authority of its Board of Directors and that
_______________________ acknowledged the instrument to be the free act and deed
of the corporation.
SWORN to and subscribed before me, this ____ day of __________, 19__.
My Commission Expires:
[STAMP] __________________________
Notary Public
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
BEFORE ME, the undersigned authority, on this day personally appeared GARY
J. JUNCO, to me personally known, who, being duly sworn, did depose and say:
That he is the President of NEW ENSERCH EXPLORATION, INC., a Delaware
corporation and that the instrument was signed in behalf of the corporation by
authority of its Board of Directors, as Managing General Partner of EP OPERATING
COMPANY, a Texas limited partnership, and that GARY J. JUNCO acknowledged the
instrument to be the free act and deed of the corporation, as Managing General
Partner of EP OPERATING COMPANY, a Texas limited partnership.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this _____ day of ________________,
19___.
My Commission Expires:
[STAMP]
__________________________
Notary Public
5
<PAGE>
EXHIBIT 10.6
PARTICIPATION AGREEMENT
-----------------------
This PARTICIPATION AGREEMENT ("Agreement") is entered into by and between
EP Operating Limited Partnership ("EPO"), by Enserch Exploration, Inc., its
Managing General Partner, 4849 Greenville Avenue, Suite 1200, Dallas, Texas
75206 and Mobil Producing Texas & New Mexico Inc. ("Mobil"), 1250 Poydras Plaza,
New Orleans, Louisiana 70113-1892. EPO and Mobil collectively may be referred
to herein as "Parties" or individually as "Party".
RECITALS
--------
EPO is the owner of an interest in certain Federal oil and gas leases
("Leases") located on the Outer Continental Shelf, Offshore Louisiana. The
Leases are dedicated to a Federal Exploratory Unit for the exploration and
production of oil and gas ("Garden Banks 388 Unit" or "Unit"). The Leases and
the Garden Banks 388 Unit are more particularly described in Exhibit "A". EPO's
exploration, development and production operations associated with the Unit may
be collectively referred to herein as the "Garden Banks 388 Project" or
"Project".
Due to the magnitude of the anticipated risks and costs related to the
exploration and development operations in the Unit, the Parties deem it
necessary to join together under the terms of the Agreement, for the purpose of
sharing said risks and minimizing the individual expenses and investments
related to the proper exploration and development of the Unit.
EPO and its predecessors in interest have drilled certain oil and gas wells
and installed certain equipment on the Leases. These wells and the equipment
associated with these wells ("Wells and Equipment") are described in Exhibit
"B".
EPO has proposed drilling an exploratory well ("GB 387 #3 Well") to test
for additional oil and gas reserves on the Leases. In addition, both EPO and
Mobil have expressed an interest in conducting 3-D seismic exploration of the
Garden Banks 388 Unit and the surrounding area.
EPO has designed and is in the process of constructing and installing a
deep water production system ("Production System") to develop and produce the
oil and gas reserves that may be located on the Leases. The deep water
production system consists of a Floating Production and Drilling Facility, 24
Slot Template, Subsea Systems, Export and Gathering Pipelines and a Shallow
Water Processing Platform (collectively referred to as the "Production System").
The Production System is more particularly described in the Project Plan
documents ("Project Plan") identified in Exhibit "C".
Mobil has expressed an interest in participating in the Garden Banks 388
Project. EPO has offered to allow Mobil to acquire an interest in the Leases,
Unit, Wells and Equipment and
<PAGE>
Production System by: (1) acquiring a license to certain seismic data for the
benefit of EPO; (2) by participating in the GB 387 #3 Well; and (3) by
participating in the design, construction and installation of the Production
System. Mobil's participation in the Garden Banks 388 Project shall be
conducted in accordance with this Agreement and the associated operating
agreements governing the conduct of operations on the Unit.
In consideration of the foregoing, EPO and Mobil agree as follows:
PHASE ONE
---------
The obligations of the Parties to participate in Phase One are effective
upon execution of this Agreement.
I. SEISMIC SURVEY
The Garden Banks 388 Unit is comprised of Garden Banks Blocks 388, 387, 386
and 344. Garden Banks Blocks 342, 343, 345 and 389 directly offset the Unit.
These offsetting blocks are more particularly described in Exhibit "D"
("Offsetting Blocks"). EPO and Mobil desire to conduct 3-D seismic exploration
of the Unit and the Offsetting Blocks ("Seismic"). The Unit and the Offsetting
Blocks shall be referred to hereinafter as the "Joint Survey Area".
Mobil has contracted with Western Geophysical Division of Western Atlas
International Inc. ("Western") to conduct a long cable 3-D seismic survey of the
Joint Survey Area and other lease blocks in the Gulf of Mexico ("Seismic
Survey"). A copy of the seismic contract dated May 25, 1994 is attached hereto
as Exhibit "E". On or before August 15, 1994, Mobil shall cause the Seismic
Survey to be commenced in accordance with such contract.
Mobil shall bear one hundred percent (100%) of the cost, risk and expense
of the Seismic Survey which is currently estimated to cost two million eight
hundred thirty-three thousand seven hundred sixty dollars ($2,833,760).
Additionally, because of derrick barge activity in the Unit during the Seismic
acquisition, Western has added an additional charge of five hundred ninety-four
thousand dollars ($594,000) to the cost of the Seismic because of the need to
run short lines. Mobil shall pay 100% of this cost ("Seismic Short Lines"). In
addition to the cost of the Seismic Survey, Mobil shall pay 100% of the one
hundred forty thousand dollars ($140,000) cost of early processing so that the
data from the Seismic Survey shall have priority over the processing of other
data by Western ("Early Processing"). Upon completion of the Seismic Survey,
Mobil shall pay to Western one hundred percent (100%) of four hundred and five
thousand dollars ($405,000) to acquire a license ("License") to the data
generated by the Seismic Survey, insofar as such data covers and pertains to the
Joint Survey Area. The License shall be acquired for the benefit of, and in the
name of, EPO and shall be in addition to the license that Mobil receives for its
own benefit from Western as a result of the Seismic Survey. EPO
2
<PAGE>
acknowledges and agrees that Mobil makes no representation or warranty as to the
accuracy or completeness of the data generated by the Seismic Survey.
MOBIL HEREBY AGREES TO PROTECT, DEFEND, INDEMNIFY, AND HOLD EPO HARMLESS
FROM ANY AND ALL DEMANDS, CLAIMS, CAUSES OF ACTION, OR LAWSUITS ARISING FROM
MOBIL'S AND WESTERN'S ACTIVITIES PURSUANT TO THE SEISMIC SURVEY FOR THE DURATION
OF THE SURVEY.
II. EXPLORATORY DRILLING
EPO has been approved as Operator of the Garden Banks 388 Unit by the
Minerals Management Service of the U.S. Department of the Interior ("MMS").
Upon execution of this Agreement, EPO shall submit the documentation required by
the MMS to qualify Mobil as operator ("Operator") for the limited purpose of
drilling, testing and temporarily suspending operations on a new exploratory
well with two bottomhole objectives to be designated as the OCS-G 7485 #3 and
the OCS-G 10350 #1 (collectively referred to herein as the "GB 387 #3 Well" or
"Well") by the MMS. Mobil's operation of the GB 387 #3 Well shall terminate and
EPO shall assume operations upon release of the rig that drilled the Well. EPO
shall at all times be operator of the remainder of the Unit and the Production
System.
The Parties shall, as soon as practicable but no later than, July 15, 1994,
execute a Well Operating Agreement ("WOA"). Mobil shall be designated the
Operator of the GB 387 #3 Well in the WOA. The WOA shall be incorporated by
reference in this Agreement. In the event of a conflict between the WOA and
this Agreement, this Agreement shall control.
Subject to the approval of Mobil as Operator by the MMS, on or before
September 15, 1994, Mobil shall commence or cause to be commenced drilling of
the GB 387 #3 Well. The contracting of a rig capable of drilling the well shall
constitute the commencement of operations. Operations shall be governed by the
WOA.
The Well shall have a surface location 3,553' FNL and 2,821' FWL and a
bottomhole location at Total Depth of 4,569'' FNL and 1,981'' FWL of Garden
Banks Block 387. The Well shall be drilled in accordance with the Well Plan
attached hereto as Exhibit "F". The Well shall be drilled to a total depth of
12,000' TVD to test the 11,200' Sand amplitude anomaly ("Total Depth"). The
11,200' Sand amplitude anomaly is identified as the stratigraphic equivalent of
that certain formation which appears in the interval between 16,100' and 16,300'
on the IES/SFL log of the OCS-G 8232 #1 well located on Garden Banks Block 344.
Unless otherwise agreed to by the Parties, the Well shall be drilled by Mobil to
a depth of 12,000' TVD and not deeper. (Notwithstanding the foregoing, if no
gravel pack flow test will be conducted, EPO may direct that the Well be drilled
deeper in accordance with Step 5 of the Well Plan.)
Upon reaching Total Depth, Mobil shall conduct logging, coring and testing
operations (other than a gravel pack flow test) in accordance with the Well Plan
and the WOA. After all
3
<PAGE>
logging, coring and testing operations have been completed, the GB 387 #3 Well
shall be cased to Total Depth, in accordance with Step 5 of the Well Plan.
If prior to reaching Total Depth, the GB 387 #3 Well encounters horizon(s)
which qualify the well as producible in paying quantities in accordance with 30
CFR 250.11 ("Producible Well"), after running casing in the hole Mobil may
conduct a gravel pack flow test of the potentially productive zones. If a
gravel pack flow test is conducted, the Parties shall not conduct deeper
drilling operations in the Well.
Mobil shall bear sixty percent (60%) and EPO shall bear forty percent (40%)
of all cost, risk and expense to reach Total Depth including, but not limited
to, the cost to drill, log, test (including gravel pack flow test), core and set
7" or 9 5/8ths" casing to Total Depth and the cost to temporarily suspend
operations on the Well. Mobil shall pay sixty percent (60%) and EPO shall pay
forty percent (40%) of all sidetracking costs conducted pursuant to the Well
Plan or otherwise mutually agreed upon by the Parties. EPO shall be credited
with all hydrocarbons produced during the gravel pack flow test, if any, and
forty percent (40%) of the net proceeds from the sale of the produced
hydrocarbons shall be subtracted from the Work Commitment (as hereinafter
defined).
If operations are proposed to be conducted that have not been agreed upon
in the Well Plan, and the non-proposing Party elects to participate, Mobil shall
bear sixty percent (60%) and EPO shall bear forty percent (40%) of the cost of
such operations. If the non-proposing Party elects not to participate in such
operation, the proposing party may conduct such operation at its sole cost, risk
and expense ("Sole Risk Operation") subject to the terms provided hereunder in
the section titled "Work Commitment". Any well information acquired as a result
of a Sole Risk Operation shall be disclosed to the non-participating Party at
the time of its acquisition. Sole Risk Operations do not include the option of
deepening the well beyond Total Depth other than to extend the depth at which
intermediate casing may be set in preparation for deepening as described in Step
5 of the Well Plan.
If upon reaching Total Depth the GB 387 #3 Well does not qualify as a
Producible Well, operations shall be temporarily suspended so that the well may
be re-entered and deepened at a later date or the Well shall be plugged and
abandoned, at EPO's option. The rig shall be released after temporary
suspension operations have been completed or upon plugging and abandonment,
whichever is applicable. After March 1, 1995, EPO shall have the right to
propose to Mobil deepening the Well ("Deepening"). The Deepening shall be
required to be commenced on or before December 31, 1995. If Mobil elects to
participate in the Production System as described in Phase Two below, Mobil may
elect to participate or not participate in such Deepening pursuant to the Unit
Operating Agreement (as hereinafter defined). In either case, Mobil shall pay
100% of the cost to mobilize and demobilize the rig that conducts the Deepening
operations up to a total cost of $500,000. This cost shall not be credited
against Mobil's Work Commitment.
4
<PAGE>
III. SUBSTITUTE WELL
If prior to the completion of the operations described above for the GB 387
#3 Well, Mobil encounters downhole mechanical conditions, which in the opinion
of a reasonably prudent operator under the same or similar conditions would
render further drilling or other operations impracticable or hazardous, and such
conditions prevent the completion of the operations described above, Mobil shall
commence a "Substitute Well". The actual drilling of the Substitute Well shall
be commenced within thirty (30) days after release of the drilling rig used for
the GB 387 #3 Well subject to rig availability. The Substitute Well shall be
drilled, tested and temporarily suspended on the same terms as are provided for
herein for the GB 387 #3 Well. The Substitute Well shall be deemed to be the GB
387 #3 Well for purposes of this Agreement.
