<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 26, 1995
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
CMS NOMECO OIL & GAS CO.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MICHIGAN 1330 38-1859381
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
incorporation or
organization)
</TABLE>
ONE JACKSON SQUARE
P.O. BOX 1150
JACKSON, MICHIGAN 49204
(517) 787-9011
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
<TABLE>
<S> <C>
WILLIAM H. STEPHENS, III ALAN M. WRIGHT
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
CMS NOMECO OIL & GAS CO. OFFICER
ONE JACKSON SQUARE CMS ENERGY CORPORATION
P.O. BOX 1150 FAIRLANE PLAZA SOUTH, SUITE 1100
JACKSON, MICHIGAN 49204 330 TOWN CENTER DRIVE
(517) 787-9011 DEARBORN, MICHIGAN 48126
(313) 436-9560
</TABLE>
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
Copies to:
<TABLE>
<S> <C> <C>
DENISE M. STURDY, ESQ. ANDREW H. SHAW, ESQ. KERRY C. L. NORTH, ESQ.
Assistant General Counsel Sidley & Austin Baker & Botts, L.L.P.
CMS Energy Corporation One First National Plaza 2001 Ross Avenue
212 W. Michigan Avenue Chicago, Illinois 60603 Dallas, Texas 75201
Jackson, Michigan 49201 (312) 853-7000 (214) 953-6500
(517) 788-0179
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM
TITLE OF EACH CLASS PROPOSED MAXIMUM AGGREGATE
OF SECURITIES AMOUNT BEING OFFERING PRICE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(1) PRICE(1)(2) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock..................... -- -- $100,000,000 $34,483
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</TABLE>
(1) There are being registered hereunder such presently indeterminate number of
shares of Common Stock, no par value, of the Registrant with an aggregate
initial offering price not to exceed $100,000,000. Pursuant to Rule 457(o)
under the Securities Act of 1933 which permits the registration fee to be
calculated on the basis of the maximum offering price of the securities
listed, the table does not specify information as to the amount to be
registered or the proposed maximum offering price per share.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
------------------------------
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 A FURTHER 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.
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<PAGE> 2
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
BETWEEN REGISTRATION STATEMENT AND PROSPECTUS
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND HEADING CAPTION OR LOCATION IN PROSPECTUS
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Facing Page; Cross-Reference Sheet;
Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus...................................... Inside Front Cover Page; Outside Back
Cover Page; Available Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Prospectus Summary; Risk Factors; The
Company
4. Use of Proceeds.................................... Use of Proceeds
5. Determination of Offering Price.................... Underwriting
6. Dilution........................................... Dilution
7. Selling Security Holders........................... *
8. Plan of Distribution............................... Outside Front Cover Page; Shares Eligible
for Future Sale; Underwriting
9. Description of Securities to be Registered......... Description of Capital Stock
10. Interests of Named Experts and Counsel............. *
11. Information with Respect to the Registrant......... Outside Front Cover Page; Inside Front
Cover Page; Prospectus Summary; Risk
Factors; The Company; Dividend Policy;
Capitalization; Selected Historical
Consolidated Financial Data; Pro Forma
Financial Information; Notes to Pro Forma
Financial Information; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business and Properties; Management;
Ownership of Capital Stock; Relationship
and Certain Transactions with CMS Energy;
Available Information; and Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities..... *
</TABLE>
- -------------------------
* Not applicable.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 26, 1995
PROSPECTUS
, 1995
[CMS NOMECO LOGO] SHARES
CMS NOMECO OIL & GAS CO.
COMMON STOCK
All of the shares offered hereby are being sold by the Company. The Company
is currently an indirect subsidiary of CMS Energy Corporation. The capital stock
of CMS Energy Corporation is listed on the New York Stock Exchange. Upon
completion of this offering, CMS Energy Corporation will beneficially own % of
the outstanding shares of Common Stock ( % if the Underwriters' over-allotment
option is exercised in full).
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price per share will be between $ and $ . See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price. The Company will apply to have the Common Stock approved
for quotation on the New York Stock Exchange under the symbol CNO.
FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, SEE
"RISK FACTORS" BEGINNING ON PAGE 9.
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.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<S> <C> <C> <C>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------
Per Share................................ $ $ $
Total(3)................................. $ $ $
</TABLE>
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(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at
$ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
additional shares at the Price to the Public, less
Underwriting Discounts and Commissions, solely to cover over-allotments, if
any. If all such shares are purchased, the total Price to the Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$ , $ and $ , respectively. See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters when, as
and if issued to and accepted by them, subject to various prior conditions,
including their right to reject orders in whole or in part. It is expected that
delivery of share certificates will be made in New York, New York on or about
, 1995.
<PAGE> 4
[MAPS OF U.S. AND NON-U.S.
OIL AND GAS PROPERTIES]
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes an initial offering price of $ per share and no
exercise of the Underwriters' over-allotment option. Except as otherwise noted,
all information in this Prospectus has been adjusted to reflect an approximate
1.644 for 1.0 stock split of the Common Stock effected on October 25, 1995. The
June 30, 1995 estimated reserve data included throughout this Prospectus are
based on the report of Ryder Scott Company ("Ryder Scott"), independent
petroleum engineering consultants, and include the estimated reserves added as a
result of the Company's recent acquisition of Terra Energy, Ltd. Unless
otherwise indicated, references to the Company include the Company and its
direct and indirect subsidiaries. Certain terms relating to the oil and gas
industry are defined in "Certain Definitions."
THE COMPANY
GENERAL
CMS NOMECO Oil & Gas Co. ("CMS NOMECO" or the "Company") is an independent
oil and natural gas company engaged in the exploration, development, acquisition
and production of oil and natural gas properties in the U.S. and seven other
countries. Formed in 1967 to explore and develop leaseholdings located solely in
Michigan, the Company has greatly expanded to become an international oil and
natural gas company. In large part as a result of acquisitions and development
activities, the Company has more than doubled both its estimated proved reserves
and its production of oil and natural gas since January 1, 1992. As of June 30,
1995, the Company had estimated proved reserves of 118.6 MMBoe, consisting of
68.9 MMBbls of oil (97.0% of which were located outside the U.S.) and 298.1 Bcf
of natural gas (94.5% of which were located in the U.S.). Approximately 64.7% of
the Company's estimated proved reserves on such date were classified as proved
developed. The Company's oil-producing assets are concentrated in South America
(Ecuador, Venezuela and Colombia) and offshore West Africa (the Congo and
Equatorial Guinea), and the Company's gas-producing assets are concentrated in
Michigan, the Gulf Coast region and the Gulf of Mexico.
The following table summarizes by region the Company's estimated proved
reserves as of June 30, 1995 and estimated average daily production during the
month of September 1995:
<TABLE>
<CAPTION>
ESTIMATED PROVED RESERVES ESTIMATED AVERAGE DAILY PRODUCTION
AS OF JUNE 30, 1995 DURING THE MONTH OF SEPTEMBER 1995
-------------------------------------------- -------------------------------------------
OIL AND NATURAL % OF OIL AND NATURAL % OF
CONDENSATE(1) GAS TOTAL TOTAL CONDENSATE GAS TOTAL TOTAL
(MMBBLS) (BCF) (MMBOE) RESERVES (MBBLS) (MMCF) (MBOE) PRODUCTION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.:
Michigan.............. 1.2 238.5 40.9 34.5% 0.9 51.6 9.5 38.3%
Other U.S............. 0.9 43.1 8.1 6.8 0.7 25.4 4.9 19.8
---- ----- ----- ----- ---- ---- ---- ------
Total U.S........... 2.1 281.6 49.0 41.3 1.6 77.0 14.4 58.1
NON-U.S.:
South America:
Ecuador............. 16.7 -- 16.7 14.1 3.2 -- 3.2 12.9
Venezuela........... 11.3 -- 11.3 9.5 0.5 -- 0.5 2.0
Colombia............ 6.7 -- 6.7 5.7 1.1 -- 1.1 4.4
West Africa:
Congo............... 15.9 -- 15.9 13.4 3.4 -- 3.4 13.7
Equatorial Guinea... 11.5 10.7 13.3 11.2 1.9 -- 1.9 7.7
Other Non-U.S......... 4.7 5.8 5.7 4.8 0.2 0.3 0.3 1.2
---- ----- ----- ----- ---- ---- ---- ------
Total Non-U.S....... 66.8 16.5 69.6 58.7 10.3 0.3 10.4 41.9
Total Company..... 68.9 298.1 118.6 100.0% 11.9 77.3 24.8 100.0%
==== ===== ===== ===== ==== ==== ==== ======
</TABLE>
- -------------------------
(1) Oil and condensate includes 0.2 MMBbls and 3.0 MMBbls, respectively, of U.S.
and non-U.S. NGLs.
3
<PAGE> 6
The Company is an indirect subsidiary of CMS Energy Corporation ("CMS
Energy"). CMS Energy is a major international energy company with electric
utility operations, natural gas utility operations, gas transmission and
marketing, independent power production and, through the Company, oil and
natural gas exploration, development and production.
STRATEGY
The Company believes that its success has resulted from its ability to
capitalize on an extensive network of industry relationships, an efficient
evaluation and decision-making process and broad technical competence. The
Company believes that its future growth depends on maintaining an opportunistic
approach which builds on the Company's existing strengths. Accordingly, the
Company's business strategy is to focus on the following goals while maintaining
the flexibility to respond to new opportunities and changed circumstances.
BALANCE. The Company seeks to maintain a balance between its U.S. and
non-U.S. interests to diversify its political, geologic and economic risk. The
Company believes that projects outside the U.S. tend to have a higher potential
for significant reserve growth, but often have greater risks, including
political risks and the risks associated with infrastructure development
necessary to market production. The Company further believes that projects in
the U.S. do not have certain of these risks, but also generally do not offer as
large a potential for reserve growth as non-U.S. projects. The Company has
historically concentrated on natural gas in the U.S. and to date has focused its
non-U.S. activities on oil, providing the Company an additional balance between
natural gas and oil.
EXPLORATION AND DEVELOPMENT OF EXISTING NON-U.S. PROPERTIES. In recent
years, the Company has made a series of investments in properties outside the
U.S. that currently have both production from proved reserves and significant
potential for exploration and development. The Company is pursuing exploration
and development of such properties, which include Block 16 in Ecuador, the Colon
Unit in Venezuela, the Espinal Block in Colombia, the Yombo Field offshore the
Congo and the Bioko Block offshore Equatorial Guinea. Most of the Company's
exploration and development opportunities outside the U.S. are located in areas
which have significant production histories and adequate infrastructure and, in
the Company's view, have a reasonable possibility of yielding sizeable
additional reserves through the application of modern exploration and
development technologies.
SELECTIVE ACQUISITIONS. The Company intends to continue to pursue
attractive opportunities to acquire producing properties with significant
exploration and development potential. The Company's primary focus is in the
geographic regions where it has significant experience. The Company's recent
acquisitions of Walter International, Inc. and Terra Energy, Ltd., discussed
below, are illustrative of the types of opportunities the Company seeks.
OPERATOR ROLE. The Company seeks to continue to expand its role as operator
of both U.S. and non-U.S. projects by pursuing acquisitions and investment
opportunities that allow it to do so. As operator, the Company believes that it
can better manage production performance and more effectively control expenses,
the allocation of capital and the timing of exploration and development of its
fields. In addition, the Company believes that its experience as operator will
provide it access to a broader range of additional investment opportunities. In
early 1995, the Company assumed the role of operator of significant offshore
producing properties in West Africa in conjunction with its acquisition of
Walter International, Inc., and more recently the Company materially increased
its role as operator of U.S. properties as a result of its acquisition of Terra
Energy, Ltd. After giving effect to these acquisitions, the Company operates
properties representing approximately 37.5% of its estimated proved reserves,
including 43.9% of its U.S. proved reserves and 32.5% of its non-U.S. proved
reserves. With respect to projects not operated by the Company, the Company
actively monitors the performance of its operators with the same objectives it
seeks for Company-operated projects.
REGIONAL FOCUS. With respect to both its U.S. and non-U.S. activities, the
Company intends to focus on selected geographic regions, particularly those
where it is currently active. In the U.S., the Company expects to continue its
emphasis on development, production and, to a lesser extent, exploration of
natural gas in its core areas of Michigan, the Gulf of Mexico and the Gulf Coast
region. Outside the U.S., the Company intends to concentrate on exploration,
development and production of oil in South America and offshore West Africa
4
<PAGE> 7
while evaluating opportunities to acquire additional reserves in those areas and
in certain areas of Southeast Asia. By focusing activities in a relatively
limited number of U.S. and non-U.S. regions, the Company has acquired
significant experience in the operational, technical and legal aspects of
conducting business in these regions and can utilize its base of geologic,
engineering and production experience in such regions to better evaluate
drilling and acquisition prospects.
TECHNOLOGY. The Company expects to continue to utilize its growing
technology base, including increasing use of 3-D seismic surveys, horizontal
drilling, new fracturing techniques and reservoir modeling, on its existing
properties as well as newly acquired properties. The Company believes it must
utilize the latest available technology to continue to compete successfully as
the industry focuses on properties with increasing amounts of exploration,
development and production risk.
RECENT DEVELOPMENTS
ACQUISITION OF TERRA ENERGY, LTD.
In August 1995, CMS Energy acquired Terra Energy, Ltd. ("Terra"), a
significant producer of gas within the Devonian Antrim Shale ("Antrim")
formation underlying a large portion of the Michigan Basin in the northern
portion of Michigan's lower peninsula. The consideration relating to such
acquisition, after giving effect to certain anticipated post-closing
adjustments, is expected to aggregate approximately $63.6 million, payable in
common stock of CMS Energy. Immediately after consummation of such acquisition,
the stock of Terra was transferred to the Company (the "Terra Acquisition"). In
connection with the Terra Acquisition, the Company recorded a capital
contribution of $1.0 million and issued a promissory note which, after giving
effect to post-closing adjustments, is expected to be in the principal amount of
approximately $62.6 million. Such note is currently held by CMS Energy. As of
June 30, 1995, the acquired Terra properties included 1,225 gross (95.6 net)
producing Antrim gas wells and estimated net proved reserves of 91.9 Bcf of
Antrim gas. During the month of September 1995, estimated average daily net
production from these properties was approximately 9.5 MMcf of gas.
The Company has been a significant producer and operator of Antrim gas
wells for a number of years. Taking into account the Terra Acquisition, the
Company operates over 1,200 Antrim gas wells, or over 25% of all producing gas
wells in the Antrim formation, making the Company the largest operator of gas
wells in the Antrim formation. Terra is currently serving as operator of several
projects involving the planned drilling of an additional 260 Antrim development
wells by December 31, 1995. Additionally, Terra has a sizeable inventory of
unproved acreage in the Antrim producing trend, and management believes that a
number of its existing wells have substantial potential for improved recovery.
The Company believes that it is particularly well suited to capitalize on the
Terra Acquisition because of its many years of experience in the natural gas
industry in Michigan and its ability as part of the CMS Energy consolidated
group to utilize, to a substantial extent, the nonconventional fuels (Section
29) tax credit associated with certain Antrim gas production.
ACQUISITION OF WALTER INTERNATIONAL, INC.
In February 1995, CMS Energy acquired Walter International, Inc.
("Walter"), an international oil and gas company, for a purchase price of
approximately $28.4 million plus assumed indebtedness of $18.3 million.
Immediately after consummation of such acquisition, the stock of Walter was
contributed to the Company (the "Walter Acquisition" and, together with the
Terra Acquisition, the "Recent Acquisitions"). In connection with the Walter
Acquisition, the Company issued a promissory note in the principal amount of
$6.5 million to CMS Energy to fund repayment of certain of the above-referenced
assumed indebtedness of Walter. Walter owns interests in and operates fields
offshore the Congo and offshore Equatorial Guinea in West Africa and in Tunisia
in North Africa. As of June 30, 1995, the acquired Walter properties included 22
gross (6.6 net) producing oil and condensate wells and estimated net proved
reserves of 21.0 MMBbls of oil and condensate. During the month of September
1995, estimated average daily net production from these properties was
approximately 4,829 Bbls of oil and condensate.
5
<PAGE> 8
The Company became familiar with Walter in part because of the Company's
participation in the Alba Field operated by Walter offshore Equatorial Guinea.
The acquisition of Walter is consistent with the Company's strategy of acquiring
producing properties with exploration and development potential. The Walter
Acquisition also expands the Company's role as operator of offshore and non-U.S.
projects.
OTHER RECENT ACQUISITIONS AND DISCOVERIES
The Company experienced significant growth in reserves in 1994 primarily as
a result of certain acquisitions of producing properties and one significant
discovery.
In December 1994, a consortium in which the Company has a 29.17% working
interest agreed to assume operation of the Colon Unit in Venezuela from an
affiliate of the state-owned oil company pursuant to an operating services
agreement. As of June 30, 1995, the Company's estimated proved oil reserves
attributable to this transaction were 11.3 MMBbls, and the Company has committed
to spend approximately $47.0 million ($38.0 million for capital expenditures and
$9.0 million for operating expenditures) over the next three years on rework and
other development and, to a lesser extent, exploration activities at the Colon
Unit. In June 1994, the Company acquired Sun Colombia, whose sole asset is a
working interest in the Espinal Block in Colombia, for approximately $25.0
million. As of June 30, 1995, the Company's estimated proved oil reserves
attributable to the Sun Colombia acquisition were 5.5 MMBbls. In the third
quarter of 1994, the Company completed two Antrim gas property acquisitions for
a total of approximately $8.5 million. The Company's estimated proved natural
gas reserves attributable to these acquisitions were approximately 10.3 Bcf as
of June 30, 1995.
In early 1994, the Company participated in a significant discovery in the
Freshwater Bayou Field in southern Louisiana. Since this discovery, four
successful development wells in this field have been drilled and with their
reserve additions, the Company's estimated proved natural gas reserves in the
field as of June 30, 1995 were 29.4 Bcf.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................. shares
Common Stock to be outstanding after the
Offering*......................................... shares
Use of Proceeds..................................... To repay a portion of the indebtedness
of the Company, including indebtedness
to CMS Energy, and for general
corporate purposes. See "Use of
Proceeds."
Proposed New York Stock Exchange Symbol............. CNO
</TABLE>
- -------------------------
* After completion of the offering made hereby (the "Offering"), approximately
% ( % if the Underwriters exercise their over-allotment option in full)
of the outstanding Common Stock of the Company will be beneficially owned by
CMS Energy by virtue of its ownership of all of the common stock of CMS
Enterprises Company ("CMS Enterprises").
RISK FACTORS
Prospective investors should carefully consider the factors discussed in
detail elsewhere in this Prospectus under the caption "Risk Factors."
6
<PAGE> 9
SUMMARY OIL AND NATURAL GAS RESERVE DATA
The following table summarizes certain historical and pro forma estimates
of the Company's net proved oil and natural gas reserves as of the dates
indicated and estimated future net cash flows and standardized measure data
attributable to these reserves at such dates. The reserve estimates and
estimated future net cash flows as of June 30, 1995 have been prepared by Ryder
Scott. The reserve estimates, estimated future net cash flows and standardized
measure data as of January 1, 1993, 1994 and 1995 have been prepared by the
Company's internal engineers. The June 30, 1995 standardized measure data were
prepared by the Company's internal engineers based on the June 30, 1995 reserve
estimates prepared by Ryder Scott. For additional information relating to the
Company's oil and natural gas reserves, see "Risk Factors -- Uncertainty of
Reserve Estimates," "Business and Properties -- Reserves," Supplemental
Information -- Oil and Gas Producing Activities in the Notes to Consolidated
Financial Statements of the Company and the supplemental oil and gas information
in the Notes to the Consolidated Financial Statements relating to the Recent
Acquisitions included elsewhere in this Prospectus. Attached hereto as Appendix
A is a letter from Ryder Scott relating to their reserve report.
<TABLE>
<CAPTION>
AS OF JANUARY 1,
-------------------------- AS OF JUNE 30,
1993 1994 1995 1995(1)
<S> <C> <C> <C> <C>
ESTIMATED PROVED RESERVES:
Oil and condensate (MMBbls)(2).................................. 36.1 36.2 54.8 68.9
Natural gas (Bcf)............................................... 208.5 201.8 231.2 298.1
Net equivalent barrels of oil (MMBoe)........................... 70.9 69.8 93.3 118.6
Discounted estimated future net cash flows (millions)(2)(3)..... $347.0 $364.7 $528.5 $629.0
Standardized measure of discounted estimated future net cash
flows after net income taxes (millions)(2)(4) $317.3 $318.4 $413.2 $526.0
</TABLE>
- -------------------------
(1) Gives effect to the Terra Acquisition.
(2) Includes natural gas liquids and the equity interest in estimated proved
reserves in the East Shabwa Block in the Republic of Yemen.
(3) The discounted estimated future net cash flows attributable to the Company's
reserves were prepared using constant prices as of the calculation date,
discounted at 10% per annum before income taxes. Such discounted estimated
future net cash flows include the estimated value of nonconventional fuels
(Section 29) tax credits.
(4) The standardized measure of discounted estimated future net cash flows
represents discounted estimated future net cash flows attributable to the
Company's reserves after income tax, calculated in accordance with the
provisions of Statement of Financial Accounting Standards No. 69.
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ --------------------
PRO FORMA PRO FORMA
1992 1993 1994 1994(1) 1995 1995(1)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Production:
Oil and condensate (MBbls)............. 1,417 1,716 2,025 3,806 3,219 3,437
Natural gas (MMcf)..................... 17,578 18,487 20,546 22,925 18,989 20,883
Natural gas liquids (MBbls)............ 291 186 193 193 172 172
Average sales price(2):
Oil and condensate (per Bbl)........... $ 18.85 $ 15.52 $ 13.30 $ 13.12 $ 14.04 $ 14.02
Natural gas (per Mcf).................. 1.89 2.17 2.05 2.02 1.88 1.82
Natural gas liquids (per Bbl).......... 16.55 15.24 14.90 14.90 14.57 14.57
OPERATING EXPENSES (PER BOE):
Depreciation, depletion and
amortization........................... $ 7.02 $ 7.15 $ 6.19 $ 5.12 $ 5.20 $ 5.10
Production costs......................... 2.91 3.01 3.42 3.48 3.54 3.50
General and administrative............... 0.97 1.12 1.12 1.26 0.86 0.85
</TABLE>
- -------------------------
(1) Gives effect to the Recent Acquisitions as if such transactions had been
consummated as of January 1 of the period presented.
(2) Adjusted to reflect amounts received or paid under futures contracts entered
into to hedge the price of production.
7
<PAGE> 10
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents certain historical consolidated and pro forma
financial data of the Company as of the dates and for the periods indicated. The
historical consolidated financial data as of and for each of the three years in
the period ended December 31, 1994 are derived from the consolidated financial
statements of the Company which have been audited by Arthur Andersen LLP,
independent certified public accountants. The historical consolidated financial
data as of and for the nine months ended September 30, 1994 and 1995 are derived
from unaudited consolidated financial statements of the Company which, in the
opinion of management, contain all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation thereof. The following data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Pro Forma Consolidated
Financial Information" and the Consolidated Financial Statements of the Company
and those relating to the Recent Acquisitions, including the Notes thereto,
included elsewhere in this Prospectus. The pro forma financial data are not
necessarily indicative of the results that would have been achieved if the pro
forma transactions had occurred on the dates indicated or the results that will
be achieved in the future. The consolidated results for the nine months ended
September 30, 1995 are not necessarily indicative of the results that may be
achieved for the full year ending December 31, 1995.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31, ----------------------------------
------------------------------------------- PRO FORMA
1992 1993 1994 PRO FORMA 1994 1995 1995(2)
1994(2)
(UNAUDITED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1):
Operating Revenues:
Oil and condensate.................... $26,553 $26,635 $ 26,831 $ 49,847 $18,479 $ 45,423 $ 48,388
Natural gas........................... 34,391 40,995 39,904 43,946 30,550 32,927 35,163
Other operating....................... 8,408 6,275 12,333 16,719 10,107 17,738 21,904
------- ------- -------- --------- ------- -------- --------
69,352 73,905 79,068 110,512 59,136 96,088 105,455
Operating Expenses:
Depreciation, depletion and
amortization........................ 32,566 35,605 34,919 40,026 25,358 34,072 35,168
Cost center write-offs................ 5,744 9,648 5,612 5,612 452 2,184 2,184
Operating and maintenance............. 13,476 15,005 19,323 27,182 14,050 23,204 24,116
General and administrative............ 4,489 5,599 6,345 9,870 4,346 5,609 5,884
Production and other taxes............ 3,997 4,221 3,838 4,117 3,010 3,463 3,735
Cost of products sold and other....... 1,427 1,127 973 1,374 682 773 990
------- ------- -------- --------- ------- -------- --------
61,699 71,205 71,010 88,181 47,898 69,305 72,077
Pretax operating income................. 7,653 2,700 8,058 22,331 11,238 26,783 33,378
Other income (expense).................. 163 382 239 (680) 152 522 1,068
Interest expense, net................... 4,954 3,844 4,023 3,428 2,624 6,455 5,124
------- ------- -------- --------- ------- -------- --------
Income (loss) before income taxes....... 2,862 (762) 4,274 18,223 8,766 20,850 29,322
Income tax provision (benefit).......... (2,100) (5,900) (5,523) (4,766) (2,148) 386 1,989
Extraordinary item, early retirement of
debt.................................. -- -- -- -- -- (987) (987)
Cumulative effect of accounting
change................................ (1,124) -- -- -- -- -- --
------- ------- -------- --------- ------- -------- --------
Net income.............................. $ 3,838 $ 5,138 $ 9,797 $ 22,989 $10,914 $ 19,477 $ 26,346
======= ======= ======== ========= ======= ======== ========
Net income per common share............. $ 0.16 $ 0.21 $ 0.41 $ $ 0.45 $ 0.81 $
======= ======= ======== ========= ======= ======== ========
Average common shares
outstanding(000)...................... 24,000 24,000 24,000 24,000 24,000
OTHER DATA:
EBITDA(3)............................... $46,126 $48,335 $ 48,828 $ 67,289 $37,200 $ 63,561 $ 71,798
Capital expenditures.................... 68,059 77,750 108,188 105,620 93,854 152,958(4) 156,646 (4)
<CAPTION>
AS OF SEPTEMBER 30,
AS OF DECEMBER 31, PRO FORMA
1992 1993 1994 1994 1995 1995(5)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(6)...................... $ 8,989 $ 9,847 $ 15,189 $13,671 $ 31,648 $ 31,648
Investments and other assets............ 4,218 7,088 12,539 10,814 23,121 23,121
Property, plant and equipment, net...... 346,188 375,990 438,057 440,194 547,943 547,943
Total assets............................ 370,274 402,361 472,700 476,082 662,406 662,406
Long-term debt, including current
portion............................... 96,382 118,720 129,041 130,593 199,048 118,048
Stockholders' equity.................... 208,351 222,989 288,886 285,903 341,089 422,089
</TABLE>
- -------------------------
(1) Certain reclassifications have been reflected in amounts prior to 1995 to
conform with 1995 presentation.
(2) Gives effect to the Recent Acquisitions and the application of assumed net
proceeds of $81.0 million from the Offering as if such transactions had been
consummated as of January 1 of the period presented. See "Use of Proceeds."
(3) EBITDA is earnings before interest, income taxes, depreciation, depletion
and amortization, extraordinary item, cumulative effect of accounting change
and cost center write-offs of oil and gas assets. EBITDA is presented to
provide additional information about the Company's ability to meet its
future requirements for debt service, capital expenditures and working
capital. EBITDA should not be considered as an alternative to net income as
an indicator of operating performance or as an alternative to cash flows as
a measure of liquidity.
(4) Includes non-cash capital expenditures of $106.9 million relating to the
Recent Acquisitions.
(5) Gives effect to the application of assumed net proceeds of $81.0 million
from the Offering as if such net proceeds had been applied as of September
30, 1995. See "Use of Proceeds."
(6) Excluding current maturities of long-term debt.
8
<PAGE> 11
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby.
Volatility of Oil and Natural Gas Prices. Revenues generated from the
Company's operations are highly dependent upon the price of, and demand for, oil
and natural gas. Historically, the markets for oil and natural gas have been
volatile and are likely to continue to be volatile in the future. The prices for
oil and natural gas are subject to wide fluctuation in response to relatively
minor changes in the supply of and demand for oil and natural gas, market
uncertainty and a variety of additional factors that are beyond the control of
the Company. These factors include the level of consumer product demand, weather
conditions, domestic and foreign governmental regulations and taxes, the price
and availability of alternative fuels, political conditions in the Middle East
and other petroleum producing areas, the foreign supply of oil and natural gas,
the price of foreign imports and overall economic conditions. It is impossible
to predict future oil and natural gas price movements with any certainty.
Declines in oil or natural gas prices would not only reduce revenue but could
reduce the amount of the Company's oil and natural gas that can be produced
economically and could therefore have a material adverse effect on the Company's
financial condition and results of operations. In order to reduce its exposure
to price risks in the sale of its oil and natural gas, the Company enters into
hedging arrangements from time to time. The Company's hedging arrangements apply
to only a portion of its production and provide only limited price protection
against fluctuations in the oil and natural gas markets. To the extent that the
Company engages in such activities, it may be prevented from realizing the
benefits of price increases above the levels of the hedges. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business and Properties."
Ceiling Test Write-Offs. The Company uses the full cost method of
accounting for its investment in oil and natural gas properties. Under the full
cost method of accounting, all costs of acquisition, exploration and development
of oil and natural gas reserves are capitalized into a "full cost pool" as
incurred, and properties in the pool, including estimated future development
costs, are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved oil and natural
gas reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the sum of
discounted estimated future net cash flows from proved oil and natural gas
reserves (using unescalated prices and costs and a 10% per annum discount rate)
and the lower of cost or market value of unproved properties after income tax
effects (the "ceiling"), such excess costs are charged against earnings. The
test is applied at the end of each fiscal quarter on a country-by-country basis
and requires a write-down of oil and natural gas properties if the ceiling is
exceeded, even if prices decline for only a short period. Once incurred, such a
write-down of oil and natural gas properties is not reversible at a later date
even if oil or natural gas prices increase. As of September 30, 1995, the
Company recorded a $2.0 million write-down to the ceiling in the U.S. cost
center due to low oil and natural gas prices. Excluding properties which are
subject to agreements of sale, the non-U.S. cost centers in which the ceiling
exceeded the Company's actual capitalized costs by the smallest amounts as of
September 30, 1995 were Yemen ($3.4 million), the Congo ($6.6 million) and
Colombia ($10.6 million). Significant downward revisions of the estimates of
proved reserves or declines in oil and natural gas prices from those in effect
on September 30, 1995 which are not offset by other factors could result in a
write-down for impairment of oil and natural gas properties.
Uncertainty of Reserve Estimates. The reserve data of the Company and Ryder
Scott set forth in this Prospectus represent only estimates. Estimates of
economically recoverable oil and natural gas reserves and of future net cash
flows necessarily depend upon a number of variable factors and assumptions, such
as the assumed effects of regulations by governmental agencies and assumptions
concerning future oil and natural gas prices, future operating costs, severance
and excise taxes, development costs and workover and remedial costs, all of
which may in fact vary considerably from actual experience. Reserves located
outside the U.S. are often held pursuant to complex contractual arrangements
with respective foreign governments, thus further complicating reserve estimates
and creating the risk of conflicting contractual interpretations. For these
reasons, estimates of economically recoverable quantities of oil and natural gas
attributable to any particular group of properties, classifications of such
reserves based on risk of recovery, and estimates of the future net
9
<PAGE> 12
cash flows expected therefrom prepared by different engineers or by the same
engineers at different times may vary substantially and such reserve estimates
may be subject to downward or upward adjustment based upon such factors. Actual
production, revenues and expenditures with respect to the Company's reserves
will likely vary from estimates, and such variances may be material.
The discounted estimated future net cash flows referred to in this
Prospectus should not be construed as the current market value of the estimated
oil and natural gas reserves attributable to the Company's properties. In
accordance with applicable requirements of the Securities and Exchange
Commission (the "Commission"), the discounted estimated future net cash flows
from proved reserves are generally based on prices and costs as of the date of
the estimate, whereas actual future prices and costs may be materially higher or
lower. Actual future net cash flows also will be affected by factors such as the
amount and timing of actual production, supply and demand for oil and natural
gas, curtailments or increases in consumption by oil and natural gas purchasers
and changes in governmental regulations or taxation. The timing of actual future
net cash flows from proved reserves, and actual discounted cash flow, will be
affected by the timing of both the production and the incurrence of expenses in
connection with development and production of oil and natural gas properties. In
addition, the calculation of the discounted estimated future net cash flows
using a 10% discount per annum as required by the Commission is not necessarily
the most appropriate discount factor based on interest rates in effect from time
to time and risks associated with the Company's reserves or the oil and natural
gas industry in general. See "Business and Properties -- Reserves."
Replacement of Reserves. In general, the rate of production from oil and
natural gas properties declines as reserves are depleted. The rate of decline
depends on reservoir characteristics and other factors. Except to the extent the
Company acquires properties containing proved reserves or conducts successful
exploration and development activities, or both, the estimated proved reserves
of the Company will decline as reserves are produced. The Company's future oil
and natural gas production, and therefore cash flow and income, are highly
dependent upon the Company's level of success in finding or acquiring additional
reserves. The business of exploring for, developing and acquiring reserves is
capital intensive. To the extent cash flow from operations is reduced and
external sources of capital become limited or unavailable, the Company's ability
to make the necessary capital investment to maintain or expand its asset base of
oil and natural gas reserves would be impaired. See "Business and Properties --
Reserves."
Economic Risks of Oil and Natural Gas Operations. The Company's oil and
natural gas operations are subject to the economic risks typically associated
with exploration, development, production and marketing activities, including
significant expenditures required to locate and acquire producing properties and
to drill exploratory, appraisal and development wells. In conducting exploration
and development activities, the Company may drill unsuccessful wells and
experience losses. There is no assurance that any discovered oil or natural gas
can be economically produced or satisfactorily marketed. Moreover, the presence
of unanticipated pressure or irregularities in formations or accidents may cause
some or all of the Company's exploration, development and production activities
to be unsuccessful, and could result in a total loss of the Company's investment
in such activities. The Company's operations may be materially curtailed as a
result of a number of factors, including lack of infrastructure, bad weather,
title problems or shortages. In addition, certain of the Company's producing
properties are subject to production limitations imposed by governmental or
regulatory authorities or under contracts. Consequently, the Company's actual
future production may be substantially affected by factors beyond the Company's
control, any of which could have a material adverse effect on the Company's
financial condition or results of operations. See "Business and Properties."
Oil and Natural Gas Transportation. A substantial portion of the Company's
oil and most of its natural gas are transported through gathering systems and
pipelines which are not owned by the Company. Transportation space on such
gathering systems and pipelines is occasionally limited and at times unavailable
due to repairs or improvements being made to such facilities or due to such
space being utilized by other oil or natural gas shippers that may or may not
have priority transportation agreements. With the exception of pipeline
curtailment relating to Block 16 and related fields in Ecuador in which the
Company has an interest, see "Business and Properties -- Description of Non-U.S.
Operations -- South America -- Republic of Ecuador," the Company has not
experienced any material inability to market its proved reserves of oil or
natural gas as a result of limited access to transportation space. If
transportation space is materially restricted
10
<PAGE> 13
or is unavailable in the future, the Company's ability to market its oil or
natural gas could be impaired and cash flow from the affected properties could
be reduced, which could have a material adverse effect on the Company's
financial condition or results of operations. See "Business and Properties --
Marketing."
Limitation on Availability of Nonconventional Fuels Tax Credits. In the
years 1992, 1993 and 1994, the Company generated $4.4 million, $5.6 million and
$8.5 million, respectively, in tax credits under Section 29 of the Internal
Revenue Code of 1986, as amended ("IRC"), for the production of natural gas from
nonconventional sources ("Section 29 Credit"). Such tax credits were associated
principally with its production of certain Antrim gas. Because the Company has
been (and is expected to continue to be) included in the consolidated federal
income tax return filed by CMS Energy, these Section 29 Credits have either been
used currently to reduce the tax liability of the CMS Energy consolidated group
or have created a minimum tax credit carryforward for use in future years. For
1995, it is expected that the Company will generate approximately $12 million of
Section 29 Credits; for 1996 through 2002, it is expected that the Company will
generate Section 29 Credits averaging approximately $14 million annually. Under
the Tax Sharing Agreement that has been entered into by CMS Energy and its
subsidiaries (see "Relationship and Certain Transactions with CMS Energy -- Tax
Sharing Agreement"), the Company will be paid for those Section 29 Credits which
it generates as such credits are utilized (either as current year Section 29
Credits or minimum tax credits) by the CMS Energy consolidated group to reduce
such group's consolidated regular tax liability. Although forecasts of the CMS
Energy consolidated tax position indicate that the CMS Energy consolidated group
is expected to generate sufficient regular tax liabilities such that the Company
will be paid for its current Section 29 Credits beginning with Section 29
Credits for the 1995 taxable year and for the accumulated minimum tax credit
carryforward allocated to the Company (approximately $27.2 million at December
31, 1994) over the next five years, there can be no assurance that this will be
the case. If the taxable income of the CMS Energy consolidated group were to be
less than projected, the payments for the Section 29 Credits would be deferred
or eliminated. Moreover, if the Company were deconsolidated from the CMS Energy
consolidated group, the Company's ability to realize any benefit from past or
future Section 29 Credits would be materially restricted. The Company has no
plans, and has been advised by CMS Energy that CMS Energy has no plans, to
effect any transaction in the foreseeable future that would cause a
deconsolidation of the Company from the CMS Energy consolidated group. Further,
a limitation on the ability of the Company to realize Section 29 Credits, as a
result of deconsolidation or otherwise, could substantially reduce the Company's
discounted estimated future net cash flows from proved reserves, thereby
increasing the likelihood of the Company being required to record a non-cash
charge to earnings. See "Business and Properties -- Tax Matters" and "Business
and Properties -- Reserves."
Potential Dual Consolidated Loss Recapture. As a result of the Walter
Acquisition and related transactions, CMS NOMECO acquired certain assets located
in the Congo which, prior to such transactions, were owned by affiliates of
Amoco Corporation ("Amoco"). As a result of certain agreements entered into in
connection with the Walter Acquisition, CMS Energy and CMS NOMECO could become
jointly and severally liable to Amoco or to the Internal Revenue Service for the
recapture of "dual consolidated losses" utilized by Amoco in prior years if a
"triggering event" were to occur with respect to such assets or with respect to
the stock of Walter or certain of its subsidiaries. The amount of such potential
liability could be up to $78.2 million, plus an interest factor thereon.
However, CMS Energy has agreed to indemnify CMS NOMECO for such liability if the
triggering event results from acts or omissions (i) of CMS Energy or any of its
subsidiaries (other than CMS NOMECO) which occur after the initial sale of the
Common Stock offered hereby; (ii) of CMS NOMECO or any of its subsidiaries if
such acts or omissions are approved by the Board of Directors of CMS NOMECO,
which approval includes the affirmative vote of a majority of the employees of
CMS Energy or any of its subsidiaries (other than CMS NOMECO) who serve on CMS
NOMECO's Board of Directors; or (iii) of any person if such acts or omissions
occur prior to the initial sale of the Common Stock offered hereby. In return,
CMS NOMECO has agreed to indemnify CMS Energy for any such dual consolidated
loss tax liability if the triggering event results from acts or omissions of CMS
NOMECO on or after the date of the initial sale of the Common Stock offered
hereby which have not been approved by the Board of Directors of CMS NOMECO in
the manner described in the preceding sentence. CMS NOMECO's subsidiary, Walter
(now named CMS NOMECO International, Inc.), could also be secondarily liable to
Amoco for up to $59.0 million in potential recapture tax, plus an interest
factor thereon, if
11
<PAGE> 14
Nuevo Energy Company ("Nuevo"), an unaffiliated company, were to fail to satisfy
its potential liability to Amoco with respect to the recapture of dual
consolidated losses relating to certain other assets located in the Congo
acquired by Nuevo's affiliate from an affiliate of Amoco simultaneously with
Walter's acquisition of its Congolese assets. Because the net assets of Nuevo
currently appear to be adequate to satisfy any obligation which Nuevo may have
with respect to such other assets, CMS NOMECO believes that it is unlikely that
Walter would have to make a payment to satisfy its secondary liability, although
there can be no assurance that this will be the case. However, if Walter were
required to make such a payment, it would have a claim against Nuevo, but would
not be able to recover such payment from CMS Energy under the above-described
indemnity. See "Business and Properties -- Tax Matters -- Dual Consolidated
Losses."
In addition, as a result of another acquisition, CMS NOMECO has agreed to
become jointly and severally liable for potential tax liability in a lesser
amount as the result of the recapture of other dual consolidated losses if
triggering events were to occur after such acquisition. Such liability is not
subject to the above-described CMS Energy indemnity. See "Business and
Properties -- Tax Matters -- Dual Consolidated Losses."
Risks of Non-U.S. Operations. The Company's non-U.S. oil and natural gas
exploration, development and production activities are subject to political and
economic uncertainties, expropriation of property, cancellation or modification
of contract rights, foreign exchange restrictions, currency fluctuations,
royalty and tax increases and other risks arising out of foreign governmental
sovereignty over the areas in which the Company's operations are conducted, as
well as risks of loss due to civil strife, acts of war, guerrilla activities and
insurrection. Consequently, the Company's non-U.S. exploration, development and
production activities may be substantially affected by factors beyond the
Company's control, any of which could have a material adverse effect on the
Company's financial condition or results of operations. Furthermore, in the
event of a dispute arising from non-U.S. operations, the Company may be subject
to the exclusive jurisdiction of courts outside the U.S. or may not be
successful in subjecting non-U.S. persons to the jurisdiction of courts in the
U.S., which could adversely affect the outcome of such dispute. See "Business
and Properties -- Governmental Regulation."
Risk of Ecuador Contract Renegotiation. Production from Block 16 and
related fields in the Oriente Basin of the Ecuadorian Amazon region has steadily
increased since start-up in mid-1994, with new wells and fields continuing to be
brought on stream. As of June 30, 1995, these fields represented approximately
14.1% of the Company's estimated total proved reserves of oil and natural gas on
a Boe basis. With lower worldwide oil prices and increases in total project
costs reducing the overall economic benefit of these fields to the Ecuadorian
government, the Ministry of Energy and Mines in Ecuador has notified the members
of the consortium with interests in such fields that they should investigate
alternatives for improving project economics to the Ecuadorian government,
including the renegotiation of the service contract governing the Company's
interest in these fields. The Ecuadorian government has significant leverage to
force changes due to its broad governmental and regulatory powers.
Authorizations have been and may in the future be withheld and/or delayed to the
economic detriment of the consortium unless the discussions are productive.
Discussions with the Ecuadorian government concerning various alternatives began
in late September 1995 and will likely continue for the next several months. The
Company cannot currently predict what impact, if any, these discussions will
have on the project's economics, and there can be no assurance that these
discussions or their outcome will not have a material adverse effect on the
Company's estimated reserves, financial condition or results of operations. See
"Business and Properties -- Description of Non-U.S. Operations -- South America
- -- Republic of Ecuador."
Operational Risks and Insurance. The oil and natural gas business involves
certain operating hazards such as well blowouts, cratering, explosions,
uncontrollable flows of oil, natural gas or well fluids, fires, formations with
abnormal pressures, pollution, releases of toxic gas and other environmental
hazards and risks, any of which could result in substantial losses to the
Company. The Company's offshore operations also are subject to the additional
hazards of marine operations, such as severe weather, capsizing and collision.
In addition, the Company may be legally responsible for environmental damages
caused by previous owners of
12
<PAGE> 15
property purchased or leased by the Company. As a result, substantial
liabilities to third parties or governmental entities may be incurred. In
accordance with customary industry practices, the Company maintains insurance
against some, but not all, of such risks and losses. The occurrence of such an
event not fully covered by insurance could have a material adverse effect on the
Company's financial condition or results of operations. See "Business and
Properties -- Operational Risks and Insurance" and "Business and Properties --
Environmental Matters."
Governmental Regulation. The Company's exploration, development, production
and marketing operations are subject to regulation at the federal, state and
local levels in the U.S. and by other countries in which the Company conducts
business, including regulation relating to such matters as the exploration for
and the development, production, marketing, pricing, transmission and storage of
oil and natural gas, as well as environmental and safety matters. Failure to
comply with such regulations could result in substantial liabilities to third
parties or governmental entities, the payment of which could have a material
adverse effect on the Company's financial condition or results of operations.
Moreover, there is no assurance that laws or regulations enacted in the future
or the modification of existing laws or regulations will not adversely affect
the Company's exploration for or development, production or marketing of oil or
natural gas. See "Business and Properties -- Governmental Regulation."
Environmental Matters. Extensive federal, state and local laws and
regulations relating to health and environmental quality in the United States as
well as environmental laws and regulations of other countries in which the
Company operates affect nearly all of the operations of the Company. These laws
and regulations set various standards regulating certain aspects of health and
environmental quality, provide for penalties and other liabilities for the
violation of such standards and establish in certain circumstances obligations
to remediate current and former facilities and off-site locations. In addition,
special provisions may be appropriate or required in environmentally sensitive
non-U.S. areas of operation, such as the rain forests in Ecuador where the
Company has substantial interests.
Significant liability could be imposed on the Company for damages, clean-up
costs and/or penalties in the event of certain discharges into the environment,
environmental damage caused by previous owners of property purchased by the
Company or non-compliance with environmental laws or regulations. Such liability
could have a material adverse effect on the Company's financial condition or
results of operations. Moreover, the Company cannot predict what environmental
legislation or regulations will be enacted in the future or how existing or
future laws or regulations will be administered or enforced. Compliance with
more stringent laws or regulations, or more vigorous enforcement policies of the
regulatory agencies, could in the future require material expenditures by the
Company for the installation and operation of systems and equipment for remedial
measures, all of which could have a material adverse effect on the Company's
financial condition or results of operations. See "Business and Properties --
Environmental Matters."
Competition. The oil and natural gas industry is highly competitive. The
Company faces competition in all aspects of its business, including acquiring
reserves, leases, licenses and concessions, obtaining the equipment and labor
needed to conduct its operations and marketing its oil and natural gas. The
Company's competitors include multinational energy companies, government-owned
oil and natural gas companies, other independent oil and natural gas concerns
and individual producers and operators. Because both oil and natural gas are
fungible commodities, the principal form of competition with respect to product
sales is price competition. Many competitors have financial and other resources
substantially greater than those available to the Company and, accordingly, may
be better positioned to acquire and exploit prospects, hire personnel and market
production. In addition, many of the Company's larger competitors may be better
able to respond to factors such as changes in worldwide oil or natural gas
prices or levels of production, the cost and availability of alternative fuels
or the application of government regulations, which affect demand for the
Company's oil and natural gas production and which are beyond the control of the
Company. Moreover, many competitors have established strategic long-term
positions and maintain strong governmental relationships in countries in which
the Company may seek new entry. The Company expects this high degree of
competition to continue. See "Business and Properties -- Competition."
13
<PAGE> 16
Legal Proceedings. On December 18, 1987, Tribal Drilling Company and
certain other plaintiffs, including J. Stuart Hunt, an affiliate of Tribal and a
director of the Company, filed a lawsuit in Dallas County, Texas (the "Dallas
County Lawsuit"), seeking, among other things, (i) a declaratory judgment
against Heritage Resources, Inc. ("Heritage") to the effect that Heritage was
not qualified to serve as the operator of Sections 21, 22 and 23 of the
Crittendon Field in Winkler County, Texas, that Heritage had been properly
removed as operator pursuant to a vote of non-operator working interest owners
and that Tribal was the duly elected replacement operator and (ii) damages
against Heritage and certain related parties in connection with Heritage's
alleged failure to carry out its obligations as operator of Sections 21, 22 and
23. The Company owns non-operating working interests in Sections 21 and 23 of
the Crittendon Field, but has no interest in Section 22 of such field. The
Company was not originally a plaintiff in the Dallas County Lawsuit, but
pursuant to a court order to join all indispensable parties, on April 20, 1988,
plaintiffs filed an amended petition which included the Company as one of the
plaintiffs. Heritage and certain related parties subsequently filed
counterclaims against all of the approximately 20 plaintiffs in the Dallas
County Lawsuit, including the Company, alleging various causes of action,
including without limitation claims for breach of contract, slander of title,
tortious interference with contract, tortious interference with business
relations, fraud, conspiracy and intentional infliction of emotional distress.
In the Dallas County Lawsuit, Heritage seeks approximately $100 million in
actual damages, exemplary damages not to exceed $1 billion, attorneys' fees and
declaratory relief. Trial of the Dallas County Lawsuit, including counterclaims,
is currently scheduled for May 1996.
On December 18, 1987, Heritage and certain related parties filed two
separate lawsuits, since consolidated, in Winkler County, Texas (the "Winkler
County Lawsuit"), against certain but not all non-operator working interest
owners of Sections 21 and 22 of the Crittendon Field. The Company was not a
party to the Winkler County Lawsuit. In the Winkler County Lawsuit, the
plaintiffs in many respects alleged the same course of conduct that is the
subject of the Dallas County Lawsuit, including Heritage's counterclaims. In
October 1992, a jury in the Winkler County Lawsuit returned a special verdict in
favor of plaintiffs and against the defendants in that litigation in an
aggregate amount in excess of $80 million plus attorneys' fees in excess of $20
million. Certain defendants subsequently entered into a settlement with the
plaintiffs and the non-settling plaintiffs have appealed the judgments in the
Winkler County Lawsuit to the Texas Court of Appeals in El Paso, Texas. The
Court of Appeals has indicated that it may rule on the appeal by late 1995 or
early 1996.
The Company believes that it has meritorious defenses to the counterclaims
in the Dallas County Lawsuit and intends to defend itself vigorously in such
lawsuit. Nonetheless, the outcome of a jury trial is difficult to predict, and
there can be no assurance that the resolution of Heritage's counterclaims
against the Company will not have a material adverse effect on the Company's
financial condition or results of operations. See "Business and Properties --
Legal Proceedings."
Acquisition Risks. The Company's rapid growth in recent years has been
attributable in significant part to acquisitions of producing properties. After
the Offering, the Company expects to continue to evaluate and, where
appropriate, pursue acquisition opportunities on terms management considers
favorable to the Company. The successful acquisition of producing properties
requires an assessment of recoverable reserves, exploration potential, future
oil and natural gas prices, operating costs, potential environmental and other
liabilities and other factors beyond the Company's control. In connection with
such an assessment, the Company performs a review of the subject properties that
it believes to be generally consistent with industry practices. Nonetheless, the
resulting assessments are necessarily inexact and their accuracy inherently
uncertain, and such a review may not reveal all existing or potential problems
nor will it necessarily permit a buyer to become sufficiently familiar with the
properties to fully assess their merits and deficiencies. Inspections may not
always be performed on every platform or well, and structural and environmental
problems are not necessarily observable even when an inspection is undertaken.
The Recent Acquisitions have been made initially by CMS Energy using common
stock of CMS Energy, with the acquired companies subsequently transferred by CMS
Energy, through CMS Enterprises, to the Company. Such acquisitions have
generally been structured to be tax-free to the sellers. This method may not be
replicated in the future, and acquisitions structured in this manner, if any,
would likely require the issuance of additional Common Stock to CMS Energy or to
CMS Enterprises which would result in a dilution of the
14
<PAGE> 17
ownership interest of the public holders of Common Stock. The issuance by the
Company of a significant amount of its Common Stock as consideration to a seller
could result in certain adverse consequences, such as the Company being
deconsolidated from the CMS Energy consolidated group for federal income tax
purposes. See "Business and Properties -- Tax Matters -- Dual Consolidated
Losses" and "Business and Properties -- Tax Matters -- Section 29 Credits."
Accordingly, it is unlikely that the Company would issue shares of its Common
Stock to the sellers in an amount sufficient to cause a deconsolidation in order
to make an acquisition. If the seller were to require a tax-free transaction
requiring Common Stock of the Company, it may be possible for the Company to use
cash on hand and/or cash available under its credit facilities or other sources
to acquire shares of its Common Stock in the open market to effect such a
transaction. If a transaction could not be structured to be tax-free, a seller
may be unwilling to consummate a sale or may require greater consideration than
if the transaction were tax free. No assurance can be given that the Company
will have sufficient cash resources to consummate large acquisitions in the
future.
Principal Stockholder Will Effectively Control the Company. After the
Offering, CMS Enterprises will own approximately % of the issued and
outstanding Common Stock of the Company ( % if the Underwriters exercise
their over-allotment option in full). As a result, CMS Enterprises, and its
parent company, CMS Energy, will be able to elect all members of the Board of
Directors of the Company and to control all matters submitted to a vote of the
Board of Directors or stockholders, including without limitation the Company's
exploration, development, capital, operating and acquisition expenditure plans.
The Board of Directors is currently comprised of eleven members, six of whom are
directors or current or former officers of CMS Energy, CMS Enterprises or the
Company. Such concentration of ownership of Common Stock may have an adverse
effect on the market price of the Common Stock. See "Ownership of Capital Stock"
and "Relationship and Certain Transactions with CMS Energy."
Potential Conflicts Involving CMS Energy and its Affiliates. The Company
and CMS Energy and certain of its other subsidiaries have entered into certain
agreements, including a tax sharing agreement, services agreements and a
registration rights agreement, to provide for certain transactions and
relationships between the parties. The Company and CMS Energy and its other
affiliates may enter into other material transactions and agreements from time
to time in the future.
The relationship between the Company and CMS Energy and its other
affiliates may give rise to conflicts of interest with respect to, among other
things, transactions and agreements among the Company and CMS Energy and its
other affiliates, issuances of additional shares of voting securities, the
election of directors or the payment of dividends, if any, by the Company. When
the interests of CMS Energy and its other subsidiaries diverge from those of the
Company, CMS Energy may exercise its influence in favor of its own interests or
the interests of another of its subsidiaries over the interests of the Company.
See "Relationship and Certain Transactions with CMS Energy."
Dividends. The Company has not paid cash dividends on its Common Stock
since 1989 and has no current plans to pay cash dividends on its Common Stock in
the proximal future. The Company currently intends to retain its cash for the
continued expansion of its business, including exploration, development and
acquisition activities. See "Dividend Policy."
No Prior Market and Determination of Public Offering Price. Prior to the
Offering, there has been no public market for shares of the Common Stock, and
there can be no assurance that an active public market for such shares will
develop or be sustained. The initial offering price for the Common Stock has
been determined by negotiation among the Company and the representatives of the
Underwriters and may not be indicative of the price at which the Common Stock
will trade following completion of the Offering. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The market price of the Common Stock could also be subject to
significant fluctuation in response to variations in results of operations and
other factors.
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the public market, whether issued in connection with acquisitions or
otherwise, following the Offering could adversely affect the market price of the
Common Stock. The Company, CMS Enterprises and CMS Energy have agreed that
during the period beginning from the date of this Prospectus and continuing to
and including the date
15
<PAGE> 18
days after the date of this Prospectus, none of them will offer, sell, contract
to sell or otherwise dispose of any securities of the Company (other than
pursuant to employee stock option plans existing or contemplated on the date of
this Prospectus and for certain other purposes) which are substantially similar
to the shares of Common Stock or which are convertible or exchangeable into
securities which are substantially similar to the shares of Common Stock,
without the prior written consent of
. The sale of shares upon the expiration of such period, or the
perception of the availability of shares for sale, could adversely affect the
prevailing market price of Common Stock. See "Shares Eligible for Future Sale."
THE COMPANY
The Company is an independent oil and natural gas company engaged in the
exploration, development, acquisition and production of oil and natural gas
properties in the U.S. and seven other countries (excluding two countries where
the Company has properties subject to agreements of sale). Formed in 1967 to
explore and develop leaseholdings located solely in Michigan, the Company has
greatly expanded to become an international oil and natural gas company. In
large part as a result of acquisitions and development activities, the Company
has more than doubled both its estimated proved reserves and its production of
oil and natural gas since January 1, 1992. As of June 30, 1995, the Company had
estimated proved reserves of 118.6 MMBoe, consisting of 68.9 MMBbls of oil
(97.0% of which were located outside the U.S.) and 298.1 Bcf of natural gas
(94.5% of which were located in the U.S.). Approximately 64.7% of the Company's
estimated proved reserves on such date were classified as proved developed. The
Company's oil-producing assets are concentrated in South America (Ecuador,
Venezuela and Colombia) and offshore West Africa (the Congo and Equatorial
Guinea), and the Company's gas-producing assets are concentrated in Michigan,
the Gulf Coast region and the Gulf of Mexico.
The Company is an indirect subsidiary of CMS Energy. CMS Enterprises owns
all of the outstanding stock of the Company and CMS Energy owns all of the
outstanding common stock of CMS Enterprises. CMS Energy is a major international
energy company with electric utility operations, natural gas utility operations,
gas transmission and marketing, independent power production and, through the
Company, oil and natural gas exploration, development and production.
The Company's principal offices are located at One Jackson Square, Jackson,
Michigan 49201. The Company's telephone number is (517) 787-9011.
USE OF PROCEEDS
The net proceeds from the Offering are estimated to be $ million after
deducting underwriting discounts and commissions and estimated expenses ($
million if the over-allotment option is exercised in full). The Company intends
to use the estimated net proceeds (i) to repay the indebtedness of the Company
under a promissory note which, after giving effect to certain anticipated
post-closing adjustments, is expected to be in the principal amount of
approximately $62.6 million issued in connection with the Terra Acquisition and
currently held by CMS Energy (the "Terra Note") and a promissory note in the
principal amount of approximately $6.5 million issued to CMS Energy in
connection with the Walter Acquisition (the "Walter Note" and, together with the
Terra Note, the "CMS Notes"); and (ii) for general corporate purposes, which may
include repayment of a portion of the Company's indebtedness ($113.3 million as
of September 30, 1995) under its three year unsecured bank credit facility
established under the Amended and Restated Credit Agreement dated as of November
1, 1993, as amended, among the Company, NBD Bank, as Agent, and the Banks named
therein (the "Credit Agreement"). The Company issued the Terra Note to CMS
Enterprises, which in turn assigned it to CMS Energy, in connection with the
transfer by CMS Energy of the common stock of Terra to CMS Enterprises and then
by CMS Enterprises to the Company, and the Company issued the Walter Note to CMS
Energy in connection with the repayment of $6.6 million of indebtedness of
Walter immediately after the consummation of the Walter Acquisition. The CMS
Notes bear interest at the rate of LIBOR plus 2% and have a maturity date of
November 1, 1999. See "Business and Properties -- Terra Acquisition," "Business
and Properties -- Walter Acquisition" and "Relationship and Certain Transactions
16
<PAGE> 19
with CMS Energy." Advances under the Credit Agreement during the past year were
used primarily for capital expenditures, property acquisitions and working
capital. The average rate of interest on indebtedness under the Credit Agreement
was 7.2% per annum as of September 30, 1995 and such indebtedness is due on
November 1, 1996. See "Capitalization" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Pending use of the net proceeds for the above purposes, the Company intends
to invest such funds in short-term, interest bearing obligations of investment
grade.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock since 1989 and
has no current plans to pay cash dividends on its Common Stock in the proximal
future. The Company currently intends to retain its cash for the continued
expansion of its business, including exploration, development and acquisition
activities. The amount of future cash dividends, if any, will depend upon future
earnings, results of operations, capital requirements, covenants contained in
various financing agreements of the Company, the financial condition of the
Company and certain other factors as the Board of Directors deems relevant.
DILUTION
The net tangible book value of the Company at September 30, 1995 was $341.1
million, or $14.21 per share. Net tangible book value per share of Common Stock
represents the amount of the Company's tangible net worth (tangible assets less
liabilities) divided by the total number of shares of Common Stock outstanding.
After giving effect to the sale by the Company of shares of Common Stock
offered hereby at an assumed offering price of $ per share and the
application of the estimated net proceeds therefrom, the adjusted net tangible
book value of the Company at September 30, 1995 would have been $ million,
or $ per share. This represents an immediate dilution in net tangible book
value of $ per share to purchasers of Common Stock in the Offering, as
illustrated by the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $
------
Net tangible book value per share at September 30, 1995.... $14.21
------
Increase per share attributable to new investors...........
------
Net tangible book value per share after the Offering.........
------
Dilution per share to new investors.......................... $
======
</TABLE>
Dilution is determined by subtracting the net tangible book value per share
after giving effect to the Offering from the initial public offering price per
share paid by a purchaser of Common Stock in the Offering.
The following table sets forth, as of September 30, 1995, the number of
shares of Common Stock purchased from the Company, the total consideration paid
therefor and the average price per share paid by the Company's sole existing
stockholder, CMS Enterprises, and by new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONTRIBUTION
------------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CMS Enterprises........................ 24,000 % $ % $
New Investors..........................
------ --- -------- --- -------
Total............................. % $ % $
====== === ======== === =======
</TABLE>
17
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1995 and as adjusted to reflect the sale of the shares of Common
Stock offered hereby and the application of the assumed net proceeds therefrom.
This table should be read in conjunction with "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," "Pro
Forma Consolidated Financial Information" and the Consolidated Financial
Statements of the Company and the related Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1995
----------------------------
HISTORICAL AS ADJUSTED(1)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-Term Debt:
CMS Energy......................................................... $ 67,840 $ --
Credit Agreement................................................... 113,300 100,140
Other(2)........................................................... 17,908 17,908
-------- --------
Total......................................................... 199,048 118,048
Stockholders' Equity:
Common Stock, no par value, 55,000,000 shares authorized;
24,000,000 shares issued and outstanding; shares
issued and outstanding as adjusted(3)........................... 169,726 250,726
Preferred stock, issuable in series, 5,000,000 shares authorized,
no shares issued and outstanding................................ -- --
Retained earnings.................................................. 171,363 171,363
-------- --------
Total stockholders' equity.................................... 341,089 422,089
-------- --------
Total capitalization.......................................... $ 540,137 $540,137
======== ========
</TABLE>
- -------------------------
(1) Adjusted to reflect the application of assumed net proceeds of $81.0 million
from the Offering.
(2) "Other" debt consists of (i) OPIC guaranteed loans relating to project
financing in Equatorial Guinea and the Congo in the amount of $14.2 million
and (ii) $3.7 million of debt assumed in the Terra Acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Financing Activities."
(3) Reflects an approximate 1.644 for 1.0 stock split of the Common Stock of the
Company effected October 25, 1995.
18
<PAGE> 21
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
In August 1995, CMS Energy acquired Terra for aggregate consideration of
approximately $63.6 million, payable in common stock of CMS Energy. Immediately
after consummation of such acquisition, the stock of Terra was transferred to
the Company. In connection with the Terra Acquisition, the Company issued the
Terra Note currently held by CMS Energy and recorded a $1.0 million capital
contribution. The Company used the purchase method to account for this
transaction. See "Business and Properties -- Recent Developments -- Terra
Acquisition."
In February 1995, CMS Energy acquired Walter for a purchase price of
approximately $28.4 million plus assumed indebtedness of $18.3 million.
Immediately after consummation of such acquisition, the stock of Walter was
contributed to the Company, and the Company issued the Walter Note to fund
repayment of $6.5 million of the assumed indebtedness of Walter. Shortly prior
to the acquisition of Walter by CMS Energy, Walter had acquired Amoco Congo
Exploration Company ("ACEC"), and an unaffiliated company had acquired Amoco
Congo Petroleum Company ("ACPC" and together with ACEC, the "Amoco Congo
Companies"), from Amoco Production Company ("APC"), a subsidiary of Amoco. The
Company used the purchase method to account for this transaction. See "Business
and Properties -- Recent Developments -- Walter Acquisition."
The unaudited Pro Forma Consolidated Statement of Income for the year ended
December 31, 1994 gives effect to the Terra Acquisition and the Walter
Acquisition and to the application of the assumed net proceeds from the Offering
as if all such transactions had been consummated as of January 1, 1994. The
unaudited Pro Forma Consolidated Statement of Income for the nine months ended
September 30, 1995 gives effect to the Terra Acquisition and the Walter
Acquisition and to the application of the assumed net proceeds from the Offering
as if all such transactions had been consummated as of January 1, 1995. The
unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1995 gives
effect to the application of the assumed net proceeds from the Offering as if
such transaction had been consummated as of September 30, 1995. See "Use of
Proceeds."
The Pro Forma Consolidated Financial Statements of the Company do not
purport to be indicative of the results of operations of the Company had such
transactions occurred on the dates assumed, nor are the Pro Forma Consolidated
Financial Statements necessarily indicative of the future results of operations
of the Company. The Pro Forma Consolidated Financial Statements should be read
together with the Consolidated Financial Statements of the Company and those
relating to the Recent Acquisitions, including the Notes thereto, included
elsewhere in this Prospectus.
19
<PAGE> 22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors,
CMS NOMECO Oil & Gas Co.:
We have examined the pro forma adjustments reflecting the transactions
described in the Notes to Pro Forma Consolidated Statement of Income for the
year ended December 31, 1994 (the "December 31, 1994 Notes") and the application
of those adjustments to the historical amounts in the accompanying Pro Forma
Consolidated Statement of Income of CMS NOMECO Oil & Gas Co. (the "Company") for
the year ended December 31, 1994. The historical amounts are derived from the
historical consolidated financial statements of the Company, CMS NOMECO
International Inc. (formerly Walter International, Inc., "CMS NOMECO
International") and Terra Energy, Ltd. ("Terra"), which were audited by us, and
of Amoco Congo Exploration and Petroleum Companies (the "Amoco Congo
Companies"), which were audited by other accountants, all appearing elsewhere
herein. Such pro forma adjustments are based upon management's assumptions
described in the December 31, 1994 Notes. Our examination was made in accordance
with standards established by the American Institute of Certified Public
Accountants and accordingly, included such procedures as we considered necessary
in the circumstances.
We have reviewed the pro forma adjustments reflecting the transactions
described in the Notes to Pro Forma Consolidated Statement of Income for the
Nine Months Ended September 30, 1995, and the Notes to Pro Forma Consolidated
Balance Sheet as of September 30, 1995 (collectively, the "September 30, 1995
Notes") and the application of those adjustments to the historical amounts in
the accompanying Pro Forma Consolidated Statement of Income for the nine months
ended September 30, 1995, and the Pro Forma Consolidated Balance Sheet as of
September 30, 1995. The historical amounts are derived from the historical
unaudited consolidated financial statements of the Company, which were reviewed
by us, of the Amoco Congo Companies, which were reviewed by other accountants,
of Terra and CMS NOMECO International all appearing elsewhere herein. Such pro
forma adjustments are based on management's assumptions as described in the
September 30, 1995 Notes. Our review was conducted in accordance with standards
established by the American Institute of Certified Public Accountants and
accordingly, included such procedures as we considered necessary in the
circumstances.
The objective of the Pro Forma Consolidated Financial Statements referred
to above is to show what the significant effects on the historical financial
information might have been had the transactions occurred at an earlier date.
However, the Pro Forma Consolidated Financial Statements are not necessarily
indicative of the results of operations, or related effects on financial
position, that would have been attained had the above-mentioned transactions
actually occurred earlier.
In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
transactions described in the December 31, 1994 Notes, the related pro forma
adjustments give appropriate effect to those assumptions, and the pro forma
combined column reflects the proper application of those adjustments to the
historical amounts in the Pro Forma Consolidated Statement of Income for the
year ended December 31, 1994.
A review is substantially less in scope than an examination, the objective
of which is the expression of an opinion on management's assumptions, the pro
forma adjustments and the application of those adjustments to historical
financial information. Accordingly, we do not express such an opinion on the pro
forma adjustments or the application of such adjustments to the Pro Forma
Consolidated Statement of Income for the nine months ended September 30, 1995,
and the Pro Forma Consolidated Balance Sheet as of September 30, 1995. Based on
our review, however, nothing came to our attention that caused us to believe
that management's assumptions do not provide a reasonable basis for presenting
the significant effects directly attributable to the above-mentioned
transactions described in the September 30, 1995 Notes, that the related pro
forma adjustments do not give appropriate effect to those assumptions, or that
the pro forma combined column does not reflect the proper application of those
adjustments to the historical financial statement amounts in the Pro Forma
Consolidated Statement of Income for the nine months ended September 30, 1995,
and the Pro Forma Consolidated Balance Sheet as of September 30, 1995.
Arthur Andersen LLP
Detroit, Michigan,
October 16, 1995.
20
<PAGE> 23
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
COMPANY TERRA WALTER ------------------------- PRO FORMA
HISTORICAL HISTORICAL(1) PRO FORMA(2) ACQUISITIONS OFFERING COMBINED
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Oil and condensate.................. $ 26,831 $ 433 $ 22,583 $49,847
Natural gas......................... 39,904 4,042 -- 43,946
Gain on sales of assets............. -- 12,423 -- $(12,423)(3) --
Other operating..................... 12,333 4,238 148 16,719
-------- ------- -------- -------- ------ -------
79,068 21,136 22,731 (12,423) 110,512
Operating Expenses:
Depreciation, depletion and
amortization...................... 34,919 2,852 4,944 (2,689)(3) 40,026
Cost center write-offs.............. 5,612 -- -- 5,612
Operating and maintenance........... 19,323 1,005 6,854 27,182
General and administrative.......... 6,345 3,744 3,881 (4,600)(4) $ 500(5) 9,870
Production and other taxes.......... 3,838 279 -- 4,117
Costs of products sold.............. 973 -- -- 973
Other............................... -- 401 -- 401
-------- ------- -------- -------- ------ -------
71,010 8,281 15,679 (7,289) 500 88,181
Pretax operating income............... 8,058 12,855 7,052 (5,134) (500) 22,331
Write-down of notes receivable...... -- (1,451) -- (1,451)
Other income........................ 239 696 53 988
Interest expense, net............... 4,023 64 210 (869)(6) 3,428
-------- ------- -------- -------- ------ -------
Income before income taxes and
minority interest................... 4,274 12,036 6,895 (5,134) 369 18,440
Minority interest in subsidiary..... -- 217 -- 217
Income tax provision (benefit)...... (5,523) 2,411 14 (1,797)(7) 129(7) (4,766)
-------- ------- -------- -------- ------ -------
Net income............................ $ 9,797 $ 9,408 $ 6,881 $ (3,337) $ 240 $22,989
======== ======= ======== ======== ====== =======
Net income per common share........... $ 0.41
======== =======
Average common shares outstanding
(000)............................... 24,000 (8)
======== ====== =======
</TABLE>
- -------------------------
Notes to Pro Forma Consolidated Statement of Income for the Year Ended December
31, 1994:
(1) The Company acquired Terra in August 1995. This column represents the
historical consolidated results of operations of Terra for the twelve months
ended December 31, 1994. See the Consolidated Financial Statements of Terra
included elsewhere in this Prospectus.
(2) The Company acquired Walter in February 1995. Walter and an unrelated
company acquired the respective Amoco Congo Companies on the business day
prior to the Company's acquisition of Walter. This column reflects the pro
forma consolidated results of operations of Walter after giving effect to
Walter's effective interest in the assets of the Amoco Congo Companies for
the twelve months ended December 31, 1994. See the Pro Forma Consolidated
Financial Statements of Walter and the Amoco Congo Companies included
elsewhere in this Prospectus.
(3) Adjustment to conform to the full cost method of accounting used by the
Company and to reflect the depreciation, depletion and amortization of oil
and gas properties of the Company and Terra, using the full cost method,
based on the aggregate consideration for the Terra Acquisition of $63.6
million.
(4) Historical general and administrative expenses for the twelve months ended
December 31, 1994 have been adjusted by estimated expense reductions of $0.5
million associated with the combination of the operations of the Company and
Terra. Such expenses have also been adjusted to reflect the elimination of
$4.1 million of pre-acquisition employee bonuses recorded on the books of
Terra as of December 31, 1994.
(5) Historical general and administrative expenses for the twelve months ended
December 31, 1994 have been adjusted by estimated incremental general and
administrative expenses expected to be associated with the Company becoming
a publicly traded entity.
(6) Adjustment to reflect the application of assumed net proceeds of $81.0
million from the Offering to repay an aggregate of $81.0 million in debt
(and the corresponding reduction of interest expense), including debt
incurred in connection with the Recent Acquisitions.
(7) Adjustment of income tax expense to reflect the combined results of
operations.
(8) Adjustment to reflect the issuance of shares of Common Stock in
the Offering.
21
<PAGE> 24
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
COMPANY TERRA WALTER ------------------------- PRO FORMA
HISTORICAL(1) HISTORICAL(2) PRO FORMA(3) ACQUISITIONS OFFERING COMBINED
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Oil and condensate........... $ 45,423 $ 373 $2,592 $ 48,388
Natural gas.................. 32,927 2,236 -- 35,163
Gain on sales of assets...... -- 2,356 -- $ (2,356)(4) --
Other operating.............. 17,738 4,166 -- 21,904
--------- ------- ------ -------- -------- --------
96,088 9,131 2,592 (2,356) 105,455
Operating Expenses:
Depreciation, depletion and
amortization............... 34,072 1,224 432 (560)(4) 35,168
Cost center write-offs....... 2,184 -- -- 2,184
Operating and maintenance.... 23,204 378 534 24,116
General and administrative... 5,609 15,657 306 (16,063)(5) $ 375(6) 5,884
Production and other taxes... 3,463 267 5 3,735
Costs of products sold....... 773 -- -- 773
Other........................ -- 217 -- 217
--------- ------- ------ -------- -------- --------
69,305 17,743 1,277 (16,623) 375 72,077
Pretax operating income
(loss)....................... 26,783 (8,612) 1,315 14,267 (375) 33,378
Other income (expense)....... 522 541 5 1,068
Interest expense, net........ 6,455 36 27 (1,394)(7) 5,124
--------- ------- ------ -------- -------- --------
Income (loss) before income
taxes........................ 20,850 (8,107) 1,293 14,267 1,019 29,322
Income tax provision
(benefit).................. 386 10 -- 1,236(8) 357(8) 1,989
--------- ------- ------ -------- -------- --------
Income (loss) before
extraordinary item........... 20,464 (8,117) 1,293 13,031 662 27,333
Extraordinary item, early
retirement of debt, net...... (987) -- -- -- -- (987)
--------- ------- ------ -------- -------- --------
Net income (loss).............. $ 19,477 $(8,117) $1,293 $ 13,031 $ 662 $ 26,346
========= ======= ====== ======== ======== ========
Net income per common share.... $ 0.81 $
========= ========
Average common shares
outstanding (000)............ 24,000 (9)
======== ========
</TABLE>
- -------------------------
Notes to Pro Forma Consolidated Statement of Income for the Nine Months Ended
September 30, 1995:
(1) This column includes the historical results of operations of the Company,
including Walter for the eight months ended September 30, 1995 and Terra for
the two months ended September 30, 1995. See Consolidated Financial
Statements of the Company and Pro Forma Consolidated Financial Statements of
Walter included elsewhere in this Prospectus.
(2) The Company acquired Terra in August 1995. This column represents the
historical consolidated results of operations of Terra for the seven months
ended July 31, 1995. See the Consolidated Financial Statements of Terra
included elsewhere in this Prospectus.
(3) The Company acquired Walter in February 1995. Walter and an unrelated
company acquired the respective Amoco Congo Companies on the business day
prior to the Company's acquisition of Walter. This column reflects the pro
forma consolidated results of operations of Walter after giving effect to
Walter's effective interest in the assets of the Amoco Congo Companies for
the month ended January 31, 1995. See the Pro Forma Consolidated Financial
Statements of Walter included elsewhere in this Prospectus.
(4) Adjustment to conform to the full cost method of accounting used by the
Company, and to reflect the depreciation, depletion and amortization of oil
and gas properties of the Company and Terra, using the full cost method,
based on the aggregate consideration for the Terra Acquisition of $63.6
million.
(5) Historical general and administrative expenses for the seven months ended
July 31, 1995 have been adjusted by estimated expense reductions of $375,000
associated with the combination of the operations of the Company and Terra.
The expenses have also been adjusted to reflect the elimination of
pre-acquisition employee bonuses and compensation relating to the exercise
of stock options recorded on the books of Terra as of July 31, 1995.
(6) Historical general and administrative expenses for the nine months ended
September 30, 1995 have been adjusted by estimated incremental general and
administrative expenses expected to be associated with the Company becoming
a publicly traded entity.
(7) Adjustment to reflect the application of assumed net proceeds of $81.0
million from the Offering to repay an aggregate of $81.0 million of debt
(and the corresponding reduction of interest expense), including debt
incurred in connection with the Recent Acquisitions.
(8) Adjustment of income tax expense to reflect the combined results of
operations.
(9) Adjustment to reflect the issuance of shares of Common Stock in the
Offering.
22
<PAGE> 25
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
COMPANY PRO FORMA PRO FORMA
HISTORICAL(1) ADJUSTMENTS COMBINED
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash............................................... $ 5,255 $ $ 5,255
Temporary cash investments......................... 3,813 3,813
Accounts receivable................................ 69,074 69,074
Other.............................................. 13,200 13,200
--------- -------- ---------
91,342 91,342
Investments and other assets......................... 23,121 23,121
Property, plant and equipment, at cost............... 1,073,981 1,073,981
Less accumulated depreciation, depletion
and amortization................................ (526,038) (526,038)
--------- -------- ---------
547,943 547,943
--------- -------- ---------
Total assets......................................... $ 662,406 $ $ 662,406
========= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt............... $ 6,677 $ $ 6,677
Accounts payable................................... 49,308 49,308
Accrued interest................................... 1,171 1,171
Accrued taxes and other............................ 9,215 9,215
--------- -------- ---------
66,371 66,371
Long-term debt....................................... 192,371 (81,000)(2) 111,371
Deferred Credits:
Deferred income taxes.............................. 54,590 54,590
Other.............................................. 7,985 7,985
--------- -------- ---------
62,575 62,575
Stockholders' Equity:
Common stock....................................... 169,726 81,000(2) 250,726
Retained earnings.................................. 171,363 171,363
--------- -------- ---------
341,089 81,000 422,089
--------- -------- ---------
Total liabilities and stockholders' equity........... $ 662,406 $ -- $ 662,406
========= ======== =========
</TABLE>
- -------------------------
Notes to Pro Forma Consolidated Balance Sheet as of September 30, 1995:
(1) The Company's historical consolidated balance sheet includes the balances of
Terra and Walter as of September 30, 1995. See the Consolidated Financial
Statements of the Company included elsewhere in this Prospectus.
(2) Adjustment to reflect the application of assumed net proceeds of $81.0
million from the Offering, including the repayment of $81.0 million in debt,
including debt incurred in connection with the Recent Acquisitions, and to
reflect the issuance of shares of Common Stock for the Offering.
23
<PAGE> 26
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial
data of the Company as of the dates and for the periods indicated. The
historical consolidated financial data as of and for each of the five years in
the period ended December 31, 1994 are derived from the consolidated financial
statements of the Company which have been audited by Arthur Andersen LLP,
independent certified public accountants. The historical consolidated financial
data as of and for the nine months ended September 30, 1994 and 1995 are derived
from unaudited consolidated financial statements of the Company which, in the
opinion of management, contain all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation thereof. The following data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and those relating to the Recent Acquisitions,
including the Notes thereto, included elsewhere in this Prospectus. The results
for the nine months ended September 30, 1995 are not necessarily indicative of
the results that may be achieved for the full year ending December 31, 1995.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- --------------------
1990 1991 1992 1993 1994 1994 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1):
Operating Revenues:
Oil and condensate..................... $ 30,316 $ 24,381 $ 26,553 $ 26,635 $ 26,831 $ 18,479 $ 45,423
Natural gas............................ 34,866 36,577 34,391 40,995 39,904 30,550 32,927
Other operating........................ 6,244 7,546 8,408 6,275 12,333 10,107 17,738
-------- -------- -------- -------- -------- -------- --------
71,426 68,504 69,352 73,905 79,068 59,136 96,088
Operating Expenses:
Depreciation, depletion and
amortization........................... 25,890 27,302 32,566 35,605 34,919 25,358 34,072
Cost center write-offs................... 8,176 5,339 5,744 9,648 5,612 452 2,184
Operating and maintenance................ 9,326 11,618 13,476 15,005 19,323 14,050 23,204
General and administrative............... 4,510 4,525 4,489 5,599 6,345 4,346 5,609
Production and other taxes............... 4,528 4,134 3,997 4,221 3,838 3,010 3,463
Cost of products sold and other.......... 2,440 1,256 1,427 1,127 973 682 773
-------- -------- -------- -------- -------- -------- --------
54,870 54,174 61,699 71,205 71,010 47,898 69,305
Pretax operating income.................... 16,556 14,330 7,653 2,700 8,058 11,238 26,783
Other income............................... 331 363 163 382 239 152 522
Interest expense, net...................... 5,007 4,314 4,954 3,844 4,023 2,624 6,455
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes.......... 11,880 10,379 2,862 (762) 4,274 8,766 20,850
Income tax provision (benefit)............. 3,720 250 (2,100) (5,900) (5,523) (2,148) 386
Income before accounting change and
extraordinary item....................... 8,160 10,129 4,962 5,138 9,797 10,914 20,464
-------- -------- -------- -------- -------- -------- --------
Extraordinary item, early retirement of
debt, net................................ -- -- -- -- -- -- (987)
Cumulative effect of accounting change, net
of income taxes.......................... -- -- (1,124) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income................................. $ 8,160 $ 10,129 $ 3,838 $ 5,138 $ 9,797 $ 10,914 $ 19,477
======== ======== ======== ======== ======== ======== ========
Net income per common share................ $ 0.34 $ 0.42 $ 0.16 $ 0.21 $ 0.41 $ 0.45 $ 0.81
======== ======== ======== ======== ======== ======== ========
Average common shares outstanding (000).... 24,000 24,000 24,000 24,000 24,000 24,000 24,000
OTHER DATA:
EBITDA(2)................................ $ 50,953 $ 47,334 $ 46,126 $ 48,335 $ 48,828 $ 37,200 $ 63,561
Capital expenditures..................... 81,834 71,431 68,059 77,750 108,188 93,854 152,958(3)
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital(4)....................... $ 4,451 $ 10,501 $ 8,989 $ 9,847 $ 15,189 $ 13,671 $ 31,648
Investments and other assets............. 4,650 4,635 4,218 7,088 12,539 10,814 23,121
Property, plant and equipment, net....... 276,793 315,555 346,188 375,990 438,057 440,194 547,943
Total assets............................. 301,946 345,936 370,274 402,361 472,700 476,082 662,406
Long-term debt, including current
portion................................ 84,500 79,600 96,382 118,720 129,041 130,593 199,048
Stockholder's equity..................... 159,084 198,713 208,351 222,989 288,886 285,903 341,089
</TABLE>
- -------------------------
(1) Certain reclassifications have been reflected in amounts prior to 1995 to
conform with 1995 presentation.
(2) EBITDA is earnings before interest, income taxes, depreciation, depletion
and amortization, cumulative effect of accounting change, extraordinary item
and cost center write-offs of oil and gas assets. EBITDA is presented to
provide additional information about the Company's ability to meet its
future requirements for debt service, capital expenditures and working
capital. EBITDA should not be considered as an alternative to net income as
an indicator of operating performance or as an alternative to cash flows as
a measure of liquidity.
(3) Includes non-cash capital expenditures of $106.9 million relating to the
Recent Acquisitions.
(4) Excluding current maturities of long-term debt.
24
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in an understanding of the
Company's historical financial position and results of operations for each of
the three years in the period ended December 31, 1994 and the unaudited
historical financial data as of and for the nine months ended September 30, 1994
and 1995. The Company's historical Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus contain detailed information that
should be referred to in conjunction with the following discussion. Additional
financial information appearing in this Prospectus includes (i) unaudited Pro
Forma Consolidated Financial Statements and Notes thereto reflecting the Recent
Acquisitions; (ii) historical Consolidated Financial Statements and Notes
thereto for CMS NOMECO International, Inc. and Subsidiaries (formerly Walter
International, Inc. and Subsidiaries) as of, and for the year ended, December
31, 1994; (iii) historical Consolidated Financial Statements and Notes thereto
for the Amoco Congo Companies as of December 31, 1993 and 1994 and for the years
ended December 31, 1992, 1993 and 1994, respectively, and (iv) historical
Consolidated Financial Statements and Notes thereto for Terra Energy, Ltd. and
Subsidiaries as of and for the year ended December 31, 1994.
GENERAL
The Company, an indirect subsidiary of CMS Energy, is an independent oil
and natural gas company engaged in the exploration, development, acquisition and
production of oil and natural gas properties in the U.S. and seven other
countries (excluding two countries where the Company has properties subject to
agreements of sale). The Company's oil-producing assets are concentrated in
South America (Ecuador, Venezuela and Colombia) and offshore West Africa (the
Congo and Equatorial Guinea), and the Company's gas-producing assets are
concentrated in Michigan, the Gulf Coast region and the Gulf of Mexico.
The following events have recently had, and will continue to have, a
significant impact on the Company's results of operations and financial
condition: (i) the Terra Acquisition in August 1995; (ii) the Walter Acquisition
in February 1995; (iii) the assumption by a consortium in which the Company has
a 29.17% working interest of operations of the Colon Unit in Venezuela in May
1995; (iv) the June 1994 acquisition by the Company of Sun Colombia Oil Company
whose sole asset is a working interest in the Espinal Block in Colombia; (v) the
completion by the Company in the third quarter of 1994 of two Antrim gas
property acquisitions; (vi) the commencement of Ecuador production in mid-1994
and the subsequent commencement of production from additional fields; and (vii)
the commencement of production from the Freshwater Bayou Field in late 1994 and
the subsequent completion of successful development wells. See "Business and
Properties -- Recent Developments."
The Company uses the full cost method of accounting for its investment in
oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool, including estimated future development costs, are depleted and charged
to operations using the unit-of-production method based on the ratio of current
production to total proved oil and natural gas reserves. To the extent that such
capitalized costs (net of accumulated depletion and amortization) less deferred
taxes exceed the sum of discounted estimated future net cash flows from proved
oil and natural gas reserves (using unescalated prices and costs and a 10% per
annum discount rate) and the lower of cost or market value of unproved
properties after income tax effects, such excess costs are charged against
earnings. The test is applied at the end of each fiscal quarter on a
country-by-country basis and requires a write-down of oil and natural gas
properties if the ceiling is exceeded, even if prices decline for only a short
period. Once incurred, such a write-down is not reversible at a later date even
if oil or natural gas prices increase. Significant downward revisions of the
estimates of proved reserves or declines in oil and natural gas prices from
those in effect on September 30, 1995 which are not offset by other factors
could result in a write-down for impairment of oil and natural gas properties.
25
<PAGE> 28
The Company periodically utilizes collar contracts and swap agreements for
portions of its oil and gas production to achieve more predictable cash flows
and to reduce its exposure to fluctuations in oil and gas prices.
The Company has generated significant amounts of Section 29 Credits as a
result of the sale of natural gas produced from Antrim shale and, to a lesser
extent, tight sands wells. For 1995, it is estimated that the Company and its
subsidiaries will generate approximately $12 million of Section 29 Credits; for
1996 through 2002, it is estimated that the Company will generate Section 29
Credits averaging $14 million annually. No Section 29 Credit will be allowed for
fuels sold after December 31, 2002. Forecasts of the CMS Energy consolidated
group's tax position indicate that such group will be able to use and,
therefore, that the Company will be paid for the Company's current year Section
29 Credits for the 1995 taxable year and that the accumulated minimum tax credit
carryforward attributable to the Company's Section 29 Credits (approximately
$27.2 million at December 31, 1994) will be paid to the Company over five years,
but there can be no assurance that this will be the case. See "Business and
Properties -- Tax Matters." If the taxable income for the CMS Energy
consolidated group were to be less than projected, the payments for the Section
29 Credits would be deferred or eliminated.
As of June 30, 1995, Block 16 and related fields in the Oriente Basin of
the Ecuadorian Amazon region represented approximately 14.1% of the Company's
estimated total proved reserves of oil and natural gas on a Boe basis. The
Ministry of Energy and Mines in Ecuador has notified the members of the
consortium with interests in such fields that they should investigate
alternatives for improving project economics to the Ecuadorian government,
including the renegotiation of the service contract governing the Company's
interest in these fields. Discussions with the Ecuadorian government concerning
various alternatives began in late September 1995 and will likely continue for
the next several months. The Company cannot currently predict what impact, if
any, these discussions will have on the project's economics, and there can be no
assurance that these discussions or their outcome will not have a material
adverse effect on the Company's estimated reserves, financial condition or
results of operations. See "Business and Properties -- Description of Non-U.S.
Operations -- South America -- Republic of Ecuador."
See "Risk Factors" for more information to assist in an understanding of
the Company's results of operations and financial position.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1994
PRETAX OPERATING INCOME AND EARNINGS
The Company's pretax operating income for the nine months ended September
30, 1995 increased $15.5 million (137.2%) to $26.8 million, from $11.3 million
in the nine months ended September 30, 1994. The increase is primarily
attributable to an increase in gains from the disposition of a gas sales
contracts ($9.9 million in 1995 and $4.8 million in 1994), as well as higher
sales volumes and higher average market prices for oil, partially offset by
lower average market prices for natural gas and a $2.0 million U.S. cost center
write-down. The volume increase includes eight months' production from the
Walter properties acquired in February 1995 and two months' production from the
Terra properties acquired in August 1995. Net income increased $8.6 million
(78.9%) to $19.5 million in the nine months ended September 30, 1995 from $10.9
million in the comparable 1994 period, reflecting the higher operating income
and a $3.0 million increase in Section 29 Credits, partially offset by an
increase in interest expense, net, and an extraordinary item, early
26
<PAGE> 29
retirement of debt, net of income taxes. The following table sets forth selected
oil and gas operating statistics of the Company for the nine-month periods ended
September 30, 1994 and 1995:
SELECTED OIL AND GAS OPERATING STATISTICS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------- INCREASE
1994 1995 (DECREASE)
<S> <C> <C> <C>
Oil volumes (MBbl):
U.S............................................................. 518 463 (10.6)%
Non-U.S......................................................... 874 2,756 215.3
Total........................................................... 1,392 3,219 131.3
Average oil price (per Bbl):
U.S............................................................. $15.64 $16.62 6.3
Non-U.S......................................................... 11.87 13.69 15.3
Overall*........................................................ 13.32 14.04 5.4
Gas volumes (MMcf)................................................ 15,008 18,989 26.5
Average gas price (per Mcf)*...................................... $ 2.11 $ 1.88 (10.9)
NGL volumes (MBbl)................................................ 123 172 39.8
Average NGL price (per Bbl)....................................... $14.84 $14.57 (1.8)
Operating expenses (per Boe):
Depreciation, depletion and amortization........................ $ 6.31 $ 5.20 (17.6)
Production costs................................................ 3.50 3.54 1.1
General and administrative...................................... 1.08 0.86 (20.4)
</TABLE>
- -------------------------
* Adjusted to reflect amounts received or paid under futures contracts entered
into to hedge the price of a portion of production.
REVENUES
Oil and Condensate. Oil and condensate revenues increased $26.9 million
(145.4%) to $45.4 million in the first nine months of 1995 over the comparable
period of 1994 as a result of a 1,827,000 Bbl (131.3%) increase in production
and a $0.72 per Bbl (5.4%) increase in the overall average market price of oil
sales (adjusted for hedging). The production increase reflected increases due
to: (i) 851,000 Bbls of Ecuador production that commenced in mid-year 1994, (ii)
approximately 1.1 million Bbls from the Walter properties acquired in February
1995, and (iii) 245,000 Bbls from the Espinal Block properties in Colombia
acquired in mid-1994, partially offset by decreased production in New Zealand
due to well performance declines.
Natural Gas. Natural gas revenues increased $2.4 million (7.9%) in the
first nine months of 1995 to $32.9 million as compared with $30.5 million in the
comparable 1994 period. A 4.0 Bcf (26.5%) increase in gas production in the
first nine months of 1995 was offset by $0.23 per Mcf (10.9%) lower average gas
prices (adjusted for hedging). The volume increase included higher production in
Michigan Antrim (2.7 Bcf) and the Freshwater Bayou properties in Louisiana (2.5
Bcf) which properties commenced production in late 1994. These increases more
than offset lower production in other U.S. areas and in New Zealand. Other U.S.
gas production declined due to lower Gulf of Mexico production and the sale of
producing properties in 1994.
Other Operating. Other operating revenues for the first nine months of 1995
include a $9.9 million gain from the disposition of a gas sales contract and a
$1.5 million increase in hedging settlements while the comparable 1994 period
included a $4.8 million gain from the disposition of a gas sales contract. The
gas sales contract disposed of in 1995 had provided for sales prices of $3.25
per MMBtu in 1995, escalating 4.0% each year through December 31, 2006, and
covered 5,000 MMBtu per day or 1.8 Bcf annually of the Company's gas sales. The
gas sales contract disposed of in 1994 had provided for sales prices of $2.53
per MMBtu in 1994,
27
<PAGE> 30
escalating 4.0% each year through December 31, 2006, and covered 10,000 MMBtu
per day or 3.6 Bcf annually of the Company's gas sales. In the future, the
Company expects to sell these gas volumes on the spot market or under term
contracts providing for current market price.
COSTS AND EXPENSES
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense increased $8.7 million (34.3%) to $34.1 million in the nine
months ended September 30, 1995 over the comparable period of 1994 primarily due
to the addition of production from the Ecuador, Walter, Terra and Espinal
properties. Additionally, depletion on increased gas production more than offset
the effects of lower U.S. oil production and a lower U.S. depletion rate, $0.99
per MMBtu in the first nine months of 1995 as compared with $1.13 per MMBtu for
the comparable period in 1994. The rate decrease resulted from significant
additions of gas reserves in the last half of 1994 in Louisiana and Michigan,
coupled with the effects of the acquisition of Terra reserves in Michigan.
Cost Center Write-offs. Cost center write-offs include a $2.0 million U.S.
write-down in the third quarter of 1995 due to low oil and gas prices.
Operating and Maintenance. Operating and maintenance expenses of $23.2
million increased $9.2 million (65.7%) in the first nine months of 1995 over the
comparable period of 1994 primarily because of $10.2 million of expense due to
the addition of production from the Ecuador, Walter and Espinal properties and a
$1.4 million increase attributable to higher Antrim gas production, including
Terra properties. The increases attributable to these items were partially
offset by the elimination of 1994 expense on properties sold (producing
properties and the Kalkaska Gas Processing Plant interest) and large workover
expense early in 1994.
General and Administrative. General and administrative expenses increased
$1.3 million (30.2%) to $5.6 million in the first nine months of 1995 over the
comparable period of 1994 primarily due to higher salaries and benefits. This
increase primarily reflects costs associated with the addition of personnel in
1995 resulting from the Recent Acquisitions and development activities in the
Colon Block in Venezuela and the Espinal Block in Colombia.
Production and Other Taxes. Production and other taxes increased $0.5
million (16.7%) to $3.5 million in the first nine months of 1995 over the
comparable period of 1994 due to taxes on production from the Espinal Block in
Colombia acquired in mid-1994.
Interest Expense, Net. Interest expense, net increased $3.8 million
(140.7%) to $6.5 million in the first nine months of 1995 over the comparable
period of 1994 due to higher expense and lower capitalized interest. The
interest expense increase resulted from higher interest rates and higher debt
levels attributable to borrowings in the last half of 1994 and in 1995 primarily
associated with acquired properties (Terra, Walter and Espinal). Interest rates
averaged 7.9% per annum in the first nine months of 1995 as compared with 6.6%
per annum in the comparable period of 1994. Average outstanding debt balances
were $147.8 million in the first nine months of 1995 and $124.8 million in the
comparable period of 1994. Interest capitalized decreased $1.9 million due to
lower Ecuador development-stage assets as a result of commencement of production
in 1994.
Extraordinary Item. On August 10, 1995, the Company repaid in full senior
serial notes in the principal amount of $27.9 million and incurred a $1.5
million ($987,000 after income tax effects) prepayment penalty for the early
extinguishment of debt.
Income Tax Expense. Income tax expense of $0.4 million in the first nine
months of 1995 is $2.5 million higher than the $2.1 million tax benefit
(resulting from Section 29 Credits) in the first nine months of 1994. The
expense associated with higher income in the first nine months of 1995 was
partially offset by an increase in Section 29 Credits, which amounted to $9.0
million in the first nine months of 1995 as compared with $6.0 million in the
comparable period of 1994.
28
<PAGE> 31
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
PRETAX OPERATING INCOME AND EARNINGS
The Company's 1994 pretax operating income of $8.1 million increased $5.4
million (200.0%) from 1993. A gain of $4.8 million from the disposition of a gas
sales contract and a decrease of $4.0 million in cost center write-offs more
than offset the effects of lower average oil and gas prices. The increase in
pretax operating income also reflects lower U.S. depletion rates reduced by
higher expenses that were not directly related to increased production, and
lower plant products revenues. Net income increased $4.7 million (92.2%) from
1993 to $9.8 million in 1994. Income taxes were slightly higher by $0.4 million,
due to an increase in income, offset by an increase in Section 29 Credits. The
following table sets forth selected oil and gas operating statistics of the
Company for the years ended December 31, 1993 and 1994:
SELECTED OIL AND GAS OPERATING STATISTICS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------ INCREASE
1993 1994 (DECREASE)
<S> <C> <C> <C>
Oil volumes (MBbl):
U.S........................................................... 870 690 (20.7)%
Non-U.S....................................................... 846 1,335 57.8
Total......................................................... 1,716 2,025 18.0
Average oil price (per Bbl):
U.S........................................................... $ 16.58 $ 15.22 (8.2)
Non-U.S....................................................... 14.43 12.23 (15.2)
Overall*...................................................... 15.52 13.30 (14.3)
Gas volumes (MMcf).............................................. 18,487 20,546 11.1
Average gas price (per Mcf)*.................................... $ 2.17 $ 2.05 (5.5)
NGL volumes (MBbl).............................................. 186 193 3.8
Average NGL price (per Bbl)..................................... $ 15.24 $ 14.90 (2.2)
Operating expenses (per Boe):
Depreciation, depletion and amortization...................... $ 7.15 $ 6.19 (13.4)
Production costs.............................................. 3.01 3.42 13.6
General and administrative.................................... 1.12 1.12 --
</TABLE>
- -------------------------
* Adjusted to reflect amounts received or paid under futures contracts entered
into to hedge the price of a portion of production.
REVENUES
Oil and Condensate. Oil and condensate revenues increased $0.2 million
(0.8%) in 1994 over 1993 as a result of a 309,000 Bbl (18.0%) increase in oil
sales volumes, partially offset by a $2.22 per Bbl (14.3%) decrease in the
average sales price. The increased volumes resulted from a 489,000 Bbl increase
in non-U.S. production primarily due to a 159,000 Bbl increase in production in
Colombia in 1994 as compared with 1993 and 369,000 Bbls of Ecuador production
which commenced in mid-year 1994. U.S. oil sales decreased 180,000 Bbls (20.7%)
in 1994 due to natural declines, sales of producing properties and well
performance problems in the Gulf of Mexico.
Natural Gas. Natural gas revenues decreased $1.1 million (2.7%) in 1994 to
$39.9 million compared with $41.0 million in 1993. In 1994, an increase of 2.1
Bcf (11.1%) in gas sales volumes increased natural gas revenues by $0.9 million
but the increase was fully offset by a $0.12 per Mcf (5.5%) decrease in the
average gas price (adjusted for hedging). Contributing to the sales volume
increase in 1994 were Antrim gas sales, which reached 8.8 Bcf in 1994 compared
with 6.0 Bcf in 1993. The increase in Antrim gas sales volumes is attributable
to production from properties acquired in 1994, the completion of several
projects which were not
29
<PAGE> 32
producing in 1993 and the utilization of improved production technology. A 0.9
Bcf increase in other Michigan gas sales volumes in 1994 partially offset
decreases in other U.S. areas.
Other Operating. Revenues received by the Company from the sale of
processing plant liquids decreased $1.2 million (30.8%) in 1994 from 1993, due
to lower revenues resulting from (i) the sale of the Company's interest in the
Kalkaska Gas Processing Plant in Michigan in the fourth quarter of 1994 and (ii)
a lower Btu content of the Company's Michigan gas production. Processing plant
sales amounted to $2.7 million in 1994 and $3.9 million in 1993. A gain of $4.8
million attributable to the disposition of a gas sales contract is included in
other revenues in 1994, while 1993 included $0.6 million of prior period items.
The gas sales contract had provided for sales prices of $2.53 per MMBtu in 1994,
escalating 4.0% per year to December 31, 2006 on 10,000 MMBtu per day, or 3.7
Bcf annually, of gas sales. Other revenues also included hedging settlements
which resulted in receipt of $2.4 million in 1994 compared with a payment of
$0.9 million in 1993.
COSTS AND EXPENSES
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense decreased $0.7 million (2.0%) in 1994 compared with 1993
due to a $0.15 per MMBtu decrease in the U.S. depletion rate to $1.11 per MMBtu,
partially offset by depletion attributable to increased non-U.S. oil production.
The rate decrease resulted from significant 1994 estimated proved reserve
additions in Louisiana and Michigan. The production increase resulted from
commencement of Ecuador production in mid-year 1994 and the acquisition of
Colombian properties in June 1994.
Cost Center Write-offs. Cost center write-offs decreased $4.0 million
(41.7%) to $5.6 million in 1994 compared with $9.6 million in 1993. These
write-offs primarily included dry hole costs associated with unsuccessful
exploration in Thailand ($4.2 million in 1994 and $3.9 million in 1993) and
China ($3.3 million in 1993). Also included are ceiling test write-downs of $0.7
million in 1994 for Papua New Guinea and $1.9 million in 1993 for Colombian
assets.
Operating and Maintenance. Operating and maintenance expenses of $19.3
million increased $4.3 million (28.7%) in 1994 from 1993. This increase reflects
$3.4 million in higher operating expenses in Michigan, Colombia and Ecuador
where production increased, combined with workover and maintenance costs
offshore Equatorial Guinea and in the Gulf of Mexico.
Production and Other Taxes. Production and other taxes decreased $0.4
million (9.5%) in 1994 compared with 1993 as a result of a $3.9 million decrease
in U.S. oil revenues, partially offset by increased severance tax on Antrim gas
production and taxes on higher Colombian oil production attributable to the
Espinal properties acquired in June 1994.
Interest Expense, Net. Net interest expense for 1994 remained about the
same as for 1993, $4.0 million compared with $3.8 million. The impact of higher
debt levels and interest rates was offset by increased capitalized interest on
the Company's investment in its Ecuador project. The Company had capitalized
interest associated with Ecuador development amounting to $4.4 million in 1994
and $2.5 million in 1993. Average outstanding debt balances were $125.4 million
in 1994 and $108.7 million in 1993.
Income Taxes. Income taxes increased slightly in 1994 from 1993. Section 29
Credits amounted to $8.5 million in 1994 and $5.6 million in 1993. However, the
$2.9 million increase in Section 29 Credits was more than offset by taxes on
higher income and the tax effects of non-U.S. income and investments. Income tax
expense for 1993 included $1.9 million to increase prior years' deferred taxes
for the 1.0% federal income tax rate increase effective January 1, 1993.
YEAR ENDED DECEMBER 31, 1993 COMPARED TO YEAR ENDED DECEMBER 31, 1992
PRETAX OPERATING INCOME AND EARNINGS
The Company's 1993 pretax operating income decreased $5.0 million (64.9%)
to $2.7 million compared with $7.7 million in 1992. This decrease is
attributable to lower average oil prices, cost center write-offs, lower plant
revenues and higher depletion, partially offset by higher average gas prices and
increased oil and gas
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<PAGE> 33
production volumes. Net income increased $1.3 million (34.2%) in 1993 to $5.1
million due to the effects of lower income taxes and a 1992 accounting change.
The following table sets forth selected oil and gas operating statistics of the
Company for the years ended December 31, 1992 and 1993:
SELECTED OIL AND GAS OPERATING STATISTICS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------ INCREASE
1992 1993 (DECREASE)
<S> <C> <C> <C>
Oil volumes (MBbl):
U.S........................................................... 994 870 (12.5)%
Non-U.S....................................................... 423 846 100.0
Total......................................................... 1,417 1,716 21.1
Average oil price (per Bbl):
U.S........................................................... $ 19.25 $ 16.58 (13.9)
Non-U.S....................................................... 17.53 14.43 (17.7)
Overall....................................................... 18.85 15.52 (17.7)
Gas volumes (MMcf).............................................. 17,578 18,487 5.2
Average gas price (per Mcf)*.................................... $ 1.89 $ 2.17 14.8
NGL volumes (MBbl).............................................. 291 186 (36.1)
Average NGL price (per Bbl)..................................... $ 16.55 $ 15.24 (7.9)
Operating expenses (per Boe):
Depreciation, depletion and amortization...................... $ 7.02 $ 7.15 1.9
Production costs.............................................. 2.91 3.01 3.4
General and administrative.................................... 0.97 1.12 15.5
</TABLE>
- -------------------------
* Adjusted to reflect amounts received or paid under futures contracts entered
into to hedge the price of a portion of production.
REVENUES
Oil and Condensate. Oil and condensate revenues were flat in 1993, $26.6
million in both 1993 and 1992 as a result of a 299,000 Bbl (21.1%) increase in
oil sales volumes, offset by a $3.33 per Bbl (17.7%) decrease in the average oil
sales price and a $1.6 million (39.3%) increase in transportation costs
attributable to higher Antrim gas production in Michigan and oil production in
Colombia. The increased volumes resulted from a 423,000 Bbl (100.0%) increase in
non-U.S. production due largely to increased production of 141,000 Bbls offshore
Equatorial Guinea and 192,000 Bbls of Colombian production which commenced in
1993. U.S. oil sales decreased 124,000 Bbls (12.5%) due to natural declines
without significant additions.
Natural Gas. Natural gas revenues increased $6.6 million (19.2%) to $41.0
million in 1993 over 1992 as a result of a $0.28 per Mcf (14.8%) increase in the
average gas sales price and 0.9 Bcf (5.1%) increase in gas sales volumes. A 1.3
Bcf increase in Antrim gas sales was partially offset by declines in other
areas.
Other Operating. Other operating revenues received by the Company from the
sale of processing plant liquids decreased $1.6 million (29.1%) to $3.9 million
in 1993 from $5.5 million in 1992. A nonrecurring gain relating to a $1.2
million settlement with Amoco Production Company was included in 1992 while 1993
included $0.6 million of prior period items. Other revenues also included
hedging settlement payments of $0.9 million in 1993 and $1.0 million in 1992.
COSTS AND EXPENSES
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense increased $3.0 million (9.2%) to $35.6 million in 1993 from
$32.6 million in 1992 due to higher non-U.S. production volumes and an increase
in the U.S. depletion rate from $1.23 per MMBtu in 1992 to $1.26 per MMBtu in
1993. The rate increase is attributable to unsuccessful U.S. exploration results
in 1993 outside Michigan.
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<PAGE> 34
Cost Center Write-offs. Cost center write-offs increased $3.9 million
(68.4%) to $9.6 million in 1993 compared with $5.7 million in 1992. These
write-offs included unsuccessful exploration in Thailand ($3.9 million) and
China ($3.3 million) in 1993 and the Congo ($1.3 million) in 1992. Also included
are ceiling test write-downs of $1.9 million and $3.1 million in 1993 and 1992,
respectively, for Colombian assets.
Operating and Maintenance. Operating and maintenance expenses increased
$1.5 million (11.1%) to $15.0 million in 1993 from $13.5 million in 1992. The
increase corresponds with higher Antrim gas production in Michigan and the
start-up of production in Colombia which commenced in early 1993, partially
offset by reductions in other Michigan oil and gas production.
General and Administrative. General and administrative expenses increased
$1.1 million (24.4%) to $5.6 million in 1993 compared with $4.5 million in 1992.
The 1993 increase included $0.6 million higher salaries and benefits, primarily
due to $0.3 million of post-retirement benefits costs in 1993 general and
administrative expenses while the corresponding 1992 expense was included in the
cumulative effect of an accounting change. Also included in 1993 was $0.1
million of currency losses, while 1992 had $0.2 million of currency gains.
Production and Other Taxes. Production and other taxes increased $0.2
million (5.0%) to $4.2 million in 1993 from $4.0 million in 1992 primarily due
to Colombian taxes relating to the commencement of production in 1993.
Interest Expense, Net. In 1993, net interest expense decreased $1.1 million
(22.4%) to $3.8 million from $4.9 million in 1992, primarily due to increased
capitalized interest in connection with the Company's Ecuador project. The
Company had capitalized interest associated with Ecuador development amounting
to $2.5 million in 1993 and $1.0 million in 1992. The expense associated with
higher levels of debt was partially offset by lower interest rates. Average
outstanding debt balances were $108.7 million in 1993 and $94.5 million in 1992.
Income Taxes. Income taxes decreased $3.8 million to a $5.9 million benefit
in 1993 compared with a $2.1 million benefit in 1992 due to lower pretax income,
higher Section 29 Credits and the tax effects of non-U.S. income and
investments. These decreases more than offset the $1.9 million effect of a 1.0%
federal income tax rate increase effective January 1, 1993. Section 29 Credits
amounted to $5.6 million in 1993 and $4.4 million in 1992.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's primary needs for capital, in addition to the funding of
ongoing operations, are for the exploration, development and acquisition of oil
and natural gas properties and the repayment of principal and interest on debt.
The Company's primary sources of liquidity have been net cash provided by
operating activities, proceeds from borrowings and equity contributions from CMS
Energy (effected through CMS Enterprises). Contributions from CMS Energy may not
be available in the future, and acquisitions funded by such contributions, if
any, would likely require the issuance of additional Common Stock to CMS Energy,
which would result in a dilution of the ownership interest of the public holders
of Common Stock. In addition, the issuance by the Company of a significant
amount of its Common Stock as consideration to a seller of acquired properties
could result in certain adverse consequences, such as the Company being
deconsolidated from the CMS Energy consolidated group for federal income tax
purposes. Accordingly, it is unlikely that the Company would issue shares of its
Common Stock to the sellers in an amount sufficient to cause a deconsolidation
in order to make an acquisition. If the Company decides not to, or does not have
the ability to, issue its Common Stock or to obtain equity contributions from
CMS Energy to finance acquisitions, the Company would likely need to use cash on
hand and/or cash available under its credit facilities or other sources to
acquire shares of its Common Stock in the open market to consummate any proposed
tax-free acquisitions. See "Risk Factors -- Acquisition Risks." The Company
budgets its capital expenditures based upon projected cash flows and, subject to
contractual commitments, routinely adjusts its capital expenditures in response
to changes in oil and natural gas prices and corresponding changes in cash flow.
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<PAGE> 35
The Company believes that cash generated from operations, together with the
estimated net proceeds of the Offering and borrowing capacity under its existing
and future financing arrangements, will be sufficient to meet its liquidity and
capital requirements for 1995 and the foreseeable future.
OPERATING ACTIVITIES
Net cash provided by operating activities for the nine months ended
September 30, 1995 was $53.2 million, an increase of $19.6 million (58.3%) from
$33.6 million for the comparable 1994 period. The increase reflects income from
the Ecuador, Terra, Walter and Espinal properties as well as the income from the
disposition of two gas sales contracts in March 1995 ($9.9 million) and in July
1994 ($4.8 million), respectively. Net cash provided by operating activities
during the year ended December 31, 1994 was $46.9 million, up $0.9 million
(2.0%) from $46.0 million in the comparable 1993 period.
FINANCING ACTIVITIES
The Company received equity contributions totaling $32.7 million ($9.0
million in cash and $23.7 million in property) from CMS Energy through CMS
Enterprises in the first nine months of 1995, primarily relating to the Walter
Acquisition, which represents a decrease of $19.3 million (37.1%) from the $52.0
million received as equity contributions from CMS Energy in the first nine
months of 1994. These 1994 equity contributions included $25.0 million for the
Sun Colombia acquisition. The amount of net additional borrowings was $70.0
million in the first nine months of 1995 as compared with $11.9 million in the
comparable 1994 period. This increase in borrowings is primarily attributable to
$67.8 million of CMS Notes for the Recent Acquisitions and $15.3 million of debt
assumed with these acquisitions, offset by the $27.9 million early retirement of
the senior serial notes. Total debt outstanding at September 30, 1995 was $199.0
million, an increase of $70.0 million from $129.0 million at December 31, 1994.
Borrowings increased $10.3 million (8.7%) in the year ended December 31, 1994 to
$129.0 million at December 31, 1994. The Company also received $56.1 million in
equity contributions from CMS Energy during the year ended December 31, 1994.
Financing for 1993 capital expenditures was provided in part by $46.0 million of
net cash provided by operating activities and in part by $9.5 million of equity
contributions from CMS Energy. Long-term debt at December 31, 1993 was $118.7
million, reflecting an increase of $22.3 million (23.1%) compared with December
31, 1992.
In December 1994, CMS Energy arranged for the issuance of a standby letter
of credit, currently in the amount of $45.0 million, to secure the Company's
performance under the operating services agreement with respect to the Colon
Unit in Venezuela. The Company has agreed to reimburse CMS Energy on demand for
any draw made under the letter of credit and to pay to CMS Energy a fee of
2.125% per annum of the face amount of the letter of credit. See "Relationship
and Certain Transactions with CMS Energy."
THE CREDIT FACILITY
The Company's Credit Agreement provides a maximum lending commitment of
$130.0 million (the "Credit Facility"). The Credit Facility is subject to an
aggregate borrowing base limitation equal to the estimated loan value of the
Company's oil and gas reserves, subject to certain exclusions, based upon
forecast rates of production and current commodity pricing assessments, as
periodically redetermined by the Banks which are parties to the Credit
Agreement. The Banks have broad discretion in determining which of the Company's
reserves to include in the borrowing base. As of September 30, 1995, the
borrowing base was $135.3 million, and accordingly, the total amount available
for borrowing from the Credit Facility at September 30, 1995 was $130.0 million.
Of this availability, $113.3 million in borrowings was outstanding at September
30, 1995.
The Company is in early stages of negotiations to, among other things,
increase commitment levels and expand the borrowing base under the Credit
Facility.
Under the terms of the Credit Agreement, the Company must (i) maintain a
ratio of current assets to current liabilities at least equal to 0.75 to 1.0,
(ii) maintain a ratio of total liabilities to tangible net worth of no more than
0.75 to 1.0, (iii) maintain a minimum tangible net worth of $150.0 million, and
(iv) maintain a
33
<PAGE> 36
ratio of cash flow after dividends to fixed charges for the most recent four
quarters of 2.0 to 1.0. Restrictive covenants under the Credit Agreement include
certain limitations on indebtedness and contingent obligations, as well as
certain restrictions on liens, investments, affiliate transactions and sales of
assets. In addition, the Banks have the right to require the Company to repay
all advances under the Credit Agreement within 90 days after notification to the
banks that (i) CMS Energy no longer beneficially owns a majority of the
outstanding voting stock of the Company or (ii) all or substantially all of the
assets of the Company are sold. See "Capitalization."
As of September 30, 1995, the Company's current ratio was 1.60 to 1.0, its
total liabilities to tangible net worth ratio was 0.72 to 1.0, its tangible net
worth was $302.0 million and its ratio of cash flow after dividends to fixed
charges was 4.9 to 1.0.
CMS NOTES
In August 1995, the Company issued the Terra Note to CMS Enterprises, which
in turn assigned it to CMS Energy, in connection with the transfer by CMS Energy
of the common stock of Terra to CMS Enterprises and then by CMS Enterprises to
the Company. In May 1995, the Company issued the Walter Note to CMS Energy in
connection with the repayment of $6.5 million of indebtedness of Walter
immediately after the consummation of the Walter Acquisition. The CMS Notes are
subordinated to the Company's obligations under the Credit Agreement, bear
interest at the rate of LIBOR plus 2.0% per annum and have a maturity date of
November 1, 1999. See "Use of Proceeds" and "Relationship and Certain
Transactions with CMS Energy."
OTHER DEBT
As of September 30, 1995, $14.2 million of project financing debt is
outstanding under agreements with the Overseas Private Investment Corporation
("OPIC"). These OPIC guaranteed loans funded development drilling for the Alba
Field in Equatorial Guinea ($5.4 million) and acquisition financing for the
Yombo Field in the Congo ($8.8 million).
In connection with the Terra Acquisition, the Company assumed $3.7 million
of long-term debt comprised of $1.9 million of capitalized leases and $1.8
million outstanding under a term loan for financing of a processing plant under
construction.
INVESTING ACTIVITIES
The Company's recent capital investments have focused primarily on the
acquisition and development of properties with proved reserves. Capital
expenditures of $153.0 million ($46.1 million in cash) for the first nine months
of 1995 represented an increase of $59.1 million (62.9%) from the comparable
1994 period. Non-cash expenditures for the first nine months of 1995 include
$65.1 million for the Terra Acquisition and $41.8 million for the Walter
Acquisition. Expenditures for the first nine months of 1994 included $25.0
million for the Sun Colombia acquisition. The Company's capital expenditures of
$108.2 million for the year ended December 31, 1994 were $30.4 million (39.1%)
higher than capital expenditures of $77.8 million for the comparable 1993
period. The increase reflects a $32.6 million increase in purchases of proved
reserves ($33.5 million in 1994 compared with $0.9 million in 1993) and an
increase of $2.7 million for non-U.S. expenditures, offset by decreases in U.S.
spending. The purchases in 1994 consisted of the Sun Colombia acquisition for
$25.0 million and two acquisitions of Antrim gas properties for $8.5 million.
The Company's capital expenditures for the year ended December 31, 1993 of $77.8
million were $9.7 million (14.2%) higher than the capital expenditures for the
comparable 1992 period. The increase reflects a $30.8 million increase in
non-U.S. expenditures, including substantial expenditures for development in
Ecuador, offset by decreases of $8.1 million in U.S. spending and $13.0 million
for U.S. acquisitions.
In December 1994, a consortium in which the Company is a 29.17% participant
entered into an agreement with Maraven, S.A. ("Maraven"), a unit of the
Venezuelan state oil company, to develop the Colon Block in the Maracaibo Basin
of southwest Venezuela. The agreement commits the consortium to
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<PAGE> 37
spend at least $160 million over three years in a development program involving
reworking, re-equipping and re-entering existing wells and drilling new wells to
optimize production from existing proved reserves.
The Company estimates that its capital expenditures for 1995 will be
approximately $193.6 million, including approximately $66.7 million for the
Terra Acquisition, $41.3 million for the Walter Acquisition and additional
Ecuador, Venezuela and Colombia development expenditures of over $34.0 million.
As of September 30, 1995, $153.0 million of such capital expenditure budget had
been spent. The Company estimates that its capital expenditures for 1996 will be
approximately $120.0 million.
INFLATION AND CHANGE IN PRICES
The Company's revenues and the value of its oil and gas properties have
been and will be affected by changes in oil and natural gas prices. The
Company's ability to obtain additional capital on satisfactory terms is also
substantially dependent on oil and natural gas prices, which are subject to
seasonal and other fluctuations that are beyond the Company's ability to control
or predict. Although certain of the Company's costs and expenses are affected by
the level of inflation, inflation has not had a significant effect on the
Company's results of operations during the first nine months of 1995 or during
each of the three years in the period ended December 31, 1994.
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<PAGE> 38
BUSINESS AND PROPERTIES
OVERVIEW
The Company is an independent oil and natural gas company engaged in the
exploration, development, acquisition and production of oil and natural gas
properties in the U.S. and seven other countries (excluding two countries where
the Company has properties subject to agreements of sale). Formed in 1967 to
explore and develop leaseholdings located solely in Michigan, the Company has
greatly expanded to become an international oil and natural gas company. In
large part as a result of acquisitions and development activities, the Company
has more than doubled both its estimated proved reserves and its production of
oil and natural gas since January 1, 1992. As of June 30, 1995, the Company had
estimated proved reserves of 118.6 MMBoe, consisting of 68.9 MMBbls of oil
(97.0% of which were located outside the U.S.) and 298.1 Bcf of natural gas
(94.5% of which were located in the U.S.). Approximately 64.7% of the Company's
estimated proved reserves on such date were classified as proved developed. The
Company's oil-producing assets are concentrated in South America (Ecuador,
Venezuela and Colombia) and offshore West Africa (the Congo and Equatorial
Guinea), and the Company's gas-producing assets are concentrated in Michigan,
the Gulf Coast region and the Gulf of Mexico.
The following table sets forth by region the Company's estimated proved
reserves as of June 30, 1995, and estimated average daily production during the
month of September 1995:
<TABLE>
<CAPTION>
ESTIMATED PROVED RESERVES ESTIMATED AVERAGE DAILY PRODUCTION
AS OF JUNE, 30, 1995 DURING THE MONTH OF SEPTEMBER 1995
-------------------------------------------- ----------------------------------------------
OIL AND NATURAL % OF OIL AND NATURAL % OF
CONDENSATE(1) GAS TOTAL TOTAL CONDENSATE GAS TOTAL TOTAL
(MMBBLS) (BCF) (MMBOE) RESERVES (MBBLS) (MMCF) (MBOE) PRODUCTION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.:
Michigan Antrim....... -- 218.0 36.3 30.6% -- 42.8 7.1 28.6%
Michigan Other........ 1.2 20.5 4.6 3.9 0.9 8.8 2.4 9.7
Freshwater Bayou...... 0.2 29.4 5.1 4.3 0.1 11.0 1.9 7.7
Gulf of Mexico........ 0.2 3.8 0.8 0.7 0.3 8.7 1.8 7.3
All Other U.S. ....... 0.5 9.9 2.2 1.8 0.3 5.7 1.2 4.8
---- ----- ----- ----- ---- ---- ---- -----
Total U.S. ....... 2.1 281.6 49.0 41.3 1.6 77.0 14.4 58.1
NON-U.S.:
South America:
Ecuador............. 16.7 -- 16.7 14.1 3.2 -- 3.2 12.9
Venezuela........... 11.3 -- 11.3 9.5 0.5 -- 0.5 2.0
Colombia............ 6.7 -- 6.7 5.7 1.1 -- 1.1 4.4
Africa/Middle East:
Congo............... 15.9 -- 15.9 13.4 3.4 -- 3.4 13.7
Equatorial Guinea... 11.5 10.7 13.3 11.2 1.9 -- 1.9 7.7
Yemen............... 2.6 -- 2.6 2.2 -- -- -- --
Other(2).............. 2.1 5.8 3.1 2.6 0.2 0.3 0.3 1.2
---- ----- ----- ----- ---- ---- ---- -----
Total Non-U.S. ..... 66.8 16.5 69.6 58.7 10.3 0.3 10.4 41.9
Total Company..... 68.9 298.1 118.6 100.0% 11.9 77.3 24.8 100.0%
==== ===== ===== ===== ==== ==== ==== =====
</TABLE>
- -------------------------
(1) Oil and condensate includes 0.2 MMBbls and 3.0 MMBbls, respectively, of U.S.
and non-U.S. NGLs.
(2) Consists of New Zealand and Papua New Guinea. The Company's properties in
each of these countries are subject to agreements of sale.
For a discussion of the amounts of revenue, operating profit and
identifiable assets attributable to each region in which the Company is active,
see Note 11 to the Consolidated Financial Statements of the Company included
elsewhere in this Prospectus.
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<PAGE> 39
STRATEGY
The Company believes that its success has resulted from its ability to
capitalize on an extensive network of industry relationships, an efficient
evaluation and decision-making process and broad technical competence. The
Company believes that its future growth depends on maintaining an opportunistic
approach which builds on the Company's existing strengths. Accordingly, the
Company's business strategy is to focus on the following goals while maintaining
the flexibility to respond to new opportunities and changed circumstances.
BALANCE
The Company seeks to maintain a balance between its U.S. and non-U.S.
interests to diversify its political, geologic and economic risk. The Company
believes that projects outside the U.S. tend to have a higher potential for
significant reserve growth but often have greater risks, including political
risks and the risks associated with infrastructure development necessary to
market production. The Company further believes that projects in the U.S. do not
have certain of these risks, but also generally do not offer as large a
potential for reserve growth as non-U.S. projects. The Company has historically
concentrated on natural gas in the U.S. and to date has focused its non-U.S.
activities on oil, providing the Company an additional balance between natural
gas and oil.
EXPLORATION AND DEVELOPMENT OF EXISTING NON-U.S. PROPERTIES
In recent years, the Company has made a series of investments in properties
outside the U.S. that currently have both production from proved reserves and
significant potential for exploration and development. The Company is pursuing
exploration and development of such properties, which include Block 16 in
Ecuador, the Colon Unit in Venezuela, the Espinal Block in Colombia, the Yombo
Field offshore the Congo and the Bioko Block offshore Equatorial Guinea. Most of
the Company's exploration and development opportunities outside the U.S. are
located in areas which have significant production histories and adequate
infrastructure and, in the Company's view, have a reasonable possibility of
yielding sizeable additional reserves through the application of modern
exploration and development technologies.
SELECTIVE ACQUISITIONS
The Company intends to continue to pursue attractive opportunities to
acquire producing properties with significant exploration and development
potential. The Company's primary focus is in the geographic regions where it has
significant experience. The Company's recent acquisitions of Walter and Terra
are illustrative of the types of opportunities the Company seeks.
OPERATOR ROLE
The Company seeks to continue to expand its role as operator of both U.S.
and non-U.S. projects by pursuing acquisitions and investment opportunities that
allow it to do so. As operator, the Company believes that it can better manage
production performance and more effectively control expenses, the allocation of
capital and the timing of exploration and development of its fields. In
addition, the Company believes that its experience as operator will provide it
access to a broader range of additional investment opportunities. In early 1995,
the Company assumed the role of operator of significant offshore producing
properties in West Africa in conjunction with the Walter Acquisition, and more
recently the Company materially increased its role as operator of U.S.
properties as a result of the Terra Acquisition. After giving effect to these
Recent Acquisitions, the Company operates properties representing approximately
37.5% of its estimated proved reserves, including 43.9% of its U.S. proved
reserves and 32.5% of its non-U.S. proved reserves. With respect to projects not
operated by the Company, the Company actively monitors the performance of its
operators with the same objectives it seeks for Company-operated projects.
REGIONAL FOCUS
With respect to both its U.S. and non-U.S. activities, the Company intends
to focus on selected geographic regions, particularly those where it is
currently active. In the U.S., the Company expects to
37
<PAGE> 40
continue its emphasis on development, production and, to a lesser extent,
exploration of natural gas in its core areas of Michigan, the Gulf of Mexico and
the Gulf Coast region. Outside the U.S., the Company intends to concentrate on
exploration, development and production of oil in South America and offshore
West Africa while evaluating opportunities to acquire additional reserves in
those areas and in certain areas of Southeast Asia. By focusing activities in a
relatively limited number of U.S. and non-U.S. regions, the Company has acquired
significant experience in the operational, technical and legal aspects of
conducting business in these regions and can utilize its base of geologic,
engineering and production experience in such regions to better evaluate
drilling and acquisition prospects.
TECHNOLOGY
The Company expects to continue to utilize its growing technology base,
including increasing use of 3-D seismic surveys, horizontal drilling, new
fracturing techniques and reservoir modeling, on its existing properties as well
as newly acquired properties. The Company believes it must utilize the latest
available technology to continue to compete successfully as the industry focuses
on properties with increasing amounts of exploration, development and production
risk.
RECENT DEVELOPMENTS
TERRA ACQUISITION
In August 1995, CMS Energy acquired Terra, a significant producer of gas
within the Antrim formation underlying a large portion of the Michigan Basin in
the northern portion of Michigan's lower peninsula. The consideration relating
to such acquisition, after giving effect to certain anticipated post-closing
adjustments, is expected to aggregate approximately $63.6 million, payable in
common stock of CMS Energy. Immediately after consummation of such acquisition,
the stock of Terra was transferred by CMS Energy, through CMS Enterprises, to
the Company. In connection with the Terra Acquisition, the Company recorded a
capital contribution of $1.0 million and issued the Terra Note which, after
giving effect to post-closing adjustments, is expected to be in the principal
amount of approximately $62.6 million. The Terra Note is currently held by CMS
Energy. A portion of the net proceeds from the Offering will be used to repay
indebtedness under the Terra Note. The Terra Acquisition was accounted for as a
purchase.
As of June 30, 1995, the acquired Terra properties included 1,225 gross
(95.6 net) producing Antrim gas wells and estimated net proved reserves of 91.9
Bcf of Antrim gas. Approximately 80.8% of the reserves attributable to the
acquired Terra properties at June 30, 1995 were proved developed reserves.
During the month of September 1995, estimated average daily net production from
these properties was approximately 9.5 MMcf of gas.
The Company has been a significant producer and operator of Antrim gas
wells for a number of years. Taking into account the Terra Acquisition, the
Company operates over 1,200 Antrim gas wells, or over 25% of all gas wells
producing from the Antrim formation, making the Company the largest operator of
Antrim gas wells. Terra is currently serving as operator of several projects
involving the planned drilling of an additional 260 Antrim development wells by
December 31, 1995. Additionally, Terra has a sizeable inventory of unproved
acreage in the Antrim producing trend, and management believes that a number of
its existing wells have substantial potential for improved recovery. The Company
believes that it is particularly well suited to capitalize on the Terra
Acquisition because of its many years of experience in the natural gas industry
in Michigan and its ability as part of the CMS Energy consolidated group to
utilize, to a substantial extent, the Section 29 Credits associated with certain
Antrim gas production.
Consolidated Financial Statements for Terra, and the related Notes thereto,
are included elsewhere in this Prospectus. See also "Pro Forma Consolidated
Financial Information."
WALTER ACQUISITION
In February 1995, CMS Energy acquired Walter, an international oil and gas
company, for a purchase price of approximately $28.4 million (of which
approximately $25.0 million was payable by delivery of CMS
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<PAGE> 41
Energy common stock and $3.4 million was paid in cash) plus assumed indebtedness
of $18.3 million. Immediately after consummation of such acquisition, the stock
of Walter was contributed by CMS Energy, through CMS Enterprises, to the
Company. The Company recorded a capital contribution of $28.4 million as a
result of the Walter Acquisition. The Walter Acquisition was accounted for as a
purchase.
Of the above-referenced assumed indebtedness of Walter, $6.6 million was
immediately repaid with funds which the Company borrowed from CMS Energy
pursuant to the Walter Note. A portion of the net proceeds from the Offering
will be used to repay the indebtedness under the Walter Note.
Walter owns interests in and operates fields offshore the Congo and
offshore Equatorial Guinea in West Africa and in Tunisia in North Africa. As of
June 30, 1995, the acquired Walter properties included 22 gross (6.6 net)
producing oil and condensate wells and estimated net proved reserves of 21.0
MMBbls of oil and condensate. Approximately 73.3% of the reserves attributable
to Walter's oil and natural gas properties at June 30, 1995, on a Boe basis,
were proved developed reserves. During the month of September 1995, estimated
average daily net production from these properties was approximately 4,829 Bbls
of oil and condensate. Walter is the operator of its fields in the Congo and
Equatorial Guinea, which account for virtually all of Walter's production.
The Company became familiar with Walter in part because of the Company's
participation in the Alba Field operated by Walter offshore Equatorial Guinea.
The acquisition of Walter is consistent with the Company's strategy of acquiring
producing properties with exploration and development potential. The Walter
Acquisition also expands the Company's role as operator of offshore and non-U.S.
projects.
Shortly prior to the acquisition of Walter by CMS Energy, Walter had
acquired ACEC from APC, a subsidiary of Amoco. At the same time, an affiliate of
Nuevo acquired ACPC, another subsidiary of APC which, together with ACEC, own
significant interests in the Yombo Field offshore the Congo. As a result of
these acquisitions and a related agreement between Walter and Nuevo, each of
Walter and Nuevo owns beneficially a 21.875% working interest in the Yombo
Field.
Consolidated Financial Statements for Walter (now named CMS NOMECO
International, Inc.), together with Combined Financial Statements for ACEC and
ACPC and unaudited pro forma consolidated financial information with respect to
Walter and its effective interest in the combined assets of ACEC and ACPC, and
the related Notes thereto, are included elsewhere in this Prospectus. See also
"Pro Forma Consolidated Financial Information."
OTHER RECENT ACQUISITIONS AND DISCOVERIES
The Company experienced significant growth in reserves in 1994 primarily as
a result of certain acquisitions of producing properties and one significant
discovery.
In December 1994, a consortium in which the Company has a 29.17% working
interest agreed to assume operation of the Colon Unit in Venezuela from an
affiliate of the state-owned oil company pursuant to an operating services
agreement. As of June 30, 1995, the Company's estimated proved oil reserves
attributable to this transaction were 11.3 MMBbls, and the Company has committed
to spend approximately $47.0 million ($38.0 million for capital expenditures and
$9.0 million for operating expenditures) over the next three years on rework and
other development and, to a lesser extent, exploration activities at the Colon
Unit. In June 1994, the Company acquired Sun Colombia, whose sole asset is a
working interest in the Espinal Block in Colombia, for approximately $25.0
million. As of June 30, 1995, the Company's estimated proved oil reserves
attributable to the Sun Colombia acquisition were 5.5 MMBbls. In the third
quarter of 1994, the Company completed two Antrim gas property acquisitions for
a total of approximately $8.5 million. The Company's estimated proved natural
gas reserves attributable to these acquisitions were approximately 10.3 Bcf as
of June 30, 1995.
In early 1994, the Company participated in a significant discovery in the
Freshwater Bayou Field in southern Louisiana. Since this discovery, four
successful development wells in this field have been drilled and with their
reserve additions, the Company's estimated proved natural gas reserves in the
field as of June 30, 1995 were 29.4 Bcf.
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<PAGE> 42
DESCRIPTION OF U.S. OPERATIONS
MICHIGAN ANTRIM SHALE
The Company has become increasingly involved in the development of Antrim
natural gas projects in northern Michigan since its initial investment in such
projects in 1988. The Antrim formation is a Devonian age, brittle, carbonaceous,
shale which, when naturally or hydraulically fractured, yields natural gas at
modest flow rates.
The Antrim formation is attractive to the Company for several reasons.
Antrim gas wells are inexpensive to drill and complete, can have producing lives
of 30 years or more and show unusually high drilling success rates. The
characteristics of Antrim projects make them relatively low in drilling risk,
but economically sensitive to changes in production rates, expenses and market
prices. The Company believes that it is an industry leader among Antrim
producers in technical and operating capabilities, including the development and
utilization of production optimization technologies. For instance, the Company
has successfully employed several techniques in the Antrim formation, such as
down-hole progressive cavity pumps, plunger lift and stainless steel gas lift
technology, reduced density spacing, cased and multiple completions and new
fracturing strategies, in order to increase production of its recoverable
reserves and to minimize expenses and well workovers. Antrim shale has been
determined to be a non-conventional fuel source qualifying for the Section 29
Credit under the IRC, and the Company, as part of the CMS Energy consolidated
group, expects to be able to utilize such credits to a substantial extent. See
"-- Tax Matters -- Section 29 Credits."
Taking into account the Terra Acquisition, the Company operates over 1,200
Antrim gas wells, or over 25% of all producing gas wells in the Antrim
formation, making the Company the largest operator of gas wells in the Antrim
formation. Terra is currently serving as operator of projects involving the
planned drilling of an additional 260 Antrim development wells by December 31,
1995. As of June 30, 1995, after giving effect to the Terra Acquisition,
estimated net proved reserves in the Company's Antrim projects totaled 218.0 Bcf
of natural gas (36.3 MMBoe). Estimated gross gas production for the month of
September 1995 from over 2,500 producing Antrim gas wells in which the Company
has an interest averaged 215.0 MMcf of natural gas per day, of which the
Company's net share was 42.8 MMcf per day. The Company also has a sizeable
inventory of unproved acreage in the Antrim producing trend and management
believes that a number of its wells, including certain of those acquired in the
Terra Acquisition, have substantial potential for improved recovery. The Company
expects that capital expenditures for 1995 relating to its Antrim interests will
total $15.0 million for its share of the costs of drilling 320 development
wells, including non-operated wells, and construction of flowlines and
production facilities. The Company made capital expenditures of $3.6 million
during the first nine months of 1995. The Company expects to make capital
expenditures totaling $16.7 million in 1996 for its share of the costs of
drilling approximately 300 Antrim development wells and constructing flowlines
and facilities to serve the new wells.
OTHER MICHIGAN
The Company discovered the Kalkaska 21 Field in 1971 and commenced
production from the first of 14 wells in 1972. The Company owns a 100% working
interest in and operates this field. As of June 30, 1995, net proved reserves in
the field totaled 6.3 Bcf of natural gas (1.1 MMBoe) and 0.5 MMBbls of oil.
Estimated gross production for the month of September 1995 from nine producing
wells averaged 372 Bopd and 170.0 Mcf of natural gas per day, of which the
Company's net share was 324 Bopd and 149.0 Mcf of natural gas per day.
Horizontal wells and secondary recovery methods are being employed in the
project. The Company also operates two natural gas processing plants at the
field. No significant capital expenditures with respect to this field are
planned for 1995 or 1996. As of June 30, 1995, other Michigan properties
contained net proved reserves of 14.2 Bcf of natural gas (2.4 MMBoe) and 0.7
MMBbls of oil. Estimated net production for the month of September 1995 from
other Michigan producing wells was 8.6 MMcf of natural gas per day and 600 Bopd.
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<PAGE> 43
GULF COAST REGION
One of the Company's most significant natural gas discoveries in recent
years occurred in early 1994 with the successful drilling to a depth of 19,260
feet and completion of the UNOCAL Louisiana Furs C 16 exploratory well in the
Freshwater Bayou Field in Vermilion Parish, Louisiana. The discovery flowed
natural gas at a rate of 30.6 MMcf per day and 192 Bcpd. The Company has a 10%
working interest in the project, in which the other participants are Unocal
Corporation, as operator, The Louisiana Land and Exploration Company and the
Vincent Joseph Duncan Trust. In addition to the exploratory well, four
successful development wells have been drilled in 1994 and 1995. As of June 30,
1995, estimated gross proved natural gas reserves in the field totaled 355.2 Bcf
of natural gas, with net reserves to the Company of 29.4 Bcf of natural gas (4.9
MMBoe), and 3.0 MMBbls of condensate, with net reserves to the Company of 0.2
MMBbls of condensate. Estimated gross production for the month of September 1995
from three of the five wells averaged 133.0 MMcf per day, of which the Company's
net share was 11.0 MMcf per day. Production from the remaining two wells
commenced in October 1995. The Company expects that capital expenditures for
1995 will total $4.1 million for its share of the costs of drilling, completing
and equipping development wells and expansion of natural gas processing and
production facilities. The Company made capital expenditures of $2.8 million
during the first nine months of 1995. One exploratory well may be drilled in
1996 to complete evaluation of the acreage block. The Company expects that its
share of capital expenditures for such well, if drilled, and for other
operations in the field, will be $1.0 million in 1996.
The Company expects that capital expenditures relating to other activities
in the Gulf Coast region for 1995 will total $6.2 million. The Company made
capital expenditures of $5.7 million during the first nine months of 1995
relating to other activities in the region. The Company expects that capital
expenditures for other operations in the region will be $3.2 million in 1996.
GULF OF MEXICO
The Company has been active in the Gulf of Mexico since 1970 and currently
holds working interests varying from 10.0% to 37.5% in six producing blocks and
17 undeveloped blocks in the Gulf, including those referred to in the following
paragraph. The Company does not operate in the Gulf of Mexico. Operators of the
Company's blocks include The Louisiana Land and Exploration Company, Oryx Energy
Company, Pogo Producing Company, Vastar Resources, Inc. and Apache Corporation.
As of June 30, 1995, estimated gross proved reserves in the Company's producing
blocks totaled 18.4 Bcf of natural gas and 1.5 MMBbls of oil, with respective
net reserves to the Company of 3.8 Bcf (0.6 MMBoe) and 0.2 MMBbls. Estimated
gross production for the month of September 1995 from the six producing blocks
averaged 36.8 MMcf gas per day and 2,195 Bopd, of which the Company's net share
was 8.7 MMcf per day and 335 Bopd.
The Company's interests in the Gulf of Mexico include a recently completed
successful development well on Galveston Block 313, which as of early September
1995 was flowing 15.3 MMcf of gas per day and 313 Bcpd. The Company's working
interest in Galveston 313 is 37.5%. The Company participated in both the March
1994, the March 1995 and the September 1995 outer continental shelf federal
offshore sales covering the central Gulf of Mexico, offshore Louisiana.
Successful bids were filed on Vermilion Block 335 and Vermilion Block 346 with
Pogo Producing Company as operator (with the Company's working interest being
25% and 33.33%, respectively), Ship Shoal Block 367 with Vastar Resources, Inc.,
as operator (with the Company's working interest being 10%) and West Cameron
Block 567 and Galveston Block 331 with Apache Corporation as operator (with the
Company's working interest being 25% and 33.3%, respectively). Ship Shoal Block
367 is located southwest of the Ship Shoal Block 349 subsalt discovery recently
made by Phillips Petroleum Corporation. The Company will participate with its
partners in acquiring and interpreting 3-D seismic data in anticipation of
drilling a subsalt well on the block in 1996 or 1997. The Company has an
interest in three other blocks in the Ship Shoal area surrounding the subsalt
discovery. Plans are underway to evaluate the subsalt potential of each of these
blocks. The Company expects that capital expenditures for 1995 will total $5.3
million principally for its share of the costs of lease and seismic acquisition
programs and the drilling of three wells in the Gulf of Mexico. The Company made
capital expenditures of $2.1 million during the first nine months of 1995. The
Company expects to make capital expenditures of up to $8.4 million in 1996 for
its share of the costs of drilling at least two exploratory wells in the Gulf.
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OTHER
The Company is a member of two consortia which have acquired an aggregate
of 38,200 acres in the Lodgepole play, an oil project, in the Williston Basin in
North Dakota, of which the Company's net share is an aggregate of 7,800 acres.
One of the consortia has acquired one 3-D seismic survey of 30 square miles
relating to this acreage, and a second 3-D seismic survey is planned.
The Company also has interests in producing, undeveloped and unproved
properties in several other areas in the U.S.
DESCRIPTION OF NON-U.S. OPERATIONS
SOUTH AMERICA
Republic of Ecuador ("Ecuador"). A consortium in which the Company has a
14% working interest was awarded the Oriente Block 16 concession in 1986. The
consortium later acquired, pursuant to special service contracts, development
rights for the Tivacuno Field located north of Block 16 and for the Capiron
Field which has been unitized with the Bogi Field located in Block 16. The other
members of the consortium include Maxus Ecuador, Inc., Overseas Petroleum
Investment Corp. (the Taiwanese state oil company), Murphy Oil Company, Ltd.,
and Canam Offshore Limited. The project is operated by Maxus Energy Corporation,
a recently acquired subsidiary of YPF Sociedad Anonima.
By the end of 1989, the consortium had acquired, processed and interpreted
over 2,500 kilometers of seismic data, leading to the drilling of eight
exploratory wells. Of these eight wells, seven were commercial discoveries. The
consortium prepared a development plan, approved by the Ecuadorian Minister of
Energy and Mines in 1991, covering five fields. Implementation of the plan
commenced in 1992 and development thereunder continues to proceed. Production
commenced in the Tivacuno Field in May 1994, in the Bogi-Capiron Field in June
1994 and in the Amo Field in December 1994. Production facilities, an oil
pipeline and roads have been completed, resulting in oil being delivered through
blending facilities at Shushufindi for transport via the Trans-Andean pipeline
to the Pacific Ocean for export.
As of June 30, 1995, estimated gross proved reserves in Block 16 and the
Tivacuno and Capiron Fields totaled 152.6 MMBbls of oil, with net reserves to
the Company of 16.7 MMBbls. Estimated gross production for the month of
September 1995 from 16 producing wells averaged 31,201 Bopd, of which the
Company's net share was 3,187 Bopd. The Company expects that capital
expenditures for 1995 will total $15.6 million for its share of the costs of
drilling 12 development wells and constructing roads, flowlines and certain
production facilities. The Company made capital expenditures of $11.9 million
during the first nine months of 1995. The Company expects to make capital
expenditures totaling $15.0 million in 1996 for its share of the costs relating
to the planned drilling of 10 development wells and the construction of
additional facilities and flowlines to serve the new wells.
The Block 16 project is located in a tropical rain forest environment.
Extensive environmental impact assessments have been completed and the
development plan has been designed to minimize impacts to the forest. The plan
provides for controlled access to the development area, provides for strict
levels of compliance and is designed to produce minimal disruption within the
project area.
Production in Block 16 and related fields is currently curtailed due to a
limitation in the capacity of the Trans-Andean pipeline to 345,000 Bopd, of
which Block 16's share as of September 30, 1995 was 33,000 Bopd. The Ecuadorian
government has solicited bids for expansion of pipeline capacity to 460,000 Bopd
but has not to date awarded a contract for such expansion. Such expansion, if
undertaken, is expected to be completed no earlier than 1997. The reserves in
the fields in the southern end of the block, including the Amo, Iro, Diami and
Ginta Fields, have not yet been officially declared part of the national
petroleum reserve by the Ecuadorian Oil Ministry. Receipt of such declaration
would give the Block 16 consortium a larger pro-rated share of Trans-Andean
pipeline capacity. However, the Company can give no assurance that pipeline
curtailment will not limit production in Block 16 for the foreseeable future.
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<PAGE> 45
With lower worldwide oil prices and increases in total project costs
reducing the overall economic benefit of Block 16 and related fields to the
Ecuadorian government, the Ministry of Energy and Mines in Ecuador has notified
the members of the consortium with interests in these fields that they should
investigate alternatives for improving project economics to the Ecuadorian
government, including the renegotiation of the service contract governing the
Company's interest in these fields. The Ecuadorian government has significant
leverage to force changes due to its broad governmental and regulatory powers.
Discussions with the Ecuadorian government concerning various alternatives began
in September 1995 and will likely continue for the next several months. See
"Risk Factors -- Risk of Ecuador Contract Renegotiation."
Republic of Venezuela ("Venezuela"). A consortium in which the Company is a
member was awarded the Colon Unit in Venezuela's Marginal Fields Reactivation
Program in 1994. The Company has a 29.17% working interest in the project, in
which the other participants are Tecpetrol International, Inc., as operator,
Wascana de Venezuela C.A. and Corexland B.V. On May 1, 1995, the consortium
assumed responsibility for the unit. As of June 30, 1995, estimated gross proved
reserves in the unit totaled 86.7 MMBbls of oil, with net reserves to the
Company of 11.3 MMBbls. Estimated gross production during the month of September
1995 from 50 producing wells averaged 3,748 Bopd, of which the Company's net
share was 479 Bopd.
The operating services agreement among the consortium and Maraven commits
the consortium to make capital and operating expenditures of $160.0 million over
three years commencing in May 1995. The Company's share of costs relating to the
project over this period is estimated to be approximately $47.0 million ($38.0
million for capital expenditures and $9.0 million for operating expenditures).
The Company expects that capital expenditures for 1995 will total $12.4 million
for its share of the costs of production refitting, reworks and drilling 11
development wells. The Company made capital expenditures of $4.5 million through
September 30, 1995. The Company expects to make capital expenditures totaling
$18.7 million in 1996 for its share of the costs of drilling 12 development
wells and three exploratory wells, workovers and repair of existing wells and
facilities and both conventional and 3-D seismic surveys.
Republic of Colombia ("Colombia"). In June 1994, the Company acquired from
Sun Company, Inc. all the capital stock of Sun Colombia, whose sole asset is a
33.33% working interest in the Espinal Block located in Colombia's Upper
Magdalena Valley. LASMO Oil (Colombia) Limited ("LASMO") is the operator of and
has the remaining working interest in this project. At the time of the Company's
acquisition of Sun Colombia, production from the block was 4,000 Bopd (gross)
from two wells in the Purificacion field. Subsequently, a third Purificacion
development well was drilled and placed on line to replace one of the two
producing wells. Estimated gross production for the month of September 1995
averaged 5,815 Bopd of which the Company's share was 675 Bopd. In addition to
these two producing wells, the block contains three undeveloped discoveries.
Development plans call for bringing two of the undeveloped fields on the block,
Venganza and Revancha, into production by the second quarter of 1996. The last
undeveloped field, Chenche, is scheduled to be developed in 1997 or sometime
thereafter.
As of June 30, 1995, estimated gross proved reserves in the block totaled
44.7 MMBbls of oil, with net reserves to the Company of 5.6 MMBbls. The Company
expects that capital expenditures for 1995 will total $3.9 million for its share
of the costs of drilling one development well in the Revancha Field and
constructing a pipeline, flowlines and production facilities. The Company made
capital expenditures of $3.4 million during the first nine months of 1995. The
Company believes that the Espinal Block holds significant exploration potential.
LASMO and the Company have obtained a detailed seismic survey of the block which
the Company expects will lead to the drilling of three exploratory wells in
1996. Costs to the Company for 1996 capital expenditures relating to the block
are expected to total $9.1 million.
The association contract among LASMO, Sun Colombia and Empressa Colombiana
de Petroleos ("Ecopetrol"), the state oil company, provides for an option for
Ecopetrol to assume a 50% working interest in the development and production of
reserves on a field-by-field basis. Ecopetrol has exercised this option with
respect to the Purificacion Field, and accordingly the Company's working
interest in such field is expected to be 16.7% over the remaining life of the
contract.
The Company has been involved in Colombia since 1981 when it initiated
exploration efforts leading to discoveries in 1988 and 1989 on the Cano de la
Hermosa Block. As of June 30, 1995, estimated gross proved
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<PAGE> 46
reserves in the block totalled 1.4 MMBbls of oil, with net reserves to the
Company of 1.1 MMBbls. Estimated gross production during the month of September
1995 from two wells on the block averaged 500 Bopd, of which the Company's net
share was 378 Bopd. The Company anticipates capital expenditures of $0.3 million
in 1995 and $1.8 million in 1996 in connection with drilling one development
well.
AFRICA
Republic of the Congo (the "Congo"). As a result of the Walter Acquisition,
the Company acquired a 43.75% working interest in and became operator of the
Marine I Exploration Permit offshore the Congo in West Africa which includes the
Yombo Field. Other participants in the project are Nuevo Congo Company, Kuwait
Foreign Petroleum Exploration Co. K.S.C. and Hydro-Congo, the Congolese state
oil company, whose interest is being carried by the other participants. The
field has been producing since 1991. As of June 30, 1995, estimated gross proved
reserves totaled 50.0 MMBbls of oil, with net reserves to the Company of 15.9
MMBbls. Estimated gross production during the month of September 1995 from 20
producing wells averaged 10,860 Bopd, of which the Company's net share was 3,400
Bopd. Oil is produced into a self-contained floating production, storage and
off-loading vessel anchored on site. The vessel's storage capacity is over one
MMBbls of oil. The Company expects that capital expenditures for 1995 will total
$7.5 million for its share of the costs of drilling two development wells. The
Company made capital expenditures of $2.8 million during the first nine months
of 1995. The Company expects to make capital expenditures totaling $11.6 million
in 1996 for its share of costs relating to the planned drilling of eight
development wells. Deeper objectives within the Yombo Field and undrilled
structures on additional acreage within the Marine I Exploration Permit remain
to be explored.
Republic of Equatorial Guinea ("Equatorial Guinea"). In 1991, the Company
joined in the development of the Alba Field, located within offshore Blocks
A-12, A-13, B-12 and B-13, Equatorial Guinea. The Company's initial working
interest in these blocks of 16.67% increased to 40.125% upon consummation of the
Walter Acquisition in February 1995. By virtue of the Walter Acquisition, the
Company became the operator of the project, the other participants in which
include Samedan of North America, Globex International, Axem Resources, Inc. and
Walter Oil & Gas Corporation. Production of condensate from the field commenced
in December 1991. As of June 30, 1995, estimated gross proved reserves in the
field totaled 25.2 MMBbls of condensate, with net reserves to the Company of 8.5
MMBbls, 9.4 MMBls (gross) of plant products, 3.0 MMBls net to the Company, and
31.3 Bcf of natural gas, 10.7 Bcf net to the Company. Estimated gross production
for the month of September 1995 from two producing wells averaged 6,226 Bcpd, of
which the Company's net share was 1,844 Bcpd.
The condensate is being recovered, processed and sold for export. The
residue gas is not currently being utilized due to the lack of a proximate
market. The participants in the block recently joined with the government of
Equatorial Guinea for the development of an LPG extraction plant which is
scheduled for completion in late 1996. The cost of the plant is projected to be
approximately $20 million, of which the Company's share is $8 million.
Production is expected to be approximately 2,500 Bbls per day of LPG and an
additional 400 Bcpd.
The Company, as operator, has acquired a 3-D seismic survey of both the
Alba Field and prospective acreage on the northern portion of the blocks. The
seismic program is designed to identify a suitable location for a committed
exploratory well and to study the Alba Field to determine the location of future
development wells. Recent activity by other operators on nearby blocks has
indicated exploration potential for the area.
The Company expects that capital expenditures for 1995 will total $5.9
million for its share of the costs of conducting the 3-D seismic survey and
construction of the LPG extraction plant. The Company made capital expenditures
of $2.2 million during the first nine months of 1995. The Company expects to
make capital expenditures totaling $9.0 million in 1996 for its share of costs
relating to the planned drilling of two exploratory wells and completion of the
construction of the LPG extraction plant.
Republic of Tunisia ("Tunisia"). As a result of the Walter Acquisition, the
Company acquired a 100% working interest in and became the operator of the El
Franig concession. A shut-in gas discovery is located within the concession.
Testing of this well began in October 1995. No reserves have been attributed to
this
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<PAGE> 47
project pending the outcome of testing. If such testing proves successful, CMS
Generation Co., or another CMS Energy affiliate, may become involved in the
project by providing gas transmission and electric generation facilities. The
Company estimates that capital expenditures for 1995 will total $1.5 million.
The Company has made capital expenditures of less than $0.1 million during the
first nine months of 1995. If warranted by test results, the Company expects to
make capital expenditures totaling $3.0 million in 1996 for further development
of the discovery.
MIDDLE EAST
Republic of Yemen ("Yemen"). The Company, through its 50% ownership of
Comeco Petroleum, Inc., holds a 14.28% working interest in the East Shabwa Block
in Yemen. Complex Resources N.L. has an option exercisable by March 31, 1996 to
buy 17.5% of Comeco Petroleum, Inc.'s issued capital in the form of nonvoting
shares at a price currently estimated to be $4.5 million. Other participants in
the East Shabwa Block are Total Yemen, as operator, Unocal Yemen Limited, Kuwait
Foreign Petroleum Exploration Co. K.S.C. and Command Petroleum Holdings N.L. The
block contains three discoveries and a number of prospects and leads. A seismic
program was completed in 1994 with a view to moving forward with development. As
of June 30, 1995, estimated gross proved reserves in the block totaled 28.1
MMBbls of oil, with net reserves to the Company of 2.6 MMBbls.
The three discoveries in the East Shabwa Block are the Kharir, Atuf N.W.
and Wadi Taribah Fields. The discovery well of the Kharir Field, drilled in
1992, tested oil at a combined rate of 3,400 Bopd. Two appraisal wells have been
drilled on the Kharir structure and tested at rates up to 12,250 Bopd. The
discovery well of the Atuf N.W. #1 Field encountered high quality oil pays on a
separate structure and was cased for testing at a later date. The discovery well
of the Wadi Taribah Field, drilled in August 1995 tested oil at the rate of
1,459 Bopd. The East Shabwa Block's production is anticipated to commence in
mid-1997. Construction of production facilities, flowlines and pipelines is
scheduled to begin during the second half of 1996. The Company expects that
capital expenditures for 1995 will total $5.1 million for its share of the costs
of drilling two exploratory wells and two development wells and constructing
pipelines and production facilities. The Company made capital expenditures of
$2.3 million during the first nine months of 1995. The Company expects to make
capital expenditures totaling $5.7 million in 1996 for its share of the costs
relating to the planned drilling of two exploratory wells and one development
well and continuing with pipeline and facilities construction.
OTHER NON-U.S.
In May 1995, the Company sold its 10% working interest in the Black Stump,
Bodalla South and Kenmore producing licenses in Australia for approximately $2.2
million. Sales are pending with respect to the Company's interests in properties
in New Zealand and Papua New Guinea. The Company has working interests of less
than 10% in each of the properties.
RESERVES
The Company has interests in producing wells located in ten states and
offshore the Gulf of Mexico in the U.S. and in six foreign countries (excluding
two countries where the Company has properties whose disposition is pending)
with most of its estimated proved reserves of natural gas located in three
natural gas producing areas of the United States (northern Michigan, the Gulf
Coast region and the Gulf of Mexico) and most of its estimated proved reserves
of oil located in South America (Ecuador, Venezuela and Colombia) and West
Africa (the Congo and Equatorial Guinea). At June 30, 1995, the Company had
estimated proved reserves of 68.9 MMBbls of oil and 298.1 Bcf of natural gas, or
a total of 118.6 MMBoe.
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The following table sets forth the Company's net interest in estimated
quantities of developed and undeveloped proved oil and natural gas reserves at
June 30, 1995, after giving effect to the Terra Acquisition, as prepared by
Ryder Scott, independent petroleum reserve engineers for the Company.
<TABLE>
<CAPTION>
OIL AND CONDENSATE (MMBBLS)* NATURAL GAS (BCF) TOTAL (MMBOE)
------------------------------- ------------------------------- ------------------------------- PERCENT
DEVELOPED UNDEVELOPED TOTAL DEVELOPED UNDEVELOPED TOTAL DEVELOPED UNDEVELOPED TOTAL DEVELOPED
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.............. 2.0 0.1 2.1 248.7 32.9 281.6 43.4 5.6 49.0 88.6%
South America.... 13.9 20.8 34.7 -- -- -- 13.9 20.8 34.7 40.1
Africa/Middle
East........... 18.0 12.0 30.0 -- 10.7 10.7 18.0 13.8 31.8 56.6
Other............ 0.4 1.7 2.1 5.8 -- 5.8 1.4 1.7 3.1 45.2
---- ---- ---- ----- ---- ----- ---- ---- ----- ----
Total........ 34.3 34.6 68.9 254.5 43.6 298.1 76.7 41.9 118.6 64.7%
==== ==== ==== ===== ==== ===== ==== ==== ===== ====
</TABLE>
- -------------------------
* Oil and condensate includes 0.2 MMBbls and 3.0 MMBbls, respectively, of U.S.
and non-U.S. NGLs.
The Company retained Ryder Scott to prepare the above reserve estimates at
June 30, 1995. A letter from Ryder Scott relating to their reserve report, dated
October 2, 1995, is included as Appendix A hereto.
There are numerous uncertainties inherent in estimating quantities of
proved oil and natural gas reserves and in projecting future rates of production
and timing of development expenditures, including many factors beyond the
control of the producer. The reserve data set forth in this Prospectus represent
only estimates. Reserve engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured in an
exact manner. The accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and judgment.
As a result, estimates of different engineers, including those used by the
Company, may vary. In addition, results of drilling, testing and production
subsequent to the date of an estimate may justify revision of such estimates,
and such revisions may be material. Accordingly, reserve estimates are generally
different from the quantities of oil and natural gas that are ultimately
recovered.
As an operator of domestic oil and natural gas properties, the Company has
filed Department of Energy Form EIA-23, "Annual Survey of Oil and Gas Reserves,"
as required by Public Law 93-275. There are differences between the reserves as
reported on Form EIA-23 and as reported herein. The differences are attributable
to the fact that Form EIA-23 requires that an operator report on the total
reserves attributable to wells which are operated by it, without regard to
ownership (i.e., reserves are reported on a gross operated basis, rather than on
a net interest basis).
The following table sets forth, at September 30, 1995, the standardized
measure of discounted future net cash flows (in thousands) attributable to the
Company's estimated proved reserves at such date as prepared by the Company's
internal engineers.
<TABLE>
<CAPTION>
SOUTH AFRICA & TOTAL
U.S. AMERICA MIDDLE EAST* OTHER WORLDWIDE
<S> <C> <C> <C> <C> <C>
Future cash flows....................... $577,369 $472,746 $414,517 $39,939 $1,504,571
Future production costs................. 218,438 111,842 185,913 8,497 524,690
Future development costs................ 10,496 59,794 25,564 6,451 102,305
-------- -------- -------- ------- ----------
Total costs...................... 228,934 171,636 211,477 14,948 626,995
Future net cash flows before taxes...... 348,435 301,110 203,040 24,991 877,576
Income tax expenses (benefit)........... (15,271) 56,230 86,304 5,145 132,408
-------- -------- -------- ------- ----------
Future net cash flows................... 363,706 244,880 116,736 19,846 745,168
Discount to present value at 10% per
annum................................. 110,328 74,849 41,197 9,817 236,191
-------- -------- -------- ------- ----------
Standardized measure of discounted
future net cash flows................. $253,378 $170,031 $ 75,539 $10,029 $ 508,977
======== ======== ======== ======= ==========
</TABLE>
- -------------------------
* Includes the Company's equity interests in the East Shabwa Block in the
Republic of Yemen.
46
<PAGE> 49
The standardized measure of discounted future net cash flows from estimated
production of the Company's proved oil and gas reserves after income taxes is
presented in accordance with the provisions of Statement of Financial Accounting
Standards No. 69, "Disclosures about Oil and Gas Producing Activities" (SFAS No.
69). In computing this data, assumptions and estimates have been utilized, and
no assurance can be given that such assumptions and estimates will be indicative
of future economic conditions. The Company cautions against interpreting this
information as a forecast of future economic conditions or revenues. Future net
cash flows are determined by using estimated quantities of proved reserves and
the periods in which they are expected to be developed and produced based on
September 30, 1995 economic conditions. Estimated future production is priced at
September 30, 1995, except where fixed and determinable price escalations are
provided by contract. The resulting estimated future net cash flows are reduced
by estimated future costs to develop and produce the proved reserves based on
September 30, 1995 cost levels, but not for debt service and general and
administrative expenses.
The discounted estimated future net cash flows referred to in this
Prospectus should not be construed as the current market value of the estimated
oil and natural gas reserves attributable to the Company's properties. In
accordance with applicable requirements of the Commission, the discounted
estimated future net cash flows from proved reserves are generally based on
prices and costs as of the date of the estimate, whereas actual future prices
and costs may be materially higher or lower. Actual future net cash flows also
will be affected by factors such as the amount and timing of actual production,
supply and demand for oil and natural gas, curtailments or increases in
consumption by oil and natural gas purchasers and changes in governmental
regulations or taxation. The timing of actual future net cash flows from proved
reserves, and actual discounted cash flow, will be affected by the timing of
both the production and the incurrence of expenses in connection with
development and production of oil and natural gas properties. In addition, the
calculation of the discounted estimated future net cash flows using a 10%
discount per annum as required by the Commission is not necessarily the most
appropriate discount factor based on interest rates in effect from time to time
and risks associated with the Company's reserves or the oil and natural gas
industry in general.
For additional information concerning reserves, the future net cash flows
and the standardized measure of discounted future net cash flows to be derived
from the Company's reserves calculated in accordance with the provisions of SFAS
No. 69, see "Risk Factors -- Uncertainty of Reserve Estimates" and Supplemental
Information -- Oil and Gas Producing Activities in the Consolidated Financial
Statements included elsewhere herein.
47
<PAGE> 50
WELLHEAD VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the Company's
net wellhead production volumes of and average wellhead prices received for
sales of oil and condensate, natural gas and natural gas liquids, and average
production costs of sales volumes, during each of the three years in the period
ended December 31, 1994 and the nine-month periods ended September 30, 1994 and
1995 and pro forma for the year ended December 31, 1994 and the nine months
ended September 30, 1995, giving effect to the Recent Acquisitions as if such
acquisitions had occurred on the first day of each such period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------------- ---------------------------------------
PRO FORMA PRO FORMA
1994 1995 1995 1992 1993 1994 1994
<S> <C> <C> <C> <C> <C> <C> <C>
SALES VOLUME:
Oil and Condensate (MBbls):
U.S........................ 518 463 485 994 870 690 717
South America.............. 409 1,269 1,269 -- 192 720 720
Africa/Middle East......... 181 1,404 1,600 149 290 283 2,037
Other...................... 284 83 83 274 364 332 332
------ ------ ------- ------ ------ ------ -------
Total.................... 1,392 3,219 3,437 1,417 1,716 2,025 3,806
====== ====== ======= ====== ====== ====== =======
Natural Gas (MMcf):
U.S........................ 14,793 18,903 20,797 17,384 18,197 20,300 22,679
Other...................... 215 86 86 194 290 246 246
------ ------ ------- ------ ------ ------ -------
Total.................... 15,008 18,989 20,883 17,578 18,487 20,546 22,925
====== ====== ======= ====== ====== ====== =======
Natural Gas Liquids (MBbls):
U.S........................ 123 172 172 291 186 193 193
====== ====== ======= ====== ====== ====== =======
AVERAGE SALES PRICES:
Oil and Condensate (per Bbl):
U.S........................ $15.64 $16.63 $ 16.66 $19.25 $16.58 $15.22 $ 15.25
South America.............. 10.20 13.22 13.22 -- 9.46 10.72 10.72
Africa/Middle East......... 15.29 14.09 13.99 19.32 17.14 15.97 13.31
Other...................... 12.10 13.94 13.94 16.55 14.89 12.32 12.32
Composite*............... 13.32 14.04 14.02 18.85 15.52 13.30 13.12
Natural Gas (per Mcf):
U.S........................ $ 2.05 $ 1.73 $ 1.68 $ 1.97 $ 2.24 $ 1.95 $ 1.93
Other...................... 1.00 1.33 1.33 0.51 0.82 1.04 1.04
Composite*............... 2.11 1.88 1.82 1.89 2.17 2.05 2.02
Natural Gas Liquids (per Bbl):
U.S........................ $14.84 $14.57 $ 14.57 $16.55 $15.24 $14.90 $ 14.90
AVERAGE PRODUCTION COSTS (PER BOE):
U.S........................... $ 3.40 $ 2.58 $ 2.46 $ 2.83 $ 3.07 $ 3.29 $ 3.21
South America................. 3.85 4.97 4.97 -- 3.23 3.94 3.94
Africa/Middle East............ 7.51 4.73 4.49 6.66 4.00 6.03 4.20
Other......................... 1.70 5.03 5.03 2.00 1.64 2.02 2.02
Composite................ 3.50 3.54 3.50 2.91 3.01 3.42 3.48
</TABLE>
- -------------------------
* Adjusted to reflect amounts received or paid under futures contracts entered
into to hedge the price of production.
48
<PAGE> 51
ACREAGE
The following table sets forth the developed and undeveloped acreage in
which the Company holds a leasehold, mineral or other interest at September 30,
1995. Excluded is acreage in which the Company's interest is limited to owned
royalty, overriding royalty and other similar interests.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL
------------------ ---------------------- ----------------------
GROSS NET GROSS NET GROSS NET
<S> <C> <C> <C> <C> <C> <C>
U.S.:
Alabama....................... 320 2 1,065 133 1,385 135
Indiana....................... -- -- 38,444 3,844 38,444 3,844
Louisiana..................... 14,326 1,476 1,647 1,358 15,973 2,834
Michigan...................... 199,214 71,348 549,160 191,714 748,374 263,062
Mississippi................... 5,765 622 1,185 296 6,950 918
Montana....................... 680 138 -- -- 680 138
New Mexico.................... 597 14 280 240 877 254
North Dakota.................. 640 27 45,872 13,079 46,512 13,106
Offshore Gulf of Mexico....... 34,046 8,305 97,034 24,627 131,080 32,932
Ohio.......................... -- -- 17,864 4,685 17,864 4,685
Oklahoma...................... 22,983 4,239 1,283 1,120 24,266 5,359
Texas......................... 24,456 2,627 19,337 5,033 43,793 7,660
Wyoming....................... 1,025 11 -- -- 1,025 11
------- ------- --------- --------- --------- ---------
Total U.S................ 304,052 88,809 773,171 246,129 1,077,223 334,938
NON-U.S.:
Colombia...................... 3,396 3,396 255,908 85,217 259,304 88,613
Congo......................... 2,000 917 41,196 17,981 43,196 18,898
Ecuador....................... 19,500 2,730 474,500 66,430 494,000 69,160
Equatorial Guinea............. 26,651 10,694 283,981 113,947 310,632 124,641
New Zealand*.................. 17,139 1,390 7,413 602 24,552 1,992
Papua New Guinea*............. -- -- 903,138 63,220 903,138 63,220
Tunisia....................... -- -- 135,782 67,891 135,782 67,891
Venezuela..................... 13,120 3,827 789,171 230,175 802,291 234,002
Yemen......................... -- -- 2,813,279 401,897 2,813,279 401,897
------- ------- --------- --------- --------- ---------
Total Non-U.S.............. 81,806 22,954 5,704,368 1,047,360 5,786,172 1,070,314
Total.................... 385,858 111,763 6,477,539 1,293,489 6,863,395 1,405,252
======= ======= ========= ========= ========= =========
</TABLE>
- -------------------------
* Properties in these countries are subject to agreements of sale.
49
<PAGE> 52
PRODUCING WELL SUMMARY
The following table sets forth the number of producing oil and natural gas
wells in which the Company has ownership interests at September 30, 1995 in
gross and net producing oil and natural gas wells:
<TABLE>
<CAPTION>
OIL GAS TOTAL
------------- -------------- --------------
GROSS NET GROSS NET GROSS NET
<S> <C> <C> <C> <C> <C> <C>
U.S.:
Michigan Antrim................................... -- -- 2,092 412.8 2,092 412.8
Michigan Other.................................... 91 36.3 26 7.9 117 44.2
Freshwater Bayou.................................. -- -- 3 0.3 3 0.3
Offshore Gulf of Mexico........................... 23 2.9 38 5.3 61 8.2
All Other U.S..................................... 68 7.0 96 14.3 164 21.3
NON-U.S.:
South America
Ecuador........................................ 35 3.6 -- -- 35 3.6
Venezuela(1)................................... 73 9.7 -- -- 73 9.7
Colombia....................................... 6 2.7 -- -- 6 2.7
Africa/Middle East
Congo.......................................... 20 6.3 -- -- 20 6.3
Equatorial Guinea.............................. 2 0.6 -- -- 2 0.6
Tunisia........................................ -- -- -- -- -- --
Yemen.......................................... 5 0.4 -- -- 5 0.4
Other
New Zealand(2)................................. 9 0.7 2 0.1 11 0.8
Papua New Guinea(2)............................ 5 0.1 -- -- 5 0.1
--- ---- ----- ----- ----- -----
Total.......................................... 337 70.3 2,257 440.7 2,594 511.0
=== ==== ===== ===== ===== =====
</TABLE>
- -------------------------
(1) The group in which the Company participates assumed control of operations in
May 1995.
(2) Properties in these countries are subject to agreements of sale.
Producing wells consist of producing wells and wells capable of production,
including natural gas wells awaiting pipeline connections to commence deliveries
and oil wells awaiting connection to production facilities. Wells that are
completed in more than one producing horizon are counted as one well. Of the
gross wells reported above, two had multiple completions.
50
<PAGE> 53
DRILLING ACTIVITIES
During each of the years ended December 31, 1992, 1993 and 1994, and the
nine months ended September 30, 1995, the Company spent approximately $43.2
million, $55.5 million, $54.0 million and $39.4 million, respectively, for
exploratory and development drilling. The Company drilled or participated in the
drilling of gross and net wells as set out in the table below for the periods
indicated (with the Company's participation in Antrim gas drilling shown
separately):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
------------------------------------------------------ ENDED
SEPTEMBER 30,
1992 1993 1994 1995
--------------- --------------- -------------- --------------
GROSS NET GROSS NET GROSS NET GROSS NET
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.:
Development Wells Completed:
Gas........................ 10.0 2.12 3.0 0.67 5.0 0.84 6.0 1.21
Oil........................ 13.0 0.74 1.0 0.20 1.0 0.29 -- --
Dry........................ 4.0 0.72 1.0 0.12 -- -- 1.0 0.28
Exploratory Wells Completed:
Gas........................ 2.0 1.56 -- -- 5.0 1.86 2.0 1.17
Oil........................ 1.0 0.25 -- -- 2.0 0.56 -- --
Dry........................ 3.0 0.84 4.0 1.11 6.0 2.30 2.0 1.21
SOUTH AMERICA:
Development Wells Completed:
Oil........................ -- -- 6.0 0.84 10.0 1.42 7.0 0.98
AFRICA/MIDDLE EAST:
Development Wells Completed:
Gas........................ 1.0 0.16 -- -- -- -- -- --
Exploratory Wells Completed:
Gas........................ -- -- -- -- -- -- -- --
Oil........................ -- -- -- -- -- -- 1.0 0.14
Dry........................ 3.0 0.31 -- -- -- -- -- --
OTHER:
Development Wells Completed:
Gas........................ -- -- -- -- -- -- 1.0 0.08
Oil........................ 3.0 0.27 2.0 0.16 3.0 0.28 1.0 0.08
Dry........................ 1.0 0.10 -- -- 2.0 0.16 -- --
Exploratory Wells Completed:
Dry........................ -- -- 3.0 0.73 2.0 0.32 -- --
----- ----- ---- ----- ---- ---- ---- ----
Total................. 41.0 7.07 20.0 3.83 36.0 8.03 25.0 5.71
===== ===== ==== ===== ==== ==== ==== ====
MICHIGAN ANTRIM GAS WELLS:*..... 109.0 80.36 27.0 17.02 12.0 9.54 63.0 9.00
===== ===== ==== ===== ==== ==== ==== ====
</TABLE>
- -------------------------
* Includes drilling of 59.0 gross (6.5 net) wells by Terra from August 1 through
September 30, 1995.
Due to the success rates typically associated with drilling Antrim gas
wells, the table above sets forth separately the Company's participation in such
drilling activities. The success rate for these wells for each of the periods
represented in the table above was 100%. The Company also participated in other
wells during 1994 through farmouts, acreage contributions and other nonpaying
interests.
With the exception of Antrim gas wells, all of the Company's drilling
activities are conducted on a contract basis with independent drilling
contractors. Three drilling rigs were recently acquired by the Company in
connection with the Terra Acquisition and are used in drilling certain Antrim
gas wells. The Company owns no other material drilling equipment.
Excluding the drilling of Antrim gas wells, at September 30, 1995, the
Company was participating in the drilling or completion of one gross (0.1 net)
well in the U.S., which was subsequently determined to be dry, two gross (0.47
net) wells in South America which will become productive when completed and one
gross (0.14 net) well in Yemen which was subsequently determined to be dry.
51
<PAGE> 54
MARKETING
NATURAL GAS
Approximately 60.0% of the Company's natural gas production is sold to
various marketing companies on either the spot market or under short-term
contracts (one year or less) providing for variable or market sensitive pricing.
The balance of the Company's natural gas production is sold under long-term
contracts at fixed prices with periodic adjustments based on contract formulas,
principally to Consumers Power Company ("Consumers"), a local distribution
company which is an affiliate of the Company. During the first nine months of
1995, sales to Consumers accounted for approximately 14.7% of the Company's
consolidated revenues. See "Relationship and Certain Transactions with CMS
Energy -- Gas Sales Agreements." The Company does not believe the loss of any
purchaser would have a material adverse effect on its financial condition or
results of operations due to the likely availability of other purchasers for the
Company's production at comparable prices.
OIL
The Company markets its oil and condensate production from its Congo and
Equatorial Guinea properties under short-term contracts at market prices on a
cargo lot basis. The Company's oil production from its Ecuadorian and Colombian
properties is sold by the respective operators of such properties under
short-term contracts at market prices. The Company's oil production from its
Venezuelan project is marketed by Maraven. With the exception of pipeline
curtailment relating to Block 16 in Ecuador, see "Business and Properties --
Description of Non-U.S. Operations -- South America -- Republic of Ecuador," the
Company has not experienced any material inability to market its oil as a result
of limited access to transportation space.
HEDGING ARRANGEMENTS
The Company periodically enters into oil and natural gas price hedge
arrangements to mitigate its exposure to price fluctuations on the sale of oil
and natural gas. As of September 30, 1995, the Company had entered into gas
price collar contracts on 1.22 Bcf of gas for delivery through December 1995 at
prices ranging from $2.05 to $2.35 per MMBtu, an oil collar contract for
delivery through December 1995 of 1,000 Bopd with a floor of $18.00 per Bbl and
a ceiling of $19.95 per Bbl.
The Company has also hedged certain of its gas supply obligations to the
Midland Cogeneration Venture ("MCV") in the years 2001 through 2006 by entering
into an agreement with Louis Dreyfus Exchanges Ltd. on May 1, 1989 to purchase
the economic equivalent of 10,000 MMBtu per day at fixed, escalating prices
starting at $2.82 per MMBtu in 2001. The settlement periods are each one year
period ending December 31, 2001 through 2006 on 3.65 Bcf of natural gas. If the
"floating price," generally the then current Gulf Coast spot price, for a period
is higher than the "fixed price," the seller pays the Company the difference,
and if the fixed price for a period is higher than the floating price, the
Company pays the seller the difference. If a party's exposure at any time
exceeds $2.0 million, that party is required to obtain a letter of credit in
favor of the other party for the excess over $2.0 million, to a maximum of $10.0
million. At September 30, 1995, neither party was required to obtain a letter of
credit.
TITLE TO PROPERTIES
As is customary in the oil and natural gas industry, the Company makes only
a limited review of title to farmout acreage and to undeveloped U.S. oil and
natural gas leases upon execution of the contracts and leases. Prior to the
commencement of drilling operations, a thorough title examination is conducted
and curative work is performed with respect to significant defects. To the
extent title opinions or other investigations reflect title defects, the Company
or other operator of the project, rather than the seller of the undeveloped
property, is typically responsible to cure any such title defects at its
expense. If the Company or other operator were unable to remedy or cure any
title defect of a nature such that it would not be prudent to commence drilling
operations on the property, the Company could suffer a loss of a portion of, or
its entire investment in, the property. The Company has obtained title opinions
on substantially all of its domestic producing properties and believes that it
has satisfactory title to such properties in accordance with standards generally
accepted in
52
<PAGE> 55
the oil and natural gas industry. The Company's oil and natural gas properties
are subject to customary royalty interests, liens for current taxes and other
burdens which the Company believes do not materially interfere with the use of
or affect the value of such properties. In the case of the Company's non-U.S.
interests, the host government generally owns the minerals. The Company
contracts with the government to explore, develop and produce oil and natural
gas, and title opinions are not considered necessary.
COMPETITION
The oil and natural gas industry is highly competitive. The Company faces
competition in all aspects of its business, including acquiring reserves,
leases, licenses and concessions, obtaining the equipment and labor needed to
conduct its operations and marketing its oil and natural gas. The Company's
competitors include multinational energy companies, government-owned oil and
natural gas companies, other independent oil and natural gas concerns and
individual producers and operators. Because both oil and natural gas are
fungible commodities, the principal form of competition with respect to product
sales is price competition. The Company believes that its competitive position
is also affected by its geological and geophysical capabilities, the
qualification of certain of its U.S. natural gas interests for tax credits and
ready access to markets for production. Many competitors have financial and
other resources substantially greater than those available to the Company and,
accordingly, may be better positioned to acquire and exploit prospects, hire
personnel and market production. In addition, many of the Company's larger
competitors may be better able to respond to factors such as changes in
worldwide oil or natural gas prices or levels of production, the cost and
availability of alternative fuels or the application of government regulations,
which affect demand for the Company's oil and natural gas production and which
are beyond the control of the Company. Moreover, many competitors have
established strategic long-term positions and maintain strong governmental
relationships in countries in which the Company may seek entry. The Company
expects this high degree of competition to continue.
GOVERNMENTAL REGULATION
The Company's exploration, development, production and marketing operations
are subject to regulation at the federal, state and local levels in the U.S. and
by other countries in which the Company conducts business, including regulation
relating to such matters as the exploration for and the development, production,
marketing, pricing, transmission and storage of oil and natural gas, as well as
environmental and safety matters. Failure to comply with such regulations could
result in substantial liabilities to third parties or governmental entities, the
payment of which could have a material adverse effect on the Company's financial
condition or results of operations. The Company believes that it is in
substantial compliance with such laws and regulations. However, there is no
assurance that laws or regulations enacted in the future or the modification of
existing laws or regulations will not adversely affect the Company's exploration
for or development, production or marketing of oil or natural gas. In addition,
non-U.S. properties, operations or investments may be adversely affected by
local political and economic developments, exchange controls, currency
fluctuations, royalty and tax increases, retroactive tax claims, import and
export regulations and other foreign laws or policies as well as by laws and
policies of the U.S. affecting foreign trade, taxation and investment.
Furthermore, in the event of a dispute arising from non-U.S. operations, the
Company may be subject to the exclusive jurisdiction of courts outside the U.S.
or may not be successful in subjecting non-U.S. persons to the jurisdiction of
courts in the U.S. The Company may also be hindered or prevented from enforcing
its rights with respect to a governmental instrumentality because of the
doctrine of sovereign immunity.
U.S. REGULATION
The oil and natural gas industry is subject to various types of regulation
by federal, state and local authorities in the U.S. Legislation affecting the
oil and natural gas industry is under constant review for amendment or
expansion. Further, numerous departments and agencies, both federal and state,
have issued rules and regulations affecting the oil and natural gas industry and
its individual members, compliance with which is often difficult and costly and
some of which may carry substantial penalties for non-compliance. The regulatory
burden on the oil and natural gas industry increases its cost of doing business
and, consequently,
53
<PAGE> 56
affects its profitability. Inasmuch as such laws and regulations are frequently
expanded, amended or reinterpreted, the Company is unable to predict the future
cost or impact of complying with such regulations.
Exploration and Production. Exploration and production operations of the
Company are subject to various types of regulation at the federal, state and
local levels. Such regulation includes requiring permits for the drilling of
wells, maintaining bonding requirements in order to drill or operate wells, and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled and the
plugging and abandoning of wells. The Company's operations are also subject to
various conservation laws and regulations. These include the regulation of the
size of drilling and spacing units or proration units and the density of wells
which may be drilled and the unitization or pooling of oil and natural gas
properties. In this regard, some states allow the forced pooling or integration
of tracts to facilitate exploration while other states rely on voluntary pooling
of lands and leases. In addition, state conservation laws establish maximum
rates of production from oil and natural gas wells, generally prohibit the
venting or flaring of natural gas and impose certain requirements regarding the
ratability of production. The effect of these regulations is to limit the
amounts of oil and natural gas the Company can produce from its wells, and to
limit the number of wells or the locations at which the Company can drill.
A portion of the Company's oil and natural gas leases are granted by the
federal government and administered by the Bureau of Land Management (the "BLM")
and the Minerals Management Service (the "MMS"), both of which are federal
agencies. Such leases are issued through competitive bidding, contain relatively
standardized terms and require compliance with detailed BLM and MMS regulations
and orders which regulate, among other matters, drilling and operations on these
leases, calculation of royalty payments to the federal government and bonding
requirements (and which are subject to change by the BLM and the MMS). For
offshore operations, lessees must obtain MMS approval for exploration plans and
development and production plans prior to the commencement of such operations.
In addition to permits required from other agencies (such as the Coast Guard,
Army Corps of Engineers and Environmental Protection Agency), lessees must
obtain a permit from the BLM or the MMS prior to the commencement of drilling.
The Mineral Lands Leasing Act of 1920 (the "MLLA") places limitations on
the number of acres under federal leases that the Company may own in any one
state. While subject to this law, the Company does not have a substantial
federal lease acreage position in any state or in the aggregate.
Natural Gas Marketing and Transportation. Federal legislation and
regulatory controls in the U.S. have historically affected the price of the
natural gas produced by the Company and the manner in which such production is
marketed. The Federal Energy Regulatory Commission (the "FERC") regulates the
interstate transportation and sale for resale of natural gas by interstate and
intrastate pipelines. The FERC previously regulated the maximum selling prices
of certain categories of gas sold in "first sales" in interstate and intrastate
commerce under the Natural Gas Policy Act. Effective January 1, 1993, however,
the Natural Gas Wellhead Decontrol Act (the "Decontrol Act") deregulated natural
gas prices for all "first sales" of natural gas, which includes all sales by the
Company of its own production. As a result, all sales of the Company's
domestically produced natural gas may be sold at market prices, unless otherwise
committed by contract. The FERC's jurisdiction over natural gas transportation
and gas sales other than first sales was unaffected by the Decontrol Act.
The Company's natural gas sales are affected by the regulation of
intrastate and interstate gas transportation. In an attempt to restructure the
interstate pipeline industry with the goal of providing enhanced access to, and
competition among, alternative natural gas suppliers, the FERC, commencing in
April 1992, issued Order Nos. 636, 636-A and 636-B ("Order No. 636") which have
altered significantly the interstate transportation and sale of natural gas.
Among other things, Order No. 636 required interstate pipelines to unbundle the
various services that they had provided in the past, such as sales, transmission
and storage, and to offer these services individually to their customers. By
requiring interstate pipelines to "unbundle" their services and to provide their
customers with direct access to pipeline capacity held by them, Order No. 636
has enabled pipeline customers to choose the levels of transportation and
storage service they require, as well as to purchase natural gas directly from
third-party merchants other than the pipelines and obtain transportation of such
gas on a non-discriminatory basis. The effect of Order No. 636 has been to
enable the
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Company to market its natural gas production to a wider variety of potential
purchasers. The Company believes that these changes generally have improved the
Company's access to transportation and have enhanced the marketability of its
natural gas production. To date, Order No. 636 has not had any material adverse
effect on the Company's ability to market and transport its natural gas
production. However, the Company cannot predict what new regulations may be
adopted by the FERC and other regulatory authorities, or what effect subsequent
regulations may have on the Company's activities. Further, even though the
implementation of Order No. 636 on individual interstate pipelines is
essentially complete, many of the individual pipeline restructuring proceedings,
as well as Order No. 636 itself and the regulations promulgated thereunder, are
subject to pending appellate review and could possibly be changed as a result of
future court orders.
In recent years the FERC also has pursued a number of other important
policy initiatives which could significantly affect the marketing of natural
gas. Some of the more notable of these regulatory initiatives include (i) a
series of orders in individual pipeline proceedings articulating a policy of
generally approving the voluntary divestiture of interstate natural gas
pipeline-owned gathering facilities to pipeline affiliates, (ii) the completion
of a rulemaking involving the regulation of interstate natural gas pipelines
with marketing affiliates under Order No. 497, (iii) FERC's on-going efforts to
promulgate standards for pipeline electronic bulletin boards and electronic data
exchange, (iv) a generic inquiry into the pricing of interstate pipeline
capacity, (v) efforts to refine FERC's regulations controlling the operation of
the secondary market for released interstate natural gas pipeline capacity, and
(vi) a policy statement regarding market-based rates and other non-cost-based
rates for interstate pipeline transmission and storage capacity. Several of
these initiatives are intended to enhance competition in natural gas markets.
While any resulting FERC action would affect the Company only indirectly, the
ongoing, or, in some instances, preliminary evolving nature of these regulatory
initiatives makes it impossible at this time to predict their ultimate impact
upon the Company's activities.
In Michigan, the pricing provisions of natural gas purchase contracts with
utilities are subject to modification by regulatory authorities. A Michigan
Court of Appeals opinion recently affirmed that the Michigan Public Service
Commission ("MPSC") has the statutory authority under certain circumstances to
approve and change the pricing provisions in gas purchase contracts between
common purchasers, principally natural gas utilities such as Consumers, and
Michigan natural gas producers such as the Company upon the petition of the
common purchaser. The court found that producers in Michigan are charged with
the knowledge that the MPSC has the power to inspect and interpret the price
aspect of natural gas purchase contracts entered into by common purchasers and
to determine the reasonableness of such prices.
NON-U.S. REGULATION
The Company's non-U.S. exploration, development and production of oil and
natural gas are also subject to various types of governmental regulation. In
addition, non-U.S. projects in which the Company has an interest generally
involve complex contractual relationships with the host government which often
contain extensive provisions governing the operation of such projects. The
matters addressed by these regulations and contractual provisions include
spacing and location of wells, maximum rates of production from wells, access to
transportation facilities, permissible volumes for transport, well abandonment
procedures and environmental protection. In addition, host governments often
seek to insure that the local communities in the areas of activity are
strengthened and developed with the view to a better social environment and that
off-shore and coastal waters and on-shore areas remain suitable for other
resource development projects.
ENVIRONMENTAL MATTERS
Extensive federal, state and local laws and regulations relating to health
and environmental quality in the U.S. as well as environmental laws and
regulations of other countries in which the Company operates affect nearly all
of the operations of the Company. These laws and regulations set various
standards regulating certain aspects of health and environmental quality,
provide for penalties and other liabilities for the violation of such standards
and establish, in certain circumstances, obligations to remediate current and
former facilities and off-site locations.
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The Company believes that its policies and procedures in the area of
pollution control, product safety and occupational health are adequate to
prevent unreasonable risk of environmental and other damage, and of resulting
material financial liability, in connection with its business. However,
significant liability could be imposed on the Company for damages, clean-up
costs and/or penalties in the event of certain discharges into the environment,
environmental damage caused by previous owners of property purchased by the
Company or non-compliance with environmental laws or regulations. Such liability
could have a material adverse effect on the Company's financial condition or
results of operations. Moreover, the Company cannot predict what environmental
legislation or regulations will be enacted in the future or how existing or
future laws or regulations will be administered or enforced. Compliance with
more stringent laws or regulations, or more vigorous enforcement policies of the
regulatory agencies, could in the future require material expenditures by the
Company for the installation and operation of systems and equipment for remedial
measures, all of which could have a material adverse effect on the Company's
financial condition or results of operations.
For instance, legislation has been proposed in the U.S. Congress from time
to time that would reclassify certain oil and natural gas exploration and
production wastes as "hazardous wastes," which would make the reclassified
wastes subject to more stringent handling, disposal and clean-up requirements.
If such legislation were to be enacted, it could have a significant impact on
the operating costs of the Company, as well as the oil and natural gas industry
in general. State initiatives to further regulate the disposal of oil and
natural gas wastes are also pending in certain states, and these various
initiatives could have a similar impact on the Company. Finally, environmental
regulations are becoming increasingly stringent and more vigorously enforced in
other countries where the Company operates, raising similar concerns.
The United States Oil Pollution Act of 1990 (the "OPA") and regulations
promulgated thereunder impose a variety of requirements on persons who are or
may be responsible for oil spills in waters of the U.S. Among other things, the
OPA requires owners and operators of facilities and vessels that may be the
source of an oil spill to develop plans for responding to an oil spill and to
acquire or have available equipment necessary to respond to a reasonably
foreseeable oil spill. The OPA also requires owners and operators of "offshore
facilities" to establish $150 million in financial responsibility to cover
environmental cleanup and restoration costs likely to be incurred in connection
with an oil spill. On August 25, 1993, the MMS published an advance notice of
its intention to prepare a rule under the OPA that would define "offshore
facilities" to include all oil and natural gas facilities that have the
potential to affect "waters of the United States." The term "waters of the
United States" has been broadly defined to include inland waterbodies, including
wetlands, playa lakes and intermittent streams. Since the Company owns or
operates many oil and natural gas facilities that could affect "waters of the
United States," the Company could become subject to the financial responsibility
rule if it is proposed as described. Under the OPA, financial responsibility
could be established through insurance, guaranty, indemnity, surety bond, letter
of credit, qualification as a self-insurer or a combination thereof. It is
unclear whether insurance coverage will be available as a practical matter
because the statute provides for direct lawsuits against insurers who provide
financial responsibility coverage, and most insurers have strongly protested
this requirement. The Company cannot predict the final form of the financial
responsibility rule that may be proposed by the MMS under the OPA or whether
pending legislation may affect it, but if such a rule were adopted and were to
apply to the Company, no assurance can be given as to the Company's ability to
comply with such rule or the costs of such compliance.
In addition, the Federal Water Pollution Control Act, also known as the
Clean Water Act, and regulations promulgated thereunder, require containment of
potential discharges of oil or hazardous substances and preparation of oil spill
contingency plans. The Company believes that it has adequate procedures that
address containment of potential discharges and spill contingency planning. The
U.S. Environmental Protection Agency has recently increased its efforts to
enforce compliance with spill containment and contingency planning requirements.
The failure to comply with ongoing requirements or inadequate cooperation during
a spill event may subject a responsible party to civil or criminal enforcement
actions.
The Comprehensive Environmental Response, Compensation and Liability Act,
as amended ("CERCLA"), also known as the "Superfund" law, imposes liability,
without regard to fault or the legality of the original conduct, on certain
classes of persons who are considered to have contributed to the release of a
"hazardous substance" into the environment. These persons include the owner or
operator of the disposal site
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or sites where the release occurred and companies that disposed or arranged for
the disposal of the hazardous substances. Under CERCLA, such persons may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment and for
damages to natural resources. Furthermore, it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by the hazardous substances released into the
environment.
Most states have comparable strict liability programs to address
environmental contamination. The Company is engaged in a number of site
remediation activities in Michigan. The Company believes that neither the costs
nor any liabilities incurred in such activities would have a material adverse
effect on its financial condition or results of operations.
The Company's non-U.S. exploration, development and production activities
are also generally subject to environmental controls which, although often not
as precisely expressed by statute or regulation as those in the U.S., are viewed
by the Company as generally establishing standards comparable to those in the
U.S. In addition, in environmentally sensitive non-U.S. areas of operation, such
as the rain forest in Ecuador where the Company has substantial interests,
especially stringent measures and special provisions may be appropriate or
required. Most of the Company's non-U.S. projects involve complex contractual
relationships with the host government, and the sources of environmental
regulation applicable to the Company's non-U.S. projects are often contractual
rather than statutory or regulatory. Host governments generally require projects
within their jurisdiction to employ technologically advanced methods for
preventing, monitoring and remediating environmental disturbances and
discharges. During the preparation of plans of development, the project operator
is often required to prepare a comprehensive environmental management plan and
to submit emergency preparedness and discharge clean-up contingency procedures.
Management believes that the Company is in substantial compliance with
applicable environmental laws and regulations and that continued compliance with
existing requirements will not have a material adverse effect on the Company.
OPERATIONAL RISKS AND INSURANCE
The oil and natural gas business involves certain operating hazards such as
well blowouts, cratering, explosions, uncontrollable flows of oil, natural gas
or well fluids, fires, formations with abnormal pressures, pollution, releases
of toxic gas and other environmental hazards and risks, any of which could
result in substantial losses to the Company. The Company's offshore operations
also are subject to the additional hazards of marine operations, such as severe
weather, capsizing and collision. These hazards can cause personal injury and
loss of life, severe damage to and destruction of property and equipment,
pollution or environmental damages and suspension of operations. The
availability of a ready market for the Company's oil and natural gas production
also depends on the proximity of reserves to, and the capacity of, oil and
natural gas gathering systems, pipelines, shipping, trucking and terminal
facilities. In addition, the Company may be legally responsible for
environmental damages caused by previous owners of property purchased or leased
by the Company. As a result, the Company could incur substantial liabilities to
third parties or governmental entities, the payment of which could reduce or
eliminate the funds available for exploration, development or acquisitions or
result in the loss of the Company's properties.
In accordance with customary industry practices, the Company maintains
insurance against some, but not all, of such risks and losses. The Company
currently maintains coverage with respect to general liability, commercial
property, workers' compensation, automotive liability and electronic equipment
and, with respect to certain properties, political risk from OPIC. The Company
also maintains an umbrella liability policy and operator's extra expense
policies. All such insurance is subject to normal deductible levels.
Among other things, coverage is not obtainable for certain types of
environmental hazards. Insurance covering the risk of contamination is hard to
obtain, costly and very restrictive. It is generally limited to sudden,
accidental events that must be reported in a very limited period of time after
occurrence to the insurer.
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The occurrence of a significant adverse event, the risks of which are not
fully covered by insurance, could have a material adverse effect on the
Company's financial condition or results of operation. Moreover, there can be no
assurance that the Company's insurance will be adequate to cover any losses or
exposure to liability or that the Company will be able to maintain adequate
insurance in the future at rates it considers reasonable.
TAX MATTERS
DUAL CONSOLIDATED LOSSES
As a result of the Walter Acquisition and related transactions in February
1995, Walter became a wholly-owned subsidiary of CMS NOMECO. Among Walter's
consolidated assets at such time were certain assets located in the Congo
acquired from an affiliate of Amoco shortly prior to the Walter Acquisition. As
a result of certain agreements entered into by Walter in connection with the
acquisition of the Congolese assets, Walter agreed to become liable for tax
liabilities incurred as a result of the recapture of "dual consolidated losses"
utilized by Amoco for tax purposes in prior years, if a "triggering event" were
to occur with respect to such assets or with respect to the stock of Walter or
certain of its subsidiaries. As part of the Walter Acquisition, CMS Energy and
CMS NOMECO became jointly and severally liable for Walter's obligation to Amoco
and agreed to obtain the approval of Amoco prior to entering into transactions
which could constitute triggering events. It is currently estimated that the
additional tax liability that could be recaptured upon a triggering event would
be approximately $78.2 million, plus an interest factor thereon. CMS Energy has
subsequently agreed to indemnify CMS NOMECO (the "CMS Energy Indemnity") for any
liability relating to recapture of such dual consolidated losses if the
triggering event results from acts or omissions (i) of CMS Energy or any of its
subsidiaries (other than CMS NOMECO) which occur after the initial sale of the
Common Stock offered hereby; (ii) of CMS NOMECO if such acts or omissions are
approved by the Board of Directors of CMS NOMECO, which approval includes the
affirmative vote of a majority of the employees of CMS Energy or any of its
subsidiaries (other than CMS NOMECO) who serve on CMS NOMECO's Board of
Directors; or (iii) of any person if such acts or omissions occur prior to the
initial sale of the Common Stock offered hereby. Pursuant to the CMS Energy
Indemnity, CMS NOMECO has also agreed to indemnify CMS Energy for any such dual
consolidated loss tax liability if the triggering event results from acts or
omissions of CMS NOMECO on or after the initial sale of the Common Stock offered
hereby which have not been approved by the Board of Directors of CMS NOMECO in
the manner described in the preceding sentence.
Among the triggering events that could result in a recapture of these dual
consolidated losses would be a sale of the assets in question under certain
circumstances to an unrelated party. Another triggering event could be the
inability to continue to include Walter in the CMS Energy consolidated group for
federal income tax purposes. Such tax deconsolidation could occur if, for
instance, CMS NOMECO issued sufficient shares of its Common Stock to unrelated
parties so that CMS Energy and its affiliates no longer owned at least 80% of
CMS NOMECO's Common Stock. A tax deconsolidation could also occur if CMS Energy
reduced its holdings in CMS Enterprises, CMS Enterprises reduced its equity
interest in CMS NOMECO to an extent that CMS Enterprises no longer owned at
least 80% of the stock of CMS NOMECO, or another U.S. corporation acquired 80%
or more of CMS Energy's stock. CMS NOMECO has no plans, and has been advised
that CMS Energy has no plans, to effect any transaction in the foreseeable
future that would cause such a deconsolidation.
In addition, at the time the Walter group acquired Congolese assets
formerly owned by Amoco's affiliate, the Nuevo group acquired from an affiliate
of Amoco certain other Congolese assets. As in the case of the transaction
involving Walter described above, subsequent triggering events with respect to
the assets acquired by the Nuevo group (or transactions with respect to the
stock of Nuevo or its affiliates) could result in recapture of dual consolidated
losses with respect to such assets. Under the arrangements negotiated among
Amoco, Walter and Nuevo prior to the Walter Acquisition, Walter and Nuevo would
be jointly and severally liable for up to $59.0 million in potential recapture
tax, plus an interest factor thereon, to Amoco if Amoco were required to
recapture its dual consolidated losses as a result of triggering events
occurring after the acquisitions described above. Although Walter and Nuevo have
agreed to indemnify each other for payments that are required to be made to
Amoco as a result of the other party's acts or omissions, if a triggering event
were to occur with respect to the assets acquired by the Nuevo group, Walter
could be required to make a
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payment to Amoco to indemnify Amoco for the resulting tax recapture and would
then have to recover such payment from Nuevo. Because the net assets of Nuevo
currently appear to be adequate to satisfy any obligation which Nuevo may have
with respect to a triggering event related to assets acquired from Amoco's
affiliate, CMS NOMECO believes that it is unlikely that Walter would have to
make a payment to satisfy its secondary liability, although there can be no
assurance that this will be the case. However, if Walter were required to make
such a payment, it would have a claim against Nuevo, but would not be able to
recover such payment from CMS Energy under the CMS Energy Indemnity.
As a result of CMS NOMECO's November 1993 acquisition (the "Yemen
Acquisition") of its ownership interest in Pecten Yemen Company ("PYC"), a
predecessor of Comeco Petroleum, Inc., from a member of the Shell Petroleum Inc.
consolidated group (the "SPI Group"), CMS NOMECO agreed to become jointly and
severally liable for tax liabilities incurred by the SPI Group as a result of
the recapture of dual consolidated losses generated by PYC and utilized by the
SPI Group for tax purposes in prior years, if a "triggering event" were to occur
with respect to the stock or assets of PYC after such acquisition. It is
estimated that CMS NOMECO's potential joint and several liability for dual
consolidated loss recapture tax liability incurred by the SPI Group would be
approximately $15.8 million plus an interest factor thereon. CMS Energy has not
agreed to indemnify CMS NOMECO for this potential tax claim. However, if CMS
NOMECO were required to make a payment in satisfaction of such liability due to
a triggering event that it did not solely cause, it would have a claim against
the other stockholder of Comeco for at least the amount by which such payment
exceeded $7.9 million (plus an interest factor thereon).
SECTION 29 CREDITS
IRC Section 29 provides a "nonconventional fuels" tax credit for the
domestic production of oil, natural gas and synthetic fuels derived from
specified nonconventional sources and sold to unrelated persons from wells
drilled after December 31, 1979 and before January 1, 1993. In general, Section
29 Credits are not allowed for fuels sold after December 31, 2002. The amount of
Section 29 Credits is phased out as the average wellhead price of uncontrolled
domestic oil increases. The phaseout begins when this price, known as the
reference price, reaches $23.50 per Bbl (adjusted for inflation). Due to this
inflation adjustment, the phaseout for 1992, 1993 and 1994 began at $43.31,
$44.46 and $45.14, respectively. Since the reference price for those years was
$15.98, $14.24 and $13.10, respectively, no phaseout of the Credit occurred in
those years. The estimates of the Company's Section 29 Credits for the years
1995 through 2002 assume that the reference price will not exceed the point at
which the phaseout of such Credits begins.
The Section 29 Credits allowed for any taxable year may not exceed the
excess of the regular tax (reduced by certain credits, primarily the foreign tax
credit) over the tentative alternative minimum tax. To the extent that the
Section 29 Credits are limited by the tentative alternative minimum tax
limitation, they can be carried forward as a "minimum tax credit," which can be
used to reduce regular tax in subsequent years (but not below the tentative
alternative minimum tax for such subsequent year). Any Credits not used in the
taxable year (or allowed as a minimum tax credit in a future year) are
permanently lost.
In the years 1992, 1993 and 1994, the Company generated $4.4 million, $5.6
million and $8.5 million, respectively, in Section 29 Credits as a result of the
sale of natural gas produced from Antrim and, to a lesser extent, tight sands
wells. Because of the limitations described in the preceding paragraph,
approximately $27.2 million of Section 29 Credits have been carried forward as a
minimum tax credit carryover. For the year 1995, it is estimated that the
Company and its subsidiaries will generate approximately $12.0 million of
Section 29 Credits; for the years 1996 through 2002, it is estimated that the
Company and its subsidiaries will generate Section 29 Credits averaging $14
million annually.
During the period of time it has produced natural gas qualifying for the
Section 29 Credit, the Company's income has been insufficient to use those
credits on a separate return basis. However, the limitations on Section 29
Credits are determined on the basis of a consolidated group's consolidated
regular tax and alternative minimum tax. Because the Company has been included
in the consolidated federal income tax return filed by CMS Energy, these credits
have either been used currently to reduce the tax liability of the CMS Energy
consolidated group or, as described above, have created a minimum tax credit
carryforward for
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use in future years. Under the Tax Sharing Agreement among CMS Energy and its
subsidiaries, the Company will be paid for those Section 29 Credits generated by
the Company which are ultimately utilized (either as current year Section 29
Credits or as alternative minimum tax credits) by the CMS Energy consolidated
group to reduce its consolidated regular tax liability. These payments are made
after the filing of the CMS Energy consolidated group tax return in which such
Section 29 Credit (or minimum tax credit carryforward) is utilized.
Because the Company is expected for the foreseeable future to continue to
be included in the CMS Energy consolidated group, and because forecasts of the
CMS Energy consolidated group's tax position indicate that it is expected to
generate significant regular tax liabilities, it is expected that the Company
will be paid for its current year Section 29 Credits for the 1995 taxable year
and that the accumulated minimum tax credit carryforward allocated to the
Company (approximately $27.2 million at December 31, 1994) will be paid to the
Company over the next five years. The issuance of additional Common Stock of the
Company, the sale of shares of the Company's Common Stock by CMS Enterprises or
the sale or distribution of the shares of CMS Enterprises by CMS Energy in the
future could result in the Company being deconsolidated from CMS Energy for tax
purposes, which would eliminate the payments from the CMS consolidated group and
restrict the ability of the Company to realize the benefit of past Section 29
Credits and those Section 29 Credits expected to be generated in the future. The
Company has no plans, and has been advised by CMS Energy that CMS Energy has no
plans, to effect any transaction in the foreseeable future that would cause such
a deconsolidation. If the taxable income for the CMS Energy consolidated group
were to be less than projected, the payments for the Section 29 Credits would be
deferred or eliminated. See "Risk Factors -- Limitations on Availability of
Nonconventional Fuels Tax Credits."
NON-U.S. OPERATIONS
The Company operates its non-U.S. oil and natural gas business primarily
through direct and indirect wholly-owned U.S. subsidiaries which operate outside
the U.S. The income or loss from these subsidiaries is taxable or deductible, as
the case may be, for U.S. federal income tax purposes on a current basis.
Through December 31, 1994, the operations of these subsidiaries have resulted in
foreign source losses for U.S. income tax purposes of approximately $90.0
million. Through the date hereof, these losses have reduced the tax liability of
the CMS Energy consolidated group, without causing any related decrease in the
tax benefits to the other members of the consolidated group which would require
an adjustment of the amount otherwise payable to the Company under the Tax
Sharing Agreement. However, if previously generated or future foreign source
losses of the Company or its subsidiaries result in the loss of tax benefits to
which another member of the CMS Energy consolidated group would otherwise be
entitled, such as foreign tax credits, the amount of such lost tax benefits
would reduce the payments to the Company under the Tax Sharing Agreement or
require a payment by the Company for the benefit of such other member.
The Company's operations that operate outside the U.S. may be subject to
foreign income taxes as well. Although the U.S. federal income tax law allows a
credit for foreign income taxes on income that is subject to both foreign and
U.S. income taxes, thereby avoiding a double tax on foreign source income, the
provisions of that credit as they apply to the Company's income operate in a
manner which may subject the Company's foreign income to tax at a combined
foreign and U.S. income tax rate significantly higher than the rate applicable
to corporations which conduct only U.S. operations.
In addition, the Company conducts certain of its operations outside the
U.S. through non-U.S. entities. The Company believes that the income from these
entities will not be subject to U.S. income taxes until repatriated to the U.S.
through dividends. Because the Company intends to cause its non-U.S. entities to
reinvest their profits in oil and natural gas operations outside the U.S., it
believes that the existing structure will postpone the payment of U.S. tax on
the income from these non-U.S. affiliates. However, because of the operation of
the foreign tax credit referred to above, the combined foreign and U.S. income
tax rate on the income generated by the foreign affiliates may exceed the
generally applicable tax rate on corporations which conduct only U.S.
operations. In addition, any losses that these entities (or the other foreign
entities owned by the Company) realize will not be currently deductible for U.S.
income tax purposes.
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LEGAL PROCEEDINGS
On December 18, 1987, Tribal Drilling Company and certain other plaintiffs,
including J. Stuart Hunt, an affiliate of Tribal and a director of the Company,
filed a lawsuit in the 162nd Judicial District Court of Dallas County, Texas
(Tribal Drilling Company, et al. v. Heritage Resources, Inc., et al.) (the
"Dallas County Lawsuit"), seeking (i) a declaratory judgment against Heritage
Resources, Inc. ("Heritage") to the effect that Heritage was not qualified to
serve as the operator of Sections 21, 22 and 23 of the Crittendon Field in
Winkler County, Texas under the applicable Joint Operating Agreements, that
Heritage was removed as operator of such sections pursuant to a vote of
non-operator working interest owners and that Tribal was the duly elected
replacement operator and (ii) seeking damages against Heritage and certain
related parties in connection with Heritage's alleged failure to carry out its
obligations as operator of Sections 21, 22 and 23. The Company owns
non-operating working interests in Sections 21 and 23 of the Crittendon Field,
but has no interest in Section 22 of such field. The Company was not originally
a plaintiff in the Dallas County Lawsuit, but pursuant to a court order to join
all indispensable parties, on April 20, 1988, plaintiffs filed a Second Amended
Original Petition for Declaratory Relief which included the Company as one of
the plaintiffs.
On June 28, 1988, Heritage filed counterclaims against all of the
approximately 20 plaintiffs in the Dallas County Lawsuit, including the Company,
alleging intentional interference with business relations and deliberate and
malicious acts of interference with Heritage's actual and prospective business
relationships. Following several amendments to the counterclaims, on or about
August 25, 1995, Heritage, together with Wise Oil Ventures, Crittendon
Acquisition Company, Chase Avenue Corporation and Michael B. Wisenbaker,
individually, filed a Fifth Amended Counterclaim and Third Party Claim against
all plaintiffs, including the Company, which alleges various causes of action,
including without limitation claims for breach of contract, slander of title,
tortious interference with contract, tortious interference with business
relations, fraud, conspiracy and intentional infliction of emotional distress.
The Fifth Amended Counterclaim seeks relief of approximately $100 million in
actual damages, exemplary damages not to exceed $1 billion, attorneys' fees and
declaratory relief. Discovery in the Dallas County Lawsuit has been stayed until
November 17, 1995, and all pleadings must be filed by March 29, 1996. Trial of
the Dallas County Lawsuit, including counterclaims, is currently scheduled for
May 1996.
On December 18, 1987, Heritage and certain related parties filed two
separate lawsuits, since consolidated, styled Heritage Resources, Inc., et al.
v. Margaret Hunt Hill, et al., in the 109th Judicial District Court of Winkler
County, Texas (the "Winkler County Lawsuit"), against certain but not all
non-operator working interest owners of Sections 21 and 22 of the Crittendon
Field. In the Winkler County Lawsuit, the plaintiffs alleged in many respects
the same course of conduct that is the subject of the Dallas County Lawsuit,
including Heritage's counterclaims. The Company was not a party to the Winkler
County Lawsuit. On October 23, 1992, a jury in the Winkler County Lawsuit
returned a special verdict in favor of plaintiffs which found, among other
things, that the defendants (i) defrauded Heritage with respect to the
non-payment of costs of drilling the No. 3 well located in Section 22 (in which
the Company has no interest), (ii) tortiously interfered with Heritage's alleged
agreements to sell non-consent interests in such No. 3 well, (iii) tortiously
interfered with Heritage's alleged agreements to sell its interest in the
Crittendon Field and in the gas therefrom, and (iv) slandered Heritage's title
to Sections 21 and 22. The jury's verdict in the Winkler County Lawsuit was in
an aggregate amount in excess of $80 million plus attorneys' fees in excess of
$20 million. The jury also found that Heritage owned an interest in Sections 21
and 22 that was sufficient for Heritage to serve as operator of those sections
under the Joint Operating Agreements attendant to those sections, and that
Heritage had not breached its duties under those Joint Operating Agreements. The
jury found against the defendants on their counterclaims. The defendants have
appealed the judgment in the Winkler County Lawsuit to the Texas Court of
Appeals in El Paso, Texas. However, certain defendants have dismissed their
appeal pursuant to a settlement with the plaintiffs that was arrived at pending
the appeal. The non-settling defendants continue to prosecute their appeal of
the judgment in the Winkler County Lawsuit. The Court of Appeals has indicated
that it may rule on the appeal by late 1995 or early 1996.
Although the Company was not a party to the Winkler County Lawsuit and did
not participate in that litigation, Heritage moved in the Dallas County Lawsuit
for judgment in its favor on all of the claims asserted against Heritage by
Tribal and other plaintiffs on grounds of res judicata and collateral estoppel,
i.e., that the
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judgment in the Winkler County Lawsuit bars the litigation of plaintiffs' claims
in the Dallas County Lawsuit. The Company opposed the Heritage motion on the
ground that the Company was not a party to the Winkler County Lawsuit and should
not be subject to any res judicata or collateral estoppel effect from that
lawsuit. Heritage's motion was denied in September 1995. The Company believes
that the verdict rendered in the Winkler County Lawsuit was based at least in
part on several acts allegedly constituting misconduct by the non-operator
working interest owner defendants named therein in asserting their alleged
contractual rights relating to Section 22 (in which the Company has no interest)
and only to a lesser extent Section 21, in which acts the Company did not
actively participate (other than to vote for Heritage's removal as operator of
Section 21). Although Heritage alleges in the Dallas County Lawsuit that the
Company conspired with such non-operator working interest owners and that such
interest owners were acting as the Company's agent with respect to all allegedly
actionable conduct of all defendants, the Company contests these allegations.
The Company also believes that under the applicable contracts it had the right
to vote for the removal of Heritage as operator.
The Company believes that it has meritorious defenses to the counterclaims
in the Dallas County Lawsuit and intends to defend itself vigorously in such
lawsuit. Management believes it is unlikely that the ultimate outcome of this
matter will have a material adverse effect on the Company's financial condition
or results of operations. However, the outcome of a jury trial is difficult to
predict, and there can be no assurance that the resolution of Heritage's
counterclaims against the Company will not have such material adverse effect.
The Company is a named defendant in various other unrelated lawsuits and is
a party in governmental proceedings from time to time arising in the ordinary
course of business. While the outcome of such lawsuits and other proceedings
against the Company cannot be predicted with certainty, management does not
believe that these matters will have a material adverse effect on the financial
condition or results of operations of the Company.
OFFICES
The Company's principal executive offices are located at One Jackson
Square, Jackson, Michigan 49201 in approximately 29,000 square feet of leased
space. The Company also maintains owned or leased district offices in Traverse
City, Michigan; Houston, Texas; and Tulsa, Oklahoma; and non-U.S. offices in
Sydney, Australia; Bogota, Colombia; Malabo, Equatorial Guinea; and Pointe
Noire, the Congo. All offices are managed by professional geologists or
petroleum engineers. Replacement of any of the Company's offices would not
result in material expenditures by the Company and alternative locations to its
leased space are anticipated to be readily available.
EMPLOYEES
As of September 30, 1995, the Company employed approximately 180 full-time
employees (including approximately 50 foreign nationals) and two part-time
employees.
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<PAGE> 65
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth the names, ages (as of October 1, 1995) and
positions of the executive officers and directors of the Company. The Company's
directors are elected annually at the annual meeting of the stockholders and
hold office from the date of their election until the next succeeding annual
meeting or until their successors are elected and qualified, and until their
resignation or removal.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
<S> <C> <C>
Gordon L. Wright................... 53 President, Chief Executive Officer
and Director
William H. Stephens, III........... 46 Executive Vice President and
General Counsel
Robert A. Dunn..................... 48 Vice President Exploration
T. Rodney Dykes.................... 39 Vice President Operations -- Africa
and the Middle East
Paul E. Geiger..................... 53 Vice President, Secretary and
Treasurer
Richard L. Redmond, Jr. ........... 39 Vice President Operations --
Western Hemisphere/Southeast Asia
Victor J. Fryling.................. 47 Chairman of the Board
Richard J. Burgess................. 64 Vice Chairman of the Board
Frank M. Burke, Jr. ............... 55 Director
J. Stuart Hunt..................... 74 Director
Thomas K. Matthews, II............. 69 Director
William T. McCormick, Jr. ......... 51 Director
Charles R. Owens................... 50 Director
S. Kinnie Smith, Jr. .............. 64 Director
P. W. J. Wood...................... 70 Director
Alan M. Wright..................... 50 Director
</TABLE>
Set forth below is a brief description of the business experience of the
executive officers and directors of the Company.
Gordon L. Wright is President and Chief Executive Officer of the Company
and has been a director of the Company since December 1994. He received a B.S.
degree in Petroleum Engineering from West Virginia University in 1965. He is a
member of the Society of Petroleum Engineers and serves on the Board of
Directors and as Chairman of the Michigan Oil and Gas Association. Mr. Wright
has over 25 years of industry experience. From 1968 to 1970, he was employed as
a petroleum engineer by Gulf Oil Corporation. From 1970 to 1976, he held various
engineering positions with Consumers. From 1976 to 1978, he was employed as
Division Manager of Reef Petroleum Corporation. He became Manager of Operations
for the Company in March 1978 and became Vice President of Operations in July
1981. In October 1993, Mr. Wright was named Executive Vice President and Chief
Operating Officer and assumed his current position February 1, 1995.
William H. Stephens, III, is Executive Vice President and General Counsel
of the Company. He received an A.B. degree with Distinction in All Subjects from
Cornell University in 1971. In 1974 he received his J.D. from Cornell Law
School. From 1974 through mid-1980, he was engaged in the private practice of
law concentrating in the oil and gas area. From June 1980 through July 1981, he
was General Attorney for the Company, in August 1981 he was promoted to the
position of General Counsel and in October 1983 he assumed the position of Vice
President Land and Legal. In October 1993, Mr. Stephens was promoted to the
position of Senior Vice President and General Counsel and assumed his current
position March 1, 1995. He is Chairman of the Industry Economics and Taxation
Committee and a member of the Legal and Legislative Committee of the Michigan
Oil and Gas Association. He is former Chairman of the Oil and Gas Committee of
the Michigan Bar Association and a member of the Section of Natural Resources
Law of the American Bar Association.
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<PAGE> 66
Robert A. Dunn is Vice President Exploration of the Company. He received
his B.A. degree in Geology from Western Michigan University in 1968 and his MBA
in Finance in 1995. In 1968 he joined the Geological Survey Division, Michigan
Department of Natural Resources, holding the position of Petroleum Geologist and
subsequently District Geologist. He joined Consumers in 1974 as an exploration
geologist, and in 1981 he was promoted by the Company to District Geologist for
Michigan. He became District Exploration Manager for the Company in 1982 and
assumed his current position effective October 1, 1984. He is a member of the
Michigan Oil and Gas Association, the Michigan Basin Geological Society and The
Geological Society of London, and is a Certified Petroleum Geologist with the
American Association of Petroleum Geologists.
T. Rodney Dykes is Vice President Operations -- Africa and Middle East of
the Company. He received a B.S. in Petroleum Engineering from Louisiana State
University in 1978. He was employed as a Petroleum Engineer with Kerr-McGee
Corporation from 1978 to 1980. From 1980 until 1994, when he joined the Company,
Mr. Dykes held a variety of positions with Maxus Energy Corporation (formerly
Diamond Shamrock Corporation), including resident Project Manager for Block 16
in Ecuador and Manager of Engineering and Development and International Drilling
Manager for a number of projects operated by Maxus in South America. He became
Manager of Operations -- Africa and Middle East when he joined the Company in
1994 and assumed his current position in October 1995. Mr. Dykes is a member of
the Society of Petroleum Engineers.
Paul E. Geiger is Vice President, Secretary and Treasurer of the Company.
He received a Bachelor of Science Degree with an Accounting major from Michigan
State University in 1964. His first 13 years of employment were with Consumers
where he worked in the Accounting, Internal Audit and Utility Rates Departments.
His last position with Consumers was Director of Corporate Accounting. Mr.
Geiger assumed his current position in March 1978. From 1971 to 1978, he served
on the Budget Committee of the American Gas Association and during the operating
year 1976 to 1977 served as Chairman of the Committee.