If Mobil encounters impenetrable substances or other geologic conditions,
which in the opinion of a reasonably prudent operator under the same or similar
conditions would render further drilling or other operations impracticable or
hazardous, and such conditions prevent the completion of the operations
described above, Mobil shall be released from the obligation to drill the GB 387
#3 Well, however, Mobil shall forfeit the opportunity to participate in Phase
Two as described herein. Mobil shall remain obligated to perform in accordance
with the other terms and conditions set forth herein.
IV. PROJECT COORDINATOR AND STAFFING
Project Coordinator and Mobil Observer(s)
- -----------------------------------------
During Phase One, EPO will assist Mobil in its assessment of the Garden
Banks 388 Project. EPO shall provide sufficient office space at its Houston
Project Office to accommodate an individual to be designated Mobil's Project
Coordinator ("Project Coordinator") and, as available, additional office space
for other Mobil employees ("Mobil Observer(s)"). EPO shall provide basic office
furniture and a telephone for the Project Coordinator and each Mobil Observer
assigned to the Project. Mobil shall be responsible for providing any other
equipment required, including computers. Access to copying facilities shall be
provided. EPO shall not be required to provide secretarial support. The Project
Coordinator and Mobil Observer(s) shall have access to the Project Office during
normal business hours and at such other times as may be necessary due to the
occurrence of critical events.
The Mobil Observer(s) shall have reasonable access to members of EPO's
project staff in order to observe and evaluate the progress of operations. Both
EPO and Mobil shall encourage the free flow of information between the project
staff and the Project Coordinator. The Project Coordinator may participate in
meetings in which key decisions regarding the Project are discussed and the
Project Coordinator may contribute information and opinions in such meetings,
however, decision making shall be the sole responsibility of EPO's project
staff. The Project Coordinator may attend meetings between representatives of
EPO and the MMS or
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other regulatory agencies as an observer. Any questions regarding access,
responsibilities or decision making shall be brought to the attention of, and
resolved by, EPO's Project Director in consultation with the Project
Coordinator.
Mobil shall have reasonable access during normal business hours to records
relating to the Unit in EPO's possession in Houston and Dallas, including
contract files, lease files, well files and financing documents. Insofar as EPO
has the ability to do so, EPO shall assist Mobil in acquiring access during
normal business hours to facilities where the components of the Production
System are being fabricated. EPO shall provide Mobil a monthly report regarding
commitments, expenditures, and estimated final costs of the Units of Leased
Property funded under the Master Lease Financing (as hereinafter defined) and
other development cost authorizations.
Other than the cost of office space, furniture and telephone service
described above, Mobil shall bear one hundred percent (100%) of the cost of the
Project Coordinator's and the Mobil Observer(s)' evaluation of the Project and
all access to the facilities of EPO, its contractors or vendors shall be at
Mobil's sole cost, risk and expense. Mobil's costs shall not be deducted from
the Work Commitment.
Seconded Staff
- --------------
Mobil shall be invited by EPO to participate in remaining engineering or
operational activities where Mobil can add value to the project in either Phase
One or Phase Two. This may occur in circumstances where Mobil employee(s) have
particular expertise in an area. If Mobil employee(s) are assigned to EPO's
project staff as technical employees of the Project, EPO and Mobil shall enter
into a contract for the services of such employee(s) prior to such employee(s)'
dedication to the Project ("Contract"). Prior to making the Participation
Election, Mobil shall periodically invoice EPO for sixty percent (60%) of the
reasonable salaries, benefits and expenses of such employee(s). If Mobil makes
the Participation Election, the reasonable salaries, benefits, and expenses of
such employee(s) shall be charged to the joint account pursuant to the Unit
Operating Agreement (as hereinafter defined). If Mobil fails to make the
Participation Election, Mobil shall invoice EPO for 100% of all reasonable
salaries, benefits, and expenses of such employee(s) under contract. Such
employee(s) shall remain dedicated to the Project through completion of the
Project Plan unless otherwise provided in the Contract.
PHASE TWO
---------
The obligations of the Parties to participate in Phase Two are contingent
upon the Participation Election of Mobil.
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V. PARTICIPATION ELECTION
On or before March 1, 1995, Mobil may elect either to participate for a
forty percent (40%) interest in the design, construction and installation of the
Production System or to withdraw from the project. Such election shall be made
in writing in accordance with the notice provisions contained herein. A failure
timely to make the required election shall be deemed an election not to
participate. Such election is contingent upon the receipt of approval by the
requisite level(s) of Mobil's management, none of which shall have any
obligation to be reasonable or not be arbitrary, and upon resolution to Mobil's
satisfaction of all outstanding issues concerning EPO's and/or Mobil's financing
of the Production System ("Participation Election").
If Mobil fails to make the Participation Election, Mobil shall earn no
interest in the GB 387 #3 Well, the Leases, the Production System or the Unit.
Mobil shall bear no additional costs other than costs associated with its
assumption of the cost, risk and expense of the operations in which it
participated and Mobil shall not be obligated for any future GB 387 #3 Well
abandonment and plugging costs (other than the mobilization and demobilization
costs associated with Deepening operations described above) that are incurred
after March 1, 1995.
If Mobil makes the Participation Election, EPO shall deliver to Mobil an
accounting for Mobil's forty percent (40%) of the costs incurred as of the last
day of the month prior to the date of the Participation Election in designing,
constructing and installing the Production System. The costs that shall be
included in the accounting are the costs EPO incurs that are funded pursuant to
the Master Lease Financing plus any other costs that are directly attributable
to the design, construction or installation of the Production System including
the cost of EPO's project office and project management. If Mobil elects to
participate in the Master Lease Financing, the accounting shall establish the
amount of Mobil's obligation to the Banks (as hereinafter defined) through the
closing date of the accounting. If Mobil elects not to participate in the Master
Lease Financing, the accounting shall serve as an invoice to Mobil that shall be
payable by Mobil to the Banks within thirty (30) days after its receipt. The
Banks shall be instructed by EPO and Mobil to apply Mobil's payment at the next
interest payment date to the outstanding principal balance under the Master
Lease Financing. Regardless of whether Mobil elects to participate in the Master
Lease Financing, if the cost of the Production System exceeds the amount funded
pursuant to the Master Lease Financing, Mobil shall pay forty percent (40%) of
such costs to EPO at the time of its Participation Election. Thereafter, Mobil
shall pay to EPO as Operator, its proportionate share of current joint interest
billing obligations pursuant to the UOA.
VI. MASTER LEASE FINANCING
EPO, the Garden Banks Trust and Chase Manhattan Bank, N.A. have entered
into a Master Lease Agreement and a Funding Agreement, each of which is dated
effective September 30, 1992. The Master Lease Agreement and Funding Agreement
are collectively referred to
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herein as the Master Lease Financing. The defined term Master Lease Financing
includes the various associated contracts which establish the lease structure
and which are referred to in the Master Lease Agreement and Funding Agreement.
A copy has been provided to Mobil prior to execution of this Agreement.
Pursuant to the Master Lease Financing, a syndicate of banks ("Banks") has
agreed to purchase certain Notes and Certificates in the amount of $235,000,000.
The proceeds from the sale of the Notes and Certificates are being used to fund
the design, construction and installation of the Production System. Pursuant to
the Master Lease Financing, the Garden Banks Trust is the owner of the
Production System. The Garden Banks Trust, as Lessor, has leased the Production
System to EPO. EPO has the right to quiet enjoyment of the Production System
during the term of the Master Lease Financing. The Master Lease Financing
establishes the Chase Manhattan Bank, N.A. as the Agent of the Garden Banks
Trust for the purposes of managing the financing transaction.
If Mobil elects to participate in the Production System, Mobil may
participate in the Master Lease Financing with EPO to the extent of its forty
percent (40%) interest as a co-lessee pursuant to Section 21 of the Master
Lease. An election by Mobil to participate as a co-lessee shall be subject to
approval by the Banks. Mobil shall provide notice to EPO of its desire to
participate in the financing no later than the date upon which it makes its
Participation Election.
Alternatively, Mobil may elect to internally fund or otherwise finance its
share of the Production System costs outside of the Master Lease Financing in
which case Mobil may require, subject to approval by the Banks, a collateral
sharing agreement with the Banks and/or other financial institutions, along the
lines of the indicative Term Sheet "B" submitted by Chase Manhattan Bank, N.A.
on June 30, 1994, as attached hereto as Exhibit "J". EPO shall, if requested by
Mobil, explore other financing options with Mobil, including a co-lessor option
which may also require a collateral sharing agreement with the Banks and/or
other financial institutions. All costs and expenses incurred by EPO in
terminating the Master Lease Financing (unless the Master Lease Financing is
terminated in order to arrange mutually acceptable financing, in which case such
termination costs shall be paid sixty (60%) by EPO and forty percent (40%) by
Mobil) and in negotiating and entering into alternatives to the Master Lease
Financing structure shall be borne one hundred percent (100%) by Mobil and shall
not be credited against the Work Commitment except that Mobil shall not be
responsible for any prepayment penalties which relate to any termination or
paydown of the Master Lease Financing, in whole or in part, except those costs
related to yield maintenance.
IF EITHER PARTY DEFAULTS OR CAUSES A DEFAULT UNDER THE MASTER LEASE
FINANCING OR ANY OTHER FINANCING PROGRAM FOR THE PRODUCTION SYSTEM, THE
DEFAULTING PARTY, ITS GENERAL PARTNER, PARENT AND\OR SUBSIDIARIES SHALL PROTECT,
DEFEND, INDEMNIFY, AND HOLD THE NON-DEFAULTING PARTY HARMLESS FROM ANY AND ALL
DEMANDS, CLAIMS, CAUSES OF ACTION, OR LAWSUITS ARISING FROM THE DEFAULTING
PARTY'S PERFORMANCE OR NON-PERFORMANCE OF ITS
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OBLIGATIONS HEREUNDER, OR ARISING FROM THE DEFAULTING PARTY'S FAILURE TO COMPLY
WITH ANY EXPRESS OR IMPLIED COVENANT OF THE FINANCING DOCUMENTS, OR ARISING OUT
OF ACTS OF THE DEFAULTING PARTY WHICH CAUSE THE LENDING INSTITUTION IN THE
AFFECTED FINANCING PROGRAM TO EXERCISE ITS REMEDIES UNDER SUCH FINANCING
PROGRAM, AND THE DEFAULTING PARTY SHALL PAY ALL OF THE NON-DEFAULTING PARTY'S
EXPENSES AND ATTORNEY'S FEES IF THE DEFAULTING PARTY FAILS TO DEFEND OR IF IT IS
NECESSARY TO BRING SUIT TO ENFORCE THIS INDEMNITY PROVISION.
VII. ASSIGNMENT
If Mobil makes the Participation Election and otherwise fulfills its
obligations pursuant to this Agreement, within 30 days following payment by
Mobil of its share of project costs as described in the preceding sections, EPO
shall assign to Mobil an undivided forty percent (40%) interest in: (1) the GB
387 #3 Well; and, (2) all existing Wells and Equipment on the Unit; and, (3) the
Garden Banks 388 Unit; and, (4) an undivided forty percent (40%) record title
interest in the Leases; and, (5) an undivided forty percent (40%) of EPO's
interest in any additional leases added to the Unit prior to Mobil's
Participation Election (collectively "Assigned Premises"). (If Mobil owns an
interest in leases added to the Unit prior to Mobil's Participation Election,
the assignment from EPO shall be reduced so that the resulting ownership ratio
shall be sixty percent (60%) EPO and forty percent (40%) Mobil). Mobil shall
bear its proportionate share of an outstanding 2.59489% of 8/8ths overriding
royalty burdening the Leases in favor of EPO's predecessors in title and its
proportionate share of any overriding royalties or other burdens created by
EPO's predecessors in title to leases assigned to Mobil that lie outside the
Unit.
The Assignment and Bill of Sale which shall convey title to the Assigned
Premises, both real and personal, moveable and immoveable, to Mobil shall be
substantially in the form of Exhibit "G". Upon execution, it shall be recorded
by EPO in the three upland parishes that are adjacent to the Unit and it shall
be filed by EPO with the Minerals Management Service of the U.S. Department of
the Interior.
VIII. WORK COMMITMENT
If Mobil elects to participate by making the Participation Election, Mobil
shall perform a $25,000,000 work commitment in favor of EPO ("Work Commitment").
At the time of its Participation Election, Mobil shall have paid one
hundred percent (100%) of the cost of EPO's License to the data from the Seismic
Survey, one hundred percent (100%) of the Early Processing fee, one hundred
percent (100%) of the Seismic Short Lines and sixty percent (60%) of the costs
of the GB 387 #3 Well, and Mobil may have undertaken other
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operations including drilling, testing and temporarily suspending a Substitute
Well. A total of $1,083,000 for EPO's License, the Early Processing fee, and
Seismic Short Line cost, plus all other actual costs of operations attributable
to the Project in excess of Mobil's forty percent (40%) interest in the Garden
Banks 388 Project shall be credited against the Work Commitment. The Work
Commitment shall be increased by the amount of all costs of operations including
the drilling, testing, and completion of wells on the Unit, and lease
acquisition costs, borne by EPO after the spud date of the GB 387 #3 Well,
insofar as such costs exceed EPO's sixty percent (60%) interest in the project.
(Notwithstanding the foregoing, seven subsea spool tree assemblies and three
satellite well flow spools and their associated connector systems may be
acquired by EPO for future well completions on the Unit prior to the spud date
of the GB 387 #3 Well. These items are not currently included in the Master
Lease Financing. At the time of its Participation Election, EPO shall invoice
Mobil for one hundred percent (100%) of the cost of this completion equipment.
Mobil shall make payment to EPO within 30 days of receipt of said invoice. Upon
payment, Mobil's Work Commitment shall be credited with sixty percent (60%) of
such payment. No payment by Mobil will be due for this equipment if Mobil does
not elect to participate.) After March 1, 1995, Mobil shall pay one hundred
percent (100%) of the cost to drill and complete new wells and the cost to
complete existing wells. Sixty percent (60%) of such expenditures shall be
credited against the Work Commitment. When the Work Commitment is reduced to
zero, Mobil shall be obligated to bear only its proportionate share of future
costs pursuant to the Unit Operating Agreement.
If a Sole Risk Operation is conducted by Mobil in the GB 387 #3 Well and
Mobil makes the Participation Election, the Work Commitment shall be reduced by
sixty percent (60%) of the cost of the Sole Risk Operation. If a Sole Risk
Operation is conducted by EPO in the GB 387 #3 Well and Mobil makes the
Participation Election, the Work Commitment shall be increased by forty percent
(40%) of the cost of the Sole Risk Operation.
Within fifteen (15) business days after the close of each quarter,
beginning April 1, 1995, EPO will provide a status accounting of the remaining
Work Commitment balance owed by Mobil to EPO as of the close of the quarter.
Included in the status report will be the opening balance owed to EPO as of the
last report, a summary list of credits or debits to the Work Commitment and the
current balance owed as of the closing date of the report.
If on July 1, 1997, Mobil has not completed its Work Commitment, it shall
on that date pay the outstanding balance to EPO in cash. After such a payment,
Mobil shall be obligated to bear only its proportionate share of costs pursuant
to the UOA.
IX. UNIT OPERATING AGREEMENT
After execution of this Agreement, the Parties shall enter into
negotiations regarding the contents of a Unit Operating Agreement ("UOA") that
will govern operations conducted on the Garden Banks 388 Unit if, and when,
Mobil makes the Participation Election. EPO shall be designated Operator under
the UOA.
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X. UNIT AGREEMENT
The Minerals Management Service of the United States Department of the
Interior has approved formation of the Garden Banks 388 Unit. Such approval was
effective January 1, 1991, and assigned Unit Agreement No. 754391006. Upon
receipt of the Assignments provided for herein, Mobil shall execute and deliver
to the MMS a ratification of the Unit Agreement for the Garden Banks 388 Unit
and a Designation of Operator form designating EPO as Operator of the Unit.
GENERAL PROVISIONS
------------------
XI. RELATIONSHIP OF THE PARTIES
This Agreement does not create, and shall not be construed as creating, a
partnership, association for profit, joint venture, or fiduciary relationship of
any kind or character between the parties hereto. Notwithstanding the foregoing,
EPO and Mobil agree that a tax partnership is created pursuant to this Agreement
and that such tax partnership shall be governed by the Tax Partnership Agreement
attached hereto as Exhibit "H". EPO and Mobil shall elect not to be excluded
from the application of all or any part of Subchapter K, Chapter 1, Subtitle A
of the Internal Revenue Code of 1986, or similar provisions of applicable state
laws.
Prior to the Participation Election, Mobil shall not own an interest in the
Leases, Unit, existing Wells and Equipment, the Production System, the GB 387 #3
Well or the oil and gas reserves associated with the Leases and Mobil shall not
bear the cost, risk, expense or liability associated with ownership or
operations conducted on the Leases or Unit by EPO, other than those operations
described in Articles I., II., III. and IV. herein. EPO hereby agrees to
protect, indemnify and hold Mobil harmless from any and all demands, claims,
causes of actions or lawsuits arising from EPO's activities prior to Mobil's
Participation Election except that prior to Mobil's Participation Election and
subject to the limitations on liability contained in the WOA, Mobil shall bear
that portion of the cost, risk, expense and liability associated with each
operation conducted on the GB 387 #3 Well in proportion to the percentage cost
assumed by Mobil for that operation. Mobil's Project Coordinator and the Mobil
Observer(s) shall at all times remain Mobil employees and the costs of such
employees shall not be charged to the Project.
NOTWITHSTANDING THE FOREGOING, BOTH BEFORE AND AFTER ITS PARTICIPATION
ELECTION, MOBIL SHALL BEAR ALL COST, RISK, EXPENSE AND LIABILITY ASSOCIATED WITH
ITS INSPECTION OR OBSERVATION OF OPERATIONS, OR ASSOCIATED WITH THE
PARTICIPATION IN OPERATIONS BY MOBIL, ITS EMPLOYEES, AGENTS, CONTRACTORS OR
INVITEES EXCEPT THOSE ATTRIBUTABLE TO THE GROSS NEGLIGENCE OR WILLFUL
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MISCONDUCT OF EPO, ITS GENERAL PARTNER, PARENT AND/OR SUBSIDIARIES. MOBIL SHALL
BEAR ALL COST, RISK, EXPENSE AND LIABILITY ASSOCIATED WITH THE ACTIVITIES OF
MOBIL, ITS EMPLOYEES, AGENTS, CONTRACTORS AND INVITEES WHILE SUCH PERSONS ARE IN
TRANSIT TO OR FROM PROJECT FACILITIES OR WHILE SUCH PERSONS ARE ON SITE AT
PROJECT FACILITIES EXCEPT THOSE ATTRIBUTABLE TO THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF EPO, ITS GENERAL PARTNER, PARENT AND/OR SUBSIDIARIES. MOBIL SHALL
PROTECT, DEFEND, INDEMNIFY, AND HOLD EPO HARMLESS FROM ANY AND ALL DEMANDS,
CLAIMS, CAUSES OF ACTION, OR LAWSUITS ARISING FROM THE ACTIVITIES OF MOBIL'S
EMPLOYEES DESCRIBED IN THIS SECTION EXCEPT THOSE ATTRIBUTABLE TO THE GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT OF EPO, ITS GENERAL PARTNER, PARENT AND/OR
SUBSIDIARIES. MOBIL SHALL PAY EPO'S EXPENSES AND ATTORNEY'S FEES IF MOBIL FAILS
TO DEFEND OR IF IT IS NECESSARY TO BRING SUIT TO ENFORCE THIS INDEMNITY
PROVISION AGAINST MOBIL. EPO SHALL PROTECT, DEFEND, INDEMNIFY, AND HOLD MOBIL
HARMLESS FROM ANY AND ALL DEMANDS, CLAIMS, CAUSES OF ACTION OR LAWSUITS
ASSOCIATED WITH MOBIL'S INSPECTION OR OBSERVATION OF OPERATIONS OR ASSOCIATED
WITH THE PARTICIPATION IN OPERATIONS BY MOBIL, ITS EMPLOYEES, AGENTS,
CONTRACTORS OR INVITEES ATTRIBUTABLE TO THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF EPO. EPO SHALL PAY MOBIL'S EXPENSES AND ATTORNEY'S FEES IF EPO
FAILS TO DEFEND OR IF IT IS NECESSARY TO BRING SUIT TO ENFORCE THIS INDEMNITY
PROVISION AGAINST EPO.
XII. REPRESENTATIONS AND WARRANTIES
------------------------------------
Representations and Warranties of EPO
- -------------------------------------
EPO represents and warrants to Mobil that, as of the Effective Date of this
Agreement:
(a) EPO is a limited partnership validly existing and in good standing
under the laws of the State of Texas with the power and authority to
own property and assets and to carry on its business as now being
conducted. EPO is authorized to do business in the states of Texas
and Louisiana and on the Outer Continental Shelf, Gulf of Mexico.
(b) EPO has the power and authority to execute and deliver this Agreement
and to perform as contemplated hereunder. This Agreement constitutes
the valid and binding obligation of EPO, enforceable against it in
accordance with the terms hereof, and no other act, approval, or
proceeding on the part of EPO or the holders of any class of capital
stock or any other parties is required to authorize
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the execution and delivery of this Agreement by EPO or the performance
by EPO as contemplated hereunder.
(c) This Agreement, and the execution and delivery hereof by EPO, do not,
and the consummation of the transaction contemplated hereunder will
not, violate any provision of, or constitute a default under the
partnership agreement establishing EP Operating Limited Partnership as
a Limited Partnership or any law or regulation to which EPO is
subject, or any provision of any indenture, mortgage, lien, lease,
agreement, instrument, order, arbitration award, judgment, or decree
to which EPO is a party or by which EPO or any of its assets or
properties is bound. Enserch Exploration, Inc. is the Managing
General Partner of EP Operating Limited Partnership.
(d) EPO has not incurred any liability, contingent or otherwise, for
brokers' or finders' fees relating to the transaction contemplated
hereunder for which EPO or Mobil shall have any responsibility
whatsoever.
(e) EPO has the right to assign the Assigned Premises on and from the date
of this Agreement. All requisite third party consents and approvals,
including, without limitation, any preferential rights of purchase,
any restrictions on sale, assignment, or transfer of the Assigned
Premises, and any necessary governmental consents or approvals (except
those governmental consents or approvals customarily obtained after an
Assignment is made) have been secured by EPO.
(f) To the best of EPO's knowledge, information and belief, EPO has
conducted its ownership of the Assigned Premises in compliance with
all applicable federal, state, or local laws, codes or ordinances,
rules and regulations, including those relating to the protection of
the environment and in compliance with all material contracts, leases
and permits.
(g) To the best of EPO's knowledge, information and belief, there are no
pending claims, lawsuits, administrative proceedings, or governmental
investigations or inquiries involving the Assigned Premises, including
notices of violation from the EPA, and/or state and local
environmental agencies except those claims, lawsuits, administrative
proceedings, and governmental investigations and inquiries that EPO
has disclosed to Mobil in writing which are listed in the Exhibits
hereto.
(h) If EPO assigns the Assigned Premises to Mobil, such Assignment shall
be free and clear of any mortgage, pledge, lien, or encumbrance
(except lessor's royalty), except as may be disclosed in this
Agreement.
(i) Other than as may be disclosed in this Agreement, there exists no
material contract or agreement to which EPO is a party relating to oil
and/or gas
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production from any part of the Assigned Premises in which any third
party is granted a call on EPO's interest in oil and/or gas production
or the right to purchase such oil and/or gas for a period in excess of
thirty (30) days. EPO has contracts in place with Sea Robin Pipeline
Company to transport gas produced from the Unit.
(j) To the best of EPO's knowledge, information and belief, no "Adverse
Environmental Condition" exists with respect to the Assigned Premises
except those disclosed in the Exhibits hereto. For purposes of the
agreement, an "Adverse Environmental Condition" is defined as any
contamination or condition that is the result of any discharge,
release, disposal, production, storage or treatment on or in the
Assigned Premises or from the Assigned Premises or migration to or
from the Assigned Premises to any other land or body of water,
wherever located prior to the Effective Date of any wastes,
pollutants, contaminants, hazardous materials or other materials or
substances and that is subject to regulation under present laws in
effect as of the Effective Date relating to the protection of the
environment.