Richard L. Redmond, Jr., is Vice President Operations-Western Hemisphere
and Southeast Asia of the Company. He received a B.S. in Petroleum Engineering
from Marietta College in 1979. Prior to joining the Company he was employed by
Amoco Production Company from 1979 to 1989 where he held a variety of positions
including New Ventures Engineer for the Central South America-Far East Region,
Production Engineer for Galeota Point, Trinidad and Operations/Reservoir
Engineer for Europe/Latin America-Far East Region. From June 1989 through July
1991, he held various engineering positions with the Company. In January 1993,
he assumed the position of Manager of International Engineering & Production. He
became Manager of Operations-South America and Southeast Asia in August 1994 and
assumed his current position December 1, 1994. Mr. Redmond is a member of the
Society of Petroleum Engineers.
Victor J. Fryling is the Chairman of the Board of Directors of the Company
and has been a Director of the Company since 1987. Mr. Fryling has been
President of CMS Energy and Vice Chairman of Consumers since January 1992. He
has been a director of CMS Energy and Consumers since 1990. Mr. Fryling is
currently a director and has been President and Chief Executive Officer of CMS
Enterprises since May 1995.
Richard J. Burgess is Vice Chairman of the Board of Directors and has been
a director of the Company since 1968. From July 1981 to January 1995, he was
President and Chief Executive Officer of the Company.
Frank M. Burke, Jr., has been a director of the Company since 1992. Mr.
Burke has been Chief Executive Officer and Managing General Partner of Burke,
Mayborn Company, Ltd. since May 1984. He has served on the boards of directors
of several private and public companies.
J. Stuart Hunt has been a director of the Company since 1985. Mr. Hunt is
currently an investor, an oil and gas producer, a real estate owner, and a
director of Pogo Producing Company, an oil and gas exploration, development and
production company.
Thomas K. Matthews, II, has been a director of the Company since 1988. Mr.
Matthews is the retired Vice Chairman of the Board of First City National Bank
of Houston. He is a director of Holly Corporation, an oil refining company.
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<PAGE> 67
William T. McCormick, Jr., has been a director of the Company since 1985.
From December 1985 to February 1992 he served as Chairman of the Board of
Directors of the Company. Mr. McCormick has been the Chairman of the Board of
Directors and Chief Executive Officer of CMS Energy since December 1987, and the
Chairman of the Board of Directors of Consumers since November 1985. He has been
Chairman of the Board of Directors of CMS Enterprises since May 1995. In
addition, Mr. McCormick serves on the boards of directors of NBD Bancorp Inc.,
Rockwell International Corporation and Schlumberger Ltd. He is also a director
of the American Gas Association, the Edison Electric Institute and the National
Petroleum Council.
Charles R. Owens has been a director of the Company since 1984. Mr. Owens
is President of The Owens Companies, Inc., a consulting firm.
S. Kinnie Smith, Jr., has been a director of the Company since 1987. Mr.
Smith has been the Vice Chairman of the Board of Directors and General Counsel
of CMS Energy since November 1992 and Vice Chairman of the Board of Directors of
Consumers since March 1987. He has been Vice Chairman of the Board of Directors
of CMS Enterprises since January 1989. In addition, Mr. Smith serves on the
boards of directors of Clarcor Corporation, a filtration and consumer packaging
products company, and Michigan National Corporation.
P. W. J. Wood has been a director of the Company since 1987. Mr. Wood is
the President of Energy Exploration Management Company. He retired from Exxon
Co. U.S.A. on August 1, 1987, as Vice President of Exploration.
Alan M. Wright has been a director of the Company since 1993. Mr. Wright
has been Senior Vice President and Chief Financial Officer of CMS Energy since
January 1992, and in July 1994 was also elected Treasurer. He has been Senior
Vice President and Chief Financial Officer of Consumers since January 1992. In
addition, Mr. Wright has been Senior Vice President, Chief Financial Officer and
Treasurer of CMS Enterprises since October 1994.
COMMITTEES
The Board of Directors of the Company has an Audit Committee, an Executive
and Remuneration Committee and a Nominating Committee. The Audit Committee, of
which Messrs. Burke, Matthews and Owens constitute the present members,
recommends the employment of the Company's independent auditors and reviews with
management and the independent auditors the Company's financial statements,
basic accounting and financial policies and practices, audit scope and
competency of control personnel. The Executive and Remuneration Committee, which
consists of Messrs. Burgess, Fryling, McCormick and Wood, reviews and recommends
to the Board of Directors the executive organization of the Company, the
compensation and promotion of officers of the Company, the terms of any proposed
employee benefit arrangements and the making of awards under such arrangements.
The Nominating Committee, which consists of Messrs. McCormick, Fryling, Smith
and Hunt, reviews and recommends to the Board of Directors modifications to
Director tenure policy and Board size, compensation and composition, and aids in
seeking out and attracting qualified Board candidates.
COMPENSATION OF DIRECTORS
The annual retainer for outside directors of the Company is $20,000. In
addition, a fee of $1,500 per meeting is paid to Directors who are not officers
or employees of the Company or CMS Energy for attendance of board and committee
meetings.
CONSULTING AND NON-COMPETE AGREEMENT
The Company is a party to a consulting and non-compete agreement with
Richard J. Burgess, the Company's Vice Chairman of the Board and former
President and Chief Executive Officer, with an initial term ending in April 1996
and continuing month-to-month thereafter unless terminated by either party.
Under the agreement, Mr. Burgess has agreed to advise the Company on issues
pertaining to the Company's business and render other services as the Company
may from time to time require. The agreement also provides that Mr. Burgess will
not, directly or indirectly, engage in the business of the Company in any market
in which the
65
<PAGE> 68
Company currently competes. Mr. Burgess is entitled to a monthly fee of $7,500
under the agreement and an additional $1,500 for each day in excess of five days
devoted in any month to services under the agreement. The monthly and daily fees
shall be increased on the same basis as any increase in the meeting fees paid to
directors who are not officers or employees of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Burgess, a member of the Executive and Remuneration Committee of the
Company's Board of Directors, was the President and Chief Executive Officer of
the Company until March 1, 1995 and is currently Vice Chairman of the Board of
Directors of the Company. Mr. Burgess has a consulting and non-compete agreement
with the Company. See "-- Consulting and Non-Compete Agreement." Mr. Fryling,
also a member of the Executive and Remuneration Committee, is Chairman of the
Board of Directors of the Company.
EXECUTIVE COMPENSATION
Effective with the adoption of the Executive Incentive Compensation Plan
and the Long-Term Performance Incentive Plan, described below, compensation for
the executive officers will consist of a base salary (as shown in the Summary
Compensation Table below) which is intended to be competitive with amounts paid
to senior executives with equivalent positions at other oil and gas exploration
and development companies of comparable size, and substantial annual and
long-term incentive compensation closely tied to the Company's success in
achieving stock appreciation and other performance goals. Annual incentive
(bonus) compensation payments are based on the Company's success in meeting
goals as outlined below. In addition, individual performance goals are
established for each executive for specific financial, operating and management
achievements. The last element of executive compensation is expected to be
long-term incentive awards in the form of stock option and profit sharing awards
under the Company's Performance Long-Term Incentive Plan as described below.
SUMMARY COMPENSATION TABLE
The following table sets forth (i) a summary of compensation for services
rendered in all capacities to the Company for the chief executive officer and
the five other most highly compensated executive officers of the Company for the
year ended December 31, 1994 and (ii) estimated 1995 annual salaries for such
officers.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1)
<S> <C> <C> <C> <C>
Gordon L. Wright,............................... 1995(2) 189,000
President and Chief Executive Officer(3) 1994 167,000 0 157,714
William H. Stephens, III,....................... 1995(2) 152,400
Executive Vice President and General
Counsel(4) 1994 141,400 0 134,347
Paul E. Geiger,................................. 1995(2) 134,400
Vice President, Secretary and Treasurer 1994 128,900 0 121,995
Robert A. Dunn,................................. 1995(2) 135,000
Vice President, Exploration 1994 127,135 0 120,134
Richard L. Redmond,............................. 1995(2) 115,000
Vice President, Operations 1994 90,335 0 66,197
W. Hemisphere and Southeast Asia
Richard J. Burgess,............................. 1994 223,020 0 221,002
Vice Chairman(5)
</TABLE>
- -------------------------
(1) Consists of Company-matched defined contribution plan contributions (Mr.
Wright, $7,256; Mr. Stephens, $6,619; Mr. Geiger, $6,238; Mr. Dunn, $6,166;
Mr. Redmond, $4,420 and Mr. Burgess, $11,058); cash payments under Plan A
under the Employee Well Participation Program (Mr. Wright, $7,823; Mr.
Stephens, $6,782; Mr. Geiger, $6,238; Mr. Dunn, $6,141; Mr. Redmond, $4,066;
and Mr. Burgess, $11,376); and the value of overriding royalty interests
received under Plan B under the Employee Well
66
<PAGE> 69
Participation Program (Mr. Wright $142,635; Mr. Stephens, $120,946; Mr.
Geiger, $109,519; Mr. Dunn, $107,827; Mr. Redmond, $57,711; and Mr. Burgess,
$198,568). The Employee Well Participation Program, which was recently
terminated as to any future wells drilled or acquired, was in effect from
April 1, 1980 to October 4, 1995. The Program consisted of Plan A and Plan
B. Plan A covered all executive, administrative and professional employees
who were not then covered by Plan B. Under Plan A, participating employees
received monthly cash incentive payments from the proceeds of a simulated
1.0% overriding royalty in properties acquired or spudded after 1980, a
simulated 0.5% overriding royalty in properties acquired or spudded after
1985 and a simulated 0.25% overriding royalty in properties acquired or
spudded after 1990. Plan B covered key employees designated by the President
of the Company, from time to time. Certain current and former employees of
the Company continue to own interests acquired when they participated in the
plan as active employees. Plan B called for participating employees to
receive actual property assignments that divide a 1.75% overriding royalty
interest. The property assignments were allocated among the participants
based on their annualized salaries plus up to 50% of the maximum year-end
bonus the participants were qualified to receive. The Company reserves a
right of first refusal on participants' sales of their interests. Further,
participants have the option to require the Company to purchase their
interests. Because they receive actual property assignments, participants
are vested in the income stream for the life of the property, which may last
20 years or more.
(2) Annual estimate based on current salary rate.
(3) Mr. Wright was Executive Vice President and Chief Operating Officer until
March 1, 1995.
(4) Mr. Stephens was Senior Vice President and General Counsel until March 1,
1995.
(5) Mr. Burgess was President and Chief Executive Officer prior to his
retirement on March 1, 1995.
EXECUTIVE INCENTIVE COMPENSATION PLAN
CMS NOMECO intends to establish the Executive Incentive Compensation Plan
which provides cash bonus payments for participants based on CMS NOMECO's
achievement of annual performance objectives established by the Executive and
Remuneration Committee of the Board with the following weighting: no less than
65% based on CMS NOMECO's earnings and finding costs and no more than 35% based
on CMS Energy's earnings. Because officers of other affiliates of CMS Energy
have similar incentives based at least in part on the earnings of CMS Energy,
such officers have incentives to identify opportunities for CMS NOMECO. The
participants in the Plan include the executive officers and other executives
designated by the President. The Plan has a threshold payout at 80% of goal and
a maximum payout at 120% of goal. The President is eligible for a standard
annual award of 55% of the median for his/her salary grade adjusted to reflect
his/her individual performance for the year. Dependent on their salary grade,
other participants are eligible for awards ranging from 15% to 50% of the median
for their particular salary grade. There were no awards under a predecessor plan
for 1994, and there would not have been any awards under this Plan if it had
been in effect in 1994.
LONG-TERM PERFORMANCE INCENTIVE PLAN
In connection with the Offering, the Board of Directors of the Company
expects to adopt, and CMS Enterprises as the Company's sole stockholder is
expected to approve, the Company's Long-Term Performance Incentive Plan.
The objective of the Plan is to link the financial interests of the
Company's executive officers and other executive employees directly with those
of stockholders. The Plan consists of a stock option program for officers
(currently six individuals) and a profit sharing plan for other key employees
(currently approximately 20 individuals). Stock appreciation rights (SARs) may
also be granted in conjunction with options. Restricted stock awards may also be
made, but will be based on Company performance. Shares included in the Plan may
not be more than 1% of the outstanding shares of the Company's Common Stock.
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<PAGE> 70
The Executive and Remuneration Committee, which administers the Plan, is
expected to grant, subject to the completion of the Offering, options to
purchase shares of Common Stock to the officers shown in the Summary
Compensation Table as follows:
<TABLE>
<CAPTION>
NAME OPTIONS
<S> <C>
Gordon L. Wright...............
William H. Stephens, III.......
Paul E. Geiger.................
Robert A. Dunn.................
Richard L. Redmond.............
</TABLE>
Each of the options has an exercise price equal to the initial public
offering price of the Common Stock offered hereby, and has a ten year term.
For other executive participants, the Committee may make cash awards
aggregating no more than 2% of the average of the most recent three years of the
net income of the Company. Such awards may be paid to the eligible participants
in equal installments over not more than three years. If a participant's
employment is terminated before a payment date other than by retirement on or
after age 62, or death, all rights to future payments may be forfeited.
PENSION PLAN & SERP TABLE
The Company is a participating employer in the Pension Plan for Employees
of Consumers ("Pension Plan"), which is a noncontributory defined benefit
pension plan intended to qualify under Section 401(a) of the IRC. The Company is
also a participating employer in the Supplemental Executive Retirement Plan for
Employees of Consumers ("SERP"). The SERP is a non-qualified plan under the IRC
providing supplemental retirement income for officers and selected executives of
the Company, based on their years of service and final pay, as defined in the
SERP. The following table shows the aggregate annual pension benefits at normal
retirement presented on a straight life annuity basis under the Pension Plan and
SERP (offset by a portion of Social Security benefits).
<TABLE>
<CAPTION>
YEARS OF SERVICE
--------------------------------------------------------
COMPENSATION 15 20 25 30 35
<S> <C> <C> <C> <C> <C>
$ 90,000.................................... $ 28,400 $ 37,800 $ 44,100 $ 50,400 $ 56,700
190,000.................................... 59,900 79,800 93,100 106,400 119,700
290,000.................................... 91,400 121,800 142,100 162,400 182,700
390,000.................................... 122,900 163,800 191,100 218,400 245,700
</TABLE>
Regular, straight-time salary as shown in the Summary Compensation Table
during the five years of highest earnings is used in computing benefits under
the Pension Plan. In addition, bonuses under the bonus incentive plans as shown
in the Summary Compensation Table during the five years of highest earnings are
used in computing benefits under the SERP. The estimated years of service for
each of Messrs. Wright, Stephens, Geiger, Dunn, Redmond and Burgess are
respectively 35.00 years, 24.66 years, 35.00 years, 30.92 years, 6.55 years and
35.00 years.
OWNERSHIP OF CAPITAL STOCK
CMS Enterprises owns all of the outstanding Common Stock of the Company,
which constitutes all of the outstanding capital stock of the Company. CMS
Energy owns all of the outstanding common stock of CMS Enterprises (the "CMS
Enterprises Common Stock") and Consumers owns all of the outstanding preferred
stock of CMS Enterprises (the "CMS Enterprises Preferred Stock"), which together
constitute all of the outstanding capital stock of CMS Enterprises. CMS Energy
owns all of the outstanding common stock of Consumers.
The following table sets forth certain information regarding the beneficial
ownership by CMS Enterprises of the Common Stock of the Company (i) immediately
prior to the Offering and (ii) as adjusted to reflect the
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<PAGE> 71
sale of Common Stock in the Offering. CMS Enterprises has sole voting and
investment power with respect to all shares beneficially owned by it.
<TABLE>
<CAPTION>
SHARES OWNED SHARES OWNED
PRIOR TO OFFERING AFTER OFFERING
---------------------- ----------------------
NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT
<S> <C> <C> <C> <C>
CMS Enterprises................................... 24,000,000 100% 24,000,000 %
330 Town Center Drive
Suite 1100
Dearborn, MI 48126
</TABLE>
The CMS Enterprises Preferred Stock may be issued in series, the terms of
which may be determined by the CMS Enterprises Board of Directors without
further action by stockholders, which terms may include, among others, dividend
rights, voting rights, redemption and sinking fund provisions, liquidation
preferences and conversion rights.
The shares of CMS Enterprises Preferred Stock currently outstanding and
owned by Consumers are 10 shares of Series A Preferred Stock (the "Series A
Preferred Stock"). The holders of the Series A Preferred Stock are entitled to
receive dividends payable, when and as declared, at the rate of $1,425,000 per
share per annum, cumulative from the date of original issuance. Upon
liquidation, the holders of the Series A Preferred Stock are entitled to receive
$25 million per share, plus accrued dividends.
On August 1, 1997 and on each August 1 thereafter, CMS Enterprises must
redeem two shares of the outstanding Series A Preferred Stock at a sinking fund
redemption price equal to $25 million per share, plus accrued dividends, and may
opt to redeem up to two additional shares under the same terms. Further, on each
such August 1, CMS Enterprises must redeem whole or fractional shares of the
Series A Preferred Stock equal to 100% of the amount of cash dividends received
from the Company during the preceding twelve-month period at a redemption price
of $25 million per share plus accrued dividends.
In addition to voting rights as otherwise provided by law, holders of
Series A Preferred Stock are entitled to one noncumulative vote per share on
each matter to be voted upon by the common stockholders. Holders of CMS
Enterprises Preferred Stock also have the exclusive right, voting as a separate
class, to elect a certain number of directors of CMS Enterprises whenever there
exist triggering defaults in quarterly dividends or any mandatory sinking fund
redemption.
The following table sets forth certain information regarding the beneficial
ownership by CMS Energy and Consumers of the CMS Enterprises Common Stock and
the CMS Enterprises Preferred Stock immediately prior to the Offering. Each of
CMS Energy and Consumers has sole voting and investment power with respect to
their respective shares.
<TABLE>
<CAPTION>
SHARES PERCENT
NAME AND ADDRESS TITLE OF CLASS BENEFICIALLY OWNED OF CLASS
<S> <C> <C> <C>
CMS Energy Corporation.............. CMS Enterprises Common Stock 100 100%
330 Town Center Drive
Suite 1100 CMS Enterprises Preferred 10* 100%
Stock
Dearborn, Michigan 48126
</TABLE>
- -------------------------
* Represents 10 shares of Series A Preferred Stock held of record by Consumers,
a subsidiary of CMS Energy of which CMS Energy owns all of the outstanding
common stock.
As of October 13, 1995, there were 91,100,135 shares of CMS Energy common
stock outstanding (the "CMS Energy Common Stock"), no shares of CMS Energy
preferred stock outstanding, and 7,552,824 shares of CMS Energy Class G common
stock outstanding (the "Class G Common Stock"). The CMS Energy Common Stock and
Class G Common Stock are together referred to hereinafter in this and the
following two paragraphs as "common stock of CMS Energy." Both classes of common
stock of CMS Energy are listed on the New York Stock Exchange.
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<PAGE> 72
Class G Common Stock reflects the separate performance of the gas
distribution, storage and transportation businesses conducted by Consumers and
Michigan Gas Storage Company, a subsidiary of Consumers (such businesses,
collectively, the "Consumers Gas Group"). CMS Energy Common Stock reflects the
performance of all of the businesses of CMS Energy and its subsidiaries, except
for the interest in the Consumers Gas Group attributable to the outstanding
shares of Class G Common Stock.
The holders of both classes of common stock of CMS Energy vote as a single
class, except on matters which are required by law or the Articles of
Incorporation of CMS Energy to be voted on by class. Each holder of common stock
of CMS Energy is entitled to one noncumulative vote per share of common stock of
CMS Energy held by such holder on each matter voted upon by the stockholders.
The following table sets forth, as of October 13, 1995, the number and
percentage of outstanding shares of capital stock of CMS Energy that are
beneficially owned by (i) each director of the Company, (ii) each executive
officer of the Company named in "Management -- Summary Compensation Table,"
(iii) all directors and officers of the Company as a group and (iv) each person
known by the Company to own beneficially more than 5% of the Common Stock of the
Company by virtue of such person's ownership of any class of CMS Energy's voting
securities before giving effect to the Offering. Except as otherwise indicated
below, to the Company's knowledge, each individual or entity named has sole
investment and voting power with respect to its respective securities, except to
the extent authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
---------------------------- PERCENT OF
CMS ENERGY CLASS G COMMON STOCK
NAME COMMON STOCK COMMON STOCK OF CMS ENERGY
<S> <C> <C> <C>
Gordon L. Wright.................................... 3,890 100 *
William H. Stephens, III............................ 4,225 0 *
Robert A. Dunn...................................... 3,223 0 *
T. Rodney Dykes..................................... 0 0 *
Paul E. Geiger...................................... 5,911 0 *
Richard L. Redmond, Jr. ............................ 851 0 *
Victor J. Fryling................................... 48,530 1,500 *
Richard J. Burgess.................................. 0 0 *
Frank M. Burke, Jr. ................................ 0 0 *
J. Stuart Hunt...................................... 0 0 *
Thomas K. Matthews, II.............................. 0 0 *
William T. McCormick, Jr. .......................... 143,908 3,000 *
Charles R. Owens.................................... 0 0 *
S. Kinnie Smith, Jr. ............................... 58,824 2,000 *
P. W. J. Wood....................................... 0 0 *
Alan M. Wright...................................... 22,105 300 *
--------- ----- ---
All Directors and Executive Officers
as a group (16 persons)........................... 291,467 6,900 *
Mellon Bank Corporation............................. 6,212,000 0 6.3%
Brinson Partners, Inc. ............................. 4,917,000 0 5.0%
</TABLE>
- -------------------------
* Less than 1%.
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<PAGE> 73
RELATIONSHIP AND CERTAIN TRANSACTIONS
WITH CMS ENERGY
VOTING CONTROL
After the Offering, CMS Enterprises will own approximately % ( % if
the Underwriters exercise their over-allotment option in full) of the issued and
outstanding Common Stock of the Company. As a result, CMS Enterprises, and
indirectly CMS Energy, by virtue of its control of CMS Enterprises, will be able
to direct the election of the entire Board of Directors of the Company and to
control the affairs and policies of the Company, including without limitation
the Company's exploration, development, capital, operating and acquisition
expenditure plans. The Company's Board of Directors is currently composed of
eleven members, six of whom are directors or current or former officers of CMS
Energy, CMS Enterprises or the Company.
CONTRACTUAL ARRANGEMENTS
The Company and CMS Energy and certain of its other subsidiaries have
entered into a number of agreements described below for the purpose of defining
their ongoing relationship. These agreements are not the result of arm's-length
negotiation between independent parties, but are believed by the Company to be
at least as favorable to the Company as could be obtained from unaffiliated
third parties.
SERVICES AGREEMENTS
The Company has entered into respective Services Agreements (the "Services
Agreements") with each of CMS Energy, CMS Enterprises and Consumers which
provide, among other things, that CMS Energy, CMS Enterprises and Consumers will
make or cause to be made available to the Company from time to time management
and consulting services such as financial services, including such
administrative, clerical, managerial, professional and/or technical services as
the parties may from time to time agree.
REGISTRATION RIGHTS AGREEMENT
Under a Registration Rights Agreement (the "Registration Rights
Agreement"), the Company has agreed, upon the request of CMS Enterprises from
and after , 199 , to file one or more registration statements under the
Securities Act of 1933, as amended (the "Securities Act") or take other
appropriate action under the laws of foreign jurisdictions in order to permit
CMS Enterprises to offer and sell, domestically or abroad, securities of the
Company that CMS Enterprises may hold at any time. CMS Enterprises will pay all
costs relating thereto and any underwriting discounts and commissions relating
to any such offering, except that the Company will pay the fees and expenses of
its accountants, and any trustees, transfer agents or other agents appointed in
connection therewith.
There is no limitation on the number or frequency of the occasions on which
CMS Enterprises may exercise its registration rights, except that the Company
will not be required to comply with any registration request unless, in the case
of a class of equity securities, the request involves at least the lesser of one
million shares or 1% of the total number of shares of such class then
outstanding, or, in the case of a class of debt securities, the principal amount
of debt securities covered by the request is at least $5 million.
The Company has also granted to CMS Enterprises the right to include
Company securities owned by it in certain registrations under the Securities Act
covering offerings of securities by the Company and the Company will pay all
costs of such offerings other than incremental costs attributable to the
inclusion of securities of the Company owned by CMS Enterprises in such
registrations, and CMS Enterprises will pay the fees and expenses of its counsel
and all underwriting discounts and commissions for the sale of securities
offered by it.
The Company will indemnify CMS Enterprises, its officers and directors and
each underwriter, if any, and controlling persons of CMS Enterprises or any such
underwriter against certain liabilities arising under the laws of any country in
respect of any registration or other offering covered by the Registration Rights
Agreement. The Company has the right to require CMS Enterprises to delay any
exercise by CMS
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Enterprises of its rights to require registration and other actions for a period
of up to 90 days if, in the judgment of the Company, any underwritten offering
by the Company of securities for its account then being conducted or about to be
conducted would be materially adversely affected. CMS Enterprises has further
agreed that it will not include any securities of the Company in any
registration by the Company under the Securities Act which, in the judgment of
the managing underwriters, would materially adversely affect any offering of
securities by the Company. The rights of CMS Enterprises under the Registration
Rights Agreement are transferable to non-affiliates of CMS Enterprises.
TAX SHARING AGREEMENT
The Company and its subsidiaries will continue to join in filing
consolidated federal income tax returns with the CMS Energy affiliated group. In
order to allocate the aggregate tax liability of the CMS Energy affiliated group
among its members and provide for certain other matters relating to the payment
of federal income taxes, CMS Energy has entered into the Amended and Restated
Agreement for the Allocation of Income Tax Liabilities and Benefits with the
Company and other members of the CMS Energy affiliated group (the "Tax Sharing
Agreement") pursuant to which, in general, CMS Energy will pay each member for
the reduction (and each member will pay CMS Energy for the increase) in the
aggregate federal income taxes payable by the CMS Energy affiliated group
resulting from the inclusion of such member in that group.
CONFLICTS OF INTEREST
The relationship between the Company and CMS Energy and its other
affiliates may give rise to conflicts of interest with respect to, among other
things, transactions and agreements between the Company and CMS Energy and its
other affiliates, issuances of additional shares of voting securities, the
election of directors or the payment of dividends, if any, by the Company. When
the interests of CMS Energy and its other subsidiaries diverge from those of the
Company, CMS Energy may exercise its influence in favor of its own interests or
the interests of another of its subsidiaries over the interests of the Company.
CMS Energy has advised the Company that it does not intend to engage in the
exploration for natural gas and oil except through its ownership of Common Stock
of the Company. However, circumstances may arise that would result in CMS
Energy, by itself or through one of its affiliated entities, in connection with
projects unrelated to those of the Company, engaging in the exploration for or
development or production of natural gas and oil.
The Company and CMS Energy and its other subsidiaries from time to time
have entered into significant intercompany transactions and agreements incident
to their respective businesses and may enter into similar transactions and
agreements in the future. In the past, such transactions and agreements have
related to, among other things, the purchase and sale of natural gas and
indemnification arrangements in connection with acquisitions. See "-- Certain
Transactions." The Company intends that the terms of any future agreements
between the Company and CMS Energy or its other affiliates will be at least as
favorable to the Company as could be obtained from unaffiliated third parties.
CERTAIN TRANSACTIONS
GAS SALES AGREEMENTS
The Company sells natural gas to affiliates at rates approximating the
average price of gas paid to other area producers. A five-year gas sales
contract dated as of January 1, 1995 between the Company and Consumers provides
for sales prices of $2.50 MMBtu in 1995, $2.60 MMBtu in 1996, and at negotiated
rates from 1997 through 1999, or 20,000 MMBtu per day. Total sales to Consumers
under certain other gas sales contracts between such parties were approximately
$3.4 million in 1992, $2.6 million in 1993 and $0.7 million in 1994. Gas sales
to MCV under three gas sales contracts amounted to approximately $6.4 million in
1992, $12.2 million in 1993 and $9.2 million in 1994. In 1994, the Company
recognized a gain of $4.8 million attributable to the disposition of an MCV gas
sales contract. The gas sales contract had provided for sales prices of $2.53
per MMBtu in 1994, escalating 4% per year to December 31, 2006 on 10,000 MMBtu
per day
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or 3.7 Bcf annually of gas sales. In March 1995, the Company recognized a gain
of $9.9 million attributable to the disposition of another MCV gas sales
contract. This gas sales contract had provided for sales prices of $3.25 per
MMBtu in 1995, escalating 4% each year through December 31, 2006, and covered
3,750 MMBtu per day or 1.37 Bcf annually of the Company's gas sales. The Company
expects to sell these volumes on the spot market or under term contracts
providing for current market price.
TERRA ACQUISITION
In August 1995, CMS Energy acquired all of the outstanding capital stock of
Terra, a significant producer of Antrim gas, for consideration which, after
giving effect to certain anticipated post-closing adjustments, is expected to
aggregate approximately $63.6 million, payable in common stock of CMS Energy.
Immediately after consummation of such acquisition, and pursuant to a transfer
agreement among CMS Energy, CMS Enterprises and the Company, the stock of Terra
was transferred by CMS Energy, through CMS Enterprises, to the Company. In
connection with the Terra Acquisition, the Company recorded a capital
contribution of $1.0 million and issued the Terra Note to CMS Enterprises which,
after giving effect to post-closing adjustments, is expected to be in the
principal amount of $62.6 million. The Terra Note is currently held by CMS
Energy. See "-- CMS Notes." A portion of the net proceeds from the Offering will
be used to repay the Terra Note.
WALTER ACQUISITION AND RELATED INDEMNIFICATION AGREEMENT
In February 1995, CMS Energy acquired all of the outstanding capital stock
of Walter, an international oil and gas company, for a purchase price of
approximately $28.4 million (of which approximately $25.0 million was payable by
delivery of CMS Energy common stock and $3.4 million was paid in cash) plus
assumed indebtedness of $18.3 million. Immediately upon consummation of such
acquisition, the stock of Walter was contributed by CMS Energy, through CMS
Enterprises, to the Company. The Company recorded a capital contribution of
$28.4 million as a result of the Walter Acquisition. Of the assumed indebtedness
of Walter, $6.5 million was immediately repaid with funds which the Company
borrowed from CMS Energy as evidenced by the Walter Note. See "-- CMS Notes." A
portion of the net proceeds from the Offering will be used to repay the Walter
Note.
Included among the assets and liabilities of Walter and its subsidiaries at
the time of the Walter Acquisition were certain Congolese assets that had been
acquired by a Walter subsidiary from affiliates of Amoco and a tax indemnity
obligation that had been incurred by Walter in connection with such acquisition.
In connection with the Walter Acquisition, CMS Energy, the Company and Walter
agreed to be jointly and severally liable for Walter's obligation to indemnify
Amoco for tax liabilities attributable to the recapture of "dual consolidated
losses" utilized by Amoco for tax purposes in prior years, if a "triggering
event" (as defined under U.S. federal income tax laws relating to dual
consolidated losses) were to occur with respect to such assets or with respect
to the stock of such entities or certain of their subsidiaries. CMS Energy has
agreed to indemnify the Company under the CMS Energy Indemnity for such
liability if the triggering event results from acts or omissions (i) of CMS
Energy or any of its subsidiaries (other than the Company or any of its
subsidiaries) which occur after the initial sale of the Common Stock offered
hereby; (ii) of the Company or any of its subsidiaries if such acts or omissions
are approved by the Board of Directors of the Company, which approval includes
the affirmative vote of a majority of the employees of CMS Energy or any of its
subsidiaries (other than the Company or any of its subsidiaries) who serve on
the Company's Board of Directors; or (iii) of any person if such acts or
omissions occur prior to the initial sale of the Common Stock offered hereby.
Conversely, the Company has agreed to indemnify CMS Energy (and/or CMS
Enterprises) if, in fact, the triggering event results from acts or omissions of
the Company or its subsidiaries which occur after the initial sale of the Common
Stock offered hereby and such acts or omissions are not approved by the Board of
Directors of the Company, which approval includes the affirmative vote of a
majority of the employees of CMS Energy or any of its subsidiaries (other than
the Company) who serve on the Company's Board of Directors. See "Business and
Properties -- Tax Matters -- Dual Consolidated Losses."
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CMS NOTES
In August 1995, the Company issued the Terra Note to CMS Enterprises, which
in turn assigned it to CMS Energy, in connection with the transfer of the common
stock of Terra by CMS Energy to CMS Enterprises and then by CMS Enterprises to
the Company. In July 1995, the Company issued the Walter Note to CMS Energy to
evidence indebtedness originally incurred in February 1995 to fund repayment of
$6.5 million of indebtedness of Walter immediately after the consummation of the
Walter Acquisition. The CMS Notes bear interest at the rate of LIBOR plus 2.0%
per annum and have a maturity date of November 1, 1999. Amounts outstanding
under the CMS Notes are expressly subordinate to borrowings under the Company's
Credit Agreement. Certain limitations are placed on the Company's obligation to
make payments on the indebtedness evidenced by the CMS Notes in the event of
default under the terms of the Credit Agreement. The Company intends to use a
portion of the net proceeds from the Offering to repay the CMS Notes.
LETTER OF CREDIT REIMBURSEMENT AGREEMENT
In December 1994, CMS Energy arranged for the issuance of a standby letter
of credit, currently in the amount of $45.0 million, to secure the Company's
performance under the operating services agreement relating to the Colon Unit in
Venezuela. The Company has agreed to reimburse CMS Energy on demand for any draw
made under the letter of credit and to pay to CMS Energy a fee of 2.125% per
annum of the face amount of the letter of credit.
CONTRIBUTIONS TO CAPITAL
During the years 1992, 1993, 1994 and the nine months ended September 30,
1995, the Company received equity contributions from CMS Enterprises amounting
to $5.8 million, $9.5 million, $56.1 million and $4.5 million, respectively.
Additionally, during the nine months ended September 30, 1995, the Company
received from CMS Enterprises equity contributions of $27.2 million ($3.5
million in cash and $23.7 million in stock) with respect to the Walter
Acquisition and $1.0 million with respect to the Terra Acquisition.
ADDITIONAL TRANSACTIONS
In 1993, the Company received $2.6 million for its share of proceeds from
the sale of certain northern Michigan pipelines to an affiliate of the Company,
CMS Gas Transmission and Storage Company. These pipelines were constructed by
the Company shortly prior to their sale for a cost of $2.2 million.
DESCRIPTION OF CAPITAL STOCK
Certain statements under this caption are summaries of the respective
Restated Articles of Incorporation and Restated Bylaws of the Company, copies of
which are filed as exhibits to the Registration Statement of which this
Prospectus is a part. Summaries herein of certain provisions of such documents
do not purport to be complete and are subject and qualified in their entirety by
reference to all provisions of such documents.
The authorized capital stock of the Company consists of 55,000,000 shares
of Common Stock, no par value per share, and 5,000,000 shares of Preferred
Stock, no par value per share. As of the date hereof, there are 24,000,000
shares of Common Stock outstanding, all of which are owned by CMS Enterprises,
and no shares of Preferred Stock outstanding. Upon completion of the Offering,
there will be shares of Common Stock outstanding, 24,000,000 shares of
which will be owned by CMS Enterprises.
COMMON STOCK OF THE COMPANY
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders. Holders of Common Stock do not have
cumulative voting rights with respect to the election of directors. Therefore,
the holders of more than 50% of the issued and outstanding shares of Common
Stock may elect all of the Company's directors. After the Offering, CMS
Enterprises will hold approximately % of the issued and outstanding Common
Stock ( % if the over-allotment option is exercised in full) and therefore will
hold the voting power to determine all matters upon which stockholders of the
Company vote,
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including the election of directors. See "Relationship and Certain Transactions
with CMS Enterprises and CMS Energy."
Holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Board of Directors out of funds
legally available therefor.
In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all net assets
available for distribution to common stockholders. Holders of Common Stock have
no preemptive, subscription, redemption or conversion rights. All outstanding
shares of Common Stock are, and the shares of Common Stock to be sold by the
Company in this Offering when issued will be, fully paid and nonassessable.
Application will be made to list the shares of Common Stock to be issued in
the Offering on the New York Stock Exchange upon official notice of issuance.
PREFERRED STOCK OF THE COMPANY
The authorized capital stock of the Company includes 5,000,000 shares of
Preferred Stock. Such Preferred Stock may be issued in series, the terms of
which may be determined by the Company's Board of Directors without further
action by stockholders, which terms may include, among others, dividend rights,
voting rights, redemption and sinking fund provisions, liquidation preferences
and conversion rights.
The issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could
adversely affect the voting power of holders of Common Stock and could have the
effect of delaying, deferring or preventing a change in control of the Company.
CERTAIN PROVISIONS OF MICHIGAN CORPORATE LAW
Chapter 7A of the Michigan Business Corporation Act (the "MBCA"), M.C.L.
sec.450.1775 et seq., is applicable to corporations organized under the laws of
Michigan which have at least 100 beneficial owners of their stock. Subject to
certain exceptions set forth therein, Chapter 7A provides that a corporation
shall not engage in any business combination with any "interested stockholder"
unless an advisory statement is given by the Board of Directors and the
combination is approved by a vote of at least 90% of the votes of each class of
stock entitled to vote, and at least two-thirds of the votes of each class of
stock entitled to vote other than the voting shares owned by the interested
stockholder. However, these statutory requirements do not apply if, prior to the
date that an interested stockholder first becomes an interested stockholder, the
Board of Directors by resolution approves or exempts such business combinations
generally or a particular combination from the requirements of the MBCA.
Furthermore, the voting requirement does not apply to a business combination if:
(a) specified fair price criteria are met, as described below; (b) the
consideration to be given to the stockholders is in cash or in the form the
interested stockholder paid for shares of the same class or series; and (c)
between the time the interested stockholder becomes an interested stockholder
and before the consummation of a business combination the following conditions
are met: (1) any preferred stock dividends are declared and paid on their
regular date; (2) the annual dividend rate of stock other than preferred stock
is not reduced and is raised if necessary to reflect any transaction which
reduces the number of outstanding shares; (3) the interested stockholder does
not receive any financial assistance or tax advantage from the corporation other
than proportionally as a stockholder; (4) the interested stockholder does not
become the beneficial owner of any additional shares of the corporation; and (5)
at least five years elapse. Except as specified therein, an "interested
stockholder" is defined to mean any person that: (a) is the owner of 10% or more
of the outstanding voting stock of the corporation, or (b) is an affiliate of
the corporation and was the owner of 10% or more of the outstanding voting stock
of the corporation at any time within two years immediately prior to the
relevant date. Under certain circumstances, Chapter 7A makes it more difficult
for an "interested stockholder" to effect various business combinations with a
corporation for a five-year period, although the stockholders may elect not to
be governed by this section, upon approval of 90% of the outstanding voting
shares and two thirds of the shares not owned by the interested stockholder. The
Company's stockholders have not excluded the Company from the restrictions
imposed under Chapter 7A of the MBCA. It is anticipated that the provisions of
Chapter 7A may encourage companies interested in acquiring the Company to
negotiate in advance with the Board of Directors.
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Fair price criteria include the following: (a) the aggregate amount of the
cash and market value of noncash consideration to be received by the holders of
common stock is at least as much as the highest of (1) the highest price the
interested stockholder paid for stock of the same class or series within the
two-year period immediately prior to the announcement date of the combination
proposal, and (2) the market value of stock of the same class or series on the
announcement date or on the determination date; and (b) the aggregate amount of
the cash and market value of noncash consideration to be received by holders of
stock other than common stock is at least as much as the highest of (1) the
highest price the interested stockholder paid for stock of the same class or
series within the two-year period immediately prior to the announcement date of
the combination proposal, (2) the highest preferential amount per share to which
the holders of such stock are entitled in the event of any liquidation,
dissolution, or winding up of the corporation, and (3) the market value of stock
of the same class or series on the announcement date or on the determination
date.
Chapter 7B of the MBCA, M.C.L. sec.450.1790 et seq., is applicable to
corporations organized under the laws of Michigan which have (a) at least 100
beneficial owners of their stock; (b) their principal place of business,
principal office or substantial assets in Michigan; and (c) at least one of the
following: (1) more than 10% of their stockholders reside in Michigan, (2) more
than 10% of their shares are owned by Michigan residents, or (3) at least 10,000
stockholders reside in Michigan. Subject to certain exceptions set forth
therein, Chapter 7B provides that once a person proposes to make or makes a
"control share acquisition" and delivers an acquiring person statement to the
corporation, the stockholders must vote on whether the control shares may
exercise voting rights. Such rights are granted only by resolution approved by
both (a) a majority of the votes cast by holders entitled to vote and a majority
of any class entitled to vote, and (b) a majority of the votes cast and a
majority of any class entitled to vote excluding the interested shares. Further,
a corporation's articles of incorporation or bylaws may authorize, under certain
circumstances, redemption at fair value of the control shares acquired in a
control share acquisition if no acquiring person statement is filed with the
corporation. "Control shares" means shares which, if voted, would have voting
power when added together with all other shares a person either owns or directs
their exercise, within the following ranges: (a) at least 20% but less than
33 1/3% of all voting power; (b) at least 33 1/3% but less than a majority of
all voting power; or (c) a majority of all voting power. An acquisition of
shares is not considered a control share acquisition under certain
circumstances, including where the acquisition is part of a merger or share
exchange if the corporation is a party to the agreement of merger or share
exchange. Under certain circumstances, Chapter 7B makes it more difficult for an
"acquiring person" to exercise control over a corporation due to the limitations
placed on that person's ability to vote the control shares, although the
corporation may, before any such control share acquisition, elect not to be
governed by this chapter by adopting an amendment to the corporation's articles
of incorporation or bylaws. The Company's Restated Articles of Incorporation and
Restated By-laws do not exclude the Company from the restrictions imposed under
Chapter 7B of the MBCA. It is anticipated that the provisions of Chapter 7B may
encourage acquiring persons interested in obtaining control over the Company to
negotiate in advance with the Board of Directors.
Section 450.1368 of the MBCA is applicable to corporations organized under
the laws of Michigan. This section prohibits a corporation from purchasing,
either directly or indirectly, any of its shares that are listed on a national
securities exchange from any person who holds at least 3% of its shares unless
one of the following conditions is met: (a) the corporation makes an equivalent
offer to all other holders of the same shares; (b) the purchase is authorized in
advance by the stockholders entitled to vote thereon; (c) the purchase meets the
requirements of the articles of incorporation for such a purchase; (d) the
shares are beneficially owned by the person for at least two years prior to the
purchase date; (e) the purchase is made on the open market; (f) the purchase
price is not more than the average market price of the shares during the 30
business days prior to the purchase date; or (g) the purchase is otherwise
authorized by the MBCA. Under certain circumstances, sec.450.1368 prevents a
stockholder from selling his shares back to the corporation at a premium within
two years of that stockholder's purchase of the shares unless one of the other
conditions is met. However, the stockholders may approve such a purchase by the
corporation or the corporation may include in its articles of incorporation
lesser requirements for such a transaction. The Company's Restated Articles of
Incorporation do not contain any provisions regarding the purchase of the
Company's shares from any stockholder who beneficially owns at least 3% of its
stock. It is anticipated that the provisions of sec.450.1368 may discourage
persons from obtaining quantities of the Company's stock for the sole purpose of
eliciting a premium from the Company in a resale of those shares.
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LIMITATION ON PERSONAL LIABILITY OF DIRECTORS; INDEMNIFICATION PROVISIONS
The Company's Restated Articles of Incorporation contains a provision,
authorized by the MBCA, designed to eliminate the personal liability of
directors for monetary damages to the Company or its stockholders for breach of
their fiduciary duty as directors. This provision, however, does not limit the
liability of any director who breached his duty of loyalty to the Company or its
stockholders, failed to act in good faith, obtained an improper personal
benefit, or paid a dividend or approved a stock repurchase or redemption that
was prohibited under Michigan law. This provision will not limit or eliminate
the rights of the Company or any stockholder to seek an injunction or any other
nonmonetary relief in the event of a breach of a directors' duty of care. In
addition, this provision applies only to claims against a director arising out
of his role as a director and does not relieve a director from liability
unrelated to his fiduciary duty of care or from a violation of statutory law
such as certain liabilities imposed on a director under the federal securities
laws.
The Company's Restated Articles of Incorporation and Restated Bylaws
provide that the Company shall indemnify all directors and officers of the
Company to the full extent permitted by the MBCA. Under the provisions of the
MBCA, any director or officer who, in his capacity as such, is made or
threatened to be made a party to any suit or proceeding, may be indemnified if
the Board determines such director or officer acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company or its stockholders.
Officers and directors are covered within specified monetary limits by
insurance against certain losses arising from claims made by reason of their
being directors or officers of the Company or of the Company's subsidiaries and
the Company's officers and directors are indemnified against such losses by
reason of their being or having been directors of officers of another
corporation, partnership, joint venture, trust or other enterprise at the
Company's request.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is the Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have shares of
Common Stock outstanding. All of the shares sold in the Offering will be
freely tradeable by persons other than "affiliates" of the Company, as such term
is defined under Rule 144 of the Securities Act (each, an "Affiliate"), without
restriction under the Securities Act. The 24,000,000 shares of Common Stock that
will continue to be beneficially owned by CMS Energy after the Offering
constitute "restricted securities" within the meaning of Rule 144, and will be
eligible for sale in the open market commencing , 199 subject to the
provisions of Rule 144. Pursuant to the Registration Rights Agreement, CMS
Enterprises may cause the Company at any time following , 199 to
register under the Securities Act all or a portion of the Common Stock owned by
it, in which event CMS Enterprises would be able to sell such shares upon the
effectiveness of any such registration without regard to the provisions of Rule
144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of this Prospectus, any person, including an Affiliate, who
has beneficially owned shares for at least two years, will be entitled to sell
in "brokers' transactions" or to market makers, within any three-month period, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock (approximately shares immediately
after the completion of the Offering) or (ii) the average weekly trading volume
in the Common Stock during the four calendar weeks immediately preceding the
date on which notice of the sale is filed with the Securities and Exchange
Commission (the "Commission"). Sales under Rule 144 are also subject to certain
manner of sale provisions, notice requirements and the availability of current
public information about the Company. Further, a person who is not an Affiliate,
and has not been an Affiliate at any time during the three months immediately
preceding the sale, and who has beneficially owned the shares proposed to be
sold for at least three years, is entitled to sell such shares under Rule 144(k)
without regard to the limitations described above. The Commission has proposed
amendments to Rule 144
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that, if adopted, would reduce the two-year and three-year holding periods
described above to one-year and two-year holding periods, respectively. No
assurances can be given as to when or if these proposed amendments will be
adopted or that the proposed amendments will not be significantly revised prior
to their adoption.
Prior to the Offering, there has been no market for the Common Stock of the
Company and no predictions can be made as to the effect, if any, that market
sales of shares of Common Stock, or the availability of such shares for sale,
will have on the market price prevailing from time to time. Nevertheless, sales
of substantial amounts of Common Stock of the Company in the public market, or
the perception that such sales could occur, could adversely affect prevailing
market prices and could impair the Company's future ability to raise capital
through the sale of its equity securities. The Company, CMS Enterprises and CMS
Energy have agreed that during the period beginning from the date of this
Prospectus and continuing to and including the date days after the date of
this Prospectus, not to offer, sell, contract to sell or otherwise dispose of
any securities of the Company (other than pursuant to employee stock option
plans existing or contemplated on the date of this Prospectus and for certain
other purposes) which are substantially similar to the shares of Common Stock or
which are convertible or exchangeable into securities which are substantially
similar to the shares of Common Stock, without the prior written consent of
.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
such Underwriters, for whom
and and are acting as representatives, has
severally agreed to purchase from the Company, the respective number of shares
of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
<S> <C>
----------
Total........................................................
==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Common Stock
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are released for sale to the public, the offering price and other selling terms
may from time to time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of
additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
to be purchased by each of them, as shown in the foregoing table, bears to the
shares of Common Stock offered.
The Company, CMS Enterprises and CMS Energy have agreed that during the
period beginning from the date of this Prospectus and continuing to and
including the date days after the date of this Prospectus, not to offer, sell,
contract to sell or otherwise dispose of any securities of the Company (other
than pursuant to employee stock option plans existing or contemplated on the
date of this Prospectus and for certain other purposes) which are substantially
similar to the shares of Common Stock or which are convertible or exchangeable
into securities which are substantially similar to the shares of Common Stock,
without the prior written consent of
.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Common Stock offered by them.
Prior to this offering, there has been no public market for the Shares. The
initial public offering price will be negotiated among the Company and the
representatives. Among the factors to be considered in determining the initial
public offering price of the Common Stock, in addition to prevailing market
conditions, will be current and historical oil and natural gas prices, current
and prospective conditions in the supply and demand for oil and natural gas,
reserve and production quantities for the Company's oil and natural gas
properties, the history of and prospects for the industry in which the Company
operates, the earnings multiples of publicly traded common stocks of comparable
companies, the cash flow and earnings of the Company and comparable companies in
recent periods and the Company's business potential and cash flow and earnings
prospects.
Application will be made to list the Common Stock on the New York Stock
Exchange. In order to meet one of the requirements for listing the Common Stock
on the New York Stock Exchange, the Underwriters will undertake to sell lots of
100 or more shares to a minimum of 2,000 beneficial holders.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
and have
from time to time performed various investment banking and financial advisory
services for CMS Energy and CMS Enterprises, for which they have received
customary fees and reimbursement of their out-of-pocket expenses. Such services
include serving as underwriter or private placement agent in connection with
various securities offerings. Such firms have also performed various investment
banking services for CMS Energy for which they received customary fees and
reimbursement of their out-of-pocket expenses.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by William H. Stephens, III, Executive Vice President and
General Counsel of the Company, and certain other legal matters in connection
with the Offering are being passed upon for the Company by Sidley & Austin and
William H. Stephens, III. Certain legal matters in connection with the Offering
will be passed upon for the Underwriters by Baker & Botts, L.L.P. As to all
matters of Michigan law, Sidley & Austin and Baker & Botts, L.L.P. will rely on
the opinion of William H. Stephens, III.
79
<PAGE> 82
EXPERTS
The Consolidated Financial Statements of the Company as of December 31,
1993 and 1994 and for each of the three years in the period ended December 31,
1994, the Consolidated Financial Statements of CMS NOMECO International, Inc.
(formerly Walter) as of and for the year ended December 31, 1994, and the
Consolidated Financial Statements of Terra as of and for the year ended December
31, 1994, all included in this Prospectus have been audited and the Pro Forma
Consolidated Statement of Income, of the Company for the year ended December 31,
1994, included in this Prospectus, has been examined by Arthur Andersen LLP
(formerly Arthur Andersen & Co.), independent public accountants, as indicated
in their reports with respect thereto, and are included herein in reliance upon
the authority of such firm as experts in accounting and auditing in giving said
reports. Reference is made to said report on the audited Consolidated Financial
Statements of the Company, which includes an explanatory paragraph with respect
to the change in the method of accounting for postretirement benefits other than
pensions in 1992 as discussed in Note 1.i to the Consolidated Financial
Statements of the Company.
With respect to the unaudited interim consolidated financial information
relating to the Company as of and for the nine month period ended September 30,
1995, Arthur Andersen LLP has applied limited procedures in accordance with
professional standards for a review of such information. However, their separate
report included herein states that they did not audit and they did not express
an opinion on that interim consolidated financial information. Accordingly, the
degree of reliance on their report on that information should be restricted in
light of the limited nature of the review procedures applied. In addition, the
accountants are not subject to the liability provisions of Section 11 of the
Securities Act for their report on the unaudited interim consolidated financial
information because that report is not a "report" or "part" of the Registration
Statement prepared or certified by the accountants within the meaning of
Sections 7 and 11 of the Securities Act.
The Consolidated Financial Statements of Walter as of December 31, 1992 and
1993 and for each of the two years in the period ended December 31, 1993
included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as set forth in their report thereon (which report
expresses an unqualified opinion and includes an explanatory paragraph referring
to substantial doubt about Walter's ability to continue as a going concern),
appearing elsewhere herein and in the Registration Statement, and are included
herein in reliance upon the authority of said firm as experts in auditing and
accounting.
The Combined Balance Sheets of the Amoco Congo Companies as of December 31,
1993 and 1994, and the related Combined Statements of Operations, Stockholder's
Equity, and Cash Flows for each of the three years in the period ended December
31, 1994 have been included herein and in the Registration Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
With respect to the unaudited combined interim financial information of the
Amoco Congo Companies as of and for the one-month period ended January 31, 1995,
included herein the independent certified public accountants have reported that
they applied limited procedures in accordance with professional standards for a
review of such information. However, their separate report included herein,
states that they did not audit and they do not express an opinion on that
interim financial information. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. The accountants are not subject to the
liability provisions of Section 11 of the Securities Act for their report on the
unaudited combined interim financial information because that report is not a
"report" or a "part" of the Registration Statement prepared or certified by the
accountants within the meaning of Sections 7 and 11 of the Securities Act.
Information relating to the estimated proved reserves of oil and natural
gas at June 30, 1995 included herein have been prepared by Ryder Scott,
independent petroleum engineer consultants, as stated in their reserve report
dated October 2, 1995, and is included herein in reliance upon the authority of
such firm as an expert in such matters. Information relating to the estimated
proved reserves of oil and natural gas and the related estimates of future net
cash flows and standardized measure data as of January 1, 1993, 1994 and 1995
80
<PAGE> 83
included herein were based upon engineering studies prepared by the Company's
internal engineers. Set forth as Appendix A is a letter of Ryder Scott relating
to their reserve report.
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended. The Company has filed with
the Commission a Registration Statement on Form S-1 (the "Registration
Statement", which term shall include all amendments, exhibits and schedules
thereto) under the Securities Act with respect to the offer and sale of Common
Stock pursuant to this Prospectus. This Prospectus, filed as a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement or the exhibits and schedules thereto and reference is
hereby made to such omitted information. Statements made in this Prospectus
concerning the contents of any contract, agreement or other document filed as an
exhibit to the Registration Statement are summaries of the terms of such
contracts, agreements or documents and are not necessarily complete. Reference
is made to each such exhibit for a more complete description of the matters
involved and such statements shall be deemed qualified in their entirety by such
reference. The Registration Statement and the exhibits and schedules thereto
filed with the Commission may be inspected, without charge, and copies may be
obtained at prescribed rates, at the public reference facility maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the Commission located at 7 World Trade Center,
Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60621.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and the report of independent auditors
and quarterly reports for the first three quarters of each fiscal year
containing unaudited financial statements.
81
<PAGE> 84
CERTAIN DEFINITIONS
The terms defined below are used throughout this Prospectus.
Acreage held by production. Acreage covered by an oil and gas lease which
has a producing well on it, or which is pooled or unitized with a lease or
leases having one or more producing wells on them, so the lease is maintained in
effect for the duration of such production.
API. American Petroleum Institute.
Bbl. One stock tank Bbl, or 42 U.S. gallons liquid volume, used herein in
reference to oil or other liquid hydrocarbons.
Bcf. One billion cubic feet.
Boe or net equivalent barrels. Barrels of oil equivalent with natural gas
volumes converted to barrels of oil equivalents using the ratio of 6.0 Mcf of
natural gas to 1.0 barrel of crude oil.
Bopd. Barrels of oil per day.
Bcpd. Barrels of condensate per day.
Btu. British thermal unit; the amount of heat required to raise the
temperature of one pound of water one degree Fahrenheit. There are approximately
1,050 Btus in each standard cubic foot of natural gas.
Completion. The installation of permanent equipment for the production of
oil or gas, or in the case of a dry hole, the reporting of abandonment to the
appropriate agency.
Condensate. A hydrocarbon mixture that becomes liquid and separates from
natural gas when the gas is produced; similar to crude oil.
Development well. A well drilled within the proved area of an oil and gas
reservoir to the depth of a stratigraphic horizon known to be productive in an
attempt to recover proved undeveloped reserves or to economically accelerate
production of reserves classified as proved developed.
Discounted estimated future net cash flows. Estimated future net cash flows
discounted at a rate of ten percent per annum.
Dry hole or well. A well found to be incapable of producing hydrocarbons in
sufficient quantities such that proceeds from the sale of such production exceed
production expenses and taxes.
Exploratory well. A well drilled to find and produce oil or gas in an
unproved area or to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir.
Farmin or Farmout. An agreement whereunder the owner of a working interest
in an oil and gas lease assigns the working interest or a portion thereof to
another party who desires to drill on the leased acreage. Generally, the
assignee is required to drill one or more wells in order to earn its interest in
the acreage. The assignor usually retains a royalty or reversionary interest in
the lease. The interest received by an assignee is a "farmin" while the interest
transferred by the assignor is a "farmout."
Field. An area consisting of single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.
Gross. "Gross" oil and gas wells or "gross" acres are the total number of
wells or acres in which the Company has an interest, without regard to the size
of that interest.
Horizontal drilling. A drilling technique that permits the operator to
contact and intersect a larger portion of the producing horizon than
conventional vertical drilling techniques and can result in both increased
production rates and greater ultimate recoveries of hydrocarbons.
LPG. Liquified petroleum gas.
MBbl. One thousand barrels of oil or other liquid hydrocarbons.
82
<PAGE> 85
MBoe. One thousand Boe.
Mcf. One thousand cubic feet.
MMBbl. One million barrels of oil or other liquid hydrocarbons.
MMBoe. One million Boe.
MMBtu. One million Btus.
MMcf. One million cubic feet.
MMcfe. One million cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Natural gas liquids (NGL) or plant products. Butane, propane, ethane,
natural gasoline and other liquid hydrocarbons that are extracted from natural
gas.
Net. "Net" oil and gas wells or "net" acres are determined by multiplying
gross wells or acres by the Company's working interest in those wells or acres.
Net revenue interest. The percentage of production to which the owner of a
working interest is entitled. For example, the owner of a 100% working interest
in a well burdened only by a landowner's royalty of 12.5% would have an 87.5%
net revenue interest in that well.
Oil. Crude oil and condensate.
Operator. The individual or company responsible for conducting oil and gas
exploration, development and production activities on an oil and gas lease or
concession on its own behalf and, if applicable, for other working interest
owners, generally pursuant to the terms of a joint operating agreement or
comparable agreement.
Overriding royalty interest. An interest in an oil and gas property
entitling the owner to a share of oil and natural gas production free of certain
costs of production.
Present value. When used with respect to oil and gas reserves, the
estimated future gross revenue to be generated from the production of proved
reserves, net of estimated production and future development costs, using prices
and costs in effect as of the date indicated, without giving effect to
non-property related expenses such as general and administrative expenses, debt
service and future income tax expenses or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
Producing well. A well that is producing oil or gas or that is capable of
production.
Proved (or proven) developed reserves. Reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods
under existing economic and operating conditions.
Proved (or proven) reserves. The estimated quantities of oil, natural gas,
natural gas liquids and oil which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions.
Proved (or proven) undeveloped reserves. Reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion.
Recompletion. Recompletion refers to the completion of an existing well for
production from a formation that exists behind the casing of the well.
Reserve life. The proved reserves divided by the average annualized
production volumes.
Reservoir. A porous and permeable underground formation containing a
natural accumulation of producible oil and/or gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
83
<PAGE> 86
Royalty interest. An interest in an oil and gas property entitling the
owner to a share of oil or gas production free of costs of production.
Seismic. The use of shock waves generated by controlled explosions of
dynamite or other means to ascertain the nature and contour of underground
geological structures.
3-D Seismic Survey. Seismic that is run, acquired and processed to yield a
three-dimensional picture of the subsurface. Three dimensional seismic is
relatively expensive because it takes a considerable amount of computer time to
process the data.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves.
Working interest. The operating interest that gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production, subject to all royalties, overriding royalties and other burdens and
to all costs of exploration, development and operations and all risks in
connection therewith.
Workover. Operations on a producing well to restore or increase production.
84
<PAGE> 87
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF CMS NOMECO OIL & GAS CO.:
Report of Independent Public Accountants.............................................. F-3
Consolidated Balance Sheets as of December 31, 1993 and 1994 and September 30, 1995
(unaudited)......................................................................... F-4
Consolidated Statements of Income for the years ended December 31, 1992, 1993 and 1994
and for the nine months ended September 30, 1994 (unaudited) and 1995 (unaudited)... F-5
Consolidated Statements of Stockholder's Equity for the years ended December 31, 1992,
1993 and 1994 and for the nine months ended September 30, 1995 (unaudited).......... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1992, 1993 and
1994 and for the nine months ended September 30, 1994 (unaudited) and 1995
(unaudited)......................................................................... F-7
Notes to Consolidated Financial Statements............................................ F-8
Supplemental Information -- Oil and Gas Producing Activities (unaudited).............. F-24
CONSOLIDATED FINANCIAL STATEMENTS OF CMS NOMECO INTERNATIONAL, INC.
(FORMERLY WALTER INTERNATIONAL, INC.):
Report of Independent Public Accountants.............................................. F-30
Consolidated Balance Sheets as of December 31, 1994 and January 31, 1995
(unaudited)......................................................................... F-31
Consolidated Statements of Operations and Accumulated Deficit for the year ended
December 31, 1994 and for the one month ended January 31, 1995 (unaudited).......... F-32
Consolidated Statements of Cash Flows for the year ended December 31, 1994 and for the
one month ended January 31, 1995 (unaudited)........................................ F-33
Notes to Consolidated Financial Statements............................................ F-34
Supplemental Information -- Oil Producing Activities (unaudited)...................... F-40
CONSOLIDATED FINANCIAL STATEMENTS OF WALTER INTERNATIONAL, INC.:
Report of Independent Auditors........................................................ F-42
Consolidated Balance Sheets as of December 31, 1992 and 1993.......................... F-43
Consolidated Statements of Operations and Accumulated Deficit for the years ended
December 31, 1992 and 1993.......................................................... F-44
Consolidated Statements of Cash Flows for the years ended December 31, 1992 and
1993................................................................................ F-45
Notes to Consolidated Financial Statements............................................ F-46
COMBINED FINANCIAL STATEMENTS OF AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES:
Report of Independent Auditors........................................................ F-53
Combined Balance Sheets as of December 31, 1993 and 1994.............................. F-54
Combined Statements of Operations for the years ended December 31, 1992, 1993 and
1994................................................................................ F-55
Combined Statements of Stockholder's Equity for the years ended December 31, 1992,
1993 and 1994....................................................................... F-56
Combined Statements of Cash Flows for the years ended December 31, 1992, 1993 and
1994................................................................................ F-57
Notes to Combined Financial Statements................................................ F-58
Supplemental Information -- Oil Producing Activities (unaudited)...................... F-61
Combined Balance Sheet as of January 31, 1995 (unaudited)............................. F-63
Combined Statement of Operations for the one month ended January 31, 1995 (unaudited)
and Combined Statement of Stockholder's Equity for the one month ended January 31,
1995 (unaudited).................................................................... F-64
Combined Statement of Cash Flows for the one month ended January 31, 1995
(unaudited)......................................................................... F-65
Notes to Combined Financial Statements (unaudited).................................... F-66
CONSOLIDATED FINANCIAL STATEMENTS OF TERRA ENERGY LTD.:
Report of Independent Public Accountants.............................................. F-67
Consolidated Balance Sheets as of December 31, 1994 and July 31, 1995 (unaudited)..... F-68
Consolidated Statements of Earnings for the year ended December 31, 1994 and for the
seven months ended July 31, 1994 (unaudited) and 1995 (unaudited)................... F-69
</TABLE>
F-1
<PAGE> 88
<TABLE>
<CAPTION>
PAGE
<S> <C>
Consolidated Statements of Shareholders' Equity for the year ended December 31, 1994
and for the seven months ended July 31, 1995 (unaudited)............................ F-70
Consolidated Statements of Cash Flows for the year ended December 31, 1994 and for the
seven months ended July 31, 1994 (unaudited) and 1995 (unaudited)................... F-71
Notes to Consolidated Financial Statements............................................ F-72
Supplemental Information -- Oil and Gas Producing Activities (unaudited).............. F-81
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF WALTER INTERNATIONAL, INC. (UNAUDITED):
Pro Forma Statement of Operations for the one month ended January 31, 1995 and the
nine months ended September 30, 1995................................................ F-84
Pro Forma Balance Sheet as of September 30, 1995...................................... F-85
Pro Forma Statement of Operations for the year ended December 31, 1994................ F-86
</TABLE>
F-2
<PAGE> 89
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors,
CMS NOMECO Oil & Gas Co.:
We have audited the accompanying consolidated balance sheets of CMS NOMECO
Oil & Gas Co. (a Michigan corporation and wholly owned subsidiary of CMS
Enterprises Company) and subsidiaries as of December 31, 1993 and 1994, and the
related consolidated statements of income, stockholder's equity, and cash flows
for each of the three years in the period ended December 31, 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CMS NOMECO
Oil & Gas Co. and subsidiaries as of December 31, 1993 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1994 in conformity with generally accepted accounting
principles.
As explained in note 1.i to the consolidated financial statements, the
Company, effective January 1, 1992, changed its method of accounting for
postretirement benefits other than pension costs.
Arthur Andersen LLP
Detroit, Michigan,
January 27, 1995.
F-3
<PAGE> 90
CMS NOMECO OIL & GAS CO.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1993 1994 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash.................................................... $ 932 $ 1,117 $ 5,255
Temporary cash investments.............................. -- 4,969 3,813
Accounts Receivable:
Revenues and other, less allowances of $226 in 1993,
1994 and 1995...................................... 9,680 10,973 55,893
Income tax benefits................................... 5,442 3,527 11,516
Affiliates............................................ 2,170 83 1,665
Other................................................... 1,059 1,435 13,200
-------- -------- -----------
19,283 22,104 91,342
Investments and other assets................................. 7,088 12,539 23,121
Property, Plant and Equipment, at cost (full cost method).... 841,524 934,460 1,073,981
Less accumulated depreciation, depletion and
amortization.......................................... 465,534 496,403 526,038
-------- -------- -----------
375,990 438,057 547,943
-------- -------- -----------
Total assets....................................... $402,361 $472,700 $ 662,406
======== ======== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt.................... $ 9,579 $ 9,579 $ 6,677
Accounts payable........................................ 5,558 3,611 49,308
Accrued interest........................................ 1,561 1,349 1,171
Accrued taxes and other................................. 2,317 1,955 9,215
-------- -------- -----------
19,015 16,494 66,371
Long-term debt............................................... 109,141 119,462 192,371
Deferred Credits:
Deferred income taxes................................... 47,343 43,349 54,590
Other................................................... 3,873 4,509 7,985
-------- -------- -----------
51,216 47,858 62,575
Stockholder's Equity:
Common stock, no par value, authorized 55.0 million
shares, issued and outstanding 24.0 million shares.... 80,900 137,000 169,726
Retained earnings....................................... 142,089 151,886 171,363
-------- -------- -----------
222,989 288,886 341,089
-------- -------- -----------
Total liabilities and stockholder's equity......... $402,361 $472,700 $ 662,406
======== ======== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 91
CMS NOMECO OIL & GAS CO.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1992 1993 1994 1994 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
Operating Revenues:
Oil and condensate.......................... $26,553 $26,635 $26,831 $18,479 $45,423
Natural gas................................. 34,391 40,995 39,904 30,550 32,927
Other operating............................. 8,408 6,275 12,333 10,107 17,738
------- ------- ------- ------- -------
69,352 73,905 79,068 59,136 96,088
Operating Expenses:
Depreciation, depletion and amortization.... 32,566 35,605 34,919 25,358 34,072
Cost center write-offs...................... 5,744 9,648 5,612 452 2,184
Operating and maintenance................... 13,476 15,005 19,323 14,050 23,204
General and administrative.................. 4,489 5,599 6,345 4,346 5,609
Production and other taxes.................. 3,997 4,221 3,838 3,010 3,463
Cost of products sold....................... 1,427 1,127 973 682 773
------- ------- ------- ------- -------
61,699 71,205 71,010 47,898 69,305
Pretax operating income.......................... 7,653 2,700 8,058 11,238 26,783
Other income..................................... 163 382 239 152 522
Interest expense, net............................ 4,954 3,844 4,023 2,624 6,455
------- ------- ------- ------- -------
Income (loss) before income taxes................ 2,862 (762) 4,274 8,766 20,850
Income tax provision (benefit)................... (2,100) (5,900) (5,523) (2,148) 386
Income before accounting change and
extraordinary item............................. 4,962 5,138 9,797 10,914 20,464
------- ------- ------- ------- -------
Extraordinary item, early retirement of debt, net
of income taxes................................ -- -- -- -- (987)
Cumulative effect of accounting change, net of
income taxes................................... (1,124) -- -- -- --
------- ------- ------- ------- -------
Net income....................................... $ 3,838 $ 5,138 $ 9,797 $10,914 $19,477
======= ======= ======= ======= =======
Net income per common share before extraordinary
item and accounting change..................... $ 0.21 $ 0.21 $ 0.41 $ 0.45 $ 0.85
Cumulative effect of accounting change and
extraordinary item, net of income taxes........ (.05) -- -- -- (.04)
------- ------- ------- ------- -------
Net income per common share...................... $ 0.16 $ 0.21 $ 0.41 $ 0.45 $ 0.81
======= ======= ======= ======= =======
Average common shares outstanding (000's)........ 24,000 24,000 24,000 24,000 24,000
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 92
CMS NOMECO OIL & GAS CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Balance at December 31, 1991............................................. $ 65,600 $133,113
Net income.......................................................... -- 3,838
Contributions from parent........................................... 5,800 --
-------- --------
Balance at December 31, 1992............................................. 71,400 136,951
Net income.......................................................... -- 5,138
Contributions from parent........................................... 9,500 --
-------- --------
Balance at December 31, 1993............................................. 80,900 142,089
Net income.......................................................... -- 9,797
Contributions from parent........................................... 56,100 --
-------- --------
Balance at December 31, 1994............................................. 137,000 151,886
Net income (unaudited).............................................. -- 19,477
Contributions from parent (unaudited)............................... 32,726 --
-------- --------
Balance at September 30, 1995 (unaudited)................................ $169,726 $171,363
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 93
CMS NOMECO OIL & GAS CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1992 1993 1994 1994 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash Flow from Operating Activities:
Net income.......................... $ 3,838 $ 5,138 $ 9,797 $ 10,914 $ 19,477
Principal noncash items:
Depreciation, depletion and
amortization................... 32,566 35,605 34,919 25,358 34,072
Cost center write-offs............ 5,744 9,648 5,612 452 2,184
Deferred income taxes, net........ (1,307) (6,588) (4,331) (3,547) 1,641
Investment tax credit, net........ (200) (132) (55) (43) --
-------- -------- --------- -------- --------
40,641 43,671 45,942 33,134 57,374
Net Change In:
Accounts receivable................. 4,790 1,134 4,368 (1,845) (17,955)
Other current assets................ 342 (489) (376) (301) (3,078)
Accounts payable.................... (3,823) 1,309 (1,947) 1,054 14,900
Accrued interest.................... 137 (146) (212) (1,056) (230)
Accrued taxes and other
liabilities....................... 978 69 (1,686) 1,969 389
Accrued postretirement benefits..... 1,704 176 346 -- --
Other, net.......................... (38) 247 486 671 1,807
-------- -------- --------- -------- --------
44,731 45,971 46,921 33,626 53,207
Cash Flow from Financing Activities:
Revolving credit additions
(retirements), net.................. 12,600 26,900 19,900 21,200 24,300
Equity contributions from parent....... 5,800 9,500 56,100 52,000 9,000
Proceeds from bank loans............... 4,182 857 -- -- --
Repayment of bank loans................ -- (418) (1,008) (756) (972)
Repayment of notes..................... -- (5,000) (8,571) (8,571) (36,428)
-------- -------- --------- -------- --------
22,582 31,839 66,421 63,873 (4,100)
Cash Flow from Investing Activities:
Exploration and development
expenditures...................... (53,287) (75,678) (71,185) (56,063) (46,881)
Purchases of oil and gas
properties........................ (13,600) (865) (33,528) (33,192) (143)
Proceeds from sale of properties.... 991 5,024 7,278 3,101 5,256
Investments in Yemen................ -- (2,720) (5,489) (3,739) (2,304)
Interest capitalized................ (2,163) (3,511) (5,264) (3,961) (2,053)
-------- -------- --------- -------- --------
(68,059) (77,750) (108,188) (93,854) (46,125)
Net increase (decrease) in cash and
temporary cash investments............. (746) 60 5,154 3,645 2,982
-------- -------- --------- -------- --------
Cash And Temporary Cash Investments:
Beginning of period................. 1,618 872 932 932 6,086
-------- -------- --------- -------- --------
End of period....................... $ 872 $ 932 $ 6,086 $ 4,577 $ 9,068
======== ======== ========= ======== ========
Supplementary Information:
Interest payments net of amounts
capitalized....................... $ 4,666 $ 3,904 $ 3,860 $ 1,698 $ 7,892
Income tax payments (refunds)....... (7,643) 518 2,177 2,082 5,550
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 94
CMS NOMECO OIL & GAS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
CMS NOMECO Oil & Gas Co. (the "Company") is a wholly owned subsidiary of
CMS Enterprises Company (the "Parent") and a second-tier subsidiary of CMS
Energy Corporation ("CMS Energy"). The Company and its subsidiaries are engaged
in the exploration, development, acquisition and production of oil and natural
gas, including the extraction and sale of natural gas liquids. Certain
reclassifications have been reflected in the prior years' amounts to conform
with the 1994 presentation. Beginning in June 1995, transportation expense,
which had been shown as an operating expense, has been deducted from operating
revenues and prior periods have been reclassified.
The consolidated financial statements and related information as of and for
the nine months ended September 30, 1994 and 1995 included herein are unaudited
and, in the opinion of management, reflect all adjustments (consisting of only
recurring adjustments) necessary for a fair presentation of financial position,
results of operations and cash flows.
These unaudited consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements as of and for
the year ended December 31, 1994. The consolidated results of operations for the
nine months ended September 30, 1994 and 1995 are not necessarily indicative of
operating results for a full year. Additionally, all other financial statement
information contained in the Notes to Consolidated Financial Statements, which
occurred subsequent to December 31, 1994, is unaudited.
A summary of significant accounting policies is set forth below:
A. BASIS OF PRESENTATION
The consolidated financial statements include the Company and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
B. REVENUE RECOGNITION
Oil and gas revenues are recognized as production takes place and the sale
is completed and the risk of loss transfers to a third party purchaser.
C. TEMPORARY CASH INVESTMENTS
All highly liquid investments with an original maturity of three months or
less are considered temporary cash investments.
D. OIL AND GAS PROPERTIES
The Company follows the full cost method of accounting and capitalizes all
costs related to its exploration and development program, including the cost of
nonproductive drilling and surrendered acreage, in cost centers on a
country-by-country basis. Such capitalized costs include lease acquisition,
geological and geophysical work, delay rentals, drilling, completing and
equipping oil and gas wells, together with internal costs directly attributable
to property acquisition, exploration and development activities. The capitalized
costs in each cost center are amortized on an overall unit-of-production method
based on total estimated proved oil and gas reserves. Additionally, certain
costs associated with major development projects and all costs of unevaluated
leases are excluded from the depletion base until reserves associated with the
projects are proved or until impairment occurs. Costs associated with
exploration and development activities in non-producing cost centers are not
amortized until proved reserves are discovered and produced or a determination
is made that the value of the property is less than the costs incurred.
To the extent that capitalized costs (net of accumulated depletion and
amortization) less deferred taxes exceed the sum of discounted estimated future
net cash flows from proved oil and natural gas reserves (using
F-8
<PAGE> 95
CMS NOMECO OIL & GAS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unescalated prices and costs and a 10% per annum discount rate) and the lower of
cost or market value of unproved properties after income tax effects, such
excess costs are charged against earnings. Accordingly, the Company has written
off $0.5 million ($0.3 million after taxes) and $0.2 million ($0.1 million after
taxes) for the nine months ended September 30, 1994 and 1995, respectively, $1.9
million ($1.2 million after taxes) in 1992, $7.7 million ($5.0 million after
taxes) in 1993 and $4.9 million ($3.2 million after taxes) in 1994 for
prediscovery non-U.S. expenditures. Also, the Company wrote down the value of
Colombia ($3.1 million in 1992 and $1.9 million in 1993), Papua New Guinea ($0.7
million in 1994) and U.S. ($2.0 million in third quarter 1995) properties in
excess of the cost center ceiling. These charges are included in cost center
write-offs on the Consolidated Statements of Income.
E. INCOME TAXES
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 109, Accounting for Income Taxes. Accordingly, the Company uses an asset and
liability method to record the deferred tax consequences of its temporary
differences. Provision is made for deferred income taxes resulting from
temporary differences arising from the capitalization of certain exploration and
development costs for book purposes which are deducted currently for income tax
purposes, and for other temporary differences between book income and taxable
income. As these temporary differences reverse, the related deferrals are
credited to income. The Company does not provide deferred taxes on the
undistributed earnings of its non-U.S. subsidiaries as such earnings are
intended to be permanently reinvested.
The deferred investment tax credit was being amortized to income over a
ten-year period; none remains at December 31, 1994.
SFAS No. 109 requires classifying any deferred tax liability and asset as
current or non-current based on the classification of the related asset or
liability and expanding the disclosure requirements related to deferred tax
assets and liabilities. Additionally, a deferred tax asset is recognized only if
it is apparent that the temporary difference will reverse in the foreseeable
future.
F. PENSION PLAN
The Company participates in an affiliate's trusteed noncontributory defined
benefit plan (the "Plan") covering full-time regular employees within specified
age limits and periods of service. Pension expenses amounted to approximately
$46,000, $83,000 and $59,000 for the years ended December 31, 1992, 1993 and
1994. respectively.
Company employees are not segregated in the Plan and it is not possible to
determine the vested benefit obligation and related Plan assets with respect to
Company employees. The affiliate has indicated that assets available for Plan
benefits are in excess of the accumulated benefit obligation.
G. ACCOUNTING FOR INVESTMENTS
The Company's ownership share of Command Petroleum Holdings N.L.
("Command") stock (3.3% as of December 31, 1993 and 2.7% as of December 31,
1994, respectively) requires the Company to follow the cost method of accounting
for its investment in Command. The book value of this investment as of December
31, 1994 was $2.2 million and the fair market value was $2.8 million. The
investment was written down to the lower of cost or fair market value which was
$2.0 million as of December 31, 1992. The 1992 charge against income of $0.8
million is included in cost center write-offs on the Consolidated Statements of
Income.
In 1993 and 1994, the Company invested $2.7 million and $5.5 million,
respectively, in Comeco Petroleum Inc. ("Comeco"). The Company currently owns
50% of Comeco, and accounts for this investment
F-9
<PAGE> 96
CMS NOMECO OIL & GAS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
under the equity method of accounting. Comeco owns a 28.57% working interest in
the East Shabwa Block in Yemen.
H. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company participates in CMS Energy's Supplemental Executive Retirement
Plan ("SERP") for certain management employees. Benefits are based on the
employees' service and earnings as defined in the SERP. In 1988, a trust was
established and partially funded. Because the SERP is a nonqualified plan under
the Internal Revenue Code, earnings of the trust are taxable and trust assets
are included in the consolidated assets of the Company. SERP expenses amounted
to $320,000 in 1992, $190,000 in 1993 and $263,000 in 1994. As of December 31,
1993 and 1994, the Company's share of trust assets was approximately $1.9
million at cost and the projected benefit obligation was $1.4 million and $1.7
million, respectively.
I. HEALTH CARE AND LIFE INSURANCE BENEFITS
The Company provides health care and life insurance benefit plans for its
employees and retirees through insurance companies. The postretirement plans are
noncontributory and currently unfunded. In 1992, the Company changed its method
of accounting for the cost of these plans from a pay-as-you-go (cash) method to
an accrual method as required by SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other than Pensions, and recognized the December 31,
1992 unfunded transition obligation as a one-time cumulative accounting
adjustment. The funded status of the postretirement benefit plans is reconciled
with the liability recorded as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1993 1994
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees............................................................. $ 162 $ 388
Fully eligible active plan participants.............................. 261 377
Other active plan participants....................................... 1,542 1,551
------ ------
1,965 2,316
Plan assets and unrecorded losses.................................... 15 (209)
------ ------
Recorded liability................................................... $1,980 $2,107
====== ======
</TABLE>
The 1992, 1993 and 1994 cost was comprised of $199,000, $132,000 and
$194,000, respectively, for service plus $143,000, $144,000 and $152,000,
respectively, for interest.
For measurement purposes, a 10% annual rate of increase was assumed in the
per capita cost of covered health care benefits for 1995. The rate was assumed
to gradually decrease to 6.0% per annum by the year 2004 and thereafter. The
health care cost trend rate assumption has an impact on the accumulated
postretirement benefit obligation and on future amounts accrued. A one
percentage point increase each year in the assumed health care cost would
increase the accumulated postretirement benefit obligation as of December 31,
1994 by $283,000 and increase the 1994 cost by $27,000. For the years ended
December 31, 1993 and 1994, the weighted average discount rate was 7.25% and
8.0% per annum, respectively, and the expected long term rate of return on plan
assets was 8.5% and 7.0% per annum, respectively.
J. NET INCOME PER COMMON SHARE
Net income per common share is based upon the number of common shares
outstanding during each period.
F-10
<PAGE> 97
CMS NOMECO OIL & GAS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
K. NEW ACCOUNTING STANDARDS
In December 1994, the American Institute of Certified Public Accountants
issued Statement of Position 94-6, Disclosure of Certain Significant Risks and
Uncertainties, effective for 1995 year-end financial statements. The Company
does not believe that it will be significantly affected by the Statement, which
requires disclosures about the nature of a company's operations and the use of
estimates in the financial statements.
L. COMMON STOCK SPLIT
These financial statements and Notes thereto reflect retroactively (i) the
increase in the authorized shares of Common Stock to 55.0 million, and (ii) the
issuance of 9.4 million shares of Common Stock, which increased the Common Stock
outstanding from 14.6 million shares to 24.0 million shares, based on a stock
split of approximately 1.644 for 1.0 effected on October 25, 1995. All per share
amounts in the financial statements reflect this split.
M. SUPPLEMENTAL NONCASH ACTIVITIES
During 1995, CMS Energy acquired all of the outstanding capital stock of
both Walter International, Inc. and subsidiaries ("Walter") and Terra Energy,
Ltd. and subsidiaries ("Terra"), as discussed further in Notes 2 and 3, payable
in Common Stock of CMS Energy. Upon consummating the acquisitions, the stock of
Walter and Terra were transferred from CMS Energy to the Company, and the
Company has recorded in the consolidated balance sheet as of September 30, 1995
the fair value of the Walter and Terra assets and liabilities, a noncash
contribution from CMS Energy of $23.8 million, cash contributions from CMS
Energy of $4.5 million and $67.8 million for notes payable to CMS Energy. These
acquisitions were recorded under the purchase method of accounting. The fair
value of Walter's and Terra's assets and liabilities at the date of the
respective acquisitions are presented in Note 2.
2. PURCHASES OF OIL AND GAS PROPERTIES
During 1994, the Company purchased 9.1 MMBbls of estimated proved oil
reserves and 9.4 billion cubic feet ("Bcf") of estimated proved gas reserves in
three separate acquisitions totaling $33.5 million. The Company participated in
four separate reserve acquisitions in 1992. These purchases added approximately
2.7 million barrels of oil equivalent ("MMBoe") of estimated proved reserves at
an aggregate net cost of $13.6 million.
F-11
<PAGE> 98
CMS NOMECO OIL & GAS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995 PURCHASES OF OIL AND GAS PROPERTIES (UNAUDITED)
In February 1995, the Company acquired Walter (through contributions from
CMS Energy, "the Walter Acquisition"). This acquisition increased certain line
items on the Consolidated Balance Sheet as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
Cash and temporary cash investments....................................... $ 7,411
Accounts receivable....................................................... 9,488
Other current assets...................................................... 3,654
Property, plant and equipment............................................. 37,457
Current maturities of long-term debt...................................... 1,968
Accounts payable.......................................................... 7,615
Accrued interest.......................................................... 52
Accrued taxes and other................................................... 1,621
Long-term debt............................................................ 16,280
Deferred income taxes and other credits................................... 3,248
Additional paid-in capital................................................ 27,226
</TABLE>
In August 1995, the Company acquired Terra (through contributions from CMS
Energy, "the Terra Acquisition"). This acquisition increased certain line items
on the Consolidated Balance Sheet as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
Cash and temporary cash investments....................................... $ 8,745
Accounts receivable....................................................... 27,048
Other current assets...................................................... 5,033
Investments and other assets.............................................. 7,940
Property, plant and equipment............................................. 55,100
Current maturities of long-term debt...................................... 2,600
Accounts payable.......................................................... 23,182
Accrued taxes and other................................................... 5,250
Long-term debt............................................................ 62,476
Deferred income taxes and other credits................................... 9,358
Additional paid-in capital................................................ 1,000
</TABLE>
The assets purchased have been included in property, plant and equipment at
cost. Results of operations include income from the purchased properties
beginning with the month of closing.
PRO FORMA INFORMATION (UNAUDITED)
The following pro forma statement of income information has been prepared
to give effect to the acquisition of Walter and Terra as if such transactions
had occurred at January 1, 1994. The other property acquisitions in 1994, noted
above, are deemed to be insignificant for inclusion in the pro forma
information. The historical results of operations have been adjusted to reflect
(i) revenues and expenses attributable to the properties, (ii) the difference
between the acquired properties' historical depreciation, depletion and
amortization and such expense calculated based on the value allocated to the
acquired assets, and (iii) adjustment of income tax expense to reflect the
combined results of operations. Management does not believe the pro forma
amounts purport to be indicative of the results of operations that would have
been reported had the acquisitions occurred as of the dates indicated below, or
that may be reported in the future.
F-12
<PAGE> 99
CMS NOMECO OIL & GAS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA
------------------------------
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1994 1995
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Operating revenues................................................. $110,512 $ 105,455
Pretax operating income............................................ 18,731 33,753
Income before extraordinary item................................... 20,084 26,671
Net income......................................................... 20,084 25,684
Net income per share............................................... $ 0.84 $ 1.07
</TABLE>
3. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1993 1994 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
$130,000,000 revolving credit agreement ("Credit
Agreement") payable in 36 monthly principal
installments beginning November 1, 1996,
variable interest rate, 7.3% average rate per
annum for the year ended December 31, 1994..... $ 69,100 $ 89,000 $ 113,300
Senior serial notes, Series A, payable in annual
principal installments of $5.0 million on each
March 1 through 1997, interest at 9.3% per
annum payable semi- annually on each March 1
and September 1*............................... 20,000 15,000 --
Senior serial notes, Series B, payable in annual
principal installments of approximately $3.6
million on each March 1 through 2000, interest
at 9.45% per annum payable semi-annually on
each March 1 and September 1*.................. 25,000 21,428 --
Notes payable to CMS Energy, interest at LIBOR
plus 2.0% per annum, maturity dates of November
1, 1999........................................ -- -- 67,840
OPIC guaranteed loans............................ 4,620 3,613 14,172
Terra debt assumed............................... -- -- 3,736
-------- -------- ---------
Total long-term debt................... 118,720 129,041 199,048
Less current maturities of long-term debt........ 9,579 9,579 6,677
-------- -------- ---------
$109,141 $119,462 $ 192,371
======== ======== =========
</TABLE>
- ------------------------------
* Repaid in full August 10, 1995 with additional bank borrowings under the
Credit Agreement.
F-13
<PAGE> 100
CMS NOMECO OIL & GAS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1994, principal maturities of long-term debt over the
next five years are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
1995...................................................................... $ 9,579
1996...................................................................... 14,523
1997...................................................................... 39,243
1998...................................................................... 33,824
1999...................................................................... 28,291
Thereafter................................................................ 3,581
---------
$ 129,041
=========
</TABLE>
In November 1993, the Company amended the terms of its Credit Agreement and
increased the amount of the commitment to $110.0 million. In March 1995, the
commitment was increased to $130.0 million. Borrowings under the agreement are
revolving credit loans for three years which convert to term loans on November
1, 1996. The term loans are payable in 36 monthly installments through November
1, 1999. The Credit Agreement provides various options to the Company relative
to interest rates. As of December 31, 1994 and September 30, 1995, the average
rate in effect was 7.3% per annum and 7.2% per annum, respectively, and amounts
outstanding were $89.0 million and $113.3 million, respectively. The Credit
Agreement requires a commitment fee.
The Company also had a series of note agreements dated as of March 1, 1990
pursuant to which $36.4 million of senior serial notes were outstanding as of
December 31, 1994. The $27.9 million of notes outstanding were repaid in full
August 10, 1995, at a premium of $1.5 million resulting in an after-tax
extraordinary item of $987,000 being reflected on the Statements of Income.
In 1992, the Company utilized an additional borrowing alternative through
Overseas Private Investment Corporation ("OPIC") project financing in Equatorial
Guinea ($3.6 million outstanding as of December 31, 1994). As of September 30,
1995, $14.2 million of project financing debt is outstanding under agreements
with OPIC. These OPIC guaranteed loans funded development drilling for the Alba
Field in Equatorial Guinea ($5.4 million) and acquisition financing for the
Yombo Filed in the Congo ($8.8 million).
At December 31, 1994, the Company also had a $4.4 million stand-by letter
of credit in support of the Ecuador project. This letter of credit expired in
1995 and has not been renewed.
The aggregate borrowing base under the Credit Facility is limited to the
estimated loan value of the Company's oil and gas reserves, subject to certain
exclusions, based upon forecast rates of production and current commodity
pricing assessments, as periodically redetermined by the Banks which are parties
to the Credit Agreement. The Banks have broad discretion in determining which of
the Company's reserves to include in the borrowing base. The Company is in early
stages of negotiations to, among other things, increase commitment levels and
expand the borrowing base under the Credit Facility.
The total borrowing base at December 31, 1994, was $134.7 million. Because
of adjustments to the borrowing base for outstanding letters of credit and
project financing debt in Equatorial Guinea, the total amount available for
borrowing from all sources as of December 31, 1994 was $133.7 million. Of the
total amount available, $129.0 million in borrowings were outstanding as of
December 31, 1994.
Under the terms of the Credit Agreement, the Company must (i) maintain a
ratio of current assets to current liabilities at least equal to 0.75 to 1.0,
(ii) maintain a ratio of total liabilities to tangible net worth of no more than
0.75 to 1.0, (iii) maintain a minimum tangible net worth of $150.0 million, and
(iv) maintain a ratio of cash flow after dividends to fixed charges for the most
recent four quarters of 2.0 to 1.0. Restrictive covenants under the Credit
Agreement include certain limitations on indebtedness and contingent
obligations, as well as certain restrictions on liens, investments, affiliate
transactions and sales of assets. In addition, the
F-14
<PAGE> 101
CMS NOMECO OIL & GAS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Banks have the right to require the Company to repay all advances under the
Credit Agreement within 90 days after notification to the banks that (i) CMS
Energy no longer beneficially owns a majority of the outstanding voting stock of
the Company or (ii) all or substantially all of the assets of the Company are
sold.
As of September 30, 1995, the Company's current ratio was 1.60 to 1.0, its
total liabilities to tangible net worth ratio was 0.72 to 1.0, its tangible net
worth was $302.0 million and its ratio of cash flow after dividends to fixed
charges was 4.9 to 1.0.
The fair value of these facilities, because of prepayment premiums on the
senior notes, is estimated to exceed the recorded amounts by approximately $2.5
million at December 31, 1993 and $2.1 million at December 31, 1994.
In August 1995, the Company issued a note in the principal amount of
approximately $61.3 million (the "Terra Note") to the Parent, which in turn
assigned it to CMS Energy, in connection with the transfer by CMS Energy of the
common stock of Terra to the Parent and then by the Parent to the Company, and
in May, 1995 the Company issued another note in the principal amount of
approximately $6.5 million (the "Walter Note") to CMS Energy in connection with
borrowings made to repay $6.6 million of indebtedness of Walter immediately upon
the closing of the Walter acquisition (the Terra Note and the Walter Note
together referred to herein as the "CMS Notes"). The CMS Notes bear interest at
the rate of London Interbank Offered Rate ("LIBOR") plus 2.0% per annum and have
a maturity date of November 1, 1999. Amounts outstanding under the CMS Notes are
expressly subordinate to the Company's Credit Agreement. Certain limitations are
placed on the Company's obligation to make payments on the loans under the CMS
Notes in the event of default under the terms of the Credit Agreement.
In connection with the Terra Acquisition, the Company assumed $3.7 million
of long-term debt comprised of $1.9 million of capitalized leases and $1.8
million outstanding under a term loan for financing of a processing plant under
construction.
In December 1994, CMS Energy arranged for the issuance of a standby letter
of credit, currently in the amount of $45.0 million, to secure the Company's
performance under the operating services agreement with respect to the Colon
Unit in Venezuela. The Company has agreed to reimburse CMS Energy on demand for
any draw made under the letter of credit and to pay to CMS Energy a fee of
2.125% per annum of the face amount of the letter of credit.
The Company has entered into an interest rate swap agreement with a bank
which effectively fixed the interest rate on $20.0 million of floating rate
debt. Under the agreement, the Company will pay the bank interest at the rate of
5.81% per annum over the term of the agreement and the bank will pay the Company
the three-month LIBOR rate. The swap agreement, which will terminate March 24,
1997, requires quarterly settlement payments. As of December 31, 1994, the bank
owed the Company $24,000 for the first quarter 1995 settlement.
4. INCOME TAXES
The Company and its consolidated subsidiaries join with CMS Energy in
filing a consolidated U.S. tax return. Taxable income or loss are determined for
the Company and its subsidiaries as if they were filing separate income tax
returns. Tax benefits for losses and nonconventional fuel tax credits (Section
29 Credits) are recognized by the Company to the extent utilized in the
consolidated return. Because the Company has been (and is expected to continue
to be) included in the consolidated federal income tax return filed by CMS
Energy, these Section 29 Credits have either been used currently to reduce the
tax liability of the CMS Energy consolidated group or have created a minimum tax
credit carryforward for use in future years. If the taxable income of the CMS
Energy consolidated group in future years were to be less than projected, the
Section 29 Credits would be deferred or eliminated. Moreover, if the Company
were deconsolidated from the CMS Energy consolidated group, the Company's
ability to realize any benefit from past or future Section 29
F-15
<PAGE> 102
CMS NOMECO OIL & GAS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credits would be materially restricted. The Company has no plans, and has been
advised by CMS Energy that CMS Energy has no plans, to effect any transaction in
the foreseeable future that would cause a deconsolidation of the Company from
the CMS Energy consolidated group. To the extent required by local law, the
Company and certain of its subsidiaries file income and other tax returns in
those non-U.S. countries in which the Company does business.
Significant components of income tax expense were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1992 1993 1994 1994 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current tax (benefit).................... $(1,173) $ 820 $(1,137) $ 1,442 $(1,788)
Deferred tax (benefit)................... (1,307) (8,474) (4,331) (3,547) 1,642
Tax rate change.......................... -- 1,886 -- -- --
Amortization of investment tax credit.... (200) (132) (55) (43) --
------- ------- ------- ------- -------
$(2,680) $(5,900) $(5,523) $(2,148) $ (146)
======= ======= ======= ======= =======
Operating................................ $(2,100) $(5,900) $(5,523) $(2,148) $ 386
Other.................................... (580) -- -- -- (532)
------- ------- ------- ------- -------
$(2,680) $(5,900) $(5,523) $(2,148) $ (146)
======= ======= ======= ======= =======
</TABLE>
Income taxes shown above for the nine months ended September 30, 1995
include a $532,000 benefit which has been deducted from the "extraordinary item"
on the Consolidated Statements of Income. Income tax expense for 1993 includes
$1.9 million to increase prior years' deferred taxes to the revised statutory
rate of 35.0% per annum. Income taxes shown above for 1992 include $580,000
which has been deducted from the "cumulative effect of accounting change" on the
Consolidated Statements of Income.
Total income tax provision (benefit) was as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1992 1993 1994 1994 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S.:
Current............................. $(2,418) $ 59 $(1,777) $ 600 $(1,291)
Deferred............................ (2,121) (7,137) (5,103) (3,849) (376)
Non-U.S.:
Current............................. 1,245 761 640 842 (497)
Deferred............................ 614 417 717 259 2,018
------- ------- ------- ------- -------
Total.......................... $(2,680) $(5,900) $(5,523) $(2,148) $ (146)
======= ======= ======= ======= =======
</TABLE>
The Company's wholly owned subsidiaries have approximately $132.9 million
of net operating loss carryforwards generated in foreign taxing jurisdictions.
These foreign net operating loss carryforwards are available to offset income
taxable only in the jurisdictions in which the corresponding losses occurred.
The losses carry forward until utilized, until they lapse under the respective
taxation regime or the wholly-owned subsidiaries which generated the losses
withdraw from business activities within the respective taxing jurisdictions.
F-16
<PAGE> 103
CMS NOMECO OIL & GAS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The principal components of the Company's deferred tax assets (liabilities)
recognized in the balance sheet are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1993 1994 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Unsuccessful well and lease costs.................. $(132,248) $(144,669) $(152,180)
Intangible drilling costs.......................... (37,881) (38,204) (38,492)
Capitalized general and administrative costs....... (10,194) (15,423) (15,359)
Other.............................................. (10,878) (9,425) (10,440)
--------- --------- ---------
Gross deferred tax liabilities..................... (191,201) (207,721) (216,471)
Accumulated depreciation, depletion and
amortization..................................... 124,898 135,696 130,148
Alternative minimum tax credit carryforward........ 18,120 27,229 28,260
Other.............................................. 742 1,684 3,710
--------- --------- ---------
Gross deferred tax assets.......................... 143,760 164,609 162,118
--------- --------- ---------
Net deferred tax liability (includes current)...... $ (47,441) $ (43,112) $ (54,353)
========= ========= =========
</TABLE>
The actual income tax expense (benefits) differs from the amount computed
by applying the statutory U.S. Federal tax rate to income before income taxes as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1992 1993 1994 1994 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income........................... $ 3,838 $ 5,138 $ 9,797 $10,914 $19,477
Income tax provision (benefit)....... (2,680) (5,900) (5,523) (2,148) (146)
------- ------- ------- ------- -------
1,158 (762) 4,274 8,766 19,331
Statutory U.S. income tax rate....... 34% 35% 35% 35% 35%
------- ------- ------- ------- -------
Expected income tax provision
(benefit).......................... 394 (267) 1,496 3,068 6,766
Increase (Decrease) In Taxes From:
Nonconventional fuels tax
credit........................ (4,425) (5,605) (8,460) (6,000) (8,950)
Intercompany interest income.... -- 130 1,185 824 1,180
Effect of tax rate change....... -- 1,886 -- -- --
Command stock transactions...... 328 (2,147) -- -- --
Foreign taxes, net of U.S.
benefit....................... 1,247 318 533 263 955
Permanent differences........... 53 (435) (268) (103) 113
Other, net...................... (277) 220 (9) (200) (210)
------- ------- ------- ------- -------
Income tax provision (benefit)....... $(2,680) $(5,900) $(5,523) $(2,148) $ (146)
======= ======= ======= ======= =======
</TABLE>
5. RELATED PARTY TRANSACTIONS
Accounts receivable -- affiliates as of December 31, 1993 includes a $2.0
million equity infusion from CMS Energy which was paid to the Company in January
1994.
The Company sells natural gas to affiliates at rates approximating the
average price of gas paid to other area producers. Total sales to an affiliate,
Consumers Power Company, were approximately $3.4 million in 1992, $2.6 million
in 1993, $0.7 million in 1994 and $14.1 million for the nine months ended
September 30, 1995. Other intercompany transactions, principally services, are
billed at cost. Gas sales to the Midland Cogeneration Venture amounted to
approximately $6.4 million in 1992, $12.2 million in 1993 and $9.2 million in
1994.
F-17
<PAGE> 104
CMS NOMECO OIL & GAS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1993, the Company received $2.6 million for its share of proceeds from
the sale of certain northern Michigan pipelines to an affiliate, CMS Gas
Transmission and Storage Company.
6. SIGNIFICANT CUSTOMERS
Revenues from sales to the Company's largest customers as a percent of
total Company revenues were:
<TABLE>
<CAPTION>
1992 1993 1994
<S> <C> <C> <C>
Midland Cogeneration Venture........................................ 9% 15% 11%
Total Petroleum Company............................................. 11% 8% 5%
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company estimates its capital expenditures for 1995 will be $193.6
million and certain commitments have been made in connection therewith.
A. HERITAGE RESOURCES, INC.
On December 18, 1987, Tribal Drilling Company ("Tribal") and certain other
plaintiffs, including J. Stuart Hunt, an affiliate of Tribal and a director of
the Company, filed a lawsuit in Dallas County, Texas (the "Dallas County
Lawsuit") seeking, among other things, a declaratory judgment against Heritage
Resources, Inc. ("Heritage") to the effect that Heritage was not qualified to
serve as the operator of Sections 21, 22 and 23 of the Crittendon Field located
in Winkler County, Texas, that Heritage had been properly removed as operator
pursuant to a vote of non-operator working interest owners and that Tribal is
the duly elected replacement operator. The Company, which was not originally a
plaintiff in the Dallas County Lawsuit, has non-operating working interests in
Sections 21 and 23 of the Crittendon Field. Pursuant to the court's order to
join all indispensable parties, on April 20, 1988 plaintiffs filed an amended
petition for declaratory relief which included the Company as one of the
plaintiffs. Heritage and certain related parties subsequently filed
counterclaims against all of the approximately 20 plaintiffs in the Dallas
County Lawsuit, including the Company, alleging various causes of action,
including without limitation claims for breach of contract, slander of title,
tortious interference with contract, tortious interference with business
relations, fraud, conspiracy and intentional infliction of emotional distress.
In the Dallas County Lawsuit, Heritage seeks approximately $100 million in
actual damages, exemplary damages not to exceed $1 billion, attorneys' fees and
declaratory relief. Trial of the Dallas County lawsuit, including counterclaims,
is currently scheduled for May 1996.
On December 18, 1987, Heritage and certain related parties filed two
separate lawsuits, since consolidated, in Winkler County, Texas (the "Winkler
County Lawsuit") against certain but not all non-operator working interest
owners of Sections 21 and 22 of the Crittendon Field. The Company was not a
party to the Winkler County Lawsuit. In the Winkler County Lawsuit, the
plaintiffs in many respects alleged the same course of conduct that is the
subject of the Dallas County Lawsuit, including Heritage's counterclaims. In
October 1992, a jury in the Winkler County lawsuit returned a verdict in favor
of plaintiffs and against the defendants in that litigation in an aggregate
amount in excess of $80 million plus attorneys' fees in excess of $20 million.
Certain defendants subsequently entered into a settlement with the plaintiffs
and the non-settling plaintiffs have appealed the judgments in the Winkler
County Lawsuit to the Texas Court of Appeals in El Paso, Texas. The Court of
Appeals has indicated that it may rule on the appeal by late 1995 or early 1996.
The Company believes that it has meritorious defenses to the counterclaims
in the Dallas County lawsuit and intends to defend itself vigorously in such
lawsuit. Management believes it is unlikely that the ultimate outcome of this
matter will have a material adverse effect on the Company's financial condition
or results of operations. However, the outcome of a jury trial is difficult to
predict, and there can be no assurance that the resolution of Heritage's
counterclaims against the Company will not have such a material adverse effect.
F-18
<PAGE> 105
CMS NOMECO OIL & GAS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. ECUADOR
The Company has a 14% working interest in a consortium which is conducting
oil development and production activities in several fields within the Oriente
Block 16 in the Republic of Ecuador and Tivacuno Area in Eastern Ecuador, from
which production began in 1994. This project is operated by Maxus Energy
Corporation, a recently-acquired subsidiary of YPF Sociedad Anonima ("YPF").
Production from Block 16 and related fields in the Oriente Basin of the
Ecuadorian Amazon region has steadily increased since start-up in mid-1994, with
new wells and fields continuing to be brought on stream. As of June 30, 1995,
these fields represented approximately 14.1% of the Company's estimated total
proved reserves of oil and natural gas on a Boe basis. With lower worldwide oil
prices and increases in total project costs reducing the overall economic
benefit of these fields to the Ecuadorian government, the Ministry of Energy and
Mines in Ecuador has notified the members of the consortium with interests in
such fields that they should investigate alternatives for improving project
economics to the Ecuadorian government, including the renegotiation of the
service contract governing the Company's interest in these fields. The
Ecuadorian government has significant leverage to force changes due to its broad
governmental and regulatory powers. Authorizations have been and may in the
future be withheld and/or delayed to the economic detriment of the consortium
unless the discussions are productive. Discussions with the Ecuadorian
government concerning various alternatives began in late September 1995 and will
likely continue for the next several months. Although the Company cannot
currently predict what impact, if any, these discussions will have on the
project's economics, and there can be no assurance that these discussions or
their outcome will not have a material adverse effect on the Company's estimated
reserves, financial condition or results of operations; in management's opinion
the ultimate outcome will not have a material adverse impact on the Company's
financial condition or results of operations.
C. DUAL CONSOLIDATED LOSSES
As a result of the Walter Acquisition and related transactions, the Company
acquired certain assets located in the Congo which, prior to such transactions,
were owned by affiliates of Amoco Corporation ("Amoco"). As a result of certain
agreements entered into in connection with the Walter Acquisition, CMS Energy
and the Company could become jointly and severally liable to Amoco or to the
Internal Revenue Service for the recapture of "dual consolidated losses"
utilized by Amoco in prior years if a "triggering event" were to occur with
respect to such assets or with respect to the stock of Walter or certain of its
subsidiaries. The amount of such potential liability could be up to $78.2
million, plus an interest factor thereon. However, CMS Energy has agreed to
indemnify the Company for such liability if the triggering event results from
acts or omissions (i) of CMS Energy or any of its subsidiaries (other than the
Company) which occur after the initial public sale of the Company's Common
Stock; (ii) of the Company or any of its subsidiaries if such acts or omissions
are approved by the Board of Directors of the Company, which approval includes
the affirmative vote of a majority of the employees of CMS Energy or any of its
subsidiaries (other than the Company or any of its subsidiaries) who serve on
the Company's Board of Directors; or (iii) of any person if such acts or
omissions occur prior to the initial public sale of the Company's Common Stock.
In return, the Company has agreed to indemnify CMS Energy for any such dual
consolidated loss tax liability if the triggering event results from acts or
omissions of the Company on or after the date of the initial public sale of the
Company's Common Stock which have not been approved by the Board of Directors of
the Company in the manner described in the preceding sentence. The Company's
subsidiary, Walter (now named CMS NOMECO International, Inc.), could also be
secondarily liable to Amoco for up to $59.0 million in potential recapture tax,
plus an interest factor thereon, if Nuevo Energy Company ("Nuevo"), an
unaffiliated company, were to fail to satisfy its potential liability to Amoco
with respect to the recapture of dual consolidated losses relating to certain
other assets located in the Congo acquired by Nuevo's affiliate from an
affiliate of Amoco simultaneously with Walter's acquisition of its Congolese
assets. Because the net assets of Nuevo currently appear to be adequate to
satisfy any obligation which Nuevo may have with respect to such other assets,
the
F-19
<PAGE> 106
CMS NOMECO OIL & GAS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company believes that it is unlikely that Walter would have to make a payment to
satisfy its secondary liability, although there can be no assurance that this
will be the case. However, if Walter were required to make such a payment, it
would have a claim against Nuevo, but would not be able to recover such payment
from CMS Energy under the above-described indemnity.
As a result of the Company's November 1993 acquisition (the "Yemen
Acquisition") of its ownership interest in Pecten Yemen Company ("PYC"), a
predecessor of Comeco Petroleum, Inc. from a member of the Shell Petroleum Inc.
consolidated group (the "SPI Group"), the Company agreed to become jointly and
severally liable for tax liabilities incurred by the SPI Group as a result of
the recapture of dual consolidated losses generated by PYC and utilized by the
SPI Group for tax purposes in prior years, if a "triggering event" were to occur
with respect to the stock or assets of PYC after such acquisition. It is
estimated that the Company's potential joint and several liability for dual
consolidated loss recapture tax liability incurred by the SPI Group would be
approximately $15.8 million plus an interest factor thereon. CMS Energy has not
agreed to indemnify the Company for this potential tax claim. However, if the
Company were required to make a payment in satisfaction of such liability due to
a triggering event that it did not solely cause, it would have a claim against
the other stockholders of Comeco for at least the amount by which such payment
exceeded $7.9 million, plus an interest factor thereon.
In addition to the potential recapture of the dual consolidated losses
arising from the Walter Acquisition, the Yemen Acquisition and related
transactions, the Company and its other domestic affiliates have incurred losses
in certain other foreign countries. The additional tax liability that could be
recaptured upon a triggering event (including the Company's obligations to other
parties under agreements similar to the indemnification agreement with Amoco and
the SPI Group described in the preceding paragraphs) would be approximately
$10.0 million as of December 31, 1994, plus an interest factor thereon.
D. HEDGING ARRANGEMENTS
The Company periodically enters into oil and gas price hedge arrangements
to mitigate its exposure to price fluctuations on the sale of oil and natural
gas. As of December 31, 1994, the Company was party to gas price collar
contracts on 7.3 Bcf of gas for the delivery months of January through December
1995 at prices ranging from $2.05 to $2.35 per MMBtu. The Company also had an
oil collar contract for 1,000 barrels ("Bbls") per day with a floor of $18.00
per Bbl and a ceiling of $19.95 per Bbl. The contracts are accounted for as
hedges; accordingly, any gains or losses are deferred and recognized on the
settlement dates. The Company received $241,000 in 1994 for settlement of
January 1995 contracts on 0.6 Bcf of gas. At December 31, 1994, the fair value
of these hedge arrangements was not materially different than the book value.
The Company has also hedged certain of its gas supply obligations to the
Midland Cogeneration Venture in the years 2001 through 2006 by entering into an
agreement with Louis Dreyfus on May 1, 1989 to purchase the economic equivalent
of 10,000 MMBtu per day at a fixed, escalated price starting at $2.82 per MMBtu
in 2001. The settlement periods are each one year period ending December 31,
2001 through 2006 on 3.65 MMBtu. If the "floating price", essentially the then
current Gulf Coast spot price, for a period is higher than the "fixed price",
the seller pays the Company the difference, and vice versa. If a party's
exposure at any time exceeds $2.0 million, that party is required to obtain a
letter of credit in favor of the other party for the excess over $2.0 million,
to a maximum of $10.0 million. At December 31, 1994, the seller had arranged a
letter of credit in the Company's favor for $3.0 million.
E. OTHER
The Company is party to certain other lawsuits and administrative
proceedings arising in the ordinary course of business before various courts and
governmental agencies involving, for example, claims for personal injury and
property damages, contractual matters, environmental issues and other matters.
Management
F-20
<PAGE> 107
CMS NOMECO OIL & GAS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cannot predict the ultimate resolution of these matters but it believes
resulting liabilities, if any, will not have a material adverse effect upon the
Company's financial position or results of operations.
8. FINANCIAL INSTRUMENTS
The carrying amounts of cash, temporary cash investments and current
liabilities approximate their fair values due to their short-term nature. The
estimated fair values of long-term investments are based on quoted market prices
or, in the absence of specific market prices, on quoted market prices of similar
investments or other valuation techniques. The carrying amounts of all long-term
investments in financial instruments approximate fair value. The carrying amount
of long-term debt was $118.7 million and $129.0 million and the fair value of
long-term debt was $121.2 million and $131.1 million as of December 31, 1993 and
1994, respectively. Although the current fair value of the long-term debt may
differ from the current carrying amount, settlement of the reported debt is
generally not expected until maturity.
The fair values of the Company's off-balance-sheet financial instruments
are based on the amounts estimated to terminate or settle the instruments. The
fair value of interest rate swap agreements was $24,000 as of December 31, 1994.
Effective January 1, 1994, the Company adopted SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, which did not materially
impact the Company's financial position or results of operations.
9. LEASES
The Company and its subsidiaries lease various assets, including vehicles,
office equipment and office space under leases expiring on various dates through
1999. Rental expense under these leases was $527,000 and $541,000 for the years
ended December 31, 1993 and 1994, respectively.
Minimum rental commitments under the Company's non-cancelable leases at
December 31, 1994, were:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
1995...................................................................... $ 467
1996...................................................................... 431
1997...................................................................... 442
1998...................................................................... 442
1999...................................................................... 416
-------
$ 2,198
=======
</TABLE>
F-21
<PAGE> 108
CMS NOMECO OIL & GAS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PROPERTY, PLANT AND EQUIPMENT
Investments in property, plant and equipment were as follows at December
31, 1993 and 1994:
<TABLE>
<CAPTION>
1993 1994
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Oil and Gas Properties:
Proved.................................................... $ 770,532 $ 866,156
Unproved.................................................. 47,591 48,401
--------- ---------
818,123 914,557
Other properties............................................... 23,401 19,903
Less accumulated depreciation, depletion and amortization...... (465,534) (496,403)
--------- ---------
Net property, plant and equipment.............................. $ 375,990 $ 438,057
========= =========
</TABLE>
Depreciation, depletion and amortization for oil and gas properties for the
years ended December 31, 1992, 1993 and 1994 were $32.4 million, $35.4 million
and $34.6 million, respectively.
11. GEOGRAPHIC AREA INFORMATION
Pertinent information with respect to the Company's business is presented
in the following table:
<TABLE>
<CAPTION>
OIL AND GAS
------------------------------------------------------
UNITED SOUTH AFRICA &
STATES AMERICA MIDDLE EAST OTHER TOTAL OTHER TOTAL
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
1992:
Revenues............... $ 54,105 $ -- $ 2,879 $ 4,634 $ 61,618 $ 7,734 $ 69,352
Pretax operating
income............... 9,351 (3,070) 1,377 356 8,014 (361) 7,653
Depreciation, depletion
and amortization..... 30,703 -- 510 1,161 32,374 192 32,566
Capital expenditures... 39,291 12,774 3,232 8,771 64,068 3,991 68,059
Identifiable assets at
December 31.......... 295,824 34,286 12,376 22,168 364,654 5,620 370,274
1993:
Revenues............... $ 55,939 $ 1,816 $ 4,971 $ 5,659 $ 68,385 $ 5,520 $ 73,905
Pretax operating
income............... 9,198 (1,805) 2,736 (4,254) 5,875 (3,175) 2,700
Depreciation, depletion
and amortization..... 31,699 947 1,075 1,690 35,411 194 35,605
Capital expenditures... 24,208 42,188 4,257 1,766 72,419 5,331 77,750
Identifiable assets at
December 31.......... 299,039 66,481 12,258 17,859 395,637 6,724 402,361
1994:
Revenues............... $ 58,292 $ 7,719 $ 4,520 $ 4,345 $ 74,876 $ 4,192 $ 79,068
Pretax operating
income............... 13,475 1,512 1,962 (3,839) 13,110 (5,052) 8,058
Depreciation, depletion
and amortization..... 28,751 3,002 852 2,034 34,639 280 34,919
Capital expenditures... 25,940 69,530 6,436 2,478 104,384 3,804 108,188
Identifiable assets at
December 31.......... 300,374 138,095 11,749 15,746 465,964 6,736 472,700
</TABLE>
F-22
<PAGE> 109
CMS NOMECO OIL & GAS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. OTHER OPERATING REVENUES
Other operating revenues for the periods indicated were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------
1992 1993 1994 1994 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Plant and refinery sales................. $7,734 $5,520 $ 4,192 $ 3,403 $ 3,442
Gas contract dispositions................ -- -- 4,800 4,800 9,858
Hedging:
Gas................................. (963) (889) 2,285 1,113 2,826
Oil................................. -- -- 95 -- (224)
Other.................................... 1,637 1,644 961 791 1,836
------ ------ ------- ------- -------
$8,408 $6,275 $12,333 $10,107 $17,738
====== ====== ======= ======= =======
</TABLE>
During 1994 and 1995, the Company disposed of two long-term gas contracts
to unrelated third parties for aggregate consideration of $4.8 million and $9.9
million, respectively. Upon disposing of these contracts, the Company has no
future obligations under either contract.
F-23
<PAGE> 110
CMS NOMECO OIL & GAS CO.
SUPPLEMENTAL INFORMATION -- OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
The following information was prepared in accordance with the Supplemental
Disclosure Requirements of SFAS No. 69, Disclosures About Oil and Gas Producing
Activities. Refer to the Consolidated Statements of Income for the Company's
results of operations from exploration and production activities provided
elsewhere in this Prospectus.
Data relating to U.S. processing plants and an Australian refinery are
excluded. Data related to the Company's equity investment in Yemen is shown
separately.
The following estimates, which were prepared by the Company's petroleum
engineers, of proved developed and proved undeveloped reserve quantities and
related standardized measure of discounted estimated future net cash flows do
not purport to reflect realizable values or fair market values of the Company's
reserves. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as future information becomes available.
Proved reserves are estimated quantities of oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions.
1. ESTIMATED PROVED RESERVES OF OIL AND GAS
<TABLE>
<CAPTION>
TOTAL U.S. SOUTH AFRICA & OTHER
------------ ------------ AMERICA MIDDLE EAST -----------
OIL GAS OIL GAS OIL OIL OIL GAS
(OIL IN MMBBLS AND GAS IN BCF)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated Proved Developed and
Undeveloped Reserves:
December 31, 1991................. 28.5 191.2 5.3 187.1 19.2 1.8 2.2 4.1
Revisions and other changes..... 0.8 (20.4) 0.2 (20.1) (0.1) 0.8 (0.1) (0.3)
Extensions and discoveries...... 7.4 45.4 0.1 44.7 5.4 0.5 1.4 0.7
Purchases of reserves........... 1.0 9.9 0.2 6.8 0.8 -- -- 3.1
Production...................... (1.6) (17.6) (1.1) (17.4) -- (0.1) (0.4) (0.2)
---- ----- ---- ----- ---- ---- ---- ----
December 31, 1992................. 36.1 208.5 4.7 201.1 25.3 3.0 3.1 7.4
Revisions and other changes..... 0.4 7.2 (0.4) 7.1 -- 0.2 0.6 0.1
Extensions and discoveries...... 0.1 2.9 0.1 2.9 -- -- -- --
Purchases of reserves........... -- 1.7 -- 1.7 -- -- -- --
Production...................... (1.9) (18.5) (1.0) (18.2) (0.2) (0.3) (0.4) (0.3)
---- ----- ---- ----- ---- ---- ---- ----
December 31, 1993................. 34.7 201.8 3.4 194.6 25.1 2.9 3.3 7.2
Revisions and other changes..... (1.3) (9.7) (0.3) (9.4) (2.0) 0.6 0.4 (0.3)
Extensions and discoveries...... 0.4 50.2 0.4 50.2 -- -- -- --
Acquisitions of reserves........ 20.2 9.4 -- 9.4 20.2 -- -- --
Production...................... (2.1) (20.5) (0.8) (20.3) (0.7) (0.3) (0.3) (0.2)
---- ----- ---- ----- ---- ---- ---- ----
December 31, 1994................. 51.9 231.2 2.7 224.5 42.6 3.2 3.4 6.7
==== ===== ==== ===== ==== ==== ==== ====
Estimated Proved Developed Reserves:
December 31, 1991................. 25.9 188.0 5.1 183.9 19.2 0.6 1.0 4.1
December 31, 1992................. 31.7 205.0 4.5 198.8 25.3 0.9 1.0 6.2
December 31, 1993................. 31.2 200.0 3.3 193.4 25.1 1.5 1.3 6.6
December 31, 1994................. 37.4 211.7 2.5 205.9 31.5 2.6 0.8 5.8
Equity Interest in Estimated Proved
Reserves of Pecten Yemen:
December 31, 1993................. 1.5 -- -- -- -- 1.5 -- --
December 31, 1994................. 2.9 -- -- -- -- 2.9 -- --
</TABLE>
F-24
<PAGE> 111
2. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM ESTIMATED
PROVED RESERVES
<TABLE>
<CAPTION>
SOUTH AFRICA &
TOTAL U.S. AMERICA MIDDLE EAST(4) OTHER
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1992:
Future Cash Flows:
Revenues(1)...................... $1,017,443 $493,846 $395,380 $ 59,298 $68,919
Less:
Production costs(2)........... 405,723 191,206 188,458 14,932 11,127
Development costs(2).......... 100,316 4,690 84,997 3,593 7,036
---------- -------- -------- --------- -------
Future cash flows before taxes..... 511,404 297,950 121,925 40,773 50,756
Income tax expense(3)............ 29,573 2,263 5,866 16,258 5,186
---------- -------- -------- --------- -------
Future net cash flows.............. 481,831 295,687 116,059 24,515 45,570
Less discount to present value at a
10% annual rate.................. 164,489 61,018 77,785 7,513 18,173
---------- -------- -------- --------- -------
Standardized measure of discounted
future net cash flows............ $ 317,342 $234,669 $ 38,274 $ 17,002 $27,397
========== ======== ======== ========= =======
December 31, 1993:
Future Cash Flows:
Revenues(1)...................... $1,036,387 $542,747 $378,467 $ 51,052 $64,121
Less:
Production costs(2)........... 332,517 135,679 180,145 13,013 3,680
Development costs(2).......... 81,274 8,947 57,639 3,393 11,295
---------- -------- -------- --------- -------
Future cash flows before taxes..... 622,596 398,121 140,683 34,646 49,146
Income tax expense(3)............ 58,500 21,341 22,185 13,174 1,800
---------- -------- -------- --------- -------
Future net cash flows.............. 564,096 376,780 118,498 21,472 47,346
Less discount to present value at a
10% annual rate.................. 247,900 161,737 62,182 6,069 17,912
---------- -------- -------- --------- -------
Standardized measure of discounted
future net cash flows............ $ 316,196 $215,043 $ 56,316 $ 15,403 $29,434
========== ======== ======== ========= =======
December 31, 1994:
Future Cash Flows:
Revenues(1)...................... $1,235,512 $539,409 $580,927 $ 58,948 $56,228
Less:
Production costs(2)........... 376,550 191,130 158,708 15,603 11,109
Development costs(2).......... 103,611 11,507 80,496 3,253 8,355
---------- -------- -------- --------- -------
Future cash flows before taxes..... 755,351 336,772 341,723 40,092 36,764
Income tax expenses
(benefit)(3).................. 67,073 (16,015) 64,905 16,462 1,721
---------- -------- -------- --------- -------
Future net cash flows.............. 688,278 352,787 276,818 23,630 35,043
Less discount to present value at a
10% annual rate.................. 278,046 138,293 115,926 8,532 15,295
---------- -------- -------- --------- -------
Standardized measure of discounted
future net cash flows............ $ 410,232 $214,494 $160,892 $ 15,098 $19,748
========== ======== ======== ========= =======
</TABLE>
- ------------------------------
(1) Oil, gas and condensate revenues are based on year-end prices with
adjustments for changes reflected in existing contracts. There is no
consideration for future discoveries or risks associated with future
production of estimated proved reserves. Beginning in June 1995,
transportation expense, which had been shown as a production cost, has been
deducted from operating revenues and prior periods have been reclassified.
(2) Based on economic conditions at year-end. Does not include general,
administrative or financing costs. Does not consider future changes in
development or production costs.
F-25
<PAGE> 112
(3) Based on current statutory rates applied to future cash inflows reduced by
future production and development costs, tax deductions and credits. Income
tax expense has been reduced by $71.8 million, $83.2 million and $97.4
million of U.S. income tax credits for Antrim gas production at December 31,
1992, 1993 and 1994, respectively.
(4) Does not include $2.2 million and $3.0 million at December 31, 1993 and
1994, respectively, of discounted future net cash flows attributable to the
Company's interest in the East Shabwa Block in Yemen, which is accounted for
using the equity method.
3. RECONCILIATION OF THE CHANGE IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1993 1994
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
New discoveries.......................................................... $ 3,698 $ 42,148
Acquisitions of reserves in place........................................ 1,829 118,492
Revisions to reserves.................................................... 11,707 (12,882)
Sales and transfers...................................................... (50,067) (45,428)
Changes in prices........................................................ 50,343 (57,483)
Changes in lifting costs................................................. (28,979) (2,012)
Accretion of discount.................................................... 33,427 34,868
Net change in income taxes............................................... (13,361) (970)
Changes in timing of production and other................................ (9,743) 17,303
-------- --------
Net change during year.............................................. $ (1,146) $ 94,036
======== ========
</TABLE>
4. NET INVESTMENT IN PROVED AREAS(1)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1993 1994
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Developed properties..................................................... $770,532 $866,156
Undeveloped properties
Subject to depletion................................................ 20,192 10,800
Not subject to depletion............................................ 27,399 37,601
-------- --------
818,123 914,557
Less accumulated depletion and amortization.............................. 445,587 480,226
-------- --------
$372,536 $434,331
======== ========
</TABLE>
- ------------------------------
(1) Excluded are approximately $1.1 million of consolidated non-U.S. investments
at December 31, 1993. These investments, which are in areas under
exploration by the Company, are not subject to depletion. As of December 31,
1994, the Company's non-U.S. investments in Australia, Colombia, Ecuador,
Equatorial Guinea and New Zealand are subject to depletion. Additionally,
the Company's net investments attributable to its investment in East Shabwa
Block reserves in Yemen, which are accounted for using the equity method,
were $2.7 million and $8.2 million as of December 31, 1993 and 1994,
respectively.
F-26
<PAGE> 113
5. EXPLORATION, DEVELOPMENT AND ACQUISITION EXPENDITURES IN PROVED AREAS
<TABLE>
<CAPTION>
SOUTH AFRICA &
TOTAL(1) U.S. AMERICA MIDDLE EAST OTHER
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1992:
Exploration................................ $ 5,115 $ 4,178 $ 63 $ 321 $ 553
Development................................ 44,634 26,484 12,710 2,910 2,530
Property acquisitions...................... 14,317 8,630 -- -- 5,687
-------- ------- ------- ------- ------
$ 64,066 $39,292 $12,773 $ 3,231 $8,770
======== ======= ======= ======= ======
Year Ended December 31, 1993:
Exploration................................ $ 2,360 $ 1,579 $ 211 $ 296 $ 274
Development................................ 60,218 15,533 42,222 1,267 1,196
Property acquisitions...................... 7,146 7,096 -- -- 50
-------- ------- ------- ------- ------
$ 69,724 $24,208 $42,433 $ 1,563 $1,520
======== ======= ======= ======= ======
Year Ended December 31, 1994:
Exploration................................ $ 7,333 $ 5,722 $ 568 $ 68 $ 975
Development................................ 58,300 11,860 44,682 371 1,387
Property acquisitions...................... 33,075 8,288 24,781 -- 6
-------- ------- ------- ------- ------
$ 98,708 $25,870 $70,031 $ 439 $2,368
======== ======= ======= ======= ======
</TABLE>
- ------------------------------
(1) Excluded are approximately $3.9 million in 1992, $5.4 million in 1993 and
$4.0 million in 1994 invested in unproved areas and non-oil and gas
producing properties. Included are $13.6 million in 1992, $0.9 million in
1993 and $33.5 million in 1994 for investments in and purchases of estimated
proved reserves.
The Company's share of exploration, development and property acquisition
expenditures for 1993 and 1994 in its East Shabwa Block reserves in Yemen which
is accounted for using the equity method are as follows:
<TABLE>
<CAPTION>
1993 1994
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Exploration......................................................... $ -- $2,425
Development......................................................... -- 59
Property acquisitions............................................... 2,720 3,004
------ ------
$2,720 $5,488
====== ======
</TABLE>
F-27
<PAGE> 114
6. RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES
The following tables set forth the Company's results of operations from oil
and gas producing activities for the years ended December 31, 1992, 1993 and
1994. Income taxes are computed by applying the appropriate statutory rate to
the results of operations before income taxes. Applicable tax credits and
allowances related to oil and gas producing activities have been taken into
account in computing income tax expenses. The results of operations below do not
include general and administrative expenses, general taxes and net interest
expense. Beginning in June 1995, transportation expense, which had been shown as
an operating expense, has been deducted from operating revenues and prior
periods have been reclassified.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
--------------------------------------------------
SOUTH AFRICA &
TOTAL U.S. AMERICA MIDDLE EAST OTHER
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating Revenues:
Oil and condensate......................... $26,553 $19,139 $ -- $ 2,879 $4,535
Natural gas................................ 34,391 34,292 -- -- 99
Other operating............................ 674 674 -- -- --
------- ------- ------- --------- ------
61,618 54,105 -- 2,879 4,634
Operating Expenses:
Depreciation, depletion and amortization... 32,374 30,703 -- 510 1,161
Cost center write-offs..................... 5,744 -- 3,050 -- 2,694
Operating and maintenance.................. 12,279 10,844 20 992 423
Production taxes........................... 3,207 3,207 -- -- --
------- ------- ------- --------- ------
53,604 44,754 3,070 1,502 4,278
Pretax operating income......................... 8,014 9,351 (3,070) 1,377 356
Income tax benefit.............................. (2,100)
-------
Income before accounting change................. 10,114
Cumulative effect accounting change............. (1,124)
-------
Net income...................................... $ 8,990
=======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
---------------------------------------------------
SOUTH AFRICA &
TOTAL U.S. AMERICA MIDDLE EAST OTHER
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating Revenues:
Oil and condensate........................ $26,635 $14,427 $ 1,816 $ 4,971 $ 5,421
Natural gas............................... 40,995 40,757 -- -- 238
Other operating........................... 755 755 -- -- --
------- ------- ------- --------- -------
68,385 55,939 1,816 4,971 5,659
Operating Expenses:
Depreciation, depletion and
amortization............................ 35,411 31,699 947 1,075 1,690
Cost center write-offs.................... 9,648 -- 1,900 -- 7,748
Operating and maintenance................. 14,191 11,936 620 1,160 475
Production taxes.......................... 3,260 3,106 154 -- --
------- ------- ------- --------- -------
62,510 46,741 3,621 2,235 9,913
Pretax operating income........................ 5,875 9,198 (1,805) 2,736 (4,254)
Income tax benefit............................. (5,900)
-------
Net income..................................... $11,775
=======
</TABLE>
F-28
<PAGE> 115
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------
SOUTH AFRICA &
TOTAL U.S. AMERICA MIDDLE EAST OTHER
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating Revenues:
Oil and condensate......................... $26,831 $10,502 $7,719 $ 4,520 $ 4,090
Natural gas................................ 39,904 39,649 -- -- 255
Other operating............................ 8,141 8,141 -- -- --
------- ------- ------- ------- -------
74,876 58,292 7,719 4,520 4,345
Operating Expenses:
Depreciation, depletion and amortization... 34,639 28,751 3,002 852 2,034
Cost center write-offs..................... 5,612 -- -- -- 5,612
Operating and maintenance.................. 18,705 13,627 2,834 1,706 538
Production taxes........................... 2,810 2,439 371 -- --
------- ------- ------- ------- -------
61,766 44,817 6,207 2,558 8,184
Pretax operating income......................... 13,110 13,475 1,512 1,962 (3,839)
Income tax benefit.............................. (5,523)
-------
Net Income...................................... $18,633
=======
</TABLE>
There is no income or expense from oil and gas producing activities
attributable to the Company's investment in Yemen for the years 1992 to 1994
which is accounted for using the equity method. Exploratory activities continue
in 1995.
F-29
<PAGE> 116
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CMS NOMECO
International, Inc.:
We have audited the accompanying consolidated balance sheet of CMS NOMECO
International, Inc. and subsidiaries (formerly Walter International, Inc. and
subsidiaries) as of December 31, 1994, and the related consolidated statements
of operations and accumulated deficit and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CMS NOMECO
International, Inc. and subsidiaries as of December 31, 1994, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas,
July 17, 1995.
F-30
<PAGE> 117
CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
DECEMBER 31, 1995
1994 (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................... $ 541,247 $ 2,018,000
Accounts receivable............................................ 1,149,995 1,471,588
Inventory...................................................... 188,323 271,140
Other current assets........................................... 1,612 1,612
------------ -----------
Total current assets...................................... 1,881,177 3,762,340
Property, Plant and Equipment, at Cost:
Oil and gas properties, full-cost basis
Proved properties being amortized............................ 15,472,534 15,423,511
Unproved properties and properties under development not
being amortized............................................. 1,117,221 1,117,221
Furniture and office equipment................................. 69,245 74,581
------------ -----------
16,659,000 16,615,313
Less-accumulated depreciation, depletion and amortization...... (9,265,792) (9,368,971)
------------ -----------
Net property, plant and equipment......................... 7,393,208 7,246,342
------------ -----------
Restricted cash (Note 1)............................................ 466,461 718,323
Other assets, net of amortization of $41,576 and $43,079,
respectively...................................................... 58,729 57,226
------------ -----------
Total assets.............................................. $ 9,799,575 $11,784,231
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities....................... $ 1,739,767 $ 3,206,650
Advances from joint venture participants....................... 27,321 363,720
Current maturities of long-term debt (Note 7).................. 2,266,110 2,266,110
------------ -----------
Total current liabilities................................. 4,033,198 5,836,480
Long-term debt (Note 7)............................................. 5,219,390 5,219,390
Commitments And Contingencies (Notes 4 and 8)
Redeemable Preferred Stock (Note 3):
14% Senior cumulative preferred stock, $1.00 par value, 3,000
shares authorized and issued (aggregate liquidation preference
of $5.1 million).............................................. 3,000 3,000
Stockholders' Equity (Note 3):
Common stock, $0.01 par value, 1,000,000 shares authorized and
100,000 shares issued......................................... 1,000 1,000
Additional paid-in capital..................................... 5,934,910 5,934,910
Accumulated deficit............................................ (5,391,923) (5,210,549)
------------ -----------
Total stockholders' equity................................ 543,987 725,361
------------ -----------
Total liabilities and stockholders' equity................ $ 9,799,575 $11,784,231
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE> 118
CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
ONE
MONTH ENDED
YEAR ENDED JANUARY 31,
DECEMBER 31, 1995
1994 (UNAUDITED)
<S> <C> <C>
Revenues:
Oil sales........................................................... $ 3,957,697 $ 426,287
Interest and other income........................................... 53,338 5,056
------------ -----------
4,011,035 431,343
Expenses:
Lease operating expense............................................. 1,574,781 46,190
General and administrative expense.................................. 405,018 22,568
Interest expense.................................................... 820,631 78,032
Depreciation, depletion and amortization............................ 587,695 103,179
------------ -----------
3,388,125 249,969
Income before income taxes.......................................... 622,910 181,374
Income taxes (Note 2)............................................... 14,000 --
------------ -----------
Net income.......................................................... 608,910 181,374
Accumulated deficit, beginning of period............................ (6,000,833) (5,391,923)
------------ -----------
Accumulated deficit, end of period.................................. $ (5,391,923) $(5,210,549)
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE> 119
CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ONE MONTH
ENDED
YEAR ENDED JANUARY 31,
DECEMBER 31, 1995
1994 (UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income...................................................... $ 608,910 $ 181,374
Adjustments to reconcile net income to net cash provided by
operating activities --
Depreciation, depletion and amortization...................... 587,695 103,179
Increase in accounts receivable............................... (426,016) (321,593)
Decrease (Increase) in inventory and other current assets..... 93,385 (81,314)
Increase in accounts payable and accrued liabilities.......... 755,996 1,466,883
Increase (Decrease) in advances from joint venture
participants................................................. (511,935) 336,399
------------ -----------
Net cash provided by operating activities.................. 1,108,035 1,684,928
Cash Flows from Investing Activities:
Additions to property, plant and equipment...................... (871,805) --
Other........................................................... -- 43,687
------------ -----------
Net cash provided by (used in) investing activities........ (871,805) 43,687
Cash Flows from Financing Activities:
Proceeds from long-term debt.................................... 610,774 --
Repayment of long-term debt..................................... (1,316,111) --
Cash restricted for payment of financial obligation............. 59,224 (251,862)
------------ -----------
Net cash used in financing activities...................... (646,113) (251,862)
Net increase (decrease) in cash and cash equivalents................. (409,883) 1,476,753
Cash and cash equivalents, beginning of period....................... 951,130 541,247
------------ -----------
Cash and cash equivalents, end of period............................. $ 541,247 $ 2,018,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE> 120
CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION
Walter International, Inc. ("Walter"), a Texas corporation, was organized
on May 22, 1987. Walter was organized for the acquisition of oil and gas
properties and the exploration, development and production of oil and gas
reserves in areas outside the continental United States.
In June 1994, Walter entered into a letter of intent with CMS Energy
Corporation ("CMS") to exchange all of the common shares of Walter for shares of
CMS (the "Merger"). This acquisition was finalized in February 1995. In
connection with the Merger, Walter changed its name to CMS NOMECO International,
Inc. ("CII" or the "Company"). Under the terms of the Merger, CMS assumed the
obligations under the Finance Agreement with Overseas Private Investment
Corporation (see Note 7) and discharged all other obligations of the Company
including (a) all the outstanding principal and interest on the revolving line
of credit (see Note 7), (b) all the outstanding principal and interest on the
term loan from a financial institution (see Note 7) and (c) the obligations to
redeem the 14% Senior Cumulative Preferred Stock (see Note 3).
CII's principal asset is an interest in the petroleum reserves associated
with a Production Sharing Contract covering approximately 500,000 acres offshore
Equatorial Guinea, West Africa (the "Alba Field"). CII's wholly owned
subsidiary, CMS NOMECO International Equatorial Guinea ("CIEG"), formerly Walter
International Equatorial Guinea, Inc., is the operator of the Alba Field. During
1992, commercial production from the Alba Field commenced.
B. UNAUDITED FINANCIAL STATEMENTS
The financial statements and related information as of and for the one
month ended January 31, 1995 included herein are unaudited and, in the opinion
of management, reflect all adjustments (consisting of only recurring
adjustments) necessary for a fair presentation of financial position and the
results of operations and cash flows.
These unaudited consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements as of and for
the year ended December 31, 1994. The consolidated results of operations for the
one month ended January 31, 1995, are not necessarily indicative of operating
results for a full year. These financial statements and related information are
reflected for the purpose of presenting information prior to the Merger with
CMS.
C. CONSOLIDATION AND PRESENTATION
The accompanying financial statements consolidate the statements of CII and
its wholly owned subsidiaries (collectively referred to as the "Company") as of
and for the year ended December 31, 1994. All significant intercompany accounts
and transactions have been eliminated.
D. OIL AND GAS PROPERTIES
The Company follows the full-cost method of accounting for its oil and gas
properties. Under this method of accounting, all productive and nonproductive
costs incurred in the acquisition of oil and gas properties and the exploration
for and the development of oil and gas reserves are capitalized in separate cost
centers for each country. No gains or losses are recognized upon the sale or
disposition of oil and gas properties unless the sale or disposition represents
a significant portion of the individual cost center's oil and gas reserves.
Instead, the proceeds from the sale of oil and gas properties are treated as a
reduction of oil and gas property costs.
F-34
<PAGE> 121
CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Company's net investment in oil and gas properties in a cost center
exceeds the present value of estimated future net revenues from proved reserves
discounted at 10% and the cost of properties not being amortized, both adjusted
for tax effects, the excess will be charged to expense as additional
depreciation, depletion and amortization.
Evaluated property costs, plus estimated future development costs, in each
cost center are amortized on a composite unit-of-production method, based on
quantities of proved reserves, over the life of the producing properties. The
costs of individual unevaluated properties are excluded from the amortization
calculation until the properties are evaluated.
E. REVENUE RECOGNITION
Oil revenues from producing wells are recognized when the oil is sold. At
December 31, 1994, inventory includes December production valued at market.
F. FURNITURE AND EQUIPMENT
Furniture and equipment is recorded at cost and is depreciated using the
straight-line method based on the estimated useful lives (five to seven years)
of the related assets.
G. MANAGEMENT SERVICE FEES
Fees received by the Company, as operator, for reimbursement of overhead
expenses attributable to exploration, development and production activities are
recorded as a reduction of general and administrative expenses. The Company
received approximately $400,000 in 1994 in reimbursed overhead charges relating
to the Alba Field.
H. STATEMENT OF CASH FLOWS
For purposes of the consolidated statement of cash flows, all highly liquid
investments with an original maturity of three months or less are considered to
be cash equivalents. Cash used in operating activities includes cash payments
for interest by the Company of approximately $1,000,000 during 1994.
I. RESTRICTED CASH
At December 31, 1994, the Company had $466,461 held in escrow to secure
certain payments of CIEG's financing obligations.
J. CONCENTRATION OF CREDIT RISK
The Company is, as operator, principally engaged in the development and
production of the Alba Field and, in 1994, all production was sold to one
customer under a term contract (see Note 4). The Company's accounts receivable
at December 31, 1994, primarily result from oil sales to this one customer and
joint interest billings to other participants in the Alba Field, all of whom are
companies in the oil and gas industry. This concentration of credit risk may
impact the Company's overall credit risk in that these entities may be similarly
affected by industrywide changes in economic or other conditions. However, no
credit losses were experienced during 1994. The Company does not require
collateral for these receivables.
2. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
SFAS No. 109 requires an asset and liability approach for accounting for income
taxes. Under this approach, deferred tax assets and liabilities are
F-35
<PAGE> 122
CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized based on anticipated future tax consequences attributable to
differences between financial carrying amounts of assets and liabilities and
their respective tax bases.
Total income tax provision (benefit) for the year ended December 31, 1994,
was as follows:
<TABLE>
<S> <C>
U.S.:
Current (alternative minimum tax)..................................... $14,000
Deferred.............................................................. --
Non-U.S.:
Current............................................................... --
-------
Total............................................................ $14,000
=======
</TABLE>
At December 31, 1994, deferred tax assets and liabilities computed at the
statutory rate related to temporary differences were as follows:
<TABLE>
<CAPTION>
(DOLLARS
IN THOUSANDS)
<S> <C>
Deferred tax assets..................................................... $ 2,144
Less-valuation allowance................................................ (1,686)
-------
Deferred tax assets, net........................................... 458
Deferred tax liabilities........................................... (458)
-------
Total deferred taxes, net..................................... $ --
=======
</TABLE>
Deferred tax assets are related to tax loss carryforwards. Deferred tax
liabilities are related primarily to the difference between the book and tax
bases of property, plant and equipment. The Company has a valuation allowance of
$1,686,000 at December 31, 1994, relating to the uncertainty of the utilization
of the net operating loss carryforwards to reduce future taxes.
As of December 31, 1994, the Company had approximately $6.1 million of net
operating loss carryforwards remaining for U.S. tax purposes that will expire
between the years 2004 and 2007.
CIEG, the Company's wholly owned subsidiary, has approximately $2.5 million
of net operating loss carryforwards generated in a foreign taxing jurisdiction
which is available to offset income taxable in that foreign jurisdiction. These
foreign net operating loss carryforwards will expire during 1995 if not
utilized. However, the Company anticipates that future payments of income taxes
in the foreign jurisdiction will generate foreign tax credits available to
offset future payments of U.S. federal income taxes. The full realization of any
tax benefits resulting from any foreign tax credits generated would depend upon
the Company's taxable income during the carryforward period.
3. REDEEMABLE PREFERRED STOCK
On December 15, 1989, certain institutional investors purchased from the
Company 3,000 shares of its 14% Senior Cumulative Preferred Stock ("Senior
Preferred") for total cash consideration of $3,000,000 ($2,925,000 net of stock
issuance expenses). Annual dividends of $140 per share are payable quarterly out
of Dedicated Net Cash Flow (as defined). If the dedicated net cash flow is
insufficient to meet any quarterly dividend requirement, the dividends
accumulate in arrears. The aggregate amount of cumulative preferred dividends in
arrears at December 31, 1994, was approximately $2.1 million.
The Company is required to redeem the Senior Preferred at a price of $1,000
per share by making quarterly payments out of Dedicated Net Cash Flow remaining,
if any, after the payment of dividends on the Senior Preferred. Dedicated Net
Cash Flows were not sufficient for the payment of dividends or the redemption of
the Senior Preferred in 1994.
F-36
<PAGE> 123
CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Currently, the Company has dedicated to the Senior Preferred the net cash
flows of its interest in the El Franig field in the Medinine concession in
Tunisia. The agreement provides that if, as of January 1 of any year beginning
January 1, 1991, 80% of the future El Franig net cash flow estimated to be
received on or prior to December 31, 1994, is less than the product of the then
outstanding shares of Senior Preferred and the Liquidation Value (as defined),
the Company shall dedicate such additional net cash flows from other properties
as is necessary so that, after such additional dedication, the future dedicated
net cash flow is equal to at least 125% of the then outstanding shares of Senior
Preferred and the Liquidation Value (as defined). As a result, if the Company
relinquishes its right to further develop El Franig (see Note 4) or the reserves
in El Franig cease to be classified by outside petroleum engineers as proved
reserves, the Company will be required to dedicate to the Senior Preferred cash
flows from other proved reserves. Presently, the Company's only other proved
reserves are in the Alba Field. El Franig was not developed by December 31,
1994, and, as a result, dedication of the reserves associated with the Alba
Field was required. Dedication to the Senior Preferred of the net cash flows
from the Alba Field requires the Company to use such net cash flows to pay
dividends on the Senior Preferred (including amounts in arrears) and redeem the
Senior Preferred with any net cash flows remaining.
The Company has the option to redeem additional Senior Preferred shares at
a price of $1,180 per share (plus accrued and unpaid dividends). No such
optional redemption will reduce the obligation of the Company to make any
mandatory redemption.
If at any time any shares of the Senior Preferred are outstanding and (a)
both of the Principal Shareholders (as defined) die; (b) both of the Principal
Shareholders cease to serve as executive officers of the Company or a Change of
Control (as defined) shall occur; (c) the Company directly, or indirectly, were
to create, incur, assume or permit to exist any Lien (as defined) on or with
respect to Dedicated Properties (as defined), except for certain instances as
specified in the agreement such as liens entered into in the ordinary course of
business or in favor of Development Financing (as defined); or (d) the Company
were to sell, assign, lease, convey or otherwise dispose of its assets,
including the sale, assignment or transfer of any royalties, overriding
royalties or other interest in its assets, except for certain instances as
specified in the agreement, the holder of the Senior Preferred shall have the
right to immediately require the Company to repurchase the shares of Senior
Preferred at $1,000 per share (plus accrued and unpaid dividends).
On June 24, 1994, the Company entered into a letter agreement with the
holders of the Senior Preferred to purchase all of the outstanding shares of the
Senior Preferred, all rights to accrued and unpaid dividends and all warrants
granted to the holders for cash consideration of $3.4 million. In February 1995,
in connection with the Merger, CMS purchased all of the outstanding shares of
the Senior Preferred for $3.4 million.
4. COMMITMENTS
During 1990, CIEG, along with other participants, entered into a Production
Sharing Contract ("PSC") with the Republic of Equatorial Guinea to conduct
exploration and development activities in that country. The PSC requires that
CIEG carry out a certain Minimum Work Program (as defined) and meet certain
minimum expenditure obligations. During 1992, CIEG drilled and completed a
development well in the Alba Field and drilled a dry exploratory well in the PSC
area. In April 1992, the date of the first sales of commercial production, CIEG
paid $235,000, its share of a production bonus, to the Republic of Equatorial
Guinea. The PSC further requires CIEG to drill an additional exploratory well by
April 1995. However, CIEG received an extension from the Republic of Equatorial
Guinea for the drilling of the exploratory well until January 1996.
In 1992, CIEG, along with other participants in the Alba Field, entered
into a purchase and sales contract with a European-based petroleum products
trader for the majority of production. The sales price under the contract is
based on an adjusted market price.
F-37
<PAGE> 124
CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1990, the Company and its joint venture partners obtained from a
major oil company an interest in two concessions (Douz and Medinine) in Tunisia
for consideration consisting of $5,000,000 cash ($1,250,000 net to the Company),
which was paid in 1990, and a production payment of $20,000,000 payable solely
out of future revenues (excluding government royalty and transportation fees)
from the two concessions. The Company drilled two wells and subsequently
suspended further development operations in the Douz concession due to low
productivity and recorded an impairment provision. At the end of 1994, the
Company decided to proceed with the development of the El Franig field and is
currently negotiating a development program with the Tunisia Government. The
Company has the right to discontinue these activities at any time without
further financial obligation.
The Company's office rent expense was $80,644 in 1994. The Company has
lease commitments for office space of $100,000 in 1995 and $88,000 in 1996.
5. RELATED-PARTY TRANSACTIONS
An affiliated corporation owned by certain stockholders of the Company
(prior to the Merger) has provided the Company with certain administrative and
other staff services. The Company reimbursed the affiliate approximately
$1,200,000 for such services for the year ended December 31, 1994, and payables
due to the affiliated corporation were $295,000 at December 31, 1994.
At December 31, 1994, receivables due from the affiliated corporation were
$30,000 and primarily related to the affiliate's share of joint interest
billings relating to the Alba Field.
6. PHANTOM STOCK PLAN
The Company terminated its phantom stock plan in 1993. The Company incurred
compensation expense in 1992 pursuant to the plan, for which approximately
$43,000 remains payable to a past participant in the plan, and is included in
accounts payable and accrued liabilities at December 31, 1994.
7. LONG-TERM DEBT
Long-term debt and current maturities at December 31, 1994:
<TABLE>
<S> <C>
OPIC guaranteed loans.................................................... $2,935,500
Borrowing on revolving line of credit.................................... 1,000,000
Term Loan................................................................ 3,550,000
----------
7,485,500
Less -- Current maturities............................................... 2,266,110
----------
$5,219,390
==========
</TABLE>
At December 31, 1994, the Company had a $1,000,000 revolving line of credit
with a third-party bank, with interest based on such bank's prime rate. This
line of credit was secured by guarantees from two principal shareholders of the
Company. The interest rate at December 31, 1994, for amounts outstanding under
the credit agreement was 8.78%. In consideration for the guarantees, CII caused
CIEG to deliver, to the two principal shareholders, overriding royalty interests
in the Alba Field equal to a fixed percentage of CIEG's net interest,
respectively. The line of credit matures on January 8, 1996, if not extended by
the lender.
In June 1992, CIEG, along with other consortium members, entered into a
Finance Agreement (the "Agreement") with the Overseas Private Investment
Corporation (OPIC), an agency of the United States government, whereby OPIC
guaranteed loans for development drilling in the Alba Field. CIEG's
participation in the OPIC guarantee was approximately $4.3 million with
approximately $3.0 million outstanding as of
F-38
<PAGE> 125
CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1994. The Agreement requires the Company maintain an escrow account
for debt service requirements (see Note 1). The principal amount of each
disbursement is to be repaid in 20 equal quarterly installments. The
disbursements bear interest, payable quarterly, based on the three-month London
Interbank Offered Rate ("LIBOR") plus 0.375%, adjusted quarterly. The interest
rate as of December 31, 1994, was 5.8%. For the year 1994, CIEG paid OPIC
guarantee fees of approximately $70,000. CIEG has pledged all of its interests
in the Alba Field and has agreed not to place any other liens on its interest in
the PSC.
In February 1993, the Company obtained a $4.6 million term loan from a
financial institution (the Term Loan) for the purpose of repaying outstanding
indebtedness, overdue trade obligations and joint interest billing obligations.
In accordance with the Term Loan, the Company caused CIEG to deliver an
overriding royalty interest to the lender calculated as a percentage of gross
proceeds, as defined in the Term Loan, received by CIEG from the Alba Field.
During 1994, CIEG paid approximately $168,000 to the lender, relating to the
overriding royalty interest. The interest on the Term Loan is fixed at 10% per
annum on the outstanding principal balance, payable quarterly. Required
principal repayments commenced on June 30, 1993, and are payable in 16 quarterly
installments, as provided in the Term Loan. As of December 31, 1994, the
outstanding balance of the Term Loan was approximately $3.6 million. The Company
has pledged all the outstanding common stock of CIEG as collateral. The Term
Loan and the overriding royalty interest are subordinate to the amounts
guaranteed by OPIC.
On June 24, 1994, in anticipation of the Merger, the Company entered into
an agreement to restructure the Term Loan. The restructuring provided for
additional funding in July 1994 of $525,000, a waiver of any event of default
for the failure to pay the March 1994, June 1994 and September 1994 scheduled
principal payments, and an increase in the fixed rate of interest to 12% per
annum effective June 30, 1994. The restructuring also provided for (a) a
one-time payment to the financial institution of $30,000, (b) a prepayment
premium of $50,000 if any portion of the additional funding or any other
principal amount of the Term Loan is prepaid prior to the maturity date, (c) the
scheduled principal repayments be amended to commence in December 1994 and be
paid in 13 quarterly installments and (d) CIEG to increase the overriding
royalty interest to the financial institution.
On October 8, 1992, CIEG entered into an interest rate and currency
exchange agreement which has effectively fixed the interest rate on
approximately $2.2 million of floating rate debt. Under the agreement, CIEG will
pay the counterparties interest at a fixed rate of 5.91% over the term of the
agreement and the counterparties will pay CIEG the three-month LIBOR. The swap
agreement, which will terminate April 1, 1998, requires quarterly interest
settlement payments and a cash collateral account. CIEG has entered into this
interest rate swap with a bank to eliminate the impact of interest rate
fluctuations with respect to this portion of its floating rate debt. CIEG is
exposed to loss if the counterparty defaults. Such counterparty is a major
international financial institution, and the Company believes the risk of
default is minimal. Interest rate swap transactions generally involve exchanges
of fixed and floating interest payment obligations without exchanges of
underlying principal amounts; therefore, CIEG's exposure to credit loss is
significantly less than the contracted amounts.
Subsequent to year-end, in connection with the Merger, CMS repaid the
outstanding principal and interest on the line of credit and outstanding
principal and interest on the Term Loan. Current maturities in connection with
the remaining OPIC debt are $866,110 in 1995, $866,110 in 1996, $866,100 in 1997
and $337,110 in 1998.
8. SUBSEQUENT EVENT
The Company together with an unaffiliated entity, entered into a stock
purchase agreement with an international oil company to purchase the common
stock of that company's U.S. subsidiaries which are involved in the production
of oil in the Republic of Congo, Africa ("Congo Acquisition") for approximately
$21.5 million, $3.9 million in cash and $17.6 million of debt, of which the
Company's share was $1.9 million in cash and $8.8 million of debt. This Congo
Acquisition was closed in February 1995.
F-39
<PAGE> 126
CMS NOMECO INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY WALTER INTERNATIONAL, INC. AND SUBSIDIARIES)
SUPPLEMENTAL DISCLOSURES OF OIL
EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED)
The following information was prepared in accordance with the Supplemental
Disclosure Requirements of SFAS No. 69, Disclosures About Oil and Gas Producing
Activities. Refer to the Consolidated Statements of Operations and Accumulated
Deficit for the Company's results of operations from exploration and production
activities.
The following estimates, which were prepared by the Company's petroleum
engineers, of proved developed and proved undeveloped reserve quantities and
related standardized measure of discounted estimated future net cash flows do
not purport to reflect realizable values or fair market values of the Company's
reserves. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as future information becomes available.
Proved reserves are estimated quantities of oil which geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions.
1. ESTIMATED PROVED RESERVES OF OIL
<TABLE>
<CAPTION>
(OIL IN MBBLS)
<S> <C>
Estimated Proved Developed and Undeveloped Reserves:
December 31, 1993......................................................... 3,925
Revisions and other changes............................................. 15
Production.............................................................. (249)
-----
December 31, 1994......................................................... 3,691
=====
Estimated Proved Developed Reserves:
December 31, 1994......................................................... 2,849
=====
</TABLE>
2. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM ESTIMATED
PROVED RESERVES
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
(DOLLARS IN THOUSANDS)
<S> <C>
Future cash flows:
Revenues(1)........................................................ $ 60,090
Less:
Production costs(2)............................................. 21,383
Development costs(2)............................................ 4,736
--------
Future cash flows before taxes....................................... 33,971
Income tax expense (benefit)(3).................................... 13,485
--------
Future net cash flows..................................................... 20,486
Less discount to present value at a 10% annual rate....................... (6,217)
--------
Standardized measure of discounted future net cash flows.................. $ 14,269
========
</TABLE>
- ------------------------------
(1) Oil revenues are based on year-end prices. There is no consideration for
future discoveries or risks associated with future production of proved
reserves.
(2) Based on economic conditions at year-end. Does not include administrative,
general or financing costs. Does not consider future changes in development
or production costs.
(3) Based on current statutory rates applied to future cash inflows reduced by
future production and development costs, tax deductions and credits.
F-40
<PAGE> 127
3. RECONCILIATION OF THE CHANGE IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
(DOLLARS IN THOUSANDS)
<S> <C>
Sales and transfers........................................................ $ (2,383)
Changes in prices.......................................................... 5,440
Accretion of discount...................................................... 1,739
Net change in income taxes................................................. (3,346)
Change in timing and other................................................. (909)
---------
Net change during the year....................................... $ 541
=========
</TABLE>
4. EXPLORATION, DEVELOPMENT AND ACQUISITION EXPENDITURES
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
(DOLLARS IN THOUSANDS)
<S> <C>
Unproved property acquisition......................................... $988
Development........................................................... 88
</TABLE>
F-41
<PAGE> 128
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Walter International, Inc.
We have audited the accompanying consolidated balance sheets of Walter
International, Inc. and subsidiaries (the "Company") as of December 31, 1992 and
1993, and the related consolidated statements of operations and accumulated
deficit, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1992 and 1993, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
7, the Company is experiencing difficulty in generating sufficient cash flow to
meet its obligations and sustain its operations, which raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are described in Notes 7 and 8. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 8 to the consolidated financial statements, the
Company has agreed to merge with CMS Energy Corporation. The merger is
contingent upon certain events.
Deloitte & Touche LLP
June 24, 1994
(July 31, 1994, as to Note 8)
F-42
<PAGE> 129
WALTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1992 1993
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................... $ 107,370 $ 951,130
Restricted cash (Note 1)....................................... 128,589 525,685
Accounts receivable:
Joint venture participants................................... 2,097,890 605,770
Trade........................................................ 409,930 9,789
Related parties.............................................. 361,766 50,249
Other........................................................ 518,790 58,171
Inventory...................................................... 24,236 259,873
Other current assets (net of amortization of $25,484 in
1993)......................................................... 4,097 82,176
----------- -----------
Total current assets...................................... 3,652,668 2,542,843
Property, Plant and Equipment, at Cost:
Oil and gas properties -- full cost basis...................... 14,362,022 15,723,697
Furniture and office equipment................................. 59,689 63,497
----------- -----------
14,421,711 15,787,194
Accumulated depreciation, depletion and amortization........... (7,858,430) (8,678,096)
----------- -----------
Net Property, plant and equipment.............................. 6,563,281 7,109,098
Other assets (net of amortization of $9,387 in 1992)................ 90,923 --
----------- -----------
Total assets.............................................. $10,306,872 $ 9,651,941
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
(ACCUMULATED DEFICIT)
Current Liabilities:
Accounts payable and accrued liabilities....................... $ 3,935,293 $ 942,372
Advances from joint venture participants....................... 81,115 539,256
Accounts payable to related parties............................ 235,373 41,399
Current maturities of long-term debt (Note 7).................. 1,593,618 7,276,611
----------- -----------
Total current liabilities................................. 5,845,399 8,799,638
Long-term notes payable (Note 7).................................... 5,432,576 914,226
Commitments And Contingencies (Notes 4 and 7)
Mandatory Redeemable Stock (Note 3):
14% Senior cumulative preferred stock, $1.00 par value, 3,000
shares authorized and issued (mandatory redemption, aggregate
liquidation preference of $4.7 million)....................... 3,000 3,000
Stockholders' Equity
(Accumulated Deficit) (Note 3):
Common stock, $0.01 par value; 1,000,000 shares authorized and
100,000 shares issued......................................... 1,000 1,000
Additional paid-in capital..................................... 5,934,910 5,934,910
Accumulated deficit............................................ (6,910,013) (6,000,833)
----------- -----------
(974,103) (64,923)
----------- -----------
Total liabilities & stockholders' equity (accumulated
deficit)................................................ $10,306,872 $ 9,651,941
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-43
<PAGE> 130
WALTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1992 1993
<S> <C> <C>
Revenues:
Oil sales...................................................... $ 2,175,812 $ 4,197,148
Management service fees........................................ 313,228 504,052
Interest and other income (Note 1)............................. 318,629 41,156
----------- -----------
2,807,669 4,742,356
Expenses:
Lease operating expense........................................ 826,730 1,168,902
General and administrative expense............................. 845,818 932,536
Interest expense............................................... 327,336 895,975
Depreciation, depletion and amortization....................... 315,892 835,763
----------- -----------
2,315,776 3,833,176
Income before income taxes and extraordinary credit................. 491,893 909,180
Income taxes (Note 2)............................................... (167,244) --
----------- -----------
Income before extraordinary credit.................................. 324,649 909,180
Extraordinary credit from utilization of tax loss carryforward...... 167,244 --
----------- -----------
Net income.......................................................... 491,893 909,180
Beginning accumulated deficit....................................... (7,401,906) (6,910,013)
----------- -----------
Ending accumulated deficit.......................................... $(6,910,013) $(6,000,833)
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-44
<PAGE> 131
WALTER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1992 1993
<S> <C> <C>
Cash Flows From Operating Activities:
Net income..................................................... $ 491,893 $ 909,180
Adjustments To Reconcile Net Income To Net Cash Provided By
(Used In) Operating Activities:
Depreciation, depletion and amortization..................... 315,892 835,763
(Increase) decrease in accounts receivable................... (1,667,402) 2,664,397
Increase in inventory........................................ (24,236) (235,637)
Increase (decrease) in accounts payable and accrued
liabilities................................................. 1,011,929 (3,186,895)
Other........................................................ (516,302) (3,253)
----------- -----------
Net cash provided by (used in) operating activities....... (388,226) 983,555
Cash Flows From Investing Activities:
Additions to property, plant and equipment..................... (4,922,787) (1,365,483)
Restricted cash for property addition.......................... 484,316 --
Increase (decrease) in advances from joint venture
participants.................................................. (667,006) 458,141
----------- -----------
Net cash used in investing activities..................... (5,105,477) (907,342)
Cash Flows From Financing Activities:
Proceeds from notes payable.................................... 6,987,391 5,806,429
Repayment of notes payable..................................... (1,345,000) (4,641,786)
Cash restricted for payment of financial obligation............ (128,589) (397,096)
----------- -----------
Net cash provided by financing activities................. 5,513,802 767,547
Net increase in cash and cash equivalents........................... 20,099 843,760
Cash and cash equivalents at beginning of year...................... 87,271 107,370
----------- -----------
Cash and cash equivalents at end of year............................ $ 107,370 $ 951,130
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-45
<PAGE> 132
WALTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION
Walter International, Inc. ("WII"), a Texas corporation, was organized on
May 22, 1987. WII was organized for the acquisition of oil and gas properties
and the exploration, development and production of oil and gas reserves in areas
outside the continental United States. WII's principal asset is an interest in
the petroleum reserves associated with the Alba Production Sharing Contract
covering approximately 500,000 acres offshore Equatorial Guinea, West Africa
(the "Alba Field"). WII's wholly-owned subsidiary, Walter International
Equatorial Guinea, Inc. ("WIEG"), is the operator of the Alba Field. During
1992, commercial production from the Alba Field commenced.
B. FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements consolidate the statements of WII and
its wholly-owned subsidiaries (collectively referred to as the "Company") at
December 31, 1992 and 1993. All significant intercompany accounts and
transactions have been eliminated.
C. OIL AND GAS PROPERTIES
The Company follows the full-cost method of accounting for its oil and gas
properties. Under this method of accounting, all costs incurred in the
acquisition of oil and gas properties and the exploration for and the
development of oil and gas reserves are capitalized in separate cost centers for
each country. No gains or losses are recognized upon the sale or disposition of
oil and gas properties unless the sale or disposition represents a significant
portion of the individual cost center's oil and gas reserves.
If the Company's net investment in oil and gas properties in a cost center
exceeds the present value of estimated future net revenues from proved reserves
discounted at 10%, adjusted for tax effects, the excess will be charged to
expense as additional depreciation, depletion and amortization.
The costs of proven properties, including the estimated cost to complete
proven undeveloped properties in each cost center, are amortized on a composite
unit-of-production method based on the proved reserves as determined by an
outside petroleum engineer.
D. REVENUE RECOGNITION
Revenue, net of the overriding royalty interests paid to a third-party
investor and the two principal shareholders (see Note 7), is recognized by the
Company based on monthly production. At December 31, 1993, inventory includes
December production of condensate valued at the contracted sales amount. All
condensate sold during the years ended December 31, 1992 and 1993 was sold to a
single purchaser on the spot market (see Note 4).
E. FURNITURE AND EQUIPMENT
Furniture and equipment is recorded at cost and is depreciated using the
straight-line method based on the estimated useful lives of the related assets.
F. MANAGEMENT SERVICE FEES
Fees received by the Company, as operator, for reimbursement of overhead
expenses attributable to exploration, development and production activities are
included in revenue. The Company received approximately $504,000 and $313,000 in
1993 and 1992, respectively, in reimbursed overhead charges relating to the Alba
Field.
F-46
<PAGE> 133
WALTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
G. STATEMENT OF CASH FLOWS
For purposes of the consolidated statements of cash flows, all highly
liquid investments with an original maturity of three months or less are
considered to be cash equivalents. Cash used in operating activities includes
cash payments for interest by the Company of approximately $175,000 and $814,000
during 1992 and 1993, respectively.
H. RESTRICTED CASH
At December 31, 1992 and 1993, the Company had approximately $129,000 and
$526,000, respectively, held in escrow to secure certain payments of WIEG's
financing obligations.
I. CONCENTRATION OF CREDIT RISK
The Company is, as operator, principally engaged in the development and
production of the Alba Field. Currently, all production is sold to one customer
in accordance with a term contract (see Note 4).
J. INTEREST AND OTHER INCOME
Other income in 1992 includes approximately $317,000 resulting from the
Company's reversal of interest accrued in prior periods on past due trade
obligations.
K. RECLASSIFICATIONS
Certain minor reclassifications have been made to prior year's amounts to
conform with current reporting practices.
2. INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), Accounting for Income Taxes. SFAS
No. 109 requires application of an asset and liability approach for financial
accounting and reporting for income taxes. The effect of adopting SFAS No. 109
was not material to the Company's consolidated financial statements.
The Company had U.S. taxable income of approximately $0.9 million for the
year ended December 31, 1993 before the utilization of net operating loss
carryforwards. As of December 31, 1993, the Company had approximately $6.8
million of net operating loss carryforwards remaining for U.S. tax purposes that
will expire between the years 2004 and 2007.
WIEG, the Company's wholly-owned subsidiary, has approximately $6.0 million
of net operating loss carryforwards generated in a foreign taxing jurisdiction
which is available to offset income taxable in that foreign jurisdiction. These
foreign net operating loss carryforwards will expire between the years 1994 and
1995, if not utilized. However, the Company anticipates that future payments of
income taxes in the foreign jurisdiction will generate foreign tax credits
available to offset future payments of U.S. federal income taxes. The full
realization of any tax benefits resulting from any foreign tax credits generated
would depend upon the Company's taxable income during the carryforward period.
At December 31, 1993, the Company had no provision for income taxes because
of a reduction in the valuation allowance during 1993. The Company recognized an
extraordinary credit in the 1992 "Consolidated Statement of Operations and
Accumulated Deficit" from utilizing a portion of such operating loss
carryforward. Provision for income taxes is obtained by applying the statutory
U.S. federal income tax rate of 34% of the income before income taxes and
extraordinary credit.
F-47
<PAGE> 134
WALTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1993, deferred tax assets and liabilities computed at the
statutory rate related to temporary differences as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Deferred tax assets................................................. $ 2,312
Valuation allowance................................................. (1,926)
--------
Deferred tax assets -- net.......................................... 386
Deferred tax liabilities............................................ (386)
--------
Total deferred taxes -- net......................................... $ --
========
</TABLE>
Deferred tax assets are related to tax loss carryforwards. Deferred tax
liabilities are related primarily to the difference between the book and the tax
basis of property, plant and equipment. The Company has a valuation allowance of
$1,926,000 at December 31, 1993 relating to the uncertainty of the utilization
of the net operating loss carryforwards to reduce future taxes.
3. STOCK TRANSACTIONS
On December 15, 1989, certain institutional investors purchased from the
Company 3,000 shares of its 14% Senior Cumulative Preferred Stock ("Senior
Preferred") for total cash consideration of $3,000,000 ($2,925,000 net of stock
issuance expenses). Annual dividends of $140 per share are payable quarterly out
of dedicated net cash flow (as defined). If the dedicated net cash flow is
insufficient to meet any quarterly dividend requirement, the dividends
accumulate in arrears. The aggregate amount of cumulative preferred dividends in
arrears at December 31, 1993 was approximately $1,697,000.
The Company is required to redeem the Senior Preferred at a price of $1,000
per share by making quarterly payments out of dedicated net cash flow remaining,
if any, after the payment of dividends on the Senior Preferred. Dedicated cash
flows were not sufficient for the payment of dividends or the redemption of the
Senior Preferred in 1992 or 1993.
Currently, the Company has dedicated to the Senior Preferred the net cash
flows of its interest in El Franig concession in Tunisia. The agreement provides
that if, as of January 1 of any year, beginning January 1, 1991, 80% of the
future Franig net cash flow estimated to be received on or prior to December 31,
1994 is less than the product of the then outstanding shares of Senior Preferred
and the liquidation value, the Company shall dedicate such additional net cash
flows from other properties as is necessary so that after such additional
dedication, the future dedicated net cash flow is equal to at least 125% of the
then outstanding shares of Senior Preferred and the liquidation value. As a
result, if the Company relinquishes its right to further develop El Franig (see
Note 4) or the reserves in El Franig cease to be classified by outside petroleum
engineers as proved reserves, the Company will be required to dedicate to the
Senior Preferred cash flows from other proven reserves. Presently, the Company's
only other proven reserves are in the Alba Field. The Company estimates that El
Franig will not be developed by December 31, 1994, and as a result, dedication
of the reserves associated with the Alba Field may be required. Dedication to
the Senior Preferred of the net cash flows from the Alba Field would require the
Company to use such net cash flows to pay dividends on the Senior Preferred
(including amounts in arrears) and redeem the Senior Preferred with any net cash
flows remaining.
The Company has the option to redeem additional Senior Preferred shares at
a price of $1,180 per share (plus accrued and unpaid dividends). No such
optional redemption will reduce the obligation of the Company to make any
mandatory redemption.
If at any time any shares of the Senior Preferred are outstanding: (a) both
of the Principal Shareholders (as defined) die; (b) both of the Principal
Shareholders cease to serve as executive officers of the Company or a change of
control (as defined) shall occur; (c) the Company directly, or indirectly, were
to create, incur,
F-48
<PAGE> 135
WALTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assume or permit to exist any Lien (as defined) on or with respect to dedicated
properties (as defined), except for certain instances as specified in the
agreement such as liens entered into in the ordinary course of business or in
favor of development financing (as defined); or (d) the Company were to sell,
assign, lease, convey or otherwise dispose of its assets, including the sale,
assignment or transfer of any royalties, overriding royalties or other interest
in its assets, except for certain instances as specified in the agreement and as
set forth in Notes 1, 4 and 7, the holder of the Senior Preferred shall have the
right to immediately require the Company to repurchase the shares of Senior
Preferred at $1,000 per share (plus accrued and unpaid dividends).
4. COMMITMENTS
During 1990, WIEG, along with other participants, entered into a Production
Sharing Contract (the "PSC") with the Republic of Equatorial Guinea to conduct
exploration and development activities in that country. The PSC requires that
WIEG carry out a certain minimum Work Program (as defined) and meet certain
minimum expenditure obligations. During 1992, WIEG drilled and completed a
development well in the Alba Field and drilled a dry exploratory well in the PSC
area. In April 1992, the date of the first sales of commercial production, WIEG
paid $235,000, its share of a production bonus, to the Republic of Equatorial
Guinea. The PSC further requires WIEG to drill an additional exploratory well by
April 1995 (see Note 7).
In 1992, WIEG, along with other participants in the Alba Field, entered
into a purchase and sales contract with a European-based petroleum products
trader for the majority of 1993 production. The sales price under the contract
is based on an adjusted market price.
During 1990, the Company and its joint venture partners obtained from a
major oil company an interest in two concessions (Douz and Medinine) in Tunisia
for consideration consisting of $5,000,000 cash ($1,250,000 net to the Company),
which was paid in March 1990, and a production payment of $20,000,000 payable
solely out of future revenues (excluding government royalty and transportation
fees) from the two concessions. The Company drilled two wells and subsequently
suspended further development operations in the Douz concession due to low
productivity and recorded an impairment provision. The concession agreement, as
modified, requires that the Company undertake to decide whether or not to
proceed with the development of El Franig field in the Medinine concession by
December 1994, if not extended. The Company has the right to discontinue these
activities at any time without further financial obligation.
5. RELATED PARTY TRANSACTIONS
An affiliated corporation owned by certain stockholders of the Company has
provided the Company with certain administrative and other staff services. The
Company was charged approximately $167,000 and $180,000 for such services for
the years ended December 31, 1992 and 1993, respectively.
Receivables from related parties primarily relate to the affiliate's share
of joint interest billings relating to the Alba Field.
6. PHANTOM STOCK PLAN
The Company terminated its phantom stock plan in 1993. The Company incurred
approximately $111,000 of compensation expense in 1992 pursuant to the Plan, for
which approximately $52,000 remains payable to a past participant in the plan,
and is included in accounts payable and accrued liabilities at December 31,
1993.
7. FINANCING
In February 1992, the Company received $3,000,000 from a revolving line of
credit with a third-party bank based on such bank's prime rate. This line of
credit was secured by guarantees from a third-party investor (letter of credit)
and the two principal shareholders (personal assets) of the Company of
$2,000,000 and
F-49
<PAGE> 136
WALTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1,000,000, respectively. During 1993, a repayment on the line of credit reduced
the amount available to $1,000,000, of which $914,226 was outstanding at
December 31, 1993, and the third-party investor's guaranty was released. The
interest rate at December 31, 1993 for amounts outstanding under the credit
agreement was 6.28%. In consideration for the guaranties, WII caused WIEG to
deliver, to the third-party investor and the two principal shareholders,
overriding royalty interests in the Alba Field equal to a fixed percentage of
WIEG's net interest, respectively. The line of credit matures on January 6,
1995, if not extended by the lender.
In June 1992, WIEG, along with other consortium members, entered into a
Finance Agreement (the "Agreement") with the Overseas Private Investment
Corporation ("OPIC"), an agency of the United States government, whereby OPIC
guaranteed loans for development drilling in the Alba Field. WIEG's
participation in the OPIC guarantee was approximately $4.3 million.
Approximately $1.2 million and $3.1 million was distributed to WIEG during 1993
and 1992, respectively, under the Agreement. The Agreement requires the Company
maintain an escrow account for debt service requirements (see Note 1). The
disbursements bear interest, payable quarterly, based on the three-month London
Interbank Offered Rate ("LIBOR") plus three-eighths percent, adjusted quarterly.
The interest rate as of December 31, 1993 and 1992 was 3.75% and 3.81%,
respectively. For the years 1993 and 1992, WIEG paid OPIC guarantee and
commitment fees of approximately $76,000 and $40,000 in the aggregate,
respectively. The principal amount of each disbursement is to be repaid in 20
equal quarterly installments. The amount outstanding as of December 31, 1993 and
1992 was approximately $3.8 million and $3.1 million, respectively. WIEG has
pledged all of its interests in the Alba Field and the PSC and has agreed not to
place any other liens on its interest in the PSC.
In February 1993, the Company obtained a $4.6 million term loan from a
financial institution (the "Term Loan") for the purpose of repaying outstanding
indebtedness, including a portion of the revolving line of credit, overdue trade
obligations and joint interest billing obligations. In accordance with the Term
Loan, the Company caused WIEG to deliver an overriding royalty interest to the
lender calculated as a percentage of Gross Proceeds, as defined in the Term
Loan, received by WIEG from the Alba Field. During 1993, WIEG paid approximately
$91,000 to the lender, relating to the overriding royalty interest, and is
recorded as additional interest expense in the 1993 consolidated statement of
operations and accumulated deficit. The interest on the Term Loan is fixed at
10% on the outstanding principal balance outstanding, payable quarterly.
Required principal repayments commenced on June 30, 1993 and are payable in 16
quarterly installments, as provided in the Term Loan. As of December 31, 1993,
the outstanding balance of the Term Loan was approximately $3.5 million. The
Company has pledged all the outstanding common stock of WIEG as collateral. The
Term Loan and the overriding royalty interest are subordinate to the amounts
guaranteed by OPIC.
On October 8, 1992, WIEG entered into an Interest Rate and Currency
Exchange Agreement which has effectively fixed the interest rate on
approximately $3.1 million of floating rate debt. Under the agreement, WIEG will
pay the counterparties interest at a fixed rate of 5.91% over the term of the
loan and the counterparties will pay WIEG the three-month LIBOR. The swap
agreement, which will terminate April 1, 1998, requires quarterly interest
settlement payments and a cash collateral account. WIEG has entered into this
interest rate swap with a bank to eliminate the impact of interest rate
fluctuations with respect to this portion of its floating rate debt. WIEG is
exposed to loss if the counterparty defaults. Such counterparty is a major
international financial institution, and the Company believes the risk of
default is minimal. Interest rate swap transactions generally involve exchanges
of fixed and floating interest payment obligations without exchanges of
underlying principal amounts; therefore, WIEG's exposure to credit loss is
significantly less than the contracted amounts.
F-50
<PAGE> 137
WALTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Notes Payable Consist of the Following at December 31:
<TABLE>
<CAPTION>
1992 1993
<S> <C> <C>
OPIC guaranteed loans......................................... $3,124,122 $3,801,611
Borrowing on revolving line of credit......................... 2,564,226 914,226
Term Loan..................................................... -- 3,475,000
Current liabilities refinanced (subsequent to December 31,
1992) on a long-term basis.................................. 1,337,846 --
---------- ----------
7,026,194 8,190,837
Less current maturities....................................... 1,593,618 7,276,611
---------- ----------
$5,432,576 $ 914,226
========= =========
</TABLE>
The Company was granted a waiver dated June 24, 1994, from the lender, for
any event of default resulting from its inability to meet the scheduled March
31, 1994 and June 30, 1994 principal payments under the Term Loan. The Company's
ability to meet its financial obligations under the restructured Term Loan (if
not repaid commensurate with a proposed merger by the Company with an
unaffiliated entity -- see Note 8), and the Company's ability to finance future
exploratory and development drilling requirements under existing concession
agreements, is dependent on the successful consummation of the aforementioned
proposed merger or management's ability to seek other long-term financing
alternatives. The Company has experienced difficulty in generating sufficient
cash flow to meet its debt obligations and sustain its operations, which raises
substantial doubt about its ability to continue as a going concern. As a result,
the entire balance of the Company's OPIC guaranteed loans and the Term Loan at
December 31, 1993, have been classified as current liabilities in the 1993
consolidated balance sheet. The line of credit, which matures on January 6, 1995
and secured by the personal assets of the two principal shareholders, remains
classified as a long-term note payable in the 1993 consolidated balance sheet.
8. SUBSEQUENT EVENTS
In June 1994, the Company, together with an unaffiliated entity, entered
into a Stock Purchase Agreement ("SPA") with an international oil company to
purchase the common stock of that company's United States subsidiaries which are
involved in the production of oil in the Republic of Congo, Africa ("Congo
Acquisition").
In June 1994, the Company entered into a Letter of Intent with CMS Energy
Corporation ("CMS") to exchange all of the common shares of the Company for
shares of CMS (the "Merger"). Under the terms of the Merger, CMS will assume the
obligations under the OPIC Agreement (see Note 7) and discharge all other
obligations of the Company including (a) all the outstanding principal and
interest on the line of credit (see Note 7), (b) all the outstanding principal
and interest on the Term Loan (see Note 7), and (c) the obligations to redeem
the Senior Preferred (see Note 3) pursuant to the terms of a proposed offer
dated June 24, 1994 discussed below. The Merger is contingent upon, among other
things, the following: (a) the successful completion of the Congo Acquisition,
(b) receipt of the necessary approvals, from the limited partners of the
partnerships that own the Senior Preferred, to redeem the Senior Preferred, and
(c) completion of due diligence by CMS.
On June 24, 1994, in anticipation of the Merger, the Company entered into
an agreement to restructure the Term Loan (see Note 7). The restructuring
provided for additional funding in July 1994 of $525,000, a waiver of any event
of default for the failure to pay the March 1994 and June 1994 scheduled
principal payments, and an increase in the fixed rate of interest to 12% per
annum effective June 30, 1994. The restructuring also provides for a one-time
payment to the financial institution of $30,000 and a prepayment premium of
$50,000 if any portion of the additional funding or any other principal amount
of the Term Loan is prepaid prior to the maturity date. If the restructured Term
Loan is not repaid by September 15, 1994, the
F-51
<PAGE> 138
WALTER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
restructuring further provides that (a) the September 1994 scheduled principal
repayment be waived, (b) the scheduled principal repayments be amended to
commence in December 1994 and to be paid in 13 quarterly installments, and (c)
the Company will cause WIEG to increase the overriding royalty interest to the
financial institution.
On June 24, 1994, the Company entered into a letter agreement with the
holder of the Senior Preferred (see Note 3) to purchase all of the outstanding
shares of the Senior Preferred, all rights to accrued and unpaid interest, and
all warrants granted to the holders for cash consideration of $3.4 million
(liquidation preference of $4.7 million). This agreement is contingent on the
consummation of the Merger referenced above, as well as the approval of the
proposed terms of the letter agreement by the limited partners of the
partnerships that own the Senior Preferred.
F-52
<PAGE> 139
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Nuevo Congo Company and
Walter International Congo, Inc.
(formerly Amoco Congo Exploration and
Petroleum Companies):
We have audited the accompanying combined balance sheets of Amoco Congo
Exploration and Petroleum Companies as of December 31, 1993 and 1994, and the
related combined statements of operations, stockholder's equity, and cash flows
for each of the years in the three-year period ended December 31, 1994. These
combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Amoco Congo
Exploration and Petroleum Companies at December 31, 1993 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1994 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
April 18, 1995
F-53
<PAGE> 140
AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES
COMBINED BALANCE SHEETS
DECEMBER 31, 1993 AND 1994
<TABLE>
<CAPTION>
1993 1994
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents..................................... $ 13,221 $ 10,703
Accounts receivable........................................... 7,170 1,221
Allowance for doubtful accounts............................... -- (429)
Inventories:
Crude oil................................................... 1,753 6,144
Supplies.................................................... 8,099 8,720
--------- ---------
Total inventories........................................ 9,852 14,864
Prepaid expenses.............................................. 755 800
--------- ---------
Total current assets..................................... 30,998 27,159
Property, Plant and Equipment:
Proved properties (Successful efforts method)................. 32,544 32,658
Office furniture and equipment................................ 5,818 5,784
--------- ---------
38,362 38,442
Less accumulated depreciation, depletion and amortization.......... (29,743) (32,285)
--------- ---------
Net property plant and equipment......................... 8,619 6,157
Deferred charges................................................... 695 393
--------- ---------
$ 40,312 $ 33,709
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable.............................................. $ 5,901 $ 6,927
Due to affiliates............................................. 2,955 26
--------- ---------
Total current liabilities................................ 8,856 6,953
Stockholder's Equity:
Common stock, $100 par value. Authorized and issued 10 shares
Amoco Congo Exploration Company and 10 shares Amoco Congo
Petroleum Company............................................ 2 2
Additional paid-in capital.................................... 455,892 433,820
Accumulated deficit........................................... (424,438) (407,066)
--------- ---------
Total stockholder's equity............................... 31,456 26,756
--------- ---------
$ 40,312 $ 33,709
========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-54
<PAGE> 141
AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
<TABLE>
<CAPTION>
1992 1993 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Oil revenues............................................ $ 45,082 $49,480 $37,249
Other income............................................ 929 292 296
-------- ------- -------
Total revenues..................................... 46,011 49,772 37,545
Operating Expenses:
Lease operating expense................................. 21,735 15,103 10,557
Write-down of proved properties......................... 19,688 6,038 --
Depreciation, depletion and amortization................ 14,940 4,397 2,664
General and administrative.............................. 19,747 12,096 6,952
Interest expense........................................ 13,933 739 --
-------- ------- -------
Total expenses..................................... 90,043 38,373 20,173
Income (loss) before income taxes.................. (44,032) 11,399 17,372
Income taxes................................................. -- -- --
-------- ------- -------
Net income (loss).................................. $(44,032) $11,399 $17,372
======== ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-55
<PAGE> 142
AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDER'S
COMMON PAID-IN ACCUMULATED (DEFICIT)
STOCK CAPITAL DEFICIT EQUITY
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balances at December 31, 1991................. $ 2 $ 130,266 $(391,805) $(261,537)
Net loss...................................... -- -- (44,032) (44,032)
Cash contributions............................ -- 61,767 -- 61,767
------ ---------- ----------- -------------
Balances at December 31, 1992................. 2 192,033 (435,837) (243,802)
------ ---------- ----------- -------------
Net income.................................... -- -- 11,399 11,399
Cash contributions............................ -- 275,214 -- 275,214
Dividends..................................... -- (11,355) -- (11,355)
------ ---------- ----------- -------------
Balances at December 31, 1993................. 2 455,892 (424,438) 31,456
------ ---------- ----------- -------------
Net income.................................... -- -- 17,372 17,372
Cash contributions............................ -- 6,883 -- 6,883
Dividends..................................... -- (28,955) -- (28,955)
------ ---------- ----------- -------------
Balances at December 31, 1994................. $ 2 $ 433,820 $(407,066) $ 26,756
====== ======== ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-56
<PAGE> 143
AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
<TABLE>
<CAPTION>
1992 1993 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss).............................................. $(44,032) $ 11,399 $17,372
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided
By (Used In) Operating Activities:
Depreciation, depletion, amortization and write-down of
proved properties....................................... 34,628 10,435 2,664
Change in oil inventory................................... (4,113) 6,800 (4,381)
Net change in assets and liabilities:
Decrease (increase) in accounts receivable.............. 2,010 (4,402) 5,949
Decrease (increase) in due to/from affiliates........... (2,993) 3,775 (2,929)
Decrease (increase) in supply inventories............... 7,339 1,681 (631)
Increase (decrease) in accounts payable and accrued
expenses............................................. 2,668 (13,834) 1,025
Decrease in other assets................................ 484 307 686
-------- --------- -------
Net cash provided by (used in) operating
activities......................................... (4,009) 16,161 19,755
Cash Flows from Investing Activities:
Capital expenditures...................................... (43,819) (2,469) (238)
Sale of property, plant and equipment..................... -- 700 37
-------- --------- -------
Net cash used in investing activities................ (43,819) (1,769) (201)
Cash Flows from Financing Activities:
Principal payments on notes payable....................... (12,000) (273,000) --
Dividends................................................. -- (11,355) (28,955)
Capital contributions..................................... 61,767 275,214 6,883
-------- --------- -------
Net cash provided by (used in) financing
activities......................................... 49,767 (9,141) (22,072)
Net increase (decrease) in cash and cash equivalents........... 1,939 5,251 (2,518)
Cash and cash equivalents at beginning of year................. 6,031 7,970 13,221
-------- --------- -------
Cash and cash equivalents at end of year....................... $ 7,970 $ 13,221 $10,703
======== ========= =======
Supplemental cash flow disclosures:
Interest paid............................................. $ 13,983 $ 739 $ --
======== ========= =======
</TABLE>
See accompanying notes to combined financial statements.
F-57
<PAGE> 144
AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1992, 1993 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Amoco Congo Exploration Company and Amoco Congo Petroleum Company
(collectively referred to as "Amoco Congo Exploration and Petroleum Companies"
or the "Company") are wholly-owned subsidiaries of Amoco Production Company (the
"Parent"). The Company's combined financial statements include the accounts of
Amoco Congo Exploration and Petroleum Companies. All significant intercompany
transfers have been eliminated.
The primary business of the Company is the exploration and production of
hydrocarbons from the Yombo-Masseko-Youbi exploration permit located
approximately fifty miles offshore of the People's Republic of Congo. Amoco
Congo Exploration and Petroleum Companies have a total combined working interest
of 87.5% and total combined net revenue interest of 63.47% in the permit. Of the
combined working interest, 43.75% represents a carried interest associated with
another interest owner which converts to a working interest at payout of the
property. The net revenue interest is burdened by a 15.04% royalty interest
payable to the Congo government and by a 12.5% interest associated with the
carried interest owner.
B. REVENUE RECOGNITION
The Company recognizes revenue when the sale is completed and risk of loss
transfers to a third party purchaser. Crude oil in inventory is stated at year
end market prices less transportation costs; the Company recognizes changes in
the market value of inventory from one period to the next as oil revenues.
C. CASH EQUIVALENTS
Cash equivalents consist of overnight repurchase agreements and
certificates of deposit with an initial term of less than three months. For
purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
D. SUPPLY INVENTORIES
Material and supply inventories are stated at the lower of current market
value or cost. Cost is determined using the first-in, first-out method or
average cost.
E. PROPERTY, PLANT AND EQUIPMENT
The Company uses the successful efforts method of accounting for its oil
operations. The costs of unproved leaseholds are capitalized pending the results
of exploration efforts. Unproved leaseholds with significant acquisition costs
are assessed periodically, on a property-by-property basis, and a loss is
recognized to the extent, if any, the cost of the property has been impaired.
Unproved leaseholds whose acquisition costs are not individually significant are
aggregated, and the portion of such costs estimated to ultimately prove
nonproductive, based on experience, are amortized over an average holding
period. As unproved leaseholds are determined to be productive, the related
costs are transferred to proved leaseholds. Exploratory dry holes and geological
and geophysical charges are expensed. Depletion of proved leaseholds and
amortization and depreciation of the costs of all development and successful
exploratory drilling are provided by the unit-of-production method based upon
estimates of proved oil reserves on a field-by-field basis. Estimated costs (net
of salvage value) of dismantling and abandoning oil production facilities are
computed and included in depreciation and depletion using the unit-of-production
method. The total estimated future dismantlement and abandonment cost being
amortized as of December 31, 1994 was approximately $9.0 million. Should the net
capitalized costs exceed the estimated future undiscounted after tax net cash
flows from proved oil
F-58
<PAGE> 145
AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
reserves, such excess costs would be charged to expense. In 1993 and 1992,
write-downs of proved oil properties of approximately $6.0 million and $19.7
million, respectively, were charged to operating expenses.
In March 1995, Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, was issued and is effective for years beginning after December
15, 1995. The statement will change the Company's method of recognition and
measurement of impairments for long-lived assets. The Company has not determined
the impact of adoption; however, it is not believed the impact will have a
material effect on the Company's financial condition.
Other property, plant and equipment are depreciated on a straight-line
basis over their estimated useful lives. Leasehold improvements, which are
recorded at cost, are amortized on a straight-line basis over their estimated
useful lives or the life of the lease, whichever is shorter.
F. INCOME TAXES
The Company follows the asset and liability method of accounting for income
taxes under the provisions of Statement of Financial Accounting Standards No.
109 ("SFAS 109"), Accounting for Income Taxes. Under the asset and liability
method of SFAS 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company files a consolidated income tax return with its Parent. The
Company recognizes income tax expense under the separate company method which
applies SFAS 109 as though the Company was filing a separate income tax return.
Accordingly, deferred income tax assets are recognized when it is more likely
than not that the Company will realize the benefits as a reduction of future
taxable income.
<TABLE>
<CAPTION>
1993 1994
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deductible temporary differences resulting from proved properties...... $ 66,452 $ 61,500
Net operating loss utilized by parent.................................. 48,921 47,966
Valuation allowance on deferred tax assets............................. (115,373) (109,466)
--------- ---------
Total deferred income tax.................................... $ -- $ --
========= =========
</TABLE>
The Company generated substantial net operating losses for federal income
tax purposes which were utilized by the Parent. Under the Parent's tax sharing
agreement, the Company received no benefit from the Parent's utilization of
these net operating losses until utilized on the separate company method to
reduce the Company's taxable income.
On a separate company basis, the Company has approximately $141.0 million
of net operating loss carryforwards available to offset the Company's taxable
income in future years which begin to expire in 2006.
The significant components of deferred income tax expense attributable to
income from continuing operations for the years ended December 31, 1992, 1993
and 1994 are as follows:
<TABLE>
<CAPTION>
1992 1993 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax expense (benefit)........................... $(14,930) $ 3,996 $ 5,907
Increase (decrease) in beginning-of-the-year balance of
the valuation allowance for deferred tax assets........ 14,930 (3,996) (5,907)
-------- ------- -------
$ -- $ -- $ --
======== ======= =======
</TABLE>
F-59
<PAGE> 146
AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. LEASES
The Company has several noncancellable operating leases, primarily for
housing and office space, that expire at various times over the next nine years.
The operating base lease becomes cancelable as of March 19, 1995 upon twelve
months notice and payment of an early termination fee. As management does not
currently intend to cancel the operating base lease, the future minimum lease
payments are included in all years presented below. The office facility is
leased based on two year terms. As management currently intends to continually
renew the lease upon expiration, the future minimum lease payments are included
in the presentation below. Rental expense for operating leases was $1,878,692,
$1,700,349, and $1,336,510 for the years ended December 31, 1992, 1993, and
1994, respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) are:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1995............................................................ $ 771,854
1996............................................................ 739,512
1997............................................................ 739,512
1998............................................................ 739,512
1999............................................................ 739,512
Later years, through 2001....................................... 800,154
----------
Total minimum lease payments.......................... $4,530,056
==========
</TABLE>
3. BUSINESS CONCENTRATIONS
The Company operates outside of the United States in the exploration and
production of oil reserves. The Company's major customers include domestic and
foreign companies.
Accrued revenues and accounts receivable relate to oil producing activities
and are deemed by management to be collectible.
During the year ended December 31, 1994, the Company settled a matter with
the Congo government regarding the calculation of royalties due to the Congo
government. The settlement of this matter resulted in an approximate $2.9
million reduction in oil revenues in 1994.
The following sales customers accounted for 10% or more of revenues of the
Company:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1992 1993 1994
<S> <C> <C> <C>
Exxon............................................................... 29% -- --
J. Aron............................................................. 18 -- --
Stinnes............................................................. -- 70% 98%
Vitol............................................................... -- 17 --
</TABLE>
4. SUBSEQUENT EVENTS
On June 30, 1994, Amoco Production Company, the sole owner of all of the
Company's issued and outstanding stock, entered into an agreement to sell all
issued and outstanding shares of the Company, effective as of December 1, 1993,
to Walter International, Inc. and Nuevo Energy Company, for a sales price of
$31,500,000. The sales price is payable in cash of $21,500,000 and a promissory
note of $10,000,000. Additionally, a production payment in an amount to be
agreed upon at a later date, is payable to the seller in quarterly installments,
based upon production beginning as of the effective date of the sale. The sale
to Walter
F-60
<PAGE> 147
AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
International, Inc. and Nuevo Energy Company closed on February 24, 1995 and the
names of the companies were changed to The Nuevo Congo Company and Walter
International Congo, Inc.
5. SUPPLEMENTAL OIL PRODUCING ACTIVITIES (UNAUDITED)
Capitalized costs relating to oil producing activities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1993 1994
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Proved properties................................................ $ 32,544 $ 32,658
Accumulated depreciation, depletion and amortization............. (27,414) (28,907)
-------- --------
$ 5,130 $ 3,751
======== ========
</TABLE>
Costs incurred in oil property acquisition, exploration and development
activities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1992 1993 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Development costs............................................. $43,262 $2,032 $114
======= ====== ====
</TABLE>
Results of operations for oil producing activities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1992 1993 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues................................................. $ 45,082 $49,480 $37,249
Lifting costs:
Lease operating expense................................ 21,735 15,103 10,557
-------- ------- -------
23,347 34,377 26,692
Depreciation, depletion and amortization and write-down
of oil properties...................................... 34,628 10,435 2,664
-------- ------- -------
Results of operations from producing activities.......... $(11,281) $23,942 $24,028
======== ======= =======
</TABLE>
The Company's standardized measure of discounted future net cash flows and
changes therein as of December 31, 1992, 1993 and 1994 are provided based on the
present value of future net revenues from proved oil reserves estimated by Amoco
Production Company in-house petroleum engineers in accordance with guidelines
established by the Securities and Exchange Commission. These estimates were
computed by applying appropriate current prices for oil to estimated future
production of proved oil reserves over the economic lives of the reserves and
assuming continuation of existing economic conditions. Year end 1994
calculations were made utilizing average prices for oil that existed at December
31, 1994 of $13.00 per barrel ("Bbl"). Income taxes are computed by applying the
statutory federal income tax rate of the net cash inflows relating to proved oil
reserves less the tax bases of the properties involved and giving effect to any
net operating loss carryforwards, tax credits and allowances relating to such
properties. As a result of the net operating losses, no income tax expense is
included in the Company's standardized measure of discounted future net cash
flows. The reserve volumes provided by the in-house petroleum engineers are
estimates only and should not be construed as being exact quantities. These
reserves may or may not be recovered and may increase or decrease as a result of
future operations of the Company and changes in market conditions.
F-61
<PAGE> 148
AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Reserve quantity information is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1992 1993 1994
OIL OIL OIL
(MBBL) (MBBL) (MBBL)
<S> <C> <C> <C>
Proved Developed Reserves:
Beginning of year.............................................. 21,973 8,306 15,359
Revisions of previous estimates................................ (10,748) 10,424 (154)
Production..................................................... (2,919) (3,371) (3,080)
------- ------ ------
End of year.................................................... 8,306 15,359 12,125
======= ====== ======
</TABLE>
Standardized measure of discounted future net cash flows is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1994
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Future cash in flows.............................................. $ 149,600 $ 157,628
Future development costs.......................................... (13,900) (13,000)
Future production costs........................................... (130,570) (103,120)
--------- ---------
Future net cash flows before discounting.......................... 5,130 41,508
10% annual discount............................................... (1,258) (10,955)
--------- ---------
Standardized measure of discounted future net cash flows.......... $ 3,872 $ 30,553
========= =========
</TABLE>
Principal sources of change in the standardized measure of discounted future net
cash flows is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1992 1993 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure of discounted future net cash
flows, beginning of year............................. $ 2,451 $ 10,965 $ 3,872
Revisions of previous quantity estimates less
related costs................................... (21,587) 10,819 (523)
Net changes in prices, net of production costs.... 37,236 728 47,533
Development costs incurred during period and
changes in estimated future development costs... (8,167) (4,665) 579
Sales of oil produced during period, net of
lifting costs................................... (24,790) (34,432) (26,692)
Accretion of discount............................. 245 1,097 387
Changes of production rates (timing) and other.... 25,577 19,360 5,397
-------- -------- --------
8,514 (7,093) 26,681
-------- -------- --------
Standardized measure of discounted future net cash
flows, end of year................................... $ 10,965 $ 3,872 $ 30,553
======== ======== ========
</TABLE>
F-62
<PAGE> 149
AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES
COMBINED BALANCE SHEET
JANUARY 31, 1995
<TABLE>
<CAPTION>
UNAUDITED
(DOLLARS IN THOUSANDS)
ASSETS
<S> <C>
Current Assets:
Cash and cash equivalents............................................ $ 9,359
Accounts receivable.................................................. 15,855
Allowance for doubtful accounts...................................... (429)
Inventories:
Crude oil.......................................................... 1,144
Supplies........................................................... 8,875
---------
Total inventories............................................... 10,019
Prepaid expenses.......................................................... 1,015
---------
Total current assets............................................ 35,819
Property, Plant and Equipment:
Proved properties (Successful efforts method)........................ 32,752
Office furniture and equipment....................................... 5,691
---------
38,443
Less accumulated depreciation, depletion and amortization................. (32,460)
---------
Net property plant and equipment................................ 5,983
Other assets.............................................................. 131
---------
$ 41,933
=========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable..................................................... $ 12,251
Due to affiliates.................................................... 137
---------
Total current liabilities....................................... 12,388
Stockholder's Equity (Deficit):
Common stock, $100 par value. Authorized and issued 10 shares Amoco
Congo Exploration Company and 10 shares Amoco Congo Petroleum
Company............................................................. 2
Additional paid-in capital........................................... 434,006
Accumulated deficit.................................................. (404,463)
---------
Total stockholder's equity...................................... 29,545
---------
$ 41,933
=========
</TABLE>
See accompanying notes to unaudited combined financial statements.
F-63
<PAGE> 150
AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES
COMBINED STATEMENT OF OPERATIONS
ONE MONTH ENDED JANUARY 31, 1995
<TABLE>
<CAPTION>
UNAUDITED
(DOLLARS IN THOUSANDS)
<S> <C>
Revenues:
Oil revenues......................................................... $4,333
------
Total revenues.................................................. 4,333
Operating Expenses:
Lease operating expense.............................................. 977
Depreciation, depletion and amortization............................. 175
General and administrative........................................... 567
Other expense........................................................ 11
------
Total expenses.................................................. 1,730
Income before income taxes...................................... 2,603
Income taxes.............................................................. --
------
Net income...................................................... $2,603
======
</TABLE>
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT EQUITY
UNAUDITED
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balances at December 31, 1994....................... $2 $ 433,820 $(407,066) $26,756
--
-------- --------- -------
Net income.......................................... -- -- 2,603 2,603
Cash contributions.................................. -- 186 -- 186
--
-------- --------- -------
Balances at January 31, 1995........................ $2 $ 434,006 $(404,463) $29,545
== ======== ========= =======
</TABLE>
See accompanying notes to unaudited combined financial statements.
F-64
<PAGE> 151
AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES
COMBINED STATEMENT OF CASH FLOWS
ONE MONTH ENDED JANUARY 31, 1995
<TABLE>
<CAPTION>
UNAUDITED
(DOLLARS IN THOUSANDS)
<S> <C>
Cash Flows from Operating Activities:
Net income........................................................... $ 2,603
Adjustments to Reconcile Net Income to Net Cash (Used In) Operating
Activities:
Depreciation, depletion and amortization of proved properties........ 175
Change in oil inventory.............................................. 4,845
Net Change In Assets and Liabilities:
Increase in accounts receivable.................................... (14,634)
Increase due to affiliates......................................... 111
Increase in prepaid expenses....................................... (215)
Increase in accounts payable....................................... 5,324
Decrease in other assets........................................... 262
--------
Net cash used in operating activities........................... (1,529)
Cash Flows from Investing Activities:
Capital expenditures................................................. (94)
Sale of property, plant and equipment................................ 93
--------
Net cash used in investing activities........................... (1)
Cash Flows from Financing Activities:
Capital contributions................................................ 186
--------
Net cash provided by financing activities.......................... 186
Net decrease in cash and cash equivalents................................. (1,344)
Cash and cash equivalents at beginning of period.......................... 10,703
--------
Cash and cash equivalents at end of period................................ $ 9,359
========
Supplemental Cash Flow Disclosures:
Interest paid........................................................ $ --
========
</TABLE>
See accompanying notes to unaudited combined financial statements.
F-65
<PAGE> 152
AMOCO CONGO EXPLORATION AND PETROLEUM COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
JANUARY 31, 1995
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited combined financial statements include, in the
opinion of management, all adjustments of a normal recurring nature necessary to
present fairly the combined financial position of Amoco Congo Exploration and
Petroleum Companies (Amoco Congo) at January 31, 1995 and the related combined
results of operations and changes in cash flows for the month then ended. These
financial statements are reflected for the purpose of presenting information
prior to the sale of all of the issued and outstanding stock of Amoco Congo
Exploration Company and Amoco Congo Petroleum Company.
2. SUBSEQUENT EVENTS
On June 30, 1994, Amoco Production Company, the sole owner of all of the
Company's issued and outstanding stock, entered into an agreement to sell all
issued and outstanding shares of the Company, effective as of December 1, 1993,
to Walter International, Inc. and Nuevo Energy Company, for a sales price of
$31,500,000. The sales price is payable in cash of $21,500,000 and a promissory
note of $10,000,000. Additionally, a production payment, in an amount to be
agreed upon at a later date, is payable to the seller in quarterly installments,
based upon production beginning as of the effective date of the sale. The sale
with Walter International, Inc. and Nuevo Energy Company closed on February 24,
1995 and the names of the companies were changed to The Nuevo Congo Company and
Walter International Congo, Inc. The $10,000,000 promissory note was settled
through net cash proceeds generated by the properties for the period between the
effective and closing dates.
F-66
<PAGE> 153
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders,
Terra Energy Ltd. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Terra Energy
Ltd. (a Michigan corporation) and subsidiaries as of December 31, 1994, and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Terra Energy
Ltd. and subsidiaries as of December 31, 1994, and the results of their
operations and cash flows for the year then ended in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Detroit, Michigan,
July 14, 1995.
F-67
<PAGE> 154
TERRA ENERGY LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31,
DECEMBER 31, 1995
1994 (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................... $ 15,690,255 $ 7,002,390
Investments -- marketable securities........................... 27,100 27,100
Accounts receivable............................................ 31,136,407 43,155,706
Notes and land contract receivable............................. 147,946 134,864
Inventory and other current assets............................. 1,280,976 1,623,436
Assets held for sale........................................... -- 4,369,571
Deferred income taxes.......................................... 144,000 149,400
------------ -----------
Total current assets...................................... 48,426,684 56,462,467
Oil And Gas Properties -- At Cost (Successful Efforts Method):
Proved oil and gas properties.................................. 22,541,253 24,424,692
Unproved oil and gas leases.................................... 4,110,811 3,021,789
Accumulated depreciation, depletion, amortization and valuation
allowance..................................................... (5,561,276) (5,510,855)
------------ -----------
Net oil and gas properties................................ 21,090,788 21,935,626
Other Assets:
Property and equipment, net.................................... 1,131,743 1,046,614
Lease financing receivable..................................... 1,127,556 756,105
Unconsolidated long-term investments........................... 195,361 243,891
Notes and land contract receivable............................. 1,667,905 1,612,087
Intangibles resulting from business acquisition, net of
accumulated amortization...................................... 284,375 225,827
Other.......................................................... 2,024 1,648
------------ -----------
Total other assets........................................ 4,408,964 3,886,172
------------ -----------
Total assets.............................................. $ 73,926,436 $82,284,265
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................... $ 15,109,086 $14,590,308
Joint interest advances........................................ 7,046,030 6,674,268
Oil and gas distributions payable.............................. 10,831,028 9,553,220
Current maturities of long-term debt........................... 776,016 4,078,338
Taxes -- other than income taxes............................... 101,387 5,612,205
Other accrued expenses......................................... 4,548,559 4,185,232
Accrued income taxes........................................... 1,434,936 50,136
Deferred income taxes.......................................... -- --
------------ -----------
Total current liabilities................................. 39,847,042 44,743,707
Deferred income taxes............................................... 1,755,000 1,755,200
Deferred gain on sale of oil and gas properties..................... 165,000 119,500
Long-term debt...................................................... 1,702,085 1,185,137
Commitments and Contingencies
Shareholders' Equity:
Common Stock, $.00026 par value; 20,000,000 shares authorized;
9,519,500 shares issued and outstanding at December 31, 1994,
and 12,065,422 shares issued and outstanding at July 31,
1995.......................................................... 2,475 3,137
Additional paid-in capital..................................... 193,665 12,333,269
Retained earnings.............................................. 30,261,169 22,144,315
------------ -----------
Total shareholders' equity................................ 30,457,309 34,480,721
------------ -----------
Total liabilities and shareholders' equity................ $ 73,926,436 $82,284,265
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-68
<PAGE> 155
TERRA ENERGY LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED JULY 31,
DECEMBER 31, ------------------------
1994 1994 1995
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Oil and gas sales................................... $8,072,286 $3,883,310 $10,226,871
Promotional, buy-in and turnkey income.............. 2,194,491 1,359,583 1,736,585
Management and operator fees........................ 2,722,566 1,396,938 1,963,869
Gain on sales of assets............................. 12,423,491 3,340,342 2,355,547
Interest and dividends.............................. 695,835 337,325 540,889
Equity in gain of affiliated partnerships........... 673,631 168,744 34,343
Other............................................... 768,132 94,821 580,827
------------ ---------- -----------
Total revenues................................. 27,550,432 10,581,063 17,438,931
Operating Costs and Expenses:
Cost of products sold............................... 2,994,786 525,877 5,802,848
General and administrative.......................... 6,467,427 2,802,994 17,621,120
Depreciation, depletion and amortization............ 2,166,921 1,207,753 1,171,745
Lease operating..................................... 1,005,327 624,533 377,646
Production and other state taxes.................... 279,419 214,303 267,216
Dry holes and abandonments.......................... 684,658 66,156 52,369
Guaranteed contract payments........................ 354,667 206,258 216,808
Interest............................................ 64,301 46,692 36,033
Equity in loss of affiliated partnerships........... 46,318 -- --
------------ ---------- -----------
Total operating costs and expenses............. 14,063,824 5,694,566 25,545,785
Write down of notes receivable, net of notes payable..... (1,450,992) -- --
Earnings (losses) before income taxes and minority
interest in subsidiary................................. 12,035,616 4,886,497 (8,106,854)
Minority interest in subsidiary.......................... 216,512 142,912 --
Income taxes............................................. 2,411,000 949,000 10,000
------------ ---------- -----------
Net earnings (losses).......................... $9,408,104 $3,794,585 $(8,116,854)
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-69
<PAGE> 156
TERRA ENERGY LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
OUTSTANDING COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
Balance:
January 1, 1994................. 9,519,500 $2,475 $ 193,665 $20,853,065 $21,049,205
Net Earnings......................... -- -- -- 9,408,104 9,408,104
----------- ------ ----------- ----------- -----------
Balance:
December 31, 1994............... 9,519,500 2,475 193,665 30,261,169 30,457,309
Stock issuances:
Stock option (unaudited)........ 2,545,922 662 12,139,604 -- 12,140,266
Net earnings (unaudited)............. -- -- -- (8,116,854) (8,116,854)
----------- ------ ----------- ----------- -----------
Balance:
July 31, 1995 (unaudited)....... 12,065,422 $3,137 $12,333,269 $22,144,315 $34,480,721
========= ====== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-70
<PAGE> 157
TERRA ENERGY LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED JULY 31,
DECEMBER 31, --------------------------
1994 1994(UNAUDITED)1995
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss).............................. $ 9,408,104 $ 3,794,585 $ (8,116,854)
Adjustments To Reconcile Net Earnings To Net Cash
Provided By (Used In) Operations:
Depreciation, depletion and amortization....... 2,166,921 1,207,753 1,171,745
Decrease in deferred income taxes.............. (42,000) (544,064) (5,200)
Dry holes and abandonments of previously
capitalized oil and gas properties.......... 684,658 66,156 52,369
Recognition of deferred gain on sale of
properties.................................. (78,000) (45,500) (45,500)
Gain on sale of assets......................... (12,441,492) (3,272,092) (2,287,296)
Write down of notes receivable................. 1,450,992 -- --
Changes In Assets And Liabilities That Provided
(Used) Cash:
Accounts receivable......................... (15,403,917) (14,554,724) (11,822,874)
Inventory and other current assets.......... (662,822) (1,230,813) (342,460)
Accounts payable............................ 4,774,271 9,292,830 (518,778)
Joint interest advances..................... 6,633,664 378,098 (371,762)
Oil and gas distributions payable........... 2,566,349 2,107,666 (1,277,808)
Accrued income taxes........................ 1,273,936 843,064 (1,384,800)
Taxes and other accrued expenses............ 3,811,199 (395,439) 5,147,491
Minority interest in subsidiary............. (6,813) (6,813) --
Equity in net income of affiliated
partnerships................................ (627,313) (168,744) (34,343)
Equity in net income of affiliate.............. (42,426) -- (46,422)
------------ ----------- ------------
Net cash flows provided by (used in)
operating activities...................... 3,465,311 (2,528,037) (19,882,492)
Cash Flows from Investing Activities:
Purchases of oil and gas properties.............. (12,705,648) (6,211,988) (5,701,285)
Purchases of property and equipment.............. (670,888) (205,513) (442,199)
Proceeds from sale of assets..................... 15,883,828 4,825,516 6,505,881
(Increase) decrease in long-term investments..... 1,035,160 (234,142) 32,235
(Increase) decrease in lease financing
receivable..................................... 82,652 (123,879) 175,026
(Increase) decrease in notes receivable.......... (82,779) 21,154 68,900
Increase in other assets......................... (1,000) -- --
Increase in assets held for sale................. -- -- (4,369,571)
------------ ----------- ------------
Net cash flows provided by (used in)
investing activities...................... 3,541,325 (1,928,852) (3,731,013)
Cash Flows from Financing Activities:
Proceeds from long-term debt..................... 46,678 -- 3,044,201
Payments of long-term debt....................... (1,092,720) (977,570) (258,827)
Stock options exercised.......................... -- -- 12,140,266
------------ ----------- ------------
Net cash flows provided by (used in)
financing activities...................... (1,046,042) (977,570) 14,925,640
Net increase (decrease) in cash and cash
equivalents......................................... 5,960,594 (5,434,459) (8,687,865)
Cash and cash equivalents at beginning of period...... 9,729,661 9,729,661 15,690,255
------------ ----------- ------------
Cash and cash equivalents at end of period............ $ 15,690,255 $ 4,295,202 $ 7,002,390
=========== ========== ===========
Supplemental Cash Flow Information:
Cash Paid During The Year For:
Interest....................................... $ 117,342 $ 77,156 $ 43,506
Income taxes................................... $ 1,253,064 $ 650,000 $ 1,400,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-71
<PAGE> 158
TERRA ENERGY LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Terra Energy Ltd. (the "Company"), a Michigan corporation, is a domestic,
independent oil and gas exploration and production company. The Company has the
following subsidiaries that have been consolidated into these financial
statements:
Terra Pipeline Company ("TPC") is a 100% owned Michigan corporation.
TPC is engaged in the collection of oil and gas revenues from oil and gas
purchasers on behalf of other interest owners and the distribution of such
revenues to these owners. In addition, TPC handles the joint interest
billing responsibilities associated with the Company's producing oil and
gas properties.
Energy Acquisition Operating Corp. ("EAOC") is a 100% owned Michigan
corporation. EAOC provides natural gas transportation services in the
Michigan natural gas market. Effective April 1, 1994 the Company purchased
the remaining 5% ownership in EAOC.
Kristen Corporation ("Kristen") is a 100% owned Michigan corporation
engaged in natural gas marketing in the Michigan natural gas market.
Cronus Development Corp. ("Cronus") is a 100% owned Michigan
corporation. Cronus is engaged in the acquisition of oil and gas leasehold
interests for future exploration and development.
Wellcorps, L.L.C. ("Wellcorp") is a 55% owned Michigan limited
liability company. Wellcorp is engaged in the oil and gas service segment
providing workover rig services to producers with Michigan operations.
The Company also serves as managing partner of a general partnership which
owns and operates a pipeline located in Antrim and Otsego counties of Michigan.
TPC also serves as the managing partner of a limited partnership which owns and
operates a pipeline and gas processing plant located in Newaygo and Oceana
counties of Michigan. These partnerships are discussed more fully in Note 7.
2. SIGNIFICANT ACCOUNTING POLICIES
A. UNAUDITED FINANCIAL STATEMENTS
The financial statements and related information as of and for the seven
months ended July 31, 1994 and 1995 included herein are unaudited and, in the
opinion of management, reflect all adjustments (consisting of only recurring
adjustments) necessary for a fair presentation of financial position and the
results of operations and cash flows. Additionally, all other financial
statement information contained in the Notes to Financial Statements, which
occurred subsequent to December 31, 1994, is unaudited.
These unaudited consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements as of and for
the year ended December 31, 1994. The consolidated results of operations for the
seven months ended July 31, 1995 and 1994 are not necessarily indicative of
operating results for a full year.
These financial statements are reflected for the purpose of presenting
information prior to the sale of all of the issued and outstanding stock of the
Company to an unrelated third party.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
TPC, EAOC, Kristen, Cronus and Wellcorp. All significant intercompany accounts
and transactions have been eliminated in consolidation.
F-72
<PAGE> 159
C. CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of cash, certificates of deposit
and U.S. Government Securities with original maturities of three months or less.
D. MARKETABLE SECURITIES
Marketable securities are carried at the lower of cost or market value.
E. ACCOUNTS RECEIVABLE
Accounts receivable -- trade consist primarily of amounts due to the
Company by co-owners of oil and gas properties for which the Company serves as
operator and has responsibility for payment to vendors for goods and services
related to joint operations. The Company provides an allowance for doubtful
accounts for those balances considered to be uncollectible.
F. INVENTORY
Inventory was valued at the lower of cost (first-in, first-out method) or
market.
G. OIL AND GAS PROPERTIES
The Company follows the successful efforts method of accounting for its oil
and gas producing activities.
Acquisition costs for proved and unproved properties are capitalized when
incurred. Costs of unproved properties are transferred to proved properties when
proved reserves are discovered. Exploration costs, including geological and
geophysical costs and costs of carrying and retaining unproved properties, are
charged against income as incurred. Exploratory drilling costs are capitalized
initially; however, if it is determined that an exploratory well does not
contain proved reserves, such capitalized costs are charged to expense, as dry
hole costs, at that time. Development costs are capitalized. Costs incurred to
operate and maintain wells and equipment and to lift oil and gas to the surface
are generally expensed.
The net cost of proved oil and gas properties are annually subjected to a
test of recoverability on a property by property basis by comparison to their
estimated present value of future net cash flows from proved reserves. Unproved
oil and gas properties are also subjected to an impairment test. Any excess
capitalized costs are expensed in the year in which such an excess occurs.
Gain or loss on the sale of oil and gas properties is recognized when the
Company's entire interest in a property is sold or when the proceeds from a
partial sale exceed the Company's book value for such property.
Depreciation, depletion and amortization of oil and gas properties is
computed on a units-of-production method based on proven reserves. The provision
for depreciation, depletion and amortization is calculated by applying the ratio
to capitalized property costs.
H. OTHER ASSETS -- PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciation is calculated
using the straight-line and declining balance methods over the respective
estimated useful life of the related asset.
I. INCOME TAXES
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 109, Accounting for Income Taxes, in 1993. The standard prescribes a
liability method for calculating the provision for income taxes, replacing the
deferred method previously used by the Company.
J. NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, effective for 1996 year-end
F-73
<PAGE> 160
financial statements. The Company does not believe that it will be significantly
affected by the statement, which establishes accounting standards for the
impairment of long-lived assets.
K. REVENUE RECOGNITION
Oil and gas revenues are recognized as production takes place and the sale
is completed and the risk of loss transfers to a third party purchaser.
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following components as of December
31, 1994:
<TABLE>
<S> <C>
Trade................................................................... $21,905,528
Oil and gas sales....................................................... 8,535,122
Related parties......................................................... 70,913
Lease financing......................................................... 624,844
-----------
Total accounts receivable..................................... $31,136,407
===========
</TABLE>
4. NOTES AND LAND CONTRACT RECEIVABLE
Notes and land contract receivable consisted of the following components as
of December 31, 1994:
<TABLE>
<S> <C>
Producing property sale.................................................. $1,720,016
Other.................................................................... 95,835
----------
Total.......................................................... 1,815,851
Less current portion..................................................... 147,946
----------
Total long-term notes and land contract receivable............. $1,667,905
==========
</TABLE>
The Company recorded a valuation allowance at December 31, 1994 in the
amount of $1,612,000 to reduce the outstanding balance of the notes receivable,
resulting from the producing property sale, to the estimated fair market value
of the producing properties securing these notes receivable. This valuation was
recorded net of a note payable valuation allowance on the same property of
approximately $161,000.
5. INVENTORY
Inventory consists primarily of casing and tubular goods utilized in the
Company's exploration activities. The Company realized a gain of approximately
$158,000 for 1994, from the disposition of certain inventory items. This gain on
sale of inventory is reported as other income on the Company's Consolidated
Statement of Earnings.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31, 1994:
<TABLE>
<S> <C>
Land..................................................................... $ 497,168
Building and improvements................................................ 399,482
Office and transportation equipment...................................... 545,208
Field equipment.......................................................... 263,912
----------
Total.......................................................... 1,705,770
Less accumulated depreciation and amortization........................... 574,027
----------
Net property and equipment..................................... $1,131,743
==========
</TABLE>
F-74
<PAGE> 161
7. UNCONSOLIDATED LONG-TERM INVESTMENTS
The Company's investment in unconsolidated subsidiaries is as follows as of
December 31, 1994:
<TABLE>
<S> <C>
Partnerships using the equity method of accounting........................ $154,188
Corporation using the equity method of accounting......................... 32,235
Corporations using the cost method of accounting.......................... 8,938
--------
Total........................................................... $195,361
========
</TABLE>
Net earnings of the above investments which are included in the earnings of
the Company are as follows for the year ended December 31, 1994:
<TABLE>
<S> <C>
Partnerships using the equity method of accounting........................ $627,313
--------
Corporation using the equity method of accounting......................... $ 42,426
========
</TABLE>
The Company has a consolidated net interest of 44.768% in Newaygo/Oceana
Pipeline Limited Partnership ("NOPLP"). The Company's 100% owned subsidiary,
TPC, is the general partner of this limited partnership. NOPLP owns and operates
a gas pipeline in Newaygo and Oceana counties of Michigan. The Company provides
administrative and accounting services to NOPLP for an agreed-upon fee. Due to
the shut-in status of the properties connected to the gas pipeline, the
partnership is currently inactive.
The Company's consolidated net interest in Terra-Hayes Pipeline Company
("THPC") was 26.58% at December 31, 1994. The Company is the managing partner in
this general partnership. THPC owns and operates a gas pipeline in Antrim and
Otsego counties of Michigan. The Company provides administrative and accounting
services to THPC and, pursuant to the terms of the partnership agreement,
received reimbursements for such services.
The Company has a net interest of 40% in an oil and gas drilling and
completion consulting firm, which provides supervisory and management services
for substantially all of the Company's drilling, completion and facility
construction operations.
The Company has a net interest of 10% in Nepenthe Corp. ("Nepenthe"), a
corporation owning outside operated oil and gas interests and real estate. In
January 1995, Nepenthe acquired this interest from the Company for $120,000.
The Company is a shareholder in four corporations that provide pumping and
other related services to the Company for substantially all of the Company's
producing oil and gas properties. The Company also provides these corporations
with financial, accounting, tax administration, engineering, consulting and
advisory services including full access and use of the Company's extensive field
communications system, under the terms of a general services contract.
Fees charged to the Company by these partnerships and corporations are
approximately as follows for the year ended December 31, 1994:
<TABLE>
<S> <C>
Corporation using the equity method of accounting........................ $ 870,000
Corporations using the cost method of accounting......................... $2,498,000
</TABLE>
Fees charged by the Company to these partnerships and corporations are
approximately as follows for the year ended December 31, 1994:
<TABLE>
<S> <C>
Partnerships using the equity method of accounting........................ $ 51,000
Corporations using the cost method of accounting.......................... $514,000
</TABLE>
8. INTANGIBLES RESULTING FROM BUSINESS ACQUISITION
Effective December 1, 1991 the Company exercised an option obtained upon
the formation of EAOC to acquire an additional 50% ownership in EAOC from a
third party in exchange for $830,000. The Company is amortizing its basis in
this acquisition on a pro-rata basis over the expected life of the asset
acquired in this
F-75
<PAGE> 162
purchase. The Company has not modified its amortization of this asset as a
result of the sale of the gas purchase contract discussed in Note 16 due to the
retention of all firm transportation rights provided for in said gas purchase
contract.
9. LONG-TERM DEBT
Long-term debt consisted of the following components as of December 31,
1994:
<TABLE>
<S> <C>
Land contracts........................................................... $ 117,254
Capitalized leases....................................................... 2,188,845
Property sale financing.................................................. 172,002
----------
2,478,101
Less current maturities of long-term debt and capitalized leases......... 776,016
----------
Total long-term debt........................................... $1,702,085
=========
</TABLE>
A schedule of the combined amount of all debt subject to mandatory
redemption during the years ended December 31 may be summarized as follows:
<TABLE>
<S> <C>
1995..................................................................... $ 776,016
1996..................................................................... 836,475
1997..................................................................... 427,099
1998..................................................................... 190,461
1999..................................................................... 99,764
2000 and after........................................................... 148,286
----------
Total.......................................................... $2,478,101
=========
</TABLE>
Land contracts included above are payable monthly at varied interest rates
through April 2003.
Installments loans are secured by vehicles and payable monthly at varied
interest rates through November 1996.
The present value of future capital lease payments associated with capital
leases for gas compression equipment includes $736,129 classified as a current
liability and $1,452,716 classified as long-term debt. Lease payments under
these capital leases are due through September 1999.
In August 1993, the Company entered into an unsecured term loan agreement
with its bank providing for a term loan in the amount of $1,300,000. The loan
bears interest at 0.5% over the bank's prime rate and is repayable over 30 equal
monthly installments commencing on October 1, 1993. The loan was repaid in full
in April 1994.
At December 31, 1994, the Company also had a $2,000,000 unused short-term
line of credit with a bank secured by a general lien on all of the Company's
assets. Borrowings under this agreement bear interest at the bank's prime rate.
10. DEFERRED GAIN ON SALE OF OIL AND GAS PROPERTIES
In 1989 the Company sold a carved out overriding royalty interest in
certain proved properties to several purchasers for an aggregate consideration
of $585,000. The purchase and sales agreement provides that the purchasers are
entitled to a guaranteed minimum monthly return on the purchase price of 1.67%
until the purchasers recover the purchase price plus an additional 50% of the
purchase price. At such time, the Company's guarantee shall terminate and the
purchasers are entitled only to their respective share of gas revenues from
these properties. Under the terms of such guarantee, the Company made payments
of $52,335 in 1994, in addition to the purchaser's share of net proceeds
realized from the sale of gas production. The Company is including a pro-rata
portion of the deferred gain resulting from the sale of these assets in income
each year based upon the repayments made to the purchasers in each respective
year until termination of the Company's guarantee. Aggregate payments made in
1994 amounted to $117,000 which have been reported as gains on sale of property
and equipment.
F-76
<PAGE> 163
11. INCOME TAXES
The provision for income taxes is as follows for the year ended December
31, 1994:
<TABLE>
<S> <C>
Current income taxes payable............................................. $2,526,600
Decrease in deferred income taxes payable................................ (42,000)
Tax attributable to minority interest in subsidiary...................... (73,600)
----------
Income taxes........................................................ $2,411,000
==========
</TABLE>
Deferred income taxes on the consolidated balance sheet reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for federal
and state income tax purposes. Significant components of the Company's deferred
tax assets as of December 31, 1994 are as follows:
<TABLE>
<S> <C>
Intangible drilling and other costs deducted for income tax purposes and
capitalized for financial statement purposes.......................... $ 4,266,000
Excess of financial statement depletion over depletion computed for
income tax purposes................................................... (960,000)
Gain from the sale of oil and gas properties recognized for income tax
purposes but not for financial statement purposes..................... (70,000)
Gain from the sale of oil and gas properties recognized for financial
statement purposes but recognized for income tax purposes in a
different accounting period........................................... 199,000
Excess of accrual basis net income for financial statement purposes over
cash basis net income reported for income tax purposes and other...... (700,000)
Alternative minimum tax credit utilized................................. (1,124,000)
-----------
Total differences............................................. $ 1,611,000
===========
</TABLE>
The differences between the Company's income tax expense and amount
calculated utilizing the federal statutory rate are as follows for the year
ended December 31, 1994:
<TABLE>
<S> <C>
Amount computed using the statutory rate................................ $ 4,188,000
Benefit of the percentage depletion allowance deducted for income tax
purposes.............................................................. (97,000)
Alternative minimum tax credit utilized................................. (1,675,000)
Other................................................................... (5,000)
-----------
Income taxes.................................................. $ 2,411,000
===========
</TABLE>
As of December 31, 1994 approximately $2,266,000 of alternative minimum tax
credit is available to be applied against future regular income taxes. For
financial statement purposes, $1,124,000 of this balance has been used to reduce
deferred income taxes as of December 31, 1994.
12. COMMITMENTS AND CONTINGENCIES
Irrevocable Letters of Credit
The Company has obtained several irrevocable letters of credit in the
aggregate amount of approximately $825,000 which serve as performance bonds
required by state oil and gas regulations. These letters of credit are generally
renewed annually upon their anniversary dates, and they are collaterized by the
Company's office facilities and related real estate.
Leasing Arrangements
The Company has entered into certain noncancellable leasing agreements for
gas compression equipment used on gas wells. These capital and operating leases
are generally for three to five year terms, which are renewable.
For capital leases the Company records an asset and a liability at the
inception of the lease equal to the present value of future minimum lease
payments. A portion of the asset, which is recorded in oil and gas
F-77
<PAGE> 164
properties, represents the Company's ownership interest in each well where the
equipment is located. These leased assets amounts to $608,586 at December 31,
1994. The remaining portion of the asset is recorded as a receivable for lease
payments due from working interest owners in various producing properties where
the leased equipment is in service. The current and long-term portions of this
lease financing receivable at December 31, 1994 were $624,844 and $1,127,556,
respectively, and were recorded in accounts receivable and other assets,
respectively. The capital lease liability is included in long-term debt and is
more fully described in Note 9.
The following is a schedule by year of future minimum rental payments
required under operating leases that have initial or remaining noncancellable
lease terms in excess of one year as of December 31, 1994:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31, LEASES
<S> <C>
1995........................................................... $181,389
1996........................................................... 122,087
1997........................................................... 50,698
1998........................................................... 14,639
1999........................................................... --
--------
Total minimum rentals................................ $368,813
========
</TABLE>
The above rental payments represent the Company's portion of the total
rental payments due under the leases based on the Company's net working interest
in each producing property on which the equipment was being used as of December
31, 1994. The Company, as operator, charges the remaining working interest
owners participating in each producing property for their proportionate share of
such monthly equipment rental payments.
The Company's total rental expense for all operating leases for the year
ended December 31, 1994 was approximately $247,000.
13. TRANSACTIONS WITH RELATED PARTIES
The Company and certain officers and directors are joint owners in various
unproved and producing properties. Transactions with related parties investing
in oil and gas exploration activities are carried out in the same manner as
transactions with unrelated working interest partners. Estimated costs are
usually billed prior to commencement of a project and cost incurred are netted
against the advances as the project progresses.
14. SHAREHOLDERS' EQUITY
COMMON STOCK
Effective April 1, 1988, the Company signed a stock option agreement with
an officer of the Company, wherein the officer will earn an option to purchase
up to 503,132 shares of the Company's common stock over a period of five years.
The option price is $162,500 for all the shares or $0.32298 per share, and the
option will expire if not exercised before March 31, 2003.
Effective January 1, 1991, the Company entered into a stock option
agreement with the same officer, wherein the officer will earn an option to
purchase up to 1,437,519 additional shares of the Company's common stock vesting
on a pro-rata basis between January 1, 1991 and March 12, 1994. Also effective
January 1, 1991, the Company entered into a stock option agreement with another
officer, wherein the officer will earn an option to purchase up to 605,271
shares of the Company's common stock vesting on a pro-rata basis between January
1, 1991 and December 31, 1995. Both of these stock option agreements provide for
an option price of $0.50 per share, and the options covered by these two
agreements will expire if not exercised on or before January 1, 2001.
F-78
<PAGE> 165
15. DEFINED CONTRIBUTION PLAN
The Company has a 401(K) profit sharing plan covering substantially all
employees. Company contributions to the plan are discretionary and are allocated
based on employee compensation. The Company has contributed approximately
$120,000 to the plan for the 1994 plan year.
16. SALE OF OIL AND GAS PROPERTIES
In two transactions during 1991 and 1992 the Company sold producing
properties with a book value of approximately $967,000 for a total sales price
of $2,300,000. The purchase and sales agreement provided that the Company
guarantee certain minimum annual cash flow distributions aggregating $2,400,000
cumulatively through December 31, 1995. Payments of $263,331 were due under the
guarantee provisions and were included in other accrued expenses at December 31,
1994.
During 1994, the Company sold to several purchasing parties producing and
unproved oil and gas leases with a book value of $1,395,000 and $1,983,000,
respectively. The aggregate sales consideration was $1,811,000 and $11,110,000,
respectively.
Effective April 1, 1994 the Company also sold its interest in a gas
purchase contract owned by its subsidiary, EAOC, for a cash consideration of
$2,900,000. As discussed in Note 8, EAOC did not sell the firm transportation
rights provided to the seller under said contract. EAOC continues to provide
transportation services to the Company for the delivery of gas to market for
purchase by a third party purchaser.
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
OFF-BALANCE SHEET RISK
The Company does not consider itself to have any material financial
instruments with off-balance sheet risks other than those disclosed in Note 12.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
include cash on deposit with one financial institution in which these deposits
exceed the Federally insured amount. The Company places its temporary cash
investment with high credit quality financial institutions. At December 31, 1994
the majority of the cash is either insured by the U.S. Federal Deposit Insurance
Corporation or has pledged securities by the financial institution in which the
cash is deposited.
The Company extends credit to various companies in the oil and gas industry
in the normal course of business. Within this industry, certain concentrations
of credit risk exist. The Company, in its role as operator of co-owned
properties, assumes responsibility for payment to vendors for goods and services
related to joint operations and extends credit to co-owners of these properties.
This concentration of credit risk may be similarly affected by changes in
economic or other conditions and may, accordingly, impact the Company's overall
credit risk. However, management believes that its accounts receivable are well
diversified, thereby reducing potential credit risk to the Company.
At December 31, 1994 accounts and notes receivable relating to these
co-owners were approximately $7,983,000 and $1,676,000, respectively. The notes
receivable are secured by certain producing property interests as discussed in
Note 16.
F-79
<PAGE> 166
18. SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
<S> <C>
INVESTMENT
Write-down to fair market value......................................... $ 135,000
NOTES RECEIVABLE
Exchange for oil and gas property....................................... $ 800,000
Valuation write-down.................................................... $ 1,450,992
</TABLE>
19. SUBSEQUENT EVENTS (UNAUDITED)
The Company has entered into two sales agreements providing for the sale of
a natural gas transmission pipeline and a CO2 processing plant currently under
construction. The book value of these assets approximating $4,370,000 has been
reclassified to Assets Held for Sale as of July 31, 1995. The Company has also
obtained bank financing in the amount of $5,130,000 covering construction costs
of the CO2 processing plant. The loan agreement provides that interest is
payable monthly at the banks prime rate and that the loan would be repaid in
full on October 1, 1995. As of July 31, 1995, the outstanding balance under this
loan agreement was $3,000,000.
On August 31, 1995, the Company's shareholders exchanged 100% of the
outstanding common stock of the Company for common stock in a publicly traded
international energy company. The Company will operate as a separate business
unit conducting domestic oil and gas exploration, development and production
activities.
Prior to the above transaction, certain oil and gas properties and property
and equipment were sold to some of the Company's shareholders for $5,000,000,
which resulted in a gain on sale of assets of $1,897,971.
Also prior to the above transaction, stock options were exercised,
resulting in an increase in the number of outstanding shares of stock of
2,545,922, and additional paid-in capital of $12,139,604.
F-80
<PAGE> 167
TERRA ENERGY LTD. AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS DISCLOSURES OF EXPLORATION AND PRODUCTION ACTIVITIES
(UNAUDITED)
The following information was prepared in accordance with the Supplemental
Disclosure Requirements of SFAS No. 69, Disclosures About Oil and Gas Producing
Activities. Refer to the Consolidated Statements of Earnings for the Company's
results of operations from exploration and production activities.
The following estimates, which were prepared by the Company's petroleum
engineers, of proved developed and proved undeveloped reserve quantities and
related standardized measure of discounted estimated future net cash flows do
not purport to reflect realizable values or fair market values of the Company's
reserves. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as future information becomes available. All of the Company's reserves
are located in the United States.
Proved reserves are estimated quantities of oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions.
1. ESTIMATED PROVED RESERVES OF OIL AND GAS
<TABLE>
<CAPTION>
TOTAL
---------------
OIL GAS
(OIL IN MBBLS
AND GAS IN BCF)
<S> <C> <C>
Estimated Proved Developed and Undeveloped Reserves:
December 31, 1993...................................................... 81 70
Extensions and discoveries........................................... -- 7
Production........................................................... 27 (2)
--- ---
December 31, 1994...................................................... 54 75
=== ===
Estimated Proved Developed Reserves:
December 31, 1994...................................................... 54 71
=== ===
</TABLE>
2. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM ESTIMATED
PROVED RESERVES
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
December 31, 1994:
Future Cash Flows, Net of Transportation:
Revenues(1)........................................................ $123,409
Less:
Production costs(2)................................................ 59,288
Development costs(2)............................................... 752
--------
Future cash flows before taxes....................................... 63,369
Income tax expense (benefit)(3).................................... --
--------
Future net cash flows................................................ 63,369
Less discount to present value at a 10% annual rate.................. 25,824
--------
Standardized measure of discounted future net cash flows............. $ 37,545
========
</TABLE>
- ------------------------------
(1) Oil, gas and condensate revenues are based on year-end prices with
adjustments for changes reflected in existing contracts. There is no
consideration for future discoveries or risks associated with future
production of proved reserves.
(2) Based on economic conditions at year-end. Does not include administrative,
general or financing costs. Does not consider future changes in development
or production costs.
(3) Based on current statutory rates applied to future cash inflows reduced by
future production and development costs, tax deductions and credits. Income
tax expense has been reduced by $20.0 million of U.S. income tax credits for
Antrim gas production at December 31, 1994.
F-81
<PAGE> 168
3. RECONCILIATION OF THE CHANGE IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
(DOLLARS IN THOUSANDS)
<S> <C>
New discoveries........................................................... $ 3,646
Sales and transfers....................................................... (2,469)
Changes in prices......................................................... (1,379)
Accretion of discount..................................................... 3,520
Net change in income taxes................................................ (821)
Change in timing of production and other.................................. (150)
--------
Net change during the year...................................... $ 2,347
========
</TABLE>
4. NET INVESTMENT IN PROVED AREAS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
(DOLLARS IN THOUSANDS)
<S> <C>
Developed properties...................................................... $ 22,541
Undeveloped properties
Subject to depletion................................................. --
Not subject to depletion............................................. 4,111
--------
26,652
Less accumulated depletion and amortization............................... (5,561)
--------
$ 21,091
========
</TABLE>
5. EXPLORATION, DEVELOPMENT AND ACQUISITION EXPENDITURES IN PROVED AREAS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994(1)
(DOLLARS IN THOUSANDS)
<S> <C>
Exploration............................................................... $ 115
Development............................................................... 5,884
Property acquisitions..................................................... 6,818
</TABLE>
- ------------------------------
(1) Excluded is approximately $218,000 invested in unproved areas and non-oil
and gas producing properties. Included are $2,366,000 for investment and
purchases of estimated proved reserves.
F-82
<PAGE> 169
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF WALTER
On February 24, 1995, Walter acquired certain oil and gas properties of the
Amoco Congo Companies ("Congo Acquisition"). The acquisition has been accounted
for using the purchase method of accounting. The following unaudited Pro Forma
Consolidated Statements of Operations for the year ended December 31, 1994, for
the one month ended January 31, 1995, and for the nine months ended September
30, 1995, assume the Congo Acquisition was consummated as of January 1, 1994,
and January 1, 1995, respectively. As the Congo Acquisition was consummated on
February 24, 1995, the unaudited Pro Forma Consolidated Balance Sheet as of
September 30, 1995, is identical to the historical consolidated balance sheet as
of September 30, 1995.
The unaudited Pro Forma Consolidated Financial Statements do not purport to
be indicative of the results of operations or financial position of Walter had
the Congo Acquisition occurred on the dates assumed, nor are the Pro Forma
Consolidated Financial Statements necessarily indicative of the future results
of operations of Walter. The Pro Forma Consolidated Financial Statements should
be read in conjunction with the historical Consolidated Financial Statements of
Walter and the Amoco Congo Companies contained elsewhere herein.
F-83
<PAGE> 170
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE ONE MONTH ENDED JANUARY
31, 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
WALTER AND WALTER WALTER
AMOCO PRO FORMA PRO FORMA
WALTER CONGO PRO FORMA (JANUARY 31, (SEPTEMBER 30,
HISTORICAL(1) HISTORICAL(2) ADJUSTMENTS 1995) 1995)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating Revenues:
Oil and condensate............. $15,126 $ 2,592 $2,592 $ 17,718
Other operating................ 363 -- -- 363
------- ------- ------ --------
15,489 2,592 2,592 18,081
Operating Expenses:
Depreciation, depletion and
amortization................. 3,238 191 $ 241(3) 432 3,670
Operating and maintenance...... 5,712 534 534 6,246
General and administrative..... 531 306 306 837
Production and other taxes..... 71 5 5 76
------- ------- ----- ------ --------
9,552 1,036 241 1,277 10,829
Pretax operating income............. 5,937 1,556 (241) 1,315 7,252
Other income................... 109 5 -- 5 114
Interest expense, net.......... 757 78 (51)(4) 27 784
------- ------- ----- ------ --------
Income before income taxes.......... 5,289 1,483 (190) 1,293 6,582
Income tax provision
(benefit).................... 1,987 -- --(5) -- 1,987
------- ------- ----- ------ --------
Net income................ $ 3,302 $ 1,483 $(190) $1,293 $ 4,595
======= ======= ===== ====== ========
</TABLE>
- ------------------------------
Notes to Pro Forma Consolidated Statement of Operations For the One Month Ended
January 31, 1995 and the Nine Months Ended September 30, 1995:
(1) The Company acquired Walter on February 27, 1995. Walter (along with an
unrelated company) acquired Amoco Congo Companies on February 24, 1995. This
column reflects the historical results of operations of Walter (including
Walter's proportionate share of Amoco Congo Companies) for the eight months
ended September 30, 1995.
(2) This column represents the combined historical results of operations of
Walter and Amoco Congo Companies (based on Walter's proportionate share of
Amoco Congo Companies) for the one month ended January 31, 1995.
(3) Adjustment to reflect the depreciation, depletion and amortization of oil
and gas properties for the month ending January 31, 1995, using the full
cost method, based on the purchase prices assigned by the Company to Walter
and to Walter's proportionate share of Amoco Congo Companies.
(4) Adjustment to reflect the repayment of approximately $10.0 million of debt
and preferred stock (and the corresponding interest expense for the one
month ended January 31, 1995), with funds provided to the Company by CMS
Energy as part of the Walter Acquisition.
(5) Adjustment to income tax expense to reflect the combined results of
operations.
F-84
<PAGE> 171
PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
WALTER WALTER
HISTORICAL(1) PRO FORMA
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash.............................................................. $ 1,757 $ 1,757
Temporary cash investments........................................ 3,752 3,752
Accounts receivable............................................... 12,716 12,716
Other............................................................. 5,582 5,582
------- -------
23,807 23,807
Property, plant and equipment, at cost................................. 51,381 51,381
Less accumulated depreciation, depletion and amortization......... (3,270) (3,270)
------- -------
48,111 48,111
------- -------
Total assets................................................. $71,918 $71,918
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt.............................. $ 3,069 $ 3,069
Accounts payable.................................................. 20,239 20,239
Accrued interest.................................................. 130 130
Accrued taxes and other........................................... 945 945
------- -------
24,383 24,383
Long-term debt......................................................... 8,246 8,246
Deferred income taxes and other credits................................ 991 991
Stockholder's Equity:
Common and preferred stock........................................ 1 1
Additional paid-in capital........................................ 34,995 34,995
Retained deficit.................................................. 3,302 3,302
------- -------
38,298 38,298
------- -------
Total liabilities and stockholder's equity................... $71,918 $71,918
======= =======
</TABLE>
- ------------------------------
Notes to Pro Forma Consolidated Balance Sheet as of September 30, 1995:
(1) The Company acquired Walter on February 27, 1995. Walter (along with an
unrelated company) acquired Amoco Congo Companies on February 24, 1995.
Therefore, Walter's historical balance sheet as of September 30, 1995
includes the balances of Amoco Congo Companies (based on Walter's
proportionate share of Amoco Congo Companies).
F-85
<PAGE> 172
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1994
(UNAUDITED)
<TABLE>
<CAPTION>
AMOCO
WALTER CONGO PRO FORMA WALTER
HISTORICAL(1) HISTORICAL(2) ADJUSTMENTS PRO FORMA
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating Revenues:
Oil and condensate........................ $ 3,958 $18,625 $22,583
Other operating........................... -- 148
------- ------- -------
3,958 18,773 22,731
Operating Expenses:
Depreciation, depletion and
amortization............................ 588 1,332 $ 3,024(3) 4,944
Operating and maintenance................. 1,575 5,279 6,854
General and administrative................ 405 3,476 3,881
------- ------- ------- -------
2,568 10,087 3,024 15,679
Pretax operating income........................ 1,390 8,686 (3,024) 7,052
Other income.............................. 53 -- 53
Interest expense, net..................... 820 -- (610)(4) 210
------- ------- ------- -------
Income before income taxes..................... 623 8,686 (2,414) 6,895
Income tax provision (benefit)............ 14 -- --(5) 14
------- ------- ------- -------
Net income........................... $ 609 $ 8,686 $(2,414) $ 6,881
======= ======= ======= =======
</TABLE>
- ------------------------------
Notes to Pro Forma Consolidated Statement of Operations for the Year Ended
December 31, 1994:
(1) The Company acquired Walter on February 27, 1995. This column reflects the
historical results of operations of Walter for the twelve months ended
December 31, 1994.
(2) Walter (along with an unrelated company) acquired Amoco Congo Companies on
February 24, 1995. This column reflects the historical results of operations
of Amoco Congo Companies (based on Walter's proportionate share of Amoco
Congo Companies) for the twelve months ended December 31, 1994.
(3) Adjustment to reflect the depreciation, depletion and amortization of oil
and gas properties, using the full cost method, based on the purchase prices
assigned by the Company to Walter and to Walter's proportionate share of
Amoco Congo Companies.
(4) Adjustment to reflect the repayment of approximately $10.0 million in debt
and preferred stock (and the corresponding interest expense), with funds
provided to the Company by CMS Energy as part of the Walter Acquisition.
(5) Adjustment to income tax expense to reflect the combined results of
operations.
F-86
<PAGE> 173
APPENDIX A
October 2, 1995
CMS NOMECO Oil & Gas Co.
One Jackson Square
Post Office Box 1150
Jackson, Michigan 49204
Gentlemen:
At your request, we have prepared an estimate of the reserves, future
production, and income attributable to certain leasehold and royalty interests
of CMS NOMECO Oil & Gas Co. (NOMECO) as of June 30, 1995. The income data were
estimated using the Securities and Exchange Commission (SEC) guidelines for
future cost and price parameters.
The estimated reserves and future income amounts presented in this report
are related to hydrocarbon prices. June 1995 hydrocarbon prices were used in the
preparation of this report as required by SEC guidelines; however, actual future
prices may vary significantly from June 1995 prices. Therefore, volumes of
reserves actually recovered and amounts of income actually received may differ
significantly from the estimated quantities presented in this report. An
EXECUTIVE SUMMARY of the results of this study is shown below.
SEC PARAMETERS
ESTIMATED NET RESERVES AND INCOME DATA
CERTAIN LEASEHOLD AND ROYALTY INTERESTS OF
CMS NOMECO OIL & GAS CO.
AS OF JUNE 30, 1995
EXECUTIVE SUMMARY
<TABLE>
<CAPTION>
PROVED
---------------------------------------------------------------
DEVELOPED
----------------------------- TOTAL
PRODUCING NON-PRODUCING UNDEVELOPED PROVED
------------ ------------- ------------ --------------
<S> <C> <C> <C> <C>
NET REMAINING RESERVES
Oil/Condensate -- Barrels.......... 27,491,431 6,606,754 31,580,462 65,678,647
Plant Products -- Barrels.......... 243,771 0 3,019,775 3,263,546
Gas -- MMCF........................ 226,327 28,180 43,543 298,050
INCOME DATA
Future Gross Revenue............... $997,236,494 $ 144,420,217 $545,734,325 $1,687,391,036
Deductions......................... 359,568,519 55,667,267 209,915,951 691,593,808(1)
------------ ------------ ------------ --------------
Future Net Income (FNI)............ $637,667,975 $ 88,752,950 $335,818,374 $ 995,797,230
Discounted FNI @ 10%................. $436,063,136 $ 51,749,958 $191,721,994 $ 629,027,227
</TABLE>
- -------------------------
(1) Total proved net income includes operating and development costs of
-$66,442,069 and 10 percent discounted costs of -$50,507,861 which are not
allocated back to the producing, non-producing, and undeveloped categories.
These costs are total project costs required for the NOMECO concessions in
Ecuador and Venezuela.
Liquid hydrocarbons are expressed in standard 42 gallon barrels. All gas
volumes are sales gas expressed in millions of cubic feet (MMCF) at the official
temperature and pressure bases of the areas in which the gas reserves are
located.
A-1
<PAGE> 174
The proved developed non-producing reserves included herein are comprised
of the shut-in and behind pipe categories. The various producing status
categories are defined in the attached "Definitions of Producing Status
Categories".
The future gross revenue is after the deduction of production taxes. The
deductions are comprised of the normal direct costs of operating the wells, ad
valorem taxes, recompletion costs, development costs, transportation and
marketing charges. The future net income is before the deduction of state and
federal income taxes and general administrative overhead, and has not been
adjusted for outstanding loans that may exist nor does it include any adjustment
for cash on hand or undistributed income. No attempt was made to quantify or
otherwise account for any accumulated gas production imbalances that may exist.
Liquid hydrocarbon reserves account for approximately 57 percent and gas
reserves account for 35 percent of total future gross revenue from proved
reserves. The remaining 8 percent of future gross revenue which is shown as
"Other Income" is comprised of Section 29 Tax Credits and post-production cost
credit in the Antrim shale, and from secondary gas contracts in Michigan.
The cash flows prepared relative to the Terra Energy, Ltd. properties which
were acquired in August, 1995 do not take into account gas purchase contracts
held by Terra providing for gas sales prices exceeding the "spot" prices used in
the cash flows; nor do the cash flows take into account transportation
arrangements to which Terra is a party providing for cost-free transportation of
gas on the wet header system. These contract agreements will have additional
value to NOMECO and an estimate of the value may be determined based on our
estimated future production rates and the estimated future gas prices.
The discounted future net income shown above was calculated using a
discount rate of 10 percent per annum compounded monthly.
The results shown above are presented for your information and should not
be construed as our estimate of fair market value.
RESERVES INCLUDED IN THIS REPORT
The proved reserves included herein conform to the definition as set forth
in the Securities and Exchange Commission's Regulation S-X Part 210.4-10(a) as
clarified by subsequent Commission Staff Accounting Bulletins. Our definition of
proved reserves is included in the attached "Definitions of Reserves".
ESTIMATES OF RESERVES
In general, the reserves included herein were estimated by performance
methods or the volumetric method; however, other methods were used in certain
cases where characteristics of the data indicated such other methods were more
appropriate in our opinion. The reserves estimated by the performance method
utilized extrapolations of various historical data in those cases where such
data were definitive in our opinion. Reserves were estimated by the volumetric
method in those cases where there were inadequate historical performance data to
establish a definitive trend or where the use of production performance data as
a basis for the reserve estimates was considered to be inappropriate.
The reserves included in this report are estimates only and should not be
construed as being exact quantities. They may or may not be actually recovered,
and if recovered, the revenues therefrom and the actual costs related thereto
could be more or less than the estimated amounts. Moreover, estimates of
reserves may increase or decrease as a result of future operations.
FUTURE PRODUCTION RATES
Initial production rates are based on the current producing rates for those
wells now on production. Test data and other related information were used to
estimate the anticipated initial production rates for those wells or locations
which are not currently producing. If no production decline trend has been
established, future production rates were held constant, or adjusted for the
effects of curtailment where appropriate, until a decline in ability to produce
was anticipated. An estimated rate of decline was then applied to depletion of
the reserves. If a decline trend has been established, this trend was used as
the basis for estimating future
A-2
<PAGE> 175
production rates. For reserves not yet on production, sales were estimated to
commence at an anticipated date furnished by NOMECO.
In general, we estimate that future gas production rates will continue to
be the same as the average rate for the latest available 12 months of actual
production until such time that the well or wells are incapable of producing at
this rate. The well or wells were then projected to decline at their decreasing
delivery capacity rate. Our general policy on estimates of future gas production
rates is adjusted when necessary to reflect actual gas market conditions in
specific cases.
The future production rates from wells now on production may be more or
less than estimated because of changes in market demand or allowables set by
regulatory bodies. Wells or locations which are not currently producing may
start producing earlier or later than anticipated in our estimates of their
future production rates.
HYDROCARBON PRICES
NOMECO furnished us with prices in effect at June 30, 1995 and these prices
were held constant except for known and determinable escalations. In accordance
with Securities and Exchange Commission guidelines, changes in liquid and gas
prices subsequent to June 30, 1995 were not taken into account in this report.
Future prices used in this report are discussed in more detail in the attached
"Hydrocarbon Pricing Parameters".
COSTS
Operating costs for the projects, leases, and wells in this report are
based on the operating expense reports of NOMECO and include only those costs
directly applicable to the leases or wells. When applicable, the operating costs
include a portion of general and administrative costs allocated directly to the
leases and wells under terms of operating agreements. Operating costs include ad
valorem taxes where applicable. Development costs were furnished to us by NOMECO
and are based on authorizations for expenditure for the proposed work or actual
costs for similar projects. The current operating and development costs were
held constant throughout the life of the properties. The estimated net cost of
abandonment after salvage was considered by NOMECO to be insignificant and not
included for the properties in this report. No deduction was made for indirect
costs such as general administration and overhead expenses, loan repayments,
interest expenses, and exploration and development prepayments that are not
charged directly to the leases or wells.
GENERAL
While it may reasonably be anticipated that the future prices received for
the sale of production and the operating costs and other costs relating to such
production may also increase or decrease from existing levels, such changes
were, in accordance with rules adopted by the SEC, omitted from consideration in
making this evaluation.
The estimates of reserves presented herein were based upon a detailed study
of the properties in which NOMECO owns an interest; however, we have not made
any field examination of the properties. No consideration was given in this
report to potential environmental liabilities which may exist nor were any costs
included for potential liability to restore and clean up damages, if any, caused
by past operating practices. NOMECO has informed us that they have furnished us
all of the accounts, records, geological and engineering data, and reports and
other data required for this investigation. The ownership interests, prices, and
other factual data furnished by NOMECO were accepted without independent
verification. The estimates presented in this report are based on data available
through August 1995.
Neither we nor any of our employees have any interest in the subject
properties and neither the employment to make this study nor the compensation is
contingent on our estimates of reserves and future income for the subject
properties.
A-3
<PAGE> 176
This report was prepared for the exclusive use of CMS NOMECO Oil & Gas Co.
The data, work papers, and maps used in this report are available for
examination by authorized parties in our offices. Please contact us if we can be
of further service.
Very truly yours,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
/s/ JOHN R. WARNER, P.E.
--------------------------------------
John R. Warner, P.E.
Group Vice President
JRW/sw
A-4
<PAGE> 177
DEFINITIONS OF RESERVES
SEC PARAMETERS
SEC DEFINITIONS
Proved reserves of crude oil, condensate, natural gas, and natural gas
liquids are estimated quantities that geological and engineering data
demonstrate with reasonable certainty to be recoverable in the future from known
reservoirs under existing operating conditions using the cost and price
parameters discussed in other sections of this report. Reservoirs are considered
proved if economic producibility is supported by actual production or formation
tests. In certain instances, proved reserves are assigned on the basis of a
combination of core analysis and electrical and other type logs which indicate
the reservoirs are analogous to reservoirs in the same field which are producing
or have demonstrated the ability to produce on a formation test. The area of a
reservoir considered proved includes (1) that portion delineated by drilling and
defined by fluid contacts, if any, and (2) the adjoining portions not yet
drilled that can be reasonably judged as economically productive on the basis of
available geological and engineering data. In the absence of data on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls the
lower proved limit of the reservoir. Proved reserves are estimates of
hydrocarbons to be recovered from a given date forward. They may be revised as
hydrocarbons are produced and additional data become available. Proved natural
gas reserves are comprised of non-associated, associated and dissolved gas. An
appropriate reduction in gas reserves has been made for the expected removal of
natural gas liquids, for lease and plant fuel, and for the exclusion of
non-hydrocarbon gases if they occur in significant quantities and are removed
prior to sale.
Reserves that can be produced economically through the application of
improved recovery techniques are included in the proved classification when
these qualifications are met: (1) successful testing by a pilot project or the
operation of an installed program in the reservoir provides support for the
engineering analysis on which the project or program was based, and (2) it is
reasonably certain the project will proceed. Improved recovery includes all
methods for supplementing natural reservoir forces and energy, or otherwise
increasing ultimate recovery from a reservoir, including (1) pressure
maintenance, (2) cycling, and (3) secondary recovery in its original sense.
Improved recovery also includes the enhanced recovery methods of thermal,
chemical flooding, and the use of miscible and immiscible displacement fluids.
Estimates of proved reserves do not include crude oil, natural gas, or
natural gas liquids being held in underground or surface storage.
A-5
<PAGE> 178
DEFINITIONS OF PRODUCING STATUS CATEGORIES
DEVELOPED PRODUCING
Producing reserves are recoverable from completion intervals currently open
and producing to market. Improved recovery reserves are considered to be
producing only after an improved recovery project has been installed and is in
operation.
DEVELOPED NON-PRODUCING
Shut-in reserves are recoverable from completion intervals now open, but
which had not started producing as of the date of our estimate.
Behind pipe reserves are recoverable from zones behind casing in existing
wells, which will require additional completion work or a future recompletion
prior to the start of production.
UNDEVELOPED
Undeveloped reserves are recoverable by new wells on undrilled acreage,
from existing wells where a relatively large expenditure is required for
recompletion and from acreage where the application of an improved recovery
project is planned and the costs required to place the project in operation are
relatively large. Reserves on undrilled acreage are limited to those drilling
units offsetting productive units that are reasonably certain of production when
drilled. Proved reserves for other undrilled units are included only where it
can be demonstrated with certainty that there is continuity of production from
the existing productive formation.
A-6
<PAGE> 179
HYDROCARBON PRICING PARAMETERS
SECURITIES AND EXCHANGE COMMISSION PARAMETERS
OIL AND CONDENSATE
NOMECO furnished us with oil and condensate prices in effect at June 30,
1995 and these prices were held constant to depletion of the properties. In
accordance with Securities and Exchange Commission guidelines, changes in liquid
prices subsequent to June 30, 1995 were not considered in this report.
PLANT PRODUCTS
NOMECO furnished us with plant product prices in effect at June 30, 1995
and these prices were held constant to depletion of the properties.
GAS
NOMECO furnished us with gas prices in effect at June 30, 1995 and with its
forecasts of future gas prices which take into account SEC guidelines, current
spot market prices, contract prices, and fixed and determinable price
escalations where applicable. In accordance with SEC guidelines, the future gas
prices used in this report make no allowances for future gas price increases
which may occur as a result of inflation nor do they make any allowance for
seasonable variations in gas prices which may cause future yearly average gas
prices to be somewhat lower than December gas prices. For gas sold under
contract, the contract gas price including fixed and determinable escalations,
exclusive of inflation adjustments, was used until the contract expires and then
was adjusted to the current market price for the area and held at this adjusted
price to depletion of the reserves.
A-7
<PAGE> 180
------------------------------------------------------
------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 9
The Company............................... 16
Use of Proceeds........................... 16
Dividend Policy........................... 17
Dilution.................................. 17
Capitalization............................ 18
Pro Forma Consolidated Financial
Information............................. 19
Report of Independent Public
Accountants............................. 20
Selected Historical Consolidated Financial
Data.................................... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 25
Business and Properties................... 36
Management................................ 63
Ownership of Capital Stock................ 68
Relationship and Certain Transactions with
CMS Energy.............................. 71
Description of Capital Stock.............. 74
Shares Eligible for Future Sale........... 77
Underwriting.............................. 78
Legal Matters............................. 79
Experts................................... 80
Available Information..................... 81
Certain Definitions....................... 82
Index to Financial Statements............. F-1
Letter of Ryder Scott Company............. A-1
</TABLE>
------------------------
UNTIL , 1995 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
SHARES
CMS NOMECO OIL & GAS CO.
COMMON STOCK
[LOGO]
------------------------
PROSPECTUS
------------------------
REPRESENTATIVES OF THE UNDERWRITERS
------------------------------------------------------
------------------------------------------------------
<PAGE> 181
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of the various expenses to be paid by the
Registrant in connection with the Offering. All amounts shown are estimates
except for the SEC registration fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................. $34,483
New York Stock Exchange Listing Fee................................. *
NASD Fee............................................................ 10,500
Printing and Engraving Expenses..................................... *
Legal Fees and Expenses............................................. *
Accounting Fees and Expenses........................................ *
Blue Sky Fees and Expenses.......................................... *
Transfer Agent and Registrar Fees and Expenses...................... *
Miscellaneous....................................................... *
-------
Total: $ *
-------
</TABLE>
- -------------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 561 through 571 of the Michigan Business Corporation Act (the
"MBCA") contain detailed provisions concerning the indemnification of directors
and officers against judgments, penalties, fines and amounts paid in settlement
of litigation.
Article VII of the Registrant's Restated Articles of Incorporation reads:
A director shall not be personally liable to the corporation or its
shareholders for monetary damages for breach of duty as a director except
(i) for a breach of the director's duty of loyalty to the corporation or
its shareholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) for a
violation of Section 551(1) of the MBCA, and (iv) any transaction from
which the director derived an improper personal benefit. If the MBCA is
amended after approval by the shareholders of this Article VII to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director shall be eliminated or limited
to the fullest extent permitted by the MBCA, as so amended. No amendment to
or repeal of this Article VII, and no modification to its provisions by
law, shall apply to, or have any effect upon, the liability or alleged
liability of any director of the corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment,
repeal or modification.
Article VIII of the Registrant's Restated Articles of Incorporation reads:
Each director, officer, employee and agent of the corporation shall be
indemnified by the corporation to the fullest extent permitted by law
against expenses (including attorneys' fees), judgments, penalties, fines
and amounts paid in settlement actually and reasonably incurred by him or
her in connection with the defense of any proceeding in which he or she was
or is a party or is threatened to be made a party by reason of being or
having been a director, officer, employee and agent of the corporation or
by reason of the fact that he or she is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. Such
right of indemnification is not exclusive of any other rights to which such
director, officer, employee and agent may be entitled under any now or
hereafter existing statute, any other provision of these Articles, Bylaws,
agreement, vote of shareholders or otherwise. If the MBCA is amended after
approval by the shareholders of this Article VIII to authorize corporate
action further eliminating or limiting the personal liability of directors,
then the liability of a director of the corporation shall be eliminated or
limited to the fullest extent permitted by the MBCA, as so amended. Any
repeal or modification of this Article VIII by
II-1
<PAGE> 182
the shareholders of the corporation shall not adversely affect any right or
protection of a director of the corporation existing at the time of such
repeal or modification.
Officers and directors are covered within specified monetary limits by
insurance against certain losses arising from claims made by reason of
their being directors or officers of the Registrant or of the Registrant's
subsidiaries and the Registrant's officers and directors are indemnified
against such losses by reason of their being or having been directors of
officers of another corporation, partnership, joint venture, trust or other
enterprise at the Registrant's request.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT NO.
<S> <C> <C>
1.1 -- Form of Underwriting Agreement.*
3.1 -- Restated Articles of Incorporation of the Registrant.
3.2 -- Restated By-Laws of the Registrant.
4.1 -- Specimen Common Stock Certificate.*
5.1 -- Opinion of counsel.*
10.1 -- Consulting and Non-Compete Agreement, dated as of February 1, 1995, by and
between the Registrant and Richard J. Burgess.
10.2 -- Employee Well Participation Program, Plan A and Plan B.
10.3 -- Reimbursement Agreement, dated as of December 9, 1994, between CMS Energy
Corporation and Registrant.
10.4 -- Key Employee Incentive Compensation Plan.
10.5 -- Supplemental Executive Retirement Plan for Employees of Consumers Power Company
("Consumers"), filed as Exhibit 10(o) to Consumers' Form 10-K Report for the
year 1993, File No. 1-5611, and incorporated herein by reference.
10.6 -- Gas Purchase Agreement, dated as of January 1, 1995, between the Registrant and
Consumers.
10.7 -- Natural Gas Purchase Agreement, dated as of May 1, 1989, between the Registrant
and Midland Cogeneration Venture Limited Partnership.
10.8 -- Gas Purchase Contract, dated as of December 1, 1987, between the Registrant and
Consumers.
10.9(a) -- Gas Purchase Contract, dated as of December 1, 1985, between the Registrant and
Consumers.
10.9(b) -- Modification and Amendment to Gas Purchase Contract, dated as of December 1,
1986, by and between Registrant and Consumers.
10.9(c) -- Modification and Amendment to Gas Purchase Contract, dated as of December 1,
1987, by and between Registrant and Consumers.
10.9(d) -- Modification and Amendment to Gas Purchase Contract, dated as of March 1, 1988,
by and between Registrant and Consumers.
10.10 -- Gas Purchase Contract, dated as of November 2, 1978, between the Registrant and
Consumers.
10.11 -- Services Agreement, dated as of October 1, 1989, between the Registrant and
Consumers.
10.12 -- Services Agreement, dated as of October 25, 1995, between the Registrant and
CMS Energy.
10.13 -- Services Agreement, dated as of October 25, 1995, between the Registrant and
CMS Enterprises.
</TABLE>
II-2
<PAGE> 183
<TABLE>
<CAPTION>
EXHIBIT NO.
<S> <C> <C>
10.14 -- Registration Rights Agreement, dated as of October 25, 1995, between the
Registrant and CMS Enterprises.
10.15 -- Amended and Restated Agreement for the Allocation of Income Tax Liabilities and
Benefits, dated as of January 1, 1994, among CMS Energy and its subsidiaries.
10.16 -- Indemnification Agreement, dated as of October 20, 1995, between the Registrant
and CMS Energy.
10.17 -- Agreement and Plan of Merger, dated as of August 29, 1995, among CMS Energy,
CMS Merging Corporation, Terra Energy Ltd., Martin G. Lagina, Craig J. Tester,
Dr. Thomas James and Nancy M. James, Dr. James Lowell and Mary K. Lowell, The
Revocable Living Trust of Dr. Leonard J. Scherock under Agreement dated May 1,
1990, Robert M. Boeve and Wayne Sterenberg.
10.18 -- Covenant Not to Compete, dated as of August 31, 1995, among CMS Energy
Corporation, Martin G. Lagina, Craig J. Tester, Robert M. Boeve and Wayne
Sterenberg.
10.19 -- Transfer Agreement, dated as of August 31, 1995, among the Registrant, CMS
Energy and CMS Enterprises.
10.20 -- Promissory Note, dated as of August 31, 1995, issued by the Registrant to CMS
Enterprises.
10.21 -- Agreement and Plan of Merger, dated as of January 24, 1995, among CMS Energy,
CMS Merging Corporation, Walter International, Inc., J.C. Walter, Jr., J.C.
Walter III, Carole Walter Looke, F. Fox Benton, Jr., Gordon A. Cain, The Cain
1988 Descendants Trust, William C. Oehmig, Prudential-Bache Energy Growth Fund,
L.P. G-2, Prudential-Bache Energy Growth Fund, L.P. G-3, Prudential-Bache
Energy Growth Fund, L.P. G-4, F. Fox Benton III, Howard A. Chapman, G.W. Frank,
Robert D. Jolly and Arthur L. Smalley.
10.22 -- Promissory Note, dated as of July 17, 1995, issued by the Registrant to CMS
Energy.
10.23 -- Tax Agreement, dated as of February 23, 1995, by and between Amoco Production
Company, Amoco Corporation, Walter International, Inc., Walter Congo Holdings
Company, Nuevo Energy Company, The Congo Holding Company, Walter International
Congo, Inc., and the Nuevo Congo Company.
10.24 -- CMS Tax Agreement, dated as of February 24, 1995, between Amoco Corporation,
Amoco Production Company, CMS Energy Corporation, CMS Enterprises, Inc.,
CMS-Nomeco Oil & Gas Co., Walter International, Inc. Walter Holdings, Inc. and
Walter International Congo, Inc.
10.25 -- Inter-Purchaser Agreement, dated as of December 28, 1994, by and among Walter
International, Inc., Walter Congo Holdings, Inc., Walter International Congo,
Inc., Nuevo Energy Company, The Congo Holding Company and the Nuevo Congo
Company.
10.26 -- Stock Purchase Agreement, dated as of June 30, 1994, by and between Amoco
Production Company, Walter International, Inc., Nuevo Energy Company, Walter
International Congo, Inc., Walter Congo Holdings, Inc., The Nuevo Congo Company
and the Congo Holdings Company.
10.27 -- Swap Agreement, dated as of May 8, 1992, by and between Registrant and Louis
Dreyfus Exchanges Ltd.
10.28 -- Finance Agreement, dated as of December 28, 1994, among Walter International
Congo, Inc., Walter Congo Holdings, Inc., and Overseas Private Investment
Corporation.
10.29(a) -- Amended and Restated Credit Agreement, dated as of November 1, 1993, as
amended, among the Registrant, the Banks, all as defined therein, and NBD Bank,
N.A., as Agent, and the Exhibits thereto.
</TABLE>
II-3
<PAGE> 184
<TABLE>
<CAPTION>
EXHIBIT NO.
<S> <C> <C>
10.29(b) -- Second Amendment to Credit Agreement and Assumption Agreement, dated as of
March 1, 1995, among the Registrant, the Banks, all as defined therein, and NBD
Bank as Agent.
10.29(c) -- Third Amendment to Credit Agreement, dated as of August 31, 1995, among the
Registrant, the Banks, all as defined therein, and NBD Bank, as Agent.
10.30 -- Long-Term Incentive Performance Plan.*
10.31 -- Executive Incentive Compensation Plan.*
15.1 -- Letters of Arthur Andersen LLP regarding unaudited financial statements.
15.2 -- Letters of KPMG Peat Marwick LLP regarding unaudited financial statements.
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Deloitte & Touche LLP.
23.3 -- Consent of KPMG Peat Marwick LLP.
23.4 -- Consent of counsel (included in Exhibit 5.1).
23.5 -- Consent of Ryder Scott Company.
24.1 -- Powers of Attorney.
27.1 -- Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
FINANCIAL STATEMENT SCHEDULE
All financial statement schedules are omitted because they are not
applicable or not required or because the required information is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 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 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 Act and will be governed by the final adjudication of
such issue.
(b) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus 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.
II-4
<PAGE> 185
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Jackson, State of
Michigan, on the 26th day of October, 1995.
CMS NOMECO Oil & Gas Co.
By: /s/ WILLIAM H. STEPHENS, III
---------------------------------
William H. Stephens, III
Executive Vice President
and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 26th day of October, 1995.
<TABLE>
<CAPTION>
NAME TITLE
<S> <C>
/s/ GORDON L. WRIGHT President, Chief Executive Officer and
- ------------------------------------------ Director (Principal Executive Officer)
(Gordon L. Wright)
/s/ PAUL E. GEIGER Vice President, Secretary and Treasurer
- ------------------------------------------ (Principal Financial and Accounting Officer)
(Paul E. Geiger)
* Director
- ------------------------------------------
(Victor J. Fryling)
* Director
- ------------------------------------------
(Richard J. Burgess)
* Director
- ------------------------------------------
(Frank M. Burke, Jr.)
* Director
- ------------------------------------------
(J. Stuart Hunt)
* Director
- ------------------------------------------
(Thomas K. Matthews, II)
* Director
- ------------------------------------------
(William T. McCormick, Jr.)
Director
- ------------------------------------------
(Charles R. Owens)
</TABLE>
II-5
<PAGE> 186
<TABLE>
<CAPTION>
NAME TITLE
<S> <C>
* Director
- ------------------------------------------
(S. Kinnie Smith, Jr.)
* Director
- ------------------------------------------
(P.W.J. Wood)
* Director
- ------------------------------------------
(Alan M. Wright)
*By: /s/ WILLIAM H. STEPHENS, III
--------------------------------------
William H. Stephens, III
Attorney-in-fact
</TABLE>
II-6
<PAGE> 187
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------------
<S> <C>
1.1 - Form of Underwriting Agreement.*
3.1 - Restated Articles of Incorporation of the Registrant.
3.2 - Restated By-Laws of the Registrant.
4.1 - Specimen Common Stock Certificate.*
5.1 - Opinion of counsel.*
10.1 - Consulting and Non-Compete Agreement, dated as of February 1, 1995, by and between the Registrant and
Richard J. Burgess.
10.2 - Employee Well Participation Program, Plan A and Plan B.
10.3 - Reimbursement Agreement, dated as of December 9, 1994, between CMS Energy Corporation and Registrant.
10.4 - Key Employee Incentive Compensation Plan.
10.5 - Supplemental Executive Retirement Plan for Employees of Consumers Power Company ("Consumers"), filed as Exhibit
10(o) to Consumers' Form 10-K Report for the year 1993, File No. 1-5611, and incorporated herein by reference.
10.6 - Gas Purchase Agreement, dated as of January 1, 1995, between the Registrant and Consumers.
10.7 - Natural Gas Purchase Agreement, dated as of May 1, 1989, between the Registrant and Midland Cogeneration Venture
Limited Partnership.
10.8 - Gas Purchase Contract, dated as of December 1, 1987, between the Registrant and Consumers.
10.9(a) - Gas Purchase Contract, dated as of December 1, 1985, between the Registrant and Consumers.
10.9(b) - Modification and Amendment to Gas Purchase Contract, dated as of December 1, 1986, by and between Registrant and
Consumers.
10.9(c) - Modification and Amendment to Gas Purchase Contract, dated as of December 1, 1987, by and between Registrant and
Consumers.
10.9(d) - Modification and Amendment to Gas Purchase Contract, dated as of March 1, 1988, by and between Registrant and
Consumers.
10.10 - Gas Purchase Contract, dated as of November 2, 1978, between the Registrant and Consumers.
10.11 - Services Agreement, dated as of October 1, 1989, between the Registrant and Consumers.
</TABLE>
<PAGE> 188
EXHIBIT INDEX (CONT.)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------------------
<S> <C>
10.12 - Services Agreement, dated as of October 25, 1995, between the Registrant and CMS Energy.
10.13 - Services Agreement, dated as of October 25, 1995, between the Registrant and CMS Enterprises.
10.14 - Registration Rights Agreement, dated as of October 25, 1995, between the Registrant and CMS Enterprises.
10.15 - Amended and Restated Agreement for the Allocation of Income Tax Liabilities and Benefits, dated as of Janaury 1,
1994, among CMS Energy and its subsidiaries.
10.16 - Indemnification Agreement, dated as of October 20, 1995, between the Registrant and CMS Energy.
10.17 - Agreement and Plan of Merger, dated as of August 29, 1995, among CMS Energy, CMS Merging Corporation, Terra
Energy Ltd., Martin G. Lagina, Craig J. Tester, Dr. Thomas James and Nancy M. James, Dr. James Lowell and Mary K.
Lowell, The Revocable Living Trust of Dr. Leonard J. Scherock under Agreement dated May 1, 1990, Robert M. Boeve
and Wayne Sterenberg.
10.18 - Covenant Not to Compete, dated as of August 31, 1995, among CMS Energy Corporation, Martin G. Lagina, Craig J.
Tester, Robert M. Boeve and Wayne Sterenberg.
10.19 - Transfer Agreement, dated as of August 31, 1995, among the Registrant, CMS Energy and CMS Enterprises.
10.20 - Promissory Note, dated as of August 31, 1995, issued by the Registrant to CMS Enterprises.
10.21 - Agreement and Plan of Merger, dated as of January 24, 1995, among CMS Energy, CMS Merging Corporation, Walter
International, Inc., J.C. Walter, Jr., J.C. Walter III, Carole Walter Looke, F. Fox Benton, Jr., Gordon A. Cain,
The Cain 1988 Descendants Trust, William C. Oehmig, Prudential-Bache Energy Growth Fund, L.P. G-2,
Prudential-Bache Energy Growth Fund, L.P. G-3, Prudential-Bache Energy Growth Fund, L.P. G-4, F. Fox Benton III,
Howard A. Chapman, G.W. Frank, Robert D. Jolly and Arthur L. Smalley.
10.22 - Promissory Note, dated as of July 17, 1995, issued by the Registrant to CMS Energy.
10.23 - Tax Agreement, dated as of February 23, 1995, by and between Amoco Production Company, Amoco Corporation, Walter
International, Inc., Walter Congo Holdings Company, Nuevo Energy Company, The Congo Holding Company, Walter
International Congo, Inc., and the Nuevo Congo Company.
10.24 - CMS Tax Agreement, dated as of February 24, 1995, between Amoco Corporation, Amoco Production Company, CMS Energy
Corporation, CMS Enterprises, Inc., CMS-Nomeco Oil & Gas Co., Walter International, Inc. Walter Holdings, Inc.
and Walter International Congo, Inc.
</TABLE>
<PAGE> 189
EXHIBIT INDEX (CONT.)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------------------
<S> <C>
10.25 - Inter-Purchaser Agreement, dated as of December 28, 1994, by and among Walter International, Inc., Walter Congo
Holdings, Inc., Walter International Congo, Inc., Nuevo Energy Company, The Congo Holding Company and the Nuevo
Congo Company.
10.26 - Stock Purchase Agreement, dated as of June 30, 1994, by and between Amoco Production Company, Walter
International, Inc., Nuevo Energy Company, Walter International Congo, Inc., Walter Congo Holdings, Inc., The
Nuevo Congo Company and the Congo Holdings Company.
10.27 - Swap Agreement, dated as of May 8, 1992, by and between Registrant and Louis Dreyfus Exchanges Ltd.
10.28 - Finance Agreement, dated as of December 28, 1994, among Walter International Congo, Inc., Walter Congo Holdings,
Inc., and Overseas Private Investment Corporation.
10.29(a) - Amended and Restated Credit Agreement, dated as of November 1, 1993, as amended, among the Registrant, the Banks,
all as defined therein, and NBD Bank, N.A., as Agent, and the Exhibits thereto.
10.29(b) - Second Amendment to Credit Agreement and Assumption Agreement, dated as of March 1, 1995, among the Registrant,
the Banks, all as defined therein, and NBD Bank as Agent.
10.29(c) - Third Amendment to Credit Agreement, dated as of August 31, 1995, among the Registrant, the Banks, all as defined
therein, and NBD Bank, as Agent.
10.30 - Long-Term Incentive Performance Plan.*
10.31 - Executive Incentive Compensation Plan.*
15.1 - Letters of Arthur Andersen LLP regarding unaudited financial statements.
15.2 - Letters of KPMG Peat Marwick LLP regarding unaudited financial statements.
21.1 - Subsidiaries of the Registrant.
23.1 - Consent of Arthur Andersen LLP.
23.2 - Consent of Deloitte & Touche LLP.
23.3 - Consent of KPMG Peat Marwick LLP.
23.4 - Consent of counsel (included in Exhibit 5.1).
23.5 - Consent of Ryder Scott Company.
24.1 - Powers of Attorney.
27.1 - Financial Data Schedule.
</TABLE>
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
CMS NOMECO OIL & GAS CO.
RESTATED BYLAWS
ARTICLE I: LOCATION OF OFFICES
Section 1 - Registered Office: The registered office of CMS NOMECO Oil
& Gas Co. (the "Company") shall be at such place in the City of Jackson,
County of Jackson, Michigan, or elsewhere in the State of Michigan, as the
Board of Directors may from time to time designate.
Section 2 - Other Offices: The Company may have and maintain other
offices within or without the State of Michigan.
ARTICLE II: CORPORATE SEAL
Section 1 - Corporate Seal: The Company shall have a corporate seal
bearing the name of the Company. The form of the corporate seal may be
altered by the Board of Directors.
ARTICLE III: FISCAL YEAR
Section 1 - Fiscal Year: The fiscal year of the Company shall begin
with the first day of January and end with the thirty-first day of December
of each year.
ARTICLE IV: SHAREHOLDERS' MEETINGS
Section 1 - Annual Meeting: An annual meeting of the shareholders for
election of directors and for such other business as may come before the
meeting shall be held at the registered office of the Company or at such
other place within or without the State of Michigan, at 10:30 o'clock A.M.,
Eastern Daylight Saving Time, or at such other time on the third Thursday
in April of
<PAGE> 2
2
each year, or upon such other day within sixty days thereafter, in each
case as the Board of Directors may designate.
Section 2 - Special Meetings: Special meetings of the shareholders may
be called by the Board of Directors, the Chairman of the Board or the
President. Such meeting shall be held at the registered office of the
Company or at such other place within or without the State of Michigan as
the Board of Directors may designate.
Section 3 - Notices: Except as otherwise provided by law, written
notice of any meeting of the shareholders shall be given, either personally
or by mail, to shareholders entitled to vote at such meeting, not less than
ten days nor more than sixty days prior to the date of the meeting, at
their last known address as the same appears on the stock records of the
Company. Such notice shall specify the time and place of holding the
meeting, the purpose or purposes for which such meeting is called, and the
record date fixed for the determination of shareholders entitled to notice
of and to vote at such meeting. The Board of Directors shall fix a record
date for determining shareholders entitled to notice of and to vote at a
meeting of shareholders, which record date shall not be more than sixty
days nor less than ten days before the date of the meeting. When a record
date has been so fixed by the Board, such record date shall apply to any
adjournment of the meeting unless the Board of Directors shall fix a new
record date for the purposes of the adjourned meeting.
No notice of an adjourned meeting shall be necessary if the time and
place to which the meeting is adjourned are announced at the meeting at
which the adjournment is taken. At the adjourned meeting only such
business may be transacted as might have been transacted at the original
meeting. If, after an adjournment, the Board of Directors shall fix a new
record date for the adjourned meeting, a notice of the adjourned meeting,
in conformity with the provisions of the first paragraph of this Section 3,
shall be given to each shareholder of record as of the new record date
entitled to vote at the adjourned meeting.
<PAGE> 3
3
Section 4 - Quorum: Except as otherwise provided by law or by the
Articles of Incorporation, the holders of the shares of stock of the
Company entitled to cast a majority of the votes at a meeting shall
constitute a quorum for the transaction of business at the meeting, but a
lesser number may convene any meeting and, by a majority vote of the shares
present at the meeting, may adjourn the same from time to time until a
quorum shall be present.
Section 5 - Voting: Shareholders may vote at all meetings in person or
by proxy in writing, but all proxies shall be filed with the Secretary of
the meeting before being voted upon.
Subject to the provisions of the Articles of Incorporation of the
Company, at all meetings of the shareholders of the Company each
shareholder shall be entitled on all questions to one vote for each share
of stock held by such holder, and a majority of the votes cast by the
holders of shares entitled to vote thereon shall be sufficient for the
adoption of any question presented, unless otherwise provided by law or by
the Articles of Incorporation of the Company.
Section 6 - Action Without Meeting: Any action required or permitted
under law to be taken at an annual or special meeting of shareholders may
be taken without a meeting, without prior notice and without a vote, if
consents in writing, setting forth the action so taken, are signed by the
holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting
at which all shares entitled to vote on such action were present and voted.
ARTICLE V: DIRECTORS
Section 1 - Number of Directors: The number of directors which
shall constitute the whole Board of Directors shall be determined by
resolution of a majority of the Board of Directors, but in no event shall
the number of directors be less than three nor more than twelve. The
number of directors may be decreased at any time and from time to time by a
majority of the directors then in office, but only to eliminate vacancies
existing by reason of the death, resignation, removal or expiration of the
term of one or more directors.
<PAGE> 4
4
Section 2 - Election: The directors shall be elected at the annual
meeting of shareholders by such shareholders as have the right to vote on
such election. Directors need not be shareholders of the Company.
Section 3 - Term of Office: Subject to the provisions of the Articles
of Incorporation of the Company, and unless otherwise provided by law, the
directors shall hold office from the date of their election until the next
succeeding annual meeting and until their successors are elected and
qualified, and until their resignation or removal.
Section 4 - Vacancies: Any vacancy or vacancies on the Board of
Directors arising from any cause may be filled by the affirmative vote of a
majority of the remaining directors although less than a quorum of the
Board. An increase in the number of members shall be construed as creating
a vacancy.
Section 5 - Fees: Except as otherwise provided by law, the Board of
Directors, by affirmative vote of a majority of directors then in office,
may establish reasonable compensation of directors for services to the
Company as directors, and may from time to time review and adjust such
compensation in an amount the Board may deem reasonable.
ARTICLE VI: DIRECTORS' MEETINGS
Section 1 - Organization Meeting: As soon as possible after their
election, the Board of Directors shall meet and organize and they may also
transact such other business as may be presented.
Section 2 - Other Meetings: Meetings of the Board of Directors may be
held at any time upon the call of the Secretary or Assistant Secretary made
at the direction of the Chairman of the Board, the President, an Executive
Vice President or two directors.
<PAGE> 5
5
Section 3 - Place of Meeting: All meetings of the Board of Directors
may be held within or without the State of Michigan.
Section 4 - Notice: A reasonable notice of all meetings of the Board
of Directors, in writing or otherwise, shall be given to each director or
sent to the director's residence or place of business; provided that no
notice shall be required for any organization meeting if held on the same
day as the shareholders' meeting at which the directors were elected.
No notice of the holding of an adjourned meeting shall be necessary.
Notice of all meetings shall specify the time and place of holding the
meeting and, unless otherwise stated, any and all business may be
transacted at such meeting.
Notice of the time, place and purpose of any meeting may be waived in
writing, either before or after the holding thereof.
Section 5 - Quorum: At all meetings of the Board of Directors a
majority of the Board then in office shall constitute a quorum, but a
majority of the directors present may convene and adjourn any such meeting
from time to time until a quorum shall be present.
Section 6 - Reliance upon Records: Every director, and every member
of any committee of the Board of Directors, shall, in the performance of
his or her duties, be fully protected in relying in good faith upon the
records of the Company and upon such information, opinions, reports or
statements presented to the Company by any of its officers or employees,
or committees of the Board of Directors, or by any other person as to
matters the director or member reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Company, including, but not limited
to, such records, information, opinions, reports or statements as to the
value and amount of the assets, liabilities and/or net profits of the
Company, or any other facts pertinent to the existence
<PAGE> 6
6
and amount of surplus or other funds from which dividends might
property be declared and paid, or with which the Company's capital stock
might properly be purchased or redeemed.
Section 7 - Voting: All questions coming before any meeting of the
Board of Directors for action shall be decided by a majority vote of the
directors present at such meeting, unless otherwise provided by law or by
these Bylaws.
Section 8 - Participation by Communications Equipment: A director or a
member of a Committee designated by the Board of Directors may participate
in a meeting by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can
hear each other. Participation in a meeting by such means shall constitute
presence in person at the meeting.
Section 9 - Action Without Meeting: Any action required or permitted
to be taken pursuant to authorization voted at a meeting of the Board of
Directors, or a Committee thereof, may be taken without a meeting if,
before or after the action, all members of the Board or of the Committee
consent thereto in writing. The written consents shall be filed with the
minutes of the proceedings of the Board or Committee, and the consents
shall have the same effect as a vote of the Board or Committee for all
purposes.
ARTICLE VII: EXECUTIVE AND OTHER COMMITTEES
Section 1 - Number and Qualifications: By resolution passed by a
majority of the Board, the Board of Directors may from time to time
designate one or more of their number to constitute an Executive or any
other Committee of the Board, as the Board of Directors may from time to
time determine to be desirable, and may fix the number of and designate the
Chairman of each such Committee. Except as otherwise provided by law, the
powers of each such Committee shall be as defined in the resolution or
resolutions of the Board of Directors relating to the authorization of such
Committee, and may include, if such resolution or resolutions so
<PAGE> 7
7
provide, the power and authority to declare a dividend or to authorize
the issuance of shares of stock of the Company.
Section 2 - Appointment: The appointment of members of each such
Committee, or other action respecting any Committee, may take place at any
meeting of the Board of Directors.
Section 3 - Term of Office: The members of each Committee shall hold
office at the pleasure of the Board of Directors.
Section 4 - Vacancies: Any vacancy or vacancies in any such Committee
arising from any cause shall be filled by the Board of Directors. The
Board may designate one or more directors to serve as alternate members of
a Committee, who may replace an absent or disqualified member at a meeting
of a Committee; provided, however, in the absence or disqualification of a
member of a Committee, the members of the Committee present at a meeting
and not disqualified from voting, whether or not constituting a quorum, may
unanimously appoint another member of the Board of Directors to act in the
place of the absent or disqualified member.
Section 5 - Fees: Except as otherwise provided by law, the Board of
Directors, by affirmative vote of a majority of directors then in office,
may establish reasonable compensation of directors for services to the
Company on Committees of the Board, and may from time to time review and
adjust such compensation in an amount the Board may deem reasonable.
Section 6 - Minutes: Except as otherwise determined by the Board of
Directors, each such committee shall make a written report or
recommendation following its meetings or keep minutes of all its meetings.
Section 7 - Quorum: At all meetings of any duly authorized Committee
of the Board of Directors, a majority of the members of such Committee
shall constitute a quorum but a majority of the members present may convene
and adjourn any such meeting from time to time
<PAGE> 8
8
until a quorum shall be present; provided, that with respect to any
Committee of the Board other than the Executive Committee, if the
membership of such Committee is four or less, then two members of such
Committee shall constitute a quorum and one member may convene and adjourn
any such meeting from time to time until a quorum shall be present.
ARTICLE VIII: OFFICERS
Section 1 - Election: The officers of the Company shall be elected
annually at the organization meeting of the Board of Directors, provided
that any officer not elected at such meeting may be elected at any
succeeding meeting of the directors. The Board shall elect a Chairman of
the Board, a President, a Secretary and a Treasurer, and if the Board so
determines, such other officers as the Board of Directors may from time to
time determine and as may be deemed necessary, who shall have such duties
and authority not inconsistent herewith, as may be prescribed by resolution
of the Board of Directors. Any two or more of such offices may be held by
the same person but no officer shall execute, acknowledge or verify any
instrument in more than one capacity, if such instrument is required by
law, by the Articles of Incorporation of the Company, or by these Bylaws to
be executed, acknowledged or verified by two or more officers.
Section 2 - Qualifications: The Chairman of the Board, Vice Chairmen,
if any, and the President shall be chosen from among the Board of
Directors.
Section 3 - Vacancies: Any vacancy or vacancies among the officers
arising from any cause shall be filled by the Board of Directors. In case
of the absence of any officer of the Company or for any other reason the
Board of Directors may deem sufficient, the Board may delegate, for the
time being, the powers or duties, in whole or part, of any officer to any
other officer or to any director.
<PAGE> 9
9
Section 4 - Term of Office: Each officer of the Company shall hold
office until his successor is elected and qualified, or until his
resignation or removal. Any officer elected by the Board of Directors may
be removed by the Board with or without cause.
Section 5 - Compensation: The compensation of the officers shall be
fixed by the Board of Directors.
ARTICLE IX: AGENTS
Section 1 - Resident Agent: The Company shall have and continuously
maintain a resident agent, which may be either an individual resident in
the State of Michigan whose business office is identical with the Company's
registered office or a Michigan corporation or a foreign corporation
authorized to transact business in Michigan and having a business office
identical with the Company's registered office. The Board of Directors
shall appoint the resident agent.
Section 2 - Other Agents: The Board of Directors may appoint such
other agents as may in their judgment be necessary for the proper conduct
of the business of the Company.
ARTICLE X: POWERS AND DUTIES
Section 1 - Directors: The business and affairs of the Company shall
be managed by the Board of Directors and it shall have and exercise all of
the powers and authority of the Company except as otherwise provided by
law, by the Articles of Incorporation of the Company or by these Bylaws.
Section 2 - Executive Committee: In the interim between meetings of
the Board of Directors, the Executive Committee shall have and exercise all
the powers and authority of the Board of Directors except as otherwise
provided by law. The Executive Committee shall meet from time to time on
the call of the Chairman of the Board or the Chairman of the Committee.
The Secretary shall keep minutes in sufficient detail to advise fully the
Board of Directors of the
<PAGE> 10
10
actions taken by the Committee and shall submit copies of such minutes
to the Board of Directors for its approval or other action at its next
meeting.
Section 3 - Chairman of the Board: The Chairman of the Board shall
preside at all meetings of the shareholders and of the Board of Directors;
shall perform and do all acts and things incident to the position of
Chairman of the Board; and perform such other duties as may be assigned
from time to time by the Board of Directors.
Unless otherwise provided by the Board, the Chairman of the Board shall
have full power and authority on behalf of the Company to execute any
shareholders' consents and to attend and act and to vote in person or by
proxy at any meetings of shareholders of any corporation in which the
Company may own stock and at any such meeting shall possess and may
exercise any and all of the rights and powers incident to the ownership of
such stock and which, as the owner thereof, the Company might have
possessed and exercised, if present. The Board of Directors by resolution
from time to time may confer like powers upon any other person or persons.
Section 4 - Vice Chairman: A Vice Chairman, if any, shall perform such
of the duties of the Chairman of the Board or the President on behalf of
the Company as may be respectively assigned from time to time by the Board
of Directors, the Executive Committee, the Chairman of the Board or the
President; and in the absence of both the Chairman of the Board and the
President, shall preside at meetings of directors and at meetings of
shareholders.
Section 5 - President: The President of the Company shall be the
chief executive officer of the Company and, subject to the supervision of
the Board of Directors, shall have general charge of the business and
affairs of the Company; shall perform all acts and things incident to the
position of President; and perform such other duties as may be assigned
from time to time by the Board of Directors. In the absence of the
Chairman of the Board, the President shall preside at meetings of
directors and at meetings of shareholders.
<PAGE> 11
11
Section 6 - Vice Presidents: The Vice Presidents shall perform such
of the duties of the President on behalf of the Company as may be
respectively assigned to them from time to time by the Board of Directors,
the Chairman of the Board or the President. In the absence or inability to
act of the President, a Vice President designated by the Board of Directors
or President shall have and exercise all the powers of the President. The
Board of Directors or Executive Committee may designate one or more of the
Vice Presidents as Executive Vice President or Senior Vice President.
Section 7 - General Counsel: The General Counsel shall have charge of
all matters of a legal nature involving the Company.
Section 8 - Secretary: The Secretary shall act as custodian of and
record the minutes of all meetings of the Board of Directors, of the
shareholders and of any committees of the Board of Directors which keep
formal minutes; shall attend to the giving and serving of all notices of
the Company; shall prepare or cause to be prepared the list of
shareholders required to be produced at any meeting; and shall attest the
seal of the Company upon all contracts and instruments executed under such
seal and shall affix or cause to be affixed the seal of the Company thereto
and to all certificates or shares of the capital stock. The Secretary
shall have charge of the stock records of the Company and such other books
and papers as the Board of Directors, the Chairman of the Board or the
President may direct; and in general, perform all the duties of Secretary,
subject to the control of the Board of Directors, the Chairman of the Board
and the President.
Section 9 - Treasurer: It shall be the duty of the Treasurer to have
the care and custody of all the funds and securities of the Company,
including the investment thereof, which may come into the Treasurer's
hands, and to endorse checks, drafts and other instruments for the payment
of money for deposit or collection when necessary or proper and to deposit
the same to the credit of the Company in such bank or banks or depository
as the Treasurer may designate, and endorse all commercial documents
requiring endorsements for or on behalf of the Company. The Treasurer
shall render an account of transactions to the Board of Directors as often
as the
<PAGE> 12
12
Board shall require the same; and shall perform all acts incident to
the position of Treasurer, subject to the control of the Board of
Directors, the Chairman of the Board and the President.
Section 10 - Controller: Subject to the control of the Board of
Directors, the President and the Vice President having general charge of
accounting, the Controller, if any, shall have charge of the supervision of
the accounting system of the Company, including the preparation and filing
of all tax returns and financial reports required by law to be made to any
and all public authorities and officials; and shall perform such other
duties as may be assigned, from time to time, by the Board of Directors,
the President, or the Vice President having general charge of accounting.
Section 11 - Assistant Secretaries and Assistant Treasurers: An
Assistant Secretary or an Assistant Treasurer shall, in the absence or
inability to act or at the request of the Secretary or Treasurer,
respectively, perform the duties of the Secretary or Treasurer,
respectively; and shall perform such other duties as may from time to time
be assigned by the Board of Directors, the Chairman of the Board or the
President. The performance of any such duty shall be conclusive evidence
of their right to act.
ARTICLE XI: STOCK
Section 1 - Stock Certificates: The shares of stock of the company
shall be represented by certificates which shall be numbered and shall be
entered on the stock records of the Company and registered as they are
issued. Each certificate shall state on its face that the Company is
formed under the laws of Michigan, the name of the person or persons to
whom issued, the number and class of shares and the designation of the
series the certificate represents, and the par value, if any, of each share
represented by the certificate; shall be signed by the Chairman of the
Board, the President or one of the Vice Presidents and by the Treasurer or
an Assistant Treasurer or the Secretary or an Assistant Secretary and
sealed with the corporate seal of the Company or a facsimile thereof. When
such certificates are countersigned by a transfer agent or registered by a
registrar, the signatures of any such Chairman of the Board, President,
Vice
<PAGE> 13
13
President, Treasurer, Assistant Treasurer, Secretary or Assistant
Secretary may be facsimiles. In case any officer, who shall have signed or
whose facsimile signature shall have been placed on any such certificate,
shall cease to be such officer of the Company before such certificate shall
have been issued by the Company, such certificate may nevertheless be
issued by the Company with the same effect as if the person, who signed
such certificate or whose facsimile signature shall have been placed
thereon, were such officer of the Company at the date of issue.
Each certificate shall set forth on its face or back or state that the
Company will furnish to a shareholder upon request and without charge a
full statement of the designations, relative rights, preferences and
limitations of the shares of stock of each class authorized to be issued
and of each series so far as the same have been prescribed and the
authority of the Board of Directors to designate and prescribe the relative
rights, preferences and limitations of other series.
Section 2 - Stock Records: The shares of stock of the Company shall be
transferable only on the stock records of the Company in person or by proxy
duly authorized and upon surrender and cancellation of the old certificates
therefor.
The Board of Directors may fix a date preceding the date fixed for any
meeting of shareholders or any dividend payment date or the date for the
allotment of rights or the date when any change, conversion or exchange of
stock shall go into effect or the date for any other action, as the record
date for the determination of the shareholders entitled to notice of and to
vote at such meeting, to receive payment of such dividend or to receive
such allotment of rights or to exercise such rights in respect of any such
change, conversion or exchange of stock or to take such other action, as
the case may be, notwithstanding any transfer of shares on the records of
the Company or otherwise after any such record date fixed as aforesaid.
The record date so fixed by the Board shall not be more than sixty nor less
than ten days before the date of the meeting of the shareholders, nor more
than sixty days before any other action. If the Board of Directors does
not fix a date of record, as aforesaid, the record date shall be as
provided by law.
<PAGE> 14
14
Section 3 - Stock: The designations, relative rights, preferences,
limitations and voting powers, or restrictions, or qualifications of the
shares of the Company's stock shall be as set forth in the Articles of
Incorporation of the Company.
Section 4 - Replacing Certificates: In case of the alleged loss, theft
or destruction of any certificate of shares of stock and the submission of
proper proof thereof, a new certificate may be issued in lieu thereof upon
delivery to the Company by the owner or legal representative of a bond of
indemnity against any claim that may be made against the Company on account
of such alleged lost, stolen or destroyed certificate or such issuance of a
new certificate.
ARTICLE XII: DIVIDENDS AND DISTRIBUTIONS
Section 1 - Declaration and Payment: Subject to the provisions of
applicable law and the Articles of Incorporation of the Company, the Board
of Directors may from time to time declare and pay dividends, or make other
distributions, on its outstanding shares of stock.
ARTICLE XIII: AUTHORIZED SIGNATURES
Section 1 - Authorized Signatures: All checks, drafts and other
negotiable instruments issued by the Company shall be made in the name of
the Company and shall be signed manually or by facsimile by such one of the
officers of the Company or by such other person as the Chairman of the
Board may from time to time designate.
Section 2 - Contracts, Conveyances, Etc.: The Board of Directors shall
have the power to designate the officers and agents who shall have
authority to execute any instrument on behalf of the Company. When the
execution of any contract, conveyance or other instrument has been
authorized without specification of the executing officers, the Chairman of
the Board, the President or any Vice President may execute the same in the
name of and on behalf of this Company.
<PAGE> 15
15
ARTICLE XIV: FIDELITY BONDS
Section 1 - Officers' and Employees' Bonds: The officers and employees
of the Company shall give bonds for the faithful discharge of their
respective duties in such form and for such amounts as may be directed by
the Board of Directors.
ARTICLE XV: INDEMNIFICATION AND INSURANCE
Section 1 - Indemnification: The Company shall indemnify its
directors, officers and employees to the full extent permitted by law as
provided in the Articles of Incorporation of the Company.
Section 2 - Insurance: The Company may purchase and maintain liability
insurance on behalf of its directors, officers or employees to the full
extent permitted by law.
ARTICLE XVI: AMENDMENTS
Section 1 - Amendments, How Effected: These Bylaws may be amended or
repealed, or new Bylaws may be adopted, either by the majority vote of the
votes cast by the shareholders entitled to vote thereon or by the majority
vote of the directors then in office at either a regular or special
meeting.
These Restated Bylaws have been duly adopted by the shareholders of CMS NOMECO
Gas & Oil Co. on the _____ day of October, 1995.
_______________________________________
Paul E. Geiger
<PAGE> 1
EXHIBIT 3.2
STATE OF MICHIGAN
DEPARTMENT OF COMMERCE
CORPORATION DIVISION
LANSING, MICHIGAN
RESTATED ARTICLES OF INCORPORATION
(Profit Corporation)
CMS NOMECO OIL & GAS GO.
Identification No. 129-659
(Incorporated in Michigan as Northern Michigan
Exploration Company on November 17, 1967; name
changed to NOMECO Oil & Gas Co. effective July
16, 1990, and name further changed to CMS NOMECO
Oil & Gas Co. effective January 9, 1995)
RESTATED ARTICLES OF INCORPORATION
These Restated Articles of Incorporation have been duly adopted by the
shareholders of CMS NOMECO Oil & Gas Co. in accordance with the provisions of
Act 284, Public Acts of 1972, and Act 407 Public Acts of 1982, as follows:
ARTICLE I
The name of the Corporation is CMS NOMECO Oil & Gas Co.
ARTICLE II
The purpose or purposes for which the Corporation is organized is to engage in
any activitiy within the purposes for which corporations may be organized under
the Business Corporation Act of Michigan.
ARTICLE III
The total number of shares of all classes of stock which the Corporation shall
have authority to issue is 60,000,000 of which 5,000,000 shares, no par value,
are of a class designated Preferred Stock and 55,000,000 shares, no par value,
are of a class designated Common Stock.
The statement of the designations and the voting and other powers, preferences
and rights, and the qualifications, limitations or restrictions thereof, of the
Common Stock and of the Preferred Stock is as follows:
<PAGE> 2
PREFERRED STOCK
The shares of Preferred Stock may be issued from time to time in one or more
series with such relative rights and preferences of the shares of any such
series as may be determined by the Board of Directors. The Board of Directors
is authorized to fix by resolution or resolutions adopted prior to the issuance
of any shares of each of such particular series of Preferred Stock, the
designation, powers, preferences and relative, participating, optional and
other rights, and the qualifications, limitations and restrictions thereof, if
any of such series, including, but without limiting the generality of the
foregoing, the following:
(a) The rate of dividend, if any;
(b) The price at and the terms and conditions upon which shares may be
redeemed;
(c) The rights, if any, of the holders of shares of the series upon
voluntary or involuntary liquidation, merger, consolidation,
distribution or sale of assets, dissolution or winding up of the
Corporation;
(d) Sinking fund or redemption or purchase provisions, if any, to be
provided for shares of the series;
(e) The terms and conditions upon which shares may be converted into
shares of other series or other capital stock, if issued with the
privilege of conversion; and
(f) The voting rights in the event of default in the payment of
dividends or under such other circumstances and upon such
conditions as the Board of Directors may determine.
No holder of any share of any series of Preferred Stock shall be entitled to
vote for the election of directors or in respect of any other matter except as
may be required by the Michigan Business Corporation Act, as amended, or as is
permitted by the resolution or resolutions adopted by the Board of Directors
authorizing the issue of such series of Preferred Stock.
COMMON STOCK
The shares of Common Stock may be issued from time to time as the Board of
Directors shall determine for such consideration as shall be fixed by the Board
of Directors. Each share of Common Stock of the Corporation shall be equal to
every other share of said stock in every respect.
2
<PAGE> 3
The Board of Directors shall determine the rights, if any, of the holders of
shares of Common Stock upon the voluntary or involuntary liquidation, merger,
consolidation, distribution or sale of assets, dissolution or winding up of the
Corporation.
The holders of Common Stock shall be entitled to receive such dividends, if
any, as may be declared from time to time by the Board of Directors.
Each holder of Common Stock shall have one vote in respect of each share of
Common Stock held by such holder on each matter voted upon by the shareholders
and any such right to vote shall not be cumulative.
PREEMPTIVE RIGHTS
The holders of shares of Preferred Stock or of Common Stock shall have no
preemptive rights to subscribe for or purchase any additional issues of shares
of the capital stock of the Corporation of any class now or hereafter
authorized or any bonds, debentures, or other obligations or rights or options
convertible into or exchangeable for or entitling the holder or owner to
subscribe for or purchase any shares of capital stock, or any rights to
exchange shares issued for shares to be issued.
CHANGE IN NUMBER OF ISSUED SHARES
OF COMMON STOCK
This change in the number and designation of issued shares of common stock of
the Corporation is made pursuant to MCL Section 450.1602(g) and (f). Prior to
the effective date of these Restated Articles of Incorporation, the number of
issued and outstanding shares of common stock of the Corporation was 14.6
million. Effective on the date of filing of these Restated Articles of
Incorporation, the number of issued and outstanding shares of common stock of
the Corporation shall be changed from 14.6 million shares to 24 million shares,
no par value, and the number of shares held by each shareholder shall be
changed in accordance with the following provisions: Each shareholder of the
Corporation shall surrender to the Corporation his certificates for common
shares, and the Corporation shall issue to each shareholder a new certificate
for common shares in an amount which equals the number of shares held prior to
the effective date of these Restated Articles times a fraction, the numerator
of which is 24 million and the denominator of which is 14.6 million. Each
certificate issued pursuant to this provision shall be in a form which is
distinguishable from the certificates which were outstanding prior to the
effective date of these Restated Articles. The corporation shall revise
3
<PAGE> 4
its stock record to reflect the change in number of shares held by each
shareholder of the Corporation whether or not the shareholder surrenders his
certificate as required by these provisions.
ARTICLE IV
Location of the registered office is: One Jackson Square, Jackson, County of
Jackson, Michigan 49201. Post Office address of the registered office is:
P.O. Box 1150, Jackson, Michigan 49204. The name of the resident agent is
Paul E. Geiger.
ARTICLE V
The number of directors of the Corporation shall be as specified in, or
determined in the manner provided in, the bylaws of the Corporation.
Any vacancies occurring on the Corporation's Board of Directors (whether by
reason of the death, resignation or removal of a director) may be filled by
a majority vote of the directors then in office although less than a
quorum. An increase in the number of members of the Board of Directors shall
be construed as creating a vacancy.
ARTICLE VI
A director may be removed by the affirmative vote of a majority of the members
of the Board of Directors then in office. A director also may be removed by
shareholders, but only for cause, at an annual meeting of shareholders and by
the affirmative vote of a majority of the shares then entitled to vote for the
election of directors. For purposes of this section, cause for removal shall
be construed to exist only if a director whose removal is proposed has been
convicted of a felony by a court of competent jurisdicition and such conviction
is no longer subject to appeal or has been adjudged by a court of competent
jurisdiction to be liable for willful misconduct in the performance of his or
her duty to the Corporation in a matter of substantial importance to the
Corporation in a matter of substantial importance to the Corporation and such
adjudiciation is no longer subject to appeal.
ARTICLE VII
A director shall not be personally liable to the Corporation or its
shareholders for monetary damages for breach of duty as a director except (i)
for a breach of the director's duty of
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<PAGE> 5
loyalty to the Corporation or its shareholders, (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) for a violation of Section 551(l) of the Michigan Business
Corporation Act, and (iv) for any transaction from which the director derived
an improper personal benefit. If the Michigan Business Corporation Act is
amended after approval by the shareholders of this Article VII to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director shall be eliminated or limited to
the fullest extent permitted by the Michigan Business Corporation Act, as so
amended. No amendment to or repeal of this Article VII, and no modification to
its provisions by law, shall apply to, of have any effect upon, the liability
or alleged liability of any director of the Corporation for or with respect to
any acts or omissions of such director occurring prior to such amendment,
repeal or modification.
ARTICLE VIII
Each director and each officer of the Corporation shall be indemnified by the
Corporation to the fullest extent permitted by law against expenses (including
attorneys' fees), judgements, penalties, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with the defense
of any proceeding in which he or she was or is a party or is threatened to be
made a party by reason of being or having been a director of an officer of the
Corporation or by reason of the fact that he or she is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. Such right
of indemnification is not exclusive of any other rights to which such director
or officer may be entitled under any now of thereafter existing statute, any
other provision of these Articles, bylaws, agreement, vote of shareholders or
otherwise. Any repeal or modification of this Article VIII by the shareholders
of the Corporation shall not adversely affect any right or protection of a
director or officer of the Corporation existing at the time of such repeal or
modification.
ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal any
provision in these Restated Articles of Incorporation as permitted by law, and
all rights conferred on shareholders herein are granted subject to this
reservation. Notwithstanding the foregoing, in addition to the vote of the
holders of any class or series of stock of the Corporation required by law or
by these Restated Articles of Incorporation,
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<PAGE> 6
or a resolution of the Board of Directors with respect to a series of Preferred
Stock, the number of authorized shares of Common Stock or the number of
authorized shares of Preferred Stock set forth in Article III shall not be
reduced or eliminated and the provisions of Articles V, VI, VII, VIII and this
Article IX may not be amended, altered, changed or repealed unless such
reduction or elimination, or amendment, alteration, change or repeal is
approved by the affirmative vote of the holders of not less than 75% of the
outstanding shares entitled to vote thereon.
These Restated Articles of Incorporation were duly adopted on the ________ day
of ___________, 1995 in accordance with the provisions of Section 642 of the
Act and were duly adopted by the written consent of all the shareholders
entitled to vote in accordance with section 407(2) of the Act.
Signed this _________ day of _____________________, 1995.
By:
-------------------------------
William H. Stephens III
Executive Vice President
6
<PAGE> 1
EXHIBIT 10.1
CONSULTING/NON-COMPETE AGREEMENT
The Agreement made effective this 1st day of February, 1995 by and between
NOMECO Oil & Gas Co., a Michigan corporation with offices located at One
Jackson Square, Jackson, Michigan 49204 ("NOMECO") and Richard J. Burgess, an
individual residing at 5380 Squire Manor Drive, Jackson, Michigan 49201
("Consultant").
W I T N E S S E T H:
WHEREAS, Consultant was employed by NOMECO for 27 years, most recently as its
President and Chief Executive Officer;
WHEREAS, Consultant is possessed of extensive knowledge and experience in the
business of NOMECO and the industry of which NOMECO is a part;
WHEREAS, Consultant is in good health and in possession of the
financial resources, business skills and knowledge to start up another
enterprise to compete with NOMECO;
WHEREAS, NOMECO desires reasonable assurances of Consultant's
continuing loyalty, non-competition with NOMECO and nondisclosure of and
reasonable protection of NOMECO's confidential business information which has
been and will be acquired and which has been and is being developed by NOMECO
at substantial expense; and
WHEREAS, NOMECO and CMS Energy desires to procure Consultant's
services as a consultant and Consultant is willing to furnish such services on
the terms herein contained.
NOW, THEREFORE, in consideration of the premises hereof and of
mutual covenants to be bound by the terms hereof, the parties agree as follows:
1. Term. This Agreement shall become effective as of the date
hereof, and shall remain in effect through April 30, 1996;
provided that this Agreement shall remain in effect from month
to month thereafter subject to termination at any time after
the initial term at the election of either party on 30 days'
written notice to the other; and provided further that the
provisions contained in Section 9 hereof shall survive
termination of this Agreement.
2. Duties of Consultant. Consultant shall advise NOMECO or an
affiliated CMS Company on issues pertaining to its business
and render such other services, including, but not limited to,
testimony, advocacy and public representation as the client
shall from time to time require.
3. Non-Compete. During the term of this Agreement, Consultant
will not, directly or indirectly, personally or as an
employee, associate, partner, manager, agent,
<PAGE> 2
owner, investor in excess of 5% of the outstanding capital
stock of any corporation or partnership, operator or
otherwise, or by means of any corporate or other device,
engage in the business of NOMECO in any market in which
NOMECO currently competes. Notwithstanding the foregoing,
Consultant shall be allowed to invest in the oil industry,
provided that such investment does not result in a control
position for Consultant.
4. Compensation. In consideration for the covenants of
Consultant contained in Sections 2 and 3 herein, Consultant
shall be compensated a minimum amount of $7500 per month for
each calendar month during the term hereof, whether or not
Consultant actually performs any services hereunder during any
such month, and at a rate of $1500 per day for services in
excess of five (5) days per calendar month performed by
Consultant hereunder. If during the term hereof NOMECO
increases the $1500 amount paid to NOMECO's nonmanagerial
directors as a meeting attendance fee, the $1500 rate to be
paid Consultant hereunder shall be increased by the same
amount at the same time and the $7500 monthly minimum to be
paid Consultant shall be increased at the same time by an
amount computed by multiplying the day rate increase by five
(5).
5. Expenses. NOMECO shall reimburse Consultant for all
reasonable and necessary expenses incurred by him in the
performance of his duties hereunder.
6. Billing and Payment. Consultant shall periodically submit to
NOMECO a statement of compensation due him and expenses
incurred by him since the date of the prior statement on a
form prescribed by NOMECO, together with such evidence of
expenditures as NOMECO reasonably requires. Within twenty
(20) days of receipt of each such statement, NOMECO shall pay
Consultant for compensation due and reimburse Consultant all
expenses properly incurred and reported.
In the event of Consultant's demise prior to payment of all
sums owing hereunder, all remaining payments shall be made to
his beneficiary.
7. Office and Secretary. During the term hereof NOMECO shall
make available to Consultant an appropriate office and
secretarial services. Consultant may at his discretion work
from other locations and use other secretarial services in the
performance of this Agreement.
8. Contract Status. It is understood between the parties that
Consultant is an independent contractor and that the manner of
performance of his duties, which will be generally described
to him by NOMECO is within his discretion.
Although it is understood and agreed that Consultant shall not
be required to devote more than twenty (20%) percent of his
normal working time (up to fifty
2
<PAGE> 3
(50%) at Consultant's election) to rendering such service or
to follow any formal schedule of duties or assignment and that
NOMECO shall not supervise the details and particulars of the
manner in which he performs such services, Consultant agrees
to give first priority to the business and affairs of the
Company and its affiliates and not to accept other engagements
which will interfere, or be inconsistent, with his services
hereunder.
9. Indemnification. NOMECO hereby agrees to indemnify and hold
Consultant harmless from any acts or omissions of Consultant
in performing the services hereunder; provided, however, that
NOMECO shall not indemnify Consultant for any gross negligence
or willful misconduct of Consultant. Consultant agrees that
NOMECO shall not be liable to Consultant for any personal
injury or other damages to Consultant except to the extent
cause by NOMECO's gross negligence or willful misconduct.
10. Confidentiality. All information, whether oral, written or
otherwise, which NOMECO or an affiliate provides to the
Consultant or which is generated or derived by the Consultant
in or as a result of the services hereunder and which NOMECO
designates, in writing or orally, as confidential to NOMECO,
shall be held in strict confidence by the Consultant and shall
not be disclosed by the Consultant to any third party without
NOMECO's express written consent.
11. Severability. If any paragraph, sentence, clause or other
provision of this Agreement or the application of such
provision, is held invalid or unenforceable, such provision
shall be deemed to be modified in a manner, consistent with
the intent of such original provision, so as to make it valid
and enforceable, and this Agreement, and the application of
such provision to persons or circumstances other than those
with respect to which it would be invalid or unenforceable,
shall not be affected thereby.
IN WITNESS WHEREOF, the parties have signed this Agreement on the 22nd day of
December, 1994.
CMS ENERGY NOMECO OIL & GAS CO.
BY: /S/ VICTOR J. FRYLING BY: /S/ GORDON L. WRIGHT
VICTOR J. FRYLING
ITS: PRESIDENT ITS: EXEC VICE PRESIDENT
RICHARD J. BURGESS
/S/ RICHARD J. BURGESS
3
<PAGE> 1
NOMECO OIL & GAS COMPANY EXHIBIT 10.2
EMPLOYEE WELL PARTICIPATION PROGRAM,
PLAN A AND PLAN B
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page(s)
<S> <C>
THE PROGRAM . . . . . . . . . . . . . . . . . . . . . . . . . . 1 - 4
I. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. PROGRAM ADMINISTRATOR . . . . . . . . . . . . . . . . . . 1
III. TERM . . . . . . . . . . . . . . . . . . . . . . . . . . 1
IV. EMPLOYEE ELECTION REGARDING PARTICIPATION . . . . . . . . 2
V. PARTICIPATION IN EXPLORATION, DEVELOPMENT
AND RESERVE ACQUISITIONS . . . . . . . . . . . . . . . . . 2 - 3
A. General . . . . . . . . . . . . . . . . . . . . . . . 2
B. Indirect Ownership - General . . . . . . . . . . . . . 2 - 3
C. Indirect Ownership - Contributions and
Distributions . . . . . . . . . . . . . . . . . . . . 3
VI. INTERPRETATIONS. . . . . . . . . . . . . . . . . . . . . . 3 - 4
VII. AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . 4
VIII. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . 4
PLAN A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 - 7
I. ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . 4
II. PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . 4 - 5
A. Commencement . . . . . . . . . . . . . . . . . . . . . 4 - 5
B. Termination . . . . . . . . . . . . . . . . . . . . . 5
III. PARTICIPATING EMPLOYEE BENEFITS . . . . . . . . . . . . . 5 - 7
A. The Royalty Benefit Fund . . . . . . . . . . . . . . . 5 - 6
B. Allocations and Distributions From
the Fund . . . . . . . . . . . . . . . . . . . . . . 6 - 7
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
PLAN B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 - 16
I. ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . 7
II. PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . 7 - 8
A. Commencement . . . . . . . . . . . . . . . . . . . . . 7
B. Termination . . . . . . . . . . . . . . . . . . . . . 8
C. Committee on Executive Organization . . . . . . . . . 8
D. Vested Interests . . . . . . . . . . . . . . . . . . . 8
III. PARTICIPATION INTERESTS . . . . . . . . . . . . . . . . . 8 - 10
A. Description of the Interest . . . . . . . . . . . . . 8 - 9
B. Allocation of Aggregate Participation
Interests Among Participating Employees. . . . . . . . 9
C. Assignments . . . . . . . . . . . . . . . . . . . . . 10
IV. RECEIPTS AND DISBURSEMENTS . . . . . . . . . . . . . . . 10
V. COMPANY'S PREEMPTIVE RIGHT TO PURCHASE . . . . . . . . . . 11
VI. COMPANY'S RIGHT TO REPURCHASE . . . . . . . . . . . . . . 12 - 13
VII. COMPANY'S RIGHT TO SELL . . . . . . . . . . . . . . . . . 13 - 15
VIII. RIGHT OF OWNER TO REDEMPTION BY THE COMPANY . . . . . . . 15 - 16
</TABLE>
<PAGE> 3
Dear Fellow Employee:
In recognition of the contribution made by the employees of Northern Michigan
Exploration Company since the Company's inception in 1967, and in order to
increase the employees' interest in the daily activities of the Company and
promote productivity, the Board of Directors approved an Employee Well
Participation Program effective April 1, 1980.
The Board has elected to extend the term of the Program for an additional
period beginning April 1, 1990 and ending March 31, 1995. However, the Board
has the authority to terminate the Program earlier, or to extend it beyond
March 31, 1995, at its discretion.
In addition to extending the Program for another five-year term, the Board has
also authorized changes for wells spudded and reserves acquired after April 1,
1990.
The remainder of this booklet explains in detail how the Program, as amended,
affects you personally. Any questions you have pertaining to the Program
should be addressed to your Supervisor, or the Plan Administrator.
This booklet, which is for your own personal use, should be treated as
CONFIDENTIAL.
Very truly yours,
/s/ R. J. Burgess
R. J. Burgess
President and Chief Executive Officer
April 1, 1990
<PAGE> 4
NORTHERN MICHIGAN EXPLORATION COMPANY
EMPLOYEE WELL PARTICIPATION PROGRAM
THE PROGRAM
GENERAL TERMS AND PROVISIONS
I. GENERAL
In order to award Company employees who have made a significant
contribution to the success of Company operations and to create
meaningful incentives for continued employee performance at a high level
of competence, professionalism and productivity, the Company hereby
establishes this Employee Well Participation Program.
The Program consists of Plan A and Plan B, the terms and conditions of
which are more specifically set forth below. Participation in the
Plans is determined by eligibility and participation criteria
specifically set forth.
II. PROGRAM ADMINISTRATOR
A Program Administrator shall be appointed by the President of the
Company, and it shall be his responsibility to administer this Program
and, among other things to:
(a) Effect the assignments contemplated in the Program;
(b) Establish and oversee accounting procedures, have charge of
collections and disbursements, and maintain all necessary or
appropriate books and records regarding the Program;
(c) Keep employees informed and respond to questions regarding the
Program, its operation and its effect on any individual employee;
(d) Acting in conjunction with the President of the Company, interpret
and apply the provisions of the Program;
(e) Report to the President and Board of Directors regarding the Program;
(f) Perform such other tasks as may be delegated to him by the Board of
Directors or the President of the Company.
III. TERM
This Program shall commence on April 1, 1980 and terminate on March 31,
1995 unless terminated earlier by action of the Board of Directors of the
Company.
<PAGE> 5
2
IV. EMPLOYEE ELECTION REGARDING PARTICIPATION
Employees eligible to participate in Plan A or B may at any time elect
not to participate in either Plan. The election shall be exercised by
providing written notice thereof to the Program Administrator and shall
be effective on the day after such notice is received by the Program
Administrator. Eligible employees who have elected not to participate in
a Plan may at any time revoke that election with respect to future
participation by giving the Program Administrator written notice of the
revocation, which shall be effective on the day after receipt by the
Program Administrator.
V. PARTICIPATION IN EXPLORATION, DEVELOPMENT AND RESERVE ACQUISITIONS
A. General
This Program is intended to give certain key Company employees a direct
financial stake in the Company's oil and gas activities. For the period
from April 1, 1980 through March 31, 1985, the working interests used to
determine employee benefits under Plans A and B shall not include any
Company working interests acquired in fully developed properties,
except where by farmout or other like transaction the Company has
conveyed an undeveloped property retaining the right thereafter to
acquire a working interest in such property. By virtue of amendments to
this Program authorized by the Company's Board of Directors, the working
interests used to determine employee benefits under Plans A and B shall
include Company working interests in oil and gas reserves acquired by the
Company after April 1, 1985, whether acquired or held by the Company
directly or indirectly. Any questions as to whether, or the extent to
which the Company's working interest in any property is subject to Plan A
or B shall be decided exclusively by and in the sole discretion of the
Company.
B. Indirect Ownership - General
As to indirect ownership of oil and gas property, this Program applies to
working interests held by another corporation, partnership, joint venture
or other entity (hereafter referred to as "intermediate company") in
which the Company owns, directly or indirectly, a significant interest.
A significant interest is defined as an interest entitling the Company:
(1) in the case of stock ownership, to exercise voting rights
equivalent to at least 10% of voting rights possessed by all stockholders
of the corporation who possess such rights; or (2) in the case of other
forms of ownership, to share in at least 10% of profits and losses or
revenue of the intermediate company. In cases where working interests
are more than one level removed from direct Company ownership, as in the
case where the Company owns an interest in another company which in turn
owns an interest in the company which directly holds the properties,
whether the Company has a significant interest in the intermediate
company which directly owns the property shall be determined by
multiplying the Company's interest in its directly owned company by that
company's interest in the intermediate
<PAGE> 6
3
company directly owning the property. The same procedure shall be
followed for all levels of ownership regardless of how far removed from
the Company is direct ownership of the working interests. The Company's
interest shall be considered significant if the product of the
multiplication is 10% or more (the product and the Company's ownership
interest in the intermediate company are hereafter referred to as the
Company's "deemed ownership interest"). A working interest in an
oil and gas well will be subject to the Program to the extent of the
Company's deemed ownership interest provided it equals or exceeds 10% in
the intermediate company directly owning the working interest. The deemed
ownership interest shall be determined as of the spud or acquisition
date, as the case may be, of the subject well. Thus, working interests
subject to the Program are determined by multiplying the Company's deemed
ownership interests by the actual working interests of the intermediate
companies which directly own such interests. Such working interests
which are subject to the Program are hereinafter referred to as "deemed
working interests."
C. Indirect Ownership - Contributions and Distributions
The amount to be contributed and distributed under Plans A and B in
connection with deemed working interests owned indirectly by the Company
shall be based upon production revenue, cash or property derived from and
allocated to the Company's deemed working interests. The Company shall
make contributions and distributions based upon any production revenue,
cash or property accruing with respect to its deemed working interests
whether or not actually distributed by the intermediate company to the
Company. It is recognized that the accrual of production revenue, cash
or property requiring the Company to make contributions and distributions
can arise from different types of transactions including, by way of
illustration and not limitation, sales of production accruing to the
deemed working interests, sales of reserves associated with the deemed
working interests, and sales of interests in any intermediate companies
resulting in reduction in the Company's deemed ownership interests.
Certain transactions engaged in by intermediate companies or the Company
may result in the reduction or elimination of deemed working interests
subject to Plans A and B. By way of illustration and not limitation,
such transactions include sales by intermediate companies of reserves
associated with deemed working interests and sales of the Company's
interests in intermediate companies. Based on the consideration received
by the Company or an intermediate company in connection with any such
transaction the Company shall make allocations and distributions under
Plans A and B as though the deemed working interests so sold or reduced
were working interests subject to Plans A and B sold directly by the
Company.
<PAGE> 7
4
VI. INTERPRETATIONS
All questions regarding the interpretation or application of the
Employee Well Participation Program shall be resolved as determined by
the Company, and such decisions shall be final and binding on Program
participants provided they are made in good faith.
VII. AMENDMENTS
This Employee Well Participation Program may be amended or terminated,
in any way or at any time, by unilateral action of the Company. The
Company also reserves the right at any time with respect to any
properties to reduce prospectively its contribution to the Plan A
fund or to reduce prospectively the Plan B interests to be granted. No
reduction of interests to be assigned or granted under Plan B shall have
any effect whatsoever on interests with respect to which the entitlement
to an assignment has theretofore accrued, or on disbursements thereon.
VIII. GOVERNING LAW
The provisions of this Employee Well Participation Program, its
operations and effect shall be governed and construed under the laws
of the State of Michigan.
PLAN A
I. ELIGIBILITY
All Executive, Administrative and Professional Employees, as defined in
NOMECO's General Orders, as they may be amended from time to time, shall
be eligible to participate in this Plan A (hereinafter such employees
shall be referred to as "Eligible Employees"), provided such employees
have been employed by the Company for a six-month period immediately
preceding the date of commencement of their participation in this Plan A
as more specifically set forth below.
Notwithstanding the foregoing, Plan B Eligible Employees shall not be
Eligible Employees for purposes of this Plan A as to the Company's
working interests or deemed working interests in wells spudded on or
after April 1, 1990 or acquired as part of a producing property or
reserve acquisition on or after such date.
II. PARTICIPATION
A. Commencement
With respect to Eligible Employees, participation in this Plan A shall
commence on the first day of the calendar month immediately following a
six-month period during which entire period the Eligible Employee has
been employed by the Company. With respect to Eligible Employees who
have been employed by the Company for a six-month period, or more,
immediately preceding the commencement of this Plan A, participation in
<PAGE> 8
5
this Plan A shall commence on the commencement date of Plan A.
Notwithstanding anything in this Plan to the contrary, an Eligible
Employee may commence participation in Plan A at any time upon approval
of the President of the Company. Eligible Employees whose
participation in this Plan A has commenced and has not terminated are
hereinafter referred to as "Participating Employees."
B. Termination
Participation in this Plan A shall terminate immediately upon employee's
termination of his employment with the Company, employee ceasing to be an
Eligible Employee, or as provided with respect to revocation by an
employee of his right to participate.
III. PARTICIPATING EMPLOYEE BENEFITS
A. The Royalty Benefit Fund
There shall be established on the books and records of the Company a
Royalty Benefit Fund ("Fund") to be administered by the Program
Administrator. During such times as this Plan is in effect the
Company will contribute to the Fund, from time to time, but not less than
quarterly. The amount to be contributed to the Fund shall be the sum of
the following:
(1) An amount equivalent to the proceeds that would arise during the
period commencing April 1, 1990 or the last contribution date,
whichever is later, and ending with the current contribution date,
from an overriding royalty of .0025 (.25%) of the Company's
working interests and deemed working interests in wells spudded
on or after April 1, 1990 or acquired as part of a producing
property or reserveacquisition on or after such date.
(2) An amount equivalent to the proceeds that would arise
during the period commencing April 1, 1985 or the last
contribution date, whichever is later, and ending with the
current contribution date, from an overriding royalty of .005
(.5%) of the Company's working interests and deemed working
interests in wells spudded on or after April 1, 1985 and before
April 1, 1990, or acquired during such period as part of a
producing property or reserve acquisition.
(3) An amount equivalent to the proceeds that would arise during the
period commencing April 1, 1980 or the last contribution date,
whichever is later, and ending with the current contribution date,
from an overriding royalty of .01 (1%) of the Company's working
interests in wells spudded on or after April 1, 1980 but before
April 1, 1985.
<PAGE> 9
6
The contribution amount shall bear the overriding royalty's share of
production, severance, mineral ad valorem, windfall profits and other
like taxes, but shall bear no other costs or charges. The contribution
date shall be as determined by the Program Administrator. Actual cash
contributions to a separately maintained cash Fund shall not be made,
but rather the Program Administrator shall record, and the books
and records maintained by the Program Administrator shall reflect, the
asset value of the Fund and the contribution amounts allocated to the
Fund from time to time.
Participating Employees shall have no rights in or to the Fund, its asset
value, or any Company assets used to determine such asset value.
Participating Employees' sole rights shall be as set forth below with
respect to distributions of the allocated asset value of the Fund. No
interest shall accrue on such asset value.
In the event of the sale of a working interest or deemed working interest
in a well subject to this Plan A, an amount shall be contributed to
the Fund as determined in good faith by the Company in accordance with
the following:
(1) the amount or value of consideration realized from the sale
shall be multiplied by a percentage being the overriding royalty
percentage, associated with the working interest sold, used to
compute Fund contributions with respect to the well; and
(2) the result shall be increased by such amount as determined by the
Company to reflect the non-cost bearing nature of an overriding
royalty interest and the correspondingly higher relative value
of an overriding royalty interest compared to an equivalent
working interest.
If the transaction in which the sale occurs involves multiple wells and
the consideration is not specifically allocated among the wells,
the Company shall perform its own allocation for purposes hereof and such
allocation, provided it is made in good faith, shall be final.
B. Allocations and Distributions From the Fund
From time to time as determined by the President of the Company, but no
less than quarterly, the asset value of the Fund shall be allocated to
then-Participating Employees and cash disbursements made to those
employees based upon the allocated asset value. The President shall
determine the allocation date, subject to the minimum quarterly
allocation requirement, and on each such date the asset value of the Fund
shall be allocated among Participating Employees who are such on the
allocation date, based upon their base salaries determined on such date
and number of years each employee has been a Participating Employee. The
allocation multiplier shall be determined by multiplying each
Participating Employee's base salary by his years as a Participating
Employee and dividing the
<PAGE> 10
7
product by the sum of the products of each Participating Employee's base
salary multiplied by his years as a Participating Employee. As used
herein "base salaries" shall mean the annualized salary of each
Participating Employee determined as of December 31 of the preceding
calendar year plus one-half (1/2) of the maximum bonus such employee is
qualified to receive on such date pursuant to Board of Directors
Resolution dated February 7, 1989 (and as may be amended by the Board of
Directors) regarding maximum bonus. With respect to Participating
Employees who were not employed on December 31 of the preceding calendar
year, "annual salary" shall be the salary received or to be received by
such employee for the first full month of employment, multiplied by
twelve (12).
As used herein "years as a Participating Employee" shall mean the number
of full years, not to exceed 10, as a Participating Employee, determined
as of December 31 of the preceding calendar year; except that a
Participating Employee will in any event be assumed to have at least one
(1) year as a Participating Employee for purposes of calculating
allocations under this Plan.
As soon as practicable after the allocation date, cash distributions
shall be made to those persons to whom the Fund asset value is allocated
as set forth above. The distribution to each such person shall be an
amount equal to his portion of the allocated asset value (reduced in
accordance with governmental withholding obligations of the Company)
determined as of the allocation date.
PLAN B
I. ELIGIBILITY
All of those Executive, Administrative and Professional Employees (as
defined in NOMECO's General Orders, as they may be amended from time to
time) designated by the President, from time to time, and approved as may
be required under Article II, Section C, below, shall be eligible
to participate in this Plan B (hereinafter such employees shall be
referred to as "Plan B Eligible Employees"). Executive, Administrative
and Professional Employees may acquire or lose eligibility to participate
in this Plan B as the President shall in his sole discretion determine
from time to time, subject to Article II, Section C, below.
II. PARTICIPATION
A. Commencement
Plan B Eligible Employees shall commence participation in this Plan B at
such time as the President of the Company shall designate, subject to
Article II, Section C, below. Plan B Eligible Employees whose
participation in this Plan B has commenced and has not terminated are
hereinafter referred to as "Plan B Participating Employees."
<PAGE> 11
8
B. Termination
Subject to Section C below, participation in this Plan B shall terminate
when and as the President of the Company so directs but in any event the
participation shall terminate immediately upon employee's termination of
his employment with the Company, employee ceasing to be a Plan B Eligible
Employee, or as provided with respect to revocation by an employee of his
right to participate.
C. Committee on Executive Organization
Effective April 1, 1990 as to wells spudded and working and deemed
working interests in wells capable of producing acquired on and after
such date, the decisions of the President of the Company with respect
to eligibility of each employee to participate in this Plan B, the
commencement and termination date for such participation, and
allocation of the aggregate Participation Interest among Plan B
Participating Employees shall be subject to review and approval of the
Committee on Executive Organization of the Company's Board of Directors.
Such review and approval shall occur no less frequently than annually.
D. Vested Interests
No termination or modification of this Plan, termination of an employee's
participation hereunder or change in the allocation of the aggregate
Participation Interests among Plan B Participating Employees shall reduce
or impair any interests or benefits accruing prior to the action
effecting such termination or change.
III. PARTICIPATION INTERESTS
A. Description of the Interests
Subject to Section C below, during such time as this Plan B is in
effect, the Company will assign to Plan B Participating Employees:
(1) an overriding royalty in the aggregate amount of one percent (1%)
of the Company's working interest or deemed working interest in
each well (and the related drilling unit as designated by the
Company) in which the Company owns, directly or indirectly, or
has the right to earn, directly or indirectly, a working interest
or deemed working interest provided such well is spudded after
April 1, 1980 and before April 1, 1990 and, in the case of wells
capable of producing at the time the Company acquires its working
interest or deemed working interest, provided such acquisition
occurs on or after April 1, 1985 and before April 1, 1990.
<PAGE> 12
9
(2) an overriding royalty in the aggregate amount of one and three
quarters percent (1.75%) of the Company's working interest or
deemed working interest in each well (and the related drilling
unit as designated by the Company) in which the Company owns,
directly or indirectly, or has the right to earn, directly or
indirectly, a working interest or deemed working interest,
provided such well is spudded on or after April 1, 1990 or, in the
case of wells capable of producing at the time the Company
acquires its working interest or deemed working interest, provided
such acquisition occurs on or after April 1, 1990.
Each Plan B Participating Employee's allocable share (as defined in
Section B, below) of the Participation Interest is referred to hereafter
as "Employee Participation Interest."
The overriding royalty to be assigned shall bear its proportionate share
of production, severance, mineral ad valorem, windfall profits and
other like taxes, but shall bear no other costs or charges.
B. Allocation of Aggregate Participation Interests
Among Plan B Participating Employees
As to all wells spudded on or after April 1, 1980 and before April 1,
1990 and as to working interests and deemed working interests acquired on
or after April 1, 1985 and before April 1, 1990 in wells capable of
producing at the time of acquisition, the aggregate Participation
Interest to be assigned by the Company in each well shall be
allocated among Plan B Participating Employees who are such on the spud
or acquisition date of the relevant well in proportion to their base
salaries, as defined below. As to all wells spudded on or after April 1,
1990 and as to working interests and deemed working interests acquired on
or after April 1, 1990 in wells capable of producing at the time of
acquisition, the aggregate Participation Interest assigned by the Company
in each well shall be allocated among Plan B Participating Employees who
are such on the spud or acquisition date of the relevant well in
proportion to their base salaries, or such fractional portion thereof as
the President may determine separately for each Plan B Participating
Employee; such allocation to be subject to review and approval by the
Committee on Organization of the Company's Board of Directors.
As used herein "base salaries" shall mean the annualized salary of each
Plan B Participating Employee determined as of December 31 of the
preceding calendar year plus one-half (1/2) of the maximum bonus such
employee is qualified to receive on that date pursuant to Board of
Director Resolution dated February 7, 1989 (and as may be amended
by the Board of Directors) regarding maximum bonus. With respect to Plan
B Participating Employees who were not employed on December 31 of the
preceding calendar year, "annual salary" shall be the salary received or
to be received by such employee for the first full month of employment
multiplied by twelve (12).
<PAGE> 13
10
C. Assignments
Each Plan B Participating Employee's allocated share of the aggregate
Participation Interest in each Company well subject to this Plan B shall
be represented by an assignment, in recordable form to the extent
practicable, to the Plan B Participating Employee of his Employee
Participation Interest. Assignments shall occur periodically, in such
form and at such times as determined by the Program Administrator, and
shall be effective as of the spud date for the well or such later date as
the working interest or deemed working interest is first acquired by the
Company. For purposes of administrative efficiency, the Program
Administrator may determine to forego preparation and delivery of
assignments to Plan B Participating Employees entitled thereto
provided: (i) appropriate entries in the Company's books and records are
made to reflect such entitlement and (ii) actual assignments are made
promptly upon written request by a person entitled thereto. All
employees who are Plan B Participating Employees as of the spud date
for a well or acquisition date of a working interest or deemed working
interest shall be entitled to an assignment of their Employee
Participation Interest in such well, whether or not they are Plan B
Participating Employees on the date the assignment is actually made.
Notwithstanding anything to the contrary herein, as to deemed working
interests and other working interests, the governing instruments or
applicable law, rule, regulation or governmental policy with
respect to which prohibit or restrict the assignments contemplated
hereby, the overriding royalty to which Plan B Participating Employees
are entitled shall be evidenced by an instrument to be delivered to the
person entitled thereto in a form considered appropriate by the Company
in its sole discretion (such instruments are referred to collectively
with actual assignments as "assignments").
IV. RECEIPTS AND DISBURSEMENTS
The Company, through the Program Administrator, shall act as agent for
purposes of receiving and disbursing proceeds on Employee Participation
Interests, and each person, by accepting his Employee Participation
Interests, agrees to such agency and agrees to execute any instruments
necessary or appropriate to implement it.
The Company shall not be obligated to recognize or distribute proceeds to
a transferee of an Employee Participation Interest until adequate proof
of such transfer in a form satisfactory to the Company has been provided
to the Company.
The Company may at any time, by giving notice to Employee Participation
Interest owners, terminate the agency created hereunder and the interest
owners shall execute such instruments necessary or appropriate to effect
the termination.
<PAGE> 14
11
V. COMPANY'S PREEMPTIVE RIGHT TO PURCHASE
No Employee Participation Interest acquired hereunder shall be sold to
any person or entity other than the Company except as provided herein.
In the event an interest owner receives a bona fide offer to purchase
any Employee Participation Interest, he shall give the Company written
notice thereof with a copy of the offer which shall be in writing setting
forth the specific terms thereof. The notice shall be addressed to the
Program Administrator and shall be deemed given when received by him.
Within 20 days the Company shall determine whether to exercise its
preemptive right to purchase the subject Employee Participation Interest.
If the Company elects to purchase the Employee Participation Interest it
shall provide the selling interest owner with written notice thereof (at
the address which the selling interest owner shall set forth in his
notice to the Company) within such 20 day period. The purchase price and
other terms of purchase by the Company shall be the same as those
contained in the written offer obtained by the selling interest owner,
unless the parties agree otherwise.
If the Company elects not to exercise its preemptive right to purchase,
the transfer of such interest pursuant to the bona fide offer shall occur
within 60 days of selling interest owner's giving notice of the bona fide
offer to purchase; otherwise the Company's preemptive right to purchase
shall be reinvoked with respect to such Employee Participation Interest,
and all provisions hereof shall apply with respect to any disposition of
such interest.
Nothing in this Plan B shall be deemed to authorize an interest owner or
require the Company to disclose in any manner to any person or entity
trade secrets or other information of a confidential nature, and
disclosure of information pertaining to the value of Employee
Participation Interests shall be completely within the discretion of the
Company. The Company may impose such restrictions on the further
communication of any such information as it may deem appropriate.
In the event of a sale hereunder to a third party, the Company shall not
be required to recognize such sale unless and until it is provided
with satisfactory proof thereof and such other information as it may
reasonably require.
Employee Participation Interests shall be subject to Company's preemptive
right to purchase as provided herein during the lifetime of the person
first acquiring those interests hereunder and for twenty-one (21)
years thereafter, but not longer.
<PAGE> 15
12
VI. COMPANY'S RIGHT TO REPURCHASE
As used herein the term "Repurchase" means a concurrent purchase by the
Company of the entirety of the Employee Participation Interests of all
owners of such interests in one or more wells subject to this Plan B.
Subject to the terms and conditions set forth herein, the Company may in
its sole discretion so Repurchase provided each Repurchase shall be for
the sole purpose of reducing or restricting administrative costs
incurred by the Company in connection with Plan B by eliminating from
Plan B through Repurchase the less significant well interests subject to
the Plan.
Repurchases hereunder shall occur no more frequently than once in each
twelve (12) month period.
A Repurchase shall not cause a reduction of more than five percent (5%)
in the future monthly distributions to owners of Employee Participation
Interests considered in the aggregate from all wells subject to Plan B.
For purposes of determining compliance with that limitation, aggregate
distributions (actual or estimated, as the Company may elect) for the
three (3) calendar months immediately preceding the month of Repurchase
shall be compared to such distributions for the same period computed as
if the Repurchase were in effect during that period. If the former
amount does not exceed the latter by more than five percent (5%), the
Repurchase shall be deemed to comply with the five percent (5%)
limitation. Estimates and computations shall be performed by the
Company in good faith, and the results shall be final.
The amount to be paid owners of Employee Participation Interests so
Repurchased shall be based upon:
(a) the reserves assigned to those interests in the Company's most
recent Company-wide reserve evaluation, provided such evaluation
(i) has an effective date prior to the Repurchase, and
(ii) is prepared by Lee Keeling & Associates, Inc. or
another petroleum engineering firm of comparable
standing, or is prepared by the Company and reviewed
and approved by any such petroleum engineering firm;
and
(b) current prices for oil and gas, as determined by the Company in
good faith, which shall for this purpose as nearly as
practicable approximate the weighted average prices actually
received by the Company for sales of its oil and gas produced
from the properties in question during the third full calendar
month preceding the month in which the Repurchase occurs.
<PAGE> 16
13
The payment amount for Repurchased interests will be computed by
applying the price as described in sub-paragraph b above to the
reserve volumes, determined in accordance with sub-paragraph a above,
assigned to the Repurchased interests. The resulting amount will then
be reduced by appropriate production taxes, as determined in good
faith by the Company, and discounted at a rate of 10% per annum based
upon the production schedule used in the Company's reserve evaluation.
The result will be the amount to be paid to owners for Repurchased
interests. A Repurchase shall be deemed to occur in the month in
which such payment is made.
Owners will be entitled to receive production revenue associated with
their Repurchased interests provided such revenue is actually received
by the Company prior to the beginning of the third calendar month
following the month of Repurchase. Owners shall also be charged or
credited with all revenue adjustments associated with the Repurchased
interests provided such adjustments are reflected on statements from
the party disbursing to the Company and received by the Company prior
to the beginning of the third calendar month following the month of
Repurchase. From that date forward the Company will bear any negative
adjustments and will receive for its own exclusive benefit any revenue
distributions or positive adjustments on revenue distributions regard-
less of the period to which the adjustments relate.
Nothing herein shall obligate the Company at any time to exercise its
Repurchase rights hereunder. If, however, the Company does exercise
its right to Repurchase it shall notify owners subject to Repurchase
at least fifteen (15) days prior to the month in which the Company
expects the Repurchase to occur, identifying in such notification the
wells the Company expects at that time to be included in the
Repurchase.
Employee Participation Interests shall be subject to Company's right
to Repurchase as provided herein during the lifetime of the person
first acquiring such interests and for twenty-one (21) years there-
after, but not longer.
VII. COMPANY'S RIGHT TO SELL
As used herein the term "Sale" means a concurrent sale by the Company
of all or a portion of its working interest in one or more wells
subject to this Plan B along with a sale of the Employee Participation
Interests associated with such working interests so sold.
Subject to the terms and conditions set forth herein, the Company may
in its sole discretion engage in such Sale transactions. The
aggregate effect of all Sales occurring within any twelve month period
shall not cause a reduction of more than ten percent (10%) in future
monthly distributions to owners of Employee Participation Interests
considered in the aggregate from all wells subject to this Plan B.
(Hereinafter such limitation is referred to as "Sales Limitation.")
For purposes of determining compliance with the Sales Limitation,
<PAGE> 17
14
aggregate distributions (actual or estimated, as the Company may
elect) for the twelve calendar months immediately preceding the month
of the effective date of the Sale under consideration shall be
compared to such distributions for the same period computed as if the
subject Sale and all other Sales occurring in such period were in
effect. If the former amount does not exceed the latter by more than
ten percent (10%) the Sale shall be deemed to comply with the Sales
Limitation.
The amount to be paid each owner of an Employee Participation Interest
so Sold shall be determined in good faith by the Company in accordance
with the following:
(i) the amount or value of consideration realized from the
Sale of the working and Employee Participation
Interests in a well shall be multiplied by a
percentage, being that owner's Employee Participation
Interest in the well associated with the working
interest Sold; and
(ii) the result shall be increased by such amount as
determined by the Company to reflect the non-cost
bearing nature of an overriding royalty interest and
the correspondingly higher value of an overriding
royalty interest compared to an equivalent working
interest.
If the transaction in which the Sale occurs involves multiple wells
and the consideration is not specifically allocated among the wells,
the Company shall perform its own allocation for purposes hereof and
such allocation, provided it is made in good faith, shall be final.
Nothing herein shall restrict the right of the Company to sell, free
of the Sales Limitation, working interests subject to this Plan B
provided the transferee expressly agrees, for itself, its successors
and assigns, in the instrument effecting the transfer to accept such
interests subject to the Employee Participation Interests pertaining
thereto, and to discharge all obligations accruing thereon under this
Plan B from and after the effective date of the transfer. Company
shall provide at least thirty (30) days written advance notice of any
such progressed transfer to all owners of Employee Participation
Interests affected thereby.
Subject to Article V, Section C, General Terms and Provisions, nothing
herein shall, except as specifically set forth below, restrict the
Company's right to reduce deemed working interests and the associated
Employee Participation Interests, whether through sales of interests
in intermediate companies, sales by intermediate companies of reserves
associated with deemed working interests or any other transaction. If
at the time of any such proposed transaction the Company has a
"controlling interest," as defined below, in the entity directly
owning the well(s) as to which the deemed working interest(s) will be
reduced by the transaction, then the Sales Limitation set forth above
shall be applicable to the transaction, taking into account Sales of
<PAGE> 18
15
working interests and reductions of deemed working interests and
associated Employee Participation Interests occurring within the
preceding twelve (12) calendar months. To the extent the transaction
does not comply with the Sales Limitation applicable thereto the
Company shall, prior to consummation of the transaction, cause or
require the entity(ies) which will directly own the subject working
interests after the transaction is completed, to agree expressly in
writing, for the benefit of the owners of Employee Participation
Interests affected thereby, that:
(i) the subject working interests are and shall remain
subject to Employee Participation Interests pursuant
to this Plan B;
(ii) such entity(ies) will discharge all obligations in
connection with such Employee Participation Interests
under this Plan B from and after the effective date of
the transaction, including distribution of revenue
associated therewith, provided that in lieu of
distributing such revenue directly to owners of such
interests, the revenue may be distributed to the
Company for redistribution by it among the owners
entitled thereto; and
(iii) such entity(ies) will cause any subsequent transferees
of any such working interests to agree in writing to
comply with the provisions hereof.
As used herein, the term "controlling interest" means an interest,
whether held directly or indirectly, in an entity entitling the
Company, acting alone, effectively to control or supervise the
business activities of the entity or to remove and replace those who
exercise such control or supervision.
VIII. RIGHT OF OWNER TO REDEMPTION BY THE COMPANY
In the event an interest owner desires to sell his Employee Participa-
tion Interests (or any part thereof) to the Company, he shall provide
the Program Administrator with written notice thereof, and the Company
shall thereupon be obligated to purchase the interests offered for
sale. The offer to sell may be withdrawn at any time prior to
consummation of the sale.
The purchase price to be paid in full by the Company at the closing
shall be the total current value of future hydrocarbon sales
attributable to the Employee Participation Interests to be sold. The
total current value of future hydrocarbon sales shall be based upon
estimated hydrocarbon reserves established by the Company in its most
recent annual reserve study and current selling prices actually being
received for those reserves. Estimated hydrocarbon reserves used to
determine value shall be adjusted, as the Company in its sole
discretion may determine, to reflect production and other events
affecting hydrocarbon reserves between the date of the annual reserve
<PAGE> 19
16
study and the closing date for the sale of the interests. The value
shall also be adjusted by discount and price escalation factors
determined by the Company to be reasonable.
In case of dispute as to the Company's determination of value, the
matter shall be referred for resolution to a reputable firm engaged in
the business of appraising oil and gas reserves selected by the
Company. The decision of such firm shall be binding. The interest
owner shall bear two-thirds of the cost of such appraisal.
The closing date for the sale of the Employee Participation Interests
shall be as the Company and the selling interest owner may determine
but in no event later than sixty (60) days from the date of notice by
the selling interest owner of his intention to exercise his rights
hereunder, or sixty (60) days after completion of the Company's latest
reserve study in those instances where the interests to be sold are
not covered by a previous Company reserve study.
This Right to Redemption shall be a personal obligation between the
Company and the person first acquiring the Employee Participation
Interests, and the benefit thereof shall not extend to the succes-
sors or assigns of such person.
Amended as of April 1, 1985 and April 1, 1990
<PAGE> 1
EXHIBIT 10.3
REIMBURSEMENT AGREEMENT
AGREEMENT between CMS ENERGY CORPORATION ("CMS Energy") and CMS NOMECO OIL &
GAS CO. ("CMS NOMECO") dated as of December 9, 1994 relating to the
reimbursement of certain costs incurred by CMS Energy with respect to a letter
of credit provided for the benefit of CMS NOMECO.
1. CMS Energy has arranged for the issuance of a Standby Letter Credit in the
amount of $46,678,333 (or such lower amount as may be called for by the
agreement with the beneficiary) in favor of Banco Latino Americano de
Exportaciones S.A. to secure CMS NOMECO's performance under the Operating
Services Agreement with respect to the Colon Unit, Venezuela (the "Letter
of Credit").
2. In consideration for arranging the issuance of the Letter of Credit, CMS
NOMECO, together with its successors and assigns, hereby agrees:
(i) to reimburse CMS Energy on demand on and after each date on which a
draw has been made under the Letter of Credit a sum equal of the
amount of any such draw plus interest on such amount from the date of
such draw until repayment in full at a fluctuating interest rate per
annum equal to the rate of interest announced publicly by Union Bank
in Los Angeles, California as the Union Bank Reference Rate, and
(ii) to pay to CMS Energy quarterly, in arrears, a fee equal to 212.5 basis
points (2.125%) per annum multiplied by the average face amount of the
Letter of Credit for such quarter.
3. This Agreement embodies the entire agreement and understandings between CMS
Energy and CMS NOMECO (or any subsidiary to which the underlying interest
may be assigned) and supersedes all prior agreements and understandings
between CMS Energy and CMS NOMECO relating to the subject matter hereof.
4. This Agreement shall be governed by and construed in accordance with the
laws of the State of Michigan.
IN WITNESS WHEREOF, CMS Energy and CMS NOMECO have executed this Agreement
as of the date first written above.
CMS ENERGY CORPORATION CMS NOMECO OIL & GAS CO.
By: /s/ T.A. McNish By: /s/ Paul E. Geiger
-------------------------- ------------------------------
Thomas A. McNish Paul E. Geiger
Title: Vice President & Secretary Title: Vice President, Secretary & Treasurer
-------------------------- -------------------------------------
<PAGE> 1
CMS NOMECO OIL & GAS CO. EXHIBIT 10.4
Key Employee Incentive Compensation Plan
INTRODUCTION
The objective of the Plan is to improve the performance of the Company by:
1. Providing compensation levels that will permit the Company to attract,
retain and motivate highly competent officers, key executives and other
key employees, and
2. Provide an incentive to officers, key executives and other key employees
based on both Company and individual performance.
This Plan replaces the Key Employee Incentive Compensation Plan which was
approved by the Board of Directors on December 1, 1994.
TERMS OF THE PLAN
1. The employees eligible for the Plan and their standard bonus as a
percentage of their year-end salary are as follows:
<TABLE>
<CAPTION>
STANDARD
EMPLOYEE BONUS
--------------------------------------------------------- --------
<S> <C> <C>
a. President 50%
b. Executive Vice President and General Counsel 45%
c. Other officers and key executives as designated
by the President 40%
d. Other key lower level employees as designated by
the President 20%
</TABLE>
2. The amount of the standard bonus which is to be paid to each employee will
be determined by the Committee on Executive Organization in early February
of the year following the year in which the bonus is earned. The amount
so determined will be presented to the Board of Directors for their
approval.
A. The calculation of bonuses will be weighted for the following goals
which shall be established at the time the operating and capital
budgets are approved for the applicable year:
(1) 80% based on the ratio of actual pretax operating income to "Goal"
pretax operating income, said ratio not to exceed 125%
(2) 20% based on the ratio of reserves added per capital dollar
expenditure (includes drilling and acquisitions of developed
properties) to "Goal" reserves added per capital dollar
expenditure, said ratio not to exceed 125%.
<PAGE> 2
TERMS OF THE PLAN (CON'T)
B. The average, stated as a percentage, of the ratios set forth in
subparagraphs 2A(1) and 2A(2) above will determine the percentage of Bonus
paid in accordance with the following:
<TABLE>
<CAPTION>
% OF GOAL ACHIEVEMENT % OF STANDARD BONUS
--------------------- -------------------
<S> <C> <C>
Less than 80% 0
80% 50%
90% 75%
100% 100%
110% 110%
120% 120%
125% or more 125%
</TABLE>
In the event the average percentage of goal achievement falls within a
percentage interval shown on the above table, the corresponding
percentage of standard bonus shall be computed by interpolation.
3. The appropriate bonuses as determined by the Committee on Executive
Organization and approved by the Board of Directors will be paid in the
first quarter of the year following the year in which the bonus is earned.
4. Payments made under this program will be considered as earnings for the
Supplemental Employee Retirement Plan but not for purposes of the
Employees' Savings Plan, Pension Plan, or other employee benefit programs.
5. A participant at any time prior to the beginning of a performance year may
elect to irrevocably defer payment for that year, through notice to the
Company on a form approved by the Company, of all or 1/2 of any incentive
compensation which would otherwise be paid to him as a result of this
Employee Incentive Compensation Plan, to a time following his retirement
with benefits under the Pension Plan for Employees of Consumers Power
Company (hereinafter "Retirement"). As part of such election, the
participant may elect that the entire amount deferred be paid in the
January following his retirement or that such amount be paid in five
annual installments beginning in January of the first year following his
retirement with 1/5 of the balance being paid that January, 1/4 of the
balance in January of the second year following his retirement, 1/3 of the
balance in January of the third year following his retirement, 1/2 of the
balance in January of the fourth year following his retirement and all of
the remaining balance in January of the fifth year following his
retirement. In the event the participant's employment is terminated
through death or any other means than Retirement, the amounts deferred
will be paid in January of the year following such termination of
employment.
At the time of electing to defer payment, the participant must also elect
whether the sum so deferred shall be treated by the Company in accordance
with Paragraph (1) or Paragraph (2) below.
2
<PAGE> 3
TERMS OF THE PLAN (CON'T)
(1) A sum certain to which the Company will add in lieu of interest an
amount equal to the prime rate of interest set by Citibank N.A.
for the sums deferred, compounded quarterly as of the first day of
January, April, July and October of each year during the deferral
period. The prime rate in effect on the first day of January,
April, July and October shall be deemed the prime rate in effect
for the preceding quarterly period.
(2) A sum treated as if it were invested as an optional cash payment
in CMS Energy's Dividend Reinvestment and Common Stock Purchase
Plan, on the first opportunity preceding the time payment would
have been made under the Employee Incentive Compensation Plan had
payment not been deferred, and subsequent cash dividends on the
shares of common stock automatically reinvested during the
deferral period. The value of the sum so deferred, at the time of
any payment, shall be equal to the number of dollars which such an
investment would have been worth as measured by the purchase price
of the shares of common stock under CMS Energy's Dividend
Reinvestment and Common Stock Purchase Plan at the time of the
most recent dividend payment preceding the month in which the
deferred payment is to be made, or, if such dividend payment was
more than three months prior to the month in which the deferred
payment is to be made, the number of shares which would have been
accumulated multiplied by the average of the closing sale price
for the common stock, as published in the Wall Street Journal in
its report of NYSE - Composite Transactions, for each of the first
five New York Stock Exchange trading days in the month preceding
the month in which payment is to be made. In the event the
participant elects to have the deferred payment treated in
accordance with this subparagraph, he may, prior to the last time
the value of the sum would have been determined before any
payment, elect to receive the payment in shares of common stock of
CMS Energy Corporation, in which case the value of the fund will
be considered to be equal to the number of shares of common stock
which would have been accumulated prior to the time of payment, if
the original sum had been invested as provided in the first
sentence of this subparagraph, and the payment will be to the
nearest whole share of common stock.
The amounts deferred are to be satisfied from the general corporate funds which
are subject to the claims of creditors.
03/01/95
3
<PAGE> 1
EXHIBIT 10.6
GAS PURCHASE AGREEMENT
BETWEEN
NOMECO OIL & GAS CO.,
SELLER
AND
CONSUMERS POWER COMPANY,
BUYER
JANUARY 1, 1995
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
----
<S> <C> <C>
I. Definitions . . . . . . . . . . . . . . . . . . . . 1
A. Btu . . . . . . . . . . . . . . . . . . . . . . 1
B. Contract Year . . . . . . . . . . . . . . . . . 1
C. Cubic Foot . . . . . . . . . . . . . . . . . . 1
D. Day . . . . . . . . . . . . . . . . . . . . . . 1
E. Delivery Point . . . . . . . . . . . . . . . . 2
F. Gas . . . . . . . . . . . . . . . . . . . . . . 2
G. Heating Value . . . . . . . . . . . . . . . . . 2
H. Mcf . . . . . . . . . . . . . . . . . . . . . . 2
I. MMBtu . . . . . . . . . . . . . . . . . . . . . 2
J. Month . . . . . . . . . . . . . . . . . . . . . 2
K. Prime Rate . . . . . . . . . . . . . . . . . . 2
L. PSIA . . . . . . . . . . . . . . . . . . . . . 3
M. PSIG . . . . . . . . . . . . . . . . . . . . . 3
II. Term of Agreement . . . . . . . . . . . . . . . . . 3
III. Area of Commitment . . . . . . . . . . . . . . . . 3
IV. Quantity . . . . . . . . . . . . . . . . . . . . . 3
V. Price . . . . . . . . . . . . . . . . . . . . . . . 4
VI. Billing and Payment . . . . . . . . . . . . . . . . 5
VII. Delivery Point - Liability and Title . . . . . . . 6
VIII. Delivery Pressure . . . . . . . . . . . . . . . . . 7
IX. Quality of Gas . . . . . . . . . . . . . . . . . . 7
X. Measurement . . . . . . . . . . . . . . . . . . . . 8
XI. Taxes . . . . . . . . . . . . . . . . . . . . . . . 8
XII. Assignment . . . . . . . . . . . . . . . . . . . . 9
XIII. Notices . . . . . . . . . . . . . . . . . . . . . . 9
XIV. Laws and Regulations . . . . . . . . . . . . . . . 10
XV. Force Majeure . . . . . . . . . . . . . . . . . . . 10
XVI. Miscellaneous . . . . . . . . . . . . . . . . . . . 11
</TABLE>
<PAGE> 3
1
NATURAL GAS PURCHASE AGREEMENT
THIS AGREEMENT, effective as of January 1, 1995, is entered into
by and between CONSUMERS POWER COMPANY, a Michigan corporation hereinafter
referred to as Buyer, and NOMECO Oil & Gas Co., a Michigan corporation
hereinafter referred to as Seller.
W I T N E S S E T H
WHEREAS, Seller, has Michigan production, which it either
controls or has access to and can commit to the terms and provisions of this
Agreement; and
WHEREAS, Buyer is willing to purchase gas owned or controlled by
Seller which Seller now has the right to sell and deliver to Buyer; and
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 The following terms, when used in this Agreement, shall
have the following meanings:
A. The term "Btu" shall mean a British thermal unit.
B. The term "Contract Year" shall mean a year beginning
January 1 and ending the following December 31.
C. The term "cubic foot of gas" shall mean the volume of
gas contained in one (1) cubic foot of space at a pressure of fifteen and
twenty-five thousandths (15.025) psia, at a temperature of sixty degrees
(60 degrees) Fahrenheit.
D. The term "day" shall mean a period of twenty-four (24)
consecutive hours beginning and ending at 7:00 AM Eastern Standard Time (EST).
<PAGE> 4
2
E. The term "Delivery Points" or "Points of Delivery" means
the Buyer's Northville interconnect with Michigan Consolidated Gas Company or
any other point(s) on Buyer's pipeline system where Michigan origin gas can be
delivered, provided the gas to be delivered at that point, after blending with
all other gas delivered at that point, meets the quality specifications of
Article IX and Buyer has sufficient capacity at such point to take the volumes
nominated by Seller.
F. The term "gas" shall mean and include natural gas
produced from gas wells (gas well gas), gas which immediately prior to being
produced from a reservoir is in solution with crude oil, or dispersed in an
intimate association with crude oil, or in contact with crude oil across a
gas-oil contact (casinghead gas), or residue gas resulting from the processing
of either or both casinghead gas and gas well gas.
G. The term "Heating Value" shall mean the quantity of heat,
in Btu, produced by the complete combustion of a cubic foot of gas under
standard conditions at constant pressure with air of the same temperature and
pressure as the gas where the products of combustion are cooled to the initial
temperature of the gas and air and where water formed by the combustion is
condensed to a liquid state, all adjusted to reflect the actual water vapor
content of the gas delivered. Standard conditions for the gas shall be a
temperature of sixty degrees (60 degrees) Fahrenheit, and a pressure of
fifteen and twenty-five thousandths (15.025) psia.
H. The term "Mcf" shall mean one thousand (1,000) cubic feet
of gas.
I. The term "MMBtu" shall mean a quantity of gas having a
Heating Value of one million (1,000,000) Btu.
J. The term "month" shall mean the period beginning at 7:00
AM Eastern Standard Time (EST) on the first day of a calendar month and ending
at 7:00 AM EST on the first day of the next succeeding calendar month.
K. The term "Prime Rate" shall mean the fluctuating per
annum lending rate of interest from time to time published by the National Bank
of Detroit or its successor for creditors having a credit rating equal to or
better than that required to qualify for such bank's lowest commercial rate of
interest without a third party's guarantee of the debt.
<PAGE> 5
3
L. The term "psia" shall mean pounds per square inch
absolute.
M. The term "psig" shall mean pounds per square inch gauge.
ARTICLE II
TERM OF AGREEMENT
2.1 This Agreement, subject to the provisions of Article V,
shall be effective January 1, 1995 and shall continue in full force and effect
through December 31, 1999.
ARTICLE III
AREA OF COMMITMENT
3.1 Seller agrees to commit to the performance of this
Agreement, sufficient production from Michigan wells operated by Seller or to
which Seller has access to meet the quantity commitments set forth in Article V
hereof.
ARTICLE IV
QUANTITY
4.1 Buyer agrees to purchase and take from Seller, and Seller
agrees to sell and deliver to Buyer, 20,000 MMBtu per day.
4.2 Buyer and Seller agree that it is the intent of both
parties to meet such daily purchase and sale commitments on as level a basis
as operations allow and that daily fluctuations in purchases and sales
should not vary (other than for force majeure conditions) by more than 5
percent per day.
4.3 On or before the fifth (5th) working day preceding the
first of each month, Seller shall submit a nomination to Buyer indicating the
Point(s) of Delivery and associated volumes for the following month. If any
such nominated volumes cannot be received by Buyer due to capacity constraints
at any Point of Delivery, Seller shall adjust its nominations accordingly.
<PAGE> 6
4
ARTICLE V
PRICE
5.1 Subject to the other provisions hereof, the price to be
paid by Buyer to Seller for gas purchased and sold hereunder shall be $2.50 per
MMBtu delivered in the first Contract Year and $2.60 per MMBtu delivered in the
second Contract Year. If Seller has failed to reach an annual average sales
level of 20,000 MMBtu per day during the first Contract Year, then the price
shall not increase but will remain at $2.50 per MMBtu for the second Contract
Year. For each of the last three Contract Years, the parties shall negotiate a
delivered price which will fall within the range specified as follows: third
Contract Year, $2.25 - $2.75 per MMBtu; fourth Contract Year, $2.35 - $2.85 per
MMBtu; fifth Contract Year, $2.45 - $2.95 per MMBtu. If the parties are unable
to agree to a contract price prior to thirty days before the beginning of
either the third, fourth or fifth Contract Years, then this Agreement shall
terminate at the end of the then current Contract Year.
5.2 If at any time after January 1, 1995 the Michigan Public
Service Commission (or any other regulatory agency exercising jurisdiction)
shall disallow any portion of the price paid Seller hereunder from Buyer's
purchased cost of gas in a ratemaking proceeding, then in such event Buyer may
reduce the price paid Seller to the maximum price allowed effective as of the
"effective date" of the aforementioned disallowance.
5.3 If at any time after January 1, 1995 the position of the
Staff of the Michigan Public Service Commission (MPSC), or its successor, in a
ratemaking proceeding is that a portion of the price to be paid Seller
hereunder should be reduced or disallowed, then Buyer shall deposit into an
escrow account the difference between the price that would otherwise be
applicable hereunder and the price for such gas recommended by the MPSC Staff.
Any portion of the price that is so escrowed and later disallowed by a final
order of the Courts or the MPSC shall be returned, with accumulated interest
thereon, to Buyer. Any portion of the price that is so escrowed and later
allowed by the final order of the Courts or the MPSC shall be paid, with
accumulated interest thereon, to Seller. All payments from the escrow
<PAGE> 7
5
account shall be made within 45 days after the relevant order becomes final.
For the purpose of this paragraph, an MPSC or Court order will be considered
final when it is no longer subject to appeal or other challenge by Buyer or
Seller.
5.4 If Sections 5.2 or 5.3 above result in a price reduction,
Seller shall have the right to seek sales to third parties and upon receipt of
a bona fide offer to purchase all or any portion of the gas committed hereunder
at a higher price, Buyer will release such gas from this Agreement upon 90
days' written notice to Buyer.
ARTICLE VI
BILLING AND PAYMENT
6.1 Seller shall, on a monthly basis, furnish Buyer a
detailed statement showing the total quantity of gas delivered by Seller to
Buyer hereunder and a tax statement showing severance tax liability. Buyer's
payment shall be due fifteen days after Buyer's receipt of Seller's statement.
6.2 Each party shall have the right at reasonable hours to
examine the books, records and charts of the other party to the extent
necessary to verify the accuracy of any statement, charge or computation made
pursuant to the provisions hereof. If any such examination reveals any
inaccuracy in any billing theretofore made, the necessary adjustment in such
billing and payment shall be promptly made, provided that no adjustment for any
billing or payment shall be made after the lapse of six (6) months from the
rendition thereof unless challenged prior thereto.
6.3 Should Buyer fail to pay any amount due Seller under any
provisions of this Agreement when same is due, interest shall accrue at the
Prime Rate until all payments, including such interest, are paid and current.
If a default in payment continues for sixty (60) days, Seller may, in addition
to all other rights and remedies, suspend deliveries of gas hereunder and
terminate this Agreement. The foregoing provision in this Section shall not
apply, however, if Buyer's refusal to pay is the result of a bona fide dispute
as to the accuracy of any statement and Buyer pays all amounts not in dispute.
<PAGE> 8
6
ARTICLE VII
DELIVERY POINT - LIABILITY AND TITLE
7.1 All costs incurred to produce, compress, transport or
process such gas prior to its delivery to Buyer shall, as between Buyer and
Seller, be for the account of Seller.
7.2 Title to gas shall pass from Seller to Buyer at the
Point(s) of Delivery. Seller shall be in control and possession of the gas
delivered hereunder and responsible for any damage or injury caused thereby
until the same shall have been delivered to the Point(s) of Delivery, after
which delivery Buyer shall be deemed to be in exclusive control and possession
thereof and responsible for any injury or damage caused thereby.
7.3 Seller agrees that it will and hereby does warrant title
to all gas sold under this Agreement and the right to sell the same, and that
such gas is free and clear from all liens, encumbrances and adverse claims; and
Seller agrees to indemnify, defend and save Buyer harmless from and against all
suits, actions, debts, accounts, damages, costs, losses and expenses arising
from or out of adverse claims of any and all persons or parties to said gas or
to royalties, taxes, license fees or charges with respect thereto, which are a
proper charge against Seller, or which may be levied or assessed upon the
production of said gas, the operation of Seller's wells, or the handling of
such gas prior to its delivery hereunder.
7.4 Seller undertakes and agrees to maintain and be entirely
responsible for the wells, equipment and other facilities used by it up to the
Point of Delivery hereinabove specified and further agrees to indemnify, defend
and save Buyer harmless from and against all suits, actions, debts, accounts,
damages, costs, losses and expenses arising from or in any manner connected
therewith. Buyer, except as herein otherwise specifically provided, agrees to
maintain and be entirely responsible for the facilities beyond the
above-mentioned Point(s) of Delivery.
<PAGE> 9
7
ARTICLE VIII
DELIVERY PRESSURE
8.1 Seller shall deliver gas hereunder against the varying
pressures in the pipeline at the Point(s) of Delivery, but will not be required
to deliver gas at a pressure in excess of 1,150 lbs psig.
ARTICLE IX
QUALITY OF GAS
9.1 The gas delivered hereunder (a) shall not contain more
than three percent oxygen by quantity; (b) shall be commercially free from
objectionable odors, solid or liquid matter, dust, gum or gum-forming
constituents which might interfere with its merchantability or cause injury to
or interference with proper operation of the lines, regulators, meters or other
appliances through which it flows; (c) shall not contain more than 0.3 grain of
hydrogen sulphide per one hundred cubic feet; (d) shall not contain more than
twenty grains of total sulfur (including hydrogen sulphide and mercaptan
sulfur) per one hundred cubic feet; (e) shall not at any time have a carbon
dioxide content in excess of two percent (2%) by volume; and (f) shall not
contain an amount of moisture which at any time exceeds seven pounds per
million cubic feet; and (g) shall be fully "interchangeable" in accordance with
the provisions of AGA Research Bulletin No. 36.
9.2 The gas hereunder shall have a total Heating Value per
cubic foot of not less than 960 Btu's nor more than 1,110 Btu's.
9.3 Should the gas offered for sale to Buyer fail at any time
to conform to any of the specifications of this Article, Buyer shall be under
no obligation to accept it. Buyer, however may notify Seller of any such
failure and Seller shall make a diligent effort to correct such failure so as
to deliver gas conforming to the above specifications. If Seller is unable to
deliver gas conforming to the specifications hereof by treatment consistent
with prudent operations and by means which are economically feasible in
Seller's opinion, Buyer may, at its opinion, accept delivery of the gas, and
at Buyer's sole cost, treat the gas so that it will conform to the subject
<PAGE> 10
8
specifications or Buyer may refuse to take such gas. In the event neither
Seller nor Buyer elect to treat gas that fails to meet the quality
specifications hereof, that gas and that gas only shall be released from
commitment under the terms hereof.
ARTICLE X
MEASUREMENT
10.1 Measurement of gas delivered at the Point(s) of Delivery
will be based on equipment operated at the Point(s) of Delivery by Buyer.
Buyer shall provide Seller with access to the measurement information.
ARTICLE XI
TAXES
11.1 Seller agrees to pay or cause to be paid all taxes
imposed upon gas prior to its delivery to Buyer hereunder or upon any
occupation or privilege relating to the production, sale or delivery of such
gas to Buyer. Buyer agrees to pay or cause to be paid all taxes imposed on
such gas after its receipt by Buyer, or any occupation or privilege tax
relating to the transmission or sale of such gas after its receipt by Buyer.
11.2 As used in this Article XII, the term "tax" shall mean
sales, transaction, occupation, service, production, severance, gathering,
transmission, value added, export or excise tax, assessment or fee levied,
assessed or fixed by governmental authority, and taxes of a similar nature or
equivalent in effect.
11.3 Buyer agrees to deduct from the amount payable to Seller
the severance and privilege taxes due from the sale of gas hereunder, and
furthermore shall remit and report to the State of Michigan in accordance with
the severance and privilege tax statutory filing requirements.
11.4 If either party receives written notice from the other
that questions the validity of any tax, the parties will consult with each
other as to the best procedure to be followed in the payment of the questioned
tax and the means of testing its validity, having due regard for the protection
of the
<PAGE> 11
9
interests of both Seller and Buyer. Following such consultation, each party
will pursue the course of action it deems proper.
ARTICLE XII
ASSIGNMENT
12.1 This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns;
provided that no conveyance, transfer of any interest, or change of ownership
by either party shall be binding upon the other party until such other party
has been furnished with a written notice evidencing such conveyance, transfer
of interest, or change of ownership and approved it. Such approval shall in no
event, however, be unreasonably withheld. The foregoing shall not, however,
restrict either party from pledging, granting a security interest in or
assigning as collateral all or any portion of such party's interest hereunder
to secure any debt or obligation.
ARTICLE XIII
NOTICES
13.1 Any nomination, notice, request, demand, statement or
payment provided for in this Agreement shall be sent to the parties hereto at
the following addresses:
BUYER: Consumers Power Company
Attn: Director of Gas Supply
1945 West Parnall Road
Jackson, MI 49201
FAX - (517) 788-1340
SELLER: NOMECO Oil & Gas Co.
Attn: Gas Marketing
One Jackson Square
PO Box 1150
Jackson, MI 49204
FAX - (517) 787-0139
13.2 Either party shall have the right by prior written notice
to the other to change its address or addresses given above at any time.
<PAGE> 12
10
ARTICLE XIV
LAWS AND REGULATIONS
14.1 This Agreement, insofar as it is affected thereby, shall
be subject to all valid and applicable laws, orders, rules and regulations of
Federal, State and any other governmental authorities having jurisdiction. Any
party hereto shall have the right to contest the validity of any such law,
order, rule or regulation, and the acquiescence therein or compliance therewith
for any period of time shall not be construed as a waiver of such right. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Michigan.
14.2 This Agreement is subject to the Federal Requirements set
forth in Exhibit A.
ARTICLE XV
FORCE MAJEURE
15.1 If Buyer or Seller is rendered unable, wholly or in part,
by force majeure to perform or comply with any obligations or conditions of
this Agreement, such obligations or conditions shall be suspended to the same
extent during the continuance of the inability so caused and such party so
rendered unable shall be relieved of liability and shall suffer no prejudice
for failure to perform the same during such period, it being understood that
Buyer's obligation to take or pay for gas hereunder shall be reduced by the
volume which Buyer was unable to take/receive during the period of time the
inability exists; provided, obligations to make payment then due for gas
delivered hereunder shall not be suspended, and provided further that the cause
of suspension (other than strikes, lockouts or labor disputes) shall be
remedied insofar as possible with reasonable dispatch. The foregoing
notwithstanding, settlement of strikes, lockouts, or labor disputes shall be
wholly within the discretion of the party having the difficulty.
15.2 The term "force majeure" shall include, without
limitation by the following enumeration, acts of God and of the public enemy,
unseasonal weather, freezing of wells or lines of pipe, repairing or altering
machinery
<PAGE> 13
11
or lines of pipe, fires, accidents, breakdowns, strikes, labor disputes, and
any other industrial, civil or public disturbance, inability to obtain
materials, supplies, rights-of-way, permits, or labor on customary terms, any
act or omission by a third party Transmission Company, or parties not
controlled by the party having the difficulty, any act or omission (including
failure to take gas) of a purchaser of gas from Buyer which is excused by any
event or occurrence of the character herein defined as constituting force
majeure and any laws, orders, rules, regulations, acts, or restraints of any
governmental body or authority, civil or military, or any other cause beyond
the control of the parties claiming force majeure.
ARTICLE XVI
MISCELLANEOUS
16.1 No waiver by either party hereto of one or more defaults
in the performance of any provision of this Agreement shall operate or be
construed as a waiver, by such party, of a future default, whether of a like or
a different character.
16.2 All headings appearing herein are for convenience only
and shall not be considered a part of this Agreement for any purpose or as in
any way interpreting, construing, varying, altering or modifying this Agreement
or any of the provisions hereof.
16.3 Each party hereby agrees to grant to the other, wherever
necessary or convenient for carrying out the terms of this Agreement,
requisite easements and rights-of-way over, across and under any land as to
which such party has the right to make such grants.
16.4 There shall be no modification of any of the terms and
provisions of this Agreement except by the formal execution of supplemental
written agreements.
<PAGE> 14
12
IN WITNESS WHEREOF, the parties hereto have caused this contract
to be executed and effective as of the day and year first above written.
<TABLE>
<CAPTION>
WITNESSES: BUYER: CONSUMERS POWER COMPANY
<S> <C>
/s/ Kevin J. Daly By: /s/ R. J. Odlevak
- ------------------------------- -------------------------------
R. J. Odlevak
/s/ Michael J. Shore
- -------------------------------
SELLER: NOMECO OIL & GAS CO.
/s/ Thad R. Shumway By: /s/ Gordon L. Wright
- ------------------------------- --------------------------------
Thad R. Shumway Gordon L. Wright
Executive Vice President
Chief Operating Officer
/s/ Diane L. Ritchie
- -------------------------------
Diane L. Ritchie
</TABLE>
<PAGE> 1
EXHIBIT 10.7
NORTHERN MICHIGAN EXPLORATION COMPANY AND CMS ENERGY CORPORATION
SELLER
and
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP
BUYER
------------------------------
NATURAL GAS PURCHASE AGREEMENT
------------------------------
May 1, 1989
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
I. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A. Buyer's Plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
B. Btu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
C. Contract Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
D. Contract Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
E. cubic foot of gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
F. day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
G. gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
H. Heating Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
I. Interstate Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
J. Intrastate Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
K. lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
L. Maximum Daily Quantity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
M. Mcf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
N. Minimum Daily Quantity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
O. MMBtu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
P. month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Q. Northern Michigan Wet Header System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
R. Prime Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
S. psia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
T. psig . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
U. Start-Up Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
V. Transmission Company; Transmission Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
II. Warranty of Deliverability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
III. Term of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
IV. Quantity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
V. Commencement and Scheduling of Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
VI. Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
VII. Billing & Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
VIII. Delivery Point(s); Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
IX. Delivery Pressure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS (Cont'd)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
X. Quality of Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
XI. Measurement and Tests of Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
XII. Warranty of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
XIII. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
XIV. Right To Terminate Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
XV. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
XVI. Governmental Rules and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
XVII. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
XVIII. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
XIX. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Exhibit A - Point(s) of Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Exhibit B - Power Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
ii
<PAGE> 4
NATURAL GAS PURCHASE AGREEMENT
THIS AGREEMENT, effective as of May 1, 1989, is entered into by and
between MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP, a Michigan limited
partnership ("Buyer"), with its principal place of business in Midland,
Michigan, and NORTHERN MICHIGAN EXPLORATION COMPANY and CMS ENERGY CORPORATION
both of which are collectively herein referred to as "Seller";
W I T N E S S E T H :
WHEREAS, Buyer is constructing a cogeneration plant located in
Midland, Michigan; and
WHEREAS, Buyer desires to secure a long-term natural gas supply for
such cogeneration plant; and
WHEREAS, Seller is in the business of exploration for and production
of natural gas; and
WHEREAS, Seller desires to sell and deliver natural gas to Buyer for
use at Buyer's cogeneration plant and Buyer desires to purchase and receive
such natural gas from Seller.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 The following terms, when used in this Agreement, shall have the
following meanings:
A. The term "Buyer's Plant" shall mean Buyer's gas fueled combined
cycle, steam and electric cogeneration facility located in Midland County,
Michigan.
B. The term "Btu" shall mean a British thermal unit.
C. The term "Contract Price" shall mean the price to be paid by
Buyer to Seller for all quantities of gas purchased and delivered hereunder, as
determined pursuant to Article VI hereof.
D. The term "Contract Year" shall mean a calendar year except that
for the initial and final year it shall mean the portion thereof that occurs
during the term of this Agreement.
E. The term "cubic foot of gas" shall mean the volume of gas
contained in one (1) cubic foot of space at a pressure of fourteen and
<PAGE> 5
2
seventy-three hundredths (14.73) psia, at a temperature of sixty degrees
(60 degrees) Fahrenheit.
F. The term "day" shall mean a period of twenty-four (24)
consecutive hours (23 hours when changing from Standard to Daylight time and 25
hours when changing back to Standard time), beginning and ending at 7:00 AM
local time at the Point of Delivery.
G. The term "gas" shall mean and include natural gas produced from
gas wells (gas well gas), gas which immediately prior to being produced from a
reservoir is in solution with crude oil, or dispersed in an intimate
association with crude oil, or in contact with crude oil across a gas-oil
contact (casinghead gas), or residue gas resulting from the processing of
either or both casinghead gas and gas well gas.
H. The term "Heating Value" shall mean the quantity of heat in Btu
produced by the complete combustion of a cubic foot of gas under standard
conditions at constant pressure with air of the same temperature and pressure
as the gas where the products of combustion are cooled to the initial
temperature of the gas and air and where water formed by the combustion is
condensed to a liquid state, all adjusted to reflect the actual water vapor
content of the gas delivered. Standard conditions for the gas shall be sixty
degrees (60 degrees) Fahrenheit, fourteen and seventy-three hundredths (14.73)
psia and saturated with water vapor.
I. The term "Interstate Gas" shall mean gas sold and purchased
hereunder which is produced from wells located outside the State of Michigan.
J. The term "Intrastate Gas" shall mean gas sold and purchased
hereunder which is produced from wells located within the State of Michigan.
K. The term "lease" shall mean any written instrument which gives
Seller the rights to drill for, produce, and dispose of gas in, under, and from
the lands described therein.
L. The term "Maximum Daily Quantity" (MDQ) shall mean ten thousand
(10,000) MMBtu/day of gas.
M. The term "Mcf" shall mean one thousand (1,000) cubic feet of gas.
N. The term "Minimum Daily Quantity" shall mean seven thousand five
hundred (7,500) MMBtu/day of gas.
O. The term "MMBtu" shall mean a quantity of gas having a Heating
Value of one million (1,000,000) Btu.
P. The term "month" shall mean the period beginning at 7:00 a.m.
local time at the Point of Delivery on the first day of a calendar month and
<PAGE> 6
3
ending at 7:00 a.m. local time at Point of Delivery, as described in Article
VIII, on the first day of the next succeeding calendar month.
Q. The term "Northern Michigan Wet-Header System" shall mean the
pipeline system-in the northern portion of Michigan's Lower Peninsula that is
operated pursuant to a contract between Consumers Power Company and Michigan
Consolidated Gas Company dated November 1, 1971.
R. The term "Prime Rate" shall mean the fluctuating per annum
lending rate of interest from time to time published by CITIBANK, NA.
S. The term "psia" shall mean pounds per square inch absolute.
T. The term "psig" shall mean pounds per square inch gauge.
U. The term "Start-Up Date" shall mean the first day of the first
month following the date on which Buyer's Plant has achieved commercial
operation for the generation and sale of electricity and steam as such
commercial operation is defined in the Power Purchase Agreement between
Consumers Power Company and Buyer dated July 17, 1986, or as amended, but in no
event shall such date be earlier than January 1, 1990 nor later than May 1,
1990.
V. The term "Transmission Company" or "Transmission Companies"
shall mean the pipeline company or companies with which Buyer executes
agreements for the transportation of gas from or downstream of the Point of
Delivery as described in Article VIII.
ARTICLE II
WARRANTY OF DELIVERABILITY
Seller, except to the extent excused by force majeure, warrants the
delivery of the Maximum Daily Quantity of gas provided for herein and failing
that delivery, Seller shall indemnify Buyer for any and all costs and expenses
that Buyer incurs in acquiring replacement gas elsewhere to the extent, if any,
that such costs and expenses, on an MMBtu basis delivered into Buyer's
facilities, are in excess of what Buyer would have incurred under this
Agreement and related transportation agreements.
ARTICLE III
TERM OF AGREEMENT
3.1 This Agreement shall, be effective from the date hereof and
shall continue in full force and effect for a primary term of twelve (12) years
(the "Primary Term") commencing on the Start-Up Date and shall continue and
remain in full force and effect thereafter for successive periods of one (1)
year each (the
<PAGE> 7
4
"Annual Renewal Term") unless and until terminated by either Seller or Buyer
after giving written notice to the other party no later than nine (9) months
prior to the expiration of the Primary Term or the then current Annual Renewal
Term.
3.2 The foregoing notwithstanding, the term shall be extended for
such period, not to exceed two (2) years, as may be necessary to allow for (a)
delivery of gas paid for but not taken; and (b) a makeup of Seller's prior
underdeliveries when such underdeliveries are caused by an event of force
majeure.
3.3 Notwithstanding anything in the foregoing to the contrary, the
terms of this Agreement shall not extend beyond December 31, 2005.
3.4 Termination of this Agreement shall not affect the accrued
rights and liabilities of the parties hereunder.
ARTICLE IV
QUANTITY
4.1 Seller agrees to sell and deliver to Buyer and Buyer agrees to
purchase, receive and pay Seller for, or to pay Seller for if available but not
taken, during each Contract Year, a daily average quantity of gas equal to
seven thousand five hundred (7,500) MMBtu of gas per day.
4.2 It is provided, however, that Buyer shall have the right to
purchase, and Seller will sell and deliver to Buyer, such quantity of gas as
Buyer may from day to day elect to purchase, up to ten thousand (10,000) MMBtu
of gas per day.
4.3 The gas purchased hereunder shall be delivered and received, as
nearly as practicable, at uniform rates of flow. The daily quantity of gas
actually delivered may vary ten percent (10%) above or below the quantity
requested by Buyer to be delivered hereunder, But in no event shall the total
quantity delivered in any month vary more than three percent (3%) above or
below the total quantity requested by Buyer for that month.
4.4 Commencing May 1, 1990, if the quantity of gas taken by Buyer
hereunder during any Contract Year is less than the quantity provided for in
Section 4.1 of this Article, Buyer shall within sixty (60) days thereafter, pay
Seller for the deficiency at the last price in effect during such Contract
Year. It is provided, however, the quantity of gas to be paid for but not
taken hereunder shall be reduced by the volume of gas Buyer elects not to take
for failure of such gas to meet the quality specifications hereinafter set
forth and
<PAGE> 8
5
the volume of gas Buyer shall have been prevented from taking by reason of
force majeure or Seller's failure or inability to deliver the volumes requested
by Buyer, up to the daily volume specified in Section 4.2 above. For purposes
of computing the deficiency payment the deficiency shall be deemed to be
Intrastate Gas and Interstate Gas in the same proportions as the takes of such
gas by Buyer during the last Contract Year in which no deficiencies in the
Buyer's takes occurred unless no such Contract Year exists, in which event such
proportions shall be based on takes during the Contract Year in which the
deficiency was incurred. Buyer shall have the right during the succeeding five
(5) Contract Years but not beyond the term of this Agreement, as provided in
Article III, to make up any gas paid for but not taken by deducting from future
monthly statements all gas taken in excess of seven thousand five hundred
(7,500) MMBtu per day until the full amount of such gas is recovered by Buyer.
4.5 It is recognized that Buyer will require quantities of gas for
use at Buyer's Plant for as much as twelve (12) months prior to the Start-Up
Date. Seller agrees that it will sell and deliver to Buyer on a best efforts
basis such quantities of gas as may be requested by Buyer from time to time
prior to the Start-Up Date for use in Buyer's Plant up to the Maximum Daily
Quantity; provided that the price per MMBtu for all such gas delivered by
Seller prior to the Start-Up Date shall be as specified in Article VI.
4.6 If Seller so elects in writing to Buyer, Buyer shall use
diligent efforts to purchase hereunder or arrange for others to purchase gas
from Seller under the terms hereof for the period pending the Start-Up Date.
If Buyer has a comparable commitment under other contracts, this obligation
shall be on a pro rata basis and need not be pursued by Buyer if it leaves
Buyer economically disadvantaged.
4.7 Seller reserves the right to process or have processed, prior to
or after delivery, all or a portion of the gas deliverable to Buyer hereunder
for the removal of all constituents other than methane, except for such methane
as is removed under normal operation of such processing facilities. In the
event Seller's gas is to be processed after delivery hereunder, Buyer will, to
the best of its ability, deliver or cause to be delivered to Seller or for
Seller's account, volumes of gas for processing which contain, as nearly as
practicable, Seller's pro rata share of all liquefiable hydrocarbons contained
in the commingled gas stream. Such processing shall not lower the total
heating value of the gas below that required in Article X and shall be subject
to such other conditions as may be acceptable to both parties. Title to all
products removed
<PAGE> 9
6
or recovered by said processing shall remain in Seller; however, Seller agrees
to reimburse Buyer for the cost of the fuel, shrinkage and plant loss volumes
attributable to such processing, plus the cost of transporting such volumes to
the processing plant if and to the extent the total of such transportation cost
and all other transportation costs to deliver the gas to Buyer's Plant exceeds
the cost of transportation Buyer is otherwise obligated to bear under this
Agreement.
ARTICLE V
COMMENCEMENT AND SCHEDULING OF DELIVERIES
5.1 To allow Buyer to arrange for transportation, Seller shall
advise Buyer where and in what quantities gas can be made available hereunder
and once deliveries have begun, they shall not be shifted between or among
Point(s) of Delivery without the agreement of both parties.
5.2 If Buyer desires to take gas under this Agreement for test
purposes in advance of the Start-Up Date, Buyer shall give Seller written
notice as far in advance as practicable, and at least one hundred and twenty
(120) days prior to the date when Buyer estimates it will first require
delivery of gas, stating the daily quantity of gas that it desires. Buyer will
also give Seller such written notice approximately thirty (30) days in advance
of the estimated Start-Up Date. Seller will commence and adjust its delivery
of gas hereunder in accordance with Buyer's notice; provided that such notice
conforms to the requirements of this Agreement. To the extent it is able to do
so, Seller may, however, at Buyer's request, agree to waive any advance notice
requirement.
5.3 In the month of the Start-Up Date and every month thereafter,
Buyer shall nominate to Seller, ten (10) days before the end of each month, the
quantity of gas to be purchased hereunder for the following month. Seller will
commence and adjust its delivery of gas hereunder in accordance with Buyer's
nomination. If Buyer desires to change the nominated volume during the month
it shall give Seller no less than twenty-four (24) hours advance notice of such
change. However, if the volume change is greater than ten percent (10%) of the
MDQ, such notice shall be given seventy-two (72) hours in advance. To the
extent it is able to do so, Seller may, however, at Buyer's request agree to
waive any part of said advance notice requirement.
<PAGE> 10
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5.4 To the extent that the procedures set forth herein conflict with
the rules and tariffs filed with and approved by those regulatory agencies
exercising regulatory authority over the Transmission Companies, such rules and
tariffs will control and the parties shall cooperate fully with each other in
complying with such rules and tariffs.
ARTICLE VI
PRICE
6.1 The price to be paid by Buyer to Seller for all quantities of
Interstate Gas hereunder, including those quantities that are available and not
taken by Buyer, as herein otherwise required, inclusive of all taxes and other
adjustments or costs not provided for herein, shall be determined separately
for each month and shall be the greater of the "Fixed Escalator Price" or the
"Energy Index Price" as defined below:
(a) The Fixed Escalator Price per MMBtu of Interstate gas sold and
delivered shall be as follows:
January 1, 1988 2.15
January 1, 1989 2.21
January 1, 1990 2.30
January 1, 1991 2.39
January 1, 1992 2.49
January 1, 1993 2.59
January 1, 1994 2.69
January 1, 1995 2.80
January 1, 1996 2.91
January 1, 1997 3.03
January 1, 1998 3.15
January 1, 1999 3.27
January 1, 2000 3.40
January 1, 2001 3.54
January 1, 2002 3.68
January 1, 2003 3.83
January 1, 2004 3.98
(b) The Energy Index Price shall be $1.95 per MMBtu, effective
January 1, 1988, adjusted on a monthly basis thereafter by
adding or subtracting, as appropriate, an amount obtained by
subtracting
<PAGE> 11
8
$1.95 from the product of (i) $1.95 per MMBtu, multiplied by
(ii) a fraction, the numerator of which is the sum of the then
current month's energy charges associated with fixed expenses
and variable expenses referenced in Exhibit "C" of the 1986
Power Purchase Agreement between Consumers Power Company and
Buyer and the denominator of which is the sum of energy charges
associated with fixed expenses and variable expenses referenced
in Exhibit "C" of said Power Purchase Agreement for the month of
December 1987 (which will represent data for the 12 months
ending October 31, 1987).
6.2 The price to be paid by Buyer to Seller for all quantities of
Intrastate Gas hereunder, including those quantities that are available and not
taken by Buyer as herein otherwise required, inclusive of all taxes and other
adjustments or costs not provided for herein, shall be determined separately
for each month as the price prescribed pursuant to Section 6.1 above plus $.45
per MMBtu.
6.3 Buyer shall pay Seller a price per MMBtu equal to the price
calculated in Section 6.1 or 6.2 above, as applicable, for all quantities of
gas delivered to the Delivery Point prior to the Start-Up Date and purchased by
Buyer pursuant to this Agreement.
6.4 Buyer, except to the extent excused by force majeure, agrees to
provide firm transportation for the Minimum Daily Quantity. Buyer will make
arrangements for and bear the cost of transportation from the Point of Delivery
to Buyer's Plant of all gas delivered by Seller to Buyer hereunder; provided,
however, as to all gas delivered to the Northern Michigan Wet-Header System,
Buyer will be reimbursed by Seller for two-thirds (2/3) of all third party
costs incurred as a transportation fee or charge to transport gas from the
Point(s) of Delivery on the Northern Michigan Wet-Header System through any
facilities to any of the Buyer's gas pipeline system, to the Consumers Power
Company gas pipeline system, or the Michigan Gas Storage Company pipeline
system for any gas transported pursuant to this contract. Subject to force
majeure, failure of Buyer to arrange transportation from the Point of Delivery
to Buyer's Plant of all gas available to Buyer in accordance with the terms
hereof shall constitute and be deemed for purposes of this Agreement failure by
Buyer to take such gas. Seller shall have no obligation to arrange for
transportation, nor shall Seller bear all or any portion of the cost of
transportation from the Point(s) of
<PAGE> 12
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Delivery to Buyer's Plant except as otherwise specifically provided with
respect to transportation on the Michigan Wet Header System.
ARTICLE VII
BILLING AND PAYMENTS
7.1 After the delivery of gas has commenced hereunder, Seller shall,
on or about the tenth (10th) day of each month, render to Buyer a statement
showing the estimated quantity of gas delivered during the preceding month
under this Agreement and the adjustment, if any, required to conform the prior
month's estimate with actual deliveries. Payment of the amount due based on
such statement shall be made by Buyer to Seller within fifteen (15) days
following receipt of such a statement by wire transfer.
7.2 Should Buyer fail to pay the full amount to Seller when the same
is due, interest on amount not paid thereon shall accrue at the Prime Rate, or
the maximum legal rate, whichever is the lesser, compounded annually from the
date such payment is due until the same is paid. If such default in payment
continues for sixty (60) days after written notice sent by registered United
States mail from Seller to Buyer, Seller may, at its election, to be exercised
at any time while such default continues, and in addition to all other
remedies, on thirty (30) days written notice to Buyer, suspend deliveries of
gas hereunder and may cancel and terminate this Agreement; provided, however,
that the provisions for suspending deliveries or terminating this Agreement
shall not apply if Buyer's refusal to pay any amount claimed by Seller is the
result of a bonafide dispute.
7.3 Each Party shall have the right at reasonable hours to examine
the records of the other party to the extent necessary to verify the accuracy
of any statement, charge or computation made pursuant to the provisions of any
Article hereof. If any such examination reveals any inaccuracy in any billing
or payment previously made, the necessary adjustment in such billing or payment
shall be promptly made. No adjustment for any error in billing or payment
shall be made after the lapse of two (2) years from the rendition thereof.
ARTICLE VIII
DELIVERY POINT(S): TITLE
8.1 For Intrastate Gas the Point(s) of Delivery shall be any point
selected by Seller with Buyer's approval, which approval shall not be
unreasonably withheld, on Buyer's or Consumers Power Company's gas pipeline
system, the Northern Michigan Wet-Header System, or the pipeline
<PAGE> 13
10
system of Michigan Gas Storage Company. The cost of transporting gas on the
Northern Michigan Wet-Header System shall be borne as specified in Section 6.4.
8.2 For Interstate Gas the Point(s) of Delivery shall be any point
selected by Seller with Buyer's approval, which approval shall not be
unreasonably withheld, on the pipeline systems of the ANR Pipeline Company,
Panhandle Eastern Pipe Line Company, Trunkline Gas Company, or Great Lakes Gas
Transmission Company. Seller shall have the option to select a Point of
Delivery for its Interstate Gas on a pipeline system other than those
identified in the preceding sentence, and Buyer shall use its best efforts to
arrange for all transportation of the gas to Buyer's Plant provided that Seller
bears all transportation costs incurred to transport the gas that are in excess
of $0.45 per MMBtu.
8.3 Title to gas delivered hereunder shall pass to Buyer when it is
received by or on behalf of Buyer at such Point(s) of Delivery, subject to the
provisions of Section 4.7. All costs and expenses of delivering the gas to the
Point(s) of Delivery shall be borne by Seller.
ARTICLE IX
DELIVERY PRESSURE
Seller shall be required to deliver gas hereunder against the varying
pressures in the Transmission companies' pipelines and shall install, maintain
and operate all necessary compression equipment at no cost to Buyer.
ARTICLE X
QUALITY OF GAS
10.1 The gas to be delivered hereunder shall Comply with the
quality requirements prescribed (without discrimination against Seller) by the
pipeline system or Transmission Company taking the gas at the Point of
Delivery.
10.2 Buyer shall have the right to terminate this Agreement in the
event that Seller fails to correct any deficiency in quality within thirty (30)
days following written notice to Seller of any such deficiency.
ARTICLE XI
MEASUREMENT AND TESTS OF GAS
11.1 Seller or Seller's designee shall, at Seller's expense, install,
maintain and operate near the Point of Delivery orifice meters with charts and
<PAGE> 14
11
any other auxiliary measuring equipment necessary in order to accomplish
accurate measurement and testing of the gas; such measurement equipment to be
installed and operated in accordance with the standards approved by the
American National Standards Institute (ANSI) Report 2530 dated June 28, 1977,
and prescribed in the Gas Measurement Committee of the American Gas Association
(AGA) Report Number 3 (herein called "ANSI/API 2530, First Edition"), as it is
now and from time to time may be revised, amended, supplemented and/or
superseded, or by any other method commonly used in the industry and mutually
acceptable to Seller and Buyer. It shall be the responsibility of Seller to
place its measuring equipment on a site to be determined by mutual agreement
between Seller and the Transmission Companies. Any disputes about the quantity
of gas delivered to the Transmission Companies for Buyer's account shall be
resolved by Seller and the Transmission Companies. Until such dispute is
settled, the quantity of gas received for Buyer's account shall be deemed to be
that amount which is acknowledged by such Transmission Companies.
11.2 The specific gravity of the gas shall be determined by Seller or
Seller's designee at Seller's expense with accuracy to the nearest one
thousandth (1/1000) by having specific gravity determined, when the subject gas
is flowing, by the use of a recording gravitometer of an approved type commonly
used and accepted in the industry, or, at Seller's election, the specific
gravity of the gas may be determined monthly, at Seller's expense, by an
independent laboratory approved by Buyer which approval shall not be
unreasonably withheld on the basis of samples of gas delivered during the month
taken, while the subject gas is flowing, by a continuous sampling device of a
type, quality and design approved by Buyer (which approval will not be
unreasonably withheld).
11.3 The Heating Value per cubic foot of gas shall be determined by
Seller or Seller's designee at Seller's expense by the arithmetical average of
the records, established while the subject gas is flowing, of a recording
calorimeter of an approved type commonly used and accepted in the industry, or,
at Seller's election, the Heating Value per cubic foot of the gas may be
determined, monthly, at Seller's expense, by an independent laboratory approved
by Buyer which approval shall not be unreasonably withheld on the basis of
samples of gas delivered hereunder during the month, taken by a continuous
sampling device of a type, quality and design approved by Buyer (which approval
will not be unreasonably withheld).
<PAGE> 15
12
11.4 The temperature of the gas shall be determined by Seller or
Seller's designee at Seller's expense by use of a recording thermometer of an
approved type commonly used and accepted in the industry.
11.5 Deviation from the Ideal Gas Law at the pressures, specific
gravities and temperatures of the gas upon delivery shall be determined as
often as found necessary. Correction of volumes for deviation from the Ideal
Gas Law shall be made by use of factors obtained from the table entitled
"Supercompressibility Factors for Natural Gas," published in ANSI/API 2530,
First Edition, as it is now and from time to time may be revised, amended,
supplemented and/or superseded. Each test shall determine the corrections to
be used in computing volume until the next test is made.
11.6 Buyer may, at its option and expense, install and operate
check measuring equipment to check the accuracy of Seller's measurements.
Buyer shall install and operate such check measuring equipment so that it will
not interfere with the operation of Seller's facilities.
11.7 Each party shall give reasonable notice to the other of tests
so that each party may (at its own expense) have its representative present at
the tests. If such notice has been given, the party giving the notice may
proceed as though the other party were present and such test results shall be
used until the next regularly scheduled test or requested test.
11.8 Tests for sulfur and hydrogen sulfide content of the gas shall
be made by Seller or Seller's designee, at Seller's expense, by approved
standard methods from time to time as requested by either party hereto, but not
more often than quarterly.
11.9 The accuracy of Seller's measuring and testing equipment shall
be verified monthly at approximately the same date in each month, and at such
other times as requested by either party. All tests shall be made at Seller's
expense, except that Buyer shall bear the expense of tests made at its request
if the inaccuracy found is two percent (2%) or less. If upon any test, any of
Seller's meters is found to be inaccurate:
(a) By two percent (2%) or less, previous readings thereof shall be
considered correct, but such meter shall be adjusted at once to
read correctly.
(b) By more than two percent (2%), the registration of such meter
shall be corrected for any period which is definitely known or
agreed upon, but in case the period is not definitely known or
<PAGE> 16
13
agreed upon, then for a period extending back one-half (1/2)-of
the time elapsed since the date of the last calibration.
Following any test, metering equipment found inaccurate shall be
immediately corrected by Seller to a condition of accuracy. If,
for any reason, any meter is out of the above-stated range of
tolerance, the amount of gas delivered through the period such
meter is out of tolerance shall be estimated and agreed upon by
the parties hereto upon the basis of the best data available,
using the first of the following methods which is feasible:
(1) By using the registration of a check meter if installed and
accurately registering; or
(2) By correcting the error if the percentage of error is
ascertainable by calibration test or mathematical
calculation; or
(3) By estimating the quantity of deliveries by deliveries
during preceding periods under similar conditions when the
meter was registering accurately.
11.10 The reading, calibration and adjustment of such
equipment and the changing of charts shall be done only by the party
responsible for the operation of such equipment or said party's authorized
representative.
ARTICLE XII
WARRANTY OF TITLE
Seller hereby warrants (i) title to all gas sold hereunder, (ii)
that it has the right to sell same to Buyer and (iii) that all such gas shall
be free from any and all lions and adverse claims of any nature; and Seller
agrees to indemnify and save and hold harmless Buyer from and against any loss,
cost, claim, expense or liability whatsoever with respect to or resulting from
any adverse claim by any party with respect to any gas delivered to Buyer under
this Agreement.
<PAGE> 17
14
ARTICLE XIII
TAXES
Seller shall pay or cause to be paid all taxes and assessments
imposed on Seller with respect to the gas delivered hereunder prior to or on a
concurrent basis with its delivery to Buyer (including, but without limitation,
all severance and sales taxes), and Buyer shall pay or cause to be paid all
taxes and assessments imposed upon Buyer with respect to gas delivered
hereunder after its receipt by Buyer. Neither party shall be responsible or
liable for any taxes or other statutory charges levied or assessed against any
of the facilities of the other party used for the purpose of carrying out the
provisions of this Agreement.
ARTICLE XIV
RIGHT TO TERMINATE AGREEMENT
14.1 In addition to and without limiting any other lawful
right or remedy of Buyer for any default by Seller provided by law or under any
other Section of this Agreement, Buyer shall have the right at its election to
terminate this Agreement upon twenty (20) days' written notice to Seller if
Seller, for any reason, other than force majeure, fails to provide an average
of ninety percent (90%) of the requested quantity of gas (provided the request
is for a volume not in excess of the Maximum Daily Quantity) averaged over a
period of at least one hundred twenty (120) consecutive days which occurred
within a period of one hundred forty (140) days immediately preceding the
giving of such notice of termination.
14.2 In addition to and without limiting any other lawful
right or remedy of Seller for any default by Buyer provided by law or under any
other Section of this Agreement, Seller shall have the right at its election to
terminate this Agreement upon twenty (20) days' written notice to Buyer if
Buyer, for any reason other than force majeure, fails to take at least fifty
percent (50%) of the MDQ averaged over a period of at least one hundred eighty
(180) consecutive days occurring within not more than two hundred (200) days
immediately preceding the giving of such notice of termination.
ARTICLE XV
FORCE MAJEURE
15.1 Neither party hereto shall be liable for any failure to
perform the terms of this Agreement when such failure is due to "force majeure"
as
<PAGE> 18
15
hereinafter defined. The term "force majeure," as employed herein and for all
purposes relating hereto, shall mean acts of God, strikes, lockouts or other
industrial disturbances, acts of public enemy, wars, blockades, insurrections,
riots, epidemics, landslides, lightning, earthquakes, explosions fires, arrests
and restraints of governments and people, civil disturbance, repairs to remedy
breakage or accident affecting Buyer's Plant or pipeline facilities used to
transport gas to Buyer's Plant, mechanical breakdowns of Buyer's Plant or
pipeline facilities used to transport gas to Buyer's Plant, inability to obtain
adequate transportation, inability of any party hereto to obtain necessary
materials, supplies or permits due to existing or future rules, regulations,
orders, laws or proclamations of governmental authorities (federal, state or
local), including both civil and military, the failure of a customer to take
contracted levels of steam or electricity from Buyer and any other causes
whether of the kind herein enumerated or otherwise, not within the control of
the party claiming suspension and which by the exercise of due diligence such
party is unable to prevent or overcome; provided that the settlement of strikes
and other labor disputes shall be at the sole discretion of the party
experiencing such difficulty.
15.2 Without limitation of the foregoing, force majeure
shall also include failure of Seller to deliver gas it is otherwise obligated
to make available hereunder when such failure is due to circumstances beyond
Seller's reasonable control relating to the leases and wells from which gas is
being produced for delivery by Seller hereunder, including, without limitation:
mechanical or operational disruptions; declines in production rates or reserves
not reasonably anticipated by Seller; any action or failure to act on the part
of the operator (except where Seller is the operator) of any such wells; sales
by Seller to other buyers as a result of Buyer's failure to take hereunder,
regardless of force majeure; provided that with respect to all force majeure
events Seller shall exercise due diligence to restore gas deliveries hereunder
as soon as reasonably possible when the force majeure is abated and with
respect to any force majeure experienced by Seller, Seller shall make up
delivery deficiencies as soon as practicable during the term of this Agreement
through gas deliveries in excess of contracted volumes and at the price in
effect for gas at the time of delivery.
<PAGE> 19
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ARTICLE XVI
RULES AND REGULATIONS
16.1 This Agreement shall be subject to all valid laws, orders,
directives, rules and regulations of any governmental body or official having
jurisdiction. Seller shall in any event endeavor to maintain this Agreement
and shall not unilaterally petition to amend it.
ARTICLE XVII
ASSIGNMENT
17.1 The terms, covenants and conditions hereof shall be
binding on the parties hereto and on their successors and assigns.
17.2 Either party may assign its interest under this
Agreement, without the consent of the other party, to an affiliate or any
company which shall succeed, by purchase, merger, consolidation, or other
transfer, to substantially all of its assets. In the event of any such
assignment, such successor shall be entitled to the rights and shall be subject
to the obligations of its predecessor. Seller acknowledges that pursuant to a
certain Gas Backup Agreement among Consumers Power Company, The Dow Chemical
Company (Dow) and the Midland Cogeneration Venture Limited Partnership dated
January 27, 1987, Buyer may be required to make an assignment to Dow of certain
rights under this Agreement. Seller specifically agrees to accept such
assignments, if any, made by Buyer to Dow in accordance with the aforementioned
Gas Backup Agreement. Except as provided above and in Section 17.3 below,
neither party shall assign this Agreement without the prior consent of the
other party, which consent shall not be unreasonably withheld; and in any
event, the party assigning its interest shall not, without a specific written
agreement with the other party to this contract, be released from any of its
obligations by-the other party. Nothing herein contained shall prevent or
restrict either party from pledging, granting a security interest in, or
assigning as collateral all or any portion of such party's interest to secure
any debt or obligation of such party under any mortgage, deed of trust,
security agreement or similar instrument.
17.3 Seller's rights, duties and obligations under this
Agreement shall be freely assignable and delegable, in whole or in part, from
time to time during the term of this Agreement. In the event Seller proposes
to so assign and/or delegate its rights, duties and/or obligations, it shall
provide Buyer with fifteen (15) days advance notice of such proposed assignment
and/or delegation. No such assignment and/or delegation shall relieve the
Seller of any
<PAGE> 20
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obligations hereunder, but rather Seller and its assignee shall be jointly and
severally liable to Buyer therefor, unless Buyer determines in good faith that
the person or entity to which any delegation of obligations has been made has
the financial or other capability to discharge such obligations. If Buyer in
good faith makes such determination, Seller shall be released of all
liabilities to Buyer to the extent of such obligations, with such release to be
evidenced by a writing in mutually agreeable form signed by the parties hereto.
ARTICLE XVIII
NOTICES
Except as otherwise herein provided, any notice, request, demand
or statement given in writing or required to be given in writing by the terms
of this Agreement shall be deemed given when deposited in the government mail,
postage prepaid, as first-class mail, directed to the post office address of
the parties as follows:
TO SELLER:
Northern Michigan Exploration Company
One Jackson Square
Jackson, MI 49202
Attention: Mr. G. L. Wright
TO BUYER:
Midland Cogeneration Venture
Limited Partnership
100 Progress Place
Midland, MI 48640
or at such other address as either party may from time to time specify as its
address for such purposes by registered or certified letter addressed to the
other party. Notices, requests, demands or statements made in person, by
telephone, Telecopier, Telex or wire shall be deemed given when received.
ARTICLE XIX
MISCELLANEOUS
19.1 As between the parties hereto, Seller shall, subject to
the provisions of Section 4.7, be or shall be deemed to be, in exclusive
control and possession of the gas sold hereunder and responsible for any damage
or injury caused thereby until such gas is delivered at the Point of Delivery,
at which
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time Buyer shall be or shall be deemed to be in exclusive control and
possession of such gas.
19.2 If, in any month during the term of this Agreement,
Seller is unable, for reasons other than force majeure, to deliver to Buyer a
quantity requested by Buyer of gas equal to the Maximum Daily Quantity times
the number of days in such month, Buyer shall have the right, in addition to
any other right or remedy provided by law or under any other Section of this
Agreement, to require Seller to pay for any unutilized pipeline demand charges
incurred by Buyer as a result thereof during such month.
19.3 No waiver by either Seller or Buyer of any default by
the other under this Agreement shall operate as a waiver of any future default,
whether of like or different character or nature.
19.4 The numbering and descriptive headings of particular
provisions of this Agreement are for the purpose of facilitating administration
and shall not be construed as having any substantive effect on the terms of
this Agreement.
19.5 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
ACCORDING TO THE LAWS OF THE STATE OF MICHIGAN.
19.6 Each of the parties agrees to proceed with due
diligence in a good faith effort to obtain such governmental authorizations as
may be necessary to enable performance of this Agreement.
19.7 This Agreement is subject to the January 27, 1987 Gas
Supply Option between Buyer and Dow and to Dow's rights under a certain Gas
Backup Agreement with Buyer and Consumers Power Company dated January 27, 1987.
19.8 If any provision of this Agreement is determined to be
invalid, void or unenforceable by any court having jurisdiction, such
determination shall not invalidate, void or make unenforceable any other
provision of this Agreement.
19.9 Notwithstanding anything to the contrary contained in
this Agreement, the liabilities and obligations of Buyer arising out of, or in
connection with, this Agreement or any other agreements entered into pursuant
hereto shall not be enforced by any action or proceeding wherein damages or any
money judgment or specific performance of any covenant in any such document and
whether based upon contract, warranty, negligence, indemnity, strict liability
or otherwise, shall be sought against the assets of the partners of Buyer. By
entering into this Agreement, Seller waives any and all right to sue for, seek
or demand any judgment against such partners and their affiliates, other than
Buyer, by reason of the nonperformance by Buyer of its obligations under this
Agreement or any other agreements entered into pursuant hereto, except to the
<PAGE> 22
19
extent such partners are legally required to be named in any action to be
brought against Buyer.
19.10 This Agreement may be amended only by a written
instrument executed by the parties hereto. This Agreement contains the entire
understanding of the parties with respect to the matter contained herein.
There are no promises, covenants or undertakings other than those expressly set
forth herein.
19.11 Buyer shall reimburse Seller for all "Excess Royalty
Payments" which Seller may be required to pay with respect to any "Royalty
Volume" of gas delivered under this Agreement. The term "Excess Royalty
Payments", as used herein, is the amount Seller is required to pay in excess of
the Contract Price paid to Seller hereunder with respect to lessor's royalty,
overriding royalty, net profits or other interests in production or proceeds
thereof from the leases from which gas is delivered by Seller to Buyer
hereunder. "Royalty Volume", as used herein, shall mean the volume of gas
attributable to any such royalty, overriding royalty, net profits or other
burden on such production or proceeds thereof, not to exceed twenty percent
(20%) of the total volume of gas delivered by Seller to Buyer under this
Agreement during the period for which such Excess Royalty Payments are due.
19.12 The warranty of deliverability given by seller under
this Agreement may be converted to a dedication of Seller's reserves, at the
option of Buyer, if Seller:
(a) provides another reserve dedication to a subsequent
purchaser of its natural gas production for a
project or use which is similar to Buyer's Plant,
upon terms and conditions substantially similar to
those contained herein (and for this purpose
substantially similar terms shall be deemed to
exist where the contract entered into between the
Seller and the third party is for a duration of
greater than five (5) years, contains prices which
are defined or readily ascertainable at the
commencement of the contract, and pertains to
dedicated reserves which are located in Seller's
producing areas); or
(b) dedicates more than fifty percent (50%) of its
proved reserves that are in the United States and
not
<PAGE> 23
20
dedicated under a contract executed prior to April
1988.
Buyer's right to request that Seller provide a dedication of reserves, and
Seller's obligation to provide such dedication, shall terminate at the end of
the eighth (8th) Contract Year.
19.13 This agreement supersedes the agreement between the
parties dated April 1, 1988 and as of the date hereof such agreement of
April 1, 1988 shall no longer be binding upon the parties.
IN WITNESS WHEREOF, this Agreement is executed in multiple
originals effective as of the day and year first hereinabove written.
BUYER MIDLAND COGENERATION VENTURE LIMITED
PARTNERSHIP
By: /s/ Rodney E. Boulanger
Name: Rodney E. Boulanger
Title: President and CEO
SELLER NORTHERN MICHIGAN EXPLORATION COMPANY
By: /s/ Gordon L. Wright
Name: Gordon L. Wright
Title: Vice President Operations
SELLER CMS ENERGY CORPORATION
By: /s/ S. Kinnie Smith, Jr.
Name: S. Kinnie Smith, Jr.
Title: President
<PAGE> 24
21
EXHIBIT A
POINT(S) OF DELIVERY
<PAGE> 25
22
EXHIBIT B
POWER PURCHASE AGREEMENT
<PAGE> 26
23
IN WITNESS WHEREOF, this Agreement is executed in multiple originals
effective as of the day and year first hereinabove written.
BUYER MIDLAND COGENERATION VENTURE LIMITED
PARTNERSHIP
By: /s/ Rodney E. Boulanger
Name: Rodney E. Boulanger
Title: President and CEO
SELLER NORTHERN MICHIGAN EXPLORATION COMPANY
By: /s/ Gordon L. Wright
Name: Gordon L. Wright
Title: Vice President Operations
SELLER CMS ENERGY CORPORATION
By: /s/ S. Kinnie Smith, Jr.
Name: S. Kinnie Smith, Jr.
Title: President
<PAGE> 1
EXHIBIT 10.8
GAS PURCHASE CONTRACT
Between
CONSUMERS POWER COMPANY
As Buyer
and
NORTHERN MICHIGAN EXPLORATION COMPANY
As Seller
December 1, 1987
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE PAGE
- ------- ------
<S> <C> <C>
I. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. Seller's Reservations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
III. Commitment of Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
IV. Determination of Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
V. Quantity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
VI. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
VII. Delivery Point - Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
VIII. Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
IX. Quality of Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
X. Delivery Pressure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
XI. Measurement and Testing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
XII. Warranty of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
XIII. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
XIV. Billing and Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
XV. Conditions of Connection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
XVI. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
XVII. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
XVIII. Laws and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
XIX. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
XX. Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
XXI. Transportation of Liquids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
XXII. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>
<PAGE> 3
GAS PURCHASE CONTRACT
THIS CONTRACT made and entered into as of, and effective the first
day of December 1987 by and between NORTHERN MICHIGAN EXPLORATION COMPANY, a
Michigan corporation, hereinafter referred to as Seller, and CONSUMERS POWER
COMPANY, a Michigan corporation, hereinafter referred to as Buyer:
W I T N E S S E T H :
WHEREAS, Seller owns certain oil and gas leases on property situated
in the northern portion of the Southern Peninsula of Michigan within the
Contract Area as described on Exhibit "A" hereto and desires to sell certain
gas which has been or may be developed thereon, in accordance with the terms
and conditions hereof; and
WHEREAS, Buyer, a public utility engaged in the distribution and sale
of gas within the State of Michigan, desires to purchase gas that may be
produced from Seller's leases within said Contract Area;
NOW, THEREFORE, in consideration of the covenants and promises of
each as set forth herein, the parties agree as follows:
ARTICLE I
Definitions
1. The term "lease" shall mean any written instrument which gives
Seller the rights to drill for, produce, and dispose of gas in, under, and from
the lands described therein.
2. The term "gas" means all elements, compounds, and mixtures
thereof which are contained in the effluent produced from a well and which
remain in the vapor phase when produced at the mouth of the well or from a
lease separator.
3. The term "gas well gas" shall mean gas produced from a well
classified as a gas well by the regulatory agency having jurisdiction.
<PAGE> 4
2
4. The term "oil well gas" shall mean gas produced from a well
classified as an oil well by the regulatory agency having jurisdiction.
5. The term "reserves," unless the context makes evident another
intended meaning, shall mean that quantity of gas underlying the acreage
attributable to each well, which may reasonably be expected to be recovered and
delivered under the terms of this Agreement plus the volume of gas which has
theretofore been delivered by Seller from such well to Buyer.
6. The term "Contract Area" shall mean that area encompassed by
the description set forth on Exhibit "A", as it may be revised from time to
time as hereinafter provided.
7. The term "contract year" shall mean the calendar year; except
that the first contract year shall commence on the date of this Agreement and
shall end on December 31 of the year in which this Agreement is dated.
8. The term "Winter Purchase Period" shall mean a period of six
(6) months from October 1 of one Contract Year through March 31 of the next
Contract Year.
9. The term "Contract Area Purchase Commitment" shall mean the
daily quantity of gas which Buyer commits to purchase from the Contract Area
under this Agreement and other agreements. During the Winter Purchase Period
the Contract Area Purchase Commitment shall be equal to the lesser of (a) the
daily average production allowable authorized by the State for all wells
selling gas from the Contract Area to Buyer, (b) 15 MMcf per day or (c) 3 MMcf
per day per well. For the remainder of each year the Contract Area Purchase
Commitment shall be equal to the simple average of Buyer's daily purchases from
the Contract Area for the preceding Winter Purchase Period multiplied by
thirty-three percent (33%), but in no event less than the lesser of (a) 15 MMcf
per day or (b) the aggregate at the daily well production capabilities which
shall, for purposes of this provision, never exceed 1 MMcf per day for any
single well.
<PAGE> 5
3
10. The term "annual contract quantity" shall, subject to Article
XIX, mean Buyer's minimum annual purchase obligation hereunder. Said quantity
to be the sum in Mcf of Buyer's share of the daily Contract Area Purchase
Commitments during the contract year. Said share, as a percentage of the total
may vary from day to day but shall be equal to Seller's daily average
production allowable authorized by the State for gas produced hereunder divided
by the combined daily average production allowable authorized by the State for
all Sellers with regard to the gas committed to Buyer from the Contract Area
pursuant to this and other agreements. Notwithstanding the above, the annual
contract quantity hereunder shall not exceed eighty-five percent (85%) of the
daily average production allowable authorized by the State for the gas
committed hereunder.
11. The term "month" shall mean the period of time
beginning at 7:00 a.m. Eastern Standard Time on the first day of a calendar
month and ending at 7:00 a.m. Eastern Standard Time on the first day of the
next succeeding calendar month.
12. The term "day" shall mean a period of twenty-four
(24) hours beginning at 7:00 a.m. Eastern Standard Time of one calendar day and
ending at 7:00 a.m. Eastern Standard Time on the next succeeding calendar day.
13. The term "cubic foot of gas" shall denote the unit
of gas measurement hereunder and shall mean a cubic foot of gas at an absolute
pressure of fifteen and twenty-five thousandths (15.025) pounds per square inch
at a temperature of sixty degrees Fahrenheit (60 degrees F).
14. The term "deliverability" is used as a measure of a
well's productivity and shall mean the average quantity of gas, per
twenty-four-hour period, which a well being tested for deliverability at a time
agreed to by both parties, produced during a seventy-two-hour period of
continuous delivery into Buyer's pipeline operating at the then existing
pipeline pressure not to exceed one thousand four hundred forty (1440) psig.
15. The term "Mcf" shall mean one thousand (1,000) cubic feet.
<PAGE> 6
4
16. The term "Btu" shall mean British thermal unit.
17. The term "MMBtu" shall mean 1,000,000 British Thermal Units
(Btu's).
18. The term "Kalkaska Plant" shall mean the gas processing
plant located in Section 31, Township 27 North, Range 7 West, Kalkaska County,
Michigan, and operated by Amoco Production Company as of the date of this
Agreement.
19. The term "Plant Owner" means an owner of the "Kalkaska Plant"
as described in the Kalkaska Plant Processing and Operating Agreement dated
November 15, 1974.
20. The term "tender of gas" or like expression shall be
understood to mean the notice by Seller to Buyer that Seller has gas available
for delivery at the point of delivery specified in the notice. A notice of
completion and request for connection, for instance, would constitute a
"tender." Such one-time notice to Buyer shall constitute a continuous tender
of such gas unless and until Seller shall give Buyer written notice to the
contrary.
21. The term "Common Line" means that certain wet header gas
transmission line (beginning at the tap valve used to deliver the gas entering
said line) and any extensions thereof jointly used by Buyer and Michigan
Consolidated Gas Company.
22. The term "Common Delivery Point" means the terminus
of the Common Line situated in Section 31, Township 27 North, Range 7 West,
Kalkaska Township, Kalkaska County, Michigan.
23. The term "psig" shall mean pounds per square inch gauge.
24. The term "psia" shall mean pounds per square inch absolute.
<PAGE> 7
5
ARTICLE II
Seller's Reservations
1. Seller reserves and excepts from the terms of this
Agreement the following:
(a) All oil and condensate separated and saved by
Seller.
(b) Liquefiable hydrocarbons subject to Seller's
extracting or arranging for the extraction
thereof as herein provided.
(c) Nonhydrocarbon substances subject to
Seller's contracting or arranging for the
extracting thereof as herein provided.
(d) Gas for development and field operations on
any of Seller's acreage, including fuel for
the operation of compression facilities by
Seller or fuel which Seller may elect to
furnish or sell to drilling contractors for
fuel in drilling on Seller's acreage.
(e) Gas for repressuring, pressure maintenance,
cycling, gas lift in a closed system, and
the use of gas as a drilling fluid.
(f) Gas which Seller is obligated to furnish
lessors under leases covering acreage
committed hereto.
(g) Gas attributable to any acreage acquired by
Seller and which is subject to any
obligation or reservation made by a third
party for the purchase and sale of such gas.
2. Seller also reserves to itself the following:
(a) The right to operate its property free from
any control by Buyer in such manner as Seller, in its sole discretion, may deem
advisable, including, without limitation by enumeration the right to drill new
wells, to test wells, to repair and rework wells, and to abandon any well and
the right to renew, extend, release, assign, surrender or permit to expire any
lease as Seller deems best in its sole and exclusive discretion.
<PAGE> 8
6
(b) The right to unitize any of its leases with other
properties of Seller and of others in such manner as to protect Buyer's
rights hereunder, in which event this Agreement will cover Seller's interest in
the unit and gas attributable thereto, to the extent that such interest is
derived from leases committed hereunder. The term "unit" as used in this
subparagraph shall mean any unit recognized by the state regulatory agency
having jurisdiction or other pooling of acreage not requiring recognition by a
regulatory agency in which two (2) or more producers contribute acreage and
each producer owns an undivided interest in the total acreage contributed, such
as working interest units, areas of mutual interest, and joint exploration and
development areas.
(c) The right to sell gas well gas Buyer is not then
taking to other purchasers when Buyer is not taking gas at rates at
least equal to the daily production rate allowed by the government agency
having jurisdiction; however, Buyer may increase Buyer's daily production takes
at any time upon notice to Seller provided there is gas available which is not
then committed to other purchasers.
ARTICLE III
Commitment of Gas
1. Seller commits to the performance of this Agreement
all gas reserves hereafter produced from or attributable to the reservoir
penetrated by well unit(s) from the lands described on Exhibit "A",
attributable to any interest in such gas reserves now or hereafter owned by
Seller.
2. Seller, with Buyer's written concurrence, may add
well units to this Agreement provided that such units lie within Alpena,
Cheboygan, Montmorency or Presque Isle Counties, Michigan and outside the lands
described on Exhibit "A". If Seller elects to so add well units to this
Agreement, Seller shall prepare and submit to Buyer a description of the
additional units and the written acceptance by Buyer of the document containing
such description shall constitute
<PAGE> 9
7
Buyer's written concurrence, and thereupon Exhibit "A" to this Agreement shall
be deemed to have been amended to reflect the additional units.
3. The gas reserves discovered in well units from lands
described on Exhibit "A", or any well units added to this Agreement
pursuant to Section 2 above, shall be determined in accordance with the
provisions of Article IV hereof.
ARTICLE IV
Determination of Reserves
1. Seller shall, upon request from Buyer, and from time to
time, make available to Buyer all factual information and data
(excluding interpretation) in Seller's possession that may reasonably be needed
by Buyer for the purpose of estimating the amount of reserves in any reservoir
or pool in the Contract Area in which Seller may own an interest. Buyer
recognizes that all information furnished by Seller to Buyer pursuant to this
Section is confidential and constitutes the proprietary information of Seller,
and Buyer shall not disclose or in any manner whatsoever divulge any such
information to others without Seller's written permission, except as is
required by the Michigan Public Service Commission or any other regulatory
agency having jurisdiction to approve facilities construction.
2. Following execution of this Agreement, Seller shall
promptly make available to Buyer such information an provided for in the
preceding Section.
3. After the date of initial deliveries hereunder, Buyer may
request and Seller shall make, at reasonable intervals, a redetermination of
reserves in any one or more of the reservoirs or pools covered by this
Agreement. When a new gas well is committed hereunder, either Seller or Buyer
shall have the right to cause a redetermination of reserves to be made for the
purpose of calculating reserves attributable to such new well; otherwise,
neither Seller nor Buyer may
<PAGE> 10
8
require that the reserves in any particular reservoir or pool be redetermined
more frequently than once each year.
ARTICLE V
Quantity
1. After deliveries of gas have commenced under this
Agreement, Seller shall sell and deliver to Buyer and Buyer shall purchase and
take from Seller hereunder, or pay Seller for, whether taken or not, the annual
contract quantity of gas, as that term is defined in Article I Section 10
hereof, with adjustments where appropriate as follows:
(a) In the event of Seller's inability to perform
its delivery obligation in accordance with a specific request from Buyer
because of a valid force majeure (on the part of either Seller or Buyer), then
Buyer's take-or-pay obligation for the time of the force majeure shall be the
volume, if any, which Seller was capable of delivering and Buyer of taking
during the period of such force majeure.
(b) If for any reason other than force majeure
Seller shall fail to make available for delivery a specific volume requested by
Buyer for a given month, Buyer's take-or-pay obligation for such month shall be
the volume so made available.
2. If the total volume of gas well gas actually purchased
and taken by Buyer during any contract year is less than the annual contract
quantity adjusted as provided for above, then (a) Seller shall have the option
of terminating this Agreement following ninety (90) days written notice to
Buyer (such option shall be waived, however, if not exercised within fifty (50)
days following the end of the contract year in which Buyer's purchases are
deficient); or if not terminated by Seller, then (b) Buyer, on or before the
25th day of the second month following the end of such contract year, shall pay
Seller for any such deficiency volume assuming that the deficiency volume would
contain 1,000
<PAGE> 11
9
Btu per cubic foot. As to gas so paid for but not taken, Buyer shall have the
right to take such gas in order of accrual during the remaining term of the
contract, free of additional cost to Buyer. The right to take such gas shall
not accrue in each ensuing contract year until the annual contract quantity for
said year has been taken. Upon the expiration of the term hereof, or upon
termination as otherwise provided for herein, Seller shall refund to Buyer for
the payments if any made to Seller hereunder that was never taken by Buyer.
3. In the event Seller's deliverability on a daily basis
hereunder should exceed the annual contract quantity x 117.6% divided by the
number of days in said contract year, Buyer shall either elect to purchase the
excess, or give Seller the option to have such excess released from this
Agreement.
ARTICLE VI
Term
This Contract, subject to the right of cancellation herein
provided, shall be effective as of the day hereof through December 31, 1995 and
shall continue from year to year thereafter subject to cancellation by either
party on three (3) months' written notice given prior to December 31, 1995 or
any anniversary date thereof. If Seller uses gas committed hereunder for
repressuring or secondary recovery operations as provided for under Article II,
Paragraph 1, Subparagraph (e), the term of this Agreement shall, at Buyer's
option, be extended, for the properties involved in such repressuring or
secondary recovery operations, for a period of time equal to the time such
operations were actually conducted.
<PAGE> 12
10
ARTICLE VII
Delivery Point - Liability
1. The point of delivery for each well for gas sold
hereunder shall, at Seller's option, be at the inlet of Buyer's tap valve
which tap valve shall be at a mutually agreeable location on the Common
Line.
2. Title to gas shall pass from Seller to Buyer at the
inlet of Buyer's facilities at said point of delivery. Seller shall be in
control and possession of the gas delivered hereunder and responsible for any
damage or injury caused thereby until the same shall have been delivered to
Buyer, after which delivery Buyer shall be deemed to be in exclusive control
and possession thereof and responsible for any injury or damage caused thereby,
except as otherwise provided for under Article XX.
3. Buyer agrees to reimburse Seller for gathering the
gas to the point of delivery in an amount equal to 7 cents/MMBtu for the first
mile or fraction of a mile of gathering line installed by Seller and 2
cents/MMBtu for each additional mile thereafter, such reimbursement to be paid
in addition to the price paid pursuant to Article VIII hereof.
ARTICLE VIII
Price
1. Subject to the other provisions hereof the price to
be paid by Buyer to Seller for gas purchased and sold, or paid for when not
taken as provided in Article V hereof, shall be $2.10 per MMBtu effective
January 1, 1988 and said price shall thereafter be escalated at a rate of 1.8%
semiannually with such escalations to take effect on January 1 and July 1 of
each year.
2. Seller or Buyer shall have the option to request a
price redetermination effective July 1, 1989 and annually thereafter with the
redetermined price to be equal to the average commodity gas cost (ACGC) charged
by ANR Pipeline (ANR), Panhandle Eastern Pipe Line Company (Panhandle),
Northern
<PAGE> 13
11
Natural Gas Company (Northern Natural), Northern Gas Pipeline Company of
America (Natural) and Trunkline Gas Company (Trunkline). The ACGC charge shall
be based on rate schedules in effect on April lst of each redetermined year.
The escalation provided for in Paragraph 1 of this Article VIII shall also
apply to any redetermined price.
3. If one year after Seller's first delivery of gas
hereunder or at any time thereafter it is determined that the marketability of
the subject gas is hampered in that the price on an MMBtu basis, payable under
the provisions of this Article, exceeds 95% of the weighted average cost of
Buyer's interstate gas, calculated using the gas component in the commodity
charge of the rate charged by all of Buyer's interstate pipeline company
suppliers (e.g., Trunkline Gas Company and Panhandle Eastern Pipe Line Company)
pursuant to a government approved tariff, then Buyer shall have the option to
limit the price paid hereunder to a level equal to 95% of such weighted average
cost. When in effect, such a limited price shall be increased by the same
escalation factor and as of the same effective dates as provided in Section 1
of this Article. If Buyer chooses to limit the price as herein provided,
Seller shall have the right to solicit offers from others to purchase the gas
at a higher price and, if Seller notifies Buyer of a bonafide third party offer
to purchase such gas at a higher price, Buyer shall, within thirty (30) days
thereafter, either agree to purchase the gas at a price equivalent to that
contained in the third party offer or release its contractual claim to the gas
and transport or exchange such gas under Buyer's transportation or exchange
tariff existing at such time which is applicable to for the class of third
party purchaser of such gas.
4. Notwithstanding any of the above, in no event shall
the total remuneration per MMBtu provided for in this Agreement exceed 80% of
the equivalent average price (rounded to the nearest $.001) of one million
(1,000,000) Btu of No. 6 Oil, using the daily prices reported by "Platt's
Oilgram Price Report," U.S. Tank Car Transport Lots, Midcontinent, for Detroit
for the
<PAGE> 14
12
preceding six (6) months. For the purposes hereof, a gallon of No. 6 Oil shall
be considered to contain one hundred fifty thousand (150,000) Btu. Should
"Platt's Oilgram Price Report" be discontinued, it is agreed that any other
similar service may be used in its place.
5. Furthermore, the price shall in no event fall below
$2.00 per MMBtu and such price will escalate at the rate of one and one-half
percent (1.5%) annually effective on January 1, 1989 and each January 1st
thereafter.
6. All prices pursuant to this Article VII shall be calculated
to the nearest one thousandth of one cent (.001 cent).
7. Any price increase provided for in this Article requiring
approval of the Michigan Public Service Commission or any successor state
regulatory agency shall not be effective until approved by such regulatory
agency.
8. If at any time the Michigan Public Service Commission (or
any successor state regulatory agency) shall disallow any portion of the price
paid Seller hereunder from Buyer's purchased cost of gas then in such event
Buyer shall reduce the price paid Seller to the maximum price from time to time
allowed; provided, however, Buyer shall always prosecute diligently to pay
Seller at the full contract price and to obtain inclusion of the full contract
price hereunder in Buyer's purchased cost of gas.
9. If at anytime during the term hereof, the price is reduced
pursuant to the preceding paragraph, Seller shall have an ongoing option to:
(a) terminate this Agreement upon thirty (30) days written notice to Buyer for
as long as Seller is not being paid the full price for gas otherwise payable
herein; or (b) exercise the rights specified under Section 3 above to sell such
gas to a third party and have Buyer transport or exchange such gas.
<PAGE> 15
13
ARTICLE IX
Quality of Gas
1. All gas delivered by Seller under the terms of this
Contract shall conform to the following specifications:
(a) The gas shall be commercially free from dust, gum,
gum forming constituents, condensate and solids when delivered to Buyer.
(b) The gas shall not at any time have an oxygen content
in excess of one percent (1%) by volume and Seller shall make every
reasonable effort to keep the gas free of oxygen.
(c) The gas shall not contain more than one (1) grain of
hydrogen sulphide per one hundred (100) cubic feet. The hydrogen sulphide
content shall be determined by a Cadmium Sulphate, Barton Titrator and/or
a Tutwiler quantitative test, or any other mutually agreeable method.
(d) The gas shall not contain more than twenty (20)
grains of total sulphur per one hundred (100) cubic feet.
(e) The total gross heating value per cubic foot of gas
shall be not less than nine hundred fifty (950) Btu, however, it is agreed
that Buyer shall accept gas from individual wells having a heating value
of less than nine hundred fifty (950) Btu per cubic foot if the composite
stream of gas in the Common Line immediately downstream from the point of
delivery, contains gas with a heating value of at least nine hundred fifty
(950) Btu per cubic foot. It is also agreed that in similar manner Buyer
will accept gas from individual wells having a hydrogen sulphide content
in excess of one (1) grain per one hundred (100) cubic feet or in excess
of twenty (20) grains total sulphur per one hundred (100) cubic feet if
said composite stream at the point above described on the Common Line does
not contain more than one-fourth (1/4) grain of hydrogen sulphide or ten
(10) grains of total sulphur; provided, however, that in no event shall
any gas sold hereunder and delivered into a lateral owned by any third
party exceed one
<PAGE> 16
14
(1) grain hydrogen sulphide per one hundred (100) cubic feet at
the point of connection with said lateral. It is agreed that if
because of such relaxation of quality specifications as to
individual wells, the gas in Seller's composite stream does not
meet the specifications hereinabove set forth for such composite
stream, then Buyer shall have the right to refuse to take such
substandard gas from any individual well or wells so long as such
composite stream would fail to meet the specified standards.
(f) The term "total gross heating value per cubic foot"
shall mean the number of British thermal units, produced by the
combustion at constant pressure, of the amount of gas on a
water-free basis which would occupy a volume of one (1) cubic
foot at a temperature of sixty degrees Fahrenheit (60 degreesF)
and at a pressure of fifteen and twenty-five thousandths
(15.025) psia, when the products of combustion are cooled to the
initial temperature of gas in air and when the water formed by
combustion is condensed to a liquid stage.
(g) The water content of the gas shall not exceed seven
(7) pounds per million cubic feet measured at fifteen and
twenty-five thousandths (15.025) psia and sixty degrees
Fahrenheit (60 degrees F).
(h) The gas should not contain by volume more than two
percent (2%) carbon dioxide.