Representations and Warranties of Mobil
- ----------------------------------------
Mobil represents and warrants to EPO as of the Effective Date of this
Agreement:
(a) Mobil is a corporation validly existing and in good standing under the
laws of the State of Delaware to carry on its business as now being
conducted. Mobil is authorized to do business in the states of Texas
and Louisiana and on the Outer Continental Shelf, Gulf of Mexico.
(b) Mobil has the corporate power and authority to execute and deliver
this Agreement and to perform as contemplated hereunder. This
Agreement constitutes the valid and binding obligation of Mobil,
enforceable against it in accordance with the terms hereof.
(c) This Agreement, and the execution and delivery hereof by Mobil, do
not, and the consummation of the transaction contemplated hereunder
will not, violate any provision of, or constitute a default under, the
charter or by-laws of Mobil or any law or regulation to which Mobil is
subject, or any provision of any indenture, mortgage, lien, lease,
agreement, instrument, order, arbitration award, judgment, or decree
to which Mobil is a party or by which Mobil or any of its assets or
properties is bound.
(d) Mobil has not incurred any liability, contingent or otherwise, for
brokers' or finders' fees relating to the exchange contemplated
hereunder for which EPO shall have any responsibility whatsoever.
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(e) Mobil is qualified by the MMS as an operator on the Outer Continental
Shelf, Gulf of Mexico.
XIII. MISCELLANEOUS
Mobil and EPO make the following additional agreements:
(a) All notices and communications required or permitted under this
Agreement shall be in writing. Any communication hereunder shall be
effective as of the date of receipt and be deemed to have been duly
made if actually delivered, transmitted by telecopier, or mailed,
postage prepaid, to the following:
If to EPO:
Mr. C. R. Erwin
Regional Director
EP Operating Limited Partnership
4849 Greenville Avenue, Suite 1200
Dallas, Texas 75206
Telephone: (214) 987-7780
Facsimile: (214) 987-7815
If to Mobil:
Mr. J. D. McFadden
Cooper Project Coordinator
Mobil Producing Texas & New Mexico Inc.
1250 Poydras Bldg.
New Orleans, LA 70113
Telephone: (504) 566-5942
Facsimile: (504) 566-5286
(b) Except as otherwise provided herein, this Agreement (including
Exhibits) constitutes the entire understanding between the Parties and
supersedes all negotiations, prior discussions, prior agreements, and
understandings relating thereto.
(c) This Agreement may not be amended, nor may any rights hereunder be
waived, except by an instrument in writing signed by the Party to be
charged with such amendment or waiver.
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(d) This Agreement shall be binding upon, and shall inure to the benefit
of, the parties hereto and their respective successors and assigns.
Neither Mobil nor EPO may assign any of its rights under this
Agreement except with the prior written consent of the other party.
(e) The headings contained herein are for guidance and convenience of
reference only and shall not limit or otherwise affect any of the
terms or conditions of this Agreement.
(f) THE PROVISIONS OF THIS AGREEMENT AND THEIR PERFORMANCE SHALL BE
CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE
OF LOUISIANA, EXCEPT TO THE EXTENT THAT FEDERAL MARITIME LAW APPLIES.
(g) References made in this Agreement, including uses of pronouns, shall
be deemed to include, unless the context clearly requires otherwise
masculine and feminine, singular and plural, and individuals,
partnerships and corporations.
(h) Mobil and EPO agree to execute, acknowledge, and deliver or cause to
be executed, acknowledged, and delivered any instrument, or take any
action necessary or appropriate to effectuate the terms of this
Agreement or any Exhibit, instrument, certificate, or other document
delivered pursuant hereto.
(i) The Parties have executed that certain Confidentiality Agreement dated
December 2, 1993, regarding the Garden Banks 388 Unit
("Confidentiality Agreement"), a copy of which is attached hereto as
Exhibit "I". The Parties hereby ratify and confirm the
Confidentiality Agreement which shall continue in full force and
effect until superseded by a revised confidentiality and technology
provision in the UOA. The definition of Confidential Information
contained in Section 1. thereof is hereby amended to include
proprietary Production System engineering design and application
information owned by EPO and disclosed to Mobil.
(j) For a period of two years after the termination date of this
Agreement, each Party shall have the right to audit, at its expense,
the books and records of the other Party which relate to the
activities under this Agreement for which a Party has incurred costs
and to make and retain copies thereof for audit purposes. If either
Party exercises such right, such Party shall give the other Party
reasonable notice of the time and scope of the audit, and the other
Party shall cooperate with such Party's representatives in the conduct
of any such audit. Audit reports shall be issued within ninety (90)
days after the end of field work. Both Parties shall exercise their
best efforts to resolve differences within ninety (90) days after the
issuance of an audit report.
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(k) THE EXPRESS WARRANTIES IN THIS AGREEMENT ARE EXCLUSIVE AND ARE IN LIEU
OF ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS, IMPLIED OR
STATUTORY. SPECIFICALLY, EACH PARTY MAKES NO WARRANTY OR
REPRESENTATION, EXPRESS OR IMPLIED, TO THE OTHER WITH RESPECT TO THE
ACCURACY, COMPLETENESS, OR MATERIALITY OF THE INFORMATION, RECORDS,
AND DATA NOW, HERETOFORE, OR HEREAFTER MADE AVAILABLE IN CONNECTION
WITH THE PROPERTIES WHICH ARE THE SUBJECT HEREOF OR THIS AGREEMENT
(INCLUDING, WITHOUT LIMITATION, ANY DESCRIPTIONS OF OIL AND GAS
LEASES, QUALITY OR QUANTITY OF HYDROCARBON RESERVES, IF ANY,
PRODUCTION RATES, EXPLORATORY OR DEVELOPMENT DRILLING OPPORTUNITIES,
DECLINE RATES, POTENTIAL FOR PRODUCTION OF HYDROCARBONS FROM THE
PROPERTIES, THE ENVIRONMENTAL CONDITION OF THE PROPERTIES, OR ANY
OTHER MATERIALS CONTAINED IN ANY OTHER MATERIAL FURNISHED IN
CONNECTION WITH THIS TRANSACTION. ANY AND ALL SUCH DATA, INFORMATION
AND MATERIAL FURNISHED BY EPO IS PROVIDED AS A CONVENIENCE ONLY AND
ANY RELIANCE ON OR USE OF SAME IS AT THE RECIPIENT'S SOLE RISK.
WITHOUT LIMITING THE GENERALITY OF THIS PARAGRAPH, EPO EXPRESSLY
DISCLAIMS AND NEGATES AS TO ANY PERSONAL PROPERTY, FIXTURES,
IMPROVEMENTS AND APPURTENANCES SUBJECT TO THIS AGREEMENT (INCLUDING
ALL WELLS) (1) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY,
(2) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR
PURPOSE, AND (3) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO
MODELS OR SAMPLE OF MATERIALS. Mobil expressly agrees that title to
such personal property, fixtures, improvements and appurtenances will
be accepted "AS IS", "WHERE IS", "WITH ALL FAULTS", and in its then
present condition and state of repair.
(l) The rights and obligations under this Agreement are personal and may
not be assigned by Mobil, in whole or in part, without first obtaining
EPO's written consent.
(m) Each of the Parties hereto participated fully in the negotiation and
preparation of this Agreement and the Parties agree that in the event
of an ambiguity, this Agreement shall not be construed in favor of or
against either EPO or Mobil, but shall be construed as if the language
were mutually drafted by both Parties.
(n) Each of the exhibits attached hereto is hereby incorporated by
reference in this Agreement and each is made a part hereof for all
purposes.
17
<PAGE>
(o) If any portion of this Agreement is held to be unenforceable or
otherwise in conflict with applicable law, the remainder of the
document shall be given effect and shall be fully enforceable without
reference to the offending portions.
(p) Each Party hereby waives any and all rights to partition and any and
all rights to have set aside to it in severalty its respective
interest in the Leases, Unit, Wells and Equipment, and Production
System that shall result if, and when, Mobil makes the Participation
Election.
XIV. PRESS RELEASES
Upon execution of this Agreement, EPO shall prepare a joint press release
announcing the transaction described herein. The press release shall be
required to be approved by Mobil prior to its release. EPO shall not identify
Mobil as a Party to the media until the press release has been announced by both
parties.
After the press release is announced, EPO may from time to time issue such
other press releases, information and photographs as operator of the Unit as it
may, in its sole discretion, deem proper. Any press release that mentions Mobil
shall be required to be approved by Mobil prior to its release. If Mobil does
not approve the proposed form of the press release, the name of Mobil shall be
removed from the document prior to its release. Prior to the Participation
Election, Mobil shall not be permitted to issue press releases regarding the
Project without the prior written approval of EPO.
XV. EFFECTIVE DATE
The Effective Date of this Participation Agreement shall be June 15, 1994.
XVI. TERM
This Agreement shall remain effective until Mobil fails to make the
Participation Election or, if Mobil elects to participate by making the
Participation Election, until the Work Commitment of Mobil is completed. If
Mobil exercises its Participation Election, all operations in the Unit will be
governed by the UOA. If while both this Agreement and the UOA are in effect
there is a conflict between this Agreement and the UOA, the terms of this
Agreement shall prevail. The obligations of the Parties incurred during the
term of this Agreement shall survive termination.
18
<PAGE>
XVII. EXECUTION
If this Agreement is not duly executed by Mobil and returned to EPO within
fifteen (15) days from the date hereof, this Agreement, at EPO's option, shall
then and thereupon be null and void and of no effect.
The terms, covenants, and conditions hereof shall be deemed to be covenants
running with the Leases and the Unit, and as such, shall extend to, bind, and
inure to the benefit of the Parties hereto, their successors, and assigns.
EXECUTED ON THIS THE 7th DAY OF JULY 1994, but effective for all purposes
as of the Effective Date.
WITNESSES: EP OPERATING LIMITED PARTNERSHIP
By Enserch Exploration, Inc.,
/s/ R. L. Kincheloe Managing General Partner
/s/ Richard D. Stewart
By: /s/ Gary J. Junco
Gary J. Junco
President
ACCEPTED AND AGREED TO THIS 7th DAY OF JULY, 1994.
WITNESSES:
MOBIL PRODUCING TEXAS &
NEW MEXICO INC.
/s/ W. A. Marko
By: /s/ H. C. Kelly, Jr.
/s/ Teresa LeBlanc H. C. Kelly, Jr.
Area Producing Manager
19
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
BEFORE ME, the undersigned authority, on this day personally appeared Gary
J. JUNCO, to me personally known, who, being duly sworn, did depose and say:
That he is President of ENSERCH EXPLORATION, INC., a Delaware corporation,
and that the instrument was signed in behalf of the corporation by authority of
its Board of Directors, as Managing General Partner of EP OPERATING LIMITED
PARTNERSHIP, and that GARY J. JUNCO acknowledged the instrument to be the free
act and deed of the corporation, as Managing General Partner of EP OPERATING
LIMITED PARTNERSHIP.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 7th day of July, 1994.
My commission expires:
[STAMP] /s/ Debra K. Evans
Notary Public
STATE OF (S)
(S)
PARISH OF (S)
BEFORE ME, the undersigned Notary Public, on this day personally appeared
H. C. Kelly, Jr., to me personally known, who, being by me duly sworn did say
that he is the Area Producing Manager of MOBIL PRODUCING TEXAS & NEW MEXICO
INC., and that the instrument was signed in behalf of the corporation by
authority of its Board of Directors and that H. C. Kelly, Jr. acknowledged the
instrument to be the free act and deed of the corporation.
SWORN to and subscribed before me, this 7th day of July, 1994.
My Commission Expires:
[STAMP] /s/ Debra K. Evans
Notary Public
20
<PAGE>
EXHIBIT "A"
Attached to and made a part of that certain Participation Agreement dated
effective June 15, 1994, between EP Operating Limited Partnership and Mobil
Producing Texas & New Mexico Inc.
Schedule of Oil and Gas Leases
- ------------------------------
1. Garden Banks 344
ML OL 83
MMS Serial No.: OCS-G 8232
Effective date of lease: October 1, 1985
Lessor: United States of America
Lessee: Placid Oil Company, et al.
Legal Description:
Block 344, Garden Banks Area, OCS Official Protraction Diagram, NG 15-2,
containing approximately 5,760 acres.