2. Should the gas offered for sale to Buyer from any
well or other delivery point fail at any time to conform to any of the
specifications of this Article, Buyer subject to Paragraph 1, Subparagraph (e)
of this Article IX may notify Seller of any such failure and Seller shall make
a diligent effort to correct such failure in Seller's wells so as to deliver
gas conforming to the above specifications. If Seller is unable to deliver gas
conforming to the above specifications by treatment consistent with prudent
operations and by means which are economically feasible in Seller's opinion,
Buyer may at its option, accept delivery of the gas and treat the gas so that
it will conform to the above
<PAGE> 17
15
specifications or Buyer may refuse to take such gas and in the event of such
refusal Buyer shall not be obligated to attribute volumes to such well or other
delivery point for take-or-pay purposes. In the event Buyer elects to accept
delivery of gas not conforming to the specifications herein and to treat said
gas so it will conform to the specifications herein, Seller shall reimburse
Buyer for the cost, including equipment, for treating said gas, but not to
exceed seventy-five percent (75%) of the sum received by Seller for such gas.
In the event both Seller and Buyer elect not to treat gas not meeting the
quality specifications herein, that gas and that gas only, shall be released
from commitment under the terms hereof.
3. It is agreed that if Seller should elect (subject to
Article XX hereof) to process or have processed gas sold hereunder, the residue
gas delivered from Seller's or other processing facility shall not contain more
than one-fourth (1/4) grain of hydrogen sulphide per one hundred (100) cubic
feet.
ARTICLE X
Delivery Pressure
1. Seller shall deliver gas well gas at a pressure sufficient
to allow the gas to enter Buyer's facilities at the delivery points hereunder,
provided Seller shall not be obligated to deliver gas well gas to Buyer at a
pressure in excess of one thousand four hundred forty (1440) psig. If the wells
completed hereunder are unable to produce the annual contract quantity against
the pressure prevailing in Buyer's pipelines and Seller elects to install
compression facilities, then, except as herein otherwise provided, Buyer agrees
to reimburse Seller: (a) six cents (6.00 cents) per MMBtu for gas from a well
that is compressed, such reimbursement will not, however, be made with respect
to monthly deliveries hereunder that are in excess of the annual contract
quantity unless the parties hereafter agree in writing to the contrary.
<PAGE> 18
16
2. Should Seller elect not to install compression facilities
in any well or wells completed in any gas well gas reservoir when the pressure
in the reservoir is inadequate to allow delivery of the gas into Buyer's
facilities, then the Buyer shall have the right to install the necessary
compression facilities. If neither the Seller nor the Buyer makes such
election, then such well or wells shall be released from this Agreement.
3. Seller shall deliver the oil well gas at a pressure
sufficient to enter Buyer's facilities but not to exceed one thousand four
hundred forty (1440) psig. If Seller is required to compresses oil well gas or
flash vapors to effect deliveries thereof to Buyer, Buyer agrees to reimburse
Seller six cents (6.00 cents) per MMBtu on volumes for such compressed gas,
which rate shall be increased by two-tenths cent (.20 cents) on January 1,
1989, and each January 1 thereafter. Seller agrees to furnish fuel for such
compression at no cost or expense to Buyer.
4. If only a portion of the gas sold to Buyer by Seller from
any given well is compressed pursuant to this Article, Seller shall measure the
gas from said well actually compressed and shall, consistent with the
foregoing, invoice Buyer therefor on or before the twentieth (20th) day of the
month following the month in which such gas was actually compressed. If all
gas sold to Buyer by Seller from any given well is compressed pursuant to this
Article, Seller shall furnish Buyer with the name of the well on or before the
twentieth (20th) day of the month following the mouth in which such compression
actually begins. Under no circumstances shall the Buyer be obligated to
reimburse the Seller for compression prior to the written notification and the
actual commencement of compression.
5. Buyer, when operating its gathering system in conformance
with the pressure conditions herein specified, shall not be obligated to
attribute volumes for take-or-pay purposes in excess of the volumes made
available at sufficient pressures to enter Buyer's lines at the point of
delivery.
<PAGE> 19
17
6. If at any time the Michigan Public Service Commission (or
any successor state regulatory agency) shall disallow any of the reimbursement
paid Seller hereunder from Buyer's purchase cost of gas in a ratemaking
proceeding, then in such event Buyer shall reduce the reimbursement paid to
Seller to the maximum rate from time to time allowed.
ARTICLE XI
Measurement and Testing
1. Buyer shall install, maintain, and operate, at no expense
to Seller, at or near the location of Seller's wellhead(s) equipment of a
character and design acceptable to Seller and perform all tests required to
accomplish the measurement of volumes, temperatures, specific gravity and
heating values. Such volume measuring equipment shall be installed,
maintained, and operated in accordance with ANSI/API Standard 2530, dated 1978,
of the American National Standards Institute, as amended from time to time, and
the volume of gas delivered hereunder and measured by such orifice meters shall
be computed in accordance with said report.
2. The temperature of the gas passing through each orifice
meter shall be determined by means of a recording thermometer installed by
Buyer so that it will properly record the temperature of the gas through the
meter. The arithmetical average of temperature recorded during the time gas was
flowing on any day shall be used in computing gas volumes for that day.
3. The specific gravity of the gas at the points of delivery
shall be determined by Buyer at least once each six (6) calendar months, or as
often as may be found necessary in practice, by a method of test generally
acceptable to the industry. Whenever a recording gravitometer is used, the
arithmetical average of the gravity recorded during the time gas was flowing on
any day shall be used in computing gas volumes for that day.
<PAGE> 20
18
4. Correction shall be made by Buyer for deviation from
Boyle's Law, and the factors for making such correction shall be obtained from
procedures contained in the aforesaid Standard 2530, or from such other source
as may be agreed upon by the parties hereto.
5. Unless otherwise agreed upon by the parties hereto, the
atmospheric pressure shall be assumed to be fourteen and four-tenths (14.4)
psia for the purpose of calculating the volumes of gas delivered hereunder.
6. Buyer shall test and calibrate all of Buyer's meters and
instruments used in measuring or testing the gas delivered hereunder at least
once each calendar month, or at less frequent intervals agreed to by the
parties on meters at specific delivery points. Any measurement equipment found
by calibration test to be registering inaccurately shall be immediately
restored to accurate operation. No correction shall be made for past
deliveries where inaccuracies are two percent (2%) or less, but if such
equipment is found to be out of service or registering inaccurately by more
than two percent (2%), the registrations of such equipment shall be disregarded
for any period known or agreed upon, or, if such period is not known or agreed
upon, for a period extending back one-half (1/2) of the time elapsed since the
last calibration test, or sixteen (16) days, whichever is shorter. The volume
of gas delivered during such period shall be estimated by using the first of
the following methods which is feasible:
(a) by using the registration of check measuring
equipment if installed and registering accurately;
(b) by correcting the error, if the extent of the error
is ascertainable by calibration test or mathematical calculation; or
(c) by estimation, based on deliveries under similar
conditions when the equipment was registering accurately.
7. Buyer shall determine the gross heating value in Btu per
cubic foot of gas, at each delivery point hereunder at such intervals
as in Buyer's
<PAGE> 21
19
opinion are required to determine the heating value hereunder but such
intervals shall be of such duration as is necessary to determine accurate
values to be used in Article VIII, Paragraph 1.
8. Buyer shall make such test for determining hydrogen
sulphide content, total sulphur content, oxygen content, and carbon dioxide
content at such intervals as in Buyer's opinion are required to determine that
the gas meets the applicable quality specifications hereunder.
9. Seller may, at its option and expense, install and operate
measurement and testing equipment to check Buyer's equipment, but measurement
and testing of gas for the purpose of this Contract shall be by Buyer's
equipment, except as hereinabove specifically provided to the contrary. Any
such check measurement or testing equipment installed by Seller shall be so
installed and operated as not to interfere with the operation of Buyer's
equipment.
10. Seller shall have the right to inspect, at all reasonable
times, the measurement and testing equipment, charts, and other measurement
data of Buyer, and Buyer shall have a similar right with respect to Seller's
equipment, charts, and data, but the reading, calibration and adjustment of
such equipment shall be performed only by the owner thereof. Buyer shall give
Seller at least ten (10) days' notice of any test of Buyer's measuring or
testing equipment in order that Seller may have a representative present to
witness the tests, and Buyer shall have the right to be present at the time
Seller's check measuring or testing equipment is adjusted or calibrated.
11. If Seller shall request a special test of any of Buyer's
measurement equipment or equipment for testing the quality of gas sold
hereunder, Buyer shall make such test, and if the equipment in question is
registering correctly, the actual expenses of such test shall be borne by
Seller; otherwise, the actual expenses shall be borne by Buyer.
12. All test data, charts, and similar records shall be
preserved by the owners thereof for a period of at least two (2) years.
<PAGE> 22
20
ARTICLE XII
Warranty of Title
1. Seller hereby warrants title to the gas sold by it hereunder
and its right to sell the same, and warrants that all such gas is owned by it
free from all liens, encumbrances and adverse claims. Seller shall
indemnify, save and hold Buyer free and harmless from all suits, actions,
debts, accounts, damages, costs, losses and expenses arising from or out of
adverse claims of any and all persons to the gas sold by Seller hereunder.
2. With respect to each lease covered by this Contract, it is
agreed, notwithstanding anything herein contained to the contrary, that, in the
event it shall be determined that Seller owns less than the interest in such
lease described in this Agreement as being owned by Seller and thereby
Seller shall be deemed to have breached any of the warranty provisions of this
Agreement then from and after such determination, this Agreement shall be
deemed to have been amended so as to cover and include the interest in such
lease which is, in fact, owned by Seller.
ARTICLE XIII
Taxes
1. Seller agrees to pay or cause to be paid all taxes imposed upon
gas prior to its delivery to Buyer hereunder or upon any occupation or
privilege relating to the production, sale or delivery of such gas to Buyer.
Buyer agrees to pay or cause to be paid all taxes imposed on such gas after
its receipt by Buyer, (except those, if any covered in Section 5 below) or any
occupation or privilege relating to the transmission or sale of such gas after
its receipt by Buyer.
2. As used in this Article XIII, the term "tax" shall mean sales,
transaction, occupation, service, production, severance, gathering,
transmission, value added, export or excise tax, assessment or fee levied,
assessed or fixed
<PAGE> 23
21
by governmental authority, and taxes of similar nature or equivalent in effect.
Any present or future tax levied on any liquid product which Seller is entitled
to retain shall be borne wholly by Seller.
3. Buyer agrees to deduct from the amount payable to Seller the
severance and privilege taxes due from the sale of gas hereunder and shall
remit and report to the State of Michigan in accordance with the severance and
privilege tax filing requirements.
4. If Seller receives written notice from Buyer that questions the
validity of any tax, Seller will consult with Buyer as to the best procedure
to be followed in the payment of the questioned tax and the means of testing
its validity, having due regard for the protection of the interests of both
Seller and Buyer. Following such consultation, each party will pursue the
course of action it deems proper.
5. Nevertheless, Buyer shall never be liable for and shall never
be obligated to reimburse Seller for any tax levied or assessed upon or with
respect to oil, condensate, liquefiable hydrocarbons or other liquids, helium
or nonhydrocarbon substances which may be extracted or separated by Seller from
gas delivered to Buyer hereunder, prior to such delivery, or upon or with
respect to the process of extracting or separating any such products or
substances from such gas or of handling, selling, transporting or otherwise
dealing in or with any of such products or substances, all of which taxes shall
be borne and paid solely by Seller and if paid by Buyer shall be reimbursed by
Seller to Buyer.
ARTICLE XIV
Billing and Payment
1. Buyer, not later than the twenty-fifth (25th) day of each
calendar month, shall furnish Seller a detailed statement showing the total
quantity of gas delivered by Seller to Buyer hereunder during the preceding
calendar month and the amount due and payable by Buyer therefor, and
simultaneously shall make
<PAGE> 24
22
payment to Seller in such amount. Upon request, Buyer shall furnish Seller
charts and measurement data supporting such statement.
2. For gas not taken by Buyer as provided for in Article V hereof,
Seller shall bill Buyer for said gas by rendering a statement on or before the
tenth (10th) day of the second month following the end of each contract year.
Buyer shall pay Seller for the gas so billed no later than the twenty-fifth
(25th) day of the second month following the end of each contract year.
3. Should Buyer fail to pay any amount due Seller under the
provision of this Agreement when same is due, interest shall accrue at the
prime interest rate, as established by the First National Bank of Chicago in
effect at the time of such deficiency, per annum, from the date payment is due
until paid. If such default in payment continues for sixty (60) days, Seller
may, in addition to all other rights and remedies, suspend deliveries of
gas hereunder and terminate this Agreement. The foregoing provision in this
Section 3 shall not apply, however, if Buyer's refusal to pay is the result of
a bona fide dispute as to the accuracy of any statement and Buyer pays all
amounts not in dispute.
4. On or before the 15th of each calendar month, Seller shall
render a statement to Buyer of the gathering costs (as the same are defined in
Article VII) for the preceding calendar month.
5. On or before the last day of each month, Buyer shall pay Seller
for the gathering costs of the Seller during the preceding month. This
payment obligation shall be extended to the extent, if any that Seller's
statement for such gathering costs is not received by the 15th of the month.
6. Each party shall have the right at reasonable hours to examine
the books, records and charts of the other party to the extent necessary to
verify the accuracy of any statement, charge, or computation made pursuant to
the provisions of any article hereof. If any such examination reveals any
inaccuracy in any billing theretofore made, the necessary adjustment in such
billing and payment shall be promptly made, provided that no adjustment for
any billing or
<PAGE> 25
23
payment shall be made after the lapse of two (2) years from the rendition
thereof unless challenged prior thereto.
ARTICLE XV
Conditions of Connection
1. Buyer and Seller agree to attempt to apply for all
permits and authorizations within ten (10) working days of executing this
contract and further agree to secure with due diligence any necessary permits
or authorizations allowing Seller to connect each well hereunder to Buyer's
facilities where Buyer will commence purchasing. As to all wells subject
hereto, in the event that any such permit or authorization to allow such
connection has not been issued within ninety (90) days after Seller has
notified Buyer of the completion of each such well, either party may cancel
this Agreement as to any such well by giving, after the expiration of said
ninety (90) days, thirty (30) days' written notice to the other. Acceptance of
such permits or authorizations containing burdensome conditions shall be within
the sole discretion of the party to whom issued; except that such party agrees
that the other party shall promptly be furnished a copy of all such permits or
authorizations and that the applicant party shall not accept such permits or
authorizations that the other party deems to contain conditions which would
deny such other party rights or impose on it burdens not provided for herein.
2. Upon issuance of the permits or authorizations provided for
in Paragraph 1 above, Seller shall connect all wells completed as producers in
the following manner:
Seller shall use its best efforts to complete connections as
soon as possible, but in no event later than seventy-five (75) days
after the granting of said permit or authorization. If any well or
wells are not connected within this period of time, either party may
cancel
<PAGE> 26
24
this Agreement as to any such well after giving thirty
(30) days' written notice to the other party.
ARTICLE XVI
Assignment
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns; provided that no
conveyance, transfer of any interest, or change of ownership by either party
shall be binding upon the other party until such other party has been
furnished with a written notice evidencing such conveyance, transfer of
interest, or change of ownership and approved such assignment, approval of
which will not be unreasonably withheld, it being understood that this
provision in no way restricts the rights of Seller as to the transfer or
assignment of Seller's leases or property thereon as provided in Paragraph 2,
Subparagraph (a) of Article II hereof.
ARTICLE XVII
Notices
1. Any notice, request, demand, statement, or payment provided
for in this Contract shall be sent to the parties hereto at the following
addresses:
BUYER: Consumers Power Company
Attn: Director of Gas & Oil Supply
212 West Michigan Avenue
Jackson, Michigan 49201
SELLER: Northern Michigan Exploration Company
One Jackson Square
PO Box 1150
Jackson, Michigan 49204
2. Either party shall have the right by prior written notice to
the other to change the address or addresses given above at any time.
<PAGE> 27
25
ARTICLE XVIII
Laws and Regulations
This Agreement insofar as it in affected thereby, shall be subject to
all valid and applicable laws, orders, rules and regulations of Federal and any
other governmental authorities having jurisdiction. Any party hereto shall
have the right to contest the validity of any such law, order, rule or
regulation, and the acquiescence therein or compliance therewith for any period
of time shall not be construed as a waiver of such right. This Agreement shall
be governed by and construed in accordance with the laws of the State of
Michigan.
ARTICLE XIX
Force Majeure
1. If either Buyer or Seller is rendered unable, wholly or in part,
by force majeure or any other cause of any kind not reasonably within its
control, to perform or comply with any obligations or conditions of this
Agreement such obligations or conditions shall be suspended during the
continuance of the inability so caused and such party so rendered unable shall
be relieved of liability and shall suffer no prejudice for failure to perform
the same during such period, it being understood that Buyer's minimum annual
obligation to take or pay for gas hereunder shall be reduced by the volume
which Buyer, under normal circumstances, would have taken from the well during
the period of time the inability exists; provided, obligations to make payments
then due for gas delivered hereunder shall not be suspended, and in other
cases, the cause of suspension (other than strikes, lockouts, or labor
disputes) shall be remedied insofar as possible with reasonable dispatch.
Settlement of strikes, lockouts, or labor disputes shall be wholly within the
discretion of the party having the difficulty.
2. The term "force majeure" shall include, without limitation by the
following enumeration, acts of God and of the public enemy, unseasonal weather,
<PAGE> 28
26
freezing of wells or lines of pipe, repairing or altering machinery or lines of
pipe, fires, accidents, breakdowns, strikes, labor disputes, and any other
industrial, civil or public disturbance, inability to obtain materials,
supplies, rights-of-way on customary terms, permits, or labor, any act or
omission by parties not controlled by the party having the difficulty, any act
or omission (including failure to take gas) of a material purchaser of gas from
Buyer which is excused by any event or occurrence of the character herein
defined as constituting force majeure, failure of gas supply or markets, and
any laws, orders, rules, regulations, acts, or restraints of any governmental
body or authority, civil or military, or any other causes beyond the control of
the parties hereto.
ARTICLE XX
Processing
1. Seller shall not process gas covered hereunder (other than in
standard field separation facilities) prior to delivery of such gas to Buyer at
the delivery points provided herein.
2. If Seller is not now a Plant Owner in the Kalkaska Plant, as
described in the Plant Processing and Operating Agreement dated November 15,
1974, between Consumers Power Company and Amoco Production Company, et al,
Buyer hereby grants Seller an option to participate as a Plant Owner with
respect to the gas covered by this Agreement, subject to the following
conditions:
(a) Seller may exercise such option by giving written notice
to Buyer and Amoco Production Company not earlier than the date of
initial delivery of gas under this Agreement.
(b) Seller's option shall not be exercised later than one
(1) year from the date of initial delivery of gas under this Agreement.
<PAGE> 29
27
(c) The acceptance and ratification by Seller of the Plant
Processing and Operating Agreement dated November 15, 1974, between
Buyer and Amoco Production Company, et al.
(d) Seller's acceptance of and consent to be bound by the
Allocation Agreement by and between Buyer, Michigan Consolidated Gas
Company, and the principal producers of gas sold to each covering the
division of components at the Common Delivery Point of the gas and
liquids transported in the Common Line, insofar as the provisions
thereof affect Seller's rights hereunder.
(e) Seller's acceptance of and consent to be bound by the
Transportation Agreement by and between Buyer and Michigan Consolidated
Gas Company, insofar as the provisions thereof affect Seller's rights
hereunder; provided, however, if there is any conflict between said
Transportation Agreement and this Agreement, the terms and provisions
of this Agreement shall prevail.
3. If Seller is now a Plant Owner or if Seller subsequently becomes
a Plant Owner in the Kalkaska Plant in accordance with Paragraph 2 of this
Article, Buyer and Seller agree to the following:
(a) Seller agrees and consents to the Allocation Agreement
and the Transportation Agreement, referred to in Paragraph 2,
Subparagraph (d) and (e) of this Article, insofar as Seller's rights
are affected by such agreements with respect to the gas covered by this
Agreement.
(b) Seller shall have the exclusive right to process all gas
sold to Buyer hereunder and Seller shall process such gas in accordance
with the Plant Processing and Operating Agreement referred to in
Paragraph 2, Subparagraph (c) of this Article subject to the following:
(i) If at any time there is insufficient processing capacity of a
sustained nature in the Kalkaska Plant to process any or all of
Seller's gas covered by this Agreement and the Plant Owners of such
plant have elected not to increase
<PAGE> 30
28
the capacity thereof sufficiently to cover all or part of the gas
covered by this Agreement. Seller shall have the right to process or
have processed such gas in any other gas processing plant near the
Common Delivery Point. Seller shall use its best efforts to limit the
duration of such processing arrangements, if possible, such that the
gas covered thereby will be available for processing in the Kalkaska
Plant when there is again adequate capacity therein. Seller shall
promptly notify Buyer and the operator of the Kalkaska Plant with
respect to such processing arrangements and advise of all necessary
details thereof. (ii) If at any time after the Plant Owners of the
Kalkaska Plant have elected to increase the capacity of such plant,
Seller may temporarily process or have processed gas covered by this
Agreement in any other gas processing plant near the Common Delivery
Point until there is capacity available in the Kalkaska Plant. (iii)
The rights granted to Seller in Paragraph 3, Subparagraph (b)(i) and
(b)(ii) above in this Article are subject to Seller receiving express
written approval of the Plant Committee, as defined in the Plant
Processing and Operating Agreement dated November 15, 1974 of the
Kalkaska Plant to do so, subject to necessary authorization, if any,
from Plant Owners. (iv) The provisions of the Plant Processing and
Operating Agreement shall apply at all times to the gas covered by this
Agreement with respect to insufficient capacity in the Kalkaska Plant
except with respect to volumes of gas for which processing arrangements
have been made in another plant as above provided.
(c) During any periods when Paragraph 3 of Article IX of the
Plant Processing and Operating Agreement is applicable and Buyer elects
not to bypass any or all of the gas well gas volumes covered hereby
which are in excess of the capacity of the Kalkaska Plant, Buyer's
take-or-pay obligation covered by Article V of this Agreement shall be
limited to the
<PAGE> 31
29
gas well gas volumes hereunder actually processed in such plant for
Seller plus the volumes bypassed by Buyer, if any. Buyer's takes of
gas from Seller and all other producers from whom Buyer purchases gas
in the Contract Area shall be ratably apportioned with respect to
volumes processed and bypassed. Seller shall not have any right to
process or any interest in the liquefiable hydrocarbons or other
constituents contained in any gas volumes bypassed by Buyer.
(d) Seller shall have the right to process gas as above
provided and use gas for fuel for processing gas and other purposes
incident thereto; provided, however, that Seller shall reimburse Buyer
for fuel and shrinkage due to product extraction, and other losses or
uses of gas on the same basis (including taxes) which Buyer purchases
such gas hereunder, and provided further that Seller shall be deemed to
be in control and possession of the gas while it is in the processing
facilities and responsible for any damage or injury caused thereby.
ARTICLE XXI
Transportation of Liquids
1. Arrangements and procedures acceptable to Buyer, Seller, Michigan
Consolidated Gas Company, and any other interested producers have been agreed
upon in the Allocation Agreement so as to provide for calculation and
allocation at the Common Delivery Point of line gain or loss and shrinkage of
various constituents of gas and liquid and liquefiable hydrocarbons injected
into the Common Line by such respective parties. Buyer, insofar as it has the
right to do so, agrees that as long as this Agreement, a Transportation
Agreement and an Allocation Agreement are in effect, and one or more processing
plants are in operation so as to permit continued processing of all the gas
transported in the Common Line, Seller shall have the right to introduce into
the Common Line the following liquids (herein called "Seller's Liquids")
belonging to the Seller:
<PAGE> 32
30
(i) condensate or distillate produced from gas wells from
which gas is sold to Buyer hereunder, provided that it is separated
from such gas by normal field separation facilities prior to delivery
of such gas to Buyer;
(ii) natural gasoline produced as a result of compression of
natural gas to be sold to Buyer hereunder, provided that the
compression facilities in which it is produced are situated upstream of
the delivery points hereunder; and
(iii) such other liquids produced from wells from which gas is
sold to Buyer hereunder (and which are separated from such gas prior to
delivery of the gas to Buyer), other than crude oil, and which will not
interfere with any other gas operations in the Common Line.
2. All Seller's Liquids shall be introduced at mutually agreeable
points downstream from gas purchase meters at rates which will not impair any
pipeline operations. Title to Seller's Liquids so introduced shall remain in
Seller, and Seller shall be responsible therefor, except that Buyer shall be
responsible and liable for any damages caused by said liquids when said damages
are the result of Buyer's or Michigan Consolidated Gas Company's negligence.
Seller's Liquids shall be transported to the Common Delivery point at no cost
to Seller; provided, however, that Seller shall reimburse Buyer promptly after
billing, for all operating expenses incurred by Buyer as a result of the
introduction of Seller's Liquids into the Common Line.
3. If, in the opinion of Buyer, any liquids are introduced into the
Common Line by Seller, at rates that will interfere with any gas operations or
cause any operating problems, Seller shall (upon written request made at any
time and from time to time by Buyer) immediately reduce the rates of
introduction of such Seller's Liquids as directed by Buyer. Such reduced rates
shall continue until Seller has submitted evidence satisfactory to Buyer that
increased rates of introduction of such Seller's Liquids will not interfere
with any gas operations or cause any operating problems. The consent by Buyer
to any such
<PAGE> 33
31
increased rates of introduction of Seller's Liquids shall not be deemed a
waiver by Buyer of its right, as above provided, to demand further reduction of
the rates of introduction of such Seller's Liquids. If any party or parties is
obligated by the Michigan Public Service Commission to levy any charge or fee
for the transportation of liquids so introduced into the Common Line or
laterals serving same, then Seller agrees it will either cease the introduction
of Seller's Liquids into such facilities or will pay such charge or fee to the
party or parties entitled thereto. It is expressly understood that Seller
shall bear the allocated share of line gain or loss and shrinkage occurring in
the Common Line attributable to Seller's Liquids as determined under the
provision of the Allocation Agreement. It is further understood that if the
liquids delivered to or for Seller's account at the Common Delivery Point
attributable to Seller's Liquids have a greater aggregate heating value than
the aggregate heating value actually attributable to Seller's Liquids at the
Common Delivery Point, thereby resulting in a loss of heating value to Buyer
for which adequate compensation is not provided in the Allocation Agreement
(considering that Buyer's purchases of gas are to be made on a Btu basis rather
than on an Mcf basis), then Seller and Buyer agree to make whatever reasonable
change in the method of accounting as between Seller and Buyer which is
required to eliminate such inequity to Buyer to such extent as is practical and
feasible.
4. Stabilization or processing of liquids or other hydrocarbon
constituents belonging to Seller or other producers who may have injected same
into the Common Line under this Article shall be handled on such basis as shall
be mutually agreed between the Plant Owners and the respective owners of such
liquids and other hydrocarbon constituents.
<PAGE> 34
32
ARTICLE XXII
Miscellaneous
1. No waiver by either party hereto of one or more defaults in the
performance of any provision of this Agreement shall operate or be construed as
a waiver, by such party, of a future default, whether of a like or a different
character.
2. All headings appearing herein are for convenience only and shall
not be considered a part of this Agreement for any purpose or as in any way
interpreting, construing, varying, altering, or modifying this Agreement or any
of the provisions hereof.
3. Each party hereby grants to the other wherever necessary or
convenient for carrying out the terms of this Agreement requisite easements and
rights of way over, across and under any land as to which such party has the
right to make such grants.
4. Buyer agrees that if it enters into any contracts with parties
other than Seller hereunder who will deliver to Buyer gas that will ultimately
enter the Common Line upstream from the Kalkaska Plant, then such contracts
with such other parties will contain the same restrictions regarding recovery
of liquids or liquefiable hydrocarbons as are contained in Paragraph 1 of
Article XX and will not contain provisions which mitigate against any of the
provisions of Article XX and Article XXI.
<PAGE> 35
33
IN WITNESS WHEREOF, the parties hereto have caused this
Contract to be executed as of the day and year first above written.
BUYER: CONSUMERS POWER COMPANY
WITNESSES:
_____________________________
By /s/ R. J. Odlevak
---------------------------------
R. J. Odlevak, Vice President
_____________________________
SELLER: NORTHERN MICHIGAN EXPLORATION
WITNESSES: COMPANY
/s/ Barbara J. Strause
- -----------------------------
Barbara J. Strause
BY /s/ Paul E. Geiger
-----------------------------
Paul E. Geiger
/s/ Diane L. Ritchie Vice President, Secretary
- ----------------------------- and Treasurer
Diane L. Ritchie
<PAGE> 36
34
EXHIBIT "A"
for
GAS PURCHASE CONTRACT
Dated
December 1, 1987
Between
CONSUMERS POWER COMPANY
and
NORTHERN MICHIGAN EXPLORATION COMPANY
Contract Area
Acreage which is included in the Production Unit(s) described below or in any
other Production Unit which drains gas from a reservoir common to same.
Production Unit Common Line Tap
- --------------- ---------------
PetroStar #2-24 Tennant & State Allis
SE SW SE Section 24, T34N-R2E
Allis Township, Presque Isle County
<PAGE> 1
EXHIBIT 10.9(a)
GAS PURCHASE CONTRACT
Between
CONSUMERS POWER COMPANY
As Buyer
and
NORTHERN MICHIGAN EXPLORATION COMPANY
As Seller
December 1, 1985
PI-216-AT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE PAGE
- ------- ----
<S> <C> <C>
I. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. Seller's Reservations . . . . . . . . . . . . . . . . . . . . . . . . . . 4
III. Commitment of Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
IV. Determination of Reserves . . . . . . . . . . . . . . . . . . . . . . . . 6
V. Quantity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
VI. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
VII. Delivery Point - Liability . . . . . . . . . . . . . . . . . . . . . . . . 14
VIII. Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
IX. Quality of Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
X. Delivery Pressure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
XI. Measurement and Testing . . . . . . . . . . . . . . . . . . . . . . . . . 21
XII. Warranty of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
XIII. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
XIV. Billing and Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
XV. Conditions of Connection . . . . . . . . . . . . . . . . . . . . . . . . . 27
XVI. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
XVII. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
XVIII. Laws and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
XIX. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
XX. Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
XXI. Transportation of Liquids . . . . . . . . . . . . . . . . . . . . . . . . 34
XXII. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
</TABLE>
Exhibit "A"
<PAGE> 3
GAS PURCHASE CONTRACT
THIS CONTRACT made and entered into as of, and effective the first day
of December 1985 by and between NORTHERN MICHIGAN EXPLORATION COMPANY, a
Michigan corporation, hereinafter referred to as Seller, and CONSUMERS POWER
COMPANY, a Michigan corporation, hereinafter referred to as Buyer:
W I T N E S S E T H :
WHEREAS, Seller owns certain oil and gas leases on property situated in
the northern portion of the Southern Peninsula of Michigan within the Contract
Area as described on Exhibit "A" hereto and desires to sell certain gas which
has been or may be developed thereon, in accordance with the terms and
conditions hereof; and
WHEREAS, Buyer, a public utility engaged in the distribution and sale of
gas within the State of Michigan, desires to purchase gas that may be produced
from Seller's leases within said Contract Area;
NOW, THEREFORE, in consideration of the covenants and promises of each
as set forth herein, the parties agree as follows:
ARTICLE I
Definitions
1. The term "lease" shall mean any written instrument which gives
Seller the rights to drill for, produce, and dispose of gas in, under, and from
the lands described therein.
2. The term "gas" means all elements, compounds, and mixtures
thereof which are contained in the effluent produced from a well and which
remain in the vapor phase when produced at the mouth of the well or from a lease
separator.
3. The term "gas well gas" shall mean gas produced from a well
classified as a gas well by the regulatory agency having jurisdiction.
<PAGE> 4
2
4. The term "oil well gas" shall mean gas produced from a well
classified as an oil well by the regulatory agency having jurisdiction.
5. The term "reserves," unless the context makes evident another
intended meaning, shall mean that quantity of gas underlying the acreage
attributable to each well, which may reasonably be expected to be recovered and
delivered under the terms of this Contract plus the volume of gas which has
theretofore been delivered by Seller from such well to Buyer.
6. The term "Contract Area" shall mean that area encompassed by the
description set forth on Exhibit "A", as it may be revised from time to time as
hereinafter provided.
7. The term "contract year" shall mean the calendar year; except that
the first contract year shall commence on the date of this Contract and shall
end on December 31 of the year in which this Contract is dated.
8. The term "month" shall mean the period of time beginning at 7:00
a.m. Eastern Standard Time on the first day of a calendar month and ending at
7:00 a.m. Eastern Standard Time on the first day of the next succeeding calendar
month.
9. The term "day" shall mean a period of twenty-four (24) hours
beginning at 7:00 a.m. Eastern Standard Time of one calendar day and ending at
7:00 a.m. Eastern Standard Time on the next succeeding calendar day.
10. The term "cubic foot of gas" shall denote the unit of gas
measurement hereunder and shall mean a cubic foot of gas at an absolute pressure
of fifteen and twenty-five thousandths (15.025) pounds per square inch at a
temperature of sixty degrees Fahrenheit (60 degrees F).
11. The term "deliverability" is used as a measure of a well's
productivity and shall mean the average quantity of gas, per twenty-four-hour
<PAGE> 5
3
period, which a well being tested for deliverability at a time agreed to by
both parties, produced during a seventy-two-hour period of continuous delivery
into Buyer's pipeline operating at the then existing pipeline pressure not to
exceed one thousand four hundred forty (1440) psig.
12. The term "Mcf" shall mean one thousand (1,000) cubic feet.
13. The term "Btu" shall mean British thermal unit.
14. The term "Kalkaska Plant" shall mean the gas processing plant
located in Section 31, Township 27 North, Range 7 West, Kalkaska County,
Michigan, and operated by Amoco Production Company as of the date of this
Contract.
15. The term "Plant Owner" means an owner of the "Kalkaska Plant" as
described in the Kalkaska Plant Processing and Operating Agreement dated
November 15, 1974.
16. The term "tender of gas" or like expression shall be understood
to mean the notice by Seller to Buyer that Seller has gas available for delivery
at the point of delivery specified in the notice. A notice of completion and
request for connection, for instance, would constitute a "tender." Such
one-time notice to Buyer shall constitute a continuous tender of such gas unless
and until Seller shall give Buyer written notice to the contrary.
17. The term "Common Line" means that certain wet header gas
transmission line (beginning at the outlet side of the purchase meters used to
measure the gas entering said line) and any extensions thereof jointly used by
Buyer and Michigan Consolidated Gas Company.
18. The term "Common Delivery Point" means the terminus of the Common
Line situated in Section 31, Township 27 North, Range 7 West, Kalkaska Township,
Kalkaska County, Michigan.
<PAGE> 6
4
19. The term "psig" shall mean pounds per square inch gauge.
20. The term "psia" shall mean pounds per square inch absolute.
ARTICLE II
Seller's Reservations
1. Seller reserves and excepts from the terms of this Contract the
following:
(a) All oil and condensate separated and saved by Seller.
(b) Liquefiable hydrocarbons subject to Seller's extracting
or arranging for the extraction thereof.
(c) Nonhydrocarbon substances subject to Seller's contracting
or arranging for the extracting thereof.
(d) Gas for development and field operations on any of
Seller's acreage, including fuel for the operation of compression
facilities by Seller or fuel which Seller may elect to furnish or sell
to drilling contractors for fuel in drilling on Seller's acreage.
(e) Gas for repressuring, pressure maintenance, cycling, gas
lift in a closed system, and the use of gas as a drilling fluid.
(f) Gas which Seller is obligated to furnish lessors under
leases covering acreage committed hereto.
(g) Gas attributable to any acreage acquired by Seller and
which is subject to any obligation or reservation made by a third party
for the purchase and sale of such gas.
Seller's right to separate and extract liquefiable hydrocarbons and
nonhydrocarbon substances is subject to the provisions of Article XX hereof.
2. Seller also reserves to itself the following:
<PAGE> 7
5
(a) The right to operate its property free from any control
by Buyer in such manner as Seller, in its sole discretion, may deem
advisable, including, without limitation by enumeration the right to
drill new wells, to test wells, to repair and rework wells, and to
abandon any well and the right to renew, extend, release, assign,
surrender or permit to expire any lease as Seller deems best in its
sole and exclusive discretion.
(b) The right to unitize any of its leases with other
properties of Seller and of others in such manner as to protect Buyer's
rights hereunder, in which event this Contract will cover Seller's
interest in the unit and gas attributable thereto, to the extent that
such interest is derived from leases committed hereunder. The term
"unit" as used in this subparagraph shall mean any unit recognized by
the state regulatory agency having jurisdiction or other pooling of
acreage not requiring recognition by a regulatory agency in which two
(2) or more producers contribute acreage and each producer owns an
undivided interest in the total acreage contributed, such as
working interest units, areas of mutual interest, and joint exploration
and development areas.
ARTICLE III
Commitment of Gas
1. Seller commits to the performance of this Contract all gas
reserves hereafter produced from or attributable to the well unit(s) described
on Exhibit "A", as said Exhibit may be amended from time to time, attributable
to any interest in such gas reserves now or hereafter owned by Seller.
2. Seller, with Buyer's written concurrence, may add well units to
this Contract, provided that such units lie within Alpena, Cheboygan,
Montmorency
<PAGE> 8
6
or Presque Isle Counties, Michigan. If Seller elects to so add well units to
this Contract, Seller shall prepare and submit to Buyer a description of the
additional units and the written acceptance by Buyer of the document containing
such description shall constitute Buyer's written concurrence, and thereupon
Exhibit "A" to this Contract shall be deemed to have been amended to reflect
the additional units.
3. The gas reserves discovered in well units described on Exhibit
"A", or any well units added to this Contract pursuant to Section 2 above, shall
be determined in accordance with the provisions of Article IV hereof.
ARTICLE IV
Determination of Reserves
1. Seller shall, promptly after the execution hereof, make available
to Buyer such basic noninterpretive information and data in Seller's possession
as may reasonably be required by Buyer for the purpose of estimating the amount
of Seller's reserves attributable to each well unit then subject to this
Contract. Upon receipt of such information and data, Buyer shall promptly
estimate the amount of such reserves attributable to each such well unit and
shall furnish to Seller within thirty (30) days after receipt of said basic data
a written statement thereof which, after agreement by Seller, shall constitute
the original determination of reserves for such well unit for the purpose of
computing the takes therefrom under this Contract. Seller shall also make
available, upon request from Buyer, such information and data in Seller's
possession as may reasonably be required by Buyer to estimate the amount of oil
well gas available hereunder in each oil reservoir or pool covered by this
<PAGE> 9
7
Contract. All information furnished by Seller to Buyer pursuant to this
paragraph shall be treated and held as confidential by Buyer and shall not be
disclosed to others without Seller's written permission.
2. After the date of initial deliveries hereunder, Buyer may make,
or Seller may request Buyer to make, at reasonable intervals, but not more often
than once every two (2) years, a redetermination of reserves attributable to any
or all of the gas well units covered by this Contract. When a new gas well has
been completed, Seller within thirty (30) days after the completion thereof
shall furnish basic data as hereinbefore provided for other wells and Buyer
shall calculate reserves attributable to such new well unit and shall furnish
Seller within thirty (30) days after the receipt of such data a written
statement of Buyer's estimate of reserves for such well unit. Whenever a
redetermination of reserves is made, such redetermination shall supersede the
previous determination for the well unit(s) affected and, beginning with the
first month after the date of such redetermination, shall be used in computing
the takes of gas well gas hereunder.
3. A written statement of each determination of reserves made by
Buyer (including also each redetermination made pursuant to Paragraph 2 above)
shall be furnished by Buyer to Seller after the same is made, and, if Seller
fails to give Buyer written notice that Seller does not agree with such
determination within thirty (30) days after Seller's receipt thereof, it shall
be conclusively presumed that Seller concurs therein. If, within this period of
time, Seller notified Buyer in writing that it does not agree with such
determination, Buyer and Seller together shall estimate the amount of reserves
for the purpose of a determination hereunder. If, within thirty (30) days after
Buyer's receipt of such notice, Buyer and Seller are unable to agree upon the
<PAGE> 10
8
amount of reserves for the purpose of determination hereunder, such amount
shall be determined by arbitration in the following manner: Upon either
party's giving notice in writing to the other of election to arbitrate, Buyer
shall appoint one arbitrator and Seller shall appoint one arbitrator, and the
two arbitrators so appointed shall select a third arbitrator. If either Buyer
or Seller shall fail to appoint an arbitrator within thirty (30) days after a
request for such appointment is made by the other party in writing, or if the
two arbitrators so appointed fail within thirty (30) days after the appointment
of the second of them to agree on a third arbitrator, the arbitrator or
arbitrators necessary to complete a board of three arbitrators shall be
appointed upon application by either party therefor, by the United States
District Judge, senior in point of service, of the Federal Judicial District in
which the property covered by this Contract is situated. In the event such
Judge should fail or refuse to act, then either party hereto may request the
American Arbitration Association to select the arbitrator or arbitrators to
complete the board of three. After three arbitrators are appointed pursuant to
the foregoing provisions of the Section, they shall meet, hear the parties with
respect to the matter of the said reserves, and arrive at a determination
thereof. Any determination agreed to in writing by at least two of the said
arbitrators shall be final and binding on the parties hereto. All arbitrators
appointed pursuant to this Section shall be qualified independent consultants
experienced in the oil and gas industry and competent to pass on the matter of
recoverable reserves. Buyer and Seller shall each bear its own costs of
arbitration hereunder, including the cost of appointing its own arbitrator,
provided, however, that the fees and expenses of the third arbitrator shall be
borne equally by Buyer and Seller.
<PAGE> 11
9
ARTICLE V
Quantity
1. Beginning seventy-five (75) days after Seller has received all
necessary governmental authority to connect its gas well(s) covered hereunder to
Buyer's purchase meter(s), or on such earlier date as actual deliveries may
commence, and during such contract year and each contract year thereafter Seller
agrees to sell and deliver, and Buyer agrees to purchase and receive from
Seller, or nevertheless to pay for if available in accordance with the terms
hereof but not taken, a quantity of gas referred to herein as the Annual
Contract Quantity, attributable to Seller's interest in each such well.
Although Buyer's obligation to take or pay for gas, if available, is on an
annual basis, it is desirable for administrative purposes to speak of a Monthly
Contract Quantity. The term "Monthly Contract Quantity" shall be adjusted where
appropriate as set out in Paragraph 5 hereof for the purpose of computing said
Annual Contract Quantity.
2. Subject to the deliverability qualification herein, Buyer shall
take from each gas well hereunder a Monthly Contract Quantity equal to the
number of days in the month times one million (1,000,000) cubic feet for each
four billion (4,000,000,000) cubic feet of reserves committed to Buyer
hereunder.
3. If, pursuant to a deliverability test made after proper notice
from one party hereunder to the other and agreed upon by the parties as to the
results thereof, the monthly deliverability of any gas well is established as
less than one hundred eleven percent (111%) of the Monthly Contract Quantity,
then effective with the first of the next accounting month, the Monthly Contract
Quantity shall be ninety percent (90%) of the deliverability established by such
test or by a later test for so long as such well's deliverability remains less
than one hundred eleven percent (111%) of its Monthly Contract Quantity as
<PAGE> 12
10
established by Paragraph 2 hereof. Either party shall have the right upon
request to secure deliverability tests at reasonable intervals, but not more
than three (3) times in any one year for any one gas well.
4. In the event regulatory authorities having jurisdiction of any of
the wells subject hereto should provide for proration of the wells by field
rules, then Buyer's Monthly Contract Quantity for take-or-pay purposes shall be
determined as follows:
(a) In the event the sum of the individual well allowables
of all of Seller's wells in the prorated field for a given month is
less than the total of the Monthly Contract Quantity of the same
wells would have been for such month in the absence of field rules,
then the allowable of each well shall become the Monthly Contract
Quantity for that month.
(b) In the event the sum of the individual well allowables
of all of Seller's wells in the prorated field for a given month is
greater than the total of the Monthly Contract Quantities of the
same wells, then the Monthly Contract Quantity for each such well for
that month shall be increased to the well's ratable share (based on
allowables) of the total of the Monthly Contract Quantity of all such
wells that would have applied in the absence of field rules.
5. As hereinbefore stated, Buyer's annual take-or-pay obligation is
the sum of the Monthly Contract Quantities with adjustments where appropriate as
follows:
(a) In the event of Seller's inability to perform its
delivery obligation in accordance with a specific request from Buyer
because of a valid force majeure (on the part of either Seller or
Buyer), then Buyer's take-or-pay obligation for the time of the
force majeure shall be the
<PAGE> 13
11
volume, if any, which Seller was capable of delivering or Buyer of
taking, as the case may be, during the period of such force majeure.
(b) If for any reason other than force majeure Seller shall
fail to make available for delivery from any well the volume requested
therefrom by Buyer for a given month, the Buyer's take-or-pay
obligation for such month shall be ninety percent (90%) of the volume so
made available; provided that for take-or-pay purposes Seller's
obligation to deliver shall never be more than one hundred eleven
percent (111%) of the well's currently Monthly Contract Quantity, even
though Buyer may have requested a larger volume.
(c) If Buyer in any month makes a change in the previously
established Monthly Contract Quantity which would otherwise by
applicable to such well for such month, then Buyer as to any and all
such wells shall furnish to Seller a statement not later than the
fifteenth (15th) day of the following month by which it notifies Seller
of such change and the reasons therefor.
6. In the event regulatory authorities having jurisdiction of any of
the wells subject hereto should provide for proration from the wells by field
rules, Buyer agrees that it is required to make nominations based on market
demand and it shall nominate for any twelve (12) month period volumes for all of
the prorated wells connected to its system from the prorated field which in the
aggregate will be at least equal to the total Annual Contract Quantity which
would have applied to such wells in the absence of such field rules.
Furthermore, Buyer agrees to make a "best efforts" attempt to secure allowables
under which the share allocated to wells committed to it will in the aggregate
<PAGE> 14
12
be at least equal to the total Annual Contract Quantity which would have
applied to such wells in the absence of such field rules.
7. As to each well subject hereto, Buyer shall have the right to
purchase and Seller shall have the obligation to deliver therefrom upon request
by Buyer any quantity of gas, subject to Seller's ability to so deliver, up to
one hundred eleven percent (111%) of such well's Monthly Contract Quantity.
Buyer shall have the additional right to purchase gas in excess of said one
hundred eleven percent (111%) to the extent that Seller is ready, willing, and
able to deliver such additional quantities.
8. (a) Buyer agrees to take gas from Seller's well in the same
ratable manner that it takes gas from wells owned by others from whom Buyer
purchases or may purchase gas in the gas reservoirs in which Seller's
wells are completed.
(b) Buyer shall increase takes beyond the Monthly Contract
Quantity, for which provisions are made herein, if necessary, in order to
maintain ratable production with takes by others from the same reservoir.
9. If the total volume of gas well gas actually purchased and taken
by Buyer during any contract year is less than the Annual Contract Quantity,
then within ninety (90) days following the end of such contract year, Buyer
shall pay Seller for any such deficiency. Interest shall accrue at the prime
interest rate, as established by the First National Bank of Chicago in effect at
the time of such deficiency, per annum from the date such deficiency payment is
due until paid. As to gas from any gas well paid for by Buyer but not taken,
Buyer shall have the right during the five (5) years immediately following the
year in which the deficiency was incurred to recoup the value thereof by taking
gas from such well, as makeup gas, from volumes in excess of the Annual Contract
Quantities.
<PAGE> 15
13
Any gas well gas taken as makeup gas shall be free of additional cost to Buyer,
except that Buyer shall pay Seller any tax reimbursement due under Article
XIII.
10. As to gas from oil wells, Buyer agrees to purchase and take from
Seller, all of the oil well gas produced from each such well and tendered to
Buyer hereunder.
ARTICLE VI
Term
This Contract, subject to the right of cancellation herein provided,
shall be effective as of the day hereof through December 31, 1995 and shall
continue from year to year thereafter subject to cancellation by either party on
three (3) months' written notice given prior to December 31, 1995 or any
anniversary date thereof. If Seller uses gas committed hereunder for
repressuring or secondary recovery operations as provided for under Article II,
Paragraph 1, Subparagraph (e), the term of this Contract shall be extended, for
the properties involved in such repressuring or secondary recovery operations,
for a period of time equal to the time such operations were actually conducted.
ARTICLE VII
Delivery Point - Liability
1. The point of delivery for each well for gas sold hereunder shall,
at Seller's option, be at the inlet of Buyer's purchase meter which meter shall
be at a mutually agreeable location on the Common Line.
2. Title to gas shall pass from Seller to Buyer at the inlet of
Buyer's facilities at said point of delivery. Seller shall be in control and
possession of the gas delivered hereunder and responsible for any damage or
<PAGE> 16
14
injury caused thereby until the same shall have been delivered to Buyer, after
which delivery Buyer shall be deemed to be in exclusive control and possession
thereof and responsible for any injury or damage caused thereby, except as
otherwise provided for under Article XX.
ARTICLE VIII
Price
1. Subject to the other provisions hereof, the price to be paid by
Buyer to Seller for gas purchased and sold, or paid for when not taken as
provided in Article V hereof, shall be $2.85 per MMBtu, effective January 1,
1986 and said price shall thereafter be escalated at a rate of 2.5% semiannually
with such escalations to take effect on July 1 and January 1 of each year.
2. Seller or Buyer shall have the option to request a price
redetermination effective July 1, 1988 and biennially thereafter with the
redetermined price to be equal to the lower of: a) seventy-five percent (75%) of
the average price of one million (1,000,000) Btu of No. 6 Residual Oil for the
preceding six (6) month period ending with the prior April 30th, using the daily
prices reported by "Platt's Oilgram Price Report," U.S. Tank Car Truck Transport
Lots, Midcontinent, for both Detroit and Chicago; b) the highest price paid by a
public utility for Niagaran gas in the Northern Michigan Trend for gas of like
quality that is produced and sold on a Btu basis from a well pursuant to a gas
purchase Contract dated after January 1, 1986, having a term of at least three
(3) years that is on file with the Michigan Public Service Commission pursuant
to the requirements of MCLA 483.111; or c) the lowest delivered cost to
Consumers Power Company of gas acquired from outside the State of Michigan
pursuant to the terms of a tariff or order approved by the FERC or its
successor. The escalation
<PAGE> 17
15
provided for in Paragraph 1 of this Article VIII shall also apply to any
redetermined price.
3. If at any time it is determined that the marketability of the
subject gas is hampered in that the price on an MMBtu basis, payable under the
provisions of this Article VIII exceeds the cost of the gas component in the
commodity charge of the rate charged by any of Buyer's interstate pipeline
company suppliers (e.g., Trunkline Gas Company and Panhandle Eastern Pipe Line
Company) pursuant to a government approved tariff, then Buyer shall have the
option to limit the price paid hereunder to a level equal to such cost of gas
component. Such a limitation shall become effective provided that Buyer
notifies Seller in writing of such a marketing problem and furnishes Seller with
documentation to support same. If Buyer chooses to limit the price as herein
provided, Seller shall have the right to solicit offers from other pipeline or
distribution companies to purchase the gas at a higher price and, if Seller
notifies Buyer of a bonafide third party offer to purchase such gas at a higher
price, Buyer shall, within thirty (30) days thereafter. either agree to purchase
the gas at a price equal to that contained in the third party offer or release
its contractual claim to the gas.
4. Notwithstanding any of the above, in no event shall the total
remuneration per MMBtu herein provided exceed eighty percent (80%) of the
equivalent average price (rounded to the nearest $.001) of one million
(1,000,000) Btu of No. 6 Residual Oil, using the daily prices reported by
"Platt's Oilgram Price Report," U.S. Tank Car Transport Lots, Midcontinent, for
both Chicago and Detroit for the preceding six (6) months. For the purposes
hereof, a gallon of No. 6 Residual Oil shall be considered to contain one
hundred fifty thousand (150,000) Btu. Should "Platt's Oilgram Price Report" be
<PAGE> 18
16
discontinued, it is agreed that any other similar service may be used in its
place. Furthermore, the price shall in no event fall below $2.75 per MMBtu.
ARTICLE IX
Quality of Gas
1. All gas delivered by Seller under the terms of this Contract
shall conform to the following specifications:
(a) The gas shall be commercially free from dust, gum, gum
forming constituents, condensate and solids when delivered to Buyer.
(b) The gas shall not at any time have an oxygen content in
excess of one percent (1%) by volume and Seller shall make every
reasonable effort to keep the gas free of oxygen.
(c) The gas shall not contain more than one (1) grain of
hydrogen sulphide per one hundred (100) cubic feet. The hydrogen
sulphide content shall be determined by a Cadmium Sulphate, Barton
Titrator and/or a Tutwiler quantitative test, or any other mutually
agreeable method.
(d) The gas shall not contain more than twenty (20) grains
of total sulphur per one hundred (100) cubic feet.
(e) The total gross heating value per cubic foot of gas shall
be not less than nine hundred fifty (950) Btu, however, it is agreed
that Buyer shall accept gas from individual wells having a
heating value of less than nine hundred fifty (950) Btu per cubic foot
if the composite stream of gas in the Common Line immediately downstream
from the point of delivery, contains gas with a heating value of at
least nine hundred fifty (950) Btu per cubic foot. It is also agreed
that in similar manner Buyer will accept gas from individual wells
having a hydrogen sulphide content in excess of
<PAGE> 19
17
one (1) grain per one hundred (100) cubic feet or in excess of twenty
(20) grains total sulphur per one hundred (100) cubic feet if said
composite stream at the point above described on the Common Line does
not contain more than one-fourth (1/4) grain of hydrogen sulphide or ten
(10) grains of total sulphur; provided, however, that in no event shall
any gas sold hereunder and delivered into a lateral owned by any third
party exceed one (1) grain hydrogen sulphide per one hundred (100) cubic
feet at the point of connection with said lateral. It is agreed that if
because of such relaxation of quality specifications as to individual
wells, the gas in Seller's composite stream does not meet the
specifications hereinabove set forth for such composite stream, then
Buyer shall have the right to refuse to take such substandard gas from
any individual well or wells so long as such composite stream would fail
to meet the specified standards.
(f) The term "total gross heating value per cubic foot" shall
mean the number of British thermal units, produced by the
combustion at constant pressure, of the amount of gas on a water-free
basis which would occupy a volume of one (1) cubic foot at a temperature
of sixty degrees Fahrenheit (60 degrees F) and at a pressure of
fifteen and twenty-five thousandths (15.025) psia, when the products
of combustion are cooled to the initial temperature of gas in air and
when the water formed by combustion is condensed to a liquid stage.
(g) The water content of the gas shall not exceed seven (7)
pounds per million cubic feet measured at fifteen and twenty-five
thousandths (15.025) psia and sixty degrees Fahrenheit (60 degrees F).
2. Should the gas offered for sale to Buyer from any well or other
delivery point fail at any time to conform to any of the specifications of this
<PAGE> 20
18
Article, Buyer subject to Paragraph 1, Subparagraph (e) of this Article IX may
notify Seller of any such failure and Seller shall make a diligent effort to
correct such failure in Seller's wells so as to deliver gas conforming to the
above specifications. If Seller is unable to deliver gas conforming to the
above specifications by treatment consistent with prudent operations and by
means which are economically feasible in Seller's opinion, Buyer may at its
option, accept delivery of the gas and treat the gas so that it will conform to
the above specifications or Buyer may refuse to take such gas and in the event
of such refusal Buyer shall not be obligated to attribute volumes to such well
or other delivery point for take-or-pay purposes. In the event Buyer elects to
accept delivery of gas not conforming to the specifications herein and to treat
said gas so it will conform to the specifications herein, Seller shall
reimburse Buyer for the cost, including equipment, for treating said gas, but
not to exceed seventy-five percent (75%) of the sum received by Seller for such
gas. In the event both Seller and Buyer elect not to treat gas not meeting the
quality specifications herein, that gas and that gas only, shall be released
from commitment under the terms hereof.
3. It is agreed that if Seller should elect (subject to Article XX
hereof) to process or have processed gas sold hereunder, the residue gas
delivered from Seller's or other processing facility shall not contain more than
one-fourth (1/4) grain of hydrogen sulphide per one hundred (100) cubic feet.
<PAGE> 21
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ARTICLE X
Delivery Pressure
1. Seller shall deliver gas well gas at a pressure sufficient to
allow the gas to enter Buyer's facilities at the delivery points hereunder,
provided Seller shall not be obligated to deliver gas well gas to Buyer at a
pressure in excess of one thousand four hundred forty (1440) psig. If the well
or wells completed in any gas well gas reservoir are unable to produce the
Monthly Contract Quantity applicable to such reservoir against the pressure
prevailing in Buyer's pipelines and Seller elects to install compression
facilities, then, except as herein otherwise provided, Buyer agrees to reimburse
Seller: (a) six cents (6.00 cents) per MMBtu per stage of compression for gas
from a well that is compressed, such reimbursement will not, however, be made
with respect to monthly deliveries hereunder that are in excess of the monthly
contract quantity for the well unless the parties hereafter agree in writing to
the contrary.
2. Should Seller elect not to install compression facilities in any
well or wells completed in any gas well gas reservoir when the pressure in the
reservoir is inadequate to allow delivery of the gas into Buyer's facilities,
then the Buyer shall have the right to install the necessary compression
facilities. If neither the Seller nor the Buyer makes such election, then such
well or wells shall be released from this Contract.
3. Seller shall deliver the oil well gas at a pressure sufficient to
enter Buyer's facilities but not to exceed one thousand four hundred forty
(1440) psig. If Seller compresses oil well gas or flash vapors to effect
deliveries thereof to Buyer, Buyer agrees to reimburse Seller six cents (6.00
cents) per MMBtu on volumes for such compressed gas, which rate shall be
increased by two-tenths
<PAGE> 22
20
cent (.20 cent) on January 1, 1986, and each January 1 thereafter. Seller
agrees to furnish fuel for such compression at no cost or expense to Buyer.
4. If only a portion of the gas sold to Buyer by Seller from any
given well is compressed pursuant to this Article X, Seller shall measure the
gas from said well actually compressed and shall, consistent with the foregoing,
invoice Buyer therefor on or before the twentieth (20th) day of the month
following the month in which such gas was actually compressed. If all gas sold
to Buyer by Seller from any given well is compressed pursuant to this Article X,
Seller shall furnish Buyer with the name of the well on or before the twentieth
(20th) day of the month following the month in which such compression actually
begins, and insofar as gas wells are concerned, Seller shall at the same time
advise Buyer of the number of stages of compression used. If additional stages
of compression later become necessary, Seller shall advise Buyer in writing of
such. Under no circumstances shall the Buyer be obligated to reimburse the
Seller for compression prior to the written notification and the actual
commencement of compression.
5. Buyer, when operating its gathering system in conformance with
the pressure conditions herein specified, shall not be obligated to attribute
volumes for take-or-pay purposes to any well or other delivery point in excess
of the volumes made available at sufficient pressures to enter Buyer's lines at
the point of delivery.
<PAGE> 23
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ARTICLE XI
Measurement and Testing
1. Buyer shall install, maintain, and operate, at no expense to
Seller, at or near each point of delivery hereunder, equipment of a character
and design acceptable to Seller and perform all tests required to accomplish the
measurement of volumes, temperatures, specific gravity and heating values. Such
volume measuring equipment shall be installed, maintained, and operated in
accordance with ANSI/API Standard 2530, dated 1978, of the American National
Standards Institute, as amended from time to time, and the volume of gas
delivered hereunder and measured by such orifice meters shall be computed in
accordance with said report.
2. The temperature of the gas passing through each orifice meter
shall be determined by means of a recording thermometer installed by Buyer so
that it will properly record the temperature of the gas through the meter. The
arithmetical average of temperature recorded during the time gas was flowing on
any day shall be used in computing gas volumes for that day.
3. The specific gravity of the gas at the points of delivery shall
be determined by Buyer at least once each six (6) calendar months, or as often
as may be found necessary in practice, by a method of test generally acceptable
to the industry. Whenever a recording gravitometer is used, the arithmetical
average of the gravity recorded during the time gas was flowing on any day shall
be used in computing gas volumes for that day.
4. Correction shall be made by Buyer for deviation from Boyle's Law,
and the factors for making such correction shall be obtained from procedures
contained in the aforesaid Standard 2530, or from such other source as may be
agreed upon by the parties hereto.
<PAGE> 24
22
5. Unless otherwise agreed upon by the parties hereto, the
atmospheric pressure shall be assumed to be fourteen and four-tenths (14.4) psia
for the purpose of calculating the volumes of gas delivered hereunder.
6. Buyer shall test and calibrate all of Buyer's meters and
instruments used in measuring or testing the gas delivered hereunder at least
once each calendar month, or at less frequent intervals agreed to by the parties
on meters at specific delivery points. Any measurement equipment found by
calibration test to be registering inaccurately shall be immediately restored to
accurate operation. No correction shall be made for past deliveries where
inaccuracies are two percent (2%) or less, but if such equipment is found to be
out of service or registering inaccurately by more than two percent (2%), the
registrations of such equipment shall be disregarded for any period known or
agreed upon, or, if such period is not known or agreed upon, for a period
extending back one-half (1/2) of the time elapsed since the last calibration
test, or sixteen (16) days, whichever is shorter. The volume of gas delivered
during such period shall be estimated by using the first of the following
methods which is feasible:
(a) by using the registration of check measuring equipment
if installed and registering accurately;
(b) by correcting the error, if the extent of the error is
ascertainable by calibration test or mathematical calculation; or
(c) by estimation, based on deliveries under similar
conditions when the equipment was registering accurately.
7. Buyer shall determine the gross heating value in Btu per cubic
foot of gas, at each delivery point hereunder at such intervals as in Buyer's
opinion are required to determine the heating value hereunder but such intervals
<PAGE> 25
23
shall be of such duration as is necessary to determine accurate values to be
used in Article VIII, Paragraph 1.
8. Buyer shall make such test for determining hydrogen sulphide
content, total sulphur content, oxygen content, and carbon dioxide content at
such intervals as in Buyer's opinion are required to determine that the gas
meets the applicable quality specifications hereunder.
9. Seller may, at its option and expense, install and operate
measurement and testing equipment to check Buyer's equipment, but measurement
and testing of gas for the purpose of this Contract shall be by Buyer's
equipment, except as hereinabove specifically provided to the contrary. Any
such check measurement or testing equipment installed by Seller shall be so
installed and operated as not to interfere with the operation of Buyer's
equipment.
10. Seller shall have the right to inspect, at all reasonable times,
the measurement and testing equipment, charts, and other measurement data of
Buyer, and Buyer shall have a similar right with respect to Seller's equipment,
charts, and data, but the reading, calibration and adjustment of such equipment
shall be performed only by the owner thereof. Buyer shall give Seller at least
ten (10) days' notice of any test of Buyer's measuring or testing equipment in
order that Seller may have a representative present to witness the tests, and
Buyer shall have the right to be present at the time Seller's check measuring or
testing equipment is adjusted or calibrated.
11. If Seller shall request a special test of any of Buyer's measurement
equipment or equipment for testing the quality of gas sold hereunder, Buyer
shall make such test, and if the equipment in question is registering correctly,
the actual expenses of such test shall be borne by Seller; otherwise, the actual
expenses shall be borne by Buyer.
<PAGE> 26
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12. All test data, charts, and similar records shall be preserved by
the owners thereof for a period of at least two (2) years.
ARTICLE XII
Warranty of Title
1. Seller hereby warrants title to the gas sold by it hereunder and
its right to sell the same, and warrants that all such gas is owned by it free
from all liens, encumbrances and adverse claims. Seller shall indemnify, save
and hold Buyer free and harmless from all suits, actions, debts, accounts,
damages, costs, losses and expenses arising from or out of adverse claims of any
and all persons to the gas sold by Seller hereunder.
2. With respect to each lease covered by this Contract, it is agreed,
notwithstanding anything herein contained to the contrary, that, in the event it
shall be determined that Seller owns less than the interest in such lease
described in this Contract as being owned by Seller and thereby Seller shall be
deemed to have breached any of the warranty provisions of this Contract, then
from and after such determination, this Contract shall be deemed to have been
amended so as to cover and include the interest in such lease which is, in fact,
owned by Seller.
ARTICLE XIII
Taxes
1. Seller shall bear the economic burden of all taxes and assessments
imposed on the date hereof with respect to the gas delivered hereunder prior to
its delivery to Buyer at the point of delivery specified herein as well as those
imposed incident to the sale or delivery of such gas to Buyer at the point of
<PAGE> 27
25
delivery, and Buyer shall bear the economic burden of all taxes and assessments
imposed upon Buyer with respect to the gas delivered hereunder after its
receipt by Buyer. Neither party shall be responsible or liable for any taxes
or other statutory charges levied or assessed against any of the equipment of
the other party used for the purpose of carrying out the provisions of this
Contract. As to taxes to be borne by Seller as above set out, but for which
Buyer makes payment on Seller's behalf, Buyer may deduct such payment from
amounts due Seller hereunder.
2. Any sales, transactions, occupation, service, production,
severance, gathering, transmission, ecological or environmental, export or
excise tax, assessment or fees (other than franchise, capital stock, ad valorem,
excess profits or income taxes or transfer or sales taxes levied incident to the
sale of the leases or gas in place), levied, assessed, fixed or collected, by
the United States or any state or other governmental authority and assessments
or taxes which are of a similar nature or equivalent in effect, in addition to
or greater than those, if any, being levied, assessed, fixed or collected on the
date of this Contract in respect of or applicable to the gas to be delivered by
Seller to Buyer hereunder and which Seller may pay or be liable for in its own
account or that of a royalty owner, overriding royalty, production payment or
similar interest owners during any month, either directly or indirectly through
any obligations to reimburse others, are hereinafter collectively referred to as
"additional tax," to the extent (and only to the extent) that the aggregate
amount of all such taxes per Mcf of gas exceeds the aggregate amount of all such
taxes per Mcf of gas being levied, assessed, fixed or collected on the date of
this Contract in respect of or applicable to the gas to be delivered by Seller
to Buyer hereunder. Buyer shall, except as herein otherwise provided, reimburse
<PAGE> 28
26
Seller for one hundred percent (100%) of every additional tax paid by Seller
attributable to the gas sold by Seller to Buyer hereunder; such reimbursement
will not, however, be made with respect to monthly deliveries from any well
hereunder that are in excess of the monthly contract quantity for the well
unless the parties hereafter agree in writing to the contrary.
3. Anything hereinabove to the contrary notwithstanding, Buyer shall
never be liable for and shall never be obligated to reimburse Seller for any tax
levied or assessed upon or with respect to oil, condensate, liquefiable
hydrocarbons or other liquids, helium or nonhydrocarbon substances which may be
extracted or separated by Seller from gas delivered to Buyer hereunder, prior to
such delivery, or upon or with respect to the process of extracting or
separating any such products or substances from such gas or of handling,
selling, transporting or otherwise dealing in or with any of such products or
substances, all of which taxes shall be borne and paid solely by Seller and if
paid by Buyer shall be reimbursed by Seller to Buyer.
ARTICLE XIV
Billing and Payment
1. Buyer, not later than the twenty-fifth (25th) day of each
calendar month, shall furnish Seller a detailed statement showing the total
quantity of gas delivered by Seller to Buyer hereunder during the preceding
calendar month and the amount due and payable by Buyer therefor, and
simultaneously shall make payment to Seller in such amount. Upon request, Buyer
shall furnish Seller charts and measurement data supporting such statement.
2. Should Buyer fail to pay any amount due Seller under the
provisions of this Contract when same is due, interest shall accrue at the prime
<PAGE> 29
27
interest rate, as established by the First National Bank of Chicago in effect
at the time of any such deficiency, per annum from the date payment is due
until paid. If such default in payment continues for sixty (60) days, Seller
may, in addition to all other rights and remedies, suspend deliveries of gas
hereunder and terminate this Contract. The foregoing provisions in this
Paragraph 2 shall not apply if Buyer's refusal to pay is the result of a
bonafide dispute as to the accuracy of any statement and Buyer pays all amounts
not in dispute until final determination of the dispute.
3. Each party shall have the right at reasonable hours to examine
the books, records and charts of the other party to the extent necessary to
verify the accuracy of any statement, charge, or computation made pursuant to
the provisions of any article hereof. If any such examination reveals any
inaccuracy in any billing theretofore made, the necessary adjustment in such
billing and payment shall be promptly made, provided that no adjustment for any
billing or payment shall be made after the lapse of two (2) years from the
rendition thereof unless challenged prior thereto.
ARTICLE XV
Conditions of Connection
1. Buyer and Seller agree to attempt to secure with due diligence
any necessary permits or authorizations allowing Seller to connect each well
hereunder to Buyer's facilities where Buyer will commence purchasing. As to all
wells subject hereto, in the event that any such permit or authorization to
allow such connection has not been issued within ninety (90) days after Seller
has notified Buyer of the completion of each such well, either party may cancel
this Contract as to any such well by giving, after the expiration of said ninety
(90)
<PAGE> 30
28
days, thirty (30) days' written notice to the other. Acceptance of such
permits or authorizations containing burdensome conditions shall be within the
sole discretion of the party to whom issued; except that such party agrees that
the other party shall promptly be furnished a copy of all such permits or
authorizations and that the applicant party shall not accept such permits or
authorizations that the other party deems to contain conditions which would
deny such other party rights or impose on it burdens not provided for herein.
2. Upon issuance of the permits or authorizations provided for in
Paragraph 1 above, Seller shall connect all wells completed as producers in the
following manner:
Seller shall use its best efforts to complete connections as
soon as possible, but in no event later than seventy-five (75) days
after the granting of said permit or authorization. If any well or
wells are not connected within this period of time, either party may
cancel this Contract as to any such well after giving thirty (30) days'
written notice to the other party.
ARTICLE XVI
Assignment
This Contract shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns; provided that no
conveyance, transfer of any interest, or change of ownership by either party
shall be binding upon the other party until such other party has been furnished
with a written notice evidencing such conveyance, transfer of interest, or
change of ownership and approved such assignment, approval of which will not be
unreasonably withheld, it being understood that this provision in no way
<PAGE> 31
29
restricts the rights of Seller as to the transfer or assignment of Seller's
leases or property thereon as provided in Paragraph 2, Subparagraph (a) of
Article II hereof.
ARTICLE XVII
Notices
1. Any notice, request, demand, statement, or payment provided for
in this Contract shall be sent to the parties hereto at the following addresses:
BUYER: Consumers Power Company
Att: Director of Gas & Oil Supply
212 West Michigan Avenue
Jackson, Michigan 49201
SELLER: Northern Michigan Exploration Company
P. O. Box 1150
One Jackson Square
Jackson, Michigan 49204
2. Either party shall have the right by prior written notice to the
other to change the address or addresses given above at any time.
ARTICLE XVIII
Laws and Regulations
This contract, insofar as it is affected thereby, shall be subject to
all valid and applicable laws, orders, rules and regulations of Federal and any
other governmental authorities having jurisdiction. Any party hereto shall have
the right to contest the validity of any such law, order, rule or regulation,
and the acquiescence therein or compliance therewith for any period of time
shall not be construed as a waiver of such right. This agreement shall be
governed by and construed in accordance with the laws of the State of Michigan.
<PAGE> 32
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ARTICLE XIX
Force Majeure
1. If either Buyer or Seller is rendered unable, wholly or in part,
by force majeure or any other cause of any kind not reasonably within its
control, to perform or comply with any obligations or conditions of this
contract, such obligations or conditions shall be suspended during the
continuance of the inability so caused and such party so rendered unable shall
be relieved of liability and shall suffer no prejudice for failure to perform
the same during such period, it being understood that Buyer's minimum annual
obligation to take or pay for gas hereunder shall be reduced by the volume which
Buyer, under normal circumstances, would have taken from the well during the
period of time the inability exists; provided, obligations to make payments then
due for gas delivered hereunder shall not be suspended, and in other cases, the
cause of suspension (other than strikes, lockouts, or labor disputes) shall be
remedied insofar as possible with reasonable dispatch. Settlement of strikes,
lockouts, or labor disputes shall be wholly within the discretion of the party
having the difficulty.
2. The term "force majeure" shall include, without limitation by the
following enumeration, acts of God and of the public enemy, unseasonal weather,
freezing of wells or lines of pipe, repairing or altering machinery or lines of
pipe, fires, accidents, breakdowns, strikes, labor disputes, and any other
industrial, civil or public disturbance, inability to obtain materials,
supplies, rights-of-way on customary terms, permits, or labor, any act or
omission by parties not controlled by the party having the difficulty, any act
or omission (including failure to take gas) of a purchaser of gas from Buyer
which is excused
<PAGE> 33
31
by any event or occurrence of the character herein defined as constituting
force majeure, failure of gas supply or markets, and any laws, orders, rules
regulations acts, or restraints of any governmental body or authority, civil or
military, or any other causes beyond the control of the parties hereto.
ARTICLE XX
Processing
1. Seller shall not process gas covered hereunder (other than in
standard field separation facilities) prior to delivery of such gas to Buyer at
the delivery points provided herein.
2. If Seller is not now a Plant Owner in the Kalkaska Plant, as
described in the Plant Processing and Operating Agreement dated November 15,
1974, between Consumers Power Company and Amoco Production Company, et al, Buyer
hereby grants Seller an option to participate as a Plant Owner with respect to
the gas covered by this agreement, subject to the following conditions:
(a) Seller may exercise such option by giving written notice
to Buyer and Amoco Production Company not earlier than the date of
initial delivery of gas under this Gas Purchase Contract with Buyer.
(b) Seller's option shall not be exercised later than one (1)
year from the date of initial delivery of gas under this Gas Purchase
Contract with Buyer.
(c) The acceptance and ratification by Seller of the Plant
Processing and Operating Agreement dated November 15, 1974, between
Buyer and Amoco Production Company, et al.
(d) Seller's acceptance of and consent to be bound by the
Allocation Agreement by and between Buyer, Michigan Consolidated Gas
<PAGE> 34
32
Company, and the principal producers of gas sold to each covering the
division of components at the Common Delivery Point of the gas and
liquids transported in the Common Line, insofar as the provisions
thereof affect Seller's rights hereunder.
(e) Seller's acceptance of and consent to be bound by the
Transportation Agreement by and between Buyer and Michigan Consolidated
Gas Company, insofar as the provisions thereof affect Seller's rights
hereunder; provided, however, if there is any conflict between said
Transportation Agreement and this Contract, the terms and provisions of
this Contract shall prevail.
3. If Seller is now a Plant Owner or if Seller subsequently becomes
a Plant Owner in the Kalkaska Plant in accordance with Paragraph 2 of this
Article, Buyer and Seller agree to the following:
(a) Seller agrees and consents to the Allocation Agreement
and the Transportation Agreement, referred to in Paragraph 2,
Subparagraph (d) and (e) of this Article, insofar as Seller's rights are
affected by such agreements with respect to the gas covered by
this Contract.
(b) Seller shall have the exclusive right to process all gas
sold to Buyer hereunder and Seller shall process such gas in
accordance with the Plant Processing and Operating Agreement referred to
in Paragraph 2, Subparagraph (c) of this Article subject to the
following:
(i) If at any time there is insufficient processing
capacity of a sustained nature in the Kalkaska Plant to process
any or all of Seller's gas covered by this Contract and the Plant
Owners of such plant have elected not to increase the capacity
thereof sufficiently to cover all or part of the gas covered by
this Contract,
<PAGE> 35
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Seller shall have the right to process or have processed such gas
in any other gas processing plant near the Common Delivery Point.
Seller shall use its best efforts to limit the duration of such
processing arrangements, if possible, such that the gas covered
thereby will be available for processing in the Kalkaska Plant when
there is again adequate capacity therein. Seller shall promptly
notify Buyer and the operator of the Kalkaska Plant with respect to
such processing arrangements and advise of all necessary details
thereof.
(ii) If at any time after the Plant Owners of the
Kalkaska Plant have elected to increase the capacity of such
plant, Seller may temporarily process or have processed gas covered
by this Contract in any other gas processing plant near the Common
Delivery Point until there is capacity available in the Kalkaska
Plant.
(iii) The rights granted to Seller in Paragraph 3,
Subparagraph (b)(i) and (b)(ii) above in this Article are
subject to Seller receiving express written approval of the Plant
Committee, as defined in the Plant Processing and Operating
Agreement dated November 15, 1974 of the Kalkaska Plant to do so,
subject to necessary authorization, if any, from Plant Owners.
(iv) The provisions of the Plant Processing and
Operating Agreement shall apply at all times to the gas covered
by this Contract with respect to insufficient capacity in the
Kalkaska Plant except with respect to volumes of gas for which
processing arrangements have been made in another plant as above
provided.
(c) During any periods when Paragraph 3 of Article IX of the
Plant Processing and Operating Agreement is applicable and Buyer
elects not
<PAGE> 36
34
to bypass any or all of the gas well gas volumes covered hereby which
are in excess of the capacity of the Kalkaska Plant, Buyer's take-or-pay
obligation covered by Article V of this Contract shall be limited to the
gas well gas volumes hereunder actually processed in such plant for
Seller plus the volumes bypassed by Buyer, if any. Buyer's takes of gas
from Seller and all other producers from whom Buyer purchases gas in the
Contract Area shall be ratably apportioned with respect to volumes
processed and bypassed. Seller shall not have any right to process or
any interest in the liquefiable hydrocarbons or other constituents
contained in any gas volumes bypassed by Buyer.
(d) Seller shall have the right to process gas as above
provided and use gas for fuel for processing gas and other
purposes incident thereto; provided, however, that Seller shall
reimburse Buyer for fuel and shrinkage due to product extraction, and
other losses or uses of gas on the same basis (including taxes) which
Buyer purchases such gas hereunder, and provided further that Seller
shall be deemed to be in control and possession of the gas while it is
in the processing facilities and responsible for any damage or injury
caused thereby.
ARTICLE XXI
Transportation of Liquids
1. Arrangements and procedures acceptable to Buyer, Seller, Michigan
Consolidated Gas Company, and any other interested producers have been agreed
upon in the Allocation Agreement so as to provide for calculation and allocation
at the Common Delivery Point of line gain or loss and shrinkage of various
constituents of gas and liquid and liquefiable hydrocarbons injected into the
<PAGE> 37
35
Common Line by such respective parties. Buyer, insofar as it has the right to
do so, agrees that as long as this Contract, a Transportation Agreement and an
Allocation Agreement are in effect, and one or more processing plants are in
operation so as to permit continued processing of all the gas transported in
the Common Line, Seller shall have the right to introduce into the Common Line
the following liquids (herein called "Seller's Liquids") belonging to the
Seller:
(i) condensate or distillate produced from gas wells
from which gas is sold to Buyer hereunder, provided that it is
separated from such gas by normal field separation facilities
prior to delivery of such gas to Buyer;
(ii) natural gasoline produced as a result of
compression of natural gas to be sold to Buyer hereunder, provided
that the compression facilities in which it is produced are situated
upstream of the delivery points hereunder; and
(iii) such other liquids produced from wells from
which gas is sold to Buyer hereunder (and which are separated from
such gas prior to delivery of the gas to Buyer), other than crude oil,
and which will not interfere with any other gas operations in the
Common Line.
2. All Seller's Liquids shall be introduced at mutually agreeable
points downstream from gas purchase meters at rates which will not impair any
pipeline operations. Title to Seller's Liquids so introduced shall remain in
Seller, and Seller shall be responsible therefor, except that Buyer shall be
responsible and liable for any damages caused by said liquids when said damages
are the result of Buyer's or Michigan Consolidated Gas Company's negligence.
Seller's Liquids shall be transported to the Common Delivery Point at no cost to
<PAGE> 38
36
Seller; provided, however, that Seller shall reimburse Buyer promptly after
billing, for all operating expenses incurred by Buyer as a result of the
introduction of Seller's Liquids into the Common Line.
3. If, in the opinion of Buyer, any liquids are introduced into the
Common Line by Seller, at rates that will interfere with any gas operations or
cause any operating problems, Seller shall (upon written request made at any
time and from time to time by Buyer) immediately reduce the rates of
introduction of such Seller's Liquids as directed by Buyer. Such reduced rates
shall continue until Seller has submitted evidence satisfactory to Buyer that
increased rates of introduction of such Seller's Liquids will not interfere with
any gas operations or cause any operating problems. The consent by Buyer to any
such increased rates of introduction of Seller's Liquids shall not be deemed a
waiver by Buyer of its right, as above provided, to demand further reduction of
the rates of introduction of such Sellers Liquids. If any party or parties is
obligated by the Michigan Public Service Commission to levy any charge or fee
for the transportation of liquids so introduced into the Common Line or laterals
serving same, then Seller agrees it will either cease the introduction of
Seller's Liquids into such facilities or will pay such charge or fee to the
party or parties entitled thereto. It is expressly understood that Seller shall
bear the allocated share of line gain or loss and shrinkage occurring in the
Common Line attributable to Seller's Liquids as determined under the provision
of the Allocation Agreement. It is further understood that if the liquids
delivered to or for Seller's account at the Common Delivery Point attributable
to Seller's Liquids have a greater aggregate heating value than the aggregate
heating value actually attributable to Seller's Liquids at the Common Delivery
Point, thereby resulting in a loss of heating value to Buyer for which adequate
compensation is
<PAGE> 39
37
not provided in the Allocation Agreement (considering that Buyer's purchases of
gas are to be made on a Btu basis rather than on an Mcf basis), then Seller and
Buyer agree to make whatever reasonable change in the method of accounting as
between Seller and Buyer which is required to eliminate such inequity to Buyer
to such extent as is practical and feasible.
4. Stabilization or processing of liquids or other hydrocarbon
constituents belonging to Seller or other producers who may have injected same
into the Common Line under this Article XXI shall be handled on such basis as
shall be mutually agreed between the Plant Owners and the respective owners of
such liquids and other hydrocarbon constituents.
ARTICLE XXII
Miscellaneous
1. No waiver by either party hereto of one or more defaults in the
performance of any provision of this Contract shall operate or be construed as a
waiver, by such party, of a future default, whether of a like or a different
character.
2. All headings appearing herein are for convenience only and shall
not be considered a part of this Contract for any purpose or as in any way
interpreting, construing, varying, altering, or modifying this Contract or any
of the provisions hereof.
3. Each party hereby grants to the other wherever necessary or
convenient for carrying out the terms of this Contract requisite easements and
rights of way over, across and under any land as to which such party has the
right to make such grants.
<PAGE> 40
38
4. Buyer agrees that if it enters into any contracts with parties
other than Seller hereunder who will deliver to Buyer gas that will ultimately
enter the Common Line upstream from the Kalkaska Plant, then such contracts with
such other parties will contain the same restrictions regarding recovery of
liquids or liquefiable hydrocarbons as are contained in Paragraph 1 of Article
XX and will not contain provisions which mitigate against any of the provisions
of Article XX and Article XXI.
5. Any price increase provided in Article VIII hereof requiring
approval of the Michigan Public Service Commission or any successor state
regulatory agency pursuant to Section 10 of PA 9 of 1929 shall not be effective
until approved by such regulatory agency.
6. If at any time the Michigan Public Service Commission (or any
successor state regulatory agency) shall disallow any portion of the price paid
Seller hereunder from Buyer's purchased cost of gas in a ratemaking proceeding,
then in such event Buyer shall thereafter reduce the price paid Seller to the
maximum price from time to time allowed; provided, however, Buyer shall always
prosecute diligently to pay Seller at the full contract price and to obtain
inclusion of the full contract price hereunder in Buyer's purchased cost of gas.
IN WITNESS WHEREOF, the parties hereto have caused this Contract to be
executed as of the day and year first above written.
BUYER: CONSUMERS POWER COMPANY
WITNESSES:
- -----------------------------
By /s/ R. J. Odlevak
---------------------------------
R. J. Odlevak, Vice President
/s/ G. F. Beaudoin
- ------------------------------------
<PAGE> 41
SELLER: NORTHERN MICHIGAN EXPLORATION CO.
WITNESSES:
/s/ Richard Rulewicz
- ------------------------------------
By /s/ Gordon L. Wright
---------------------------------
/s/ Cynthia M. Marienfeld
- ------------------------------------
<PAGE> 42
EXHIBIT "A"
for
GAS PURCHASE CONTRACT
Dated
December 1, 1985
Between
CONSUMERS POWER COMPANY
and
NORTHERN MICHIGAN EXPLORATION COMPANY
Township County
------------------------- --------------
Allis North, T34N-R2E Presque Isle
Allis South, T33N-R2E Presque Isle
Case North, T34N-R3E Presque Isle
Case South, T33N-R3E Presque Isle
Bismarck North, T34N-R4E Presque Isle
Bismarck South, T33N-R4E Presque Isle
Belknap, T34N-R5E Presque Isle
Metz, T33N-R5E Presque Isle
Pulawski, T34N-R6E Presque Isle
Shell #1-30 Sylvania Savings
SE NW SW Section 30, T34N-3E
Case Township, Presque Isle County
NOMECO #1-30 Parr
NW NE NW Section 30, T34N-3E
Case Township, Presque Isle County
<PAGE> 1
EXHIBIT 10.9(b)
MODIFICATION AND AMENDMENT TO GAS PURCHASE CONTRACT
THIS AGREEMENT, made and entered into as of the 1st day of
December, 1986, by and between CONSUMERS POWER COMPANY, a Michigan corporation,
hereinafter referred to as "Buyer", and NORTHERN MICHIGAN EXPLORATION COMPANY,
hereinafter referred to as "Seller";
WITNESSETH:
WHEREAS, By Gas Purchase Contract dated December 1, 1985, Buyer
and Seller entered into an agreement upon the terms, conditions and provisions
therein contained and covering the well units set forth on Exhibit A attached
thereto; and
WHEREAS, Buyer and Seller desire to modify and amend said Gas
Purchase Contract to cover and include, in addition to the well(s) now covered
and included therein, the Amoco #2-26 Sorgett located in the NW-1/4 of the
NE-1/4 of the SW-1/4 of Section 26, T34N-R4E, Bismark Township, Presque Isle
County, Michigan;
NOW THEREFORE, for and in consideration of the premises, Buyer
and Seller mutually agree as follows:
1. Effective as of December 1, 1986, Original Exhibit A
attached to said Gas Purchase Contract is of no further force and effect and
there is hereby substituted therefore, effective as of December 1, 1986, the
First Amended Exhibit A which is attached hereto and made a part hereof.
2. Except as specifically herein modified and amended, all of
the other terms, conditions and provisions of said Gas Purchase Contract are
and shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed or caused
this agreement to be executed as of the day and year first above written.
WITNESSES: BUYER
CONSUMERS POWER COMPANY
/s/ Beverly A. Avery By /s/ R. J. Odlevak
- ------------------------------- -------------------------------
R. J. Odlevak, Vice President
- -------------------------------
SELLER
NORTHERN MICHIGAN EXPLORATION COMPANY
By /s/ Gordon L. Wright
- ------------------------------- -------------------------------
- -------------------------------
<PAGE> 2
FIRST AMENDED EXHIBIT "A"
for
GAS PURCHASE CONTRACT
Dated
December 1, 1985
Between
CONSUMERS POWER COMPANY
and
NORTHERN MICHIGAN EXPLORATION COMPANY
<TABLE>
<CAPTION>
Township County
------------------------ ------------
<S> <C>
Allis North, T34N-R2E Presque Isle
Allis South, T33N-R2E Presque Isle
Case North, T34N-R3E Presque Isle
Case South, T33N-R3E Presque Isle
Bismarck North, T34N-R4E Presque Isle
Bismarck South, T33N-R4E Presque Isle
Belknap, T34N-R5E Presque Isle
Metz, T33N-R5E Presque Isle
Pulawski, T34N-R6E Presque Isle
</TABLE>
Shell #1-30 Sylvania Savings
SE NW SW Section 30, T34N-R3E
Case Township, Presque Isle County
NOMECO #1-30 Parr
NW NE NW Section 30, T34N-R3E
Case Township, Presque Isle County
Amoco #2-26 Sorgett
NW NE SW Section 26, T34N-R4E
Bismark Township, Presque Isle County
<PAGE> 1
EXHIBIT 10.9(c)
MODIFICATION AND AMENDMENT TO GAS PURCHASE CONTRACT
THIS AGREEMENT, made and entered into as of the 1st day of December, 1987,
by and between CONSUMERS POWER COMPANY, a Michigan corporation, hereinafter
referred to as "Buyer", and NORTHERN MICHIGAN EXPLORATION COMPANY, hereinafter
referred to as "Seller";
WITNESSETH:
WHEREAS, By Gas Purchase Contract dated December 1, 1985, Buyer and Seller
entered into an agreement upon the terms, conditions and provisions therein
contained and covering the well units set forth on Exhibit A attached thereto;
and
WHEREAS, Exhibit A was previously amended to include one or more wells not
covered by the original contract; and
WHEREAS, Buyer and Seller desire to modify and amend said Gas Purchase
Contract to cover and include, in addition to the well(s) now covered and
included therein, the Shell #2-27 Kanka-State Case located in the NW-1/4 of the
NW-1/4 of the NW-1/4 of Section 27, T34N-R3E, Case Township, Presque Isle
County, Michigan;
NOW THEREFORE, for and in consideration of the premises, Buyer and Seller
mutually agree as follows:
1. Effective as of December 1, 1987, the First Amended Exhibit A attached
to said Gas Purchase Contract is of no further force and effect and there is
hereby substituted therefore, effective as of December 1, 1987, the Second
Amended Exhibit A which is attached hereto and made a part hereof.
2. Except as specifically herein modified and amended, all of the other
terms, conditions and provisions of said Gas Purchase Contract (as previously
amended) are and shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed or caused this
agreement to be executed as of the day and year first above written.
WITNESSES: BUYER
-----
CONSUMERS POWER COMPANY
/s/ Beverly A. Avery By /s/ R. J. Odlevak
- ------------------------------ ------------------------------
R. J. Odlevak, Vice President
/s/ Michael J. Ryan
- ------------------------------
SELLER
------
NORTHERN MICHIGAN EXPLORATION COMPANY
/s/ Richard Rulewicz By /s/ Gordon L. Wright
- ------------------------------ ------------------------------
/s/ Cynthia M. Marienfeld
- ------------------------------
<PAGE> 2
SECOND AMENDED EXHIBIT "A"
for
GAS PURCHASE CONTRACT
Dated
December 1, 1985
Between
CONSUMERS POWER COMPANY
and
NORTHERN MICHIGAN EXPLORATION COMPANY
<TABLE>
<CAPTION>
Township County
------------------------ ------------
<S> <C>
Allis North, T34N-R2E Presque Isle
Allis South, T33N-R2E Presque Isle
Case North, T34N-R3E Presque Isle
Case South, T33N-R3E Presque Isle
Bismarck North, T34N-R4E Presque Isle
Bismarck South, T33N-R4E Presque Isle
Belknap, T34N-R5E Presque Isle
Metz, T33N-R5E Presque Isle
Pulawski, T34N-R6E Presque Isle
</TABLE>
Shell #1-30 Sylvania Savings
SE NW SW Section 30, T34N-R3E
Case Township, Presque Isle County
NOMECO #1-30 Parr
NW NE NW Section 30, T34N-R3E
Case Township, Presque Isle County
Amoco #2-26 Sorgett
NW NE SW Section 26, T34N-R4E
Bismark Township, Presque Isle County
Shell #2-27 Kanka-State Case
NW NW NW Section 27, T34N-R3E
Case Township, Presque Isle County
<PAGE> 1
EXHIBIT 10.9(d)
MODIFICATION AND AMENDMENT TO GAS PURCHASE CONTRACT
THIS AMENDMENT, made and entered into as of the 1st day of March, 1988,
by and between CONSUMERS POWER COMPANY, a Michigan corporation, hereinafter
referred to as "Buyer", and NORTHERN MICHIGAN EXPLORATION COMPANY, hereinafter
referred to as "Seller";
WITNESSETH:
WHEREAS, By Gas Purchase Contract dated December 1, 1985, Buyer and
Seller entered into an agreement upon the terms, conditions and provisions
therein contained and covering the well units set forth on Exhibit A attached
thereto; and
WHEREAS, Exhibit A was previously amended to include one or more wells
not covered by the original contract; and
WHEREAS, Buyer and Seller desire to modify and amend said Gas Purchase
Contract to cover and include, in addition to the well(s) now covered and
included therein, the Shell #2-30 Sylvania Savings located in the NW-1/4 of the
SE-1/4 of the NW-1/4 of Section 30, T34N-R3E, Case Township, Presque Isle
County, Michigan;
NOW THEREFORE, for and in consideration of the premises, Buyer and
Seller mutually agree as follows:
1. Effective as of March 1, 1988, the Second Amended Exhibit A attached
to said Gas Purchase Contract is of no further force and effect and there is
hereby substituted therefore, effective as of March 1, 1988, the Third Amended
Exhibit A which is attached hereto and made a part hereof.
2. Except as specifically herein modified and amended, all of the other
terms, conditions and provisions of said Gas Purchase Contract as previously
amended are and shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Amendment to be executed as of the day and year first above written.
WITNESSES: BUYER
-----
CONSUMERS POWER COMPANY
By /s/ R. J. Odlevak
- ------------------------------ ------------------------------
- ------------------------------
SELLER
------
NORTHERN MICHIGAN EXPLORATION COMPANY
/s/ Barbara J. Strause By /s/ W. H. Stephens, III
- ------------------------------ ------------------------------
/s/ Tami A. Opalik
- ------------------------------
<PAGE> 2
THIRD AMENDED EXHIBIT "A"
for
GAS PURCHASE CONTRACT
Dated
December 1, 1985
Between
CONSUMERS POWER COMPANY
and
NORTHERN MICHIGAN EXPLORATION COMPANY
<TABLE>
<CAPTION>
Township County
------------------------ ------------
<S> <C>
Allis North, T34N-R2E Presque Isle
Allis South, T33N-R2E Presque Isle
Case North, T34N-R3E Presque Isle
Case South, T33N-R3E Presque Isle
Bismarck North, T34N-R4E Presque Isle
Bismarck South, T33N-R4E Presque Isle
Belknap, T34N-R5E Presque Isle
Metz, T33N-R5E Presque Isle
Pulawski, T34N-R6E Presque Isle
</TABLE>
Shell #1-30 Sylvania Savings
SE NW SW Section 30, T34N-R3E
Case Township, Presque Isle County
NOMECO #1-30 Parr
NW NE NW Section 30, T34N-R3E
Case Township, Presque Isle County
Amoco #2-26 Sorgett
NW NE SW Section 26, T34N-R4E
Bismark Township, Presque Isle County
Shell #2-27 Kanka-State Case
NW NW NW Section 27, T34N-R3E
Case Township, Presque Isle County
Shell #2-30 Sylvania Savings
NW SE NW Section 30, T34N-R3E
Case Township, Presque Isle County
<PAGE> 1
EXHIBIT 10.10
G A S P U R C H A S E C O N T R A C T
Between
CONSUMERS POWER COMPANY
As Buyer
- and -
NORTHERN MICHIGAN EXPLORATION COMPANY
As Seller
Dated: November 2, 1978
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
ARTICLE PAGE
- ------- ----
<S> <C> <C>
I Definitions 2
II Initial Procedure 4
III Commitment of Gas 5
IV Determination of Reserves 6
V Reservations 9
VI Quantity 11
VII Price 15
VIII Billing and Payment 18
IX Delivery Point or Points 19
X Term 20
XI Quality of Gas 20
XII Delivery Pressure 23
XIII Measurements and Tests 23
XIV Force Majeure 28
XV Laws, Orders, Rules and Regulations 29
XVI Taxes 29
XVII Assignment 30
XVIII Notices 31
XIX General 31
XX Option 32
</TABLE>
<PAGE> 3
GAS PURCHASE CONTRACT
THIS AGREEMENT, made and entered into as of this 2nd day of November
1978, by and between NORTHERN MICHIGAN EXPLORATION COMPANY, (hereinafter
referred to as "Seller") and CONSUMERS POWER COMPANY, a Michigan corporation,
(hereinafter referred to as "Buyer");
W I T N E S S E T H :
WHEREAS, Seller presently owns or controls or has contractual rights in
certain oil and gas leases that cover or relate to portions of the lands
embraced within the area described on Exhibit "A", attached hereto and made a
part hereof; and
WHEREAS, Seller desires to sell all gas attributable to its interest
which may be produced from said well; and
WHEREAS, Buyer, a public utility, engaged in the distribution and sale
of gas in numerous cities, villages and townships within the State of Michigan,
is willing, subject to the terms and conditions hereinafter contained, to
purchase the gas that may be produced by Seller from the area described on
Exhibit "A";
NOW, THEREFORE, in consideration of the mutual promises, agreements and
undertakings hereinafter set forth, it is hereby agreed by and between Seller
and Buyer as follows:
<PAGE> 4
ARTICLE I
DEFINITIONS
1. The term "gas well gas", unless the context otherwise requires, shall
mean that part of the effluent produced from a well classified as a gas well by
the regulatory agency having jurisdiction in such matters which remains in the
vapor phase after passing such well effluent through a conventional mechanical
separator or separators for the separation of liquids and gas.
2. The term "oil well gas", unless the context otherwise requires, shall
mean that part of the effluent produced from a well classified as an oil well
by the regulatory agency having jurisdiction in such matters which remains in
the vapor phase after passing such well effluent through a conventional
mechanical separator or separators for the separation of liquids and gas.
3. The term "gas", unless the context otherwise requires, shall mean gas
well gas or oil well gas or the combination of both.
4. The term "reserves", unless the context otherwise requires, shall
mean the estimated quantities of producible gas in place that remain as of
November 2, 1978, in the following types of reservoirs. For gas reservoirs,
defined as those subsurface accumulations in which all hydrocarbons are
initially in the vapor phase, producible reserves shall be calculated using a
recovery factor of 92 percent of hydrocarbon gas in place with no further
adjustment for shrinkage due to surface condensation of liquids. For oil
reservoirs, defined as those subsurface accumulations in which all hydrocarbons
are initially in the liquid phase, producible reserves shall be
- 2 -
<PAGE> 5
calculated using a recovery factor of 80 percent of the vaporizable
hydrocarbons ("solution gas") in place with no further adjustment for shrinkage
due to surface condensation. For associated reservoirs, defined as those
subsurface accumulations in which a hydrocarbon vapor phase (gas cap) and a
hydrocarbon liquid phase (oil column) co-exist at initial conditions,
producible reserves shall be calculated using recovery factors of 92 percent of
the hydrocarbon vapor phase (gas cap gas) initially in place and 80 percent of
the vaporizable liquid phase ("solution gas') initially in place with no
further adjustments for shrinkage due to surface condensation. All reserves
shall be estimated using engineering principles generally accepted in the gas
industry.
5. The term "contract year" shall mean a period of twelve (12)
consecutive months commencing on January 1st of each year; provided, however,
that the first contract year will commence on the date of first delivery of gas
hereunder and end on January 1 next following the date of such first delivery.
6. The term "annual contract quantity" shall mean a quantity of gas well
gas equal to the sum of the products obtained by multiplying the contract
quantity in effect during a contract year by the number of days for which it
was in effect.
7. The term "well" shall mean an individual completion in an oil or gas
reservoir.
8. The term "Deliverability" shall mean the maximum daily volume of
legally producible gas well gas which, in the course of prudent operations (as
determined in the sole discretion of Seller), can be delivered to Buyer from
the properties covered hereunder.
- 3 -
<PAGE> 6
9. The term "month" shall mean the period of time beginning at 12:00
noon on the first day of a calendar month and ending at 12:00 noon on the first
day of the next succeeding calendar month.
10. The term "day" shall mean a period of twenty-four (24) consecutive
hours beginning at 12:00 noon.
11. The term "Mcf" shall mean one thousand cubic feet.
12. The term "Bcf" shall mean one billion cubic feet.
13. The term "tendered" shall mean Seller's commitment of reserves
hereunder.
ARTICLE II
INITIAL PROCEDURE
1. Seller agrees that it shall, in the exercise of due diligence, file
for all governmental consents and authorizations, if any, necessary for Seller
to produce, sell and deliver gas to Buyer in accordance with the terms and
provisions hereof. Seller further agrees that it will install or cause to be
installed the facilities necessary for Seller to perform its obligations
hereunder.
2. Buyer agrees that it shall, in the exercise of due diligence file for
all governmental consents and authorizations, if any, necessary for Buyer to
purchase and receive gas hereunder. Buyer agrees to make any required
Petitions to the Michigan Public Service Commission within thirty (30) days
after the date on which this Agreement has been executed by the parties hereto.
If any such necessary governmental consents and authorizations have not been
issued to Buyer within one hundred eighty (180) days after application
therefor, then Seller may, acting in good faith and not capriciously, by notice
to Buyer during the time such condition continues, cancel this Agreement
insofar as it pertains to the reserves affected by the lack of such consents
and authorizations Buyer further agrees that,
- 4 -
<PAGE> 7
subsequent to the receipt of all necessary governmental consents and
authorizations, it will proceed with due diligence to install the facilities
necessary for Buyer to perform its obligations hereunder.
ARTICLE III
COMMITMENT OF GAS
1. Subject to all of the provisions hereof, Seller commits to the
performance of this Agreement all gas reserves in the formations and strata in
and under the area described on Exhibit "A" which are above the base of the
Niagaran Formation and which are attributable to any interest in such gas now
or hereafter owned by Seller.
Said commitment shall continue in effect until December 31, 1981 and from
month to month thereafter unless cancelled by written notice by Seller to Buyer
given at least thirty (30) days prior to the time Seller desires to cancel the
commitment provided for hereunder. Said cancellation shall apply only to
acreage outside of drilling or production units in the area described on
Exhibit "A" on the effective date of said cancellation.
2. Seller, with Buyer's written concurrence, may add acreage to the
performance of the foregoing commitment. If Seller elects to so add additional
acreage to this Agreement, Seller shall prepare and submit to Buyer a
description of the additional acreage and the written acceptance by Buyer of
the document containing such description shall constitute Buyer's written
concurrence and thereupon Exhibit "A" to this Agreement shall be deemed to have
been amended to reflect the additional acreage.
3. The gas reserves discovered in wells drilled within the area
described on Exhibit "A", or on acreage added to this Agreement pursuant to
Section 2 above, shall be determined in accordance with the provisions of
Article IV hereof.
- 5 -
<PAGE> 8
ARTICLE IV
DETERMINATION OF RESERVES
1. Seller shall forthwith furnish Buyer all information and data in
Seller's possession which Seller deems nonconfidential that may be required by
Buyer for the purpose of estimating the initial amount of reserves, and shortly
after furnishing such information Seller shall also submit to Buyer a statement
showing Seller's estimate of the initial amount of reserves and the amount of
reserves in each gas well gas reservoir then covered hereunder. If Buyer does
not object to all or any part of such statement within forty-five (45) days
after receipt thereof, Seller's said statement shall be deemed correct for all
purposes hereof. If Buyer objects to all or any part of such statement within
said forty-five day period, the parties shall promptly meet to attempt to
resolve their difference over those portions of such statement to which Buyer
has objected. If the parties have not resolved all such portions within thirty
(30) days after Buyer's said objection, then the parties shall submit those
portions of the statement still in disagreement to arbitration as provided in
Section 4 of this Article IV. The effective date of the initial determination
of reserves pursuant to this Section 1 shall be the date of initial deliveries
of gas hereunder or within one hundred twenty (120) days following the tender
by Seller of gas reserves to Buyer, whichever is earlier.
2. From time to time after execution hereof, Seller may discover
additional reserves on acreage committed to Buyer pursuant to the provisions
hereof. Promptly after the time of each such discovery Seller shall furnish
Buyer all available basic data required to estimate the gas reserves discovered
and a statement showing the amount of such reserves and the amount of reserves
in
- 6 -
<PAGE> 9
each gas well gas reservoir as committed. If Buyer does not object to all or
any part of such statement within thirty (30) days after receipt thereof, the
amount of reserves shown on Seller's said statement shall be added to the
then-current amount of reserves, and the total shall be the reserves for all
purposes hereunder. If Buyer objects to all or any part of such statement
within said thirty-day period, the parties shall promptly meet to attempt to
resolve their differences over those portions of such statement to which Buyer
has objected. If the parties have not resolved all such portions within thirty
(30) days after Buyer's said objection, then the parties shall submit those
portions of the statement still in disagreement to arbitration as provided in
Section 4 of this Article IV. The effective date that such committed reserves,
as determined by agreement or arbitration, shall be added to the
previously-committed reserves hereunder shall be the first day of the month
next following the date of connection of such reserves to Buyer's facilities.
3. After the initial determination of reserves hereunder, Buyer may
make, or Seller may request Buyer to make, at reasonable intervals, a
redetermination of the amount of reserves. Upon Buyer's making a
redetermination or within thirty (30) days after a request for a
redetermination, Buyer shall furnish Seller a statement showing Buyer's
estimate of the amount of reserves and the amount of reserves in each gas well
gas reservoir then covered hereby. If Seller does not object to all or any
part of such statement within thirty (30) days after receipt thereof, Buyer's
said statement shall be deemed correct for all purposes hereof. If Seller
objects to all or any part of such statement within said thirty-day period, the
parties shall promptly meet to attempt to resolve their differences over those
portions of such statement to which Seller
- 7 -
<PAGE> 10
has objected. If the parties have not resolved all such portions within thirty
(30) days after Seller's said objection, then the parties shall submit those
portions of the statement still in disagreement to arbitration as provided in
Section 4 of this Article IV. The effective date of any redetermination of
reserves pursuant to this Section 3 shall be the first day of the month
following the date of request therefor.
4. If arbitration is required to resolve any differences over reserves,
such dispute shall be submitted to three qualified arbitrators for arbitration,
one to be selected by Seller, one to be selected by Buyer and the third
arbitrator to be selected by the first two arbitrators. If either Seller or
Buyer shall fail to select an arbitrator within ten (10) days after said
dispute is provided to be submitted to arbitration hereunder, or if the two
arbitrators first selected shall fail to select a third arbitrator within ten
(10) days after the selection of the second of them, then either Seller or
Buyer may request the American Arbitration Association to select the arbitrator
or arbitrators to complete the board of three. After three arbitrators are
selected in accordance with the foregoing, they shall meet, hear the parties
with respect to the dispute and arrive at a decision all in accordance with the
Rules of the American Arbitration Association. Any decision regarding such
dispute which has been agreed in writing by at least two of the said
arbitrators shall be final and conclusive and all costs of arbitration
hereunder shall be borne equally by Seller and Buyer. All arbitrators
appointed pursuant to this section shall be qualified independent engineers
experienced in the oil and gas industry and competent to pass on the matter of
reserves. A judgment upon the award or decision rendered by the arbitrators
may be entered in any Circuit Court having
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<PAGE> 11
Jurisdiction; and this arbitration agreement shall be governed by the laws of
the State of Michigan.
5. If, upon the conclusion of any redetermination, Buyer does not have
sufficient capacity in its facilities to take the total quantities of gas which
it is required to take or pay for under this Agreement, Buyer shall diligently
proceed to obtain the governmental consents and authorizations, if any,
required to expand the capacity of such facilities. If Buyer has not received
all such consents and authorizations within one hundred eighty (180) days after
conclusion of the redetermination, then either party, acting in good faith and
not capriciously, by notice to the other party given prior to Buyer's receipt
of all such consents and authorizations, may cancel this Agreement insofar as
it covers gas in excess of Buyer's capacity.
6. Seller agrees to furnish to Buyer, as it becomes available, all
information and data in Seller's possession which Seller deems nonconfidential
that may be required by Buyer for the purpose of estimating reserves pursuant
to the provisions of this Article IV.
ARTICLE V
RESERVATIONS
1. Notwithstanding anything to the contrary which may be contained or
implied herein, Seller hereby reserves unto itself the following rights with
respect to the gas produced from the lands and leaseholds subject to this
Agreement:
(a) To operate Seller's leaseholds, lands and/or interests therein free
from any control by Buyer in such manner as Seller, at Seller's sole
discretion, may deem advisable, including without limitation the right,
but never the obligation, to drill new wells, to repair and
- 9 -
<PAGE> 12
rework old wells, renew and extend, in whole or in part, any leases
subject hereto and to abandon any well or surrender any lease, in whole
or in part, when no longer deemed by Seller to be capable of producing
gas in paying quantities.
(b) To deliver to Seller's lessors sufficient gas to meet Seller's
obligations under its leases.
(c) To use all gas that Seller may need or require for the development
and operation ofSeller's leases subject hereto and other leases in the
vicinity thereof, including, but not limited to, the use of gas for fuel,
drilling, deepening, reworking, compression, gas lifting, processing,
cycling, repressuring, or other secondary recovery operations.
(d) To sell gas to others for drilling fuel in the vicinity of the leases
subject hereto.
(e) To process gas prior to delivery to Buyer for the extraction of any
substance contained therein other than methane (except such methane
necessarily removed in such processing); provided, however, that such
processing shall not render the residue gas remaining after processing
incapable of meeting the quality standards required herein.
(f) To form or participate in the formation of any unit or units,
including, but not limited to, field wide unit or units, which may
include all or part of the lands and leaseholds subject hereto;
provided that this Agreement shall apply to the interest of Seller in
such unit or units to the extent such interest is attributable to the
lands and leaseholds subject hereto.
2. The obligations of Seller hereunder are subject to the ability of
Seller's well to produce without waste and in accordance with
prudent oil and gas field practice, and Seller shall not be required to produce
any well in excess of the maximum rate of flow fixed by law or regulatory body
or in
- 10 -
<PAGE> 13
excess of maximum efficient rate of flow of such well, at Seller's sole
discretion.
ARTICLE VI
QUANTITY
1. Commencing on the date of first delivery of gas hereunder and
continuing throughout the term hereof, Seller shall sell and deliver to Buyer,
and Buyer shall purchase and take from Seller hereunder, during each day, all
of the oil well gas made available for sale by Seller from the properties
covered hereby.
2. Commencing on the date of first delivery of gas well gas hereunder
and continuing throughout the term of this Agreement, Seller shall sell and
deliver to Buyer, and Buyer shall purchase and take from Seller hereunder, or
pay Seller for whether taken or not, during each contract year, a daily
contract quantity of gas well gas equal to the sum of the following:
(a) One million (1,000,000) cubic feet for each two billion, five hundred
million (2,500,000,000) cubic feet of gas well gas reserves from gas well
gas reservoirs from which less than fifty percent (50%) of the reserves
have been produced; and
(b) One million (1,000,000) cubic feet for each three billion, six
hundred and fifty million (3,650,000,000) cubic feet of gas well gas
reserves from gas well gas reservoirs other than those described in
subsection (a) above.
3. Buyer agrees, in the absence of force majeure, to purchase and take
from Seller, on each day, a quantity of gas well gas sufficient
to keep Seller's leases in effect, but not less than one million (1,000,000)
cubic
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<PAGE> 14
feet for each five billion (5,000,000,000) cubic feet of gas well gas
reserves as established from time to time pursuant to Article IV hereof.
4. If Seller fails on any day for any reason other than force majeure to
deliver the daily volume of gas well gas requested by Buyer hereunder up to one
hundred eleven percent (111%) of the daily contract quantity, then the daily
contract quantity for that day shall be reduced to ninety percent (90%) of the
volume of gas well gas which Seller delivered on such day.
5. If Seller fails for any reason other than force majeure to deliver
the volumes of gas well gas requested by Buyer up to one hundred eleven percent
(111%) of the daily contract quantity for five (5) consecutive days, then,
commencing on the first day of the month following the end of the fifth (5th)
day of such failure to deliver, and continuing thereafter until adjusted as
hereinafter provided, the daily contract quantity of gas well gas shall be
reduced to ninety percent (90%) of the average daily volume of gas well gas
delivered during such five (5) day period.
6. If the daily contract quantity is adjusted downwards as provided in
Section 5 of this Article VI, then Seller shall have the opportunity to restore
all or a portion of the daily contract quantity determinable under Section 2 or
Section 3, as the case may be, of this Article VI in the following manner: Not
later than three (3) days after Seller has notified Buyer in writing that its
inability to deliver gas well gas hereunder has been remedied, Buyer shall,
upon twenty-four (24) hours' notice by Buyer to Seller, commence a five (5) day
test period, during which time Seller will deliver and Buyer will purchase the
Deliverability, but not to exceed one hundred eleven percent (111%) of the
daily contract quantity determinable under Section 2 or Section 3, as the case
may be, of this Article VI. Commencing on the day following the last day of
such test period, the daily contract quantity under Section 2 or Section 3, as
the case may be, of this Article VI shall be deemed to be ninety
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<PAGE> 15
percent (90%) of the average daily volume of gas well gas delivered by Seller
during such five (5) day test period.
If, as a result of such test, the daily contract quantity is not restored
to the daily contract quantity determinable under Section 2 or Section 3, as
the case may be, of this Article VI, Seller shall not be permitted until three
(3) months following the completion of such test to again request Buyer to
conduct a subsequent test unless a reasonable amount of additional development
or remedial work has been performed by Seller since the last test, in which
case evidence of such work shall be sufficient to permit a request for a
subsequent test.
Upon receipt of notice from Seller that the inability to deliver has been
remedied, Buyer may, in lieu of conducting such test, notify Seller that,
commencing with the first day following receipt of said notice from Seller, the
downward adjustment in daily contract quantity shall no longer be effective.
7. If the total volume of gas well gas actually purchased and taken by
Buyer during any contract year is less than the annual contract quantity for
such year, then, within fifteen (15) days following the end of such contract
year, Buyer shall pay Seller for any such deficiency at the then-effective
price per Mcf hereunder. Buyer shall have the right, during the next five (5)
contract years following the contract year in which a deficiency occurred, to
take gas well gas paid for but not taken by Buyer hereunder by taking gas well
gas in volumes in excess of the annual contract quantities for such years. Any
such gas well gas so taken as makeup for gas well gas shall be free of
additional cost to Buyer, except that Buyer shall pay Seller the difference
between the price paid for gas not taken and the price in effect at the end of
the contract year during which gas well gas was made up, plus the tax
reimbursement, if any, due under Article XVI.
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<PAGE> 16
8. If withdrawals by other producers from a reservoir or common source
of supply containing gas well gas reserves committed hereunder cause drainage
of Seller's reserves, Buyer shall be obligated, upon written notice from Seller
to Buyer accompanied by sufficient proof of such drainage, to equalize, within
the limits of the physical capacity of its facilities, withdrawals of gas well
gas from such reservoir and shall thereafter take volumes of gas, well gas from
such reservoir so that, during the remaining term of this Agreement, Seller's
reserves will be delivered hereunder as if such drainage had not occurred. If
the capacity of Buyer's facilities is not sufficient to prevent such drainage,
Buyer shall, within thirty (30) days after Seller's said notice, file an
application with the governmental authority having jurisdiction for such
authorization as may be necessary to accept and transport the quantities of gas
well gas necessary to prevent such drainage. Promptly after receipt of such
authorization, Buyer shall enlarge its said facilities and thereafter take
volumes of gas well gas from such reservoir so that, during the remaining term
of this Agreement, Seller's reserves will be delivered hereunder as if such
drainage had not occurred. Buyer shall release from this Agreement an amount
of gas equal to the volumes which have been drained and which, without such
release, would be drained prior to the completion of Buyer's facilities if
approval to construct the facilities is not obtained within ninety (90) days
after application therefor.
9. Notwithstanding anything to the contrary contained or implied herein,
on any day when deliveries or takes are affected by force majeure and as a
result thereof volumes delivered are less than the applicable daily contract
quantity, the daily contract quantity hereunder shall be deemed to be the
actual volume delivered and purchased on such day.
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<PAGE> 17
10. Notwithstanding the provisions of Section 2 and 3 of this Article
VI, Buyer shall not be obligated to take, or pay for if not taken, gas which
does not meet the quality specifications set forth in Article XI hereafter.
ARTICLE VII
PRICE
1. The price to be paid by Buyer to Seller for gas to be sold and
purchased under this Agreement, or for which payment is due hereunder, shall be
230.049 cents per Mcf, which price shall remain in effect until January 1,
1979. On January 1, 1979 and thereafter, at the beginning of each subsequent
three-month period the price then in effect shall be increased by the following
percentage rates:
<TABLE>
<CAPTION>
Years Quarterly Escalation
----- --------------------
<S> <C>
1979 1.50%
1980-1981 1.75%
1982-1983 2.00%
1984-1985 2.25%
1986 and thereafter 2.50%
</TABLE>
All increases in price shall be calculated to the nearest one thousandth of one
cent. The price provided to be paid under the provisions of this Section 1
shall constitute the Contract Price.
2. Commencing in January, 1986, and in each month thereafter in which
the Contract Price exceeds the equivalent value of 1,000,000 BTU's of Number 2
Fuel Oil based on the arithmetic average of the daily price quotations for
Number 2 Fuel Oil as reported by "Platts Oilgram Price Service, US Tank
Car-Truck Transport Lots, Midcontinent, Detroit," Seller shall refund to Buyer
an amount calculated by multiplying the difference between the Contract Price
and the equivalent value of 1,000,000 BTU's of Number 2 Fuel Oil, as herein
defined, by the volume of gas taken or paid for by Buyer hereunder during the
month. For the purpose hereof, a gallon of Number 2 Fuel Oil shall be
considered to
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<PAGE> 18
contain 140,640 BTU's. Notwithstanding the foregoing provisions of this
Section 2, it is understood and agreed that there is hereby established a base
price of 390.000 cents per Mcf for the period commencing January 1, 1986, and
ending March 31, 1986, which shall increase at the rate of six and one-quarter
cents (6.25c.) at the beginning of each three-month period thereafter,
commencing April 1, 1986. If the base price so established for any month is in
excess of the equivalent value of 1,000,000 BTU's of Number 2 Fuel Oil
(calculated as provided above), the base price shall be utilized in lieu of the
price equivalent value of 1,000,000 BTU's of Number 2 Fuel Oil for the purpose
of determining the amount of refund to be made by Seller to Buyer hereunder.
3. If, at any time and from time to time, the Federal Energy Regulatory
Commission (or any other governmental authority, whether Federal or State,
having jurisdiction over the rates to be charged or paid for the sale or
purchase of natural gas) shall authorize by order, by settlement, or by other
authorization of general applicability (except with regard to (i) emergency
sales, (ii) sales of gas made in accordance with optional certificate
procedures pursuant to Federal Power Commission Order Nos. 455 and 455-A,
including any modification, amendment or replacement of similar import of said
Orders, and (iii) sales of gas made by any producer at a price prescribed
pursuant to a petition for special relief filed by any such producer), or if
any statute shall authorize, a higher rate (whether or not subject to refund)
than the rate herein provided to be paid for all or a portion of the gas
hereunder, which higher rate is applicable to the geographical area of gas
sales under this contract and to other sales or purchases of gas produced in
the Lower Peninsula of the State of Michigan (including the adjacent waters of
Lakes Michigan and Huron), then the price to be paid by Buyer to Seller for gas
delivered or for which payment is due hereunder shall be increased to equal
such higher rate, effective as of the date such higher rate is authorized. If
any such higher rate is subject to refund pursuant to applicable law, such
increased rate under this
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<PAGE> 19
Agreement shall also be subject to refund, and if refunds are required with
respect to such higher rate, Seller shall make refunds hereunder in the same
manner as are applicable to such higher rate; provided, Seller shall not be
required to make any refunds hereunder based on rates less than the prices set
forth in the foregoing provisions of this Article. If, pursuant to this
Paragraph, the price to be paid hereunder is increased, such increased price
shall be in effect until a higher price shall become effective hereunder
pursuant to this Agreement.
4. Notwithstanding the foregoing provisions of this Article VII, Buyer
shall pay Seller, in lieu of any other price herein provided the greater of the
following prices for the gas attributable to royalty and overriding royalty
shares, if any, owned by the United States, the State of Michigan, or a
political subdivision thereof (hereinafter called "government lease gas"):
(a) The price provided from time to time by Buyer for gas delivered
or for which payment is due hereunder; or
(b) The price at which Seller is required to account to the United
States, the State of Michigan, or a political subdivision thereof, for
royalties on the sale of government lease gas.
5. Buyer and Seller acknowledge that the price per Mcf is related to
both the temperature base and the pressure base used for measurement of gas.
Therefore, if either the temperature base or the pressure base of this
Agreement is, for any reason, modified from the base temperature of sixty
degrees (60 degrees) Fahrenheit and/or from the base pressure of 14.73 pounds
per square inch absolute, the price provisions of all sections of this Article
VII will be adjusted proportionately.
6. It is the intent of the parties that Buyer shall be permitted to pay
and Seller shall be permitted to collect each of the prices provided in
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<PAGE> 20
this Agreement from time to time. Therefore, each party covenants and agrees
it will not, by act or omission, conduct itself in a manner calculated to
nullify, cancel, circumvent or minimize the operation of any of the pricing
provisions hereof. These covenants and agreements shall extend to and be
binding upon each of the parties, their successors, assigns, subsidiaries,
parent corporations and affiliated corporations and the directors, officers,
employees, agents and attorneys of each of same.
ARTICLE VIII
BILLING AND PAYMENT
1. After deliveries of gas have commenced under this Agreement, Buyer
shall, on or before the tenth (10th) day of each month, render to Seller a
statement showing the quantity of gas delivered hereunder to Buyer during the
preceding month. Not later than the twenty-fifth (25th) day of each month,
Buyer shall pay Seller for the gas taken by Buyer during the preceding month.
2. Each party hereto shall have the right at reasonable hours to examine
books, records and charts of the other party to the extent necessary to verify
the accuracy of any statement, charge, or computation made pursuant to the
provisions of this Agreement. If any such examination reveals an inaccuracy
resulting in an error in any billing theretofore made, the necessary
adjustments in such billing and payments shall be promptly made.
3. In the event any adverse claim of any character whatsoever is
asserted in respect to any of the gas committed hereunder, Buyer may retain, as
security for the performance of Seller's obligations with respect to such
claim, the entire purchase price of said gas until Buyer has been satisfied as
to the amount of such claim and thereafter up to the amount of such claim, both
without interest, until such claim has been finally determined or until Seller
shall have furnished bond to Buyer in the amount and with sureties satisfactory
to Buyer, conditioned for the protection of Buyer with respect to such claim.
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<PAGE> 21
ARTICLE IX
DELIVERY POINT OR POINTS
1. The delivery point or points of all gas provided to be sold and
purchased hereunder shall be as follows:
Oil Well Gas - - - At the entrance of a meter station to be installed
by Buyer at a mutually agreeable location in each
field.
Gas Well Gas - - - At the entrance of a meter station to be installed
by Buyer at or near each well in each field.
Title to all gas sold hereunder shall pass from Seller to Buyer at said
point or points of delivery.
2. Seller hereby warrants title to all gas sold under this Agreement and
the right to sell the same, and that such gas is free and clear from all liens
and adverse claims, and that Seller will indemnify, defend and save Buyer
harmless from and against all suits, actions, debts, accounts, damages, costs,
losses and expenses arising from or out of adverse claims of any or all persons
or parties to said gas or to royalties, taxes, license fees or charges with
respect thereto, which are a proper charge against Seller, or which may be
levied or assessed upon the production of the said gas, the sale thereof to
Buyer or upon the operation of Seller's wells.
3. Seller undertakes and agrees to maintain and be entirely responsible
for its ownership in said well, equipment and other facilities up to the point
of delivery hereinabove specified and further agrees to hold harmless,
indemnify and defend Buyer from and against all expense and liability in any
manner connected therewith. Buyer agrees to maintain and be entirely
responsible for its meter stations and transmission facilities beyond the
above-mentioned point of delivery and that it will hold harmless, indemnify and
defend Seller from and against all loss, damage, expense and liability
resulting therefrom.
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<PAGE> 22
As between the parties hereto, Seller shall be in control and possession
of the gas delivered hereunder and shall be responsible therefor and for any
damage or injury caused thereby, in whole or in part, until the same is
delivered to Buyer at the said point of delivery, after which delivery Buyer
shall be in exclusive control and possession thereof and shall be responsible
therefor any injury or damage caused thereby in whole or in part.
ARTICLE X
TERM
1. This Agreement shall become effective as of the date hereof and
unless cancelled earlier pursuant to the other provisions of this Agreement
shall remain effective for a period of twenty (20) years from the date of this
Agreement.
ARTICLE XI
QUALITY OF GAS
1. All gas delivered by Seller under the terms of this Agreement shall
conform to the following specifications:
(a) The gas shall be commercially free from dust, gum, gum-forming
constituents and liquids and solids which may become separated from gas.
(b) The water content of the gas shall not exceed five (5) pounds per
million cubic feet; provided, however, water content in excess of five
(5) pounds per million cubic feet will be accepted, if said water
content will not occasion any adverse effect on the operation of Buyer's
facilities, but in no event shall the water exceed seven (7) pounds per
million cubic feet.
(c) The gas shall not at any time have an oxygen content in excess
- 20 -
<PAGE> 23
of one percent (1%) by volume, and Seller shall make every reasonable
effort to keep the gas free of oxygen.
(d) The partial pressure of carbon dioxide shall not exceed 4 psi at a
total gas pressure of 100 psig.
(e) The gas shall not contain more than one quarter (1/4) grain of
hydrogen sulphide per one hundred (100) cubic feet. The purity
requirement shall be considered as satisfied if a strip of white filter
paper, freshly moistened with a solution of one hundred (100) grains of
lead acetate in one hundred (100) cubic centimeters' of water is exposed
to the gas for one and one-half (1-1/2) minutes in a previously purged
apparatus through which gas is flowing at a rate of approximately five
(5) cubic feet per hour, the gas not impinging from a jet upon the test
paper, and after this exposure the test paper is not found distinctly
darker than a second paper freshly moistened with the solution and not
exposed to the gas. If the gas does not meet the purity requirements
determined in the above test, the hydrogen sulphide content shall be
determined by a cadmium sulphate quantitative test. The gas shall not
contain more than one-half (1/2) grain of mercaptan sulfur per one
hundred (100) cubic feet, provided that if the mercaptan sulfur level of
Seller's gas causes intolerable odorant conditions, Buyer, after making
every reasonable effort to correct said conditions, will notify Seller,
which in turn agrees to use its best efforts to alleviate said condition.
Failing to alleviate the intolerable condition, the volume of gas causing
the intolerable condition
- 21 -
<PAGE> 24
which cannot be reasonably treated by Seller nor utilized by Buyer
through mixing with other gases will be excluded from those volumes of
gas which Buyer is obligated to purchase and take from Seller hereunder
or pay Seller for whether taken or not. In no event, however, shall
Seller be required to reduce the mercaptan sulfur level below one-fifth
(1/5th) grain per one hundred (100) cubic feet.
(f) The gas shall not contain more than five (5) grains of total sulfur
(including the sulfur in any hydrogen sulphide and mercaptans) per one
hundred (100) cubic feet.
(g) The gas shall have a total heating value per cubic foot of not
less than one thousand (1,000) British thermal units. The gas shall have
a maximum total heating value per cubic foot sufficiently low that the
quotient of the total heating value per cubic foot of gas divided by the
square root of the specific gravity of the gas does not exceed 1375. The
phrase "total heating value per cubic foot" shall mean the number of
British thermal units, produced by combustion at constant pressure, of
that amount of gas, saturated with water vapor, which would occupy a
volume of one (1) cubic foot at a temperature of sixty degrees (60
degrees) Fahrenheit and under a pressure equivalent to that of thirty
(30) inches of mercury at thirty-two degrees (32 degrees) Fahrenheit
and under the standard gravitational force with air of the same
temperature and pressure as the gas, when the products of combustion
are cooled to the initial temperature of gas in air and when the water
formed by combustion is condensed to a liquid state.
(h) The gas shall be interchangeable as defined in American Gas
Association Research Bulletin 36, published in 1946, entitled
"Interchangeability of Other Fuel Gases with Natural Gases."
- 22 -
<PAGE> 25
2. If the gas offered for sale to Buyer fails at any time to conform to
any of the specifications of this Article XI, Buyer may notify Seller of any
such failure in writing and Seller shall make a diligent effort to correct such
failure so as to deliver gas conforming to the above specifications. If after
receiving such notice, Seller is unable to deliver gas conforming to the above
specifications by treatment consistent with prudent operations and by means
which are economically feasible, in Seller's opinion, Buyer may at its option
either accept or reject deliveries thereof. If Buyer rejects the gas, such gas
shall be released from this Agreement.
ARTICLE XII
DELIVERY PRESSURE
1. Seller shall deliver gas well gas at a pressure sufficient to allow
the gas well gas to enter Buyer's facilities at the delivery points hereunder,
provided Seller shall not be obligated to deliver gas well gas to Buyer at a
pressure in excess of one thousand and fifty (1,050) pounds per square inch
gauge. If the well is unable to produce the daily contract quantity applicable
to such reservoir against the pressure prevailing in Buyer's pipelines, then
Buyer shall promptly reduce such pressures to the extent required to permit the
delivery of such quantity from such well; provided, that Buyer shall never be
obligated to reduce such pressure below 200 pounds per square inch gauge. If
Buyer is required to install compression facilities to effectuate such
reduction in pressure, the provision of Article XIV hereof shall excuse Buyer's
failure to take such daily contract quantity during the period prior to the
completion of the installation of such compression facilities.
ARTICLE XIII
MEASUREMENTS AND TESTS
1. Standards of measurements and tests:
(a) The volume of gas delivered hereunder shall be computed in
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<PAGE> 26
accordance with the methods prescribed in the Gas Measurement Committee
Report #3, Natural Gas Department, American Gas Association, as revised
and reprinted September, 1969, and any subsequent amendments thereof
which are mutually acceptable to the parties hereto. The unit of volume
for all purposes hereunder shall be one cubic foot of gas at a base
temperature of sixty degrees (60o) Fahrenheit and a base pressure of
14.73 pounds per square inch absolute.
(b) The deviation of the gas from the Ideal Gas Laws at the pressures
and temperatures under which gas is delivered hereunder, shall be
determined at the beginning of deliveries hereunder and at intervals of
six (6) months thereafter or at such other intervals as may be mutually
agreed upon or found necessary in practice. Results of each such
determination shall be used in computing the volumes of gas delivered
hereunder until the next such determination is made. Such determination
shall be made by reference to the Tables on Super Compressibility
Factors for Natural Gas, American Gas Association.
(c) The specific gravity of the gas shall be determined every six (6)
months by joint tests or as much oftener as is found necessary in
practice. The method of test used shall be by gravity balance or by such
other methods as shall be agreed upon by the parties. The regular tests
at the first of each six-month period shall determine the specific
gravity to be used in the computation for the measurement of gas
deliveries during such period or until changed by special tests, the
special tests to be applicable from the date made to and including the
last day of such period or until further special tests are made.
- 24 -
<PAGE> 27
(d) The flowing temperature of the gas at the points of delivery shall be
determined by means of a recording thermometer of standard make
acceptable to both parties, and the arithmetical average of hourly
readings during the time gas is flowing each day shall be deemed the gas
temperature and used in computing the volumes of gas delivered during
such day.
(e) The heating value of the gas delivered hereunder shall be
determined by means of a recording calorimeter using the Thomas Principle
of calorimetry or its equal. If neither party elects to install a
recording calorimeter so located as to record the heating value of said
gas, then the heating value shall be determined by test from samples
taken under delivery conditions in one of Buyer's recording calorimeters
at Buyer's expense.
2. Measurements:
(a) For the purpose of calculating the volume of gas delivered
hereunder and for other purposes of establishing a volume where
applicable and in the compilation of such volumes, the atmospheric
pressure shall be assumed to be fourteen and four-tenths (14.4) pounds
per square inch absolute regardless of the actual atmospheric pressure at
which the gas is delivered and measured, unless otherwise established by
governmental authority.
(b) Buyer shall install, maintain and operate at its own expense,
equipment of a character and design acceptable to Seller and perform
all tests required to accomplish the measurement of volumes,
temperatures, specific gravity and heating values, except as provided in
Section 1(e), of this Article XIII, of the gas delivered hereunder. Such
volume measuring equipment shall conform to the specifications contained
in the Report designated in
- 25 -
<PAGE> 28
Section l(a) of this Article XIII. Seller shall have access to such
measuring equipment at all reasonable hours, but the calibrating and
adjusting thereof and changing of charts shall be the responsibility of
Buyer. Upon request of Seller, all volume, specific gravity, and
temperature charts used in the measurement of gas hereunder shall be
mailed or delivered to Seller for checking and calculating. Such charts
shall be mailed or returned to Buyer within thirty (30) days after
receipt thereof by Seller.
(c) Seller may install, maintain and operate such check measurement
equipment as it may desire, but same shall not interfere in any way with
the operation of Buyer's measurement equipment hereunder. All
calibrating and adjusting of Seller's meters and changing of charts shall
be done by Seller.
(d) Buyer and Seller shall each have the right to be present at the
time of installing, testing, cleaning, changing, repairing, inspecting,
calibrating or adjusting done in connection with the measuring equipment
of the other which is used in measuring deliveries hereunder; and the
party which is planning to conduct such operations shall give the other
party at least ten (10) days' prior notice thereof in order that it may
be present.
(e) If, for any reason, Buyer's measuring equipment is out of service
or out of repair so that the quantity of gas is not correctly indicated
by the reading thereof, the gas delivered during the period such
measuring equipment is out of service or repair shall be estimated and
agreed upon on the basis of the best data available, using the first of
the following methods which is feasible:
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<PAGE> 29
i. By using the registration of any check measuring equipment
if installed and accurately registering; or
ii. By correcting the error if the percentage of error is
ascertainable by calibration, tests or mathematical calculations; or
iii. By estimating the quantity of deliveries by comparison
with deliveries during preceding periods under similar conditions
when the meter was registering accurately.
(f) The accuracy of the measuring equipment at the point of delivery
shall be tested at reasonable intervals of not less than once a month and
whenever requested by Buyer or Seller. If any such test shall be
requested by Seller and, upon such test, the measuring equipment in
question shall be found to be registering correctly, the cost of such
test shall be charged to and borne by Seller; otherwise, the cost of all
such tests shall be borne by Buyer.
(g) If, upon any test, the measuring equipment in the aggregate is found
to be inaccurate by two percent (2%) or less, previous readings of such
equipment shall be considered correct in computing the deliveries of gas
hereunder, but such equipment shall be immediately adjusted to record
accurately. If, upon any test, the measuring equipment shall be found to
be inaccurate by more than two percent (2%), then and in that event any
previous readings of such equipment and any payments based on such
previous readings of such equipment and any payments based on such
previous readings, shall be corrected to zero error for any period is not
definitely known or agreed upon, but, if the period is not definitely
known and agreed upon, such
- 27 -
<PAGE> 30
corrections shall be for a period covering the last half of the time
elapsed since the last test. (h) Buyer shall preserve or cause to be
preserved for a period of at least six (6) years all test data, charts,
or other similar records for the mutual use of both parties.
ARTICLE XIV
FORCE MAJEURE
1. If either Buyer or Seller is rendered unable, wholly or in part, by
force majeure or any other cause of any kind not reasonably within such party's
control to perform or comply with any obligation or condition of this
Agreement, upon giving notice and reasonably full particulars to the other
party such obligation or condition shall be suspended during the continuance of
the inability so caused and such party shall be relieved of liability and shall
suffer no prejudice for failure to perform the same during such period;
provided, obligations to make payments then due for gas delivered hereunder
shall not be suspended and the cause of suspension (other than strikes or
lockouts) shall be remedied so far as possible with reasonable dispatch.
Settlement of strikes and lockouts shall be wholly within the discretion of the
party having the difficulty. The term "force majeure" shall include, without
limitation by the following enumeration, acts of God and the public enemy, the
elements, fire, flood, accidents, breakdowns, permits (including any necessary
authorizations from the Michigan Public Service Commission), strikes and any
other industrial, civil or public disturbances, and any laws, orders, rules,
regulations, acts or restraints of any government or governmental body or
authority, civil or military.
- 28 -
<PAGE> 31
ARTICLE XV
LAWS, ORDERS, RULES AND REGULATIONS
1. The performance by either party of any and all of the obligations set
forth in the Agreement shall be subject to all valid and applicable laws,
orders, rules and regulations of any duly constituted authority having
jurisdiction. Either party shall have the right to contest the validity of any
such law, order, rule or regulation and the acquiescence or compliance
therewith for any period of time shall not be construed as a waiver of such
right.
ARTICLE XVI
TAXES
1. Except as hereinafter provided, Seller agrees to pay or cause to be
paid all taxes imposed upon gas prior to its delivery to Buyer hereunder or
upon any occupation or privilege relating to the production, sale or delivery
of such gas to Buyer. Buyer agrees to pay or cause to be paid all taxes
imposed on such gas after its receipt by Buyer, or upon any occupation or
privilege relating to the transmission or sale of such gas after its receipt by
Buyer.
2. If at any time after the date of this Agreement, there is imposed
upon Seller any new tax or increased rate of existing taxes, then, from and
after the date of imposition of such new or additional taxes, Buyer shall
reimburse Seller one hundred percent (100%) of the calculated amount of such
new or increased tax or taxes imposed on Seller. As used herein the term "tax"
shall mean sales, transaction, occupation, service, production, severance,
gathering, transmission, value added, export or excise tax, assessment or fee
levied, assessed or fixed by governmental authority, and taxes of similar
nature or equivalent in effect (not including income, payroll, excess profits,
capital stock, franchise or general property taxes). Such reimbursement shall
apply to the royalty interest as well as the working interest
- 29 -
<PAGE> 32
provided that Seller passes such reimbursement on to such royalty interest.
Any present or future tax levied on any liquid product which Seller is entitled
to retain shall be borne wholly by Seller.
3. If Seller receives written notice from Buyer that questions the
validity of any additional or supplemental tax, Seller will consult with Buyer
as to the best procedure to be followed in the payment of the questioned tax
and the means of testing its validity, having due regard for the protection of
the interests of both Seller and Buyer. Following such consultation, each
party will pursue the course of action it deems proper.
4. If Seller fails, refuses or neglects to pay any excise tax imposed by
governmental authority upon or by reason of any of Seller's operations in
connection with the gas provided to be sold and purchased hereunder and a lien
shall be filed by such governmental authority as a result thereof, then Buyer
shall have, and Seller hereby expressly gives it, the right to withhold the
amount of money necessary to discharge such lien from the amounts payable to
Seller by Buyer until final judicial determination.
ARTICLE XVII
ASSIGNMENT
1. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns; provided that no
assignment of interest under this Agreement, conveyance, transfer of any
interest or change of ownership by either party shall be binding upon the other
party until such other party has been furnished with a written notice
evidencing such assignment, conveyance, transfer of interest or change of
ownership.
- 30 -
<PAGE> 33
ARTICLE XVIII
NOTICES
1. Any notice, request, demand, statement or payment provided for in
this Agreement shall be sent to the parties hereto at the following:
BUYER: Consumers Power Company
212 West Michigan Avenue
Jackson, Michigan 49201
Att: Director of Oil and Gas Supply
SELLER: Northern Michigan Exploration Company
One Jackson Square
P.O. Box 1150
Jackson, Michigan 49204
to such other address which may be designated by either party.
ARTICLE XIX
GENERAL
1. Seller represents that the gas committed by it hereunder has not been
previously, nor is it now dedicated in interstate commerce, and Seller
specifically agrees that it will not commingle gas covered hereby with any gas
to be used or consumed in or transported into any state other than the State of
Michigan prior to delivery of such gas to Buyer hereunder. Buyer agrees it
will only transport, or cause to be transported, gas purchased from Seller
hereunder to markets located in the State of Michigan and that none of the gas
purchased from Seller will be used or consumed in or transported into any state
other than the State of Michigan, and that none of the gas purchased from
Seller hereunder will be commingled with any gas to be used or consumed in, or
transported out of or into, any state other than the State of Michigan.
Buyer's and Seller's agreements expressed in the preceding sentences of this
Section 1 constitute a large measure of the consideration for each party's
entering into this Agreement. Therefore, violation of these agreements will
constitute an irreparable injury to the other party, and such other party
- 31 -
<PAGE> 34
shall be entitled to injunctive relief and all other relief, in law and in
equity, to which it may be entitled including, but not limited to, cancellation
of this Agreement and, further, notwithstanding assignment by a party of its
rights under this Agreement, the party in default shall nevertheless remain
liable to the other party for any injury, damage or expense such other party
may sustain by reason of a breach of such agreement even by an assignee hereof,
immediate or remote. The provisions of this Section 1 shall not be waived by
Seller except by written notice to Buyer.
2. Seller grants to Buyer, so far as Seller has the right so to do,
rights-of-way on the lands described on Exhibit "A" acquired by Seller as
lessee for Buyer's pipelines and other equipment, as may be necessary, with
full right of ingress and egress to and from said premises, and the further
right to do thereon acts necessary or convenient for the carrying out of the
terms of this Agreement. All pipelines and equipment placed on the lands
described in this Section 2 by Buyer shall be and remain its property and be
subject to removal by it at any time. Buyer agrees to indemnify and hold
Seller harmless from any cost, injury, claim or damage caused by or arising out
of the installation, operation or presence of Buyer's facilities on said lands.
3. The failure of any party hereto to exercise any right granted
hereunder shall not impair nor be deemed as a waiver of such party's privilege
of exercising such right at any subsequent time or times.
4. All headings appearing herein are for convenience only, and shall not
be considered a part of this Agreement for any purpose or as in any way
interpreting, construing, varying, altering, or modifying this Agreement or any
of the provisions hereof.
ARTICLE XX
OPTION
1. It is expressly understood and agreed that, commencing with the date
- 32 -
<PAGE> 35
on which it is determined that at least seventy-five percent (75%) of the gas
reserves attributable to any gas well gas field subject to this Agreement has
been produced and extending throughout the remaining term of this Agreement,
Buyer shall have the exclusive right and option, with respect to each such
field, to purchase from Seller, all of Seller's right, title and interest to
the extent that same are assignable, in and to: (a) any and all oil and gas
leases owned or controlled by Seller which cover those lands embraced within
the boundaries of such gas well gas field insofar as such leases cover or
relate to the Niagaran formation; (b) all rights and interests heretofore or
hereafter acquired by Seller for the storage of gas in such formation within
the drilling unit; (c) all interests of Seller in and to the wells located on
the above-mentioned lands which are drilled and completed in the Niagaran
formation and which Seller elects to assign to Buyer. If Seller elects not to
sell a well or wells in said field and if said well or wells have been
completed in the Niagaran formation, then Seller agrees to isolate said well or
wells at Seller's expense, from the Niagaran formation.
2. For the purpose of this Article XX, the determination of the
remaining gas reserves attributable to each gas well gas field subject to this
Agreement shall be as follows:
(a) Prior to production from each such field and on an annual basis
thereafter for three years, Seller shall measure in each well therein the
stabilized static reservoir pressure or determine the extrapolated
reservoir pressure from a conventional Horner type pressure build-up
analysis. Following the third year, measurements shall be made at
mutually acceptable time intervals; however, at no time shall well
off-line times resulting from abovesaid pressure measurements be counted
as force majeure and result in a reduction in the
- 33 -
<PAGE> 36
annual contract quantity to be purchased by Buyer. Measurements,
whenever possible, shall be conducted at times when wells are shut-in for
reasons so as not to reduce production. Seller shall give Buyer
sufficient advance notice each time that Seller determines the reservoir
pressure of said wells as aforesaid, and Buyer shall, at its election,
have the right to be present each time such pressures are being recorded.
Within thirty (30) days after Buyer exercises its option hereunder
Seller shall make the final pressure recording as to each gas well and
Buyer and Seller shall determine the total original gas reserves in place
in each separate gas field where an option has been exercised by Buyer,
by plotting reservoir pressures divided by compressibility factor (P/Z)
versus production and extending a straight line down to a reservoir
pressure of zero psia. Such straight line will be drawn through
P/Z-production points as of the respective dates during the period
commencing prior to production and the time that the above-mentioned test
has been made after Buyer exercises its option hereunder. The date on
which the above stated determination of original gas reserves is made
shall, for purposes of this Agreement, be known as the "Determination
Date". The production figure to be utilized as the abscissa for each of
the said P/Z-production points for each separate gas field will be the
total volume of gas produced from each separate gas field during the
period immediately prior to production and the end of each of said dates
respectively. The pressure (P) to be utilized as the ordinate for each
of the said P/Z-production points for each separate gas field shall be
either the arithmetical average
- 34 -
<PAGE> 37
or volumetric average, as mutually agreed upon, of the bottomhole
pressure of each well in the gas field. The bottomhole pressure to be
taken under the aforesaid conditions and utilized in the manner
prescribed above shall be obtained in each separate gas field at a subsea
depth which is at or near the midpoint of the gas pay section in each
separate gas field, such depth to be agreed upon by both parties.
(b) The compressibility factors (Z) to be utilized in determining each
such ordinate shall be the compressibility factors of natural gas
produced from each of the separate gas fields at the pressures (P)
utilized in determining each such ordinate with temperature conditions of
each separate gas field measured at the subsea depths mentioned above and
taken immediately prior to production from each separate gas field, as
read from the Table on page 710 of Handbook of Natural Gas, written by D.
L. Katz, et al, using critical temperature (Tc) and critical pressure
(Pc) to be determined as follows:
i. A gas sample shall be taken from each separate gas field.
The chemical analysis of the said gas sample shall be applied in the
manner described in Table 4-8 on page 108 with the critical constants
from Table A-1 on page 708 of the aforementioned Handbook.
Notwithstanding the foregoing, if any of the separate gas
fields enters and passes through a period of production known as
"retrograde condensation" all P/Z-production points during the period
shall be ignored. If the P/Z-production points actually used in the
reserve determinations do not
- 35 -
<PAGE> 38
form a straight line, the line to be drawn through said points shall
be determined by the application of the least squares method.
It is understood, however, that another engineering reserve
determination method may be used if more appropriate and accurate
than the method set forth above.
(c) The gas reserves remaining in the gas well gas field as of the
Determination Date will then be calculated by subtracting the actual
cumulative production from the field as of such date from the total
original gas reserves therein. The remaining gas reserves as calculated
are hereinafter called the "remaining reserves".
(d) A portion of the remaining reserves will then be allocated to each
producing unit embraced in whole or in part within the boundaries of said
gas field which, on the Determination Date, has a well thereon that is
entitled to a Field Rating Percentage by the Michigan Public Service
Commission. This portion will be determined by multiplying the remaining
reserves by the Field Rating Percentage for each such well as established
by the Proration Schedule of the Michigan Public Service Commission in
effect on the Determination Date or, if such Proration Schedule does not
reflect all reworking and additional drilling completed in said gas field
prior to the Determination Date, by the first Proration Schedule
thereafter issued by the Michigan Public Service Commission which does
reflect such reworking and drilling, provided, however, that in the event
a new well or wells to test the field are commenced to be drilled, but
not completed, prior to the Determination Date, and such well or wells
when completed are
- 36 -
<PAGE> 39
capable of producing gas from the said field in such quantities as to
entitle the same to have a Field Rating Percentage established therefor
by the Michigan Public Service Commission, the remaining reserves will be
allocated to each producing unit on which such new well or wells are
drilled, by multiplying the said remaining reserves by the Field Rating
Percentage for each well on such units as established by the first
Proration Schedule of the Michigan Public Service Commission which
reflects all reworking and additional drilling in said gas well gas field
completed prior to the Determination Date and the said new well or wells
completed after the Determination Date.
Notwithstanding the foregoing, if, prior to the Determination Date,
any well in said gas field loses its eligibility for a Field Rating
Percentage by the Michigan Public Service Commission as a result of being
reworked, and a new well to replace the well which has lost its
eligibility has not been commenced prior to the Determination Date on the
producing unit on which the well losing its eligibility is located, the
Proration Schedule which is provided to be used under the foregoing
provisions of this Section 2(d) shall be recomputed to include a Field
Rating Percentage for the well which has lost its eligibility, said
recomputation to be made as though such well had not been reworked in
accordance with the formula upon which such Proration Schedule is
predicated. The Proration schedule, as so modified, will be used for the
allocation of remaining reserves hereunder, including an allocation to
the producing unit on which the well which has lost its eligibility is
located. In the event any well in said gas well gas field loses its
eligibility for a Field Rating Percen-
- 37 -
<PAGE> 40
tage as aforesaid, and a new well is commenced prior to the Determination
Date on the producing unit on which the well losing its eligibility is
located, the drilling of such new well shall have the same effect under
the foregoing provisions of this Section 2(d) as the drilling of any
other well prior to the Determination Date.
In addition, if the Proration Schedule provided to be used under the
provisions of this Section 2(d) for the allocation of the said remaining
reserves reflects wells reworked or commenced after the Determination
Date, such Proration Schedule, recomputed in accordance with the
foregoing, if such be the case, shall be recomputed as though such
reworking had not occurred or such wells had not been drilled in
accordance with the formula upon which said Proration Schedule is
predicated. The Field Rating Percentage contained in such Proration
Schedules, recomputed as aforesaid shall be used for the allocation of
remaining reserves hereunder in lieu of the percentages contained therein
prior to any recomputation provided to be made in accordance with the
foregoing provisions of this Section 2(d).
(e) The respective portions of the remaining reserves allocated to the
above mentioned producing units which, computed on the basis of surface
acreage, are attributable to interests of Seller therein will then be
totaled. The resultant gas reserve figure shall then be adjusted either
upward or downward, as the case may be, by the total underage or overage
in gas production which is attributable to Seller's interest as of the
Determination Date, shown by the records of the Michigan Public Service
Commission
- 38 -
<PAGE> 41
which will be brought up to date by the use of Buyer's daily meter
charts, if necessary.
(f) Buyer shall calculate the remaining reserves referred to in this
Section 2, in accordance with the terms and provisions thereof as soon
after the Determination Date as practicable, and shall furnish Seller
with a written statement of such reserves promptly after it is made. If
Seller fails to give Buyer written notice that Seller questions such
reserves within thirty (30) days after Seller's receipt thereof, it shall
be conclusively presumed that Seller agrees therewith. If, within such
thirty-day period, Seller notifies Buyer that it questions said
determination, Buyer and Seller together shall calculate the same in the
manner set forth in this Section 2.
If, within thirty (30) days after Seller notifies Buyer that Seller
questions such determination, Buyer and Seller are unable to a agree
thereon, said determination shall be determined by arbitration as
provided in Section 4 of Article IV. All arbitrators appointed pursuant
to Section 4 of Article IV shall be qualified independent engineers,
experienced in the oil and gas industry and competent to pass upon the
matter of gas reserves. All costs of arbitration pursuant to the terms
and provisions hereof shall be borne equally by Buyer and Seller.
3. If, for any gas well gas field or fields, Buyer desires to exercise
the option herein granted, Buyer shall do so by giving written notice
thereof to Seller designating such field or fields and thereafter, in
accordance with the terms and provisions of Section 1 and Section 4 of
this Article XX, Seller shall assign to Buyer, by instrument or
instruments satisfactory to Buyer, all of Seller's right, title and
interest in and to all oil and gas leases, storage
- 39 -
<PAGE> 42
right and interests, and wells. The assignments, except for the oil and gas
leases and the storage rights assigned thereunder, shall be with warranty of
title and all wells assigned thereby shall be free and clear of all claims,
liens and encumbrances. Such written notice shall include a statement of
Buyer's plan to convert such field or fields to gas storage reservoir use.
In full consideration of such assignments, Buyer shall, simultaneously
with the execution and delivery thereof to Buyer, pay to Seller an amount equal
to the value attributable to Seller's interest in (1) the estimated quantities
of the original gas in place less the cumulative production from such reservoir
at the price then in effect under Sections 1 or 2 as the case may be, of
Article VII of this Agreement, and (2) fifty percent (50%) of Seller's actual
original cost for drilling and equipping each well sold, as shown in Seller's
accounting records, which is producing or is capable of producing at the time
of Buyer's exercise of its option.
As further consideration for the transfer and conveyance by Seller to
Buyer of all of Seller's properties, rights and interests in said gas field,
Buyer shall pay Seller for the remaining commercially recoverable crude oil
and/or lease condensate reserves, if any, at a price equal to Seller's lease
tank revenue per barrel less Seller's average cost for the previous six months
to produce a barrel of crude oil and/or lease condensate from such field. If
the parties are unable to agree on such average cost, Seller shall either
provide Buyer such records to indicate such average cost or shall accept
payment of fifty-five percent (55%) of the then current lease tank revenue per
barrel for each barrel of said reserves. Buyer and Seller shall determine, by
establishing standards and procedures which are acceptable to both parties, the
amount of such remaining commercially recoverable crude oil and/or lease
condensate reserves. If, for any reason, Buyer or Seller are unable to agree
upon the remaining commercially recoverable crude oil and/or lease condensate
reserves, then such reserves shall be determined by arbitration as provided
- 40 -
<PAGE> 43
in Section 4 of Article IV. All arbitrators appointed pursuant to Section 4 of
Article IV shall be qualified independent engineers, experienced in the oil and
gas industry and competent to pass on the matters of crude oil and/or
condensate reserves. All costs of arbitration pursuant to the terms and
provisions hereof shall be borne equally by Buyer and Seller.
The payments provided to be made by Buyer to Seller under this Article XX
shall be made simultaneously with the assignments by Seller to Buyer of the
properties, rights and interests referred to herein.
4. Within twenty (20) days after exercise of the option referred to in
this Article XX, Seller shall deliver to Buyer all abstracts and other
documents that Seller has which evidence Seller's title to, and extent of
ownership of, the property and interests referred to in the notice exercising
said option. Buyer shall have one hundred twenty (120) days after receipt of
such abstracts and documents to examine the same or cause the same to be
examined and to notify Seller in writing of Buyer's approval or disapproval of
the extent of Seller's ownership of the property and interests involved and
Seller's title thereto. In the event Buyer approves Seller's title and extent
of ownership, the assignment provided to be made in this Article XX shall be
made by Seller to Buyer within fifteen (15) days after receipt of said approval
notice. In the event Buyer does not approve of Seller's title and extent of
ownership, Buyer shall specify its objections in the disapproval notice and
shall, within thirty (30) days after the date of such disapproval notice, give
Seller written notice of those of the above mentioned oil and gas leases, wells
and other property, rights and interests Buyer desires to have assigned to it
by Seller and Seller shall, within fifteen (15) days thereafter, make the
necessary assignment in accordance with the provisions of this Article XX.
It is expressly understood and agreed that Buyer shall return all
abstracts to Seller within a reasonable time and shall retain all other
documents fur-
- 41 -
<PAGE> 44
nished by Seller to Buyer hereunder covering any oil and gas leases, wells and
other properties and interests assigned by Seller to Buyer hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate counterparts, each of which is an original and all of
which are identical, as of the day and year first above written.
<TABLE>
<CAPTION>
WITNESS: NORTHERN MICHIGAN EXPLORATION COMPANY
<S> <C>
/s/ John T. McDonald By /s/ R. J. Burgess
- --------------------------------- -----------------------------------
R. J. Burgess
Vice President
Executed at Jackson, Michigan
/s/ Gerald F. Beaudoin November 2, 1978 at 12:55 p.m. EST
- ---------------------------------
CONSUMERS POWER COMPANY
/s/ J. R. Biek By /s/ R. J. Odlevak
- --------------------------------- -----------------------------------
R. J. Odlevak
Vice President
Executed at Jackson, Michigan
/s/ Gerald F. Beaudoin November 2, 1978 at 11.34 a.m. EST
- ---------------------------------
</TABLE>
- 42 -
<PAGE> 45
ACKNOWLEDGEMENT
STATE OF MICHIGAN )
) ss
COUNTY OF JACKSON )
Before me, the undersigned, a Notary Public within and for said County
and State, on this 2nd day of November, 1978, personally appeared R. J.
Burgess, to me known to be the identical person who executed the within and
foregoing instrument as Vice President for NORTHERN MICHIGAN EXPLORATION
COMPANY, a corporation, and acknowledged to me that he executed the same as his
free and voluntary act and deed and as the free and voluntary act and deed of
NORTHERN MICHIGAN EXPLORATION COMPANY, a corporation, for the uses and purposes
therein set forth.
In testimony whereof, I have hereunto set my hand and official seal the
day and year last above written.
/s/ Gerald L Williams
-------------------------------------
Notary Public, Jackson County, Michigan
My commission expires: 11/7/79
STATE OF MICHIGAN )
) ss
COUNTY OF JACKSON )
Before me, the undersigned, a Notary Public within and for said County
and State, on this 2nd day of November, 1978, personally appeared R. J.
Odlevak, to me known to be the identical person who executed the within and
foregoing instrument as Vice President for CONSUMERS POWER COMPANY, a
corporation, and acknowledged to me that he executed the same as his free and
voluntary act and deed and as the free and voluntary act and deed of CONSUMERS
POWER COMPANY, a corporation, for the uses and purposes therein set forth.
In testimony whereof, I have hereunto set my hand and official seal the
day and year last above written.
/s/ Winifred G. Mills
-------------------------------------
Notary Public, Jackson County, Michigan
My commission expires: 10/20/81
<PAGE> 46
Exhibit "A"
Attached to and made apart of Gas Purchase Contract dated as of November
2, 1978 between NORTHERN MICHIGAN EXPLORATION COMPANY (Seller) and CONSUMERS
POWER COMPANY (Buyer).
Area of Dedication
1. Belknap Township - T34N-R5E Presque Isle County, Michigan
2. Bismark Township - T34N-R4E Presque Isle County, Michigan
<PAGE> 1
EXHIBIT 10.11
SERVICES AGREEMENT
This Agreement is made as of this 1st day of October, 1989 between
Northern Michigan Exploration Company, a Michigan corporation ("NOMECO") and
Consumers Power Company, a Michigan corporation ("Consumers").
R E C I T A L S
Whereas, Consumers is a majority owned subsidiary of CMS Energy
Corporation, a Michigan corporation ("CMS Energy"), and NOMECO is a wholly
owned subsidiary of CMS Energy;
Whereas, NOMECO desires, from time to time, to purchase Services from
Consumers; and
Whereas, Consumers is willing to perform such service as NOMECO may
from time to time request on the terms and conditions contained herein.
Now, Therefore, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:
1. Scope of Services. Consumers shall perform for NOMECO, under the
terms of this Agreement, such administrative, clerical, managerial,
professional and technical services as the parties may from time to time agree
by executing an intercompany service request(s) as hereinafter provided
("ISR").
In the event NOMECO desires Consumers to perform any such services,
then the services desired, the time for their performance, and any other
specific requirement (not inconsistent with this Agreement) relating thereto,
shall be more particularly described in ISRs signed by an officer or other
authorized person of NOMECO and issued to Consumers. Upon receipt of such
ISR, Consumers shall make all of the necessary cost estimates and supply all
other information required by the ISR. ISRs shall not become effective and
binding until a copy thereof is signed by an officer
<PAGE> 2
or other authorized employee of Consumers and returned to NOMECO, at which time
the ISR shall be deemed to become part of this Agreement; provided, however,
that NOMECO shall have the right to reject any ISR within ten (10) days after
it has been returned to NOMECO by Consumers; provided further, however, that in
case of discrepancy between any provision in the ISR and any provision of this
Agreement, the latter shall prevail. If at any time Consumers becomes aware of
any reason which it believes may cause the estimated monthly cost in any ISR to
become inaccurate, Consumers shall promptly notify the officer or other
authorized person of NOMECO who issued the ISR of such reason.
Unless otherwise provided in this Agreement or such ISR, Consumers
shall provide everything necessary to perform the services requested
thereunder, including, but not limited to, all supervision, personnel,
supplies, services and transportation.
This Agreement is not exclusive. NOMECO reserves the right to have
similar or like services performed by others or through its own employees and
to any extent deemed desirable by NOMECO.
2. Term of Agreement. This Agreement shall become effective as of the
date hereof and continue until terminated by either party, at the terminating
party's convenience, by at least thirty (30) days' written notice to the
non-terminating party. The terms of this Agreement shall remain in effect as
to each such uncompleted ISR until the services thereunder are completed or it
is terminated by NOMECO under Section 12, "Termination." The terms of Section
14, "Ownership and Confidentiality" shall survive termination of this Agreement
for a period of five (5) years after all other terms hereof expire.
3. Price of Services. NOMECO will pay to Consumers and Consumers will
accept as full compensation, satisfaction and payment for said service the
rates and charges set forth in the schedule attached hereto and made a part
hereof as Exhibit A.
4. Payments. Within twenty (20) days after the end of each calendar
month, Consumers shall submit to NOMECO an invoice respecting all ISRs,
itemized to NOMECO's reasonable satisfaction, for the services performed under
such ISRs during the prior month, together with the amount due.
Contemporaneously with the issuance of its monthly invoice, Consumers shall
also send to NOMECO written
<PAGE> 3
3
explanation(s) for any variance in excess of 10% (positive or negative) between
the monthly cost estimate from the relevant ISR and the actual amount being
billed to NOMECO that month for such ISR. Within thirty (30) days after
receipt of each properly-itemized and supported invoice and explanation(s) of
cost variances, if any, payment of such invoice shall be made to Consumers.
Payment of such invoice by NOMECO shall not constitute acceptance of the
services and shall be subject to correction in the payment of any subsequent
invoice.
With each invoice, Consumers shall submit copies of all vendors' and
subcontractors' invoices for amounts greater than $10,000 for which
reimbursement is sought. Credit shall be given to NOMECO for any discounts
received by Consumers on all reimbursable invoices.
5. Changes in the Services. No changes to any ISR hereunder shall be made
except in writing, signed by an officer, authorized employee or other
authorized person of each party. Except as provided below, no claims for
compensation for additional services shall be valid unless authorized by such
written change; provided, however, that whenever it is necessary to immediately
authorize extra work to restore service, to avoid breakdowns, to avoid work
stoppages or to respond to other emergency conditions, Consumers shall be
entitled to perform services in reliance on an oral or written authorization by
one of NOMECO's officers or other authorized representative of NOMECO
theretofore identified to Consumers by notice, and a written change to the ISR
shall be made covering such services as soon thereafter as is reasonably
practicable.
6. Independent Contractor. In the performances of services hereunder,
Consumers shall be an independent contractor with the sole authority to control
and direct the performance of the details of the services, NOMECO being
interested only in the results obtained.
7. Permits and Laws. Consumers shall secure all licenses or permits required
by law and shall comply with all applicable ordinances, laws, orders, rules and
regulations, pertaining to its performance of services hereunder.
<PAGE> 4
4
8. Warranty and Remedy. Services performed directly by Consumers
shall be performed in a careful and competent manner by properly trained and
skilled personnel. CONSUMERS HAS NOT MADE AND DOES NOT HEREBY MAKE ANY OTHER
WARRANTIES, EXPRESSED, IMPLIED OR STATUTORY AS TO THE SERVICES PERFORMED,
INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
ANY PURPOSE.
In the event any service performed directly by Consumers fails to
conform to the above warranty, Consumers will reperform said service at its
expense if NOMECO gives Consumers notice of such nonconformance within one year
after performance of the nonconforming service.
As to services performed by subcontractors and vendors, Consumers shall
on the written request of NOMECO assign to NOMECO any assignable warranties
obtained by Consumers.
The foregoing states NOMECO's sole and exclusive remedies and
Consumers' sole and exclusive liabilities, whether in contract, tort or
otherwise, for any defects in the services performed hereunder.
9. Limitation on Liability. Notwithstanding any other provision of
this Agreement, in no event shall Consumers' liability to NOMECO under this
Agreement exceed the compensation paid by NOMECO to Consumers for that portion
of the services giving rise to the claim and in no event shall the total of all
such liabilities of Consumers exceed the total dollar amount paid to Consumers
under this Agreement. Further, in no event shall Consumers be liable for any
special, indirect, incidental or consequential damages of any nature on account
of this Agreement or the performance or nonperformance thereof, including but
not limited to any loss of use of property, equipment or systems, loss by
reason of equipment shutdowns or service interruptions, loss of profits or
revenue or of use thereof, cost of purchased or replacement power, or claims of
NOMECO's customers.
10. Changes to Agreement; Assignment and Subcontracting. The terms of
this Agreement shall not be changed, superseded or supplemented except in
writing signed by an officer of each party. This Agreement shall not be
assigned or any part thereof subcontracted by Consumers without NOMECO's
previous written consent; provided, however, that NOMECO hereby consents to any
assignment or subcontracting to any affiliate or affiliates of Consumers. Any
<PAGE> 5
5
attempted assignment without such written consent shall be void and NOMECO may
refuse to permit the performance of any unauthorized subcontract. In case any
such subcontracting is approved, the subcontract shall be in writing and shall
be fully executed prior to the commencement of the services involved. If
required by NOMECO to do so, Consumers shall promptly furnish NOMECO with
copies of each executed subcontract. Any professional engineering services to
be provided under this Agreement shall be performed by an entity or individual
qualified to practice professional engineering in any jurisdiction or
jurisdictions in which such qualification is required in order for the services
to be provided.
11. Auditing of Consumers' Accounts and Refunds. Consumers shall make and
keep, as the same accrue, full and complete records and books of account of its
costs, expenses, man-hours and equipment hours relating to the services
hereunder in accordance with generally accepted accounting practices and
Consumers, record retention policy in effect for such records whenever, by the
terms of this Agreement, Consumers' compensation shall be based wholly or
partially on such costs, expenses, man-hours or equipment hours. When relevant
to determining Consumers' compensation hereunder, said records and books of
accounts shall be open to examination during regular business hours by NOMECO
or its agents for the purpose of inspecting, auditing, verifying or copying the
same or making extracts therefrom. NOMECO's payment of invoices hereunder
shall not constitute acceptance of the accuracy thereof. Amounts paid with
respect to any ISR shall be subject to audit in accordance with this section
for one (1) year after the making of the last payment under the ISR.
Whenever an audit of Consumers' records shows that NOMECO is entitled to a
refund or Consumers is entitled to additional payment, Consumers or NOMECO, as
the case may be, shall promptly make said refund or additional payment with
interest, compounded annually, at the prime rate established by the National
Bank of Detroit from time to time or at the highest rate permitted by law,
whichever is less, from the date the erroneous payment was made to Consumers.
Each party shall bear its own costs in connection with any such audit and
billing error correction.
12. Termination. Notwithstanding anything in this Agreement to the contrary
should NOMECO for any reason desire to suspend or stop the services under any
ISR hereunder at any time before the services have been completed, Consumers
shall stop-performing the services upon notice from NOMECO. Any such
termination shall be without prejudice to any other rights or remedies of
NOMECO for any breach
<PAGE> 6
6
of this Agreement by Consumers. Consumers shall, upon the effective date of
such notice of termination, if requested by NOMECO, immediately cease
performance of the services and remove its employees, representatives, tools,
equipment and other property from NOMECO's premises. If Consumers fails to
effect such removal within a reasonable time, NOMECO may do so at Consumers'
expense. In the event of such termination, payment for all services properly
performed under the applicable ISR shall be made in accordance with the rates
and charges set forth in Exhibit A, subject to proper deductions for defective
services, damages or costs recoverable under this Agreement by NOMECO by reason
of any default, breach or failure to perform by Consumers. Upon any
termination pursuant to this section, NOMECO shall be released from all further
obligations under any ISR so terminated except for payment as provided for in
this section and such liability or other obligations as have accrued as of the
time of termination.
13. NOTICES AND OTHER COMMUNICATIONS. Whenever notices, invoices, payments, or
other communications are required or permitted hereunder, the same may be
given, made or delivered by mail addressed as follows:
<TABLE>
<S> <C>
Consumers Power Company Northern Michigan Exploration
212 W. Michigan Avenue Company
Jackson, Michigan 49201 One Jackson Square
Attention: Treasury Dept. PO Box 1150
(for payments) Jackson, MI 49204
General Accounting Attention: Treasurer
(for all other notices)
</TABLE>
or to such other address as the addressee shall have specified in writing.
14. OWNERSHIP AND CONFIDENTIALITY. "Confidential Information" shall mean
(i) all documents, records, data and other information furnished to Consumers
in any form in connection with the performance of the services contemplated
hereunder and any copies thereof and (ii) all documents, records, data and
other work product produced by Consumers for NOMECO in performance of the
services contemplated hereunder and copies thereof. Confidential Information
shall not include the records and books of account made and kept by Consumers
pursuant to Section 11, "Auditing of Consumers' Accounts and Refunds."
<PAGE> 7
7
Confidential Information is, and shall continue to be the property of
NOMECO. Consumers shall, to the extent permitted by law, upon written request
from NOMECO, immediately deliver to NOMECO or destroy, at NOMECO's option, all
Confidential Information.
Consumers shall not disclose any confidential Information or the content
thereof to any party except those Consumers' employees who need to have access
to such Confidential Information unless ordered by court, administrative agency
or other governmental body having jurisdiction. If Consumers becomes aware
that any party is attempting to obtain any such order, Consumers shall
immediately notify the following person:
General Counsel
CMS Enterprises Company
Fairlane Plaza South
330 Town Center Drive, Suite 1100
Dearborn, Michigan 48126
or such other person as NOMECO may have designated in writing.
Consumers acknowledges that disclosure of Confidential Information in
violation of this Agreement may cause NOMECO irreparable damage and hereby
consents to the issuance of an injunction by any court of competent
jurisdiction prohibiting any disclosure of Confidential Information in
violation of this Agreement. Such right to injunctive relief is in addition to
all other remedies available to NOMECO at law or in equity.
Consumers shall inform all of its employees who have access to
Confidential Information of the obligations referred to above and require their
compliance with the provisions of this Agreement.
15. Governing Law. This Agreement shall be deemed to be a Michigan contract
and shall be construed in accordance with and governed by the laws of the State
of Michigan.
16. Headings. The section headings in this Agreement are included for
reference only. They shall not affect the interpretation and construction of
this Agreement.
<PAGE> 8
8
17. Entire Agreement. With respect to the subject matter hereof, this
Agreement supersedes all previous agreements, representations, understandings
and negotiations, either written or oral, between the parties hereto or their
representatives, and constitutes the entire agreement between the parties.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
as of the day and year first written above.
NORTHERN MICHIGAN EXPLORATION CONSUMERS POWER COMPANY
COMPANY
By: /s/ P. E. Geiger By: /s/ F. W. Buckman
P. E. Geiger
Title: Vice President, Secretary Title: President and COO
and Treasurer
<PAGE> 9
EXHIBIT A
Page 1 of 3
EXHIBIT A
Pricing
Recoverable Costs payable under this Agreement are those costs reasonably
incurred by Consumers in the performance of the services hereunder and are
generally described below. Such costs shall be accumulated in accordance with
Consumers' standard practices and policies in affect at the time and in
accordance with generally accepted accounting principles. Recoverable Costs
shall not include any costs incurred in contesting, whether informally, by
arbitration, or otherwise, any matter or issue under this Agreement.
A. DIRECT LABOR COSTS
Salary and wage costs of Consumers' employees directly engaged in the
performance of the services hereunder. Such salary and wage costs shall
be billed an accrual basis, including a loading for paid absences. This
paid absence loading shall cover vacation, sick leave, holidays, workers'
compensation supplemental pay, and other paid absences, as recorded on
Consumers' books of account.
B. DIRECT AND DISTRIBUTABLE COSTS AND EXPENSES
Costs and expenses, other than direct labor costs, directly attributable
to the performance of Consumers' obligations hereunder shall be charged at
actual costs or so an allocated charge based on the portion of the
resources devoted to the performance of this Contract. Such costs, to be
charged on an accrual basis, include materials, contract payments,
internal service chargebacks (labor and non-labor portions separately
identified) and non-A&G support costs (supervision, Energy Supply Services
and/or Region support services, identified separately between labor and
non-labor), if applicable.
<PAGE> 10
EXHIBIT A
Page 2 of 3
C. ADMINISTRATIVE AND GENERAL OVERHEAD RATES
Administrative and General (A&G) overheads will be charged as a
percentaged of the labor components billed pursuant to Items A and B
above. A&G overheads include administrative and general expenses, payroll
taxes, Michigan Single Business Tax (and similar taxes present or future),
return on utility used investment, and employee pensions and other
benefits except paid absence included elsewhere.
Primarily A&C expenses shall include all applicable costs and expenses
properly chargeable to the following current FERC Accounts, their
replacements or applicable new accounts as described below:
1. FERC Account 920, Administrative and General Salaries
2. FERC Account 921, Office Supplies and Expenses
3. FERC Account 923, Outside Services Employed
4. FERC Account 924, Property Insurance
5. FERC Account 925, Injuries and Damages
6. FERC Account 926, Employee Pensions and Benefits
7. FERC Account 928, Regulatory Commission Expenses
8. FERC Account 930.2, Miscellaneous General Expenses
9. FERC Account 931, Rents
10. FERC Account 935, Maintenance of General Plant
11. FERC Accounts 403-407, Depreciation and Amortization
12. FERC Account 408, Payroll Taxes, Michigan Single
Business Tax and Property Taxes
The overhead percentages will cover administration costs for Consumers of
furnishing all services for the benefit of CMS. As soon as practicable
after the close of each calendar year, the accuracy of the rates shall be
reviewed by Consumers. After such review Consumers shall issue any credit
or additional charge to adjust the billings for said year from an
estimated rate to an actual rate, if material (if the differential in
total overhead rate is greater than + or -3%).
<PAGE> 11
EXHIBIT A
Page 3 of 3
D. COST OF MONEY
A Cost of Money or carrying charge will be added to all costs incurred by
Consumers in connection with this Agreement from the 25th of the month
such costs were incurred until the invoice due date. This Cost of Money
charge will be calculated at the average short-term borrowing rate at
Citibank and will continue on all past due invoices until paid.
<PAGE> 1
Exhibit 10.12
SERVICES AGREEMENT
This Agreement is made as of this 25th day of October 1995 between
CMS NOMECO Oil & Gas Co., a Michigan corporation ("CMS NOMECO") and CMS Energy
Corporation, a Michigan corporation ("CMS Energy").
R E C I T A L S
WHEREAS, CMS NOMECO is a subsidiary of CMS Enterprises Company, a
Michigan corporation, which in turn is a subsidiary of CMS Energy;
WHEREAS, CMS Energy desires, from time to time, to provide services to
CMS NOMECO;
WHEREAS, CMS NOMECO desires, from time to time, to purchase services
from CMS Energy; and
WHEREAS, CMS Energy is willing to perform such services as CMS NOMECO
may from time to time request on the terms and conditions contained herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:
1. SCOPE OF SERVICES. CMS Energy shall perform for CMS NOMECO, under the
terms of this Agreement, such administrative, clerical, managerial,
professional and/or technical services as the parties may from time to time
agree by executing an intercompany service request ("ISR") as hereinafter
provided (a copy of an ISR is attached hereto as Exhibit I). In the event CMS
NOMECO desires CMS Energy to perform any such services, then the services
desired, the time for their performance, and any other specific requirement
(not inconsistent with the Agreement) relating thereto, shall be described in
an ISR signed by an officer or other authorized person of CMS NOMECO and
delivered to CMS Energy. Upon receipt of such ISR, CMS Energy shall make all
of the necessary cost estimates and supply all other information required by
the ISR. ISRs shall not become effective and binding until a completed copy
thereof is signed by an officer or other authorized employee of both CMS NOMECO
and CMS Energy, at which time the ISR shall be deemed to become part of this
Agreement; provided, however, that in case of a discrepancy between any
provision in the ISR and any provision of this Agreement, this Agreement shall
prevail. Unless otherwise provided in this Agreement or such ISR, CMS Energy
shall provide everything necessary to perform the services requested
thereunder, including, but not limited to, all supervision, personnel,
supplies, services and transportation. CMS NOMECO reserves the right to have
similar or like services performed by others or through its own employees.
2. TERM OF AGREEMENT. This Agreement shall become effective as of the
date hereof and continue until terminated by either party, at the terminating
party's convenience, by at least thirty (30) days' written notice to the
non-terminating party. The terms of this Agreement shall remain in effect as
to each such uncompleted ISR until the services thereunder are completed or it
is terminated by CMS NOMECO under Section 12, "Termination." The terms of
Section 14, "Ownership and Confidentiality" shall survive termination of this
Agreement for a period of five (5) years after all other terms hereof expire.
<PAGE> 2
3. PRICE OF SERVICES. CMS NOMECO will pay to CMS Energy and CMS Energy
will accept as full compensation, satisfaction and payment for said services
the rates and charges set forth in the applicable ISR.
4. PAYMENTS. Within twenty (20) days after the end of each calendar
month, CMS Energy shall submit to CMS NOMECO an invoice respecting all ISRs,
itemized to CMS NOMECO's reasonable satisfaction, for the services performed
under such ISRs during the prior month, together with the amount due. Within
thirty (30) days after receipt of each properly-itemized and supported invoice
payment of such invoice shall be made to CMS Energy. Payment of such invoice
by CMS NOMECO shall not constitute acceptance of the services and shall be
subject to correction in the payment of any subsequent invoice. With each
invoice, CMS Energy shall submit copies of all vendors' and subcontractors'
invoices for amounts greater than $10,000 for which reimbursement is sought.
Credit shall be given to CMS NOMECO for any discounts received by CMS Energy on
all reimbursable invoices.
5. CHANGES IN SERVICES. Changes to any ISR issued hereunder may only be
made pursuant to a written change order signed by an officer or authorized
person of each party. Except as provided below, no claims for compensation for
additional services shall be valid unless authorized by such written change
order; provided, however, that whenever it is necessary to immediately
authorize extra work to respond to emergency conditions, CMS Energy shall be
entitled to perform services in reliance on an oral or written authorization by
one of CMS NOMECO's officers or other authorized representatives previously
identified to CMS Energy, and a written change to the ISR shall be made
covering such services as soon thereafter as is reasonably practicable.
6. INDEPENDENT CONTRACTOR. In the performances of services hereunder,
CMS Energy shall be an independent contractor with the sole authority to
control and direct such performance.
7. PERMITS AND LAWS. CMS Energy shall secure all licenses or permits
required by law and shall comply with all applicable ordinances, laws, orders,
rules and regulations, pertaining to its performance of services hereunder.
8. WARRANTY AND REMEDY. Services performed directly by CMS Energy shall
be performed in a careful and competent manner by properly trained and skilled
personnel. CMS Energy HAS NOT MADE AND DOES NOT HEREBY MAKE ANY OTHER
WARRANTIES, EXPRESS, IMPLIED OR STATUTORY AS TO THE SERVICES PERFORMED,
INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
ANY PURPOSE. In the event any service performed directly by CMS Energy fails
to conform to the above warranty, CMS Energy will re-perform said service at
its expense if CMS NOMECO gives CMS Energy notice of such non-conformance
within one (1) year after performance of the non-conforming service. As to
services performed by subcontractors and vendors, CMS Energy shall on the
request of CMS NOMECO assign to CMS NOMECO any assignable warranties obtained
by CMS Energy. The foregoing states CMS NOMECO's sole and exclusive remedies
hereunder.
2
<PAGE> 3
9. LIMITATION ON LIABILITY. Notwithstanding any other provision of this
Agreement, in no event shall CMS Energy's liability to CMS NOMECO under this
Agreement exceed the compensation paid by CMS NOMECO to CMS Energy for that
portion of the services giving rise to the claim and in no event shall the
total of all such liabilities of CMS Energy exceed the total dollar amount paid
to CMS Energy under this Agreement. Further, in no event shall CMS Energy be
liable for any special, indirect, incidental or consequential damages of any
nature on account of this Agreement.
10. CHANGES TO AGREEMENT; ASSIGNMENT AND SUBCONTRACTING. The terms of
this Agreement shall not be changed, superseded or supplemented except in
writing signed by an officer of each party. This Agreement shall not be
assigned or any part thereof subcontracted by CMS Energy without CMS NOMECO's
previous written consent. Any attempted assignment without such written
consent shall be void and CMS NOMECO may refuse to permit the performance of
any unauthorized subcontract. In case any such subcontracting is approved, the
subcontract shall be in writing and shall be fully executed prior to the
commencement of the services involved. If required by CMS NOMECO to do so, CMS
Energy shall promptly furnish CMS NOMECO with copies of each executed
subcontract. Any professional engineering services to be provided under this
Agreement shall be performed by an entity or individual qualified to practice
professional engineering in any jurisdiction or jurisdictions in which such
qualification is required in order for the services to be provided.
11. AUDITING OF CMS ENERGY'S ACCOUNT AND REFUNDS. CMS Energy shall make
and keep, as the same accrue, full and complete records and books of account of
its costs, expenses, man-hours and equipment hours relating to the services
hereunder in accordance with generally accepted accounting practices and CMS
Energy's record retention policy in effect for such records whenever, by the
terms of this Agreement, CMS Energy's compensation shall be based wholly or
partially on such costs, expenses, man-hours or equipment hours. When relevant
to determining CMS Energy's compensation hereunder, said records and books of
accounts shall be open to examination during regular business hours by CMS
NOMECO or its agents for the purpose of inspecting, auditing, verifying or
copying the same or making extracts therefrom. CMS NOMECO's payment of
invoices hereunder shall not constitute acceptance of the accuracy thereof.
Amounts paid with respect to any ISR shall be subject to audit in accordance
with this section for one (1) year after the making of the last payment under
the ISR. Whenever an audit of CMS Energy's records shows that CMS NOMECO is
entitled to a refund or CMS Energy is entitled to additional payment, CMS
Energy or CMS NOMECO, as the case may be, shall promptly make said refund or
additional payment with interest, compounded annually, at the prime rate
established by the National Bank of Detroit from time to time or at the highest
rate permitted by law, whichever is less, from the date the erroneous payment
was made to CMS Energy. Each party shall bear its own costs in connection with
any such audit and billing error correction.
12. TERMINATION. Notwithstanding anything in this Agreement to the
contrary, should CMS NOMECO for any reason desire to suspend or stop the
services under any ISR hereunder at any time before the services have been
completed, CMS Energy shall stop performing the services upon notice from CMS
NOMECO. Any such termination shall be without prejudice to any other rights or
remedies of CMS NOMECO for any breach of this Agreement by CMS
3
<PAGE> 4
Energy. CMS Energy shall, upon the effective date of such notice of
termination, if requested by CMS NOMECO, immediately cease performance of the
services and remove its employees, representatives, tools, equipment and other
property from CMS NOMECO's premises. If CMS Energy fails to effect such
removal within a reasonable time, CMS NOMECO may do so at CMS Energy's expense.
In the event of such termination, payment for all services properly performed
through the date of such termination shall be made in accordance with the rates
and charges set forth in the applicable ISR, subject to proper deductions for
defective services, damages or costs recoverable under this Agreement by CMS
NOMECO by reason of any default, breach or failure to perform by CMS Energy.
Upon any termination pursuant to this section, CMS NOMECO shall be released
from all further obligations under any ISR so terminated except for payment as
provided for in this section and such liability or other obligations as have
accrued as of the time of termination.
13. NOTICES AND OTHER COMMUNICATIONS. Whenever notices, invoices,
payments, or other communications are required or permitted hereunder, the same
may be given, made or delivered by mail address as follows:
CMS NOMECO Oil & Gas Co. CMS Energy Corporation
One Jackson Square Fairlane Plaza South, Suite 1000
P. O. Box 1150 330 Town Center Drive
Jackson, Michigan 49204 Dearborn, MI 48126
Attention: Corporate Secretary Attention: Treasury Dept.
(for payments)
General Accounting
(for all other notices)
or to such other address as the addressee shall have specified in writing.
14. OWNERSHIP AND CONFIDENTIALITY. "Confidential Information" shall
mean (i) all documents, records, data and other information furnished to CMS
Energy in any form in connection with the performance of the services
contemplated hereunder and any copies thereof, and (ii) all documents, records,
data and other work product produced by CMS Energy for CMS NOMECO in
performance of the services contemplated hereunder and copies thereof.
Confidential Information is, and shall continue to be, the property of CMS
NOMECO. CMS Energy shall, to the extent permitted by law, upon written request
from CMS NOMECO, immediately deliver to CMS NOMECO or destroy, at CMS NOMECO's
option, all Confidential Information. CMS Energy shall not disclose any
Confidential Information or the content thereof to any party except those CMS
Energy employees or agents who need to have access to such Confidential
Information unless ordered by court, administrative agency or other
governmental body having jurisdiction. If CMS Energy becomes aware that any
party is attempting to obtain any such order, CMS Energy shall immediately
notify the following person:
General Counsel
CMS NOMECO Oil & Gas. Co.
One Jackson Square
P. O. Box 1150
Jackson, Michigan 49204
4
<PAGE> 5
or such other person as CMS NOMECO may have designated in writing.
CMS Energy acknowledges that disclosure of Confidential Information in
violation of this Agreement may cause CMS NOMECO irreparable damage and hereby
consents to the issuance of an injunction by any court of competent
jurisdiction prohibiting any disclosure of Confidential Information in
violation of this Agreement. Such right to injunctive relief is in addition to
all other remedies available to CMS NOMECO at law or in equity. CMS Energy
shall inform all employees who have access to Confidential Information of the
obligations referred to above and require their compliance with the provisions
of this Agreement.
15. GOVERNING LAW. This Agreement shall be deemed to be a Michigan
contract and shall be construed in accordance with and governed by the laws of
the State of Michigan.
16. HEADINGS. The section headings in the Agreement are included for
reference only. They shall not affect the interpretation and construction of
this Agreement.
17. ENTIRE AGREEMENT. With respect to the subject matter hereof, this
Agreement supersedes all previous agreements, representations, understandings
and negotiations, either written or oral, between the parties hereto or their
representatives, and constitutes the entire agreement between the parties.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
as of the day and year first written above.
CMS NOMECO OIL & GAS CO. CMS ENERGY CORPORATION
By:_________________________ By:______________________
Title:______________________ Title:___________________
5
<PAGE> 1
Exhibit 10.13
SERVICES AGREEMENT
This Agreement is made as of this 25th day of October 1995 between
CMS NOMECO Oil & Gas Co., a Michigan corporation ("CMS NOMECO") and CMS
Enterprises Company, a Michigan corporation ("CMS Enterprises").
R E C I T A L S
WHEREAS, CMS NOMECO is a subsidiary of CMS Enterprises, which in turn
is a subsidiary of CMS Energy Corporation, a Michigan corporation;
WHEREAS, CMS Enterprises desires, from time to time, to provide
services to CMS NOMECO;
WHEREAS, CMS NOMECO desires, from time to time, to purchase services
from CMS Enterprises; and
WHEREAS, CMS Enterprises is willing to perform such services as CMS
NOMECO may from time to time request on the terms and conditions contained
herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:
1. SCOPE OF SERVICES. CMS Enterprises shall perform for CMS NOMECO,
under the terms of this Agreement, such administrative, clerical, managerial,
professional and/or technical services as the parties may from time to time
agree by executing an intercompany service request ("ISR") as hereinafter
provided (a copy of an ISR is attached hereto as Exhibit I). In the event CMS
NOMECO desires CMS Enterprises to perform any such services, then the services
desired, the time for their performance, and any other specific requirement
(not inconsistent with the Agreement) relating thereto, shall be described in
an ISR signed by an officer or other authorized person of CMS NOMECO and
delivered to CMS Enterprises. Upon receipt of such ISR, CMS Enterprises shall
make all of the necessary cost estimates and supply all other information
required by the ISR. ISRs shall not become effective and binding until a
completed copy thereof is signed by an officer or other authorized employee of
both CMS NOMECO and CMS Enterprises, at which time the ISR shall be deemed to
become part of this Agreement; provided, however, that in case of a
discrepancy between any provision in the ISR and any provision of this
Agreement, this Agreement shall prevail. Unless otherwise provided in this
Agreement or such ISR, CMS Enterprises shall provide everything necessary to
perform the services requested thereunder, including, but not limited to, all
supervision, personnel, supplies, services and transportation. CMS NOMECO
reserves the right to have similar or like services performed by others or
through its own employees.
2. TERM OF AGREEMENT. This Agreement shall become effective as of the
date hereof and continue until terminated by either party, at the terminating
party's convenience,
<PAGE> 2
by at least thirty (30) days' written notice to the non-terminating party. The
terms of this Agreement shall remain in effect as to each such uncompleted ISR
until the services thereunder are completed or it is terminated by CMS NOMECO
under Section 12, "Termination." The terms of Section 14, "Ownership and
Confidentiality" shall survive termination of this Agreement for a period of
five (5) years after all other terms hereof expire.
3. PRICE OF SERVICES. CMS NOMECO will pay to CMS Enterprises and CMS
Enterprises will accept as full compensation, satisfaction and payment for said
services the rates and charges set forth in the applicable ISR.
4. PAYMENTS. Within twenty (20) days after the end of each calendar
month, CMS Enterprises shall submit to CMS NOMECO an invoice respecting all
ISRs, itemized to CMS NOMECO's reasonable satisfaction, for the services
performed under such ISRs during the prior month, together with the amount
due. Within thirty (30) days after receipt of each properly-itemized and
supported invoice payment of such invoice shall be made to CMS Enterprises.
Payment of such invoice by CMS NOMECO shall not constitute acceptance of the
services and shall be subject to correction in the payment of any subsequent
invoice. With each invoice, CMS Enterprises shall submit copies of all
vendors' and subcontractors' invoices for amounts greater than $10,000 for
which reimbursement is sought. Credit shall be given to CMS NOMECO for any
discounts received by CMS Enterprises on all reimbursable invoices.
5. CHANGES IN THE SERVICES. Changes to any ISR issued hereunder may only
be made pursuant to a written change order signed by an officer or authorized
person of each party. Except as provided below, no claims for compensation for
additional services shall be valid unless authorized by such written change
order; provided, however, that whenever it is necessary to immediately
authorize extra work to respond to emergency conditions, CMS Enterprises shall
be entitled to perform services in reliance on an oral or written authorization
by one of CMS NOMECO's officers or other authorized representatives previously
identified to CMS Enterprises, and a written change to the ISR shall be made
covering such services as soon thereafter as is reasonably practicable.
6. INDEPENDENT CONTRACTOR. In the performances of services hereunder, CMS
Enterprises shall be an independent contractor with the sole authority to
control and direct such performance.
7. PERMITS AND LAWS. CMS Enterprises shall secure all licenses or permits
required by law and shall comply with all applicable ordinances, laws, orders,
rules and regulations, pertaining to its performance of services hereunder.
8. WARRANTY AND REMEDY. Services performed directly by CMS Enterprises
shall be performed in a careful and competent manner by properly trained and
skilled personnel. CMS Enterprises HAS NOT MADE AND DOES NOT HEREBY MAKE ANY
OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY AS TO THE SERVICES PERFORMED,
INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
ANY PURPOSE. In the event any service
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performed directly by CMS Enterprises fails to conform to the above warranty,
CMS Enterprises will re-perform said service at its expense if CMS NOMECO gives
CMS Enterprises notice of such non-conformance within one (1) year after
performance of the non-conforming service. As to services performed by
subcontractors and vendors, CMS Enterprises shall on the request of CMS NOMECO
assign to CMS NOMECO any assignable warranties obtained by CMS Enterprises.
The foregoing states CMS NOMECO's sole and exclusive remedies hereunder.
9. LIMITATION ON LIABILITY. Notwithstanding any other provision of this
Agreement, in no event shall CMS Enterprises' liability to CMS NOMECO under
this Agreement exceed the compensation paid by CMS NOMECO to CMS Enterprises
for that portion of the services giving rise to the claim and in no event shall
the total of all such liabilities of CMS Enterprises exceed the total dollar
amount paid to CMS Enterprises under this Agreement. Further, in no event
shall CMS Enterprises be liable for any special, indirect, incidental or
consequential damages of any nature on account of this Agreement.
10. CHANGES TO AGREEMENT; ASSIGNMENT AND SUBCONTRACTING. The terms of
this Agreement shall not be changed, superseded or supplemented except in
writing signed by an officer of each party. This Agreement shall not be
assigned or any part thereof subcontracted by CMS Enterprises without CMS
NOMECO's previous written consent. Any attempted assignment without such
written consent shall be void and CMS NOMECO may refuse to permit the
performance of any unauthorized subcontract. In case any such subcontracting
is approved, the subcontract shall be in writing and shall be fully executed
prior to the commencement of the services involved. If required by CMS NOMECO
to do so, CMS Enterprises shall promptly furnish CMS NOMECO with copies of each
executed subcontract. Any professional engineering services to be provided
under this Agreement shall be performed by an entity or individual qualified to
practice professional engineering in any jurisdiction or jurisdictions in which
such qualification is required in order for the services to be provided.
11. AUDITING OF CMS ENTERPRISES' ACCOUNT AND REFUNDS. CMS Enterprises
shall make and keep, as the same accrue, full and complete records and books of
account of its costs, expenses, man-hours and equipment hours relating to the
services hereunder in accordance with generally accepted accounting practices
and CMS Enterprises' record retention policy in effect for such records
whenever, by the terms of this Agreement, CMS Enterprises' compensation shall
be based wholly or partially on such costs, expenses, man-hours or equipment
hours. When relevant to determining CMS Enterprises' compensation hereunder,
said records and books of accounts shall be open to examination during regular
business hours by CMS NOMECO or its agents for the purpose of inspecting,
auditing, verifying or copying the same or making extracts therefrom. CMS
NOMECO's payment of invoices hereunder shall not constitute acceptance of the
accuracy thereof. Amounts paid with respect to any ISR shall be subject to
audit in accordance with this section for one (1) year after the making of the
last payment under the ISR. Whenever an audit of CMS Enterprises' records
shows that CMS NOMECO is entitled to a refund or CMS Enterprises is entitled to
additional payment, CMS Enterprises or CMS NOMECO, as the case may be, shall
promptly make said refund or additional payment with interest, compounded
annually, at the prime rate established by the National Bank of Detroit from
time to time or at the highest rate permitted by law, whichever
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is less, from the date the erroneous payment was made to CMS Enterprises. Each
party shall bear its own costs in connection with any such audit and billing
error correction.
12. TERMINATION. Notwithstanding anything in this Agreement to the
contrary, should CMS NOMECO for any reason desire to suspend or stop the
services under any ISR hereunder at any time before the services have been
completed, CMS Enterprises shall stop performing the services upon notice from
CMS NOMECO. Any such termination shall be without prejudice to any other rights
or remedies of CMS NOMECO for any breach of this Agreement by CMS Enterprises.
CMS Enterprises shall, upon the effective date of such notice of termination,
if requested by CMS NOMECO, immediately cease performance of the services and
remove its employees, representatives, tools, equipment and other property from
CMS NOMECO's premises. If CMS Enterprises fails to effect such removal within
a reasonable time, CMS NOMECO may do so at CMS Enterprises' expense. In the
event of such termination, payment for all services properly performed through
the date of such termination shall be made in accordance with the rates and
charges set forth in the applicable ISR, subject to proper deductions for
defective services, damages or costs recoverable under this Agreement by CMS
NOMECO by reason of any default, breach or failure to perform by CMS
Enterprises. Upon any termination pursuant to this section, CMS NOMECO shall
be released from all further obligations under any ISR so terminated except for
payment as provided for in this section and such liability or other obligations
as have accrued as of the time of termination.
13. NOTICES AND OTHER COMMUNICATIONS. Whenever notices, invoices,
payments, or other communications are required or permitted hereunder,
the same may be given, made or delivered by mail address as follows:
CMS NOMECO Oil & Gas Co. CMS Enterprises Company
One Jackson Square Fairlane Plaza South, Suite 1000
P. O. Box 1150 330 Town Center Drive
Jackson, Michigan 49204 Dearborn, MI 48126
Attention: Corporate Secretary Attention: Treasury Dept.
(for payments)
General Accounting
(for all other notices)
or to such other address as the addressee shall have specified in writing.
14. OWNERSHIP AND CONFIDENTIALITY. "Confidential Information" shall mean
(i) all documents, records, data and other information furnished to CMS
Enterprises in any form in connection with the performance of the services
contemplated hereunder and any copies thereof, and (ii) all documents, records,
data and other work product produced by CMS Enterprises for CMS NOMECO in
performance of the services contemplated hereunder and copies thereof.
Confidential Information is, and shall continue to be, the property of CMS
NOMECO. CMS Enterprises shall, to the extent permitted by law, upon written
request from CMS NOMECO, immediately deliver to CMS NOMECO or destroy, at CMS
NOMECO's option, all Confidential Information. CMS Enterprises shall not
disclose any Confidential Information or the content thereof to any party
except those CMS Enterprises' employees or agents who need to have access to
such Confidential Information unless ordered by court,
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administrative agency or other governmental body having jurisdiction. If CMS
Enterprises becomes aware that any party is attempting to obtain any such
order, CMS Enterprises shall immediately notify the following person:
General Counsel
CMS NOMECO Oil & Gas. Co.
One Jackson Square
P. O. Box 1150
Jackson, Michigan 49204
or such other person as CMS NOMECO may have designated in writing.
CMS Enterprises acknowledges that disclosure of Confidential
Information in violation of this Agreement may cause CMS NOMECO irreparable
damage and hereby consents to the issuance of an injunction by any court of
competent jurisdiction prohibiting any disclosure of Confidential Information
in violation of this Agreement. Such right to injunctive relief is in addition
to all other remedies available to CMS NOMECO at law or in equity. CMS
Enterprises shall inform all employees who have access to Confidential
Information of the obligations referred to above and require their compliance
with the provisions of this Agreement.
15. GOVERNING LAW. This Agreement shall be deemed to be a Michigan contract
and shall be construed in accordance with and governed by the laws of the State
of Michigan.
16. HEADINGS. The section headings in the Agreement are included for
reference only. They shall not affect the interpretation and construction of
this Agreement.
17. ENTIRE AGREEMENT. With respect to the subject matter hereof, this
Agreement supersedes all previous agreements, representations, understandings
and negotiations, either written or oral, between the parties hereto or their
representatives, and constitutes the entire agreement between the parties.
IN WITNESS WHEREOF, the parties hereto have entered into this
Agreement as of the day and year first written above.
CMS NOMECO OIL & GAS CO. CMS ENTERPRISES COMPANY
By:__________________________ By:__________________________
Title:_______________________ Title:_______________________
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EXHIBIT 10.14
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement, dated as of October 25, 1995,
is entered into between CMS Enterprises Company, a Michigan corporation (herein
called "CMS Enterprises"), and CMS NOMECO Oil & Gas Co., a Michigan corporation
(herein called "CMS NOMECO").
WHEREAS, CMS Enterprises owns all of the issued and outstanding
shares of the common stock of CMS NOMECO ("Common Stock"), which have been or
will be converted into Common Stock, no par (such Common Stock being herein
collectively called the "Securities", which term shall also have the meaning
assigned thereto in Section 8(c) hereof);
NOW, THEREFORE, in consideration of the foregoing and in order to
specify certain provisions relating to the sale by means of domestic or foreign
public offerings of Securities owned by CMS Enterprises, the parties hereto
agree as follows:
Section 1. Registration and Listing Rights.
(a) Registration. If CMS Enterprises shall, at any time and
from time to time, request CMS NOMECO in writing to register under the
Securities Act of 1933 (the "Act") any Securities held by it (whether for
purposes of a public offering, an exchange offer or otherwise), CMS NOMECO
shall use reasonable efforts to cause the prompt registration of all Securities
specified in such request, and in connection therewith shall prepare and file
on such appropriate form as CMS NOMECO, in its reasonable discretion, shall
determine, a registration statement
<PAGE> 2
under the Act to effect such registration. If CMS Enterprises shall so
request, CMS NOMECO will register such Securities for offering on a delayed or
continuous basis pursuant to Rule 415 (or any successor rule or rules to
similar effect) under the Act. Notwithstanding the foregoing, CMS NOMECO shall
be entitled to postpone for a reasonable period of time, but not in excess of
90 calendar days, the filing of any registration statement otherwise required
to be prepared and filed by it if (i) CMS NOMECO is at such time conducting or
about to conduct an underwritten public offering of Securities for sale for its
account and determines that such offering would be materially adversely
affected by the registration so required and (ii) CMS NOMECO so notifies CMS
Enterprises within five days after CMS Enterprises so requests.
(b) Other Offer and Sale. If CMS Enterprises shall, at any
time and from time to time, request CMS NOMECO in writing to take such actions
as shall be necessary or appropriate to permit any Securities held by CMS
Enterprises to be publicly or privately offered and sold in compliance with the
securities laws or other relevant laws or regulations of any foreign
jurisdiction in which a principal securities market outside the United States
is located, CMS NOMECO shall use reasonable efforts to take such actions in any
such foreign jurisdiction (including listing such Securities on any foreign
securities exchange on which such listing is requested by CMS Enterprises) and
shall otherwise cooperate in a timely manner in such offering. Any request
under this paragraph (b) may be made separately or in conjunction with any
request under paragraph (a). Notwithstanding the foregoing, CMS NOMECO shall
be entitled to postpone for a reasonable period of time, but not in excess of
90 calendar days, the taking of any actions otherwise required under this
paragraph (b) if (i) CMS NOMECO is at
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such time conducting or about to conduct an underwritten public offering of
Securities for sale for its account and determines that such offering would be
materially adversely affected by the registration so required and (ii) CMS
NOMECO so notifies CMS Enterprises within 5 days after CMS Enterprises so
requests.
(c) Written Notice. Any request by CMS Enterprises pursuant
to paragraph (a) or (b) of this Section 1, shall (i) specify the number and
class of shares of Securities which CMS Enterprises intends to offer and sell,
(ii) express the intention of CMS Enterprises to offer or cause the offering of
such Securities, (iii) describe the nature or method of the proposed offer and
sale thereof and state whether such offer is intended to be made domestically
or abroad, or both, and, if abroad, the country or countries in which such
offer is intended to be made, (iv) specify any securities exchange (including
any foreign securities exchange in any principal securities market outside the
United States) or quotation system on which CMS Enterprises requests that such
Securities be listed, (v) contain the undertaking of CMS Enterprises to provide
all such information regarding its holdings and the proposed manner of
distribution thereof as may be required in order to permit CMS NOMECO to (A)
comply with all applicable laws and regulations, foreign or domestic, and all
requirements of the Securities and Exchange Commission (the "SEC"), any other
applicable United States or foreign regulatory or self-regulatory body and any
other body having jurisdiction and any securities exchange (including any
foreign securities exchange in any principal securities market outside the
United States) on which the Securities are to be listed, and (B) use reasonable
efforts to obtain acceleration of the effective date of any registration
statement filed in connection therewith, and (vi) in the case of an
underwritten public offering made domestically or abroad, or both, specify the
managing
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underwriter or underwriters of such Securities, which shall be selected by CMS
Enterprises; provided, however, that CMS Enterprises may, upon delivery of
written notice to CMS NOMECO, at any time prior to the effectiveness of any
such registration statement or commencement of any such offering not pursuant
to a registration statement, in its sole discretion and without the consent of
CMS NOMECO, abandon the proposed offering.
(d) Condition to Exercise of Rights. The obligations of CMS
NOMECO under paragraphs (a) and (b) of this Section 1 shall be subject to the
limitation that CMS NOMECO shall not be obligated to register, take other
specified actions with respect to, or cooperate in the offering of, Securities
upon the request of CMS Enterprises, unless the number of shares specified in
such request pursuant to Section 1(c)(i) shall be greater than the lesser of
(A) one million shares or (B) one percent of the total number of shares at the
time issued and outstanding. Notwithstanding the foregoing, the failure of CMS
Enterprises to own the minimum number of Securities referred to in the
preceding sentence at any time shall not affect the ability of CMS Enterprises
to exercise its rights under this Agreement at any subsequent time when CMS
Enterprises again owns such minimum number or percent.
(e) Incidental Registration. If CMS NOMECO shall, at any time
and from time to time, propose an underwritten offering for cash of any
Securities, whether pursuant to a registration statement under the Act or
otherwise, CMS NOMECO shall give written notice as promptly as practicable of
such proposed registration or offering to CMS Enterprises and shall use
reasonable efforts to include in such offering and, if such offering is
pursuant to a registration statement under the Act, in such registration, any
of the same class of such
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Securities held by CMS Enterprises as CMS Enterprises shall request within 20
calendar days after the giving of such notice, upon the same terms (including
the method of distribution) as such offering; provided, however, that (i) CMS
NOMECO shall not be required to give such notice or include any such Securities
in any offering pursuant to a registration statement filed on Form S-8 or Form
S-4 (or such other form or forms as shall be prescribed under the Act for the
same purposes), and (ii) CMS NOMECO may at any time prior to the effectiveness
of any such registration statement or commencement of any such offering not
pursuant to a registration statement, in its sole discretion and without the
consent of CMS Enterprises, abandon the proposed offering in which CMS
Enterprises had requested to participate. Notwithstanding the foregoing, CMS
NOMECO shall not be obligated to include such Securities in such offering if
CMS NOMECO is advised in writing by its managing underwriter or underwriters
(with a copy to CMS Enterprises within ten days after CMS Enterprises delivers
its request pursuant to this paragraph (e)) that such offering would in its or
their opinion be materially adversely affected by such inclusion; provided,
however, that CMS NOMECO shall in any case be obligated to include up to, at
CMS Enterprises' discretion, such number or amount of Securities in such
offering as such managing underwriter or underwriters shall determine will not
materially adversely affect such offering.
(f) Conversion of Other Securities. Should CMS Enterprises
offer any rights, warrants or other securities issued by it or any other person
that are convertible into or exercisable or exchangeable for any Securities,
CMS NOMECO's obligations under this Section 1 shall be applicable to such
Securities to be purchased upon such conversion, exercise or exchange.
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Section 2. Covenants of CMS NOMECO. In connection with any
offering of Securities pursuant to this Agreement, CMS NOMECO shall:
(a) furnish to CMS Enterprises such number of copies of any
prospectus (including any preliminary prospectus), registration
statement, offering memorandum or other offering document (including any
exhibits thereto or documents referred to therein) as CMS Enterprises
may reasonably request and a copy of any and all transmittal letters or
other correspondence with the SEC or any other governmental agency or
self-regulatory body or other body having jurisdiction (including any
domestic or foreign securities exchange) relating to such offering of
Securities;
(b) take such reasonable action as may be necessary to qualify
such Securities for offer and sale under such securities, "blue sky" or
similar laws of such jurisdictions (including any foreign country or
political subdivision thereof) as CMS Enterprises or any underwriter
shall request;
(c) enter into an underwriting agreement (or equivalent
document in any foreign jurisdiction) containing representations,
warranties, indemnities, contribution provisions and agreements then
customarily included by an issuer in underwriting agreements (or such
equivalent documents) in the form customarily used by the managing
underwriter and reasonably acceptable to CMS NOMECO and CMS Enterprises
with respect to secondary distributions;
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(d) at the closing, furnish unlegended certificates
representing ownership of the Securities being sold in such
denominations as shall be requested by CMS Enterprises or the managing
underwriter;
(e) instruct the transfer agent and registrar to release any
stop transfer orders with respect to the equity securities being sold;
(f) promptly inform CMS Enterprises (i) in the case of any
domestic offering of Securities in respect of which a registration
statement is filed under the Act, of the date on which such registration
statement or any post-effective amendment thereto becomes effective
(and, in the case of any offering abroad of Securities, of the date when
any required filing under the securities and other laws of such foreign
jurisdiction shall have been made and when the offering may be commenced
in accordance with such laws) and (ii) of any request by the SEC, any
securities exchange, government agency, self-regulatory body or other
body having jurisdiction for any amendment of or supplement to any
registration statement or preliminary prospectus or prospectus included
therein or any offering memorandum or other offering document relating
to such offering;
(g) upon any registration statement becoming effective
pursuant to any registration under the Act pursuant to this Agreement,
file any necessary amendments or supplements to such registration
statement and otherwise use reasonable efforts to keep such registration
statement effective for such period as CMS Enterprises shall request;
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(h) take such reasonable actions as may be necessary to have
such Securities listed on any securities exchange or quotation system on
which CMS Enterprises shall request such listing pursuant to the notice
delivered by CMS Enterprises under Section 1(c) hereof;
(i) promptly notify CMS Enterprises of the happening of any
event as a result of which any registration statement or any preliminary
prospectus or prospectus included therein or any offering memorandum or
other offering document includes an untrue statement of a material fact
or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of
the circumstances then existing, and prepare and furnish to CMS
Enterprises as many copies of a supplement to or amendment of such
offering document which shall correct such untrue statement or eliminate
such omission, as CMS Enterprises shall request;
(j) appoint any transfer agent, registrar, depository,
authentication agent or other agent as may be necessary or desirable or
as may be requested by CMS Enterprises; and
(k) take such actions as may be reasonably necessary and
execute and deliver such other documents as may be necessary to give
full effect to the rights of CMS Enterprises under this Agreement.
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Section 3. Expenses.
(a) All expenses incurred in complying with Section 1(a) or
(b) hereof, including, without limitation, all registration and filing fees
(including all expenses incident to any filing with the National Association of
Securities Dealers, Inc., or listing on any domestic or foreign securities
exchange), fees and expenses of complying with securities and blue sky laws
(including those of counsel satisfactory to CMS Enterprises retained to effect
such compliance) and printing expenses (collectively "Registration Expenses")
and any stamp, duty or transfer tax, incurred in connection with such
compliance, shall be paid by CMS Enterprises. Notwithstanding the foregoing,
(i) CMS Enterprises shall pay all underwriting discounts and commissions
relating to such compliance, and (ii) CMS NOMECO shall pay (x) the fees and
disbursements of its independent public accountants (including any such fees
and expenses incurred in performing any special audits required in connection
with any such offering and incurred in connection with the preparation of pro
forma financial statements and comfort letters for any such offering), (y)
transfer agents', trustees', fiscal agents', depositaries', and registrars'
fees and the fees of any other agent appointed in connection with such
offering, and (z) all security engraving and printing expenses, and (iii) CMS
Enterprises shall pay the fees and expenses of counsel for both CMS Enterprises
and CMS NOMECO relating to such compliance.
(b) All expenses incurred in complying with Section 1(e)
hereof, including, without limitation, any Registration Expenses, shall be paid
by CMS NOMECO, except that (i) CMS Enterprises shall pay all underwriting
discounts, commissions and expenses specifically
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attributable to the inclusion in the offering under said Section 1(e) of the
Securities being sold by CMS Enterprises and (ii) each party shall pay the fees
and expenses of its counsel.
Section 4. Indemnification.
(a) CMS NOMECO Indemnity. In the case of each offering
contemplated by this Agreement, CMS NOMECO shall indemnify and hold harmless
CMS Enterprises, its officers and directors, each underwriter of Securities so
offered and each person, if any, who controls CMS Enterprises or any such
underwriter within the meaning of Section 15 of the Act, and each person
affiliated with or retained by CMS Enterprises and who may be subject to
liability under any applicable securities laws, against any and all losses,
claims, damages or liabilities to which they or any of them may become subject
under the Act or any other statute or common law of the United States of
America or any other country, or otherwise, including any amount paid in
settlement of any litigation commenced or threatened, and shall promptly
reimburse them, as and when incurred, for any reasonable legal or other
expenses incurred by them in connection with defending any actions, insofar as
any such losses, claims, damages, liabilities or actions shall arise out of or
shall be based upon any untrue statement or alleged untrue statement of a
material fact contained in the registration statement (or in any preliminary or
final prospectus included therein) or in any offering memorandum or other
offering document relating to the offering and sale of such Securities, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or
any violation or alleged violation by CMS NOMECO of the Act, any blue sky laws,
securities laws or other applicable laws of any state or country in which
Securities are offered and relating to
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action or inaction required of CMS NOMECO in connection with such offering;
provided, however, that the indemnification agreement contained in this Section
4(a) shall not apply to such losses, claims, damages, liabilities or actions if
such losses, claims, damages, liabilities or actions shall arise out of or
shall be based upon any such untrue statement or alleged untrue statement, or
any such omission or alleged omission, made in reliance upon and in conformity
with information concerning CMS Enterprises supplied or approved by CMS
Enterprises in writing for use in connection with the preparation of the
registration statement or any preliminary prospectus or final prospectus
contained in the registration statement, any offering memorandum or other
offering document, or any amendment thereof or supplement thereto.
(b) CMS Enterprises Indemnity. In the case of each offering
made pursuant to this Agreement, CMS Enterprises shall, in the same manner and
to the same extent as set forth in paragraph (a) of this Section 4, indemnify
and hold harmless CMS NOMECO and each person, if any, who controls CMS NOMECO
within the meaning of Section 15 of the Act, and each person affiliated with or
retained by CMS NOMECO and who may be subject to liability under any applicable
securities laws, its directors and those officers of CMS NOMECO who shall have
signed any registration statement, offering memorandum or other offering
document with respect to any statement in or omission from such registration
statement, any preliminary prospectus or final prospectus contained in such
registration statement, any offering memorandum or other offering document, or
any amendment thereof or supplement thereto, if such statement or omission
shall have been made in reliance upon and in conformity with information
concerning CMS Enterprises supplied or approved by CMS Enterprises in writing
for use in connection with the preparation of such registration statement, any
preliminary
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prospectus or final prospectus contained in such registration statement, any
offering memorandum or other offering document, or any amendment thereof or
supplement thereto.
(c) Procedure for Indemnification. Each party indemnified
under paragraph (a) or (b) of this Section 4, or under Section 8(f) hereof,
shall, promptly after receipt of notice of the commencement of any action
against such indemnified party in respect of which indemnity may be sought,
notify the indemnifying party in writing of the commencement thereof. The
omission of any indemnified party so to notify an indemnifying party of any
such action shall not relieve the indemnifying party from any liability in
respect of such action which it may have to such indemnified party on account
of the indemnity agreement contained in paragraph (a) or (b) of this Section 4,
or under Section 8(f) hereof, unless the indemnifying party was materially
prejudiced by such omission, and in no event shall relieve the indemnifying
party from any other liability which it may have to such indemnified party. In
case any such action shall be brought against any indemnified party and such
indemnified party shall notify an indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate therein and,
to the extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory in any case to CMS Enterprises. If the indemnifying party so
assumes the defense thereof, it may not agree to any settlement of any such
action as the result of which any remedy or relief shall be applied to or
against the indemnified party, without the prior written consent of the
indemnified party. If the indemnifying party does not assume the defense
thereof, it shall be bound by any settlement to which the indemnified party
agrees, irrespective of whether the indemnifying party consents thereto. If
any settlement of any claim is effected by the indemnified party prior to
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commencement of any action relating thereto, the indemnifying party shall be
bound thereby only if it has consented in writing thereto. In any action
hereunder, the indemnified party shall continue to be entitled to participate
in the defense thereof, with counsel reasonably satisfactory to CMS
Enterprises, even if the indemnifying party has assumed the defense thereof,
and the indemnifying party shall be relieved of the obligation hereunder to
reimburse the indemnified party for the legal expenses and other costs thereof.
Section 5. Transfer of Rights.
(a) Subject to paragraph (b) below, the rights of CMS
Enterprises under this Agreement with respect to any Security may be
transferred to any one or more transferees of such Security. Any transfer of
registration rights pursuant to this Section 5 shall be effective only upon
receipt by CMS NOMECO of written notice from CMS Enterprises stating the name
and address of any transferee and identifying the Securities with respect to
which the rights under this Agreement are being transferred.
(b) The rights of a transferee under paragraph (a) above shall
be the same rights granted to CMS Enterprises under this Agreement, except such
transferee shall (i) only have the right to make one request under paragraph
(a) or (b) of Section 1, which may be a simultaneous request under paragraphs
(a) and (b) , and two requests under paragraph (e) of Section 1 and (ii) in the
case of a request under paragraph (a) or (b) of Section 1, be required to pay
all expenses that, under Section 3, would be required to be paid by CMS
Enterprises and in the case
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of a request under paragraph (e) of Section 1, be required to pay all expenses
that, under Section 3(b), would be required to be paid by CMS Enterprises.
Section 6. Termination of Obligations. Section 1 of this
Agreement shall terminate and cease to be of any force and effect in respect of
CMS Enterprises at such time as CMS Enterprises, and in respect of any assignee
of CMS Enterprises under Section 9(c) at such time as such assignee, shall
cease beneficially to own any Securities; provided, however, that such
termination shall not affect the rights of any transferee under Section 5.
Section 7. Representation and Warranties. As an inducement to
enter into this Agreement, each party represents to and agrees with the other
that:
(a) it is a corporation duly organized, validly existing in
good standing under the laws of the State of Michigan and has all
requisite corporate power to own, lease and operate its material
properties, to carry on its business as presently conducted and to carry
out the transactions contemplated by this Agreement;
(b) it has duly and validly taken all corporate action
necessary to authorize the execution, delivery.and performance of this
Agreement and the consummation of the transactions contemplated hereby;
(c) this Agreement has been duly executed and delivered by it
and constitutes its legal, valid and binding obligation enforceable in
accordance with its terms (subject, as
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<PAGE> 15
to the enforcement of remedies, to applicable bankruptcy,
reorganization, insolvency, moratorium or other similar laws affecting
the enforcement of creditors' rights generally from time to time in
effect, and subject to application of general principles of equity); and
(d) none of the execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby or the compliance
with any of the provisions of this Agreement will (i) conflict with or
result in a breach of any provision of its corporate charter or bylaws,
(ii) breach, violate or result in a default under any of the terms of
any material agreement or other material instrument or obligation to
which it is a party or by which it or any of its properties or assets
may be bound, or (iii) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to it or any of its properties or
assets.
Section 8. Certain Agreements and Definitions.
(a) Calculation of Amounts. For purposes of this Agreement,
the amount of any Securities outstanding at any time (and the amount of any
Securities then beneficially owned by CMS Enterprises or any other person)
shall be calculated on the basis of the information contained in CMS NOMECO's
most recent report filed with the SEC. For purposes of calculating the amount
of Securities outstanding at any time (and the amount of Securities then
beneficially owned by CMS Enterprises or any other person) all outstanding
securities convertible into or exchangeable for such Securities, including
outstanding securities that in the
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<PAGE> 16
future will become so convertible or exchangeable, shall be deemed to have been
fully converted at such time.
(b) "Person"; "Affiliate". As used in this Agreement, the
term "person" shall mean any individual, partnership, corporation, trust or
other entity. As used in this Agreement, the term "affiliate" shall mean, with
respect to any specified 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 specified person.
(c) "Securities". As used in this Agreement, the term
"Securities" shall include any capital stock of CMS NOMECO now owned or
hereafter acquired by CMS Enterprises, whether acquired in any transaction with
CMS NOMECO or another person, in any recapitalization of CMS NOMECO, as a
dividend or other distribution, as a result of any "split" or "reverse split",
upon conversion or exercise of another security of CMS NOMECO or any other
person, or otherwise.
(d) No Legend. No Security held or to be transferred by CMS
Enterprises shall bear any legend, nor shall CMS NOMECO cause or permit any
transfer agent or registrar appointed by CMS NOMECO with respect to such
Security to refuse or fail to effect a transfer or registration with respect to
such Security, provided that CMS Enterprises provides to CMS NOMECO a
certificate of an officer to CMS Enterprises in connection with such transfer
or registration to the effect that such transfer or registration is not in
violation of any applicable
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<PAGE> 17
securities or other laws and that the security so transferred or registered is
thereafter free of securities law transfer restrictions.
(e) Stock Books. Except as otherwise provided by law for all
holders of securities, CMS NOMECO will not close its stock books or other
registries against the transfer of any Security held by CMS Enterprises.
(f) Securities Exchange Act of 1934. After the initial public
offering of the Common Stock, CMS NOMECO shall at all times timely file such
information, documents and reports as the SEC may require or prescribe under
the Securities Exchange Act of 1934 (the "Exchange Act") and shall provide CMS
Enterprises with two copies of each thereof. CMS NOMECO shall, whenever
requested by CMS Enterprises, notify CMS Enterprises in writing whether CMS
NOMECO has, as of the date specified by CMS Enterprises, complied with the
Exchange Act reporting requirements to which it is subject for such period to
such date as shall be specified by CMS Enterprises. CMS NOMECO acknowledges
and agrees that one of the purposes of the requirements contained in this
Section 8(f) is to enable CMS Enterprises to comply with the current public
information requirements contained in Paragraph (c) of Rule 144 under the Act
(or any corresponding rule hereafter in effect) should CMS Enterprises ever
wish to dispose of any Securities without registration under the Act in
reliance upon Rule 144. In addition, CMS NOMECO shall take such other measures
and file such other information, documents and reports as shall hereafter be
required by the SEC as a condition to the availability of Rule 144. CMS NOMECO
covenants, represents and warrants that all such information, documents and
reports filed with the SEC shall not contain any untrue statement
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<PAGE> 18
of a material fact or fail to state therein a material fact required to be
stated therein or necessary to make the statements contained therein not
misleading, and CMS NOMECO shall indemnify and hold CMS Enterprises, its
officers and directors and each broker, dealer, underwriter or other person
acting for CMS Enterprises (and any controlling person of any of the foregoing)
harmless from and against any and all claims, liabilities, losses, damages,
expenses and judgments and shall promptly reimburse them, as and when incurred,
for any legal or other expenses incurred by them in connection with
investigating any claims and defending any actions insofar as such claims,
liabilities, losses, damages expenses and judgments arise out of or based upon
any breach of the foregoing covenants, representations or warranties. The
procedure for indemnification set forth in Section 4(c) hereof shall apply to
the indemnification provided under this Section 8(f).
(g) Listing. Once initially listed, CMS NOMECO shall maintain
in effect any listing of Securities on any securities exchange (domestic or
foreign) or quotation system, shall make all filings and take all other actions
required under the rules of such exchange or quotation system and any
applicable listing agreement, shall provide CMS Enterprises with two copies of
each such filing at the time at which such filing is made, and shall notify CMS
Enterprises of any proceeding or other action taken by such exchange, quotation
system or any other person which might have the effect of terminating or
otherwise changing the status of such listing, forthwith upon the occurrence
thereof.
(h) Limitation on Other Securities To Be Registered. In case
of any registration, offering or sale contemplated by paragraph (a) or (b) of
Section 1, CMS NOMECO shall not
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<PAGE> 19
include in such registration, offering or sale any Securities other than those
beneficially owned by CMS Enterprises, and in case of any registration,
offering or sale contemplated by paragraph (e) of Section 1, CMS NOMECO shall
not include in such registration, offering or sale any Securities other than
those being offered by CMS NOMECO and CMS Enterprises.
(i) Filings; Press Releases. As far in advance as is
practicable of (but in any event no later than two business days before) (i)
the publication of any press release containing information material to CMS
NOMECO's stockholders or (ii) the filing of any document or report with the SEC
or with any securities exchange or quotation system, CMS NOMECO shall send a
reasonably final draft of such press release, document or report to CMS
Enterprises at the address set forth in Section 9(m) hereof. CMS Enterprises
shall have the right to request amendments, modifications or supplements to any
such release, document or report and CMS NOMECO shall not unreasonably withhold
its consent thereto. The obligations of CMS NOMECO under this Section 8(i)
shall terminate and cease to be of any force and effect at such time as CMS
Enterprises shall cease to beneficially own any Securities.
(j) Counsel. In any case where legal counsel is to be
employed to represent the parties for any purpose under this Agreement, CMS
Enterprises shall have the right to select such counsel. If in the judgment of
CMS Enterprises it would be appropriate to do so, CMS Enterprises may select
the same counsel to represent both parties in connection with any matter, and
CMS NOMECO hereby consents in advance to any such joint representation;
provided, however, that if any counsel selected for such joint representation
is of the opinion at any time that, in light of the circumstances then
existing, it would not be able to discharge
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<PAGE> 20
its professional responsibilities properly in undertaking or in continuing such
joint representation, then CMS NOMECO shall select separate counsel to
represent itself, which counsel shall be reasonably satisfactory to CMS
Enterprises, in the matter. Except as otherwise specifically provided in
Section 4(b) hereof, CMS NOMECO shall be solely responsible for the fees and
expenses of any separate counsel so selected, and CMS Enterprises shall have no
responsibility or liability whatsoever with respect thereto. If the parties
use the same counsel, each of the parties shall be responsible for the portion
of the fees and expenses of such counsel determined by such counsel to be
allocable to each of the parties.
Section 9. Miscellaneous.
(a) Injunctions. Irreparable damage would occur in the event
that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. Therefore, the parties
hereto shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically the terms and
provisions hereof in any court having jurisdiction, such remedy being in
addition to any other remedy to which they may be entitled at law or in equity.
(b) Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to
be invalid, void, or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms,
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<PAGE> 21
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or enforceable. In the event that any such
term, provision, covenant or restriction is so held to be invalid, void or
unenforceable, the parties hereto shall use their best efforts to find and
employ an alternative means to achieve the same or substantially the same
result as that contemplated by such term, provision, covenant or restriction.
(c) Assignment. Except in the case of a transaction as a
result of which CMS NOMECO ceases to be an affiliate of CMS Enterprises or
except as provided otherwise in Section 5 hereof, and except by operation of
law or in connection with the sale of all or substantially all the assets of a
party hereto, this Agreement shall not be assignable, in whole or in part,
directly or indirectly, by either party hereto without the prior written
consent of the other, and any attempt to assign any rights or obligations
arising under this Agreement without such consent shall be void ab initio;
provided, however, that the provisions of this Agreement shall be binding upon,
inure to the benefit of and be enforceable by the parties hereto (including,
solely for purposes of Sections 4 and 8(g) hereof, their officers and
directors) and their respective successors and permitted assigns. This
Agreement and all of CMS Enterprises' rights and obligations hereunder shall be
deemed to be automatically assigned to any person who acquires Securities in
connection with the transaction and who CMS NOMECO and CMS Enterprises are
affiliates of both before and after the transaction.
(d) Further Assurances. Subject to the provisions hereof, the
parties hereto shall make, execute, acknowledge and deliver such other
instruments and documents, and take all such other actions as may be reasonably
required in order to effectuate the purposes of this
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<PAGE> 22
Agreement and to consummate the transactions contemplated hereby. Subject to
the provisions hereof, each of the parties shall, in connection with entering
into this Agreement, performing its obligations hereunder and taking any and
all actions relating hereto, comply with all applicable laws, regulations,
orders and decrees, obtain all required consents and approvals and make all
required filings with any governmental agency, other regulatory or
administrative agency, commission or similar authority and promptly provide the
other with all such information as the other may reasonably request in order to
be able to comply with the provisions of this sentence.
(e) Parties in Interest. Except as otherwise expressly set
forth herein, nothing in this Agreement expressed or implied is intended or
shall be construed to confer any right or benefit upon any person, firm or
corporation other than the parties and their respective permitted successors
and assigns.
(f) Waivers, Etc. No failure or delay on the part of the
parties in exercising any power or right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power,
or any abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No amendment, modification or waiver of any provision of this
Agreement nor consent to any departure by the parties therefrom shall in any
event be effective unless the same shall be in writing and signed by the chief
executive officer or the chief financial officer of each party in the case of
amendments or modifications, or by the chief executive officer or the chief
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<PAGE> 23
financial officer of the waiving or consenting party, and then such waiver or
consent shall be effective only in the specific instance and for the purpose
for which given.
(g) Setoff. All payments to be made by either party under
this Agreement shall be made without setoff, counterclaim or withholding, all
of which are expressly waived.
(h) Changes of Law. If, due to any change in applicable law
or regulations or the interpretation thereof by any court of law or other
governing body having jurisdiction subsequent to the date of this Agreement,
performance of any provision of this Agreement or any transaction contemplated
hereby shall become impracticable or impossible, the parties hereto shall use
reasonable efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such provision.
(i) Confidentiality. Subject to any contrary requirement of
law and the right of each party to enforce its rights hereunder in any legal
action, each party shall keep strictly confidential and shall cause its
employees and agents to keep strictly confidential, any information which it or
any of its agents or employees may acquire pursuant to, or in the course of
performing its obligations under, any provision of this Agreement; provided,
however, that such obligation to maintain confidentiality shall not apply to
information which (x) at the time of disclosure was in the public domain not as
a result of acts by the receiving party, (y) was in the possession of the
receiving party at the time of disclosure, or (z) was required to be disclosed
by law.
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<PAGE> 24
(j) Entire Agreement. This Agreement contains the entire
understanding of the parties with respect to the transactions contemplated
hereby.
(k) Headings. Descriptive headings are for convenience only
and shall not control or affect the meaning or construction of any provision of
this Agreement.
(l) Counterparts. For the convenience of the parties, any
number of counterparts of this Agreement may be executed by the parties hereto,
and each such executed counterpart shall be, and shall be deemed to be, an
original instrument.
(m) Notices. All notices, consents, requests, instructions,
approvals and other communications provided for herein shall be validly given,
made or served, if in writing and delivered personally, by telegram or sent by
registered mail, postage prepaid to:
CMS Enterprises at:
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, MI 48126
with separate copies at such address to the attention of the
Chief Financial Officer and the Corporate Secretary
CMS NOMECO at:
One Jackson Square
P. O. Box 1150
Jackson, MI 49204
with separate copies at such address to the attention of the
Chief Financial Officer and the Corporate Secretary
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<PAGE> 25
or to such other address as any party may, from time to time, designate in a
written notice given in a like manner. Any notice given under this Agreement
shall be deemed delivered when received at the appropriate address.
(m) Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Michigan
applicable to contracts made and to be performed therein.
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<PAGE> 26
IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed by their respective officers, each of whom is duly authorized,
all as of the date and year first above written.
CMS Enterprises Company
By:_____________________________________
Name:___________________________________
Title:__________________________________
CMS NOMECO Oil & Gas Co.
By:_____________________________________
Name:___________________________________
Title:__________________________________
Signature Page of Registration Rights Agreement
dated as of September __, 1995.
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<PAGE> 1
EXHIBIT 10.15
AMENDED AND RESTATED
AGREEMENT FOR THE ALLOCATION OF
INCOME TAX LIABILITIES AND BENEFITS
This tax allocation agreement ("Agreement"), amended and restated as of
January 1, 1994, is made by and among CMS Energy Corporation, a Michigan
corporation ("CMS"), each of the corporations that are members of the
Consolidated Group (as defined in Section 1) as of the date hereof, and each of
the corporations that become members of the Consolidated Group from time to
time thereafter, (each such corporation being referred to herein as
"Subsidiary" and together as "Subsidiaries").
RECITALS
Each of the parties hereto are members of the Consolidated Group. Consumers
Power Company ("Consumers") was the common parent of the Consolidated Group
prior to May 26, 1987. CMS became the common parent of the Consolidated Group
on May 26, 1987, pursuant to a reorganization that continued the existence of
the Consolidated Group and replaced Consumers with CMS as common parent.
The Consolidated Group elected to file consolidated Federal income tax returns
for all tax years beginning with 1973 and CMS intends to continue to file a
consolidated Federal income tax return for each taxable year for which the
Consolidated Group is required or permitted to file a consolidated Federal
income tax return.
The Consolidated Group filed an election with the Internal Revenue Service,
beginning with tax year 1973, to allocate its tax liabilities and benefits for
all Consolidated Years in accordance with certain methods permitted by Treasury
Regulations (the "Separate Taxable Income Method") and has applied such methods
both for Federal income tax purposes and for financial reporting purposes. A
copy of that election is attached as Exhibit A hereto.
The parties desire that the income tax liabilities and benefits of each member
of the Consolidated Group, resulting from the filing of consolidated Federal
income tax returns, continue to be allocated for Federal income tax purposes
using the Separate Taxable Income Method. However, for financial reporting
purposes, for all Consolidated Years after December 31, 1993, the parties
intend to use the method of allocation described herein. The parties believe
that the method described herein conforms generally to the Separate Taxable
Income Method, but to the extent of any conflict, the parties intend that the
method described herein shall prevail believing that it best furthers their
desire that no cross-subsidies arise between the utility and nonutility
activities of the Consolidated Group.
<PAGE> 2
2
AGREEMENT
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and for other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties agree as follows:
1. Definitions. The following terms as used herein shall have the
meaning set forth below:
1.1 "Applicable Quarterly Percentage" means the quarterly
percentage determined by the CMS Corporate Tax Department for each estimated
payment, necessary to comply with and avoid underpayment penalty under Code
Section 6655.
1.2 "Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any predecessor or successor thereto, and "Treas. Reg."
means the regulations issued under the Code.
1.3 "Consolidated Group" means the affiliated group of
corporations, as defined in Section 1504(a) of the Code, of which CMS is the
common parent, and which has duly elected to file a Consolidated Return.
1.4 "Consolidated AMT Liability" means the alternative minimum
tax imposed on the Consolidated Group for the Consolidated Year under Section
55(a) of the Code, calculated without regard to credits available to reduce
such liability.
1.5 "Consolidated Return" means a consolidated Federal income
tax return filed with respect to the Consolidated Group pursuant to Section
1501 of the Code.
1.6 "Consolidated Regular Tax Liability" means the regular
Federal income tax liability of the Consolidated Group for the Consolidated
Year, determined under Treas. Reg. Section 1.1502-2, applying the actual
credits allowable on the Consolidated Return (whether applied to reduce regular
tax or AMT tax).
1.7 "Consolidated Tax Liability" means the Consolidated Regular
Tax Liability plus the Consolidated AMT Liability.
1.8 "Consolidated Year" means a taxable period for which a
Consolidated Return is filed.
1.9 "Excess Credits" has the meaning assigned to that term in
Section 5, below.
1.10 "Excess FTC" has the meaning assigned to that term in
Section 5, below.
<PAGE> 3
3
1.11 "Member" means, with respect to all or a portion of each
Consolidated Year, each member of the Consolidated Group.
1.12 "OFL" means an overall foreign loss as defined in Section
904(f)(2) of the Code, a separate limitation loss as defined in Section
904(f)(5)(E) of the Code, or a foreign oil extraction loss as defined in
Section 907(c)(4)(B) of the Code, as the context requires, and in each case
determined on an aggregate basis for all taxable years (net of recapture).
1.13 "Positive AMT Liability" has the meaning assigned to that
term in Section 4, hereof.
1.14 "Separate Credits" has the meaning assigned to that term
in Section 5, below.
1.15 "Separate Losses" has the meaning assigned to that term in
Section 5 below.
1.16 "Separate Taxable Income" means, with respect to any
Member, the positive separate taxable income of such member, if any, for the
Consolidated Year determined under Treas. Reg. Section 1.1502-12 and adjusted
under Treas. Reg. Section 1.1552-1(a)(1)(ii).
1.17 "Separate Tax Benefits" of any Member with respect to a
Consolidated Year means the amount determined under Section 5, hereof.
1.18 "Separate Return Tax Liability" means, with respect to any
Member, the separate return tax liability of such member for the Consolidated
Year determined under Treas. Reg. Section 1.1552-1(a)(2)(ii), without regard to
Positive AMT liability and applying the actual credits that would have been
allowable had such Member filed on a separate company basis.
1.19 "Separate Tax Liability" of a Member means, with respect to
a Consolidated Year, the sum of the amounts determined under Sections 3 and 4,
hereof.
1.20 "Stand Alone Tax Liability" means the tax liability of a
Member based on the member's separate items of income, deductions and credits,
computed as if the Member had filed a separate return for the year, without
giving effect to any items of consolidation, and without regard to the
graduated rates imposed under Section 11(b) of the Code.
2. Consolidated Tax Returns. CMS and each Subsidiary acknowledge
that a consolidated Federal income tax return has been, and shall continue to
be, filed by CMS for the Consolidated Group for each taxable year. CMS and
each Subsidiary agree to allocate the Federal income tax liabilities and
benefits reported by the Consolidated Group in the manner provided in this
Agreement and to make the payments required by this Agreement at such time and
in such manner as set forth in this Agreement.
<PAGE> 4
4
3. Regular Tax Liability Allocation. The Consolidated Regular Tax
Liability for each Consolidated Year shall be allocated among the Members with
Separate Taxable Income pro rata with the ratio that each such Member's
Separate Taxable Income bears to the sum of the Separate Taxable Incomes of all
Members. An additional amount shall be allocated to each Member equal to 100%
of the excess, if any, of (i) the Separate Return Tax Liability of such Member
for the Consolidated Year over (ii) the Consolidated Regular Tax Liability
allocated to such Member in accordance with the first sentence of this section.
4. Alternative Minimum Tax Liability Allocation. For each
Consolidated Year for which the Consolidated Group has a Consolidated AMT
Liability, the Consolidated AMT Liability shall be allocated among the Members
with a Positive AMT Liability pro rata with the ratio that each such Member's
Positive AMT Liability bears to the sum of the Positive AMT Liability of all
Members. For purposes of this computation, Positive AMT Liability exists for
any Member for whom the tentative minimum tax exceeds the regular tax of such
Member for the Consolidated Year. In making this computation, the tentative
minimum tax and the regular tax of such Member shall be calculated, on a
separate company basis, in the manner prescribed by Section 55 of the Code,
except that a negative amount of tentative minimum tax or regular tax shall be
deemed to exist for any Member for which negative alternative minimum taxable
income or negative taxable income, respectively, exists for the Consolidated
Year.
5. Separate Tax Benefits. For each Consolidated Year, CMS shall
determine, with respect to each Member, (a) the amount of losses or deductions
which do not reduce such Member's Separate Return Tax Liability, if any,
including carryovers ("Separate Losses") but which reduce the Consolidated Tax
Liability and (b) the amount of credits, if any, including carryovers
("Separate Credits") which reduce the Consolidated Tax Liability whether or not
they reduce the Separate Return Tax Liability of the Member (the amount of such
Separate Losses and Separate Credits as adjusted in this Section 5 and Sections
8 and 9 being called herein, with respect to any Member, "Separate Tax
Benefits"). In making the determination of Separate Tax Benefits, the
following rules shall apply:
(a) CMS shall be deemed to have utilized such Separate Losses and
Separate Credits in the order and priority as permitted or
required under the Code.
(b) Separate Losses or Separate Credits of equal priority that cannot
be fully utilized will be allocated among the Members which
generated such Separate Losses or Separate Credits
proportionately to such Separate Losses or Separate Credits.
(c) If, after application of paragraphs (a) and (b) above (except as
to foreign tax credits limited by the foreign tax credit
limitation under Code Section 904 separately provided for under
paragraph (d) below), there are Members with credits that would
have been utilized on a separate company basis in the aggregate
in excess of the amount utilized on the Consolidated Return
("Excess Credits"), then such Members shall have their Separate
Tax Benefits increased, and the Members generating the Separate
Losses, tax preference items, or other tax attributes responsible
for the reduction in the Separate Credits shall
<PAGE> 5
5
have their Separate Tax Benefits decreased, so as to equitably
shift such Separate Tax Benefits. If any Member's Separate Tax
Benefits are decreased under this paragraph (c), then, in
subsequent allocations, for all purposes of this Agreement,
including this paragraph (c), such Member shall be assigned such
Excess Credits to the extent it has had a decrease in its
Separate Tax Benefits.
(d) If, by reason of application of the foreign tax credit
limitations under Code Section 904, the sum of the foreign tax
credits utilized by the Members in computing their Separate
Return Tax Liabilities is greater than the foreign tax credits
utilized to reduce the Consolidated Tax Liability, then the
Separate Tax Benefits of such Members shall be increased by such
excess ("Excess FTC") and the Separate Tax Benefits of those
Members with OFLs shall be decreased (if necessary, below zero)
in proportion to each such Member's OFL computed on a separate
company basis. In computing the OFL on a separate company basis
of any Member for this purpose, the foreign source income of one
Member from the current year can offset the foreign source loss
of a second Member, but only after the foreign source income of
the first Member is first applied to offset any existing OFL of
such first Member. If a Member leaves the Consolidated Group,
and, as a result, there is a difference between the aggregate OFL
of the remaining Members as determined under this Agreement and
under the Treasury Regulations, then such difference shall be
eliminated by equitably distributing such difference among the
remaining Members. If any Member's Separate Tax Benefits are
decreased under this paragraph (d), then, in subsequent
allocations and for all other purposes of this Agreement,
including this paragraph (d), such Member shall be assigned such
Excess FTC to the extent it has had a decrease in its Separate
Tax Benefits.
The computation of foreign tax credits on a separate company
basis, solely for the purpose of this paragraph (d), shall be
made without regard to an election on the Consolidated Return to
take a deduction for foreign taxes in lieu of a credit, but in
that event the Separate Tax Benefits credited and charged under
this paragraph (d) shall be reduced to reflect the mitigating
effect of the deduction.
(e) If the net of the positive and negative Separate Tax Benefits
allocated under this Section 5 exceeds the aggregate of the
additional amounts allocated under the second sentence of Section
3, then the Separate Tax Benefits allocated to Members with
positive Separate Tax Benefits (after application of paragraphs
(a) through (d) above) shall be reduced in an equitable manner
(first taking into account the extent to which a Member has
effectively benefited from its Separate Tax Benefits in
calculating its Separate Return Tax Liability) so that the net of
the positive and negative Separate Tax Benefits allocated under
this Section 5 equals the aggregate of the additional amounts
allocated under the second sentence of Section 3.
<PAGE> 6
6
(f) AMT Credits for regular tax purposes shall be allocated to the
Members in a manner consistent with the allocation of the
Consolidated AMT Liability under Section 4 hereof.
6. Payments. Each Subsidiary shall provide CMS, thirty days before
the day on which a periodic consolidated Federal income tax installment
(including the estimated tax installments and the installment required on the
due date before extension of the return) is due for any Consolidated Year, all
information requested by CMS to calculate such installment. Each Subsidiary
shall pay to CMS its estimated Stand Alone Tax Liability multiplied by the
Applicable Quarterly Percentage, less previous payments made for such tax year.
CMS shall invoice each Subsidiary for any such amount five business days prior
to the date CMS is obligated to make any such payment. The amounts due may be
paid either by the actual remittance of cash or via inter-company accounts, as
determined by CMS.
7. Reconciliation of Tax Liability. After the close of each
Consolidated Year, CMS shall reconcile payments made by each Subsidiary under
Section 6 hereof with the Separate Tax Liability and the Separate Tax Benefits
attributable to each Subsidiary that results or is expected to result from the
filing of the Consolidated Return. A tentative reconciliation shall be made by
April 30 and a final reconciliation shall be made by November 15 of the year
following the Consolidated Year. CMS shall invoice each Subsidiary and each
Subsidiary shall pay to CMS any additional amount due, or receive payment from
CMS for any overpayment or Separate Tax Benefit, based upon such
reconciliation, within 15 days. The amounts due may be paid either by the
actual remittance of cash or via inter-company accounts, as determined by CMS.
8. Adjustments to Tax Liability. If any adjustments are made to the
income, gains, losses, deductions, or credits pertaining to any Member with
respect to any Consolidated Year, as reported in a Consolidated Return, by
reason of the filing of an amended return or claim for refund, or arising out
of an audit of such Consolidated Return by the Internal Revenue Service, then
the Separate Tax Liabilities or Separate Tax Benefits, as the case may be, of
each Member shall be redetermined to give effect to any such adjustments as if
it had been made as part of the filed Consolidated Return. If any interest or
penalty is to be paid or interest received as a result of a tax deficiency or
refund, such interest or penalty shall be allocated in accordance with the
item(s) giving rise to such interest or penalty. Either CMS or the Subsidiary
affected may contest or cause to be contested any adjustments to income, gains,
losses, deductions, credits or interest or penalty assessments and the
reasonable costs incurred in contesting such adjustments or assessments shall
be allocated upon such basis as is mutually agreed to by CMS and the Subsidiary
affected in advance of such contest. If, as a result of such redetermination,
any amounts due to CMS or any of the Subsidiaries under this Agreement, as the
case may be, shall exceed the amounts previously paid to such Member, then
payment of such excess shall be made by the appropriate member, as the case may
be, within 30 days after the earliest date on which (i) CMS shall pay, or be
deemed to have paid, any additional taxes resulting from any such adjustment,
(ii) CMS shall receive, or be deemed to have received, a refund of taxes
resulting from any such adjustment or (iii) such adjustment shall become final;
provided,
<PAGE> 7
7
however, that no payment between CMS and a Subsidiary pursuant to (i) or (ii),
above, shall be considered a final determination of such amount until the
adjustment with respect to which the redetermination was made becomes final.
For purposes of this Section 8, an adjustment shall become final at the time of
the expiration of the applicable statute of limitations with respect to the
taxable period to which such adjustment relates (or, if earlier, the date on
which a closing agreement with the IRS becomes binding), or, if such adjustment
was made pursuant to a decision of a court, at the time such decision shall
become final and the resulting tax deficiency or overpayment, including
interest, has been finally determined and paid by or refunded to CMS.
9. Carryovers and Carrybacks. If, for any Consolidated Year, a Member
has losses or credits which, under the Code, may be carried back to any
Consolidated Year in which the Consolidated Group filed a Consolidated Return
which included such Subsidiary, and such losses or credits give rise to a
reduction in the tax liability of the Consolidated Group that would not have
arisen if such Subsidiary were excluded from the Consolidated Group for any
such Consolidated Year, then the Separate Tax Liabilities or Separate Tax
Benefits, as the case may be, of each Member shall be redetermined in
accordance with Section 8.
If all or part of an unused loss or tax credit is allocated to a Member
pursuant to Treas. Reg. Section 1.1502-79 and is carried back or forward to a
year in which such Member filed a separate return or a consolidated return with
another affiliated group, any refund or reduction in tax liability arising from
the carryback or carryover shall be retained by such Member. Notwithstanding
the above, CMS shall determine whether an election shall be made not to carry
back the consolidated net operating loss for any taxable year in accordance
with Section 172(b)(3)(C) of the Code.
10. Miscellaneous.
10.1 Administration. This Agreement shall be administered by
the Corporate Tax Department of CMS. In administering this Agreement, the
Corporate Tax Department of CMS, in its reasonable discretion, may make such
determinations as it deems appropriate to effectuate the purposes of this
Agreement, consistent with past practices and any changes in tax laws.
10.2 Consents, Waivers, etc. CMS and each Subsidiary agrees to
execute and file such consents, waivers and other documents as may be necessary
to effect the provisions of this Agreement.
10.3 Verification of Computation. CMS shall provide to each
Subsidiary, upon the reasonable request of such Subsidiary, such copies of the
computations of all amounts payable under this Agreement as may be necessary to
verify such computations; provided, however, that CMS is satisfied that the
requesting Subsidiary can maintain the confidentiality of such information.
<PAGE> 8
8
10.4 Successors and Beneficiaries. This Agreement may not be
assigned, pledged, transferred or hypothecated by any Subsidiary without the
express written consent of CMS.
If during any Consolidated Year, CMS or any Subsidiary acquires
or organizes another corporation that is required to be included in the
consolidated Federal income tax return, then such corporation shall, by such
action, be deemed to have become a party to and be bound by this Agreement as
of the date upon which such corporation became a member of the Consolidated
Group.
This Agreement shall be binding upon and inure to the benefit of
any successor, whether by merger, acquisition of assets or otherwise, to any of
the parties hereto, to the same extent as if the successor has been an original
party to this Agreement.
10.5 Termination. This Agreement shall apply to all
Consolidated Years ended on or after December 31, 1994, unless earlier
terminated by written agreement of the parties. Notwithstanding termination of
this Agreement, its provisions will remain in effect with respect to any period
of time during the taxable year in which the termination or expiration occurs
for which the income or loss of any Subsidiary must be included in the
Consolidated Return of CMS. In addition, such termination or expiration shall
not relieve any party of any obligation arising hereunder with respect to
Consolidated Years covered by this Agreement.
In Witness Whereof, the parties hereto have caused this Agreement
to be executed as of the date hereof by their duly authorized officers on their
own behalf, and on behalf of their Subsidiaries.
CMS ENERGY CORPORATION by:_________________________________
CONSUMERS POWER COMPANY by:_________________________________
CMS ENTERPRISES COMPANY by:_________________________________
CMS ENERGY FINANCE CORPORATION by:_________________________________
CMS CAPITAL CORP. by:_________________________________
CMS LAND COMPANY by:_________________________________
CMS NOMECO OIL & GAS CO. by:_________________________________
CMS UTILITY SERVICES, INC. by:_________________________________
KJL LIMITED, INC. by:_________________________________
CMS ELECTRIC MARKETING COMPANY by:_________________________________
CMS GAS MARKETING COMPANY by:_________________________________
CMS GAS TRANSMISSION AND STORAGE CO. by:_________________________________
MONARCH MANAGEMENT COMPANY by:_________________________________
<PAGE> 1
Exhibit 10.16
INDEMNIFICATION AGREEMENT
This Agreement is made and entered into as of the 20th day of October,
1995 by and among CMS Energy Corporation, a Michigan corporation ("CMS"), CMS
Enterprises, Inc., a Michigan corporation ("Enterprises"), CMS NOMECO Oil & Gas
Co., a Michigan corporation ("Nomeco"), CMS NOMECO International, Inc., f/k/a
Walter International, Inc., a Texas corporation ("Walter"), Walter Congo
Holdings, Inc., a Texas corporation ("Walter Holdings") and Walter
International Congo, Inc., f/k/a Amoco Congo Exploration Company, a Delaware
corporation ("Walter Congo").
RECITALS.
1. An agreement (the "Amoco Tax Agreement") was entered into as of the 23rd
day of February, 1995 by and among Amoco Corporation, an Indiana
corporation ("Amoco"), Amoco Production Company, a Delaware corporation
("APC"), Walter, Walter Holdings, Walter Congo, Nuevo Energy Company, a
Delaware corporation ("Nuevo"), the Congo Holdings Company, a Texas
corporation ("Nuevo Holdings"), and Nuevo Congo Company, a Texas
corporation ("Nuevo Congo").
2. Pursuant to the Amoco Tax Agreement, Walter, Walter Holdings, Walter
Congo, Nuevo, Nuevo Holdings and Nuevo Congo agreed to jointly and
severally indemnify and hold harmless APC, its Affiliates and their
respective directors, officers and employees from and against any and all
Taxes, tax credits utilized, interest, penalties, cost of enforcement,
and reasonable attorneys fees incurred in defending against any claim for
Taxes, interest, penalties, or additional income or enforcement of the
indemnification, if any, arising out of, or based upon, or with respect
to any failure by Walter, Walter Holdings, Walter Congo, Nuevo, Nuevo
Holdings or Nuevo Congo to comply with each and every obligation and
covenant of the Amoco Tax Agreement (generally relating to the avoidance
of a "Triggering Event" within the meaning of Treasury Regulation Section
1.1503-2).
3. An agreement (the "CMS Tax Agreement") was entered into as of the 24th
day of February, 1995 by and among Amoco, APC, CMS, Enterprises, Nomeco,
Walter, Walter Holdings and Walter Congo.
4. Pursuant to the CMS Tax Agreement, CMS, Enterprises, Nomeco, Walter,
Walter Holdings and Walter Congo agreed to jointly and severally
indemnify and hold harmless APC, its Affiliates and their respective
directors, officers and employees from and against any and all Taxes, tax
credits utilized, interest, penalties, cost of enforcement, and
reasonable attorneys fees incurred in defending against any claim for
Taxes, interest, penalties, or additional income or the enforcement of
the indemnification, if any, arising out of, or based upon, or with
respect to any failure by CMS, Enterprises, Nomeco, Walter, Walter
Holdings, or Walter Congo, to comply with each and every obligation and
covenant of the CMS Tax Agreement (generally relating to the avoidance of
a "Triggering Event" within the meaning of Treasury Regulation Section
1.1503-2).
<PAGE> 2
5. An agreement (the "Guarantee Agreement") was entered into as of the 17th
day of January, 1995 by and between Nomeco and APC whereby Nomeco agreed
to guarantee certain of Walter's potential liabilities, including certain
obligations of Walter under the Amoco Tax Agreement.
6. The Amoco Tax Agreement was entered into as part of a transaction by
which Walter Congo, a Congolese affiliate of APC, was acquired by an
affiliate of Walter and Nuevo Congo, a Congolese affiliate of APC, was
acquired by an affiliate of Nuevo (collectively, the "Initial
Acquisitions"). The CMS Tax Agreement was entered into as part of a
transaction by which, among other matters, CMS acquired Walter and then
contributed the stock of Walter to Enterprises, followed by a
contribution by Enterprises of the Walter stock to Nomeco (collectively
the "Walter Acquisition").
7. As a part of (a) the Initial Acquisitions and (b) the Walter Acquisition,
Amoco, Walter, CMS and Nuevo (and certain of their respective affiliates)
requested certain private letter rulings from the Internal Revenue
Service dealing, generally, with whether (i) the tax losses resulting
from the operations of APC's Congolese affiliates (and utilized by Amoco
to reduce its United States federal income tax liability) constituted
"dual consolidated losses" within the meaning of Section 1503(d) of the
Internal Revenue Code of 1986, as amended (the "Code") and Treasury
Regulation Section 1.1503-2(c)(5), and (ii) the various transactions
relating to the Initial Acquisitions and the Walter Acquisition
constituted "Triggering Events" within the meaning of Treasury Regulation
Section 1.1503-2. Pursuant to the requests for private letter rulings
described in the preceding sentence, Amoco, Walter, Nuevo, CMS and
certain former shareholders of Walter submitted forms of closing
agreements and protective closing agreements (collectively, the "Closing
Agreements") for execution by the Internal Revenue Service and the
appropriate taxpayers relating to the treatment of the Congolese losses
as a result of the Initial Acquisitions and the transactions entered into
pursuant to the Walter Acquisition, as well as certain agreements with
respect to the utilization and treatment of such losses in the future.
Although the Closing Agreements have not yet been entered into by the
Internal Revenue Service or the appropriate taxpayers, it is contemplated
that such agreements (subject to possible modification) will be entered
into in the near future.
8. The parties believe that it is appropriate for (a) CMS to indemnify
Nomeco, Walter, Walter Congo and Walter Holdings against certain
liabilities that such indemnified party may incur in the future under the
Amoco Tax Agreement, the CMS Tax Agreement, the Guarantee Agreement or
the Closing Agreements and for (b) Nomeco and Walter to indemnify CMS and
Enterprises against certain liabilities that CMS or Enterprises may incur
in the future under the CMS Tax Agreement or the Closing Agreements.
NOW, THEREFORE, in consideration of the premises and the respective covenants,
agreements and conditions contained herein, the parties hereby agree as
follows:
1. INDEMNITY
A. If, as a result of (1) any event that occurs prior to the effective
date of the initial consummation of the Nomeco initial public
offering (the "Effective Date"), (2) an act or omission of CMS or
any entity that controls, is controlled by, or is under
2
<PAGE> 3
common control with, CMS (other than Nomeco or any of its
subsidiaries) taken on or after the Effective Date, or (3) an act or
omission of Nomeco or any of its subsidiaries taken on or after the
Effective Date with Consent (as defined below), a liability arises
or is asserted to arise under the CMS Tax Agreement, the Amoco Tax
Agreement or the Guarantee Agreement, then CMS agrees to indemnify
and hold harmless Nomeco, Walter, Walter Holdings and/or Walter
Congo, as they may be, against (1) any and all amounts which they
are required to pay under the CMS Tax Agreement; (2) any amounts
which Walter, Walter Holdings or Walter Congo are required to pay
under the Amoco Tax Agreement not related to dual consolidated
losses of Nuevo, Nuevo Holdings or Nuevo Congo; (3) any amounts
which Nomeco is required to pay under the Guarantee Agreement not
related to dual consolidated losses of Nuevo, Nuevo Holdings or
Nuevo Congo; (4) any and all costs of enforcement of this indemnity
(including reasonable attorney fees); and (5) all reasonable
attorneys fees incurred in defending against any liability under the
Amoco Tax Agreement, the Guarantee Agreement or the CMS Tax
Agreement (including defending against any such liability by
defending against any claim for taxes asserted by the Internal
Revenue Service but not including defending against any liability
related to dual consolidated losses of Nuevo, Nuevo Holdings or
Nuevo Congo). For purposes of this Agreement, Consent means
approval of an action by the Board of Directors of Nomeco, which
approval includes the affirmative vote of a majority of those
members of the Board of Directors of Nomeco who are employees of CMS
or any of its subsidiaries (other than Nomeco or any of its
subsidiaries).
B. If as a result of (1) any event that occurs prior to the Effective
Date or (2) an act or omission of CMS or any entity that controls,
is controlled by, or is under common control with, CMS (other than
Nomeco or any of its subsidiaries) taken on or after the Effective
Date or (3) an act or omission of Nomeco or any of its subsidiaries
taken on or after the Effective Date with Consent, a liability
arises or is asserted to arise under any of the Closing Agreements,
then CMS agrees to indemnify and hold harmless Nomeco, Walter,
Walter Holdings and Walter Congo against (1) any and all amounts
payable by such indemnified party pursuant to the terms of the
Closing Agreements; (2) any and all costs of enforcement of this
indemnity (including reasonable attorneys fees); and (3) all
reasonable attorneys fees incurred in defending against any claim
for payments pursuant to the terms of the Closing Agreements.
C. If, as a result of an act or omission of Nomeco or any of its
subsidiaries taken on or after the Effective Date without Consent, a
liability arises or is asserted to arise under the CMS Tax
Agreement, then Nomeco agrees to indemnify and hold harmless CMS and
Enterprises against (1) any and all amounts which they are required
to pay under the CMS Tax Agreement; (2) all costs of enforcement of
this indemnity (including reasonable attorney fees); and (3) all
reasonable attorneys fees incurred in defending against any
liability under the CMS Tax Agreement (including defending against
any such liability by defending against any claim for taxes asserted
by the Internal Revenue Service).
D. If, as a result of an act or omission of Nomeco or any of its
subsidiaries taken on or after the Effective Date without Consent, a
liability arises or is asserted to arise
3
<PAGE> 4
under any of the Closing Agreements, then Nomeco agrees to indemnify
and hold harmless CMS and Enterprises against (1) taxes and all
amounts payable by CMS or Enterprises pursuant to the terms of the
Closing Agreements; (2) all costs of enforcement of this indemnity
(including reasonable attorneys fees); and (3) all reasonable
attorneys fees incurred in defending against any claim for payments
pursuant to the terms of the Closing Agreements.
E. All indemnity payments hereunder shall be made on an "after-tax
basis," and therefore shall be in an amount which, after subtraction
of the amount of all federal, state and foreign taxes payable by the
recipient thereof as a result of the receipt or accrual of such
payment (the "Gross-Up Amount"), and after taking into account the
reduction in federal, state and foreign taxes payable by the
recipient as a result of allowable deductions for the payment or
accrual of items included in the amount of the indemnity payable
hereunder, shall be sufficient as of the date of payment to
compensate the recipient for such indemnified event.
The determination of the Gross-Up Amount payable with respect to an
indemnified event shall be made by the recipient in the exercise of
its reasonable judgment. Such recipient shall furnish the payor
with a notice (the "Gross-Up Notice") setting forth the Gross-Up
Amount so payable and, in reasonable detail, the computation of such
amount. If reasonably requested by the payor in writing within 10
days of receipt of such Notice, such computation shall be subject to
verification at the expense of the payor by the firm of independent
certified public accountants which regularly reviews the recipient's
financial statements, provided, however that the cost of such
verification shall be at the cost of the recipient if such
accountants determine that the Gross-Up Amount payable is less than
90% of the amount set forth in the Gross-Up Notice. Such
verification which is made by such accountants in accordance
herewith shall be conclusive absent manifest error.
2. RIGHTS OF INDEMNIFYING PARTY
Upon the agreement to pay CMS or Enterprises in full any indemnified
amounts hereunder, the indemnified party agrees to assign to Nomeco any
and all rights which such party possesses as an indemnifying party (but
not as an indemnified party) under the CMS Tax Agreement or as a payor
under the Closing Agreements. To the extent that Amoco fails to
recognize the assignment of any such rights under the CMS Tax Agreement,
CMS agrees to exercise any such rights on behalf of, and as directed by,
Nomeco. Upon the agreement to pay Nomeco, Walter, Walter Holdings or
Walter Congo in full any indemnified amounts hereunder, the indemnified
party agrees to assign to CMS any and all rights which such party
possesses as an indemnifying party (but not as an indemnified party)
under the Amoco Tax Agreement, the CMS Tax Agreement or the Guarantee
Agreement (as the case may be) or as a payor under the Closing
Agreements.
3. NOTICES
A. CMS agrees to furnish to Nomeco promptly a copy of any notice
received or delivered by CMS or any of its Affiliates under the CMS
Tax Agreement or the Closing Agreements. Nomeco and Walter agree to
furnish to CMS promptly a
4
<PAGE> 5
copy of any notice received or delivered by Nomeco or Walter or any
of their Affiliates under the Amoco Tax Agreement, the CMS Tax
Agreement or the Closing Agreements. Nomeco and Walter further
agree to comply with the provisions of the first paragraph of
Article 7 A of the CMS Tax Agreement as if Nomeco and Walter were
referenced therein together with Amoco and CMS. CMS further agrees
to comply with the provisions of the first paragraph of Article 7 A
of the Amoco Tax Agreement as if CMS were referenced therein
together with the other parties thereto.
B. All notices shall be given in writing and shall be delivered (i) by
hand to the party for which intended, (ii) by registered or
certified mail, return receipt requested, postage prepaid, (iii) by
telex, or (iv) by facsimile, all of which addressed to the party for
which it is intended at the following respective addresses or such
other person or address previously furnished in writing by such
party in the manner provided herein:
To CMS or Enterprises: CMS Energy Corporation
c/o Corporate Tax Department
212 W. Michigan Avenue
Jackson, MI 49201
Telephone: (517) 788-2965
Facsimile: (517) 788-0433
Attention: Theodore J. Vogel
Director of Corporate
Taxes and
Tax Counsel
To Nomeco, Walter, CMS Nomeco Oil & Gas Co.
Walter Holdings or 1 Jackson Square
Walter Congo: Jackson, Michigan 49204
Telephone: (517)787-9037
Facsimile: (517)787-6360
Attention: Paul E. Geiger
C. The date of service of the notice shall be the date on which notice
is received.
4. CONTEST
A. Upon receipt by Nomeco of a written notice from CMS or Enterprises
of a claim that an amount may be payable by Nomeco to CMS or
Enterprises pursuant to Sections 1.C. or 1.D. hereof (hereafter
called a "Claim Notice"), Nomeco may request, in writing, that CMS
or Enterprises contest (or use its best efforts to cause Amoco or
Amoco's affiliates to contest) the adjustment which resulted in such
Claim Notice. CMS shall (and shall use its best efforts to cause
Amoco or Amoco's affiliates to) consult in good faith with Nomeco
with respect to the prosecution and possible settlement of such
contest, including the opportunity to be present at and participate
in all conferences with the Internal Revenue Service with respect to
the adjustment giving rise to the Claim Notice. In connection with
any such contest, CMS shall provide (and use its best efforts to
cause Amoco or Amoco's affiliates to provide) Nomeco with copies of
all documents, pleadings,
5
<PAGE> 6
briefs and other documents to be submitted to the Internal Revenue
Service or any other party sufficiently prior to such submission so
as to permit Nomeco and its counsel with an opportunity to comment
thereon and shall consider Nomeco's comments in good faith.
B. Neither CMS nor Enterprises is required to contest (or cause Amoco
or Amoco's affiliate to contest) such adjustment until CMS shall
have received from Nomeco, at Nomeco's expense, a written opinion of
independent tax counsel reasonably satisfactory to CMS to the effect
that there is substantial authority in law and fact for contesting
such adjustment and Nomeco shall have agreed to pay, and shall pay,
CMS on demand all reasonable out-of-pocket costs and expenses which
CMS may incur in connection with contesting such adjustment,
including without limitation, reasonable fees for attorneys and
accountants.
C. If Nomeco shall have requested CMS to contest (or cause Amoco or
Amoco's affiliates to contest) such adjustment as above provided in
subsections A or B and shall have duly complied with all the terms
of this Section, Nomeco's liabilities for indemnification under this
Agreement with respect to such adjustment (but not for the costs and
expenses incurred in connection with the contest of such adjustment)
shall be deferred until a Final Determination of the liability of
CMS or Enterprises has occurred. (For purposes of this Agreement,
the term "Final Determination" shall be (x) a decision, judgment,
decree or other order has become final (i.e., when all allowable
appeals conducted in accordance with this Section have been
exhausted by either party to the action) or in any case where
judicial review shall at the time be unavailable, a decision,
judgment, decree or other order of an administrative, official or
agency of competent jurisdiction, which decision, judgment, decree
or other order has become final (i.e., all administrative appeals
have been exhausted by either party to the action), (y) a closing
agreement entered into under Section 7121 of the Code or any other
settlement agreement entered into in connection with an
administrative or judicial proceeding, in accordance with this
Section 4 or (z) the expiration of the time for instituting a claim
for refund, or if such claim were filled, the expiration of the time
for instituting suit with respect thereto.) At such time, Nomeco
shall become obligated for the payment of any indemnification
hereunder resulting from the outcome of such contest and such amount
shall be paid within 30 days after such Final Determination.
Notwithstanding anything herein to the contrary, neither CMS nor
Enterprises (or their representatives or affiliates) shall enter
into a closing agreement under Section 7121 of the Code or any other
settlement agreement in connection with an administrative or
judicial proceeding with respect to any matter for which it is
entitled to be indemnified hereunder, unless it first obtains the
written consent of Nomeco to such closing agreement or settlement
agreement or expressly waives its right to receive indemnification
hereunder with respect to such matter. The failure of CMS or
Enterprises to obtain the consent described in the preceding
sentence shall constitute a waiver by each of CMS and Enterprises of
its right to receive indemnification hereunder with respect to such
matter.
D. Upon receipt by CMS of a written notice from Nomeco or its
subsidiaries of a claim that an amount may be payable by CMS to
Nomeco or its subsidiaries
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pursuant to Sections 1.A. or 1.B. hereof, CMS shall have rights
reciprocal to those of Nomeco described in paragraphs A., B. and C.
of this Section 4.
5. DEFINITIONS
All capitalized terms in this Agreement not otherwise defined herein
shall have the meanings as set forth in the CMS Tax Agreement.
6. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and inure to the benefit of the
parties and their respective permitted successors and assigns. No party
to this Agreement shall be relieved of its obligations hereunder, by
assignment or otherwise, without the prior written consent of the other
parties hereto.
7. GOVERNING LAW
This Agreement shall be governed by the laws of Michigan excluding any
choice of law provisions which would require the application of the law
of any other jurisdiction.
8. FURTHER ASSURANCES
The parties hereto hereby agree to execute all such further instruments
and documents, and to take all such other actions, as may be reasonable
and appropriate to further effectuate the intent of this Agreement.
9. HEADINGS
Headings in this Agreement are included herein for convenience of
reference only and shall not constitute a part of the Agreement for any
other purpose.
10. SEVERABILITY OF PROVISIONS, EFFECTIVENESS
Any provision of this Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the
extent of such prohibition or un-enforceability of such provision in any
other jurisdiction.
11. EXECUTION IN COUNTERPARTS
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
taken together shall constitute but one and the same instrument.
12. ENTIRE AGREEMENT
Except for the Amoco Tax Agreement, the CMS Tax Agreement, the Closing
Agreements, the Guarantee Agreement and the Agreement for the Allocation
of Income Tax Liabilities and Benefits dated as of January 1, 1994 among
CMS and its various
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direct and indirect subsidiaries, including Nomeco (the "Tax Allocation
Agreement"), this Agreement represents the entire understanding of the
parties with respect to the subject matter hereof. There are no other
terms, conditions, representations or warranties, express or implied,
written or oral, except as set forth herein or in the Amoco Tax
Agreement, the CMS Tax Agreement, the Closing Agreements, the Guarantee
Agreement and the Tax Allocation Agreement. In the event of a conflict
between the provisions of this Agreement and the Tax Allocation
Agreement, the provisions of this Agreement shall control. No
amendments, modifications or additions hereto shall be binding unless
executed in writing by all of the parties to this Agreement.
IN WITNESS WHEREOF, the parties have negotiated and duly executed this
agreement on the day and year first written above.
CMS ENERGY CORPORATION CMS NOMECO INTERNATIONAL, INC.
By:_____________________________________ By:________________________________
Name: Name:
Title: Title:
CMS ENTERPRISES COMPANY WALTER CONGO HOLDINGS, INC.
By:_____________________________________ By:________________________________
Name: Name:
Title: Title:
CMS NOMECO OIL & GAS CO. WALTER INTERNATIONAL CONGO,INC.
By:_____________________________________ By:________________________________
Name: Name:
Title: Title:
8
<PAGE> 1
EXHIBIT 10.17
AGREEMENT AND PLAN OF MERGER
AMONG
CMS ENERGY CORPORATION
CMS MERGING CORPORATION
TERRA ENERGY LTD.
MARTIN G. LAGINA
CRAIG J. TESTER
DR. THOMAS JAMES AND NANCY M. JAMES
DR. JAMES LOWELL AND MARY K. LOWELL
THE REVOCABLE LIVING TRUST OF DR. LEONARD J. SCHEROCK
UNDER AGREEMENT DATED MAY 1, 1990
ROBERT M. BOEVE
AND
WAYNE STERENBERG
_______________________________________________
Dated as of August 29, 1995
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I
THE MERGER....................... 2
Section 1.1. The Merger................................... 2
Section 1.2. Filing Certificate of Merger and
Effectiveness.............................. 2
Section 1.3. Effects of the Merger........................ 3
Section 1.4. Articles of Incorporation, By-Laws,
Directors and Officers..................... 3
Section 1.5. Further Assurances........................... 3
ARTICLE II
CONVERSION OF SHARES................... 3
Section 2.1. Conversion of Securities..................... 3
Section 2.2. Aggregate Consideration; Terra
Consolidated Net Working Capital;
Terra Debt................................. 5
Section 2.3. Exchange of Lagina Shares by Lagina.......... 6
Section 2.4. Payment of Cash and Delivery
of Certificates............................ 7
Section 2.5. Dividends and Distributions.................. 8
Section 2.6. Fractional Shares............................ 8
Section 2.7. Changes in CMS Common Stock.................. 9
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE STOCKHOLDERS AND THE OPTIONHOLDERS........ 9
Section 3.1. Organization of Terra........................ 9
Section 3.2. Subsidiaries and Investments................. 9
Section 3.3. Capitalization............................... 11
Section 3.4. Authority.................................... 13
Section 3.5. Financial Statements......................... 15
Section 3.6. Operations Since Balance Sheet Date.......... 15
Section 3.7. No Undisclosed Liabilities................... 17
Section 3.8. Taxes........................................ 18
Section 3.9. Condition of Tangible Assets................. 22
Section 3.10. Title to Property; Property Schedules........ 22
Section 3.11. Availability and Ownership of Assets......... 23
Section 3.12. Personal Property Leases..................... 23
Section 3.13. Accounts Receivable.......................... 23
Section 3.14. Intellectual Property........................ 24
Section 3.15. Owned Real Property.......................... 26
Section 3.16. Leased Real Property......................... 26
Section 3.17. Litigation................................... 27
Section 3.18. No Guaranties; Extensions of Credit.......... 27
Section 3.19. Compliance with Laws......................... 27
- ii -
<PAGE> 3
Page
Section 3.20. Permits...................................... 27
Section 3.21. Insurance.................................... 28
Section 3.22. Employee Benefit Plans....................... 29
Section 3.23. Employees and Agents and Related
Agreements................................. 31
Section 3.24. Employee Relations and Labor Matters......... 31
Section 3.25. Absence of Certain Business Practices........ 32
Section 3.26. Territorial Restrictions..................... 32
Section 3.27. Transactions with Certain Persons............ 32
Section 3.28. No Finder.................................... 33
Section 3.29. Environmental Matters........................ 33
Section 3.30. Contracts.................................... 35
Section 3.31. Additional Drilling Obligations.............. 38
Section 3.32. Gas Imbalances; Production Rights
and Obligations............................ 38
Section 3.33. Wells........................................ 38
Section 3.34. CMS Energy Common Shares;
Terra Common Stock......................... 39
Section 3.35. Disclosure................................... 39
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CMS ENERGY...... 40
Section 4.1. Organization of CMS Energy................... 40
Section 4.2. Authority.................................... 40
Section 4.3. Shares of CMS Common Stock................... 41
Section 4.4. Capitalization............................... 42
Section 4.5. Operations Since June 30, 1995............... 42
Section 4.6. Compliance with Laws......................... 43
Section 4.7. SEC Documents................................ 43
Section 4.8. No Finder.................................... 43
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SUB......... 43
Section 5.1. Organization and Standing.................... 44
Section 5.2. Capital Structure............................ 44
Section 5.3. Authority.................................... 44
ARTICLE VI
ACTIONS PRIOR TO THE EFFECTIVE DATE........... 44
Section 6.1. Issuance of CMS Common Shares................ 44
Section 6.2. Action by Stockholders of Terra.............. 45
Section 6.3. Subsequent Financial Statements.............. 45
Section 6.4. Investigation of Terra....................... 45
Section 6.5. Lawsuits, Proceedings, Etc................... 46
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Page
Section 6.6. Conduct of Business by Terra
Pending the Merger......................... 46
Section 6.7. Mutual Cooperation;
Reasonable Best Efforts.................... 49
Section 6.8. No Public Announcement....................... 50
Section 6.9. No Solicitation.............................. 50
Section 6.10. Antitrust Law Compliance..................... 50
Section 6.11. Termination of Lagina Proxies................ 51
Section 6.12. Exercise of Options.......................... 51
Section 6.13. New Office Building.......................... 51
ARTICLE VII
ADDITIONAL COVENANTS AND AGREEMENTS........... 52
Section 7.1. Tax-Free Nature; Tax Consequences............ 52
Section 7.2. Taxes........................................ 54
Section 7.3. Resale of CMS Common Shares.................. 59
Section 7.4. Access to Data............................... 59
Section 7.5. Terra Employees.............................. 59
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS
OF CMS ENERGY AND SUB................ 60
Section 8.1. No Misrepresentation or Breach
of Covenants and Warranties................ 60
Section 8.2. No Material Adverse Effect................... 61
Section 8.3. Opinions of Counsel for Terra, the
Stockholders and the Optionholders......... 61
Section 8.4. No Injunctions or Restraints................. 61
Section 8.5. Necessary Governmental Approvals............. 61
Section 8.6. Necessary Consents........................... 61
Section 8.7. Effectiveness of Registration Statement...... 62
Section 8.8. Listing of CMS Common Shares................. 62
Section 8.9. Stockholder Action........................... 62
Section 8.10. Dissenting Stockholders...................... 62
Section 8.11. Due Diligence................................ 62
Section 8.12. Resignations of Terra Directors
and Officers............................... 62
Section 8.13. Options to Acquire Terra Common Stock........ 63
Section 8.14. CMS NOMECO Lenders' Consent.................. 63
Section 8.15. Payments for Purchased Assets................ 63
Section 8.16. Guarantee.................................... 63
Section 8.17. Consulting Agreement......................... 63
Section 8.18. Employment Agreements........................ 63
Section 8.19. 1995 Antrim Program.......................... 63
Section 8.20. Minimum Aggregate Consideration.............. 63
Section 8.21. Insurance.................................... 63
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Page
Section 8.22. Gas Delivery................................. 64
Section 8.23. Covenant Not to Compete...................... 64
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS
OF TERRA AND THE STOCKHOLDERS............. 64
Section 9.1. No Misrepresentation or Breach
of Covenants and Warranties................ 64
Section 9.2. No Material Adverse Effect................... 65
Section 9.3. No Injunctions or Restraints................. 65
Section 9.4. Opinions of Counsel for CMS Energy
and Sub and Counsel for the Stockholders... 65
Section 9.5. Necessary Governmental Approvals............. 65
Section 9.6. Effectiveness of Registration Statement...... 65
Section 9.7. Listing of CMS Common Shares................. 66
Section 9.8. Stockholder Action........................... 66
Section 9.9. Necessary Consents........................... 66
Section 9.10. Minimum Aggregate Consideration.............. 66
Section 9.11. Covenant Not to Compete...................... 66
ARTICLE X
INDEMNIFICATION; SURVIVAL............... 66
Section 10.1. Indemnification by the Stockholders
and Optionholders.......................... 66
Section 10.2. Indemnification by CMS Energy
and the Surviving Corporation.............. 68
Section 10.3. Notice of Claims............................. 68
Section 10.4. Third Party Claims........................... 69
Section 10.5. Exclusive Remedy............................. 70
Section 10.6. Survival of Obligations...................... 70
Section 10.7. Update of the Representations
and Warranties............................. 70
Section 10.8. Adjustment to Consideration.................. 72
ARTICLE XI
TERMINATION....................... 72
Section 11.1. Termination.................................. 72
Section 11.2. Effect of Termination........................ 72
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Page
ARTICLE XII
OTHER PROVISIONS.................... 73
Section 12.1. Confidential Nature of Information........... 73
Section 12.2. Fees and Expenses............................ 73
Section 12.3. Notices...................................... 73
Section 12.4. Definitions.................................. 74
Section 12.5. Partial Invalidity........................... 80
Section 12.6. Successors and Assigns....................... 81
Section 12.7. Execution in Counterparts.................... 81
Section 12.8. Titles and Headings.......................... 81
Section 12.9. Schedules and Exhibits....................... 81
Section 12.10. Entire Agreement; Amendments and
Waivers; Assignment........................ 81
Section 12.11. Independent Investigation and
Scope of Representations................... 82
Section 12.12. Governing Law; Arbitration................... 82
Section 12.13. No Third-Party Beneficiaries................. 83
Section 12.14. Interpretation............................... 83
EXHIBITS
Exhibit A Certificate of Merger
Exhibit B Purchased Assets transfer documents
Exhibit C Section 8.1 Certificates
Exhibit D Form of Opinions of Mika, Meyers, Beckett & Jones, P.L.C.
Exhibit E Form of Opinion on behalf of Non-Management Stockholders
Exhibit F Guarantee of Net Receipts relating to
Gas Purchase Agreements and Gas Sale Agreements
Exhibit G Consulting Agreement with Newco
Exhibit H Employment Agreement of Tester
Exhibit I Employment Agreement of Sterenberg
Exhibit J Covenant Not to Compete
Exhibit K Section 9.1 Certificates
Exhibit L Form of Opinion of Denise Sturdy, Esq.
Exhibit M Form of Opinion re: tax matters
SCHEDULES
Schedule 3.2 Subsidiaries, Capital Stock, State of Organization and
Jurisdiction; Partnerships
Schedule 3.3(a) Owners of Terra Common Stock and Options
Schedule 3.3(b) Other Restrictions on Terra Common Stock
Schedule 3.3(c) Liens on Shares of Capital Stock
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<PAGE> 7
Schedule 3.3(d) Liens on Partnerships, Joint Ventures and Other Interests
Schedule 3.4(a) Agreements Requiring Consents
Schedule 3.5 Adjustments to Balance Sheet and Statement of Income as of
December 31, 1994
Schedule 3.6(a) Material Adverse Changes Since December 31, 1994
Schedule 3.6(b) Actions Not in the Ordinary Course of Business Since
December 31, 1994
Schedule 3.7 Undisclosed Liabilities since December 31, 1994
Schedule 3.8(a) Tax Matters
Schedule 3.9 Condition of Assets
Schedule 3.10(a) Title to Property
Schedule 3.10(b) Liens on Material Assets
Schedule 3.10(c) Costs and Expenses
Schedule 3.12 Personal Property Leases
Schedule 3.14 Intellectual Property
Schedule 3.15 Owned Real Property
Schedule 3.16 Leased Real Property
Schedule 3.17 Litigation; Disputes
Schedule 3.18 Guaranties
Schedule 3.19 Compliance with Laws
Schedule 3.21 Insurance
Schedule 3.22 Employee Plans
Schedule 3.23(a) Employment/Consulting Agreements/Non-Compete Agreements Not
Terminable on 30 Days Notice, Deferred Compensation
Schedule 3.23(b) Consultants
Schedule 3.24(b) Collective Bargaining Agreements
Schedule 3.26 Third Party Restrictions on Conduct of Business
Schedule 3.27 Transactions with Affiliates, Stockholders, Officers or
Directors
Schedule 3.29 Environmental Matters
Schedule 3.30 Terra Agreements
Schedule 3.31 Additional Drilling Obligations
Schedule 3.32 Gas Imbalances; Take or Pay Obligations
Schedule 12.4(e) Knowledge of Terra
Schedule 12.4(i) Property Schedules
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SCHEDULE OF DEFINED TERMS
TERM DEFINITION SECTION
---- ------------------
AAA 12.12(b)
Acquisition Expenses 12.2
Acquisition Proposal 6.9
Affiliate 12.4(a)
After-Tax Basis 7.2(e)
Aggregate Consideration 2.2(a)
Agreement Preamble
Applicable Environmental Laws 3.29(c)
Associate 12.4(b)
Average Price 2.1(c)
Balance Sheet 3.5
Balance Sheet Date 3.5
BCA 1.1
Boeve Preamble
CERCLA 3.29(a)
CERCLIS 3.29(a)
Certificates 2.4
CMS Common Shares 2.1(c), 2.7
CMS Common Stock First Recital
CMS Energy Preamble
CMS Energy SEC Documents 4.7
CMS NOMECO 8.14
Code Sixth Recital
Company Group 3.8(a)
Confidentiality Agreement 12.10
Constituent Corporations Preamble
Conversion Number 2.1(c)
Covenant Not to Compete 8.23
Daily Prices 2.1(c)
Dispute 12.12(b)
Effective Date 1.2
Effective Time 1.2
Enterprises 8.14
ERISA 3.22(a)
ERISA Affiliate 3.22(a)
Exchange Act 4.7
Exchange Closing 2.3
Exchange Closing Time 2.3
Expense 10.1
GAAP 3.5
Good and Defensible Title 12.4(c)
Gordon Notes 2.2
Guardian 3.30(d)
Hazardous Substance 3.29(c)
HSR Act 3.4(a)
Indemnified Tax Items 7.2(c)
Interests 12.4(d)
James Preamble
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<PAGE> 9
Knowledge of Terra 12.4(e)
Lagina Preamble
Lagina Proxies 6.11
Lagina Shares 2.3
Leased Real Property 3.16
Leases 3.30(a)
Liens 3.10(b)
Loss 10.1
Lowell Preamble
Management Stockholders Preamble
Material Adverse Change or Effect 12.4(f)
Merger Fifth Recital
Non-Wholly Owned Subsidiaries 3.2(b)
Newco 6.6(b)
New Office 6.13
1995 Antrim Program 8.19
Non-Management Stockholders Preamble
NORM 3.7
NPL 3.29(a)
NYSE 2.1(c)
Operating Agreements 3.2(a)
Optionholders Preamble
Options 3.3(a)
Owned Real Property 3.15
Participants 3.22(a)
Partnership Agreements 3.2(b)
Partnerships 3.2(b)
Permits 3.20
Permitted Encumbrances 12.4(g)
Permitted Transferee 3.3(b)
Person 12.4(h)
Plan 3.22(a)
PPC 3.7
Property 3.29(b)
Property Schedules 12.4(i)
Prospectus 6.1
Proved Developed Interests 12.4(d)(i)
Proved Undeveloped Interests 12.4(d)(ii)
Purchased Assets 6.6(b)
Registration Statement 6.1
Release 3.29(c)
Remedial Action 3.29(c)
Scherock Preamble
SEC 4.2
Securities Act 4.2
Sterenberg Preamble
Statement of Income 3.5
Stockholders Preamble
Sub Preamble
Subsidiaries 3.2(a)
Surviving Corporation 1.1
Tax Indemnitees 7.2(a)
Tax Partnership 3.8(e)
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<PAGE> 10
Tax Return 3.8(d)
Tax Sharing Arrangement 3.8(d)
Taxes 3.8(d)
Terra Preamble
Terra Agreements 3.30(b)
Terra Business Fourth Recital
Terra Common Stock Third Recital
Terra Consolidated Net
Working Capital 2.2(b)
Terra Debt 2.2(c)
Tester Preamble
Title Defect 12.4(j)
Title IV Plan 3.22(b)
Unaudited Balance Sheet 3.5
Unaudited Balance Sheet Date 3.5
Unaudited Statement of Income 3.5
Unproved Interests 12.4(d)(iii)
Wells 3.33(b)
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<PAGE> 11
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of August 29, 1995 (this
"Agreement"), among CMS Energy Corporation, a Michigan corporation ("CMS
Energy"), CMS Merging Corporation, a Michigan corporation and a wholly-owned
Subsidiary of CMS Energy ("Sub"), Terra Energy Ltd., a Michigan corporation
("Terra" and, together with Sub, the "Constituent Corporations"), Martin G.
Lagina ("Lagina"), Craig J. Tester ("Tester" and, together with Lagina and each
Optionholder (as hereinafter defined) from and after acquisition by such
Optionholder of any shares of Terra Common Stock (as hereinafter defined), each
individually a "Management Stockholder" and collectively the "Management
Stockholders"), Dr. Thomas James and Nancy M. James (collectively, "James"),
Dr. James Lowell and Mary K. Lowell (collectively, "Lowell"), The Revocable
Living Trust of Dr. Leonard J. Scherock under Agreement dated May 1, 1990,
acting by and through its sole trustee, Dr. Leonard J. Scherock ("Scherock"
and, together with James and Lowell, each individually a "Non-Management
Stockholder" and collectively the "Non-Management Stockholders" and, together
with Lagina, Tester, James, Lowell and each Optionholder from and after
acquisition by such Optionholder of any shares of Terra Common Stock, each
individually a "Stockholder" and collectively the "Stockholders"), Robert M.
Boeve ("Boeve") and Wayne Sterenberg ("Sterenberg", and, together with Boeve,
each individually an "Optionholder" and collectively the "Optionholders").
Unless otherwise indicated, capitalized terms used herein are used as defined
in Section 12.4 hereof.
W I T N E S S E T H :
WHEREAS, CMS Energy is a Michigan corporation having an authorized capital
of (i) 250,000,000 shares of common stock, $.01 par value (the "CMS Common
Stock"), of which, as of June 30, 1995, 88,174,182 shares were issued and
outstanding, (ii) 10,000,000 shares of preferred stock, $.01 par value, none of
which, on the date hereof, is issued and outstanding, and (iii) 60,000,000
shares of Class G common stock, no par value, of which, as of August 15, 1995,
7,520,000 shares were issued and outstanding;
WHEREAS, Sub is a Michigan corporation having an authorized capital of
60,000 shares of common stock, no par value, of which, on the date hereof, 10
shares are issued and outstanding;
WHEREAS, Terra is a Michigan corporation having an authorized capital of
20,000,000 shares of common stock, no par value (the "Terra Common Stock"), of
which, on the date hereof, 9,519,500 shares are issued and outstanding;
<PAGE> 12
WHEREAS, Terra, itself and through its Subsidiaries, is in the business of
natural gas and oil exploration, development and production and activities
related thereto (hereinafter generally referred to as the "Terra Business");
WHEREAS, the respective Boards of Directors of CMS Energy and the
Constituent Corporations have approved the merger (the "Merger") of Sub into
Terra pursuant to the terms and conditions of this Agreement and the related
transactions contemplated by this Agreement, the Board of Directors of Terra
has directed that this Agreement be submitted to its stockholders for adoption,
and CMS Energy as the sole stockholder of Sub has adopted this Agreement;
WHEREAS, the parties hereto intend the Merger to constitute a reorganization
described in section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code");
WHEREAS, CMS Energy, Sub, Terra, the Stockholders and the Optionholders
desire to make certain representations, warranties and agreements in connection
with the Merger and the related transactions contemplated by this Agreement and
also to prescribe various conditions to the Merger and such transactions;
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein contained, the parties hereto agree as
follows:
ARTICLE I
THE MERGER
SECTION 1.1. THE MERGER. Upon the terms and subject to the conditions
contained herein, and in accordance with the provisions of this Agreement and
the Michigan Business Corporation Act (the "BCA"), at the Effective Time (as
hereinafter defined), Sub shall be merged with and into Terra pursuant to the
Certificate of Merger in substantially the form of Exhibit A hereto or in such
other form as the parties may agree to accomplish the Merger. As the
corporation surviving in the Merger (the "Surviving Corporation"), Terra shall
continue unaffected and unimpaired by the Merger to exist under and be governed
by the laws of the State of Michigan. Upon the effectiveness of the Merger,
the separate existence of Sub shall cease except to the extent provided by law
in the case of a corporation after its merger into another corporation.
SECTION 1.2. FILING CERTIFICATE OF MERGER AND EFFECTIVENESS. Upon the
satisfaction or waiver of the conditions to the obligations of each of the
parties contained herein, the Certificate of Merger, executed in accordance
with the laws of the State of Michigan, shall be filed in the office of the
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<PAGE> 13
Corporation and Securities Bureau, Department of Commerce, of the State of
Michigan. The Merger shall become effective upon such filing as provided in
the BCA. The date and the time on such date of effectiveness of the Merger are
herein called, respectively, the "Effective Date" and the "Effective Time."
SECTION 1.3. EFFECTS OF THE MERGER. The Merger shall have the effects set
forth in Section 724 of the BCA.
SECTION 1.4. ARTICLES OF INCORPORATION, BY-LAWS, DIRECTORS AND OFFICERS.
The Articles of Incorporation and By-Laws of Terra, in each case as they may be
amended, as in effect immediately prior to the Effective Time, shall continue
in full force and effect as the Articles of Incorporation and By-Laws of the
Surviving Corporation. The initial directors of the Surviving Corporation
shall consist of the directors of Sub immediately prior to the Effective Time,
who shall serve until their respective successors are duly elected and
qualified. The initial officers of the Surviving Corporation shall consist of
the officers of Sub immediately prior to the Effective Time, who shall serve
until their respective successors are duly elected and qualified.
SECTION 1.5. FURTHER ASSURANCES. From time to time after the Effective
Time, the officers and directors of the Surviving Corporation shall be
authorized to execute and deliver, in the name and on behalf of Terra or
otherwise, such deeds and other instruments and to take or cause to be taken
such further or other action as shall be necessary or desirable in order to
vest or perfect in or to confirm, of record or otherwise, in the Surviving
Corporation title to, and possession of, all of the property, rights,
privileges, powers, immunities and franchises of Terra (subject, however, to
the provisions of Section 6.6(b) hereof) and otherwise carry out the purposes
of this Agreement.
ARTICLE II
CONVERSION OF SHARES
SECTION 2.1. CONVERSION OF SECURITIES. As of the Effective Time, by virtue
of the Merger and without any action on the part of any stockholder of Terra or
Sub:
(a) Each share of common stock of Sub issued and outstanding immediately
prior to the Effective Time shall be converted into and become one fully paid
and nonassessable share of common stock, no par value, of the Surviving
Corporation.
(b) All shares of Terra Common Stock that immediately prior to the
Effective Time are held in the treasury of Terra or by any wholly-owned
Subsidiary of
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<PAGE> 14
Terra or by CMS Energy (including the Lagina Shares, as hereinafter defined)
shall be canceled and no capital stock of CMS Energy or other consideration
shall be delivered in exchange therefor.
(c) Subject to the provisions of Sections 2.6 and 2.7 hereof, each share of
Terra Common Stock issued and outstanding immediately prior to the Effective
Time (exclusive of shares of Terra Common Stock referred to in Section
2.1(b)) shall be converted into the number (the "Conversion Number") of
shares of CMS Common Stock (such shares of CMS Common Stock, together with
shares of CMS Common Stock issuable pursuant to Section 2.3 hereof and the
Covenant Not to Compete, are collectively referred to herein as "CMS Common
Shares"), rounded to the nearest millionth of a share, equal to the quotient
of (i) the quotient of (A) $46,474,772 and (B) the aggregate number of shares
of Terra Common Stock issued and outstanding immediately prior to the
Effective Time (exclusive of shares of Terra Common Stock referred to in
Section 2.1(b)) which the parties understand shall be 11,065,422 shares of
Terra Common Stock; and (ii) the average of the per share Daily Prices (as
hereinafter defined) on the New York Stock Exchange, Inc. (the "NYSE") of CMS
Common Stock (the "Average Price") as reported in the New York Stock Exchange
Composite Transactions (on the Transaction Reporting System operated by the
Consolidated Tape Association) during the ten (10) consecutive trading days
ending on the fifth trading day prior to the Effective Time of the Merger;
provided, however, that in the event the foregoing would result in an Average
Price greater than $24.625, then the Average Price shall be deemed to be
$24.625; and provided, further, that in the event the foregoing would result
in an Average Price less than $20.625, then the Average Price shall be deemed
to be $20.625.
All such shares of Terra Common Stock, when so converted, shall no longer be
outstanding and shall automatically be canceled and retired and each holder
of a Certificate (as hereinafter defined) theretofore representing any such
shares shall cease to have any rights with respect thereto, except the right
to receive, upon surrender of such Certificate in accordance with Section
2.4, shares of CMS Common Stock and cash in lieu of fractional shares as
contemplated by Section 2.6. As used herein, the term Daily Price shall mean
the last sale price, or the closing bid price if no sale occurred, on the day
in question.
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<PAGE> 15
(d) Each Option outstanding immediately prior to the Effective Time and not
theretofore exercised or canceled shall no longer be outstanding and shall
automatically be canceled.
SECTION 2.2. AGGREGATE CONSIDERATION; TERRA CONSOLIDATED NET WORKING
CAPITAL; TERRA DEBT. (a) Aggregate Consideration shall mean the difference
between (A) the sum of (I) $59,274,000, (II) an amount equal to Terra
Consolidated Net Working Capital (as hereinafter defined), which is estimated
to be $9,183,000 and (III) an amount equal to the revenue received by Terra or
its Subsidiaries for its account attributable to the Purchased Assets (as
hereinafter defined) between January 1, 1995 through the Effective Date, which
amount is estimated to be $250,000; and (B) the sum of (I) Terra Debt, (II) an
amount equal to the royalty and Tax obligations of Terra or its affiliates
incurred on or after January 1, 1995 relating to the income from the Purchased
Assets, which amount is estimated to be $100,000, (III) all costs and expenses
in excess of $100,000 borne or incurred by Terra or its affiliates after
December 31, 1994 (including, without limitation, fees and disbursements of its
counsel or counsel for the Stockholders or Optionholders, accountants and other
financial, legal, accounting or other advisers, but excluding the cost of the
audit of Terra's 1994 consolidated financial statements) in connection with the
negotiation, execution, delivery or performance of this Agreement and each of
the other documents and agreements executed in connection with or contemplated
by this Agreement or the consummation of the transactions contemplated hereby,
which amount is estimated to be $200,000, (IV) the amount, if any, by which the
bonuses paid pursuant to Section 6.6(a)(xiii)(D) hereof exceed the aggregate
amount received by Terra upon exercise of the Options (as hereinafter defined)
prior to the Effective Time as contemplated by Section 6.12 hereof, (V) an
amount equal to the costs and expenses (net of any Tax benefit not taken into
account in calculating the amount referred to in clause (B)(II) above), and any
capital costs, paid by Terra or its Subsidiaries (including amounts paid on
mortgages on Purchased Assets) in connection with acquisition or operation of
the Purchased Assets between January 1, 1995 through the Effective Date, which
are estimated to be $475,000, (VI) fifty percent (50%) of the deferred income
tax account of Terra and its Subsidiaries as shown on the Balance Sheet, which
was $878,000, (VII) the amount paid by Terra or its Subsidiaries for the
bonuses referred to in Section 6.6(a)(xiii)(B) and (C);
(b) Terra Consolidated Net Working Capital shall mean the consolidated net
working capital of Terra as of December 31, 1994 determined in accordance with
GAAP (as hereinafter defined) except that (i) current maturities of long-term
debt relating to periods after January 1, 1995 that arise from gas compressor
financing transactions, which was $736,129, shall be added back, (ii) the
current portion of the Gordon Foods Notes (the "Gordon
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<PAGE> 16
Notes"), which current portion is equal to $147,946 shall be deleted as an
asset, (iii) the current portion of the liability to Boeve relating to his 10%
interest in the Gordon Notes shall be deleted as a liability, (iv) any amounts
representing principal or interest payable to Terra on promissory notes or
other indebtedness secured by workover rigs shall not be included in
calculating Terra Consolidated Net Working Capital, (v) any amounts
representing payments or receivables for overhead costs to be incurred in 1995
or thereafter shall be deleted as an asset except to the extent that there is
included a corresponding amount as a liability for prepaid revenues and (vi)
any amounts representing payments or receivables for drilling costs to be
incurred in 1995 or thereafter shall be deleted as an asset except to the
extent that there is included a corresponding amount as a liability for such
costs.
(c) Terra Debt shall mean the actual outstanding principal and all accrued
but unpaid interest payable by Terra or any of its Subsidiaries under any
long-term debt (excluding the current portion to the extent included in Terra
Consolidated Net Working Capital) as of December 31, 1994, excluding, however,
(i) the non-current portion of debt arising from gas compressor financing
transactions as of December 31, 1994, which was $1,452,845, (ii) project
finance debt of Terra incurred on or prior to December 31, 1994 of up to $5
million relating to the construction of the Vienna CO2 plant, but only to the
extent that MCN has a firm commitment to purchase such plant upon its
completion in consideration, among other things, of the discharge of such
indebtedness, which was zero, (iii) the non-current portion of debt of Terra to
Boeve relating to Boeve's 10% interest in the Gordon Notes, (iv) capitalized
auto lease debt of Terra and (v) debt of Terra or any of its Subsidiaries to be
assumed by the purchasers of the Purchased Assets pursuant to the documents
referred to in Section 6.6(b).
SECTION 2.3 EXCHANGE OF LAGINA SHARES BY LAGINA. (a) Subject to the terms
and conditions set forth in this Agreement, Lagina agrees to exchange, assign,
transfer and deliver to CMS Energy, on the Effective Date and at a time which
is immediately prior to the time which is immediately prior to the Effective
Time (the "Exchange Closing Time"), and CMS Energy agrees to acquire from
Lagina at such time, an aggregate of one million (1,000,000) shares of Terra
Common Stock (the "Lagina Shares") currently owned by Lagina.
(b) In consideration of the exchange by Lagina of the Lagina Shares and
subject to the satisfaction or waiver of the closing conditions described in
Article VIII below, CMS Energy shall assign, transfer and deliver to Lagina, in
exchange for and upon delivery of the Lagina Shares, the number of shares of
CMS Common Stock, rounded to the nearest thousandth of a share, determined by
dividing (i) $10,632,168 by (ii) the Average Price, provided that CMS Energy
shall satisfy such obligation by
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<PAGE> 17
delivering cash in lieu of fractional shares or interests pursuant to Section
2.6, by check or wire transfer of immediately available funds to the account or
accounts designated by Lagina in a notice to CMS Energy, and one or more
certificates representing the aggregate number of whole CMS Common Shares into
which the Lagina Shares shall have been exchanged pursuant to this Section 2.3.
(c) At the Exchange Closing (as hereinafter defined), subject to the
satisfaction or waiver of the closing conditions described in Article IX below,
Lagina will deliver to CMS Energy the certificates representing the Lagina
Shares, duly endorsed in blank, or accompanied by duly authorized and executed
stock powers, such transfer representing full transfer of all of Lagina's
right, title and interest in the Lagina Shares, free and clear of any
encumbrances, Liens, or intervening interests of any Person.
(d) Subject to the terms and conditions hereof, the consummation of the
transactions contemplated by this Section 2.3 (the "Exchange Closing") shall
take place at the Exchange Closing Time on the Effective Date.
SECTION 2.4. PAYMENT OF CASH AND DELIVERY OF CERTIFICATES. (a) At or
after the Effective Time, each holder, except for any holder referred to in
Section 2.1(b), of a certificate or certificates representing issued and
outstanding shares of record of Terra Common Stock immediately prior to the
Effective Time (collectively, the "Certificates") may surrender such
Certificate or Certificates to CMS Energy, and CMS Energy shall deliver or
cause to be delivered, in exchange therefor, (i) cash in lieu of fractional
shares or interests pursuant to Section 2.6, by check or wire transfer of
immediately available funds to the account or accounts designated by such
holder in a notice to CMS Energy, and (ii) one or more certificates
representing the aggregate number of whole CMS Common Shares into which the
Terra Common Stock represented by the Certificate or Certificates so
surrendered shall have been converted pursuant to Section 2.1.
(b) Any certificates representing CMS Common Shares or cash in lieu of
fractional shares deliverable pursuant to Section 2.1(c) shall be deliverable
upon the surrender to CMS Energy of a Certificate or Certificates representing
issued and outstanding shares of record of Terra Common Stock immediately prior
to the Effective Time. Until so surrendered, each outstanding certificate
representing issued and outstanding shares of record of Terra Common Stock
immediately prior to the Effective Time shall not be transferable on the books
of the Surviving Corporation or CMS Energy, but shall be deemed for all
corporate purposes, subject to Section 2.5, to evidence the right to receive
such cash and ownership of the number of whole CMS Common Shares, as the case
may be, into which the shares of Terra Common
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Stock which immediately prior to the Effective Time were represented thereby
shall have been converted pursuant to Section 2.1. At the close of business on
the business day next preceding the Effective Date, the stock transfer books of
Terra shall be closed and, except with respect to the exercise of the Options
and the exchange of the Lagina Shares as contemplated by Section 2.3 hereof, no
transfer of Terra Common Stock shall thereafter be made or consummated.
SECTION 2.5. DIVIDENDS AND DISTRIBUTIONS. Any dividend or other
distribution paid in respect of CMS Common Stock to holders of record on or
after the Effective Date and otherwise payable to the holder of an outstanding
Certificate which, immediately prior to the Effective Time, represented issued
and outstanding shares of Terra Common Stock until the surrender of such
Certificate and the issuance of a certificate or certificates for CMS Common
Shares in respect thereof, shall be retained by CMS Energy pending such
surrender, and no such dividend or other distribution payable in respect of CMS
Common Stock shall be paid to the holder of such Certificate representing Terra
Common Stock until such Certificate shall have been so surrendered to CMS
Energy and a certificate or certificates for CMS Common Shares shall have been
so issued. Upon surrender of each such Certificate and issuance in exchange
therefor of CMS Common Shares, there shall be paid by CMS Energy to or at the
direction of the holder of the certificate for such CMS Common Shares the
amount of all dividends and distributions which became payable to holders of
record on or after the Effective Date in respect of the number of whole CMS
Common Shares represented by the certificate or certificates so issued. In no
event shall any holder of any Certificate which, immediately prior to the
Effective Time, represented issued and outstanding shares of Terra Common Stock
be entitled to receive interest on any of the funds to be received in the
Merger, or the consideration to be paid pursuant to the Covenant Not to Compete
or on any such dividend or other distribution.
SECTION 2.6. FRACTIONAL SHARES. No certificates for fractions of shares of
CMS Common Stock and no scrip or other certificates evidencing fractional
interests in such shares shall be issued pursuant to Section 2.1, 2.3 or the
Covenant Not to Compete. If the exchange or conversion of a person's aggregate
holdings of Terra Common Stock or other right to obtain CMS Common Shares at
any time results in a fractional share of CMS Common Stock or interest therein,
such person shall, in lieu thereof, be paid in cash in an amount equal to the
value of such fractional share or interest based on the Average Price of CMS
Common Stock. Any person otherwise entitled to a fractional share or interest
shall not be entitled by reason thereof to any voting, dividend or other rights
as a stockholder of CMS Energy.
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SECTION 2.7. CHANGES IN CMS COMMON STOCK. In the event that, during the
period of ten (10) trading days which is used to determine the Average Price,
or subsequent to such period but prior to the Effective Time, there has
occurred the record date of any reclassification, stock split, stock dividend
or similar change in respect of the CMS Common Stock, then appropriate
adjustment shall be made in the number of shares of CMS Common Stock and/or
kind of securities issued as CMS Common Shares in order to provide holders of
Terra Common Stock or of any other right to obtain CMS Common Shares pursuant
to the transactions contemplated by this Agreement with the same number of
shares of CMS Common Stock and/or securities that they would have received
after such reclassification, stock split, stock dividend or similar change if
the Effective Time had occurred immediately prior to the record date of such
reclassification, stock split, stock dividend or similar change (and all
references herein to the "CMS Common Shares" shall refer to such adjusted
number and/or kind of securities).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
AND THE OPTIONHOLDERS
As an inducement to CMS Energy and Sub to enter into this Agreement and to
consummate the transactions contemplated hereby, the Management Stockholders
and Optionholders jointly and severally (except as otherwise provided below)
represent and warrant to CMS Energy and Sub and agree, and the Non-Management
Stockholders severally and not jointly represent and warrant to CMS Energy and
Sub and agree solely with respect to Section 3.3(b) (first sentence), Section
3.4(b) and Section 3.34 as follows:
SECTION 3.1. ORGANIZATION OF TERRA. Terra is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Michigan. Terra is duly qualified to transact business as a foreign
corporation and is in good standing in each of the jurisdictions in which the
ownership or leasing of the properties used in its business or the conduct of
its business requires such qualification, other than in such jurisdictions
where the failure to be so qualified and in good standing would not have a
Material Adverse Effect. Terra has full corporate power and authority
necessary to own or lease and operate its properties and to carry on its
business as now conducted. Terra has delivered to CMS Energy complete and
correct copies of the articles of incorporation and by-laws of Terra, in each
case as amended and in effect on the date hereof.
SECTION 3.2. SUBSIDIARIES AND INVESTMENTS. (a) Terra owns beneficially
and of record, or indirectly, all of the issued and outstanding shares of
capital stock of each of the
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corporations listed under the heading "Subsidiaries" on Schedule 3.2 (each such
corporation, together with any partnership or limited liability company
(whether or not a Tax Partnership, but excluding any entity created by any
Operating Agreement, as hereinafter defined) of which Terra or any such
corporation is a general or managing partner or member or of which Terra or any
such corporation owns at least 50% of the partnership or membership interest,
each of which is identified in Schedule 3.2, but excluding Cronus Development
Corp., being herein collectively referred to as "Subsidiaries"). Except as
disclosed on Schedule 3.2, and excluding oil and gas joint operating agreements
or other agreements providing for the joint acquisition, exploration,
development or production of oil and gas properties and all amendments thereto
to which Terra or any Subsidiary is a party (the "Operating Agreements"), Terra
does not, directly or indirectly, (i) own, of record or beneficially, any
outstanding securities or other interest in any corporation, limited liability
company, partnership, joint venture or other entity (other than investments in
publicly traded securities, cash equivalents and short-term investment grade
debt) or (ii) control any corporation, limited liability company, partnership,
joint venture or other entity.
(b) Except as disclosed on Schedule 3.2, each of the Subsidiaries is duly
organized, validly existing and, in the case of corporate Subsidiaries, in good
standing, under the laws of its jurisdiction of organization, and each has full
corporate, partnership or limited liability company power and authority, as the
case may be, necessary to own or lease and operate its properties as now
conducted. Each of the Subsidiaries is duly qualified to transact business as
a foreign corporation, foreign partnership or foreign limited liability
company, as the case may be, and is in good standing in each of the
jurisdictions in which conduct of its business requires such qualification,
other than in such jurisdictions where the failure to be so qualified and in
good standing would not have a Material Adverse Effect. Schedule 3.2 contains
a list of each jurisdiction in which each Subsidiary is duly qualified to
transact business. Schedule 3.2 sets forth the authorized, and issued and
outstanding shares of, capital stock of each corporate Subsidiary and a
complete and accurate list of each corporation in which Terra directly or
indirectly owns at least 20% but less than 100% of the issued and outstanding
shares of capital stock (the "Non-Wholly Owned Subsidiaries") and a complete
and accurate list of each partnership or limited liability company (whether or
not a Tax Partnership, but excluding any entity created by any Operating
Agreement) of which Terra or any Subsidiary is or at any time has been a
managing, general or limited partner or a member or has served in a similar
capacity (the "Partnerships"), together with the state and date of organization
of each Partnership, the name and address of each general or limited partner or
member of each Partnership as they appear in the records of Terra or such
subsidiary, and the percentage interest of Terra or any of its
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Subsidiaries in each Partnership. Terra has delivered to CMS Energy true and
complete copies of each partnership agreement, limited liability company
agreement, regulations or similar governing instrument and all amendments
thereto pursuant to which each Partnership was organized (the "Partnership
Agreements").
(c) The assets of Cronus Development Corporation, the common stock of which
constitutes a Purchased Asset under Section 6.6(b), consist solely of
properties known as the "Crystal Prospect" leasehold; "Crystal Prospect"
Teselsky & Rubert surface and minerals (T10N-R5W,SEC.3); "Vernon Prospect"
leasehold; "Southern Michigan White Bear" leasehold interests; "Asiala Maidens"
leasehold; "Pontisso" minerals (T30N-R1W, SEC. 15); "Elvira 11" surface and
minerals 3.748 acres in Sec. 18; Hutches State Kalkaska well; Pontisso # 2-10 &
#4-10 wells; and oil and gas leases in Benzie and Manistee Counties; and
additional assets which do not exceed $10,000 in value in the aggregate.
SECTION 3.3. CAPITALIZATION. (a) The authorized capital of Terra consists
of 20,000,000 shares of common stock, no par value, of which 9,519,500 shares
are duly and validly issued and outstanding and, except for 2,545,922 shares
issuable upon exercise of certain Options (as hereinafter defined) granted by
Terra, none of which is reserved for any purpose. All of the outstanding
shares of Terra Common Stock are duly authorized, validly issued, fully paid
and nonassessable. The record owners of the Terra Common Stock as of the date
hereof are listed in Schedule 3.3(a) and a list of the record owners of the
Terra Common Stock as of the Effective Time will be provided to CMS Energy on
the Effective Date. The record owners of options, warrants or similar rights
to purchase shares of Terra Common Stock from Terra or from the holders of any
Terra Common Stock (collectively, the "Options") are listed in Schedule 3.3(a)
hereto. Complete and correct copies of the material agreements relating to the
Options have been delivered to CMS Energy. Except for the Options, there are
no options, warrants or other rights to acquire, or agreements or commitments
of Terra to issue, sell, purchase or redeem, or of the holders of any Terra
Common Stock to sell or purchase, shares of capital stock or any other equity
interest of Terra, whether on conversion of other securities or otherwise.
None of the issued and outstanding shares of Terra Common Stock has been issued
in violation of, or is subject to, any preemptive or subscription rights.
Except as set forth in Schedule 3.3(a), there are no stockholder agreements,
voting trust agreements or any other similar contracts, agreements,
arrangements, commitments, plans or understandings restricting or otherwise
relating to voting, dividend, ownership or transfer rights with respect to any
shares of capital stock of Terra.
(b) Each Stockholder severally represents and warrants as to himself that
(i) he is the beneficial owner of the shares of Terra Common Stock listed in
Schedule 3.3(a) opposite his name
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or he has transferred such shares to a Permitted Transferee or Permitted
Transferees (as hereinafter defined) or, in the case of Lagina, that the Lagina
Shares are subject to Section 2.3 hereof and (ii) all such shares are owned
free from all liens, claims, encumbrances or other restrictions of any kind,
other than liens, claims, encumbrances or other restrictions listed on Schedule
3.3(b), securities law restrictions applicable to restricted stock and
restrictions created by this Agreement. Each Optionholder severally represents
and warrants as to himself that (i) he is the beneficial owner of Options to
purchase shares of Terra Common Stock listed in Schedule 3.3(a) opposite his
name, (ii) all such Options are owned free from all liens, claims, encumbrances
or other restrictions of any kind, other than liens, claims, encumbrances or
other restrictions listed on Schedule 3.3(b), securities law restrictions
applicable to restricted securities and restrictions created by this Agreement,
and (iii) that such Options will be exercised prior to the Effective Time and,
as of the Effective Time, no shares of Terra Common Stock will be issuable
pursuant thereto. Permitted Transferee shall mean any executor of the estate
of any Stockholder or any person acquiring the CMS Common Shares of such
Stockholder solely pursuant to the laws of descent.
(c) All outstanding shares of capital stock of each corporate Subsidiary
are duly authorized, validly issued, fully paid and nonassessable. Terra or
another wholly-owned Subsidiary is the record and beneficial owner of all of
the issued and outstanding shares of capital stock of each such Subsidiary and,
to the knowledge of Terra, is the record and beneficial owner of the shares of
capital stock of each Non-Wholly Owned Subsidiary as indicated on Schedule 3.2.
All such shares of capital stock are so owned free from all liens, claims,
encumbrances or other restrictions of any kind, other than liens, claims,
encumbrances or other restrictions listed on Schedule 3.3(c). Except as set
forth on Schedule 3.3(c), there are no options, warrants or other rights to
acquire, or agreements or commitments to issue, sell, purchase or redeem,
shares of capital stock of any corporate Subsidiary, whether on conversion of
other securities or otherwise. None of the issued and outstanding shares of
common stock of any corporate Subsidiary has been issued in violation of, or is
subject to, any preemptive or subscription rights. There are no voting trust
agreements or any other similar contracts, agreements, arrangements,
commitments, plans or understandings restricting or otherwise relating to
voting, dividend, ownership or transfer rights with respect to any shares of
common stock of any corporate Subsidiary.
(d) All outstanding partnership or membership interests in each Partnership
Subsidiary (including any limited liability company Subsidiary) are duly
authorized and validly issued. Terra or another Subsidiary is the record and
beneficial owner of such partnership or membership interests of each such
Partnership Subsidiary to the extent set forth in Schedule 3.2.
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All such partnership or membership interests are so owned free from all liens,
claims, encumbrances or other restrictions of any kind, other than liens,
claims, encumbrances or other restrictions listed on Schedule 3.3(d) and other
than as set forth in the relevant Partnership Agreements. There are no
options, warrants or other rights to acquire, or agreements or commitments to
issue, sell, purchase or redeem, any partnership or membership interests in any
Partnership Subsidiary, other than as set forth in the relevant Partnership
Agreements.
SECTION 3.4. AUTHORITY. (a) Terra has full corporate power and authority
to enter into this Agreement and, subject to adoption of this Agreement by the
stockholders of Terra (which adoption shall be effected promptly after the date
hereof), to consummate the transactions contemplated hereby.
The execution, delivery and performance of this Agreement by Terra and the
consummation by Terra of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Terra, subject to
such adoption of this Agreement by the stockholders of Terra. This Agreement
has been duly executed and delivered by Terra and is, and each other agreement
or instrument of Terra contemplated hereby when executed and delivered by or on
behalf of Terra will be, the legal, valid and binding agreement of Terra,
enforceable against Terra in accordance with its respective terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
Each Management Stockholder and Optionholder severally represents and
warrants as to himself and as to Terra that neither the execution or delivery
of this Agreement by Terra or such Stockholder or Optionholder, nor
consummation of the transactions contemplated hereby or compliance with or
fulfillment of the terms and provisions hereof by Terra or such Stockholder or
Optionholder, will (a) conflict with, result in a breach of the terms,
conditions or provisions of, or constitute a default, an event of default or an
event creating rights of acceleration, termination or cancellation or a loss of
rights, or result in the creation or imposition of any encumbrance upon any of
the material assets of Terra or any Subsidiary, under the articles of
incorporation or the by-laws or partnership agreement, limited liability
company agreement, regulations or similar governing instrument of Terra or any
Subsidiary, any instrument, agreement (including any partnership agreement),
mortgage, indenture, deed of trust, permit, concession, grant, franchise,
license, judgment, order, award, decree or other restriction to which Terra or
any Subsidiary is a party or any of its respective properties is subject or by
which it is bound or any statute, other law or regulatory provision affecting
it,
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except for such conflicts, breaches, defaults, events, creations and
impositions that are set forth on Schedule 3.4(a) or (b) require the approval,
consent or authorization of, or the making of any declaration, filing or
registration with, any third party or any foreign, federal, state or local
court, governmental authority or regulatory body, by or on behalf of Terra or
any Subsidiary, except for the applicable requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "HSR Act"), the filing of a Certificate
of Merger with the Corporation and Securities Bureau, Department of Commerce,
of the State of Michigan and appropriate documents with the relevant
authorities of other jurisdictions in which Terra is qualified to do business,
adoption of this Agreement by the stockholders of Terra and as set forth in
Schedule 3.4(a).
(b) Each Stockholder and Optionholder severally represents and warrants as
to himself that he has full power and authority to enter into this Agreement.
Scherock severally represents and warrants as to itself that (i) it is a trust
duly formed and validly existing under the laws of the State of Michigan and
Dr. Leonard J. Scherock serves as sole trustee thereof, (ii) such trustee has
the power and authority under the agreement dated May 1, 1990 creating the
trust and the laws of the State of Michigan to execute and deliver this
Agreement, to consummate the transactions contemplated hereby and to cause the
trust to perform its obligations hereunder and (iii) Scherock has, and will
continue to have and maintain, sufficient assets to perform its obligations as
set forth in this Agreement. Each Stockholder and Optionholder severally
represents and warrants as to himself, and the Management Stockholders and
Optionholders represent and warrant as to Terra, that neither the execution or
delivery of this Agreement by Terra or such Stockholder or Optionholder, nor
consummation of the transactions contemplated hereby or compliance with or
fulfillment of the terms and provisions hereof by Terra or such Stockholder or
Optionholder, will conflict with, result in a breach of the terms, conditions
or provisions of, or constitute a default, an event of default or an event
creating rights of acceleration, termination or cancellation or a loss of
rights under, or result in the creation or imposition of any encumbrance upon
any of the material assets of Terra or any Subsidiary under, any instrument,
agreement, mortgage, indenture, deed of trust, permit, concession, grant,
franchise, license, judgment, order, award, decree or other restriction to
which such Stockholder or Optionholder is a party or by which such Stockholder
or Optionholder is bound. Each Stockholder and Optionholder severally
represents and warrants as to himself that this Agreement has been duly
executed and delivered by such person and is, and each other agreement or
instrument of such Stockholder or Optionholder contemplated hereby when
executed and delivered by or on behalf of such person will be, the legal, valid
and binding agreement of such Stockholder or Optionholder, as the case may be,
enforceable against such Stockholder or Optionholder in accordance with its
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respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
the enforceability of creditors' rights generally and by general equitable
principles (whether enforcement is sought by proceedings in equity or at law).
SECTION 3.5. FINANCIAL STATEMENTS. Terra has previously provided CMS
Energy with: (i) the draft dated August 14, 1995 of the consolidated balance
sheet (the "Balance Sheet") of Terra as of December 31, 1994 (the "Balance
Sheet Date") and the related draft dated August 14, 1995 of the consolidated
statements of income (the "Statement of Income"), stockholders' equity and cash
flows for the year then ended, together with the notes and any schedules to
such financial statements, as in the process of being audited by Arthur
Andersen L.L.P., independent public accountants, and (ii) the consolidated
unaudited balance sheet (the "Unaudited Balance Sheet") of Terra as of June 30,
1995 (the "Unaudited Balance Sheet Date") and the related unaudited
consolidated statement of income (the "Unaudited Statement of Income") for the
six months then ended. Except as set forth on Schedule 3.5 or disclosed in the
notes or any schedules to the consolidated financial statements referred to in
clause (i) of the preceding sentence, and disregarding the matters referred to
in the proviso contained in Section 3.7, to the knowledge of Terra, the
consolidated balance sheets and statements of income, stockholders' equity and
cash flows referred to in such clause (i) have been prepared in conformity with
generally accepted accounting principles ("GAAP") consistently applied and
fairly present in all material respects the consolidated financial position of
Terra and its consolidated subsidiaries at the dates of such balance sheets and
the consolidated results of its operations and consolidated cash flows for the
respective periods indicated.
SECTION 3.6. OPERATIONS SINCE BALANCE SHEET DATE. (a) Except as set forth
in Schedule 3.6(a), since the Balance Sheet Date, there has been: (i) except
for changes relating to the oil and gas industry in general and not
specifically relating to Terra, its Subsidiaries, or the Stockholders, no
Material Adverse Change in Terra and its Subsidiaries taken as a whole, and
(ii) no damage, destruction, loss or claim with respect to, whether or not
covered by insurance, or condemnation or other taking of, assets having a
Material Adverse Effect on Terra and its Subsidiaries taken as a whole;
provided, however, that no representation or warranty is made with respect to
the items described in the proviso contained in Section 3.7.
(b) Except as set forth in Schedule 3.6(b), as contemplated hereby or with
the prior written consent of CMS Energy after the date hereof, since the
Balance Sheet Date, Terra has conducted its business only in the ordinary
course and in general conformity with past practice. Without limiting the
generality of the foregoing, except as set forth in
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Schedule 3.6(b), as contemplated by any provision of this Agreement or with the
prior written consent of CMS Energy after the date hereof, since the Balance
Sheet Date, neither Terra nor any of its Subsidiaries has: (i) issued,
delivered or agreed (actually or contingently) to issue or deliver any of its
capital stock, except with respect to the exercise of the Options, or granted
any option, warrant or right to purchase any of its capital stock or other
equity interest, or security convertible into its capital stock or other equity
interest, or, other than in the ordinary course of business consistent with
past practice, any of its bonds, notes or other securities, or borrowed or
agreed to borrow any funds; (ii) paid any obligation or liability (absolute or
contingent) other than current liabilities reflected on the balance sheets
referred to in Section 3.5 and current liabilities incurred since the Balance
Sheet Date in the ordinary course of business consistent with past practice;
(iii) declared or made, or agreed to declare or make, any payment of dividends
or distributions to stockholders or purchased or redeemed, or agreed to
purchase or redeem, any of its capital stock or other equity interest, (iv)
mortgaged, pledged or encumbered any assets other than in the ordinary course
of business consistent with past practice; (v) except for (A) assets sold,
leased or transferred in the ordinary course of business consistent with past
practice and (B) the sale of the Purchased Assets as contemplated by Section
6.6(b) hereof, sold, leased or transferred or agreed to sell, lease or transfer
any material assets or rights; (vi) to the knowledge of Terra, except in the
ordinary course of business consistent with past practice, canceled or agreed
to cancel any material debts or claims, waived or agreed to waive any rights of
material value, or allowed to lapse or failed to keep in force any material
franchise, permit or other material right; (vii) to the knowledge of Terra,
except in the ordinary course of business consistent with past practice, made
or permitted any material amendment or termination of any material contract,
agreement or license; (viii) undertaken or committed to capital expenditures
exceeding $100,000 for any single project or related series of projects, except
for the 1995 Antrim Program and the New Office; (ix) made any increase in the
compensation paid or to become payable to, or paid any bonus or incentive
compensation to, any of its directors, officers or employees except for
increases in base compensation in the normal course of business consistent with
past practice, increases required to be made pursuant to the terms of any
written employment or other agreement or employee benefit plan entered into
prior to the Balance Sheet Date, any bonus or incentive compensation the
payment of which has been approved in writing by CMS Energy or which is
included in calculating Terra Consolidated Net Working Capital, and any bonus
or incentive compensation which is referred to in Section 6.6(a)(xiii); (x)
amended its articles of incorporation or by-laws; (xi) to the knowledge of
Terra, undergone any material adverse change in its relationship with any
material supplier, purchaser, distributor, lessor, governmental body,
co-venturer under any Operating Agreement or
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consultant; (xii) made charitable donations in excess of $20,000 in the
aggregate; (xiii) incurred any liability or obligation (whether absolute,
accrued, contingent or otherwise and whether direct or as guarantor or
otherwise with respect to obligations of others) material to the business or
assets of Terra and its Subsidiaries, taken as a whole, except in the ordinary
course of business consistent with past practice and except as contemplated
hereunder and disregarding matters referred to in the proviso contained in
Section 3.7; (xiv) instituted, settled or agreed to settle any litigation,
action, or proceeding before any court or governmental body relating to the
business or assets of Terra or any of its Subsidiaries and involving an amount
in excess of $10,000 or materially affecting Terra or its Subsidiaries; (xv)
entered into, or amended in any material respect, any employment, collective
bargaining, deferred compensation, retention, change of control, termination or
other material agreement or arrangement for the benefit of employees (whether
or not legally binding) or entered into, adopted or amended in any material
respect any Plan (as hereinafter defined); (xvi) suffered any strike or other
employment related problem which would have a Material Adverse Effect on Terra
and its Subsidiaries taken as a whole; (xvii) suffered the loss of any key
employees, consultants or agents which would have a Material Adverse Effect on
Terra and its Subsidiaries taken as a whole or, to the knowledge of Terra, had
any material adverse change in its relations with its employees, consultants or
agents; (xviii) received any notice of termination of any material contract or
lease or other material agreement; (xix) transferred or expressly granted any
rights under, or entered into any settlement regarding the breach or
infringement of, any material United States or foreign license, patent,
copyright, trademark, trade name, invention or other material intellectual
property or modified in any material respect any existing rights with respect
thereto; (xx) changed its accounting reference period; (xxi) entered into any
transaction of the type described in Section 3.30 except as permitted
hereunder; or (xxii) entered into or become committed to enter into any other
material transaction except in the ordinary course of business consistent with
past practice.
SECTION 3.7. NO UNDISCLOSED LIABILITIES. Neither Terra nor any of its
Subsidiaries is subject to any material liability which is required in
accordance with GAAP to be shown on the Balance Sheet but which is not so
shown, and, to the knowledge of Terra, neither Terra nor any of its
Subsidiaries is subject to any material liability, absolute or contingent,
which is not shown on the Balance Sheet or which is in excess of amounts shown
or reserved for in the Balance Sheet, other than, in each case, (i) as referred
to in the notes to the Balance Sheet or in the discussion of the accounting
methodologies contained therein, (ii) as disclosed in Schedule 3.7 and (iii)
liabilities incurred after the Balance Sheet Date in the ordinary course of its
business consistent with past practice; provided, however, that no
representation or warranty is made with respect
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to liabilities or obligations in connection with (A) naturally occurring
radioactive material ("NORM"), (B) charges for post-production costs ("PPC")
made and to be made to the owners of royalties, overriding royalties and other
interests which do not bear all or a portion of production costs, (C) plugging
and abandonment of Wells, (D) the amount of fees and disbursements charged and
to be charged to Terra by its accountants relating to the audit of Terra's
consolidated financial statements for the year ended December 31, 1994, or (E)
those items referred to in Sections 3.22 or 3.29.
SECTION 3.8. TAXES. (a) Except as set forth on Schedule 3.8(a): (i) each
of Terra and its Subsidiaries (as hereinafter defined) has filed on or before
the date hereof (or will timely file) all Tax Returns (as hereinafter defined)
that are required to be filed on or before the date hereof or the Effective
Date; (ii) all such Tax Returns for taxable years or periods ending on or
before December 31, 1994 are (or will be) complete and accurate in all material
respects and disclose all Taxes (as hereinafter defined) required to be paid by
Terra and its Subsidiaries for the periods covered thereby except for Taxes for
which adequate reserves have been established by Terra or its Subsidiaries and
such reserves are reflected in the computation of Terra Consolidated Net
Working Capital and all Taxes shown to be due on such Tax Returns have been
timely paid or are reflected in the computation of Terra Consolidated Net
Working Capital; (iii) none of Terra or any Subsidiary has waived or been
requested to waive any statute of limitations in respect of Taxes; (iv) the Tax
Returns referred to in clause (i) for taxable years or periods ending on or
before December 31, 1991 have been examined by the Internal Revenue Service or
the appropriate state, local or foreign taxing authority, or the period for
assessment of Taxes in respect of which such Tax Returns were required to be
filed has expired; (v) there is no action, suit, investigation, audit, claim or
assessment pending or, to the knowledge of Terra, proposed or threatened with
respect to Taxes of Terra or any Subsidiary for taxable years or periods ending
on or before December 31, 1994 and, to the knowledge of Terra, no basis exists
therefor for which adequate reserves have not been established and such
reserves are reflected in the computation of Terra Consolidated Net Working
Capital; (vi) all deficiencies asserted or assessments made as a result of any
examination of the Tax Returns referred to in clause (i) for taxable years or
periods ending on or before December 31, 1994 have been paid in full or are
reflected in the computation of Terra Consolidated Net Working Capital; (vii)
all Tax Sharing Arrangements (as hereinafter defined) will terminate prior to
the Effective Date and neither Terra nor any Subsidiary will have any liability
thereunder on or after the Effective Date; (viii) there are no Tax indemnity
agreements to which Terra or any Subsidiary is a party or is bound; (ix) there
are no liens for Taxes upon the assets of Terra or any Subsidiary except liens
relating to current Taxes not yet due or which are reflected in the computation
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of Terra Consolidated Net Working Capital; (x) all Taxes which Terra or any
Subsidiary is required by law to withhold or to collect for payment (including
with respect to the exercise of the Options, collection of withholding from the
Optionholders due with respect thereto as contemplated by Section 6.12, and
with respect to the bonuses referred to in Section 6.6(a)(xiii), collection of
withholding due with respect thereto) have been duly withheld and collected,
and have been paid or accrued; (xi) none of Terra or any of its Subsidiaries
has been a member of any consolidated group other than the Company Group of
which it is a member on the date hereof; (xii) to the knowledge of Terra, the
accruals for deferred Taxes reflected in the Balance Sheet are adequate to
cover any deferred tax liability of Terra and its Subsidiaries determined in
accordance with GAAP through the date thereof; (xiii) there are no Tax rulings,
requests for private letter rulings or requests for technical advice, in each
case initiated by Terra or any Subsidiary, or requests for a change in method
of accounting or closing agreements relating to Terra or any Subsidiary, which
in each case could affect the liability of Terra or any Subsidiary for Taxes
for any period after December 31, 1994; (xiv) none of Terra or any Subsidiary
has filed a consent under Section 341(f) of the Code or any comparable
provision of state statutes; (xv) since January 1, 1991, none of Terra or any
Subsidiary has taken any action not in accordance with past practice that would
have the effect of deferring any Tax liability for Terra or any Subsidiary from
any taxable period ending on or before December 31, 1994 to any taxable period
ending after December 31, 1994; (xvi) no income or gain of Terra or any
Subsidiary has been deferred pursuant to Treasury Regulation Section Section
1.1502-13 or -14, or Temporary Treasury Regulation Section Section 1.1502-13T
or -14T; (xvii) no power of attorney has been granted with respect to any
matter relating to Taxes of Terra or any Subsidiary which is currently in
force; (xviii) none of the property of Terra or any Subsidiary is required to
be treated as owned by another person pursuant to Section 168(f)(8) of the Code
(as in effect prior to its amendment by the Tax Equity and Fiscal
Responsibility Act of 1982) or is "tax exempt use property" within the meaning
of Section 168(h) of the Code or is subject to a so-called TRAC lease under
Section 7701(h) of the Code or any predecessor provision; (xix) Terra and each
Subsidiary is the owner for income tax purposes of all property which it has
leased to any other person; (xx) neither Terra nor any Subsidiary has
participated in or cooperated with an international boycott, within the meaning
of Section 999 of the Code, and all filing requirements imposed by Section 999
of the Code with respect to Terra and its Subsidiaries have been and will be
complied with; (xxi) neither Terra nor any Subsidiary has disposed of property
in a transaction being accounted for under the installment method pursuant to
Section 453 or 453A of the Code; (xxii) neither Terra nor any Subsidiary has
any corporate acquisition indebtedness, as described in Section 279(b) of the
Code; (xxiii) no taxes with respect to any period ending on or before December
31, 1994 were paid by Terra or any Subsidiary (or charged to Terra or any
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Subsidiary through any intercompany account or payment) after December 31, 1994
which were not included in the provision for income taxes on the Statement of
Income; (xxiv) to the knowledge of Terra, all of the production from intervals
in production or completed for production as of the date of this Agreement and
sold prior to January 1, 2003 from the Wells designated as "Section 29 Wells"
in the Property Schedules will, absent a change in applicable law occurring
after the Effective Date, constitute "qualified fuels" within the meaning of
Section 29(c) of the Code and, absent a change in applicable law occurring
after the Effective Date, none of such production will be "gas produced from a
tight formation" within the meaning of Section 29(c)(2)(B) of the Code; (xxv)
except as may be limited as a result of the Merger and the other transactions
contemplated by this Agreement, the alternative minimum tax credit described in
Note 11 to the consolidated financial statements of Terra and subsidiaries for
the year ended December 31, 1994 will be available, subject to applicable
limits relating to the amount of "regular" Tax that can be offset by an
alternative minimum tax credit, to reduce the "regular" federal income tax of
Terra and its Subsidiaries for periods beginning January 1, 1995; and (xxvi) no
portion of the Interests (A) has been contributed to and is currently owned by
a Tax Partnership, (B) is subject to any form of agreement (whether formal or
informal, written or oral) deemed by any state or federal Tax statute, rule or
regulation to be or to have created a Tax Partnership; or (C) otherwise
constitutes "partnership property" (as that term is used throughout Subchapter
K of Chapter 1 of Subtitle A of the Code) of a Tax Partnership.
(b) No disposition by Terra or any of the Stockholders pursuant to this
Agreement is subject to withholding under Section 1445 of the Code and no stock
transfer taxes, real estate transfer taxes, or other similar taxes will be
imposed in respect of the Merger.
(c) As a result of the Merger and the transactions contemplated by this
Agreement, none of Terra, any Subsidiary or the Surviving Corporation will be
obligated (limited, in the case of the Surviving Corporation, to obligations to
which the Surviving Corporation becomes subject as a result of any agreement or
arrangement entered into by Terra or any Subsidiary prior to the Merger) to
make a payment to an individual that would be an "excess parachute payment" to
a "disqualified individual" as those terms are defined in Section 280G of the
Code, without regard to whether such payment is reasonable compensation for
personal services performed or to be performed in the future.
(d) For purposes of this Section 3.8 and Section 7.2, notwithstanding any
other provision hereof, the following definitions shall apply:
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(i) "Company Group" shall mean any "affiliated group" (as defined in
Section 1504(a) of the Code without regard to the limitations contained in
Section 1504(b) of the Code) that, at any time on or before the Effective
Date, includes or has included Terra, any of its Subsidiaries or any
predecessor of or successor to Terra or any of its Subsidiaries (or another
such predecessor or successor), or any other group of corporations which, at
any time on or before the Effective Date, files or has filed Tax Returns on a
combined, consolidated or unitary basis with Terra or any of its Subsidiaries
or any predecessor of or successor to Terra or any of its Subsidiaries (or
another such predecessor or successor).
(ii) "material" shall mean, with respect to Taxes, that the failure
on a timely basis to pay all such Taxes would result in an aggregate Tax
liability of not less than $25,000.
(iii) "Subsidiary" shall have the meaning ascribed thereto in Section
3.2(a).
(iv) "Tax" (and, with correlative meaning, "Taxes" and "Taxable")
shall mean (i) any federal, state, local or foreign net income, gross income,
gross receipts, windfall profits, severance, property, production, sales, use,
value added, license, excise, franchise, employment, payroll, withholding,
alternative or add-on minimum, ad valorem, transfer, excise, stamp, or
environmental tax, or any other tax, custom, duty, governmental fee or import
or export duty or other like assessment or charge of any kind whatsoever,
together with any interest or penalty, addition to tax or additional amount
imposed by any governmental authority, and (ii) liability of Terra or any of
its Subsidiaries for the payment of amounts with respect to payments of a
type described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group, or as a result of any obligation of
Terra or any of its Subsidiaries under any Tax Sharing Arrangement or Tax
indemnity arrangement.
(v) "Tax Partnership" shall mean any entity, organization, agreement
or group deemed to be a partnership within the meaning of Section 761 of the
Code or any similar state or federal statute, rule or regulation and that is
not excluded from the application of the partnership provisions of Subchapter
K of Chapter 1 of Subtitle A of the Code and of all similar provisions of
state tax statutes or regulations by reason of elections made, pursuant to
Section 761(a)
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of the Code and all such similar state or federal statutes, rules and
regulations.
(vi) "Tax Return" shall mean any return, report or similar statement
required to be filed with respect to any Tax (including any attached
schedules), including, without limitation, any information return, claim for
refund, amended return and declaration of estimated Tax.
(vii) "Tax Sharing Arrangement" shall mean any written or unwritten
agreement or arrangement for the allocation or payment of Tax liabilities or
payment for Tax benefits with respect to a consolidated, combined or unitary
Tax Return, which Tax Return includes Terra or any of its Subsidiaries.
SECTION 3.9. CONDITION OF TANGIBLE ASSETS. Except as otherwise disclosed
in Schedule 3.9, to the knowledge of Terra, each tangible Interest or asset
owned or leased by Terra or any of its Subsidiaries and having a book or fair
market value in excess of $25,000 is in good operating condition (subject to
reasonable wear and tear and immaterial impairments of value and damage) and
generally suitable for the uses for which intended.
SECTION 3.10. TITLE TO PROPERTY; PROPERTY SCHEDULES. (a) Since June 1,
1995, except as set forth in Schedule 3.10(a) neither Terra nor any Subsidiary
has made or suffered to be made any conveyance, encumbrance or burden on
production with respect to the Proved Developed Interests, Proved Undeveloped
Interests and Unproved Interests except for those not included in the working
interests, net revenue interests or overriding royalty interests shown on the
Property Schedules, nor knowingly acted or knowingly failed to act in such
manner as to give rise to any Title Defect or other adverse claim against the
Proved Developed Interests, Proved Undeveloped Interests or Interests relating
to oil and gas gathering, transportation, processing and treating activities
or, except in the ordinary course of business consistent with past practice,
Unproved Interests. Except as set forth in this Section 3.10(a), no
representation is made as to title to the Proved Developed Interests, the
Proved Undeveloped Interests or the Unproved Interests or Interests relating to
oil and gas gathering, transportation, processing or treating activities.
(b) Each of Terra and its Subsidiaries has good and, with respect to real
property, indefeasible title to all other Interests (excluding Proved Developed
Interest, Proved Undeveloped Interests and Unproved Interests or Interests
relating to oil and gas gathering, transportation, processing and treating
activities) and assets reflected on the Balance Sheet as being owned by it and
all such other Interests and assets thereafter acquired by it (except to the
extent that such assets have thereafter been disposed of in the ordinary course
of
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business consistent with past practice), subject to no liens, mortgages,
pledges, security interests, encumbrances, claims or charges of any kind
(collectively, "Liens") except (i) as noted in Schedule 3.10(b), (ii) for Liens
for taxes not yet delinquent or the validity of which is being contested in
good faith, (iii) any Liens arising by operation of law securing obligations
not yet overdue, (iv) Liens that do not materially interfere with the present
use or value of the applicable asset and (v) Permitted Encumbrances.
(c) To the knowledge of Terra, except as set forth in Schedule 3.10(c),
Terra and its Subsidiaries are currently bearing or, in the case of Interests
not operated by Terra or its Subsidiaries, paying the operators of such
Interests, as Terra's share of costs and expenses, no more than the working
interests set forth on the Property Schedules, unless there has been a
corresponding and proportionate increase in the net revenue interests. Terra
and its Subsidiaries have made all such payments in a timely manner so that
neither Terra nor its Subsidiaries is in default, or currently required to pay
interest, under the terms of any agreements relating to such payments.
SECTION 3.11. AVAILABILITY AND OWNERSHIP OF ASSETS. The Interests and
assets shown on the Balance Sheet, taken as a whole, include all the material
properties and assets owned or used or held by Terra or its Subsidiaries during
the twelve months covered by the Balance Sheet and required, in accordance with
GAAP, to be reflected on the Balance Sheet (except properties and assets sold,
cash disposed of, accounts receivable collected, prepaid expenses realized,
contracts fully performed, and properties or assets which had become worn out,
obsolete or surplus, in each case in the ordinary course of business or as
contemplated by this Agreement). There are no material Interests, assets or
properties used in the Terra Business owned by any person other than Terra or
its Subsidiaries which are leased or licensed pursuant to a lease or license
that will terminate as a result of the consummation of the Merger and the other
transactions contemplated hereby.
SECTION 3.12. PERSONAL PROPERTY LEASES. Schedule 3.12 identifies each
lease or other agreement or right, whether written or oral, under which Terra
or any of its Subsidiaries is lessee of, or holds or operates, any machinery,
equipment, vehicle or other tangible personal property owned by a third person
having scheduled rental payments in excess of $10,000 per year.
SECTION 3.13. ACCOUNTS RECEIVABLE. To the knowledge of Terra, all
outstanding accounts receivable of Terra and its Subsidiaries have arisen from
bona fide transactions, except to the extent that a reserve in respect thereof
shall have been established on the Balance Sheet or the Unaudited Balance
Sheet.
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To the knowledge of Terra, (i) the accounts receivable reflected in the Balance
Sheet, taken as a whole, are good and collectible in all material respects in
the ordinary course of business at the aggregate recorded amounts thereof, net
of any applicable allowances for doubtful accounts reflected therein; and (ii)
the accounts receivable to be reflected in the books and records of Terra and
its Subsidiaries as of the Effective Date, taken as a whole, will be good and
collectible in all material respects in the ordinary course of business at the
aggregate recorded amounts thereof, net of any applicable allowances for
doubtful accounts reflected thereon, which allowances will be determined on a
basis consistent with the basis used in determining the allowances for doubtful
accounts reflected in the Balance Sheet. The reserve established on the
Balance Sheet for doubtful accounts has been deducted in calculating Terra
Consolidated Net Working Capital, and the reserve to be reflected in the books
and records of Terra and its Subsidiaries as of the Effective Date will not be
a greater percentage of accounts receivable reflected therein than is the
percentage of the reserve established on the Balance Sheet for doubtful
accounts of accounts receivable reflected thereon.
SECTION 3.14. INTELLECTUAL PROPERTY. (a) Schedule 3.14 contains a list of:
(i) all material United States and foreign patents and patent
applications, all material United States, state and foreign trademarks,
service marks, trade names and copyrights for which registrations have been
issued or applied for, and all other material United States, state and
foreign trademarks, service marks, trade names and copyrights, owned by
Terra or any of its Subsidiaries or in which Terra or any of its Subsidiaries
holds any material right, license or interest, showing in each case the
product, device, process, service, business or publication covered thereby,
the registered or other owner, expiration date and, in the case of any such
right, license or interest, a brief description thereof;
(ii) all material agreements, commitments, contracts, understandings,
licenses and assignments relating or pertaining to any asset, property or
right described in the preceding clause to which Terra or any of its
Subsidiaries is a party, showing in each case the parties thereto and, in the
case of oral agreements, commitments, contracts, understandings, licenses and
assignments, the material terms thereof;
(iii) all material licenses or agreements pertaining to mailing lists,
know-how, trade secrets, inventions or uses of ideas to which Terra or any of
its Subsidiaries is a party, showing in each case the parties thereto and, in
the case of oral licenses or
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agreements, a brief description of the material terms thereof; and
(iv) all registered assumed or fictitious names under which Terra or any of
its Subsidiaries is conducting its business as of the date hereof.
(b) All patents listed in Schedule 3.14 as being owned by Terra or any of
its Subsidiaries are valid and in full force, all patents listed in Schedule
3.14 as being used by Terra or any of its Subsidiaries are, to the knowledge of
Terra, valid and in full force and all patent applications of Terra or any of
its Subsidiaries listed therein are in good standing, all without material
challenge of any kind except as otherwise disclosed in Schedule 3.14, and,
except as otherwise disclosed in Schedule 3.14, Terra or a Subsidiary owns the
entire right, title and interest in and to such patents and patent applications
so listed as being owned by Terra or any of its Subsidiaries without
limitation, burden or encumbrance of any kind, except for such limitations,
burdens and encumbrances that would not have a Material Adverse Effect on Terra
and its Subsidiaries taken as a whole. All of the registrations for trade
names, trademarks, service marks and copyrights listed in Schedule 3.14 as
being owned by Terra or any of its Subsidiaries are valid and in full force,
all of the registrations for trade names, trademarks, service marks and
copyrights listed in Schedule 3.14 as being used by Terra or any of its
Subsidiaries are, to the knowledge of Terra, valid and in full force and all
applications by Terra or any of its Subsidiaries for such registrations are
pending and in good standing, all without material challenge of any kind except
as otherwise disclosed in Schedule 3.14, and, except as otherwise disclosed in
Schedule 3.14, Terra or its Subsidiaries owns the entire right, title and
interest in and to all such trade names, trademarks, service marks and
copyrights so listed as being owned by Terra or any of its Subsidiaries as well
as the registrations and applications for registration therefor without
qualification, limitation, burden or encumbrance of any kind, except for such
qualifications, limitations, burdens and encumbrances that would not have a
Material Adverse Effect on Terra and its Subsidiaries taken as a whole.
Correct and complete copies of all the patents and patent applications,
registered trademarks, trade names, service marks and copyrights, registrations
or applications therefor and licenses listed in Schedule 3.14 have heretofore
been delivered by Terra to CMS Energy.
(c) To the knowledge of Terra, no infringement of any patent, patent right,
trademark, service mark, trade name, or copyright or registration thereof has
occurred or results in any way from the operations or business of Terra or its
Subsidiaries, except for such infringements that would not have a Material
Adverse Effect on Terra and its Subsidiaries taken as whole.
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SECTION 3.15. OWNED REAL PROPERTY. Schedule 3.15 contains a brief
description of each parcel of real property, excluding Proved Developed
Interests, Proved Undeveloped Interests and Unproved Interests and easements,
rights of way and other Interests relating to oil and gas gathering,
transportation, processing and treating activities, owned by Terra or any of
its Subsidiaries (the "Owned Real Property") and of each option held by Terra
or any of its Subsidiaries to acquire any such real property. Complete and
correct copies of any title opinions, surveys and appraisals in the possession
of Terra or any of its Subsidiaries or any policies of title insurance
currently in force and in the possession of Terra or any of its Subsidiaries
with respect to each such parcel have heretofore been made available by Terra
to CMS Energy.
SECTION 3.16. LEASED REAL PROPERTY. Schedule 3.16 sets forth a list of
each lease or similar agreement under which (i) Terra or any of its
Subsidiaries is lessee of, or holds or operates, any real property or interest
therein owned by any third person, excluding Proved Developed Interests, Proved
Undeveloped Interests and Unproved Interests and easements, rights of way and
other Interests relating to oil and gas gathering, transportation, processing
and treating activities, (ii) to the knowledge of Terra, Terra or any of its
Subsidiaries has been lessee of, or has held or operated, any real property
owned by any third person, excluding Proved Developed Interests, Proved
Undeveloped Interests and Unproved Interests and easements, rights of way and
other Interests relating to oil and gas gathering, transportation, processing
and treating activities, and is as of the date hereof, or will be as of the
Effective Date, subject to any actual or contingent liability (other than any
liability in respect of a matter referred to in Section 3.29) in respect
thereof (the real property described in clauses (i) and (ii) above being
collectively referred to herein as the "Leased Real Property") or (iii) Terra
or any of its Subsidiaries is lessor of any of the Owned Real Property. Except
as set forth in Schedule 3.16, Terra or a Subsidiary has the right to quiet
enjoyment of all the Leased Real Property described in clause (i) of the
immediately preceding sentence for the full term of each such lease or similar
agreement (and any renewal option) relating thereto, and the leasehold or other
interest of Terra or such Subsidiary in such real property is not subject or
subordinate to any encumbrance, except for any failure to have such right or
the existence of any such encumbrance that would not have a Material Adverse
Effect on Terra and its Subsidiaries taken as whole. Complete and correct
copies of any title opinions, surveys and appraisals in the possession of Terra
or any of its Subsidiaries or any policies of title insurance currently in
force and in the possession of Terra or any of its Subsidiaries with respect to
each such parcel of leased property have heretofore been made available by
Terra to CMS Energy.
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SECTION 3.17. LITIGATION. Except as set forth in Schedule 3.17, there are
no claims, actions, suits or proceedings to which Terra or any of its
Subsidiaries is a party or any of their respective properties is subject or by
which any of them is bound, pending or, to the knowledge of Terra, threatened
before or by any court or governmental agency, which in the case of threatened
claims, actions, suits or proceedings, would, if adversely determined, have a
Material Adverse Effect on Terra and its Subsidiaries taken as a whole, or
prevent or hinder the consummation of the transactions contemplated hereby.
Notwithstanding anything contained in this Section 3.17 to the contrary, no
representation or warranty is made with respect to threatened claims, actions,
suits or proceedings relating to the items set forth in clauses (A) through (C)
of the proviso contained in Section 3.7.
SECTION 3.18. NO GUARANTIES; EXTENSIONS OF CREDIT. Except as set forth in
Schedule 3.18, except for customary indemnification and guaranty provisions
contained in any Operating Agreement and except for extensions of credit made
in the ordinary course of business, no material obligations or liabilities of
Terra or any of its Subsidiaries are guaranteed by or subject to a similar
contingent obligation of any other person, nor has Terra or any of its
Subsidiaries guaranteed or become subject to a similar contingent obligation in
respect of the obligations or liabilities of, or extended credit to any other
person.
SECTION 3.19. COMPLIANCE WITH LAWS. To the knowledge of Terra, except as
disclosed in Schedule 3.19, Terra and its Subsidiaries are in compliance with
the provisions of all applicable existing laws and regulations (but excluding
environmental laws and regulations, which are the subject of Section 3.29, and
also excluding laws and regulations pertaining to employee benefits matters,
which are the subject of Section 3.22) of all federal, state, local and foreign
governments, except to the extent that the failure to comply therewith would
not have a Material Adverse Effect on Terra and its Subsidiaries taken as
whole. Except as disclosed in Schedule 3.19, to the knowledge of Terra, there
are no proposed orders, judgments, decrees, governmental takings, condemnations
or other proceedings, in each case binding upon the business, operations or
properties of Terra or any of its Subsidiaries and which would have a Material
Adverse Effect on Terra and its Subsidiaries taken as a whole. Notwithstanding
anything contained in this Section 3.19 to the contrary, no representation or
warranty is made with respect to the items set forth in clauses (A) through (C)
of the proviso contained in Section 3.7.
SECTION 3.20. PERMITS. To the knowledge of Terra, each of Terra and its
Subsidiaries possesses all material federal, state, local and foreign
governmental and regulatory franchises, rights, privileges, permits, grants,
concessions,
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licenses, certificates, variances, authorizations, approvals, and other
material authorizations (including any amendments to any thereof) necessary to
own or lease and operate its Interests and other material properties and to
conduct its business as now conducted (collectively, the "Permits"), excluding
environmental Permits, which are the subject of Section 3.29.
To the knowledge of Terra, all Permits are in full force and effect and will
continue in full force and effect immediately following the consummation of the
Merger without the breach of any terms or conditions thereof or the forfeiture
or impairment of any rights thereunder and no consent, approval or act of, or
the making of any filing with, any governmental body, regulatory commission or
other party will be required to be obtained or made by Terra or any of its
Subsidiaries in respect of any Permit as a result of the consummation of the
Merger and the other transactions contemplated hereby. To the knowledge of
Terra, neither Terra nor any of its Subsidiaries is in default in any material
respect under the terms of any such Permit nor has received notice of any
material default thereunder which has not been resolved.
SECTION 3.21. INSURANCE. To the knowledge of Terra, Schedule 3.21 contains
a list and brief description (including type of coverage, limits, deductibles,
carriers and effective and termination dates) of all policies of fire and
casualty, liability (general, product and other liability), well control,
workers' compensation and other forms of insurance and bonds maintained by
Terra or any of its Subsidiaries since December 31, 1992 up to and including
the Effective Date, and except as disclosed in Schedule 3.21, each of Terra and
its Subsidiaries is a named insured or is otherwise covered under each such
policy, and each such policy is in full force and effect and will not in any
way be affected by or terminate or lapse by reason of the transactions
contemplated by this Agreement.
Terra has made available to CMS Energy complete and correct copies of all
policies listed on Schedule 3.21, together with all riders and amendments
thereto, and, to the knowledge of Terra, no insurer under such policies has a
basis to void such policies on grounds of non-disclosure on the part of the
policyholder or the insured thereunder.
To the knowledge of Terra, (i) Schedule 3.21 hereto includes a list of each
claim and each notice of claim submitted under any such policy since December
31, 1992; (ii) except for any such claims or notices of claim, the full policy
limits (subject to deductibles provided therein) are available and unimpaired
under each such policy; and (iii) each of Terra and its Subsidiaries and
affiliates has complied with each such policy in all material respects and has
not failed to give any notice or present any claim thereunder in a due and
timely manner.
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SECTION 3.22. EMPLOYEE BENEFIT PLANS. (a) Schedule 3.22) sets forth a
list of, and, except as set forth in Schedule 3.22, Terra has delivered to CMS
Energy copies of, any pension, profit sharing, retirement, disability, health,
welfare or other "employee benefit plan", as that term is defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), bonus, stock option or other equity based, incentive, severance,
termination, retention or other material employee benefit or compensation plan,
policy, arrangement or agreement, whether written or unwritten, (i) under which
any employee or former employee of Terra or any of its Subsidiaries or the
beneficiary or dependent of any such employee or former employee (collectively,
the "Participants") is eligible to participate or derive a benefit and (ii)
that is established, maintained or contributed to by Terra or any of its
Subsidiaries or any trade or business, whether or not incorporated, which would
be treated as a single employer together with Terra and its Subsidiaries under
Section 414 of the Code, as of any date of determination (each, an "ERISA
Affiliate") or to which Terra or any of its Subsidiaries or any ERISA Affiliate
is obligated to contribute (collectively, the "Plans"). Neither Terra nor, to
the knowledge of Terra, any such Plan nor any trust created thereunder has
engaged in a transaction prohibited by Section 406 of ERISA or Section 4975 of
the Code that would result in any material liability to Terra or any of its
Subsidiaries. Except as disclosed in Schedule 3.22, current determination
letters have been received from the Internal Revenue Service with respect to
each Plan which is intended to qualify under Section 401(a) of the Code to the
effect that such Plan and the attendant trust are qualified and tax-exempt
within the meaning of Sections 401 and 501 of the Code, respectively, and, to
the knowledge of Terra, nothing has occurred either before or after the date of
such letters that would result in disqualification of such Plans or the loss of
such tax-exempt status and a material liability to Terra or any of its
Subsidiaries as a result thereof. Each of the Plans has been operated and
administered in material compliance with ERISA, the Code and all other
applicable laws, regulations and rules, except where any such noncompliance
would not result in a material liability to Terra or any of its Subsidiaries.
There are no material pending or, to the knowledge of Terra, threatened, claims
by or on behalf of any Plan, by or on behalf of any Participant or otherwise
involving any Plan (other than routine claims for benefits). Each Plan which
is subject to the minimum funding standards of Section 412 of the Code or
Section 302 of ERISA satisfies such standards, and no such Plan has incurred an
"accumulated funding deficiency," whether or not waived, within the meaning of
such Sections of the Code or ERISA. All contributions required to have been
made by Terra or any of its Subsidiaries and each ERISA Affiliate to each Plan
under the terms of any such Plan or pursuant to applicable law or any
applicable collective bargaining agreement have been made within the time
prescribed by any such Plan, law or agreement, as the case may be.
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(b) Except as set forth in Schedule 3.22, neither Terra or any of its
Subsidiaries nor any ERISA Affiliate would be liable for any material amount
pursuant to Title IV of ERISA if any employee pension benefit plan (within the
meaning of section 3(2) of ERISA) subject to such Title (a "Title IV Plan")
were to terminate. Except as disclosed on Schedule 3.22 hereto, as of the last
day of the 1994 plan year of each Plan which is a Title IV Plan, the "projected
benefit obligations" (within the meaning of the Financial Accounting Standards
Board Statement No. 87) under each such Plan did not exceed the fair market
value of the assets of each such Plan, determined on the basis of actuarial
assumptions each of which is reasonable. Neither Terra or any of its
Subsidiaries nor any ERISA Affiliate has engaged in a transaction which could
cause Terra or any such Subsidiary or such ERISA Affiliate to be subject to
liability under section 4069 or 4212 of ERISA. Neither Terra nor any of its
Subsidiaries nor any ERISA Affiliate has incurred any material liability under
or pursuant to Title I or IV of ERISA or the penalty, excise tax or joint and
several liability provisions of the Code or ERISA relating to employee benefit
plans for failure to comply with such provisions with respect to the Plans and
no event or condition has occurred or exists which could result in any material
liability following the Effective Date to CMS Energy under or pursuant to Title
I or IV of ERISA or such penalty, excise tax or liability provisions of the
Code or ERISA for failure to comply with such provisions with respect to the
Plans.
(c) No Plan is a "multiemployer plan" or a "multiple employer plan" within
the meaning of ERISA or the Code.
(d) No Participant is or may become entitled to post-employment welfare
benefits of any kind by reason of employment with Terra or any of its
Subsidiaries, including, without limitation, death or medical benefits (whether
or not insured), other than coverage mandated by section 4980B of the Code or
Part 6 of Title I of ERISA. The consummation of the transactions contemplated
by this Agreement will not result in an increase in the amount of compensation
or benefits or accelerate the vesting or timing of payment of any compensation
or benefits payable under any Plan to or in respect of any participant.
(e) Terra has delivered, or made available, to CMS Energy with respect to
each Plan subject to ERISA, correct and complete copies, where applicable, of
(i) all Plan documents and amendments thereto, trust agreements and amendments
thereto and insurance and annuity contracts and policies, (ii) the current
summary plan description, (iii) the Annual Reports (Form 5500 series) and
accompanying schedules, as filed, for the most recently completed three plan
years for which such reports have been filed, (iv) the financial statements for
the most recently completed three plan years for which such statements have
been prepared, (v) the actuarial reports for the most recently begun three plan
years for which such reports exist, (vi) the most
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recent determination letter issued by the Internal Revenue Service and the
application submitted with respect to such letter, (vii) PBGC Form 1 for the
most recently begun plan year and (viii) all correspondence with the Internal
Revenue Service, Department of Labor and Pension Benefit Guaranty Corporation
concerning any controversy. Each report described in clause (v) of the
preceding sentence accurately describes the funded status of the Plan to which
it relates and subsequent to the date of such report there has been no adverse
change in the funding status or financial condition of such Plan.
SECTION 3.23. EMPLOYEES AND AGENTS AND RELATED AGREEMENTS. (a) Except as
set forth in Schedules 3.23(a) or 3.30, neither Terra nor any of its
Subsidiaries is a party to or bound by any material oral or written employment
agreement, consulting agreement (other than employment or consulting agreements
under which the obligations of Terra or such Subsidiary are terminable by Terra
or such Subsidiaries without premium or penalty (other than statutory severance
or termination benefits) on notice of 30 days or less), deferred compensation
agreement, confidentiality agreement or covenant not to compete with any
officer, director, stockholder, employee, agent or attorney-in-fact of Terra or
any of its Subsidiaries. Terra has delivered to CMS Energy complete and
correct copies of each such agreement or instrument.
(b) Schedule 3.23(b) contains a list of all independent contractors
performing services for Terra or any of its Subsidiaries whose compensation
from Terra and all such Subsidiaries in 1994 was in excess of $250,000.
SECTION 3.24. EMPLOYEE RELATIONS AND LABOR MATTERS. (a) To the knowledge
of Terra, Terra and its Subsidiaries have complied in all material respects
with all applicable laws, rules and regulations which relate to wages, hours,
discrimination in employment and collective bargaining and are not liable for
any material arrearages of wages or any material taxes or penalties for failure
to comply with any of the foregoing. Terra believes that the relations of
Terra and its Subsidiaries with their employees are good.
(b) Except as set forth in Schedule 3.24(b) hereto, neither Terra nor any
of its Subsidiaries is a party to any collective bargaining agreement and Terra
and its Subsidiaries have complied in all material respects with all such
collective bargaining agreements. Neither Terra nor any of its Subsidiaries is
a party to or, to the knowledge of Terra, is threatened with, any dispute or
controversy with a union or with respect to unionization or collective
bargaining involving its employees. To the knowledge of Terra, neither Terra
nor any of its Subsidiaries is materially affected by any dispute or
controversy with a union or with respect to unionization or collective
bargaining involving any of its suppliers or customers. Schedule
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3.24(b) hereto sets forth a list of any union organizing or election activities
involving any non-union employees of Terra or any of its Subsidiaries known to
Terra which have occurred since December 31, 1991 or, to the knowledge of
Terra, are threatened as of the date hereof.
SECTION 3.25. ABSENCE OF CERTAIN BUSINESS PRACTICES. (a) None of Terra or
any of its Subsidiaries, any officer, employee or agent of Terra or any of its
Subsidiaries or any other person acting on its behalf, has, directly or
indirectly, given or agreed to give any gift or similar benefit (other than
with respect to bona fide payments for which adequate consideration has been
given) to any customer, supplier, governmental employee or other person who is
or may be in a position to help or hinder the business of Terra or any of its
Subsidiaries (or assist Terra or any of its Subsidiaries in connection with any
actual or proposed transaction) (a) which might subject Terra or any of its
Subsidiaries to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, (b) which, if not continued in the future, would have
a Material Adverse Effect on Terra or any of its Subsidiaries or which would
subject Terra or any of its Subsidiaries to suit or penalty in any private or
governmental litigation or proceeding, (c) for any of the purposes described in
section 162(c) of the Code, or (d) for establishment or maintenance of any
concealed fund or concealed bank account.
(b) Terra and each of its Subsidiaries is in compliance with all applicable
provisions of the Foreign Corrupt Practices Act of 1976, as amended.
SECTION 3.26. TERRITORIAL RESTRICTIONS. Except as set forth on Schedule
3.26 and except for written agreements or understandings not listed on Schedule
3.26 unless they contain provisions which would have a Material Adverse Effect
on Terra, neither Terra nor any of its Subsidiaries is restricted in any
material respect by any written agreement or understanding (including area of
mutual interest or similar agreements or provisions, but excluding
confidentiality agreements or provisions) with third parties from carrying on
its business in any geographical area.
SECTION 3.27. TRANSACTIONS WITH CERTAIN PERSONS. Except as set forth in
Schedule 3.27 hereto, except for the transactions contemplated by this
Agreement, and except for transactions relating to the participation of an
officer of Terra in oil or gas projects on properties where the transactions
are documented in writing and the interests of such officers pursuant to those
transactions are not included within Terra's net revenue interests, working
interests or overriding royalty interests shown in the Property Schedules,
since January 1, 1992 neither Terra nor any of its Subsidiaries has purchased,
leased or otherwise acquired any material property or obtained any material
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services from, or sold, leased or otherwise disposed of any material property
or furnished any material services to (except with respect to remuneration for
services rendered as a director, officer or employee of Terra or any of its
Subsidiaries), in the ordinary course of business or otherwise, (i) any
Stockholder, (ii) any affiliate of Terra or any of its Subsidiaries, (iii) any
person who is an officer or director of Terra or any of its Subsidiaries or
(iv) any associate of any person referred to in clause (i), (ii) or (iii)
above. Except as set forth in Schedule 3.27 hereto and except for the
transactions contemplated by this Agreement, neither Terra nor any of its
Subsidiaries owes any amount in excess of $10,000 to, or has any contract with
or commitment to, any Stockholder, director, officer or employee of Terra or
any of its Subsidiaries (other than for compensation for current services not
yet due and payable and reimbursement of expenses arising in the ordinary
course of business) and none of such persons owes any amount in excess of
$10,000 to Terra or any of its Subsidiaries.
SECTION 3.28. NO FINDER. Neither Terra nor any of its Subsidiaries nor any
party acting on the behalf of any of them has paid or become obligated to pay
any fee or commission to any broker, finder or intermediary for or on account
of the transactions contemplated by this Agreement.
SECTION 3.29. ENVIRONMENTAL MATTERS. (a) Except as set forth in Schedule
3.29, to the knowledge of Terra, each of Terra and its Subsidiaries and each
operator of Proved Developed Interests or Proved Undeveloped Interests not
operated by Terra or its Subsidiaries, with respect to such Interests:
(i) is in material compliance with all Applicable Environmental Laws,
including those with respect to the use, handling, transportation, discharge,
release and/or disposal of any Hazardous Substance;
(ii) is not the subject of any investigation, judicial or administrative
proceeding, or settlement concerning (A) a Release (as hereinafter defined)
or threatened Release of any Hazardous Substance or (B) the violation of any
Applicable Environmental Laws;
(iii) is not under a duty to file any notice under any Applicable
Environmental Laws reporting the violation of any Applicable Environmental
Laws or the Release or threatened Release of any Hazardous Substance;
(iv) has no contingent liability in connection with any Release or
threatened Release of any Hazardous Substance nor has any present Property or
past Property been listed or proposed for listing on the National Priorities
List ("NPL") pursuant to the federal
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Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. Section Section 9601 et seq., ("CERCLA") or on the Comprehensive
Environmental Response Compensation Liability Information System List
("CERCLIS") or any similar state or foreign list of sites requiring Remedial
Action;
(v) has generated, treated, stored, recycled, transported or disposed of
any Hazardous Substances in accordance with Applicable Environmental Laws;
(vi) has installed underground storage tanks or surface impoundments on its
Property only in connection with the exploration for, or production, treating
or transportation of, oil, gas or other hydrocarbons and in accordance with
Applicable Environmental Laws;
(vii) is operating all Wells, pipelines, storage tanks and other storage
vessels operated by it in material compliance with all secondary containment,
spill prevention and financial assurance requirements of Applicable
Environmental Laws; and
(viii) has no outstanding Lien filed on its assets in favor of any
governmental agency in connection with any Applicable Environmental Laws.
(b) To the knowledge of Terra, each of Terra and its Subsidiaries possesses
all material federal, state, local and foreign rights, privileges, permits and
other material authorizations (including any amendments to any thereof) under
Applicable Environmental Laws necessary to own or lease and operate its
Interests and other material properties and to conduct its business as now
conducted.
(c) For purposes of this Section 3.29, the following definitions shall
apply:
(i) "Applicable Environmental Laws" shall mean any environmental, health,
safety statutes, laws, rules, regulations, ordinances and codes, including,
without limitation, those imposing liability or standards of care with
respect to the handling, transport, treatment or disposal of Hazardous
Substances, and any governmental agency orders, guidelines, directives and
instructions, whether United States federal or state or any foreign
government or political subdivision thereof, applicable to the relevant
operation;
(ii) "Hazardous Substance" means any hazardous or toxic waste, hazardous
substance or any constituent thereof, pollutant, contaminant, including
petroleum
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and its various fractions, natural gas, drilling mud or production wastes,
and equipment and Property affected thereby, as defined or regulated under
any Applicable Environmental Laws.
(iii) "material" means any fines, penalties, natural resource damages,
costs or expenses arising under Applicable Environmental Laws that would
result in an aggregate liability to Terra and its Subsidiaries of not less
than $25,000 per year;
(iv) "Property" means any real or personal property, plant, building,
facility, structure, well, pipeline, storage tank, equipment or unit, or
other asset owned, leased or operated by Terra or any of its Subsidiaries or
in which Terra or any of its Subsidiaries has a net revenue interest or
working interest (including any surface water thereon or adjacent thereto,
and soil or groundwater thereunder whether now or previously or any time);
and
(v) "Release" means any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal; leaching or migration
into the indoor or outdoor environment or into or out of any Property,
including the movement of Hazardous Substances through or in the air, soil,
surface water, groundwater or Property.
(vi) "Remedial Action" shall mean any action required to (A) clean up,
remove, treat or in any other way address Hazardous Substances in the indoor
or outdoor environment; (B) prevent the Release or threat of Release or
minimize the further Release of any Hazardous Substance; or (C) perform
pre-remedial studies and investigations and post remedial care.
(d) Notwithstanding anything contained in this Section 3.29 to the
contrary, no representation or warranty is made with respect to the items set
forth in clauses (A) through (C) of the proviso contained in Section 3.7.
SECTION 3.30. CONTRACTS. (a) Except as contemplated hereby or as set
forth in Schedule 3.30, any other Schedule under this Article III or, in the
case of documents or instruments referred to in clause (ii) below, as are
contained in the records and files of Terra or its Subsidiaries located at
Terra's offices in Traverse City, Michigan and made fully available for
inspection by CMS Energy, neither Terra nor any of its Subsidiaries is a party
to or is bound by any written or material oral contract, agreement, commitment
or instrument or amendment to any of the foregoing (excluding any of the
foregoing which has been fully performed by all parties):
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(i) for the purchase, sale or lease (except if the scheduled lease payments
are less than $10,000 per year) of real property;
(ii) relating to oil and gas leases, licenses, permits and similar
arrangements (collectively, the "Leases"), Operating Agreements, farm-out
and farm-in agreements, service contracts and similar agreements, option
agreements, pooling and unitization agreements, production marketing
agreements, gas balancing agreements, gas purchase and sales contracts,
production sales contracts, processing agreements, permits, licenses and
orders, easements, rights of way, pipeline agreements, exploration
agreements, participation agreements, oil sales contracts, and all agreements
or amendments relating to the same, or assignments of rights or obligations
under any such agreements, all relating to the exploration for or the
development, production, treating, processing, transportation or marketing of
hydrocarbons;
(iii) which provides for, or relates to, the guarantee by Terra or any of
its Subsidiaries of any obligation of any customers, suppliers, officers,
directors, employees or affiliates of Terra or such Subsidiaries;
(iv) which provides for, or relates to, the incurrence by Terra or any of
its Subsidiaries of debt for borrowed money in excess of $10,000;
(v) which provides for, or relates to, any non-competition or
confidentiality arrangement with any person, including any current or former
director, officer or employee of Terra or any of its Subsidiaries;
(vi) for capital expenditures in excess of $25,000 for any single project
or related series of projects;
(vii) any partnership, joint venture or other similar arrangements or
agreements involving a sharing of profits or losses;
(viii) which (other than contracts, agreements, commitments and instruments
of the nature described in clauses (i) through (vii) above) involve payments
or receipts by Terra or any of its Subsidiaries of more than $10,000; and
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(ix) for any purpose (whether or not made in the ordinary course of the
business or otherwise not required to be listed or described in Schedule
3.30) which is material to the business of Terra and its Subsidiaries taken
as a whole.
(b) To the knowledge of Terra, except as set forth in Schedule 3.30, (i)
Terra and its Subsidiaries have fulfilled and performed their obligations in
all material respects under each of the leases, contracts and other agreements
listed in Schedule 3.30 or referred to in clause (ii) of Section 3.30(a)
(collectively, together with other leases, contracts and other agreements
listed in other Schedules under this Article III, the "Terra Agreements") and
are not, and are not alleged to be, in breach or default in any material
respect under, nor is there or is there alleged to be any basis for termination
of, any of the Terra Agreements, and (ii) no event has occurred and no
condition or state of facts exists which, with the passage of time or the
giving of notice or both, would constitute such a default or breach by Terra or
any of its Subsidiaries; provided, however, that no representation or warranty
is made with respect to the items set forth in clauses (A) through (C) of the
proviso to Section 3.7. Copies of each of the Terra Agreements have been made
available to CMS Energy by Terra.
Except as disclosed on Schedule 3.30, the Terra Agreements (i) have been
duly authorized, executed and delivered by Terra or the Subsidiaries of Terra
that are a party thereto, and (ii) are in full force and effect and constitute
legal, valid, binding and enforceable obligations of Terra or such Subsidiaries
and will continue in full force and effect following the consummation of the
Merger without the breach of any terms or conditions thereof or the forfeiture
or impairment of any rights thereunder and without the consent, approval or act
of, or the making of any filing with, any other person or party.
(c) Except as set forth in Schedule 3.30, to the knowledge of Terra, each
operator of Proved Developed Interests or Proved Undeveloped Interests not
operated by Terra or its Subsidiaries fulfilled and performed its respective
obligations in all material respects under each of the leases, contracts and
other agreements relating to such Interests and is not in breach or default in
any material respect under nor is there alleged to be any basis for termination
of any of such agreements, and no event has occurred and no condition or state
of facts exists which, with the passage of time or the giving of notice or
both, would constitute such a default or breach by any such operator; provided,
however, that no representation or warranty is made with respect to the items
set forth in clauses (A) through (C) of the proviso contained in Section 3.7.
(d) Terra has disclosed to its principal co-venturers, Guardian Energy
Management Corp. ("Guardian"), MCN Investment
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Corporation, Destec Fuel Resources, Inc., Chevron U.S.A. Production Company, a
division of Chevron U.S.A. Inc. and Enogex Exploration Corporation, or their
applicable respective affiliates, (i) Terra's ownership of an interest in
certain persons performing services for the projects for which Terra serves as
operator and in which any such co-venturers have respective interests, and (ii)
payment, reimbursement or revenue sharing arrangements that are in place with
respect to the charges assessed against such co-venturers with respect to such
services.
SECTION 3.31. ADDITIONAL DRILLING OBLIGATIONS. Except as disclosed on
Schedule 3.31, except for the 1995 Antrim Program and except for implied
covenants under Leases, as to which no violation has heretofore been asserted,
no Terra Agreements applicable to the Proved Developed Interests contain
provisions to the effect that the drilling of additional wells or other
material development operations is a condition to earning, maintaining or
continuing to hold all or any portion of such Interests, and no Terra
Agreements applicable to Proved Developed Interests, the Proved Undeveloped
Interests or the Unproved Interests contain provisions that unconditionally
require the drilling of additional wells or other material development
operations.
SECTION 3.32. GAS IMBALANCES; PRODUCTION RIGHTS AND OBLIGATIONS. (a)
Except as disclosed on Schedule 3.32, there are no gas imbalances pertaining to
the production and marketing of gas as between Terra or any of its Subsidiaries
and any third party.
(b) Except as disclosed on Schedule 3.32, neither Terra nor any of its
Subsidiaries has received any advance, "take-or-pay," or other similar payments
under production sales contracts that entitle the purchasers to "make-up" or
otherwise receive deliveries of hydrocarbons produced from the Interests
without paying at such time the full contract price therefor that were not made
up prior to January 1, 1995. Except as disclosed on Schedule 3.32, each of
Terra and its Subsidiaries has paid to each royalty and overriding royalty
owner (or such other party in interest as may be entitled to share therein)
such owner's or party's full share of any royalty or other payments with
respect to advance, "take-or-pay" or similar payments (including, but not
limited to, payments relating to any "buy-down" or "buy-out" of any such
contract or arrangement), and no such owner has proposed, demanded or
threatened to demand that it is entitled to any further payments.
SECTION 3.33. WELLS (a) The historical production figures for oil, gas
and water, and revenue and cost and expense figures, relating to the Interests
and provided by Terra to CMS Energy are, to the knowledge of Terra, accurate
and complete in all material respects.
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(b) To the knowledge of Terra, all oil wells and gas wells and all fresh
water wells, injection wells, salt water disposal wells and other wells of
every nature and kind, and wells-in-progress to the extent applicable, whether
producing or non-producing, located on any of the Leases or which constitute
part of the Interests, whether or not operated by Terra (collectively, the
"Wells"), have been drilled, completed and operated substantially within the
limits permitted by applicable local, state, federal or foreign laws, rules or
regulations (excluding Applicable Environmental Laws). To the knowledge of
Terra, no Well is subject to material penalties or production restrictions
because of any overproduction or any other violation of applicable laws, rules,
regulations, permits or judgments, orders or decrees of any court or
governmental body or agency which would have a material adverse effect on the
operation of any Wells.
(c) To the knowledge of Terra, Terra has, with respect to the Interests,
complied in all material respects with the Natural Gas Policy Act of 1978, as
amended, and the rules and regulations thereunder.
SECTION 3.34. CMS ENERGY COMMON SHARES; TERRA COMMON STOCK. (a) Each
Stockholder severally represents and warrants that such Stockholder has
received (i) the Prospectus of CMS Energy dated June 30, 1995 relating to the
CMS Common Shares on July 25, 1995, which is at least twenty (20) Business Days
prior to the Effective Date; (ii) the CMS Energy SEC Documents (as hereinafter
defined), with the exception of the Form 10-Q of CMS Energy for the second
quarter of 1995, on July 25, 1995, (iii) the Form 10-Q of CMS Energy for the
second quarter of 1995 on or about August 14, 1995; and (iv) such further
information as such Stockholder reasonably requests concerning CMS Energy and
its business, results of operations and financial condition.
(b) Each Non-Management Stockholder severally represents and warrants that
such Non-Management Stockholder has received (i) the financial statements
referred to in Section 3.5 (including, without limitation, the Balance Sheet,
the Statement of Income, the Unaudited Balance Sheet and the Unaudited
Statement of Income) relating to Terra and its consolidated subsidiaries and
(ii) such further information as such Non- Management Stockholder reasonably
requests concerning Terra, the Terra Business, its properties, results of
operations, financial condition and prospects.
SECTION 3.35. DISCLOSURE. To the knowledge of Terra, none of the
representations and warranties contained herein, the information contained in
the Schedules referred to in this Article III or the other information or
documents referred to in this Article III as having been furnished or to be
furnished or made available to CMS Energy or any of its representatives by
Terra, the Stockholders or their representatives pursuant to the
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<PAGE> 50
terms of this Agreement is false or misleading in any material respect or omits
to state a fact necessary to make the statements herein or therein not
misleading in any material respect.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CMS ENERGY
As an inducement to Terra, the Stockholders and the Optionholders to enter
into this Agreement and to consummate the transactions contemplated hereby, CMS
Energy hereby warrants and represents to Terra, the Stockholders and the
Optionholders and agrees as follows:
SECTION 4.1. ORGANIZATION OF CMS ENERGY. CMS Energy is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Michigan. CMS Energy is duly qualified to transact business as a foreign
corporation and is in good standing in each of the jurisdictions in which the
ownership or leasing of the properties used in its business or the conduct of
its business requires such qualification, other than in such jurisdictions
where the failure to be so qualified and in good standing would not have a
material adverse effect on the financial condition or results of operation of
CMS Energy and its consolidated subsidiaries taken as a whole, and no other
jurisdiction has demanded, requested or otherwise indicated that CMS Energy is
required so to qualify. CMS Energy has full corporate power and authority to
own or lease and operate its properties and to carry on its business as now
conducted.
SECTION 4.2. AUTHORITY. CMS Energy has full corporate power and authority
to enter into this Agreement and to consummate the transactions contemplated
hereby. The execution, delivery and performance of this Agreement by CMS
Energy and the consummation by CMS Energy of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of CMS Energy, subject to the adoption of this Agreement by CMS Energy as the
sole stockholder of Sub. This Agreement is, and each other agreement or
instrument of CMS Energy contemplated hereby when executed and delivered by CMS
Energy will be, the legal, valid and binding obligation of CMS Energy
enforceable against CMS Energy in accordance with its respective terms, except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
Neither the execution and delivery of this Agreement by CMS Energy nor
consummation of the transactions contemplated hereby or compliance with or
fulfillment of the terms and provisions hereof by CMS Energy will (a) result in
a breach of
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the terms, conditions or provisions of, or constitute a default, an event of
default or an event creating rights of acceleration, termination or
cancellation or a loss of rights, or result in the creation or imposition of
any encumbrance upon any of the material assets of CMS Energy, under (i) the
articles of incorporation or the by-laws of CMS Energy, (ii) any material
instrument, agreement, mortgage, indenture, deed of trust, permit, concession,
grant, franchise, license, judgment, order, award, decree or other restriction
to which CMS Energy is a party or any of its material properties is subject or
by which it is bound or (iii) any material statute, other law or regulatory
provision affecting CMS Energy other than, in the case of clauses (ii) or
(iii), any such breaches, defaults, rights or encumbrances that, individually
or in the aggregate, would not have a material adverse effect on the financial
condition or results of operation of CMS Energy and its consolidated
subsidiaries taken as a whole, materially impair the ability of CMS Energy to
perform its obligations hereunder or prevent the consummation of any of the
transactions contemplated hereby, or (b) require the approval, consent or
authorization of, or the making of any declaration, filing or registration
with, any third party or any foreign, federal, state or local court,
governmental authority or regulatory body, by or on behalf of CMS Energy or
Sub, except for the filing of a Form S-4 Registration Statement with the
Securities and Exchange Commission (the "SEC") under the Securities Act of
1933, as amended (the "Securities Act") and the declaration of effectiveness
thereof by the SEC, and for the applicable requirements of the HSR Act, the
filing of a Certificate of Merger in the office of the Corporation and
Securities Bureau, Department of Commerce, of the State of Michigan, and
appropriate documents with the relevant authorities of other jurisdictions in
which Terra is qualified to do business, such filings and consents as may be
required under any environmental, health or safety law or regulation pertaining
to any notification, disclosure or required approval triggered by the Merger or
the transactions contemplated by this Agreement, such consents, approvals,
orders, authorizations, registrations, declarations and filings as may be
required under the corporation, takeover or blue sky laws of various states,
and such other consents, orders, authorizations, registrations, declarations
and filings the failure of which to be obtained or made would not, individually
or in the aggregate, have a material adverse effect on the financial condition
or results of operation of CMS Energy and its consolidated subsidiaries taken
as a whole, materially impair the ability of CMS Energy to perform its
obligations hereunder or prevent the consummation of any of the transactions
contemplated hereby.
SECTION 4.3. SHARES OF CMS COMMON STOCK. The CMS Common Shares to be
delivered to the Stockholders pursuant to this Agreement will, when issued and
delivered in accordance with the terms hereof, be duly and validly issued and
outstanding, fully paid and nonassessable shares of CMS Common Stock free and
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clear of all Liens other than those arising by or through any Stockholder, and
the issuance of all shares of CMS Common Stock issuable in connection with the
consummation of the transactions contemplated hereby has been duly registered
with the SEC on a Form S-4 Registration Statement under the Securities Act
(reg. no. 033-60007) of CMS Energy which was declared effective by the SEC on
June 30, 1995, and prior to the Effective Time all CMS Common Shares issuable
in connection with the consummation of the transactions contemplated hereby
shall have been listed, or approved for listing upon notice of issuance, on the
NYSE. No stop order suspending the effectiveness of such Registration
Statement has been issued by the SEC.
SECTION 4.4. CAPITALIZATION. The authorized capital of CMS Energy consists
of (i) 250,000,000 shares of common stock, $.01 par value, of which, as of June
30, 1995, 88,174,182 shares were issued and outstanding, 2,829,900 shares were
held by CMS Energy, 5,222,648 shares were held by subsidiaries of CMS Energy
and 3,188,210 shares were reserved for issuance under certain CMS Energy
compensation plans, (ii) 10,000,000 shares of preferred stock, $.01 par value,
none of which is issued and outstanding or reserved for any purpose, and (iii)
60,000,000 shares of Class G common stock, no par value, of which, as of August
15, 1995, 7,526,924 shares were issued and outstanding. All of the outstanding
shares of CMS Common Stock are duly authorized, validly issued, fully paid and
nonassessable. Except for options granted and CMS Common Stock issuable
pursuant to certain CMS Energy compensation plans, and as contemplated hereby,
there are no options, warrants or other rights to acquire from CMS Energy or
agreements or commitments by CMS Energy to issue or sell shares of its capital
stock, whether on conversion of other securities or otherwise. None of the
issued and outstanding shares of CMS Common Stock has been issued in violation
of, or is subject to, any preemptive or subscription rights. There are no
stockholder agreements, voting trust agreements or any other similar contracts,
agreements, arrangements, commitments, plans or understandings to which CMS
Energy is a party restricting or otherwise relating to voting, dividend,
ownership or transfer rights with respect to any shares of capital stock of CMS
Energy.
SECTION 4.5. OPERATIONS SINCE JUNE 30, 1995. Except as set forth in the
CMS Energy SEC Documents, since June 30, 1995, there has been: (i) no material
adverse change in the financial condition or results of operation of CMS Energy
and its consolidated subsidiaries taken as a whole; and (ii) no damage,
destruction, loss or claim with respect to, whether or not covered by
insurance, or condemnation or other taking of, assets having a material adverse
effect on the financial condition or results of operation of CMS Energy and its
consolidated subsidiaries taken as a whole.
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SECTION 4.6. COMPLIANCE WITH LAWS. CMS Energy is in compliance with the
provisions of all applicable laws and regulations of the federal, state, local
and foreign governments, except to the extent that the failure to comply
therewith would not have a material adverse effect on the financial condition
or results of operation of CMS Energy and its consolidated subsidiaries taken
as a whole. Except as set forth in the CMS Energy SEC Documents, to the
knowledge of CMS Energy, there are no proposed orders, judgments, decrees,
governmental takings, condemnations or other proceedings, in each case binding
upon the business, operations or properties of CMS Energy or any subsidiary
thereof, which would have a material adverse effect on the financial condition
or results of operation of CMS Energy and its consolidated subsidiaries taken
as a whole.
SECTION 4.7. SEC DOCUMENTS. CMS Energy has previously delivered to Terra
and the Stockholders complete and correct copies of all reports (including
annual reports on Form 10-K, current reports on Form 8-K, quarterly reports on
Form 10-Q and proxy statements) filed by it with the SEC pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act") since December
31, 1994 (the "CMS Energy SEC Documents"). To the knowledge of CMS Energy,
none of the information supplied by CMS Energy and included in the Registration
Statement or the Prospectus (as hereinafter defined), as it may be amended or
supplemented, or the documents filed under the Exchange Act which are
incorporated by reference therein, as of their respective effective, issue or
filing dates, does or will, as the case may be, contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Registration
Statement and Prospectus comply as to form in all material respects with the
applicable provisions of the Securities Act and the rules and regulations
promulgated thereunder.
SECTION 4.8. NO FINDER. Neither CMS Energy nor any party acting on its
behalf has paid or become obligated to pay any fee or any commission to any
broker, finder or intermediary for or on account of the transactions
contemplated herein.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SUB
As an inducement to Terra, the Stockholders and the Optionholders to enter
into this Agreement and to consummate the transactions contemplated hereby, CMS
Energy and Sub hereby jointly and severally warrant and represent to Terra, the
Stockholders and the Optionholders and agree as follows:
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SECTION 5.1. ORGANIZATION AND STANDING. Sub is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Michigan. Sub was organized solely for the purpose of engaging in the
transactions contemplated by this Agreement and has not engaged in any business
since it was incorporated which is not in connection with this Agreement and
has no material assets or liabilities (other than the rights and obligations
referred to in this Agreement).
SECTION 5.2. CAPITAL STRUCTURE. The authorized capital stock of Sub
consists of 60,000 shares of common stock, no par value, of which 10 shares are
validly issued and outstanding, fully paid and nonassessable and are owned by
CMS Energy free and clear of all liens, claims and encumbrances.
SECTION 5.3. AUTHORITY. Sub has full corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement, the performance by Sub
of its obligations hereunder and the consummation of the transactions
contemplated hereby have been duly authorized by its Board of Directors and by
CMS Energy as its sole stockholder, and, except for the corporate filings
required by state law, no other corporate proceedings on the part of Sub are
necessary to authorize this Agreement and the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by Sub and this
Agreement is, and each other agreement or instrument of Sub contemplated hereby
when executed and delivered by Sub will be, the legal, valid and binding
agreement of Sub enforceable against Sub in accordance with its respective
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and by general equitable principles
(whether enforcement is sought by proceedings in equity or at law).
ARTICLE VI
ACTIONS PRIOR TO THE EFFECTIVE DATE
CMS Energy, Sub and Terra (and the Stockholders with respect to their
individual obligations set forth in Sections 6.2, 6.7, 6.8, and 6.11 and the
Optionholders with respect to their individual obligations set forth in
Sections 6.2, 6.7, 6.8 and 6.12) covenant and agree to take the following
respective actions between the date hereof and the Effective Date:
SECTION 6.1. ISSUANCE OF CMS COMMON SHARES. (a) CMS Energy has filed a
registration statement on Form S-4 with the SEC containing a prospectus (the
"Prospectus") covering the issuance and sale of the CMS Common Shares to be
delivered
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hereunder. CMS Energy will use all reasonable efforts to cause such
registration statement (the "Registration Statement") to be effective at least
twenty (20) Business Days prior to the Effective Date. CMS Energy shall
deliver to the NYSE pursuant to Rule 153 under the Securities Act copies of the
Prospectus included in the Registration Statement, as the same may be amended
or supplemented from time to time.
(b) CMS Energy shall use all reasonable efforts to list the CMS Common
Shares to be issued hereunder on the NYSE.
SECTION 6.2. ACTION BY STOCKHOLDERS OF TERRA. Terra shall duly call, give
notice of, convene and hold a meeting of its stockholders for the purpose of
approving the Merger and adopting this Agreement. Terra will, through its
Board of Directors, recommend to its stockholders the adoption of this
Agreement. In lieu of such meeting, the stockholders of Terra may take the
actions described in the preceding sentence by unanimous written consent in
accordance with the BCA. Each of the Stockholders and the Optionholders agrees
to take all necessary action to cause this Agreement to be so adopted.
SECTION 6.3. SUBSEQUENT FINANCIAL STATEMENTS. Prior to the Effective Date,
Terra shall deliver to CMS Energy, not later than sixty (60) days after the end
of each monthly period beginning after June 30, 1995 and in the form
customarily prepared by Terra, the unaudited internal consolidated financial
statements of Terra, including an income statement, for the monthly period then
ended and for the period from the beginning of the fiscal year to the end of
such monthly period.
SECTION 6.4. INVESTIGATION OF TERRA. Terra shall afford to the officers,
employees and authorized representatives of CMS Energy (including, without
limitation, independent public accountants, attorneys, environmental
consultants and financial advisors of CMS Energy), reasonable access during
normal business hours to the offices, properties, employees and business and
financial records (including, without limitation, computer files, retrieval
programs and similar documentation) of Terra to the extent CMS Energy shall
deem necessary or desirable, and shall furnish to CMS Energy or its authorized
representatives such additional information concerning the operations,
properties and businesses of Terra as may be reasonably requested in writing,
to enable CMS Energy or its authorized representatives to verify the accuracy
of the representations and warranties contained in this Agreement, to verify
the accuracy of the financial statements referred to in Section 3.5 and to
determine whether the conditions set forth in Article VIII have been satisfied.
CMS Energy agrees that such investigations shall be conducted in such manner as
not to interfere unreasonably with the operation of the business of Terra.
Without limiting the foregoing, Terra shall permit CMS Energy, or its
representatives, (i) to conduct a site inspection of any of the Interests, the
Owned Real Property or
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the Leased Real Property, to witness and to conduct well tests, and to conduct
an environmental audit of any such properties with respect to any
environmental, health or safety issues deemed material by CMS Energy, (ii)
access to all title information in the possession of Terra or its Subsidiaries,
its agents or attorneys, relating to the Interests, and Terra shall use its
best efforts to obtain any other such title information from third parties that
is reasonably requested by CMS Energy, and (iii) access to all production and
operating information in the possession of Terra or its Subsidiaries, its
agents or attorneys, relating to the Interests, and Terra shall use its best
efforts to obtain any other production and operation information from third
parties that is reasonably requested by CMS Energy.
SECTION 6.5. LAWSUITS, PROCEEDINGS, ETC. Each of CMS Energy and Terra
shall notify the other promptly of any lawsuit, proceeding, claim or
investigation that may be threatened, brought, asserted or commenced against
any party hereto involving in any way the transactions contemplated by this
Agreement or that would have been listed in Schedule 3.17 or the CMS Energy SEC
Documents if such lawsuit, proceeding, claim or investigation had arisen prior
to the date hereof.
SECTION 6.6. CONDUCT OF BUSINESS BY TERRA PENDING THE MERGER. (a) During
the period from January 1, 1995 through the Effective Time, except as set forth
in any Schedules to this Agreement or as expressly contemplated by this
Agreement, Terra has carried on, and will carry on, its business in, and has
not entered into, and will not enter into, any material transaction other than
in, the ordinary course of business consistent with past practice and, to the
extent consistent therewith, has used and will use its reasonable efforts to
preserve intact its current business organization, to keep available the
services of its current officers and employees and to preserve its
relationships with material customers, material suppliers and others having
material business dealings with it (except with the written consent of CMS
Energy and except as set forth in any Schedules to this Agreement or as
contemplated by this Agreement). Without limiting the generality of the
foregoing, and except as set forth in any Schedules to this Agreement or as
expressly contemplated by this Agreement, Terra and its Subsidiaries has not
since January 1, 1995 and shall not, without the prior written consent of CMS
Energy, which, as to matters relating to clauses (vii), (viii) or (xii) of this
Section 6.6(a), CMS Energy agrees not to unreasonably withhold or delay:
(i) (A) declare, set aside or pay any dividends on, or make any other
actual, constructive or deemed distributions in respect of, any of its
capital stock, or otherwise make any payments to the Stockholders in their
capacity as such, (B) split, combine or reclassify any of its capital stock
or issue, sell or authorize the issuance of any other securities in
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respect of, in lieu of or in substitution for shares of its capital stock, or
(C) purchase, redeem or otherwise acquire any shares of capital stock of
Terra or any other securities thereof or any rights, warrants or options to
acquire any such shares or other securities;
(ii) issue, deliver, sell, pledge, dispose of or otherwise encumber any
shares of its capital stock or other securities (including, without
limitation, any rights, warrants or options to acquire any securities),
except for issuances of its common stock upon exercise of the Options to
acquire an aggregate of up to 2,545,922 shares of Terra Common Stock held by
certain Optionholders;
(iii) amend its articles of incorporation or by-laws;
(iv) acquire or agree to acquire, by merging or consolidating with, or by
purchasing a substantial portion of the assets of or equity in, or in any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof;
(v) sell, lease or otherwise dispose of or agree to sell, lease or
otherwise dispose of, any of its assets, except for (A) sales of produced
hydrocarbons in the ordinary course of business, (B) the sale, lease or other
disposition of other assets in the ordinary course of business consistent
with past practice, provided that no such sale, lease or disposition has
caused or will cause the representations and warranties contained in Section
3.6(a) hereof to be untrue or incorrect in any material respect; (C)
dispositions of assets as contemplated by clause (xiii) of this Section
6.6(a), or (D) the sale of the Purchased Assets as contemplated by Section
6.6(b);
(vi) incur any indebtedness for borrowed money or guarantee any such
indebtedness material to the business or assets of Terra and its
Subsidiaries, taken as a whole, except in the ordinary course of business
consistent with past practice and except as contemplated hereunder or issue
or sell any debt securities or guarantee any debt securities of others, or
make any loans, advances or capital contributions to, or investments in, any
other person, except the incurrence and/or guarantee of indebtedness to fund
working capital;
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(vii) with respect to its operations other than the 1995 Antrim Program and
construction of the New Office, make or incur any new capital expenditure or
capital expenditures for any single project or related series of projects
which are in excess of $100,000 and, with respect to the New Office
(exclusive of furnishings and equipment), make any capital or major
expenditures or investments, or incur any obligations for capital or major
expenditures or enter into any leases for personal or real property, in
excess of $2 million.
(viii) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than such payment, discharge or satisfaction in the ordinary course of
business consistent with past practice;
(ix) alter through merger, liquidation, reorganization, restructuring or in
any other fashion its corporate structure;
(x) enter into or adopt, or amend, any existing, bonus, incentive, deferred
compensation, insurance, medical, hospital, disability or severance plan,
agreement or arrangement or enter into or amend any Plan or material
employment, consulting or management agreement, other than any such amendment
to a Plan that is made to maintain the qualified status of such Plan or its
continued compliance with applicable law and except as contemplated
hereunder;
(xi) make any change in accounting practices or policies applied in the
preparation of the financial statements referred to in Section 3.5 except as
required by GAAP;
(xii) except in the ordinary course of business consistent with past
practice, knowingly make any material modifications to any material
agreements, understandings, obligations, commitments, indebtedness or other
material obligations or enter into any agreement, understanding, obligation
or commitment, or incur any indebtedness or obligation, of the type that
would have been required to be listed on Schedule 3.30 or that would
otherwise would have been included in the Terra Agreements if in existence on
the date hereof; provided that no such modifications, agreements or
incurrences of indebtedness shall in any event cause the representations and
warranties contained in Section 3.6(a) hereof to be untrue or incorrect in
any material respect;
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(xiii) pay or commit to pay any bonus to any director, officer or employee
of Terra other than (A) payment to the respective employees entitled thereto
of the bonuses contemplated by Section 7.5(b) hereof, (B) payment to
employees (other than the Management Stockholders) of bonuses not to exceed
$1.0 million in the aggregate; (C) payment of employee bonuses to the
Management Stockholders not to exceed $2.4 million in the aggregate; and (D)
payment to Boeve and Sterenberg of bonuses not to exceed $881,260 and
$302,636, respectively; or
(xiv) enter into any other transaction materially affecting the business of
Terra, other than in the ordinary course of business consistent with past
practice or as expressly contemplated by this Agreement; provided that to the
extent that this clause (xiv) constitutes a representation or warranty, no
representation or warranty is made with respect to the items set forth in
clauses (A) through (C) of the proviso contained in Section 3.7 or with
respect to the matters referred to in Sections 3.22 and Section 3.29 (except
to the extent specifically set forth therein).
(b) Notwithstanding any other provision of this Agreement, prior to the
Effective Time, Terra shall sell to one or more limited liability companies to
be formed by Lagina, Boeve, Tester and/or Sterenberg ("Newco"), Lagina or
Boeve, as designated, to be effected immediately prior to the Effective Time,
certain assets, together with all associated liabilities and obligations
relating thereto (the "Purchased Assets"), of Terra, all as designated in, and
such sales to be effected pursuant to, respective asset purchase agreements
with each of Newco, Lagina and Boeve and related transfer instruments and other
required documentation substantially in the form of Exhibit B hereto, and Terra
may take any action reasonably necessary or appropriate pursuant thereto to
effect such sales.
(c) Terra shall promptly advise CMS Energy orally and in writing of any
change or event having a Material Adverse Effect on Terra and its Subsidiaries
taken as a whole.
SECTION 6.7. MUTUAL COOPERATION; REASONABLE BEST EFFORTS. The respective
parties hereto shall cooperate with each other, and shall use their respective
reasonable best efforts, to cause the fulfillment, to the extent within their
reasonable control, of the conditions to each party's obligations hereunder
which are within such reasonable control and to obtain as promptly as possible,
to the extent within their reasonable control, all consents, authorizations,
orders or approvals from each and every third party, whether private or
governmental, required in connection with the transactions contemplated by this
Agreement; provided, however, that the foregoing shall not
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require CMS Energy or Terra to make any divestiture or consent to any
divestiture in order to obtain any waiver, consent or approval.
SECTION 6.8. NO PUBLIC ANNOUNCEMENT. None of the parties hereto shall,
without the approval of CMS Energy and Terra (which may not be unreasonably
withheld), make any press release or other public announcement concerning the
transactions contemplated by this Agreement, except as and to the extent that
such party shall be so obligated by law, in which case each of CMS Energy and
Terra shall be advised and they shall use their reasonable best efforts to
cause a mutually agreeable release or announcement to be issued; provided that
nothing herein shall be deemed to interfere with the filing by CMS Energy of a
Form S-4 with the SEC.
SECTION 6.9. NO SOLICITATION. Terra shall not, nor shall it authorize or
permit any officer, director or employee of it or its Subsidiaries or
affiliates or any investment banker, attorney or other adviser or
representative of Terra or any of its Subsidiaries or affiliates to, (i)
solicit, initiate, or encourage the submission of, any Acquisition Proposal (as
hereinafter defined), (ii) enter into any agreement with respect to any
Acquisition Proposal or (iii) except to the extent required by law as advised
by counsel in writing, participate in any discussions or negotiations
regarding, or furnish to any person any information for the purpose of
facilitating the making of, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any Acquisition Proposal. Terra promptly shall advise CMS
Energy of any Acquisition Proposal and any inquiries with respect to any
Acquisition Proposal, in each case occurring on or after May 27, 1995. For
purposes of this Agreement, "Acquisition Proposal" means any proposal for a
merger or other business combination involving Terra or any of its Subsidiaries
or affiliates or any proposal or offer to acquire in any manner, directly or
indirectly, an equity interest in Terra or any of its Subsidiaries or
affiliates, any voting securities of Terra or any of its Subsidiaries or
affiliates or a substantial portion of the assets of Terra and its Subsidiaries
taken as a whole.
SECTION 6.10. ANTITRUST LAW COMPLIANCE. CMS Energy and Terra shall file
and Terra shall cause to be filed with the Federal Trade Commission and the
United States Department of Justice the notification and other information
required to be filed with respect to the transactions contemplated hereby under
the HSR Act and the rules and regulations promulgated thereunder. CMS Energy
warrants that all such filings by it shall be, and Terra warrants that all such
filings by it shall be, accurate as of the date filed and in accordance with
the requirements of the HSR Act and all such rules and regulations. CMS Energy
and Terra agree to make available, or cause to be made available, to the
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other parties such information as may reasonably be requested relative to the
businesses, assets and property of CMS Energy and Terra, as the case may be, as
may be required to file any additional information requested by such agencies
under the HSR Act and such rules and regulations.
SECTION 6.11. TERMINATION OF LAGINA PROXIES. Lagina, Boeve and Sterenberg
shall cause all rights of Lagina to receive voting proxies (the "Lagina
Proxies") as to shares of Terra Common Stock to be acquired by the
Optionholders under the terms of the Options to be terminated, effective at or
prior to the Effective Time, and each of Lagina, Boeve and Sterenberg agree
that the Lagina Proxies are hereby terminated effective as of the Effective
Time.
SECTION 6.12. EXERCISE OF OPTIONS. Each of Terra, Tester and the
Optionholders agrees that, prior to the Effective Time, the Options to acquire
an aggregate of up to 2,545,922 shares of Terra Common Stock from Terra
currently held by certain Optionholders shall be exercised in accordance with
their terms and the options to acquire an additional 359,379 currently
outstanding shares of Terra Common Stock by Boeve from Tester shall be
exercised, and each such Optionholder shall, to the extent such Options are
subject to Section 83 of the Code and the regulations thereunder, pay to Terra
an amount equal to the income tax and employment tax withholding relating
thereto assuming a fair market value of each share of Terra Common Stock
received upon exercise equal to the fair market value of the consideration to
be received therefor in the Merger, such amount to be payable by each such
Optionholder in cash; and as of the Effective Time, no shares of Terra Common
Stock shall be issuable by Terra pursuant to or shall otherwise be subject to
the Options.
SECTION 6.13. NEW OFFICE BUILDING. Terra shall proceed with construction
of a new office building on the six acre parcel on which such office building
("New Office") is proposed to be constructed in accordance with current plans
and budgets; provided that Terra shall immediately and from time to time
thereafter confer with CMS Energy regarding the plans, budgets and construction
process and any revisions thereto shall be subject to the written consent of
CMS Energy; and provided further that Terra will not make any commitment
relating to construction costs in excess of $2 million (exclusive of
furnishings and equipment) in the aggregate, and will not make any commitment
with respect to the $350,000 budgeted for furnishings and equipment, in each
case without the prior written approval of CMS Energy, which approval will not
be unreasonably withheld or delayed.
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ARTICLE VII
ADDITIONAL COVENANTS AND AGREEMENTS
SECTION 7.1. TAX-FREE NATURE; TAX CONSEQUENCES. (a) The Stockholders and
CMS Energy intend the Merger to constitute a reorganization described in
Section 368(a)(2)(E) of the Code and shall use their best efforts to cooperate
in achieving such a tax-free reorganization. Notwithstanding the preceding
sentence, the parties to this Agreement will rely solely on their own advisors
in determining the tax consequences of the transactions contemplated by this
Agreement and each party is not relying, and will not rely, on any
representations or assurances of any other party regarding such consequences
other than the representations and covenants set forth in writing in this
Agreement or any other agreement or certificate delivered in connection
herewith. In the event that the Merger does not qualify as such a tax-free
reorganization, the validity of the Merger and the transactions contemplated
thereby shall nevertheless be binding and final upon the parties to this
Agreement. Neither the Stockholders nor CMS Energy will take any tax reporting
positions or make any tax elections inconsistent with the characterization of
the Merger as a reorganization described in Section 368(a)(2)(E) of the Code
except as may be required upon examination (or the result of a prior
determination) by the Internal Revenue Service or any other Tax authority.
(b) Each Stockholder agrees that he will not sell or transfer more than one
percent (1%) of the aggregate outstanding CMS Common Stock within any ninety
(90) day period. The Stockholders agree that the aggregate sales and transfers
by all Stockholders of CMS Common Stock (i) shall not exceed 25% of the
aggregate number of shares of CMS Common Stock issued in the Merger in any
ninety (90) day period and (ii) shall not exceed 20,000 shares of CMS Common
Stock on any given trading day during the first ninety (90) day period after
the Effective Date; provided that transfers by any Stockholder to a spouse in
transactions not effected in the public markets shall be excluded from such
restrictions so long as such spouse agrees to be bound by the restrictions
contained in this Section 7.1(b).
(c) CMS Energy hereby warrants and represents to and covenants with Terra
and the Stockholders that:
(i) neither CMS Energy nor the Surviving Corporation has any plan or
intention to take any action following the Merger that could result in the
Surviving Corporation's failing to hold at least 90 percent of the fair
market value of Terra's net assets and at least 70 percent of the fair market
value of Terra's gross assets and at least 90 percent of the fair market
value of Sub's net assets and at least 70
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percent of the fair market value of Sub's gross assets held immediately prior
to the Merger (determined before taking into account the payment of bonuses
referred to in Section 6.6(a)(xiii), and any amounts used by Terra or Sub to
pay Merger expenses and assuming that the amount received with respect to the
Purchased Assets was not less than the fair market value thereof). For
purposes of the preceding sentence, the Merger expenses incurred by Terra or
Sub shall be deemed not to exceed $500,000, and the loan by the Surviving
Corporation of up to $5,000,000 to CMS NOMECO on commercially reasonable
terms shall not be deemed to be a transfer or distribution;
(ii) the Surviving Corporation has no plan or intention to issue additional
shares of its stock that would result in CMS Energy's losing control of the
Surviving Corporation within the meaning of Section 368(c) of the Code;
(iii) CMS Energy has no plan or intention to reacquire any of the CMS
Common Stock issued in the Merger;
(iv) CMS Energy has no plan or intention to liquidate the Surviving
Corporation, to merge the Surviving Corporation with or into another
corporation, to sell or otherwise dispose of the stock of the Surviving
Corporation (except for a transfer of stock of the Surviving Corporation by
CMS Energy to CMS Enterprises (which is a corporation controlled by CMS
Energy within the meaning of Section 368(a)(2)(C) of the Code and Treas. Reg.
Section 1.368-2(j)(4)) in exchange for the stock and debt obligations of
Enterprises, which is to be followed by a transfer of the stock of the
Surviving Corporation by Enterprises to CMS NOMECO (which is a corporation
controlled by Enterprises within the meaning of Section 368(c) of the Code)
in exchange for the stock and debt obligation of CMS NOMECO);
(v) Sub will have no liabilities assumed by the Surviving Corporation and
will not transfer to the Surviving Corporation any assets subject to
liabilities in the Merger;
(vi) following the Merger, the Surviving Corporation will continue Terra's
historic business or use a significant portion of Terra's historic business
assets in a business;
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(vii) CMS Energy and Sub will pay their respective expenses, if any,
incurred in connection with the Merger;
(viii) there is no intercorporate indebtedness between CMS Energy and Terra
or between Sub and Terra that will be settled at a discount following the
Merger;
(ix) CMS Energy is not an investment company as defined in Sections
368(a)(2)(F)(iii) and (iv) of the Code;
(x) the total cash consideration that will be paid in the Merger in lieu of
issuing fractional shares of CMS Common Stock will not exceed one percent of
the total fair market value of the CMS Common Stock (as of the Effective
Time) to be issued in the Merger;
(xi) prior to acquisitions contemplated by this Agreement, CMS Energy did
not own during the past five years any shares of the stock of Terra; and
(xii) prior to the Merger, CMS Energy will be in control of Sub within the
meaning of Section 368(c) of the Code.
SECTION 7.2. TAXES.
(a) Liability for Taxes.
(i) Except as shown as a liability or reserve on the Balance Sheet, the
Management Stockholders shall be liable for and indemnify CMS Energy, the
Surviving Corporation and their subsidiaries (collectively, the "Tax
Indemnitees") for all Taxes imposed on any Tax Indemnitee (or for which a Tax
Indemnitee may otherwise be liable) arising from the assets or activities of
Terra and its Subsidiaries for any taxable year or period of Terra or its
Subsidiaries that ends on or before the Balance Sheet Date and, with respect
to any taxable year or period beginning before and ending after the Balance
Sheet Date, the portion of such taxable year ending on and including the
Balance Sheet Date.
(ii) The Tax Indemnitees shall be liable for and indemnify the Management
Stockholders for the Taxes of Terra and its Subsidiaries for any taxable year
or period that begins after the Balance Sheet Date and, with respect to any
taxable year or period beginning before and ending after the Balance Sheet
Date, the
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portion of such taxable year or period beginning after the Balance Sheet
Date. Notwithstanding the preceding sentence, the Management Stockholders
shall be liable for and indemnify the Tax Indemnitees for 63% of any Taxes
imposed on any Tax Indemnitee (or for which a Tax Indemnitee may otherwise be
liable) arising from the disallowance of a deduction for the payments
described in Section 6.6(a)(xiii)(B), (C) or (D) or Section 7.5(b). For
purposes of the preceding sentence, no effect shall be given to the use of
credits allowable pursuant to Sections 29 or 53 of the Code.
(iii) For purposes of paragraphs (a)(i) and (a)(ii), whenever it is
necessary to determine the liability for Taxes of Terra and its Subsidiaries
for a portion of a taxable year or period that begins before and ends after
the Balance Sheet Date, the determination of the Taxes of Terra and its
Subsidiaries for the portion of the year or period ending on, and the portion
of the year or period beginning after, the Balance Sheet Date shall be
determined by assuming that Terra and its Subsidiaries had a taxable year or
period which ended at the close of the Balance Sheet Date, except that
exemptions, allowances or deductions that are calculated on an annual basis,
such as the deduction for depreciation, shall be apportioned on a daily
basis.
(iv) The Management Stockholders shall be liable for all transfer, sales,
use or similar Taxes arising from the transactions contemplated by Section
6.6(b).
(v) Within twenty (20) days after the execution of this Agreement, the
Stockholders shall deliver or cause to be delivered to CMS Energy or its
designee true and complete copies of: (A) all income Tax Returns of Terra
and its Subsidiaries requested by CMS Energy or its Subsidiaries; (B) any
other Tax Returns of Terra and its Subsidiaries requested by CMS Energy or
its Subsidiaries, as may be relevant to Terra and its Subsidiaries and their
assets and operations; and (C) any work papers or other supporting data
requested by CMS Energy or its subsidiaries relating to "income taxes
payable" or similar line item reflected in the Statement of Income or Balance
Sheet relating to Tax Returns made available pursuant to (A) or (B), or
relating to Tax Returns referred to in (A) or (B) not yet filed, to the
extent copies of such Tax Returns, work papers or other data are in existence
and in the possession of Terra at the time of such request.
(vi) Surviving Corporation and Subsidiaries shall be entitled to retain any
refund or credit of Taxes
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(and interest thereon) attributable to a carryback of losses, credits or
other similar items from a taxable year or period that ends after the Balance
Sheet Date to a taxable year or period that ends on or before the Balance
Sheet Date.
(b) Tax Returns. Terra shall file when due (after taking into account all
extensions properly obtained) all Tax Returns that are required to be filed by
or with respect to Terra and its Subsidiaries on or before the Effective Date
and shall remit or cause to be remitted any Taxes shown to be due on such Tax
Returns, and the Surviving Corporation shall file when due (after taking into
account all extensions properly obtained) all Tax Returns that are required to
be filed by Terra and its Subsidiaries after the Effective Date and shall remit
or cause to be remitted any Taxes due in respect of such Tax Returns. All Tax
Returns which Terra is required to file in accordance with this paragraph (b)
shall be prepared and filed in a manner consistent with past practice and, on
such Tax Returns, no position shall be taken or method adopted that is
inconsistent with positions taken or methods used in preparing and filing
similar Tax Returns in prior periods except for changes required by law or
changes in facts.
(c) Contest Provisions. CMS Energy or one of its subsidiaries shall
notify the Stockholders in writing upon receipt by any Tax Indemnitee of notice
of any pending or threatened federal, state, local or foreign Tax audit or
assessment (including any revenue agent report or notice of proposed
adjustment) which may materially affect the Tax liabilities of Terra or its
Subsidiaries for which the Stockholders would be required to indemnify the Tax
Indemnitees pursuant to Section 10.1 or this Section 7.2, provided, that
failure to comply with this provision shall not affect the Tax Indemnitees'
right to indemnification hereunder except to the extent that such omission
results in a failure of actual knowledge of the Stockholders and the
Stockholders are damaged as a result of such failure of actual knowledge.
The Stockholders shall have the sole right to represent the interests of
Terra and its Subsidiaries in any Tax audit or administrative or court
proceeding relating to taxable periods ending on or before the Balance Sheet
Date, and to employ counsel of their choice at their expense, provided that the
Tax Indemnitees (and their tax counsel) may, at their own expense, be present
at and participate in any such audit or proceeding. Notwithstanding the
foregoing, the Stockholders shall not be entitled to settle, either
administratively or after the commencement of litigation, any claim for Taxes
which would adversely affect the liability for Taxes of the Tax Indemnitees for
any period after the Balance Sheet Date to any extent (including, but not
limited to, the imposition of income Tax deficiencies, the reduction of asset
basis or cost adjustments,
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the lengthening of any amortization or depreciation periods, the denial of
amortization, depreciation or depletion deductions, or the reduction of loss or
credit carryforwards) without the prior written consent of the Tax Indemnitees.
Such consent shall not be necessary to the extent that the Stockholders have
indemnified the Tax Indemnitees in a manner reasonably acceptable to the Tax
Indemnitees against the effects of any such settlement.
Except to the extent that CMS Energy reasonably concludes that the presence
of a representative of Management Stockholders will interfere with the contest
of matters unrelated to the matters which are subject to indemnification by the
Management Stockholders under this Section 7.2 ("Indemnified Tax Items"), a
representative of the Management Stockholders (and their tax counsel) may, at
their own expense, be present at and participate in any audit or proceeding
relating to Indemnified Tax Items. CMS Energy shall not settle any dispute
with respect to Indemnified Tax Items without the consent of the Management
Stockholders, except that CMS may settle any such dispute without the consent
of the Management Stockholders if it agrees to relieve the Management
Stockholders of their indemnification obligation hereunder with respect to such
transaction.
(d) Assistance and Cooperation. After the Effective Date, each of the
Stockholders and the Tax Indemnitees shall:
(i) agree to timely sign and deliver such certificates or forms as may be
necessary or appropriate to establish an exemption from (or otherwise
reduce), or make a report with respect to, Taxes described in paragraph
(a)(iv) of this Section 7.2;
(ii) assist (and cause their respective affiliates to assist) the other
parties in preparing any Tax Returns which such other parties are responsible
for preparing and filing in accordance with paragraph (b) of this Section
7.2;
(iii) cooperate fully in preparing for any audits of, or disputes with
taxing authorities regarding, any Tax Returns of Terra and its Subsidiaries;
(iv) make available to the other parties and to any taxing authority as
reasonably requested all information, records, and documents relating to
Taxes of Terra and its Subsidiaries;
(v) provide timely notice to the other parties in writing of any pending
or threatened Tax audits or assessments of Terra and its Subsidiaries for
taxable periods for which the other may have a liability under this Section
7.2; and
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(vi) furnish the other with copies of all correspondence received from any
taxing authority in connection with any Tax audit or information request with
respect to any such taxable period.
(e) Adjustment to Purchase Price. Any payment by the Stockholders under
this Section 7.2 shall be considered an adjustment to the consideration paid in
connection with the Merger and to the extent that it cannot be so characterized
for Tax purposes, shall be made on an After-Tax Basis. (For purposes of this
Agreement, the term After-Tax Basis means, with respect to any amount which is
to be paid hereunder on an "After-Tax Basis," an amount which, after
subtraction of the amount of all federal, state, local and foreign Taxes
payable by the recipient thereof as a result of the receipt or accrual of such
payment, and after taking into account (i) the increase in federal, state,
local and foreign Taxes (including estimated Taxes) payable by such recipient
for all affected taxable years as a result of the event or occurrence giving
rise to such payment, and (ii) the reduction in federal, state, local and
foreign Taxes (including estimated Taxes) payable by the recipient for all
applicable taxable years, including the present value (using the applicable
Federal rate as the discount rate) of all reasonably anticipated future tax
reduction for taxable years ending on or after the end of the taxable year in
which such payment is made, shall be sufficient as of the date of payment to
compensate the recipient for such event or occurrence giving rise to such
payment.
(f) Survival of Obligations; No Duplication of Indemnities.
Notwithstanding Article X, the obligations of the Stockholders and the Tax
Indemnitees set forth in this Section 7.2 shall be unconditional and absolute
and shall remain in effect until 30 days after the expiration of the applicable
statute of limitations, except that if the Internal Revenue Service shall not,
prior to the third anniversary of the Effective Date, have proposed (including
in a revenue agent report or notice of proposed assessment) to disallow any
portion of the bonus described in Section 6.6(a)(xiii)(B) or (C) (including
through a reduction in a net operating loss carryover or carryback), the
indemnity provided in the second sentence of Section 7.2(a)(ii) shall terminate
on said third anniversary. To the extent that the provisions of this Section
7.2 conflict with the provisions of Article X, the provisions of this Section
7.2 shall control and no double payment shall be made with respect to any
breach or alleged breach of any representation or warranty contained in or
pertaining to the matters which are the subject of Section 3.8, it being
understood that if there is a breach or alleged breach of any representation or
warranty contained in or pertaining to the matters which were not taken into
account in determining the Aggregate Consideration and such breach or alleged
breach does not give rise to an indemnification obligation under Section 7.2,
such breach or alleged breach shall give rise to an indemnification obligation
under Article X.
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(g) Tax Reporting of Certain Payments. Each of the Management Stockholders
agrees to report the bonus paid pursuant to Section 6.6(a)(xiii)(C) as ordinary
income for federal, state and local income tax purposes in the year paid. Each
of the Optionholders agrees to report the excess of the fair market value of
the Terra Common Stock acquired upon the exercise of his Option (determined as
provided in Section 6.12) over the amount, if any, paid upon such exercise as
ordinary income for federal, state and local income tax purposes in the year of
such exercise.
SECTION 7.3. RESALE OF CMS COMMON SHARES. Each Shareholder who is an
affiliate of Terra within the meaning of Rule 145 under the Securities Act
agrees that any resale of CMS Common Shares to be received hereunder shall be
made in compliance with Rule 145(d) under the Securities Act.
SECTION 7.4. ACCESS TO DATA. For a period of one year after the Effective
Date, Terra shall allow Lagina and/or Boeve, or a company controlled by them,
access to and the right to copy (at their expense), Terra data as follows:
(i) Niagaran base maps;
(ii) Dundee base maps;
(iii) Michigan State production data;
(iv) seismic data over leaseholds located west of a north-south line
demarcated by the west boundary line of Kalkaska County, Michigan; and
(v) plat maps, pipeline maps, and lease ownership and data maps.
SECTION 7.5. TERRA EMPLOYEES. (a) CMS Energy agrees with respect to each
employee of Terra as of the Effective Date other than Messrs. Lagina, Boeve,
Tester and Sterenberg that from and after the Effective Date either (i) CMS
Energy shall cause Terra to continue to employ such employee for at least one
year after the Effective Date at a level of compensation and benefits
(considered in the aggregate for each such employee) not materially less
favorable to the employee than Terra was obligated to provide such employee as
of January 1, 1995 or (ii) in the event that the employment of any such
employee is terminated by Terra within one year after the Effective Date for
any reason other than death, disability or cause, CMS Energy shall cause Terra
to pay such employee severance pay equal to the difference between (A) one
year's base salary for such employee as of January 1, 1995 and (B) the actual
amount of base salary paid to such employee for the period commencing on the
Effective Date and ending on the effective date of such employee's termination.
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(b) CMS Energy agrees that it will cause and permit Terra to pay as a bonus
to employees of Terra as of both the Effective Date and the date which is
thirty (30) days after the Effective Date an aggregate amount of $803,000, such
amount to be paid on or prior to December 31, 1995 and allocated to such
employees as Terra and Newco shall mutually determine; provided, that CMS
Energy and Terra shall have the right to make the payment of any such bonus to
any or all such employees conditional upon such employees executing a release
of any interest such employees might otherwise have or have had in the
properties and associated rights known as the Terra employee override pool.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF CMS ENERGY AND SUB
The obligations of CMS Energy and Sub under this Agreement to cause the
Merger and the other transactions contemplated to be consummated at the
Effective Time to be consummated, and the obligation of CMS Energy to complete
the transactions contemplated by the Exchange Closing, shall, at the option of
CMS Energy, be subject to the satisfaction, on or prior to the Effective Date,
of the following conditions:
SECTION 8.1. NO MISREPRESENTATION OR BREACH OF COVENANTS AND WARRANTIES.
There shall have been no material breach by Terra, any Stockholder or any
Optionholder in the performance of their respective covenants and agreements
herein to be performed at or prior to the Effective Time; subject to Section
10.7, none of the representations and warranties of Terra, any Stockholder or
any Optionholder that is qualified as to materiality shall be untrue or
incorrect in any respect on the Effective Date and on the Effective Date such
representations and warranties shall be true and correct as though made on the
Effective Date except for changes therein specifically permitted by this
Agreement or resulting from any transaction expressly consented to in writing
by CMS Energy, permitted by Section 6.6 or entered into in connection with the
consummation of the Merger and the other transactions contemplated hereby;
subject to Section 10.7, none of the representations or warranties that is not
so qualified shall be untrue or incorrect in any material respect on the
Effective Date and on the Effective Date such representations and warranties
shall be true and correct in all material respects as though made on the
Effective Date except for changes therein specifically permitted by this
Agreement or resulting from any transaction expressly consented to in writing
by CMS Energy, permitted by Section 6.6 or entered into in connection with the
consummation of the Merger and the other transactions contemplated hereby; and
there shall have been delivered to CMS Energy and Sub a certificate or
certificates to the foregoing effect in substantially the form of Exhibit C
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hereto, dated the Effective Date, signed on behalf of Terra by its Chairman and
its President and signed by each of the Stockholders and the Optionholders
(limited in the case of the respective Management and Non-Management
Stockholders and Optionholders to the respective covenants and agreements, and
representation and warranties, of such persons contained herein).
SECTION 8.2. NO MATERIAL ADVERSE EFFECT. Between the date hereof and the
Effective Date, there shall have been no Material Adverse Effect on Terra and
its Subsidiaries, taken as a whole; and there shall have been delivered to CMS
Energy and Sub a certificate or certificates to such effect, dated the
Effective Date, signed on behalf of Terra and its Subsidiaries by its President
and its Chief Financial Officer and signed by each of the Management
Stockholders.
SECTION 8.3. OPINIONS OF COUNSEL FOR TERRA, THE STOCKHOLDERS AND THE
OPTIONHOLDERS. CMS Energy and Sub shall have received from (i) Mika, Meyers,
Beckett & Jones, P.L.C., counsel for Terra and the Management Stockholders and
the Optionholders, opinions, dated the Effective Date, in form and substance
reasonably satisfactory to CMS Energy, substantially to the effect set forth in
Exhibits D-1 and D-2, respectively, and (ii) Law, Weathers & Richardson, P.C.,
counsel to the Non-Management Stockholders, an opinion, dated the Effective
Date, in form and substance reasonably satisfactory to CMS Energy,
substantially to the effect set forth in Exhibit E.
SECTION 8.4. NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger or any other material transaction contemplated by
this Agreement shall be in effect; provided, however, that each of the parties
shall have used its reasonable best efforts to prevent the entry of any such
injunction or other order and to appeal as promptly as possible any injunction
or other order that may be entered.
SECTION 8.5. NECESSARY GOVERNMENTAL APPROVALS. The parties shall have
received all governmental and regulatory approvals and actions reasonably
necessary to consummate the transactions contemplated hereby, which are either
required to be obtained prior to the Effective Date by applicable law or
regulation (including, without limitation, the expiration or early termination
of the applicable waiting period under the HSR Act) or are necessary to prevent
a Material Adverse Effect on Terra and its Subsidiaries taken as a whole.
SECTION 8.6. NECESSARY CONSENTS. Terra shall have received consents, in
form and substance reasonably satisfactory to CMS Energy, to the transactions
contemplated hereby from the other parties to all material contracts, leases,
agreements and
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permits to which Terra or any of its Subsidiaries is a party or by which any of
them are affected and which require such consent prior to the Merger and are
necessary to prevent a Material Adverse Effect with respect to Terra and its
Subsidiaries taken as a whole.
SECTION 8.7. EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement, including the Prospectus, shall be effective under the Securities
Act, no stop order suspending the effectiveness of the Registration Statement
shall have been entered by the SEC and no material or fundamental change shall
have occurred which requires disclosure thereof to be included in an amendment
to the Registration Statement or a supplement to the Prospectus included in the
Registration Statement, or to be incorporated by reference therein from a
filing under the Exchange Act, prior to any further use of such Registration
Statement and Prospectus under the Securities Act and the rules and regulations
thereunder; and further, a sufficient time period shall have lapsed following
the delivery of the Prospectus to the Stockholders as is necessary to comply
with the requirements of Form S-4.
SECTION 8.8. LISTING OF CMS COMMON SHARES. The CMS Common Shares to be
issued hereunder shall have been approved for listing upon notice of issuance
by the NYSE.
SECTION 8.9. STOCKHOLDER ACTION. This Agreement shall have been
unanimously adopted by all holders of Terra Common Stock. The payments of the
bonuses described in Section 6.6(a)(xiii) to the Management Stockholders and
the payments described in the Covenant Not to Compete shall have been approved
in a separate vote or written consent of all such holders who do not receive
such payments.
SECTION 8.10. DISSENTING STOCKHOLDERS. No stockholder of Terra shall have
delivered a written demand for appraisal of its Terra Common Stock pursuant to
Section 762 of the BCA; and there shall have been delivered to CMS Energy and
Sub a certificate or certificates to such effect, dated the Effective Date,
signed on behalf of Terra by its Chairman and its President.
SECTION 8.11. DUE DILIGENCE. CMS Energy shall have conducted a legal,
business and financial due diligence review of Terra and its Subsidiaries the
results of which shall have been reasonably satisfactory to CMS Energy.
SECTION 8.12. RESIGNATIONS OF TERRA DIRECTORS AND OFFICERS. CMS Energy
shall have received the resignation of each of the directors and officers of
Terra and the directors and officers of each of its Subsidiaries which are
serving at the request or for the convenience of Terra.
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SECTION 8.13. OPTIONS TO ACQUIRE TERRA COMMON STOCK. All outstanding
Options shall have been exercised, including, without limitation, the exercise
of Options to acquire an aggregate of 2,545,922 shares of Terra Common Stock
from Terra currently held by certain Optionholders in accordance with their
terms.
SECTION 8.14. CMS NOMECO LENDERS' CONSENT. The lenders to CMS NOMECO Oil &
Gas Co., a Michigan corporation ("CMS NOMECO") and a wholly-owned subsidiary
of CMS Enterprises Company, a Michigan corporation ("Enterprises") and a
subsidiary of CMS Energy, under the financing arrangements of CMS NOMECO, shall
have consented to the Merger and the transfer to CMS NOMECO of the capital
stock of the Surviving Corporation and shall have waived any breach under such
arrangement as a result of the indebtedness, guarantees or similar obligations
of the Surviving Corporation, in each case on terms and conditions satisfactory
to CMS Energy.
SECTION 8.15. PAYMENTS FOR PURCHASED ASSETS. Terra shall have received
payments for the Purchased Assets as contemplated by Section 6.6(b).
SECTION 8.16. GUARANTEE. Each of Lagina, Boeve, Tester and Sterenberg
shall have executed a guarantee in favor of Terra substantially in the form of
Exhibit F in the amount of $3,600,000 relating to net revenue to be received by
Terra from and after January 1, 1995 for gas sales under its gas sale
agreements after taking into account its purchases of gas under its gas
purchase agreements.
SECTION 8.17. CONSULTING AGREEMENT. Terra and Newco shall have entered
into a consulting agreement substantially in the form of Exhibit G.
SECTION 8.18. EMPLOYMENT AGREEMENTS. Terra and each of Tester and
Sterenberg shall have entered into employment agreements substantially in the
respective forms of Exhibits H and I.
SECTION 8.19. 1995 ANTRIM PROGRAM. Terra shall have obtained written
commitments from co-venturers for the funding, drilling and operation by Terra
of the wells included in the 1995 Antrim Program consisting of at least 282
wells and related pipelines and other facilities (the "1995 Antrim Program").
SECTION 8.20. MINIMUM AGGREGATE CONSIDERATION. The amount calculated
pursuant to clause (A) less clause (B) of Section 2.2(a) shall be at least
$59,000,000.
SECTION 8.21. INSURANCE. Terra and its Subsidiaries shall have maintained
policies of fire and casualty, liability (general, product and other
liability), well control, workers'
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compensation and other forms of insurance and bonds in such amounts and against
such risks and losses as are usually insured against in the same general areas
by companies engaged in the same or a similar business.
SECTION 8.22. GAS DELIVERY. Terra shall have reached an agreement with
Michigan Consolidated Gas Company to the effect that any gas delivered into the
Gaylord-Alpena pipeline system shall be redelivered to the Taggart interconnect
at an aggregate cost not to exceed 12 cents per Mcf.
SECTION 8.23. COVENANT NOT TO COMPETE. Each of the Management Stockholders
shall have entered into the Covenant Not to Compete with CMS Energy
substantially in the form of Exhibit J (the "Covenant Not to Compete").
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS
OF TERRA AND THE STOCKHOLDERS
The obligations of Terra, the Stockholders and the Optionholders under this
Agreement to cause the Merger and the other transactions contemplated to be
consummated at the Effective Time, and the obligation of Lagina to complete the
transactions contemplated by the Exchange Closing, shall, at the option of
Terra, the Stockholders, and the Optionholders, be subject to the satisfaction,
on or prior to the Effective Date, of the following conditions:
SECTION 9.1. NO MISREPRESENTATION OR BREACH OF COVENANTS AND WARRANTIES.
There shall have been no material breach by CMS Energy or Sub in the
performance of any of their respective covenants and agreements herein to be
performed at or prior to the Effective Time; subject to Section 10.7, none of
the representations and warranties of CMS Energy or Sub that is qualified as to
materiality shall be untrue or incorrect in any respect on the Effective Date
and on the Effective Date such representations and warranties shall be true and
correct as though made on the Effective Date except for changes therein
specifically permitted by this Agreement or resulting from any transactions
expressly consented to in writing by Terra, permitted by Section 6.6 or entered
into in connection with the consummation of the Merger and the other
transactions contemplated hereby; subject to Section 10.7, none of the
representations or warranties that are not so qualified shall be untrue or
incorrect in any material respect on the Effective Date and on the Effective
Date such representations and warranties shall be true and correct in all
material respects as though made on the Effective Date except for changes
therein specifically permitted by this Agreement or resulting from any
transactions expressly consented to in writing by Terra, permitted by Sections
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6.6 or entered into in connection with the consummation of the Merger and the
other transactions contemplated hereby; and there shall have been delivered to
Terra and the Stockholders a certificate or certificates to the foregoing
effect substantially in the form of Exhibit K hereto, dated the Effective Date,
signed on behalf of CMS Energy and Sub by their respective Presidents or Vice
Presidents.
SECTION 9.2. NO MATERIAL ADVERSE EFFECT. Between the date hereof and the
Effective Date, there shall have been no Material Adverse Effect on CMS Energy
and its Subsidiaries taken as a whole; and there shall have been delivered to
Terra and the Stockholders a certificate or certificates to such effect, dated
the Effective Date, signed on behalf of CMS Energy by its President or a Vice
President.
SECTION 9.3. NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger or any other material transaction contemplated by
this Agreement shall be in effect; provided, however, that each of the parties
shall have used its reasonable best efforts to prevent the entry of any such
injunction or other order and to appeal as promptly as possible any injunction
or other order that may be entered.
SECTION 9.4. OPINIONS OF COUNSEL FOR CMS ENERGY AND SUB AND COUNSEL FOR THE
STOCKHOLDERS. Terra and the Stockholders shall have received from Denise
Sturdy, Esq., Assistant General Counsel for CMS Energy and Sub, an opinion,
dated the Effective Date, in form and substance satisfactory to Terra, the
Stockholders, substantially to the effect set forth in Exhibit L, and the
Stockholders shall have received from Dykema Gossett, special tax counsel for
Terra, an opinion, dated the Effective Date, as to certain tax matters,
substantially to the effect set forth in Exhibit M.
SECTION 9.5. NECESSARY GOVERNMENTAL APPROVALS. The parties shall have
received all governmental and regulatory approvals and actions reasonably
necessary to consummate the transactions contemplated hereby, which are either
required to be obtained prior to the Effective Date by applicable law or
regulation (including, without limitation, the expiration or early termination
of the applicable waiting period under the HSR Act) or are necessary to prevent
a Material Adverse Effect on CMS Energy and its Subsidiaries taken as a whole.
SECTION 9.6. EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement, including the Prospectus, shall be effective under the Securities
Act, no stop order suspending the effectiveness of the Registration Statement
shall have been entered by the SEC and no material or fundamental change shall
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have occurred which requires disclosure thereof to be included in an amendment
to such Registration Statement or a supplement to the Prospectus included in
such Registration Statement, or to be incorporated by reference therein from a
filing under the Exchange Act, prior to any further use of such Registration
Statement and Prospectus under the Securities Act and the rules and regulations
thereunder.
SECTION 9.7. LISTING OF CMS COMMON SHARES. The CMS Common Shares to be
issued hereunder shall have been approved for listing upon notice of issuance
by the NYSE.
SECTION 9.8. STOCKHOLDER ACTION. This Agreement shall have been
unanimously adopted by all holders of Terra Common Stock. The payments of the
bonuses described in Section 6.6(a)(xiii) and the payments described in the
Covenant Not to Compete shall have been approved in a separate vote or written
consent of all such holders who do not receive such payments. By the execution
hereof, all such holders agree to give their timely consent and agree to
execute such consents and other documents necessary to evidence such approvals.
SECTION 9.9. NECESSARY CONSENTS. Terra shall have received consents, in
form and substance reasonably satisfactory to Terra, to the transactions
contemplated hereby from the other parties to all material contracts, leases,
agreements and permits to which Terra or any of its Subsidiaries is a party or
by which any of them are affected and which require such consent prior to the
Merger and are necessary to prevent a Material Adverse Effect with respect to
Terra and its Subsidiaries taken as whole.
SECTION 9.10. MINIMUM AGGREGATE CONSIDERATION. The amount calculated
pursuant to clause (A) less clause (B) of Section 2.2(a) shall be at least
$59,000,000.
SECTION 9.11. COVENANT NOT TO COMPETE. CMS Energy shall have entered into
the Covenant Not to Compete with each of the Management Stockholders
substantially in the form of Exhibit J.
ARTICLE X
INDEMNIFICATION; SURVIVAL
SECTION 10.1. INDEMNIFICATION BY THE STOCKHOLDERS AND OPTIONHOLDERS. From
and after the Effective Time, each of the Stockholders and Optionholders shall
jointly and severally indemnify and hold harmless CMS Energy, the Surviving
Corporation and their subsidiaries, affiliates and successors from and against
any and all (a) liabilities, losses, costs or damages ("Loss") and (b)
reasonable attorneys', consultants' and accountants' fees and expenses, court
costs and all other reason-
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able out-of-pocket expenses ("Expense") incurred by CMS Energy, the
Surviving Corporation and their subsidiaries, affiliates and successors in
connection with or arising from (i) any breach or failure to perform by any
Stockholder or Optionholder of any of his respective agreements, covenants or
obligations in this Agreement or any agreement entered into in connection with
the transactions contemplated hereby, (ii) any breach or failure to perform by
Terra of any of its agreements, covenants or obligations in this Agreement or
any agreement entered into in connection with the transactions contemplated
hereby, in each case to be performed or complied with prior to or at the
Effective Time, and (iii) any breach of any warranty or the inaccuracy of any
representation of Terra or any Stockholder or Optionholder contained in this
Agreement, as updated in accordance with Section 10.7 hereof, or in any
certificate delivered by or on behalf of Terra or any Stockholder or
Optionholder pursuant hereto; provided, however, that no Stockholder or
Optionholder shall have any obligation to indemnify and hold harmless any
indemnified party with respect to any Loss or Expense arising from any breach
of a warranty, or inaccuracy of a representation, of any other Stockholder
contained in Section 3.3(b) or 3.4(b) or 3.34 or of any other Optionholder
contained in Section 3.3(b) or 3.4(b); and provided, further, however, that no
Non-Management Stockholder shall have any obligation to indemnify and hold
harmless any indemnified party except with respect to (A) any Loss or Expense
arising from any breach or failure to perform by such Non-Management
Stockholder of any of his respective agreements, covenants or obligations in
this Agreement or any agreement entered into in connection with the
transactions contemplated hereby, or (B) any breach of a warranty, or
inaccuracy of a representation, of such Non-Management Stockholder contained in
Section 3.3(b) (first sentence), 3.4(b) or 3.34; and provided, further,
however, that, it is understood that if there is a breach or alleged breach of
any representation or warranty contained in or pertaining to the matters which
were not taken into account in determining the Aggregate Consideration and such
breach or alleged breach does not give rise to an indemnification obligation
under Section 7.2, such breach or alleged breach shall give rise to an
indemnification obligation under this Article X; and provided, further,
however, that the Stockholders shall be required to indemnify and hold harmless
CMS Energy and the Surviving Corporation under this Section 10.1 with respect
to the breach or inaccuracy of any representations or warranties as hereinabove
provided only to the extent that the aggregate amount of Loss and Expense
referred to above in this Section 10.1 relating thereto exceeds $300,000,
except for any Loss or Expense incurred in connection with or arising from any
breach or inaccuracy of the representations and warranties contained in Section
3.3 and 3.4, as to which no such limitation shall apply; and provided further,
that the obligation of the Stockholders to indemnify and hold harmless CMS
Energy and the Surviving Corporation pursuant to this Section 10.1 shall be
limited to the aggregate payment by
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such Stockholders of an amount equal to $30,000,000, except for any Loss or
Expense incurred in connection with or arising from any breach or inaccuracy of
the representations and warranties contained in Sections 3.3 and 3.4, as to
which such limitation shall be the Aggregate Consideration.
SECTION 10.2. INDEMNIFICATION BY CMS ENERGY AND THE SURVIVING CORPORATION.
From and after the Effective Time, CMS Energy and the Surviving Corporation
shall jointly and severally indemnify and hold harmless the Stockholders and
Optionholders and their affiliates and successors from and against any and all
Loss and Expense incurred by the Stockholders or Optionholders and their
affiliates and successors in connection with or arising from (a) any breach or
failure to perform by CMS Energy or the Surviving Corporation of any of their
respective agreements, covenants or obligations in this Agreement or any
agreement entered into in connection with the transactions contemplated hereby
or thereby, and (b) any breach of any warranty or the inaccuracy of any
representation of CMS Energy or Sub contained in this Agreement, as updated in
accordance with Section 10.7 hereof, or in any certificate delivered by or on
behalf of CMS Energy or Sub pursuant hereto or thereto, provided, however, that
the obligation of CMS Energy and the Surviving Corporation to indemnify and
hold harmless pursuant to this Section 10.2 shall be limited to the aggregate
payment by CMS Energy and/or the Surviving Corporation of an amount equal to
$30,000,000, except for any Loss or Expense in connection with or arising from
any breach or inaccuracy of the representations and warranties contained in
Sections 4.1, 4.2, 4.3 and 4.4, as to which such limitation shall be the
Aggregate Consideration.
SECTION 10.3. NOTICE OF CLAIMS. If CMS Energy (with respect to Section
10.1) or a Stockholder or Optionholder (with respect to Section 10.2) believes
that any of the persons entitled to indemnification under this Article X has
suffered or incurred any Loss or incurred any Expense, CMS Energy or the
Stockholder or Optionholder, as the case may be, shall so notify the others
promptly in writing describing such Loss or Expense, the amount thereof, if
known, and the method of computation of such Loss or Expense, all with
reasonable particularity and containing a reference to the provisions of this
Agreement or any certificate delivered pursuant hereto in respect of which such
Loss or Expense shall have occurred; provided, however, that the omission by
such indemnified party to give notice as provided herein shall relieve the
indemnifying party of its indemnification obligation under this Article X only
if such omission results in a failure of actual notice to the indemnifying
party and then only to the extent that such indemnifying party is materially
damaged as a result of such failure to give notice. If any action at law or
suit in equity is instituted by or against a third party with respect to which
any of the persons entitled to indemnification under this Article X intends to
claim any liability or expense as Loss or Expense
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under this Article X, any such person shall promptly notify the indemnifying
party of such action or suit as specified in this Section 10.3 and Section
10.4. Any party entitled to indemnification hereunder shall use reasonable
efforts to minimize any Loss or Expense for which indemnification is sought
hereunder.