2. Garden Banks 386
ML OL 109
MMS Serial No.: OCS-G 10350
Effective date of lease: October 1, 1988
Lessor: United States of America
Lessee: Exxon Corporation, et al.
Legal Description:
Block 386, Garden Banks Area, OCS Official Protraction Diagram, NG 15-2,
containing approximately 5,760 acres.
3. Garden Banks 387
ML OL 76
MMS Serial No.: OCS-G 7485
Effective date of lease: October 1, 1984
Lessor: United States of America
Lessee: Placid Oil Company, et al.
Legal Description:
Block 387, Garden Banks Area, OCS Official Protraction Diagram, NG 15-2,
containing approximately 5,760 acres.
<PAGE>
Schedule of Oil and Gas Leases (Continued)
- ------------------------------
4. Garden Banks 388
ML OL 77
MMS Serial No.: OCS-G 7486
Effective date of lease: October 1, 1984
Lessor: United States of America
Lessee: Placid Oil Company, et al.
Legal Description:
Block 388, Garden Banks Area, OCS Official Protraction Diagram, NG 15-2,
containing approximately 5,760 acres.
Schedule of Contracts and Agreements
- ------------------------------------
Unit Agreement for Outer Continental Shelf Exploration, Development, and
Production Operations On the Block 388 Unit, dated effective January 1, 1991, as
approved by the Minerals Management Service and assigned Unit Agreement No.
754391006, wherein the parties to such agreement unitized all of their leasehold
interests in the following oil and gas leases, in the Garden Banks Area, Block
344 (OCS-G 8232); Block 386 (OCS-G 10350); Block 387 (OCS-G 7485); Block 388
(OCS-G 7486).
2
<PAGE>
EXHIBIT "B"
Attached to and made a part of that certain Participation Agreement dated
effective June 15, 1994, between EP Operating Limited Partnership and Mobil
Producing Texas & New Mexico Inc.
Schedule of Wells and Equipment:
- -------------------------------
1. OCS-G 7486 #1 Well (SHL and BHL in Block 388)
2. OCS-G 8232 #1 Well (SHL in Block 388, BHL in Block 344)
3. OCS-G 7486 #2 Well (SHL and BHL in Block 388)
4. (P&A) OCS-G 7485 #1 Well (SHL and BHL in Block 387)
5. OH OCS-G 7485 #2 Well (SHL in Block 388, BHL in Block 387)
6. ST OCS-G 7486 #3 Well (SHL and BHL in Block 388)
7. All templates located on the seafloor of the Leases.
<PAGE>
EXHIBIT "C"
Attached to and made a part of that certain Participation Agreement dated
effective June 15, 1994, between EP Operating Limited Partnership and Mobil
Producing Texas & New Mexico Inc.
Project Plan:
- ------------
The following documents represent the Project Plan:
1. Garden Banks Field Development Study - Final Report, Phase I Concept
Screening, dated June 8, 1990.
2. Garden Banks Field Development Study - Phase II - Task 1, Penrod 72 FPF
Evaluation dated July 1990.
3. Garden Banks Field Development Study - Phase III FPF Evaluation, November
1991.
4. Garden Banks 388 Field Development Study - Phase IV - Alternative Candidate
Vessels, dated June 1992.
5. EPOC Garden Banks 388 Capital Development Estimate, dated August 12, 1992.
6. Organizational Plan for Garden Banks Block 388 Field Development prepared
by EPO dated September 18, 1992.
7. Garden Banks Block 388 Field Development Description, prepared by EPO dated
September 18, 1992.
8. Garden Banks 388 Cost Estimate for Export Pipeline by R. J. Brown and
Associates, dated December 4, 1992.
9. Development Operations Coordination Document (DOCD) - Garden Banks Block
388 Unit, Offshore Louisiana, Updated.
10. Plan of Exploration (POE) - Garden Banks 387, Offshore Louisiana, original
and revisions.
<PAGE>
EXHIBIT "D"
Attached to and made a part of that certain Participation Agreement dated
effective June 15, 1994, between EP Operating Limited Partnership and Mobil
Producing Texas & New Mexico Inc.
Schedule of Offsetting Blocks:
- -----------------------------
1. Block 342, Garden Banks Area, OCS Official Protraction Diagram, NG 15-2,
containing approximately 5760 acres.
2. Block 343, Garden Banks Area, OCS Official Protraction Diagram, NG 15-2,
containing approximately 5760 acres.
3. Block 345, Garden Banks Area, OCS Official protraction Diagram, NG 15-2,
containing approximately 5760 acres.
4. Block 389, Garden Banks Area, OCS Official protraction Diagram, NG 15-2,
containing approximately 5760 acres.
<PAGE>
EXHIBIT "E"
Attached to and made a part of that certain Participation Agreement dated
effective June 15, 1994, between EP Operating Limited Partnership and Mobil
Producing Texas & New Mexico Inc.
Seismic Contract: [ SEE ATTACHED ]
- ----------------
<PAGE>
EXHIBIT "F"
Attached to and made a part of that certain Participation Agreement dated
effective June 15, 1994, between EP Operating Limited Partnership and Mobil
Producing Texas & New Mexico Inc.
Garden Banks 387 #3
Exhibit for Participation Agreement
General
The well will consist of an initial BHL in the 7,600 sand and a sidetrack to a
BHL in the 11,200 Sand. A series of operations have been agreed to in each of
the three intervals, the 7,600', 9,800' an 11,200' sands, and are described
below.
GB 387 #3 Drilling Co-ordinates
<TABLE>
<CAPTION>
==================================================================
FNL FWL SS
<S> <C> <C> <C>
- ------------------------------------------------------------------
Surface Location 3,553' 2,821' 0
- ------------------------------------------------------------------
7,600' 4,344' 1,060' 7,564
- ------------------------------------------------------------------
7,600' S/T 3,553' 2,821' 7,477'
- ------------------------------------------------------------------
9,800' 3,727' 2,677' 9,315'
- ------------------------------------------------------------------
11,200' 4,067' 2,395' 10,401'
- ------------------------------------------------------------------
PBHL 4,569' 1,981' 12,000'
==================================================================
</TABLE>
Four elections are designated during the well plan:
1. Elect whether to install an 11 3/4" casing string or 9 5/8".
2. Elect to install the production casing string.
3. Elect the zone to be the Primary Completion.
4. Elect whether to complete a second interval and flow test it.
All intervals will be evaluated with MWD and if found hydrocarbon bearing,
formation evaluations with electric wire line logs will be performed.
Additional operations to obtain RFT pressure and fluid samples and SWC's will be
designed based on the results of the electric logging.
Accommodations for two Enserch employees will be made available on the drilling
rig at all times. Additional Enserch employees may be accommodated on the rig
as space permits and, if space is not available, such additional employees may
be present on the rig on a day trip basis.
<PAGE>
Mobil will install a real time drilling data acquisition system at Enserch's
office in Dallas, Texas for the duration of the drilling operations.
Fluid sample acquisition, transfer, transport and analysis will be performed
using a Mobil prescribed procedure which is not elaborated in detail in this
Exhibit.
The DST program details and durations will be defined as a result of the
formation evaluation and the zone selection. The flow test(s) will not exceed a
10 day flow duration each.
Step 1 - 7,600' Sand
The well will be drilled vertically to a depth sufficient to set 13 3/8" casing.
A deviated hole will be drilled to the 7,600' sand using a MWD tool assembly.
7,600' Sand Evaluation Program
The open hole formation interval will be evaluated with MWD and wire line
formation tests to determine the reservoir pressure, pressure gradients and to
obtain fluid samples. Side wall cores will be obtained. If wire line
operations are not feasible, the evaluation tools may be run on drill pipe.
Electric logs will be run across the interval only if the MWD results indicate
the presence of hydrocarbons and the hole conditions permit.
In the Event of the 7,600' Sand Being Non-productive
In the event the 7,600' sand is wet, Mobil shall have the option, in its sole
discretion to cancel the evaluation program described in the previous paragraph.
The well plan will continue with "Step 2".
In the event of the 7,600' sand being potentially productive the well plan will
continue with "Step 2".
Step 2 - 7,600' Sand Side Track #1
The open hole section drilled in "Step 1" will be abandoned and the well side
tracked to the 7,600' S/T location in a vertical hole. A MWD tool in a
configuration which will provide the formation evaluation in close proximity to
the bit will be used.
7,600' Sand S/T Evaluation Program
After determination that the 7,600' sand has been penetrated, a Baker Hydrolift
coring assembly will be run and coring operations will commence until the base
of 7,600' sand has been reached or on-site Mobil and Enserch experts determine
that coring operations should be stopped.
An electric logging program will be run across the interval.
2
<PAGE>
The 7,600' sand interval will be evaluated with wire line formation tests to
determine the reservoir pressure, pressure gradients and to obtain fluid
samples. Side wall cores will be obtained. If wire line operations are not
feasible, the evaluation tools may be run on drill pipe.
In the Event of the 7,600' Sand Side Track Being Non-productive
In the event the MWD results obtained upon penetration of the 7,600' Sand
indicate this interval to be wet, the coring operations will not be conducted.
The 7,600' Sand electric logging program shall be conducted, unless the parties
mutually agree otherwise based on the MWD results. The well plan will continue
with "Step 3".
Step 3 - Casing Program, 11 3/4" String Election
If after evaluation of the 7,600' Sand results, Mobil is unable to commit to a
gravel pack flow test or if adverse hole conditions are present, Mobil shall set
11 3/4" casing at the proper depth. It is anticipated that if the 7,600' sand
is productive and the pressure regimes are not excessive, the 11 3/4" casing
string will not be installed and a 9 5/8" casing string will be installed at the
proper depth.
Step 4 - 9,800' Sand & 11,200' Sand Drilling
The well will be drilled using the MWD assembly described in "Step 2" to the
9,800' and 11,200' sand locations. Conventional core samples will be obtained
in each as described below.
9,800' and 11,200' Sand Evaluation Programs
As the MWD response indicates each sand is penetrated, three trips will be made
with a Baker Hydrolift coring assembly using a thirty foot long core barrel
with aluminum inner sleeve in each trip.
The MWD assembly will be used to drill through each interval.
An electric logging program will be run across each interval.
The intervals will be evaluated with wire line formation tests to determine the
reservoir pressure, pressure gradients and to obtain fluid samples. Side wall
cores will be obtained. If wire line operations are not feasible, the
evaluation tools may be run on drill pipe.
In the Event of 9,800' or 11,200' Sand Being Non-productive
In the event that either sand is determined to be wet, the coring operations
will not be conducted. The 9,800' and 11,200' Sand electric logging program
shall be conducted unless the parties mutually agree otherwise based upon the
MWD results. The well plan will continue with "Step 5".
3
<PAGE>
Step 5 - Production Casing Election
Upon completion of evaluations in "Step 4", Mobil shall notify EPO whether it
will conduct a gravel pack flow test of the 9,800' Sand or the 11,200' Sand. If
11 3/4" casing was set in Step #3 above and if Mobil will conduct any gravel
pack flow test in the well, Mobil shall have the option, in its sole discretion,
to run 9 5/8" casing or 7" production casing to Total Depth. If Mobil will not
conduct any gravel pack flow test in the well, EPO shall have the option, in its
sole discretion, to direct that Mobil run 9 5/8" casing, 7" casing or no casing
to Total Depth. In addition, if no gravel pack flow test will be conducted, EPO
may direct that Mobil continue drilling the well deeper until such time as the
mud weight reaches 1/2 PPG less than the previous casing shoe test. The purpose
of such deeper drilling shall be to extend the depth at which intermediate
casing may be set in preparation for Deepening operations to be conducted at a
later date. Such deeper drilling shall be conducted as a Sole Risk Operation for
EPO. Mobil shall remain obligated for its share of casing costs to 12,000'.
Prior to setting casing, if hole conditions permit, 200' of "rat hole" will be
drilled below the deepest known hydrocarbon interval.
Step 6 - Completion and Flow Tests
If the MWD indicates the presence of hydrocarbons in the well, Mobil may elect
that at least one zone but no more than two will be completed and flow tested.
An election will be made whether to complete and flow a second interval. Mobil
will designate which zone is the "Primary Completion".