SECTION 10.4. THIRD PARTY CLAIMS. In the event of any claim for
indemnification hereunder resulting from or in connection with any claim or
legal proceeding by a third party, the indemnified persons shall give such
notice thereof to the indemnifying party not later than twenty (20) days prior
to the time any response to the asserted claim is required, if possible, and in
any event within fifteen (15) days following the date such indemnified person
has actual knowledge thereof; provided, however, that the omission by such
indemnified party to give notice as provided herein shall relieve the
indemnifying party of its indemnification obligation under this Article X only
if such omission results in a failure of actual notice to the indemnifying
party and then only to the extent that such indemnifying party is materially
damaged as a result of such failure to give notice. In the event of any such
claim for indemnification resulting from or in connection with a claim or legal
proceeding by a third party, the indemnifying party may, at its sole cost and
expense, assume the defense thereof; provided, however, that counsel for the
indemnifying party, who shall conduct the defense of such claim or legal
proceeding, shall be reasonably satisfactory to the indemnified party; and
provided, further, that if the defendants in any such actions include both the
indemnified persons and the indemnifying party and the indemnified persons
shall have reasonably concluded that there may be legal defenses or rights
available to them which have not been waived and are in actual or potential
conflict with those available to the indemnifying party, the indemnified
persons shall have the right to select one law firm reasonably acceptable to
the indemnifying party to act as separate counsel, on behalf of such
indemnified persons, at the expense of the indemnifying party. Subject to the
second proviso of the immediately preceding sentence, if an indemnifying party
assumes the defense of any such claim or legal proceeding, such indemnifying
party shall not consent to entry of any judgment, or enter into any settlement,
that (a) is not subject to full indemnification hereunder, (b) provides for
injunctive or other non-monetary relief affecting the indemnified persons or
(c) does not include as an unconditional term thereof the giving by each
claimant or plaintiff to such indemnified persons of a release from all
liability with respect to such claim or legal proceeding, without the prior
written consent of the indemnified persons (which consent, in the case of
clauses (b) and (c), shall not be unreasonably withheld); provided, however,
that subject to the second proviso of the immediately preceding sentence, the
indemnified persons may, at their own expense, participate in any such
proceeding with the counsel of their choice without any right of
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control thereof. So long as the indemnifying party is in good faith defending
such claim or proceeding, the indemnified persons shall not compromise or
settle such claim or proceeding without the prior written consent of the
indemnifying party, which consent shall not be unreasonably withheld. If the
indemnifying party does not assume the defense of any such claim or litigation
in accordance with the terms hereof, the indemnified persons may defend against
such claim or litigation in such manner as they may deem appropriate,
including, without limitation, settling such claim or litigation (after giving
prior written notice of the same to the indemnifying party and obtaining the
prior written consent of the indemnifying party, which consent shall not be
unreasonably withheld) on such terms as the indemnified persons may deem
appropriate, and the indemnifying party will promptly indemnify the indemnified
persons in accordance with the provisions of this Section 10.4.
SECTION 10.5. EXCLUSIVE REMEDY. In the event the Merger is consummated,
any claim against either the Stockholders or Optionholders or CMS Energy or the
Surviving Corporation for any breach of this Agreement or in connection with
any of the transactions contemplated hereby (other than a claim for breach of
Section 7.2 or of any agreements or instruments entered into in connection
herewith) shall, to the extent permitted by law, be made solely pursuant to
this Article X.
SECTION 10.6. SURVIVAL OF OBLIGATIONS. All representations, warranties,
covenants and obligations contained in this Agreement shall survive the
consummation of the transactions contemplated by this Agreement; provided,
however, that the representations and warranties in Articles III and IV shall
terminate on the third anniversary of the Effective Date except for the
representations and warranties contained in Sections 3.3 and 3.4, which shall
survive without termination, and the representations contained in Sections 3.8,
3.22 and 7.1(c), which shall survive until expiration of the applicable statute
of limitations; and provided, further, that if any claim under this Article X
for Loss or Expense in respect of any representations and warranties is
asserted in writing with reasonable specificity prior to the expiration of the
applicable period set forth above, the obligations of the indemnifying party
with respect to such claim shall not be affected by the expiration of such
period.
SECTION 10.7. UPDATE OF THE REPRESENTATIONS AND WARRANTIES. (a) Not later
than five days prior to the Effective Date, Terra, any Stockholder or any
Optionholder may deliver a written notice to CMS Energy setting forth any and
all facts, conditions, occurrences, changes and other matters, in each case,
occurring after the date hereof, that has caused or may cause the
representations and warranties of the Stockholders and/or the Optionholders
contained herein (including the Schedules hereto) not to be true and correct in
all respects (in the case of any
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representation or warranty containing any materiality qualification) or in all
material respects (in the case of any representation or warranty without any
materiality qualification). In the event that any of such facts, conditions,
occurrences, changes and other matters shall have caused or will cause, on or
prior to the Effective Date, any such representation or warranty not to be true
and correct in all respects (in the case of any representation or warranty
containing any materiality qualification) or in all material respects (in the
case of any representation or warranty without any materiality qualification)
on the Effective Date with the same effect as though made on the Effective
Date, CMS Energy may elect to terminate this Agreement pursuant to Section
11.1(d) based on such facts, conditions, occurrences, changes or other matters.
If CMS Energy shall nevertheless proceed to consummate the Merger, such facts,
conditions, occurrences, changes and other matters so disclosed as to each such
representation or warranty of the Stockholders and/or the Optionholders
contained herein (including the Schedules) shall be deemed to constitute an
exception to such representation or warranty reflecting the facts, conditions,
occurrences, changes and other matters so disclosed with the same effect as if
such exception had been made in such representation or warranty as of the date
hereof in this Agreement to the extent, but only to the extent, of such
disclosure.
(b) Not later than five days prior to the Effective Date, CMS Energy may
deliver a written notice to Terra, the Stockholders and the Optionholders
setting forth any and all facts, conditions, occurrences, changes and other
matters, in each case, occurring after the date hereof, that has caused or may
cause the representations and warranties of CMS Energy contained herein
(including the Schedules hereto) not to be true and correct in all respects (in
the case of any representation or warranty containing any materiality
qualification) or in all material respects (in the case of any representation
or warranty without any materiality qualification). In the event that any of
such facts, conditions, occurrences, changes and other matters shall have
caused or will cause, on or prior to the Effective Date, any such
representation or warranty not to be true and correct in all respects (in the
case of any representation or warranty containing any materiality
qualification) or in all material respects (in the case of any representation
or warranty without any materiality qualification) on the Effective Date with
the same effect as though made on the Effective Date, Terra may elect to
terminate this Agreement pursuant to Section 11.1(e) based on such facts,
conditions, occurrences, changes or other matters. If Terra shall nevertheless
proceed to consummate the Merger, such facts, conditions, occurrences, changes
or other matters so disclosed as to each such representation or warranty of CMS
Energy contained herein (including the Schedules) shall be deemed to constitute
an exception to such representation or warranty reflecting the facts,
conditions, occurrences, changes and other matters so disclosed with the same
effect as if such
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exception had been made in such representation or warranty as of the date
hereof in this Agreement to the extent, but only to the extent, of such
disclosure.
SECTION 10.8. ADJUSTMENT TO CONSIDERATION. All indemnity payments
made pursuant to this Article X shall be considered as adjustments to the
consideration paid in connection with the Merger and to the extent that it
cannot be so characterized for Tax purposes, shall be made on an After-Tax
Basis.
ARTICLE XI
TERMINATION
SECTION 11.1. TERMINATION. Anything contained in this Agreement to
the contrary notwithstanding, this Agreement may be terminated at any time
prior to the Effective Time:
(a) by the mutual consent of CMS Energy and Terra;
(b) by CMS Energy upon any material breach by Terra or any Stockholder
or any Optionholder of any of the covenants contained in Article VI or VII or
Section 12.1;
(c) by Terra upon any material breach by CMS Energy or Sub of any of
the covenants contained in Article VI or VII or Section 12.1;
(d) by CMS Energy if any of the conditions specified in Article VIII
has not been met in all material respects or waived by CMS Energy at such time
as such condition can no longer be satisfied;
(e) by Terra if any of the conditions specified in Article IX has not
been met in all material respects or waived by Terra and the Stockholders, as
applicable, at such time as such condition can no longer be satisfied; or
(f) by CMS Energy or Terra if the Merger shall not have been
consummated on or before September 30, 1995.
SECTION 11.2. EFFECT OF TERMINATION. In the event that this Agreement
shall be terminated pursuant to Section 11.1, all further obligations of the
parties under this Agreement (other than Sections 12.1, 12.2 and 12.10) shall
terminate without further liability of any party to the others; provided,
however, that nothing herein shall relieve any party from
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liability for its breach of this Agreement during its effectiveness, provided
that anything contained in this Agreement to the contrary notwithstanding, in
the event of such termination after the Exchange Closing Time, Lagina shall be
deemed to have continuously held the Lagina Shares and any action taken
pursuant to Section 2.3 hereof or in connection with the Exchange Closing shall
be deemed null and void, ab initio, and shall be reversed effective as of the
Exchange Closing Time.
ARTICLE XII
OTHER PROVISIONS
SECTION 12.1. CONFIDENTIAL NATURE OF INFORMATION. Each party agrees that
it will treat in strict confidence all documents, materials and other
information which it obtains regarding the other parties during the course of
the negotiations leading to the consummation of the transactions provided for
herein and the preparation of this Agreement; and if for any reason whatsoever
the transactions contemplated by this Agreement shall not be consummated, each
party shall return to each other party all copies of non-public documents and
materials which have been furnished or acquired in connection therewith and
shall not use or disseminate such documents, materials or other information for
any purpose whatsoever.
SECTION 12.2. FEES AND EXPENSES. Except as otherwise provided in this
Section 12.2, each of the parties hereto shall bear its own costs and expenses
(including, without limitation, fees and disbursements of its counsel,
accountants and other financial, legal, accounting or other advisors), incurred
by it or its affiliates in connection with the preparation, negotiation,
execution, delivery and performance of this Agreement and each of the other
documents and instruments executed in connection with or contemplated by this
Agreement, and the consummation of the transactions contemplated hereby and
thereby (collectively "Acquisition Expenses"); provided, however, that
Acquisition Expenses incurred or paid by Terra in excess of $100,000 shall be
included in Section 2.2(a)(B)(III).
SECTION 12.3. NOTICES. All notices and other communications under this
Agreement shall be in writing and shall be deemed given when delivered
personally or by overnight mail, or four days after being mailed (by registered
mail, return receipt requested) to a party at the following address (or to such
other address as such party may have specified by notice given to the other
parties pursuant to this provision):
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If to CMS Energy to:
CMS Energy Corporation
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
Attention: Corporate Secretary
with a copy to:
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
Attention: Andrew H. Shaw, Esq.
and
CMS NOMECO Oil & Gas Co.
One Jackson Square
P.O. Box 1150
Jackson, Michigan 49201
Attention: William H. Stephens III
If to Sub to:
CMS Merging Corporation
c/o CMS Energy Corporation
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
Attention: Corporate Secretary
with a copy to:
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
Attention: Andrew H. Shaw, Esq.
If to Terra to:
Terra Energy Ltd.
1503 North Garfield Road
Traverse City, Michigan 49686
Attention: President
with a copy to:
Mika, Meyers, Beckett & Jones, P.L.C.
Suite 700
200 Ottawa Avenue, N.W.
Grand Rapids, Michigan 49503
Attention: Michael C. Haines, Esq.
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If to the Management Stockholders to the
Stockholders' Representative as follows:
Martin G. Lagina
c/o Terra Energy Ltd.
1503 North Garfield Road
Traverse City, Michigan 49686
with a copy to:
Mika, Meyers, Beckett & Jones, P.L.C.
Suite 700
200 Ottawa Avenue, N.W.
Grand Rapids, Michigan 49503
Attention: Michael C. Haines, Esq.
If to the Optionholders to the
Stockholders' Representative as follows:
Martin G. Lagina
c/o Terra Energy Ltd.
1503 North Garfield Road
Traverse City, Michigan 49686
with a copy to:
Mika, Meyers, Beckett & Jones, P.L.C.
Suite 700
200 Ottawa Avenue, N.W.
Grand Rapids, Michigan 49503
Attention: Michael C. Haines, Esq.
If to the Non-Management Stockholders to:
Dr. Leonard J. Scherock
1465 S. Lincoln Road
Mt. Pleasant, Michigan 48858
with a copy to:
Law, Weathers & Richardson
800 Bridgewater Place
333 Bridge Street, N.W.
Grand Rapids, MI 49503
Attention: John P. Schneider, Esq.
SECTION 12.4. DEFINITIONS. For purposes of this Agreement:
(a) an "affiliate" of any person means another person that, directly or
indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such first person;
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(b) an "associate" of any person means (i) a corporation or organization of
which such person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10 percent or more of a class of equity securities, (ii)
any trust or other estate in which such person has substantial beneficial
interest or as to which such person serves as trustee or in a similar
capacity and (iii) any relative or spouse of such person, or any relative of
such spouse, who has the same home as such person or who is a director or
officer of the person or any of its parents or subsidiaries.
(c) "Good and Defensible Title" shall mean that title, free and clear of
all liens, encumbrances, burdens and claims, which entitles Terra or any
Subsidiary, as the case may be, (i) with respect to Interests constituting
pipelines, gathering lines, and treating and processing facilities, to the
interest in all capital assets and revenues, subject to associated costs and
expenses, not less than the undivided interests as held on June 1, 1995, and
(ii) with respect to Proved Developed Interests, Proved Undeveloped Interests
and Unproved Interests, to receive, during the remaining life of the Leases
or other mineral rights or interests constituting an Interest, not less than
the undivided interests set forth in the Property Schedules as net revenue
interests, both before and after payout, and overriding royalty interests in
all hydrocarbons produced, saved and marketed from such Leases or other
mineral rights and all Wells located thereon through the plugging,
abandonment and salvage of such Wells, without suspense or any indemnity
other than normal division order warranty of title, and which obligates Terra
or any Subsidiary, as the case may be, to bear a portion of the costs and
expenses relating to the maintenance and development of, and operations
relating to, the Leases or such other mineral rights or interests and all
Wells located thereon through the plugging, abandonment and salvage of such
Wells not greater than the working interests for such Leases or such other
mineral rights or interests, both before and after payout, set forth in the
Property Schedules, except in each case (A) to the extent that the Property
Schedules indicate that such net revenue interest, overriding royalty
interest and/or working interest is subject to change; (B) for penalty
provisions and contribution requirements customarily provided for in
operating and other similar agreements; (C) for increases in the working
interest where there has been a corresponding and proportionate increase in
the net revenue interest and (D) for Permitted Encumbrances.
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(d) "Interests" shall mean and include all of the following:
(i) Proved Developed Oil and Gas Interests. The interests and rights
of Terra and its Subsidiaries in and to oil and gas Leases, overriding
royalty interests, mineral interests, and other interests of Terra and its
Subsidiaries in producing oil and gas reserves that are expected to be
recovered through existing Wells which are producing oil or gas or which are
capable of production (whether or not in actual production) with existing
equipment and operating methods, including, without limitation, the
interests and rights of Terra and its Subsidiaries in and to the Leases,
units, Wells, and other properties described as proved developed in the
Property Schedules (collectively, the "Proved Developed Interests");
(ii) Proved Undeveloped Oil and Gas Interests. The interests and
rights of Terra and its Subsidiaries in and to oil and gas Leases,
overriding royalty interests, mineral interests, and other interests of
Terra and its Subsidiaries in oil and gas reserves that are considered to be
proven in accordance with commonly accepted petroleum engineering standards
and are expected to be recovered from Wells that have not been drilled,
completed or equipped to a point that would permit production of commercial
quantities of oil and gas, including, without limitation, the interests and
rights of Terra and its Subsidiaries in and to the Leases, units, Wells, and
other properties described as proved undeveloped in the Property Schedules
(collectively, the "Proved Undeveloped Interests");
(iii) Unproved Oil and Gas Interests. The interests and rights of
Terra and its Subsidiaries in and to oil and gas Leases, overriding royalty
interests, mineral interests, and other interests of Terra and its
Subsidiaries in oil and gas properties that are neither Proved Developed
Interests or Proved Undeveloped Interests, including, without limitation,
the interests and rights of Terra and its Subsidiaries in and to the
properties described as unproved in the
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Property Schedules (collectively, the "Unproved Interests");
(iv) Personal Property and Equipment. All of the personal property,
equipment, inventory and supplies of Terra and its Subsidiaries of
whatsoever kind or nature, wheresoever situated;
(v) Agreements. All of the interests of Terra and its Subsidiaries in
the entire estates and other rights created by all equipment, real estate
and other leases, licenses, permits, employment contracts, pipeline
easements or rights of way, and other Terra Agreements, together with all of
the property and rights incident thereto;
(vi) Geological and Geophysical Data. All right, title or interest of
Terra and its Subsidiaries in or to any seismic, geological and geophysical
data, of whatsoever kind or nature, wheresoever situated, together with all
interpretive analyses; and
(vii) Remaining Assets. All other assets and properties now or as of the
Effective Time owned by Terra or any of its Subsidiaries, whether real or
personal, tangible or intangible, wheresoever situated.
(e) the "knowledge of Terra" or "the best knowledge of Terra" or "known to
Terra" or "knowingly" means the knowledge of any of the Management
Stockholders or the Optionholders or of any of the persons listed in Schedule
12.4(e), which Schedule includes all persons other than the Management
Stockholders and the Optionholders who are directors of Terra or the chief
executive officers of Terra or any of its Subsidiaries or officers of Terra.
(f) "Material Adverse Change or Effect" means any change or effect (or any
development that, insofar as can reasonably be foreseen, would result in any
change or effect) that is materially adverse to the business, properties,
operations, assets, condition (financial or otherwise) or results of
operations of the applicable person or persons;
(g) "Permitted Encumbrances" shall mean (i) landowners' royalties,
overriding royalties, production payments, net profits interests, and other
similar burdens on production in amounts that do not operate to
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reduce the net revenue interest of any Interest, either before or after
payout, to less than the net revenue interest, either before or after payout,
set forth on the Property Schedules for such Interest or to increase the
working interest of any Interest, either before or after payout, to greater
than the working interest set forth on the Property Schedules for such
Interest, either before or after payout; (ii) division orders that do not
operate to reduce the net revenue interest of any Interest, either before or
after payout, to less than the net revenue interest, either before or after
payout, set forth in the Property Schedules for such Interest and that do not
increase the working interest of any Interest, either before or after payout,
to greater than the working interest, either before or after payout, set
forth in the Property Schedules for such Interest without a corresponding and
proportionate increase in the net revenue interest; (iii) operating
agreements containing terms and conditions customary in the industry for the
area in which the affected Interest is located and that do not operate to
reduce the net revenue interest of any Interest, either before or after
payout, to less than the net revenue interest, either before or after payout,
set forth in the Property Schedules for such Interest and that do not
increase the working interest of any Interest, either before or after payout,
to greater than the working interest, either before or after payout, set
forth in the Property Schedules for such Interest without a corresponding and
proportionate increase in the net revenue interest; (iv) unitization,
pooling, communitization and spacing agreements and orders that contain terms
and conditions customary in the industry for the area in which the affected
Interest is located and that do not operate to reduce the net revenue
interest, either before or after payout, of any Interest to less than the net
revenue interest, either before or after payout, set forth in the Property
Schedules for such Interest and that do not increase the working interest,
either before or after payout, of any Interest to greater than the working
interest, either before or after payout, for such Interest set forth in the
Property Schedules for such Interest without a corresponding and
proportionate increase in the net revenue interest; (v) farmout and farmin
agreements that contain terms and conditions that are customary in the
industry for the area in which the affected Interest is located and that have
been taken into consideration in setting forth the net revenue interest and
working interest, both before and after payout, set forth in the Property
Schedules; (vi) mechanic's, materialmen's, warehousemen's and carrier's liens
and other similar liens arising by operation of
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law or statute in the ordinary course of the Terra Business for
obligations that are not delinquent or that will be paid or discharged in
the ordinary course of the Terra Business; (vii) liens arising under joint
operating agreements for obligations that are not delinquent or that will be
paid or discharged in the ordinary course of business; (viii) liens for
taxes, assessments and similar governmental charges incurred or payable by
Terra or its Subsidiaries that are not delinquent or, if delinquent, that
are being contested in good faith by Terra and for which adequate reserves
have been established by Terra and reflected on the Statement of Income
and/or the Balance Sheet (and taken into account in determining Terra
Consolidated Net Working Capital); (ix) liens and encumbrances securing
Terra Debt; (x) liens and encumbrances that shall be released at or prior to
the Effective Time at no cost to Terra; (xi) easements, servitudes,
rights-of-way and other similar rights relating to the Leases that do not
materially interfere with the use of the Leases; (xii) rights reserved to or
vested in any municipality or to governmental, statutory or public authority
to control or regulate any of the Interest in any manner, and all applicable
laws, rules and orders of governmental authorities; and (xiii) any defect
(but not a deficiency) in title or related lien, encumbrance, encroachment
or burden of a type expected to be encountered, and which is customarily
acceptable to prudent oil and gas operators, in the area in which the
Interest is located.
(h) "person" means an individual, corporation, partnership,
association, trust, unincorporated organization or other entity.
(i) "Property Schedules" shall mean the Schedules of Proved Developed
Interests, Proved Undeveloped Interests and Unproved Interests attached
hereto as Schedule 12.4(i).
(j) "Title Defect" shall mean any defect or deficiency in title, lien,
encumbrance, encroachment, burden, circumstance, that renders title to any
Interest identified in the Property Schedules or any portion thereof, or any
Interest relating to oil and gas gathering and transportation activities,
less than or deficient from Good and Defensible Title.
SECTION 12.5. PARTIAL INVALIDITY. In case any one or more of the
provisions contained herein shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Agreement, but
this Agreement shall be
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construed as if such invalid, illegal or unenforceable provision or provisions
had never been contained herein unless the deletion of such provision or
provisions would result in such a material change as to cause completion of the
transactions contemplated hereby to be unreasonable.
SECTION 12.6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective permitted
successors or assigns.
SECTION 12.7. EXECUTION IN COUNTERPARTS. This Agreement may be executed in
one or more counterparts, each of which shall be considered an original
counterpart, and shall become a binding agreement when CMS Energy, Sub, Terra,
the Stockholders and the Optionholders shall have each executed one
counterpart.
SECTION 12.8. TITLES AND HEADINGS. Titles and headings to Articles and
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
SECTION 12.9. SCHEDULES AND EXHIBITS. The Schedules and Exhibits referred
to in this Agreement shall be construed with and as an integral part of this
Agreement to the same extent as if the same had been set forth verbatim herein.
SECTION 12.10. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS; ASSIGNMENT. This
Agreement, including the Schedules and Exhibits, contains the entire
understanding of the parties hereto with regard to the subject matter contained
herein except that the confidentiality agreement, dated March 29, 1995 (the
"Confidentiality Agreement"), between Terra and CMS NOMECO shall remain in full
force in effect pursuant to the terms thereof after the execution of this
Agreement; provided, however, that the Confidentiality Agreement shall
terminate as of the Effective Time. The parties hereto, by mutual agreement in
writing, may amend, modify and supplement this Agreement. The failure of any
party hereto to enforce at any time any provision of this Agreement shall not
be construed to be a waiver of such provision, nor in any way to affect the
validity of this Agreement or any part hereof or the right of such party
thereafter to enforce each and every such provision. No waiver of any breach
of this Agreement shall be held to constitute a waiver of any other or
subsequent breach. Except as expressly provided herein, the rights and
obligations of the parties under this Agreement may not be assigned or
transferred by any party hereto without the prior written consent of the other
parties hereto.
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SECTION 12.11. INDEPENDENT INVESTIGATION AND SCOPE OF REPRESENTATIONS. CMS
Energy acknowledges and confirms that (i) in making the decision to enter into
this Agreement and to consummate the transactions contemplated hereby, it has
relied on the representations, warranties, covenants and agreements of Terra,
the Stockholders and the Optionholders set forth in the Agreement (including
the exhibits and schedules) and on no other representations, warranties,
covenants and agreements, and (ii) it has made its own independent
investigation, analysis and evaluation of Terra's properties (including CMS
Energy's own estimate and appraisal of the extent and value of Terra's
hydrocarbon reserves, pipelines and contracts), business, financial condition,
operations and prospects. Except to the extent expressly set forth in this
Agreement, including Section 3.35, no party makes any representation or
warranty whatsoever. Without limiting the generality of the foregoing, except
as set forth in Article III, NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS
OR IMPLIED, ARE MADE WITH RESPECT TO THE MERCHANTABILITY, USEFULNESS OR
SUITABILITY FOR ANY PURPOSE OF ANY PERSONAL PROPERTY OF Terra OR ITS
SUBSIDIARIES, INCLUDING, WITHOUT LIMITATION (a) ANY IMPLIED OR EXPRESS WARRANTY
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, (b) ANY RIGHTS OF CMS
ENERGY UNDER APPROPRIATE STATUTES TO CLAIM DIMINUTION OF CONSIDERATION AND (c)
ANY CLAIM FOR DAMAGES BECAUSE OF DEFECTS, WHETHER KNOWN OR UNKNOWN, WITH
RESPECT TO SUCH PERSONAL PROPERTY, IT BEING UNDERSTOOD THAT, EXCEPT AS
AFORESAID, SUCH PERSONAL PROPERTY SHALL EXIST IN ITS PRESENT CONDITION AND
STATE OF REPAIR, "AS IS" AND "WHERE IS," WITH ALL FAULTS.
SECTION 12.12. GOVERNING LAW; ARBITRATION. (a) This Agreement, and the
application or interpretation thereof, shall be governed by its terms and by
the internal laws of the State of Michigan, without regard to principles of
conflicts of laws as applied in the State of Michigan or any other jurisdiction
which, if applied, would result in the application of any laws other than the
internal laws of the State of Michigan.
(b) Any action, dispute, claim or controversy arising under, out of, in
connection with, or relating to, this Agreement, or any amendment hereof, or
the breach hereof (a "Dispute"), shall be determined and settled by binding
arbitration in Lansing, Michigan, by a person or persons mutually agreed upon,
or in the event of a disagreement as to the selection of the arbitrator or
arbitrators, in accordance with the rules of the American Arbitration
Association ("AAA"). Any award rendered therein shall specify the findings of
fact of the arbitrator or arbitrators and the reasons for such award, with the
reference to and reliance on relevant law. Any such award shall be final and
binding on each and all of the parties thereto and their personal
representatives, and judgment may be entered thereon in any court having
jurisdiction thereof. Any party may, by summary proceedings, bring an action
in court to compel arbitration of any Dispute. Any arbitration hereunder shall
be
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administered by the AAA in accordance with the terms of this Section 12.12, the
Commercial Arbitration Rules of the AAA, and, to the maximum extent applicable,
the Federal Arbitration Act. To the maximum extent practicable, an arbitration
proceeding hereunder shall be concluded by December 31, 1995. Each party
agrees to keep all Disputes and arbitration proceedings strictly confidential
except for disclosure of information required by applicable law.
SECTION 12.13. NO THIRD-PARTY BENEFICIARIES. Except for Section 7.2 and
Article X, nothing in this Agreement, expressed or implied, is intended or
shall be construed to confer upon any person other than the parties hereto and
successors and assigns permitted by Section 12.6 any right, remedy or claim
under or by reason of this Agreement (but excluding for the purpose of this
provision the Exhibits and Schedules).
SECTION 12.14. INTERPRETATION. Except as expressly stated otherwise, any
reference herein to "he," "she" or "it", or comparable terms, with respect to
any person or entity shall mean and include references to any or all of the
same as applicable whether or not so stated and regardless of gender, and any
reference herein to "this Agreement," "herein," "hereof," "hereby,"
"hereunder," or comparable terms shall mean and include references to this
Agreement and the Schedules and Exhibits to this Agreement.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the parties hereto or by their duly authorized officers, all as of the date
first above written.
CMS ENERGY CORPORATION,
a Michigan corporation
By: /s/ Preston D. Hopper
Name: Preston D. Hopper
Title: Vice President
CMS MERGING CORPORATION,
a Michigan corporation
By: /s/ William H. Stephens III
Name: William H. Stephens III
Title: Vice President and
General Counsel
TERRA ENERGY LTD.,
a Michigan corporation
By: /s/ Martin G. Lagina
Name: Martin G. Lagina
Title: Chairman and Chief
Executive Officer
/s/ Martin G. Lagina
Martin G. Lagina
/s/ Craig J. Tester
Craig J. Tester
/s/ Dr. Thomas James
Dr. Thomas James
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/s/ Nancy H. James
Nancy H. James
/s/ Dr. James Lowell
Dr. James Lowell
/s/ Mary K. Lowell
Mary K. Lowell
The Revocable Living Trust of
Dr. Leonard J. Scherock Under
Agreement dated May 1, 1990
By: /s/ Dr. Leonard Scherock
Dr. Leonard Scherock, Trustee
/s/ Robert M. Boeve
Robert M. Boeve
/s/ Wayne Sterenberg
Wayne Sterenberg
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EXHIBIT 10.18
COVENANT NOT TO COMPETE
THIS COVENANT NOT TO COMPETE (this "Agreement") is made as of August 31,
1995 by and among CMS Energy Corporation, a Michigan corporation ("CMS
Energy"), Martin G. Lagina ("Lagina"), Craig J. Tester ("Tester"), Robert M.
Boeve ("Boeve") and Wayne Sterenberg ("Sterenberg", and, together with Lagina,
Tester and Boeve, each individually a "Management Stockholder" and collectively
the "Management Stockholders").
W I T N E S S E T H:
WHEREAS, Terra Energy Ltd., a Michigan corporation ("Terra"), has an
authorized capital of 20,000,000 shares of common stock, no par value (the
"Terra Common Stock"), of which, on the date hereof, 12,065,422 shares are
issued and outstanding as of the date hereof;
WHEREAS, 11,065,422 shares of Terra Common Stock are owned in the aggregate
by the Management Stockholders;
WHEREAS, CMS Energy, Terra, the Management Stockholders and certain other
persons are parties to an Agreement and Plan of Merger dated as of August 29,
1995 (the "Merger Agreement");
WHEREAS, under the Merger Agreement, CMS Energy will acquire all of the
issued and outstanding shares of capital Stock of Terra, upon the terms and
subject to the conditions set forth therein;
WHEREAS, in order to satisfy the conditions to the obligations of various
parties under the Merger Agreement, and to induce such parties to consummate
the transactions contemplated by the Merger Agreement, CMS Energy and the
Management Stockholders desire to enter into this Agreement, upon the terms and
subject to the conditions hereinafter set forth;
NOW, THEREFORE, CMS Energy and the Management Stockholders, in consideration
of the agreements, covenants and conditions contained herein, hereby covenant
and agree as follows:
1. DEFINITIONS
Each capitalized term used herein without definition has the meaning given
to it in the Merger Agreement.
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2. NONCOMPETITION AGREEMENT
(a) Except as otherwise approved in advance and in writing by CMS Energy,
each Management Stockholder severally agrees not to, directly or indirectly,
for himself, or through, on behalf of, or in conjunction with any person, firm,
corporation, business or other legal entity (whether as an employer, employee,
partner, officer, director, agent, holder of a controlling interest, creditor,
consultant or otherwise), (i) during the period commencing on the Effective
Date and ending on the date which is three (3) years after the Effective Date,
own, maintain, operate, control, be employed by, have any interest in, perform
consulting services for or otherwise engage in any business or enterprise which
is in competition with or similar to or the same as the Terra Business (a
"Competing Business") with respect to its activities in the Michigan Devonian
Antrim Shale formation within the territories designated in Exhibit A attached
hereto (the "Territory"); provided, however, that nothing in this clause (i)
shall prevent any Management Stockholder from continuing to engage in such
business with respect to the Purchased Assets or other assets owned by such
Management Stockholder continuously from June 1, 1995 through the Effective
Time, and provided, further, that nothing in this clause (i) shall prevent any
Management Stockholder from being employed by or performing consulting services
for a Competing Business doing business within the Territory so long as the
services performed by such Management Stockholder for such Competing Business
relate solely and exclusively to projects or activities of such Competing
Business which are located exclusively outside the Territory; and provided,
further, that nothing in this clause (i) shall prevent any Management
Stockholder from acquiring mineral interests within the Territory if, in the
case of each such interest, it is subject to an oil and gas lease that has a
remaining term of at least two (2) years or that is held by production at the
time of such acquisition, or (ii) during the period commencing on the Effective
Date and ending on the date which is one (1) year after the Effective Date,
induce or attempt to persuade any employee, agent or customer of or co-venturer
with Terra or any Subsidiary or the Terra Business to terminate his or her
employment, agency or business relationship with Terra, or employ, hire or
engage any such employee; and provided, however, that nothing in this clause
(ii) shall prevent any Management Stockholder from inviting co-venturers with
Terra to participate as co-venturers with any such Management Stockholder in
projects or activities which are located exclusively outside the Territory.
(b) During the period commencing on the Effective Date and ending on the
date which is fifteen (15) years after the Effective Date, each Management
Stockholder further severally agrees not to divulge or use, in each case to the
detriment of the Terra Business in the Territory, any confidential information
or trade secrets of CMS Energy, Terra or the Terra Business or any subsidiary
or affiliate thereof, including personnel information, secret processes,
know-how, customer lists, formulas or other technical data, except as may be
required by law, provided, however, that this prohibition shall not apply to
any information which, through no improper action of any Management
Stockholder, is publicly available or generally known in the industry; and
provided, further, that beginning with the third anniversary of the Effective
Date this Section 2(b) shall apply only to geological and geophysical data in
documentary form owned by Terra at the Effective Date that is not: (i) in the
public domain now or hereafter, or (ii) acquired from sources other than Terra,
and Terra's sole remedy for breach of the obligation set forth in this proviso
after such third anniversary shall be injunctive relief.
(c) To the extent necessary to satisfy the laws of any state, including the
State of Michigan, each Management Stockholder agrees that any geographical,
temporal or other restriction set forth in this Section 2 can and should, if
necessary, be judicially modified to the extent necessary to make it
enforceable and enforced as modified.
(d) It is agreed between the parties that CMS Energy would be irreparably
damaged by reason of any violation of the provisions of this Section 2, and
that any remedy at law for a breach of such provision would be inadequate.
Therefore, CMS Energy shall be entitled to seek and obtain
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injunctive or other equitable relief (including, but not limited to, a
temporary restraining order, a temporary injunction or a permanent injunction)
against any Management Stockholder, his agents, assigns or successors for a
breach or threatened breach of such provisions and without the necessity of
proving actual monetary loss. It is expressly understood among the parties
that this injunctive or other equitable relief shall not be CMS Energy's
exclusive remedy for any breach of this Section 2, except as otherwise provided
in the last proviso of Section 2(b), and CMS Energy shall be entitled to seek
any other relief or remedy which it may have by contract, statute, law or
otherwise for any breach hereof, and it is agreed that CMS Energy shall also be
entitled to recover its attorneys' fees and expenses in any successful action
or suit against any Management Stockholder relating to any such breach.
(e) Each Management Stockholder warrants and represents that he:
(i) is familiar with covenants not to compete;
(ii) has discussed the provisions of the covenant not to compete contained
herein with his attorneys and has concluded that such provisions (including,
without limitation, the right to equitable relief and the length of time and
size of area provided for herein) are fair, reasonable and just under the
circumstances; and
(iii) is fully aware of the obligations, limitations and liabilities
included in the covenant not to compete contained in this Agreement.
(f) In consideration of the covenants of the Management Stockholders
contained in Section 2, CMS Energy shall pay to the respective Management
Stockholders an aggregate of the number of shares of CMS Common Stock, rounded
to the nearest millionth of a share, determined by dividing (i) the difference
between (A) the Aggregate Consideration and (B) $57,106,940 by (ii) the Average
Price, and such consideration shall be allocated among the Management
Stockholders as set forth in Exhibit B attached hereto; provided, however, that
CMS Energy shall satisfy such obligation by delivering cash in lieu of
fractional shares pursuant to Section 2.6 of the Merger Agreement, by check or
wire transfer of immediately available funds to the account or accounts
designated by the respective Management Stockholders in a notice to CMS Energy,
and one or more certificates (to the respective Management Stockholders)
representing the aggregate number of whole CMS Common Shares to which the
respective Management Stockholders are entitled pursuant hereto.
(g) Any certificates representing CMS Common Shares or cash in lieu of
fractional shares or interests deliverable pursuant hereto shall be deliverable
five (5) business days after the final determination of the difference between
the amounts calculated pursuant to clauses (A) and (B) of Section 2.2(a) of the
Merger Agreement, provided, however, that notwithstanding the foregoing, as
respects certificates representing CMS Common Shares otherwise deliverable in
accordance with this sentence pursuant to this Agreement, not less than two
business days prior to the Effective Date CMS Energy will estimate, in good
faith, the number of CMS Common Shares deliverable under this Agreement and the
allocation thereof to each Management Stockholder and, at the Effective Time,
CMS Energy shall deliver an aggregate number of CMS Common Shares (allocated to
each Management Stockholder in accordance with part I of Exhibit B attached
hereto) equal to eighty percent (80%) of the estimated number (rounded to the
nearest whole share) of CMS Common Shares deliverable by CMS Energy or equal to
such higher percentage of the estimated number of CMS Common Shares deliverable
by CMS Energy as CMS Energy may elect (the aggregate of all such Shares so
delivered being the "Delivered Share Number"). Following the Effective Time,
CMS Energy and the Stockholders' Representative will determine the actual
number of CMS Common Shares (and cash in lieu of fractional shares) deliverable
under this Agreement (the "Actual Share Number") and the allocation thereof to
each Management Stockholder. Disputes regarding the Actual Share Number shall
be resolved as soon as
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practicable, but in any event disputes regarding the Actual Share Number that
are not resolved by the parties within five (5) business days after the
sixtieth (60th) day after the Effective Time shall be submitted to an
arbitrator who is acceptable to both parties, and whose decision shall be final
and binding with respect to the Actual Share Number. The fees and expenses of
the arbitrator (if any) incurred in connection with the determination of the
Actual Share Number shall be shared equally by CMS Energy on the one hand and
the Management Stockholders on the other hand. If the Actual Share Number is
greater than the Delivered Share Number, then CMS Energy shall deliver to the
respective Management Stockholders entitled thereto an aggregate number of
whole CMS Common Shares equal to such excess (allocated in accordance with the
percentages set forth in part II of Exhibit B attached hereto), together with
an amount equal to all dividends and distributions which became payable to
holders of record on or after the Effective Date in respect of such number of
CMS Common Shares. If the Actual Share Number is less than the Delivered Share
Number, then the respective Management Stockholders shall deliver to CMS Energy
within two business days following the determination of the Actual Share Number
an aggregate number of whole CMS Common Shares equal to such deficiency
(allocated in accordance with the percentages set forth in part II of Exhibit B
attached hereto), together with an amount equal to all dividends and
distributions which became payable to holders of record on or after the
Effective Date in respect of such number of CMS Common Shares.
(h) Each of the Management Stockholders agrees to report the fair market
value of the CMS Common Shares delivered pursuant to this Agreement as ordinary
income in his federal, state and local income tax returns for the taxable year
in which the Effective Date occurs.
3. NOTICES
Any notice to be given hereunder by any party to the others may be effected
by delivery of written notice either in person or by mail, registered or
certified, postage prepaid, with return receipt requested. Mailed notices
shall be addressed to the parties at their addresses appearing in the Merger
Agreement, but each party may change his or its address by written notice in
accordance with this paragraph. Notices delivered personally shall be deemed
communicated as of actual receipt. Mailed notices shall be deemed communicated
as of three (3) days after mailing.
4. ENTIRE AGREEMENT
This Agreement contains the entire agreement of the parties hereto with
respect to the subject matter hereof and any prior or contemporaneous oral or
written agreement between the parties shall have no effect.
5. AMENDMENTS
Any modifications to this Agreement or consents or approvals hereunder shall
be effective only if they are in writing, signed by the respective party
against which such modification, consent or approval is to be enforced.
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6. APPLICABLE LAW
The rights, duties, and obligations of the parties hereto shall be construed
in accordance with the laws of the State of Michigan.
7. SUCCESSORS AND ASSIGNS
The duties hereunder of the Management Stockholders may not be assigned or
in any manner transferred, but rather, it is agreed by and between the parties
that the duties to be performed hereunder shall be performed by the Management
Stockholders only. CMS Energy may sell, assign or transfer its rights, duties
and obligations under this Agreement, with the exception of those set forth in
Section 2(f) and 2(g), to Terra or a company directly or indirectly owning all
of the common stock of Terra or a purchaser or transferee of all or
substantially all of the assets of Terra (and any such transferee may likewise
sell, assign or transfer such rights, duties and obligations), subject to CMS
Energy remaining secondarily liable for its duties and obligations hereunder.
8. PARTIAL INVALIDITY
If any provision of this Agreement is held by a court of competent
jurisdiction to be invalid, void or unenforceable, the remaining provisions
shall nevertheless continue in full force without being impaired or invalidated
in any way.
9. HEADINGS
The headings of the sections and paragraphs herein are inserted for
convenience only and shall not control or affect the meaning or construction of
any of the provisions of this Agreement.
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10. FURTHER ASSURANCES
Each party hereto agrees to do such further acts and things, and to execute
and deliver such additional agreements and instruments, as any party may
reasonably request of any other in order to carry out the provisions and
purposes of this Agreement.
11. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which
when so executed shall be deemed an original, but all such counterparts
together shall constitute one and the same agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Covenant Not to
Compete as of the date first above written.
CMS Energy Corporation,
a Michigan corporation
By: /s/ Preston Hopper
Preston Hopper
Vice President
/s/ Martin G. Lagina
Martin G. Lagina, an individual
/s/ Craig J. Tester
Craig J. Tester, an individual
/s/ Robert M. Boeve
Robert M. Boeve, an individual
/s/ Wayne Sterenberg
Wayne Sterenberg, an individual
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EXHIBIT 10.19
TRANSFER AGREEMENT
TRANSFER AGREEMENT dated as of the 31st day of August, 1995 between CMS
NOMECO Oil & Gas Co. (CMS NOMECO), a Michigan corporation, CMS Enterprises
Company (CMS Enterprises), a Michigan corporation and CMS Energy Corporation
(CMS Energy), a Michigan Corporation.
WHEREAS, CMS Energy has (i) entered into an Agreement and Plan of Merger (the
"Merger Agreement") among CMS Energy, CMS Merging Corporation, a Michigan
corporation and a wholly-owned subsidiary of CMS Energy, Terra Energy Ltd.
("Terra"), Martin G. Lagina, Craig J. Tester, Dr. Thomas James and Nancy M.
James, Dr. James Lowell and Mary K. Lowell, The Revocable Living Trust of Dr.
Leonard J. Scherock under agreement dated May 1, 1990, Robert M. Boeve and
Wayne Sterenberg pursuant to which CMS Energy has acquired all of the
outstanding stock (the "Terra Stock") of Terra in exchange for approximately
2,319,055 shares of the common stock of CMS Energy ("CMS Energy Stock") and an
amount of cash representing the value of fractional shares of CMS Energy Stock
that would otherwise be delivered pursuant to the Merger Agreement, and (ii)
entered into a Covenant Not to Compete dated as of August 31, 1995 (the
"Covenant Agreement") pursuant to which CMS Energy acquired undertakings by
certain of the former shareholders of Terra not to compete with Terra for a
specified period within the area designated in the Covenant Agreement and not
to disclose certain information for a specified period in exchange for which
CMS Energy is obligated to deliver approximately 265,626 shares of CMS Energy
Stock and an amount of cash representing the value of fractional shares of CMS
Energy Stock that would otherwise be delivered pursuant to the Covenant
Agreement;
WHEREAS, CMS Energy desires to transfer to its subsidiary, CMS Enterprises, for
the consideration described herein, the Terra Stock and its rights under the
Covenant Agreement described above;
WHEREAS, CMS Enterprises desires to transfer to its subsidiary, CMS NOMECO,
for the consideration described herein, the Terra Stock and the rights under
the Covenant Agreement which it has received from CMS Energy;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. CMS Energy hereby transfers to CMS Enterprises the Terra Stock and its
(CMS Energy's) rights under the Covenant Agreement. CMS Energy and CMS
Enterprises intend $1 million of the value of the Terra Stock to be a
contribution to the capital of CMS Enterprises and CMS Enterprises agrees to
pay to CMS Energy the
<PAGE> 2
remaining $62,648,000 of the anticipated Aggregate Consideration (as that term
is defined in the Merger Agreement), consisting of $56,106,940 of the value of
the Terra Stock and all $6,541,060 of the value of the Covenant Agreement by
assignment to CMS Energy of the obligation of CMS NOMECO described in
Paragraph 2 hereof.
2. CMS Enterprises, immediately following the transfer described in
Paragraph 1 hereof, hereby transfers to CMS NOMECO the Terra Stock and its
(CMS Enterprises') rights under the Covenant. CMS Enterprises and CMS NOMECO
intend $1 million of the value of the Terra Stock to be a contribution to the
capital of CMS NOMECO and CMS NOMECO agrees to pay to CMS Enterprises the
remaining $62,648,000 of the Aggregate Consideration, consisting of
$56,106,940 of the value of the Terra Stock and all $6,541,060 of the value of
the Covenant Agreement. A copy of that certain note (the "Note") dated the
date hereof, evidencing CMS NOMECO's payment obligation to CMS Enterprises, in
an amount equal to the difference of the Aggregate Consideration and the $1
million of contribution to capital, is attached hereto. CMS NOMECO
acknowledges that the Note will be assigned by CMS Enterprises to CMS Energy
and CMS NOMECO agrees to make all payments required under the Note directly to
CMS Energy. CMS Enterprises agrees that all payments by CMS NOMECO under the
Note shall be made to CMS Energy. CMS Energy acknowledges that the Note is
subject to a Subordination Agreement dated as of August 31, 1995 among CMS
Enterprises and the Banks party to the CMS NOMECO Amended and Restated Credit
Agreement dated as of November 1, 1993, as amended, and agrees to be bound by
all of the Terms and Conditions of said Subordination Agreement.
3. The parties further agree that in the event that post-closing
adjustments to the Aggregate Consideration (as that term is defined in the
Merger Agreement), cause the Aggregate Consideration to be other than
$63,648,000, the obligation of CMS NOMECO under the Note (and the consideration
payable by CMS Enterprises to Energy) will be adjusted as follows:
(a) if the Aggregate Consideration is more than $63,648,000, the
obligation of CMS NOMECO under the Note (and the consideration payable by CMS
Enterprises to CMS Energy) will be increased by such difference, and
(b) if the Aggregate Consideration is less than $63,648,000, the
obligation of CMS NOMECO under the Note (and the consideration payable by CMS
Enterprises to CMS Energy) will be decreased by such difference.
<PAGE> 3
In the event of any such adjustment, the parties hereto will revise the terms
of the Note (and the terms of this Agreement) to reflect such adjustment.
CMS ENTERPRISES COMPANY CMS ENERGY CORPORATION
By: /s/ Thomas A. McNish By: /s/ Thomas A. McNish
Its _____________________ Its _____________________
CMS NOMECO OIL & GAS CO.
By: /s/ Paul E Geiger
Paul E. Geiger
Its Vice President, Secretary
and Treasurer
<PAGE> 1
EXHIBIT 10.20
PROMISSORY NOTE
$65,000,000 August 31, 1995
CMS NOMECO Oil & Gas Co., formerly known as NOMECO Oil & Gas Co., a
corporation duly organized and existing in good standing under the laws of the
State of Michigan (the "Borrower"), for value received, hereby promises to pay
to the order of CMS Enterprises Company, a Michigan corporation (the "Lender"),
the principal sum of Sixty Five Million Dollars ($65,000,000) or, if less, the
aggregate unpaid principal amount of all loans made by the Lender to the
Borrower and endorsed by the Lender on Schedule A hereto (the "Schedule") on
November 1, 1999.
The Borrower promises to pay interest on the unpaid principal balance
of each loan hereunder from and including the date of such loan to the maturity
date of such loan (as shown on the Schedule) at a rate per annum equal to the
average cost of debt of CMS Energy Corporation (on an unconsolidated basis) for
the most recent quarter (the "Borrowing Rate"), payable quarterly in arrears
and on such maturity date. Any principal not paid when due shall bear interest
from maturity until paid in full, payable upon demand, at a rate per annum
equal to 120% of the Borrowing Rate. Interest shall be calculated on the basis
of a year of 360 days and actual days elapsed.
All payments hereunder shall be made in lawful money of the United
States and in immediately available funds. Any extension of time for the
payment of the principal of this note resulting from the due date falling on a
Saturday, Sunday or legal holiday shall be included in computation of interest.
If (i) any sum payable on any liability of the Borrower to the Lender
hereunder shall not be paid when due and such default shall continue for 30
consecutive days; or (ii) the Borrower shall default on any obligation for
repayment of borrowed money and the holder of such borrowed money shall
accelerate the due date thereof, the Lender may, at its option, declare the
principal and interest on this note immediately due and payable, without
protest, presentment, notice or demand, all of which the Borrower hereby
waives. Notwithstanding the above, the Lender may terminate the unused portion
of this facility in whole or in part by giving the Borrower thirty days advance
written notice thereof.
The Borrower agrees to pay on demand all expenses, including reasonable
attorneys' fees, the Lender may incur in connection with the enforcement of
this note.
The indebtedness evidenced by this note (including the obligations
described in the preceding paragraph) and any renewals or extension hereof,
shall at all times be wholly subordinate and junior in right of payment to any
and all present and future indebtedness, obligations and liabilities of the
Borrower pursuant to the Amended and Restated Credit
-1-
<PAGE> 2
Agreement dated as of November 1, 1993 among the Borrower, the banks now or
hereafter parties thereto and NBD Bank, N.A., as agent, as such Amended and
Restated Credit Agreement is amended, modified, restated or refinanced from
time to time and all renewals or increases therein and further including
without limitation all reimbursement obligations pursuant to any letters of
credit issued pursuant thereto and all obligations pursuant to any promissory
notes issued pursuant thereto, all amounts accruing after the filing of any
petition in bankruptcy or similar loss, whether or not such amount is an
allowable claim, all guarantees, all guarantees for any of the foregoing and
all rights and remedies of the holders of any of the foregoing (herein called
"Superior Indebtedness"), in the manner and with the force and effect hereafter
set forth:
(1) In the event of any liquidation, dissolution, or winding up of the
Borrower, or of any execution receivership, insolvency, bankruptcy,
liquidation, reorganization or other similar proceeding
relative to the Borrower or its property, all Superior Indebtedness
shall first be paid in full in cash or cash equivalents before any
payment is made upon the indebtedness evidenced by this note; and in
any such event any payment or distribution of any kind or character,
whether in cash, property or securities (other than in securities,
including equity securities, or other evidences of indebtedness, the
payment of which is subordinated to the payment of all Superior
Indebtedness which may at the time be outstanding in the same manner as
the subordinated notes are subordinated to the Superior Indebtedness,
but only to the extent that the court awarding or permitting the
distribution of such securities states that in doing so it is giving
effect to the subordination of this note to the Superior Indebtedness
set forth herein) which shall be made upon or in respect of this note
shall be paid over the holders of such Superior Indebtedness, pro rata,
for application in payment thereof unless and until such Superior
Indebtedness shall have been paid or satisfied in full;
(2) In the event that this note is declared or becomes due and payable
because of the occurrence of any event of default hereunder or
otherwise than at the option of the Borrower, under circumstances when
the foregoing clause (1) shall not be applicable, the Lender shall be
entitled to payments only after there shall first have been paid in
full in cash or cash equivalents all Superior Indebtedness outstanding
at the time this note so becomes due and payable because of any such
event, or payment shall have been provided for in a manner satisfactory
to the holders of such Superior Indebtedness; and
(3) During the continuance of any default with respect to any Superior
Indebtedness permitting the holders thereof to accelerate the
maturity of such Superior Indebtedness, no payment of principal,
premium or interest or other amount shall be made on this note, if
either (i) notice of such default in writing or by telegram has been
given to the Borrower by the holders of a majority in aggregate
principal amount of the outstanding Superior Indebtedness in default,
provided that judicial proceedings shall be commenced with respect to
such default (x) within one hundred twenty (120) days thereafter in the
case such default relates to the non-payment of principal, interest or
premium on such Superior Indebtedness or (y) within 90 days after the
giving of such notice in the case
-2-
<PAGE> 3
of any other event or condition causing such default, or (ii)
judicial proceedings shall be pending in respect of such default. The
holders of Superior Indebtedness shall not be entitled to give notice
pursuant to this clause (3) more than once with respect to any default
which was specified in such a notice and which has continued without
interruption since the date such notice was given, nor shall such
holders be entitled to give a separate notice with respect to any
default not so specified which (to the knowledge of any holder giving
such notice) was existing on the date notice shall have been given
pursuant to this clause (3) and which has continued without
interruption from the date such notice was given. Upon receipt of any
notice from such holders of Superior Indebtedness pursuant to this
clause (3), the Borrower shall forthwith send a copy thereof to the
Lender.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets or securities of the Borrower of any kind or character,
whether in cash, property or securities, shall be received by any trustee,
agent or paying agent or the holders of this note (or, if the borrower of any
subsidiary or affiliate of the Borrower is acting as paying agent, money,
assets or securities shall be segregated or held in trust) on account of
principal of, premium on, interest on or other amounts with respect to this
note contrary to the terms hereof, such payment or distribution shall be
received, segregated from other funds, and held in trust by such trustee,
agent, paying agent or holder for the benefit of, and shall immediately be paid
over to, the holders of Superior Indebtedness or their representative, ratably
according to the respective amounts of Superior Indebtedness held or
represented by each.
The Lender undertakes and agrees for the benefit of each holder of
Superior Indebtedness to execute, verify, deliver and file any proofs of claim
which any holder of Superior Indebtedness may at any time require in order to
prove and realize upon any rights or claims pertaining to this note and to
effectuate the full benefit of the subordination contained herein; and upon
failure of the Lender so to do, any such holder of Superior Indebtedness shall
be deemed to be irrevocably appointed the agent and attorney-in-fact of the
Lender to execute, verify, deliver and file any such proofs of claim.
No right of any holder of any Superior Indebtedness to enforce
subordination as herein provided shall at any time or in any way be affected or
impaired by any failure to act on the part of the Borrower or the holders of
Superior Indebtedness, or by any noncompliance by the Borrower with any of the
terms, provisions and covenants of this note or the agreement under which they
are issued, regardless of any knowledge thereof that any holder of Superior
Indebtedness may have or be otherwise charged with.
The Borrower agrees, for the benefit of the holders of Superior
Indebtedness, that in the event that this note is declared due and payable
before its expressed maturity because of the occurrence of a default hereunder,
(i) the Borrower will give prompt notice in writing of such happening to the
holders of Superior Indebtedness and (ii) all Superior Indebtedness shall
forthwith become immediately due and payable upon demand. regardless of the
expressed maturity thereof.
-3-
<PAGE> 4
The Borrower may make optional prepayments on this note at any time,
provided that no event of default under the Superior Indebtedness and no event
which may become such an event of default with notice or lapse of time, or
both, has occurred and is continuing at the time of such payment or would be
caused by such payment, in which case the Borrower not make, and the holder of
this note shall not accept, any such optional prepayment.
The foregoing provisions are solely for the purpose of defining the
relative rights of the holders of Superior Indebtedness on the one hand, and
the Lender on the other hand, and nothing herein shall impair, as between the
Borrower and the Lender, the obligation of the Borrower which is unconditional
and absolute, to pay the principal, premium, if any, and interest on this note
in accordance with its terms, nor shall anything herein prevent the Lender from
exercising all remedies otherwise permitted by applicable law or hereunder upon
default hereunder, subject to the rights of the holders of Superior
Indebtedness as herein provided for.
This note is subject to further terms and conditions specified in
Subordination Agreement executed among the Lender and the current holders of
the Superior Indebtedness.
This note shall be governed by, and interpreted and construed in
accordance with, the laws of the State of Michigan.
CMS NOMECO OIL & GAS CO.
BY: /s/ Paul E. Geiger
----------------------
Paul E. Geiger
ITS: Vice President, Secretary and Treasurer
-4-
<PAGE> 5
Schedule A
to $65,000,000 CMS NOMECO Oil & Gas Co.
Promissory Note dated August 31, 1995
ADVANCES AND PAYMENTS OF PRINCIPAL
<TABLE>
<CAPTION>
Amount of
Principal Unpaid
Amount of Paid or Principal Interest Notation
Date Advance Prepaid Balance Maturity Date Rate Made By
- --------------- ------------ ----------- ----------- ---------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1995 $61,340,000 $61,340,000 November 1, 1999
</TABLE>
<PAGE> 1
EXHIBIT 10.21
AGREEMENT AND PLAN OF MERGER
AMONG
CMS ENERGY CORPORATION
CMS MERGING CORPORATION
WALTER INTERNATIONAL, INC.
J.C. WALTER, JR.
J.C. WALTER III
CAROLE WALTER LOOKE
F. FOX BENTON, JR.
GORDON A. CAIN
THE CAIN 1988 DESCENDANTS TRUST
WILLIAM C. OEHMIG
PRUDENTIAL-BACHE ENERGY GROWTH FUND, L.P. G-2
PRUDENTIAL-BACHE ENERGY GROWTH FUND, L.P. G-3
PRUDENTIAL-BACHE ENERGY GROWTH FUND, L.P. G-4
F. FOX BENTON III
HOWARD A. CHAPMAN
G.W. FRANK
ROBERT D. JOLLY
AND
ARTHUR L. SMALLEY
_______________________________________________
Dated as of January 24, 1995
<PAGE> 2
TABLE OF CONTENTS
ARTICLE I
THE MERGER......................... 2
Section 1.1. The Merger.......................................... 2
Section 1.2. Filing Articles of Merger and
Effectiveness..................................... 3
Section 1.3. Effects of the Merger............................... 3
Section 1.4. Articles of Incorporation, By-Laws,
Directors and Officers............................ 3
Section 1.5. Further Assurances.................................. 3
ARTICLE II
CONVERSION OF SHARES............... 3
Section 2.1. Conversion of Securities............................ 3
Section 2.2. Walter Consolidated Net
Working Capital................................... 7
Section 2.3. Walter Debt to be Retained and
Walter Debt to be Discharged...................... 7
Section 2.4. Payment of Cash and Delivery
of Certificates................................... 8
Section 2.5. Dividends and Distributions......................... 9
Section 2.6. Fractional Shares................................... 10
Section 2.7. Changes in CMS Common Stock......................... 10
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE STOCKHOLDERS, THE PREFERRED
STOCKHOLDERS AND THE WARRANTHOLDERS........... 11
Section 3.1. Organization of Walter.............................. 11
Section 3.2. Subsidiaries and Investments........................ 11
Section 3.3. Capitalization...................................... 12
Section 3.4. Authority........................................... 14
Section 3.5. Financial Statements................................ 16
Section 3.6. Operations Since Unaudited Balance
Sheet Date........................................ 17
Section 3.7. No Undisclosed Liabilities.......................... 19
Section 3.8. Taxes............................................... 19
Section 3.9. Condition of Tangible Assets........................ 23
Section 3.10. Title to Property................................... 23
Section 3.11. Availability and Ownership of Assets................ 23
Section 3.12. Personal Property Leases............................ 24
Section 3.13. Accounts Receivable................................. 24
Section 3.14. Intellectual Property............................... 24
Section 3.15. Owned Real Property................................. 26
Section 3.16. Leased Real Property................................ 26
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Page
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Section 3.17. Obligations; Litigation............................. 27
Section 3.18. Amoco Stock Purchase Agreement...................... 27
Section 3.19. Compliance with Laws................................ 27
Section 3.20. Permits............................................. 28
Section 3.21. Insurance........................................... 28
Section 3.22. Employee Benefit Plans.............................. 29
Section 3.23. Employees and Agents and Related
Agreements........................................ 30
Section 3.24. Employee Relations and Labor Matters................ 31
Section 3.25. Absence of Certain Business Practices............... 31
Section 3.26. Territorial Restrictions............................ 32
Section 3.27. Transactions with Certain Persons................... 32
Section 3.28. No Finder........................................... 33
Section 3.29. Environmental Matters............................... 33
Section 3.30. Contracts........................................... 34
Section 3.31. No Guaranties; Extensions of Credit................. 35
Section 3.32. Gas Imbalances; Production Rights
and Obligations................................... 36
Section 3.33. Net Revenue Interests and Cost and
Expense Bearing Interests......................... 36
Section 3.34. CMS Common Shares................................... 38
Section 3.35. Disclosure.......................................... 38
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CMS ENERGY........ 38
Section 4.1. Organization of CMS Energy.......................... 38
Section 4.2. Authority........................................... 39
Section 4.3. Shares of CMS Common Stock.......................... 40
Section 4.4. Capitalization...................................... 40
Section 4.5. Operations Since September 30, 1994................. 41
Section 4.6. Compliance with Laws................................ 41
Section 4.7. SEC Documents....................................... 41
Section 4.8. No Finder........................................... 42
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SUB........... 42
Section 5.1. Organization and Standing........................... 42
Section 5.2. Capital Structure................................... 42
Section 5.3. Authority........................................... 42
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<PAGE> 4
Page
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ARTICLE VI
ACTIONS PRIOR TO THE EFFECTIVE DATE............. 43
Section 6.1. Issuance of CMS Common Shares....................... 43
Section 6.2. Action by Stockholders of Walter.................... 43
Section 6.3. Amoco Stock Purchase Agreement...................... 43
Section 6.4. Investigation of Walter............................. 43
Section 6.5. Lawsuits, Proceedings, Etc.......................... 44
Section 6.6. Conduct of Business by Walter
Pending the Merger................................ 44
Section 6.7. Mutual Cooperation;
Reasonable Best Efforts........................... 48
Section 6.8. No Public Announcement.............................. 48
Section 6.9. No Solicitation..................................... 48
Section 6.10. Antitrust Law Compliance............................ 49
Section 6.11. Termination of Stockholders'
Agreement and ORR Plan............................ 49
Section 6.12. Subsequent Financial Statements..................... 49
Section 6.13. Exercise or Cancellation of Warrants................ 49
Section 6.14. Stock Purchase Agreements........................... 50
Section 6.15. Substitution on Office Lease........................ 50
ARTICLE VII
ADDITIONAL COVENANTS AND AGREEMENTS............. 50
Section 7.1. Tax-Free Nature; Tax Consequences................... 50
Section 7.2. Taxes............................................... 52
Section 7.3. Repayment of Debt................................... 56
Section 7.4. Resale of CMS Common Shares......................... 56
Section 7.5. Claims of Preferred Stockholders.................... 56
Section 7.6. Claims of Walter and the Stockholders............... 57
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS
OF CMS ENERGY AND SUB................ 57
Section 8.1. No Misrepresentation or Breach
of Covenants and Warranties....................... 57
Section 8.2. No Material Adverse Effect.......................... 58
Section 8.3. Opinions of Counsel for Walter, the
Stockholders and the Preferred
Stockholders...................................... 58
Section 8.4. No Injunctions or Restraints........................ 58
Section 8.5. Necessary Governmental Approvals.................... 58
Section 8.6. Necessary Consents.................................. 58
Section 8.7. Effectiveness of Registration Statement............. 59
Section 8.8. Listing of CMS Common Shares........................ 59
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<PAGE> 5
Page
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Section 8.9. Stockholder Action.................................. 59
Section 8.10. Dissenting Stockholders............................. 59
Section 8.11. Inter-Purchaser Agreement........................... 59
Section 8.12. Closing of the Amoco Stock
Purchase Agreement................................ 59
Section 8.13. Resignations of Certain Employees................... 60
Section 8.14. Warrants to Acquire Walter Common Stock............. 60
Section 8.15. Resignations of Walter Directors
and Officers...................................... 60
Section 8.16. Amoco Consent....................................... 60
Section 8.17. OPIC Consent........................................ 60
Section 8.18. NOMECO Lenders' Consent............................. 60
Section 8.19. Walter Debt to be Discharged........................ 61
Section 8.20. Warrantholder Notes................................. 61
Section 8.21. Walter Congo Note................................... 61
Section 8.22. ORR Plan............................................ 61
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS
OF WALTER AND THE STOCKHOLDERS........... 61
Section 9.1. No Misrepresentation or Breach
of Covenants and Warranties....................... 61
Section 9.2. No Material Adverse Effect.......................... 62
Section 9.3. No Injunctions or Restraints........................ 62
Section 9.4. Opinions of Counsel for CMS Energy
and Sub........................................... 62
Section 9.5. Necessary Governmental Approvals.................... 62
Section 9.6. Effectiveness of Registration Statement............. 63
Section 9.7. Listing of CMS Common Shares........................ 63
Section 9.8. Stockholder Action.................................. 63
Section 9.9. Necessary Consents.................................. 63
Section 9.10. Office Lease Guarantor.............................. 63
ARTICLE X
INDEMNIFICATION; SURVIVAL.......... 63
Section 10.1. Indemnification by the Stockholders................. 63
Section 10.2. Indemnification by CMS Energy
and the Surviving Corporation..................... 65
Section 10.3. Notice of Claims.................................... 66
Section 10.4. Third Party Claims.................................. 67
Section 10.5. Exclusive Remedy.................................... 68
Section 10.6. Survival of Obligations............................. 68
Section 10.7. Update of the Representations
and Warranties.................................... 68
Section 10.8. Adjustment to Consideration......................... 70
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<PAGE> 6
Page
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ARTICLE XI
TERMINATION.............. 70
Section 11.1. Termination......................................... 70
ARTICLE XII
OTHER PROVISIONS............... 71
Section 12.1. Confidential Nature of Information.................. 71
Section 12.2. Fees and Expenses................................... 71
Section 12.3. Notices............................................. 71
Section 12.4. Definitions......................................... 73
Section 12.5. Partial Invalidity.................................. 74
Section 12.6. Successors and Assigns.............................. 74
Section 12.7. Execution in Counterparts........................... 74
Section 12.8. Titles and Headings................................. 74
Section 12.9. Schedules and Exhibits.............................. 74
Section 12.10. Entire Agreement; Amendments and
Waivers; Assignment............................... 75
Section 12.11. Independent Investigation and Scope
of Representations................................ 75
Section 12.12. Governing Law; Arbitration.......................... 76
Section 12.13. No Third-Party Beneficiaries........................ 76
EXHIBITS
Exhibit A Plan of Merger
Exhibit B Alba Partnership documents
Exhibit C El Franig Partnership documents
Exhibit D Forms of Opinions of Vinson & Elkins, L.L.P.
Exhibit E Form of Opinion of Jones, Walker, Waechter, Poitevant, Carrere &
Denegre L.L.P.
Exhibit F Form of Inter-Purchaser Agreement
Exhibit G Form of Opinion of Denise Sturdy, Esq.
SCHEDULES
Schedule 3.2 Subsidiaries, Capital Stock, State of Organization and
Jurisdiction
Schedule 3.3(a) Owners of Walter Common and Preferred Stock and
Warrants
Schedule 3.3(b) Other Restrictions on Walter Common and Preferred Stock
Schedule 3.3(c) Liens on Shares of Capital Stock
Schedule 3.3(d) Liens on Partnerships, Joint Ventures and Other
Interests
- v -
<PAGE> 7
Schedule 3.4(a) Agreements Requiring Consents
Schedule 3.5 Adjustments to Unaudited Balance Sheet and Statement of
Income as of June 30, 1994
Schedule 3.6(a) Material Adverse Changes Since June 30, 1994
Schedule 3.6(b) Actions Not in the Ordinary Course of Business Since
June 30, 1994
Schedule 3.7 Undisclosed Liabilities since June 30, 1994
Schedule 3.8(a) Tax Returns
Schedule 3.8(b) Net Operating Losses
Schedule 3.8(c) Estimated Loss from January 1, 1994 through June 30, 1994
Schedule 3.9 Condition of Assets
Schedule 3.10 Liens on Material Assets
Schedule 3.12 Personal Property Leases
Schedule 3.14 Intellectual Property
Schedule 3.15 Owned Real Property
Schedule 3.16 Leased Real Property
Schedule 3.17 Material Obligations, Litigation Disputes
Schedule 3.19 Compliance with Laws
Schedule 3.20 Permits
Schedule 3.21 Insurance
Schedule 3.22(a) Employee Plans
Schedule 3.22(d) Plans with Jurisdictions
Schedule 3.22(f) Outside the United States Plans Not Covered by ERISA
Schedule 3.23(a) Employment/Consulting Agreements/Non-Compete Agreements Not
Terminable on 30 Days Notice, Deferred Compensation
Schedule 3.23(b) Employee/Consultants with Compensation Greater than $50,000
Schedule 3.24(b) Collective Bargaining Agreement
Schedule 3.26 Third Party Restrictions on Conduct of Business
Schedule 3.27 Transactions with Affiliates, Stockholders, Officers or
Directors
Schedule 3.30 Contracts
Schedule 3.31 Guaranties
Schedule 3.32 Production Contracts/Product Sales
Schedule 3.33 Wells
Schedule 3.33(a) Cash Flow Statements
Schedule 7.3 Walter Debt to be Discharged as of the Effective Time
Schedule 12.4 Knowledge of Walter
- vi -
<PAGE> 8
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of January 24, 1995
(this "Agreement"), among CMS Energy Corporation, a Michigan corporation
("CMS Energy"), CMS Merging Corporation, a Texas corporation and a wholly-owned
Subsidiary of CMS Energy ("Sub"), Walter International, Inc., a Texas
corporation ("Walter" and, together with Sub, the "Constituent Corporations"),
J.C. Walter, Jr., ("J.C. Walter"), J.C. Walter III ("J.C. Walter III"), Carole
Walter Looke ("Looke"), F. Fox Benton, Jr. ("Benton"), Gordon A. Cain ("Cain"),
the Cain 1988 Descendants Trust (the "Cain Trust"), William C. Oehmig ("Oehmig"
and, together with J.C. Walter, J.C. Walter III, Looke, Benton, Cain, the Cain
Trust and each Warrantholder (as hereinafter defined) from and after acquisition
of any shares of Walter Common Stock (as hereinafter defined), each individually
a "Stockholder" and collectively the "Stockholders"), Prudential-Bache Energy
Growth Fund, L.P. G-2, a Delaware limited partnership ("Prudential-Bache G-2"),
Prudential-Bache Energy Growth Fund, L.P. G-3, a Delaware limited partnership
("Prudential-Bache G-3"), Prudential-Bache Energy Growth Fund, L.P. G-4, a
Delaware limited partnership ("Prudential-Bache G-4" and, together with
Prudential-Bache G-2 and Prudential-Bache G-3, each individually a "Preferred
Stockholder" and collectively the "Preferred Stockholders"), F. Fox Benton III
("Benton III"), Howard A. Chapman ("Chapman"), G.W. Frank ("Frank"), Robert D.
Jolly ("Jolly") and Arthur L. Smalley ("Smalley", and, together with Benton III,
Chapman, Frank, Jolly, Prudential Bache G-2, Prudential-Bache G-3 and
Prudential-Bache G-4, each individually a "Warrantholder" and collectively the
"Warrantholders"). Unless otherwise indicated, capitalized terms used herein
are used as defined in Section 12.4 hereof.
W I T N E S S E T H :
WHEREAS, CMS Energy is a Michigan corporation having an
authorized capital of (i) 250,000,000 shares of common stock, $.01 par value
(the "CMS Common Stock"), of which, as of September 30, 1994, 86,246,928 shares
were issued and outstanding, and (ii) 5,000,000 shares of preferred stock, $.01
par value, none of which, on the date hereof, are issued and outstanding;
WHEREAS, Sub is a Texas corporation having an authorized
capital of 1,000 shares of common stock, $.01 par value, of which, on the date
hereof, 10 shares are issued and outstanding;
WHEREAS, Walter is a Texas corporation having an authorized
capital of (i) 1,000,000 shares of common stock, $.01 par value (the "Walter
Common Stock"), of which, on the date hereof, 100,662 shares are issued and
outstanding, and (ii)
<PAGE> 9
100,000 shares of preferred stock, $1.00 par value, of which, on the date
hereof, 3,000 shares of "14% Senior Cumulative Preferred Stock" have been
authorized all of which are issued and outstanding (the "Walter Preferred
Stock") and 1,000 shares of "Series A Junior Preferred Stock" have been
authorized, none of which is issued or outstanding;
WHEREAS, Walter, itself and through its Subsidiaries, is in the
business of oil and gas exploration, development and production and activities
related thereto (hereinafter generally referred to as the "Walter Business");
WHEREAS, the respective Boards of Directors of CMS Energy and
the Constituent Corporations have approved the merger (the "Merger") of Sub
into Walter pursuant to the terms and conditions of this Agreement, the Board
of Directors of Walter has directed that this Agreement be submitted to its
stockholders for adoption, and CMS Energy as the sole stockholder of Sub has
adopted this Agreement;
WHEREAS, the parties hereto intend the Merger to constitute a
reorganization described in section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code");
WHEREAS, CMS Energy, Sub, Walter, the Stockholders, the
Preferred Stockholders and the Warrantholders desire to make certain
representations, warranties and agreements in connection with the Merger and
also to prescribe various conditions to the Merger;
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements herein contained, the parties hereto
agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1. THE MERGER. Upon the terms and subject to the
conditions contained herein, and in accordance with the provisions of this
Agreement and the Texas Business Corporation Act (the "TBCA"), at the Effective
Time (as hereinafter defined), Sub shall be merged with and into Walter
pursuant to the Plan of Merger in substantially the form of Exhibit A hereto or
in such other form as the parties may agree to accomplish the Merger. As the
corporation surviving in the Merger (the "Surviving Corporation"), Walter shall
continue unaffected and unimpaired by the Merger to exist under and be governed
by the laws of the State of Texas. Upon the effectiveness of the Merger, the
separate existence of Sub shall cease except to the extent provided by law in
the case of a corporation after its merger into another corporation.
-2-
<PAGE> 10
SECTION 1.2. FILING ARTICLES OF MERGER AND EFFECTIVENESS.
Upon the satisfaction or waiver of the conditions to the obligations of each of
the parties contained herein, Articles of Merger (which shall be in form and
substance reasonably satisfactory to the parties hereto), executed in
accordance with the laws of the State of Texas, shall be filed in the office of
the Secretary of State of the State of Texas. The Merger shall become
effective upon such filing and the issuance of a Certificate of Merger by the
Secretary of State of the State of Texas as provided by the TBCA. The date and
the time on such date of effectiveness of the Merger are herein called,
respectively, the "Effective Date" and the "Effective Time."
SECTION 1.3. EFFECTS OF THE MERGER. The Merger shall have the
effects set forth in Section 5.06 of the TBCA.
SECTION 1.4. ARTICLES OF INCORPORATION, BY-LAWS, DIRECTORS AND
OFFICERS. The Articles of Incorporation and By-Laws of Walter, in each case as
they may be amended, as in effect immediately prior to the Effective Time,
shall continue in full force and effect as the Articles of Incorporation and
By-Laws of the Surviving Corporation. The initial directors of the Surviving
Corporation shall consist of the directors of Sub immediately prior to the
Effective Time, who shall serve until their respective successors are duly
elected and qualified. The initial officers of the Surviving Corporation shall
consist of the officers of Sub immediately prior to the Effective Time, who
shall serve until their respective successors are duly elected and qualified.
SECTION 1.5. FURTHER ASSURANCES. From time to time after the
Effective Time, the officers and directors of the Surviving Corporation shall
be authorized to execute and deliver, in the name and on behalf of Walter or
otherwise, such deeds and other instruments and to take or cause to be taken
such further or other action as shall be necessary or desirable in order to
vest or perfect in or to confirm, of record or otherwise, in the Surviving
Corporation title to, and possession of, all of the property, rights,
privileges, powers, immunities and franchises of Walter (subject, however, to
the provisions of Section 6.6(b) hereof) and otherwise carry out the purposes
of this Agreement.
ARTICLE II
CONVERSION OF SHARES
SECTION 2.1. CONVERSION OF SECURITIES. As of the Effective
Time, by virtue of the Merger and without any action on the part of any
stockholder of Walter or Sub:
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(a) Each share of common stock of Sub issued and
outstanding immediately prior to the Effective Time shall be converted
into and become one fully paid and nonassessable share of common stock,
$.01 par value, of the Surviving Corporation.
(b) All shares of Walter Common Stock that immediately
prior to the Effective Time are held in the treasury of Walter or by
any wholly-owned Subsidiary of Walter shall be cancelled and no capital
stock of CMS Energy or other consideration shall be delivered in
exchange therefor.
(c) Subject to the provisions of Sections 2.6 and 2.7
hereof, each share of Walter Common Stock issued and outstanding
immediately prior to the Effective Time (exclusive of shares of Walter
Common Stock referred to in Section 2.1(b)) shall be converted into the
number (the "Conversion Number") of shares of CMS Common Stock (such
shares of CMS Common Stock, together with any shares of CMS Common
Stock which may be issuable pursuant to Section 2(d), are collectively
referred to herein as "CMS Common Shares") rounded to the nearest
thousandth of a share, or if there shall not be a nearest thousandth of
a share, to the next higher thousandth of a share, determined by
solving for "X" in the formula:
X = ((A-B) / C) / D
where (A) is the sum of (I) $45,900,000, (II) Walter Consolidated Net
Working Capital (as hereinafter defined), (III) the net cash proceeds
received by Walter upon exercise of any Warrants (as hereinafter
defined) prior to the Effective Time, to the extent that such proceeds
are not included in calculating Walter Consolidated Net Working Capital
(the "Warrant Proceeds") and (IV) to the extent credited or allocated
to Walter or any Subsidiary pursuant to the Inter-Purchaser Agreement
dated as of December 28, 1994 (the "Inter-Purchaser Agreement") by and
among Walter, Nuevo Energy Company, a Delaware corporation ("Nuevo")
and certain of their respective Affiliates and not included in
calculating Walter Consolidated Net Working Capital, an amount equal to
one-half (1/2) of (i) any cash transfers or capital contributions made
after June 30, 1994 by Amoco (as hereinafter defined) to Amoco Congo
Exploration Company, a Delaware corporation ("ACEC") and/or Amoco Congo
Petroleum Company, a Delaware corporation ("ACPC"), which amount is
estimated to be $2,083,500, and (ii) any payment by Amoco in final
settlement of the Balancing Payment pursuant to Section
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3.B(2) of the Amoco Stock Purchase Agreement (as hereinafter defined).
(B) is the sum of (I) Walter Debt to be Retained, (II) Walter Debt to
be Discharged, (III) $3,400,000, (IV) the share of Walter or its
affiliates of the costs incurred after June 30, 1994 (but not reflected
in the books of Walter as of June 30, 1994) in connection with the
rework of the Alba No. 2 well, (V) all costs and expenses of Walter or
its affiliates (including any such expenses of Nuevo (as hereinafter
defined) to be borne by Walter) incurred after June 30, 1994 (but not
reflected in the books of Walter as of June 30, 1994) (including
without limitation, fees and disbursements of counsel, accountants and
other financial, legal, accounting or other advisers) in connection
with the negotiation, execution, delivery or performance of the Amoco
Stock Purchase Agreement (as hereinafter defined) and each of the other
documents and agreements executed in connection with or contemplated by
such Agreement or the consummation of the transactions contemplated
thereby (but excluding OPIC commitment fees and routine recurring
operating costs, including costs of operating personnel in the Republic
of the Congo), (VI) all costs and expenses borne or incurred by Walter
or its affiliates after June 30, 1994 (including, without limitation,
fees and disbursements of its counsel or counsel for the Stockholders,
Preferred Stockholders or Warrantholders, accountants and other
financial, legal, accounting or other advisers) in connection with the
negotiation, execution, delivery or performance of this Agreement and
each of the other documents and agreements executed in connection with
or contemplated by this Agreement or the consummation of the
transactions contemplated hereby, and (VII) to the extent allocable to
Walter or any Subsidiary (including ACEC) pursuant to the
Inter-Purchaser Agreement and not included in calculating Walter
Consolidated Net Working Capital, an amount equal to one-half (1/2) of
any cash or cash equivalent distributions made after June 30, 1994 by
ACEC and/or ACPC to Amoco, which amount is estimated to be $5,000,000.
(C) is the aggregate number of shares of Walter Common Stock issued and
outstanding immediately prior to the Effective Time (exclusive of
shares of Walter Common Stock referred to in Section 2.1(b)); and
(D) is the average of the per share Daily Prices (as hereinafter
defined) on the New York Stock Exchange, Inc. (the "NYSE") of CMS
Common Stock (the "Average Price") as reported in the New York Stock
Exchange
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Composite Transactions (on the Transaction Reporting System operated by
the Consolidated Tape Association) during the ten (10) consecutive
trading days ending on the fifth trading day prior to the Effective
Time of the Merger; provided, however, that in the event the foregoing
would result in an Average Price greater than $23.50, then the Average
Price shall be deemed to be $23.50; and provided, further, that in the
event the foregoing would result in an Average Price less than $20.50,
then the Average Price shall be deemed to be $20.50.
All such shares of Walter Common Stock, when so converted, shall no
longer be outstanding and shall automatically be cancelled and retired
and each holder of a Certificate (as hereinafter defined) theretofore
representing any such shares shall cease to have any rights with
respect thereto, except the right to receive, upon surrender of such
Certificate in accordance with Section 2.4, shares of CMS Common Stock,
cash in lieu of fractional shares as contemplated by Section 2.6 and
certain distributions as contemplated by Section 6.6(b). As used
herein, the term Daily Price shall mean the last sale price, or the
closing bid price if no sale occurred, on the day in question.
(d) Each share of Walter Preferred Stock issued and
outstanding immediately prior to the Effective Time, other than any
such shares of Walter Preferred Stock owned by any Stockholder referred
to in the next succeeding sentence, shall be converted into the right
to receive from CMS Energy in cash an amount equal to $1,133.33.
Subject to the provisions of Section 2.6 and 2.7 hereof, each share of
Walter Preferred Stock, if any, issued and outstanding immediately
prior to the Effective Time and which is then owned by any Stockholder
(and as to which written notice of such ownership has been delivered to
CMS Energy at least three (3) business days prior to the Effective
Date) shall be converted into the number of shares of CMS Common Stock,
rounded to the nearest thousandth of a share, or if there shall not be
a nearest thousandth of a share, to the next higher thousandth of a
share, determined by dividing (i) $1,133.33 by (ii) the Average Price
as determined pursuant to Section 2.1(c). All such shares of Walter
Preferred Stock, when so converted, shall no longer be outstanding and
shall automatically be cancelled and retired and each holder of a
Certificate theretofore representing any such shares shall cease to
have any rights with respect thereto, except the right to receive, upon
surrender of such Certificate in accordance with Section 2.4, such
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cash payment or shares of CMS Common Stock and cash in lieu of
fractional shares as contemplated by Section 2.6.
(e) Each Warrant outstanding immediately prior to the
Effective Time (other than Warrants exercised pursuant to Section 6.13)
shall no longer be outstanding and shall automatically be cancelled.
SECTION 2.2. WALTER CONSOLIDATED NET WORKING CAPITAL. Walter
Consolidated Net Working Capital shall mean the consolidated net working
capital of Walter as of June 30, 1994 determined in accordance with GAAP (as
hereinafter defined) except that current maturities of long-term debt shall be
added back, which was $135,301, plus, to the extent allocated to Walter or any
Subsidiary under the Inter-Purchaser Agreement, an amount equal to one-half
(1/2) of the combined net working capital of ACEC and ACPC as of June 30, 1994
determined in accordance with GAAP, which amount is estimated to be $5,015,315.
SECTION 2.3. WALTER DEBT TO BE RETAINED; WALTER DEBT TO BE
DISCHARGED. (a) Walter Debt to be Retained shall mean the sum of (i) the
principal and all accrued but unpaid interest payable by Walter or any of its
Subsidiaries under the Finance Agreement among Walter International Equatorial
Guinea, Inc., other sponsors and OPIC dated June 1, 1992 (the "OPIC Debt-Alba")
as of June 30, 1994, which was $3,368,556 and (ii) the principal amount payable
by Walter or any of its Subsidiaries under the Finance Agreement among Walter
Congo, Walter Congo Holdings, Inc. and OPIC dated December 28, 1994 (the "OPIC
Debt-Congo") as of the date incurred, which amount is estimated to be
$8,812,500, determined in accordance with GAAP.
(b) Walter Debt to be Discharged shall mean the sum of (i) the
principal of and all accrued but unpaid interest on the $4,600,000 Term Loan
among Walter, Walter International Equatorial Guinea, Inc. and Trust Company of
the West dated February 1, 1993 ("TCW Debt") as of June 30, 1994, which was
$3,475,000, (ii) the principal of and all accrued but unpaid interest on the
$1,000,000 Promissory Note between Walter and Post Oak Bank dated January 5,
1994 and due January 8, 1996 (the "Post Oak Debt") as of June 30, 1994, which
was $914,226, (iii) the principal amount as of the date incurred of the loan
from Torch Energy Advisors, Inc. or an affiliate thereof to Walter made in
connection with the consummation of the transactions contemplated by the Amoco
Stock Purchase Agreement, which is currently estimated to be approximately
$1,937,500 (the "Nuevo Carry"), and (iv) one-half (Walter's proportionate
share) of the principal amount as of the date incurred of the Promissory Note
referred to in Section 3.A.(2) of the Amoco Stock Purchase Agreement, which is
estimated to be $0.00 (the "Amoco Note").
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SECTION 2.4. PAYMENT OF CASH AND DELIVERY OF CERTIFICATES.
(a) At or after the Effective Time, each holder of a certificate or
certificates representing issued and outstanding shares of record of Walter
Common Stock and each holder of a certificate or certificates representing
issued and outstanding shares of record of Walter Preferred Stock, in each case
immediately prior to the Effective Time (collectively, the "Certificates"), may
surrender such certificate or certificates to CMS Energy, and CMS Energy shall
deliver or cause to be delivered, in exchange therefor, (i) cash (constituting
amounts payable pursuant to Section 2.1(d) or in lieu of fractional shares or
interests pursuant to Section 2.6), by check or wire transfer (except in the
case of amounts payable pursuant to Section 2.1(d), which CMS Energy agrees
shall be paid by wire transfer) in immediately available funds to the account
or accounts designated by such holder in a notice to CMS Energy, and/or (ii)
one or more certificates representing the aggregate number of whole CMS Common
Shares, into which the Walter Common Stock or the Walter Preferred Stock, as
the case may be, represented by the certificate or certificates so surrendered
shall have been converted pursuant to Section 2.1.
(b) Any amount of cash or certificates representing CMS Common
Shares deliverable pursuant to Section 2.1(d) shall be immediately deliverable
upon surrender to CMS Energy of a Certificate or Certificates representing
issued and outstanding shares of record of Walter Preferred Stock immediately
prior to the Effective Time. Any certificates representing CMS Common Shares
or cash in lieu of fractional shares or interests deliverable pursuant to
Section 2.1(c) shall be deliverable upon the later to occur of (i) surrender to
CMS Energy of a Certificate or Certificates representing issued and outstanding
shares of record of Walter Common Stock immediately prior to the Effective Time
and (ii) five (5) business days after the final determination of the purchase
price (including the Balancing Payment) under the Amoco Stock Purchase
Agreement, provided, however, that notwithstanding clause (ii) above, as
respects certificates representing CMS Common Shares otherwise deliverable in
accordance with this sentence pursuant to Section 2.1(c), not less than two
business days prior to the Effective Date CMS Energy will estimate, in good
faith, the number of CMS Common Shares deliverable upon the surrender to CMS
Energy of all Certificates representing issued and outstanding shares of record
of Walter Common Stock immediately prior to the Effective Time and the
allocation thereof (on a pro rata basis) to each Certificate representing such
issued and outstanding shares and, upon surrender at or after the Effective
Time as contemplated by clause (i) above, CMS Energy shall deliver a number of
CMS Common Shares with respect to each such Certificate (rounded to the nearest
whole share) equal to ninety-five percent (95%) of the estimated number of CMS
Common Shares deliverable with respect to such Certificate (the aggregate of
all such Shares so delivered being the "Delivered Share Number"). Following
the Effective
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Time, CMS Energy and the Stockholders will determine the actual number of CMS
Common Shares (and cash in lieu of fractional shares) deliverable upon
surrender of all such Certificates (the "Actual Share Number") and the
allocation thereof (on a pro rata basis) to each Certificate representing such
issued and outstanding shares. Disputes regarding the Actual Share Number that
are not resolved by the parties within five (5) business days after the later
of (A) final determination of the purchase price (including the Balancing
Payment) under the Amoco Stock Purchase Agreement and (B) the ninetieth (90th)
day after the Effective Time shall be submitted to an arbitrator who is
acceptable to both parties, and whose decision shall be final and binding with
respect to the Actual Share Number. The fees and expenses of the arbitrator
(if any) incurred in connection with the determination of the Actual Share
Number shall be shared equally by CMS Energy and the Stockholders. If the
Actual Share Number is greater than the Delivered Share Number, then CMS Energy
shall deliver to the respective stockholders entitled thereto an aggregate
number of whole CMS Common Shares equal to such excess (allocated as described
above), together with the amount of all dividends and distributions which
became payable to holders of record on or after the Effective Date in respect
of such number of CMS Common Shares. If the Actual Share Number is less than
the Delivered Share Number, then the stockholders respectively shall deliver to
CMS Energy within two business days following the determination of the Actual
Share Number an aggregate number of whole CMS Common Shares equal to such
deficiency (pro rata in accordance with the number of whole CMS Common Shares
each such Stockholder was entitled to receive pursuant to the proviso in the
fifth preceding sentence upon delivery of Certificates as contemplated by
clause (i) above), together with the amount of all dividends and distributions
which became payable to holders of record on or after the Effective Date in
respect of such number of CMS Common Shares. Until so surrendered, each
outstanding certificate representing issued and outstanding shares of record of
Walter Common Stock or Walter Preferred Stock immediately prior to the
Effective Time shall not be transferable on the books of the Surviving
Corporation or CMS Energy, but shall be deemed for all corporate purposes,
subject to Section 2.5, to evidence the right to receive such cash and/or
ownership of the number of whole CMS Common Shares, as the case may be, into
which the shares of Walter Common Stock or Walter Preferred Stock, as the case
may be, which immediately prior to the Effective Time were represented thereby
shall have been converted pursuant to Section 2.1. At the close of business on
the business day next preceding the Effective Date, the stock transfer books of
Walter shall be closed and no transfer of Walter Common Stock or Walter
Preferred Stock shall thereafter be made or consummated.
SECTION 2.5. DIVIDENDS AND DISTRIBUTIONS. Any dividend or
other distribution paid in respect of CMS Common Stock to holders of record on
or after the Effective Date and
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otherwise payable to the holder of an outstanding certificate which,
immediately prior to the Effective Time, represented issued and outstanding
shares of Walter Common Stock or Walter Preferred Stock shall, until the
surrender of such certificate and the issuance of a certificate or certificates
for CMS Common Shares in respect thereof, be retained by CMS Energy pending
such surrender, and no such dividend or other distribution payable in respect
of CMS Common Stock shall be paid to the holder of such certificate
representing Walter Common Stock or Walter Preferred Stock until such
certificate shall have been so surrendered to CMS Energy and a certificate or
certificates for CMS Common Shares shall have been so issued. Upon surrender
of each such certificate and issuance in exchange therefor of CMS Common
Shares, there shall be paid by CMS Energy to or at the direction of the holder
of the certificate for such CMS Common Shares the amount of all dividends and
distributions which became payable to holders of record on or after the
Effective Date in respect of the number of whole CMS Common Shares represented
by the certificate or certificates so issued. In no event shall the holder of
any certificate which, immediately prior to the Effective Time, represented
issued and outstanding shares of Walter Common Stock or Walter Preferred Stock
be entitled to receive interest on any of the funds to be received in the
Merger or on any such dividend or other distribution.
SECTION 2.6. FRACTIONAL SHARES. No certificates for fractions
of shares of CMS Common Stock and no scrip or other certificates evidencing
fractional interests in such shares shall be issued pursuant to Section 2.1.
If the conversion of a person's aggregate holdings of Walter Common Stock or
Walter Preferred Stock at any time results in a fractional share of CMS Common
Stock or interest therein, such person shall, in lieu thereof, be paid in cash
in an amount equal to the value of such fractional share or interest based on
the Average Price of CMS Common Stock. Any person otherwise entitled to a
fractional share or interest shall not be entitled by reason thereof to any
voting, dividend or other rights as a stockholder of CMS Energy.
SECTION 2.7. CHANGES IN CMS COMMON STOCK. In the event that,
during the period of ten (10) trading days which is used to determine the
Average Price, or subsequent to such period but prior to the Effective Time,
there has occurred the record date of any reclassification, stock split, stock
dividend or similar change in respect of the CMS Common Stock, then appropriate
adjustment shall be made in the number of shares of CMS Common Stock and/or
kind of securities issued as CMS Common Shares in order to provide holders of
Walter Common Stock or Walter Preferred Stock with the same number of shares of
CMS Common Stock and/or securities that they would have received after such
reclassification, stock split, stock dividend or similar change if the
Effective Time had occurred immediately prior to the record date of such
reclassification, stock split, stock dividend or similar change (and all
references herein to
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the CMS Common Shares" shall refer to such adjusted number and/or kind of
securities).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS,
THE PREFERRED STOCKHOLDERS AND THE WARRANTHOLDERS
As an inducement to CMS Energy and Sub to enter into this
Agreement and to consummate the transactions contemplated hereby, the
Stockholders (other than Cain, the Cain Trust and Oehmig) jointly and severally
(except as otherwise provided below) represent and warrant to CMS Energy and
Sub and agree, and Cain, the Cain Trust and Oehmig represent and warrant to CMS
Energy and Sub and agree solely with respect to Section 3.3(b), Section 3.4(a)
(third paragraph) and Section 3.4(b), and the Preferred Stockholders severally
and not jointly or solidarily represent and warrant to CMS Energy and Sub and
agree solely with respect to Section 3.3(b) (second sentence) and Section
3.4(b), and the Warrantholders severally and not jointly or solidarily
represent and warrant to CMS Energy and Sub and agree solely with respect to
Section 3.3(b) (third sentence) and Section 3.4(b), as follows, it being
understood and agreed that any and all such representations and warranties as
to ACEC are made to the knowledge of Walter and the Stockholders based on
Walter having conducted due diligence on ACEC in accordance with industry
practice for a transaction of the size and nature of the acquisition of ACEC by
Walter as contemplated by the Amoco Stock Purchase Agreement:
SECTION 3.1. ORGANIZATION OF WALTER. Walter is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Texas. Walter is duly qualified to transact business as a foreign
corporation and is in good standing in each of the jurisdictions in which the
ownership or leasing of the properties used in its business or the conduct of
its business requires such qualification, other than in such jurisdictions
where the failure to be so qualified and in good standing would not have a
Material Adverse Effect. Walter has full corporate power and authority
necessary to own or lease and operate its properties and to carry on its
business as now conducted. Walter has made available to CMS Energy complete
and correct copies of the articles of incorporation and by-laws of Walter, each
as amended and in effect on the date hereof.
SECTION 3.2. SUBSIDIARIES AND INVESTMENTS. (a) Walter owns
beneficially and of record, or indirectly, all of the issued and outstanding
shares of capital stock of each of the corporations listed on Schedule 3.2
(each such corporation, together with (i) effective as of June 30, 1994, ACEC,
if not listed thereon, from and after the consummation of the transactions
contemplated by the Amoco Stock Purchase Agreement,
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and (ii) any partnership of which Walter or any such corporation is a general
partner or of which Walter or any such corporation owns at least 50% of the
partnership interest, each of which is identified in Schedule 3.2, being herein
collectively referred to as "Subsidiaries"). Except as disclosed on Schedule
3.2, Walter does not, directly or indirectly, (i) own, of record or
beneficially, any outstanding securities or other interest in any corporation,
partnership, joint venture or other entity (other than investments in publicly
traded securities, cash equivalents and short-term investment grade debt) or
(ii) control any corporation, partnership, joint venture or other entity.
(b) Each of the Subsidiaries is duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization, and each has full corporate or partnership power and authority,
as the case may be, necessary to own or lease and operate its properties now
conducted. Each of the Subsidiaries is duly qualified to transact business as
a foreign corporation or foreign partnership, as the case may be, and is in
good standing in each of the jurisdictions in which conduct of its business
requires such qualification, other than in such jurisdictions where the failure
to be so qualified and in good standing would not have a Material Adverse
Effect. Schedule 3.2 contains a list of each jurisdiction in which each
Subsidiary is duly qualified to transact business. Schedule 3.2 sets forth the
authorized, and issued and outstanding shares of, capital stock of each
corporate Subsidiary and a complete and accurate list of each partnership of
which Walter or any Subsidiary is a general or limited partner (the
"Partnerships"), together with the state of organization of each Partnership,
the name and address of each general or limited partner of each Partnership,
and the percentage interest of each partner in each Partnership, and of each
joint operating agreement and all amendments thereto to which Walter or any
Partnership is a party (the "Operating Agreements"). Walter has made available
to CMS Energy true and complete copies of each partnership agreement and all
amendments thereto pursuant to which each Partnership was organized (the
"Partnership Agreements") and each Operating Agreement.
SECTION 3.3. CAPITALIZATION. (a) The authorized capital of
Walter consists of (i) 1,000,000 shares of common stock, $.01 par value, of
which 100,662 shares are duly and validly issued and outstanding and, except
for 11,300 shares issuable upon exercise of the Warrants, none of which is
reserved for any purpose, and (ii) 100,000 shares of preferred stock, $1.00 par
value, of which 3,000 shares of "14% Senior Cumulative Preferred Stock" have
been authorized and all of which are issued and outstanding, 1,000 shares of
"Series A Junior Preferred Stock" have been authorized none of which is issued
or outstanding and none of which is reserved for any purpose. All of the
outstanding shares of Walter Common Stock and Walter Preferred Stock are duly
authorized, validly issued, fully paid and nonassessable. The Walter Preferred
Stock is entitled to
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voting rights in accordance with the certificate of designation relating
thereto. The record owners of the Walter Common Stock and the Walter Preferred
Stock as of the date hereof are listed in Schedule 3.3(a) and a list of the
record owners of the Walter Common Stock and the Walter Preferred Stock as of
the Effective Date will be provided to CMS Energy on the Effective Date. The
record owners of warrants or similar rights (collectively, the "Warrants") to
purchase shares of Walter Common Stock as of the date hereof are listed in
Schedule 3.3(a) hereto. Complete and correct copies of the material agreements
relating to the Warrants have been made available to CMS Energy. Except for
the Warrants, there are no options, warrants or other rights to acquire, or
agreements or commitments to issue, sell, purchase or redeem, shares of capital
stock or any other equity interest of Walter, whether on conversion of other
securities or otherwise. None of the issued and outstanding shares of Walter
Common Stock has been issued in violation of, or is subject to, any preemptive
or subscription rights. Except as set forth in Schedule 3.3(a), there are no
stockholder agreements, voting trust agreements or any other similar contracts,
agreements, arrangements, commitments, plans or understandings restricting or
otherwise relating to voting, dividend, ownership or transfer rights with
respect to any shares of capital stock of Walter.
(b) Each Stockholder severally represents and warrants as
to itself that (i) it is the beneficial owner of the shares of Walter Common
Stock listed in Schedule 3.3(a) opposite its name or it has transferred such
shares to a Permitted Transferee or Permitted Transferees (as hereinafter
defined) and (ii) all such shares are owned free from all liens, claims,
encumbrances or other restrictions of any kind, other than liens, claims,
encumbrances or other restrictions listed on Schedule 3.3(b), securities law
restrictions applicable to restricted stock and restrictions created by this
Agreement. Each Preferred Stockholder severally represents and warrants as to
itself that (i) it is the beneficial owner of the shares of Walter Preferred
Stock listed in Schedule 3.3(a) opposite its name or it has transferred such
shares to a Permitted Transferee or Permitted Transferees and (ii) all such
shares are owned free from all liens, claims, encumbrances or other
restrictions of any kind, other than liens, claims, encumbrances or other
restrictions listed on Schedule 3.3(b), securities law restrictions applicable
to restricted stock and restrictions created by this Agreement. Each
Warrantholder severally represents and warrants as to itself that (i) it is the
beneficial owner of Warrants to purchase shares of Walter Common Stock listed
in Schedule 3.3(a) opposite its name, (ii) all such Warrants are owned free
from all liens, claims, encumbrances or other restrictions of any kind, other
than liens, claims, encumbrances or other restrictions listed on Schedule
3.3(b), securities law restrictions applicable to restricted stock and
restrictions created by this Agreement, and (iii) that such Warrants will be
exercised or cancelled prior to the Effective Time and, as of the Effective
Time, no shares of
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Walter Common Stock will be issuable pursuant thereto. Permitted Transferee
shall mean any executor of the estate of any Stockholder or any person
acquiring the CMS Common Shares of such Stockholder solely pursuant to the laws
of descent.
(c) All outstanding shares of capital stock of each
corporate Subsidiary are duly authorized, validly issued, fully paid and
nonassessable. Walter or another wholly-owned Subsidiary is the record and
beneficial owner of all of the issued and outstanding shares of capital stock
of each such Subsidiary. All such shares of capital stock are so owned free
from all liens, claims, encumbrances or other restrictions of any kind, other
than liens, claims, encumbrances or other restrictions listed on Schedule
3.3(c). There are no options, warrants or other rights to acquire, or
agreements or commitments to issue, sell, purchase or redeem, shares of capital
stock of any corporate Subsidiary, whether on conversion of other securities or
otherwise. None of the issued and outstanding shares of common stock of any
corporate Subsidiary has been issued in violation of, or is subject to, any
preemptive or subscription rights. There are no voting trust agreements or any
other similar contracts, agreements, arrangements, commitments, plans or
understandings restricting or otherwise relating to voting, dividend, ownership
or transfer rights with respect to any shares of common stock of any corporate
Subsidiary.
(d) All outstanding equity interests in each partnership
Subsidiary are duly authorized, validly issued, fully paid and nonassessable.
Walter or another Subsidiary is the record and beneficial owner of such equity
interests of each such partnership Subsidiary to the extent set forth in
Schedule 3.2. All such equity interests are so owned free from all liens,
claims, encumbrances or other restrictions of any kind, other than liens,
claims, encumbrances or other restrictions listed on Schedule 3.3(d). There
are no options, warrants or other rights to acquire, or agreements or
commitments to issue, sell, purchase or redeem, any equity interests in any
partnership Subsidiary.
SECTION 3.4. AUTHORITY. (a) Walter has full corporate power
and authority to enter into this Agreement and, subject to adoption of this
Agreement by the stockholders of Walter (which adoption shall be effected
promptly after the date hereof), to consummate the transactions contemplated
hereby.
The execution, delivery and performance of this Agreement by
Walter and the consummation by Walter of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the part of
Walter, subject to such adoption of this Agreement by the stockholders of
Walter. This Agreement has been duly executed and delivered by Walter and is,
and each other agreement or instrument of Walter contemplated hereby when
executed and delivered will be, the legal, valid and binding agreement of
Walter, enforceable against Walter in
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accordance with its respective terms, except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the enforcement of creditors' rights generally and by general
equitable principles (whether enforcement is sought by proceedings in equity or
at law).
Neither the execution or delivery of this Agreement by Walter
or any Stockholder or Preferred Stockholder or Warrantholder, nor consummation
of the transactions contemplated hereby or compliance with or fulfillment of
the terms and provisions hereof by Walter or such Stockholder or Preferred
Stockholder or Warrantholder, will (a) conflict with, result in a breach of the
terms, conditions or provisions of, or constitute a default, an event of
default or an event creating rights of acceleration, termination or
cancellation or a loss of rights, or result in the creation or imposition of
any encumbrance upon any of the material assets of Walter, under the articles
of incorporation or the by-laws of Walter, any instrument, agreement, mortgage,
indenture, deed of trust, permit, concession, grant, franchise, license,
judgment, order, award, decree or other restriction to which Walter is a party
or any of its material properties is subject or by which it is bound or any
material statute, other law or regulatory provision affecting it, except for
such conflicts, breaches, defaults, events, creations and impositions that are
set forth on Schedule 3.4(a) or (b) require the approval, consent or
authorization of, or the making of any declaration, filing or registration
with, any third party or any foreign, federal, state or local court,
governmental authority or regulatory body, by or on behalf of Walter, except
for the applicable requirements of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 (the "HSR Act"), the filing of Articles of Merger with the
Secretary of State of the State of Texas and appropriate documents with the
relevant authorities of other jurisdictions in which Walter is qualified to do
business, adoption of this Agreement by the stockholders of Walter and as set
forth in Schedule 3.4(a).
(b) Each Stockholder, Preferred Stockholder and
Warrantholder severally and not jointly or solidarily represents and warrants
as to itself that it has full power and authority to enter into this Agreement.
Each Stockholder severally represents and warrants as to itself and Walter, and
each Preferred Stockholder and Warrantholder severally represents and warrants
as to itself, that neither the execution or delivery of this Agreement by
Walter or such Stockholder, or such Preferred Stockholder or Warrantholder, nor
consummation of the transactions contemplated hereby or compliance with or
fulfillment of the terms and provisions hereof by Walter or such Stockholder,
or such Preferred Stockholder or Warrantholder, will conflict with, result in a
breach of the terms, conditions or provisions of, or constitute a default, an
event of default or an event creating rights of acceleration, termination or
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cancellation or a loss of rights under, or result in the creation or imposition
of any encumbrance upon any of the material assets of Walter, under any
instrument, agreement, mortgage, indenture, deed of trust, permit, concession,
grant, franchise, license, judgment, order, award, decree or other restriction
to which such Stockholder, or such Preferred Stockholder or Warrantholder, is a
party or by which such Stockholder, or such Preferred Stockholder or
Warrantholder, is bound. Each Stockholder, Preferred Stockholder and
Warrantholder severally represents and warrants as to itself that this
Agreement has been duly executed and delivered by such person and is, and each
other agreement or instrument of such Stockholder or Preferred Stockholder or
Warrantholder contemplated hereby when executed and delivered will be, the
legal, valid and binding agreement of such Stockholder or Preferred Stockholder
or Warrantholder, as the case may be, enforceable against such Stockholder or
Preferred Stockholder or Warrantholder in accordance with its respective terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforceability of
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
SECTION 3.5. FINANCIAL STATEMENTS. Walter has previously
provided CMS Energy with: (i) the consolidated audited balance sheet (the
"Balance Sheet") of Walter as of December 31, 1993 (the "Balance Sheet Date")
and the related audited consolidated statements of income (the "Statement of
Income"), stockholders' equity and cash flows for the year then ended, together
with appropriate notes to such financial statements, certified by Deloitte &
Touche, independent public accountants, and (ii) the consolidated unaudited
balance sheet (the "Unaudited Balance Sheet") of Walter as of June 30, 1994
(the "Unaudited Balance Sheet Date") and the related unaudited consolidated
statement of income (the "Unaudited Statement of Income") for the six months
then ended. Except as disclosed in the notes thereto, such consolidated
balance sheets and statements of income, stockholders' equity and cash flows
referred to in clauses (i) and (ii) of the preceding sentence have been
prepared in conformity with generally accepted accounting principles ("GAAP")
consistently applied and fairly present in all material respects the
consolidated financial position of Walter at the dates of such balance sheets
and the consolidated results of its operations and consolidated cash flows for
the respective periods indicated, except that the Unaudited Balance Sheet and
the Unaudited Statement of Income are subject to normal year-end audit
adjustments. The Unaudited Statement of Income does not contain any material
items of special or nonrecurring income except as expressly specified therein.
The Statement of Income does not contain any material items of special or
nonrecurring income except as expressly specified therein. Except as set forth
on Schedule 3.5 or in the Unaudited Statement of Income or the Unaudited
Balance Sheet, the
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Unaudited Balance Sheet and the Unaudited Statement of Income include all
adjustments, which consist only of normal recurring accruals, other than normal
year-end audit adjustments, necessary for such fair representation. All costs
and expenses incurred in generating the revenues reflected in the Statement of
Income during the period covered thereby which are required by generally
accepted accounting principles to be reflected in the Statement of Income are
so reflected.
SECTION 3.6. OPERATIONS SINCE UNAUDITED BALANCE SHEET DATE.
(a) Except as set forth in Schedule 3.6(a), since the Unaudited Balance Sheet
Date, there has been: (i) no material adverse change in the assets,
liabilities, operations, profits or business or condition, financial or
otherwise, of Walter and its Subsidiaries taken as a whole, and (ii) no damage,
destruction, loss or claim with respect to, whether or not covered by
insurance, or condemnation or other taking of, assets having a Material Adverse
Effect on Walter and its Subsidiaries taken as a whole.
(b) Except as set forth in Schedule 3.6(b), as contemplated
hereby or with the prior written consent of CMS Energy after the date hereof,
since the Unaudited Balance Sheet Date, Walter has conducted its business only
in the ordinary course and in conformity with past practice. Without limiting
the generality of the foregoing, except as set forth in Schedule 3.6(b) or with
the prior written consent of CMS Energy after the date hereof, since the
Unaudited Balance Sheet Date, neither Walter nor any of its Subsidiaries has:
(i) issued, delivered or agreed (actually or contingently) to issue or deliver
any of its capital stock, or granted any option, warrant or right to purchase
any of its capital stock or other equity interest, or security convertible into
its capital stock or other equity interest, or any of its bonds, notes or other
securities, or borrowed or agreed to borrow any funds, other than in the
ordinary course of business consistent with past practice; (ii) paid any
obligation or liability (absolute or contingent) other than current liabilities
reflected on the balance sheets referred to in Section 3.5 and current
liabilities incurred since the Unaudited Balance Sheet Date in the ordinary
course of business consistent with past practice; (iii) declared or made, or
agreed to declare or make, any payment of dividends or distributions to
stockholders or purchased or redeemed, or agreed to purchase or redeem, any of
its capital stock or other equity interest, except in each case as permitted
hereunder; (iv) mortgaged, pledged or encumbered any assets other than in the
ordinary course of business consistent with past practice; (v) except for
assets sold, leased or transferred in the ordinary course of business
consistent with past practice, sold, leased or transferred or agreed to sell,
lease or transfer any material assets or rights; (vi) cancelled or agreed to
cancel any material debts or claims, waived or agreed to waive any rights of
material value, or allowed to lapse or failed to keep in force any material
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franchise, permit or other material right; (vii) except in the ordinary course
of business consistent with past practice, made or permitted any material
amendment or termination of any material contract, agreement or license; (viii)
undertaken or committed to capital expenditures exceeding U.S. $25,000 or its
equivalent in foreign currency for any single project or related series of
projects; (ix) made any increase in the compensation paid or to become payable
to any of its officers or employees except for increases in the normal course
of business consistent with past practice and increases required to be made
pursuant to the terms of any employment or other agreement or employee benefit
plan, policy, arrangement or agreement entered into prior to the Balance Sheet
Date; (x) amended its articles of incorporation or by-laws; (xi) undergone any
material adverse change in its relationship, taken as a whole, with suppliers,
purchasers, distributors, lessors, governmental bodies, co-venturers under
Operating Agreements and consultants; (xii) made charitable donations in excess
of U.S. $10,000 or its equivalent in foreign currency in the aggregate; (xiii)
incurred any liability or obligation (whether absolute, accrued, contingent or
otherwise and whether direct or as guarantor or otherwise with respect to
obligations of others) material to the business or assets of Walter and its
Subsidiaries, taken as a whole, except in the ordinary course of business
consistent with past practice and except as permitted hereunder; (xiv)
instituted, settled or agreed to settle any litigation, action, or proceeding
before any court or governmental body relating to the business or assets of
Walter or any of its Subsidiaries and involving an amount in excess of U.S.
$10,000 or its equivalent in foreign currency or otherwise materially affecting
Walter or its Subsidiaries; (xv) entered into, or amended in any material
respect, any employment, collective bargaining, deferred compensation,
retention, change of control, termination or other material agreement or
arrangement for the benefit of employees (whether or not legally binding) or
entered into, adopted or amended in any material respect any Plan (as
hereinafter defined); (xvi) suffered any strike or other employment related
problem which would have a Material Adverse Effect on Walter and its
Subsidiaries taken as a whole; (xvii) suffered the loss of any key employees,
consultants or agents or had any material change in its relations with its
employees, consultants or agents; (xviii) received any notice of termination of
any material contract, lease or other material agreement; (xix) transferred or
expressly granted any rights under, or entered into any settlement regarding
the breach or infringement of, any material United States or foreign license,
patent, copyright, trademark, trade name, invention or other material
intellectual property or modified in any material respect any existing rights
with respect thereto; (xx) changed its accounting reference period; (xxi)
entered into any transaction of the type described in Section 3.30 except as
permitted hereunder; or (xxii) entered into or become committed to enter into
any other material transaction except in the ordinary course of business
consistent with past practice.
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SECTION 3.7. NO UNDISCLOSED LIABILITIES. Neither Walter nor
any of its Subsidiaries (other than ACEC) is subject to any material liability
which is required in accordance with GAAP to be shown on the Unaudited Balance
Sheet but which is not so shown, and, to the knowledge of Walter or any
Stockholder, neither Walter nor any of its Subsidiaries (other than ACEC) is
subject to any material liability, absolute or contingent, which is not shown
on the Unaudited Balance Sheet or which is in excess of amounts shown or
reserved for in the Unaudited Balance Sheet or referred to in the notes
thereto, other than, in each case, (i) as disclosed in Schedule 3.7 and (ii)
liabilities of a similar nature as those set forth in the Unaudited Balance
Sheet and notes thereto and incurred after the Unaudited Balance Sheet Date in
the ordinary course of its business consistent with past practice.
SECTION 3.8. TAXES. (a) Except as set forth on Schedule
3.8(a), (i) each of Walter and its Subsidiaries (as hereinafter defined) has
filed on or before the date hereof (or will timely file) all material Tax
Returns (as hereinafter defined) required to be filed on or before the
Effective Date; (ii) all such Tax Returns are (or will be) complete and
accurate in all material respects and disclose all material Taxes (as
hereinafter defined) required to be paid by Walter and each Subsidiary for the
periods covered thereby except for Taxes for which adequate reserves have been
established by Walter in accordance with generally accepted accounting
principles and all Taxes shown to be due on such Tax Returns have been or will
be timely paid; (iii) none of Walter or any Subsidiary has waived any statute
of limitations in respect of Taxes; (iv) none of the Tax Returns referred to in
clause (i) have been examined by the Internal Revenue Service or the
appropriate state, local or foreign taxing authority, and the period for
assessment of the Taxes in respect of Tax Returns for United States federal,
state or local Taxes for the year 1990 and prior years has expired; (v) there
is no action, suit, investigation, audit, claim or assessment pending or
proposed or threatened with respect to Taxes of Walter or any Subsidiary; (vi)
there are no Tax Sharing Arrangements (as defined in Section 3.8(d)(v)) to
which any Person other than Walter and its Subsidiaries is a party or is bound;
(vii) there are no material liens for Taxes upon the assets of Walter or any
Subsidiary except liens relating to current Taxes not yet due; (viii) all
material Taxes which Walter or any Subsidiary are required by law to withhold
or to collect for payment have been duly withheld and collected, and have been
paid or accrued, reserved against and entered upon the books of Walter or such
Subsidiary; (ix) none of Walter and its Subsidiaries (other than ACEC) has been
a member of any consolidated group other than the Company Group of which it is
a member on the date hereof; (x) no material amount of the income of Walter and
its Subsidiaries recognized, for federal, state, local or foreign income tax
purposes, during the period beginning January 1, 1994 and ending on the
Effective Date will (y) be derived other than
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in the ordinary course of business, or (z) arise from transactions of a type
not reflected in the Tax Returns for the taxable year ending December 31, 1993;
(xi) except for the Closing Agreement expected to be entered into among Amoco
Corporation, ACEC, CMS Energy and the Commissioner of Internal Revenue, and the
ruling requests to be submitted to the Internal Revenue Service in connection
with the transactions contemplated by the Amoco Stock Purchase Agreement and
this Agreement, there are no Tax rulings, requests for rulings, requests for a
change in method of accounting or closing agreements relating to Walter or any
Subsidiary which could affect the liability of Walter or any Subsidiary for
Taxes for any period after the Effective Date; (xii) none of Walter or any
Subsidiary has filed a consent under Section 341(f) of the Code or any
comparable provision of state statutes; (xiii) since January 1, 1994, none of
Walter or any Subsidiary has taken any action not in accordance with past
practice that would have the effect of deferring any material Tax liability for
Walter or any Subsidiary from any taxable period ending on or before the
Effective Date to any taxable period ending after the Effective Date; (xiv) no
power of attorney has been granted with respect to any matter relating to Taxes
of Walter or any Subsidiary which is currently in force; (xv) none of the
property of Walter or any Subsidiary is required to be treated as owned by
another person pursuant to Section 168(f)(8) of the Code (as in effect prior to
its amendment by the Tax Equity and Fiscal Responsibility Act of 1982) or is
"tax exempt use property" within the meaning of Section 168(h) of the Code or
is subject to a so-called TRAC lease under Section 7701(h) of the Code or any
predecessor provision; (xvi) neither Walter nor any Subsidiary has participated
in or cooperated with an international boycott, within the meaning of Section
999 of the Code, and all filing requirements imposed by Section 999 of the Code
with respect to Walter and its Subsidiaries have been and will be complied
with; (xvii) neither Walter nor any Subsidiary has disposed of property in a
transaction being accounted for under the installment method pursuant to
Section 453 or 453A of the Code; (xviii) neither Walter nor any Subsidiary has
any corporate acquisition indebtedness, as described in Section 279(b) of the
Code; (xix) no taxes with respect to the period January 1, 1994 through June
30, 1994 were paid by Walter (or charged to Walter through any intercompany
account or payment) after June 30, 1994 which were not included in the
provision for taxes on the Unaudited Statement of Income; (xx) except as may be
limited as a result of the Merger and the other transactions contemplated by
this Agreement, the "regular" and "alternative tax" consolidated net operating
loss carryforwards set forth in Schedule 3.8(b) are each available to Walter
and the Company Group of which Walter is a member for a period of fifteen
taxable years from the end of the taxable year in which the applicable loss was
incurred; (xxi) except as may be limited as a result of the Merger and the
other transactions contemplated by this Agreement, the "regular" and
"alternative tax" estimated consolidated net operating loss for the period
January 1, 1994
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through June 30, 1994 set forth in Schedule 3.8(c) will, to the extent it is
not utilized to offset income for the period July 1, 1994 through and including
the Effective Date, be available to CMS and members of the CMS Company Group
for a period of fifteen taxable years following the Effective Date; (xxii)
except as set forth in Schedule 3.8(b), Walter has elected to be bound by the
provisions of Treasury Regulation Section 1.1503-2(g)(2) (and has complied with
all of the requirements thereof) with respect to all of the losses incurred
during the period covered by Schedule 3.8(b) which constitute "dual
consolidated losses" (as defined in Section 1503 of the Code and the
regulations thereunder); and (xxiii) except as set forth in Schedule 3.8(c),
for the period January 1, 1994 through the Effective Date, for United States
federal (and to the extent applicable, state or local) income tax purposes,
neither Walter nor any Subsidiary has taken any loss, expense or deduction for
any dual resident company or separate unit (as such terms are defined in
Treasury Regulation Section 1.1503-2(c)) which Walter or such Subsidiary has
used (or will use) to offset the income of any other Person under the laws of
any foreign country.
(b) No disposition by Walter or any of the Stockholders or
the Preferred Stockholders pursuant to this Agreement is subject to withholding
under Section 1445 of the Code and no stock transfer taxes, real estate
transfer taxes, or other similar taxes will be imposed in respect of the
Merger.
(c) As a result of the Merger, none of Walter, any
Subsidiary or the Surviving Corporation will be obligated (limited, in the case
of the Surviving Corporation, to obligations to which the Surviving Corporation
becomes subject as a result of any agreement or arrangement entered into by
Walter or any Subsidiary prior to the Merger) to make a payment to an
individual that would be an "excess parachute payment" to a "disqualified
individual" as those terms are defined in Section 280G of the Code, without
regard to whether such payment is reasonable compensation for personal services
performed or to be performed in the future.
(d) None of Walter, any Subsidiary or the Surviving
Corporation will be obligated to pay to the Republic of Congo any registration
or other Tax as a result of the Merger or as a result of the acquisition by
Walter of ACEC.
(e) For purposes of this Section 3.8 and Section 7.2,
notwithstanding any other provision hereof, the following definitions shall
apply:
(i) "Company Group" shall mean any "affiliated group" (as
defined in Section 1504(a) of the Code without regard to the
limitations contained in Section 1504(b) of the Code) that, at any time
on or before the Effective Date, includes or has included Walter, any
of
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its Subsidiaries or any predecessor of or successor to Walter or any of
its Subsidiaries (or another such predecessor or successor), or any
other group of corporations which, at any time on or before the
Effective Date, files or has filed Tax Returns on a combined,
consolidated or unitary basis with Walter or any of its Subsidiaries or
any predecessor of or successor to Walter or any of its Subsidiaries
(or another such predecessor or successor).
(ii) "material" shall mean, with respect to Taxes or Tax
Returns, that the failure on a timely basis to pay all such Taxes, to
file all such Tax Returns or pay the Taxes due in respect of such Tax
Returns, as the case may be, would result in an aggregate Tax liability
of not less than U.S. $50,000 or its equivalent in foreign currency.
(iii) "Subsidiary" shall have the meaning ascribed thereto in
Section 3.2(a) except that ACEC shall be treated as a Subsidiary only
with respect to taxable periods of ACEC beginning after the closing
date of the Amoco Stock Purchase Agreement.
(iv) "Tax" (and, with correlative meaning, "Taxes" and
"Taxable") shall mean (i) any federal, state, local or foreign income,
gross receipts, windfall profit, severance, property, production,
sales, use, value added, license, excise, franchise, employment,
payroll, withholding, alternative or add-on minimum, ad valorem,
transfer, excise, stamp, or environmental tax, or any other tax,
custom, duty, governmental fee or import or export duty or other like
assessment or charge of any kind whatsoever, together with any interest
or penalty, addition to tax or additional amount imposed by any
governmental authority, and (ii) liability of Walter or any of its
Subsidiaries (other than ACEC) for the payment of amounts with respect
to payments of a type described in clause (i) as a result of being a
member of an affiliated, consolidated, combined or unitary group, or as
a result of any obligation of Walter or any of its Subsidiaries under
any Tax Sharing Arrangement. Notwithstanding the preceding sentence,
the term "Tax" shall not include any royalty or income share payable to
any governmental body.
(v) "Tax Return" shall mean any return, report or similar
statement required to be filed with respect to any Tax (including any
attached schedules), including, without limitation, any information
return, claim for refund, amended return and declaration of estimated
Tax.
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(vi) "Tax Sharing Arrangement" shall mean any written or
unwritten agreement or arrangement for the allocation or payment of Tax
liabilities or payment for Tax benefits with respect to a consolidated,
combined or unitary Tax Return, which Tax Return includes Walter or any
of its Subsidiaries (other than ACEC).
SECTION 3.9. CONDITION OF TANGIBLE ASSETS. To the knowledge
of Walter and the Stockholders, except as otherwise disclosed in Schedule 3.9,
each material tangible operating asset owned or leased by Walter or any of its
Subsidiaries (other than ACEC) and used as of the Effective Time in the Walter
Business and having a book or fair market value in excess of U.S. $50,000 or
its equivalent in foreign currency is, as of the Effective Time, in good
operating condition (subject to reasonable wear and tear and immaterial
impairments of value and damage) and generally suitable for the uses for which
intended.
SECTION 3.10. TITLE TO PROPERTY. Each of Walter and its
Subsidiaries has good and, with respect to real property, indefeasible title to
all of the material assets reflected on the Unaudited Balance Sheet as being
owned by it and all of the material assets thereafter acquired by it (except to
the extent that such assets have thereafter been disposed of in the ordinary
course of business consistent with past practice), subject to no liens,
mortgages, pledges, security interests, encumbrances, claims or charges of any
kind (collectively, "Liens") except (i) as noted in Schedule 3.10, (ii) for
Liens for taxes not yet delinquent or the validity of which is being contested
in good faith, (iii) any Liens arising by operation of law securing obligations
not yet overdue and (iv) Liens that do not materially interfere with the
present use or value of the applicable asset.
SECTION 3.11. AVAILABILITY AND OWNERSHIP OF ASSETS. The
assets shown on the Unaudited Balance Sheet, taken as a whole, include all the
material properties and assets owned or used or held by Walter or its
Subsidiaries (other than ACEC) during the past twelve months and required, in
accordance with generally accepted accounting principles, to be reflected on
the Unaudited Balance Sheet (except properties and assets sold, cash disposed
of, accounts receivable collected, prepaid expenses realized, contracts fully
performed, and properties or assets which had become worn out, obsolete or
surplus, in each case in the ordinary course of business, and except for the
stock of ACEC, which has been or will prior to the Effective Time be acquired
pursuant to the merger contemplated by the Amoco Stock Purchase Agreement).
There are no material assets or properties used in the Walter Business owned by
any person other than Walter or its Subsidiaries which are leased or licensed
pursuant to a lease or license that will terminate as a result of the
consummation of the Merger and the other transactions contemplated hereby.
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SECTION 3.12. PERSONAL PROPERTY LEASES. Set forth in Schedule
3.12 is a brief description of each lease or other agreement or right, whether
written or oral (including in each case the annual rental, the expiration date
thereof and a brief description of the property covered), under which Walter or
any of its Subsidiaries (other than ACEC) is lessee of, or holds or operates,
any machinery, equipment, vehicle or other tangible personal property owned by
a third person having scheduled rental payments in excess of U.S. $50,000 per
year or its equivalent in foreign currency.
SECTION 3.13. ACCOUNTS RECEIVABLE. To the knowledge of Walter
and the Stockholders, all outstanding accounts receivable of Walter and its
Subsidiaries have arisen from bona fide transactions, except to the extent that
a reserve in respect thereof shall have been established on the Unaudited
Balance Sheet. To the knowledge of Walter and the Stockholders, the accounts
receivable reflected in the Unaudited Balance Sheet, (including all accounts
receivable of ACEC reflected in the Unaudited Balance Sheet or otherwise
included in the calculation of Walter Consolidated Net Working Capital), taken
as a whole, are good and collectible in all material respects in the ordinary
course of business at the aggregate recorded amounts thereof, net of any
applicable allowances for doubtful accounts reflected therein. Neither Walter
nor any Stockholder has any knowledge that any accounts receivable to be
reflected in the books and records of Walter and its Subsidiaries as of the
Effective Date, taken as a whole, will not be good and collectible in all
material respects in the ordinary course of business at the aggregate recorded
amounts thereof, net of any applicable allowances for doubtful accounts
reflected thereon, which allowances will be determined on a basis consistent
with the basis used in determining the allowances for doubtful accounts
reflected in the Balance Sheet.
SECTION 3.14. INTELLECTUAL PROPERTY. (a) Schedule 3.14
contains a list of:
(i) all material United States and foreign patents and patent
applications, all material United States, state and foreign trademarks,
service marks, trade names and copyrights for which registrations have
been issued or applied for, and all other material United States, state
and foreign trademarks, service marks, trade names and copyrights,
owned by Walter or any of its Subsidiaries or in which Walter or any of
its Subsidiaries holds any material right, license or interest, showing
in each case the product, device, process, service, business or
publication covered thereby, the registered or other owner, expiration
date and, in the case of any such right, license or interest, a brief
description thereof;
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(ii) all material agreements, commitments, contracts,
understandings, licenses and assignments relating or pertaining to any
asset, property or right described in the preceding clause to which
Walter or any of its Subsidiaries is a party, showing in each case the
parties thereto and, in the case of oral agreements, commitments,
contracts, understandings, licenses and assignments, the material terms
thereof;
(iii) all material licenses or agreements pertaining to
mailing lists, know-how, trade secrets, inventions or uses of ideas to
which Walter or any of its Subsidiaries is a party, showing in each
case the parties thereto and, in the case of oral licenses or
agreements, a brief description of the material terms thereof; and
(iv) all registered assumed or fictitious names under which
Walter or any of its Subsidiaries is conducting its business as of the
date hereof.
(b) All patents listed in Schedule 3.14 as being owned by
Walter or any of its Subsidiaries are valid and in full force, all patents
listed in Schedule 3.14 as being used by Walter or any of its Subsidiaries are,
to the knowledge of Walter, valid and in full force and all patent applications
of Walter or any of its Subsidiaries, listed therein are in good standing, all
without material challenge of any kind except as otherwise disclosed in
Schedule 3.14, and, except as otherwise disclosed in Schedule 3.14, Walter or a
Subsidiary owns the entire right, title and interest in and to such patents and
patent applications so listed as being owned by Walter or any of its
Subsidiaries without limitation, burden or encumbrance of any kind, except for
such limitations, burdens and encumbrances that would not have a Material
Adverse Effect on Walter and its Subsidiaries taken as a whole. All of the
registrations for trade names, trademarks, service marks and copyrights listed
in Schedule 3.14 as being owned by Walter or any of its Subsidiaries are valid
and in full force, all of the registrations for trade names, trademarks,
service marks and copyrights listed in Schedule 3.14 as being used by Walter or
any of its Subsidiaries are, to the knowledge of Walter, valid and in full
force and all applications by Walter or any of its Subsidiaries for such
registrations are pending and in good standing, all without material challenge
of any kind except as otherwise disclosed in Schedule 3.14, and, except as
otherwise disclosed in Schedule 3.14, Walter or its Subsidiaries owns the
entire right, title and interest in and to all such trade names, trademarks,
service marks and copyrights so listed as being owned by Walter or any of its
Subsidiaries as well as the registrations and applications for registration
therefor without qualification, limitation, burden or encumbrance of any kind,
except for such qualifications, limitations, burdens and encumbrances that
would not have a Material Adverse Effect on
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Walter and its Subsidiaries taken as a whole. Correct and complete copies of
all the patents and patent applications, registered trademarks, trade names,
service marks and copyrights, registrations or applications therefor and
licenses listed in Schedule 3.14 have heretofore been delivered by Walter to
CMS Energy.
(c) No infringement of any patent, patent right, trademark,
service mark, trade name, or copyright or registration thereof has occurred or
results in any way from the operations or business of Walter or its
Subsidiaries, except for such infringements that would not have a Material
Adverse Effect on Walter and its Subsidiaries taken as whole.
SECTION 3.15. OWNED REAL PROPERTY. Schedule 3.15 contains a
brief description of each parcel of real property owned by Walter or any of its
Subsidiaries (the "Owned Real Property") and of each option held by Walter or
any of its Subsidiaries to acquire any real property. Complete and correct
copies of any title opinions, surveys and appraisals in the possession of
Walter or any of its Subsidiaries or any policies of title insurance currently
in force and in the possession of Walter or any of its Subsidiaries with
respect to each such parcel have heretofore been made available by Walter to
CMS Energy.
SECTION 3.16. LEASED REAL PROPERTY. Schedule 3.16 sets forth
a list of each lease or similar agreement under which (i) Walter or any of its
Subsidiaries is lessee of, or holds or operates, any real property or interest
therein owned by any third person, (ii) to the knowledge of Walter and the
Stockholders, Walter or any of its Subsidiaries has been lessee of, or has held
or operated, any real property owned by any third person and is as of the date
hereof, or will be as of the Effective Date, subject to any actual or
contingent liability (other than any liability in respect of a matter referred
to in Section 3.29) in respect thereof (the real property described in clauses
(i) and (ii) above being collectively referred to herein as the "Leased Real
Property") or (iii) Walter or any of its Subsidiaries is lessor of any of the
Owned Real Property. Except as set forth in Schedule 3.16, Walter or a
Subsidiary has the right to quiet enjoyment of all the Leased Real Property
described in clause (i) of the immediately preceding sentence for the full term
of each such lease or similar agreement (and any renewal option related
thereto) relating thereto, and the leasehold or other interest of Walter or
such Subsidiary in such real property is not subject or subordinate to any
encumbrance, except for any failure to have such right or the existence of any
such encumbrance that would not have a Material Adverse Effect on Walter and
its Subsidiaries taken as whole. Complete and correct copies of any title
opinions, surveys and appraisals in the possession of Walter or any of its
Subsidiaries or any policies of title insurance currently in force and in the
possession of
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Walter or any of its Subsidiaries with respect to each such parcel of leased
property have heretofore been made available by Walter to CMS Energy.
SECTION 3.17. OBLIGATIONS; LITIGATION. Except as set forth in
Schedule 3.17, Walter and its Subsidiaries have performed all obligations
required to be performed by them to date, and are not in default, under any
agreement, lease or other document to which either is a party, or under any law
or order of any court or governmental agency, except for such failures to
perform or defaults that would not have a Material Adverse Effect on Walter and
its Subsidiaries taken as whole. Except as set forth in Schedule 3.17, there
are no claims, actions, suits or proceedings to which Walter or any of its
Subsidiaries is a party or any of their respective properties is subject or by
which any of them is bound, pending or, to the knowledge of Walter or any
Stockholder, threatened before or by any court or governmental agency, which is
reasonably expected to have a Material Adverse Effect on Walter and its
Subsidiaries taken as a whole or prevent or hinder the consummation of the
transactions contemplated hereby.
SECTION 3.18. AMOCO STOCK PURCHASE AGREEMENT. None of Walter
or any Stockholder has taken any action that would cause the Amoco Stock
Purchase Agreement or any other material agreements executed in connection with
the Amoco Stock Purchase Agreement not to be, and neither Amoco (as hereinafter
defined) nor Nuevo has asserted to Walter that the Amoco Stock Purchase
Agreement or such other material agreement does not constitute, a legal, valid
and binding agreement. None of Amoco, Nuevo, Nuevo Congo (as hereinafter
defined), Walter nor Walter Congo (as hereinafter defined) is, and, to the
knowledge of Walter or any Stockholder, none of such parties is alleged to be,
in breach or default in any material respect under the Amoco Stock Purchase
Agreement or such other material agreement, and the conditions to the
obligation of each party to such Agreement to consummate the transactions
contemplated thereby were as of the date of consummation of such transactions,
and will continue as of the Effective Date to be, satisfied.
SECTION 3.19. COMPLIANCE WITH LAWS. Except as disclosed in
Schedule 3.19, Walter and its Subsidiaries are in compliance with the
provisions of all applicable laws and regulations of all federal, state, local
and foreign governments, including but not limited to all Applicable
Environmental Laws (as defined in Section 3.29(a)), except to the extent that
the failure to comply therewith would not have a Material Adverse Effect on
Walter and its Subsidiaries taken as whole. Except as disclosed in Schedule
3.19, to the knowledge of Walter and each Stockholder, there are no proposed
orders, judgments, decrees, governmental takings, condemnations or other
proceedings, in each case binding upon the business, operations or properties
of
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Walter or any of its Subsidiaries and which would have a Material Adverse
Effect on Walter and its Subsidiaries taken as a whole.
SECTION 3.20. PERMITS. Each of Walter and its Subsidiaries
possesses all material federal, state, local and foreign governmental and
regulatory franchises, rights, privileges, permits, grants, concessions,
licenses, certificates, variances, authorizations, approvals, production
sharing arrangements, conventions, and other material authorizations (including
any amendments to any thereof) necessary to own or lease and operate its
material properties and to conduct its business as now conducted and all rights
to explore for, develop and/or produce hydrocarbons and to conduct all
operations related thereto (collectively, the "Permits"), including but not
limited to environmental Permits. All Permits are set forth in Schedule 3.20,
except for such Permits which would be readily obtainable by any qualified
applicant without undue burden in the event of any lapse, termination,
cancellation or forfeiture.
Except as disclosed in Schedule 3.20, all Permits are in full
force and effect and will continue in full force and effect immediately
following the consummation of the Merger without the breach of any terms or
conditions thereof or the forfeiture or impairment of any rights thereunder and
no consent, approval or act of, or the making of any filing with, any
governmental body, regulatory commission or other party will be required to be
obtained or made by Walter or any of its Subsidiaries in respect of any Permit
as a result of the consummation of the Merger and the other transactions
contemplated hereby. Neither Walter nor any of its Subsidiaries is in default
in any material respect under the terms of any such Permit nor has received
notice of any material default thereunder.
SECTION 3.21. INSURANCE. Walter and its Subsidiaries (except
ACEC) maintain policies of fire and casualty, liability (general, product and
other liability), workers' compensation and other forms of insurance and bonds
with those insurers listed on Schedule 3.21. Schedule 3.21 contains a list and
brief description (including type of coverage, limits, deductibles, carriers
and effective and termination dates) of all policies of insurance maintained by
Walter or any of its Subsidiaries (except for ACEC) since December 31, 1991, up
to and including the Effective Date. Each of Walter and its Subsidiaries
(except for ACEC) is a named insured or is otherwise covered under each such
policy, and each such policy is in full force and effect and will not in any
way be affected by or terminate or lapse by reason of the transactions
contemplated by this Agreement.
Walter has made available to CMS Energy complete and correct
copies of all policies listed on Schedule 3.21, together with all riders and
amendments thereto, and, to the knowledge of Walter and the Stockholders, no
insurer under such policies has a
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basis to void such policies on grounds of non-disclosure on the part of the
policyholder or the insured thereunder.
Schedule 3.21 hereto includes a list of each claim and each
notice of claim submitted under any such policy since December 31, 1991.
Except for any such claims or notices of claim, the full policy limits (subject
to deductibles provided therein) are available and unimpaired under each such
policy. Each of Walter and its Subsidiaries and affiliates has complied with
each such policy in all material respects and has not failed to give any notice
or present any claim thereunder in a due and timely manner.
SECTION 3.22. EMPLOYEE BENEFIT PLANS. (a) Schedule 3.22(a)
sets forth a list of, and, except as set forth in Schedule 3.22(a), Walter has
made available to CMS Energy copies of, any pension, profit sharing,
retirement, disability, health, welfare or other "employee benefit plan", as
that term is defined in Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), bonus, stock option or other equity based,
incentive, severance, termination, retention or other material employee benefit
or compensation plan, policy, arrangement or agreement, whether written or
unwritten, other than any of the same of ACEC that will terminate as of or
prior to the closing of the Amoco Stock Purchase Agreement, (i) under which any
employee or former employee of Walter or any of its Subsidiaries or the
beneficiary or dependent of any such employee or former employee (collectively,
the "Participants") is eligible to participate or derive a benefit and (ii)
that is established, maintained or contributed to by Walter or any of its
Subsidiaries or any trade or business, whether or not incorporated, which would
be treated as a single employer together with Walter and its Subsidiaries under
Section 414 of the Code, as of any date of determination (each, an "ERISA
Affiliate") or to which Walter or any of its Subsidiaries or any ERISA
Affiliate is obligated to contribute (collectively, the "Plans"). No Plan is
an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA.
No Plan is intended to qualify under Section 401(a) of the Code. Each of the
Plans has been operated and administered in accordance with ERISA, the Code and
all other applicable laws, regulations and rules, except where any such
noncompliance would not result in a material liability to Walter or any of its
Subsidiaries or CMS Energy. There are no material pending or, to the knowledge
of Walter or any Stockholder, threatened, claims by or on behalf of any Plan,
by or on behalf of any Participant or otherwise involving any Plan (other than
routine claims for benefits).
(b) Neither Walter nor any of its Subsidiaries nor any ERISA
Affiliate has ever maintained or contributed to, or been required to contribute
to, any employee benefit plan subject to Title IV of ERISA or the minimum
funding requirements of Section 302 of ERISA.
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(c) No Plan is a "multiemployer plan" or a "multiple employer
plan" within the meaning of ERISA or the Code.
(d) Except as disclosed on Schedule 3.22(d), no Plan is
subject to the law of any jurisdiction outside of the United States of America.
(e) No Participant is or may become entitled to
post-employment benefits of any kind by reason of employment with Walter or any
of its Subsidiaries, including, without limitation, death or medical benefits
(whether or not insured), other than coverage mandated by section 4980B of the
Code. The consummation of the transactions contemplated by this Agreement will
not result in an increase in the amount of compensation or benefits or
accelerate the vesting or timing of payment of any compensation or benefits
payable to or in respect of any participant.
(f) Schedule 3.22(f) sets forth a list of any Plan which is
not covered by ERISA pursuant to Section 4(b)(4) of ERISA, including any Plan
which may be required by local law ("Foreign Plan") and identifies which
Foreign Plan, if any, is, under applicable local law, required to be funded
through a trust or other funding vehicle ("Foreign Pension Plan"). Each
Foreign Plan is required by applicable foreign law and is in compliance in all
material respects with all laws, regulations and rules applicable thereto and
the respective requirements of the governing documents for such Foreign Plan.
There are no actions, suits or claims (other than routine claims for benefits)
pending or threatened against Walter, any of its Subsidiaries or any ERISA
Affiliate with respect to any Foreign Plan.
(g) Walter has delivered, or made available, to CMS Energy
with respect to each Plan subject to ERISA, correct and complete copies, where
applicable, of (i) all Plan documents and amendments thereto, trust agreements
and amendments thereto and insurance and annuity contracts and policies, (ii)
the current summary plan description, (iii) the Annual Reports (Form 5500
series) and accompanying schedules, as filed, for the most recently completed
three plan years for which such reports have been filed, (iv) all
correspondence with the Internal Revenue Service, Department of Labor and
Pension Benefit Guaranty Corporation concerning any controversy.
(h) All amounts that have been credited, or may in the
future be credited, to any participant under the Walter International, Inc.
Phantom Stock Plan have been paid to such participants or fully accrued and
reflected in the books of Walter as of June 30, 1994.
SECTION 3.23. EMPLOYEES AND AGENTS AND RELATED AGREEMENTS.
(a) Except as set forth in Schedules 3.23(a) or 3.30, and other than those of
ACEC that will terminate as of or
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prior to the closing of the Amoco Stock Purchase Agreement, neither Walter nor
any of its Subsidiaries is a party to or bound by any oral or written
employment agreement, consulting agreement (other than employment or consulting
agreements under which the obligations of Walter or such Subsidiary are
terminable by Walter or such Subsidiaries without premium or penalty (other
than statutory severance or termination benefits) on notice of 30 days or
less), deferred compensation agreement, confidentiality agreement or covenant
not to compete with any officer, director, stockholder, employee, agent or
attorney-in-fact of Walter or any of its Subsidiaries. Walter has made
available to CMS Energy complete and correct copies of each such agreement or
instrument.
(b) Schedule 3.23(b) contains a list of all employees or
independent contractors of Walter or any of its Subsidiaries (except ACEC) as
of or since December 31, 1993 whose rate of annual compensation from Walter and
all such Subsidiaries was in excess of U.S. $50,000 or its equivalent in
foreign currency on such date.
SECTION 3.24. EMPLOYEE RELATIONS AND LABOR MATTERS. (a)
Walter and its Subsidiaries have complied in all material respects with all
applicable laws, rules and regulations which relate to wages, hours,
discrimination in employment and collective bargaining and are not liable for
any material arrearages of wages or any material taxes or penalties for failure
to comply with any of the foregoing. Walter believes that the relations of
Walter and its Subsidiaries with their employees are good.
(b) Except as set forth in Schedule 3.24(b) hereto, neither
Walter nor any of its Subsidiaries is a party to any collective bargaining
agreement and Walter and its Subsidiaries have complied in all material
respects with all such collective bargaining agreements. Neither Walter nor
any of its Subsidiaries is a party to or, to the knowledge of Walter or any
Stockholder, is threatened with, any dispute or controversy with a union or
with respect to unionization or collective bargaining involving its employees.
To the knowledge of Walter or any Stockholder, neither Walter nor any of its
Subsidiaries is materially affected by any dispute or controversy with a union
or with respect to unionization or collective bargaining involving any of its
suppliers or customers. Schedule 3.24(b) hereto sets forth a list of any union
organizing or election activities involving any non-union employees of Walter
or any of its Subsidiaries known to Walter which have occurred since December
31, 1990 or, to the knowledge of Walter or any Stockholder, are threatened as
of the date hereof.
SECTION 3.25. ABSENCE OF CERTAIN BUSINESS PRACTICES. (a)
None of Walter or any of its Subsidiaries, any officer, employee or agent of
Walter or any of its Subsidiaries or any other person acting on its behalf,
has, directly or indirectly,
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given or agreed to give any gift or similar benefit (other than with respect to
bona fide payments for which adequate consideration has been given) to any
customer, supplier, governmental employee or other person who is or may be in a
position to help or hinder the business of Walter or any of its Subsidiaries
(or assist Walter or any of its Subsidiaries in connection with any actual or
proposed transaction) (a) which might subject Walter or any of its Subsidiaries
to any damage or penalty in any civil, criminal or governmental litigation or
proceeding, (b) which, if not continued in the future, would have an adverse
affect on the assets, business, operations or prospects of Walter or any of its
Subsidiaries or which would subject Walter or any of its Subsidiaries to suit
or penalty in any private or governmental litigation or proceeding, (c) for any
of the purposes described in section 162(c) of the Code, or (d) for
establishment or maintenance of any concealed fund or concealed bank account.
(b) Walter and each of its Subsidiaries is in compliance with
all applicable provisions of the Foreign Corrupt Practices Act of 1976, as
amended.
SECTION 3.26. TERRITORIAL RESTRICTIONS. Except as set forth
on Schedule 3.26, neither Walter nor any of its Subsidiaries is restricted in
any material respect by any written agreement or understanding with third
parties from carrying on its business anywhere in the world.
SECTION 3.27. TRANSACTIONS WITH CERTAIN PERSONS. Except as
set forth in Schedule 3.27 hereto, neither Walter nor any of its Subsidiaries
has, directly or indirectly, purchased, leased or otherwise acquired any
material property or obtained any material services from, or sold, leased or
otherwise disposed of any material property or furnished any material services
to (except with respect to remuneration for services rendered as a director,
officer or employee of Walter or any of its Subsidiaries), in the ordinary
course of business or otherwise, (a) any Stockholder, (b) any affiliate of
Walter or any of its Subsidiaries, (c) any person who is an officer or director
of Walter or any of its Subsidiaries or (d) any associate of any person
referred to in clause (a), (b) or (c) above. Except as set forth in Schedule
3.27 hereto, neither Walter nor any of its Subsidiaries owes any amount in
excess of U.S. $10,000 or its equivalent in foreign currency to, or has any
contract with or commitment to, any Stockholder, director, officer or employee
of Walter or any of its Subsidiaries (other than for compensation for current
services not yet due and payable and reimbursement of expenses arising in the
ordinary course of business) and none of such persons owes any amount in excess
of U.S. $10,000 or its equivalent in foreign currency to Walter or any of its
Subsidiaries.
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SECTION 3.28. NO FINDER. Neither Walter nor any of its
Subsidiaries nor any party acting on the behalf of any of them has paid or
become obligated to pay any fee or commission to any broker, finder or
intermediary for or on account of the transactions contemplated by this
Agreement.
SECTION 3.29. ENVIRONMENTAL MATTERS. (a) Each of Walter
and its Subsidiaries:
(i) have complied with and are in compliance with any
Applicable Environmental Laws, including those with respect to the use,
handling, discharge, release and/or disposal of any Hazardous
Substance;
(ii) have not received and are not otherwise aware of any
notice or claim alleging a violation of any Applicable Environmental
Law by Walter or any of its Subsidiaries; and
(iii) have no material liability, known or contingent, arising
out of or related to a Release or threatened Release at any location of
any Hazardous Substance into the environment, or any remedial action in
response thereto.
(b) For purposes of this Section 3.29, the following
definitions should apply:
(i) "Applicable Environmental Laws" shall mean any
environmental, health, safety statutes, laws, rules, regulations,
ordinances and codes, whether United States federal or state or any
foreign government or political subdivision thereof, applicable to the
relevant operation;
(ii) "Hazardous Substance" means any hazardous or toxic waste,
substance or constituent, or other hazardous substance, including
petroleum or its constituents, drilling mud or production wastes, as
defined or regulated under any Applicable Environmental Laws.
(ii) "material" means any fines, penalties, natural resource
damages, costs or expenses arising under Applicable Environmental Laws
that would result in an aggregate liability to Walter or any of its
subsidiaries of not less than U.S. $50,000 per year or its equivalent
in foreign currency;
(iv) "Release" means release, spill, emission, leaking,
pumping, injection, deposit, disposal, discharge, dispersal; leaching
or migration into the indoor or outdoor environment, including the
movement
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of Hazardous Substances through or in the air, soil, surface water,
groundwater or Property.
SECTION 3.30. CONTRACTS. (a) Except as set forth in Schedule
3.30 or, in the case of clauses (ii) and (v) below, as are contained in records
and files of Walter or its Subsidiaries located in Houston, Texas, Pointe
Noire, Republic of the Congo and Malabo, Republic of Equatorial Guinea and made
fully available for inspection by CMS Energy, neither Walter nor any of its
Subsidiaries is a party to or is bound by any oral or written contract,
agreement, commitment or instrument:
(i) for the purchase, sale or lease (except if the scheduled
lease payments are less than U.S. $25,000 per year or its equivalent in
foreign currency) of real property;
(ii) relating to oil, gas and mineral or other leases, joint
operating agreements, farm-out and farm-in agreements, service
contracts and similar agreements, option agreements, pooling and
unitization agreements, production marketing agreements, gas balancing
agreements, gas sales contracts, production sales contracts, processing
agreements, permits, licenses and orders, oil and gas concessions,
conventions, production sharing or similar agreements and all
agreements relating to the same, oil sales contracts, or assignments of
rights or obligations under any such agreements;
(iii) which provides for, or relates to, the guarantee by
Walter or any of its Subsidiaries of any obligation of any customers,
suppliers, officers, directors, employees or affiliates of Walter or
such Subsidiaries;
(iv) which provides for, or relates to, the incurrence by
Walter or any of its Subsidiaries of debt for borrowed money in excess
of U.S. $10,000 or its equivalent in foreign currency;
(v) which provides for, or relates to, any non-competition or
confidentiality arrangement with any person, including any current or
former officer or employee of Walter or any of its Subsidiaries;
(vi) for capital expenditures in excess of U.S. $25,000 or its
equivalent in foreign currency for any single project or related series
of projects;
(vii) any partnership, joint venture or other similar
arrangements or agreements involving a sharing of profits or losses;
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(viii) which (other than contracts, agreements, commitments
and instruments of the nature described in clauses (i) through (vii)
above) involve payments or receipts by Walter or any of its
Subsidiaries of more than U.S. $25,000 or its equivalent in foreign
currency; and
(ix) for any purpose (whether or not made in the ordinary
course of the business or otherwise not required to be listed or
described in Schedule 3.30) which is material to the business of Walter
and its Subsidiaries taken as a whole.
(b) Except as set forth in Schedule 3.30, Walter and its
Subsidiaries have fulfilled and performed their obligations in all material
respects under each of the leases, contracts and other agreements listed in
Schedule 3.30 or referred to in clause (ii) or (v) of Section 3.30(a)
(collectively, together with other material leases, contracts and other
agreements listed in other Schedules under this Article III, the "Walter
Agreements") and are not, or, to the knowledge of Walter, are not alleged to
be, in breach or default in any material respect under, nor, to the knowledge
of Walter or any Stockholder, is there or, to the knowledge of Walter, is there
alleged to be any basis for termination of, any of the Walter Agreements and no
event has occurred and no condition or state of facts exists which, with the
passage of time or the giving of notice or both, would constitute such a
default or breach by Walter or any of its Subsidiaries. Copies of each of the
Walter Agreements have heretofore been made available to CMS Energy by Walter.
Except as disclosed on Schedule 3.30, the Walter Agreements (i)
have been duly authorized, executed and delivered by Walter or the Subsidiaries
of Walter that are a party thereto, and (ii) are in full force and effect and
constitute legal, valid, binding and enforceable obligations of Walter or such
Subsidiaries and will continue in full force and effect following the
consummation of the Merger without the breach of any terms or conditions
thereof or the forfeiture or impairment of any rights thereunder and without
the consent, approval or act of, or the making of any filing with, any other
person or party.
SECTION 3.31. NO GUARANTIES; EXTENSIONS OF CREDIT. Except as
set forth in Schedule 3.31, no material obligations or liabilities of Walter or
any of its Subsidiaries are guaranteed by or subject to a similar contingent
obligation of any other person, nor has Walter or any of its Subsidiaries
guaranteed or become subject to a similar contingent obligation in respect of
the obligations or liabilities of, or extended credit to any other person.
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SECTION 3.32. GAS IMBALANCES; PRODUCTION RIGHTS AND
OBLIGATIONS. (a) Except as disclosed on Schedule 3.32, there are no gas
imbalances pertaining to the production and marketing of gas as between Walter
or any of its Subsidiaries and any third party.
(b) Except as disclosed on Schedule 3.32, neither Walter nor
any of its Subsidiaries has received any advance, "take-or-pay," or other
similar payments under production sales contracts that entitle the purchasers
to "make-up" or otherwise receive deliveries of hydrocarbons without paying at
such time the full contract price therefor. Except as disclosed on Schedule
3.32, (i) all gas marketing contracts may be terminated on not more than sixty
(60) days notice without penalty, or contain pricing terms that are market
sensitive, and (ii) any calls upon, options to purchase, or similar rights are
exercisable at a price that is at, or near, the fair market price for such
production in the general area involved. Except as disclosed on Schedule 3.32,
Walter is receiving the prices stipulated in its oil and gas sales contracts,
as amended through the date of this Agreement and, to the best knowledge of
Walter and each Stockholder, no purchaser of oil or gas production has proposed
or threatened any reduction in prices or purchases of such production under any
contract or arrangement or have taken or are threatening to take unilateral
action that would have a material adverse effect on the price or quantities of
purchases under any such contract or arrangement or that would have a Material
Adverse Effect on Walter and its Subsidiaries taken as a whole. Each of Walter
and its Subsidiaries has paid to each royalty and overriding royalty owner (or
such other party in interest as may be entitled to share therein) such owner's
or party's full share of any royalty or other payments with respect to advance,
"take-or-pay" or similar payments (including, but not limited to, payments
relating to any "buy-down" or "buy-out" of any such contract or arrangement)
and no such owner has proposed, demanded or threatened to demand that it is
entitled to any further payments.
SECTION 3.33. NET REVENUE INTERESTS AND COST AND EXPENSE
BEARING INTERESTS. (a) The net revenue interests and cost and expense bearing
interests utilized to calculate the net cash flow values in the cash flow
statements attached as Schedule 3.33(a) (collectively, the "Cash Flow
Statements") relating to the oil and gas reserves of Walter and its
Subsidiaries accurately state Walter's and its Subsidiaries' net revenue
interests and cost and expense bearing interests in those oil and gas reserves,
given the assumptions used in the Cash Flow Statements regarding oil prices,
reserve volumes, production rates, operating and capital expenditure amounts
and schedules, and taxes.
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(b) The historical production figures for oil, gas and water,
revenue and expense figures, and the advance account figures under the Joint
Operating Agreement related to the interests of ACEC in the Republic of the
Congo provided by Walter to CMS Energy are, to the knowledge of Walter and the
Stockholders, accurate and complete in all material respects; and the
historical production figures for oil, gas and water, revenue and cost and
expense figures, related to the interests of Walter or its Subsidiaries in the
Republic of Equatorial Guinea provided by Walter to CMS Energy are accurate and
complete in all material respects.
(c) To the knowledge of Walter, all oil wells and gas wells
(collectively, the "Wells"), including without limitation, the wells
specifically identified on Schedule 3.33 and all fresh water wells, injection
wells, salt water disposal wells and other wells of every nature and kind, and
Wells-in-progress to the extent applicable, whether producing or non-producing,
located on areas covered by Permits held directly, indirectly or beneficially
by Walter or its Subsidiaries, including, without limitation, the Permits
specifically identified on Schedule 3.33, have been drilled and completed
substantially within the limits permitted by applicable Permit and applicable
local, state, federal or foreign laws, rules or regulations. To the best
knowledge of Walter, no Well is subject to material penalties or production
restrictions because of any overproduction or any other violation of applicable
laws, rules, regulations, permits or judgments, orders or decrees of any court
or governmental body or agency which would have a material adverse effect on
the operation of any of the Wells. To the best knowledge of Walter, and except
as identified in Schedule 3.33, there are no Wells located in areas covered by
Permits that:
(i) Walter or any Subsidiary is currently obligated by law
or contract to plug and abandon;
(ii) Walter or any Subsidiary will be obligated by law or
contract to plug and abandon with the lapse of time or notice or both
because the Well is not currently capable of producing in commercial
quantities;
(iii) are subject to temporary exceptions granted by
governmental authorities to plugging and abandonment that would
otherwise be required under applicable law;
(iv) have been plugged and abandoned in a manner not in
substantial compliance with all applicable requirements of regulatory
authority having jurisdiction thereof; and
(v) could be classified as "sour" wells because of the content
of H2S in the oil and gas.
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SECTION 3.34. CMS COMMON SHARES. Each Stockholder severally
represents and warrants that such Stockholder has received (i) the Prospectus
of CMS Energy dated November 2, 1994 relating to the CMS Common Shares on
November 4, 1994; (ii) the CMS Energy SEC Documents (as hereinafter defined) on
November 4, 1994, and (iii) such further information as such Stockholder
reasonably requests concerning CMS Energy and its business, results of
operations and financial condition.
SECTION 3.35. DISCLOSURE. None of the representations and
warranties contained herein, the information contained in the Schedules
referred to in this Article III and the other information or documents referred
to in this Article III as having been furnished or to be furnished or made
available to CMS Energy or any of its representatives by Walter, the
Stockholders or their representatives pursuant to the terms of this Agreement
is false or misleading in any material respect to the transaction taken as a
whole or omits to state a fact necessary to make the statements herein or
therein not misleading in any material respect to the transaction taken as a
whole. To the best knowledge of Walter and each Stockholder, there is no fact
(other than those relating to the industry in general and not specifically
relating to Walter, its Subsidiaries, their respective assets or the
Stockholders) which adversely affects the properties, business or prospects of
Walter and its Subsidiaries in any material respect to the transaction taken as
a whole which has not been set forth or referred to in this Agreement or the
Schedules hereto.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CMS ENERGY
As an inducement to Walter, the Stockholders, the Preferred
Stockholders and the Warrantholders to enter into this Agreement and to
consummate the transactions contemplated herein, CMS Energy hereby warrants and
represents to Walter, the Stockholders, the Preferred Stockholders and the
Warrantholders and agrees as follows:
SECTION 4.1. ORGANIZATION OF CMS ENERGY. CMS Energy is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Michigan. CMS Energy is duly qualified to transact
business as a foreign corporation and is in good standing in each of the
jurisdictions in which the ownership or leasing of the properties used in its
business or the conduct of its business requires such qualification, other than
in such jurisdictions where the failure to be so qualified and in good standing
would not have a material adverse effect on the financial condition or results
of operation of CMS Energy and its consolidated subsidiaries taken as a whole,
and no other jurisdiction has demanded, requested or otherwise indicated that
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CMS Energy is required so to qualify. CMS Energy has full corporate power and
authority to own or lease and operate its properties and to carry on its
business as now conducted.
SECTION 4.2. AUTHORITY. CMS Energy has full corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
by CMS Energy and the consummation by CMS Energy of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of CMS Energy. This Agreement is, and each other agreement or
instrument of CMS Energy contemplated hereby when executed and delivered will
be, the legal, valid and binding agreement of CMS Energy enforceable against
CMS Energy in accordance with its respective terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforcement of creditors' rights generally and by
general equitable principles (whether enforcement is sought by proceedings in
equity or at law).
Neither the execution and delivery of this Agreement by CMS
Energy nor consummation of the transactions contemplated hereby or compliance
with or fulfillment of the terms and provisions hereof by CMS Energy will (a)
result in a breach of the terms, conditions or provisions of, or constitute a
default, an event of default or an event creating rights of acceleration,
termination or cancellation or a loss of rights, or result in the creation or
imposition of any encumbrance upon any of the material assets of CMS Energy,
under (i) the articles of incorporation or the by-laws of CMS Energy, (ii) any
material instrument, agreement, mortgage, indenture, deed of trust, permit,
concession, grant, franchise, license, judgment, order, award, decree or other
restriction to which CMS Energy is a party or any of its material properties is
subject or by which any of them is bound or (iii) any material statute, other
law or regulatory provision affecting CMS Energy other than, in the case of
clauses (ii) or (iii), any such breaches, defaults, rights, or encumbrances
that, individually or in the aggregate, would not have a material adverse
effect on the financial condition or results of operation of CMS Energy and its
consolidated subsidiaries taken as a whole, materially impair the ability of
CMS Energy to perform its obligations hereunder or prevent the consummation of
any of the transactions contemplated hereby, or (b) require the approval,
consent or authorization of, or the making of any declaration, filing or
registration with, any third party or any foreign, federal, state or local
court, governmental authority or regulatory body, by or on behalf of, CMS
Energy or Sub, except for the filing of a Form S-4 with the Securities and
Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "Securities Act") and the declaration of effectiveness thereof by the SEC,
and for the applicable requirements of the HSR Act, the filing of Articles of
Merger
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with the Secretary of State of the State of Texas, and appropriate documents
with the relevant authorities of other jurisdictions in which Walter is
qualified to do business, such filings and consents as may be required under
any environmental, health or safety law or regulation pertaining to any
notification, disclosure or required approval triggered by the Merger or the
transactions contemplated by this Agreement, such filings as may be required in
connection with the Amoco Stock Purchase Agreement, such consents, approvals,
orders, authorizations, registrations, declarations and filings as may be
required under the laws of any foreign country in which Walter or any of its
Subsidiaries conducts any business or owns any property or assets or the
corporation, takeover or blue sky laws of various states, and such other
consents, orders, authorizations, registrations, declarations and filings the
failure of which to be obtained or made would not, individually or in the
aggregate, have a material adverse effect on the financial condition or results
of operation of CMS Energy and its consolidated subsidiaries taken as a whole,
materially impair the ability of CMS Energy to perform its obligations
hereunder or prevent the consummation of any of the transactions contemplated
hereby.
SECTION 4.3. SHARES OF CMS COMMON STOCK. The CMS Common
Shares to be delivered to the Stockholders of Walter pursuant to this Agreement
will, when issued and delivered in accordance with the terms hereof, be validly
issued, fully paid and nonassessable and registered with the SEC on Form S-4
under the Securities Act and listed, or approved for listing upon notice of
issuance, on the NYSE.
SECTION 4.4. CAPITALIZATION. The authorized capital of CMS
Energy consists of (i) 250,000,000 shares of common stock, $.01 par value, of
which as of September 30, 1994, 86,246,928 shares were issued and outstanding,
2,829,900 shares were held by CMS Energy and 1,382,950 shares were reserved for
issuance under certain CMS Energy compensation plans, and (ii) 5,000,000 shares
of preferred stock, $.01 par value, none of which is issued and outstanding or
reserved for any purpose. All of the outstanding shares of CMS Common Stock
are duly authorized, validly issued, fully paid and nonassessable. Except for
options granted pursuant to certain CMS Energy compensation plans and as
contemplated hereby, there are no options, warrants or other rights to acquire
from CMS Energy or agreements or commitments by CMS Energy to issue or sell
shares of its capital stock, whether on conversion of other securities or
otherwise. None of the issued and outstanding shares of CMS Common Stock has
been issued in violation of, or is subject to, any preemptive or subscription
rights. There are no stockholder agreements, voting trust agreements or any
other similar contracts, agreements, arrangements, commitments, plans or
understandings to which CMS Energy is a party restricting or otherwise relating
to voting,
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dividend, ownership or transfer rights with respect to any shares of capital
stock of CMS Energy.
SECTION 4.5. OPERATIONS SINCE SEPTEMBER 30, 1994. Except as
set forth in the CMS Energy SEC Documents, since September 30, 1994, there has
been: (i) no material adverse change in the financial condition or results of
operation of CMS Energy and its consolidated subsidiaries taken as a whole; and
(ii) no damage, destruction, loss or claim with respect to, whether or not
covered by insurance, or condemnation or other taking of, assets having a
material adverse effect on the financial condition or results of operation of
CMS Energy and its consolidated subsidiaries taken as a whole.
SECTION 4.6. COMPLIANCE WITH LAWS. CMS Energy is in
compliance with the provisions of all applicable laws and regulations of the
federal, state, local and foreign governments, except to the extent that the
failure to comply therewith would not have a material adverse effect on the
financial condition or results of operation of CMS Energy and its consolidated
subsidiaries taken as a whole. Except as set forth in the CMS Energy SEC
Documents, to the knowledge of CMS Energy, there are no proposed orders,
judgments, decrees, governmental takings, condemnations or other proceedings,
in each case binding upon the business, operations or properties of CMS Energy
or any Subsidiary thereof, which would have a material adverse effect on the
financial condition or results of operation of CMS Energy and its consolidated
subsidiaries taken as a whole.
SECTION 4.7. SEC DOCUMENTS. CMS Energy has previously
delivered to Walter complete and correct copies of all reports (including
annual reports on Form 10-K, current reports on Form 8-K, quarterly reports on
Form 10-Q and proxy statements) filed by it with the SEC pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act") since December
31, 1993 (the "CMS Energy SEC Documents"). None of the information supplied
by CMS Energy and included in the Registration Statement or the Prospectus (as
hereinafter defined), as it may be amended or supplemented, or the documents
filed under the Exchange Act which are incorporated by reference therein, as of
their respective effective, issue or filing dates, does or will, as the case
may be, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading. The Registration Statement and Prospectus comply as to form in
all material respects with the applicable provisions of the Securities Act and
the rules and regulations promulgated thereunder.
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SECTION 4.8. NO FINDER. Neither CMS Energy nor any party
acting on its behalf has paid or become obligated to pay any fee or any
commission to any broker, finder or intermediary for or on account of the
transactions contemplated herein.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SUB
As an inducement to Walter, the Stockholders, the Preferred
Stockholders and the Warrantholders to enter into this Agreement and to
consummate the transactions contemplated hereby, CMS Energy and Sub hereby
jointly and severally warrant and represent to Walter, the Stockholders, the
Preferred Stockholders and the Warrantholders and agree as follows:
SECTION 5.1. ORGANIZATION AND STANDING. Sub is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Texas. Sub was organized solely for the purpose of engaging in the
transactions contemplated by this Agreement and has not engaged in any business
since it was incorporated which is not in connection with this Agreement and
has no material assets (other than the rights and obligations referred to in
this Agreement).
SECTION 5.2. CAPITAL STRUCTURE. The authorized capital stock
of Sub consists of 1,000 shares of common stock, $.01 par value, of which 10
shares are validly issued and outstanding, fully paid and nonassessable and are
owned by CMS Energy free and clear of all liens, claims and encumbrances.
SECTION 5.3. AUTHORITY. Sub has full corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement, the
performance by Sub of its obligations hereunder and the consummation of the
transactions contemplated hereby have been duly authorized by its Board of
Directors and by CMS Energy as its sole stockholder, and, except for the
corporate filings required by state law, no other corporate proceedings on the
part of Sub are necessary to authorize this Agreement and the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by Sub and this Agreement is, and each other agreement or instrument
of Sub contemplated hereby when executed and delivered will be, the legal,
valid and binding agreement of Sub enforceable against Sub in accordance with
its respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
the enforcement of creditors' rights generally and by general equitable
principles (whether enforcement is sought by proceedings in equity or at law).
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ARTICLE VI
ACTIONS PRIOR TO THE EFFECTIVE DATE
CMS Energy, Sub and Walter (and the Stockholders with respect
to Sections 6.2, 6.7, 6.8, 6.11, 6.13 and 6.14, the Preferred Stockholders only
with respect to their individual obligations set forth in Sections 6.2, 6.6(b),
6.7, 6.8 and 6.14, and the Warrantholders only with respect to their individual
obligations set forth in Sections 6.7, 6.8 and 6.13) covenant and agree to take
the following respective actions between the date hereof and the Effective
Date:
SECTION 6.1. ISSUANCE OF CMS COMMON SHARES. (a) CMS Energy
has filed a registration statement on Form S-4 with the SEC containing a
prospectus (the "Prospectus") covering the issuance and sale of the CMS Common
Shares to be delivered hereunder. CMS Energy will use all reasonable efforts
to cause such registration statement (the "Registration Statement") to be
effective at least twenty (20) Business Days prior to the Effective Date. CMS
Energy shall deliver to the NYSE pursuant to Rule 153 under the Securities Act
copies of the Prospectus included in the Registration Statement, as the same
may be amended or supplemented from time to time.
(b) CMS Energy shall use all reasonable efforts to list the
CMS Common Shares to be issued hereunder on the NYSE.
SECTION 6.2. ACTION BY STOCKHOLDERS OF WALTER. Walter shall
duly call, give notice of, convene and hold a meeting of its stockholders for
the purpose of approving the Merger and adopting this Agreement. Walter will,
through its Board of Directors, recommend to its stockholders the adoption of
this Agreement. In lieu of such meeting, the stockholders of Walter may take
the actions described in the preceding sentence by unanimous written consent in
accordance with the TBCA. Each of the Stockholders, the Preferred Stockholders
and the Warrantholders agrees to take all necessary action to cause this
Agreement to be so adopted.
SECTION 6.3. AMOCO STOCK PURCHASE AGREEMENT. Walter shall use
all reasonable efforts to consummate the transactions contemplated by the Amoco
Stock Purchase Agreement on the terms set forth therein.
SECTION 6.4. INVESTIGATION OF WALTER. Walter shall afford to
the officers, employees and authorized representatives of CMS Energy
(including, without limitation, independent public accountants, attorneys,
environmental consultants and financial advisors of CMS Energy), reasonable
access during normal business hours to the offices, properties, employees and
business and financial records (including, without limitation, computer files,
retrieval programs and similar documentation) of Walter to the
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extent CMS Energy shall deem necessary or desirable, and shall furnish to CMS
Energy or its authorized representatives such additional information concerning
the operations, properties and businesses of Walter as may be reasonably
requested in writing, to enable CMS Energy or its authorized representatives to
verify the accuracy of the representations and warranties contained in this
Agreement, to verify the accuracy of the financial statements referred to in
Section 3.5 and to determine whether the conditions set forth in Article VIII
have been satisfied. CMS Energy agrees that such investigations shall be
conducted in such manner as not to interfere unreasonably with the operation of
the business of Walter. Without limiting the foregoing, Walter shall permit
CMS Energy, or its representatives, to conduct a site inspection of any of the
Owned Real Property or the Leased Real Property or any real property covered by
any Permit and to conduct an environmental audit of any such properties with
respect to any environmental health and safety issues deemed material by CMS
Energy.
SECTION 6.5. LAWSUITS, PROCEEDINGS, ETC. Each of CMS Energy
and Walter shall notify the other promptly of any lawsuit, proceeding, claim or
investigation that may be threatened, brought, asserted or commenced against
any party hereto involving in any way the transactions contemplated by this
Agreement or that would have been listed in Schedule 3.17 or the CMS Energy SEC
Documents if such lawsuit, proceeding, claim or investigation had arisen prior
to the date hereof.
SECTION 6.6. CONDUCT OF BUSINESS BY WALTER PENDING THE MERGER.
(a) During the period from July 1, 1994 through the Effective Time, except as
set forth in any Schedules to this Agreement or as expressly contemplated by
this Agreement, Walter has carried on, and will carry on, its business in, and
has not entered into, and will not enter into, any material transaction other
than in the ordinary course consistent with past practice and, to the extent
consistent therewith, has used and will use its reasonable efforts to preserve
intact its current business organization, keep available the services of its
current officers and preserve its relationships with customers, suppliers and
others having business dealings with it (except with the prior written consent
of CMS Energy). Without limiting the generality of the foregoing, and except
as set forth in any Schedules to this Agreement or as expressly contemplated by
this Agreement, Walter and its Subsidiaries has not since June 30, 1994 and
shall not, without the prior written consent of CMS Energy:
(i) (x) declare, set aside or pay any dividends on, or make
any other actual, constructive or deemed distributions in respect of,
any of its capital stock, or otherwise make any payments to the
Stockholders in their capacity as such (other than any such payments or
distributions otherwise permitted to be made under this Agreement), (y)
split, combine or reclassify any of its
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capital stock or issue, sell or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of
its capital stock, or (z) purchase, redeem or otherwise acquire any
shares of capital stock of Walter or any other securities thereof or
any rights, warrants or options to acquire any such shares or other
securities;
(ii) issue, deliver, sell, pledge, dispose of or otherwise
encumber any shares of its capital stock or other securities
(including, without limitation, any rights, warrants or options to
acquire any securities) (other than any issuances of its common stock
upon exercise of the Warrants to acquire 3,500 shares of Walter Common
Stock not held by the Preferred Stockholders);
(iii) amend its articles of incorporation or by-laws;
(iv) acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial portion of the assets of or equity
in, or by any other manner, any business or any corporation,
partnership, association or other business organization or division
thereof (other than as contemplated by the Amoco Stock Purchase
Agreement;
(v) sell, lease or otherwise dispose of or agree to sell,
lease or otherwise dispose of, any of its assets, except sales in the
ordinary course of business and the sale, lease or other disposition of
other assets having a book or fair market value in the aggregate not
exceeding U.S. $25,000 or its equivalent in foreign currency;
(vi) incur any indebtedness for borrowed money or guarantee
any such indebtedness or issue or sell any debt securities or guarantee
any debt securities of others, or make any loans, advances or capital
contributions to, or investments in, any other person, except the
incurrence and/or guarantee of indebtedness to fund working capital and
except as contemplated by the Amoco Stock Purchase Agreement;
(vii) with respect to its operations other than ACEC, make or
incur any new capital expenditure or capital expenditures which,
individually, is in excess of U.S. $25,000 or its equivalent in foreign
currency or, in the aggregate, are in excess of U.S. $50,000 or its
equivalent in foreign currency and, with respect to ACEC, make any
capital or major expenditures or investments, or incur any obligations
for capital or
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major expenditures or enter into any leases for personal or real
property, in excess of fifty thousand U.S. Dollars ($50,000) or its
equivalent in foreign currency per transaction;
(viii) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than such payment, discharge or satisfaction in the
ordinary course of business;
(ix) alter through merger, liquidation, reorganization,
restructuring or in any other fashion its corporate structure (other
than as contemplated by the Amoco Stock Purchase Agreement);
(x) enter into or adopt, or amend, any existing, bonus,
incentive, deferred compensation, insurance, medical, hospital,
disability or severance plan, agreement or arrangement or enter into or
amend any Plan or employment, consulting or management agreement, other
than any such amendment to a Plan that is made to maintain the
qualified status of such Plan or its continued compliance with
applicable law;
(xi) make any change in accounting practices or policies
applied in the preparation of the financial statements referred to in
Section 3.5 except as required by GAAP;
(xii) modify any of the material agreements, understandings,
obligations, commitments, indebtedness or other obligations or enter
into any material agreement, understanding, obligation or commitment,
or incur any material indebtedness or obligation, of the type that
would have been required to be listed on Schedule 3.30 if in existence
on the date hereof (other than as contemplated by the Amoco Stock
Purchase Agreement);
(xiii) pay or commit to pay any bonus to any officer or
employee of Walter other than (A) as paid or accrued on or prior to
June 30, 1994 or to Jerry Livingston in accordance with and when
required by the terms of the employment agreement of Walter with such
Person and (B) bonuses not to exceed $80,000 in the aggregate which,
notwithstanding any provision of this Agreement to the contrary, may be
paid by Walter in its discretion to certain of its officers or
employees prior to the Effective Time; or
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(xiv) enter into any other transaction affecting the business
of Walter, other than in the ordinary course of business consistent
with past practice or as expressly contemplated by this Agreement.
(b) Notwithstanding any other provision of this Agreement,
prior to the Effective Time, Walter:
(i) shall make a pro rata distribution to the Stockholders
with respect to the Walter Common Stock, to be effected immediately
prior to the Effective Time, of a partnership interest representing the
equivalent of an aggregate fifty percent (50%) net profits interest
after the recovery of certain items (the "Alba Net Profits Interest")
in net production revenue from the interest of Walter and its
Subsidiaries in the liquefied petroleum gas project covered by the
Heads of Agreement dated May 14, 1993 between the Republic of
Equatorial Guinea and Walter International Equatorial Guinea, Inc., as
project operator for a consortium (the "Alba LPG Project"), pursuant to
the form of partnership agreement and transfer of partnership interest
instruments and other required documentation attached hereto as Exhibit
B; and
(ii) shall make a pro rata distribution to the Stockholders
with respect to the Walter Common Stock, to be effected immediately
prior to the Effective Time, of a partnership interest representing the
equivalent of an aggregate fifty percent (50%) net profits interest
after the recovery of certain items (the "El Franig Net Profits
Interest" and, together with the Alba Net Profits Interest, the "Net
Profits Interests") in net production revenue from the El Franig
natural gas field discovered by the El Franig No. 1 well spudded in
April 1981, located within the boundaries of the El Franig Concession
dated effective May 24, 1993 (the "El Franig Field"), pursuant to the
form of partnership agreement and transfer of partnership interest
instruments and other required documentation attached hereto as Exhibit
C;
and Walter may take any action reasonably necessary or appropriate to effect
such distributions; provided, however, that no assets shall be distributable
pursuant to this Section 6.6(b) unless Walter shall have determined, in its
reasonable discretion, that such assets are available to it for such
distribution and that such distribution may otherwise be permissibly made. To
the extent that such distribution may violate the terms of the certificate of
designation relating to the Walter Preferred Stock, Walter, the Stockholders
and the Preferred Stockholders agree to take such action as may be
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necessary or appropriate to amend such certificate or otherwise eliminate such
violation.
(c) Walter shall promptly advise CMS Energy orally and in
writing of any change or event having a Material Adverse Effect on Walter and
its Subsidiaries taken as a whole.
SECTION 6.7. MUTUAL COOPERATION; REASONABLE BEST EFFORTS. The
respective parties hereto shall cooperate with each other, and shall use their
respective reasonable best efforts, to cause the fulfillment, to the extent
within their reasonable control, of the conditions to each other party's
obligations hereunder and to obtain as promptly as possible, to the extent
within their reasonable control, all consents, authorizations, orders or
approvals from each and every third party, whether private or governmental,
required in connection with the transactions contemplated by this Agreement;
provided, however, that the foregoing shall not require CMS Energy or Walter to
make any divestiture or consent to any divestiture in order to obtain any
waiver, consent or approval.
SECTION 6.8. NO PUBLIC ANNOUNCEMENT. None of the parties
hereto shall, without the approval of CMS Energy and Walter (which may not be
unreasonably withheld), make any press release or other public announcement
concerning the transactions contemplated by this Agreement, except as and to
the extent that such party shall be so obligated by law, in which case each of
CMS Energy and Walter shall be advised and they shall use their reasonable best
efforts to cause a mutually agreeable release or announcement to be issued;
provided that nothing herein shall be deemed to interfere with the filing by
CMS Energy of a Form S-4 with the SEC or with the filing by the Preferred
Stockholders of Forms 8-K with the SEC.
SECTION 6.9. NO SOLICITATION. Walter shall not, nor shall it
authorize or permit any officer, director or employee of it or its Subsidiaries
or affiliates or any investment banker, attorney or other adviser or
representative of Walter or any of its Subsidiaries or affiliates to, (i)
solicit, initiate, or encourage the submission of, any Acquisition Proposal (as
hereinafter defined), (ii) enter into any agreement with respect to any
Acquisition Proposal or (iii) except to the extent required by law as advised
by counsel in writing, participate in any discussions or negotiations
regarding, or furnish to any person any information for the purpose of
facilitating the making of, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any Acquisition Proposal. Walter promptly shall advise
CMS Energy of any Acquisition Proposal and any inquiries with respect to any
Acquisition Proposal. For purposes of this Agreement, "Acquisition Proposal"
means any proposal for a merger or other business combination involving Walter
or any of its Subsidiaries or affiliates or any proposal or offer to
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acquire in any manner, directly or indirectly, an equity interest in Walter or
any of its Subsidiaries or affiliates, any voting securities of Walter or any
of its Subsidiaries or affiliates or a substantial portion of the assets of
Walter and its Subsidiaries taken as a whole.
SECTION 6.10. ANTITRUST LAW COMPLIANCE. CMS Energy and
Walter shall file with the Federal Trade Commission and the United States
Department of Justice the notification and other information required to be
filed with respect to the transactions contemplated hereby under the HSR Act
and the rules and regulations promulgated thereunder. CMS Energy warrants that
all such filings by it shall be, and Walter warrants that all such filings by
it shall be, accurate as of the date filed and in accordance with the
requirements of the HSR Act and all such rules and regulations. CMS Energy and
Walter agree to make available, or cause to be made available, to the other
parties such information as may reasonably be requested relative to the
businesses, assets and property of CMS Energy and Walter, as the case may be,
as may be required to file any additional information requested by such
agencies under the HSR Act and such rules and regulations.
SECTION 6.11. TERMINATION OF STOCKHOLDERS' AGREEMENT AND ORR
PLAN. The Stockholders shall cause the Buy-Sell and Voting Agreement dated as
of November 29, 1989 to which the Stockholders are parties (the "Stockholders'
Agreement") and the ORR Plan to be terminated, effective at or prior to the
Effective Time, and each of the Stockholders, the Warrantholders and the
Preferred Stockholders who are parties to the Stockholders Agreement agrees
that the Stockholders Agreement is hereby terminated effective as of the
Effective Time, and each of Walter, J.C. Walter and Benton agrees that the ORR
Plan is hereby terminated effective as of the Effective Time.
SECTION 6.12. SUBSEQUENT FINANCIAL STATEMENTS. Prior to the
Effective Date, Walter shall deliver to CMS Energy, not later than fifteen (15)
days after the end of each monthly period and in the form customarily prepared
by Walter, the unaudited internal consolidated financial statements of Walter,
including an income statement, for the monthly period then ended and for the
period from the beginning of the fiscal year to the end of such monthly period.
SECTION 6.13. EXERCISE OR CANCELLATION OF WARRANTS. Each of
Walter and the Warrantholders agrees that, prior to the Effective Time, the
Warrants to acquire an aggregate of 9,000 shares of Walter Common Stock
currently held by the holders of Walter Preferred Stock shall be cancelled and
Warrants to acquire an aggregate of 2,300 shares of Walter Common Stock
currently held by Benton III, Chapman, Frank, Jolly and Smalley shall be
exercised (or cancelled) and, if exercised, each such Warrantholder shall, to
the extent such Warrants are subject to Section 83 of the Code, pay to Walter
an amount equal to the
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income tax withholding relating thereto assuming a fair value of each share of
Walter Common Stock received equal to the value of the consideration to be
received therefor in the Merger, such amount to be payable at the election of
each such Warrantholder either in cash or pursuant to a one-year promissory
note (collectively, the "Warrantholder Notes") payable to Walter and bearing
interest at the prime rate of interest per annum; and, as of the Effective
Time, no shares of Walter Common Stock shall be issuable pursuant to the
Warrants.
SECTION 6.14. STOCK PURCHASE AGREEMENTS. Each of the
Preferred Stockholders agrees that, effective as of the Effective Time, all
necessary consents to the Merger and related transactions which may be required
of them pursuant to the Purchase Agreement, 14% Senior Cumulative Preferred
Stock with Common Stock Warrants, among Walter and the Preferred Stockholders
are hereby granted and that such Agreement is hereby terminated effective as of
the Effective Time (except for Section 9.2 of such Agreement, which shall
survive), and each of Cain, the Cain Trust and Oehmig agrees that, effective as
of the Effective Time, all necessary consents to the Merger and related
transactions which may be required of them pursuant to the Stock Purchase
Agreement to which each of them and Walter is a party are hereby granted and
that such Agreement is hereby terminated effective as of the Effective Time.
SECTION 6.15. SUBSTITUTION ON OFFICE LEASE. CMS Energy shall
use reasonable efforts to cause NOMECO to become the lessee in place of Walter
on the office lease between Walter and First City National Bank of Houston, as
lessor, covering Walter's office space at 1021 Main Street, Houston, Texas or,
if a substitution is unable to be negotiated on terms satisfactory to the
parties, CMS shall cause NOMECO to indemnify and hold harmless Walter Oil & Gas
Corporation against any liabilities incurred by Walter Oil & Gas Corporation
with respect thereto.
ARTICLE VII
ADDITIONAL COVENANTS AND AGREEMENTS
SECTION 7.1. TAX-FREE NATURE; TAX CONSEQUENCES. (a) The
Stockholders and CMS Energy intend the Merger to constitute a reorganization
described in section 368(a)(2)(E) of the Code and shall use their best efforts
to cooperate in achieving such a tax-free reorganization. Notwithstanding the
preceding sentence, the parties to this Agreement will rely solely on their own
advisors in determining the tax consequences of the transactions contemplated
by this Agreement and each party is not relying, and will not rely, on any
representations or assurances of any other party regarding such consequences
other than the representations and covenants set forth in writing in this
Agreement or any other agreement or certificate delivered in connection
herewith. In
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the event that the Merger does not qualify as such a tax-free reorganization,
the validity of the Merger and the transactions contemplated thereby shall
nevertheless be binding and final upon the parties to this Agreement. Neither
the Stockholders nor CMS Energy will take any tax reporting positions or make
any tax elections inconsistent with the characterization of the Merger as a
reorganization described in section 368(a)(2)(E) of the Code except as may be
required upon examination (or the result of a prior determination) by the
Internal Revenue Service or any other Tax authority.
(b) The Stockholders agree that the aggregate sales and
transfers by all such persons in any three month period of CMS Common Stock
shall not exceed 25% of the aggregate number of shares of CMS Common Stock
issued in the Merger.
(c) CMS Energy hereby warrants and represents to and covenants
with Walter and the Stockholders that:
(i) neither CMS Energy nor the Surviving Corporation has any
plan or intention to take any action following the Merger that could
result in the Surviving Corporation's failing to hold at least 90
percent of the fair market value of Walter's net assets and at least 70
percent of the fair market value of Walter's gross assets and at least
90 percent of the fair market value of Sub's net assets and at least 70
percent of the fair market value of Sub's gross assets held immediately
prior to the Merger (determined after taking into account the payment
of bonuses referred to in Section 6.6(a)(xiii)(B), the distributions
referred to in Section 6.6(b)(i) and (ii), which for purposes of this
representation are deemed to be valued at $38,000, and amounts used by
Walter or Sub to pay Merger expenses, which CMS Energy may assume will
not exceed $200,000.
(ii) the Surviving Corporation has no plan or intention to
issue additional shares of its stock that would result in CMS Energy's
losing control of the Surviving Corporation within the meaning of
section 368(c) of the Code;
(iii) CMS Energy has no plan or intention to reacquire any of
the CMS Common Stock issued in the Merger;
(iv) CMS Energy has no plan or intention to liquidate the
Surviving Corporation, to merge the Surviving Corporation with or into
another corporation, to sell or otherwise dispose of the stock of the
Surviving Corporation (except for a transfer of stock to a corporation
controlled by CMS Energy within the
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meaning of section 368(a)(2)(C) of the Code and Treas. Reg.
1.368-2(j)(4)), or to cause the Surviving Corporation to sell or
otherwise dispose of any of its assets or of any of the assets acquired
from Sub except for dispositions made in the ordinary course of
business (or a transfer of assets to a corporation controlled by CMS
Energy within the meaning of section 368(a)(2)(C) of the Code and Treas
Reg. 1.368-2(j)(4));
(v) Sub will have no liabilities assumed by the Surviving
Corporation and will not transfer to the Surviving Corporation any
assets subject to liabilities in the Merger;
(vi) following the Merger, the Surviving Corporation will
continue Walter's historic business or use a significant portion of
Walter's historic business assets in a business;
(vii) CMS Energy and Sub will pay their respective expenses, if
any, incurred in connection with the Merger;
(viii) there is no intercorporate indebtedness between CMS
Energy and Walter or between Sub and Walter that will be settled at a
discount following the Merger;
(ix) CMS Energy is not an investment company as defined in
section 368(a)(2)(F)(iii) and (iv) of the Code; and
(x) the total cash consideration that will be paid in the
Merger in lieu of issuing fractional shares of CMS Common Stock will
not exceed one percent of the total fair market value of the CMS Common
Stock (as of the Effective Time) to be issued in the Merger.
SECTION 7.2. TAXES.
(a) Liability for Taxes. (i) Except as shown as a
liability or reserve on the Unaudited Balance Sheet, the Stockholders shall be
liable for and indemnify CMS Energy, the Surviving Corporation and their
subsidiaries (collectively, the "Tax Indemnitees") for all Taxes imposed on any
Tax Indemnitee (or for which a Tax Indemnitee may otherwise be liable) arising
from the assets or activities of Walter and its Subsidiaries for any taxable
year or period of Walter or its Subsidiaries that ends on or before the
Unaudited Balance Sheet Date and, with respect to any taxable year or period
beginning before and ending after the Unaudited Balance Sheet Date, the portion
of such taxable year ending on and including the Unaudited Balance Sheet Date
(each such taxable year, period or portion thereof referred
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to herein as "Pre-June 30, 1994 Taxable Period"). Notwithstanding the
preceding sentence, in the case of an adjustment which increases an item of
income or gain, or decreases an item of loss, deduction or credit, of Walter or
any of its Subsidiaries for any Pre-June 30, 1994 Taxable Period and which will
(under the law in effect at the time of such adjustment) result in a
corresponding decrease in an item of income or gain, or an increase in an item
of loss, deduction or credit, of Walter, any of its Subsidiaries, or the
Surviving Corporation for one or more taxable years or periods following the
year or period to which the adjustment relates (a "Timing Adjustment"), the
Shareholders shall not be required to pay to the Tax Indemnitees any increase
in the tax liability of Walter and its Subsidiaries attributable to such Timing
Adjustment, but shall be required to pay to the Tax Indemnitees the amount of
any interest and penalties payable as a result of such Timing Adjustment,
provided that if the representations set forth in Sections 3.8(a)(xx) through
3.8(a)(xxiii) are breached other than as a result of Timing Adjustments
(including as a result of an adjustment (other than a Timing Adjustment) to the
taxable income of Walter or its Subsidiaries for a taxable year or period that
ends on or before the Unaudited Balance Sheet Date which is used to reduce the
net operating loss carryforwards of Walter and its Subsidiaries described in
such Sections), the Stockholders shall pay to the Tax Indemnitees an amount
equal to the sum of (y) 20% of the amount by which the net operating loss
carryovers set forth in Schedule 3.8(b) or Schedule 3.8(c) from any taxable
period exceed the amount of net operating loss carryovers as finally determined
from such taxable period; provided, that the aggregate amount payable by the
Stockholders pursuant to this clause (y) by reason of all such breaches shall
not exceed $1,000,000, plus (z) the amount of any interest and penalties
payable as a result of the reduction in such net operating loss carryover.
Notwithstanding the preceding sentence, the Stockholders shall not be required
to indemnify the Tax Indemnitees as a result of the breach of the
representations described in Sections 3.8(a)(xx) through 3.8(a)(xxiii) unless
the unavailability of any of the carryovers described therein are challenged in
the audit of the Tax Returns filed by CMS Energy and its Affiliates for their
taxable years ending on or before December 31, 1999.
(ii) The Tax Indemnitees shall be liable for and indemnify
the Stockholders for the Taxes of Walter and its Subsidiaries for any taxable
year or period that begins after the Unaudited Balance Sheet Date and, with
respect to any taxable year or period beginning before and ending after the
Unaudited Balance Sheet Date, the portion of such taxable year or period
beginning after the Unaudited Balance Sheet Date.
(iii) For purposes of paragraphs (a)(i) and (a)(ii), whenever
it is necessary to determine the liability for Taxes of Walter and its
Subsidiaries for a portion of a taxable year or
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period that begins before and ends after the Unaudited Balance Sheet Date, the
determination of the Taxes of Walter and its Subsidiaries for the portion of
the year or period ending on, and the portion of the year or period beginning
after, the Unaudited Balance Sheet Date shall be determined by assuming that
Walter and its Subsidiaries had a taxable year or period which ended at the
close of the Unaudited Balance Sheet Date, except that exemptions, allowances
or deductions that are calculated on an annual basis, such as the deduction for
depreciation, shall be apportioned on a daily basis.
(iv) The Stockholders shall be liable for all transfer, sales
or similar Taxes arising from the Merger and the other transactions
contemplated by this Agreement.
(v) Within twenty (20) days after the execution of this
Agreement, the Stockholders shall deliver or cause to be delivered to CMS
Energy or its designee true and complete copies of: (A) all income Tax Returns
of Walter and its Subsidiaries requested by CMS Energy or its Subsidiaries; (B)
any other Tax Returns requested by CMS Energy or its Subsidiaries, as may be
relevant to Walter and its Subsidiaries and their assets and operations; and
(C) any workpapers or other supporting data requested by CMS Energy or its
subsidiaries relating to "income taxes payable" or similar line item reflected
in the Unaudited Statement of Income and Unaudited Balance Sheet relating to
Tax Returns made available pursuant to (A) or (B), or relating to Tax Returns
referred to in (A) or (B) not yet filed, to the extent copies of such Tax
Returns, work papers or other data are in existence and in the possession of
Walter at the time of such request.
(b) Tax Returns. Walter shall file when due (after taking
into account all extensions properly obtained) all Tax Returns that are
required to be filed by or with respect to Walter and its Subsidiaries on or
before the Effective Date and shall remit or cause to be remitted any Taxes
shown to be due on such Tax Returns, and the Surviving Corporation shall file
when due (after taking into account all extensions properly obtained) all Tax
Returns that are required to be filed by Walter and its Subsidiaries after the
Effective Date and shall remit or cause to be remitted any Taxes due in respect
of such Tax Returns. All Tax Returns which Walter is required to file in
accordance with this paragraph (b) shall be prepared and filed in a manner
consistent with past practice and, on such Tax Returns, no position shall be
taken or method adopted that is inconsistent with positions taken or methods
used in preparing and filing similar Tax Returns in prior periods except for
changes required by law or changes in facts.
(c) Contest Provisions. CMS Energy or one of its
subsidiaries shall notify the Stockholders in writing upon receipt by any Tax
Indemnitee of notice of any pending or
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threatened federal, state, local or foreign Tax audit or assessment which may
materially affect the Tax liabilities of Walter or its Subsidiaries for which
the Stockholders would be required to indemnify the Tax Indemnitees pursuant to
Section 10.1 or this Section 7.2, provided, that failure to comply with this
provision shall not affect the Tax Indemnitees' right to indemnification
hereunder except to the extent that such omission results in a failure of
actual knowledge of the Stockholders and the Stockholders are damaged as a
result of such failure of actual knowledge.
The Stockholders shall have the sole right to represent the
interests of Walter and its Subsidiaries in any Tax audit or administrative or
court proceeding relating to taxable periods ending on or before the Unaudited
Balance Sheet Date, and to employ counsel of their choice at their expense,
provided that the Tax Indemnitees (and their tax counsel) may, at their own
expense, be present at and participate in any such audit or proceeding.
Notwithstanding the foregoing, the Stockholders shall not be entitled to
settle, either administratively or after the commencement of litigation, any
claim that would constitute a Timing Adjustment or any claim for Taxes which
would adversely affect the liability for Taxes of the Tax Indemnitees for any
period after the Unaudited Balance Sheet Date to any extent (including, but not
limited to, the imposition of income Tax deficiencies, the reduction of asset
basis or cost adjustments, the lengthening of any amortization or depreciation
periods, the denial of amortization, depreciation or depletion deductions, or
the reduction of loss or credit carryforwards) without the prior written
consent of the Tax Indemnitees. Such consent shall not be necessary to the
extent that the Stockholders have indemnified the Tax Indemnitees in a manner
acceptable to the Tax Indemnitees against the effects of any such settlement.
(d) Assistance and Cooperation. After the Effective Date,
each of the Stockholders and the Tax Indemnitees shall:
(i) agree to timely sign and deliver such certificates or
forms as may be necessary or appropriate to establish an exemption from
(or otherwise reduce), or make a report with respect to, Taxes
described in paragraph (a)(iv) of this Section 7.2;
(ii) assist (and cause their respective affiliates to
assist) the other parties in preparing any Tax Returns which such other
parties are responsible for preparing and filing in accordance with
paragraph (b) of this Section 7.2;
(iii) cooperate fully in preparing for any audits of, or
disputes with taxing authorities regarding, any Tax Returns of Walter
and its Subsidiaries;
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(iv) make available to the other parties and to any taxing
authority as reasonably requested all information, records, and
documents relating to Taxes of Walter and its Subsidiaries;
(v) provide timely notice to the other parties in writing
of any pending or threatened Tax audits or assessments of Walter and
its Subsidiaries for taxable periods for which the other may have a
liability under this Section 7.2; and
(vi) furnish the other with copies of all correspondence
received from any taxing authority in connection with any Tax audit or
information request with respect to any such taxable period.
(f) Adjustment to Purchase Price. Any payment by the
Stockholders under this Section 7.2 shall be considered an adjustment to the
consideration paid in connection with the Merger.
(g) Survival of Obligations. Notwithstanding Article X,
the obligations of the Stockholders and the Tax Indemnitees set forth in this
Section 7.2 shall be unconditional and absolute and shall remain in effect
without limitation as to time and the Stockholders' obligations under this
Section 7.2 shall not be limited as set forth in Section 10.1.
(h) No Duplication of Indemnities. To the extent that the
provisions of this Section 7.2 conflict with the provisions of Article X, the
provisions of this Section 7.2 shall control and no double payment shall be
made with respect to any breach or alleged breach of any representation or
warranty contained in Section 3.8.
SECTION 7.3. REPAYMENT OF DEBT. The parties agree that the
Surviving Corporation shall repay in full the Walter Debt to be Discharged
immediately after the Effective Time as more fully itemized as to principal and
interest then due as set forth in Schedule 7.3.
SECTION 7.4. RESALE OF CMS COMMON SHARES. Each Shareholder
who is an affiliate of Walter within the meaning of Rule 145 under the
Securities Act agrees that any resale of CMS Common Shares to be received
hereunder shall be made in compliance with Rule 145(d) under the Securities
Act.
SECTION 7.5. CLAIMS OF PREFERRED STOCKHOLDERS. Effective as
of the Effective Time, each of the Preferred Stockholders hereby waives any
claim it may have against Walter or the Surviving Corporation relating to
non-payment or arrearage in the payment of dividends on the Walter Preferred
Stock and
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waives any other claim it may have against Walter or the Surviving Corporation
other than pursuant to this Agreement.
SECTION 7.6. CLAIMS OF WALTER AND THE STOCKHOLDERS. Effective
as of the Effective Time, each of Walter and the Stockholders hereby waives any
claim it may have against the Preferred Stockholders relating to the Walter
Preferred Stock and waives any other claim it may have against the Preferred
Stockholders other than pursuant to this Agreement.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF CMS ENERGY AND SUB
The obligations of CMS Energy and Sub under this Agreement to
cause the Merger to be consummated shall, at the option of CMS Energy, be
subject to the satisfaction, on or prior to the Effective Date, of the
following conditions:
SECTION 8.1. NO MISREPRESENTATION OR BREACH OF COVENANTS AND
WARRANTIES. There shall have been no material breach by Walter, any
Stockholder, any Preferred Stockholder or any Warrantholder in the performance
of their respective covenants and agreements herein to be performed at or prior
to the Effective Time; subject to Section 10.7, none of the representations and
warranties of Walter, any Stockholder, any Preferred Stockholder or any
Warrantholder that is qualified as to materiality shall be untrue or incorrect
in any respect and on the Effective Date such representations and warranties
shall be true and correct as though made on the Effective Date except for
changes therein specifically permitted by this Agreement or resulting from any
transaction expressly consented to in writing by CMS Energy, permitted by
Section 6.6 or entered into in connection with the consummation of the Merger
and the other transactions contemplated hereby; subject to Section 10.7, none
of the representations or warranties that is not so qualified shall be untrue
or incorrect in any material respect and on the Effective Date such
representations and warranties shall be true and correct in all material
respects as though made on the Effective Date except for changes therein
specifically permitted by this Agreement or resulting from any transaction
expressly consented to in writing by CMS Energy, permitted by Section 6.6 or
entered into in connection with the consummation of the Merger and the other
transactions contemplated hereby; and there shall have been delivered to CMS
Energy and Sub a certificate or certificates to the foregoing effect, dated the
Effective Date, signed on behalf of Walter by its President and its Chief
Financial Officer and signed by each of the Stockholders, the Preferred
Stockholders and the Warrantholders (limited in the case of Cain, the Cain
Trust, Oehmig, the Preferred Stockholders and the Warrantholders to the
respective covenants and
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agreements, and representation and warranties, of such persons contained
herein).
SECTION 8.2. NO MATERIAL ADVERSE EFFECT. Between the date
hereof and the Effective Date, there shall have been no Material Adverse Effect
on Walter and its Subsidiaries, taken as a whole; and there shall have been
delivered to CMS Energy and Sub a certificate or certificates to such effect,
dated the Effective Date, signed on behalf of Walter and its Subsidiaries by
its President and its Chief Financial Officer and signed by each of the
Stockholders.
SECTION 8.3. OPINIONS OF COUNSEL FOR WALTER, THE STOCKHOLDERS
AND THE PREFERRED STOCKHOLDERS. CMS Energy and Sub shall have received (i)
from Vinson & Elkins L.L.P., counsel for Walter and the Stockholders, an
opinion, dated the Effective Date, in form and substance reasonably
satisfactory to CMS Energy, substantially to the effect set forth in Exhibit D
and (ii) from Jones, Walker, Waechter, Poitevant, Carrere & Denegre L.L.P.,
counsel for the Preferred Stockholders, an opinion, dated the Effective Date,
in form and substance reasonably satisfactory to CMS Energy, substantially to
the effect set forth in Exhibit E.
SECTION 8.4. NO INJUNCTIONS OR RESTRAINTS. No temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect; provided,
however, that each of the parties shall have used its reasonable best efforts
to prevent the entry of any such injunction or other order and to appeal as
promptly as possible any injunction or other order that may be entered.
SECTION 8.5. NECESSARY GOVERNMENTAL APPROVALS. The parties
shall have received all governmental and regulatory approvals and actions
reasonably necessary to consummate the transactions contemplated hereby, which
are either required to be obtained prior to the Effective Date by applicable
law or regulation (including, without limitation, the expiration or early
termination of the applicable waiting period under the HSR Act, if any required
governmental approvals or actions under foreign laws or regulations) or are
necessary to prevent a Material Adverse Effect on Walter and its Subsidiaries
taken as a whole.
SECTION 8.6. NECESSARY CONSENTS. Walter shall have received
consents, in form and substance reasonably satisfactory to CMS Energy, to the
transactions contemplated hereby from the other parties to all material
contracts, leases, agreements and permits to which Walter or any of its
Subsidiaries is a party or by which they are affected and which require such
consent prior to the Merger and are necessary to prevent a Material Adverse
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Effect with respect to Walter and its Subsidiaries taken as a whole.
SECTION 8.7. EFFECTIVENESS OF REGISTRATION STATEMENT. The
Registration Statement, including the Prospectus, shall be effective under the
Securities Act, no stop order suspending the effectiveness of the Registration
Statement shall have been entered by the SEC and no material or fundamental
change shall have occurred which requires disclosure thereof to be included in
an amendment to the Registration Statement or a supplement to the Prospectus
included in the Registration Statement, or to be incorporated by reference
therein from a filing under the Exchange Act, prior to any further use of such
Registration Statement and Prospectus under the Securities Act and the rules
and regulations thereunder; and further, a sufficient time period shall have
lapsed following the delivery of the Prospectus to the Stockholders as is
necessary to comply with the requirements of Form S-4.
SECTION 8.8. LISTING OF CMS COMMON SHARES. The CMS Common
Shares to be issued hereunder shall have been approved for listing upon notice
of issuance by the NYSE.
SECTION 8.9. STOCKHOLDER ACTION. This Agreement shall have
been unanimously adopted by all holders of Walter Common Stock and Walter
Preferred Stock.
SECTION 8.10. DISSENTING STOCKHOLDERS. No stockholder of
Walter shall have delivered a written demand for appraisal of its Walter Common
Stock or Walter Preferred Stock pursuant to Sections 5.11 and 5.12 of the TBCA;
and there shall have been delivered to CMS Energy and Sub a certificate or
certificates to such effect, dated the Effective Date, signed on behalf of
Walter by its President and its Chief Financial Officer.
SECTION 8.11. INTER-PURCHASER AGREEMENT. Each of Walter,
Nuevo, Walter Congo Holdings, Inc., Walter Congo, The Congo Holding Company and
Nuevo Congo shall have each entered into the Inter-Purchaser Agreement
substantially in the form of Exhibit F.
SECTION 8.12. CLOSING OF THE AMOCO STOCK PURCHASE AGREEMENT.
The transactions contemplated by the Stock Purchase Agreement dated as of June
30, 1994 (the "Amoco Stock Purchase Agreement") among Amoco Production Company
("Amoco"), Walter, Walter International Congo, Inc. ("Walter Congo"), Nuevo and
The Nuevo Congo Company ("Nuevo Congo") shall have been consummated on the
terms set forth in the Amoco Stock Purchase Agreement, all of the conditions to
the consummation of such transactions by each of the parties to such Agreement
shall have been satisfied in connection with such consummation, and none of the
representations and warranties contained in Section 3.18 shall be untrue or
incorrect in any respect and on the Effective Date such
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representations and warranties shall be true and correct as though made on the
Effective Date.
SECTION 8.13. RESIGNATIONS OF CERTAIN EMPLOYEES. Each of
Joseph C. Walter, Jr., F. Fox Benton, Jr., F. Fox Benton III and R.D. Jolly
shall have resigned, effective as of the Effective Time, his employment with
Walter and any of its Subsidiaries or affiliates.
SECTION 8.14. WARRANTS TO ACQUIRE WALTER COMMON STOCK. All
outstanding Warrants or options to acquire Walter Common Stock shall have been
exercised or cancelled or shall have expired, including, without limitation,
the cancellation of Warrants to acquire an aggregate of 9,000 shares of Walter
Common Stock currently held by holders of Walter Preferred Stock and the
exercise (or cancellation) of Warrants to acquire an aggregate of 2,300 shares
of Walter Common Stock currently held by Benton III, Chapman, Frank, Jolly and
Smalley, in accordance with their terms.
SECTION 8.15. RESIGNATIONS OF WALTER DIRECTORS AND OFFICERS.
CMS Energy shall have received the resignation of each of the directors and
officers of Walter and each of its Subsidiaries, effective as of the Effective
Time.
SECTION 8.16. AMOCO CONSENT. Amoco shall have (i) consented
to the Merger as provided in the Tax Agreement which is Schedule D to the Amoco
Stock Purchase Agreement on terms and conditions satisfactory to CMS Energy,
(including that no consideration shall be required of CMS Energy or its
affiliates to obtain such consent) and (ii) agreed, upon terms and conditions
satisfactory to CMS Energy, that upon the Surviving Corporation paying in full
to Amoco one-half (Walter's proportionate share) of the principal and accrued
interest due under the Amoco Note, the Surviving Corporation shall be released
from any further obligations under the Amoco Note, including without limitation
from any and all liability of Nuevo or Nuevo Congo under or relating to such
Note.
SECTION 8.17. OPIC CONSENT. The Overseas Private Investment
Corporation ("OPIC") shall have consented to the Merger on terms and conditions
satisfactory to CMS Energy with respect to both the OPIC Debt-Alba and the OPIC
Debt-Congo, or OPIC shall have acknowledged that its consent to the Merger is
not required.
SECTION 8.18. NOMECO LENDERS' CONSENT. The lenders to NOMECO
Oil & Gas Co., a Michigan corporation ("NOMECO") and a wholly-owned subsidiary
of CMS Enterprises Company, a Michigan corporation ("Enterprises") and a
wholly-owned subsidiary of CMS Energy, under the financing arrangements of
NOMECO, shall have consented to the Merger and the contribution to the capital
of NOMECO of the capital stock of the Surviving Corporation and
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shall have waived any breach under such arrangement as a result of the
indebtedness, guarantees or similar obligations of the Surviving Corporation,
in each case on terms and conditions satisfactory to CMS Energy or the
obligations or guarantees of NOMECO arising pursuant to the Inter-Purchaser
Agreement.
SECTION 8.19. WALTER DEBT TO BE DISCHARGED. Each of the
lenders under the Walter Debt to be Discharged shall have agreed to accept
repayment of such Debt immediately after the Effective Time and that, upon
repayment of such Debt in accordance with Schedule 7.3, the Surviving
Corporation shall be released from such Debt and all other obligations relating
thereto and all security therefor returned (including, without limitation, the
stock of Walter International Equatorial Guinea, Inc., which is pledged to
secure the TCW Debt).
SECTION 8.20. WARRANTHOLDER NOTES. Walter shall have received
cash or the Warrantholder Notes executed by the respective Warrantholders as
contemplated by Section 6.13.
SECTION 8.21. WALTER CONGO NOTE. The Congo Holding Company
shall have demanded and received payment of the Walter Congo Note (as defined
in the Inter-Purchaser Agreement) by delivery of the Latent Working Interest
and the Latent ORRI (each as defined in the Inter- Purchaser Agreement).
SECTION 8.22. ORR PLAN. The Walter International, Inc.
Exploration Participation Plan dated January 1, 1988 (the "ORR Plan") shall
have been terminated.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS
OF WALTER AND THE STOCKHOLDERS
The obligations of Walter, the Stockholders and the Preferred
Stockholders under this Agreement to cause the Merger to be consummated shall,
at the option of Walter, the Stockholders and the Preferred Stockholders, be
subject to the satisfaction, on or prior to the Effective Date, of the
following conditions:
SECTION 9.1. NO MISREPRESENTATION OR BREACH OF COVENANTS AND
WARRANTIES. There shall have been no material breach by CMS Energy or Sub in
the performance of any of their respective covenants and agreements herein to
be performed at or prior to the Effective Time; none of the representations and
warranties of CMS Energy or Sub that is qualified as to materiality shall be
untrue or incorrect in any respect and on the Effective Date such
representations and warranties shall be true and correct as though made on the
Effective Date except for changes therein specifically permitted by this
Agreement or
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resulting from any transactions expressly consented to in writing by Walter,
permitted by Section 6.6 or entered into in connection with the consummation of
the Merger and the other transactions contemplated hereby; none of the
representations or warranties that are not so qualified shall be untrue or
incorrect in any material respect and on the Effective Date such
representations and warranties shall be true and correct in all material
respects as though made on the Effective Date except for changes therein
specifically permitted by this Agreement or resulting from any transactions
expressly consented to in writing by Walter, permitted by Sections 6.6 or
entered into in connection with the consummation of the Merger and the other
transactions contemplated hereby; and there shall have been delivered to Walter
and the Stockholders a certificate or certificates to the foregoing effect,
dated the Effective Date, signed on behalf of CMS Energy and Sub by their
respective Presidents or Vice Presidents.
SECTION 9.2. NO MATERIAL ADVERSE EFFECT. Between the date
hereof and the Effective Date, there shall have been no Material Adverse Effect
on CMS Energy and its Subsidiaries taken as a whole; and there shall have been
delivered to Walter and the Stockholders a certificate or certificates to such
effect, dated the Effective Date, signed on behalf of CMS Energy by its
President or a Vice President.
SECTION 9.3. NO INJUNCTIONS OR RESTRAINTS. No temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect; provided,
however, that each of the parties shall have used its reasonable best efforts
to prevent the entry of any such injunction or other order and to appeal as
promptly as possible any injunction or other order that may be entered.
SECTION 9.4. OPINIONS OF COUNSEL FOR CMS ENERGY AND SUB.
Walter, the Stockholders and the Preferred Stockholders shall have received
from Denise Sturdy, Esq., counsel for CMS Energy and Sub, an opinion, dated the
Effective Date, in form and substance satisfactory to Walter, the Stockholders
and the Preferred Stockholders, substantially to the effect set forth in
Exhibit G.
SECTION 9.5. NECESSARY GOVERNMENTAL APPROVALS. The parties
shall have received all governmental and regulatory approvals and actions
reasonably necessary to consummate the transactions contemplated hereby, which
are either required to be obtained prior to the Effective Date by applicable
law or regulation (including, without limitation, the expiration or early
termination of the applicable waiting period under the HSR Act, if any) or are
necessary to prevent a Material Adverse Effect on CMS Energy and its
Subsidiaries taken as a whole.
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SECTION 9.6. EFFECTIVENESS OF REGISTRATION STATEMENT. The
Registration Statement, including the Prospectus, shall be effective under the
Securities Act, no stop order suspending the effectiveness of the Registration
Statement shall have been entered by the SEC and no material or fundamental
change shall have occurred which requires disclosure thereof to be included in
an amendment to such Registration Statement or a supplement to the Prospectus
included in such Registration Statement, or to be incorporated by reference
therein from a filing under the Exchange Act, prior to any further use of such
Registration Statement and Prospectus under the Securities Act and the rules
and regulations thereunder.
SECTION 9.7. LISTING OF CMS COMMON SHARES. The CMS Common
Shares to be issued hereunder shall have been approved for listing upon notice
of issuance by the NYSE.
SECTION 9.8. STOCKHOLDER ACTION. This Agreement shall have
been unanimously adopted by all holders of Walter Common Stock and Walter
Preferred Stock. By the execution hereof, all such holders agree to give their
timely consent and agree to execute such consents and other documents necessary
to evidence such approvals.
SECTION 9.9. NECESSARY CONSENTS. Walter shall have received
consents, in form and substance reasonably satisfactory to Walter, to the
transactions contemplated hereby from the other parties to all material
contracts, leases, agreements and permits to which Walter is a party or by
which it is affected and which require such consent prior to the Merger and are
necessary to prevent a Material Adverse Effect with respect to Walter and its
Subsidiaries taken as whole.
SECTION 9.10. OFFICE LEASE GUARANTOR. CMS Energy shall have
caused NOMECO to become substituted in the place and stead of Walter on the
office lease between Walter and First City National Bank of Houston, as lessor,
so that Walter Oil & Gas Corporation may be released as guarantor thereunder
or, if a substitution and release are unable to be negotiated on terms
satisfactory to the parties, CMS Energy shall have caused NOMECO to indemnify
and hold harmless Walter Oil & Gas Corporation against any liabilities incurred
by Walter Oil & Gas Corporation with respect to such lease.
ARTICLE X
INDEMNIFICATION; SURVIVAL
SECTION 10.1. INDEMNIFICATION BY THE STOCKHOLDERS. From and
after the Effective Time, each of the Stockholders shall indemnify and hold
harmless CMS Energy, the Surviving Corporation and their subsidiaries,
affiliates and successors from and
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against any and all (a) liabilities, losses, costs or damages ("Loss") and (b)
reasonable attorneys', consultants' and accountants' fees and expenses, court
costs and all other reasonable out-of-pocket expenses ("Expense") incurred by
CMS Energy, the Surviving Corporation and their subsidiaries, affiliates and
successors in connection with or arising from (i) any breach or failure to
perform by any Stockholder of any of its respective agreements, covenants or
obligations in this Agreement or any agreement entered into in connection with
the transactions contemplated hereby, in each case to be performed or complied
with after the Effective Time, as the case may be, (ii) any breach of any
warranty or the inaccuracy of any representation of Walter or any Stockholder
contained in this Agreement, as updated in accordance with Section 10.7 hereof,
or in any certificate delivered by or on behalf of Walter or any Stockholder
pursuant hereto, (iii) any reduction in the Discounted Present Value (as
hereinafter defined) of all future net cashflows (including for periods after
one year after the Effective Date) to Walter's direct or indirect interest from
the Equatorial Guinea Production Sharing Contract ("PSC") arising solely from
any unilateral change made to the PSC by the Government of the Republic of
Equatorial Guinea or any agency or instrumentality thereof effected at any time
during the period beginning June 1, 1994 and ending one year after Effective
Date; and (iv) the litigation referred to in Schedule 3.17, including, but not
limited to the Waldroup and the Aker/Addax litigation; provided, however, that
the Stockholders shall be required to indemnify and hold harmless under this
Section 10.1 with respect to the breach or inaccuracy of any representations or
warranties only to the extent that the aggregate amount of Loss and Expense
referred to above in this Section 10.1 relating thereto exceeds U.S. $300,000,
except for any Loss or Expense incurred in connection with or arising from any
breach or inaccuracy of the representations and warranties contained in Section
3.3 and 3.4, as to which no such limitation shall apply; and provided further,
that each Stockholder's obligation to indemnify and hold harmless pursuant to
this Section 10.1 shall be limited to the payment by such Stockholder
(excluding any amounts reimbursed to such Stockholder) of cash in the aggregate
in an amount equal to the product obtained by multiplying the Average Price by
the number of such Stockholder's shares of Walter Common Stock immediately
prior to the Effective Time; and provided further, that no Stockholder shall
have any obligation to indemnify and hold harmless any indemnified party with
respect to any Loss or Expense arising from any breach of a warranty, or
inaccuracy of a representation, of any other Stockholder contained in Section
3.3(b) or 3.4(b) or 3.34 or of any Preferred Stockholder contained in Section
3.3(b) or 3.4(b) or of any Warrantholder contained in Section 3.3(b) or 3.4(b).
Discounted Present Value of future net cashflows shall mean the future revenues
from sales of condensate production under the PSC attributable to the interest
of Walter and its Subsidiaries therein after deducting all associated operating
costs, royalties, other burdens on production, capital expenditures,
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other applicable costs and all foreign and U.S. taxes, discounted at a 25%
annual rate. Change in Discounted Present Value shall be calculated by
comparing the Discounted Present Value under the Modified Economic Model to the
Discounted Present Value under the Original Economic Model (as hereinafter
defined). Modified Economic Model shall mean the economic model of the PSC
used to compute discounted present value of the Alba field under the PSC as
made available to CMS Energy by Walter in connection with the negotiation of
the transactions contemplated by this Agreement, a copy of which is included in
Schedule 3.33(a) attached hereto ("Original Economic Model"), modified to
reflect any unilateral changes to the PSC made by the Republic of Equatorial
Guinea, all other factors remaining the same. Stockholders reserve the right
to assume, at their sole cost and expense, the defense against any attempted
unilateral change to the PSC that would give rise to an indemnity right
hereunder; provided, however, that any such defense shall be conducted in
accordance with all applicable laws and agreements; and provided, further, that
counsel for the Stockholders, who shall conduct the defense of such matter,
shall be reasonably satisfactory to CMS Energy; and provided, further, that CMS
Energy shall have the right to have separate counsel reasonably acceptable to
the Stockholders act on behalf of CMS Energy, at its expense. If the
Stockholders assume the defense of any such matter, the Stockholders shall not
consent to entry of any judgment, or enter into any settlement, without the
written consent of CMS Energy. If the Stockholders do not assume the defense
of any such matter, in accordance with the terms hereof, CMS Energy may defend
against such claim or litigation in such manner as it may deem appropriate,
including, without limitation, settling such matter, on such terms as CMS
Energy may deem appropriate, and the Stockholders will promptly indemnify CMS
Energy, if required, in accordance with the provisions of this Section 10.1.
Any change to the PSC as a result of bilateral negotiations or any act or
omission of the Surviving Corporation in violation of the PSC or applicable
law, rule or order of general applicability after the Effective Time is
specifically excluded from the indemnity contained in clause (iii) above.
SECTION 10.2. INDEMNIFICATION BY CMS ENERGY AND THE SURVIVING
CORPORATION. From and after the Effective Time, CMS Energy and the Surviving
Corporation shall jointly and severally indemnify and hold harmless the
Stockholders and their subsidiaries, affiliates and successors from and against
any and all Loss and Expense incurred by the Stockholders and their
subsidiaries, affiliates and successors in connection with or arising from (a)
any breach or failure to perform by CMS Energy or the Surviving Corporation of
any of their respective agreements, covenants or obligations in this Agreement
or any agreement entered into in connection with the transactions contemplated
hereby or thereby, in each case to be performed or complied with after the
Effective Time, and (b) any breach of any warranty or the inaccuracy of any
representation of CMS Energy or
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Sub contained in this Agreement or in any certificate delivered by or on behalf
of CMS Energy or Sub pursuant hereto or thereto; provided, however, that CMS
Energy and the Surviving Corporation shall be required to indemnify and hold
harmless under this Section 10.2 with respect to the breach or inaccuracy of
any representations or warranties only to the extent that the aggregate amount
of Loss and Expense referred to above in this Section 10.2 relating thereto
exceeds U.S. $300,000; and provided, further, that the obligation of CMS Energy
and the Surviving Corporation to indemnify and hold harmless pursuant to this
Section 10.2 shall be limited to the aggregate payment by CMS Energy and/or the
Surviving Corporation of an amount equal to U.S. $10,000,000. In addition,
from and after the Effective Time, if any Stockholder is named as a defendant
in any lawsuit by a third party for a claim against the Surviving Corporation
or any affiliate thereof, for which neither Walter nor any Stockholder has any
liability, CMS Energy and the Surviving Corporation shall indemnify and hold
harmless each such named Stockholder, to the extent permitted by applicable
law, from all Loss and Expense relating to such matter without regard to the
$300,000 required minimum amount set forth in the preceding sentence.