If a second zone is recommended for completion and flow testing by Mobil or
Enserch, the other party may elect not to participate. In this event, the cost
of the second zone operations will be Sole Risk Operations and added or
subtracted from the Mobil Work Commitment according to the Participation
Agreement. Both parties will fund the costs of the Primary Completion and its
flow test. Any mob or de-mob and operational setup charges for the completion
and flow test operations will be carried by the Primary Completion operation and
not factored for inclusion in the charges for the second interval completion and
flow testing.
The cost of the second completion and flow test will not be included in the
initial AFE.
The completion(s) will be gravel packed with 3 1/2" i.d. production tubing if
the casing program permits.
The flow test(s) will not exceed a 10 day flow duration each.
Step 7 - TP&A Well
The well will be TP&A'ed upon completion of the flow test(s). If no gravel pack
flow tests are conducted, EPO may, it its sole discretion, direct that Mobil
permanently plug and abandon the well.
4
<PAGE>
EXHIBIT "G"
Attached to and made a part of that certain Participation Agreement dated
effective June 15, 1994, between EP Operating Limited Partnership and Mobil
Producing Texas & New Mexico Inc.
ASSIGNMENT OF INTEREST IN OIL AND GAS LEASE AND BILL OF SALE
------------------------------------------------------------
UNITED STATES OF AMERICA (S)
(S) KNOW ALL MEN BY THESE PRESENTS
OUTER CONTINENTAL SHELF (S)
THAT EP OPERATING LIMITED PARTNERSHIP, whose mailing address is 4849
Greenville Avenue, Suite 1200, Dallas, Texas 75206 (hereinafter referred to as
"ASSIGNOR"), for and in consideration of the sum of One Thousand and No/100
Dollars ($1,000.00), cash in hand paid, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, has
bargained, transferred, sold, assigned, and conveyed, and by these presents does
hereby bargain, sell, transfer, assign, and convey unto the following named
party, its successors and assigns (hereinafter referred to as "ASSIGNEE"), the
undivided percentage interest set opposite the name of such ASSIGNEE as follows:
ASSIGNEE INTEREST
-------- --------
MOBIL PRODUCING TEXAS & NEW MEXICO INC. 40.000%
1250 Poydras Plaza
New Orleans, Louisiana 70113
in and to the Oil and Gas Lease described as follows:
ML#: OL ___________
Lessor: United States of America
Lessee: _______________________________
Serial No.: ____________________
Effective Date of Lease: ____________________
Description: ________________________________________________
________________________________________________
________________________________________________
together with an undivided forty percent (40.000%) interest in and to the wells,
wellbores, gathering systems, pipe, tubing, casing, equipment, templates,
platforms (temporary or permanent), inventory, improvements and any and all
personal property, moveables and immoveables, presently located thereon,
appurtenant thereto, or used in connection therewith, and an undivided forty
percent (40.000%) of ASSIGNOR'S right, title and interest in and to any
<PAGE>
contracts, agreements, pipeline use agreements, easements, rights-of-way,
permits, licenses and other agreements and interests insofar and only insofar as
the same are appurtenant to, or used or obtained in connection with the above
described Oil and Gas Lease, wells, platforms, improvements, appurtenances and
equipment.
The Oil and Gas Lease as described hereinabove shall hereinafter sometimes
be referred to as the "Subject Lease," and the interest in the agreements and
the personal property, equipment, wells, platforms and improvements appurtenant
thereto as described above and herein conveyed, shall sometimes be referred to
as the "Assigned Premises."
As a result of this Assignment, record title in and to the Subject Lease
shall be held by the parties hereto in the proportions set forth opposite their
names below:
EP Operating Limited Partnership 60.000%
Mobil Producing Texas & New Mexico Inc. 40.000%
--------
Total 100.000%
This Assignment and Bill of Sale is expressly made subject, however, to the
following terms, covenants, and conditions:
1. LEASE OBLIGATIONS: ASSIGNEE does hereby covenant and agree to perform
-----------------
and comply with all express or implied obligations with respect to the Subject
Lease, insofar as they affect and apply to the interest herein conveyed.
2. EXISTING AGREEMENT: This Assignment and Bill of Sale is expressly
------------------
made in conformance with and subject to the terms, covenants, and conditions of
that certain Participation Agreement, dated effective June 15, 1994, and
executed by and between ASSIGNOR and ASSIGNEE (the "Participation Agreement"),
and that certain Unit Operating Agreement dated effective __________________,
between ASSIGNOR, as Operator, and ASSIGNEE, as Non-Operator. All
representations and warranties, if any, made by ASSIGNOR or ASSIGNEE, under the
terms and provisions of the Participation Agreement are incorporated herein by
reference and are made a part hereof as if fully set out herein.
3. APPROVAL: This Assignment and Bill of Sale is subject to approval by
--------
the Minerals Management Service of the U.S. Department of Interior, under the
provision of Title 30, Section 256.62 CFR, or any other governmental agency or
entity having jurisdiction. In connection with all operations on the Subject
Lease, ASSIGNEE, by its acceptance hereof, agree to comply with all applicable
rules, regulations, or laws pertaining to the Subject Lease and the Assigned
Premises.
4. SPECIAL WARRANTY: ASSIGNOR does hereby bind itself, its successors
----------------
and assigns, to warrant and forever defend all and singular, the title to said
undivided interest in and
2
<PAGE>
to the Subject Lease and the Assigned Premises unto ASSIGNEE, its successors and
assigns against all persons claiming or attempting to claim the same or any part
thereof, by, through, or under ASSIGNOR, but not otherwise.
5. MISCELLANEOUS:
-------------
A. ASSIGNOR and ASSIGNEE do hereby agree to execute any forms or documents
required by the Minerals Management Service of the U. S. Department of
Interior, or any other state or federal entity having jurisdiction over the
Subject Lease, to effectuate a change of ownership on the records of such
agency.
B. The parties hereto do hereby agree to do such further acts or execute
such further documents as may be reasonably required to properly create or
confirm title to the Subject Lease or to effectuate the transfer of
leasehold interest hereunder.
C. This Assignment and Bill of Sale is made free and clear of any
arrangement which is treated as a partnership for federal income tax
purposes.
D. The paragraph headings used in this Assignment and Bill of Sale are
inserted for convenience only and shall not be regarded in construing this
Assignment and Bill of Sale.
TO HAVE AND TO HOLD the said undivided interest in and to the Subject Lease
and Assigned Premises unto ASSIGNEE, its successors and assigns, according to
the terms, covenants, and conditions of the Subject Lease, the ASSIGNEE to
perform all such terms, covenants, and conditions thereof as to its interest in
the Subject Lease, as well as all of the terms, covenants, and conditions
hereof.
The reservations, terms, covenants, and conditions hereof shall be binding
upon and shall inure to the benefit of ASSIGNOR and ASSIGNEE, their respective
legal representatives, successors, and assigns, and shall attach to and run with
the Subject Lease and the Assigned Premises and with each transfer or assignment
thereof.
3
<PAGE>
WITNESS THE EXECUTION HEREOF on this ______ day of _________________,
199___, but effective as of _________________.
WITNESSES: EP OPERATING LIMITED PARTNERSHIP,
by Enserch Exploration, Inc., Managing
___________________________ General Partner
___________________________
By:_____________________________________________
C. R. ERWIN
Regional Director
"A S S I G N O R"
WITNESSES: MOBIL PRODUCING TEXAS & NEW MEXICO INC.
___________________________
By:_____________________________________________
___________________________ Title:__________________________________________
"A S S I G N E E"
4
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
BEFORE ME, the undersigned authority, on this day personally appeared C. R.
ERWIN, to me personally known, who, being duly sworn, did depose and say:
That he is a Regional Director of ENSERCH EXPLORATION, INC., a Delaware
corporation, and that the instrument was signed in behalf of the corporation by
authority of its Board of Directors, as Managing General Partner of EP OPERATING
LIMITED PARTNERSHIP, and that C. R. ERWIN acknowledged the instrument to be the
free act and deed of the corporation, as Managing General Partner of EP
OPERATING LIMITED PARTNERSHIP.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this _______ day of ______________,
199___.
My commission expires:
[STAMP] _____________________________
Notary Public
STATE OF _______________ (S)
(S)
COUNTY OR (S)
PARISH OF ______________ (S)
BEFORE ME, the undersigned Notary Public, on this day personally appeared
__________________, to me personally known, who, being by me duly sworn did say
that he is the ___________________ of MOBIL PRODUCING TEXAS & NEW MEXICO INC.,
and that the instrument was signed in behalf of the corporation by authority of
its Board of Directors and that ____________________ acknowledged the instrument
to be the free act and deed of the corporation.
SWORN to and subscribed before me, this ____ day of ________________,
19___.
My Commission Expires:
[STAMP] _____________________________
Notary Public
5
<PAGE>
EXHIBIT "H"
Attached to and made a part of that certain Participation Agreement dated
effective June 15, 1994, between EP Operating Limited Partnership and Mobil
Producing Texas & New Mexico, Inc.
TAX PARTNERSHIP PROVISIONS
OF THE GARDEN BANKS 388 TAX PARTNERSHIP
1. GENERAL PROVISIONS
1.1 Designation of Documents. This exhibit is referred to in, and is part
of, that Agreement identified above and, if so provided, a part of any
agreement to which the Agreement is an exhibit. Such agreement(s)
(including all exhibits thereto, other than this exhibit) shall be
hereinafter referred to as the "Agreement"; and this exhibit is hereinafter
referred to as the "Exhibit." Except as may be otherwise provided in this
Exhibit, terms defined and used in the Agreement shall have the same
meaning when used herein.
1.2 Relationship of the Parties. The parties to this Agreement shall be
hereinafter referred to as "Party" or collectively as "Parties." The
Parties understand and agree that the arrangement and undertakings
evidenced by the Agreement result in a partnership for purposes of Federal
income taxation and certain State income tax laws which incorporate or
follow Federal income tax principles as to tax partnerships. Such
partnership for tax purposes is hereinafter referred to as the
"Partnership." For every other purpose of the Agreement the Parties
understand and agree that: (i) their legal relationship to each other under
applicable State law with respect to all property subject to the Agreement
is one of tenants in common, or undivided interest owners, or lessee(s)-
sublessee(s), and not a partnership; (ii) that the inabilities of the
Parties shall be several and not joint or collective; and (iii) that each
Party shall be responsible solely for its obligations.
1.3 Priority of Provisions of this Exhibit. If there is a conflict or
inconsistency, whether direct or indirect, actual or apparent, between the
terms and conditions of this Exhibit and the terms and conditions of the
Agreement, or any other exhibit or any part thereof, the terms and
conditions of this Exhibit shall govern and control.
1.4 Survivorship.
1.4.1 Any termination of the Agreement shall not affect the
continuing application of the Partnership provisions for termination
and liquidation.
1.4.2 Any termination of the Agreement shall not affect the continuing
application of the Partnership provisions for the resolution of all
matters regarding Federal and State income reporting.
<PAGE>
1.4.3 These Partnership provisions shall inure to the benefit of, and
be binding upon, the Parties hereto and their successors and assigns.
1.5 Term. The effective date of the Partnership shall be the effective
date of the Agreement. The Partnership shall continue in full force and
effect from and after such date, until termination and liquidation.
2. INCOME TAX COMPLIANCE AND CAPITAL ACCOUNTS
2.1 Tax Returns. The Tax Matters Partner ("TMP"), as designated in (S)
3.1, shall prepare and file all required Federal and State partnership
income tax returns. In preparing such returns the TMP shall use its best
efforts and in doing so shall incur no liability to any other Party. Not
less than thirty (30) days prior to the return due date (including
extensions) the TMP shall submit to each Party for review a copy of the
return as proposed.
2.2 Fair Market Value Capital Accounts. The TMP shall establish and
maintain for each Party fair market value ("FMV") capital accounts and tax
basis capital accounts. Upon request, the TMP shall submit to each Party
along with a copy of any proposed partnership income tax return an
accounting of such Party's FMV capital accounts as of the end of the return
period.
2.3 Information Requests. Each Party agrees to furnish to the TMP not
later than sixty (60) days before the return due date (including
extensions) such information relating to the operations conducted under
this Agreement as may be required for the proper preparation of such
returns and capital accounts.