SECTION 10.3. NOTICE OF CLAIMS. If CMS Energy (with respect
to Section 10.1) or the Stockholders (with respect to Section 10.2) believe
that any of the persons entitled to indemnification under this Article X has
suffered or incurred any Loss or incurred any Expense, whether or not the
applicable dollar limitation specified by Section 10.1 or 10.2 has been
exceeded, CMS Energy or such Stockholders, as the case may be, shall so notify
the other promptly in writing describing such Loss or Expense, the amount
thereof, if known, and the method of computation of such Loss or Expense, all
with reasonable particularity and containing a reference to the provisions of
this Agreement or any certificate delivered pursuant hereto in respect of which
such Loss or Expense shall have occurred; provided, however, that the omission
by such indemnified party to give notice as provided herein shall not relieve
the indemnifying party of its indemnification obligation under this Article X
except to the extent that such omission results in a failure of actual notice
to the indemnifying party and such indemnifying party is materially damaged as
a result of such failure to give notice. If any action at law or suit in
equity is instituted by or against a third party with respect to which any of
the persons entitled to indemnification under this Article X intends to claim
any liability or expense as Loss or Expense under this Article X, any such
person shall promptly notify the indemnifying party of such action or suit as
specified in this Section 10.3 and Section 10.4. Any party entitled to
indemnification hereunder shall use reasonable efforts to minimize any Loss or
Expense for which indemnification is sought hereunder.
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SECTION 10.4. THIRD PARTY CLAIMS. In the event of any claim
for indemnification hereunder resulting from or in connection with any claim or
legal proceeding by a third party, the indemnified persons shall give such
notice thereof to the indemnifying party not later than twenty (20) days prior
to the time any response to the asserted claim is required, if possible, and in
any event within fifteen (15) days following the date such indemnified person
has actual knowledge thereof; provided, however, that the omission by such
indemnified party to give notice as provided herein shall not relieve the
indemnifying party of its indemnification obligation under this Article X
except to the extent that such omission results in a failure of actual notice
to the indemnifying party and such indemnifying party is materially damaged as
a result of such failure to give notice. In the event of any such claim for
indemnification resulting from or in connection with a claim or legal
proceeding by a third party, the indemnifying party may, at its sole cost and
expense, assume the defense thereof; provided, however, that counsel for the
indemnifying party, who shall conduct the defense of such claim or legal
proceeding, shall be reasonably satisfactory to the indemnified party; and
provided, further, that if the defendants in any such actions include both the
indemnified persons and the indemnifying party and the indemnified persons
shall have reasonably concluded that there may be legal defenses or rights
available to them which have not been waived and are in actual or potential
conflict with those available to the indemnifying party, the indemnified
persons shall have the right to select one law firm reasonably acceptable to
the indemnifying party to act as separate counsel, on behalf of such
indemnified persons, at the expense of the indemnifying party. Subject to the
second proviso of the immediately preceding sentence, if an indemnifying party
assumes the defense of any such claim or legal proceeding, such indemnifying
party shall not consent to entry of any judgment, or enter into any settlement,
that (a) is not subject to full indemnification hereunder (except for the
deductible referred to in the first proviso to the first sentence of each of
Section 10.1 and Section 10.2), (b) provides for injunctive or other
non-monetary relief affecting the indemnified persons or (c) does not include
as an unconditional term thereof the giving by each claimant or plaintiff to
such indemnified persons of a release from all liability with respect to such
claim or legal proceeding, without the prior written consent of the indemnified
persons (which consent, in the case of clauses (b) and (c), shall not be
unreasonably withheld); provided, however, that subject to the second proviso
of the immediately preceding sentence, the indemnified persons may, at their
own expense, participate in any such proceeding with the counsel of their
choice without any right of control thereof. So long as the indemnifying party
is in good faith defending such claim or proceeding, the indemnified persons
shall not compromise or settle such claim or proceeding without the prior
written consent of the indemnifying party, which consent shall not be
unreasonably withheld. If the indemnifying
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party does not assume the defense of any such claim or litigation in accordance
with the terms hereof, the indemnified persons may defend against such claim or
litigation in such manner as they may deem appropriate, including, without
limitation, settling such claim or litigation (after giving prior written
notice of the same to the indemnifying party and obtaining the prior written
consent of the indemnifying party, which consent shall not be unreasonably
withheld) on such terms as the indemnified persons may deem appropriate, and
the indemnifying party will promptly indemnify the indemnified persons in
accordance with the provisions of this Section 10.4.
SECTION 10.5. EXCLUSIVE REMEDY. In the event the Merger is
consummated, any claim against either the Stockholders or CMS Energy or the
Surviving Corporation for any breach of this Agreement or in connection with
any of the transactions contemplated hereby (other than a claim for breach of
Section 7.2 and other than claims by or against the Preferred Stockholders)
shall, to the extent permitted by law, be made solely pursuant to this Article
X.
SECTION 10.6. SURVIVAL OF OBLIGATIONS. All representations,
warranties, covenants and obligations contained in this Agreement shall survive
the consummation of the transactions contemplated by this Agreement; provided,
however, that the representations and warranties in Articles III and IV shall
terminate on the third anniversary of the Effective Date except for the
representations and warranties contained in Sections 3.3 and 3.4, which shall
survive without termination, the representations and warranties contained in
Section 3.9, which shall terminate on the first anniversary of the Effective
Date, the representations contained in Sections 3.8, 3.22 and 7.1(c), which
shall survive until expiration of the applicable statute of limitations, and
any representations relating to ACEC, which shall terminate on the second
anniversary of the Effective Date; and provided, further, that if any claim
under this Article X for Loss or Expense in respect of any representations and
warranties is asserted in writing prior to the expiration of the applicable
period set forth above, the obligations of the indemnifying party with respect
to such claim shall not be affected by the expiration of such period.
SECTION 10.7. UPDATE OF THE REPRESENTATIONS AND WARRANTIES.
(a) Not later than ten days prior to the Effective Date, Walter, any
Stockholder, any Preferred Stockholder and any Warrantholder may deliver a
written notice to CMS Energy setting forth any and all facts, conditions,
occurrences, changes and other matters, in each case, occurring after the date
hereof, that has caused or may cause the representations and warranties of the
Stockholders, the Preferred Stockholders and/or the Warrantholders contained
herein (including the Schedules hereto) not to be true and correct in all
respects (in the case of any representation or warranty containing any
materiality
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qualification) or in all material respects (in the case of any representation
and warranty without any materiality qualification). In the event that any of
such facts, conditions, occurrences, changes and other matters shall have
caused or will cause, on or prior to the Effective Date, any such
representation or warranty not to be true and correct in all respects (in the
case of any representation or warranty containing any materiality
qualification) or in all material respects (in the case of any representation
and warranty without any materiality qualification) on the Effective Date with
the same effect as though made on the Effective Date, CMS Energy may elect to
terminate this Agreement pursuant to Section 11.1(d) based on such facts,
conditions, occurrences, changes or other matters. If CMS Energy shall
nevertheless proceed to consummate the Merger, such facts, conditions,
occurrences, changes and other matters so disclosed as to each such
representation or warranty of the Stockholders, the Preferred Stockholders
and/or the Warrantholders contained herein (including the Schedules) shall be
deemed to constitute an exception to such representation or warranty reflecting
the facts, conditions, occurrences, changes and other matters so disclosed with
the same effect as if such exception had been made in such representation or
warranty as of the date hereof in this Agreement to the extent, but only to the
extent, of such disclosure.
(b) Not later than ten days prior to the Effective Date, CMS
Energy may deliver a written notice to Walter, the Stockholders, the Preferred
Stockholders and the Warrantholders setting forth any and all facts,
conditions, occurrences, changes and other matters, in each case, occurring
after the date hereof, that has caused or may cause the representations and
warranties of CMS Energy contained herein (including the Schedules hereto) not
to be true and correct in all respects (in the case of any representation or
warranty containing any materiality qualification) or in all material respects
(in the case of any representation and warranty without any materiality
qualification). In the event that any of such facts, conditions, occurrences,
changes and other matters shall have caused or will cause, on or prior to the
Effective Date, any such representation or warranty not to be true and correct
in all respects (in the case of any representation or warranty containing any
materiality qualification) or in all material respects (in the case of any
representation and warranty without any materiality qualification) on the
Effective Date with the same effect as though made on the Effective Date,
Walter may elect to terminate this Agreement pursuant to Section 11.1(e) based
on such facts, conditions, occurrences, changes or other matters. If Walter
shall nevertheless proceed to consummate the Merger, such facts, conditions,
occurrences, changes or other matters so disclosed as to each such
representation or warranty of CMS Energy contained herein (including the
Schedules) shall be deemed to constitute an exception to such representation or
warranty reflecting the facts, conditions, occurrences, changes and other
matters so
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disclosed with the same effect as if such exception had been made in such
representation or warranty as of the date hereof in this Agreement to the
extent, but only to the extent, of such disclosure.
SECTION 10.8. ADJUSTMENT TO CONSIDERATION. All indemnity
payments made pursuant to this Article X (other than by or to the Preferred
Stockholders) shall be considered as adjustments to the consideration paid in
connection with the Merger.
ARTICLE XI
TERMINATION
SECTION 11.1. TERMINATION. Anything contained in this
Agreement to the contrary notwithstanding, this Agreement may be terminated at
any time prior to the Effective Date:
(a) by the mutual consent of CMS Energy and Walter;
(b) by CMS Energy upon any material breach by Walter or any
Stockholder or any Preferred Stockholder or any Warrantholder of any of
the covenants contained in Article VI or VII or Section 12.1;
(c) by Walter upon any material breach by CMS Energy or Sub of
any of the covenants contained in Article VI or VII or Section 12.1;
(d) by CMS Energy if any of the conditions specified in
Article VIII has not been met in all material respects or waived by CMS
Energy at such time as such condition can no longer be satisfied;
(e) by Walter if any of the conditions specified in Article IX
has not been met in all material respects or waived by Walter and the
Stockholders, as applicable, at such time as such condition can no
longer be satisfied; or
(f) by CMS Energy or Walter if the Merger shall not have been
consummated on or before February 28, 1995.
In the event that this Agreement shall be terminated pursuant to this Section
11.1, all further obligations of the parties under this Agreement (other than
Sections 12.1, 12.2 and 12.10) shall terminate without further liability of any
party to the others; provided, however, that nothing herein shall relieve any
party from liability for its willful breach of this Agreement.
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ARTICLE XII
OTHER PROVISIONS
SECTION 12.1. CONFIDENTIAL NATURE OF INFORMATION. Each party
agrees that it will treat in strict confidence all documents, materials and
other information which it obtains regarding the other parties during the
course of the negotiations leading to the consummation of the transactions
provided for herein and the preparation of this Agreement; and if for any
reason whatsoever the transactions contemplated by this Agreement shall not be
consummated, each party shall return to the other party all copies of
non-public documents and materials which have been furnished or acquired in
connection therewith and shall not use or disseminate such documents, materials
or other information for any purpose whatsoever.
SECTION 12.2. FEES AND EXPENSES. Except as otherwise provided
in this Section 12.2, each of the parties hereto shall bear its own costs and
expenses (including, without limitation, fees and disbursements of its counsel,
accountants and other financial, legal, accounting or other advisors), incurred
by it or its affiliates in connection with the preparation, negotiation,
execution, delivery and performance of this Agreement and each of the other
documents and instruments executed in connection with or contemplated by this
Agreement, and the consummation of the transactions contemplated hereby and
thereby (collectively "Acquisition Expenses"); provided, however, that, except
for the Acquisition Expenses of the Stockholders and Walter relating to the
transactions contemplated by this Agreement incurred on or prior to June 30,
1994 and Acquisition Expenses included in Section 2.1(c)(B)(VI), which may be
borne by Walter, the Acquisition Expenses of the Stockholders and Walter shall
be borne entirely by the Stockholders, and the Stockholders shall reimburse
Walter for any such Acquisition Expenses paid by Walter in connection with the
foregoing.
SECTION 12.3. NOTICES. All notices and other communications
under this Agreement shall be in writing and shall be deemed given when
delivered personally or by overnight mail, or four days after being mailed (by
registered mail, return receipt requested) to a party at the following address
(or to such other address as such party may have specified by notice given to
the other parties pursuant to this provision):
If to CMS Energy to:
CMS Energy Corporation
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
Attention: Corporate Secretary
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with a copy to:
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
Attention: Andrew H. Shaw, Esq.
and
NOMECO Oil & Gas Co.
One Jackson Square
P.O. Box 1150
Jackson, Michigan 49201
Attention: William H. Stephens III
If to Sub to:
CMS Merging Corporation
c/o CMS Energy Corporation
Fairlane Plaza South, Suite 1100
330 Town Center Drive
Dearborn, Michigan 48126
Attention: Corporate Secretary
with a copy to:
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
Attention: Andrew H. Shaw, Esq.
If to Walter to:
Walter International, Inc.
1021 Main Street, Suite 2110
Houston, Texas 77082
Attention: F. Fox Benton, Jr.
with a copy to:
Vinson & Elkins L.L.P.
2500 First City Tower
1001 Fannin
Houston, Texas 77002
Attention: Douglas Glass, Esq.
If to the Stockholders to:
F. Fox Benton, Jr.
c/o Walter International, Inc.
1021 Main Street, Suite 2110
Houston, Texas 77082
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If to the Preferred Stockholders to:
BraeLoch Holdings Inc.
P.O. Box 3134
114 Northpark Blvd., Suite 9
Covington, Louisiana 70434-3134
Attention: Mr. Russell Allen
President
with a copy to:
Mr. William Hardie
Jones, Walker, Waechter, Poitevant,
Carrere & Denegre L.L.P.
Place St. Charles
201 St. Charles Ave.
New Orleans, Louisiana 70170-5100
If to the Warrantholders to:
F. Fox Benton III
c/o Walter International, Inc.
1021 Main Street, Suite 2110
Houston, Texas 77002
SECTION 12.4. DEFINITIONS. For purposes of this Agreement:
(a) an "affiliate" of any person means another person that
directly or indirectly, through one or more intermediaries, controls,
is controlled by, or is under common control with, such first person;
provided that in the case of Walter and its Subsidiaries, Walter Oil &
Gas Corporation shall not be considered an affiliate thereof;
(b) an "associate" of any person means (i) a corporation or
organization of which such person is an officer or partner or is,
directly or indirectly, the beneficial owner of 10 percent or more of a
class of equity securities, (ii) any trust or other estate in which
such person has substantial beneficial interest or as to which such
person serves as trustee or in a similar capacity and (iii) any
relative or spouse of such person, or any relative of such spouse, who
has the same home as such person or who is a director or officer of the
person or any of its parents or Subsidiaries.
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(c) the "knowledge of Walter" means the knowledge of the
persons listed in Schedule 12.4, which Schedule includes all directors
of Walter, the chief executive officers of Walter and each of its
Subsidiaries and all officers of Walter.
(d) "Material Adverse Effect" means any change or effect
(or any development that, insofar as can reasonably be foreseen, would
result in any change or effect) that is materially adverse to the
business, properties, assets, condition (financial or otherwise) or
results of operations of the applicable person or persons; and
(e) "person" means an individual, corporation, partnership,
association, trust, unincorporated organization or other entity.
SECTION 12.5. PARTIAL INVALIDITY. In case any one or more of
the provisions contained herein shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Agreement, but
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision or provisions had never been contained herein unless the deletion of
such provision or provisions would result in such a material change as to cause
completion of the transactions contemplated hereby to be unreasonable.
SECTION 12.6. SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective permitted successors or assigns.
SECTION 12.7. EXECUTION IN COUNTERPARTS. This Agreement may
be executed in one or more counterparts, each of which shall be considered an
original counterpart, and shall become a binding agreement when CMS Energy,
Sub, Walter, the Stockholders, the Preferred Stockholders and the
Warrantholders shall have each executed one counterpart.
SECTION 12.8. TITLES AND HEADINGS. Titles and headings to
Articles and Sections herein are inserted for convenience of reference only and
are not intended to be a part of or to affect the meaning or interpretation of
this Agreement.
SECTION 12.9. SCHEDULES AND EXHIBITS. The Schedules and
Exhibits referred to in this Agreement shall be construed with and as an
integral part of this Agreement to the same extent as if the same had been set
forth verbatim herein.
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SECTION 12.10. ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS;
ASSIGNMENT. This Agreement, including the Schedules and Exhibits, contains the
entire understanding of the parties hereto with regard to the subject matter
contained herein except that the confidentiality letter agreement, dated May
18, 1994 (the "Confidentiality Agreement"), between Walter and NOMECO shall
remain in full force in effect pursuant to the terms thereto after the
execution of this Agreement; provided, however, that the Confidentiality
Agreement shall terminate as of the Effective Time. The parties hereto, by
mutual agreement in writing, may amend, modify and supplement this Agreement.
The failure of any party hereto to enforce at any time any provision of this
Agreement shall not be construed to be a waiver of such provision, nor in any
way to affect the validity of this Agreement or any part hereof or the right of
such party thereafter to enforce each and every such provision. No waiver of
any breach of this Agreement shall be held to constitute a waiver of any other
or subsequent breach. Except as expressly provided herein, the rights and
obligations of the parties under this Agreement may not be assigned or
transferred by any party hereto without the prior written consent of the other
parties hereto.
SECTION 12.11. INDEPENDENT INVESTIGATION AND SCOPE OF
REPRESENTATIONS. CMS Energy acknowledges and confirms that (i) in making the
decision to enter into this Agreement and to consummate the transactions
contemplated hereby, it has relied on the representations, warranties,
covenants and agreements of Walter, the Stockholders, the Preferred
Stockholders and the Warrantholders set forth in the Agreement (including the
exhibits and schedules) and on no other representations, warranties, covenants
and agreements, and (ii) it has made its own independent investigation,
analysis and evaluation of Walter's properties (including CMS Energy's own
estimate and appraisal of the extent and value of Walter's hydrocarbon
reserves, pipelines and contracts), business, financial condition, operations
and prospects. Except to the extent expressly set forth in this Agreement,
including Section 3.35, no party makes any representation or warranty
whatsoever. Without limiting the generality of the foregoing, except as set
forth in Article III, NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR
IMPLIED, ARE MADE WITH RESPECT TO THE MERCHANTABILITY, USEFULNESS OR
SUITABILITY FOR ANY PURPOSE OF ANY PERSONAL PROPERTY OF WALTER OR ITS
SUBSIDIARIES, INCLUDING, WITHOUT LIMITATION (a) ANY IMPLIED OR EXPRESS WARRANTY
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, (b) ANY RIGHTS OF CMS
ENERGY UNDER APPROPRIATE STATUTES TO CLAIM DIMINUTION OF CONSIDERATION AND (c)
ANY CLAIM FOR DAMAGES BECAUSE OF DEFECTS, WHETHER KNOWN OR UNKNOWN, WITH
RESPECT TO SUCH PERSONAL PROPERTY, IT BEING UNDERSTOOD THAT, EXCEPT AS
AFORESAID, SUCH PERSONAL PROPERTY SHALL EXIST IN ITS PRESENT CONDITION AND
STATE OF REPAIR, "AS IS" AND "WHERE IS," WITH ALL FAULTS.
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SECTION 12.12. GOVERNING LAW; ARBITRATION. (a) Except to the
extent that Texas law is mandatorily applicable to the Merger and the rights
and obligations of the stockholders of Walter and Sub, this Agreement, and the
application or interpretation thereof, shall be governed by its terms and by
the internal laws of the State of Texas, without regard to principles of
conflicts of laws as applied in the State of Texas or any other jurisdiction
which, if applied, would result in the application of any laws other than the
internal laws of the State of Texas.
(b) Any action, dispute, claim or controversy arising under,
out of, in connection with, or relating to, this Agreement, or any amendment
hereof, or the breach hereof (a "Dispute"), shall be determined and settled by
binding arbitration in Houston, Texas, by a person or persons mutually agreed
upon, or in the event of a disagreement as to the selection of the arbitrator
or arbitrators, in accordance with the rules of the American Arbitration
Association ("AAA"). Any award rendered therein shall specify the findings of
fact of the arbitrator or arbitrators and the reasons for such award, with the
reference to and reliance on relevant law. Any such award shall be final and
binding on each and all of the parties thereto and their personal
representatives, and judgment may be entered thereon in any court having
jurisdiction thereof. Any party may, by summary proceedings, bring an action
in court to compel arbitration of any Dispute. Any arbitration hereunder shall
be administered by the AAA in accordance with the terms of this Section 12.11,
the Commercial Arbitration Rules of the AAA, and, to the maximum extent
applicable, the Federal Arbitration Act. To the maximum extent practicable, an
arbitration proceeding hereunder shall be concluded within 180 days of the
filing of the Dispute with the AAA. Each party agrees to keep all Disputes and
arbitration proceedings strictly confidential except for disclosure of
information required by applicable law.
SECTION 12.13. NO THIRD-PARTY BENEFICIARIES. Except for
Section 7.2 and Article X, nothing in this Agreement, expressed or implied, is
intended or shall be construed to confer upon any person other than the parties
hereto and successors and assigns permitted by Section 12.6 any right, remedy
or claim under or by reason of this Agreement.
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<PAGE> 84
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the parties hereto or by their duly authorized officers, all as of
the date first above written.
CMS ENERGY CORPORATION,
a Michigan corporation
By: /s/ Preston D. Hopper
Name: Preston D. Hopper
Title: Vice President
CMS MERGING CORPORATION,
a Texas corporation
By: /s/ William H. Stephens, III
Name: William H. Stephens, III
Title: General Counsel
WALTER INTERNATIONAL, INC.,
a Texas corporation
By: /s/ J. C. Walter, Jr.
Name: J. C. Walter, Jr.
Title: President
/s/ J.C. Walter, Jr.
J.C. WALTER, JR.
/s/ J.C. Walter, III
J.C. WALTER, III
/s/ Carole Walter Looke
CAROLE WALTER LOOKE
By: /s/ J. C. Walter, Jr.
Name: J. C. Walter, Jr.
As Agent and Attorney-in-Fact
/s/ F. Fox Benton, Jr.
F. FOX BENTON, JR.
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<PAGE> 85
/s/ Gordon A. Cain
GORDON A. CAIN
THE CAIN 1988 DESCENDANTS TRUST
By: /s/ James D. Weaver
Name: James D. Weaver
Title: Trustee
WILLIAM C. OEHMIG
By: /s/ Margaret W. Oehmig
Margaret W. Oehmig
Attorney-in-Fact
PRUDENTIAL-BACHE ENERGY
GROWTH FUND, L.P. G-2
By: GRAHAM ENERGY, LTD,
as liquidating agent
By: /s/ Russell L. Allen
Name: Russell L. Allen
Title: President
PRUDENTIAL-BACHE ENERGY
GROWTH FUND, L.P. G-3
By: GRAHAM ENERGY, LTD,
as liquidating agent
By: /s/ Russell L. Allen
Name: Russell L. Allen
Title: President
PRUDENTIAL-BACHE ENERGY
GROWTH FUND, L.P. G-4
By: GRAHAM ENERGY, LTD,
as liquidating agent
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<PAGE> 1
EXHIBIT 10.22
PROMISSORY NOTE
$6,500,000.00 July 17, 1995
CMS NOMECO Oil & Gas Co., formerly known as NOMECO Oil & Gas Co., a
corporation duly organized and existing in good standing under the laws of the
State of Michigan (the "Borrower"), for value received, hereby promises to pay
to the order of CMS Energy Corporation, a Michigan corporation (the "Lender"),
the principal sum of Six Million Five Hundred Thousand Dollars ($6,500,000.00)
or, if less, the aggregate unpaid principal amount of all loans made by the
Lender to the Borrower and endorsed by the Lender on Schedule A hereto (the
"Schedule") on November 1, 1999.
The Borrower promises to pay interest on the unpaid principal balance of
each loan hereunder from and including the date of such loan to the maturity
date of such loan (as shown on the Schedule) at a rate per annum equal to the
average cost of debt of CMS (on an unconsolidated basis) for the most recent
quarter (the "Borrowing Rate"), payable quarterly in arrears and on such
maturity date. Any principal not paid when due shall bear interest from
maturity until paid in full, payable upon demand, at a rate per annum equal to
120% of the Borrowing Rate. Interest shall be calculated on the basis of a
year of 360 days and actual days elapsed.
All payments hereunder shall be made in lawful money of the United States
and in immediately available funds. Any extension of time for the payment of
the principal of this note resulting from the due date falling on a Saturday,
Sunday or legal holiday shall be included in computation of interest.
If (i) any sum payable on any liability of the Borrower to the Lender
hereunder shall not be paid when due and such default shall continue for 30
consecutive days; or (ii) the Borrower shall default on any obligation for
repayment of borrowed money and the holder of such borrowed money shall
accelerate the due date thereof, the Lender may, at its option, declare the
principal and interest on this note immediately due and payable, without
protest, presentment, notice or demand, all of which the Borrower hereby
waives. Notwithstanding the above, the Lender may terminate the unused portion
of this facility in whole or in part by giving the Borrower thirty days advance
written notice thereof.
The Borrower agrees to pay on demand all expenses, including reasonable
attorneys' fees, the Lender may incur in connection with the enforcement of
this note.
The indebtedness evidenced by this note (including the obligations described
in the preceding paragraph) and any renewals or extension hereof, shall at all
times be wholly subordinate and junior in right of payment to any and all
present and future indebtedness, obligations and liabilities of the Borrower
pursuant to the Amended and Restated Credit
-1-
<PAGE> 2
Agreement dated as of November 1, 1993 among the Borrower, the banks now or
hereafter parties thereto and NBD Bank, N.A., as agent, and pursuant to the
Borrower's Senior Serial Notes in the aggregate principal amount of $50,000,000
issued pursuant to the Note Agreements dated as of March 1, 1990 of the
Borrower regarding the $25,000,000 9.30% Senior Serial Notes, Series A due
March 1, 1997 and the $25,000,000 9.45% Senior Serial Notes, Series B due March
1, 2000, as such Amended and Restated Credit Agreement, Note Agreements and
Senior Serial Notes are amended, modified, restated or refinanced from time to
time and all renewals or increases therein and further including without
limitation all reimbursement obligations pursuant to any letters of credit
issued pursuant thereto and all obligations pursuant to any promissory notes
issued pursuant thereto, all amounts accruing after the filing of any petition
in bankruptcy or similar loss, whether or not such amount is an allowable
claim, all guarantees, all guarantees for any of the foregoing and all rights
and remedies of the holders of any of the foregoing (herein called "Superior
Indebtedness"), in the manner and with the force and effect hereafter set
forth:
(1) In the event of any liquidation, dissolution, or winding up of the
Borrower, or of any execution receivership, insolvency, bankruptcy,
liquidation, reorganization or other similar proceeding relative to the
Borrower or its property, all Superior Indebtedness shall first be paid in
full in cash or cash equivalents before any payment is made upon the
indebtedness evidenced by this note; and in any such event any payment or
distribution of any kind or character, whether in cash, property or
securities (other than in securities, including equity securities, or other
evidences of indebtedness, the payment of which is subordinated to the
payment of all Superior Indebtedness which may at the time be outstanding in
the same manner as the subordinated notes are subordinated to the Superior
Indebtedness, but only to the extent that the court awarding or permitting
the distribution of such securities states that in doing so it is giving
effect to the subordination of this note to the Superior Indebtedness set
forth herein) which shall be made upon or in respect of this note shall be
paid over the holders of such Superior Indebtedness, pro rata, for
application in payment thereof unless and until such Superior Indebtedness
shall have been paid or satisfied in full;
(2) In the event that this note is declared or becomes due and payable
because of the occurrence of any event of default hereunder or otherwise
than at the option of the Borrower, under circumstances when the foregoing
clause (1) shall not be applicable, the Lender shall be entitled to payments
only after there shall first have been paid in full in cash or cash
equivalents all Superior Indebtedness outstanding at the time this note so
becomes due and payable because of any such event, or payment shall have
been provided for in a manner satisfactory to the holders of such Superior
Indebtedness; and
(3) During the continuance of any default with respect to any Superior
Indebtedness permitting the holders thereof to accelerate the maturity of
such Superior Indebtedness, no payment of principal, premium or interest or
other amount shall be made on this note, if either (i) notice of such
default in writing or by telegram has been given to the Borrower by the
holders of a majority in aggregate principal amount of the outstanding
Superior Indebtedness in default,
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<PAGE> 3
provided that judicial proceedings shall be commended with respect to
such default (x) within one hundred twenty (120) days thereafter in the case
such default relates to the non-payment of principal, interest or premium on
such Superior Indebtedness or (y) within 90 days after the giving of such
notice in the case of any other event or condition causing such default, or
(ii) judicial proceedings shall be pending in respect of such default. The
holders of Superior Indebtedness shall not be entitled to give notice
pursuant to this clause (3) more than once with respect to any default which
was specified in such a notice and which has continued without interruption
since the date such notice was given, nor shall such holders be entitled go
give a separate notice with respect to any default not so specified which
(to the knowledge of any holder giving such notice) was existing on the date
notice shall have been given pursuant to this clause (3) and which has
continued without interruption from the date such notice was given. Upon
receipt of any notice from such holders of Superior Indebtedness pursuant to
this clause (3), the Borrower shall forthwith send a copy thereof to the
Lender.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets or securities of the Borrower of any kind or character,
whether in cash, property or securities, shall be received by any trustee,
agent or paying agent or the holders of this note (or, if the borrower of any
subsidiary or affiliate of the Borrower is acting as paying agent, money,
assets or securities shall be segregated or held in trust) on account of
principal of, premium on, interest on or other amounts with respect to this
note contrary to the terms hereof, such payment of distribution shall be
received, segregated from other funds, and held in trust by such trustee,
agent, paying agent or holder for the benefit of, and shall immediately be paid
over to, the holders of Superior Indebtedness or their representative, ratably
according to the respective amounts of Superior Indebtedness held or
represented by each.
The Lender undertakes and agrees for the benefit of each holder of Superior
Indebtedness to execute, verify, deliver and file any proofs of claim which any
holder of Superior Indebtedness may at any time require in order to prove and
realize upon any rights or claims pertaining to this note and to effectuate the
full benefit of the subordination contained herein; and upon failure of the
Lender so to do, any such holder of Superior Indebtedness shall be deemed to be
irrevocably appointed the agent and attorney-in-fact of the Lender to execute,
verify, deliver and file any such proofs of claim.
No right of any holder of any Superior Indebtedness to enforce subordination
as herein provided shall at any time or in any way be affected or impaired by
any failure to act on the part of the Borrower or the holders of Superior
Indebtedness, or by any noncompliance by the Borrower with any of the terms,
provisions and covenants of this note or the agreement under which they are
issued, regardless of any knowledge thereof that any holder of Superior
Indebtedness may have or be otherwise charged with.
The Borrower agrees, for the benefit of the holders of Superior
Indebtedness, that in the event that this note is declared due and payable
before its expressed maturity because of the occurrence of a default hereunder,
(i) the Borrower will give prompt notice in writing of such happening to the
holders of Superior Indebtedness and (ii) all Superior Indebtedness shall
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<PAGE> 4
forthwith become immediately due and payable upon demand, regardless of the
expressed maturity thereof.
The Borrower may make optional prepayments on this note at any time,
provided that no event of default under the Superior Indebtedness and no event
which may become such an event of default with notice or lapse of time, or
both, has occurred and is continuing at the time of such payment or would be
caused by such payment, in which case the Borrower not make, and the holder of
this note shall not accept, any such optional prepayment.
The foregoing provisions are solely for the purpose of defining the relative
rights of the holders of Superior Indebtedness on the one hand, and the Lender
on the other hand, and nothing herein shall impair, as between the Borrower and
the Lender, the obligation of the Borrower which is unconditional and absolute,
to pay the principal, premium, if any, and interest on this note in accordance
with its terms, nor shall anything herein prevent the Lender from exercising
all remedies otherwise permitted by applicable law or hereunder upon default
hereunder, subject to the rights of the holders of Superior Indebtedness as
herein provided for.
This note shall be governed by, and interpreted and construed in accordance
with, the laws of the State of Michigan.
CMS NOMECO OIL & GAS CO.
BY: /s/ Paul E. Geiger
-----------------------------
Paul E. Geiger
ITS: Vice President, Secretary and Treasurer
---------------------------------------
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<PAGE> 1
EXHIBIT 10.23
TAX AGREEMENT
This Tax Agreement is made and entered into as of the 23rd day of
February, 1995, by and between Amoco Production Company ("Seller"), a Delaware
corporation, Amoco Corporation ("Amoco"), an Indiana corporation and the
indirect parent of Seller, Walter International, Inc. ("Walter"), a
corporation organized under the laws of Texas, Walter Congo Holdings Company
("Walter Holdings"), a corporation organized under the laws of Texas and a
wholly-owned subsidiary of Walter, Nuevo Energy Company ("Nuevo"), a
corporation organized under the laws of Delaware, The Congo Holding Company
("Nuevo Holdings"), a corporation organized under the laws of Texas and a
wholly-owned subsidiary of Nuevo (Walter, Walter Holdings, Nuevo, and Nuevo
Holdings hereinafter collectively "Guarantors"), and Walter International
Congo, Inc. ("Walter Congo"), a corporation organized under the laws of Texas
and a wholly-owned subsidiary of Walter Holdings, and The Nuevo Congo Company
("Nuevo Congo"), a corporation organized under the laws of Texas and a
wholly-owned subsidiary of Nuevo Holdings (Walter Congo and Nuevo Congo
hereinafter collectively "Purchasers").
W I T N E S S E T H:
WHEREAS, Seller is the owner of ten (10) issued capital shares, one
hundred United States Dollars (U.S. $100.00) par value per share, of each of
Amoco Congo Exploration Company ("ACEC") and Amoco Congo Petroleum Company
("ACPC"), both Delaware corporations (hereinafter referred to as "Company" or
"Companies"), constituting all of the Companies' issued and outstanding shares
of capital stock ("Shares"); and
WHEREAS, Seller, Guarantors, and Purchasers have entered into a Stock
Purchase Agreement dated June 30, 1994 ("Agreement"), pursuant to which Seller
agrees to sell and Purchasers agree to purchase the Shares on the terms and
conditions stated therein; and
WHEREAS, the Agreement contemplates that the purchase and sale of the
Shares by Seller to Purchasers will be effectuated by means of a taxable
reverse subsidiary merger, with the result that ACEC will be wholly owned by
Walter Holdings and ACPC will be wholly owned by Nuevo Holdings; and
WHEREAS, OPIC has issued to Walter and Nuevo a contract of political
risk insurance (individually, an "Insurance Policy" and collectively,
"Insurance Policies") in respect of such Guarantor's investment in the
Companies; and, upon the payment of certain claims under either such policy,
the applicable Guarantor will transfer, or cause to be transferred, to OPIC
Shares and/or other interests in, or of, the applicable Company;
WHEREAS, OPIC and the Purchasers have entered into a Finance Agreement
(the "Finance Agreement") and a related Participation and Guaranty Agreement,
each dated as of the date hereof (collectively the "Loan Documents") (which
Loan Documents will become binding on the Companies upon consummation of the
mergers referenced above), pursuant to which OPIC has guaranteed the
obligations of the Purchasers and the Companies in respect of loans (the
"Loans") to be made by as yet unspecified lenders pursuant to the Finance
Agreement;
WHEREAS, true and correct copies of the Insurance Policies and the Loan
Agreements will be provided to Seller prior to Closing;
<PAGE> 2
WHEREAS, the proceeds of the Loans advanced to Purchasers will be used
exclusively to finance the purchase of the Shares by the Purchasers;
WHEREAS, the obligations of the Companies and the Purchasers under the
Loan Agreements will be secured by a pledge of the Shares and by a lien on
specified escrow accounts at a bank in the United States containing only funds
denominated in U.S. dollars;
WHEREAS, the execution of this Tax Agreement by Purchasers, Guarantors,
Seller, Amoco, and the Companies is a condition precedent to Closing of the
sale of the Shares; and
WHEREAS, Companies' operations are subject to taxation in the Republic
of the Congo ("Congo") as branch operations of a foreign corporation; and
WHEREAS, Companies may have incurred substantial dual consolidated
losses ("DCLs"), as defined by the DCL Regulations; and
WHEREAS, Seller and its Consolidated Group have filed all necessary
certifications required pursuant to Treasury Regulation Section
1.1503-2A(d)(3), and intend to timely file all certifications required pursuant
to Treasury Regulation Section 1.1503-2(g)(2), with the United States Internal
Revenue Service ("IRS") regarding the use of said DCLs; and
WHEREAS, the existing DCLs of the Companies must be recaptured into
income under circumstances, potentially resulting in substantial tax liability;
and
WHEREAS, the parties hereto desire to avoid triggering recapture into
income of said DCLs pursuant to the provisions of the DCL Regulations, and
WHEREAS, the Purchasers hereby acknowledge that, after the sale of the
Companies to the Purchasers, the Seller can rely only on the Guarantors,
Purchasers and their successors and assigns, and the Companies to monitor the
transactions of the Companies and take any action necessary to prevent the
triggering of the DCL recapture liability.
NOW THEREFORE, in consideration of the premises and the respective
covenants, agreements, and conditions contained herein, the parties hereby
agree as follows:
1. Definitions
For the purposes of this Tax Agreement, the following terms shall have
the following meanings:
"Affiliate" shall mean:
(1) any company at least fifty percent (50%) of whose shares
entitled to vote for the election of directors are owned,
directly or indirectly, by such party;
(2) any company which owns, directly or indirectly, at least
fifty percent (50%) of the shares entitled to vote for the
election of directors of such party; or
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<PAGE> 3
(3) any company at least fifty percent (50%) of whose shares
entitled to vote for the election of directors are owned,
directly or indirectly, by a company which at the same
time owns, directly or indirectly, at least fifty percent
(50%) of the shares entitled to vote for the election of
directors of such party.
"Closing Agreement" shall mean an agreement described in Treasury
Regulation Section 1.1503-2(g)(2)(iv)(B)(2).
"Code" shall mean the U.S. Internal Revenue Code of 1986, as amended.
All references herein to the Code, or to the Treasury Regulations
promulgated thereunder, shall include any amendments or any substitute
or successor provisions thereto.
"Consolidated Group" shall mean a group of corporations that has elected
to make a consolidated return with respect to income tax imposed by
chapter 1 of the Code.
"DCL" shall mean the dual consolidated losses of the Companies, if any,
as defined in section 1503(d) of the Code and the DCL Regulations.
"DCL Regulations" shall mean Treasury Regulation Section 1.1503-2A,
Treasury Regulation Section 1.1503-2, or any successor regulation as in
effect from time to time.
"Event of Default" shall have the meaning defined in the Finance
Agreement.
"Loss Event" shall have the meaning defined in the Insurance Policies.
"Obligated Person" shall mean any Person (other than OPIC or any Person
(other than a Person who is a party to this Tax Agreement) who acquires
any interest in any of the Shares or any of the assets of any Company
from or under the direction of OPIC solely as a result of OPIC's
exercise of its rights under any Insurance Policy or Loan Agreement) who
acquires any interest in any of the Shares or any of the assets of any
Company (including but not limited to any transferee, creditor,
guarantor, or subrogee), excluding any unrelated third party who
purchases hydrocarbons or surplus materials or equipment from a Company
in the ordinary course of the Company's business.
"OPIC" shall mean the Overseas Private Investment Corporation, an agency
of the United States of America organized as a corporation under the
laws of the United States.
"Person" shall have the meaning contained in section 7701(a)(1) of the
Code and any Treasury Regulations promulgated thereunder.
3
<PAGE> 4
"Separate Unit" shall have the meaning contained in Treasury Regulation
Section 1.1503-2(c)(3).
"Taxes" shall mean all federal, state, local, foreign, and other net
income, gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, lease, service, service use, withholding,
payroll, employment, excise, severance, stamp, occupation, premium,
property, windfall profits, customs, duties, or other taxes, fees,
assessments, or charges in the nature of a tax, together with any
interest and any penalties, additions to tax or additional amounts with
respect thereto, and the term "Tax" means any of the foregoing Taxes.
"Tax Agreement" shall mean this Tax Agreement and any amendments thereto.
"Triggering Event" shall mean any one or more of the events specified in
Treasury Regulation Section 1.1503-2(g)(iii)(A) or Treasury Regulation
1.1503-2A(d)(4), the occurrence of which would require the recapture of
DCLs, plus applicable interest, into income as provided in the DCL
Regulations.
All other terms specifically defined in the Agreement and not defined herein
shall have the meanings assigned to them in the Agreement unless the context
clearly requires otherwise.
2. Initial Closing Agreement
A. Amoco, Guarantors, and Companies agree that prior to Closing,
they shall submit to the IRS a request for a Closing Agreement as
specified in Treasury Regulation Section
1.1503-2(g)(2)(iv)(B)(2).
B. In conjunction with the Closing Agreement specified in Article
2.A, above, and as an integral part thereof, Amoco shall request
from the IRS, on behalf of itself Guarantors, Purchasers, and
Companies, such rulings as Amoco, in its sole discretion (but in
consultation with Guarantors), deems necessary, which may
include, but may not be limited to, the following:
(1) that the net operating losses incurred by the Companies
are not DCLs;
(2) that the sale of the Shares pursuant to the Agreement will
not constitute a Triggering Event with respect to any DCLs
of the Companies;
(3) that a subsequent transfer of any of the Shares or any of
the assets of either of the Companies to OPIC or to any
other creditor as the result of a foreclosure or Loss
Event, to a bankruptcy trustee or receiver (or
substantially similar Person) as the result of a
bankruptcy proceeding or receivership (or a substantially
similar proceeding), or to the Congo (or an Affiliate
thereof) as a result of an expropriation, will not
constitute a Triggering Event; and
(4) that any transfer of any of the Shares or any of the
assets of either of the Companies to any Person that is
already a party to
4
<PAGE> 5
the Closing Agreement specified in Article 2.A above will
not constitute a Triggering Event.
C. Amoco, Guarantors, Purchasers, and Companies agree to make all
representations and to supply all information necessary for the
IRS to enter into the Closing Agreement and to issue the rulings
requested under this Article 2, including, but not limited to:
(1) representations by Amoco, Guarantors, and Companies that
they agree to be jointly and severally liable for the
amount of income tax, plus applicable interest, due as a
result of the occurrence of any Triggering Event;
(2) representations by Guarantors and Companies that they will
treat any potential recapture amount as unrealized
built-in gain for purposes of section 384(a) of the Code;
(3) representations by Walter, Nuevo and Companies that they
will each timely file the certifications required by
Treasury Regulation Section Section
1.1503-2(g)(2)(iv)(B)(2)(iii) and 1.1503-2(g)(2)(i).
3. Covenants Regarding Periods After Closing
Purchasers, Guarantors, and Companies agree with respect to each taxable
year ending after the Closing Date that they:
A. shall not take any action to cause the occurrence of any
Triggering Event;
B. shall limit the business of the Companies to the exploitation of
the Yombo Permit;
C. shall promptly notify Seller of (i) any proposed voluntary sale,
exchange, transfer, contribution, distribution, actual or
constructive liquidation, dissolution, reorganization, lease,
farmout, or other disposition of a Company, any of the Shares
that would have the effect of causing a Company to cease being a
member of its Consolidated Group, or any of the assets of a
Company or any Separate Unit thereof (other than sales of
hydrocarbons or surplus materials or equipment to unrelated third
parties in the ordinary course of business), or (ii) any proposed
sale, exchange, transfer, contribution, reorganization,
distribution, actual or constructive liquidation, dissolution,
lease, or other disposition of a Guarantor or the stock of a
Guarantor that would have the effect of causing a Company to
become a member of a new Consolidated Group. Prior to the
consummation of any such voluntary sale, exchange, transfer,
contribution, reorganization, distribution, actual or
constructive liquidation, dissolution, lease, farmout, or other
disposition, Guarantors, Purchasers, and Companies shall:
(1) allow Seller to advise Guarantors, Purchasers, and
Companies regarding the terms and conditions of such
proposed sale, exchange, transfer, contribution,
reorganization, distribution, actual or constructive
liquidation, dissolution, lease, farmout, or other
disposition solely for the purpose of avoiding recapture
of any DCLs of the Companies or any Separate Unit thereof
as a result of said sale, exchange, transfer,
contribution,
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<PAGE> 6
reorganization, distribution, actual or constructive
liquidation, dissolution, lease, farmout, or other
disposition; and
(2) obtain the written approval of Seller with respect to such
terms and conditions, which approval shall not be
unreasonably withheld;
D. shall promptly notify Seller of any actual or potential
involuntary sale, exchange, transfer, contribution,
reorganization, distribution, actual or constructive liquidation,
dissolution, lease, farmout, or other disposition of a Company or
any of the Shares or any of the assets of a Company or any
Separate Unit thereof, or any sale, exchange, transfer,
contribution, reorganization, distribution, actual or
constructive liquidation, dissolution, lease, or other
disposition of any of a Guarantor or the stock of a Guarantor
that could have the effect of causing a Company to become a
member of a new Consolidated Group, including, but not limited to
(i) any Event of Default by any of Guarantors, Purchasers, or
Companies under any Loan Document or other obligation to OPIC;
(ii) any default or claimed default by any of the Guarantors,
Purchasers, or Companies with respect to any indebtedness that
could result in a recapture of DCLs of the Companies or any
Separate Unit thereof; or (iii) any Loss Event under any
Insurance Policy or any other similar policy issued by any other
Person relating to the Companies that could result in a recapture
of DCLs of the Companies or any Separate Unit thereof;
E. shall, prior to any sale, exchange, transfer, contribution,
reorganization, distribution, actual or constructive liquidation,
dissolution, lease, farmout, or other disposition of a Company or
any of the Shares that would have the effect of causing a Company
to cease being a member of its Consolidated Group or any of the
assets of a Company or any Separate Unit thereof (other than
sales of hydrocarbons or surplus materials or equipment in the
ordinary course of business), notify Seller in writing of the
terms and conditions of the proposed sale, exchange, transfer,
contribution, disposition, reorganization, actual or constructive
liquidation, dissolution, lease, farmout, or other disposition
and Seller shall then have thirty (30) days to elect to purchase
such Shares or assets on such notified terms;
F. shall require any Obligated Person to agree to fulfill and be
bound by all of the obligations and covenants of Purchasers,
Guarantors, and Companies contained in this Tax Agreement;
G. shall honor and abide by, and shall not in any way amend the
terms and obligations, of that certain Letter dated November 21,
1994, to the Director General of Taxation of the Congo;
H. shall not permit any Company to incur secured indebtedness in
excess of $10,000,000 in the aggregate, other than the Loans,
without the prior written consent of Seller, which consent shall
be granted if the lender enters into an option agreement with
Seller similar in form and substance to that certain Option
Agreement attached as Schedule L to the Agreement; and
I. shall not permit any omission (other than any failure to
contribute money or assets to the Companies) that causes a
Triggering Event.
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<PAGE> 7
Notwithstanding the covenants contained in this Article 3, (A) if (i) the
conditions contained in Article 4.B or Article 4.C hereof are met with respect
to an event and (ii) any Guarantor or Purchaser is released from any indemnity
in accordance with Article 4.B hereof or Article 4.C hereof, then the
Guarantors and Purchasers shall, with respect to that event only, (a) have no
further obligation to comply with the obligations or covenants contained herein
and (b) be released from any breach of any covenant or obligation contained
herein, and (B) if (i) the conditions contained in Article 4.B hereof are met
with respect to an event and (ii) any Company is released from any indemnity in
accordance with Article 4.B hereof, then the Companies, Guarantors, and
Purchasers shall, with respect to that event only, (a) have no further
obligation to comply with the obligations or covenants contained herein, and
(b) be released from any breach of any covenant or obligation contained herein.
For purposes of this paragraph and Article 4.B and Article 4.C hereof, an event
shall be deemed to be a separate event regardless of whether it may be, or may
have been intended to be, directly or indirectly, dependent on, related to, or
contemporaneous with any other event.
4. Indemnification by Guarantors- Purchasers, and Companies
A. Except as expressly provided in Article 4.B and 4.C hereof
Walter, Walter Holdings, Walter Congo, Nuevo, Nuevo Holdings,
Nuevo Congo, ACEC, ACPC, or each of them, jointly and severally,
agree to indemnify and hold harmless Seller, its Affiliates and
their respective directors, officers and employees from and
against any and all Taxes, tax credits utilized, interest,
penalties, costs of enforcement and reasonable attorneys fees
incurred in defending any claim for Taxes, interest, penalties,
or additional income or the enforcement of this indemnification,
if any, arising out of or based upon or with respect to any
failure by Walter, Walter Holdings, Walter Congo, Nuevo, Nuevo
Holdings, Nuevo Congo, a Company, or any of them, to comply with
each and every obligation and covenant of this Tax Agreement.
B. Notwithstanding the foregoing Article 4.A, no Guarantor,
Purchaser, or Company, shall be required to indemnify Seller, its
Affiliates or their respective directors, officers, and
employees:
(1) if, in the case of (i) a voluntary sale, exchange,
transfer, contribution, reorganization, distribution,
actual or constructive liquidation, dissolution, lease,
farmout, or other disposition of a Company or any of the
Shares that would have the effect of causing a Company to
cease being a member of its Consolidated Group or assets
of a Company (other than sales of hydrocarbons or surplus
materials or equipment in the ordinary course of
business), or (ii) any sale, exchange, transfer,
contribution, reorganization, distribution, actual or
constructive liquidation, dissolution, lease, or other
disposition of a Guarantor or the stock of a Guarantor
that would have the effect of causing a Company to become
a member of a new Consolidated Group, such Guarantor,
Purchaser, or Company obtained the review and written
approval described in Article 3.C hereof;
(2) in the case of a transfer of any Shares or U.S. dollars
contained in any escrow account to OPIC or any other
secured lender as a result of a foreclosure upon default,
but only if Seller and OPIC or other secured lender, as
the case may be, are, at the time of
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<PAGE> 8
such transfer of Shares or U.S. dollars, parties to an
option agreement in the form and substance of that certain
Option Agreement attached as Schedule L to the Agreement;
(3) in the case of any transfer of Shares or assets resulting
from an expropriation or other Loss Event under an
Insurance Policy, unless OPIC fails to pay compensation
for any loss under political risk or similar insurance
because OPIC has determined that a primary cause of the
loss was unreasonable actions, including corrupt
practices, attributable to a Company, Purchaser, or
Guarantor; or
(4) if, in the case of any other sale, exchange, transfer,
contribution, reorganization, distribution, actual or
constructive liquidation, dissolution, lease, farmout, or
other disposition of a Company or any of the Shares or
assets of a Company not otherwise described in this
Article 4.B, such Guarantor, Purchaser, or Company
complied with Article 3.E hereof.
C. Notwithstanding the foregoing Article 3 or Article 4.A, none of
the Guarantors or Purchasers shall be required to comply with the
covenants and obligations contained in Article 3 hereof or to
indemnify Seller, its Affiliates, or their respective directors,
officers, and employees in the case of a Triggering Event
attributable to a taxable period in which a Company is not an
Affiliate of any of the Guarantors.
5. Indemnification by Seller
If the Guarantors, Purchasers, and Companies shall have complied with
the obligations and covenants contained in Article 3 of this Tax
Agreement with respect to a Triggering Event that caused the recapture
of DCLs of a Company or a Separate Unit thereof and such DCLs are
attributable to periods ending on or before the Closing Date, then
Seller shall indemnify and hold harmless Guarantors, Purchasers,
Companies, their Affiliates, and their respective directors, officers
and employees from and against any and all Taxes, tax credits utilized,
interest, penalties, costs of enforcement, and reasonable attorneys fees
incurred in defending against any claim for Taxes, interest, penalties,
or additional income or the enforcement of this indemnification, if any,
arising out of or based upon or with respect to any such recapture.
6. Rights of Indemnifying Party
A. Each indemnified party hereunder agrees that within five (5)
calendar days following the issuance of any notice from any
taxing authority of a Tax assessment or deficiency resulting from
any DCL recapture in connection with which a claim for
indemnification under this Tax Agreement might be made (a
"Claim"), it will give prompt notice thereof to the indemnifying
party, together with a statement of such information respecting
any of such facts as it may have and a formal demand for
indemnification. The indemnifying party shall not be obligated
to indemnify the indemnified party with respect to any Claim if
the indemnified party falls to notify the indemnifying party in
sufficient time to permit the indemnifying party to defend
against such matter and to make a timely response thereto.
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<PAGE> 9
B. The indemnifying party shall be entitled at its cost and expense
to contest and defend by all appropriate legal proceedings any
Claim with respect to which they are called upon to indemnify the
indemnified party; provided, that notice of the intention so to
contest shall be delivered by the indemnifying party to
indemnified party within 10 days after the date of receipt by the
indemnifying party of notice by the indemnified party of the
assertion of the Claim. Any such contest may be conducted in the
name and on behalf of the indemnifying party or the indemnified
party as may be appropriate. The indemnified party shall have
the right but not the obligation to participate in such
proceedings and to be represented by counsel of its own choosing
at its sole cost and expense.
C. If requested by the indemnifying party, the indemnified party
agrees to cooperate with the indemnifying party and its counsel
in contesting any Claim that the indemnifying party elects to
contest or, if appropriate, in making any counterclaim against
the Person asserting the Claim, or any cross-complaint against
any Person, and the indemnifying party will reimburse the
indemnified party for any expenses it incurs by so cooperating.
The indemnified party agrees to afford the indemnifying party and
its counsel the opportunity to be present at, and to participate
in, conferences with all Persons asserting any Claim the
indemnified party or conferences with representatives of or
counsel for such Persons.
D. The indemnified party shall take no action which would prejudice
the indemnifying party's defense of the matter giving rise to the
Claim.
E. The indemnified party shall have no right to recover from any
other party hereto any losses, costs, expenses, or damages
arising under or in connection with this Tax Agreement any amount
in excess of actual damages, court costs, and reasonable attorney
fees, suffered by such party. Each indemnified party waives any
right to recover punitive, special, exemplary, and consequential
damages arising under or in connection with this Tax Agreement.
7. Defense Against Tax Claims
A. Seller, Guarantors, Purchasers, and Companies each agrees to
notify the other parties to this Tax Agreement promptly in the
event that, in respect of a Company or any Separate Unit thereof,
(i) any tax authority, in the course of any audit or other
examination of the tax returns or records of such party, raises
any question or issue with respect to any loss, expense, or
deduction constituting a DCL or any potential DCL recapture, or
(ii) any tax authority issues a notice of proposed adjustment or
similar notice with respect to any potential DCL recapture.
Purchasers will permit Seller and will cause the Companies and/or
their successors to permit Seller, at Seller's option and
expense, to direct the Companies or Purchasers to take whatever
actions are reasonably necessary in Seller's judgment to contest
and defend any issues which may result in a claim for such Taxes
prior to the payment of such Taxes.
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<PAGE> 10
In the event Purchasers and/or the Companies are responsible for
paying Taxes described in this Tax Agreement or required to pay
Seller the amount of such Taxes under any of the terms of this
Tax Agreement, Seller will permit Purchasers, at Purchasers'
option and expense, to direct Seller to take whatever actions are
reasonably necessary in Purchasers' judgment to contest and
defend any issues which may result in a claim for such Taxes
prior to the payment of such Taxes and prior to the payment of
the amount of such Taxes to Seller. If Purchasers exercise the
option provided for in the preceding sentence, Seller will, at
Purchasers' request, cause its employees and representatives to
be available (at reasonable times and places) to consult with
employees and representatives of the Purchasers regarding the
issues relating to such Taxes. Purchasers shall reimburse Seller
for all its reasonable costs and expenses in complying with the
previous sentence.
In the event of a claim by any taxing authority which will
adversely affect both Seller, Purchasers and/or the Companies by
the liability to pay Taxes and by payments under the terms of
this Tax Agreement or, if the liability under such claim cannot
be readily ascertained, Seller and Purchasers agree to cooperate
fully with each other, each bearing its own expenses, to take
whatever action is necessary to contest and defend or to direct
the Companies to contest and defend any issue which may result in
a claim for Taxes or a payment under the terms of this Tax
Agreement prior to the payment of such Taxes and prior to the
payment of the amount of such Taxes to Purchasers or Seller.
B. If a Tax has been paid to any taxing authority and, as a result
of the payment of such Tax, either Seller or Purchasers incurs a
liability to make payment to the other because of the payment of
such Tax, provisions similar to Article 6.A above shall apply to
enable the party or parties bearing the burden of the Tax
liability to cause the appropriate party to take whatever action
is necessary to claim, pursue or litigate with respect to a
refund of such Tax. If the entire burden of an increased Tax
liability has been borne by Seller or by Purchasers, the right to
litigate for or otherwise claim Tax refunds shall be assigned, to
the extent it is legally permissible to do so, to the party
bearing such economic burden. If any refunds or settlement
amounts shall be delivered to the party who did not bear the
burden of the Tax liability, such party shall assign such amounts
to the party who bore the burden of the Tax liability. In the
event both Seller and Purchasers jointly bear the economic burden
of the payment of any Tax described in this Tax Agreement, Seller
and Purchasers agree to cooperate fully with each other, each
bearing its own expenses, to cause the appropriate party to
litigate the claim for Tax refund and to share the proceeds of
any refund or settlement in proportion to the economic burden
previously borne.
8. Survival
The obligations, covenants, and agreements set forth in this Tax
Agreement and in any certificate or instrument delivered in connection
herewith shall, unless otherwise provided herein, survive the date of
Closing.
9. Notices
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<PAGE> 11
A. All notices shall be given in writing and shall be delivered (i)
by hand to the party for which intended, (ii) by registered or
certified mail, return receipt requested, postage prepaid, (iii)
by telex, or (iv) by facsimile, all of which addressed to the
party for which it is intended at the following respective
addresses or such other address previously furnished in writing
by either party:
To Amoco or Seller: Amoco Production Company
501 WestLake Park Boulevard
Houston, Texas 77079
Telephone: (713) 366-7119
Facsimile: (713) 366-7596
Attention: Michael A. Wolf,
Director of Taxes--APC(I)
To Guarantors or Purchasers: Walter International, Inc.
1021 Main Street, Suite 2110
Houston, Texas 77002-6502
Telephone: (713) 756-1100
Facsimile: (713) 756-1111
Attention: Mr. F. Fox Benton, Jr.
Nuevo Energy Company
1221 Lamar, Suite 1600
Houston, Texas 77010-3039
Telephone: (713) 650-1246
Facsimile: (713) 756-1898
Attention: Mr. Roland Sledge
To Companies: The Nuevo Congo Company
(formerly Amoco Congo Petroleum
Company)
1221 Lamar, Suite 1600
Houston, Texas 77010-3039
Telephone: (713) 650-1246
Facsimile: (713) 756-1898
Attention: Mr. Roland Sledge
Walter International Congo, Inc.
(formerly Amoco Congo Exploration
Company)
1021 Main Street, Suite 2110
Houston, Texas 77002-6502
Telephone: (713) 756-1100
Facsimile: (713) 756-1111
Attention: Mr. F. Fox Benton, Jr.
B. The date of service of the notice shall be the date on which
notice is received.
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<PAGE> 12
10. No Waiver
No failure or delay by any party hereto in exercising any right, power,
privilege or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power, privilege or
remedy preclude the exercise of any other right power, privilege or
remedy. The rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies provided by law. No amendment,
modification or waiver of, or consent with respect to, any provision of
this Tax Agreement shall in any event be effective unless the same shall
be in writing.
11. Successors and Assigns
This Tax Agreement shall be binding upon and inure to the benefit of the
parties and their respective permitted successors and assigns other than
OPIC or any other Person who is not an Obligated Person. No party to
this Tax Agreement shall be relieved of its obligations hereunder, by
assignment or otherwise, without the prior written consent of the other
parties hereto.
12. Governing Law and Dispute Resolution
A. This Tax Agreement shall be governed by the laws of Illinois
excluding any choice of law provisions which would require the
application of the law of any other jurisdiction.
B. Any action, dispute, claim or controversy of any kind now
existing or hereafter arising between any of the parties hereto
in any way arising out of, pertaining to or in connection with
this Tax Agreement (a "Dispute") shall be resolved by binding
arbitration in accordance with the terms hereof. Any party may,
by summary proceedings, bring an action in court to compel
arbitration of any Dispute.
C. Any arbitration shall be administered by the American Arbitration
Association (the "AAA") in accordance with the terms of this
Article 12, the Commercial Arbitration Rules of the AAA, and, to
the maximum extent applicable, the Federal Arbitration Act.
Judgment on any award rendered by an arbitrator may be entered in
any court having jurisdiction.
D. Any arbitration shall be conducted before one arbitrator. The
arbitrator shall be a licensed practicing attorney who is
knowledgeable in the subject matter of the Dispute selected by
agreement between the parties hereto. If the parties cannot
agree on an arbitrator within 30 days after the request for an
arbitration, then any party may request the AAA to select an
arbitrator. The arbitrator may engage engineers, accountants or
other consultants that the arbitrator deems necessary to render a
conclusion in the arbitration proceeding.
E. To the maximum extent practicable, an arbitration proceeding
hereunder shall be concluded within 180 days of the filing of the
Dispute with the AAA. Arbitration proceedings shall be conducted
in Houston, Texas. Arbitrators shall be empowered to impose
sanctions and to take such other actions as the arbitrators deem
necessary to the same extent a judge could impose sanctions or
take such other actions
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<PAGE> 13
pursuant to the Federal Rules of Civil Procedure and applicable
law. At the conclusion of any arbitration proceeding, the
arbitrator shall make specific written findings of fact and
conclusions of law. The arbitrator shall have the power to award
recovery of all costs and fees to the prevailing party. Each
party agrees to keep all Disputes and arbitration proceedings
strictly confidential except for disclosure of information
required by applicable law.
F. All fees of the arbitrator and any engineer, accountant or other
consultant engaged by the arbitrator, shall be paid by Seller, on
the one hand, and the Purchasers, on the other hand, equally
unless otherwise awarded by the arbitrator.
13. Further Assurances and Guaranty
A. Purchasers and Seller hereby agree to execute all such further
instruments and documents, and to take all such other actions, as
may be reasonable and appropriate to further effectuate the
intent of this Tax Agreement.
B. The Guarantors, jointly and severally, unconditionally guarantee
as if each of them were the primary obligor, the punctual payment
and performance of the Purchasers' and the Companies' obligations
under this Tax Agreement and any other agreement between
Purchasers, Companies, and Seller required by this Tax Agreement.
14. Headings
References herein to Articles are to Articles of this Tax Agreement.
Article headings in this Tax Agreement are included herein for
convenience of reference only and shall not constitute a part of the Tax
Agreement for any other purpose.
15. Severability of Provisions
Any provision of this Tax Agreement which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to
the extent of such prohibition or unenforceability without invalidating
the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction.
16. Execution in Counterparts
This Tax Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of
which taken together shall constitute but one and the same instrument.
17. Entire Agreement
This Tax Agreement represents the entire understanding of the parties
with respect to the subject matter hereof. There are no other terms,
conditions, representations or warranties, express or implied, written
or
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<PAGE> 14
oral, except as set forth herein. No amendments, modifications or
additions hereto shall be binding unless executed in writing by all of
the parties to this Tax Agreement.
18. Expenses
Except as otherwise expressly provided in the Agreement or in this Tax
Agreement, each party shall pay its own expenses, including
consultants', counsels', and public accountants' fees and expenses
incurred in any way in connection with this Tax Agreement.
19. Confidentiality
Except as may be required by law or regulation or this Tax Agreement,
the parties agree to keep confidential this Tax Agreement and the terms
and provisions hereof and not to disclose them to any third party
without the prior written consent of the parties hereto.
20. No Third Party Beneficiaries
Nothing expressed or referred to in this Tax Agreement is intended to or
shall be construed to give any Person other than Amoco, Seller,
Purchasers, Guarantors, or Companies any legal or equitable remedy or
claim under or with respect to this Tax Agreement.
IN WITNESS WHEREOF, the parties have negotiated and duly executed this Tax
Agreement at Houston, Texas, on the day and year first written above.
AMOCO CORPORATION
By: /s/ John D Spence
Name: John D. Spence
Title: Attorney-in-Fact
AMOCO PRODUCTION COMPANY
By: /s/ John D Spence
Name: John D. Spence
Title: Attorney-in-Fact
WALTER INTERNATIONAL CONGO, INC.
By: /s/ J C Walter, Jr
Name: J.C. Walter, Jr.
Title: President
THE NUEVO CONGO COMPANY
By: /s/ Michael D Watford
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<PAGE> 15
Name: Michael D. Watford
Title: President
WALTER INTERNATIONAL, INC.
By: /s/ J C Walter, Jr
Name: J.C. Walter, Jr.
Title: President
NUEVO ENERGY COMPANY
By: /s/ Michael D Watford
Name: Michael D. Watford
Title: President
THE CONGO HOLDING COMPANY
By: /s/ Michael D Watford
Name: Michael D. Watford
Title: President
WALTER CONGO HOLDINGS, INC.
By: /s/ J C Walter, Jr
Name: J.C. Walter, Jr.
Title: President
AMOCO CONGO EXPLORATION COMPANY
By: /s/ John D Spence
Name: John D. Spence
Title: Attorney-in-Fact
AMOCO CONGO PETROLEUM COMPANY
By: /s/ John D Spence
Name: John D. Spence
Title: Attorney-in-Fact
15
<PAGE> 1
EXHIBIT 10.24
CMS TAX AGREEMENT
This Agreement is made and entered into as of the 24th day of February,
1995, by and between Amoco Corporation ("Amoco"), an Indiana corporation
("Amoco"), Amoco Production Company, a Delaware corporation ("APC"), CMS Energy
Corporation, a Michigan corporation ("CMS"), CMS Enterprises, Inc., a Michigan
corporation ("Enterprises"), CMS-Nomeco Oil & Gas Co., a Michigan corporation
("Nomeco"), Walter International, Inc., a Texas corporation ("Walter"), Walter
Congo Holdings, Inc., a Texas corporation ("Walter Holdings"), and Walter
International Congo, Inc., a Delaware corporation ("Walter Congo").
W I T N E S S E T H:
WHEREAS, Amoco is the indirect parent of APC; and
WHEREAS, APC was the owner of ten (10) issued capital shares, one
hundred United States Dollars (U.S. $100.00) par value per share, of Amoco
Congo Exploration Company ("ACEC") (ACEC or its successor corporation, Walter
Congo, sometimes hereinafter referred to as the "Company"), constituting all of
the ACEC's issued and outstanding shares of capital stock ("Shares"); and
WHEREAS, the Company's operations are subject to taxation in the
Republic of the Congo ("Congo") as a branch operation of a foreign corporation;
and
WHEREAS, ACEC may have incurred substantial dual consolidated losses
("DCLs"), as defined by the DCL Regulations; and
WHEREAS, APC and the Amoco Consolidated Group have filed all necessary
certifications required pursuant to Treasury Regulation Section
1.1503-2A(d)(3), and have filed and will timely file all certifications
required pursuant to Treasury Regulation Section 1.1503-2(g)(2), and have
filed the replacement election under Treasury Regulation Section
1.1503-2(h)(2)(ii) with the United States Internal Revenue Service ("IRS")
regarding the use of said DCLs; and
WHEREAS, the existing DCLs of the Company must be recaptured into income
under certain circumstances, potentially resulting in substantial tax
liability, as well as an interest charge thereon; and
WHEREAS, on February 22, 1995, Amoco filed a request for a private
letter ruling with the U.S. Internal Revenue Service (the "Service") that the
net operating losses of ACEC do not constitute DCLs; and
WHEREAS, on the Sale Closing Date (as hereinafter defined), APC sold all
of the Shares of ACEC to Walter Holdings by means of a taxable reverse
subsidiary merger; and
<PAGE> 2
WHEREAS, Walter Holdings is a wholly-owned subsidiary of Walter; and
WHEREAS, OPIC has issued to Walter a contract of political risk
insurance ("Insurance Policy") with respect to Walter's investment in the
Company, and, upon payment of certain claims under such policy, Walter will
transfer or cause to be transferred, to OPIC the Shares and/or other interests
in, or of, the Company; and
WHEREAS, OPIC and Walter Holdings have entered into a Finance Agreement
(the "Finance Agreement") and a related Participation and Guaranty Agreement,
pursuant to which OPIC has guaranteed the obligations of Walter Holdings and
the Company in respect of loans (the "Loans") to be made by lenders pursuant to
the Finance Agreement; and
WHEREAS, the obligations of the Company and Walter Holdings under the
Loan Agreements will be secured by a pledge of the Shares and by a lien on
specified escrow accounts at a bank in the United States containing funds
denominated in U.S. dollars; and
WHEREAS, under the terms of that certain Tax Agreement dated February
23, 1995, between, inter alia, Amoco, APC, Walter, Walter Holdings, and the
Company (the "Tax Agreement"), Walter, Walter Holdings, and the Company agreed
that they shall (i) promptly notify APC of any proposed transaction that might
constitute an event that could trigger recapture of any DCLs under the DCL
Regulations; (ii) allow APC to advise them regarding the terms and conditions
of such proposed transaction solely for the purpose of avoiding recapture of
any DCLs; and (iii) obtain the written approval of APC with respect to such
proposed transaction, which approval is not to be unreasonably withheld; and
WHEREAS, following the sale of ACEC to Walter Holdings, CMS Merging
Corporation, a Texas corporation and a wholly-owned subsidiary of CMS, will be
merged with and into Walter. It is contemplated that following the CMS Merging
Corporation-Walter merger, CMS will transfer all the outstanding stock of
Walter to Enterprises, a subsidiary of CMS, and immediately thereafter,
Enterprises will transfer all of the outstanding stock of Walter to Nomeco, a
subsidiary of Enterprises (the transactions described in this paragraph
hereinafter collectively referred to as the "Proposed Acquisition"); and
WHEREAS, follow the Proposed Acquisition, each of Enterprises, Nomeco,
Walter, Walter Holdings, and Walter Congo will be members of the CMS
Consolidated Group; and
WHEREAS, the execution of this Agreement by the parties hereto is a
condition precedent to Amoco's granting its approval to the Proposed
Acquisition; and
WHEREAS, the parties hereto desire to avoid triggering recapture into
income of any DCLs pursuant to the provisions of the DCL Regulations; and
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<PAGE> 3
WHEREAS, CMS Enterprises, Nomeco, Walter, Walter Holdings, and Walter
Congo collectively, the "CMS Indemnifying Parties") hereby acknowledge that,
after the Proposed Acquisition, Amoco and APC can rely only on CMS,
Enterprises, Nomeco, Walter, Walter Holdings, Walter Congo, and their
successors and assigns, to monitor transactions with respect to the Company and
take any action necessary to prevent the triggering of the DCL recapture
liability.
NOW THEREFORE, in consideration of the premises and the respective
covenants, agreements, and conditions contained herein, the parties hereby
agree as follows:
1. Definitions
For the purposes of this Agreement, the following terms shall have the
following meanings:
"Affiliate" shall mean:
(1) any company at least fifty percent (50%) of whose shares
entitled to vote for the election of directors are owned,
directly or indirectly, by such party;
(2) any company which owns, directly or indirectly, at least
fifty percent (50%) of the shares entitled to vote for the
election of directors of such party; or
(3) any company at least fifty percent (50%) of whose shares
entitled to vote for the election of directors are owned,
directly or indirectly, by a company which at the same time
owns, directly or indirectly, at least fifty percent (50%) of
the shares entitled to vote for the election of directors of
such party.
"Agreement" shall mean this Agreement and any amendments thereto.
"Closing Agreement" shall mean an agreement described in Treasury
Regulation Section 1.1503-2(g)(2)(iv)(B)(2).
"Closing Date" shall mean the date of the proposed merger of CMS Merging
Corporation into Walter.
"Code" shall mean the U.S. Internal Revenue Code of 1986, as amended.
All references herein to the Code, or to the Treasury Regulations
promulgated thereunder, shall include any amendments or any substitute
or successor provisions thereto.
"Consolidated Group" shall mean a group of corporations that has elected
to make a consolidated return with respect to income tax imposed by
chapter 1 of the Code.
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<PAGE> 4
"DCL" shall mean the dual consolidated losses of the Company, if any, as
defined in section 1503(d) of the Code and the DCL Regulations.
"DCL Regulations" shall mean Treasury Regulation Section 1.1503-2A,
Treasury Regulation Section 1.1503-2, or any successor regulation as in
effect from time to time.
"Event of Default" shall have the meaning defined in the Finance
Agreement.
"Loss Event" shall have the meaning defined in the Insurance Policy.
"Obligated Person" shall mean any Person (other than OPIC or any Person
(other than a Person who is a party to this Agreement) who acquires any
interest in any of the Shares or any of the assets of the Company from
or under the direction of OPIC solely as a result of OPIC's exercise of
its rights under any Insurance Policy or Loan Agreement) who acquires
any interest in any of the Shares or any of the assets of the Company
(including but not limited to any transferee, creditor, guarantor, or
subrogee), excluding any unrelated third party who purchases
hydrocarbons or surplus materials or equipment from the Company in the
ordinary course of the Company's business.
"OPIC" shall mean the Overseas Private Investment Corporation, an agency
of the United States of America organized as a corporation under the
laws of the United States.
"Person" shall have the meaning contained in section 7701(a)(1) of the
Code and any Treasury Regulations promulgated thereunder.
"Sale Closing Date" shall mean the date on which APC sold all of the
Shares to Walter Holdings by means of a taxable reverse subsidiary
merger.
"Separate Unit" shall have the meaning contained in Treasury Regulation
Section 1.1503-2(c)(3).
"Taxes" shall mean all federal, state, local, foreign, and other net
income, gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, lease, service, service use, withholding,
payroll, employment, excise, severance, stamp, occupation, premium,
property, windfall profits, customs, duties, or other taxes, fees,
assessments, or charges in the nature of a tax, together with any
interest and any penalties, additions to tax or additional amounts with
respect thereto, and the term "Tax" means any of the foregoing Taxes.
"Treasury Regulations" shall mean the Treasury Regulations promulgated
under the Code, including any amendments or any substitute or successor
provisions thereto.
"Triggering Event" shall mean any one or more of the events specified in
Treasury Regulation Section 1.1503-2(g)(iii)(A) or Treasury Regulation
Section 1.1503-2A(d)(4), the occurrence of which would require the
recapture of DCLs, plus applicable interest, into income as provided in
the DCL Regulations.
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<PAGE> 5
2. Closing Agreement
A. Amoco and CMS agree that prior to the Closing Date, CMS, Walter,
the Company, and if the Service deems it necessary, Amoco, shall
submit to the IRS a request for a Closing Agreement as specified
in Treasury Regulation Section 1.1503-2(g)(2)(iv)(B)(2) in the
form and substance attached hereto as Exhibit A.
B. In conjunction with the Closing Agreement specified in Article
2.A, above, and as an integral part thereof, CMS, Walter, the
Company, and if the Service deems it necessary, Amoco, shall
request from the Service a ruling that the Proposed Acquisition
will not constitute a Triggering Event with respect to any DCLs of
the Company.
C. CMS, Walter, the Company, and, if necessary, Amoco, agree to make
all representations and to supply all information necessary for
the Service to enter into the Closing Agreement and to issue the
rulings requested under this Article 2, including, but not limited
to:
(1) representations by CMS, Walter, Walter Congo, and, if deemed
necessary by the Service in order to have an effective
Closing Agreement, Amoco, that they agree to be jointly and
severally liable for the amount of United States federal
income tax with respect to any DCLs of ACEC incurred up to
and including the Sale Closing Date, plus any applicable
interest charge thereon, due as a result of the occurrence of
any Triggering Event;
(2) representations by CMS, Walter, and Walter Congo that they
agree to be jointly and severally liable for the amount of
United States federal income tax, plus any applicable
interest charge thereon, with respect to any DCLs of the
Company incurred after the Sale Closing Date, due as a result
of the occurrence of any Triggering Event;
(3) representations by CMS that it will treat any potential
recapture amount as unrealized built-in gain for purposes of
section 384(a) of the Code;
(4) representations by CMS and the Company that they will each
timely file the agreement (including applicable
certifications) required by Treasury Regulation Section
Section 1.1503-2(g)(2)(iv)(B)(2)(iii) and 1.1503-2(g)(2)(i).
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3. Covenants Regarding Periods After Closing Date
CMS, Enterprises, Nomeco, Walter, and the Company agree with respect to
each taxable year ending after the Closing Date that they:
A. shall not take any action to cause the occurrence of any
Triggering Event;
B. shall limit the business of the Company to the exploitation of the
Yombo Permit;
C. shall promptly notify APC of (i) any proposed voluntary sale,
exchange, transfer, contribution, distribution, actual or
constructive liquidation, dissolution, reorganization, lease,
farmout of any of the Shares or any of the assets of the Company
or any Separate Unit thereof that would have the effect of causing
the Company to cease being a member of its Consolidated Group, or
any of the assets of the Company or any Separate Unit thereof
(other than sales of hydrocarbons or surplus materials or
equipment to unrelated third parties in the ordinary course of
business), or (ii) any proposed sale, exchange, transfer,
contribution, reorganization, distribution, actual or constructive
liquidation, dissolution, lease, or other disposition of CMS,
Enterprises, Nomeco, Walter, or Walter Holdings or the stock of
CMS, Enterprises, Nomeco, Walter, or Walter Holdings that would
have the effect of causing the Company to become a member of a new
Consolidated Group. Prior to the consummation of any such
voluntary sale, exchange, transfer, contribution, reorganization,
distribution, actual or constructive liquidation, dissolution,
lease, farmout, or other disposition, CMS shall:
(1) allow APC to advise CMS and its Affiliates regarding the
terms and conditions of such proposed sale, exchange,
transfer, contribution, reorganization, distribution, actual
or constructive liquidation, dissolution, lease, farmout, or
other disposition solely for the purpose of avoiding
recapture of any DCLs of the Company or any Separate Unit
thereof as a result of said sale, exchange, transfer,
contribution, reorganization, distribution, actual or
constructive liquidation, dissolution, lease, farmout, or
other disposition; and
(2) obtain the written approval of APC with respect to such terms
and conditions, which approval shall not be unreasonably
withheld;
D. shall promptly notify APC of any actual or potential involuntary
sale, exchange, transfer, contribution, reorganization,
distribution, actual or constructive liquidation, dissolution,
lease, farmout, or other disposition of the Company or any of the
Shares or any of the assets of a Company or any Separate Unit
thereof, or any sale, exchange, transfer, contribution,
reorganization, distribution, actual or constructive liquidation,
dissolution, lease, or other disposition of CMS or any Affiliate
of CMS or the stock of CMS or any Affiliate of CMS that could have
the effect of causing a Company to become a member of a new
Consolidated Group, including, but not
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<PAGE> 7
limited to (i) any Event of Default by any of Walter, Walter
Holdings, or the Company under any Loan Document or other
obligation to OPIC; (ii) any default or claimed default by any of
Walter, Walter Holdings, or the Company with respect to any
indebtedness that could result in a recapture of DCLs of the
Company or any separate Unit thereof; or (iii) any Loss Event
under any Insurance Policy or any other similar policy issued by
any other Person relating to the Company that could result in a
recapture of DCLs of the Company or any Separate Unit thereof;
E. shall, prior to any sale, exchange, transfer, contribution,
reorganization, distribution, actual or constructive liquidation,
dissolution, lease, farmout, or other disposition of the Company
or any of the Shares that would have the effect of causing a
Company to cease being a member of its Consolidated Group or any
of the assets of the Company or any Separate Unit thereof (other
than sales of hydrocarbons or surplus materials or equipment in
the ordinary course of business), notify APC in writing of the
terms and conditions of the proposed sale, exchange, transfer,
contribution, disposition, reorganization, actual or constructive
liquidation, dissolution, lease, farmout, or other disposition and
APC shall then have thirty (30) days to elect to purchase such
Shares or assets on such notified terms;
F. shall require any Obligated Person to agree to fulfill and be
bound by all of the obligations and covenants of CMS, Enterprises,
Nomeco, Walter, Walter Holdings, and Walter Congo contained in
this Agreement;
G. shall honor and abide by, and shall not in any way amend the terms
and obligations, of that certain Letter dated November 21, 1994,
from ACEC to the Director General of Taxation of the Congo;
H. shall not permit the Company to incur secured indebtedness in
excess of $10,000,000 in the aggregate, other than the Loans,
without the prior written consent of APC, which consent shall be
granted if the lender enters into an option agreement with APC
similar in form and substance to that certain Option Agreement
between Amoco and OPIC dated February 24, 1995; and
I. shall not permit any omission within its control that causes a
Triggering Event (other than any failure to contribute money or
assets to the Company).
Notwithstanding the covenants contained in this Article 3, (A) if (i) the
conditions contained in Article 4.B or Article 4.C hereof are met with respect
to an event and (ii) CMS or any Affiliate of CMS is released from any indemnity
in accordance with Article 4.B hereof or Article 4.C hereof, then CMS or such
Affiliate shall, with respect to that event only, (a) have no further
obligation to comply with the obligations or covenants
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<PAGE> 8
contained herein and (b) be released from any breach of any covenant or
obligation contained herein, and (B) if (i) the conditions contained in Article
4.B hereof are met with respect to an event and (ii) the Company is released
from any indemnity in accordance with Article 4.B hereof, then CMS and its
Affiliates shall, with respect to that event only (a) have no further
obligation to comply with the obligations or covenants contained herein, and
(b) be released from any breach of any covenant or obligation contained herein.
For purposes of this paragraph and Article 4.B and Article 4.C hereof, an event
shall be deemed to be a separate event regardless of whether it may be, or may
have been intended to be, directly or indirectly, dependent on, related to, or
contemporaneous with any other event.
4. Indemnification by CMS, Enterprises, Nomeco, Walter, Walter Holdings,
and the Company
A. Except as expressly provided in Article 4.B and 4.C hereof, CMS,
Enterprises, Nomeco, Walter, Walter Holdings, the Company, or each
of them, jointly and severally, agree to indemnify and hold
harmless APC, its Affiliates, and their respective directors,
officers, and employees from and against any and all Taxes, tax
credits utilized, interest, penalties, costs of enforcement, and
reasonable attorneys fees incurred in defending against any claim
for Taxes, interest, penalties, or additional income or the
enforcement of this indemnification, if any, arising out of or
based upon or with respect to any failure by CMS, Enterprises,
Nomeco, Walter, Walter Holdings, the Company, or any of them, to
comply with each and every obligation and covenant of this
Agreement.
B. Notwithstanding the foregoing Article 4.A, CMS, Enterprises,
Nomeco, Walter, Walter Holdings, or the Company shall not be
required to indemnify APC, its Affiliates, or their respective
directors, officers, and employees:
(1) if, in the case of (i) a voluntary sale, exchange, transfer,
contribution, reorganization, distribution, actual or
constructive liquidation, dissolution, lease, farmout, or
other disposition of the Company or any of the Shares that
would have the effect of causing the Company to cease being a
member of its Consolidated Group or assets of the Company or
any Separate Unit thereof (other than sales of hydrocarbons
or surplus materials or equipment in the ordinary course of
business), or (ii) any sale, exchange, transfer,
contribution, reorganization, distribution, actual or
constructive liquidation, dissolution, lease, or other
disposition of CMS, Enterprises, Nomeco, Walter, Walter
Holdings or the stock of CMS, Enterprises, Nomeco, Walter, or
Walter Holdings that would have the effect of causing the
Company to become a member of a new Consolidated Group, CMS,
Enterprises, Nomeco, Walter, Walter Holdings, and the Company
obtained the review and written approval described in Article
3.C hereof.
(2) in the case of a transfer of any Shares of U.S. dollars
contained in any escrow account to OPIC or any other secured
lender as a result of a foreclosure upon default, but only if
APC and OPIC or other secured lender, as the case may be,
are, at the time of such transfer of Shares of U.S. dollars,
parties to an option agreement in the form and substance of
that certain Option Agreement attached as Schedule L to the
Agreement;
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<PAGE> 9
(3) in the case of any transfer of Shares or assets resulting
from an expropriation or other Loss Event under an Insurance
Policy, unless OPIC fails to pay compensation for any loss
under political risk or similar insurance because OPIC has
determined that a primary cause of the loss was unreasonable
actions, including corrupt practices, attributable to CMS or
any Affiliate of CMS; or
(4) if, in the case of any other sale, exchange, transfer,
contribution, reorganization, distribution, actual or
constructive liquidation, dissolution, lease, farmout, or
other disposition of the Company or any of the Shares or
assets of the Company not otherwise described in this Article
4.B, CMS, Enterprises, Nomeco, Walter, Walter Holdings, or
Company complied with Article 3.E hereof.
C. Notwithstanding the foregoing Article 3 or Article 4.A, in the
case of a Triggering Event attributable to a taxable period in
which the Company is not an Affiliate of CMS, CMS and its
Affiliates at the time of such Triggering Event shall not be
required to comply with the covenants and obligations contained in
Article 3 hereof or to indemnify APC, its Affiliates, or their
respective directors, officers, and employees.
5. Indemnification by APC
If CMS, Enterprises, Nomeco, Walter, Walter Holdings, and the Company
shall have complied with the obligations and covenants contained in
Article 3 of this Agreement with respect to a Triggering Event that
caused the recapture of DCLs of a Company or a Separate Unit thereof and
such DCLs are attributable to periods ending on or before the Sale
Closing Date, then APC shall indemnify and hold harmless CMS and its
Affiliates, and their respective directors, officers, and employees from
and against any and all Taxes, tax credits utilized, interest,
penalties, costs of enforcement, and reasonable attorneys fees incurred
in defending against any claim for Taxes, interest, penalties, or
additional income or the enforcement of this indemnification, if any,
arising out of or based upon or with respect to any such recapture.
6. Rights of Indemnifying Party
A. Each indemnified party hereunder agrees that within five (5)
calendar days following the issuance of any notice from any taxing
authority of a Tax assessment or deficiency resulting from any DCL
recapture in connection with which a claim for indemnification
under this Agreement might be made (a "Claim"), it will give
prompt notice thereof to the indemnifying party, together with a
statement of such information respecting any of such facts as it
may have and a formal demand for indemnification. The
indemnifying party shall not be obligated to indemnify the
indemnified party with respect to any Claim if the indemnified
party fails to notify the indemnifying party in sufficient time
and with sufficient detail to permit the
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<PAGE> 10
indemnifying party to defend against such matter and to make a
timely response thereto.
B. The indemnifying party shall be entitled, at its cost and expense,
to contest and defend by all appropriate legal proceedings any
Claim with respect to which they are called upon to indemnify the
indemnified party; provided, that notice of the intention so to
contest shall be delivered by the indemnifying party to the
indemnified party within 10 days after the date of receipt by the
indemnifying party of notice by the indemnified party of the
assertion of the Claim. Any such contest may be conducted in the
name and on behalf of the indemnifying party or the indemnified
party as may be appropriate. The indemnified party shall have the
right but not the obligation to participate in such proceedings
and to be represented by counsel of its own choosing at its sole
cost and expense.
C. If requested by the indemnifying party, the indemnified party
agrees to cooperate with the indemnifying party and its counsel in
contesting any Claim that the indemnifying party elects to contest
or, if appropriate, in making any counterclaim against the Person
asserting the Claim, or any cross-complaint against any Person,
and the indemnifying party will reimburse the indemnified party
for any expenses it incurs by so cooperating. The indemnified
party agrees to afford the indemnifying party and its counsel the
opportunity to be present at, and to participate in, conferences
with all Persons asserting any Claim against the indemnified party
or conferences with representatives of or counsel for such
Persons.
D. The indemnified party shall take no action which would prejudice
the indemnifying party's defense of the matter giving rise to the
Claim.
E. The indemnified party shall have no right to recover from any
other party hereto any losses, costs, expenses, or damages arising
under or in connection with this Agreement any amount in excess of
actual damages, court costs, and reasonable attorney fees,
suffered by such party. Each indemnified party waives any right
to recover punitive, special, exemplary, and consequential damages
arising under or in connection with this Agreement.
7. Defense Against Tax Claims
A. Amoco and CMS each agrees to notify the other parties to this
Agreement promptly in the event that, in respect of the Company or
any Separate Unit thereof, (i) any tax authority, in the course of
any audit or other examination of the tax returns or records of
such party, raises any question or issue with respect to any loss,
expense, or deduction constituting a DCL or any potential DCL
recapture, or (ii) any tax authority issues a notice of proposed
adjustment or similar notice with respect to any potential DCL
recapture.
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CMS will permit Amoco and will cause the Company and/or its
successors to permit Amoco, at Amoco's option and expense, to
direct the Company or any other Affiliate of CMS to take whatever
actions are reasonably necessary in Amoco's judgment to contest
and defend any issues which may result in a claim for such Taxes
prior to the payment of such Taxes.
In the event CMS or any Affiliate of CMS is responsible for paying
Taxes described in this Agreement or required to pay Amoco the
amount of such Taxes under any of the terms of this Agreement,
Amoco will permit CMS, at CMS's option and expense, to direct
Amoco to take whatever actions are reasonably necessary in CMS's
judgment to contest and defend any issues which may result in a
claim for such Taxes prior to the Payment of such Taxes and prior
to the payment of the amount of such Taxes to Amoco. If CMS
exercises the option provided for in the preceding sentence, Amoco
will, at CMS's request, cause its employees and representatives to
be available (at reasonable times and places) to consult with
employees and representatives of CMS regarding the issues relating
to such Taxes. CMS shall reimburse Amoco for all its reasonable
costs and expenses in complying with the previous sentence.
In the event of a claim by any taxing authority which will
adversely affect both Amoco and CMS by the liability to pay Taxes
and by payments under the terms of this Agreement or, if the
liability under such claim cannot be readily ascertained, Amoco
and CMS agree to cooperate fully with each other, each bearing its
own expenses, to take whatever action is necessary to contest and
defend or to direct the Company to contest and defend any issue
which may result in a claim for Taxes or a payment under the terms
of this Agreement prior to the payment of such Taxes and prior to
the payment of the amount of such Taxes to CMS or Amoco.
B. If a Tax has been paid to any taxing authority and, as a result of
the payment of such Tax, either Amoco or CMS incurs a liability to
make payment to the other because of the payment of such Tax,
provisions similar to Article 6.A above shall apply to enable the
party or parties bearing the burden of the Tax liability to cause
the appropriate party to take whatever action is necessary to
claim, pursue or litigate with respect to a refund of such Tax.
If the entire burden of an increased Tax liability has been borne
by Amoco or by CMS, the right to litigate for or otherwise claim
Tax refunds shall be assigned, to the extent it is legally
permissible to do so, to the party bearing such economic burden.
If any refunds or settlement amounts shall be delivered to the
party who did not bear the burden of the Tax liability, such party
shall assign such amounts to the party who bore the burden of the
Tax liability. In the event both Amoco and CMS jointly bear the
economic burden of the payment of any Tax described in this
Agreement, Amoco and CMS agree to cooperate fully with each other,
each bearing its own expenses, to cause the appropriate party to
litigate the claim for Tax refund and to share the proceeds of any
refund or settlement in proportion to the economic burden
previously borne.
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8. Survival
Except as otherwise expressly provided in Article 4.C hereof, the
obligations, covenants, and agreements set forth in the Tax Agreement
and this Agreement and in any certificate or instrument delivered in
connection therewith and herewith shall, unless otherwise provided,
survive regardless of any subsequent transaction involving the stock or
assets of the CMS, Enterprises, Nomeco, Walter, Walter Holdings, or the
Company or any Separate Unit thereof.
9. Notices
A. All notices shall be given in writing and shall be delivered (i)
by hand to the party for which intended, (ii) by registered or
certified mail, return receipt requested, postage prepaid, (iii)
by telex, or (iv) by facsimile, all of which addressed to the
party for which it is intended at the following respective
addresses or such other person or address previously furnished in
writing by either party in the manner provided herein:
To Amoco or its Affiliates: Amoco Corporation
501 WestLake Park Boulevard
Houston, Texas 77079
Telephone: (713) 366-7119
Facsimile: (713) 366-7596
Attention: Michael A. Wolf,
Director of Taxes--APC(I)
with a copy to:
Amoco Corporation
501 WestLake Park Boulevard
Houston, Texas 77079
Telephone: (713) 366-2755
Facsimile: (713) 366-7596
Attention: Robert M. Gordon,
Senior Tax Attorney (International)
To CMS or its Affiliates: CMS-Nomeco Oil & Gas Company
1 Jackson Square
Jackson, Michigan 49204
Telephone: (517) 787-9011
Facsimile: (517) 787-6360
Attention: William H. Stephens, III
B. The date of service of the notice shall be the date on which
notice is received.
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10. No Waiver
No failure or delay by any party hereto in exercising any right, power,
privilege or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power, privilege or
remedy preclude the exercise of any other right, power, privilege or
remedy. The rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies provided by law. No amendment,
modification or waiver of, or consent with respect to, any provision of
this Agreement shall in any event be effective unless the same shall be
in writing.
11. Successors and Assigns
This Agreement shall be binding upon and inure to the benefit of the
parties and their respective permitted successors and assigns other than
OPIC or any other Person who is not an Obligated Person. No party to
this Agreement shall be relieved of its obligations hereunder, by
assignment or otherwise, without the prior written consent of the other
parties hereto.
12. Governing Law and Dispute Resolution
A. This Agreement shall be governed by the laws of Illinois excluding
any choice of law provisions which would require the application
of the law of any other jurisdiction.
B. Any action, dispute, claim or controversy of any kind now existing
or hereafter arising between any of the parties hereto in any way
arising out of, pertaining to or in connection with this Agreement
(a "Dispute") shall be resolved by binding arbitration in
accordance with the terms hereof. Any party may, by summary
proceedings, bring an action in court to compel arbitration of any
Dispute.
C. Any arbitration shall be administered by the American Arbitration
Association (the "AAA") in accordance with the terms of this
Article 12, the Commercial Arbitration Rules of the AAA, and, to
the maximum extent applicable, the Federal Arbitration Act.
Judgment on any award rendered by an arbitrator may be entered in
any court having jurisdiciton.
D. Any arbitration shall be conducted before one arbitrator. The
arbitrator shall be a licensed practicing attorney who is
knowledgeable in the subject matter of the Dispute selected by
agreement between the parties hereto. If the parties cannot agree
on an arbitrator within 30 days after the request for an
arbitration, then any party may request the AAA to select an
arbitrator. The arbitrator may engage engineers, accountants or
other consultants that the arbitrator deems necessary to render a
conclusion in the arbitration proceeding.
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E. To the maximum extent practicable, an arbitration proceeding
hereunder shall be concluded within 180 days of the filing of the
Dispute with the AAA. Arbitration proceedings shall be conducted
in Houston, Texas. Arbitrators shall be empowered to impose
sanctions and to take such other actions as the arbitrators deem
necessary to the same extent a judge could impose sanctions or
take such other actions pursuant to the Federal Rules of Civil
Procedure and applicable law. At the conclusion of any
arbitration proceeding, the arbitrator shall make specific written
findings of fact and conclusions of law. The arbitrator shall
have the power to award recovery of all costs and fees to the
prevailing party. Each party agrees to keep all Disputes and
arbitration proceedings strictly confidential except for
disclosure of information required by applicable law.
F. All fees of the arbitrator and any engineer, accountant or other
consultant engaged by the arbitrator, shall be paid by Amoco, on
the one hand, and CMS, on the other hand, equally unless otherwise
awarded by the arbitrator.
13. Further Assurances and Guaranty
A. The parties hereto hereby agree to execute all such further
instruments and documents, and to take all such other actions, as
may be reasonable and appropriate to further effectuate the intent
of this Agreement.
B. CMS, Enterprises, Nomeco, Walter, Walter Holdings, and Walter
Congo, jointly and severally, unconditionally guarantee as if each
of them were the primary obligor, the punctual payment and
performance of each of their obligations under this Agreement and
any other agreement between any of the parties hereto required by
this Agreement.
14. Headings
References herein to Articles are to Articles of this Agreement.
Article headings in this Agreement are included herein for convenience
of reference only and shall not constitute a part of the Agreement for
any other purpose.
15. Severability of Provisions; Effectiveness
Any provision of this Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability
of such provision in any other jurisdiction. This Agreement shall
become effective when CMS Merging Corporation, or another member of the
CMS consolidated group, merges into and with Walter as contemplated by
the fourteenth Whereas paragraph hereof.
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16. Execution in Counterparts
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of
which taken together shall constitute but one and the same instrument.
17. Entire Agreement
Except for the Tax Agreement, to which Amoco, APC, Walter, Walter
Holdings, and the Company shall remain subject, this Agreement
represents the entire understanding of the parties with respect to the
subject matter hereof. There are no other terms, condiitions,
representations or warranties, express or implied, written or oral,
except as set forth herein or in the Tax Agreement. No amendments,
modifications or additions hereto shall be binding unless executed in
writing by all of the parties to this Agreement.
18. Expenses
Except as otherwise expressly provided in the Agreement or in this
Agreement, each party shall pay its own expenses, including
consultants', counsels', and public accountants' fees and expenses
incurred in any way in connection with this Agreement.
19. Confidentiality
Except as may be required by law or regulation or this Agreement, the
parties agree to keep confidential this Agreement and the terms and
provisions hereof and not to disclose them to any third party without
the prior written consent of the parties hereto.
20. No Third Party Beneficiaries
Nothing expressed or referred to in this Agreement is intended to or
shall be construed to give any Person other than Amoco or CMS (and their
respective Affiliates) any legal or equitable remedy or claim under or
with respect to this Agreement.
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IN WITNESS WHEREOF, the parties have negotiated and duly executed this
Agreement on the day and year first written above.
AMOCO CORPORATION
By /s/ John D. Spence
------------------------
Name: John D. Spence
Title: Attorney-In-Fact
AMOCO PRODUCTION COMPANY
By /s/ John D. Spence
------------------------
Name: John D. Spence
Title: Attorney-In-Fact
CMS ENERGY CORPORATION
By P. D. Hopper
------------------------
Name: Preston D. Hopper
Title: Vice President
CMS ENTERPRISES COMPANY
By P. D. Hopper
------------------------
Name: Preston D. Hopper
Title: Vice President
CMS-NOMECO OIL & GAS COMPANY
By /s/ W. H. Stephens
------------------------
Name: W. H. Stephens, III
Title: Sr. Vice President
WALTER INTERNATIONAL, INC.
By F. Fox Benton, Jr.
------------------------
Name: F. Fox Benton, Jr.
Title: Exec. Vice President
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WALTER CONGO HOLDINGS COMPANY
By F. Fox Benton, Jr.
------------------------
Name: F. Fox Benton, Jr.
Title: Exec. Vice President
WALTER INTERNATIONAL CONGO, INC.
By F. Fox Benton, Jr.
------------------------
Name: F. Fox Benton, Jr.
Title: Exec. Vice President
17
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EXHIBIT 10.25
INTER-PURCHASER AGREEMENT
This Inter-Purchaser Agreement (this "Agreement") dated as of December
28, 1994, is entered into by and among Walter International, Inc., a Texas
corporation ("Walter"), Walter Congo Holdings, Inc., a Texas corporation
("Walter Holdings"), Walter International Congo, Inc., a Texas corporation
("Old Walter Congo"), Nuevo Energy Company, a Delaware corporation ("Nuevo"),
The Congo Holding Company, a Texas corporation ("Nuevo Holdings"), and The
Nuevo Congo Company, a Texas corporation ("Old Nuevo Congo").
1. INTRODUCTION.
1.1 On June 30, 1994, Walter entered, and caused its indirect
subsidiary Old Walter Congo to enter, and Nuevo entered and caused its indirect
subsidiary, Old Nuevo Congo, to enter, into that certain Stock Purchase
Agreement (the "Purchase Agreement") with Amoco Production Company ("Amoco").
Pursuant to the Purchase Agreement, Old Walter Congo will merge with and into
Amoco Congo Exploration Company, a Delaware corporation ("ACE"), with ACE as
the surviving entity, and Old Nuevo Congo will merge with and into Amoco Congo
Petroleum Company, a Delaware corporation ("ACP"), with ACP as the surviving
entity (collectively, the "Mergers"). After the Mergers, the name of ACE will
be changed to Walter International Congo, Inc. ("New Walter Congo") and the
name of ACP will be changed to The Nuevo Congo Company ("New Nuevo Congo"). In
this Agreement, any reference to "Walter Congo" shall mean Old Walter Congo
prior to the Mergers and New Walter Congo after the Mergers, and any reference
to "Nuevo Congo" shall mean Old Nuevo Congo prior to the Mergers and New Nuevo
Congo after the Mergers.
1.2 All of the capital stock of Old Nuevo Congo is held by
Nuevo Holdings, prior to the Mergers, and all the capital stock of New Nuevo
Congo will be held by Nuevo Holdings after the Mergers. Nuevo Holdings is a
wholly-owned subsidiary of Nuevo. All of the capital stock of Old Walter Congo
is held by Walter Holdings, prior to the Mergers, and all of the capital stock
of New Walter Congo will be held by Walter Holdings after the Mergers. Walter
Holdings is a wholly-owned subsidiary of Walter.
1.3 ACE owns an undivided 25% interest in the Marine I Joint
Operating Agreement and a like beneficial interest in the Convention and Yombo
Permit. ACP owns an undivided 18.75% interest in the Marine I Joint Operating
Agreement and a like beneficial interest in the Convention and Yombo Permit.
1.4 Nuevo has posted a letter of credit for the benefit of
Amoco on behalf of both of the Purchasers in connection with the letter of
intent dated December 2, 1993, executed by Walter, Nuevo and Amoco; replacement
letters of credit in connection with extensions of the letter of intent; and a
letter of credit for the benefit of Amoco on behalf of both of the Purchasers
as required by Section 5 of the Purchase Agreement. In addition, Nuevo will
post a letter of credit for the benefit of Amoco on behalf of both Purchasers
to secure the Promissory Note as required by Section 3.A(2) of the Purchase
Agreement.
<PAGE> 2
1.5 The purpose of this Agreement is to set forth certain
understandings between Walter and certain of its subsidiaries and Nuevo and
certain of its subsidiaries. For good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereby agree as
set forth herein.
2. DEFINITIONS. Capitalized terms used in this Agreement and not
otherwise defined herein shall have the meanings set forth in the Purchase
Agreement or the Tax Agreement (as defined in the Purchase Agreement). In
addition to the terms defined elsewhere in this Agreement, the following terms
shall have the meaning set forth below, which shall be equally applicable to
both the singular and the plural forms of the terms herein defined:
"Business Day" means any day excluding Saturday, Sunday, or any day
which shall be in Houston, Texas, a legal holiday or a day on which banking
institutions in Houston, Texas are authorized or required by law to close.
"Finance Agreement" shall mean, with respect to Walter Congo, the
Finance Agreement to be entered into between OPIC, Walter Holdings and Walter
Congo and, with respect to Nuevo Congo, the Finance Agreement to be entered
into between OPIC, Nuevo Holdings and Nuevo Congo; and "Finance Agreements"
shall mean both such agreements.
"Interests" shall mean the undivided interests in the Marine I Joint
Operating Agreement and the beneficial interests in the Convention and Yombo
permit.
"Latent ORRI" shall mean those certain contractual obligations of Walter
Congo (or its assigns or successors) as described in Section 6.4.
"Latent Working Interest" shall mean those certain contractual
obligations and rights of Walter Congo (or its assigns or successors) as
described in Section 6.3.
"NOMECO" shall mean NOMECO Oil & Gas Company.
"OPIC Financing" shall mean (i) the loans to be obtained by Nuevo Congo
and Walter Congo for the cash to be paid to Amoco pursuant to the Mergers and
the development of the Yombo Permit and the related guarantee to be provided by
OPIC and (ii) the political risk insurance to be provided by OPIC.
"Promissory Note" shall mean the Promissory Note payable to Amoco to be
delivered by Purchasers pursuant to Section 3.A(2) of the Purchase Agreement.
"Republic" shall mean the Republic of the Congo.
"Walter Congo Note" shall mean that demand promissory note payable to
Nuevo Holdings (or its assigns or successors) delivered by Walter Congo as
described in paragraph 6.1 below.
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<PAGE> 3
3. RELATIONSHIP OF THE PARTIES. Walter and Nuevo are causing Old
Walter Congo and Old Nuevo Congo, respectively, to enter into the transactions
contemplated by the Purchase Agreement and to become independent owners of the
capital stock of ACE and ACP, respectively. After the Closing, Walter and
Nuevo will cause Walter Congo and Nuevo Congo, respectively, to own and operate
the interests under the Convention on the same terms and conditions as
currently in force pursuant to the Marine I Joint Operating Agreement. Nothing
contained in this Agreement or the Stock Purchase Agreement shall be deemed to
constitute any of Nuevo, Nuevo Holdings or Nuevo Congo, on the one hand, and
Walter, Walter Holdings or Walter Congo, on the other hand, as a partner, joint
venturer, agent or legal representative of the other or to create any fiduciary
relationship. Except as otherwise expressly provided in the Marine I Joint
Operating Agreement, or the Purchase Agreement, neither Purchaser shall have
any authority to act for or to assume any obligation or responsibility on
behalf of any other Purchaser.
4. TRANSACTION EXPENSES.
4.1 Except as provided in Section 4.2, each of Nuevo and
Walter shall reimburse the other for one-half of all reasonable and customary
expenses incurred by the other (or its respective subsidiaries) that are common
to the parties in connection with the transactions contemplated by the Purchase
Agreement and the OPIC Financing, including, without limitation, (i) all fees
and expenses in connection with the letters of credit posted pursuant to the
letter of intent and the Purchase Agreement prior to the Closing, (ii) all fees
and expenses in connection with the letter of credit posted by Nuevo pursuant
to the Purchase Agreement to secure payment of the Promissory Note described in
Section 3(B)(2) of the Purchase Agreement, but only to the extent that a
party's respective share of the obligations under such Promissory Note remains
unpaid, (iii) all legal and accounting fees and disbursements and fees and
expenses of other advisers retained by it in connection with due diligence,
negotiation, drafting, transition expenses and other similar activities,
whether in the Republic or elsewhere, and (iv) travel and other reasonable
business expenses incurred in connection with the Purchase Agreement.
4.2 Each of Walter and Nuevo shall individually bear and pay
their respective (x) fees and expenses relating to negotiations and agreements
between them, including fees and expenses incurred with respect to this
Agreement, (y) fees and expenses relating to compliance by each of Walter
(including its Affiliates) and Nuevo (including its Affiliates) with
representations, warranties and covenants relating or pertaining to each of
them, individually, in favor of Amoco, OPIC or each other, and (z) fees and
expenses relating to any other matters not substantially related to the common
undertaking by such parties as contemplated by the Purchase Agreement and the
OPIC Financing.
4.3 Walter and Nuevo shall invoice each other for amounts that
may be reimbursed pursuant to this Section, and all such amounts that meet the
requirements of this Section shall be paid by Walter to Nuevo or by Nuevo to
Walter, as appropriate, within thirty days after receipt of the invoice. Any
single expense that is to be borne by both parties in excess of $10,000 shall
be approved by both Walter and Nuevo.
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<PAGE> 4
5. OBLIGATIONS TO AMOCO AND THE IRS.
5.1 Walter shall, and shall require Walter Congo and Walter
Holdings to, and Nuevo shall, and shall require Nuevo Congo and Nuevo Holdings
to, perform all of their respective obligations (including both affirmative and
negative covenants) under the Marine I Joint Operating Agreement, the Tax
Agreement, the Purchase Agreement, the Closing Agreement and all of the
agreements executed in connection with the OPIC Financing. In addition, (i)
neither Walter nor Nuevo shall, and Walter and Nuevo shall not permit any of
their respective Affiliates to, take (or, to the extent possible, permit) any
action for which any of them would have an obligation to indemnify Amoco or any
of its Affiliates under the terms of the Tax Agreement without obtaining the
prior consent of the other and (ii) unless they obtain the prior consent of the
other, Walter and Nuevo shall, and Walter and Nuevo shall cause each of their
respective Affiliates to, take all actions necessary to avoid the occurrence of
an event for which any of them would have an obligation to indemnify Amoco or
any of its Affiliates under the terms of the Tax Agreement. Such consent may
be conditioned on, among other things, the receipt by the party that is to
provide the consent of an indemnity from an entity acceptable to such
consenting party (in its sole discretion) against any liability, cost or
expense in connection with such action.
5.2 To the extent that any act, omission, condition or event
with respect to Walter or any of its Affiliates causes the occurrence of a
Triggering Event without the prior consent of Nuevo or any Affiliate of Nuevo
having been obtained to such act, omission, condition or event, Walter shall
reimburse Nuevo for any and all amounts payable by Nuevo or any Affiliate of
Nuevo to Amoco or any Affiliate of Amoco pursuant to the Tax Agreement or to
the IRS pursuant to the Closing Agreement. Such reimbursement shall be
adjusted to eliminate any net tax effect from such reimbursement or payments
pursuant to the Tax Agreement or to the IRS.
5.3 To the extent that any act, omission, condition or event
with respect to Nuevo or any of its Affiliates causes the occurrence of a
Triggering Event without the prior consent of Walter or any Affiliate of Walter
having been obtained to such act, omission, condition or event, Nuevo shall
reimburse Walter for any and all amounts payable by Walter or any Affiliate of
Walter to Amoco or any Affiliate of Amoco pursuant to the Tax Agreement or to
the IRS pursuant to the Closing Agreement. Such reimbursement shall be
adjusted to eliminate any net tax effect from such reimbursement or payments
pursuant to the Tax Agreement or to the IRS.
5.4 Nuevo shall reimburse Walter for any payment that Walter
is required to make to Amoco or its Affiliates in connection with any
representation or warranty relating or pertaining to Nuevo or its Affiliates in
the Purchase Agreement.
5.5 Walter shall reimburse Nuevo for any payment that Nuevo is
required to make to Amoco or its Affiliates in connection with any
representation or warranty relating or pertaining to Walter or its Affiliates
in the Purchase Agreement.
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<PAGE> 5
5.6 Except as provided in Sections 5.2, 5.3, 5.4 or 5.5, in
the event Walter or any of its respective Affiliates is obligated to pay to
Amoco or any of its Affiliates any amount in connection with the Purchase
Agreement (including the Promissory Note and the Production Payment), the Tax
Agreement or the Closing Agreement and Nuevo does not pay an equal amount to
Amoco or its Affiliates, then Nuevo shall reimburse Walter the amount necessary
to equalize the payments by Walter and its Affiliates, collectively, and Nuevo
and its Affiliates, collectively.
5.7 Except as provided in Sections 5.2, 5.3, 5.4 or 5.5, in
the event Nuevo or any of its respective Affiliates is obligated to pay to
Amoco or any of its Affiliates any amount in connection with the Purchase
Agreement (including the Promissory Note and the Production Payment), the Tax
Agreement or the Closing Agreement and Walter does not pay an equal amount to
Amoco or its Affiliates, then Walter shall reimburse Nuevo the amount necessary
to equalize the payments by Walter and its Affiliates, collectively, and Nuevo
and its Affiliates, collectively.
5.8 In the event that Amoco or any of its Affiliates receives
any funds under the letters of credit posted by Nuevo prior to the Closing,
then reimbursements to the issuer of such letters of credit by Nuevo or any of
its Affiliates that are discharged by the funds delivered to Amoco or its
Affiliates shall be deemed a payment by Nuevo and its Affiliates for purposes
of this Section 5. In the event that Amoco or any of its Affiliates receives
any funds under the letter of credit posted by Nuevo pursuant to the Purchase
Agreement to secure payment of the Promissory Note described in Section 3(B)(2)
of the Purchase Agreement, then reimbursements to the issuer of such letter of
credit by Nuevo or any of its Affiliates shall be deemed a payment by Nuevo and
its Affiliates for purposes of this Section 5 as long as Walter has not paid
its share of such Promissory Note.
5.9 At least ten days prior to filing any consolidated federal
income tax return, Walter shall provide Nuevo a copy of the certification to be
included with such return described in Treas. Reg. Section
1.1503-2(g)(2)(vi)(B) which is required to avoid a Triggering Event. At least
ten days prior to filing any consolidated federal income tax return, Nuevo
shall provide Walter a copy of the certification to be included with such
return described in Treas. Reg. Section 1.1503-2(g)(2)(vi)(B) which is required
to avoid a Triggering Event. Within two business days of a party's providing a
notice to Amoco under Section 3 of the Tax Agreement, it shall provide a copy
to the other parties hereto.
5.10 Pursuant to the Stock Purchase Agreement, the combined
purchase price for the stock of ACE and ACP is the sum of $31.5 million plus
the Balancing Payment--the sum of $18 million plus 57.143% of the Balancing
Payment attributable to the ACE stock and the sum of $13.5 million plus 42.857%
of the Balancing Payment attributable to the stock of ACP. The parties will
pay this purchase price to Amoco in the following manner: Walter Holdings will
pay the sum of $18 million plus 57.143% of the Balancing Payment to Amoco for
100% of the stock of ACE and Nuevo Holdings will pay the sum of $13.5 million
plus 42.857% of the Balancing Payment to Amoco for 100% of the stock of ACP.
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<PAGE> 6
6. NUEVO HOLDINGS LOAN TO WALTER CONGO; CREATION OF LATENT WORKING
INTEREST AND LATENT ORRI.
6.1 To enable Walter Holdings to purchase 100% of the stock of
ACE, Nuevo Holdings will loan to Walter Congo pursuant to the Walter Congo Note
a principal amount equal to the sum of $2.25 million plus 7.143% of the
Balancing Payment (the "Principal Amount"). The terms of the Walter Congo Note
shall authorize Nuevo Holdings (or its assigns or successors) to demand (at the
option of Nuevo Holdings or its assigns or successors) payment of the Walter
Congo Note either (i) in cash or (ii) in kind through the creation of certain
contract rights pursuant to the Latent Working Interest and the Latent ORRI.
The various steps associated with the Walter Congo Note and the creation of the
Latent Working Interest and the Latent ORRI are set out below and shall occur
in the order set out:
First, on the Closing Date, Nuevo Holdings will loan the Principal
Amount to Walter Congo, and such loan shall be evidenced by the Walter Congo
Note. Walter Congo agrees to use the proceeds of this loan solely to acquire
the stock of ACE.
Second, on the Closing Date, Walter Holdings will arrange for Walter
Congo to obtain, as of the Closing Date, but prior to the Closing, an amount
equal to the sum of $18 million plus 57.143% of the Balancing Payment
(including the proceeds from the Walter Congo Note). Nuevo Holdings will
arrange for Nuevo Congo to obtain, as of the Closing Date but prior to the
Closing, an amount equal to the sum of $13.5 million plus 42.857% of the
Balancing Payment.
Third, on the Closing Date, Walter Holdings will purchase 100% of the
stock of ACE from Amoco for an amount equal to the sum of $18 million plus
57.143% of the Balancing Payment, by causing Walter Congo to merge into ACE,
with ACE the surviving entity. Walter Holdings will cause ACE to change its
name to Walter International Congo, Inc. Simultaneously Nuevo Holdings will
purchase 100% of the stock of ACP from Amoco for an amount equal to the sum of
$13.5 million plus 42.857% of the Balancing Payment, by causing Nuevo Congo to
merge into ACP, with ACP the surviving entity. Nuevo Holdings will cause ACP
to change its name to The Nuevo Congo Company.
Fourth, on the Closing Date, Nuevo Holdings will contribute the Walter
Congo Note to the capital of Nuevo Congo.
Fifth, no sooner than the day immediately after the Closing Date, Nuevo
Congo will demand of Walter Congo the payment of the Walter Congo Note by the
creation of the contractual rights and obligations represented by the Latent
Working Interest and the Latent ORRI. Walter Congo will create contracts
represented by the Latent Working Interest and the Latent ORRI and deliver them
to Nuevo Congo, in complete satisfaction of all obligations of Walter Congo
under the Walter Congo Note.
6.2 Walter and Nuevo agree that they will take consistent
income tax reporting positions with respect to the contractual rights and
obligations represented by the Latent Working Interest and the Latent ORRI.
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<PAGE> 7
6.3 The contract for the Latent Working Interest will evidence
for Nuevo Congo the following contractual rights and obligations: (i) the right
of Nuevo Congo (or its assigns or successors) to receive from Walter Congo (or
its assigns or successors) an amount of cash equal to the amount of cash,
proceeds and revenues attributable to an undivided 12.5% of Walter Congo's 25%
interest in the Marine I Joint Operating Agreement and like beneficial interest
in the Convention and Yombo Permit and any rights of Walter Congo arising after
the Closing Date under the Purchase Agreement, payable by Walter Congo (or its
assigns or successors) at the times that the operator under the Marine I Joint
Operating Agreement makes distributions of proceeds from the sale of
hydrocarbons to working interest owners or at the time of a sale of such
interests; and (ii) the obligation of Nuevo Congo (or its assigns or
successors) to pay to Walter Congo (or its assigns or successors) an amount of
cash equal to 12.5% of the obligations, costs, expenses and other liabilities
payable by Walter Congo with respect to its interest in the Marine I Joint
Operating Agreement, the Convention and the Yombo Permit, including a
proportionate part of the obligations after the Closing Date under the Purchase
Agreement (but excluding (A) any part of the OPIC Financing or any OPIC
Insurance Costs and (B) the Latent ORRI), payable at such time as Walter Congo
(or its assigns or successors) is obligated to make such payments under the
Marine I Joint Operating Agreement or other instruments.
6.4 The contract for the Latent ORRI will evidence for Nuevo
Congo (or its assigns or successors) a contractual right to receive from Walter
Congo (or its assigns or successors) an amount of cash equal to the amounts
that would be paid with respect to an overriding royalty interest equal to the
difference between (a) one-half the aggregate royalty burden to the Republic on
the interest of Walter Congo and Nuevo Congo in the Convention and (b) the
royalty burden to the Republic on the interest of Walter Congo beneficially
owned by Walter Congo (ie., 21.875% out of Walter Congo's 25% interest). Such
amounts shall be calculated and paid in the same manner as royalty payments are
made to or for the account of the Republic. The Latent ORRI will also evidence
the parties' obligations to make additional payments measured by the Congolese
income tax consequences of their Congolese operations.
6.5 Walter Congo shall not be liable for any actions taken
hereunder with respect to the Latent Working Interest or the Latent ORRI if
made in good faith and without gross negligence, fraud or bad faith. Walter
Congo shall not be treated as a fiduciary with respect to the Latent Working
Interest or the Latent ORPI.
6.6 Nuevo and Nuevo Congo hereby jointly and severally agree
to indemnify and hold harmless Walter Congo and its Affiliates from and against
any and all claims, damages, losses, liabilities and expenses of any kind,
including but not limited to any liability or expense arising from U.S. or
Congolese income, capital gains, or other taxes paid or payable on production
or with respect to the Latent Working Interest or the Latent ORRI, in
connection with or arising directly or indirectly out of the creation of the
Latent Working Interest or the Latent ORRI and payments made thereunder, unless
such claims, damages, losses, liabilities or expenses resulted from the sole
gross negligence, fraud or bad faith of Walter or Walter Congo. Such indemnity
with respect to taxes shall be grossed up or decreased as necessary to
eliminate any net tax effect from such indemnity payments.
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<PAGE> 8
6.7 Nuevo and Walter agree that prior to the creation of the
contractual rights represented by the Latent Working Interest and the Latent
ORRI, they shall (i) comply with the requirements of the Tax Agreement, and
(ii) submit (and shall cause their respective controlled subsidiaries to join
in such submission) to the Internal Revenue Service (the "IRS") a request for a
Closing Agreement as specified in Treasury Regulations Section
1.1503-2(g)(2)(iv)(B)(2). In conjunction with such Closing Agreement, Walter
shall request from the IRS such rulings as Nuevo and Walter shall jointly deem
necessary, taking into account the ruling submitted to the IRS by Amoco in
conjunction with the sale of the stock of ACE and ACP. The parties agree to
make all representations and supply all information necessary for the IRS to
enter into the Closing Agreement and to issue the rulings that may be requested
pursuant to the prior sentence.
6.8 If Nuevo Congo requests and Nuevo Congo has obtained the
appropriate approvals, Walter Congo will make assignments to Nuevo Congo of the
interests in the Marine I Joint Operating Agreement represented by the Latent
Working Interest and the Latent ORRI.
7. LOANS BETWEEN THE COMPANIES; ACQUISITIONS PURSUANT TO FINANCE
AGREEMENTS.
7.1 In the event that either Walter Congo acquires the capital
stock or assets of Nuevo Congo or Nuevo Congo acquires the capital stock or
assets of Walter Congo pursuant to Section 9.14 of the respective Finance
Agreement, the acquiring party shall pay to the other an amount equal to the
appraised value as determined by an independent appraiser selected by Walter
and Nuevo (and, if Walter and Nuevo are unable to agree, then, at the request
of either of them, the judge of the Southern District of Texas that is senior
in term of service shall select an independent appraiser). The appraiser shall
utilize the most recent reserve value calculations prepared by the engineer
most recently employed by Walter Congo and Nuevo Congo pursuant to the Finance
Agreements. Such engineer shall utilize pricing parameters consistent with the
methodology utilized in connection with reports provided under the Finance
Agreements and shall utilize a discount rate of 25%.
7.2 In the event that either Nuevo Congo or Walter Congo
becomes a defaulting party under the terms of Section 8.05 of the Marine I
Joint Operating Agreement, the non-defaulting party shall have the right (but
not the obligation) to loan to the defaulting party prior to the expiration of
the ninety-day period described in Section 8.05(b) of the Marine I Joint
Operating Agreement the amount necessary to cure such default. The entire
amount loaned by the non-defaulting party to the defaulting party shall be used
within such ninety-day period to cure the default in accordance with Section
8.05(b) of the Marine I Joint Operating Agreement.
7.3 In the event that either Walter Congo or Nuevo Congo cures
a default by the other pursuant to Section 9.13 of the respective Finance
Agreement, the amount advanced to cure the default shall be deemed to be a loan
by the non-defaulting party.
7.4 In the event that any amount is loaned by either Walter
Congo or Nuevo Congo pursuant to Section 7.2 or is deemed to be loaned pursuant
to Section 7.3, such loaned amount shall be payable on demand (subject to the
terms of any subordination agreement in favor of OPIC required in connection
with the OPIC Financing) and shall bear interest at the lesser of (i) the prime
rate announced from time to time by Texas Commerce Bank National
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<PAGE> 9
Association plus 5% per annum or (ii) the maximum nonusurious rate permitted by
applicable law.
8. WORK PROGRAMS, BUDGET AND AFES; ADMINISTRATIVE AND TECHNICAL
MATTERS.
8.1 After the earlier of (i) the repayment by each of Walter
Congo and Nuevo Congo of all its obligations under its respective Finance
Agreement and all related documents or (ii) the completion of the development
program approved by OPIC in connection with the Finance Agreements, Walter
shall not permit Walter Congo, and Nuevo shall not permit Nuevo Congo, to
submit any work program, budget or authorization for expenditure pursuant to
Article 6 of the Marine I Joint Operating Agreement, or submit any other matter
for a vote of the owners of the Interests under the Marine I Joint Operating
Agreement without obtaining the prior approval of Nuevo Congo or Walter Congo,
as the case may be, which approval shall not be unreasonably withheld.
8.2 If (i) any matter is presented for a vote to the owners of
the Interests under the Marine I Joint Operating Agreement and (ii) the result
of the vote would change if the percentage attributable to the Latent Working
Interest were voted by Nuevo Congo rather than Walter Congo, then Walter Congo
shall vote its interest in a manner that will cause the same result that would
be obtained if the Latent Working Interest were voted by Nuevo Congo.
8.3 In the event that Walter or any of its Affiliates engages
Nuevo, Torch Operating Company or any of their respective Affiliates to perform
services with respect to the Yombo Permit, Nuevo shall, or shall cause Torch
Operating Company or such Affiliate to, provide a monthly invoice to Walter
Congo for such services, and Walter shall pay or cause Walter Congo to pay the
amount of such invoice within thirty days after receipt of such invoice.
8.4 Walter shall administer, or cause its Affiliates to
administer, in conformity with the standards set forth in Section 4.07 of the
Marine I Joint Operating Agreement, the OPIC Financing on behalf of Nuevo
Holdings and Nuevo Congo, including (i) the preparation for the review and
approval by Nuevo Holdings of all reports, certificates and other submissions
by Nuevo Holdings and Nuevo Congo pursuant to the agreements evidencing the
OPIC Financing, other than any financial statements or other financial
information pertaining primarily to Nuevo or its Affiliates, and (ii) the
coordination with the engineer that will provide reports to OPIC in connection
with the OPIC Financing so that the engineer has full and complete information
necessary to timely prepare whatever reports the engineer is required to
deliver pursuant to the OPIC Financing. Nuevo may assume the obligation to
administer the OPIC Financing provided to Nuevo Holdings and Nuevo Congo at any
time after thirty days notice to Walter. As long as Walter or one of its
Affiliates is administering the OPIC Financing on behalf of Nuevo Congo and
Nuevo Holdings, Nuevo shall cause Nuevo Congo to reimburse Walter and its
Affiliates for one-half of all of the reasonable costs and expenses incurred by
Walter and its Affiliates in connection with the administration of the OPIC
Financing.
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<PAGE> 10
9. RIGHT OF FIRST REFUSAL.
9.1 If Walter or Nuevo, or any of their respective Affiliates,
agrees or makes an arrangement (i) to sell all or any portion of the assets
constituting the interests under the Convention, the Yombo Permit or the Marine
I Joint Operating Agreement, (ii) to sell all or any portion of the capital
stock of Walter Holdings or Nuevo Holdings or any rights thereto, (iii) to sell
all or any portion of the capital stock of Walter Congo or Nuevo Congo,
respectively, (iv) for a merger of Walter Congo or Nuevo Congo, respectively,
with or into any other entity, or (v) for a merger of Walter Holdings or Nuevo
Holdings, respectively, with or into any other entity, then Walter or Nuevo,
respectively, shall promptly give written notice to Nuevo or Walter,
respectively. The notice shall contain the name and address of the
prospective purchaser, a summary of all relevant terms of the offer and a copy
of all agreements with, and offers from, the prospective purchaser relating to
the sale.
9.2 To the extent that Amoco or any of its Affiliates has a
preferential right under the Purchase Agreement, the Tax Agreement, or the
Option Agreement in connection with a proposed sale of Interests or capital
stock, or proposed merger, by or on behalf of either Nuevo Congo or Walter
Congo, and none of Amoco or such Affiliates elects to exercise such
preferential right, (i) Nuevo shall have an optional prior right to purchase or
merge (or to cause one of its subsidiaries to purchase or merge) on the same
terms and conditions as the proposed sale of such Interests or such capital
stock, or the proposed merger, as appropriate, by Walter Congo, Walter Holdings
or Walter, respectively; and (ii) Walter shall have an optional prior right to
purchase or merge (or to cause one of its subsidiaries to purchase or merge) on
the same terms and conditions as the proposed sale of such Interests, or the
proposed sale of such capital stock, or the proposed merger, as appropriate, by
Nuevo Congo, Nuevo Holdings, or Nuevo, respectively. To exercise the prior
right, Nuevo or Walter, as appropriate, must provide to the other a notice of
its (or its Affiliate's) intent to purchase such Interests or capital stock, or
to merge, as the case may be, within 15 days after receipt of the notice
described in Section 9.1. If such prior right is exercised and any right of
Amoco or any of its Affiliates is not exercised, the purchasing or merging
parties shall be entitled to complete the proposed purchase or merger in
accordance with the terms specified in the notice.
9.3 In the event that the proposed consideration to be
received by Walter or Nuevo or any of their respective Affiliates in connection
with any transaction described in Section 9.1 is not cash, then Nuevo and
Walter shall engage an independent appraiser acceptable to both of them to
determine the cash value of the proposed consideration. The person exercising
the right of first refusal shall pay to the other the cash value of the
non-cash consideration as determined by the appraiser.
9.4 There shall not be a preferential right under this Section
9 where Nuevo or Walter or any of their respective Affiliates grants a lien or
security interest in any asset or transfers any asset (via merger,
consolidation or otherwise) to any Affiliate of Nuevo or Walter, respectively,
nor shall the preferential right under this Section 9 apply to a merger by
Walter (or its Affiliates) with or into NOMECO (or its Affiliates).
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<PAGE> 11
10. BALANCING OF WORKING CAPITAL. The combined working capital of
ACE and ACP on the date of Closing shall be allocated to Walter Congo and Nuevo
Congo such that Walter Congo will own 57.143% of total combined working capital
of both entities and Nuevo Congo will own 42.857% of the total combined working
capital of both entities. To accomplish this, Walter and Nuevo shall prior to
June 30, 1995 examine the books of ACE and ACP to determine the actual working
capital of the two Companies as of the date of Closing. As soon as practical
after this determination has been made, Walter Congo shall pay to Nuevo Congo
an amount equal to the difference between (i) 42.857% of the amount obtained by
adding total cash and accounts receivable of both ACE and ACP and subtracting
therefrom total current liabilities of ACE and ACP, in each case determined
after, but as of, the Closing and (ii) the balance reflected on the books of
ACP equal to the amount obtained by adding cash and accounts receivable and
subtracting therefrom total current liabilities in each case determined on, but
as of, the Closing. In addition, amounts with respect to each of Crude Oil
Inventory, Materials and Supplies, and Prepaid Expenses equal to the difference
between 42.857% of the combined total amount determined after, but as of, the
Closing and the amount reflected on the books of ACP on the date of Closing
shall be transferred from the books of ACE to the books of ACP.
11. RESOLUTION OF DISPUTES.
11.1 On the request of any party hereto, whether made before or
after the institution of any legal proceeding, any action, dispute, claim or
controversy of any kind now existing or hereafter arising between any of the
parties hereto in any way arising out of, pertaining to or in connection with
this Agreement (a "Dispute") shall be resolved by binding arbitration in
accordance with the terms hereof. Any party may, by summary proceedings, bring
an action in court to compel arbitration of any Dispute.
11.2 Any arbitration shall be administered by the American
Arbitration Association (the "AAA") in accordance with the terms of this
Section, the Commercial Arbitration Rules of the AAA, and, to the maximum
extent applicable, the Federal Arbitration Act. Judgment on any award rendered
by an arbitrator may be entered in any court having jurisdiction.
11.3 Any arbitration shall be conducted before one arbitrator.
The arbitrator shall be a practicing attorney licensed to practice in the State
of Texas who is knowledgeable in the subject matter of the Dispute selected by
agreement between the parties hereto. If the parties cannot agree on an
arbitrator within 30 days after the request for an arbitration, then any party
may request the AAA to select an arbitrator. The arbitrator may engage
engineers, accountants or other consultants that the arbitrator deems necessary
to render a conclusion in the arbitration proceeding.
11.4 To the maximum extent practicable, an arbitration
proceeding hereunder shall be concluded within 60 days of the filing of the
Dispute with the AAA. Arbitration proceedings shall be conducted in Houston,
Texas. The arbitrator shall be empowered to impose sanctions and to take such
other actions as the arbitrator deems necessary to the same extent a judge
could impose sanctions or take such other actions pursuant to the Federal Rules
of Civil Procedure and applicable law. At the conclusion of any arbitration
proceeding, the arbitrator shall make specific written findings of fact and
conclusions of law. The arbitrator shall have the power to
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<PAGE> 12
award recovery of all costs and fees to the prevailing party. Each party
agrees to keep all Disputes and arbitration proceedings strictly confidential
except for disclosure of information required by applicable law.
11.5 All fees of the arbitrator and any engineer, accountant or
other consultant engaged by the arbitrator, shall be paid by Walter and Nuevo
equally unless otherwise awarded by the arbitrator.
12. PAYMENTS AND RECORDS. All payments due pursuant to Section 6
hereof shall be made at the address set forth below or at such other address as
Nuevo Congo may designate. All payments due with respect to any loan made
pursuant to Section 7 shall be made at the address set forth below or at such
other address as Nuevo or Walter may designate. Walter Congo shall maintain
true and correct books and records sufficient to enable Nuevo Congo to verify
the correctness of the amounts paid and payable to Nuevo Congo in connection
with the Latent Working Interest and the Latent ORRI.
13. ACCESS TO BOOKS AND RECORDS. At Nuevo's request, Walter shall
provide Nuevo with access, at the office of Walter during normal business
hours, to the books and records of Walter and its Affiliates relating to the
payments due under Section 4 hereof, the Yombo Permit, the Convention, the
Marine I Joint Operating Agreement and the OPIC Financing to enable Nuevo to
verify the compliance with the obligations of Walter and its Affiliates
hereunder. At Walter's request, Nuevo shall provide Walter with access, at the
office of Nuevo during normal business hours, to the books and records of Nuevo
and its Affiliates relating to the Yombo Permit, the Convention, the Marine I
Joint Operating Agreement and the OPIC Financing to enable Walter to verify the
compliance with the obligations of Nuevo and its Affiliates hereunder.
14. AREA OF INTEREST. In the event that Walter or Nuevo, or any of
their respective Affiliates, acquires, or acquires any right to acquire, any
interest in any rights to explore for, develop or produce hydrocarbons within
the Republic (the "Acquisitor"), then the Acquisitor shall provide a notice to
the other (the "offeree") describing the acquisition and all relevant terms of
any obligations associated with the acquired rights. In addition, the
notification by the Acquisitor shall contain an offer to assign to the offeree
one-half of the interest acquired for the payment of one-half of the
consideration paid by the Acquisitor and the assumption by the offeree of
one-half of the obligations of the Acquisitor with respect to the acquired
interest. To exercise the right to acquire, the offeree must notify the
Acquisitor within thirty days receipt of the notice.
15. SUCCESSORS AND ASSIGNS. Subject to the provisions of Section 9,
this Agreement shall inure to the benefit of and be binding upon the successors
and assigns of the respective parties hereto.
16. WAIVERS AND AMENDMENTS. To be effective, all amendments and
other modifications hereof and all consents that may be given pursuant hereto
must be in writing and signed by each of the parties hereto. Any party may by
written instrument (i) waive compliance by any other party with, or modify any
of, the covenants or agreements made to it by any other
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<PAGE> 13
party contained in this Agreement of (ii) waive or modify performance of any of
the obligations or other acts of any of the other parties hereto. The delay or
failure on the part of any party hereto to insist, in any one instance or more,
upon strict performance of any of the terms or conditions of this Agreement, or
to exercise any right or privilege herein conferred shall not be construed as a
waiver of any such terms, conditions, rights or privileges but the same shall
continue and remain in full force and effect. All rights and remedies are
cumulative.
17. NOTICES. All notices, consents and other communications under
this Agreement shall be in writing and shall be deemed to have been duly given
(a) when delivered by hand, (b) when sent by telecopier (with receipt
confirmed), provided that a copy is promptly thereafter mailed in the United
States by first class postage prepaid registered or certified mail, return
receipt requested, (c) when received by the addressee, if sent by express
delivery service (receipt requested) or by such other means as the parties may
agree from time to time or (d) five Business Days after being mailed in the
United States, by first class postage prepaid registered or certified mail,
return receipt requested; in each case to the appropriate addresses and
telecopier numbers set forth below (or to such other addresses, telex numbers
and telecopier numbers as a party may designate as to itself by notice to the
other parties):
if to Walter or any of its Affiliates:
Walter International, Inc.
1021 Main Street, Suite 2110
Houston, Texas 77002-6502
Telecopier No.: (713) 756-1111
Attention: F. Fox Benton, Jr.
if to Nuevo or any of its Affiliates:
Nuevo Energy Company
1221 Lamar, Suite 1600
Houston, Texas 77010
Telecopier No.: (713) 655-1711
Attention: Roland E. Sledge
18. SECTION HEADINGS. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
19. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
20. ENTIRE AGREEMENT. This Agreement, the exhibits, schedules and
annexes hereto, if any, contain the entire agreement between the parties hereto
with respect to the subject matter
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<PAGE> 14
hereof and thereof and supersede all prior agreements and undertakings between
the parties hereto relating to the subject matters hereof and thereof.
21. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the law of the State of Texas.
22. PAYMENT TERMS AND INTEREST CALCULATIONS.
22.1 If the due date for any payment hereunder falls on the
Saturday or a non-Monday bank holiday, such payment shall be made on the last
banking day before the non-banking day, and if such payment falls due on a
Sunday or a Monday bank holiday, such payment shall be made on the next
succeeding banking day.
22.2 Interest shall accrue on any unpaid and outstanding amount
on which interest is stated to accrue hereunder from the time such amount is
due and payable through the date upon which such amount, together with accrued
interest thereon, is paid in full.
22.3 All interest calculations hereunder shall be compounded
quarterly, to the extent permitted by law, if not paid currently.
22.4 A wire transfer or delivery of a check shall not operate
to discharge any payment under this Agreement and is accepted subject to
collection.
23. NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement shall
entitle any party other than Walter, Walter Holdings, Old Walter Congo, Nuevo,
Nuevo Holdings, and Old Nuevo Congo to any claim, cause of action, remedy or
right of any kind.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
Walter International, Inc.
Walter Congo Holdings, Inc.
Walter International Congo, Inc.
By: /s/ F. Fox Benton, Jr.
------------------------------
Name: F. Fox Benton, Jr.
-----------------------
Title: Exec. Vice Pres.
-----------------------
Nuevo Energy Company
The Congo Holding Company
The Nuevo Congo Company
By: /s/ Michael D. Watford
------------------------------
Michael D. Watford
President
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<PAGE> 1
EXHIBIT 10.26
STOCK PURCHASE AGREEMENT
SALE OF SHARES
IN
AMOCO CONGO EXPLORATION COMPANY
AND
AMOCO CONGO PETROLEUM COMPANY
BY
AMOCO PRODUCTION COMPANY
TO
WALTER INTERNATIONAL CONGO, INC.
AND
THE NUEVO CONGO COMPANY
<PAGE> 2
TABLE OF CONTENTS
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Purchase and Sale of Capital Shares . . . . . . . . . . . . . . . 3
3. Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4. Further Consideration . . . . . . . . . . . . . . . . . . . . . . . 6
5. Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6. Other Mutual Considerations . . . . . . . . . . . . . . . . . . . 8
7. Company Name Change . . . . . . . . . . . . . . . . . . . . . . . 10
8. Closing Transactions . . . . . . . . . . . . . . . . . . . . . . . 10
9. Representations and Warranties of Seller . . . . . . . . . . . . . 12
10. Representations and Warranties of Purchasers . . . . . . . . . . . 17
11. Additional Agreements, Covenants, Rights and Obligations . . . . . 23
12. Breach of Representations or Warranties . . . . . . . . . . . . . 24
13. Conditions Precedent for Closing by Seller . . . . . . . . . . . . 24
14. Conditions Precedent for Closing by Purchasers . . . . . . . . . . 26
15. Actions of the Companies Prior to Closing . . . . . . . . . . . . 28
16. Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
17. Termination of Use of Trademarks . . . . . . . . . . . . . . . . . 31
18. Records & Access to Properties & Records by Seller & Affiliates . 31
19. Indemnification by Seller . . . . . . . . . . . . . . . . . . . . 31
20. Indemnification by Purchasers . . . . . . . . . . . . . . . . . . 32
21. Right to Defend . . . . . . . . . . . . . . . . . . . . . . . . . 33
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<PAGE> 3
22. Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
23. Right of First Refusal . . . . . . . . . . . . . . . . . . . . . . 37
24. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
25. Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
26. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
27. No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
28. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . 39
29. Governing Law and Dispute Resolution . . . . . . . . . . . . . . . 39
30. Further Assurances and Guaranty . . . . . . . . . . . . . . . . . 40
31. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
32. Severability of Provisions . . . . . . . . . . . . . . . . . . . . 41
33. Execution in Counterparts . . . . . . . . . . . . . . . . . . . . 41
34. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 41
35. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
36. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . 41
37. Restricted Transactions . . . . . . . . . . . . . . . . . . . . . 42
38. No Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . 42
39. Compliance with Agreement . . . . . . . . . . . . . . . . . . . . 42
Schedules:
Schedule A - Promissory Note, Guaranty and Letter of Credit
Schedule B - Production Payment
Schedule C - Letter of Credit
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<PAGE> 4
Schedule D - Tax Agreement
Schedule E - Law Suits and Claims
Schedule F - Balance Sheet
Schedule G - Unplugged Wells
Schedule H - Listed Agreements
Schedule I - Continuing Insurance Policies
Schedule J - Tubulars and Drilling Equipment
Schedule K - Proprietary Items
Schedule L - Option Agreement
Schedule M - Agreement and Plan of Merger
iii
<PAGE> 5
STOCK PURCHASE AGREEMENT
This Agreement is made and entered into as of the 30th day of June,
1994, by and between Amoco Production Company, a Delaware corporation
("Seller"), and Walter International, Inc., a company organized under the laws
of Texas and Nuevo Energy Company, a company organized under the laws of
Delaware (collectively "Guarantors"), and Walter International Congo, Inc.
("Walter"), a company organized under the laws of Texas, Walter Congo Holdings,
Inc. ("Walter Holdings"), a company organized under the laws of Texas, The
Nuevo Congo Company ("Nuevo"), a company organized under the laws of Texas and
The Congo Holdings Company ("Nuevo Holdings'), a company organized under the
laws of Texas (Walter, Walter Holdings, Nuevo and Nuevo Holdings collectively
"Purchasers").
WITNESSETH:
WHEREAS, Seller is the owner of ten (10) issued capital shares, one
hundred United States Dollars (U.S. $100.00) par value per share, of each of
Amoco Congo Exploration Company ("ACEC") and Amoco Congo Petroleum Company
("ACPC") both Delaware corporations (hereinafter referred to as "Company" or
"Companies"), constituting all of the Companies' issued and outstanding shares
of capital stock ("Shares"); and
WHEREAS, Seller desires to sell to Purchasers, and Purchasers desire to
purchase from Seller, said Shares for the purchase price and upon the terms and
conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the respective
representations, warranties, covenants, agreements and conditions contained
herein, the parties hereby agree as follows:
1. Definitions
For the purposes of this Agreement the following terms shall have the
following meanings:
A. "AFFILIATE" shall mean:
(1) any company at least fifty percent (50%) of whose shares
entitled to vote for the election of directors are
owned, directly or indirectly, by such party;
(2) any company which owns, directly or indirectly, at least
fifty percent (50%) of the shares entitled to vote for
the election of directors of such party; or
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<PAGE> 6
(3) any company at least fifty percent (50%) of whose shares
entitled to vote for the election of directors are
owned, directly or indirectly, by a company which at the
same time owns, directly or indirectly, at least fifty
percent (50%) of the shares entitled to vote for the
election of directors of such party.
B. "AGREEMENT" shall mean this Agreement and any amendments thereto.
C. "CLOSING" or "CLOSE" shall mean, respectively, the consummation
of or to consummate the transactions contemplated by this
Agreement as provided in Article 8.
D. "CODE" shall mean the U.S. Internal Revenue Code of 1986, as
amended. All references herein to the Code, or to the Treasury
Regulations promulgated thereunder, shall include any amendments
or any substitute or successor provisions thereto.
E. "CONKOUATI" shall mean the floating production, storage and
offloading facility of that name located on the Yombo Permit.
F. "CONVENTION" shall mean the Convention dated May 25, 1979, as
amended, relative to Marine I originally by and between The
People's Republic of Congo, Congolese Superior Oil Company,
Cities Service Congo Petroleum Corporation, Canadian Superior Oil
Ltd., and Societe Nationale de Recherches et d'Exploitation
Petrolieres "HYDRO-CONGO".
G. "EFFECTIVE DATE" shall mean 12:01 A.M. Congo time on December 1,
1993.
H. "GOVERNMENT" shall mean the government of the Congo.
I. "HSR ACT" shall mean the Hart-Scott-Rodino Antitrust
Improvements Act of 1976.
J. "HYDRO-CONGO" shall mean the Societe Nationale de Recherches et
d'Exploitation Petrolieres.
K. "LETTER OF INTENT" shall mean the Letter of Intent executed by
the parties on December 2, 1993, as amended.
L. "MARINE I" shall mean the area covered by the Marine I
exploration permit, offshore Congo, as defined in the Convention
as the "Permit" and originally granted pursuant to Decree
253/79 by the Government.
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<PAGE> 7
M. "YOMBO PERMIT" shall mean the Yombo-Masseko-Youbi exploitation
permit issued on March 15, 1989, pursuant to Decree 89/211 of the
Government, pursuant to the Convention and created out of Marine
I.
N. "MARINE I JOINT OPERATING AGREEMENT" or "JOA" shall mean the
Joint Operating Agreement, as amended, entered into on May 25,
1979, pursuant to the Convention.
O. "PRODUCTION PAYMENT" shall have the meaning contained in Article
4.
P. "SECURITY" shall mean the security provided by Purchasers to
Seller pursuant to the Article 5.
Q. "TAX RETURNS" shall mean all returns, declarations, reports,
statements, and other documents required to be filed in respect
of Taxes, and the term "Tax Return" means any of the foregoing
Tax Returns.
R. "TAXES" shall mean all federal, state, local, foreign, and other
net income, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, license, lease, service, service
use, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, property, windfall profits, customs, duties,
or other taxes, fees, assessments, or charges of any kind
whatever, together with any interest and any penalties, additions
to tax or additional amounts with respect thereto, and the term
"Tax" means any of the foregoing Taxes.
S. "TREASURY REGULATIONS" shall mean the Treasury Regulations
promulgated under the Code, including any amendments or any
substitute or successor provisions thereto.
2. Purchase and Sale of Capital Shares
Pursuant to the terms of this Agreement, on the date of Closing Seller
will sell and assign and Purchasers will purchase and accept the
Shares. Seller will deliver to Purchasers certificates representing
the Shares, together with stock powers duly endorsed by Seller, so that
the Shares may be duly registered in Purchasers' name upon receipt by
Seller of confirmation that the consideration required pursuant to
Article 3.A hereof has been received. Each purchase shall be
accomplished by a reverse subsidiary merger as described in Article
11.D(4).
3. Purchase Price
Upon the terms and subject to the conditions of this Agreement,
Purchasers will purchase the Shares for the purchase price ("Purchase
Price") of thirty one million five hundred
3
<PAGE> 8
thousand United States ("U.S.") Dollars ($31,500,000), without
prejudice to the Production Payment pursuant to Article 4, as follows:
A. Purchasers will deliver at the Closing:
(1) the sum of twenty one million five hundred thousand U.S.
Dollars (U.S. $21,500,000) to the bank designated by
Seller in Article 8.A hereof, by transfer in immediately
available U.S. Dollars; plus
(2) a Promissory Note in the amount of ten million U.S.
Dollars ($10,000,000), subject to increase in
accordance with Article 3.B below, in the form attached
hereto as Schedule A, which Promissory Note shall be
subordinate to the Overseas Private Investment
Corporation ("OPIC") financing guarantee on terms
acceptable to OPIC and Seller, together with a joint and
several guaranty of payment from each of the Guarantors
and an unconditional and irrevocable letter of credit in
the form attached hereto as Schedule A securing payment
of the Promissory Note, which letter of credit shall
equal thirty percent (30%) of the principal amount of
the Promissory Note after giving effect to the initial
payment of principal contemplated in Article 3.B.
B. At Closing, there shall be a calculation of a Balancing Payment.
The Balancing Payment shall be the net sum of all amounts
described in this Article 3.B (without duplication). If the
Balancing Payment is positive, the principal amount of the
Promissory Note shall be increased by such amount. If the
Balancing Payment is negative, an initial payment of principal
shall be deemed made under the Promissory Note at Closing in the
amount of the Balancing Payment. If the Balancing Payment is
negative and is in excess of the principal amount of the
Promissory Note, the Promissory Note shall be deemed to have
been paid in full and the excess amount shall be paid in cash by
Seller to Purchasers.
(1) In the event that the combined Adjusted Working Capital
(as hereinafter defined) of the Companies (i) is less
than $0.00, the Balancing Payment shall be reduced in
the amount by which the Adjusted Working Capital of the
Companies is less than $0.00, or (ii) exceeds $0.00, the
Balancing Payment shall be increased in the amount by
which the Adjusted Working Capital of the Companies so
exceeds $0.00. The term "Adjusted Working Capital"
shall mean the sum of: the cash, securities and cash
equivalents, accounts receivable (minus reserves
therefor), crude oil, fuel, materials and supplies, and
materials in transit (less reserves therefor), prepaid
expenses (including Tax and lease expenses) and other
current assets of the Companies as at the Effective
Date, less the sum of all current liabilities (which
shall not include any liability for disputed royalty as
referenced Schedule E) of the Companies as at the
Effective Date, all as determined
4
<PAGE> 9
in accordance with generally accepted accounting
principles employed by the Companies on a basis
consistent with prior periods and exclusive of any
deferred income taxes. For purposes of calculating
Adjusted Working Capital, the value of any unsold crude
oil inventory of the Companies in storage on the
Conkouati on the Effective Date shall be included in
current assets, shall be measured as of 12:01 a.m. Congo
time on the Effective Date and shall be valued based on
the net price per barrel received by the Companies for
the first sale of crude oil following the Effective
Date. In addition, any unsold crude oil lifted from the
Conkouati prior to the Effective Date shall be included
in such current assets (to the extent not otherwise
included in such current assets) at the actual net price
received by the Companies, less the royalty and other
amounts payable by the Companies with respect thereto
(to the extent not otherwise included in such current
liabilities).
For purposes of both current assets and current
liabilities, amounts in local currency will be converted
into U.S. dollars using the exchange rate available
from BIDC - Pointe Noire (i) on the Effective Date for
purposes of Article 3.B(l), and (ii) for purposes of
Article 3.B(2) through (4), on the first business day of
the month in which Closing occurs.
(2) The Balancing Payment shall be adjusted to reflect
intercompany transfers of cash ("Transfers") between the
Effective Date and the Closing. All Transfers from the
Companies to Seller and its Affiliates (other than the
Companies) shall be subtracted from the sum of all
Transfers from Seller and its Affiliates (other than the
Companies) to the Companies. If the result so obtained
is a positive amount, the Balancing Payment shall be
increased by such amount. If the result so obtained is
a negative amount, the Balancing Payment shall be
reduced by such amount. Transfers do not include
payments of receivables and receipts of payables as
specified in Article 3.B(4) below.
(3) The Balancing Payment shall be increased by all capital
contributions by Seller to the Companies between the
Effective Date and the Closing insofar as such capital
contributions do not constitute Transfers.
(4) Receivables and payables between the Companies and their
Affiliates on the date of Closing shall be offset. All
of the payables owed by the Companies to Seller and its
Affiliates (other than the Companies) on the date of
Closing shall be subtracted from the sum of all
receivables owed by the Seller and its Affiliates (other
than the Companies) to the Companies on the date of
Closing. If the result so obtained is a positive
amount, the Balancing Payment shall be reduced by such
amount. If the result so obtained is a negative amount,
the Balancing Payment shall be
5
<PAGE> 10
increased by such amount. All of the receivables and
payables that have been offset shall be cancelled.
(5) Recognizing that the resolution of the royalty issue as
addressed in Schedule E will result in increased royalty
payments being due from the Companies in the future, the
Balancing Payment shall be reduced by an amount (the
"Royalty Adjustment") equal to U.S. Dollars two million
three hundred thousand (U.S. $2,300,000).
(6) In order to reflect Purchasers' contribution to the
Companies' share of the signature bonus paid to the
Government with regard to Amendment No. 2 to the
Convention, the Balancing Payment shall be increased by
an amount equal to U.S. Dollars one million (U.S.
$1,000,000).
C. No fewer than ten (10) days prior to Closing, Seller shall
prepare and deliver to Purchasers an estimated Balancing Payment
statement as of the date of Closing. Such Balancing Payment
shall be reflected in the Promissory Note as provided in 3.B
above. Within ninety (90) days following the date of Closing,
Purchasers shall prepare and deliver to Seller a final Balancing
Payment statement as of the date of Closing. Within thirty
calendar days after Seller's receipt of the final Balancing
Payment statement, Purchasers and Seller shall endeavor to agree
on the final adjustments of the Balancing Payment. If Seller
and Purchasers cannot agree on the final Balancing Payment, the
Houston Office of the firm of Price Waterhouse is designated to
act as an arbitrator and to decide all points of disagreement
with respect to the final Balancing Payment, such decision to be
binding on both parties. The costs and expenses of the
arbitrator shall be shared equally by Seller and Purchasers.
Notwithstanding the Balancing Payment being reflected in the
Promissory Note as set forth above, payments pursuant to the
final Balancing Payment shall be made in cash. Should any
adjustment be necessary to the Balancing Payment as determined
at Closing, the party owing funds to the other shall pay such
funds within thirty (30) days following the date of agreement or
the decision of the arbitrator.
4. Further Consideration
A. As further consideration, Purchasers shall cause the Companies
to pay Seller a Production Payment based on the crude oil
produced and sold by the Companies after the Effective Date as
set forth in Schedule B. Purchasers shall use reasonable
efforts to sell the crude oil to third parties in arms length
transactions in a manner which will achieve the best available
net back value FOB the Conkouati for the product. Should the
crude oil be marketed by an Affiliate of Seller pursuant to an
Agency Agreement or other agreement with Purchasers, Purchasers
shall be deemed to have met such "reasonable efforts"
requirement.
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<PAGE> 11
B. Payments made pursuant to the Production Payment shall be made
by the Companies in U.S. dollars from a United States bank
account to a bank account of Seller in the United States, which
account shall be designated in writing. The Purchasers further
agree that no payments pursuant to the Production Payment will
be deducted from the income of any taxpayer for Congolese income
tax purposes.
C. APC and the Purchasers shall reach an agreement as to the value
of the Production Payment and shall both report consistently
with such agreed upon value for U.S. federal income Tax
purposes. If the parties cannot agree upon a value, the parties
shall submit the issue to an agreed upon reputable appraiser
with expertise in such valuations and shall both report
consistently with the valuation determined by such appraiser.
D. Seller shall be entitled to recoup the Royalty Adjustment, as
determined in Article 3.B(5), in the manner set forth this
Article 4(D). Within forty (40) days after the end of each
quarterly period in which IA(n) (hereinafter "Payout Amount") is
greater than zero, Purchasers shall pay Seller an amount equal
to 50% of IA(n), determined as set forth below, until the sum of
all such payments shall equal the Royalty Adjustment, plus
interest at a rate of 7.0% per annum on the unrecouped balance
of said Royalty Adjustment.
For period n = 1:
IA(l) = IA(O) X (1.020833) + NCF(l); and
For all periods other than n (1):
IA(n) = IA(n-1) X (1.06250) + NCF(n)
Where:
n = the quarterly period in question, with
n(l) being the one month period ending
December 31, 1993.
IA(n) = Payout Amount at the end of the quarterly
period "n", where IA(O) = $30,200,000,
expressed as a negative number.
NCF(n) = Net Cash Flow during the quarterly period
"n". For purposes of this Article 4(D),
"Net Cash Flow" shall mean proceeds from
the sale of (i) the Companies' total
Participating Interest share of
production and (ii) the Companies'
total entitlement to Hydro-Congo's
Participating Interest share of
production; LESS, applicable
7
<PAGE> 12
royalty payments to the Government and
all Costs and Expenses incurred during
such quarter. "Costs and Expenses" shall
include all costs including capital
costs, direct operating costs, indirect
operating costs and administrative costs
as chargeable to the Joint Account under
the JOA, Taxes paid on the total
production sold by the Companies and
Production Payments. For purposes of
computing Net Cash Flow, the principle of
depreciation of capital costs shall not
be applicable. Net Cash Flow shall be
negative in any quarter in which all
payments exceed all receipts.
E. Purchasers shall afford to the officers, attorneys, accountants
and other authorized representatives of Seller at Seller's sole
risk and expense, free and full access upon reasonable notice to
the accounting and production books and records of the Companies
in order that such individuals may have full opportunity to make
such examinations and audits as Seller shall deem reasonably
necessary for the purposes of determining the accuracy of the
payments made for the recoupment of the Royalty Adjustment as
provided in Article 4.D., provided such examinations shall not
unreasonably interfere with the operations of the Companies and
shall be carried out during regular business hours. Seller
shall have the right to make such copies as it deems necessary
of any such accounting and production books and records. Seller
shall keep the results of such examinations confidential and
shall not reveal the same to any third party without the consent
of Purchasers.
F. The recoupment of the Royalty Adjustment pursuant to Article 4.D
shall be subordinate to the OPIC Financing Guarantee on terms
acceptable to OPIC and Seller.
G. In consideration for the execution of Amendment No. 2 to the
Convention, Amoco Congo Exploration Company and Amoco Congo
Petroleum Company (Amoco Companies) will pay to the Government
of the Republic of the Congo a signature bonus sum of U.S.
$2,900,625, representing the Companies' net share of such
signature bonus. This payment will be financed one hundred
percent (100%) by the Companies and shall be treated as a
Pre-Effective Date liability, with the amount of $2,900,625
being included as a current liability on the Effective Date for
purposes of the Balancing payment calculation in Article
3.B.(l). As noted in Article 3.B.(6), Purchasers' contribution
to the Companies' Share of the signature bonus will be included
in the balancing payment.
5. Security
On the date that this Agreement is signed, Purchasers shall cause
Banque Paribas, Houston Agency to issue an Irrevocable Standby Letter
of Credit in the form attached
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<PAGE> 13
hereto as Schedule C, to secure certain aspects of the performance of
Purchasers hereunder. The letter of credit may be drawn by Seller as
provided therein.
6. Other Mutual Considerations
A. Purchasers have reviewed the assets of the Companies and agree
to accept those assets at Closing on an "as-is" basis. Seller
shall use reasonable efforts to insure that assets as are
necessary for the continued operation of the Companies will be
present in the Companies at Closing. Purchasers recognize,
however, that Seller is attempting to sell certain tubulars and
drilling equipment, as listed in Schedule J which are deemed to
be surplus to the Companies' operations, but not to include
those listed in the letter of November 23, 1993, from Gerald
Livingston to Ron Cole likewise included in Schedule J, and
certain Submarine Power Cable located in France, which are
likewise deemed to be surplus, and agree that the proceeds from
any such sale which occurs prior to Closing shall be treated as
if they were pre Effective Date proceeds, even if sold after the
Effective Date. Any obligations or liabilities for storage or
handling charges, customs duties and fees or other costs
incurred prior to Closing relating to such surplus equipment and
materials shall be reimbursed to the Companies by Seller.
B. The Companies shall not terminate the national payroll employees
of the Companies prior to Closing without the prior consent of
Purchasers. The Companies shall retain or assume all of the
liability associated with the pension/benefit obligations with
respect to the employees of the Companies who are national
payroll employees, including but not limited to obligations
associated with salary, severance and/or retirement benefits.
Purchasers will indemnify and hold Seller and its Affiliates
harmless from any claims which may arise from such obligations.
Purchasers shall not terminate the employment or reduce the
benefits of any of the Companies' national payroll employees
(other than for theft or other illegal acts) for a period of one
(1) year after Closing. The Seller represents and covenants
that, at Closing, the Companies shall not have any employees who
are non national payroll employees or any liability with respect
to any former employees who are or were non national payroll
employees, except with regard to potential liability relating to
the lawsuit Patricia Bettis vs. Amoco Production Company, Amoco
Corporation and Amoco Congo Exploration Company (hereinafter
"Bettis Litigation") (See Schedule E).
C. Seller shall bear and indemnify Purchasers and Companies with
respect to any obligations or liabilities associated with the
plugging and abandonment of any wells drilled prior to the
Effective Date and not listed on Schedule G. Purchasers will
fulfill all of the obligations of the Companies, if any (and/or
of Seller and its Affiliates, if any), associated with plugging
and abandonment of the wells drilled under the Convention in
Marine I and all other abandonment and removal obligations
related to Marine I; and Purchasers will hold the Seller and its
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<PAGE> 14
Affiliates harmless from any claim which may arise from such
obligations and Purchasers will indemnify the Seller and its
Affiliates from any claims asserted by any third party with
regard to such plugging, abandonment or removal.
D. Except to the extent any refund was reflected in the balance
sheet of either of the Companies on the Effective Date as an
asset, the Companies will transfer and assign to Seller prior to
Closing all their rights to refunds (whether cash or non-cash)
or credits received after the Closing Date on account of
operations prior to the Effective Date.
E. Materials on order to the Companies at the time of the Effective
Date shall constitute a post-Effective Date liability.
F. Subsequent to Closing, Purchasers shall cause the Companies to
operate under the Convention as a prudent operator in accordance
with generally accepted international petroleum standards.
G. Should any of Seller's expatriate personnel remain in Pointe
Noire beyond Closing, they may remain in their current housing
and retain their current vehicles for so long as they remain in
the Congo at no expense to Seller.
H. At the time of Closing, the assets of the Companies shall not
include any Amoco Corporation or affiliate or subsidiary,
proprietary data, software, technology, or information
(including manuals) as listed in Schedule K or any data or
software (including Petroware) procured by Amoco Corporation or
affiliate or subsidiary from a third party under a
confidentiality agreement.
7. Company Name Change
Prior to Closing, Seller shall cause the name of Amoco Congo
Exploration Company and the name of Amoco Congo Petroleum Company to be
changed to Yombo Exploration Company and Yombo Petroleum Company,
respectively. Purchasers shall have no right to use the trade name or
trademark "Amoco" or any derivative thereof for any purpose whatsoever
and shall cause to be removed all signs or labels with such name.
8. Closing Transactions
Should Closing not occur by September 15, 1994, or a mutually agreed
later date, then any Party may by notice to the other Parties,
terminate this Agreement, subject to the provisions of Article 5;
provided, however, that if the Closing does not occur because of the
failure to conclude the closing agreement with the U.S. Internal
Revenue Service as referred to in Article 13.G., then this date shall
be automatically extended at the request of Seller for ninety (90)
days.
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<PAGE> 15
A. The following transactions shall take place at Closing:
(1) Purchasers shall pay the cash portion of the Purchase
Price specified in Article 3.A to Seller's account number
910-1-409-887 at the Chase Manhattan Bank, New York,
New York.
(2) Purchasers shall deliver the Promissory Note portion of
the Purchase Price specified in Article 3.A to Seller,
together with the unconditional and irrevocable letter
of credit referenced in that Article.
(3) Seller shall deliver stock certificates representing the
Shares, accompanied by stock powers duly executed in
blank or duly executed instruments of transfer, and any
other documents necessary to transfer to Purchasers
title to the Shares.
(4) Seller shall deliver to Purchasers the corporate minute
books of the Companies which shall be current as of the
date of Closing and which shall contain a Resolution of
the Board of Directors of each Company terminating all
outstanding Powers of Attorney as of the date of Closing.
(5) Seller shall deliver to Purchasers and Purchasers shall
accept the resignations of all directors and officers of
the Companies at the Closing, effective as of 7:00 A.M.
Congo time on the date of Closing.
(6) Seller and Purchasers shall make the elections provided
for in Article 22(H) and/or enter into the other
agreements as provided in Article 22.
(7) Seller shall pay Purchasers any cash amounts due as
provided in Article 3.B.
B. Closing shall take place on a date and at a location to be
mutually agreed between Seller and Purchasers. Each Party shall
bear and pay the expenses incurred by it in connection with the
Closing.
C. On or before Closing the Purchasers shall deliver to the Seller
a copy, certified as a true copy and in full force and effect by
a Director, Secretary or Assistant Secretary of a resolution of
the Board of Directors of the Purchasers approving the purchase
of the Shares on the terms of this Agreement and the execution
on behalf of the Purchasers of all other documents contemplated
hereby.
D. The Parties shall execute all such other documents and do all
acts and things as may be reasonably required in order to effect
the sale and purchase of the Shares and otherwise carry out the
intent of this Agreement.
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<PAGE> 16
9. Representations and Warranties of Seller
Seller represents and warrants to the Purchasers the following:
A. Seller is duly organized, validly existing and in good standing
under the laws of the State of Delaware.
B. Seller has the corporate power and authority to enter into and
perform this Agreement and all documents and actions required of
Seller hereunder. All corporate proceedings necessary for
Seller's execution and performance of this Agreement and of all
other documents and actions required of Seller hereunder have
been taken; and this Agreement constitutes, and such documents
upon their execution by duly authorized officer of Seller will
constitute the legal, valid and binding obligations of Seller
enforceable in accordance with the terms hereof, except as may
be limited by applicable bankruptcy, insolvency, and moratorium
and other laws affecting the enforcement of creditors' rights in
general and by general principles of equity (whether applied in
a proceeding at law or in equity); provided, however, that the
inclusion of the foregoing exception shall not be construed to
waive, impair, diminish or reduce, or to expand or create, any
right, power, privilege or benefit of Seller hereunder, and, in
particular, but not by way of limitation, shall not impair any
right of Seller to contest the propriety of any bankruptcy,
insolvency, moratorium, equitable, or other proceeding. No
other act, approval, or proceeding on the part of Seller or the
holders of any class of its equity or debt securities or any
other person or entity is required to authorize the execution,
delivery and performance of this Agreement by Seller.
C. The Companies are duly organized, existing and in good standing
under the laws of the State of Delaware and have the corporate
power and authority to own and hold the properties and assets
they now own and hold and to carry on their business as and
where such properties are now owned or held and such business is
now conducted. Each of the Companies is duly registered or
qualified to do business as a foreign corporation in the
Republic of the Congo.
D. Complete and correct copies of the certificate of incorporation
and by-laws, as amended to the date hereof, of each Company,
together with a list of all their officers and directors, all of
which have been certified as complete and correct by an
Assistant Secretary of each Company have been furnished to
Purchasers.
E. The Shares consist of (i) ten (10) shares of common stock which
constitute all of the issued shares of ACEC, par value One
Hundred United States Dollars (U.S. $100) per share, and (ii)
ten (10) shares of common stock which constitute all of the
issued shares of ACPC, par value One Hundred United States
Dollars (U.S. $100) per share, all of which Shares are validly
issued, outstanding, fully paid and nonassessable. All of the
Shares are owned by Seller and are free and clear of
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<PAGE> 17
all security interests, liens, charges, encumbrances or other
evidence of indebtedness, and rights of others. There are no
outstanding subscriptions, options, convertible securities,
warrants, calls, rights or other agreements or commitments
obligating the Companies to issue shares of its capital stock or
other securities or obligating Seller to transfer any of the
Shares, other than pursuant to this Agreement.
F. The Companies have no subsidiaries and have no direct or
indirect investment or interest in or control over any other
corporation, partnership, joint venture or other business
entity, except as relates to the Joint Operating Agreement or to
equipment or facility sharing arrangements.
G. Except for the flags under the HSR Act, this Agreement and the
execution and delivery hereof by Seller do not, and the
fulfillment and compliance with the terms and conditions hereof
and the consummation of the transactions contemplated hereby
will not, (i) conflict with any of, or require the consent of
any person or entity under, the terms, conditions or provisions
of the charter documents or bylaws or equivalent governing
instruments of Seller or either of the Companies; (ii) violate
any provision of, or require any consent, authorization or
approval under, any United States law or administrative
regulation or any United States judicial, administrative or
arbitration order, award, judgment, writ, injunction or decree
applicable to the Seller or either of the Companies; (iii)
violate the provisions of, result in a breach of, constitute a
default under (whether with notice or the lapse of time or
both), or accelerate or permit the acceleration of the
performance required by, or require any consent, authorization
or approval under, any indenture, mortgage or lien, or, any
agreement, contract, commitment or instrument to which Seller or
either of the Companies is a party or by which any of them is
bound or to which any property of Seller or either of the
Companies is subject; or (iv) result in the creation of any
lien, charge or encumbrance on the assets of either of the
Companies under any such indenture, mortgage, lien, lease,
agreement or instrument. Furthermore, to the best of Seller's
knowledge, this Agreement and the execution and delivery hereof
by Seller do not violate any provision of or require any
consent, authorization or approval under any Congolese law or
administrative regulation or any judicial, administrative or
arbitration order, award, judgment, writ, injunction or decree
applicable to the Seller or either of the Companies.
H. Except as set forth in Schedule E, and except for those
violations which could not reasonably be expected materially and
adversely to affect the businesses, operations, affairs,
prospects, properties, assets, profits or condition (financial
or otherwise) of the Companies, taken as a whole, the Companies
are not in violation of or in default under any United States
law or regulation, or under any order of any United States court
or governmental department, commission, board, bureau, agency or
instrumentality applicable to them and are not knowingly in
violation
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<PAGE> 18
of or in default under any Congolese law or regulation, or under
any order of any Congolese court or governmental department,
commission, board, bureau, agency or instrumentality applicable
to them.
I. Except as set forth in Schedule E, and except for such lack of
compliance, violations or liabilities that could not reasonably
be expected materially and adversely to affect the businesses,
operations, affairs, prospects, properties, assets, profits or
condition (financial or otherwise) of the Companies, taken as a
whole, the Companies have conducted and are conducting their
businesses in compliance with, and are in compliance with the
requirements, standards, criteria and conditions set forth in
applicable United States federal, state and local statutes,
ordinances, permits, permit applications, licenses, orders,
approvals, variances, rules and regulations applicable to them
and have to the best of Seller's knowledge conducted and are
conducting their businesses in compliance with, and are in
compliance with the requirements, standards, criteria and
conditions set forth in applicable Congolese federal, state and
local statutes, ordinances, permits, permit applications,
licenses, orders, approvals, variances, rules and regulations
applicable to them.
J. Except to the extent set forth in Schedule E, there are no
claims, fines, actions, suits, demands, investigations or
proceedings pending or, to the best knowledge of Seller,
threatened against or affecting either of the Companies, at law
or in equity, or before or by any governmental department,
commission, board, bureau, agency or instrumentality having
jurisdiction over the Companies.
K. Except as set forth in Schedule E, neither of the Companies is
in default under, and no condition exists that with notice or
lapse of time or both could constitute a default under, (i) any
mortgage, loan agreement, indenture, evidence of indebtedness or
other instrument evidencing borrowed money to which it or any of
its properties are bound, (ii) any judgment, order or injunction
of any United States court, arbitrator or governmental agency,
or (iii) any other agreement, except for such defaults and
conditions that, individually or in the aggregate, are
insignificant to the business, financial condition or results of
operations of the Companies. Furthermore, to the best of
Seller's knowledge, neither of the Companies is in default
under, and no condition exists that with notice or lapse of time
or both could constitute a default under any judgment, order or
injunction of any Congolese Court, arbitrator or governmental
agency.
L. Attached as Schedule F are copies of each Company's unaudited
balance sheet (the "Balance Sheet") as at December 1, 1993 (the
"Balance Sheet Date") and the statement of income, cash flows
and shareholders' equity for the nine months ending September
30, 1993 (collectively, the "Financial Statements"). The
Financial Statements have been prepared in accordance with
generally accepted accounting principles consistently applied
except as noted therein and except for
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<PAGE> 19
normal year-end adjustments, and (except with regard to
insurance and abandonment and removal obligations) fairly
present in all material respects the financial position of each
of the Companies as of the respective dates set forth therein
and the results of operations and cash flows for the Companies
for the respective fiscal periods set forth therein.
M. Except on account of matters that generally affect the economy
or the oil and gas industry, since the Balance Sheet Date there
have been no material adverse changes in (i) the assets,
liabilities or financial condition of the Companies, taken as a
whole, from that set forth in the Financial Statements or (ii)
the business or financial condition of the Companies, taken as a
whole, other than, with respect to clauses (i) and (ii) hereof,
changes in the ordinary course of business or as permitted in
Article 15. The Companies own, free and clear of any security
interest, lien or encumbrance, their Participating Interest
Share in the JOA and all property owned jointly by the parties
to the JOA.
N. Except as set forth on Schedule E or as otherwise set forth on
the Balance Sheet or reflected in the notes thereto, and except
with regard to abandonment and removal obligations or
liabilities related to national payroll employees, neither of
the Companies has any obligation or liability material to the
Companies, taken as a whole (whether accrued, absolute,
contingent, unliquidated or otherwise, whether due or to become
due), other than contractual liabilities incurred in the
ordinary course of business which are not required to be
disclosed on the Financial Statements and other than liabilities
which have arisen after the Balance Sheet Date in the ordinary
course of business, consistent with past practices, or as
permitted in Article 15.
O. Except as set forth on Schedule G, all wells drilled by the
Companies in Marine I have been plugged and abandoned.
P. Except as set forth on Schedule H and as may be required by
Congolese law regarding employees, neither of the Companies are
bound by or subject to (i) any agreement that contains any
severance pay obligations, (ii) any employment agreements or
consulting contracts, (iii) any agreement of surety or guaranty,
(vi) any agreement, contract or commitment relating to the
acquisition or disposition of the assets of, or any interest in,
any business enterprise, (vii) any indenture, mortgage, pledge,
credit or other financing commitment or agreement for the
borrowing of funds from any person for which either Company has
or will have any liability to any person, or (viii) any joint
operating or other similar agreements.
Q. All of the documents required to be set forth under Article 9.P
above are in full force and effect and constitute the legal,
valid, binding and enforceable obligations of the parties
thereto.
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<PAGE> 20
R. The Companies have paid all corporate income Taxes, as they have
become due and payable, including penalties, interest, and
related charges, and have filed all returns for such Taxes as
they have become due, it being acknowledged and agreed, however,
that Seller makes no representation or warranty concerning the
ability of the Companies to carry forward any Tax losses or
deductions.
S. Except as provided in Schedule E, the Companies' interest in the
Convention and in the JOA and to all personalty of any kind or
nature owned by it is free and clear of all liens, encumbrances
or claims whatsoever, except for such liens, encumbrances,
claims or easements on personalty as do not materially detract
from or interfere with the value, or present or reasonably
foreseeable use in its business of the properties subject
thereto.
T. Except with regard to the Hydro-Congo advance account under the
JOA, each of the Companies' receivables can be collected in the
amounts shown on Schedule F in the usual and ordinary course of
business without resort to legal proceedings.
U. The historical production figures, revenue and expense figures,
and the advance account figures related to the interest in
Marine I of Societe Nationale de Recherches et d'Exploitation
(Hydro-Congo) provided by Seller or caused to be provided by the
Companies are accurate and complete in all material respects.
Except for such representation, and as otherwise expressly
warranted herein, Seller makes no representations or warranties,
express or implied, regarding the completeness, quality or
accuracy of the data and information or any manuals or plans
provided to Purchasers. Without limiting the generality of the
foregoing, Seller makes no representations or warranties
whatsoever, express, implied or statutory, with respect to any
report regarding reserves of petroleum that may have been
provided Purchasers or which, subsequent to this Agreement,
comes into Purchasers' possession, in connection with the
transactions contemplated hereby or the completeness or accuracy
of any such report or the validity of assumptions made with
respect thereto. Furthermore, Seller makes no representations
or warranties concerning the condition or operation of any
fields under the Convention.
V. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN,
SELLER SPECIFICALLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY OR
WARRANTY OF FITNESS FOR A SPECIFIC PURPOSE WITH REGARD TO ANY
INTEREST OF THE COMPANIES IN WELLS, PLATFORMS, THE CONKOUATI,
EQUIPMENT, MATERIALS OR SUPPLIES. Except as made in this
Agreement, Seller hereby disclaims all liability and
responsibility for any statement or information made or
communicated (orally or in writing) to Purchasers or to an
Affiliate thereof including, but not limited to any opinion,
information or advice which may have been provided to
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<PAGE> 21
Purchasers by any officer, stockholder, director, employee,
agent, consultant or representative of Seller or the Companies,
or by any petroleum engineer or engineering firm, or any other
agent, consultant or representative. Without limiting the
generality of the foregoing, except as and to the extent set
forth in this Article 9, Seller makes no representations or
warranties whatsoever, express, implied or statutory, in
connection with the transactions contemplated by this Agreement
and/or the matters set forth herein.
Provided that, the Seller shall use all reasonable efforts to
ensure that the representations and warranties referred to in
the Article 9 are true and accurate on the Closing Date; but if,
notwithstanding such efforts, any matter or thing occurs which
would be materially inconsistent with any of such
representations and warranties on the Closing Date, the Seller
shall promptly notify the Purchasers thereof.
10. Representations and Warranties of Purchasers
A. Walter represents and warrants to Seller the following:
(1) Walter is duly organized, validly existing and in good
standing under the laws of the State of Texas and has the
corporate power and authority to carry on its business
as now conducted.
(2) Walter has the corporate power and authority to enter
into and perform this Agreement and all other documents
and actions required of Walter hereunder. All corporate
proceedings necessary for Walter's execution and
performance of this Agreement and of all documents and
actions required of Walter hereunder have been taken; and
this Agreement constitutes, and such documents upon their
execution by duly authorized officers of Walter will
constitute, the valid and binding obligations of Walter
enforceable in accordance with the terms hereof, except
as may be limited by applicable bankruptcy, insolvency,
and moratorium and other laws affecting the enforcement
of creditors' rights in general and by general principles
of equity (whether applied in a proceeding at law or in
equity); provided, however, that the inclusion of the
foregoing exception shall not be construed to waive,
impair, diminish or reduce, or to expand or create, any
right, power, privilege or benefit of Walter hereunder,
and, in particular, but not by way of limitation, shall
not impair any right of Walter to contest the propriety
of any bankruptcy, insolvency, moratorium, equitable or
other proceeding. No other act, approval, or proceeding
on the part of Walter or the holders of any class of its
equity or debt securities or any other person or entity
is required to authorize the execution, delivery and
performance of this Agreement by Walter.
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<PAGE> 22
(3) Walter is purchasing the Shares for its own account for
investment purposes and not with a view to, or for sale
in connection with, any distribution thereof. Walter
undertakes that the Shares shall not be sold,
transferred, offered for sale, pledged, hypothecated or
otherwise disposed of in violation of any applicable
securities laws or regulations.
(4) Walter hereby acknowledges and affirms that it has made
its own independent investigation, analysis and
evaluation of the Companies and their properties, assets
(including its own estimate and appraisal of the extent
and value of petroleum reserves), business, financial
condition, operations and prospects and have the capacity
to evaluate the merits and risks of the acquisition of
the Shares.
(5) To the best of Walter's knowledge and belief, the making
and performance of this Agreement by Walter will not
violate any provisions of any laws, rules, regulations,
decrees, orders or judgments or any provision of Walter's
certificate of incorporation or by-laws and will not
result in the breach or violation of, or constitute a
default under, any contractual agreement of Walter or
require any consent under Walter's certificate of
incorporation or by-laws or any law or regulation to
which Walter or any of its Affiliates is subject, or any
provision of any material indenture, mortgage, lien,
lease agreement, instrument, order, arbitration award,
judgment or decree to which Walter, or any of its
Affiliates is a party or by which Walter or any of its
Affiliates or any other respective assets or properties
are bound.
(6) Walter acknowledges that Seller and the Companies and
their respective directors, employees, representatives
and agents, disclaim any representations or warranties
concerning the profitability of the Companies, the
markets for the Companies products or, except as
otherwise expressly provided herein, the capabilities and
condition of the Companies or the wells or other
facilities in which they hold an interest, and any
representations or warranties other than those expressly
set forth in this Agreement.
B. Walter Holdings represents and warrants to Seller the following:
(1) Walter Holdings is duly organized, validly existing and
in good standing under the laws of the State of Texas
and has the corporate power and authority to carry on
its business as now conducted.
(2) Walter Holdings has the corporate power and authority to
enter into and perform this Agreement and all other
documents and actions required of Walter Holdings
hereunder. All corporate proceedings necessary for
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<PAGE> 23
Walter Holdings's execution and performance of this
Agreement and of all documents and actions required of
Walter Holdings hereunder have been taken; and this
Agreement constitutes, and such documents upon their
execution by duly authorized officers of Walter Holdings
will constitute, the valid and binding obligations of
Walter Holdings enforceable in accordance with the terms
hereof, except as may be limited by applicable
bankruptcy, insolvency, and moratorium and other laws
affecting the enforcement of creditors' rights in
general and by general principles of equity (whether
applied in a proceeding at law or in equity); provided,
however, that the inclusion of the foregoing exception
shall not be construed to waive, impair, diminish or
reduce, or to expand or create, any right, power,
privilege or benefit of Walter Holdings hereunder, and,
in particular, but not by way of limitation, shall not
impair any right of Walter Holdings to contest the
propriety of any bankruptcy, insolvency, moratorium,
equitable or other proceeding. No other act, approval,
or proceeding on the part of Walter Holdings or the
holders of any class of its equity or debt securities or
any other person or entity is required to authorize the
execution, delivery and performance of this Agreement by
Walter Holdings.
(3) Walter Holdings is purchasing the Shares for its own
account for investment purposes and not with a view to,
or for sale in connection with, any distribution
thereof. Walter Holdings undertakes that the Shares
shall not be sold, transferred, offered for sale,
pledged, hypothecated or otherwise disposed of in
violation of any applicable securities laws or
regulations.
(4) Walter Holdings hereby acknowledges and affirms that it
has made its own independent investigation, analysis and
evaluation of the Companies and their properties, assets
(including its own estimate and appraisal of the extent
and value of petroleum reserves), business, financial
condition, operations and prospects and have the
capacity to evaluate the merits and risks of the
acquisition of the Shares.
(5) To the best of Walter Holdings's knowledge and belief,
the making and performance of this Agreement by Walter
Holdings will not violate any provisions of any laws,
rules, regulations, decrees, orders or judgments or any
provision of Walter Holdings's certificate of
incorporation or by-laws and will not result in the
breach or violation of, or constitute a default under,
any contractual agreement of Walter Holdings or require
any consent under Walter Holdings's certificate of
incorporation or by-laws or any law or regulation to
which Walter Holdings or any of its Affiliates is
subject, or any provision of any material indenture,
mortgage, lien, lease agreement, instrument, order,
arbitration award, judgment or decree to
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<PAGE> 24
which Walter Holdings, or any of its Affiliates is a
party or by which Walter Holdings or any of its
Affiliates or any other respective assets or properties
are bound.
(6) Walter Holdings acknowledges that Seller and the
Companies and their respective directors, employees,
representatives and agents, disclaim any representations
or warranties concerning the profitability of the
Companies, the markets for the Companies products or,
except as otherwise expressly provided herein, the
capabilities and condition of the Companies or the wells
or other facilities in which they hold an interest, and
any representations or warranties other than those
expressly set forth in this Agreement.
C. Nuevo represents and warrants to Seller the following:
(1) Nuevo is duly organized, validly existing and in good
standing under the laws of the State of Texas and has
the corporate power and authority to carry on its
business as now conducted.
(2) Nuevo has the corporate power and authority to enter
into and perform this Agreement and all other documents
and actions required of Nuevo hereunder. All corporate
proceedings necessary for Nuevo's execution and
performance of this Agreement and of all documents and
actions required of Nuevo hereunder have been taken; and
this Agreement constitutes, and such documents upon
their execution by duly authorized officers of Nuevo
will constitute, the valid and binding obligations of
Nuevo enforceable in accordance with the terms hereof,
except as may be limited by applicable bankruptcy,
insolvency, and moratorium and other laws affecting the
enforcement of creditors' rights in general and by
general principles of equity (whether applied in a
proceeding at law or in equity); provided, however, that
the inclusion of the foregoing exception shall not be
construed to waive, impair, diminish or reduce, or to
expand or create, any right, power, privilege or benefit
of Nuevo hereunder, and, in particular, but not by way
of limitation, shall not impair any right of Nuevo to
contest the propriety of any bankruptcy, insolvency,
moratorium, equitable or other proceeding. No other
act, approval, or proceeding on the part of Nuevo or the
holders of any class of its equity or debt securities or
any other person or entity is required to authorize the
execution, delivery and performance of this Agreement by
Nuevo.
(3) Nuevo is purchasing the Shares for its own account for
investment purposes and not with a view to, or for sale
in connection with, any distribution thereof. Nuevo
undertakes that the Shares shall not be sold,
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transferred, offered for sale, pledged, hypothecated or
otherwise disposed of in violation of any applicable
securities laws or regulations.
(4) Nuevo hereby acknowledges and affirms that it has made
its own independent investigation, analysis and
evaluation of the Companies and their properties, assets
(including its own estimate and appraisal of the extent
and value of petroleum reserves), business, financial
condition, operations and prospects and have the
capacity to evaluate the merits and risks of the
acquisition of the Shares.
(5) To the best of Nuevo's knowledge and belief, the making
and performance of this Agreement by Nuevo will not
violate any provisions of any laws, rules, regulations,
decrees, orders or judgments or any provision of Nuevo's
certificate of incorporation or by-laws and will not
result in the breach or violation of, or constitute a
default under, any contractual agreement of Nuevo or
require any consent under Nuevo's certificate of
incorporation or by-laws or any law or regulation to
which Nuevo or any of its Affiliates is subject, or any
provision of any material indenture, mortgage, lien,
lease agreement, instrument, order, arbitration award,
judgment or decree to which Nuevo, or any of its
Affiliates is a party or by which Nuevo or any of its
Affiliates or any other respective assets or properties
are bound.
(6) Nuevo acknowledges that Seller and the Companies and
their respective directors, employees, representatives
and agents, disclaim any representations or warranties
concerning the profitability of the Companies, the
markets for the Companies products or, except as
otherwise expressly provided herein, the capabilities
and condition of the Companies or the wells or other
facilities in which they hold an interest, and any
representations or warranties other than those expressly
set forth in this Agreement.
D. Nuevo Holdings represents and warrants to Seller the following:
(1) Nuevo Holdings is duly organized, validly existing and
in good standing under the laws of the State of Texas
and has the corporate power and authority to carry on
its business as now conducted.
(2) Nuevo Holdings has the corporate power and authority to
enter into and perform this Agreement and all other
documents and actions required of Nuevo Holdings
hereunder. All corporate proceedings necessary for
Nuevo Holdings's execution and performance of this
Agreement and of all documents and actions required of
Nuevo Holdings hereunder have been taken; and this
Agreement constitutes, and such documents upon their
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<PAGE> 26
execution by duly authorized officers of Nuevo Holdings
will constitute, the valid and binding obligations of
Nuevo Holdings enforceable in accordance with the terms
hereof, except as may be limited by applicable
bankruptcy, insolvency, and moratorium and other laws
affecting the enforcement of creditors' rights in
general and by general principles of equity (whether
applied in a proceeding at law or in equity); provided,
however, that the inclusion of the foregoing exception
shall not be construed to waive, impair, diminish or
reduce, or to expand or create, any right, power,
privilege or benefit of Nuevo Holdings hereunder, and,
in particular, but not by way of limitation, shall not
impair any right of Nuevo Holdings to contest the
propriety of any bankruptcy, insolvency, moratorium,
equitable or other proceeding. No other act, approval,
or proceeding on the part of Nuevo Holdings or the
holders of any class of its equity or debt securities or
any other person or entity is required to authorize the
execution, delivery and performance of this Agreement by
Nuevo Holdings.
(3) Nuevo Holdings is purchasing the Shares for its own
account for investment purposes and not with a view to,
or for sale in connection with, any distribution
thereof. Nuevo Holdings undertakes that the Shares
shall not be sold, transferred, offered for sale,
pledged, hypothecated or otherwise disposed of in
violation of any applicable securities laws or
regulations.
(4) Nuevo Holdings hereby acknowledges and affirms that it
has made its own independent investigation, analysis and
evaluation of the Companies and their properties, assets
(including its own estimate and appraisal of the extent
and value of petroleum reserves), business, financial
condition, operations and prospects and have the
capacity to evaluate the merits and risks of the
acquisition of the Shares.
(5) To the best of Nuevo Holdings's knowledge and belief,
the making and performance of this Agreement by Nuevo
Holdings will not violate any provisions of any laws,
rules, regulations, decrees, orders or judgments or any
provision of Nuevo Holdings's certificate of
incorporation or by-laws and will not result in the
breach or violation of, or constitute a default under,
any contractual agreement of Nuevo Holdings or require
any consent under Nuevo Holdings's certificate of
incorporation or by-laws or any law or regulation to
which Nuevo Holdings or any of its Affiliates is
subject, or any provision of any material indenture,
mortgage, lien, lease agreement, instrument, order,
arbitration award, judgment or decree to which Nuevo
Holdings, or any of its Affiliates is a party or by
which Nuevo Holdings or any of its Affiliates or any
other respective assets or properties are bound.
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<PAGE> 27
(6) Nuevo Holdings acknowledges that Seller and the
Companies and their respective directors, employees,
representatives and agents, disclaim any representations
or warranties concerning the profitability of the
Companies, the markets for the Companies products or,
except as otherwise expressly provided herein, the
capabilities and condition of the Companies or the wells
or other facilities in which they hold an interest, and
any representations or warranties other than those
expressly set forth in this Agreement.
E. Purchasers jointly represent and warrant that they have received
a commitment for political risk insurance and for financial
guarantees for third party financing from OPIC in a form
acceptable to Purchasers.
11. Additional Agreements, Covenants, Rights and Obligations
A. Purchasers and Seller shall cooperate and use their best efforts
to secure any approvals or consents which may be legally or
contractually required from the Government of Congo, the
Government of the United States or other governmental
authorities, or any other entity for the transactions
contemplated by this Agreement. Purchasers and Seller shall
keep each other advised on a timely basis of the steps proposed
to be taken to obtain such approvals and consents and the
results thereof.
B. Purchasers and Seller shall issue such notices to third parties
as may be required by law, regulations, rules, decrees or orders
to inform them of the sale and purchase of the Companies.
C. The Parties have determined that the preferential rights
provided under the JOA will not be triggered by the transaction
contemplated by this Agreement and that therefore the notices in
regard to such rights should not be given to the JOA Partners.
Any assertion by a JOA Partner of such a preferential right
shall not be considered a breach of any warranty given by
Seller.
D. Purchasers and Guarantors further covenant and represent:
(1) Purchasers were each formed solely for the purpose of
enabling Purchasers to acquire the Shares.
(2) Prior to the Closing, Purchasers conducted no business,
had no income, had no operating assets, had
substantially no liabilities, and conducted no
activities that were not related to the acquisition of
the Shares.
(3) Purchasers have furnished to Seller correct and complete
written commitments from OPIC committing to provide
Walter and Nuevo only
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with such financing as is necessary to consummate the
purchase of the Shares.
(4) To accomplish the acquisition of the Shares, Walter will
merge with and into ACEC, and Nuevo will merge with and
into ACPC, on the terms and conditions contained in that
certain Agreement of Merger in the form attached hereto
as Schedule M (the "Merger"), pursuant to which the
Companies shall be the surviving entities, and the
separate existences of Walter and Nuevo will cease upon
completion of the Merger. This Agreement shall be
implemented by means of reverse subsidiary mergers
consistent with Schedule M, without affecting any of the
rights, remedies or obligations of any of the parties
hereto.
(5) Prior to the Closing, no Shares are or will be owned
either actually or constructively within the meaning of
section 318(a) of the Code by Guarantors or a member of
an affiliated group (within the meaning of section
338(h)(5) of the Code) of which Guarantors are members.
(6) There is no plan or intention to liquidate Guarantors.
12. Breach of Representations or Warranties
The liability of the Seller for the breach of any of the
representations and warranties of the Seller set forth herein shall
survive the Closing, but shall be limited to claims for which any of
the Purchasers delivers written notice to the Seller on or before the
second anniversary date of the date of Closing. The liability of the
Purchasers for the breach of any of the respective representations and
warranties of the Purchasers set forth herein shall survive the
Closing, but shall be limited to claims for which Seller shall deliver
written notice to the appropriate Purchaser on or before the second
anniversary date of the date of Closing. The foregoing is not intended
to in any way limit the obligation of the Guarantors under Article 30,
except with regard to liability for Purchasers' breach of any of the
representations and warranties.
13. Conditions Precedent for Closing by Seller
The obligations of Seller to proceed with the Closing are subject to
the completion on or prior to the date of Closing, to the satisfaction
of Seller, of all of the following conditions precedent, any one or
more of which may be waived in whole or in part by Seller:
A. Seller shall have received a resolution of the Board of
Directors of each of the Purchasers, certified by the Secretary
or Assistant Secretary of such Purchaser, authorizing
Purchaser's execution, delivery and performance of this
Agreement.
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B. Purchasers shall have complied in all material respects with
each of their covenants and agreements contained herein and all
of the representations and warranties of Purchasers stated in
Article 10 shall be true and correct in all material respects on
the date hereof and the date of Closing.
C. Seller shall have received a certificate, dated as of the date
of Closing, of an executive officer of each of Purchaser
certifying as to the matters specified in Article 13.B above.
D. On the date of Closing no action or proceeding by or before any
court or other governmental body shall have been threatened in
writing or instituted by or on behalf of any third party
(expressly excluding any party hereto, any Affiliate of such
party, and any director, officer, employee or representative of
such party or Affiliate) to restrain or prohibit the
transactions contemplated by this Agreement.
E. All necessary filings with and consents of any United States
governmental authority or agency required for the consummation
of the transactions contemplated in this Agreement shall have
been made and obtained, and all waiting periods with respect to
filings made with United States governmental authorities in
contemplation of the consummation of the transactions described
herein shall have expired or been terminated. In addition,
Seller shall have received from the Government of the Congo such
consents as may be required by law or contract (if any) with the
Government to the transactions contemplated by this Agreement.
F. Seller shall have received from the Government such releases as
Seller may require.
G. Purchasers, Sellers and Companies shall have entered into a
closing agreement pursuant to Section 1.1503-2(g)(2)(iv)(B)(2)
of the Treasury Regulations with the U.S. Internal Revenue
Service, as more fully described in Article 22 and Schedule D.
H. On the date of Closing, Purchasers shall make an election under
section 338(g) of the Code with respect to the Companies, and
Purchasers and Seller shall make a timely and effective election
under section 338(h)(10) of the Code with respect to Purchasers'
purchase of the Shares.
I. At Closing, Purchasers, Guarantors, Seller, the Companies, and
Amoco Corporation shall execute the Tax Agreement in the form
attached hereto as Schedule D and incorporated herein.
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<PAGE> 30
J. Seller shall have received assurances from the Government, in
form and substance acceptable to Seller in its sole discretion,
that, as of the date of Closing, the income tax laws of the
Republic of the Congo, as applicable to the Companies:
(1) Do not permit a Company to use its losses, expenses or
deductions to offset the income of any other person that
is recognized in the same taxable year in which the
losses, expenses, or deductions are incurred, and
(2) Do not permit the losses, expenses or deductions of a
Company to be carried over or back to be used, by any
means, to offset the income of any other person in other
taxable years.
K. Seller and OPIC shall have entered into the Option Agreement in
the form and substance attached hereto as Schedule L and
incorporated herein.
14. Conditions Precedent for Closing by Purchasers
The obligations of Purchasers to proceed with the Closing are subject
to the completion on or prior to the date of Closing to the
satisfaction of Purchasers of all of the following conditions
precedent, any one or more of which may be waived in whole or in part
by Purchasers:
A. Purchasers shall have received a resolution of the Board of
Directors of Seller, certified by the Secretary or Assistant
Secretary of Seller authorizing Seller's execution, delivery and
performance of this Agreement.
B. The Seller shall have complied in all material respects with
each of its covenants and agreements contained herein and all
the representations and warranties of Seller stated in Article 9
shall be true and correct in all material respects on the date
hereof and the date of Closing.
C. Purchasers shall have received a certificate, dated the
Effective Date, of an executive officer of Seller certifying as
to the matters specified in Article 14.B above.
D. On the date of Closing no action or proceeding by or before any
court or other governmental body shall have been threatened in
writing or instituted by or on behalf of any third party
(expressly excluding any party hereto, any Affiliate of such
party, and any director, officer, employee or representative of
such party or Affiliate) to restrain or prohibit the
transactions contemplated by this Agreement.
E. All necessary filings with and consents of any United States
governmental authority or agency required for the consummation
of the transactions contemplated in this Agreement shall have
been made and obtained, and all
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waiting periods with respect to filings made with United States
governmental authorities in contemplation of the consummation of
the transactions described herein shall have expired or been
terminated.
F. OPIC shall have obtained an agreement of cooperation with the
Government that includes the following:
(1) The Government grants approval of OPIC's financing of
the acquisition of the purchase of the Shares and the
further development of the Yombo Permit.
(2) The Government agrees not to impose any tax, tariff,
duty, levy or similar charge on the payment of
principal, interest or other fees due in connection with
the OPIC guaranteed loans.
(3) The Government recognizes the transfer of the Shares and
agrees that such transfer and any change of name shall
in no way affect the validity or status of the
Companies' registration, permits, properties, assets,
operations, and/or financial and tax accounts and does
not result in any tax or other fees payable to the
Government.
(4) The Government consents to the conditional assignment to
OPIC of the Shares.
(5) The Government agrees that in the event OPIC proceeds
against the collateral under its loan, OPIC shall enjoy
all the rights and benefits of the Companies under the
Yombo Permit and that the Government shall communicate,
cooperate and otherwise deal with OPIC as it would have
dealt but for the assignment of the shares of the
Companies.
(6) The Government agrees that in the event of any asserted
post-closing default under the Yombo Permit which would
give the Government the possible right to terminate, the
Government agrees to give OPIC the right to cure.
(7) The Government agrees to confirm that immediately
following the transfer of the Companies' shares from
Seller to Purchasers:
(a) The Companies and/or their Congo branches are
validly registered and in good standing.
(b) The Yombo Permit is in good standing and in full
force and effect.
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(8) The Government agrees that the representations,
warranties, covenants and confirmations are for the
benefit of the Purchasers, the Companies and the Seller,
as well as for the benefit of OPIC.
G. Seller shall have entered into a subordination agreement with
OPIC in form and substance acceptable to OPIC and Seller.
H. Purchasers shall have obtained from the Overseas Private
Investment Corporation ("OPIC") the political risk insurance and
the financial guarantees for third party financing referenced in
the commitment issued by OPIC to Purchasers on June 27, 1994.
I. The royalty issue as addressed in Schedule E and the ability of
the Companies to maintain accounting records in United States
dollars rather than CFAs shall have been resolved to the
satisfaction of Purchasers as well as Seller.
15. Actions of the Companies Prior to Closing
A. Until the Closing, unless Purchasers otherwise consent and
except as otherwise provided in this Agreement, Seller shall
cause each Company:
(1) not to create, permit or suffer the creation of any
liens, security interests or other encumbrances on any
of its real or personal property, except in connection
with transactions in the ordinary course of business;
(2) not to purchase, redeem or otherwise acquire any of its
capital stock, issue any additional capital stock or
reclassify its capital stock, or change any of the
privileges or limitations of its capital, stock or,
except as otherwise provided in this Agreement, amend
its certificate of incorporation or bylaws;
(3) not to make any capital or major expenditures or
investments, or incur any obligations for capital or
major expenditures or enter into any leases for personal
or real property, in excess of fifty thousand U.S.
Dollars ($50,000) per transaction without the prior
approval of Purchasers;
(4) except as to the production and sale of crude oil and
except as provided in Article 6.A., not to sell, lease,
transfer or otherwise dispose of any substantial part or
amount of its assets, other than in the ordinary course
of business, or discontinue or liquidate or dispose of
any substantial part of its operations or business
without consulting with Purchasers; for the purpose of
this Article 15, "substantial" shall mean having an
individual replacement value of greater than five
thousand United States Dollars ($5,000);
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<PAGE> 33
(5) not to merge or consolidate with or into any other firm
or corporation or purchase or otherwise acquire any
substantial part or amount of the capital stock or
assets of any other firm or corporation;
(6) to carry on its business in a manner consistent with
prior practice in the usual and ordinary course,
including the purchase of warehouse inventory, and to
use its best efforts to preserve its business
organization intact and to conserve the good will and
relationships of its employees, customers, suppliers and
others having business relations with it;
(7) to maintain its corporate existence and good standing in
its jurisdiction of incorporation;
(8) from the date hereof and to the extent that it does not
interfere unreasonably with normal business operations,
on reasonable notice, to afford Purchasers, their
advisers and representatives, full access at Purchasers'
sole risk and expense during normal business hours
throughout the period prior to the date of Closing to
all of Companies' employees, plants, offices, properties
and records, including such access as may be necessary
to allow Purchasers at their expense to make an audit or
otherwise satisfy itself of the accuracy of the
representations contained in this Agreement and that the
conditions contained in this Agreement have been
complied with, and to furnish documents and all such
other information concerning its properties and business
as Purchasers may reasonably request; provided, however,
that, Seller and Purchasers shall use their best efforts
take whatever actions are reasonable to reconcile
discrepancies in the representations and warranties
contained in this Agreement discovered by Purchasers
prior to the date of Closing.
(9) other than in the ordinary course of business, not to
enter into any contract or agreement that Seller is
required to disclose under Article 9.P., or to terminate
or amend in any material respect, or be in default in
any material respect under any contract or agreement
that Seller is required to disclose under Article 9.P;
(10) not to increase the indebtedness of, or incur any
obligation or liability, direct or indirect, for, either
of the Companies other than the incurrence of
liabilities in the ordinary course of business
consistent with past practices; provided, however, that
in no event will either Company incur any obligation or
liability for funded indebtedness;
(11) not to allow or permit the expiration, termination or
cancellation at any time prior to the Closing of any
existing insurance policies, unless it is replaced, with
no loss of coverage, by a comparable insurance policy
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<PAGE> 34
issued by a comparably rated insurance company;
provided, however, that at Closing such insurance
policies will terminate, with the exception of those
listed on Schedule I;
(12) not to implement or adopt any change in their tax
methods, principles or elections; or
(13) to maintain its properties and facilities in materially
the same working order and condition as at present,
ordinary wear and tear excepted;
B. The Companies shall close all bank accounts of the Companies
effective as of Closing.
C. For the avoidance of doubt, Seller shall not be in breach of
this Article:
(i) in circumstances in which the Seller or the Companies
have acted with the consent of the Purchasers, or
(ii) in circumstances where the Seller or the Companies have
acted in an emergency to prevent danger to life or
damage to property or to prevent or mitigate the effects
of pollution.
D. Post Effective Date casualty losses shall be borne by the
Companies as post Effective Date liabilities. In the event of a
casualty loss prior to Closing that exceeds $5,000,000.00, by
notice to the Seller the Purchasers may terminate this Agreement
and receive a release and refund of any security for the
performance of Purchasers obligations to Seller.
16. Commissions
A. Purchasers agree to be responsible for payment of any
commissions, brokerage or finder's fees incurred by them or on
their behalf in connection with the sale and purchase of the
Shares. Purchasers agree to indemnify and save harmless Seller
from and against any claims, losses or expenses arising from or
in any way connected with agents, brokers, or finders acting or
claiming to act for Purchasers in respect of the transactions
contemplated by this Agreement.
B. Seller agrees to be responsible for payment of any commissions,
brokerage or finder's fees incurred by Seller or on its behalf
in connection with the sale and purchase of the Shares. Seller
agrees to indemnify and save harmless the Purchasers from and
against any claims, losses or expenses arising from or in any
way connected with agents, brokers, or finders acting or
claiming to act for Seller in respect of the transactions
contemplated by this Agreement.
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17. Termination of Use of Trademarks
From the date of Closing, Purchasers shall cause the Companies to
discontinue the use of the name "Amoco" and the "Amoco Torch and Oval"
trademark and to remove all signs or labels with such name or
trademark.
18. Records and Access to Properties and Records by Seller and Affiliates
The following records relating to the years prior to the date of
Closing shall remain with the Companies in the Congo and Purchasers
shall cause the Companies to maintain the same for the period specified
by the laws of Congo, but in no event for less than fifteen (15) years
after the Closing:
- Accounting ("fiscal") documentation which involves
payments to the Government (e.g., Tax payments, employee
salary deductions for insurance, medical, etc.), and
payments and/or receipts for third parties.
- Customs related documentation concerning the
importations or exportations of materials, all
correspondence on Tax exoneration and all documentation
referring to customs payment matters.
- "Social issues" documentation concerning employee
payroll, both national and expatriate, and all personnel
files for national employees.
Purchasers shall afford to the officers, attorneys, accountants and
other authorized representatives of Seller at Seller's sole risk and
expense, free and full access to such records and shall make them
available to the Government upon request from Seller, provided that
such examination shall be preceded by reasonable notice and carried out
during regular business hours.
19. Indemnification by Seller
A. Subject to Article 12, Seller agrees to indemnify and hold
harmless Purchasers, their Affiliates and their respective
directors, officers and employees from and against any and all
lawsuits, losses, claims, damages, liabilities, out-of-pocket
expenses and costs and penalties, if any, arising out of or
based upon or with respect to any failure to perform any
covenant, agreement or undertaking on the part of Seller
contained in this Agreement, or any breach of Seller's
representations or warranties stated herein.
B. Seller agrees to indemnify and hold harmless Purchasers, their
Affiliates and their respective directors, officers and
employees from and against any and all lawsuits,
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losses, claims, damages, liabilities, out-of-pocket expenses and
arising out of or based upon
(1) any suit, action, arbitration or other proceeding or
governmental investigation which as of the Effective
Date is pending against the Companies or as to which the
Companies have received notice, or
(2) the Bettis Litigation and any acts, omissions, events or
circumstances that occurred prior to the Effective Date
and as to which the Companies receive notice within two
(2) years subsequent to the Effective Date,
except for those liabilities specifically set out in Article 6
above, which Purchasers have expressly agreed that the Companies
will retain, or that assumed in Article 20.C. below.
20. Indemnification by Purchasers
A. Subject to Article 12, Purchasers agree to indemnify and hold
harmless Seller, its Affiliates and their respective directors,
officers and employees from and against any and all lawsuits,
losses, claims, damages, liabilities, out-of-pocket expenses and
costs and penalties, if any, arising out of or based upon or
with respect to any failure to perform any covenant, agreement
or undertaking on the part of Purchasers contained in this
Agreement, or any breach of Purchasers' representations or
warranties stated herein.
B. Purchasers agree to indemnify and hold harmless Seller, their
Affiliates and its respective directors, officers and employees
from and against any and all lawsuits, losses, claims, damages,
liabilities, out-of-pocket expenses and costs and penalties, if
any, arising out of or based upon
(1) any suit, action, arbitration or other proceeding or
governmental investigation for which the Seller has not
indemnified the Purchasers pursuant to Article 19, or
(2) any acts, omissions, events or circumstances that Occur
after the Effective Date.
C. Purchasers agree to indemnify and hold harmless Seller and Amoco
Corporation, their Affiliates and their respective directors,
officers and employees from and against any and all liabilities,
out of pocket expenses and costs occurring after the Effective
Date arising out of or related to the litigation National Union
Fire Insurance Company of Pittsburgh, Pa. vs The People's
Republic of the Congo, CP No. 91 C 3172 in the U.S. District
Court for the Northern District of Illinois. Furthermore,
Purchasers agree to submit themselves to the jurisdiction of the
U.S.
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District Court for the Northern District of Illinois, including
substituting themselves for Seller and Amoco Corporation and
their Affiliates in the above mentioned litigation as Seller may
direct.
21. Right to Defend
A. Each indemnified party hereunder agrees that promptly upon its
discovery of facts giving rise to a claim for indemnity
hereunder (a "Claim"), it will give prompt notice thereof to the
indemnifying party, together with a statement of such
information respecting any of such facts as it may have and a
formal demand for indemnification. The Indemnifying party shall
not be obligated to indemnify the indemnified party with respect
to any Claim if the indemnified party knowingly fails to notify
the indemnifying party in sufficient time to permit the
indemnifying party to defend against such matter and to make a
timely response thereto.
B. The indemnifying party shall be entitled at its cost and expense
to contest and defend by all appropriate legal proceedings any
Claim with respect to which they are called upon to indemnify
the indemnified party; provided, that notice of the intention so
to contest shall be delivered by the indemnifying party to
indemnified party within 20 days after the date of receipt by
the indemnifying party of notice by the indemnified party of the
assertion of the Claim. Any such contest may be conducted in
the name and on behalf of the indemnifying party or the
indemnified party as may be appropriate. The indemnified party
shall have the right but not the obligation to participate in
such proceedings and to be represented by counsel of its own
choosing at its sole cost and expense.
C. If requested by the indemnifying party, the indemnified party
agrees to cooperate with the indemnifying party and its counsel
in contesting any Claim that the indemnifying party elects to
contest or, if appropriate, in making any counterclaim against
the person asserting the Claim, or any cross-complaint against
any person, and the indemnifying party will reimburse the
indemnified party for any expenses it incurs by so cooperating.
The indemnified party agrees to afford the indemnifying party
and its counsel the opportunity to be present at, and to
participate in, conferences with all persons asserting any Claim
against the indemnified party or conferences with
representatives of or counsel for such persons.
D. The indemnified party shall take no action which would prejudice
the indemnifying party's defense of the matter giving rise to
the Claim.
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22. Taxation
A. Tax Indemnification. Except as otherwise provided in the Tax
Agreement attached hereto as Schedule D, Purchasers agree to
indemnify and pay Seller or its Affiliates for Taxes, if any,
attributable to the Companies in the following manner: (i) for
the taxable periods which begin after the Effective Date,
Purchasers shall indemnify Seller or its Affiliates for all
Taxes, if any, attributable to the Companies for such periods,
and (ii) for taxable periods which begin prior to the Effective
Date but which end after the Effective Date (a "Straddle Taxable
Period"), Purchasers shall indemnify Seller or its Affiliates
for its allocable portion of the Taxes attributable to such
period. Except as otherwise provided in the Tax Agreement
attached hereto as Schedule D, Seller agrees to indemnify and
pay Purchasers or their Affiliates for all Taxes, if any,
attributable to the Companies in the following manner: (i) for
taxable periods which end prior to the Effective Date, Seller
agrees to indemnify Purchasers or their Affiliates for all Taxes
attributable to such periods, and (ii) for a Straddle Taxable
Period, Seller shall indemnify Purchasers and their Affiliates
for its allocable portion of the Taxes attributable to such
period. Taxes for a Straddle Taxable Period shall be
apportioned between two short periods. Taxes attributable to
the short period beginning on the opening date of the Straddle
Taxable Period and ending at the close of the Effective Date
shall be attributed to Seller, and Taxes attributable to the
short period beginning on the first day after the Effective Date
and ending on the last day of the Straddle Taxable Period shall
be attributed to Purchasers and their Affiliates. Taxes shall
be apportioned between the two short periods by prorating such
Taxes on a daily basis for the Straddle Taxable Period.
Purchasers agree to execute and file and/or cause the Companies
to execute and file such reasonable consents, elections and
other documents and to take such other actions as may be
reasonably necessary or appropriate to file, and to enable
Seller or its Affiliates to file, all Tax returns for periods
ending on or prior to the Effective Date to the extent that such
Tax returns include the Companies. Seller agrees to cooperate
with Purchasers in the filing of all of the Tax returns for the
Companies, the Purchasers, and their Affiliates and to execute
and file such reasonable consents, elections and other documents
and to take such other actions as may be reasonably necessary or
appropriate to file such Tax returns. In addition, Purchasers
agree to be responsible for the payment of duties, if any, which
are payable or may become due on the sale of the Shares of the
Companies by Seller to Purchasers and indemnify Seller against
any such liability, except as provided in Article 22.G.
B. Tax Refunds. Purchasers agree to pay to Seller, or cause the
Companies to pay to Seller, any and all Tax refunds received by
or credited to the Companies after the Effective Date
attributable to periods of the Companies' corporate existence
prior to the Effective Date, and to pay such Tax refunds to
Seller within ten (10)
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<PAGE> 39
days after the Companies receives or is credited with such
refunds. All other Tax refunds after the Effective Date shall
be for the account of Purchasers.
C. Rights to Contest Tax Claims Before the Payment of Tax. Seller
and Purchasers each agree to notify the other promptly in the
event that in respect of the Companies (i) an examination of any
Tax return is commenced, (ii) a deficiency assessment or other
claim is made or asserted by the United States Internal Revenue
Service, the Congolese Taxing Authority or any other Taxing
authority. In the event Seller is solely responsible for paying
the Taxes described in this Article 22 or required to pay
Purchasers the amount of such Taxes under any of the terms of
this Agreement, Purchasers will permit Seller and will cause the
Companies and/or its successor to permit Seller, at Seller's
option and expense, to direct the Companies or Purchasers to
take whatever actions are reasonably necessary in Seller's
judgment to contest and defend any issues which may result in a
claim for such Taxes prior to the payment of such Taxes and
prior to the payment of the amount of such Taxes to Purchasers.
In the event Purchasers and/or the Companies are responsible for
paying Taxes described in this Article 22 or required to pay
Seller the amount of such Taxes under any of the terms of this
Agreement, Seller will permit Purchasers at Purchasers' option
and expense, to direct Seller to take whatever actions are
reasonably necessary in Purchasers' judgment to contest and
defend any issues which may result in a claim for such Taxes
prior to the payment of such Taxes and prior to the payment of
the amount of such Taxes to Seller. In the event of a claim by
any Taxing authority which will adversely affect both Seller,
Purchasers and/or the Companies by the liability to pay Taxes
and by payments under the terms of this Agreement or, if the
liability under such claim cannot be readily ascertained, Seller
and Purchasers agree to cooperate fully with each other, each
bearing its own expenses, to take whatever action is necessary
to contest and defend or to direct the Companies to contest and
defend any issue which may result in a claim for Taxes or a
payment under the terms of this Agreement prior to the payment
of such Taxes and prior to the payment of the amount of such
Taxes to Purchasers or Seller.
D. Right to Litigate for Tax Refunds. If a Tax has been paid to
any Taxing authority and, as a result of the payment of such
Tax, either Seller or Purchasers incurs a Unity to make payment
to the other because of the payment of such Tax, provisions
similar to Article 22.B above shall apply to enable the party or
parties bearing the burden of the Tax liability to cause the
appropriate party to take whatever action is necessary to claim,
pursue or litigate with respect to a refund of such Tax. If the
entire burden of an increased Tax liability has been borne by
Seller or by Purchasers, the right to litigate for or otherwise
claim Tax refunds shall be assigned, to the extent it is legally
permissible to do so, to the party bearing such economic burden.
If any refunds or settlement amounts shall be delivered to the
party who did not bear the burden of the Tax liability, such
party shall assign such amounts to the party who bore the burden
of the Tax liability.
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<PAGE> 40
In the event both Seller and Purchasers jointly bear the
economic burden of the payment of any Tax described in this
Article 22.D, Seller and Purchasers agree to cooperate fully
with each other, each bearing its own expenses, to cause the
appropriate party to litigate the claim for Tax refund and to
share the proceeds of any refund or settlement in proportion to
the economic burden previously borne.
E. Tax Returns. Seller shall be responsible for the preparation
and filing of all Tax Returns of the Companies for taxable
periods ending on or before the Closing Date. Purchasers shall
be responsible for the preparation and filing of all other Tax
returns of the Companies for taxable periods ending after the
Closing Date.
Purchasers shall execute and file and/or cause the Companies to
execute and file such reasonable consents, elections and other
documents and to take such other actions as may be reasonably
necessary or appropriate to file, and to enable Seller or its
Affiliates to file any Tax returns for which the Seller is
responsible. Seller shall execute and file and/or cause its
Affiliates to execute and file such reasonable consents,
elections, and other documents and to take such other actions as
may be reasonably necessary or appropriate to file, and to
enable Purchasers, the Companies, or their Affiliates to file
any Tax returns for which the Purchasers are responsible.
F. Payment. All Taxes shall be paid by the party which is legally
responsible therefor.
Upon payment of any Taxes with respect to which a party is
entitled to receive indemnification hereunder, such party shall
submit an invoice to the indemnifying party stating that such
Taxes have been paid and providing in appropriate detail the
particulars relating thereto. The indemnifying party shall
remit payment for such Taxes promptly upon receipt of such
invoice.
G. Transfer Taxes. Seller will pay any United States sales, use,
transfer, or documentary Taxes and recording and filing fees
applicable to the transfer of the Shares to Purchasers at
Closing.
H. Election Under Section 338(h)(10). Purchasers shall make an
election under section 338(g) of the Code with respect to the
Companies. Purchasers and Seller shall make a timely and
effective election under section 338(h)(10) of the Code with
respect to Purchasers' purchase of the Shares. Purchasers and
Seller shall cooperate fully with each other in the making of
such election, and Seller's parent, Seller, Purchasers' parents,
and Purchasers further agree that they will not take, or cause
to be taken, any action in connection with the filing of any
Return of the Companies or otherwise which would be inconsistent
with or prejudice such elections. In particular, and not by way
of limitation, Purchasers shall deliver to Seller all
information to enable Seller to prepare Form 8023 and all
attachments
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<PAGE> 41
required to be filed therewith (the "Form"), including the
schedule of required data (as provided in Treasury Regulation
Section 1.338-IT(e)(1) and any other schedules or data required
to be attached to the Form. At Closing, the Form shall be duly
executed by an authorized person for each Party, and duly and
timely filed by the Seller on behalf of the Purchasers and the
Seller (as prescribed by Treasury Regulation Section
1.338(h)10-1T). The allocation of purchase price among the
assets of the Companies shall be made in accordance with section
338 of the Code and the Treasury Regulations promulgated
thereunder and shall be mutually agreed to by the parties.
I. Termination of Tax Sharing Agreement
The Companies' obligations under any tax sharing or tax
allocation agreement shall be extinguished as of the Closing
Date and such agreement shall be null and void as to the
Companies after the Closing Date.
23. Right of First Refusal
Guarantors shall, prior to any sale, exchange, transfer, contribution,
reorganization, distribution, actual or constructive liquidation,
dissolution, lease, farmout, or other disposition of a Company or any
of the Shares that would have the effect of causing a Company to cease
being a member of its Consolidated Group or any of the assets of a
Company or any Separate Unit thereof (other than sales of hydrocarbons
or surplus materials or equipment in the ordinary course of business),
notify Seller in writing of the terms and conditions of the proposed
sale, exchange, transfer, contribution, disposition, reorganization,
actual or constructive liquidation, dissolution, lease, farmout, or
other disposition and Seller shall then have thirty (30) days to elect
to purchase such Shares or assets on such notified terms.
24. Termination
A. This Agreement may be terminated at any time:
(1) prior to Closing by the written agreement of Seller and
Purchasers;
(2) prior to Closing by Seller or Purchasers, by notice
thereof to the other, if the purchase and sale of the
Shares contemplated hereby shall not have been
consummated by September 15, 1994, or December 13, 1994,
if this Agreement has been extended pursuant to Article
8, or such other date, if any, as Seller and Purchasers
shall agree in writing, subject to the provisions of
Article 5.
In the event of the termination of this Agreement by either party as
provided hereunder, none of the parties shall have any liability
hereunder of any nature whatsoever to the
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<PAGE> 42
other, including any liability for damages; provided that if such
termination shall result from the willful failure of one party to
fulfill a condition to the performance of the other party hereto or to
perform a covenant of this Agreement or from a willful
misrepresentation by either party, such party shall be fully liable for
any and all actual damages sustained or incurred by the other party,
but shall not be liable for indirect, incidental or consequential
damages, including without limitation, loss of profit or business
interruption.
25. Survival
The covenants and agreements set forth in this Agreement and in any
certificate or instrument delivered in connection herewith shall,
unless otherwise provided herein, survive the date of Closing.
26. Notices
A. All notices shall be given in writing and shall be delivered (i)
by hand to the party for which intended, (ii) by registered or
certified mail, return receipt requested, postage prepaid, (iii)
by telex, or (iv) by facsimile, all of which addressed to the
party for which it is intended at the following respective
addresses or such other address previously furnished in writing
by either party:
To Seller: Amoco Production Company
501 WestLake Park Boulevard
Houston, Texas 77079
Telephone: (713) 366-2000
Facsimile: (713) 366-2139
Attention: Mr. Martin Zimmerman
To Purchasers: Walter International Congo, Inc. and
Walter Congo Holdings Company, Inc.
c/o Walter International, Inc.
1021 Main Street, Suite 2110
Houston, Texas 77002-6502
Telephone: (713) 756-1100
Facsimile: (713) 756-1111
Attention: Mr. F. Fox Benton, Jr.
The Nuevo Congo Company and
The Congo Holdings Company
c/o Torch Energy Advisors Incorporated
1221 Lamar, Suite 1600
Houston, Texas 77010-3039
Telephone: (713) 650-1246
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<PAGE> 43
Facsimile: (713) 756-1898
Attention: Mr. Roland Sledge
To Guarantors: Walter International, Inc.
1021 Main Street, Suite 2110
Houston, Texas 77002-6502
Telephone: (713) 756-1100
Facsimile: (713) 756-1111
Attention: Mr. F. Fox Benton, Jr.
Nuevo Energy Company
1221 Lamar, Suite 1600
Houston, Texas 77010-3039
Telephone: (713) 650-1246
Facsimile: (713) 756-1898
Attention: Mr. Roland Sledge
B. The date of service of the notice shall be the date on which
notice is received.