3. TAX MATTERS PARTNER
3.1 Tax Matters Partner. The Operator is designated TMP as defined in
Internal Revenue Code (the "Code") (S) 6231 (a)(7). In the event of any
change in the TMP, the Party serving as TMP at the beginning of a given
taxable year shall continue as TMP with respect to all matters concerning
such year. The TMP and other Parties shall use their best efforts to comply
with responsibilities outlined in this section and Code (S)(S) 6222 through
6233 and 6050K (and the Treasury Regulations thereunder) and in doing so
shall incur no liability to any other Party. Notwithstanding the TMP's
obligation to use its best efforts in the fulfillment of its
responsibilities, the TMP shall not be required to incur any expenses for
the preparation for, or pursuance of, administrative or judicial
proceedings, unless the Parties agree on a method for sharing such
expenses.
3.2 Information Request by the TMP. The Parties shall furnish the TMP,
within two weeks from the receipt of the request, the information
(including information specified in Code (S)(S) 6230(e) on partner
identification and 6050K for transfers of partnership
2
<PAGE>
interests) the TMP may reasonably request to comply with the requirements
on furnishing information to the Internal Revenue Service.
3.3 TMP Agreements with IRS.
3.3.1 The TMP shall not agree to any extension of the statute of
limitations for making assessments on behalf of the Partnership
without first obtaining the written consent of all Parties. The TMP
shall not bind any other Party to a settlement agreement in tax audits
without obtaining the written concurrence of any such Party.
3.3.2 Any other Party who enters in a settlement agreement with the
Secretary of the Treasury with respect to any partnership items, as
defined in Code (S) 6231(a)(3), shall notify the other Parties of the
terms within ninety (90) days from the date of such settlement.
3.4 Inconsistent Treatment of Partnership Items. If any Party intends to
file a notice of inconsistent treatment under Code (S) 6222(b), such
Party shall, prior to the filing of such notice, notify the TMP of the
(actual or potential) inconsistency of the Party's intended treatment of a
partnership item with the treatment of that item by the Partnership. Within
one week of receipt the TMP shall remit copies of such notification to the
other Parties. If an inconsistency notice is filed solely because a Party
has not received a Schedule K-1 in time for the filing of its income tax
return, the TMP need not be notified.
3.5 Request for Administrative Adjustment. No Party shall file pursuant to
Code (S) 6227 a request for an administrative adjustment of partnership
items without first notifying all other parties. If all other Parties agree
with the requested adjustment. the TMP shall file the request on behalf of
the Partnership. If unanimous consent is not obtained within thirty (30)
days from such notice, or within the period required to timely file the
request, if shorter, any Party, including the TMP, may file a request for
administrative adjustment on its own behalf.
3.6 Judicial Proceedings. Any Party intending to file a petition under
Code (S) 6226, 6228, or any other Code section with respect to any
partnership item, or other tax matters involving the Partnership, shall
notify the other Parties prior to such filing of the nature of the
contemplated proceeding. In the case where the TMP is the Party intending
to file such petition, such notice shall be given within a reasonable time
to allow the other Parties to participate in the choice of the forum for
such petition. If the Parties do not agree on the appropriate forum, then
the forum shall be chosen by majority vote. Each Party shall have a vote in
accordance with its percentage interest in the Partnership for the year
under audit. If a majority cannot agree, the TMP shall choose the forum.
If a Party intends to seek review of any court decision rendered as a
3
<PAGE>
result of such proceeding, the Party shall notify the other Parties prior
to seeking such review.
4. TAX AND FMV CAPITAL ACCOUNT ELECTIONS
4.1. General Elections. For both income tax return and capital account
purposes, the Partnership shall elect:
(a) to deduct currently intangible drilling and development costs
("ID");
(b) to use the maximum allowable accelerated tax method and the
shortest permissible tax life for depreciation;
(c) to use the accrual method of accounting;
(d) to report income on a calendar year basis;
if checked below:
____ (e) to account for dispositions of depreciable assets under the
general asset method to the extent permitted by Code
(S) 168(i)(4);
____ (f) under Code (S) 754 to adjust the basis of partnership property,
with the adjustments provided in Code (S) 734 for a distribution
of property and in Code (S) 743 for a transfer of a partnership
interest. In the case of a distribution of property the TMP shall
adjust all tax basis capital accounts. In the case of a transfer
of a partnership interest the acquiring party(ies) shall
establish and maintain its (their) tax basis capital account(s).
4.2 Depletion. Solely for FMV capital account purposes, depletion shall
be calculated by using simulated percentage depletion within the meaning of
Treas. Reg. (S) 1.704-1 (b)(2)(iv)(k)(2). For purposes of a simulated
percentage depletion calculation the depletion rate shall be the rate
specified in Code (S) 613A(c)(1).
4.3 Election Out Under Code (S) 761(a). The TMP shall notify all Parties
of an intended election to be excluded from the application of Subchapter K
of Chapter 1 of the Code not later than sixty (60) days prior to the
filing date or the due date (including extensions) for the Federal
partnership income tax return, whichever comes earlier. Any Party that does
not consent must provide the TMP with written objection within thirty (30)
days of such notice.
4.4 Other Tax or FMV Capital Account Elections or Consents. Any election
other than those referenced above must be approved by the affirmative vote
of two (2) or more Parties owning a Majority Working Interest based upon
post-Payout ownership.
4
<PAGE>
5. CAPITAL CONTRIBUTIONS AND FMV CAPITAL ACCOUNTS
5.1 Capital Contributions. The respective capital contributions of each
Party to the Partnership shall be (a) each Party's interest in the oil and
gas lease(s), including all associated lease and well equipment, committed
to the Partnership, and (b) all amounts of money paid by each Party in
connection with the acquisition, exploration, development, and operation of
the lease(s), and all other costs characterized as contributions or
expenses borne by such Party under the Agreement. The contribution of the
leases and any other properties committed to the Partnership shall be made
by each Party's agreement to hold legal title to its interest in such
leases or other property as nominee of the Partnership.
5.2 FMV Capital Accounts. The FMV capital accounts shall be increased and
decreased as follows:
5.2.1 The FMV capital accounts shall be increased by: (i) the amount
---------
of money and the fair market value of any property contributed by each
Party to the Partnership (net of liabilities assumed by the
Partnership or to which the contributed property is subject); (ii) a
Party's (S) 6.1 allocated share of Partnership income and gain, or
items thereof; and (iii) that Party's share of Code (S) 705(a)(1)(B)
items.
5.2.2 The FMV capital accounts shall be decreased by: (i) the amount
---------
of money and the fair market value of property distributed to each
Party (net of liabilities assumed by such Party or to which the
property is subject), (ii) that Party's (S) 6.1 allocated share of
Partnership loss and deductions, or items thereof; and (iii) that
Party's share of Code (S) 705(a)(2)(B) items.
5.2.3 "Fair market value" when it applies to property contributed by
a Party to the Partnership shall be assumed to equal the adjusted tax
basis, as defined in Code (S) 1011, of that property unless the
Parties agree otherwise as indicated below [or in a separate written
agreement; if so, insert reference to separate document].
Property Contributed Agreed Fair Market Value
-------------------- ------------------------
_______________________________
_______________________________
_______________________________
5
<PAGE>
if checked below:
5.3 FMV Capital Account Revaluation. The FMV capital accounts will be
revalued to reflect revaluation of partnership property according to Treas.
Reg. (S) 1.704-1(b)(2)(iv)(9) if the Parties agree pursuant to (S) 4.4.
6. PARTNERSHIP ALLOCATIONS
6.1 FMV Capital Account Allocations. Each item of income, gain, loss, or
deduction shall be allocated to each party as follows:
6.1.1 Actual or deemed income from the sale, exchange, distribution
or other disposition of production shall be allocated to the Party
entitled to such production or the proceeds from the sale of such
production. The amounts received from the sale of production and of
the fair market value of production taken in kind by the Parties are
deemed to be identical; accordingly, such items may be omitted from
the adjustments made to the Parties' FMV capital accounts.
6.1.2 Exploration cost, ID, and operating and maintenance cost shall
be allocated to each Party in accordance with its respective
contribution, or obligation to contribute, to such cost.
6.1.3 Depreciation shall be allocated to each Party in accordance
with its contribution, or obligation to contribute, to the cost of the
underlying asset.
6.1.4 Simulated depletion shall be allocated to each Party in
accordance with its FMV capital account adjusted basis in each oil and
gas property of the Partnership.
6.1.5 Loss (or simulated loss) upon the sale, exchange, distribution,
abandonment or other disposition of depreciable or depletable property
shall be allocated to the Parties in the ratio of their respective FMV
capital account adjusted basis in the depreciable or depletable
property.
6.1.6 Gain (or simulated gain) upon the sale, exchange, distribution,
abandonment or other disposition of depreciable or depletable property
shall be allocated to the Parties so that the FMV capital account
balances of the Parties will most closely reflect their respective
percentage or fractional interests under the Agreement. However, as
provided in Treas. Reg. (S) 1.704-1(b)(4)(v) for oil and gas
properties, the amount realized is allocated as follows: (i) first, an
amount that represents recovery of adjusted simulated depletion basis
is allocated (without being credited to the capital accounts) to the
Parties in the same proportion as the aggregate simulated depletion
basis was allocated to such Parties under this section; (ii) next,
from the remainder of the amount realized, if any,
6
<PAGE>
an amount up to any remaining pre-contribution gain under Code
(S) 704(c), but only to the extent not included in the allocation
under the first allocation step, is allocated to the Parties having
contributed the respective property; and (iii) finally, any amount of
realization remaining after the allocations under (i) and (ii) is
allocated in accordance with the first sentence of this (S) 6.1.6.
6.1.7 Costs or expenses of any other kind shall be allocated to each
Party in accordance with its respective contribution, or obligation to
contribute, to such costs or expenses.
6.1.8 Any other income item shall be allocated to the Parties in
accordance with the manner in which such income is realized by each
Party.
6.2 Tax Return and Tax Basis Capital Account Allocations
6.2.1 Unless otherwise expressly provided in this (S) 6.2, the
allocations of partnership items of income, gain, loss, or deduction
for tax return and tax basis capital account purposes shall follow the
principles of the allocations under (S) 6.1. However, the
partnership's gain or loss on the taxable disposition of a partnership
property in excess of the gain or loss under (S) 6.1, if any, is
allocated to the contributing Party to the extent of such Party's pre-
contribution gain or loss.
6.2.2 The Parties recognize that under Code (S) 613A(c)(7)(D) the
depletion allowance is to be computed separately by each Party. For
this purpose, each Party's share of the adjusted tax basis in each oil
and gas property shall be equal to its contribution to the adjusted
tax basis of such property.
6.2.3 The Parties recognize that under Code (S) 613A(c)(7)(D) the
computation of gain or loss on the disposition of an oil and gas
property is to be computed separately by each Party.
6.2.4 Depreciation shall be allocated to each Party in accordance
with its contribution to the adjusted tax basis of the depreciable
asset.
6.2.5 Any recapture of depreciation, ID, and any other item of
deduction or credit shall, to the extent possible, be allocated among
the Parties in accordance with their sharing of the depreciation, ID,
or other item of deduction or credit which is recaptured.
6.2.6 Any recapture of depletion shall be computed separately by each
Party, in accordance with its depletion allowance computed pursuant to
(S) 6.2.2.
7
<PAGE>
6.2.7 For partnership properties with FMV capital account values
different from their adjusted tax bases the Parties intend that the
allocations described in this (S) 6.2 constitute a "reasonable method"
of allocating gain or loss under Treas. Reg. (S) 1.704-3(a)(1).
6.2.8 Take-in-kind:
6.2.8.1 Unless checked below, the income attributable to take-
in-kind production will not be reflected on the tax return.
6.2.8.2 The provision for taking production in-kind, as provided
in the Agreement, is recognized as each Party's right to
determine the market for its proportionate share of production.
All items of income, deductions, and credits arising from such
marketing of production shall be recognized by the Partnership
and shall be allocated to each Party who designated such a
market.
7. TERMINATION AND LIQUIDATING DISTRIBUTION
7.1 Termination of the Partnership. Termination shall occur on the earlier
of the events described in Code (S) 708(b)(1)(A) or (B).
7.1.1 Upon termination under Code (S) 708(b)(1)(B), each Party's FMV
capital account shall be adjusted as provided in Treas. Reg. (S)1.704-
1(b)(2)(iv)(l) and (S) 7.3. The distributions provided in (S)(S) 7.2
through 7.4 shall be deemed to have occurred with the Partnership cash
and properties deemed contributed to a new Partnership to which this
Exhibit also applies.
7.1.2 Upon termination under Code (S) 708(b)(1)(A), the business shall
be wound-up and concluded, and the assets shall be distributed to the
Parties as described below by the end of such calendar year (or, if
later, within ninety (90) days after the date of such termination).
The assets shall be valued and distributed to the parties in the order
provided in (S)(S) 7.2 through 7.4.
7.2 Reversion. First, all cash representing unexpended contributions by
any Party and any property in which no interest has been earned by any
other Party under the Agreement shall be returned to the contributor.
7.3 Balancing. Second, the FMV capital accounts of the Parties shall be
determined as described hereafter. The TMP shall take the actions specified
under this (S)7.3 in order to cause the ratios of the Parties' FMV capital
accounts to reflect as closely as possible their interests under the
Agreement. The ratio of a Party's FMV capital account is represented by a
fraction, the numerator of which is the Party's FMV capital account balance
and the denominator of which is the sum of all Parties' FMV capital account
8
<PAGE>
balances. This is hereafter referred to as the "balancing of the FMV
capital accounts" and, when completed, the FMV capital accounts of the
Parties shall be referred to as "balanced."
7.3.1 The fair market value of ail Partnership properties shall be
determined and the gain or loss for each property, which would have
resulted if sold at such fair market value, shall be allocated in
accordance with (S)(S)6.1.5 and 6.1.6. If hereafter any Party has a
negative FMV capital account balance, that is a balance of less than
zero, in accordance with Treas. Reg. (S)1.704-1(b)(2)(ii)(b)(3) such
Party is obligated to contribute an amount of money to the Partnership
sufficient to achieve a zero balance FMV capital account (the "Deficit
Make-Up Obligation"). Moreover, any Party may contribute an amount of
cash to the Partnership to facilitate the balancing of the FMV capital
accounts. If after these adjustments the FMV capital accounts are not
balanced, (S)(S) 7.3.2 and 7.3.3 shall apply.
7.3.2 If all Parties agree, any cash or an undivided interest in
certain selected properties shall be distributed to one or more
Parties as necessary for the purpose of balancing the FMV capital
accounts.
7.3.3 Unless (S) 7.3.2 applies, an undivided interest in each and
every property shall be distributed to one or more Parties in
accordance with the ratios of their FMV capital accounts.
7.3.4 If a property is to be valued under (S) 7.3.1 or distributed
pursuant to (S)(S) 7.3.2 or 7.3.3 the Parties must first attempt to
agree on the FMV of the property; failing such an agreement, the TMP
shall cause a nationally recognized independent engineering firm to
prepare an appraisal of the FMV of such property.
7.4 Final Distribution. After the FMV capital accounts of the Parties
have been adjusted pursuant to (S) 7.3, all remaining property and
interests then held by the Partnership shall be distributed to the Parties
in accordance with their positive FMV capital account balances.
8. TRANSFERS, INDEMNIFICATION, AND CORRESPONDENCE
8. 1 Transfer of Partnership Interests. Transfers of Partnership
interests shall be governed by the Agreement. A Party transferring its
interest, or any part thereof, shall notify the TMP in writing within two
weeks after such transfer.
8.2 Indemnification. This agreement does not provide for any
indemnification to protect Parties against any tax cost from a Code
(S)708(b)(1)(B) termination. If the Parties desire such
indemnification, it must be expressly stipulated as a variation from
this Exhibit.
9
<PAGE>
8.3 Correspondence. All correspondence relating to the preparation
and filing of the Partnership's income tax returns and capital
accounts shall be sent to:
For EP Operating Limited Partnership:
ENSERCH Corporation
Attn: John P. Gamino
300 S. St. Paul
Dallas, Texas 75201-5598
For Mobil Producing Texas & New Mexico Inc. :
Mobil Administrative Services Company, Inc.
Attn: D.V. Daubaras
P. O. Box 900
Dallas, Texas 75221
10
<PAGE>
EXHIBIT "I"
Attached to and made a part of that certain Participation Agreement dated
effective June 15, 1994, between EP Operating Limited Partnership and Mobil
Producing Texas & New Mexico Inc.
Confidentiality Agreement: [ SEE ATTACHED ]
- -------------------------
<PAGE>
EXHIBIT "J"
Attached to and made a part of that certain Participation Agreement dated
effective June 15, 1994, between EP Operating Limited Partnership and Mobil
Producing Texas & New Mexico Inc.
Chase Term Sheet: [ SEE ATTACHED ]
- ----------------
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement on Form S-4 of New Enserch
Exploration, Inc. and Enserch Exploration Partners, Ltd. of our reports dated
February 7, 1994 and September 1, 1994, appearing in the Prospectus/Information
Statement, which is a part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus/Information Statement.
Deloitte & Touche
December 8, 1994
Dallas, Texas
<PAGE>
Exhibit 23.3
CONSENT OF FINANCIAL ADVISER
We hereby consent to the use of our opinion, dated November 15, 1994,
addressed to the Board of Directors of Enserch Exploration, Inc. which is
included as Exhibit A to the Prospectus/Information Statement which forms a part
of the Registration Statement on Form S-4 of New Enserch Exploration, Inc.,
relating to the proposed reorganization of Enserch Exploration Partners, Ltd.
and to the references to us under the headings "Summary -- The Reorganization --
Fairness Opinion", "Special Considerations -- Newco -- Transaction Costs", "The
Reorganization -- Background" and "The Reorganization -- Fairness Opinion"
therein. In giving this consent, we do not admit that we are, and we are of the
view that we are not, within the category of persons whose consent is required
under Section 7 of, nor do we thereby admit that we are experts with respect to
any part of such Registration Statement within the meaning of the term "experts"
as used in, the Securities Act of 1933 or the rules and regulations issued by
the Securities and Exchange Commission thereunder.
DEAN WITTER REYNOLDS INC.
By: /s/ Edward C. Oelsner, III
--------------------------------
Name: Edward C. Oelsner III
---------------------------
Title: Managing Director
--------------------------
New York, New York
December 8, 1994
<PAGE>
Exhibit 23.4
November 18, 1994
Enserch Exploration Partners, Ltd.
4849 Greenville Avenue, Suite 1500
Dallas, Texas 75206
Gentlemen:
We hereby consent to the references to us under the caption "Properties"
and in Note 7 of the Notes to Financial Statements in your Annual Report on Form
10-K for the fiscal year ended December 31, 1993, and to the use of information
from our "Report as of January 1, 1994 on Proved and Probable Reserves of
Certain Properties owned by EP Operating Company," in your Proxy/Registration
Statement on Form S-4 being filed with the Securities and Exchange Commission on
or about November 21, 1994; provided, however, we are in the early stages of
preparing estimates of the proved and probable reserves of the properties owned
by EP Operating Company, as of December 31, 1994, and are not presently aware of
any material change, other than production, in the estimated quantities of
reserves of the properties to be included in our report.
Very truly yours,
DeGOLYER and MacNAUGHTON
<PAGE>
Exhibit 23.5
CONSENT OF FUTURE DIRECTOR
The undersigned hereby consents to the use of his name as a proposed
director of New Enserch Exploration, Inc., a Texas corporation (the "Company"),
in the Registration Statement registering the issuance of Common Stock, $1.00
par value, of the Company expected to be filed with the Securities and Exchange
Commission in December 1994.
/s/ Frederick S. Addy
---------------------------------
Frederick S. Addy
<PAGE>
Exhibit 23.6
CONSENT OF FUTURE DIRECTOR
The undersigned hereby consents to the use of his name as a proposed
director of New Enserch Exploration, Inc., a Texas corporation (the "Company"),
in the Registration Statement registering the issuance of Common Stock, $1.00
par value, of the Company expected to be filed with the Securities and Exchange
Commission in December 1994.
/s/ B. A. Bridgewater, Jr.
---------------------------------
B. A. Bridgewater, Jr.
<PAGE>
Exhibit 24
POWER OF ATTORNEY
WHEREAS, New Enserch Exploration, Inc., a Texas corporation (the
"Corporation"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended, a Registration
Statement on Form S-4, including a Prospectus, with such amendment or amendments
thereto in each case as may be necessary or appropriate, together with any and
all exhibits and other documents having relation to said Form S-4 in connection
with the registration of common stock of this Company or of its affiliates with
guarantees or other undertakings by this Company;
NOW, THEREFORE, the undersigned in his capacity as a director or officer or
both, as the case may be, of the Company, does hereby appoint S. R. Singer his
true and lawful attorney, to execute in his name, place and stead in his
capacity as a director, officer or both, as the case may be, of the Company,
said Form S-4 and any and all amendments thereto and all instruments necessary
or incidental in connection therewith and to file the same with the Commission.
Said attorney shall have full power and authority to do and perform in the name
and on behalf of the undersigned in any and all capacities every act whatsoever
necessary or desirable to be done in the premises as fully and to all intents
and purposes as the undersigned might or could do in person, the undersigned
hereby ratifying and approving the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
3rd day of October 1994.
/s/ D. W. Biegler
<PAGE>
POWER OF ATTORNEY
WHEREAS, New Enserch Exploration, Inc., a Texas corporation (the
"Corporation"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended, a Registration
Statement on Form S-4, including a Prospectus, with such amendment or amendments
thereto in each case as may be necessary or appropriate, together with any and
all exhibits and other documents having relation to said Form S-4 in connection
with the registration of common stock of this Company or of its affiliates with
guarantees or other undertakings by this Company;
NOW, THEREFORE, the undersigned in his capacity as a director or officer or
both, as the case may be, of the Company, does hereby appoint D. W. Biegler and
S. R. Singer, and each of them severally, his true and lawful attorney or
attorneys, to execute in his name, place and stead in his capacity as a
director, officer or both, as the case may be, of the Company, said Form S-4 and
any and all amendments thereto and all instruments necessary or incidental in
connection therewith and to file the same with the Commission. Each of said
attorneys shall have full power and authority to do and perform in the name and
on behalf of the undersigned in any and all capacities every act whatsoever
necessary or desirable to be done in the premises as fully and to all intents
and purposes as the undersigned might or could do in person, the undersigned
hereby ratifying and approving the acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
3rd day of October 1994.
/s/ Gary J. Junco
<PAGE>
POWER OF ATTORNEY
WHEREAS, New Enserch Exploration, Inc., a Texas corporation (the
"Corporation"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended, a Registration
Statement on Form S-4, including a Prospectus, with such amendment or amendments
thereto in each case as may be necessary or appropriate, together with any and
all exhibits and other documents having relation to said Form S-4 in connection
with the registration of common stock of this Company or of its affiliates with
guarantees or other undertakings by this Company;
NOW, THEREFORE, the undersigned in his capacity as a director or officer or
both, as the case may be, of the Company, does hereby appoint D. W. Biegler his
true and lawful attorney, to execute in his name, place and stead in his
capacity as a director, officer or both, as the case may be, of the Company,
said Form S-4 and any and all amendments thereto and all instruments necessary
or incidental in connection therewith and to file the same with the Commission.
Said attorney shall have full power and authority to do and perform in the name
and on behalf of the undersigned in any and all capacities every act whatsoever
necessary or desirable to be done in the premises as fully and to all intents
and purposes as the undersigned might or could do in person, the undersigned
hereby ratifying and approving the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
3rd day of October 1994.
/s/ S. R. Singer
<PAGE>
POWER OF ATTORNEY
WHEREAS, New Enserch Exploration, Inc., a Texas corporation (the
"Corporation"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended, a Registration
Statement on Form S-4, including a Prospectus, with such amendment or amendments
thereto in each case as may be necessary or appropriate, together with any and
all exhibits and other documents having relation to said Form S-4 in connection
with the registration of common stock of this Company or of its affiliates with
guarantees or other undertakings by this Company;
NOW, THEREFORE, the undersigned in his capacity as a director or officer or
both, as the case may be, of the Company, does hereby appoint D. W. Biegler and
S. R. Singer, and each of them severally, his true and lawful attorney or
attorneys, to execute in his name, place and stead in his capacity as a
director, officer or both, as the case may be, of the Company, said Form S-4 and
any and all amendments thereto and all instruments necessary or incidental in
connection therewith and to file the same with the Commission. Each of said
attorneys shall have full power and authority to do and perform in the name and
on behalf of the undersigned in any and all capacities every act whatsoever
necessary or desirable to be done in the premises as fully and to all intents
and purposes as the undersigned might or could do in person, the undersigned
hereby ratifying and approving the acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
3rd day of October 1994.
/s/ J. W. Pinkerton