27. No Waiver
No failure or delay by any party hereto in exercising any right, power,
privilege or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power, privilege or
remedy preclude the exercise of any other right, power, privilege or
remedy. The rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies provided by law. No amendment,
modification or waiver of, or consent with respect to, any provision of
this Agreement shall in any event be effective unless the same shall be
in writing.
28. Successors and Assigns
This Agreement shall be binding upon and inure to the benefit of the
parties and their respective permitted successors and assigns. No
party to this Agreement shall assign its rights or obligations
hereunder without the prior written consent of the other parties
hereto.
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<PAGE> 44
29. Governing Law and Dispute Resolution
A. This Agreement shall be governed by the laws of Illinois
excluding any choice of law provisions which would require the
application of the law of any other jurisdiction.
B. Any action, dispute, claim or controversy of any kind now
existing or hereafter arising between any of the parties hereto
in any way arising out of, pertaining to or in connection with
this Agreement (a "Dispute") shall be resolved by binding
arbitration in accordance with the terms hereof. Any party may,
by summary proceedings, bring an action in court to compel
arbitration of any Dispute.
C. Any arbitration shall be administered by the American
Arbitration Association (the "AAA") in accordance with the terms
of this Article 30, the Commercial Arbitration Rules of the AAA,
and, to the maximum extent applicable, the Federal Arbitration
Act. Judgment on any award rendered by an arbitrator may be
entered in any court having jurisdiction.
D. Any arbitration shall be conducted before one arbitrator. The
arbitrator shall be a licensed practicing attorney who is
knowledgeable in the subject matter of the Dispute selected by
agreement between the parties hereto. If the parties cannot
agree on an arbitrator within 30 days after the request for an
arbitration, then any party may request the AAA to select an
arbitrator. The arbitrator may engage engineers, accountants or
other consultants that the arbitrator deems necessary to render
a conclusion in the arbitration proceeding.
E. To the maximum extent practicable, an arbitration proceeding
hereunder shall be concluded within 180 days of the filing of
the Dispute with the AAA. Arbitration proceedings shall be
conducted in Houston, Texas. Arbitrators shall be empowered to
impose sanctions and to take such other actions as the
arbitrators deem necessary to the same extent a judge could
impose sanctions or take such other actions pursuant to the
Federal Rules of Civil Procedure and applicable law. At the
conclusion of any arbitration proceeding, the arbitrator shall
make specific written findings of fact and conclusions of law.
The arbitrator shall have the power to award recovery of all
costs and fees to the prevailing party. Each party agrees to
keep all Disputes and arbitration proceedings strictly
confidential except for disclosure of information required by
applicable law.
F. All fees of the arbitrator and any engineer, accountant or other
consultant engaged by the arbitrator, shall be paid by Seller,
on the one hand, and the Purchasers, on the other hand, equally
unless otherwise awarded by the arbitrator.
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<PAGE> 45
30. Further Assurances and Guaranty
A. Purchasers and Seller hereby agree to execute all such further
instruments and documents, and to take all such other actions,
as may be reasonable and appropriate to further effectuate the
intent of this Agreement.
B. The Guarantors, jointly and severally, unconditionally guarantee
as if each of them were the primary obligor, the punctual
payment and performance of the Purchasers' obligations under
this Agreement, the Promissory Note and any other agreement
between Purchasers and Seller required by this Agreement.
31. Headings
References herein to Articles are to Articles of this Agreement.
Article headings in this Agreement are included herein for convenience
of reference only and shall not constitute a part of the Agreement for
any other purpose.
32. Severability of Provisions
Any provision of this Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability
of such provision in any other jurisdiction.
33. Execution in Counterparts
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when
so executed and delivered shall be deemed to be an original and all of
which taken together shall constitute but one and the same instrument.
34. Entire Agreement
This Agreement, including the Schedules, represents the entire
understanding of the parties, and supersedes and replaces the letter of
intent, dated December 2, 1993, as amended, and all other prior
agreements, contracts, arrangements and understandings between the
parties concerning the subject matter hereof. There are no other
terms, conditions, representations or warranties, express or implied,
written or oral, except as set forth herein. No amendments,
modifications or additions hereto shall be binding unless executed in
writing by Purchasers and Seller.
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<PAGE> 46
35. Expenses
Each party shall pay its own expenses, including consultants',
counsels' and public accountants' fees and expenses incurred in any way
in connection with this Agreement.
36. Confidentiality
Except for any necessary advice to the Congolese government, OPIC, or
Purchasers' financial institutions, and except as may be required by
law or regulation, the Convention, JOA, or this Agreement, the parties
agree to keep confidential this Agreement and the terms and provisions
hereof and not to disclose them to any third party without the prior
written consent of the parties hereto, provided that after the date of
Closing the parties hereto jointly shall issue a public announcement of
the sale and purchase of the Shares.
37. Restricted Transactions
During the period beginning on the date hereof and ending on the
earlier of the Closing or the termination of this Agreement, Seller
will not initiate, or solicit any inquiries, offers or proposals by any
person other than Purchasers (a "Third Party") with respect to, or
participate in, any effort or attempt by any Third Party to do or seek,
any transaction of the type contemplated by Article 15.A(4) and
15.A(5). The foregoing shall not apply to the Government or any
designee thereof.
38. No Third Party Beneficiaries
Nothing expressed or referred to in this Agreement, is intended to or
shall be construed to give any person other than Seller, Purchasers or
Guarantors any legal or equitable remedy or claim under or with respect
to this Agreement.
39. Compliance with Agreement
From and after the date of Closing, Purchasers agrees to cause each of
the Companies to comply with and faithfully, perform all the terms and
provisions of this Agreement applicable to it.
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<PAGE> 47
IN WITNESS WHEREOF, the parties have negotiated and duly executed this
Agreement at June 30, 1994, on the day and year first written above.
AMOCO PRODUCTION COMPANY
By: /s/ Martin Zimmerman
- ------------------------
Name: Martin Zimmerman
Title: Vice President
WALTER INTERNATIONAL CONGO, INC.
By: /s/ J. C. Walter
- ------------------------
Name: J. C. Walter
Title: President
THE NUEVO CONGO COMPANY
By: /s/ Willard I. Boss
- ------------------------
Name: Willard I. Boss
Title: Vice President
WALTER CONGO HOLDINGS, INC.
By: /s/ J. C. Walter, Jr.
- ------------------------
Name: J. C. Walter, Jr.
Title: President
THE CONGO HOLDINGS COMPANY
By: /s/ Willard I. Boss
- ------------------------
Name: Willard I. Boss
Title: Vice President
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<PAGE> 48
WALTER INTERNATIONAL, INC.
By: /s/ J. C. Walter, Jr.
- ------------------------
Name: J. C. Walter, Jr.
Title: President
NUEVO ENERGY COMPANY
By: /s/ Willard I. Boss
- ------------------------
Name: Willard I. Boss
Title: Vice President
44
<PAGE> 1
EXHIBIT 10.27
SWAP AGREEMENT
THIS SWAP AGREEMENT (together with Schedules A, B, C, D and E the
"Agreement") made and entered by and between NOMECO Oil & Gas Co., a Michigan
corporation ("NOGC") and Louis Dreyfus Exchanges Ltd., a Delaware corporation
("LDEL");
RECITAL
LDEL and NOGC have entered into a transaction pursuant to which
payments will be made based on fixed and floating prices of natural gas.
AGREEMENTS
LDEL and NOGC agree as follows:
ARTICLE I.
DEFINITIONS
For the purposes of this Agreement, the terms set forth below
shall have the meanings indicated:
1.1 "BUSINESS DAY" shall mean a day on which commercial banks
in New York are open for business.
1.2 "COMMODITY" shall mean natural gas.
1.3 "DEFAULTING PARTY" shall mean a Party with respect to
which an Event of Default has occurred.
1.4 "DETERMINATION DAY" shall mean each Business Day during
the period that commences on the Effective Date and ends on the date on which
all of the obligations of LDEL and NOGC under this Agreement have been
performed.
1.5 "DOLLARS" (and the symbol "$") shall mean dollars in the
lawful currency of the United States of America.
1.6 "EARLY TERMINATION DATE" shall mean a date that is
designated as such by a Party pursuant to Article V.
1.7 "EARLY TERMINATION EVENT" shall mean any event which
permits the establishment of an Early Termination Date.
1.8 "EFFECTIVE DATE" shall mean May 8, 1992.
1.9 "EVENT OF DEFAULT" shall mean each of the events set forth
in Section 5.1(c).
1.10 "EXPOSURE AMOUNT" shall be the amount computed pursuant to
Schedule C.
<PAGE> 2
3
1.11 "EXPOSED PARTY" shall be the Party which is described as
the Exposed Party in Schedule C.
1.12 "FIXED AMOUNT" shall mean with respect to a Settlement
Period the product, in Dollars, of the Quantity Per Settlement Period and the
Fixed Price for that Settlement Period.
1.13 "FIXED PRICE" shall mean for the Settlement Period ending
on:
December 31, 2001 -- $2.82
December 31, 2002 -- $3.04
December 31, 2003 -- $3.28
December 31, 2004 -- $3.55
December 31, 2005 -- $3.83
December 31, 2006 -- $4.14
1.14 "FLOATING AMOUNT" shall mean with respect to a Settlement
Period the product, in Dollars, of the Quantity Per Settlement Period and the
Floating Price for that Settlement Period.
1.15 "FLOATING PRICE" shall mean for a Settlement Period the
amount computed to two decimal places using the Floating Price Determinant.
1.16 "FLOATING PRICE DETERMINANT" shall mean the formulas, set
of calculations, or indices designated in Schedule B to be used to calculate
the Floating Price.
1.17 "GUARANTY" shall mean the guaranty substantially in the
form of Schedule E duly executed and delivered by LDNG to NOGC.
1.18 "INDEMNIFIABLE TAX" shall mean a Tax that is imposed in
respect of a payment made under this Agreement as a result of a present or
former connection (and that would not be imposed but for that connection)
between the jurisdiction of the government or taxing authority imposing that
Tax and the person to whom that payment is made or a person related to that
person including without limitation, a connection arising from that person's or
that related person's being or having been (a) a citizen or resident of, (b)
organized, present or engaged in a trade or business, or (c) having or having
had a permanent establishment or fixed place of business in that jurisdiction;
but excluding a connection arising solely from that recipient's having
executed, delivered, enforced, or performed obligations or received a payment
under this Agreement.
1.19 "LETTER OF CREDIT" shall mean irrevocable letter of credit
in the form of Schedule D appropriately completed and with such changes in that
form as the issuing bank may require.
1.20 "LOCAL BANKING DAY" shall mean a day on which commercial
banks are open for business in the locality to which a notice or communication
under this Agreement is addressed in accordance with this Agreement.
1.21 "LDNG" shall mean Louis Dreyfus Natural Gas Corp., a
Delaware corporation.
1.22 "NOT EXPOSURE AMOUNT" shall mean the excess of the
Exposure Amount over $2 million.
1.23 "NON-DEFAULTING PARTY" shall have the meaning set forth in
Section 5.1(a).
<PAGE> 3
4
1.24 "NON-EXPOSED PARTY" shall be the Party which is not the
Exposed Party.
1.25 "OBLIGATED PARTY" shall mean for a Payment Date (i) LDEL
if the Floating Price exceeds the Fixed Price and (ii) NOGC if the Fixed Price
exceeds the Floating Price.
1.26 "PARTY" shall mean either LDEL or NOGC; and "PARTIES"
shall mean LDEL and NOGC.
1.27 "PAYMENT DATE" shall mean for the Period End Date of:
December 31, 2001 - January 3, 2002
December 31, 2002 - January 3, 2003
December 31, 2003 - January 2, 2004
December 31, 2004 - January 3, 2005
December 31, 2005 - January 3, 2006
December 31, 2006 - January 3, 2007
except that if the Floating Amount is not determinable on the Calendar Day
immediately preceding the Payment Date, then the Payment Date shall be the
Business Day immediately following the day on which LDEL notifies NOGC of the
Floating Amount in accordance with Section 2.1.
1.28 "PERIOD END DATE" shall mean the December 31 in each of
the years 2001 through 2006, both inclusive.
1.29 "PROCEEDINGS" shall mean any suit, action or proceedings
between the Parties relating to this Agreement.
1.30 "QUANTITY PER SETTLEMENT PERIOD" shall mean 3,650,000
MMBtu's.
1.31 "RECEIVING PARTY" shall mean (i) NOGC if LDEL is the
Obligated Party and (ii) LDEL if NOGC is the Obligated Party.
1.32 "SETTLEMENT PERIOD" shall mean each period that ends on a
Period End Date, the first of which commences on January 1, 2001 and continues
through the first Period End Date, and the remainder of each of which commences
on the calendar day immediately following each Period End Date and continues
to, and includes, the next following Period End Date.
1.33 "TAX" shall mean any existing or future tax, levy, impost,
duty charge, assessment or fee of any nature (including interest, penalties and
additions thereto) that is imposed by any government or other taxing authority
in respect of any payment made under this Agreement other than a stamp,
registration, documentation or similar tax.
1.34 "TERMINATION DATE" shall mean February 23, 2007.
1.35 "TERMINATION NOTICE" shall mean the notice designating an
Early Termination Date that is sent pursuant to Section 5.1(a).
<PAGE> 4
5
ARTICLE II.
PAYMENTS
2.1 No later than 10:00 a.m., Connecticut time, on the Calendar
Day immediately preceding each Payment Date LDEL shall determine and notify
NOGC of the Floating Amount for the Settlement Period then ended, the
calculation of the Floating Amount and the difference between the Floating
Amount and the Fixed Amount; except that if the Floating Amount is not
determinable in accordance with the Floating Price Determinant on the Calendar
Day immediately preceding a Payment Date, then LDEL shall determine and notify
NOGC of the Floating Amount on the first Calendar Day on which the Floating
Amount is determinable. If (a) the Floating Amount is greater than the Fixed
Amount, then LDEL shall pay to NOGC a sum equal to the difference between the
two amounts and, (b) the Fixed Amount is greater than the Floating Amount, then
NOGC shall pay to LDEL a sum equal to the difference between the two amounts
and (c) there is no difference between the Fixed Amount and the Floating
Amount, then, no payment shall be made.
2.2 All payments under Section 2.1 shall be made on a same day
basis in immediately available funds, by wire transfer on the applicable
Payment Date to the account designated on Schedule A no later than 10:00 A.M.
in the place where such account is located on the Payment Date, except that
neither Party shall be obligated to make the payment on the Payment Date if an
Event of Default or an event which with the giving of notice or lapse of time
or both could become an Event of Default with respect to the Party otherwise
entitled to receive the payment has occurred and is continuing (but shall pay
or be entitled to a credit on account of that payment on an Early Termination
Date as is provided in Section 5.3(b)) Notwithstanding the failure of LDEL to
give the notice as set forth in Section 2.1, payment shall be deemed to be due
by either Party at 12 Noon New York City time on the Payment Date. Payments
that are not made when due by either Party shall bear interest at the rate set
forth in Section 2.7. Any Failure by LDEL to give the notice pursuant to
Section 2.1 shall not be deemed to be an Event of Default. If LDEL fails to
give the notice required in Section 2.1 then, unless LDEL has given that
notice, NOGC may make the determinations that LDEL was obligated to make and
give the notice to LDEL, which determination and notice will have the same
effect as the notice that was to have been given by LDEL.
2.3 No payment that is made or accepted by either Party
pursuant to Section 2.2 and based on LDEL's notice (pursuant to Section 2.1) or
NOGC's notice (pursuant to Section 2.2) shall constitute acceptance by either
Party of the correctness of the calculations set forth in the notice. Either
Party may request a recalculation or adjustment if it believes the calculations
were made incorrectly, and any adjustments in payments by either Party due to
incorrect calculations will be made promptly by the Parties; except that no
such adjustment in payment will be made after two years from rendition of the
notice on account of which the payments were made. The provisions of this
Section 2.3 will survive any termination of this Agreement for a period of two
years from the date of such termination.
2.4 All payments shall be made without any deduction or
withholding for, or on account of any Tax unless that deduction or withholding
is required by any law (as modified by the practice or regulation of any
relevant governmental revenue authority) in effect at the time at which the
payment is made. If an Obligated Party is required to deduct or withhold on
account of any Tax, then the obligated Party will (a) pay to the relevant
authority the full amount required to be deducted or withheld (including the
full amount required to be deducted or withheld from any additional amount paid
by the obligated Party to the Receiving Party under this Section 2.4) promptly
upon the later of the last date on which that amount is required to be paid to
the relevant authority and the date on which the Obligated Party receives
notice that the amount (i) is payable to the relevant authority or (ii) has
been assessed against the Receiving
<PAGE> 5
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Party; (b) promptly forward to the Receiving Party an official receipt (or a
certified copy) or other documentation reasonably acceptable to the Receiving
Party evidencing the payment to the relevant authority; and (c) if the Tax is
an Indemnifiable Tax, pay to the Receiving Party, in addition to the payment to
which the Receiving Party otherwise is entitled, such additional amount as is
necessary to ensure that the net amount actually received by the Receiving
Party (free and clear of Indemnifiable Taxes whether assessed against either
Party) will equal the full amount that the Receiving Party would have received
if no such deduction or withholding had been required.
2.5 The Receiving Party will deliver to the Obligated Party
promptly upon request at any time (unless such delivery is reasonably likely to
prejudice the Receiving Party's Tax position) any Tax certificates or documents
reasonably requested to enable the Obligated Party to make payments without
deduction or withholding for or on account of Taxes or to make such deduction
or withholding at a reduced rate. If the Receiving Party subsequently
receives a Tax credit resulting from a payment which includes an additional
amount under Section 2.4, then promptly upon its receipt of that Tax credit, it
will pay to the Obligated Party such amount as the Receiving Party reasonably
determines will leave it (after such payment) in the same position as it would
have been if no additional amount had been required to be paid.
2.6 If the Obligated Party would not be required to deduct or
withhold for or on account of Taxes but for the failure by the Receiving Party
to deliver any certificate or document referred to in Section 2.5, then the
Obligated Party shall not be required to pay to the Receiving Party any
additional amount referred to above. If, in such circumstances, a liability is
assessed directly against the Obligated Party for not so deducting or
withholding, then, except to the extent the Receiving Party has satisfied or
then satisfies the liability resulting from such Tax, promptly upon demand
therefor by the Obligated Party the Receiving Party will promptly pay to the
Obligated Party the amount of the liability so assessed against it, including
any related liability for penalties.
2.7 If either Party fails to pay the full amount payable by it
when due, then interest on the unpaid portion shall accrue (both before and
after judgment) at a rate equal to 1 1/2 percent per annum above the base rate
from time to time of Citibank N.A. from the date on which the payment was due
until the date of payment. If either Party fails to make timely payment of any
amount due under this Agreement, then the other Party, in addition to any other
remedy it may have, shall have the right to suspend its performance hereunder
until such amount, including interest, has been paid.
2.8 All obligations arising out of this Agreement shall be
paid and settled in cash. LDEL and NOGC shall have no obligation to deliver or
receive any Commodity in its physical form.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1 Each Party represents and warrants to the other that on
the date of this Agreement:
(a) It is duly organized and validly existing in good
standing under the laws of the jurisdiction of its organization or
incorporation;
(b) It has the corporate power to execute and deliver
and perform its obligations under this Agreement;
<PAGE> 6
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(c) Such execution, delivery and performance does not
and will not violate or conflict with its charter or by-laws (or comparable
constitutive documents), any law applicable to it or any order or judgment of
any court or other agency of government applicable to it or any agreement to
which it is a party or by which it or any of its property is bound;
(d) This Agreement constitutes its legal, valid and
binding obligation enforceable in accordance with its terms (except as
enforcement may be limited by bankruptcy, reorganization, insolvency,
moratorium or other laws affecting the enforcement of creditors' rights
generally and subject, as to enforceability, to equitable principles of general
application);
(e) It is entering into this Agreement in connection
with business or the financing of its business;
(f) The material terms of this Agreement have been
individually tailored and negotiated;
(g) It has obtained all governmental, regulatory or
other consents, authorizations or clearances that are required to be obtained
by it in respect of its entry into and its performance of this Agreement, and
all of those consents are in full force and effect and any conditions have been
complied with;
(h) No Early Termination Event with respect to it has
occurred and is continuing and no such event would occur by its entry into or
its performance of its obligations under this Agreement; and
(i) Information provided to the other Party in writing
relating to itself in connection with this Agreement is, as of the date of the
information, true, accurate and complete in every material respect.
3.2 LDEL represents and warrants to NOGC that LDEL is a
wholly-owned subsidiary of LDNG.
ARTICLE IV.
UNDERTAKINGS
4.1 Concurrently with its execution and delivery of this
Agreement, (a) each Party shall furnish the other Party with evidence
reasonably satisfactory to the other Party as to the names, the signatures and
authority of its officers or officials signing this Agreement and the Guaranty,
and (b) LDEL will deliver to NOGC the Guaranty.
4.2 So long as it has or may have any obligation under this
Agreement, each Party will (a) pay any stamp, registration, documentation or
similar tax that is levied or imposed upon it in respect of its execution or
performance of this Agreement by a jurisdiction in which it is incorporated,
organized, managed and controlled, or considered to have its seat, or in which
a branch or office through which it is acting for the purpose of this Agreement
is located, and (b) indemnify the other Party against any such tax that is
levied or imposed upon the other Party or in respect of the other Party's
execution or performance of this Agreement by any jurisdiction in which the
indemnifying Party is and the indemnified Party is not incorporated, organized,
managed and controlled.
<PAGE> 7
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ARTICLE V.
EARLY TERMINATION
5.1 (a) If any of the events set forth below in Section
5.1(c) or (d) occurs (an "Event of Default"), and is continuing with respect to
either Party, then that Party shall be deemed the Defaulting Party and the
other Party (the "Non-Defaulting Party") may, subject to Section 5.1 (b), by
notice which, if applicable, specifies the relevant event to the Defaulting
Party, designate a Business Day as an Early Termination Date which shall be no
earlier than the date such notice is received or deemed to have been received
by the Defaulting Party and no later than 30 days after giving that Termination
Notice, on which all obligations under this Agreement with respect to amounts
payable pursuant to Section 2.1 on all Payment Dates falling after the Early
Termination Date shall be terminated, whereupon such obligations shall
terminate (without regard to subsequent events, and without affecting the
Party's other obligations under this Agreement).
(b) If the Event of Default is one that is described in
Sections 5.1(c)(i), (ii), (iii), (iv), (v), or (xi), then the Non-Defaulting
Party may designate the Early Termination Date by sending a Termination Notice
to the Defaulting Party. If the Event of Default is one that is described in
Sections 5.1(c)(vi) [other than Section 5.1(c)(vi)(z)), (vii), (viii), or (x),
then an Early Termination Date shall be deemed to occur upon the occurrence of
that Early Termination Event without the giving of a Termination Notice and if
the Event of Default is one that is described in Section 5.1(c)(vi)(z) or
5.1(c)(ix), then an Early Termination Date shall be deemed to have occurred
immediately preceding the institution of the relevant proceeding or the
presentation of the relevant petition.
(c) Each of the following shall be an Event of Default:
(i) The Party fails to make a payment required
under this Agreement and does not remedy the failure to pay within a period of
three Business Days after receipt of notice of that failure from the other
Party;
(ii) Any representation or warranty made by a
Party in this Agreement or in any document required to be delivered by it
hereunder proves to have been false or misleading in any material respect when
made or whenever deemed to be repeated and remains so false or misleading at
the time at which the Termination Notice is given;
(iii) The Party fails to perform, observe or
comply with any covenant, condition or provision (other than one dealt with in
the preceding subsections) contained in this Agreement and fails to cure the
failure ten Business Days after receipt of notice of that failure from the
other Party;
(iv) The Party fails in the (x) payment when due
(whether at maturity, by acceleration or otherwise) of an aggregate amount that
exceeds $2 million with respect to obligations in respect of money borrowed
from or guaranteed to any person or persons and fails to remedy the non-payment
or failure within any applicable grace period; or (y) performance of, or
occurrence of any other event of default, however defined, under any agreement
in which those obligations are created, evidenced or secured, if that failure
or event of default is not remedied within any applicable grace period and the
effect of that failure or event of default is to cause an amount that exceeds
$2 million of those obligations to become, or to permit the holder or holders
of those obligations (or a trustee or agent on behalf of such holder or
holders) to declare such an amount of those obligations, due and payable before
they would otherwise have become due;
<PAGE> 8
9
(v) The Party becomes insolvent or fails or is
unable to pay its debts as they become due or admits in writing its inability
generally to pay its debts as they become due or is adjudicated a bankrupt or
insolvent;
(vi) The Party (w) applies for or consents to the
appointment of, or the taking of possession by, a receiver, receiver manager,
custodian, trustee, liquidator, administrator or other similar official for
itself or for all or a substantial part of its property, (x) makes an
assignment or any general arrangement for the benefit of its creditors, (y)
files a petition or otherwise commences, authorizes or acquiesces in the
commencement of a proceeding or cause under any bankruptcy, insolvency or
similar law for the protection from creditors or have such petition or
proceeding commenced against it; or (z) in the absence of such application,
consent, assignment, filing, failure or acquiescence, a trustee, custodian or
receiver is appointed for the Party or for a substantial part of its property
and is not discharged within 30 days;
(vii) The Party winds up its affairs;
(viii) The Party takes any corporate action to
authorize any of the actions towards winding-up its affairs or liquidating;
(ix) Any bankruptcy, reorganization, debt
arrangement, or other proceeding under any bankruptcy or insolvency law, or any
dissolution or liquidation proceeding is instituted against the Party, or any
material event comparable to any of the foregoing shall occur under the laws of
any competent jurisdiction, and the proceeding is consented to or acquiesced in
by the Party and remains for 30 days undismissed, or an order for relief
against the Party is entered under applicable bankruptcy law or other law for
the relief of debtors;
(x) Any event occurs with respect to the Party
which, under the applicable laws of any jurisdiction, has an analogous effect
to any of the events specified in Sections 5(c)(v) to (ix) both inclusive; or
(xi) The Party consolidates or amalgamates with or
merges into, or transfers all or substantially all of its assets to another
entity and either (i) the resulting survivor or transferee entity fails to
assume (by operation of law or otherwise) all of the obligations of that Party
under this Agreement, or (ii) the creditworthiness of the resulting, surviving
or transferee entity is materially less than was the creditworthiness of the
Party immediately before the consolidation, amalgamation, merger or transfer.
(d) The occurrence of any event described -in (i)
Sections 5.1(c)(i), (ii) or (iii) by or in respect of the Guarantor under the
Guaranty (except that for the purpose of applying those three sections to the
Guarantor the words "this Agreement" as used in those three sections shall read
"the Guaranty") or (ii) Sections 5.1(c)(iv) through (xi), both inclusive, by or
in respect of the Guarantor in each case shall constitute an Event of Default
by LDEL.
5.2 If an event occurs such as (a) the adoption of, or any
change in a law or regulation or in the interpretation or application thereof
which makes it unlawful for a Party to perform any of its material obligations
under this Agreement, or (b) it is reasonably foreseeable that a Party will be
required on the next succeeding date on which a payment is due under this
Agreement to pay to the other Party an additional amount in respect of an
Indemnifiable Tax under Section 2.4 (except on account of interest on any past
due payment), or (c) if the prices at which the Commodity may be bought and
sold are fixed by federal, state or local government so that the Floating Price
Determinant does not reflect the normal free market response to supply and
demand which would exist if prices were not so fixed, or (d) there is an
increase of more than 30 cents in the Daily Determination Price of the
Commodity as is described in
<PAGE> 9
10
paragraph (c) of Schedule B, then either Party, by appropriate notice may
designate an Early Termination Date.
5.3 (a) Upon the designation of an Early Termination Date
pursuant to Section 5.1, the terminating Party shall (i) promptly calculate an
amount that is equal to the then present value of the total of all actual
damages suffered and costs and expenses reasonably incurred and reasonably
expected to be incurred by the terminating Party as a result of the occurrence
of the Early Termination Date including, without limitation, any loss, cost or
expense that would be incurred to preserve for the terminating Party the
economic equivalent of the payment obligations of the Parties under this
Agreement in respect of each Payment Date that is scheduled to occur after the
Early Termination Date, which may be the costs and expenses to replace this
Agreement with one or more swap agreements or arrangements which will provide
the terminating Party with equivalent payment obligations in respect of each
Payment Date, and (ii) send a statement of its calculation to the other Party.
(b) On the Early Termination Date pursuant to Section
5.1, (i) the Defaulting Party shall owe to the Non-Defaulting Party the sum of
the amount payable under Section 5.3(a), and the aggregate amount, if any, owed
by the Defaulting Party pursuant to Article II up to the Early Termination Date
if such amounts remain unpaid as of the Early Termination Date for any reason,
including under the provisions of Section 2.2, and (ii) the Non-Defaulting
Party shall owe the Defaulting Party the aggregate amount, if any, owed by the
Non-Defaulting Party to the Defaulting Party pursuant to Article II up to the
Early Termination Date if such amounts remain unpaid as of the Early
Termination Date. The Party owing the greater amount under clauses (i) and
(ii) of the immediately preceding sentence shall pay to the other Party the
excess of the greater amount over the lesser amount on demand.
(c) Upon the designation of an Early Termination Date
pursuant to Section 5.2, each Party shall (i) promptly calculate an amount that
is equal to the then present value of the total of all actual damages suffered
or actual gains or benefits received and costs and expenses reasonably incurred
or avoided or reasonably expected to be incurred or avoided by that Party as a
result of the occurrence of the Early Termination Date including, without
limitation, any gain, loss, cost or expense that would be incurred to preserve
for such Party the economic equivalent of the payment obligations of the
Parties hereunder in respect of each Settlement Date scheduled to occur after
the Early Termination Date, which may be the costs and expenses to replace this
Agreement with one or more swap agreements or arrangements which will provide
such Party with equivalent payment obligations in respect of each Settlement
Date, and (ii) send a statement of its calculation to the other Party.
(d) (i) The Party having the larger gain or smaller lose
pursuant to Section 5.3(c) shall pay to the other Party an amount equal to
one-half of the difference between that gain or loss and (ii) each Party shall
pay the aggregate amount owed to the other Party under Article II up to the
Early Termination Date.
5.4 All amounts payable pursuant to Section 5.3 shall be
calculated as of the Early Termination Date and be payable upon demand after
the amounts payable are determined, together with interest on the amounts from
the Early Termination Date to the date of payment at the rate specified in
Section 2.7.
5.5 If either Party disagrees with the calculation of any
amounts payable under this Article V, then two independent experts agreeable to
both Parties shall mutually determine the matter and those experts'
determination shall be binding save for fraud or manifest error. If the
Parties fail to agree promptly upon the independent experts or if the
independent experts agreed upon fail to mutually determine the matter promptly,
then each Party shall promptly nominate one independent expert (if they have
not been nominated previously) and the two experts so nominated shall promptly
in turn nominate a third
<PAGE> 10
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independent expert and the determination of the third independent expert shall
be binding upon the Parties save for fraud or manifest error. All of the
independent experts shall be at the time at which they act under this Section
5.5 persons who are actually engaged in business as swap dealers in the
Commodity. Each Party shall be entitled to (a) submit to the independent
experts written briefs setting forth their views on the matter submitted for
the determination; if copies of those briefs are forwarded to the other Party,
and (b) make to the independent experts oral arguments, but only in the
presence of the other Party.
ARTICLE VI.
FINANCIAL RESPONSIBILITY
6.1 On each Determination Day LDEL shall determine an Exposure
Amount and shall send a notice of its determination to NOGC.
6.2 (a) If on any Determination Day a Net Exposure Amount
exists for an Exposed Party, then, within seven Business Days after that
Determination Date the Non-Exposed Party shall establish and thereafter
maintain so long as there is a Net Exposure Amount for that Exposed Party a
Letter of Credit from a major U.S. commercial bank acceptable to the Exposed
Party (which shall not unreasonably withhold its acceptance) for the benefit of
the Exposed Party that is equal to the Net Exposure Amount rounded to the next
highest integral multiple of $500,000.
(b) If on any Determination Day the aggregate amount of
existing Letters of Credit that have been established by the Non-Exposed Party
exceeds the Net Exposure Amount rounded to the next highest integral multiple
of $500,000, then the Exposed Party shall do whatever the Non-Exposed Party
reasonably requests as being necessary to authorize the appropriate reduction
in the aggregate amount of the Letters Of Credit.
(c) If on any Determination Day the aggregate amount of
existing Letters of Credit is less than the Net Exposure Amount rounded to the
next highest integral multiple of $500,000, then the Non-Exposed Party shall do
whatever is necessary to cause an appropriate increase in the aggregate amount
of the Letters of Credit or the issuance of additional Letters of Credit so
that the aggregate amount of all Letters of Credit in favor of the Exposed
Party equals the Net Exposure Amount rounded to the next highest integral
multiple of $500,000.
6.3 Notwithstanding the foregoing, neither Party shall be
required to provide a Letter of Credit in excess Of $10 million.
6.4 Within 120 days after the end of each of its fiscal years,
(a) NOGC will provide to LDEL a copy of NOGC's audited financial statements
(including, without limitation, its balance sheet and income statement) for
that fiscal year, and (b) LDEL will deliver or cause to be delivered to NOGC a
copy of LDNG's audited financial statements (including, without limitation, its
balance sheet and income statement) for that fiscal year. In the event that at
any time (a) NOGC has shareholders, equity below $125 million, positive working
capital (current assets minus current liabilities, excluding deferred taxes and
current maturities on long-term debt) below $1 million or total liabilities
exceeding twice the amount of its shareholders, equity, or (b) LDNG has
shareholders, equity below $20 million, positive working capital below $1
million or (c) the sum of LDNG's earnings before income taxes for any fiscal
year of LDNG, plus depreciation, amortization and other items that were
deducted in determining those earnings before taxes, but were not paid in cash,
is less than one sixth of the amount at the end of that fiscal year of LDNG's
total indebtedness for money borrowed which is not subordinated in right of
payment to LDNG's obligations under the Guaranty or (d) any event that is
described in Sections 5.1(c)(v)(vi)(vii)(viii)
<PAGE> 11
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or (ix) of this Agreement which if that event occurred with respect to a Party
would constitute an Event of Default, occurs with respect to any entity
("Controlling Entity") that directly or indirectly controls the right to vote
the majority of the shares of that Party or owns the majority of the equity
interest in that Party or to LDNG (whether or not LDNG controls the right to
vote the majority of the shares of LDEL or owns the majority of the equity
interest in LDEL at the time at which that event occurs), then in any of those
four events, and without affecting any other rights or remedies a Party may
have under this Agreement because of the occurrence of any such event, the
Letter of Credit to be provided by NOGC (if the events are those described in
clause (a) or clause (d) of this sentence; but, as to clause (d), only to the
extent the events relate to NGOC's Controlling Entity) or by LDEL (if the
events are those described in clause (b), (c) or (d) of this sentence; but, as
to clause (d), only to the extent the events relate to LDNG or to any other
Controlling Entity of LDEL) under Section 6.2 shall equal the Exposure Amount
and not the Net Exposure Amount, without giving effect to Section 6.3.
6.5 All of the financial statements referred to in Section 6.4
shall be prepared in accordance with generally accepted accounting principles
in the United States as in effect at the time at which the financial statements
are prepared. Each of the Parties will deliver or cause to be delivered to the
other party upon the other Party's request, unaudited interim financial
statements of the types described in Section 6.4 if and to the extent that
those interim financial statements are prepared in the normal course of
business of NOGC or LDNG, as the case may be.
ARTICLE VII.
ASSIGNMENT
7.1 Either Party may assign all or part of its rights to
receive payments under this Agreement, subject to the agreement by the Parties
to procedures which will ensure compliance by the assignor with the terms and
obligations of this Agreement, otherwise no assignment of this Agreement or any
of the rights or obligations under this Agreement will be made unless or until
the Party seeking the assignment obtains the written consent thereto of the
non-assigning Party. No transfer or succession to the interest of either Party
under this Agreement, wholly or partially, will affect or bind the
non-assigning Party until it has been furnished with written notice and a true
copy of such assignment or with other proper proof that the claimant is legally
entitled to such interest.
ARTICLE VIII.
WAIVER
8.1 No waiver by either Party of any one or more defaults by
the other Party in the performance of any of the provisions of this Agreement
shall operate or be construed to be a waiver of any other default or defaults
whether of a like kind or different nature.
<PAGE> 12
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ARTICLE IX.
APPLICABLE LAW
9.1 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CONNECTICUT WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
9.2 Each Party irrevocably waives, to the fullest extent
permitted by applicable law, with respect to itself and its revenues and assets
(irrespective of their use or intended use), all immunity on the grounds of
sovereignty or other similar grounds to which it or its revenues or assets
might otherwise be entitled in any Proceedings in the courts of any
jurisdiction and irrevocably agrees, to the extent permitted by applicable law,
that it will not claim any such immunity in any Proceedings.
ARTICLE X.
NOTICES
10.1 Any notice or communication in respect of this Agreement
will be sufficiently given to a Party if in writing and delivered in person,
sent by recorded delivery or registered mail (airmail if overseas) or the
equivalent or by overnight courier or given by telex or by facsimile (in each
case with answerback received) at the address or telex number or facsimile
number specified in Schedule A. A notice or communication will be effective:
(a) if delivered by hand or sent by overnight courier, on
the day on which it is delivered;
(b) if transmitted by telex or facsimile, at the time of
transmission; or
(c) if sent by recorded delivery or registered mail
(airmail, if overseas) or the equivalent, two Local Banking Days after despatch
if the recipient's address for service is in the same country as the place of
despatch and otherwise seven Local Banking Days after despatch;
except that, in the case of delivery by hand or by courier or by transmission
or by telex or facsimile that is made after 4:00 PM on a Local Banking Day in
the locality to which the delivery is made, or that is made on a day which is
not a Local Banking Day in that locality, service shall be deemed to occur at
9:00 AM on the next Local Banking Day in that locality.
10.2 In proving the making of service under Section 10.1 it
shall be sufficient to prove that delivery by hand or by courier was made, or
that the envelope containing such notice or communication was correctly
addressed and posted, or that the telex was transmitted with the correct
answerback, or that a facsimile transmission report (or other appropriate
evidence) was obtained that the facsimile had been fully and legibly
transmitted to and received by the addressee and no notification was received
from the addressee that the transmission was incomplete or illegible by 4:00 PM
on the Local Banking Day in the locality to which the transmission was
addressed immediately following the day of transmission.
10.3 Either Party may, by notice to the other, change the
address, telex number or facsimile number at which notices or communications
are to be given to it as provided in Schedule A.
<PAGE> 13
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ARTICLE XI.
MISCELLANEOUS
11.1 The kinds of the remedies and their extent provided for in
this Agreement are the sole and exclusive kinds and extent of the remedies that
are available to and that may be asserted by either Party under or on account
of the breach of this Agreement (whether statutory or otherwise), and each of
the Parties waives any right to seek any other remedy' Each of the Parties
acknowledges that those remedies will provide appropriate and the only relief
to it for a breach by the other Party of its obligations under this Agreement,
notwithstanding that those remedies may not provide any or complete
compensation for such breach. In no event shall either Party be liable to the
other for, and each of the Parties waives the right to seek, incidental,
consequential or punitive damages, except that either Party shall be entitled
to reimbursement from the other Party for the attorneys, fees and expenses that
it incurs in successfully enforcing this Agreement against the other.
11.2 This Agreement may be executed in counterparts, each of
which when executed and delivered shall be deemed to be an original and all of
which taken together shall constitute one and the same instrument. No
amendment, waiver, modification or supplement of any provision of this
Agreement and no consent to any departure from such a provision shall be
effective unless in writing and signed by both Parties and designated as an
amendment or, in the case of a waiver or consent, by the Party granting it.
11.3 This Agreement is not intended, and shall not be
construed, to confer any benefits on, or result in any responsibility to, any
third party except an approved successor or assignee of a Party pursuant to an
assignment valid under Article VII.
11.4 This Agreement constitutes the entire agreement between
the Parties relating to the subject matter hereof and supersedes all prior
communications between the Parties relating thereto.
11.5 All payments of any kind under this Agreement shall be in
Dollars.
11.6 The existence of this Agreement, its contents, and the
existence of and contents of all other instruments and documents relating
hereto and any information made available by one Party to the other Party with
respect to this transaction are confidential and will not be discussed with or
disclosed to any third party, nor shall any public announcement or press
release be made by either Party, except with the express prior written consent
of the other Party or as may be required by contract or law, except for such
information (a) as may become generally available to the public, (b) as may be
required or appropriate in response to any summons, subpoena or in connection
with any litigation or to comply with any applicable law, order, regulation or
ruling, (c) as may be obtained from a non-confidential source, (d) as may be
required to be furnished to that Party's (i) affiliated companies, (ii)
auditors, (iii) third party lawyer's, (iv) financial institutions, or (v)
prospective business parties with which the Party has a written agreement to
keep the information that is disclosed in confidence.
<PAGE> 14
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed in multiple originals as of May 8, 1992.
Louis Dreyfus Exchanges Ltd.
By: /s/ Michael Cornish
-------------------------------------------
Name:
Michael Cornish
-------------------------------------------
Title: Vice President
-------------------------------------------
NOMECO Oil & Gas Co.
By: /s/ Paul E. Geiger
-------------------------------------------
Name:
Paul E. Geiger
-------------------------------------------
Title: Vice President, Secretary & Treasurer
-------------------------------------------
<PAGE> 15
16
SCHEDULE A
TO
SWAP AGREEMENT
NOTICE AND COMMUNICATION
<TABLE>
<S> <C>
Notice to LDEL: Notice to NOGC:
c/o Louis Dreyfus Exchanges Ltd. NOMECO Oil & Gas CO.
10 Westport Road One Jackson Square
P.O. Box 810 Jackson, MI 49204
Wilton, CT 06897-0810 Attn: Richard Rulewicz
Attn: Peter Fritzinger Telex: 62205218
Telex: 981937 Fax: (517) 787-0139
Fax: (203) 761-2321
Payments to LDEL: Payments to NOGC:
Wire Transfer to Morgan Wire Transfer to NBD Bank, N.A.
Guaranty Trust Company for account of NOMECO
for the account of Louis Dreyfus Oil & Gas Co.
Exchanges Ltd. A/C # 09430
A/C Louis Dreyfus Corporation ABA 1072-000326
Account #017-57-892
Billing and Accounting Matters Billing and Accounting Matters
To LDEL: to NOGC:
c/o Louis Dreyfus Exchanges Ltd. c/o NOMECO Oil & Gas Co.
10 Westport Road One Jackson Square
P.O. Box 810 Jackson, MI 49204
Wilton, CT 06897-0810 Attn: Richard Rulewicz
Attn: Steve Waugh Telex: 62205218
Telex: 981937 Fax: (517) 787-0139
Fax: (203) 761-2321
</TABLE>
<PAGE> 16
17
SCHEDULE B
FLOATING PRICE DETERMINANT
The Floating Price Determinant for a Settlement Period shall be
an amount (rounded to the second decimal place) computed for the Settlement
Period that is equal to the Daily Average Price.
(a) The "Daily Average Price" shall be the sum of the Daily
Determination Price for each calendar day during the
Settlement Period (each, a "Calendar Day") divided by the
number of Calendar Days in the Settlement Period.
(b) The "Daily Determination Price" shall be:
(i) For each Calendar Day when natural gas futures
contracts (the "Gas Contracts") are being regularly
traded on the New York Mercantile Exchange
("NYMEX"), the Daily Determination Price for each
Calendar Day on which the Gas Contracts (x) were
traded shall be the closing price of the one of the
Gas Contracts the last trading date of which occurs
(m) on that Calendar Day or (n) if no Gas Contracts
have a last trading day on that Calendar Day, then
the closing price on that Calendar Day of the Gas
Contract having a last trading day most nearly
following that Calendar Day (the "Prompt Contract")
and (y) were not traded because of a temporary,
short-term suspension of trading not exceeding five
consecutive Calendar Days (Such as on a Saturday,
Sunday or holiday on which NYMEX did not conduct
trading) the closing price of the Prompt Contract
on the most recent Calendar Day on which the Gas
Contracts were traded (in either case, the "NYMEX
Price").
(ii) For each Calendar Day for which the provisions of
paragraph (b) (i) are not applicable to establish
the Daily Determination Price, the Daily
Determination Price Shall be the arithmetic average
of the Index prices of spot gas delivered to
pipelines for the following pipelines and markets,
as each is reported in Inside F.E.R.C.'s Gas Market
Report for the first day of the calendar month in
which that Calendar Day fell: (q) ANR Pipeline Co.,
Louisiana; (r) Columbia Gulf Transmission Co.,
Louisiana; (s) Florida Gas Transmission Co.,
Louisiana; (t) Natural Gas Pipeline Co. of America,
Louisiana; (u) Tennessee Gas Pipeline Co.,
Louisiana; (v) Trunkline Gas Co., Field Zone; (w)
United Gas Pipe Line Co., Louisiana; (x) Texas
Eastern Transmission Corp., Louisiana; (y) Texas
Gas Transmission Corp., Zone SL; and (z) The
Transcontinental Gas Pipe Line Corporation, the
average price for Zones 2 and 3 (pooling points).
If at any time the provisions of this paragraph
b(ii) would be applicable but for the fact that
Inside F.E.R.C. has not reported such an Index
price for all the pipelines referred to above, but
has reported such an Index price for at least
[five] of such pipelines, then the Daily
Determination Price shall be calculated as provided
herein but using only such of those Index prices
for such of those pipelines as were reported.
(iii) For each Calendar Day for which the provisions of
paragraph (b) (i) or (b) (ii) are not applicable to
determine a Daily Determination Price, but for
which Natural Gas Week (the "Report") reports
"spot" prices for "Gulf Coast, Onshore" in the
"Delivered to Pipeline" column in the Louisiana
section under
<PAGE> 17
18
the heading "Gas Price Report ($/MMBtu)", the Daily
Determination Price shall be the Report Price, for
the first day of the calendar month in which that
Calendar Day fell, regardless of the date of the
issue of the Report in which the report price is
published.
(iv) If the Daily Determination Price for any Calendar
Day cannot be determined in the manner contemplated
above by the tenth Business Day after a Period End
Date, then the price for that Calendar Day to be
used in calculating the Floating Price shall be the
amount mutually determined by NOGC and LDEL to
reflect most closely the average spot price for
that Calendar Day for natural gas delivered to an
interstate pipeline in the Louisiana market.
(v) If, NOGC and LDEL are unable to agree upon the
Daily Determination Price pursuant to paragraph
(b)(iv) on or before the Payment Date, but in no
event later than ten days after a Period End Date,
then either Party may submit the matter to
arbitration by written notification to the other
Party of its desire to submit the matter to
arbitration and in that notification shall name its
arbitrator. The Party receiving a notification for
arbitration shall notify the other Party of the
name of its arbitrator within ten calendar days
thereafter. The two arbitrators so named shall
choose a third arbitrator. If the Party receiving
the notification for arbitration fails to name an
arbitrator within ten calendar days, then the
arbitration shall be heard and determined by the
single arbitrator which has been named. If two
arbitrators are named but fail to name a third
arbitrator, then the Chief Judge, United States
District Court, Southern District of New York shall
name the third arbitrator. The arbitration shall
be conducted in accordance with the Commercial
Rules of Arbitration of the American Arbitration
Association. All arbitrators shall be individuals
who are qualified by education, knowledge and
experience to determine the issue being arbitrated.
The decision of the arbitrators (a) shall be within
the positions of the parties, (b) shall clearly
state the Daily Determination Price, (c) if the
arbitration was required because the sources of
prices set forth in paragraph (b) are unavailable
due to termination of trading of Gas Contract or
termination of publication of prices, shall provide
the parties with a method for calculating the Daily
Determination Price for the remaining term of the
Agreement, (d) shall be written and (e) shall be
rendered within 15 days after all evidence has been
submitted and arguments concluded. After the date
of a notification of a Party's desire to submit a
matter to arbitration until the matter is finally
resolved by arbitration or by agreement of the
parties, no payments attributable to the Settlement
Period in question shall be due. Upon resolution
of the matter, payment shall made within five
business days and shall include interest accruing
from the Payment Date until the date on which
payment is made at a rate that is equal to the
lesser of the then effective prime rate of interest
for large U.S. Money Center Commercial Banks,
published under "Money Rates" by The Wall Street
Journal, and the maximum applicable non-usurious
rate.
(c) If any tax or similar charge that is imposed on the
Commodity by any governmental body or agency after the
date of the Agreement results in any increase in the Daily
Determination Price that, but for that tax or charge would
not have occurred at that time, then, for so long as that
tax or charge and increase remain in effect, the Floating
Price for each Settlement Period after the date on which
that increase first
<PAGE> 18
19
occurs shall be the Floating Price calculated using the
Daily Determination Price for each Calendar Day of the
Settlement Period less an amount which shall be the
lesser, determined for each such Calendar Day, of:
(i) one half of the amount of the increase in
effect on such Calendar Day, and
(ii) 15 cents per MMBtu.
If that increase exceeds 30 cents per MMBtu at any time
during the term of this Agreement, then that increase
shall constitute an event on account of which either Party
shall have the option to exercise its rights under Section
5.2 of the Agreement. If NOGC and LDEL are unable to
agree if such an increase in the Daily Determination Price
has occurred or upon the amount, duration or other aspects
of such increase relevant to the calculation of the
Floating Price, on or before the Payment Date then either
Party may submit the matter to arbitration in the same
manner and under the same procedures as are described in
paragraph (b)(v).
<PAGE> 19
20
SCHEDULE C
EXPOSURE AMOUNT COMPUTATION
On any Determination Day:
(a) The Exposure Amount shall be equal to the positive number
(in which case LDEL will be the Exposed Party) or the negative number (in which
case NOGC will be the Exposed Party) that is calculated by adding each of the
Settlement Period Exposure Amounts for that Determination Day.
(b) The Settlement Period Exposure Amount for each Settlement
Period shall be the positive or negative amount that is equal to the present
value on the Determination Date of the Settlement Period Price Amount
Difference for that Settlement Period from the Period End Date of that
Settlement Period which is computed using a discount rate that is equal to the
effective interest rate return that a purchaser would receive if it purchased
on that Determination Date U.S. government securities that mature, as nearly as
are available, on the Period End Date of that Settlement Period.
(c) The Settlement Period Price Amount Difference for each
Settlement Period shall be the product of multiplying (i) the Settlement Period
Measurement Unit Price Difference for that Settlement Period by (ii) the
Quantity per Settlement Period for that Settlement Period.
(d) The Settlement Period Price Measurement Unit Difference
for a Settlement Period shall be the difference of subtracting (i) the
Escalated Collateral Base Price for that Settlement Period from (ii) the Fixed
Price for that Settlement Period.
(e) The Escalated Collateral Base Price for a Settlement
Period shall be the Collateral Base Price on that Determination Day increased
by compounding that Collateral Base Price from that Determination Day at the
annual rate of eight percent on (i) each January 1 after that Determination Day
to and including the first day of that Settlement Period and (ii) on the Period
End Date of that Settlement Period.
(f) The Collateral Base Price shall mean, (i) if there are
futures contracts for natural gas ("Gas Contracts") regularly traded on the New
York Mercantile Exchange ("NYMEX") on that Determination Day, the quotient of
dividing (x) the sum of adding each of the closing prices on that Determination
Day (or if there was no trading on the Determination Day because the NYMEX did
not conduct trading on that Determination Day, the most recent day before the
Determination Day on which there was trading conducted on NYMEX) of the 12 Gas
Contracts for which the last trading day occurs most nearly after the month in
which the Determination Day falls (except if a Gas Contract has a last trading
day on that Determination date, that Gas Contract shall be the first of those
12 Gas Contracts) by (y) 12; or (ii) if there is no Gas Contract being traded
on NYMEX on that Determination Day, then the prices that would be used to
determine the Daily Determination Price under Schedule B if the prices of Gas
Contracts are not available for determination of the Daily Determination Price
shall be used to determine the Collateral Base Price in lieu of the prices of
the Gas Contracts.
<PAGE> 20
21
SCHEDULE D
LETTER OF CREDIT FORMAT
To:
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
We hereby authorize you to draw at sign on ourselves for the account of
for any sum or sums not exceeding in the aggregate _________________________.
Drafts must be accompanied by a statement signed by an officer of
_____________________________________ stating that:
1. An Early Termination has [designate whichever of the following
applies]:
(a) Been declared by [the Party drawing upon the Letter
of Credit] by a Notice given in accordance with Section 5.1(a) of the Swap
Agreement between Louis Dreyfus Exchanges Ltd. and NOMECO Oil & Gas Co. dated
as of May 8, 1992; or
(b) Been deemed to have occurred pursuant to Section
5.l(b) of the Swap Agreement between Louis Dreyfus Exchanges Ltd. and NOMECO
Oil & Gas Co. dated as of May 8, 1992.
2. [The Party drawing under the Letter of Credit] has notified
_________________________________pursuant to Section 5.3(a) or 5.3(c) of the
Agreement that _______________________________ is obligated to [the Party
drawing upon the Letter of Credit] in the amount of $______________________;
and
3. _____________________________________ has failed to make the
payment to [the Party drawing upon the Letter of Credit] in the amount of
$__________________________________ as is required by Article 5 of the
Agreement.
Partial drawings are permitted.
This letter of credit will expire on the 180th day after the date of its
issuance, but will automatically extend without amendment for an additional
180-day period from that 180th day, or any future expiration date, if you as
beneficiary, and the applicant have not received due notice by certified mail,
registered mail, telegram, fax, telex, or hand delivery of our intention not to
renew this letter of credit at least 30 days before that 180th day and each
subsequent expiration date.
<PAGE> 21
22
SCHEDULE E
GUARANTY
1. In order to induce NOMECO Oil & Gas Co., ("NOGC") to enter in the Swap
Agreement (the "Agreement") dated as of May 8, 1992, between NOGC and
Louis Dreyfus Exchanges Ltd. ("LDEL"), Louis Dreyfus Natural Gas Corp.
(the "Guarantor") guarantees and promises (a) to pay to NOGC, on demand,
all amounts which LDEL becomes obligated to pay to NOGC under the
Agreement and including, without limitation, obligations and liabilities
of LDEL made, incurred or created under the Agreement for principal,
interest, expenses, damages or otherwise, whether voluntary or
involuntary and whether the obligations become unenforceable due to the
bankruptcy or insolvency of LDEL (the "Obligations") as and when any of
the Obligations become due; and (b) that all payments made to or
received by NOGC on account of the obligations will, when made, be
final, and if any such payment is recovered from or is repaid by NOGC in
whole or in part in any bankruptcy, insolvency or similar proceeding
that is instituted by or against LDEL or under any other circumstance,
then this Guaranty shall continue to apply to those Obligations to the
same extent as though the payment so recovered or repaid never had been
made or received on account of those Obligations.
2. This is a continuing and irrevocable guaranty relating to the
obligations, irrespective of (a) any lack of validity or enforceability
of any of the Obligations resulting from the bankruptcy or insolvency of
LDEL, (b) any present or future law or order of any government or of any
agency that purports to reduce, amend or otherwise affect any of the
Obligations or their terms of payment of, (c) any release of, or
granting of time or any other indulgence to LDEL and (d) any other
circumstance which might otherwise constitute a defense available to, or
a legal or equitable discharge of, a guarantor under a guaranty given by
it.
3. The obligations of the Guarantor under this Guaranty are independent of
the Obligations and at NOGC's election a separate action or actions may
be brought and prosecuted against the Guarantor alone or joined in an
action brought against LDEL. The Guarantor will indemnify NOGC on
demand if any amount due under Section 1 is not recoverable on the basis
of a guaranty for any reason whatsoever.
4. The Guarantor authorizes NOGC, without notice to, without consent from
or demand of the Guarantor, and without affecting the liability of the
Guarantor under this Guaranty, from time to time to (a) renew,
compromise, extend, accelerate or otherwise change the time for payment
of, or otherwise change the terms of, the obligations or any part
thereof, including any increase or decrease of the rate of interest
thereon; (b) take and hold security for the payment of the obligations,
and exchange, enforce, waive and release any such security; and (c)
apply such security and direct the order or manner of sale thereof as
NOGC in its discretion determines. This is a guaranty of payment. NOGC
may with notice to the Guarantor assign this Guaranty to a party to
which it has assigned its interest in the Agreement in accordance with
the terms of the Agreement.
5. The Guarantor waives (a) any right to require NOGC to (i) proceed
against LDEL, (ii) proceed against or exhaust any security, or (iii)
pursue any other remedy that is available to NOGC; and (b) all
presentments, demands for performance, notices of non-performance,
protests, notices of protest, notices of dishonor, notices of
acceleration of or intent to accelerate the maturity of any
indebtedness, notices of acceptance of this Guaranty and of the
existence, creation, or incurring of new or additional obligations and
all other notices expressly set forth in this Guaranty.
<PAGE> 22
23
6. Until all of the Obligations have been paid in full, the Guarantor shall
have no right of subrogation and waives any right to enforce any remedy
which NOGC now has or may hereafter have against LDEL under the
Agreement, and waives any benefit of, and any right to participate in,
any security now or hereafter held by. NOGC. NOGC may foreclose, either
by judicial foreclosure or by exercise of power of sale, any mortgage,
deed of trust or other similar documents or other collateral securing
the obligations and, even though the foreclosure may destroy or diminish
the Guarantor's rights against LDEL, the Guarantor shall be liable to
NOGC for any part of the obligations that remains unpaid after the
foreclosure.
7. Every lien and right of setoff given to NOGC by law may be exercised by
NOGC without demand upon or notice to the Guarantor. No lien or right
of setoff shall be deemed to have been waived by any act or conduct on
the part of NOGC, or by any neglect to exercise such right of setoff or
to enforce such lien, or by any delay in so doing, and every right of
setoff and lien shall continue in full force and effect until that right
of setoff or lien is specifically waived or released by an instrument in
writing duly signed by an authorized officer of NOGC.
8. The Guarantor represents and warrants to NOGC that (a) all
authorizations, approvals, notices, filings and other actions required
by the internal documents governing the Guarantor and the regulatory
authorities having jurisdiction over the Guarantor in connection with
the due authorization, execution and delivery of this Guaranty have been
duly obtained or made and are in full force and effect; (b) this
Guaranty has been duly executed and delivered by the Guarantor; and (c)
it owns all of the issued and outstanding capital stock of LDEL.
9. The Guarantor will pay reasonable attorneys, fees and other costs and
expenses which are incurred by NOGC in the enforcement of this Guaranty.
10. All of the Guarantor's agreements in this Guaranty shall be binding upon
the Guarantor and its successors and assigns and shall inure to the
benefit of NOGC and its successor and assigns under assignments that
have been made in accordance with the Agreement.
11. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAW OF CONNECTICUT WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
12. None of the terms or provisions of the Guaranty may be waived, altered,
modified or amended except by a writing duly signed by an authorized
officer of NOGC and by an authorized officer of the Guarantor. If any
term of this Guaranty is held to be invalid, illegal or unenforceable in
any jurisdiction, the validity of all other terms shall in no way be
affected thereby in that jurisdiction, and the unenforceability in that
jurisdiction shall in no way affect the validity or enforceability of
that or any other term hereof in any other jurisdiction.
13. The Guarantor reserves to itself all rights, setoffs, counterclaims and
other defenses which LDEL has, or may be entitled to, arising from or
out of the Agreement.
<PAGE> 23
24
IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be
signed on its behalf by its duly authorized representatives as of the 8th day
of May, 1992.
Louis Dreyfus Natural Gas Corp.
By:
--------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
<PAGE> 24
25
SCHEDULE E
GUARANTY
1. In order to induce NOMECO Oil & Gas Co., ("NOGC") to enter in the Swap
Agreement (the "Agreement") dated as of May 8, 1992, between NOGC and
Lou is Dreyfus Exchanges Ltd. ("LDEL"), Louis Dreyfus Natural Gas Corp.
(the "Guarantor") guarantees and promises (a) to pay to NOGC, on demand,
all amounts which LDEL becomes obligated to pay to NOGC under the
Agreement and including, without limitation, obligations and liabilities
of LDEL made, incurred or created under the Agreement for principal,
interest, expenses, damages or otherwise, whether voluntary or
involuntary and whether the obligations become unenforceable due to the
bankruptcy or insolvency of LDEL (the "Obligations") as and when any of
the Obligations become due; and (b) that all payments made to or
received by NOGC on account of the obligations will, when made, be
final, and if any such payment is recovered from or is repaid by NOGC in
whole or in part in any bankruptcy, insolvency or similar proceeding
that is instituted by or against LDEL or under any other circumstance,
then this Guaranty shall continue to apply to those Obligations to the
same extent as though the payment so recovered or repaid never had been
made or received on account of those Obligations.
2. This is a continuing and irrevocable guaranty relating to the
Obligations, irrespective of (a) any lack of validity or enforceability
of any of the obligations resulting from the bankruptcy or insolvency of
LDEL, (b) any present or future law or order of any government or of any
agency that purports to reduce, amend or otherwise affect any of the
Obligations or their terms of payment of, (c) any release of, or
granting of time or any other indulgence to LDEL and (d) any other
circumstance which might otherwise constitute a defense available to, or
a legal or equitable discharge of, a guarantor under a guaranty given by
it.
3. The obligations of the Guarantor under this Guaranty are independent of
the obligations and at NOGC's election a separate action or actions may
be brought and prosecuted against the Guarantor alone or joined in an
action brought against LDEL. The Guarantor will indemnify NOGC on
demand if any amount due under Section 1 is not recoverable on the basis
of a guaranty for any reason whatsoever.
4. The Guarantor authorizes NOGC, without notice to, without consent from
or demand of the Guarantor, and without affecting the liability of the
Guarantor under this Guaranty, from time to time to (a) renew,
compromise, extend, accelerate or otherwise change the time for payment
of, or otherwise change the terms of, the obligations or any part
thereof, including any increase or decrease of the rate of interest
thereon; (b) take and hold security for the payment of the Obligations,
and exchange, enforce, waive and release any such security; and (c)
apply such security and direct the order or manner of sale thereof as
NOGC in its discretion determines. This is a guaranty of payment. NOGC
may with notice to the Guarantor assign this Guaranty to a party to
which it has assigned its interest in the Agreement in accordance with
the terms of the Agreement.
5. The Guarantor waives (a) any right to require NOGC to (i) proceed
against LDEL, (ii) proceed against or exhaust any security, or (iii)
pursue any other remedy that is available to NOGC; and (b) all
presentments, demands for performance, notices of non-performance,
protests, notices of protest, notices of dishonor, notices of
acceleration of or intent to accelerate the maturity of any
indebtedness, notices of acceptance of this Guaranty and of the
existence, creation, or incurring of new or additional obligations and
all other notices expressly set forth in this Guaranty.
<PAGE> 25
26
6. Until all of the Obligations have been paid in full, the Guarantor shall
have no right of subrogation and waives any right to enforce any remedy
which NOGC now has or may hereafter have against LDEL under the
Agreement, and waives any benefit of, and any right to participate in,
any security now or hereafter held by NOGC. NOGC may foreclose, either
by judicial foreclosure or by exercise of power of sale, any mortgage,
deed of trust or other similar documents or other collateral securing
the Obligations and, even though the foreclosure may destroy or diminish
the Guarantor's rights against LDEL, the Guarantor shall be liable to
NOGC for any part of the obligations that remains unpaid after the
foreclosure.
7. Every lien and right of setoff given to NOGC by law may be exercised by
3NOGC without demand upon or notice to the Guarantor. No lien or right
of setoff shall be deemed to have been waived by any act or conduct on
the part of NOGC, or by any neglect to exercise such right of setoff or
to enforce such lien, or by any delay in so doing, and every right of
setoff and lien shall continue in full force and effect until that right
of setoff or lien is specifically waived or released by an instrument in
writing duly signed by an authorized officer of NOGC.
8. The Guarantor represents and warrants to NOGC that (a) all
authorizations, approvals, notices, filings and other actions required
by the internal documents governing the Guarantor and the regulatory
authorities having jurisdiction over the Guarantor in connection with
the due authorization, execution and delivery of this Guaranty have been
duly obtained or made and are in full force and effect; (b) this
Guaranty has been duly executed and delivered by the Guarantor; and (c)
it owns all of the issued and outstanding capital stock of LDEL.
9. The Guarantor will pay reasonable attorneys' fees and other costs and
expenses which are incurred by NOGC in the enforcement of this Guaranty.
10. All of the Guarantor's agreements in this Guaranty shall be binding upon
the Guarantor and its successors and assigns and shall inure to the
benefit of NOGC and its successors and assigns under assignments that
have been made in accordance with the Agreement.
11. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAW OF CONNECTICUT WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
12. None of the terms or provisions of the Guaranty may be waived, altered,
modified or amended except by a writing duly signed by an authorized
officer of NOGC and by an authorized officer of the Guarantor. If any
term of this Guaranty is held to be invalid, illegal or unenforceable in
any jurisdiction, the validity of all other terms shall in no way be
affected thereby in that jurisdiction, and the unenforceability in that
jurisdiction shall in no way affect the validity or enforceability of
that or any other term hereof in any other jurisdiction.
13. The Guarantor reserves to itself all rights, setoffs, counterclaims and
other defenses which LDEL has, or may be entitled to, arising from or
out of the Agreement.
<PAGE> 26
27
IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be
signed on its behalf by its duly authorized representatives as of the 8th day
of May, 1992.
Louis Dreyfus Natural Gas Corp.
By: /s/ Richard Gray
------------------------------------
Name:
Richard Gray
-------------------------------------
Title: Vice President
------------------------------------
<PAGE> 1
Exhibit 10.28
CERTAIN RIGHTS AND OBLIGATIONS OF THE OVERSEAS PRIVATE INVESTMENT
CORPORATION ("OPIC") ARE SET FORTH IN AN OPTION AGREEMENT, DATED AS OF
FEBRUARY 24, 1995, BY AND AMONG AMOCO PRODUCTION COMPANY, AMOCO
CORPORATION AND OPIC, WHICH SHOULD BE REVIEWED IN CONNECTION WITH
THE AGREEMENT SET FORTH HEREIN
________________________________________________________________________________
________________________________________________________________________________
FINANCE AGREEMENT
AMONG
WALTER INTERNATIONAL CONGO, INC.
WALTER CONGO HOLDINGS, INC.
AND
OVERSEAS PRIVATE INVESTMENT CORPORATION
DATED AS OF DECEMBER 28, 1994
OPIC 679-94-139-IG
________________________________________________________________________________
________________________________________________________________________________
<PAGE> 2
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.02. Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 1.03. Project Cost; Financial Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 1.04. Assumption of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE II AMOUNT AND TERMS OF THE LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 2.01. Amount and Disbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 2.02. Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 2.03. Cancellation of the Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 2.04. Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 2.05. Repayment of the Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 2.06. Amortization of the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 2.07. Voluntary Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 2.08. Mandatory Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 2.09. OPIC Guaranty Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 2.10. Facility and Maintenance Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 2.11. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 2.12. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE III REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 3.01. Existence and Power of the Holding Company and the Borrower. . . . . . . . . . . . . . . . . . 20
Section 3.02. Authority of the Holding Company and the Borrower. . . . . . . . . . . . . . . . . . . . . . . 20
Section 3.03. Status of Holding Company and Walter Congo . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 3.04. Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 3.05. Capitalization of the Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 3.06. Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 3.07. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 3.08. Taxes and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 3.09. Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 3.10. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 3.11. Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 3.12. Easements, Property Interests, Utilities, Etc. . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 3.13. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 3.14. Project Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 3.15. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE IV CONDITIONS PRECEDENT TO THE FIRST DISBURSEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 4.01. Corporate Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 4.02. Participation and Guaranty Agreement and OPIC's Guaranty . . . . . . . . . . . . . . . . . . . 25
Section 4.03. Financing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
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Section 4.04. Stock Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 4.05. Engineer's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 4.06. Parents' Equity Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 4.07. Government Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 4.08. Financial Condition of the Borrower. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 4.09. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 4.10. Development Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 4.11. Environmental and Worker Rights Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 4.12. Appointment of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 4.13. Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 4.14. Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 4.15. Capital and Organizational Structure of the Borrower . . . . . . . . . . . . . . . . . . . . . 29
Section 4.16. Escrow Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 4.17. Other Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE V CONDITIONS PRECEDENT TO THE DISBURSEMENTFOR THE KUFPEC
ACQUISITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 5.01. Kufpec Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 5.02. Corporate Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 5.03. Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 5.04. Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 5.05. Parent Equity Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 5.06. Amendments to the Financing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 5.07. Engineer's Report and Borrower's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE VI CONDITIONS PRECEDENT TO THEFIRST DEVELOPMENT
DISBURSEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 6.01. Normal Field Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 6.02. Engineer's Report and Borrower's Certificate; Treatment of
Designated Wells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE VII CONDITIONS PRECEDENT TO THESECOND DEVELOPMENT
DISBURSEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 7.01. Completion of Phase I; Development Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 7.02. Engineer's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
ARTICLE VIII CONDITIONS PRECEDENT TO ALL DISBURSEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 8.01. Representations and Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 8.02. Change in Circumstances; Tax Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 8.03. Certification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 8.04. Payment or Reimbursement of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 8.05. OPIC Notifications to Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 8.06. Disbursement to Other Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 8.07. Delivery of Note(s) to OPIC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE IX AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 9.01. Permit Area Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>
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Section 9.02. Borrower Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 9.03. Maintenance of Rights and Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 9.04. Government Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 9.05. Insurance .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 9.06. Accounting and Financial Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 9.07. Financial Statements and Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 9.08. Access to Records; Inspection; Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 9.09. Notice of Default and Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 9.10. Security Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 9.11. Funding of the Loan; Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 9.12. Project Monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 9.13. Cure of Defaults Under JOA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 9.14. Compliance with Environmental Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 9.15. Engineer's Reports; Present Value Ratio Calculations . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE X NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 10.01. Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 10.02. No Alteration of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 10.03. Dividends and Share Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 10.04. Conduct of Business with Other Borrower and Affiliates . . . . . . . . . . . . . . . . . . . 44
Section 10.05. Sale of Assets, Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 10.06. Mortgages and Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 10.07. Ordinary Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 10.08. Worker Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
ARTICLE XI DEFAULTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section 11.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section 11.02. Remedies upon Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 11.03. Jurisdiction and Consent to Suit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 11.04. Judgment Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 11.05. Immunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
ARTICLE XII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 12.01. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 12.02. English Language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 12.03. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 12.04. Succession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 12.05. Survival of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 12.06. Integration; Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 12.07. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 12.08. No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 12.09. Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 12.10. Waiver of Litigation Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 12.11. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 12.12. Assumption of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Section 12.13. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
</TABLE>
<PAGE> 5
FINANCE AGREEMENT
AGREEMENT, dated as of December 28, 1994 between and among Walter
International Congo, Inc., a Texas corporation ("Walter Congo"), Walter Congo
Holdings, Inc., a Texas corporation which wholly-owns Walter, Congo (the
"Holding Company"), and Overseas Private Investment Corporation ("OPIC"), an
agency of the United States of America.
WITNESSETH:
WHEREAS, (i) the Holding Company intends to acquire, through the
Merger of Walter Congo with and into ACEC, all of the Interests held by ACEC in
the Yombo-Masseko-Youbi exploitation Permit issued by the GORC, (ii) the Other
Holding Company intends to acquire through the Other Merger of the Other
Borrower with and into ACPC all of the Interests held by ACPC in the Permit,
(iii) subject to the successful negotiation of the terms thereof, the Holding
Company and the Other Holding Company may acquire all or a portion of the
Interests in the Permit held by Kufpec, and (iv) the Holding Company, the
Borrower, the Other Holding Company and the Other Borrower intend to further
develop the Permit area, all as more fully described in the Application and the
Development Plan (collectively, the "Project") (all capitalized terms used in
these recitals and not defined herein are as defined below); and
WHEREAS, it is a condition to the making of the Loan contemplated by
this Finance Agreement that, as of the date hereof, the Other Holding Company
and Other Borrower shall enter into the Other Finance Agreement and related
financing documents with OPIC in connection with the Project; and
WHEREAS, the Parent, the Other Parent, the Holding Company, the Other
Holding Company, the Borrower and the Other Borrower have entered into a Stock
Purchase Agreement with APC pursuant to which, among other things, the Holding
Company shall acquire by merger ACEC and the Other Holding Company shall
acquire by merger ACPC; and
WHEREAS, ACEC, ACPC, the GORC and certain other parties are parties to
the Convention, pursuant to which the GORC granted the Interests in the Permit
to the holders thereof; and
WHEREAS, ACEC, ACPC, Hydro-Congo and certain other parties are parties
to the JOA, which sets forth the terms and conditions of the relations among
the holders of Interests in the Permit, and it is contemplated that, upon the
Merger of Walter Congo with and into ACEC, New Walter Congo will act as the
Operator under the JOA; and
WHEREAS, in connection with this Finance Agreement and the Other
Finance Agreement and the Loan and the Other Loan contemplated hereby and
thereby, OPIC is entering into an agreement with the GORC and Hydro-Congo with
respect to certain approvals, consents and agreements relating to, among other
things, the Project, the Loan and the Other Loan, and investment insurance that
may be provided by OPIC; and
<PAGE> 6
2
WHEREAS, OPIC is entering into a Participation and Guaranty Agreement,
dated as of the date hereof, with the Borrower and the Paying Agent with
respect to the Loan and the Finance Agreement, and is also entering into the
Other Participation and Guaranty Agreement, dated as of the date hereof with
the Other Borrower and the Paying Agent with respect to the Other Loan and the
Other Finance Agreement; and
WHEREAS, OPIC is entering into an Option Agreement with Amoco and APC,
the execution and delivery of which is a condition precedent to the closing of
the Mergers referred to above, which Option Agreement sets forth certain rights
and obligations of the parties thereto in the event of a default hereunder or
under the Other Loan Agreement; and
WHEREAS, to secure a portion of the financing for the Project, the
Holding Company has requested that OPIC extend a credit facility to the
Borrower in an amount up to U.S. $25,000,000 pursuant to Section 234(b) of the
Foreign Assistance Act of 1961, as amended, which OPIC is willing to do on the
terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and of the agreements
contained herein, it is hereby agreed as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Definitions.
Unless otherwise provided, capitalized terms used herein shall have
the definitions specified below:
"ACEC" means Amoco Congo Exploration Company, a Delaware corporation.
"ACPC" means Amoco Congo Petroleum Company, a Delaware corporation.
"Acquisition Expenses" means, (i) with respect to each of the Mergers
and the Kufpec Acquisition, the reasonable expenses of such
transaction, determined in accordance with GAAP, including
fees for business and legal counsel, accounting, engineering
and technical advisors, and costs of document preparation and
distribution, plus (ii) with respect to the Mergers only,
other expenses of personnel performing due diligence and
transitional duties in the Congo, and all expense
reimbursements and fees payable to OPIC and/or the Holders
hereunder, under the Other Finance Agreement or under the
Commitment Letter prior to the First Disbursement, all as
certified to, and approved by, OPIC.
"Affiliate" means, with respect to any Person, (i) any other Person
that is directly or indirectly controlled by, under common
control with or controlling such Person; (ii) any other Person
owning beneficially or controlling five percent (5%) or more
of the equity interest in such Person; (iii) any officer,
director or partner of such
<PAGE> 7
3
Person; or (iv) any spouse or relative of such Person. As
used herein, the term "control" means possession, directly or
indirectly, of the power to direct or cause the direction of
the management and policies of a Person, whether through the
ownership of partnership interests or voting securities, by
contract or otherwise.
"Aggregate Present Value Ratio" means, as of any date of
determination, the ratio of (i) Future Cash Flows, discounted
from the projected dates of receipt and/or payment of each
component thereof to the date of determination at the Discount
Rate, compounded quarterly, to (ii) the aggregate outstanding
principal amount of the Loan and the Other Loan as of the date
of determination.
"Agreement" means this Finance Agreement among the Borrower, the
Holding Company and OPIC.
"Amoco" means Amoco Corporation, an Illinois corporation.
"APC" means Amoco Production Company, a Delaware corporation and a
wholly-owned subsidiary of Amoco.
"APC Subordination Agreement" means the Subordination Agreement to be
entered into pursuant hereto, among APC, the Borrower, the
Holding Company, the Other Borrower, the Other Holding Company
and OPIC, substantially in the form attached hereto as Exhibit
C-2.
"Applicable World Bank Guidelines" means the Offshore Hydrocarbon
Project Guidelines, in the form attached hereto as Exhibit J.
"Application" means the application to OPIC for the Loan, consisting
of the Sponsor Disclosure Report dated November 29, 1993, the
Commitment Letter and the items described in Schedule 1.01
hereto.
"Assignment Agreement" means the Conditional Assignment and Security
Agreement to be entered into pursuant hereto, between the
Borrower and OPIC, substantially in the form attached hereto
as Exhibit E.
"Authorized Officer" means, with respect to any Person, its Chairman,
Managing Director, President, Secretary or Treasurer, any Vice
President, Assistant Secretary or Assistant Treasurer thereof,
and any other officer designated in writing by such Person as
having been authorized to execute and deliver this Agreement,
the Notes, any of the other Financing Documents to which it is
or will be a party or any other notice or instrument
contemplated hereunder.
"Borrower" means, prior to consummation of the Merger, Walter Congo,
and from and after such time, New Walter Congo.
"Borrower's Environmental Manuals" has the meaning set forth in
Section 9.14.
<PAGE> 8
4
"Borrower's Share" means, as of any date, (i) until the independent
Voluntary Prepayment Date, fifty percent (50%); and (ii) from
and after the Independent Voluntary Prepayment Date, the
percentage of the sum of the Loan and the Other Loan
outstanding on such date which is represented by the Loan.
"Business Day" means any day other than a Saturday, Sunday or day on
which commercial banks are authorized or required by law to
close in the City of New York, New York, in Houston, Texas or
in Washington, D.C., United States of America.
"Cancellation Fee" has the meaning set forth in Section 2.03.
"Charter Documents" means, in respect of any company, corporation,
partnership, governmental agency or other enterprise, its
founding act, articles of incorporation and by-laws,
memorandum and articles of association, statute or similar
instrument.
"Closing Agreement" means the agreement with the IRS to be entered
into by the Borrower and the other parties thereto pursuant to
the Tax Agreement.
"Closing Date" means any Business Day on which a Disbursement is made.
"Commitment" means, as of any date during the Commitment Period, the
amount of $25,000,000 less the portion thereof which has
expired or been cancelled pursuant to Section 2.03 hereof.
"Commitment Fee" has the meaning set forth in Section 2.02.
"Commitment Letter" means the letter agreement among the Parent, the
Other Parent and OPIC dated June 27, 1994, in which OPIC has
agreed to guarantee, and the Parents have agreed to borrow or
cause to be borrowed, the Loan and the Other Loan, subject to
the conditions stated therein.
"Commitment Period" means the period commencing on the date hereof and
ending on the earlier of (i) the first date on which the
aggregate principal amount of all Disbursements made hereunder
equals the Commitment and (ii) June 26, 1999.
"Congo" means the Republic of the Congo.
"Convention" shall mean the Convention, dated May 25, 1979, among the
GORC, Hydro-Congo and the other holders of Interests in the
Permit.
"Current Assets" means assets treated as current assets under GAAP.
"Current Liabilities" means all Indebtedness and liabilities due on
demand or to become due within one year and other liabilities
treated as current liabilities under GAAP.
"Debt Service Reserve Account" has the meaning set forth in the Escrow
Agreement.
"Debt Service Reserve Amount" has the meaning set forth in the Escrow
Agreement.
<PAGE> 9
5
"Deemed Acquisition Costs" shall mean (A) with respect to the Mergers,
the sum of (i) $31,500,000, increased or decreased to reflect
any cash Balancing Payments (as referred to in the Stock
Purchase Agreement) pursuant to Section 3(B) or Section 3(C)
of the Stock Purchase Agreement and (ii) the applicable
Acquisition Expenses; and (B) with respect to the Kufpec
Acquisition, the actual purchase price of the Interest held by
Kufpec (which may include the principal of subordinated debt
issued to the seller), as reasonably determined by OPIC, plus
the applicable Acquisition Expenses.
"Designated Wells" means a well or wells that the Engineer has
confirmed are located in an area covered by the Permit which,
in the Engineer's sole opinion, contains proved Oil reserves.
"Development Plan" means the development plan of the Borrower and the
Other Borrower, dated December 28, 1994, as amended from time
to time with the prior written consent of OPIC.
"Disbursement" means each disbursement of the Loan.
"Disbursement Maturity Date" means (i) with respect to the First
Disbursement, the fourth anniversary of the first Payment Date
occurring at least 180 days after the date of such
Disbursement, and (ii) with respect to each Disbursement
thereafter, the fourth anniversary of the first Payment Date
occurring at least 90 days after the date of such
Disbursement.
"Discount Rate" means, for a given calendar year, the rate determined
by calculating as of January 1 of such year the weighted
average of the Note Rates (as defined in the Participation and
Guaranty Agreement) for each outstanding Note, weighted on the
basis of the outstanding amount of the Loan represented by
each such Note. Such calculation shall be made by the
Borrower and the Other Borrower and shall be approved by OPIC.
"Dollars" or "$" means United States dollars.
"Engineer" means Arthur Bear of Poco Oil Company or such other
individual employed by Poco Oil Company or such other
independent engineering firm as shall, in either case, be
approved by OPIC.
"Engineer's Report" has the meaning set forth in Section 6.05.
"Environmental Laws" means any federal, state or local statute, law,
ordinance, code, rule, regulation, order, decree or other
requirement of any Governmental Body regulating, relating to
or imposing liability or standards of conduct concerning any
hazardous, toxic or dangerous waste, substance or material and
applicable to the Project or to the Borrower or the Other
Borrower.
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6
"Escrow Account" or "Escrow Accounts" means a Dollar-denominated
escrow account or accounts established pursuant to the terms
of the Escrow Agreement.
"Escrow Agent" means Citibank, N.A., a national banking association,
or any successor or successors thereto as Escrow Agent under
the Escrow Agreement.
"Escrow Agreement" means the Escrow and Security Agreement to be
entered into pursuant hereto, among the Borrower, OPIC and the
Escrow Agent, substantially in the form attached hereto as
Exhibit D.
"Event of Default" has the meaning set forth in Section 11.01.
"Existing Environmental Manuals" has the meaning set forth in
Section 9.14.
"Facility Fee" has the meaning set forth in Section 2.10.
"Financial Plan" has the meaning set forth in Section 1.03.
"Financial Statements" means, with respect to any Person, such
Person's quarterly or annual balance sheet and statements of
income, retained earnings, and sources and application of
funds for such fiscal period, together with all notes thereto
and with comparable figures for the corresponding period of
its previous Fiscal Year, each prepared in Dollars in
accordance with GAAP.
"Financing Documents" means the Loan Documents, the Security Documents
and the Project Documents, each as defined in Section 4.03.
"First Development Disbursement" has the meaning set forth in
Section 2.01(c).
"First Disbursement" has the meaning set forth in Section 2.01(c).
"Fiscal Year" means, with respect to ACEC and the Borrower, the period
beginning on January 1 and ending on December 31 of each year.
"Future Cash Flows" means, as of any date of determination, the amount
equal to (I) gross revenues allocable to the Interests of the
Borrower and the Other Borrower projected, for the period from
the date of determination through the economic life of the
proved reserves, to be realized from production from proved
reserves in the Permit area, plus (II) without duplication,
amounts projected to be repaid by Hydro-Congo pursuant to
Article 9.02 of the JOA on the advance accounts of the
Borrower and the Other Borrower during the projection period,
less (III) the aggregate amount of Project Expenses projected
to be paid during the projection period, plus (IV) the
aggregate amount of such Project Expenses reasonably expected
to be funded by the proceeds of Disbursements made (or to be
made) on or prior to the date of determination. The Future
Cash Flows shall be computed on the basis of projections and
the related price of Oil determined by the Engineer for
purposes of the Engineer's Report.
<PAGE> 11
7
"GAAP" means generally accepted accounting principles in the United
States of America in effect from time to time, applied on a
consistent basis both as to classification of items and
amounts.
"GORC" means the Government of the Congo.
"GORC Approval Letters" means collectively the letter dated February
22, 1995 from the Minister of Foreign Affairs of the Congo,
the letters dated February 14, 1995 from the Minister of
Hydrocarbons of the Congo, and the letter dated February 22,
1995 from the President of Hydro-Congo.
"Governmental Body" means and includes any national, federal, state,
county, city, town, village, municipal or other local
governmental department, commission, board, bureau, agency,
authority or instrumentality, domestic or foreign, or any
political subdivision thereof, and any Person exercising
executive, legislative, judicial, regulatory or administrative
functions of or pertaining to any government, including
without limitation all commissions, boards, bureaus,
arbitrators and arbitration panels, and any corporation,
authority or other Person owned or controlled (through stock
or capital ownership or otherwise) by any of the foregoing.
"Guaranty Fee" has the meaning set forth in Section 2.09.
"Hazardous Materials" means any hazardous, toxic or dangerous waste,
substance or material defined as such in any of the applicable
Environmental Laws.
"Holder" means any holder of a fractional, undivided beneficial
interest in the Loan and the Notes, pursuant to the terms of
the Participation and Guaranty Agreement.
"Holding Company" has the meaning set forth in the recitals to this
Agreement.
"Hydro-Congo" means Societe Nationale de Recherches et d'Exploration
Petrolieres Hydro-Congo, a Congolese corporation that is
wholly-owned by the GORC.
"Indebtedness" of any Person means, at any date, all or any
liabilities, obligations and reserves, contingent or
otherwise, which, in accordance with GAAP, would be reflected
as a liability on a balance sheet, including without
limitation, (i) any obligation of such Person for borrowed
money or arising out of any credit facility, (ii) any
obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, (iii) any obligation of
such Person to pay the deferred purchase price of property or
services, (iv) any obligation of such Person under conditional
sales or other title retention agreements, (v) the net
aggregate rentals under any lease by such Person as lessee
which under GAAP would be capitalized on the books of the
lessee or which is the substantial equivalent of the financing
of the property so leased, (vi) any obligation of such Person
to purchase securities or other property which arise out of or
in connection with the sale of the same or substantially
similar securities or property, (vii) any obligation of such
Person secured by any Lien upon property, (viii) any
Indebtedness of others secured by a
<PAGE> 12
8
Lien on any asset of such Person and (ix) any Indebtedness of
others guaranteed, directly or indirectly, by such Person.
"Indemnified Persons" has the meaning set forth in Section 12.11.
"Independent Voluntary Prepayment Date" has the meaning set forth in
Section 2.07(b).
"Individual Present Value Ratio" means the ratio determined in a
manner identical to the Aggregate Present Value Ratio but
taking into account only (i) Future Cash Flows attributable to
the Interests of the Borrower and (ii) the Loan.
"Interests" means the beneficial interests in the Permit.
"Inter-Purchaser Agreement" means the Inter-Purchaser Agreement, to be
entered into in connection with the Mergers, between the
Borrower and the Other Borrower.
"IRS" means the Internal Revenue Service of the United States
Department of the Treasury.
"Issuing Instructions" has the meaning set forth in the Participation
and Guaranty Agreement.
"JOA" means the Joint Operating Agreement among Hydro-Congo, Kufpec,
ACEC (or, following the Merger, the Borrower) and ACPC (or,
following the Other Merger, the Other Borrower), as amended
from time to time.
"Kufpec" means Kufpec (Congo) Limited, a Cayman Islands corporation
that is wholly-owned by the Kuwait Foreign Petroleum
Corporation.
"Kufpec Acquisition" means the acquisition by the Borrower and/or the
Other Borrower of all of the Interests held by Kufpec or all
of the outstanding capital stock of Kufpec.
"Lien" means any lien, pledge, mortgage, security interest, deed of
trust, charge, assignment, hypothecation, title retention or
other encumbrance on or with respect to, or any preferential
arrangement having the practical effect of constituting a
security interest with respect to the payment of any
obligation with, or from the proceeds of, any asset or revenue
of any kind.
"Loan" means, on any date, the aggregate of the outstanding unpaid
principal amounts of the Notes then outstanding.
"Loan Documents" has the meaning set forth in Section 4.03(a).
"Loan Maturity Date" means the last occurring Disbursement Maturity
Date of any Disbursement made hereunder.
"Maintenance Fee" has the meaning set forth in Section 2.10(b).
<PAGE> 13
9
"Merger Closing Date" means the closing date for the transactions
contemplated by the Merger.
"Merger" means the merger of Walter Congo with and into ACEC pursuant
to the Plan of Merger contemplated by the Stock Purchase
Agreement.
"Mergers" means the Merger and the Other Merger.
"Net Cash Flow" means, for any period, the aggregate Proceeds
attributable to the Interests of the Borrower and the Other
Borrower less the aggregate Operating Costs and Required
Payments for such period (as such terms are defined in the
Escrow Agreement).
"Net Income" means, with respect to any Person for any fiscal period,
the net income of such Person for such period after Taxes but
before extraordinary items, determined in accordance with
GAAP.
"New Walter Congo" means, from and after the effective time of the
Merger, Walter Congo International, Inc., a Delaware
corporation and the surviving entity of the Merger of Walter
Congo into ACEC.
"Note" or "Notes" means any promissory note issued by the Borrower
pursuant to this Agreement and the Participation and Guaranty
Agreement, substantially in the form of Exhibit A to the
Participation and Guaranty Agreement.
"Nuevo Congo" means The Nuevo Congo Company, a Texas corporation.
"NUFIC" means National Union Fire Insurance Co.
"Oil" means oil, other hydrocarbons and any other energy natural
resources which are exploited in the Permit area as part of
the Project.
"Operator" means New Walter Congo, in its capacity as "Operator" under
the JOA and any successor entity appointed as operator
pursuant to the JOA.
"OPIC" means Overseas Private Investment Corporation, an agency of the
United States of America.
"Option Agreement" means the Option Agreement by and among APC, Amoco
and OPIC substantially in the form of Schedule L to the Stock
Purchase Agreement.
"Other Borrower" means, prior to the consummation of the Other Merger,
Nuevo Congo, and from and after such time, the surviving
entity of the Other Merger.
"Other Finance Agreement" means the Finance Agreement, dated as of the
date hereof, by and among the Other Borrower, the Other
Holding Company and OPIC.
<PAGE> 14
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"Other Holding Company" means The Congo Holding Company, a Texas
corporation which owns all of the issued and outstanding
capital stock of the Other Borrower.
"Other Loan" means, on any date, the aggregate of the unpaid principal
amounts of the notes outstanding under the Other Finance
Agreement.
"Other Merger" means the merger of Nuevo Congo with and into ACPC
pursuant to the Other Plan of Merger contemplated by the Stock
Purchase Agreement.
"Other Parent" means Nuevo Energy Company, a Delaware corporation
which owns all of the issued and outstanding capital stock of
the Other Holding Company.
"Other Participation and Guaranty Agreement" means the Participation
and Guaranty Agreement among the Other Borrower, OPIC and the
Paying Agent.
"Other Plan of Merger" means the Agreement and Plan of Merger of
Nuevo Congo with and into ACPC substantially in the form of
Schedule M-2 to the Stock Purchase Agreement.
"Other Subordination Agreement" means the Subordination Agreement by
and among OPIC, the Other Borrower, the Other Holding Company
and the Other Parent.
"Parent" means Walter International, Inc., a Texas corporation, which
owns all of the issued and outstanding capital stock of the
Holding Company.
"Parent Reimbursement Agreement" means a Reimbursement Agreement,
which may be entered into pursuant to the Escrow Agreement
between OPIC and the Parent, substantially in the form
attached to the Escrow Agreement as Exhibit A thereto.
"Parent Tax Indemnity Agreement" means the Tax Indemnity Agreement to
be entered into pursuant hereto, between the Parent and OPIC,
substantially in the form attached hereto as Exhibit G.
"Parents" means the Parent and the Other Parent.
"Participation and Guaranty Agreement" means the Participation and
OPIC Guaranty Agreement among the Borrower, OPIC and the
Paying Agent, substantially in the form attached hereto as
Exhibit A.
"Paying Agent" means NationsBank of Texas, N.A., a national banking
association, or any successor or successors thereto as Paying
Agent under the Participation and Guaranty Agreement and the
Other Participation and Guaranty Agreement.
"Payment Date" means each January 15, April 15, July 15 and October 15
commencing on April 15, 1995 until the Loan and all amounts
due hereunder or under the Notes are paid in full, unless such
date is not a Business Day, in which case the Payment Date
will be the next succeeding Business Day.
<PAGE> 15
11
"Payment Target" has the meaning set forth in the Escrow Agreement.
"Payments Account" has the meaning set forth in the Escrow Agreement.
"Permit" means the Yombo-Masseko-Youbi exploitation permit created out
of the Marine I exploration permit, offshore the Congo, which
was issued by Decree 89/211 of the GORC pursuant to the
Convention.
"Person" means and includes an individual, a legal entity, including
but not limited to, a partnership, a joint venture, a
corporation, a trust and an unincorporated organization, and a
government or any department or agency thereof.
"Phase I Cap Ex" has the meaning set forth in Section 2.01(c).
"Phase II Cap Ex" has the meaning set forth in Section 2.01(c).
"Plan of Merger" means the Agreement and Plan of Merger of Walter
Congo with and into ACEC substantially in the form of Schedule
M-1 to the Stock Purchase Agreement.
"Prepayment Premium" has the meaning set forth in Section 2.07.
"Present Value Ratio" means (i) on any date as of which the Loan and
the Other Loan are equal, the Aggregate Present Value Ratio
and (ii) on any other date, each of (A) the Individual Present
Value Ratio and (B) the "Individual Present Value Ratio" as
defined in the Other Loan Agreement (it being understood that,
on any date described in clause (ii), a requirement that the
Present Value Ratio equal 2.0 to 1.0 shall be a requirement
that each ratio described in clauses (A) and (B) equal 2.0 to
1.0).
"Proceeds" has the meaning set forth in the Escrow Agreement.
"Project" has the meaning set forth in the Recitals.
"Project Assets" means materials and equipment governed by Article
8.01 of the JOA and any other property or assets of the
Borrower or the Other Borrower that are used from time to time
in connection with the Project.
"Project Documents" has the meaning set forth in Section 4.03(c).
"Project Expenses" means, for any applicable period, (i) production
and other payments (including royalty recoupment and
subordinated debt) to be made by the Borrower or the Other
Borrower to Amoco and, if applicable, the seller of the Kufpec
Interests, and (ii) Required Payments to the GORC and NUFIC,
taxes, operating costs and expenses reasonably projected to be
paid and capital expenditures reasonably projected to be
necessary, in each case (x) to cause the Oil production for
the projection period to be achieved, and (y) to be paid by,
or for the account of, the Borrower or the Other Borrower.
<PAGE> 16
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"Required Payments" has the meaning set forth in the Escrow Agreement.
"Security Documents" has the meaning set forth in Section 4.03(b).
"Self-Monitoring Questionnaire" means the Annual Self-Monitoring
Questionnaire attached hereto as Exhibit I as the same may be
revised and supplemented by OPIC from time to time.
"Stock Pledge Agreement" means the Stock Pledge Agreement to be
entered into pursuant hereto, between the Holding Company and
OPIC, substantially in the form attached hereto as Exhibit F.
"Stock Purchase Agreement" means the Stock Purchase Agreement, dated
as of June 30, 1994, by and among Walter Congo, the Holding
Company, the Parent, APC and the other parties named therein.
"Subordination Agreement" means the Subordination Agreement to be
entered into pursuant hereto, by and among OPIC, the Borrower,
the Holding Company and the Parent, substantially in the form
attached hereto as Exhibit C-1.
"Tax Agreement" means the Tax Agreement among Walter Congo, the
Holding Company, APC, and the other parties thereto,
substantially in the form as attached as Exhibit D to the
Stock Purchase Agreement.
"Taxes" has the meaning set forth in Section 2.11.
"World Bank" means the International Bank for Reconstruction and
Development, an international organization headquartered in
Washington, D.C., United States of America.
Section 1.02. Interpretation.
In this Agreement, unless otherwise indicated or otherwise required by
the context:
(a) Reference to and the definition of any document (including
this Agreement) shall be deemed a reference to such document as it may be
amended or modified from time to time;
(b) All references to an "Article", "Section", "Schedule" or
"Exhibit" are to an Article or Section hereof or to a Schedule or an Exhibit
attached hereto;
(c) The table of contents, article and section headings and other
captions in this Agreement are for the purpose of reference only and do not
limit or affect its meaning;
(d) Defined terms in the singular shall, except where the context
otherwise requires, include the plural and vice versa, and the masculine,
feminine or neuter gender shall include all genders;
<PAGE> 17
13
(e) Accounting terms used herein but not defined in Section 1.01
hereof shall have the respective meanings given to them under GAAP;
(f) The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement; the headings in
this Agreement are for the purpose of reference only and do not limit or affect
its meaning; and
(g) Any reference herein to a time of day means Washington, D.C.
time.
(h) In the event of any conflict or inconsistency between the
terms and provisions of this Agreement and the terms and provisions of any
certificate or notice delivered pursuant hereto, the terms and provisions of
this Agreement shall be controlling for all purposes.
Section 1.03. Project Cost; Financial Plan.
The total cost of the Project (including provisions for contingencies)
is estimated to be the equivalent of $78,300,000 based on the financial plan
set forth in Schedule 1.03 hereto (the "Financial Plan").
Section 1.04. Assumption of Obligations.
Immediately upon the consummation of the Merger and pursuant to the
terms of the Plan of Merger, the surviving entity of such Merger shall by
operation of law assume and become obligated in respect of all the liabilities
and obligations of Walter Congo under the Financing Documents and shall, upon
the request of OPIC, countersign the Notes issued to OPIC in connection with
the First Disbursement.
ARTICLE II
AMOUNT AND TERMS OF THE LOAN
Section 2.01. Amount and Disbursement.
(a) Subject to the terms and conditions hereof and in accordance
with the Participation and Guaranty Agreement, OPIC agrees to make and the
Borrower agrees to accept, the Loan for the Project in the principal amount of
not more than $25,000,000. Not more than $9,250,000 in Loan proceeds shall be
applied to finance the Merger, not more than $750,000 shall be applied to
finance the Kufpec Acquisition; and the balance shall be applied to finance the
development of Oil reserves in the Permit area.
(b) Subject to the satisfaction of the conditions set forth in
Articles IV, V, VI VII and VIII hereof the Borrower may request Disbursements
of the Loan in accordance with the Participation and Guaranty Agreement by
delivering Issuing Instructions to OPIC pursuant thereto.
<PAGE> 18
14
Each Disbursement shall be evidenced by one or more (as OPIC may specify) Notes
aggregating the principal amount of the Disbursement and dated the Closing
Date. Each Note shall be issued for a term ending on or before the applicable
Disbursement Maturity Date. The principal amount of each Disbursement of the
Loan will be repaid in Dollars in equal quarterly installments as follows: (i)
in the case of the First Disbursement, in no more than 16 quarterly
installments commencing on the first Payment Date occurring at least 180 days
after the date of such Disbursement, and (ii) in the case of each Disbursement
thereafter, in no more than 16 quarterly installments commencing on the first
Payment Date occurring at least 90 days after the date of such Disbursement.
The outstanding principal amount of the Loan shall not exceed the amount of the
Commitment on any date during the Commitment Period. OPIC, in accordance with
the Participation and Guaranty Agreement, shall notify the Paying Agent
forthwith after the conditions set forth in Article VIII and, as applicable,
Article IV, V, VI or VII have been satisfied or waived.
(c) The Loan will be disbursed in no more than four (4) separate
Disbursements on or prior to the last day of the Commitment Period. The first
Disbursement shall be applied to fund the Merger (the "First Disbursement") and
shall not exceed the lesser of (i) $9,250,000, (ii) 37.5% of the Deemed
Acquisition Costs with respect to the Mergers and (iii) the difference between
50% of such Deemed Acquisition Costs and $2,250,000. The Kufpec Acquisition
shall be funded by a single Disbursement in an aggregate amount not to exceed
the lesser of (iv) $750,000, (v) 50% of the sum of (X) 50% of the purchase
price payable on the date of such acquisition in cash and/or notes and (Y) the
applicable Acquisition Expenses and (vi) an amount that, when added to the
amount of the First Disbursement, equals 37.5% of the Deemed Acquisition Costs.
The first Disbursement to fund development of the Permit area (the "First
Development Disbursement") will not exceed the lesser of (vii) $9,350,000,
(viii) 75% of the capital expenditures (the "Phase I Cap Ex") reasonably (in
OPIC's sole judgment) estimated to be required, and to be funded by the
Borrower, to complete "Phase I" of the Development Plan and (ix) an amount
that, when added to the aggregate principal amount of prior Disbursements,
equals 75% of the sum of (A) 50% of the Deemed Acquisition Costs and (B) the
Phase I Cap Ex; provided, however, that Phase I Cap Ex shall not include
capital expenditures relating to wells which are not Designated Wells. The
final disbursement to fund development (the "Second Development Disbursement")
will be the lesser of (x) an amount equal to the Commitment as of the date of
Disbursement, less the aggregate principal amount of all prior Disbursements,
(xi) 75% of the capital expenditures reasonably (in OPIC's sole judgment)
estimated to be required, and to be funded by the Borrower, to complete the
Development Plan (the "Phase H Cap Ex") and (xii) an amount that, when added to
the aggregate principal amount of all prior Disbursements, equals 75% of the
sum of (A) actual capital expenditures theretofore incurred by the Borrower to
implement the Development Plan, (B) without duplication, the Phase H Cap Ex and
(C) 50% the Deemed Acquisition Costs; provided, however, that Phase H Cap Ex
shall not include capital expenditures relating to wells that are not
Designated Wells. No Disbursements will be made after the last day of the
Commitment Period or in respect of Loan amounts repaid or prepaid.
Section 2.02. Commitment Fee.
Commencing from the date hereof and continuing through the last day of
the Commitment Period, a commitment fee (the "Commitment Fee") shall accrue on
a daily basis at the rate of
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0.4375% (seven sixteenths of one percent) per annum on the difference,
calculated for each day during such period, between (i) the Commitment and (ii)
the aggregate principal amount of all Disbursements made on or prior to such
day. The Commitment Fee shall be payable in arrears to OPIC on each Payment
Date and upon the termination of the Commitment or any portion thereof.
Section 2.03. Cancellation of the Commitment.
Following consummation of the Merger, the Borrower may cancel all or
any part of the Commitment (less the aggregate amount of all Disbursements to
the date of cancellation), upon payment to OPIC of a fee (the "Cancellation
Fee") equal to 0.5% (one-half of one percent) of the amount of the Commitment
then canceled, together with the Commitment Fee accrued on such amount through
the date of cancellation provided, however, that such cancellation shall only
be effective if at the same time the Other Borrower shall cancel an equal
amount of the OPIC commitment to fund the Other Loan. Any part of the
Commitment not disbursed at the close of business on the last day of the
Commitment Period shall be deemed to have been cancelled and the Cancellation
Fee on such amount shall be due and payable. Anything to the contrary herein
notwithstanding, if any portion, up to a maximum of $5,650,000, of the
Commitment is canceled solely because OPIC (in consultation with the Engineer)
and the Borrower shall have determined that further development of the Oil
reserves in the Permit area is not economically feasible, then the Cancellation
Fee payable with respect to such cancellation shall be 0.25% (one-quarter of
one percent) of the amount cancelled.
Section 2.04. Interest.
Interest payable on any Note shall be at the rate (which may be fixed
or floating), or in the amount, specified in such Note (which rate or amount
must be satisfactory to OPIC); provided, however, that if the Borrower fails to
pay in full when due (whether at scheduled maturity, by acceleration or
otherwise) any amount of principal or interest on any Note, the Borrower shall
pay interest to OPIC on demand (to the extent permitted by applicable law) at a
rate of interest equal to the sum of 2.0% (two percent) plus the rate specified
in such Note applied on a daily basis to the amount in default from the due
date thereof to the date of actual payment of the defaulted amount.
Section 2.05. Repayment of the Loan.
Subject to the provisions of Section 2.06, the Borrower shall repay
each Note at such times and in such amounts as are set forth in such Note and
in the manner prescribed in the Participation and Guaranty Agreement.
Upon repayment in full of the amounts due under the Notes and the
discharge of all obligations of the Borrower under this Agreement and the
Participation and Guaranty Agreement, OPIC shall cancel and return each Note to
the Borrower.
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Section 2.06. Amortization of the Notes.
Each Disbursement shall mature on the applicable Disbursement Maturity
Date and, in accordance with Section 2.01(b), shall have a separate schedule of
principal payments for the portion of the Loan advanced pursuant to such
Disbursement; and the Note or Notes issued in connection with each such
Disbursement shall set forth the scheduled principal payments due on each
Payment Date with respect to such portion of the Loan. At any time following
the end of the Commitment Period, OPIC may elect to replace outstanding Notes
that have identical Note Rates (as defined in the Participation and Guaranty
Agreement) with a single Note that consolidates the schedule of principal
payments into a single schedule.
Section 2.07. Voluntary Prepayment.
(a) Subject to the requirements of the Holders and the provisions
of Section 2.07(b), on any date the Borrower may, upon not less than ten (10)
Business Days' prior notice to OPIC and the Paying Agent, reduce the amount of
the Loan outstanding upon (A) the payment to the Holders of any premium or
other amount required by such Holders, and (B) the payment to OPIC of a
prepayment premium (the "Prepayment Premium") of (i) 3% (three percent) of the
amount by, which the Loan is so reduced during the year immediately following
the date of the First Disbursement, (ii) 2% (two percent) of the amount by
which the Loan is so reduced during the year immediately following the first
anniversary of the date of the First Disbursement, and (iii) 1% (one percent)
of the amount by which the Loan is so reduced during the year immediately
following the second anniversary of the date of the First Disbursement. No
prepayment premium shall be payable to OPIC following the third anniversary of
the date of the First Disbursement. The amount by which the Loan is so reduced
shall be applied against the outstanding Loan in the inverse order of the
reductions thereof provided for in all outstanding Notes.
(b) Until the date on which the conditions set forth in Section
7.01 have been satisfied in OPIC's sole discretion or OPIC and the Borrower
have mutually agreed to the abandonment or discontinuation of the Development
Plan (such date, the "Independent Voluntary Prepayment Date"), any voluntary
prepayment pursuant to Section 2.07(a) may only be made at the time, and in the
amount, of a simultaneous voluntary prepayment of the Other Loan by the Other
Borrower pursuant to the Other Finance Agreement. From and after the
Independent Voluntary Prepayment Date, the Borrower may make voluntary
prepayments on the Loan pursuant to Section 2.07(a) independent of any
voluntary prepayment by the Other Borrower.
Section 2.08. Mandatory Prepayment
The Borrower shall reduce the amount of the Loan outstanding by:
(a) 50% of the amount by which (x) the aggregate amount of
insurance proceeds received by the Borrower, the Other Borrower or the Operator
for or in respect of the Interests of the Borrower or the Other Borrower in the
Project Assets during any Fiscal Year, other than proceeds received in respect
of political risk coverages, which are not applied or committed within
<PAGE> 21
17
180 days after the receipt thereof to the repair or replacement of such
properties or assets, exceeds (y) $500,000; and
(b) (x) On any date when the Loan and the Other Loan are equal,
the Borrower's Share of the amount by which the aggregate outstanding balance
of the Loan and the Other Loan exceeds the amount that would yield a Present
Value Ratio, as of any date of determination, of at least 2.0 to 1.0, and (y)
on any other date, the amount by which the aggregate outstanding balance of the
Loan exceeds the amount that would yield an Individual Present Value Ratio of
2.0 to 1.O. Any prepayment obligation arising solely as a result of the
Present Value Ratio, or the Individual Present Value Ratio, as applicable,
being less than 2.0 to 1.0 but which is at least 1.3 to 1.0 may be satisfied by
retaining 100% (one hundred percent) of Net Cash Flow on a reserved basis in
the Payments Account, and applying such accumulated amounts to make the
required prepayment (together with all interest and fees accrued on the amount
prepaid) on successive Payment Dates, until the prepayment obligation has been
satisfied in full.
The reduction in the outstanding Loan occasioned pursuant to this
Section 2.08 shall have the same effect as if such reduction occurred pursuant
to Section 2.07 above, except that no Prepayment Premium to OPIC shall be due.
Except as provided in Section 2.08(b) above, all mandatory prepayment amounts
shall be due immediately.
Section 2.09. OPIC Guaranty Fee.
The Borrower shall pay to OPIC a fee (the "Guaranty Fee") for its
guaranty under the Participation and Guaranty Agreement at the rate of 2.75%
(two and three-quarters percent) per annum on the amount of the Loan
outstanding from time to time. The Guaranty Fee shall be payable in arrears on
each Payment Date and upon the repayment of the Loan in full.
Section 2.10. Facility and Maintenance Fees.
(a) The Borrower agrees to pay to OPIC a one-time facility fee
(the "Facility Fee") in the amount of $250,000, of which a total of $100,000
has previously been paid to OPIC. Of the remaining amount, $100,000 shall be
due and payable upon the execution and delivery of this Agreement; and the
remaining outstanding balance of $50,000 shall be due and payable on the date
of the First Disbursement.
(b) Commencing on October 15, 1995 and continuing until all
amounts due hereunder are paid in full, the Borrower shall pay to OPIC in
arrears on October 15 of each year an annual maintenance fee (the "Maintenance
Fee") of $2,500.
Section 2.11. Taxes.
(a) All sums payable by the Borrower hereunder or under the Notes
or under the Participation and Guaranty Agreement, whether of principal,
interest, fees, expenses or otherwise, shall be paid in full, free of any
deductions or withholdings for any and all present and future taxes,
<PAGE> 22
18
levies, imposts, stamps, duties, fees, deductions, charges, withholdings, and
all liabilities with respect thereto (herein, collectively, but subject to the
following exclusions, referred to as "Taxes"), excluding income, franchise or
ad valorem taxes imposed by any jurisdiction as a direct consequence of OPIC,
the Paying Agent or any Holder, as the case may be, being organized and
existing, qualified to do business, or maintaining a permanent establishment,
in such jurisdiction. In the event that the Borrower is prohibited by law from
making payments hereunder or under the Notes free of such deductions or
withholdings, then the Borrower shall pay such additional amount as may be
necessary in order that the actual amount received after such deduction or
withholding shall equal the full amount stated to be payable hereunder or under
the Notes.
(b) The Borrower shall pay directly to the appropriate taxing
authority any and all present and future Taxes, and all liabilities with
respect thereto imposed by law or by any taxing authority on or with regard to
any aspect of the transactions contemplated by this Agreement or the execution
and delivery of this Agreement, the Notes or the Participation and Guaranty
Agreement, except for any Taxes or other liabilities which the Borrower is
contesting in good faith by appropriate proceedings, provided that OPIC, the
Paying Agent and the Holders shall be indemnified and held harmless from and
against any and all liabilities, fees or additional expense with respect to or
resulting from any delay in paying, or omission to pay, Taxes. Within 30 days
after the payment by the Borrower of any Taxes, the Borrower shall furnish OPIC
with the original or a certified copy of the receipt evidencing payment
thereof, together with any other information OPIC may reasonably require to
establish to its satisfaction that full and timely payment of such Taxes has
been made.
(c) OPIC or the Paying Agent, as the case may be, shall notify the
Borrower of any payment of Taxes required or requested of either of them or of
any Holder and shall give due consideration to any advice or recommendation
given in response thereto by the Borrower, and upon notice from OPIC or the
Paying Agent, as the case may be, that Taxes or any liability relating thereto
(including penalties and interest) have been paid by any of them, the Borrower
shall pay or reimburse such party therefor within 30 days of such notice.
(d) Without prejudice to the survival of any other agreement of
the Borrower hereunder, the agreements and obligations of the Borrower
contained in this Section 2.11 shall survive the payment in full of principal
and interest hereunder and under the Notes.
Section 2.12. Miscellaneous.
(a) Payment or Reimbursement of Expenses. The Borrower shall pay
or reimburse OPIC, upon request, for the Borrower's Share of all costs and
expenses incurred by OPIC in connection with the negotiation, preparation,
execution and delivery, and implementation of this Agreement, the Commitment
Letter, the Notes, the other Financing Documents, the Other Finance Agreement,
and the notes and other financing documents related thereto, including, without
limitation, (i) the reasonable fees and expenses of outside legal counsel,
business consultants and technical advisors (including without limitation all
such fees and expenses incurred prior to the date hereof), (ii) all expenses
associated with document preparation and distribution, costs of reproducing and
binding document transcripts (including up to five copies for OPIC), (iii) all
<PAGE> 23
19
expenses associated with the translation, authentication and recordation (if
required) of the Loan, the Other Loan or any of the related documents, and (iv)
communication and travel expenses and other such out-of-pocket expenses
incurred by OPIC. In addition, the Borrower shall pay or reimburse OPIC, upon
request, for all reasonable costs and expenses (including, without limitation,
reasonable attorneys' fees and expenses and the reasonable cost of travel)
incurred by OPIC in preserving in full force and effect or enforcing its rights
hereunder, including collecting amounts due hereunder and under the Notes, the
Escrow Agreement, the Participation and Guaranty Agreement, the Subordination
Agreement, the Stock Pledge Agreement, and the Assignment Agreement, and such
costs and expenses with respect to the other Financing Documents or incurred in
connection with the modification, amendment or waiver of any provision of any
of the foregoing documents. Such payments or reimbursements shall be due and
payable upon the receipt by the Borrower of OPIC's request therefor from time
to time; provided, however, that to the extent of any portion of the Facility
Fee that previously has been paid to OPIC, travel expenses incurred directly by
OPIC prior to the date of the First Disbursement shall be reimbursed out of
such Fee. The obligation of the Borrower to pay or reimburse OPIC as provided
herein shall remain whether or not any Disbursement occurs under this
Agreement.
(b) Currency and Place of Payments. All payments required
hereunder or under the Participation and Guaranty Agreement shall be made in
Dollars in immediately available funds without any offset or deduction for
Taxes or otherwise to the Paying Agent at the address specified in the
Participation and Guaranty Agreement or, as the case may be, to OPIC by wire
transfer (via a United States domestic bank) as follows:
U.S. Treasury Department
New York, NY
ABA No. 0210-3000-4
TREAS NYC/CTR/BNF=AC-71000001
OBI=OPIC Loan Number 679-94-139-IG
(c) Computation of Interest on Notes and Fees. Except as otherwise
provided herein or in the Participation and Guaranty Agreement or in any Note,
interest, Commitment Fees and the Guaranty Fee shall be computed on the basis
of 360-day years consisting of twelve 30-day months.
(d) Application of Payments to OPIC. Payments received by OPIC
under this Agreement or payments made with respect to any Note shall be applied
to amounts due under this Agreement and under the Notes in such manner as OPIC
in its sole discretion may determine to be appropriate, notwithstanding any
instruction to the contrary from the Borrower.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Each of the Borrower and the Holding Company represents, covenants,
and warrants to OPIC that:
<PAGE> 24
20
Section 3.01. Existence and Power of the Holding Company and the Borrower.
Each of the Holding Company and the Borrower is a corporation duly
organized, validly existing, and in good standing under the laws of Texas (or,
with respect to the Borrower, from and after consummation of the Merger, under
the laws of Delaware). Each of the Holding Company and the Borrower is duly
authorized to borrow money and create a charge on its properties and to
execute, deliver and perform this Agreement, the Notes and each of the other
Financing Documents to which it is or will be a party. From and after
consummation of the Merger, the Borrower shall be duly registered or qualified
to do business as a foreign corporation in the Congo.
Section 3.02. Authority of the Holding Company and the Borrower.
The Holding Company's and the Borrower's execution, delivery and
performance of this Agreement, the Notes (with respect to the Borrower) and
each of the other Financing Documents to which it is or will be a party: (i)
have been duly authorized by all necessary corporate action; (ii) will not
violate any applicable regulation or ruling of any governmental authority; and
(iii) will not breach, or result in the imposition of any Lien upon any of its
assets (except as permitted by Section 10.06 hereof) under, any of its Charter
Documents or any agreement or other requirement by which it or any of its
properties may be bound or affected. The execution and delivery by the Holding
Company or the Borrower of this Agreement, the Notes and each of the other
Financing Documents to which it is or will be a party will cause each such
respective instrument to constitute a legal, valid and binding obligation of
the Holding Company or the Borrower enforceable in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of creditors'
rights generally or general principles of equity (regardless of whether such
enforcement is considered in a proceeding in equity or at law). Except as set
forth in Section 3.11 hereof, no consent of any other Person, including
shareholders of the Holding Company or the Borrower, is required in connection
with the execution, delivery, performance, validity or enforceability of any of
the Financing Documents. The Borrower's obligations hereunder and under the
Notes will rank not less than pari passu with all of the Borrower's other
Indebtedness and obligations.
3.03. Status of Holding Company and Walter Congo.
Each of the Holding Company and Walter Congo were formed solely for
the purpose of the transactions contemplated by the Stock Purchase Agreement
and this Agreement; and neither the Holding Company nor Walter Congo have
conducted any business, own any assets, or are subject to any liabilities,
except, in each case, as are incident to their formation or as contemplated by
the Stock Purchase Agreement, the Inter-Purchaser Agreement, or this Agreement.
Section 3.04. Financial Condition.
The consolidated unaudited balance sheet for ACEC and ACPC (the
"Balance Sheet") as at December 1, 1993 (the "Balance Sheet Date") have been
furnished to OPIC. The Balance Sheet
<PAGE> 25
21
has been prepared in accordance with generally accepted accounting principles
consistently applied except as noted therein and except for normal year-end
adjustments, and (except with regard to insurance and abandonment and removal
obligations) fairly presents in all material respects the combined financial
position of ACEC and ACPC as of the Balance Sheet Date. Except on account of
matters that generally affect the economy or the oil and gas industry, since
the Balance Sheet Date there have been no material adverse changes in (i) the
assets, liabilities or financial condition of ACEC or ACPC, taken as a whole,
from that set forth in the Balance Sheet or (ii) the business or financial
condition of ACEC or ACPC, taken as a whole, other than, with respect to
clauses (i) and (ii) hereof changes in the ordinary course of business or as
permitted in Article 15 of the Stock Purchase Agreement. ACEC owns, free and
clear of any security interest, lien or encumbrance, its Participating Interest
Share (as defined in the Stock Purchase Agreement) in the JOA and all property
owned jointly by the parties to the JOA. Except as set forth on Schedule E of
the Stock Purchase Agreement or as otherwise set forth on the Balance Sheet or
reflected in the notes thereto, and except with regard to abandonment and
removal obligations or liabilities related to national payroll employees, ACEC
and ACPC have no obligation or liability material which is to ACEC and ACPC,
taken as a whole (whether accrued, absolute, contingent, unliquidated or
otherwise, whether due or to become due), other than contractual liabilities
incurred in the ordinary course of business which are not required to be
disclosed on the Balance Sheet and other than liabilities which have arisen
after the Balance Sheet Date in the ordinary course of business, consistent
with past practices, or as permitted in Article 15 of the Stock Purchase
Agreement
Section 3.05. Capitalization of the Borrower.
Following consummation of the Merger, the authorized capital of the
Borrower shall consist only of ten (10) shares of common stock, par value
$100.00 per share. As of the consummation of the Merger, all such capital
stock of the Borrower shall have been duly authorized and validly issued, and
shall be fully paid and nonassessable. There are no outstanding subscriptions,
options, warrants, calls, agreements, preemptive rights, acquisition rights,
redemption rights or any other rights or claims of any character which restrict
the transfer of, require the issuance of, or otherwise relate to any class of
the capital stock of the Borrower. From and after the consummation of the
Merger, all of the issued and outstanding capital stock of the Borrower shall
be owned beneficially and of record by the Holding Company.
Section 3.06. Subsidiaries.
The Borrower does not own or otherwise control any voting stock of, or
have any ownership interest in, any other Person, including any other
corporation or partnership.
Section 3.07. Liens.
The Security Documents are, or upon filing and registration will be,
effective to create in favor of OPIC legal, valid and enforceable first Liens
on all of the assets intended to be covered thereby. The Borrower does not
have outstanding, nor is it contractually bound to create, any
<PAGE> 26
22
Lien on or with respect to, any of its properties, rights or revenues, except
as permitted in Section 10.06.
Section 3.08. Taxes and Reports.
All material tax returns and reports of the Borrower required by law
to be filed in the United States and the Congo, and each governmental
subdivision thereof, have been duly filed for periods ending prior to the date
of this Agreement, and all material Taxes, assessments, fees and other
governmental charges due, or reasonably anticipated to become due with respect
to the period up to and including the first Closing Date, in respect of the
Borrower, or any assets, income or franchises of the Borrower, have been duly
paid, or have been adequately provided for on the books of the Borrower.
Section 3.09. Defaults.
No Event of Default hereunder, or event which with the passage of time
or the giving of notice would constitute an Event of Default hereunder, has
occurred and is continuing. Neither the Borrower nor any other party is in
breach of any provision of any contract to which the Borrower is a party, which
breach would have a material adverse effect upon the Borrower's financial
condition or upon the Borrower's right or ability to perform its obligations
under this Agreement, any Note or any other Financing Document.
Section 3.10. Litigation.
No action, suit, other legal proceeding, arbitral proceeding or
investigation is pending by or before any domestic or foreign court or
governmental authority or in any arbitral or other forum, or, to the knowledge
of the Borrower after due inquiry, is threatened, against the Borrower, the
Holding Company or the Parent (or, to the best knowledge of the Borrower, the
Other Borrower or the Operator) or any of its properties or rights that (i)
relates to any of the transactions contemplated by this Agreement or any other
Financing Document, or (ii) has, or if adversely determined would have, a
material adverse effect on the Borrower's financial condition or on its right
or ability to perform its obligations under this Agreement, any Note or any
other Financing Document.
Section 3.11. Compliance with Law.
The Borrower is conducting its business and the Project is being
operated in compliance in all material respects with all applicable laws,
regulations and authorizations of all relevant governmental authorities, non-
compliance with which could reasonably be expected to have material adverse
legal or financial consequences for the Borrower, and in compliance with its
Charter Documents. The Borrower or the Operator has duly obtained all material
consents, licenses, approvals and authorizations and has effected all
declarations, filings and registrations
<PAGE> 27
23
necessary for the due execution, delivery and performance by the Borrower of
this Agreement, the Notes and each of the other Financing Documents to which it
is or will be a party, except for those relating to future operations and
transactions, which are expected to be obtained as a matter of course.
Section 3.12. Easements, Property Interests, Utilities, Etc.
All easements, leasehold and other property interests, and to the
knowledge of the Borrower after due inquiry, all utility and other services,
means of transportation, facilities, other materials and other rights that can
reasonably be expected to be necessary for the construction, completion and
operation of the Project in accordance with applicable requirements of law and
the Financing Documents (including, without limitations gas, electrical water
and sewage services and facilities) have been procured or are commercially
available to the Project, and, to the extent appropriate, arrangements have
been made on commercially reasonable terms for such easements, interests,
services, means of transportation, facilities, materials and rights. To the
best knowledge of the Borrower after due inquiry, no material licenses,
trademarks, patents or other similar agreements are necessary for the
construction, ownership, operation and maintenance of the Project.
Section 3.13. Environmental Matters.
(a) The Borrower has duly complied with, and its businesses,
operations, assets, equipment, property, leaseholds, or other facilities are
materially in compliance with, the provisions of all applicable environmental,
health and safety laws, codes and ordinances, and all rules and regulations
promulgated thereunder. The Borrower (x) has been issued and will maintain all
required permits, licenses, certificates and approvals relating to, and (y) has
received no complaint, order, directive, claim, citation or notice by any
governmental authority or any Person with respect to: (i) air emissions, (ii)
discharges to surface water or ground water, (iii) noise emissions, (iv) solid
or liquid waste disposal, (v) the use, generation, storage, transportation or
disposal of toxic or hazardous substances or wastes, or (vi) other
environmental, health or safety matters.
(b) No real property owned or leased by the Borrower contains, to
the Borrower's knowledge after due inquiry, any Hazardous Materials that, under
any applicable Congolese Environmental Law currently in effect and under the
Applicable World Bank Guidelines (i) could reasonably be expected to impose
liability on the Borrower or the Project Assets that could reasonably be
expected to have a material adverse effect on the business (including the
Project), results of operations or financial condition of the Borrower, (ii)
could reasonably be expected to have a material adverse effect on the value or
prospects of the Project, or (iii) will result in the imposition of a Lien on
the Project Assets or any other real property owned or leased by the Borrower.
<PAGE> 28
24
Section 3.14. Project Cost.
The Borrower's good faith estimate of the total cost to the Borrower
and the Other Borrower of the Project (including provisions for contingencies)
is the equivalent of $78,300,000, based on the Financial Plan set forth in
Schedule 1.03. The Project costs related to the Mergers include an aggregate
cash payment of $21,500,000 (representing a purchase price of $31,500,000,
reduced by a Balancing Payment (as defined in the Stock Purchase Agreement) of
$10,000,000) to APC and estimated Acquisition Expenses of $2,800,000.
Section 3.15. Disclosure.
All documents, reports or other written information pertaining to the
Project (including, without limitation, the Application and this Agreement)
which have been furnished to OPIC are true and correct in all material respects
and do not contain any material misstatement of fact or omit to state a
material fact or any fact necessary to make the statements contained herein or
therein not materially misleading. There is no fact known to the Borrower,
that has not been disclosed to OPIC in writing, the existence of which would
have a material adverse effect upon the business, operations, properties or
prospects of the Borrower or the Other Borrower or the ability of the Borrower
or the Other Borrower to perform its respective obligations under any of the
Financing Documents. No condition has arisen since the date of the Commitment
Letter that has or would have a material adverse effect on the Borrower's
ability to perform its obligations hereunder or under the Financing Documents.
To the best knowledge of the Borrower, after due inquiry, the representations
and warranties of APC in the Stock Purchase Agreement are true and correct in
all material respects.
ARTICLE IV
CONDITIONS PRECEDENT TO THE FIRST DISBURSEMENT
Unless OPIC otherwise agrees in writing, the obligation of OPIC to
make the First Disbursement of the Loan is subject to the prior fulfillment, to
OPIC's satisfaction in its sole discretion, of the following conditions
precedent and to their continued turbulent on the date of the First
Disbursement:
Section 4.01. Corporate Authorization.
(a) OPIC shall have received a certificate of an Authorized
Officer of the Borrower and the Holding Company, dated the Closing Date, in
form and substance satisfactory to OPIC attaching a copy of each of the Charter
Documents of the Borrower (after giving effect to the Merger), as amended to
date, certifying that the attached copies are true and complete and in full
force and effect as of the Closing Date;
<PAGE> 29
25
(b) OPIC shall have received a certificate of an Authorized
Officer of each party executing the applicable agreements and documents (i)
attaching a true and complete copy of the resolutions of the Board of Directors
of each applicable party, and of all documents evidencing any other necessary
corporate action (each such resolution and document in form and substance
satisfactory to OPIC), authorizing such party to execute, deliver and perform
this Agreement, the Notes and each of the other Financing Documents to which it
is or will be a party and to engage in the transactions herein contemplated,
and certifying that such resolutions and other documents are in full force and
effect as of the Closing Date; and (ii) certifying the names, titles and
specimen signatures of the Persons who are authorized to execute and deliver on
behalf of such party this Agreement, the Notes, each of the other Financing
Documents to which it is or will be a party and all other notices or
instruments contemplated hereunder.
Section 4.02. Participation and Guaranty Agreement and OPIC's Guaranty.
The Paying Agent shall have received a duly executed original copy of
the Participation and Guaranty Agreement, and OPIC's guaranty thereunder shall
be in full force and effect.
Section 4.03. Financing Documents.
OPIC shall have received the following documents, each of which shall
be in form and substance satisfactory to OPIC, each of which shall have been
duly executed by the parties thereto and each of which shall be in full force
and effect in accordance with its terms without default:
(a) OPIC shall have received duly executed original copies (except
as otherwise indicated) of each of the following agreements and documents (the
"Loan Documents"):
(i) this Agreement;
(ii) the Note or Notes issued in connection with the First
Disbursement;
(iii) the Participation and Guaranty Agreement;
(iv) the Escrow Agreement;
(v) the Option Agreement among OPIC, APC and Amoco;
(vi) the Subordination Agreement;
(vii) the Parent Tax Indemnity Agreement;
(viii) the APC Subordination Agreement; and
(ix) a form of the Parent Reimbursement Agreement (which
shall not be executed).
<PAGE> 30
26
(b) OPIC shall have received duly executed original copies (or, at
OPIC's sole discretion, a true and complete copy) of the following agreements
and documents (collectively, the "Security Documents"), whereby the payment of
all amounts due or to become due hereunder and under the Notes (including but
not limited to principal, interest and fees) is secured by valid and
enforceable first priority security interest in favor of OPIC on such assets of
the Borrower as may be required by OPIC, whether located in the Congo or
elsewhere, including:
(i) the Stock Pledge Agreement;
(ii) the Escrow Agreement;
(iii) the Assignment Agreement; and
(iv) all such other agreements, documents or actions which
OPIC determines are necessary to secure the payment
of all amounts due or to become due hereunder and
under the Notes.
Each of the Security Documents shall be in full force and effect and shall have
been duly filed and registered in every jurisdiction in which such filing and
recording is necessary to make valid and effective the Liens intended to be
created thereby, and the rights of OPIC thereunder, and OPIC shall have
received evidence satisfactory to it that such filing and registration has been
made.
(c) OPIC shall have received copies of the following agreements,
each of which shall be in form and substance satisfactory to OPIC, shall have
been duly executed by the parties thereto and shall have been certified by an
Authorized Officer of the Borrower as being true and complete and in full force
and effect in accordance with its terms without default (the "Project
Documents"):
(i) the JOA;
(ii) the Convention;
(iii) the Permit;
(iv) the Inter-Purchaser Agreement;
(v) the Stock Purchase Agreement;
(vi) the Tax Agreement;
(vii) the Closing Agreement (which shall have been approved
by the other parties and submitted to the IRS for
approval); and
(viii) the Plan of Merger and the Other Plan of Merger.
<PAGE> 31
27
Section 4.04. Stock Purchase Agreement.
(a) OPIC shall have received a copy of the officer's certificate
of APC delivered to the Borrower and the Holding Company or the Parent pursuant
to the Stock Purchase Agreement certifying that (i) all representations and
warranties of APC in the Stock Purchase Agreement shall be true and correct as
of the date of the First Disbursement; (ii) all conditions to the obligations
of the Purchasers (as defined in the Stock Purchase Agreement) under the Stock
Purchase Agreement have been satisfied or, with OPIC's prior written consent,
waived; and (iii) APC is ready, willing and able to consummate the Mergers
simultaneously with the First Disbursement.
(b) OPIC shall be satisfied, in its sole discretion, with the
computation and effect of the "Balancing Payment" to be made pursuant to
Section 3 of the Stock Purchase Agreement, as certified to OPIC by the
Borrower.
(c) OPIC shall have received original counterparts or certified
true copies of all documents, agreements and instruments to be delivered
pursuant to the Stock Purchase Agreement, and all such agreements, documents
and instruments shall be satisfactory in form and substance to OPIC.
Section 4.05. Engineer's Report
OPIC shall have received a report, in form and substance satisfactory to OPIC,
from the Engineer dated May 20, 1994 (which shall include an analysis dated as
of January 1, 1994), or such other current date as OPIC may request, which
report shall contain projections of production from proved reserves allocable
to the Interests of the Borrower and the Other Borrower and the related Future
Cash Flows allocable to such Interests, adjusted to the date of the First
Disbursement. OPIC shall also have received a certificate from an Authorized
Officer of the Borrower stating that, based on such projections, the Present
Value Ratio shall be at least 2.0 to 1.0 immediately following such
Disbursement.
Section 4.06. Parents' Equity Investment.
OPIC shall have received evidence satisfactory to it that the Parent
has contributed at least $2,937,500 in equity capital to the Borrower and that
the Other Parent has contributed at least $2,937,500 in equity capital to the
Other Borrower.
Section 4.07. Government Approvals.
OPIC shall have received copies, certified by an Authorized Officer of
the Borrower as true and complete and in full force and effect, of any
registration, governmental consent, approval or permit required by the GORC or
obtained in compliance with Section 3.11 hereof or which, in the opinion of
special legal counsel to OPIC in the Congo, are necessary for (i) the approval
of the Project by the GORC for purposes of the OPIC guaranty under the
Participation and Guaranty
<PAGE> 32
28
Agreement, and (ii) this Agreement, the Loan and the Note(s) and the payment of
all amounts due or to become due with respect thereto not to be subject to any
Taxes.
Such registrations, consents, approvals or permits shall include,
without limitation, (x) the Convention, (y) the Government of the Congo Decree
No. 89/211, dated March 15, 1989, granting the Permit, and (z) the GORC
Approval Letters.
Section 4.08. Financial Condition of the Borrower.
OPIC shall have received evidence satisfactory to it, which may, at
OPIC's request, include a certificate from the Borrower's chief financial
officer or other officer satisfactory to OPIC substantially in the form
attached as Exhibit K hereto, with respect to the financial solvency of the
Borrower after giving effect to the Merger and the First Disbursement.
Section 4.09. Insurance.
OPIC shall have received evidence satisfactory to it that the
insurance required by Section 9.05 hereof is in full force and effect without
default.
Section 4.10. Development Plan.
OPIC shall have received from the Borrower the Development Plan
prepared jointly by the Borrower and the Other Borrower (certified by an
Authorized Officer of each of the Borrower and the Other Borrower as true and
correct), which shall be in form and substance satisfactory to OPIC. In the
event of any inconsistency between the terms and provisions of this Agreement
and those contained in the Development Plan, the terms and provisions of this
Agreement shall be governing.
Section 4.11. Environmental and Worker Rights Matters.
(a) OPIC shall have received a certificate from an Authorized
Officer of the Borrower or other evidence reasonably satisfactory to OPIC
affirming that, after giving effect to the Merger, the Borrower will be in
compliance with the more stringent of the Applicable World Bank Guidelines or
Congolese Environmental Laws relating to, without limitation, the prevention
and, if necessary, the mitigation of any potential adverse environmental
consequences arising from the Project.
(b) OPIC shall also have received a certificate from an Authorized
Officer of the Borrower or other evidence reasonably satisfactory to OPIC
affirming that each of the Operator and the Borrower (i) is not taking any
actions to prevent employees of the Borrower or Other Borrower from lawfully
exercising their right of association and their right to organize and bargain
collectively; (ii) is observing applicable laws relating to a minimum age for
employment of children,
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acceptable conditions of work with respect to minimum wages, hours of work, and
occupational health and safety, and (iii) are not utilizing forced or
compulsory labor. The Borrower is not responsible under this Section 4.11 for
the actions of a government that may affect any of the foregoing.
Section 4.12. Appointment of Agent.
OPIC shall have received evidence that the agent for service of
process referred to in Section 11.03 has been duly appointed and holds such
appointment without reservation until the Loan Maturity Date.
Section 4.13. Legal Opinions.
OPIC shall have received written opinions, dated the Closing Date, in
form and substance satisfactory to OPIC, of (i) United States counsel to the
Holding Company and the Borrower, and (ii) Moquet Borde & Associes Societe
d'Avocats.
Section 4.14. Accountants.
OPIC shall have received evidence satisfactory to it that the Borrower
(or, if separate audited financial statements of the Borrower are not prepared,
then the Parent) has authorized its independent accountants to communicate with
OPIC as required by Section 9.06.
Section 4.15. Capital and Organizational Structure of the Borrower.
OPIC shall have received originals or copies of such documents, which
shall be in form and substance satisfactory to OPIC, evidencing all shareholder
and management arrangements among the Borrower, the Holding Company and the
Parent as OPIC shall reasonably request, in each case duly executed by the
parties to each such agreement and certified by Authorized Officers of the
Borrower as being true and correct and in full force and effect in accordance
with their terms without default.
Section 4.16. Escrow Arrangements.
OPIC shall have received a duly executed copy of the Escrow Agreement
and evidence satisfactory to OPIC in its sole discretion that, pursuant to the
Escrow Agreement, the Borrower has established the Escrow Accounts (as defined
in the Escrow Agreement) denominated in Dollars at the banking offices of the
initial Escrow Agent.
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Section 4.17. Other Documents.
OPIC shall have received such other certificates, opinions, agreements
and documents, each in form and substance satisfactory to OPIC, as it may
reasonably request.
ARTICLE V
CONDITIONS PRECEDENT TO THE DISBURSEMENT
FOR THE KUFPEC ACQUISITION
Unless OPIC otherwise agrees in writing, the obligation of OPIC to
make the Disbursement for the Kufpec Acquisition is subject to the prior
fulfillment, to OPIC's satisfaction in its sole discretion, of the following
conditions precedent and to their continued fulfillment on the date of the
Disbursement for the Kufpec Acquisition.
Section 5.01. Kufpec Acquisition.
All representations and warranties of the seller in the acquisition
agreement for the Kufpec Acquisition shall be true and correct as of the
Closing Date of the Disbursement; all conditions to the obligations of the
Purchasers (as defined in the acquisition documents for the Kufpec Acquisition)
under such agreement shall have been satisfied (or waived with OPIC's consent);
all parties to such agreement shall be ready, willing and able to consummate
the Kufpec Acquisition; and the acquisition agreement, all documents,
agreements and instruments to be delivered pursuant thereto, the structure of
the acquisition and any purchase price or similar adjustments to be made
pursuant thereto, shall be satisfactory in form and substance to OPIC.
Section 5.02. Corporate Authorization.
OPIC shall have received satisfactory evidence of all necessary
corporate authorizations, including resolutions authorizing the Kufpec
Acquisition and all related obligations of the Borrower, the Holding Company
and the Parent, and OPIC shall otherwise be satisfied with all corporate
proceedings in connection with the Kufpec Acquisition.
Section 5.03. Legal Opinions.
OPIC shall have been authorized by counsel to Kufpec to rely on any
opinion of such counsel delivered to the Borrower as if such opinion were
addressed to OPIC, and shall have received opinions of counsel dated the date
of such Disbursement, confirming in form and substance satisfactory to OPIC the
continuing validity of the opinions delivered for the First Disbursement.
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Section 5.04. Governmental Approvals.
Such governmental approvals and consents as OPIC in its sole
discretion shall deem necessary shall have been received with respect to the
Kufpec Acquisition.
Section 5.05. Parent Equity Contributions.
OPIC shall have received evidence satisfactory to it that the Parent
has contributed at least $1,250,000 in equity capital or subordinated debt (on
terms and conditions satisfactory to OPIC) and that the Other Parent has
contributed at least $1,250,000 in equity capital or subordinated debt (on
terms and conditions satisfactory to OPIC) to the Other Borrower.
Section 5.06. Amendments to the Financing Documents.
An amendment or amendments in form and substance satisfactory to OPIC,
shall have been executed and delivered by the applicable parties making such
changes to this Agreement and/or the Financing Documents as may, in OPIC's
judgment, be required in connection with the consummation of the Kufpec
Acquisition. Without limiting the foregoing, the Financing Documents shall be
amended or supplemented in connection with the Kufpec Acquisition as necessary
in OPIC's judgment to create Liens for the benefit of OPIC on the Kufpec stock
and/or the Interests held by Kufpec, as applicable, equivalent to the Liens
provided by the Security Documents.
Section 5.07. Engineer's Report and Borrower's Certificate.
OPIC shall have received (i) a written report by the Engineer dated as
of a current date acceptable to OPIC, satisfactory to OPIC in form and
substance, containing projections of production from proved reserves allocable
to the Interests of the Borrower and the Other Borrower and the related Future
Cash Flows, adjusted to the Closing Date of the Disbursement for the Kufpec
Acquisition (and giving effect to such Disbursement) and (ii) a certificate of
an Authorized Officer of each of the Borrower and the Other Borrower showing
the Present Value Ratio as of such date (after taking into account such
Disbursement) to be at least 2.0 to 1.0.
ARTICLE VI
CONDITIONS PRECEDENT TO THE
FIRST DEVELOPMENT DISBURSEMENT
Unless OPIC otherwise agrees in writing, the obligation of OPIC to
make the First Development Disbursement of the Loan is subject to the prior
fulfillment, to OPIC's satisfaction in its sole discretion, of the following
conditions precedent and to their continued fulfillment on the Closing Date of
the First Development Disbursement.
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Section 6.01. Normal Field Operations.
Not less than 60 days shall have elapsed since the consummation of the
Merger and, during such period, normal field operations at the Project shall
have been conducted and production levels shall have been substantially as
projected in the Engineering Report.
Section 6.02. Engineer's Report and Borrower's Certificate; Treatment of
Designated Wells.
(a) OPIC shall have received (i) a written report by the Engineer
dated as of a current date acceptable to OPIC, and satisfactory to OPIC in form
and substance, containing projections of production from proved reserves
allocable to the Interests of the Borrower and the Other Borrower and the
related Future Cash Flows, adjusted to the Closing Date of the First
Development Disbursement (and giving effect to such Disbursement) and (ii) a
certificate of an Authorized Officer of each of the Borrower and the Other
Borrower showing the Present Value Ratio as of such date (after taking into
account such Disbursement) to be at least 2.0 to 1.0.
(b) OPIC shall be satisfied, in its sole discretion, with the
Development Plan as amended to the Closing Date of the First Development
Disbursement and with the identification and treatment of Designated Wells and
non-designated wells, including as set forth in the Development Plan as
amended to such date.
(c) OPIC shall have received a certificate of an Authorized
Officer of the Borrower in form and substance satisfactory to OPIC (i) setting
forth the results of the post-closing audit and related adjustment, if any, to
the "Balancing Payment" contemplated by the Stock Purchase Agreement and (ii)
certifying the actual Acquisition Expenses of the Mergers.
ARTICLE VII
CONDITIONS PRECEDENT TO THE
SECOND DEVELOPMENT DISBURSEMENT
Unless OPIC otherwise agrees in writing, the obligation of OPIC to
make the Second Development Disbursement is subject to the prior fulfillment,
to OPIC's satisfaction in its sole discretion, of the Following conditions
precedent and to their continued fulfillment on the Closing Date of the Second
Development Disbursement.
Section 7.01. Completion of Phase 1; Development Plan.
Phase I of the Development Plan shall have been completed by the
Borrower and the Other Borrower, and the wells drilled as part of Phase I shall
have been in normal field operations for at least 30 days, and production
levels during such 30-day period shall have been substantially as projected in
the Engineering Report. An amended Development Plan providing detail for the
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Phase II development of the Permit area shall have been delivered to OPIC and
shall be satisfactory in form and substance to OPIC.
Section 7.02. Engineer's Report.
OPIC shall have received (i) a written report by the Engineer dated as
of a current date acceptable to OPIC, and satisfactory to OPIC in form and
substance, containing projections of production from proved Borrower and the
related Future Cash Flows, adjusted to the Closing Date of the Second
Development Disbursement (and giving effect to such Disbursement) and (ii) a
certificate of an Authorized Officer of each of the Borrower and the Other
Borrower showing the Present Value Ratio as of such date (after taking into
account such Disbursement) to be at least 2.0 to 1.0.
ARTICLE VIII
CONDITIONS PRECEDENT TO ALL DISBURSEMENTS
Unless OPIC otherwise agrees in writing and save as otherwise provided
herein, it shall be a condition precedent to the Borrower's right to each
Disbursement (including the First Disbursement), that each of the following
conditions be satisfied on the date of any such Disbursement:
Section 8.01. Representations and Defaults.
The representations and warranties set forth in Article III hereof
shall be true and correct in all material respects on the date of such
Disbursement after giving effect to such Disbursement and, in the case of the
Mergers or the Kufpec Acquisition, the consummation of the contemplated
transactions, as if made on such date, and on such date (after giving such
effect) no Event of Default, and no event or condition which with lapse of time
or the giving of notice, or both, would constitute an Event of Default, shall
exist.
Section 8.02. Change in Circumstances; Tax Events.
At the time of each Disbursement: (a) no change in circumstances shall
have occurred which could reasonably be expected to materially adversely affect
(I) the financial condition of the Borrower, (II) OPIC's rights and remedies in
respect of the Loan, or (III) the ability of the Borrower, the Holding Company
or the Parent (x) to fulfill its respective obligations under the Financing
Documents or (y) otherwise to complete the Project in accordance with the
Development Plan; and (b) no "Triggering Event' shall have occurred under the
"dual consolidated loss" provisions of the Internal Revenue Code of 1986, as
amended.
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Section 8.03. Certification.
The Borrower shall have furnished OPIC with a certificate of an
Authorized Officer of the Borrower, dated the date of such Disbursement, in
form and substance satisfactory to OPIC (i) certifying the satisfaction of each
of the conditions set forth in Section 8.01 hereof, (ii) setting forth the
Project costs to which any prior Disbursements have been applied, (iii) setting
forth the Project costs to which the present Disbursement will be applied and
certifying that the proceeds of such Disbursement are presently needed for
these purposes, and (iv) setting forth the pro forma Escrow Account funding as
of the first Payment Date following such Disbursement and certifying that, as
of such Payment Date, the Payment Target will be fully reserved in the Payments
Account.
Section 8.04. Payment or Reimbursement of Expenses.
All fees and other amounts due to OPIC on or prior to the date of such
Disbursement with respect to the making of the Loan, and all other amounts
payable or reimbursable by the Borrower in connection with the making of the
Loan, shall have been paid, including, but not limited to, (i) the Commitment
Fee, (ii) the Facility Fee, (iii) any Taxes payable pursuant to Section 2.11,
(iv) any amounts payable pursuant to Section 2.12(a), including the fees and
expenses of OPIC legal counsel and business consultants and the costs of
registration and recordation of any of the Financing Documents, and (v) the
fees of the agent for service of process referred to in Section 11.03.
Section 8.05. OPIC Notifications to Paying Agent.
If any condition set forth in this Article VIII shall not be satisfied
or waived by OPIC, OPIC shall be entitled to notify the Paying Agent to the
effect that (i) such condition has not been satisfied and (ii) the Paying Agent
should cease authenticating and issuing Participation Certificates (as defined
in the Participation and Guaranty Agreement). If OPIC shall have notified the
Paying Agent to cease authenticating and issuing Participation Certificates, as
aforesaid, OPIC shall, when the conditions set forth in this Article VIII have
been satisfied or waived, forthwith dispatch a further notice to the Paying
Agent to the effect that the Paying Agent should resume authenticating and
issuing Participation Certificates in accordance with the Participation and
Guaranty Agreement.
Section 8.06. Disbursement to Other Borrower.
The Other Borrower shall have requested a disbursement under the Other
Finance Agreement in the same amount and for the same purposes as the
Disbursement hereunder, and as of the date of the proposed Disbursement
hereunder all conditions precedent to the disbursement to the Other Borrower
shall be satisfied.
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Section 8.07. Delivery of Note(s) to OPIC.
OPIC shall have received an executed copy of the Note or Notes to be
issued in connection with the Applicable Disbursement.
ARTICLE IX
AFFIRMATIVE COVENANTS
Unless OPIC otherwise agrees in writing, so long as the Commitment
shall remain outstanding and until all amounts due and to become due hereunder
and under the Notes shall have been paid in full, each of the Borrower and the
Holding Company covenants and agrees as follows:
Section 9.01. Permit Area Development.
The Borrower shall, together with the Other Borrower, develop the
Permit area pursuant to the Development Plan, shall apply the proceeds of the
Loan exclusively to the Project and shall use its best efforts to cause the
Project to be developed in accordance with the Development Plan (and, if the
Second Development Disbursement is made, in accordance with the amended
Development Plan providing for the Phase II development of the Permit area).
If the Borrower becomes unable to achieve the undertakings set out in the
preceding sentence, or becomes unable to meet its other obligations hereunder,
it shall promptly so notify OPIC.
Section 9.02. Borrower Operations.
The Borrower shall comply with and perform its obligations and undertakings
under this Agreement, the Notes, and each of the other Financing Documents to
which it is a party. The Borrower shall conduct its operations on the basis of
customary commercial practice and arm's-length arrangements, with due diligence
and efficiency and under the supervision of qualified and experienced
management. The Borrower shall repair, replace and protect each of its assets
so that its business can be conducted properly at all times.
Section 9.03. Maintenance of Rights and Compliance with Laws.
The Borrower shall (i) whenever in its power to do so, acquire,
maintain and if necessary renew all rights, contracts, powers, privileges,
leases, lands, sanctions and franchises necessary for the conduct of its
business and the performance of its obligations hereunder and under the other
Financing Documents; (ii) conduct its business in compliance in all material
respects with all applicable laws and directives of governmental authorities
having force of law, including applicable environmental, health and safety
standards; and (iii) duly pay before they become overdue all Taxes, assessments
and other government charges levied or imposed in any jurisdiction upon its
property, earnings or business, except amounts being contested in good faith by
appropriate
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36
proceedings diligently pursued for which adequate reserves in accordance with
GAAP shall have been established.
Section 9.04. Government Approvals.
The Borrower shall obtain, and shall at all times maintain in full
force and effect, all material consents, licenses, registrations, approvals and
authorizations necessary for the performance by the Borrower of this Agreement,
the Notes and each of the other Financing Documents to which it is a party.
Section 9.05. Insurance.
(a) The Borrower shall maintain or cause to be maintained in
effect insurance with respect to its Interest in the Project and the assets
thereof, against such hazards (including, without limitation, fire, lightning,
collapse, wind and hail, explosion, smoke, aircraft and vehicles, riot, civil
commotion, vandalism, other extended coverage risks, flood and earthquake,
environmental remediation and sudden and accidental seepage and pollution, and
any other hazards to the extent that properties of a nature similar to those
included in the Project and in the same or similar localities are usually
insured), in such form (including the form of the loss payable clauses) and
with such insurers as shall be selected by the Borrower and approved by OPIC
(such approval not to be withheld unreasonably), such insurance to be in such
amount as the Borrower would, in the prudent management of its property,
maintain, or would be maintained by others similarly situated in respect of
property similar to the Project, provided that (i) the amount of such insurance
with respect to the Project shall not at any time be less than the amount of
all obligations of the Borrower from time to time owing to OPIC under this
Agreement or any other Financing Document, whether for principal, interest,
fees, expenses or otherwise and (ii) such insurance shall be on a "no
co-insurance/agreed-amount" basis.
The Borrower shall also carry workmen's compensation insurance,
disability benefits insurance, and such other form of insurance which the
Borrower is required by law to provide, covering loss resulting from injury,
sickness, disability, or death of the employees of the Borrower.
All insurance policies required hereby covering loss or damage to the
Project shall name the Borrower and the Other Borrower as additional insureds
as their interests may appear and shall provide that any payment thereunder for
any loss or damage shall be made to OPIC (unless otherwise approved by OPIC),
except that such policies may provide that any payment of less than $250,000
made in respect of any single casualty or other occurrence may be paid solely
to the Borrower. OPIC shall apply all such proceeds as a prepayment of the
Loans pursuant to Section 2.08, provided that OPIC shall forthwith remit to the
Borrower any proceeds paid to OPIC, (i) upon certification by the Borrower that
the property damaged or lost has been fully repaired or replaced, or (ii) if,
within 60 days of the event giving rise to such payment of proceeds, OPIC shall
have approved a plan submitted by the Borrower whereby the property damaged or
destroyed by such event is to be fully repaired or replaced, and provided
further that if an Event of Default shall have occurred and be continuing, OPIC
shall apply such amount in accordance with Section 11.02.
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Any other permitted payee of such insurance proceeds shall also apply all such
proceeds as a prepayment of the Loan pursuant to Section 2.08, provided that,
if within 60 days of the event giving rise to such payment of proceeds, OPIC
shall have approved a plan submitted by the Borrower whereby application of
such proceeds shall not be required. Each such policy shall expressly provide
that all provisions thereof, except the limits of liability, shall operate in
the same manner as if there were a separate policy covering each such insured;
each such policy shall waive any right of subrogation of the insurers to any
rights of the Borrower or OPIC in respect of any liability of the Borrower or
OPIC; and shall waive any right of the insurers to any setoff or counterclaim
or any other deduction, whether by attachment or otherwise, in respect of any
liability of the Borrower or OPIC; each such policy shall provide that, if such
insurance is cancelled, terminated or materially changed for any reason
whatsoever (other than non-payment of premium), the insurers will provide 30
days' prior notice of such cancellation, termination or change; and each such
policy shall provide, or each insurer shall agree with OPIC, that the insurer
shall give OPIC 30 days' prior notice of the expiration of insurance under such
policy in accordance with its terms if the Borrower has failed by such time to
pay any premium due in respect of the renewal of insurance under such policy.
(b) The Borrower shall, without cost to OPIC, maintain or cause to
be maintained in effect insurance policies with respect to the Project insuring
against liability for death of, or loss, injury or damage to, the person or
property of others from such risks, in such form and with such insurers as
shall (in the case of such risks, form and insurers) be selected by the
Borrower and approved by OPIC (which approval shall not be unreasonably
withheld) and in such amounts as the Borrower would in the prudent management
of its property maintain, or would be maintained by others similarly situated
in respect of property similar to the Project. Each of the insurance policies
maintained in accordance with this Section 9.05(b) shall name the Borrower and
OPIC as additional insureds thereunder with respect to the Project. Each such
insurance policy shall expressly provide that all of the provisions thereof
except the limits of liability (which shall be applicable to all insureds as a
group) and liability for premiums (which shall be solely a liability of the
Borrower) shall operate in the same manner as if there were a separate policy
covering each insured, and shall provide that such insurance, as to the
interest of OPIC therein, shall not be invalidated by the use or operation of
the Project for purposes which are not permitted by such policy.
(c) On or before the date of the First Disbursement hereunder and
thereafter at intervals of not more than twelve calendar months (or less at the
request of OPIC) until all obligations of the Borrower under the Financing
Documents shall have been paid in full, the Borrower shall furnish to OPIC a
certificate signed by a duly authorized representative of each insurer, showing
the insurance then maintained by the Borrower pursuant to this Section 9.05.
The Borrower shall use its best efforts to cause the insurers with whom it
maintains such insurance to agree to advise the Borrower and OPIC in writing
promptly of any default in the payment of any premiums or any other act or
omission on the part of the Borrower of which they have knowledge and which
might invalidate or render unenforceable, in whole or in party, any such
insurance.
(d) In the event the Borrower fails to take out or maintain the
full insurance coverage required by this Agreement, fails to pay the fees and
other charges referred to in Section 9.05(a) at or prior to the time they are
required to be paid, or fails to keep the Project in good order and
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repair and in as reasonably safe conditions as its operations permit, OPIC,
upon thirty days' written notice (unless the aforementioned insurance would
lapse within such period or such other event as would lessen the security for
the Loan would occur, in which event notice should be given as soon as
reasonably possible) to the Borrower of any such failure on its part, may (but
shall not be obligated to) take out the required policies of insurance. and pay
the premiums on the same, pay such taxes or other charges or complete the
Project or make such repairs, renewals and replacements as may be necessary to
maintain the Project in good order and repair and in as reasonably safe
conditions as the Borrower's operations permit. All amounts so advanced
therefor by OPIC shall become an additional obligation of the Borrower to OPIC,
and the Borrower will forthwith pay such amounts to OPIC, together with
interest thereon at the default rate specified in Section 2.04 from the date so
advanced.
Section 9.06. Accounting and Financial Management.
(a) The Borrower shall (i) maintain adequate management
information and cost control systems, (ii) maintain a system of accounting,
(iii) prepare its Financial Statements in accordance with GAAP, (iv) engage
independent internationally-recognized accountants satisfactory to OPIC, (v)
notify OPIC of any change in such accountants and the reason therefor and (vi)
upon OPIC's reasonable request to the Borrower, shall instruct such accountants
to communicate directly with OPIC regarding the Borrower's accounts and
operations.
(b) The Borrower shall make arrangements satisfactory to OPIC for
overseeing the financial operations of the Borrower, including its cash
management, accounting and financial reporting, and for overseeing the
Borrower's relationship with its lenders and independent accountants; such
arrangements may include, but shall not be limited to, employing a chief
financial officer to oversee the financial operations of the Borrower.
Section 9.07. Financial Statements and Other Information.
At its cost the Borrower shall furnish to OPIC each of the following
documents:
(a) Within 45 days after the end of each fiscal quarter of each
Fiscal Year, its unaudited Financial Statements, and a comparison between the
results of operations included in such Financial Statements and the projections
for such fiscal quarter furnished pursuant to Section 9.07(e) below, all
certified by the chief financial officer of the Borrower as being complete and
correct, together with such officer's certificate that such officer's review
has not disclosed the existence of an Event of Default, or an event which with
the passage of time or the giving of notice, or both, would constitute an Event
of Default, or, if any such event then exists, specifying the nature and period
of existence thereof and what action the Borrower has taken or proposes to take
with respect thereto;
(b) Within 90 days after the end of each Fiscal Year, its audited
Financial Statements, or audited consolidated Financial Statements for the
Parent with consolidating statements for the Borrower, together with a
certificate by the chief financial officer of the Borrower certifying that
<PAGE> 43
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such officer's review of such audited Financial Statements has not disclosed
the existence of an Event of Default, or an event which with the passage of
time or the giving of notice, or both, would constitute an Event of Default or,
if any such event then exists, specifying the nature and period of existence
thereof and what action the Borrower has taken with respect thereto;
(c) Until the Borrower and the Other Borrower shall have achieved
completion of all activities contemplated by the Development Plan, a joint
report by the Borrower and the Other Borrower within 45 days after the end of
each fiscal quarter certified by an Authorized Officer setting forth in
reasonable detail the progress of the Project, including (i) expenditures of
funds, (ii) estimated future costs, (iii) unexpended funds available to the
Borrower, (iv) the progress of the major phases of the Project, (v) the
acquisition of fixtures and equipment and (vi) any material variation order,
amendment or waiver relating to the Development Plan;
(d) Within 45 days after the end of each Fiscal Year, a report
certified by an Authorized Officer setting forth in reasonable detail all
transactions, other than in the ordinary course of business, between the
Borrower and (x) the Parent or any Affiliate thereof or (y) the Other Borrower
or any Affiliate thereof, in each case other than payments pursuant to the
Inter-Purchaser Agreement as amended from time to time with OPIC's prior
consent.
(e) Not later than 30 days prior to the beginning of each Fiscal
Year, an annual operating forecast which shall be prepared jointly for the
Borrower and the Other Borrower, including projected quarterly financial and
operational results for the Interests of the Borrower and the Other Borrower
for such Fiscal Year, together with a statement of the assumptions on which
such forecast is based; and
(f) Copies of all other annual or interim audit reports submitted
to the Borrower by its independent accountants and such other information and
data with respect to its operations (including supporting information as to
compliance with this Agreement) as OPIC may reasonably request from time to
time.
Section 9.08. Access to Records; Inspection; Meetings.
The Borrower shall, upon request of OPIC, give, or cause to be given,
to any representatives of OPIC access during normal business hours to, and
permit them to examine, copy and make extracts from, any and all records and
documents in the possession or subject to the control of the Borrower relating
to its operations and financial affairs and otherwise respecting the Project,
and to inspect any of its facilities or properties and the Project site. If
OPIC so requests, the Borrower shall give OPIC not less than 15 days' notice
of, and shall permit OPIC's Authorized Officer to attend, each meeting of its
shareholders and of its directors. Subject to all applicable law, OPIC shall
treat the information contained in such records and documents and received in
such meetings, or otherwise received from the Borrower, as confidential
information not to be disclosed to other parties.
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Section 9.09. Notice of Default and Other Matters.
The Borrower shall promptly and, in any event within five (5) Business
Days, notify OPIC of (i) the occurrence of each Event of Default and of each
event known to any of its officers which, upon the giving of notice, the lapse
of time or both, would become an Event of Default, (ii) any actions, suits,
other legal proceedings or arbitral proceedings against the Borrower which
involve claims aggregating more than the equivalent of $100,000, (iii) the
occurrence of each event of default and of each event known to any of its
officers which, upon the giving of notice or the lapse of time or both, would
become an event of default under any of the Project Documents; and (iv) the
occurrence of any other condition or event (including government action) which
is likely to have a material adverse effect on the Borrower's financial
condition or its ability to perform its obligations under any of the Financing
Documents. Without limiting the foregoing, the Borrower, in its capacity as
Operator, shall promptly, and in any event within five (5) Business Days,
notify OPIC if any party to the JOA shall fail to advance to the Operator its
share of expenditures or to pay its share of costs and expenses as required by
the JOA.
Section 9.10. Security Documents.
The Borrower at its own cost shall take all actions necessary to
maintain each of the Security Documents in full force and effect and
enforceable in accordance with its terms, including all (i) filings and
recordations, (ii) payments of fees and other charges, (iii) issuance of
supplemental documentation, (iv) discharge of all claims or other Liens
adversely affecting the rights of OPIC in the property subject to any Security
Document, (v) publication or other delivery of notice to third parties and (vi)
deposit of title documents.
Section 9.11. Funding of the Loan; Funding Losses.
The Borrower shall arrange for and pay all costs associated with the
funding of the Loan, including, without Stations the fees of all placement
agents, paying agents and liquidity facility providers and their respective
counsel; and shall provide to OPIC satisfactory evidence of the payment of, or
provision for the payment of, such funding costs. Without prejudice to any
other rights that OPIC may have, the Borrower shall on demand make
reimbursement payments to or for the account of OPIC for any costs, losses,
expenses and liabilities incurred in connection with the funding of the Loan
under the Participation and Guaranty Agreement and other agreements
contemplated therein and for any costs, losses, expenses and liabilities
incurred by OPIC if it is required to repurchase all or a portion of the
Participations in the Loan from the Holders. A certificate prepared by or on
behalf of OPIC setting forth the amount of such funding costs, losses, expenses
or liabilities and specifying in reasonable detail the basis therefore shall,
in the absence of manifest error, be conclusive and binding on the parties
hereto.
<PAGE> 45
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Section 9.12. Project Monitoring.
The Borrower shall complete and deliver to OPIC not later than 90 days
following the end of each year a Self-Monitoring Questionnaire, in the form
attached hereto as Exhibit I, or such other form as OPIC may from time to time
prescribe, certified by an Authorized Officer as true and complete.
Section 9.13. Cure of Defaults Under JOA.
So long as the Other Loan remains outstanding, in the event of a
default under the JOA by the Other Borrower, the Borrower shall (i) cure the
default (which may include providing a loan to the Other Borrower pursuant to
the Inter-Purchaser Agreement), (ii) acquire the Other Borrower's Interests or
(iii) acquire all of the capital stock of the Other Borrower, in each case at
least 45 days prior to the expiration of the 90-day period described in Section
8.05 of the JOA and, in the case of any such acquisition, shall assume all of
the Other Borrower's obligations under the Other Finance Agreement, the related
financing agreements, and the Other Loan.
Section 9.14. Compliance with Environmental Standards.
The Borrower (x) shall comply and shall cause all tenants and other
authorized persons occupying the Project to comply with and implement in all
material respects all of the mitigating measures specified in the manuals
described on Schedule 9.14 (the "Existing Environmental Manuals") and, after
the Borrower has prepared and OPIC has approved the Borrower's own
environmental and operational manuals (the "Borrower's Environmental Manuals"),
the Borrower's Environmental Manuals, (y) shall immediately pay or cause to be
paid all costs and expenses incurred in such compliance and implementation, and
(z) shall keep or cause to be kept the Project free and clear of any Liens
imposed pursuant to applicable Environmental Laws. The Borrower shall ensure
that the implementation and effectiveness of the mitigating measures and the
performance of the Project site activities shall comply with all applicable
Environmental Laws and with Applicable World Bank Guidelines, whichever shall
be the more stringent standard. The Borrower shall, in addition, comply with
any applicable Environmental Laws that come into force subsequent to the date
hereof.
The Borrower shall conduct any investigation, study, sampling and
testing and undertake any clean-up, removal remedial or other action necessary
to remove and clean-up all Hazardous Materials from the Project in accordance
with the requirements of the more stringent of the Applicable World Bank
Guidelines or Environmental Laws and in accordance with orders and directives
of all relevant Governmental Bodies.
The Borrower shall not generate, use, treat, store, release or dispose
of, or permit the generation, use, treatment, storage, release or disposal of
Hazardous Materials on or in the Project, or transport or permit the
transportation of Hazardous Materials to or from the Project site except in
compliance with the more stringent of the Applicable World Bank Guidelines or
Environmental Laws.
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Subsequent to the date hereof, the Borrower shall prepare and submit
to OPIC the Borrower's Environmental Manuals and, upon approval by OPIC, shall
substitute such manuals for the Existing Environmental Manuals.
The Borrower shall conduct environmental monitoring of the Project
substantially in accordance with the monitoring program set forth in the
Existing Environmental Manuals or the Borrower's Environmental Manuals, as the
case may be.
The Borrower shall provide OPIC with copies of any reports or studies
which primarily address environmental issues or the results of the
environmental monitoring program at the Project, which are (a) prepared by the
Borrower for Congolese Governmental Bodies, (b) prepared by an independent
consultant, engineer, environmental specialist or other third party at the
request of or for the account of the Borrower, or (c) prepared by the Borrower
or by the Borrower together with the Other Borrower on a regular or periodic
basis for internal purposes or for any Affiliate. The Borrower shall also
permit OPIC or its representatives (which may include independent contractors)
to conduct periodic Project site inspections to monitor the Borrower's
compliance with the requirements of this Section. Any costs incurred by OPIC
or its representatives in connection with such Project site inspections shall
be borne by OPIC. The Borrower shall advise OPIC promptly in writing of any
complaint, dispute or other matter of which the Borrower is aware or should
have been reasonably aware that reasonably might be expected to give rise to a
violation of this Section.
Section 9.15. Engineer's Reports; Present Value Ratio Calculations.
(a) The Borrower and the Other Borrower, at their cost, shall
cause to be furnished annually to OPIC, so long as any portion of the Loan is
outstanding, a report prepared by the Engineer (the "Engineer's Report") which
shall be satisfactory to OPIC in form and substance, and which shall set forth
a projection of production from proved reserves allocable to the Interests of
the Borrower and the Other Borrower and the related Future Cash Flows,
calculated using reasonable and customarily accepted parameters. The report
shall be prepared as of January 1 of each year and shall be delivered to OPIC
within 60 days thereafter.
(b) The Borrower and the Other Borrower, at their cost, shall
determine the Present Value Ratio at least once each calendar quarter (and as
of any other time as is required pursuant to the Escrow Agreement or as OPIC
may reasonably request), and shall report such Present Value Ratio to OPIC
within 15 days following the end of such quarter (or within 15 days following
the date of a request by OPIC), together with such supporting data as shall be
satisfactory to OPIC.
ARTICLE X
NEGATIVE COVENANTS
Unless OPIC otherwise agrees in writing, so long as the Commitment
shall remain outstanding and until all amounts due and to become due hereunder
and under the Notes shall have been paid in full, each of the Borrower and the
Holding Company covenants and agrees as follows:
<PAGE> 47
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Section 10.01. Indebtedness.
The Borrower shall not incur, assume, guarantee, endorse or permit to
exist or otherwise become directly or contingently liable for any Indebtedness
except:
(a) the Loan;
(b) Indebtedness consisting of trade credit from suppliers of
goods or services incurred in the ordinary course of business and on terms
requiring payment in full in not more than 90 days;
(c) Indebtedness arising from any subordinated promissory note
issued in connection with the Kufpec Acquisition in a principal amount, and on
terms, approved in advance in writing by OPIC;
(d) Indebtedness consisting of subordinated indebtedness to APC in
respect of royalty recapture payments and additional indebtedness to APC in
respect of production payments, in each case pursuant to the terms and
provisions of the Stock Purchase Agreement as in effect on the date hereof;
(e) Indebtedness to its Parent or wholly-owned subsidiaries
thereof which shall be subordinated to the Loan pursuant to a subordination
agreement substantially in the form of Exhibit C-1 attached hereto;
(f) Indebtedness to the Other Borrower incurred solely to enable
the Borrower to comply with its obligations under the JOA, provided that such
Indebtedness shall be subordinated to the Loan pursuant to a subordination
agreement in substantially the form of Exhibit C-3 attached hereto;
(g) Indebtedness incurred in respect of equipment and facility
leases or sharing arrangements entered into on an arms length basis in the
ordinary course of the business of the Project;
(h) Indebtedness in an aggregate principal amount not to exceed
$100,000 in respect of letters of credit issued to secure payment of contracts
entered into in the ordinary course of the business of the Project; and
(i) Indebtedness to the Other Holding Company incurred in
connection with the Merger as contemplated by Section 6 of, and subject to the
terms and conditions stated in, the Inter-Purchaser Agreement.
Section 10.02. No Alteration of Agreements.
(a) The Borrower shall not terminate, amend or grant any waiver
of, or assign any of the respective rights, duties or obligations under, any of
its Charter Documents or any provision of any of the Financing Documents to
which it is a party (other than, upon prior written notice to OPIC, amendments
or waivers to correct manifest error or which are of a formal minor or
<PAGE> 48
44
technical nature and do not change materially any party's rights or obligations
or which are pursuant to Section 9.13 hereof).
(b) The Borrower shall not, without the prior consent of OPIC,
approve any material variation under, or amend or grant any waiver of any
provision of, (i) the Development Plan, or (ii) the Existing Environmental
Manuals.
Section 10.03. Dividends and Share Redemptions.
The Borrower shall not declare or pay any dividends (or the equivalent
thereof), or make any other distributions on or in respect of its capital
stock, or purchase, acquire, redeem or retire (directly or indirectly) any such
capital stock until all amounts due or to become due hereunder or under the
Notes shall have been paid in full; provided, however, that the Borrower may
pay such dividends or make such redemptions, but only if, after giving effect
to each such dividend or redemption, (i) no Event of Default shall have
occurred and be continuing, and no event or condition which with the lapse of
time or the giving of notice, or both, would constitute an Event of Default,
shall exist; (ii) the amounts on deposit in the Debt Service Reserve Account
(and funded out of post-Merger cash flow from operations) equal or exceed the
Debt Service Reserve Amount and the Payment Target is fully funded (out of cash
flow from post-Merger operations) and reserved in the Payments Account, and
(iii) the Present Value Ratio, as certified to OPIC in conjunction with such
action, equals or exceeds 2.0 to 1.O.
Section 10.04. Conduct of Business with Other Borrower and Affiliates.
The Borrower shall not conduct any business with, or enter into any
business transaction involving, the Other Borrower or an Affiliate of the
Borrower or the Other Borrower, except on an arm's length basis and subject to
the reporting requirement set forth in Section 9.07(d).
Section 10.05. Sale of Assets, Mergers.
The Borrower shall not:
(a) sell, assign, convey, lease or otherwise dispose of all or any
material part of its assets or properties, whether now owned or hereafter
acquired, except for the replacement of a capital asset with an asset of equal
or greater value;
(b) dissolve, liquidate or otherwise cease to do business;
(c) except as contemplated by this Agreement, acquire by purchase
or otherwise all or substantially all of the shares of capital stock or assets
of another entity; or
(d) except as contemplated by this Agreement, merge or consolidate
with any Person.
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Section 10.06. Mortgages and Liens.
The Borrower shall not create or suffer to exist any Lien with respect
to any of its properties or assets, whether now owned or hereafter acquired, or
in any proceeds or income therefrom except for:
(a) the Liens created under the Security Documents or pursuant to
any of the other Financing Documents;
(b) Liens for Taxes or other governmental Liens and charges which
are not yet due and payable or which are being contested or litigated in good
faith and are adequately reserved for in accordance with GAAP;
(c) any mechanic's, workmen's or other like Liens arising by
mandatory provision of law securing obligations incurred in the ordinary course
of business that are not yet overdue or that are being contested or litigated
in good faith and that are adequately reserved for in accordance with GAAP;
(d) Liens arising under the JOA (as in effect on the first Closing
Date); and
(e) Liens arising under the Stock Purchase Agreement or the
Inter-Purchaser Agreement or the obligation to pay Required Payments to the
GORC, in any case (i) as such agreements or obligations are in effect on the
date hereof and (ii) only with respect to amounts that are not yet due and
payable.
Section 10.07. Ordinary Conduct of Business.
The Borrower shall not:
(a) engage in any business other than its present business
activities and those related to the Project;
(b) materially change the nature or scope of the Project;
(c) change its Charter Documents in a manner that would be
inconsistent with the provisions of any of the Financing Documents;
(d) materially change its capitalization;
(e) except as contemplated in the Stock Purchase Agreement, the
JOA and the Inter-Purchaser Agreement, enter into any partnership, joint
venture, profit-sharing or royalty agreement or other similar arrangement
whereby the Borrower's income or profits are, or might be, shared with any
other Person;
(f) except as contemplated in the Stock Purchase Agreement, the
JOA and the Inter-Purchaser Agreement, form any subsidiaries, purchase any
equity securities of, make or permit to
<PAGE> 50
46
exist any loans or advances to, invest or acquire any interest whatsoever in,
or assume, guarantee, endorse or otherwise become directly or contingently
liable for any obligation or Indebtedness of, any Person, other than (i) the
endorsement of negotiable instruments for collection in the ordinary course of
business and the prudent investment of idle surplus funds in readily marketable
Dollar-denominated debt securities and (ii) loans and advances to employees in
the ordinary course of business, in an aggregate outstanding principal amount
not to exceed $200,000 at any time; provided, however, notwithstanding the
foregoing, that the Borrower shall be permitted to acquire all the stock or all
or a portion of the Interests of Kufpec subject to the satisfaction of the
conditions set forth in Articles V and VIII; and, provided further that,
anything in the Inter-Purchaser Agreement to the contrary notwithstanding, the
Borrower shall not make any loans or advances to the Other Borrower except, so
long as the Other Loan remains outstanding, loans in an aggregate principal
amount not to exceed the amount required to comply with the Borrower's
obligations under Section 9.13; or
(g) fail to maintain its corporate existence and its right to
carry on its operations.
Section 10.09. Worker Rights.
The Borrower shall not take any action to prevent its employees (or
other persons employed in connection with the Project) from lawfully exercising
their right of free association and their right to organize and bargain
collectively. The Borrower further agrees to observe applicable laws relating
to a minimum age for employment of children, acceptable conditions of work with
respect to minimum wages, hours of work and occupational health and safety, and
not to use forced labor. The Borrower is not responsible under this Section
10.08 for the actions of a government.
ARTICLE XI
DEFAULTS AND REMEDIES
Section 11.01. Events of Default
The occurrence and continuation of any of the following events or
circumstances shall constitute an "Event of Default" hereunder:
(a) The Borrower fails to pay punctually when due any principal or
interest payable pursuant to any Note or any other amount payable pursuant to
this Agreement;
(b) The Borrower fails to pay when due any principal of or
interest on any of its Indebtedness of $500,000 or more outstanding principal
amount and such failure continues beyond the grace period, if any, applicable
thereto; or a default occurs under any agreement or instrument evidencing, or
under which the Borrower has outstanding at the time, any such Indebtedness and
such default continues beyond the grace period, if any, applicable thereto, if
the effect of such default is to accelerate, or to permit the acceleration of,
the maturity of such Indebtedness;
<PAGE> 51
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(c) Any representation or warranty made by or on behalf of the
Borrower in this Agreement, or in any notice or other certificate, document,
Financial Statement or other statement delivered pursuant hereto, proves to
have been incorrect in any material respect when made;
(d) The Borrower (i) fails to comply with any covenant or
provision set forth in Section 9.09 or 9.13 hereof or in Article X hereof or
(ii) fails to advance to Operator its share of expenditures, or to pay its
share of costs and expenses, in accordance with the terms of the JOA, and, with
respect to this clause (ii), such failure is not cured within 45 days of the
occurrence thereof,
(e) The Borrower fails to comply with or perform any agreement or
covenant contained herein other than those referred to in Sections 11.01(a),
(b), (c) and (d) above, and such failure continues for 30 days after OPIC has
notified such Borrower thereof,
(f) Any authorization, consent or approval of any governmental
agency or public authority necessary for the execution, delivery or performance
of this Agreement, the Notes, or any of the other Financing Documents or for
the validity or enforceability of any of either Borrower's obligations under
this Agreement, the Notes or any of the other Financing Documents, is not
effected or given or is withdrawn or ceases to remain in full force and effect;
(g) This Agreement, the Notes or any of the other Financing
Documents at any time for any reason ceases to be in full force and effect or
is declared to be void or is repudiated or the validity or enforceability
hereof or thereof is at any time contested by the Borrower, or, in the case of
the Security Documents or the Inter-Purchaser Agreement, ceases to give or
provide the respective Liens, rights, titles, remedies, powers or privileges
intended to be created thereby;
(h) Any governmental authority condemns, nationalizes, seizes or
otherwise expropriates any substantial portion of the assets of the Project or
the assets or capital stock of the Borrower or takes any action that would
prevent the Borrower from carrying on any material part of its business or
operations;
(i) The Borrower or any other party fails to comply with or
perform any of its material obligations or undertakings set forth in any
Financing Document (other than this Agreement) and such failure continues for
30 days after OPIC has notified such Borrower thereof,
(j) The Borrower, the Holding Company or the Parent (or any
successor in interest thereto), (i) applies for, or consents to the appointment
of, a receiver, trustee, custodian, intervenor or liquidator of itself or of
all or a substantial part of its assets, (ii) files a voluntary petition in
bankruptcy, admits in writing that it is unable to pay its debts as they become
due or generally fails to pay its debts as they become due, (iii) makes a
general assignment for the benefit of creditors, (iv) files a petition or
answer seeking reorganization or arrangement with creditors or to take
advantage of any bankruptcy or insolvency laws, (v) files an answer admitting
the material allegations of, or consents to, or defaults in answering, a
petition filed against it in any bankruptcy, reorganization or insolvency
proceeding where such action or failure to act will result in a determination
of bankruptcy or insolvency against it;
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(k) Without its application, approval or consent, a proceeding is
instituted in any court of competent jurisdiction or by or before any
government or governmental agency of competent jurisdiction, seeking in respect
of the Borrower, the Holding Company or the Parent (or any successor in
interest thereto): adjudication in bankruptcy, reorganization, dissolution,
winding up, liquidation, a composition or arrangement with creditors, a
readjustment of Indebtedness, the appointment of a trustee, receiver,
liquidator or the like of it or of all or any substantial part of its property
or assets, or other like relief in respect of it under any bankruptcy,
reorganization or insolvency law; and, if such proceeding is being contested by
it in good faith, the same continues undismissed for a period of 60 days;
(l) Any final non-appealable judgment or judgments for the payment
of money in an aggregate amount in excess of $500,000 or its equivalent in
another currency is rendered against the Borrower, and such judgment or
judgments is not satisfied or discharged within 60 days of entry;
(m) The Parent ceases to hold, directly or indirectly, the legal
and beneficial title to 100% of the issued and outstanding shares of the
capital stock of the Borrower or ceases to retain management control of the
Borrower, or the Other Parent ceases to hold, directly or indirectly, the legal
and beneficial title to 100% of the issued and outstanding shares of the
capital stock of the Other Borrower or ceases to retain management control of
the Other Borrower, or the Other Borrower ceases to own beneficially that
portion of the Interests which it owned upon consummation of the Merger.
Anything to the contrary herein notwithstanding, the acquisition of the
outstanding stock of the Parent by NOMECO Oil & Gas Co. or an Affiliate thereof
shall not constitute an Event of Default under this Section 11.01(m);
(n) Any of the Convention, the Permit, the GORC Approval Letters
or the JOA, or the rights of the Borrower under any of them, shall have been
terminated or repealed, or in the reasonable judgment of OPIC (and without
limiting the obligations of the Borrower under Section 10.02) amended in a
manner that could have a material adverse effect on the ability of any party to
observe or perform any of its respective obligations or undertakings under any
of the Financing Documents.
(o) Either the Borrower or the Escrow Agent fails to make the
payments required under the Escrow Agreement when due or otherwise fails to
comply with its obligations thereunder (and, solely in the case of a failure to
fund the Payment Target 30 days prior to the Payment Date, such failure is not
cured on or prior to such Payment Date);
(p) Any event shall have occurred which, in the reasonable
judgment of OPIC, is likely to have a material adverse effect on the ability of
any party to observe or perform any of its respective material obligations or
undertakings under any of the Financing Documents;
(q) Any person other than the Borrower is appointed as "Operator"
under the JOA without OPIC's prior consent; or the Operator fails to comply in
any material respect with any of its obligations under the JOA and such failure
shall not be cured within 30 days thereof;
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(r) The Borrower fails in any material respect to comply with any
of its obligations under the Tax Agreement or the Closing Agreement, or the
Internal Revenue Service issues a notice of deficiency under Section 6212 of
the Internal Revenue Code with respect to the "dual consolidated losses" of
ACEC or the Borrower; or
(s) The Parent shall fail to make any required payment when due to
the Debt Service Reserve Account pursuant to the Parent Reimbursement
Agreement.
Section 11.02. Remedies upon Event of Default.
(a) Except as otherwise provided in Section 11.02(b), if any Event
of Default has occurred and is continuing, OPIC may at any time in its sole
discretion, (i) suspend or terminate the Commitment, (ii) declare, by written
demand for payment to the Borrower, any portion or all of the Loan to be due
and payable, whereupon such portion of the Loan shall immediately mature and
become due and payable together with interest accrued thereon, without any
other presentment, demand, diligence, protest, notice of acceleration, or other
notice of any kind, all of which the Borrower hereby expressly waives, and/or
(iii) without notice of default or demand, proceed to protect and enforce its
rights and remedies by appropriate proceedings, whether for damages or the
specific performance of any provision of this Agreement or any Note, or in aid
of the exercise of any power granted in this Agreement, any Note or by law, or
may proceed to enforce the payment of any Note.
(b) Upon the occurrence of an Event of Default referred to in
Sections 11.01(j) or (k), (i) the Commitment shall automatically be terminated,
and (ii) the Loan, together with interest accrued thereon and all other amounts
due under this Agreement, the Notes, and the other Financing Documents, shall
immediately mature and become due and payable, without any other presentment,
demand, diligence, protest, notice of acceleration, or other notice of any
kind, all of which the Borrower hereby expressly waives.
Section 11.03. Jurisdiction and Consent to Suit.
Without prejudice to OPIC's right to bring suit in the courts of the
Republic of the Congo or any other jurisdiction, any proceeding to enforce this
Agreement or any Note may be brought in the courts of the United States of
America in the State of New York or the District of Columbia. The Borrower
hereby irrevocably waives any present or future objection to such venue, and
irrevocably consents and submits unconditionally to the non-exclusive
jurisdiction for itself and in respect of any of its property of any such
court. The Borrower further irrevocably waives any claim that any such court
is not a convenient forum for any such proceeding. The Borrower agrees that
any service of process, writ, judgment or other notice of legal process shall
be deemed and held in every respect to be effectively served upon it in
connection with proceedings in the District of Columbia, if delivered to CT
Corporation System, the offices of which are now located at 1025 Vermont
Avenue, N.W., Washington, D.C. 20005, which it irrevocably designates and
appoints as its authorized agent for the service of process in the courts in
the District of Columbia. Nothing herein shall affect OPIC's right to serve
process in any other manner permitted by
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applicable law. The Borrower further agrees that final judgment against it in
any such action or proceeding arising out of or relating to this Agreement or
any Note, shall be conclusive and may be enforced in any other jurisdiction
within or outside the United States of America by suit on the judgment, a
certified or exemplified copy of which shall be conclusive evidence of the fact
and of the amount of its indebtedness.
Section 11.04. Judgment Currency.
This is an international loan transaction in which the specification
of United States Dollars is of the essence, and such currency shall be the
currency of account in all events. The payment obligation of the Borrower
hereunder and under the Notes shall not be discharged by an amount paid in
another currency, whether pursuant to a judgment or otherwise, to the extent
that the amount so paid on prompt conversion to Dollars or transfer to the
District of Columbia under normal banking procedures does not yield the amount
of Dollars then due. In the event that any payment by the Borrower, whether
pursuant to a judgment or otherwise, upon conversion and transfer, does not
result in the payment of such amount of Dollars at the place such amount is
due, OPIC shall be entitled to demand immediate payment of, and shall have a
separate cause of action against the Borrower for, the additional amount
necessary to yield the amount of Dollars then due. In the event OPIC, upon the
conversion of such judgment into Dollars, shall receive (as a result of
currency exchange rate fluctuations) an amount greater than that to which it
was entitled, the Borrower shall be entitled to immediate reimbursement of the
excess amount.
Section 11.05. Immunity.
The Borrower represents and warrants that it is subject to civil and
commercial law with respect to its obligations under this Agreement, the Notes
and each of the other Financing Documents to which it is a party, that the
making and performance of this Agreement, the Notes and such other Financing
Documents and the borrowings by the Borrower pursuant hereto constitute private
and commercial acts rather than governmental or public acts and that neither
such Borrower nor any of its properties or revenues has any right of immunity
from suit, court jurisdiction, attachment prior to judgment, attachment in aid
of execution of a judgment, set-off execution of a judgment or from any other
legal process with respect to its obligations under this Agreement, the Notes
and such other Financing Documents. To the extent that the Borrower may
hereafter be entitled, in any jurisdiction in which judicial proceedings may at
any time be commenced with respect to this Agreement, any Note or any other
Financing Document to which it is a party, to claim for itself or its revenues
or assets any such immunity, and to the extent that in any such jurisdiction
there may be attributed to such Borrower such an immunity (whether or not
claimed), such Borrower hereby irrevocably agrees not to claim and hereby
irrevocably waives such immunity. The foregoing waiver of immunity shall have
effect under the United States Sovereign Immunities Act of 1976.
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ARTICLE XII
MISCELLANEOUS
Section 12.01. Notices.
Each report, notice and other communication to be given under
this Agreement or the Notes shall be in writing, shall be delivered by hand,
mail telegram, telex, or facsimile transmission, postage prepaid, and shall be
deemed to have been duly given when received by the addressee as follows:
To the Borrower:
Walter International Congo, Inc.
1021 Main Street
Suite 2110
Houston, Texas 77002-6502
United States of America
Attn: Mr. William H. Gibbons
Facsimile: (713) 756-1111
To OPIC:
Overseas Private Investment Corporation
1100 New York Avenue, N.W.
Washington, D.C. 20527
United States of America
Attn: Vice President for Finance
Facsimile: (202) 408-9866
With a copy, which shall not constitute notice, to:
Overseas Private Investment Corporation
1100 New York Avenue, N.W.
Washington, D.C. 20527
Attn: Vice President and Treasurer
Facsimile: 202-408-9862
Either party may, by written notice to the other, change the address to which
such communications should be sent to it.
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Section 12.02. English Language.
All documents to be furnished or communications the be given
or made under this Agreement, the Notes and each of the other Financing
Documents to which the Borrower is a party shall be in the English language or,
if in another language, shall be accompanied by a translation into English
certified by an Authorized Officer of the Borrower, which translation shall be
the governing version between the Borrower and OPIC.
Section 12.03. GOVERNING LAW.
THIS AGREEMENT AND THE NOTES SHALL BE CONSTRUED AND ENFORCED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA,
WITHOUT REGARD TO ITS CONFLICT OF LAWS PROVISIONS.
Section 12.04. Succession.
This Agreement shall inure to the benefit of and be binding
upon the successors and assigns of the parties hereto, provided that the
Borrower shall not, without the prior written consent of OPIC, assign or
delegate all or any part of its interest herein or obligations hereunder.
Section 12.05. Survival of Agreements.
Each agreement, representation, warranty and covenant
contained or referred to in this Agreement shall survive any investigation at
any time made by OPIC and shall survive the Disbursement of the Loan, except
for changes permitted hereby, and, save as otherwise provided in Section 2.11
or this Section 12.05, shall terminate only when all amounts due or to become
due under this Agreement and the Notes are paid in full. The agreements set
forth in Sections 12.11 and 12.12 shall survive any such payment in full.
Section 12.06. Integration; Amendments.
This Agreement embodies the entire understanding of the
parties hereto, and supersedes all prior negotiations, understandings and
agreements between them with respect to the subject matter hereof. The
provisions of this Agreement may be waived, supplemented or amended only by an
instrument in writing signed by Authorized Officers of the Borrower and OPIC.
Section 12.07. Severability.
If any provision of this Agreement is prohibited or held to be
invalid, illegal or unenforceable in any jurisdiction, the parties hereto agree
to the fullest extent permitted by law that (i) the validity, legality and
enforceability of the other provisions in such jurisdiction shall not be
affected or impaired thereby, and (ii) any such prohibition, invalidity,
illegality or unenforceability shall not render such provision prohibited,
invalid, illegal or unenforceable in any other jurisdiction.
Section 12.08. No Waiver.
No course of dealing and no failure or delay by OPIC in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof or otherwise prejudice OPIC's rights, powers or remedies. No
<PAGE> 57
53
right, power or remedy conferred upon OPIC hereby or by any Note shall be
exclusive of any other right, power or remedy referred to herein or therein or
now or hereafter available at law, in equity, by statute or otherwise.
<PAGE> 58
54
Section 12.09. WAIVER OF JURY TRIAL.
THE BORROWER, THE HOLDING COMPANY AND OPIC EACH HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO HAVE A
JURY PARTICIPATE IN RESOLVING ANY DISPUTE ARISING OUT OF, IN CONNECTION WITH,
RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP BETWEEN THEM ESTABLISHED BY THIS
AGREEMENT, THE NOTES, ANY OTHER FINANCING DOCUMENT AND ANY OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT ENTERED INTO IN CONNECTION WITH THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
Section 12.10. Waiver of Litigation Payments.
In the event that any action or lawsuit is initiated by or on
behalf of OPIC against the Borrower, the Holding Company or any other party to
any Financing Document, the Borrower and the Holding Company, to the fullest
extent permissible under applicable law, each irrevocably waives its right to,
and agrees not to request, plead, or claim that OPIC and its successors,
transferees, and assigns (any such Person, an "OPIC Plaintiff") post, pay, or
offer, cautio judicatum solvi bond, litigation bond, or any other bond, fee,
payment, or security measure provided for by any provision of law applicable to
such action or lawsuit (any such bond, fee, payment, or measure, a "Litigation
Payment"), and the Borrower and the Holding Company each further waives any
objection that it may now or hereafter have to an OPIC Plaintiffs claim that
such OPIC Plaintiff should be exempt or immune from posting, paying, making or
offering any such Litigation Payment.
Section 12.11. Indemnity.
To the extent permitted by law, the Borrower and the Holding
Company each hereby indemnifies and holds harmless OPIC and its directors,
officers, employees, agents, counsel, subsidiaries and Affiliates (the
"Indemnified Persons") from and against any and all losses, liabilities,
obligations, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever that may be imposed on, incurred
by or asserted against any Indemnified Person in any way relating to or arising
out of this Agreement, the Financing Documents or any of them or any of the
transactions contemplated hereby or thereby including, without Stations the use
or intended use of the proceeds of the Loan; provided, however, that neither
the Borrower nor the Holding Company shall be liable to any Indemnified Person
for any losses, liabilities, obligations, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements that resulted from the gross
negligence or willful misconduct of such Indemnified Person.
Section 12.12. Assumption of Obligations.
In the event that the Borrower or the Holding Company shall,
pursuant to the JOA or otherwise, acquire any or all of the stock or Interests
of the Other Borrower, the Borrower shall be liable for all of the obligations
of the Other Borrower in respect of the Other Borrower's obligations under the
Other Finance Agreement, the Other Participation and Guaranty Agreement and the
other related escrow and security documents.
<PAGE> 59
55
Section 12.13. Further Assurances.
From time to time, the Borrower and the Holding Company shall
execute and deliver to OPIC such additional documents as OPIC may require to
carry out the purposes of this Agreement or the Financing Documents or to
preserve and protect OPIC's rights as contemplated herein or therein.
Section 12.14. Counterparts.
This Agreement may be executed in counterparts, each of which when so executed
and delivered shall be deemed an original and all of which together shall
constitute one and the same instrument.
[The remainder of this page intentionally left blank]
<PAGE> 60
56
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed and delivered on its behalf by its Authorized Officer
on the date first above written.
WALTER INTERNATIONAL CONGO, INC.
By: /s/ F. Fox Benton III
----------------------------------------
Its: Vice President, F. Fox Benton III
----------------------------------------
WALTER CONGO HOLDINGS, INC.
By: /s/ F. Fox Benton III
----------------------------------------
Its: Vice President, F. Fox Benton III
----------------------------------------
OVERSEAS PRIVATE INVESTMENT
CORPORATION
By:
----------------------------------------
Its:
----------------------------------------
<PAGE> 61
57
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed and delivered on its behalf by its Authorized Officer
on the date first above written.
WALTER INTERNATIONAL CONGO, INC.
By:
----------------------------------------
Its:
----------------------------------------
WALTER CONGO HOLDINGS, INC.
By:
----------------------------------------
Its:
----------------------------------------
OVERSEAS PRIVATE INVESTMENT
CORPORATION
By: /s/ F. Carl Reinhardt
----------------------------------------
Its: Regional Manager, Finance
----------------------------------------
<PAGE> 1
EXHIBIT 10.29(a)
NOMECO OIL & GAS CO.
_______________________________________
AMENDED AND RESTATED CREDIT AGREEMENT
dated as of November 1, 1993
_______________________________________
NBD BANK, N.A., as Agent
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
1. DEFINITIONS
1.1 Certain Definitions . . . . . . . . . . . . . . . . 1
1.2 Other Definitions; Rules of Construction . . . . . . 14
2. THE COMMITMENTS
2.1 Revolving Credit Loans. . . . . . . . . . . . . . . 15
2.2 Term Loan . . . . . . . . . . . . . . . . . . . . . 15
2.3 Standby Letters of Credit . . . . . . . . . . . . . 16
2.4 Limit on Advances . . . . . . . . . . . . . . . . . 16
3. THE ADVANCES
3.1 Disbursement of Advances. . . . . . . . . . . . . . 16
3.2 Conditions of Advances. . . . . . . . . . . . . . . 18
3.3 Certification . . . . . . . . . . . . . . . . . . . 20
3.4 Subsequent Elections as to Loans . . . . . . . . . . 20
3.5 Minimum Amounts; Limitation
on Number of Loans. . . . . . . . . . . . . . . . 20
3.6 Termination of Prior Loan Agreement . . . . . . . . 20
4. PAYMENT AND PREPAYMENT; PARTNERSHIPS; ELECTED AVAILABLE
PORTION; FEES; CASH COVER OF S/L/Cs; INDEMNITY
4.1 Principal Payments. . . . . . . . . . . . . . . . . 21
4.2 Interest Payments . . . . . . . . . . . . . . . . . 23
4.3 Partnerships. . . . . . . . . . . . . . . . . . . . 23
4.4 Elected Available Portion . . . . . . . . . . . . . 24
4.5 Fees . . . . . . . . . . . . . . . . . . . . . 24
4.6 Cash Cover of S/L/Cs. . . . . . . . . . . . . . . . 25
4.7 Indemnity . . . . . . . . . . . . . . . . . . . . . 25
4.8 Payment Method. . . . . . . . . . . . . . . . . . . 27
4.9 No Setoff or Deduction. . . . . . . . . . . . . . . 27
4.10 Payment on Non-Business Day;
Payment Computations. . . . . . . . . . . . . . . 27
4.11 Agent's Fees. . . . . . . . . . . . . . . . . . . . 27
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
5. YIELD PROTECTION AND CONTINGENCIES
5.1 Additional Costs. . . . . . . . . . . . . . . . . . 27
5.2 Limitations of Requests and Elections . . . . . . . 29
5.3 Illegality and Impossibility. . . . . . . . . . . . 29
5.4 Indemnification . . . . . . . . . . . . . . . . . . 30
6. REPRESENTATIONS AND WARRANTIES
6.1 Corporate Existence and Power . . . . . . . . . . . 30
6.2 Corporate Authority . . . . . . . . . . . . . . . . 30
6.3 Binding Effect. . . . . . . . . . . . . . . . . . . 30
6.4 Subsidiaries. . . . . . . . . . . . . . . . . . . . 30
6.5 Litigation. . . . . . . . . . . . . . . . . . . . . 31
6.6 Financial Condition . . . . . . . . . . . . . . . . 31
6.7 Use of Advances . . . . . . . . . . . . . . . . . . 31
6.8 Consents, Etc . . . . . . . . . . . . . . . . . . . 32
6.9 Taxes . . . . . . . . . . . . . . . . . . . . . 32
6.10 Liens and Title to Properties . . . . . . . . . . . 32
6.11 Partnerships. . . . . . . . . . . . . . . . . . . . 32
6.12 ERISA . . . . . . . . . . . . . . . . . . . . . . 33
6.13 Disclosure . . . . . . . . . . . . . . . . . . . . . 33
6.14 Environmental and Safety Matters. . . . . . . . . . 33
7. COVENANTS
7.1 Affirmative Covenants. . . . . . . . . . . . . . . . 34
(a) Preservation of Corporate
Existence, Etc.34
(b) Compliance with Laws, Etc. . . . . . . . . 34
(c) Maintenance of Properties; Insurance . . . 35
(d) Reporting Requirements . . . . . . . . . . 35
(e) Access to Records, Books, Etc. . . . . . . 37
(f) Maintenance of Records, Books, Etc . . . . 38
(g) Change of Control. . . . . . . . . . . . . 38
(h) Additional Reserve Reports . . . . . . . . 38
(i) Prepayments. . . . . . . . . . . . . . . . 38
</TABLE>
2
<PAGE> 4
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
7.2 Negative Covenants. . . . . . . . . . . . . . . . . 39
(a) Borrowing Base . . . . . . . . . . . . . . 39
(b) Current Ratio. . . . . . . . . . . . . . . 39
(c) Total Liabilities to Tangible
Net Worth. . . . . . . . . . . . . . . . 39
(d) Tangible Net Worth . . . . . . . . . . . . 39
(e) Debt Service . . . . . . . . . . . . . . . 39
(f) Liens. . . . . . . . . . . . . . . . . . . 39
(g) Investments. . . . . . . . . . . . . . . . 41
(h) Disposal of Subsidiaries, Sale of
Assets . . . . . . . . . . . . . . . . . 41
(i) Mergers or Consolidation . . . . . . . . . 43
(j) Dividends. . . . . . . . . . . . . . . . . 43
(k) Indebtedness . . . . . . . . . . . . . . . 43
(l) Transactions with Affiliates . . . . . . . 45
8. DEFAULT
8.1 Events of Default . . . . . . . . . . . . . . . . . 45
8.2 Remedies. . . . . . . . . . . . . . . . . . . . . . 47
9. THE AGENT AND THE BANKS
9.1 Appointment of Agent . . . . . . . . . . . . . . . 48
9.2 Scope of Agency. . . . . . . . . . . . . . . . . . 49
9.3 Duties of Agent. . . . . . . . . . . . . . . . . . 49
9.4 Resignation of Agent . . . . . . . . . . . . . . . 50
9.5 Pro Rata Sharing by Banks. . . . . . . . . . . . . 50
9.6 Determination of Borrowing Base, Etc . . . . . . . 50
10. MISCELLANEOUS
10.1 Amendments, Etc. . . . . . . . . . . . . . . . . . 52
10.2 Notices. . . . . . . . . . . . . . . . . . . . . . 52
10.3 Conduct No Waiver; Remedies Cumulative . . . . . . 52
10.4 Reliance on and Survival of
Various Provisions . . . . . . . . . . . . . . . 53
</TABLE>
3
<PAGE> 5
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
10.5 Expenses; Indemnification. . . . . . . . . . . . . . 53
10.6 Successors and Assigns; Additional Banks . . . . . . 54
10.7 Governing Law. . . . . . . . . . . . . . . . . . . . 57
10.8 Table of Contents and Headings . . . . . . . . . . . 57
10.9 Construction of Certain Provisions . . . . . . . . . 57
10.10 Integration and Severability . . . . . . . . . . . . 57
10.11 Interest Rate Limitation . . . . . . . . . . . . . . 58
10.12 Confidentiality. . . . . . . . . . . . . . . . . . . 58
10.13 Counterparts . . . . . . . . . . . . . . . . . . . . 58
10.14 Independence of Covenants. . . . . . . . . . . . . . 59
10.15 Jury Trial Waiver. . . . . . . . . . . . . . . . . . 59
EXHIBITS
- --------
Exhibit A Revolving Credit Notes
Exhibit B S/L/C Application
Exhibit C Term Notes
Exhibit D Request for Advance
Exhibit E Legal Opinion
Exhibit F Request for Continuation or Conversion
Exhibit G Subsidiaries
Exhibit H Litigation
Exhibit I Tax Schedule
Exhibit J Environmental Matters
Exhibit K Certificate of Chief Financial Officer
Exhibit L Assignment and Acceptance
Exhibit M Assumption Agreement
</TABLE>
4
<PAGE> 6
AMENDED AND RESTATED CREDIT AGREEMENT
THIS AGREEMENT, dated as of November 1, 1993, is by and among NOMECO
OIL & GAS CO., a Michigan corporation, (the "Company"), the lenders party
hereto from time to time (collectively, the "Banks" and individually, a "Bank")
and NBD BANK, N.A., as agent for the Banks (in such capacity, the "Agent").
RECITALS
A. The Company, the Banks party thereto and NBD Bank, N.A., as
Agent, entered into a Credit Agreement dated as of March 1, 1990 (as amended,
the "Prior Loan Agreement").
B. The Company desires to obtain a credit facility providing for
both revolving credit loans and standby letters of credit in the aggregate
principal amount of $80,000,000, with the possibility of increasing to
$110,000,000 if an additional bank is added to this Agreement, to replace the
credit facility and to refinance the advances outstanding under the Prior Loan
Agreement and otherwise to provide funds for its corporate purposes, and the
Banks are willing to establish such a credit facility in favor of the Company
on the terms and conditions herein set forth.
AGREEMENT
In consideration of the premises and of the mutual agreements herein
contained, the parties hereto agree that the Prior Loan Agreement shall be
amended and restated in its entirety as follows:
SECTION 11. Definitions
1.1 Certain Definitions. As used herein, the following terms
shall have the following respective meanings:
"Adjusted Prime Rate" shall mean the per annum rate equal to the sum
of (a) the greater of (i) the per annum rate announced by the Agent from time
to time as its "prime rate", which "prime rate" may not be the lowest rate
charged by the Agent to any of its customers but will be its only published
prime rate, or (ii) the sum of one-half percent (1/2%) per annum plus the per
annum rate established and announced by the Agent from time to time as the
opening federal funds rate paid by the Agent in its regional federal funds
market for overnight borrowings from other banks, all as conclusively
determined in good faith by the Agent, such sum to be rounded up, if necessary,
to the nearest whole multiple of 1/100 of 1%, plus
(b) whichever of the following margins shall be applicable on the
date of which such determination is made:
<PAGE> 7
With respect to each Revolving Credit Loan....No margin, or
With respect to a Term Loan....one-half percent (1/2%) per annum.
Such Adjusted Prime Rate to change simultaneously with any change in such prime
rate or federal funds rate, as the case may be.
"Advance" shall mean any Loan and any S/L/C.
"Advance Date" shall mean each date for the making of a Loan or the
issuance of an S/L/C as specified in the notice delivered by the Company under
Section 3.1 and permitted by this Agreement.
"Available Portion" at any time shall be the lesser of (a) the most
recently determined Borrowing Base less the principal amount of the Private
Placement Notes outstanding at such time, or (b) the Commitments.
"Borrowing Base" shall mean, as of any date, the difference of:
(a) the present value of the Future Net Income (discounted at
the Discount Rate) times a fraction determined by the Agent (or by each of the
Banks as described in Section 9.6) based on the Agent's or each Bank's, as the
case may be, customary and standard practices in lending to oil and gas
companies generally, including without limitation their standard engineering
criteria and oil and gas lending criteria (and it is acknowledged and agreed
that such customary and standard practices, including without limitation such
engineering criteria and oil and gas lending criteria, shall be determined by
the Agent and each Bank, as the case may be, in their sole discretion, and such
determination shall be conclusive and binding), minus
(b) an amount equal to the lesser of (i) the aggregate
cumulative amount of all distributions or other payments made to the Company or
any of its Subsidiaries related in any way to the Special Project Assets or any
interest of the Company or any of its Subsidiaries therein to the extent such
distribution or payments can be claimed by the lenders of Non-Recourse Debt to
repay Non-Recourse Debt (i.e., if any distributions with respect to a Special
Project Asset exceed the amount of Non-Recourse Debt related to such Special
Project Asset and cannot be claimed by the lender of such Non Recourse Debt,
such amount which cannot be claimed by such lender would not be included in the
aggregate cumulative amount of all distributions described in this clause (i)),
and (ii) the outstanding liability for principal, interest and other payments
under all Non-Recourse Debt.
If there is any Lien on any Borrowing Base Asset then such
Borrowing Base Asset shall not be included in such calculations, unless such
Lien is permitted by Sections 4.3(c) or 7.2(f)(i), (ii), (iii), (iv), (v),
(vii), (viii) or (ix) hereof. Notwithstanding anything herein to the contrary,
for purposes of calculating the Borrowing Base, the aggregate amount of the
Borrowing Base attributable to Borrowing Base Assets owned by (i) any Foreign
Restricted
2
<PAGE> 8
Subsidiary or any Partnership of which a Foreign Restricted Subsidiary is a
partner shall be limited to no more than 10% of the Borrowing Base, (ii) all
Foreign Restricted Subsidiaries and all Partnerships of which a Foreign
Restricted Subsidiary is a partner shall be limited in the aggregate to no more
than 20% of the Borrowing Base, and (iii) any Domestic Restricted Subsidiary or
any Partnership of which a Domestic Restricted Subsidiary is a partner shall be
limited to no more than 20% of the Borrowing Base. Future Net Income of any
Restricted Subsidiary which is not a wholly owned subsidiary of the Company
shall be reduced by the percentage thereof which is not owned by the Company.
The Borrowing Base shall be determined as described in Section 9.6.
"Borrowing Base Assets" shall mean the Oil and Gas Interests and
Kalkaska Assets which are included in the calculation of Net Income-Oil and Gas
and Net Income-Kalkaska Plant.
"Borrowing Base Deficiency" shall mean the condition which exists when
the sum of the aggregate principal amount of the outstanding Advances plus the
aggregate principal amount of the outstanding Private Placement Notes exceeds
the Borrowing Base.
"Business Day" shall mean any day other than a Saturday or Sunday or
other day on which the Agent or any Bank is not open for transaction of
substantially all of its banking functions.
"Cash Flow" shall mean, for any period, the sum of net income
(excluding extraordinary gains and losses and taxes associated therewith and
excluding gross revenues and expenses attributable to Special Project Assets)
plus, to the extent deducted in the computation of such net income,
depreciation, depletion, deferred taxes, amortization of goodwill plus interest
expenses (net of interest capitalized and excluding any interest payable on the
Non-Recourse Debt) and plus other non-cash charges acceptable to the Majority
Lenders for such period.
"CD Interest Period" shall mean, with respect to any CD Rate Loan, the
period commencing on the day such Loan is made or converted to a CD Rate Loan
and ending on the date 30, 60, 90 or 120 days thereafter, as the Company may
elect under Section 3.1 or 3.4, and each subsequent period commencing on the
last day of the immediately preceding CD Interest Period and ending on the date
30, 60, 90 or 120 days thereafter, as the Company may elect under Section 3.4,
provided, however, that (a) each Interest Period which would otherwise end on a
day which is not a Business Day shall end on the next succeeding Business Day,
and (b) no CD Interest Period which would end after the maturity date of any
outstanding Note shall be permitted.
"CD Rate" shall mean, with respect to any CD Rate Loan and the related
CD Interest Period, the per annum rate that is equal to the sum of:
(a) whichever of the following margins shall be applicable on the
date as of which such determination is made:
3
<PAGE> 9
With respect to a Revolving Credit Loan....one and three-eighths percent
(1-3/8%) per annum, or
With respect to a Term Loan....one and seven-eighths percent (1-7/8%) per
annum, plus
(b) the rate obtained by dividing (i) the arithmetic mean of
secondary market bid rates per annum quoted at approximately 10:00 a.m. New
York time (or as soon thereafter as practicable) on the first day of the
related CD Interest Period by two or more New York certificate of deposit
dealers of recognized standing selected by the Agent for the purchase from the
Agent at face value of negotiable certificates of deposit of the Agent with a
term approximately equal to such CD Interest Period in an aggregate amount
approximately equal to the related CD Rate Loan, by (ii) a number equal to 1.0
minus the stated maximum rate (expressed as a decimal) of all reserve
requirements under any regulations of the Board of Governors of the Federal
Reserve System or other governmental authority having jurisdiction with respect
thereto (including, without limitation, any marginal, emergency, supplemental,
special or other reserves), as now and from time to time hereafter in effect,
applicable on the first day of the related CD Interest Period to a negotiable
certificate of deposit of the Agent in excess of $100,000 and with a term
approximately equal to such CD Interest Period, plus
(c) the annual assessment rate (expressed as a percentage)
estimated by the Agent on the first day of the related CD Interest Period to be
payable by the Agent to the Federal Deposit Insurance Corporation (or any
successor agency thereto) for such Corporation's (or such successor's) insuring
negotiable certificates of deposit of the Agent in excess of $100,000 during
the related CD Interest Period; all as conclusively determined by the Agent,
such sum rounded up, if necessary, to the nearest whole multiple of 1/16 of 1%.
"CD Rate Loan" shall mean any Loan which bears interest at the CD Rate.
"Change of Control" shall have the meaning ascribed thereto in Section
7.1(g) hereof.
"Clause B Prepayment", "Clause C Prepayment", "Clause I Prepayment"
and "Clause II Prepayment" shall have the meanings ascribed thereto in Section
4.1(d)(ii) hereof.
"CMS" shall mean CMS Energy Corporation, a Michigan corporation.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and the regulations thereunder.
"Commitments" shall mean, with respect to each Bank, the commitment of
each such Bank to make Advances pursuant to Sections 2.1, 2.2 and 2.3, in
amounts not exceeding in aggregate principal amount outstanding at any time the
respective commitment amounts for each Bank set forth next to the name of each
such Bank on the signature pages hereof or of any Bank added pursuant to
Section 10.6, with the amount as specified pursuant to the terms of Section
4
<PAGE> 10
10.6, as such amounts may be reduced from time to time pursuant to Section 2.1
or modified pursuant to Section 10.6.
"Company Debt" shall mean the aggregate outstanding principal amount
of the Advances and the Private Placement Notes.
"Consolidated" or "consolidated" shall mean, when used with reference
to any financial term in this Agreement, the aggregate for two or more Persons
of the amount signified by such term for all such Persons determined on a
consolidated basis and in accordance with generally accepted accounting
principles.
"Consolidated Tangible Net Assets" shall mean the total amount of all
assets of the Company and its Restricted Subsidiaries (less depreciation,
depletion and other properly deductible valuation reserves and less a
percentage of the assets of any Restricted Subsidiary equal to the percentage
of all capital stock of such Restricted Subsidiary not owned by the Company),
less all goodwill and all other intangible assets of the Company and its
Restricted Subsidiaries, and excluding all Special Project Assets.
"Consumers" shall mean the Consumers Power Company, a Michigan
corporation.
"Credit" shall mean the commercial revolving credit established by
Section 2.1 hereof.
"Current Assets" and "Current Liabilities" shall mean all assets or
liabilities, respectively, which should be classified as current assets and
current liabilities in accordance with generally accepted accounting
principles; provided that the calculation of Current Assets shall not include
receivables of the Company or any Subsidiary owing by any Related Entity or
Consumers in excess of 90 days or subject to any dispute or offset or otherwise
unacceptable, or advances by the Company or any Subsidiary to any Related
Entity or Consumers, and Current Liabilities shall not include liabilities for
deferred taxes; provided, further, that Current Assets shall not include any
Special Project Assets and Current Liabilities shall not include any
Non-Recourse Debt.
"Debt" shall have the meaning ascribed thereto in the Private
Placement Agreement delivered to the Banks on the Effective Date pursuant to
Section 3.2(a)(vi) hereof, without giving effect to any amendment, modification
or termination after the Effective Date, including without limitation any
retroactive amendment or modification, of the Private Placement Agreement.
"Discount Rate" shall mean the discount rate determined from time to
time by the Agent or, in the case of each Bank calculating the Borrowing Base
pursuant to Section 9.6, by such Bank in its own calculation.
"Dollars" and "$" shall mean the lawful money of the United States of
America.
5
<PAGE> 11
"Domestic Subsidiary" shall mean any Subsidiary which is organized
under the laws of the United States or any State or other political subdivision
thereof.
"Effective Date" shall mean the effective date specified in the final
paragraph of this Agreement.
"Elected Available Portion" at any time shall be the amount of the
Available Portion, which could be 100% of the Available Portion but may not
exceed the Available Portion, most recently elected by the Company to be
available under the Credit pursuant to Section 4.4 hereof.
"Enterprises" shall mean CMS Enterprises Company, a Michigan
corporation.
"Environmental Laws" at any date shall mean all provisions of law,
statute, ordinances, rules, regulations, judgments, writs, injunctions,
decrees, orders, awards and standards promulgated by the government of the
United States of America or any foreign government or by any state, province,
municipality or other political subdivision thereof or therein or by any court,
agency, instrumentality, regulatory authority or commission of any of the
foregoing concerning the protection of, or regulating the discharge of
substances into, the environment.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, together with any successor statute thereto
and the regulations thereunder.
"ERISA Affiliate" shall mean any trade or business (whether or not
incorporated) which (i) together with the Company or any Significant
Subsidiary, would be treated as a single employer under Section 414(b) or (c)
of the Code or (ii) for purposes of liability under Section 412(C)(11) of the
Code, the lien created under Section 412(n) of the Code or for a tax imposed
for failure to meet minimum funding standards under Section 4971 of the Code,
is a member of the same affiliated service group (within the meaning of Section
401(m) of the Code) as the Company or any Significant Subsidiary, or any other
trade or business described in clause (i) above.
"Eurodollar Business Day" shall mean, with respect to any Eurodollar
Rate Loan, a day which is both a Business Day and a day on which dealings in
Dollar deposits are carried out in the interbank market selected by the Agent
with respect to such Eurodollar Rate Loan.
"Eurodollar Interest Period" shall mean, with respect to any
Eurodollar Rate Loan, the period commencing on the day such Eurodollar Rate
Loan is made or converted to a Eurodollar Rate Loan and ending on the date one,
two, three or six calendar months thereafter, as the Company may elect under
Section 3.1 or 3.4, and each subsequent period commencing on the last day of
the immediately preceding Eurodollar Interest Period and ending on the date
one, two, three, or six months thereafter, as the Company may elect under
Section 3.4, provided, however, that (a) any Eurodollar Interest Period which
commences on the last Eurodollar Business Day of a calendar month (or on any
day for which there is no numerically
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<PAGE> 12
corresponding day in the appropriate subsequent calendar month) shall end on
the last Eurodollar Business Day of the appropriate subsequent calendar month,
(b) each Eurodollar Interest Period which would otherwise end on a day which is
not a Eurodollar Business Day shall end on the next succeeding Eurodollar
Business Day or, if such next succeeding Eurodollar Business Day falls in the
next succeeding calendar month, on the next preceding Eurodollar Business Day,
and (c) no Eurodollar Interest Period which would end after the maturity date
of any outstanding Note shall be permitted.
"Eurodollar Rate" shall mean, with respect to any Eurodollar Rate Loan
and the related Eurodollar Interest Period, the per annum rate that is equal to
the sum of:
(a) whichever of the following margins shall be applicable on the
date as of which such determination is made:
With respect to a Revolving Credit Loan....one and one-quarter (1-1/4%) per
annum, or
With respect to a Term Loan....one and three-quarters percent (1-3/4%) per
annum, plus
(b) The per annum rate obtained by dividing (i) the per annum rate
of interest at which deposits in Dollars for such Eurodollar Interest Period
and in an aggregate amount approximately equal to the amount of such
Eurodollar Rate Loan are offered to the Agent by other prime banks in the
London interbank market, at approximately 11:00 a.m. London time, on the
second Eurodollar Business Day prior to the first day of such Eurodollar
Interest Period, by (ii) a number equal to 1.0 minus the stated maximum rate
(expressed as a decimal) which is in effect on such day, under any regulation
of the Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System with deposits exceeding five billion Dollars in respect of
"Eurocurrency liabilities" (or in respect of any other category of liabilities
which includes deposits by reference to which the interest rate on Eurodollar
Rate Loans is determined or any category of extensions of credit or other
assets which includes loans by a non-United States office of the Agent to
United States residents);
all as conclusively determined in good faith by the Agent, such sum to be
rounded up, if necessary, to the nearest whole multiple of 1/16 of 1%.
"Eurodollar Rate Loan" shall mean any Loan which bears interest at the
Eurodollar Rate.
"Event of Default" shall mean any of the events or conditions
described in Section 8.1.
"Expiry Date" shall mean the date occurring after the stated expiry
date of an S/L/C which would provide to the Agent a reasonable time after such
stated expiry date to examine any document presented pursuant to such S/L/C on
such stated expiry date, and, for the purpose of this Agreement, such S/L/C
shall be deemed outstanding at all times prior to and including such Expiry
Date.
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<PAGE> 13
"Fixed Charges" of any Person shall mean, for any period, the sum of
the aggregate interest expense (excluding any interest payable on any
Non-Recourse Debt) for such period plus the current maturity of long-term debt
(excluding the Non-Recourse Debt) during such period plus all operating lease
expenses for such period.
"Fixed Rate Loan" shall mean any CD Rate Loan or Eurodollar Rate Loan.
"Foreign Restricted Subsidiary" shall mean any Restricted Subsidiary
which is not a Domestic Subsidiary.
"Future Net Income" shall mean the aggregate amount of Net Income-Oil
and Gas Interests and Net Income-Kalkaska Plant estimated by the Agent as of
7:00 A.M. on the date of any determination to be receivable by the Company or
any Restricted Subsidiary in the future, provided that revenues, costs and
expenses shall be those estimated by the Agent to be receivable or payable in
the future.
"GAAP" shall mean generally accepted accounting principles applied on
a basis consistent with that reflected in the financial statements referred to
in Section 6.6 hereof.
"Guaranty" shall mean any guaranty delivered at any time pursuant to
Section 7.2(h)(ii) hereof.
"Hydrocarbons" shall mean oil (including condensates and natural gas
liquids) and natural gas.
"Indebtedness" of any Person shall mean, as of any date, (a) all
obligations of such Person for borrowed money, (b) all obligations which are
secured by any lien or encumbrance existing on property owned by such Person
whether or not the obligation secured thereby shall have been assumed by such
Person, other than those obligations which are incurred in the ordinary course
of business and are not required to be shown as a liability on a balance sheet
in accordance with GAAP, (c) all obligations as lessee under any lease which,
in accordance with GAAP, is or should be capitalized on the books of the
lessee, (d) the deferred purchase price for goods, property or services
acquired by such Person, and all obligations of such Person to purchase such
goods, property or services where payment therefore is required regardless of
whether or not delivery of such goods or property or the performance of such
services is ever made or tendered, other than unsecured trade payables incurred
in the ordinary course of business (e) all obligations of such Person to
advance funds to, or to purchase property or services from, any other Person in
order to maintain the financial condition of such Person, (f) all obligations
of such person in respect of any interest rate or currency swap, rate cap or
other similar transaction (valued in an amount equal to the highest termination
payment, if any, that would be payable by such person upon termination for any
reason on the date of termination), and (g) all obligations of such person or
of others for which such person is contingently liable, as guarantor, surety or
in any other similar capacity, or in respect of which obligations such person
assures a creditor against loss or agrees to take any action to prevent any
such loss (other
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<PAGE> 14
than endorsements of negotiable instruments for collection in the ordinary
course of business), including without limitation all reimbursement obligations
of such person in respect of any letters of credit, surety bonds or similar
obligations.
"Interest Payment Date" shall mean (a) with respect to any Fixed Rate
Loan, the last date of each Interest Period with respect to such Fixed Rate
Loan and, in the case of any Interest Period exceeding three months, each date
that is three months after the first day of such Interest period, and (b) with
respect to any Prime Rate Loan, the last Business Day of each month, commencing
with the first such day after the Effective Date.
"Interest Period" shall mean any CD Interest Period or any Eurodollar
Interest Period.
"Kalkaska Assets" shall mean all rights, interests and other assets
owned by the Company in or relating to the, Kalkaska Processing Plant,
including without limitation the right to receive revenues from such processing
plant.
"Kalkaska Processing Plant" shall mean the gas processing plant
constructed by Consumers Power Company, and the lands associated therewith in
Section 31, Township 27 North, Range 7 West, Kalkaska County Michigan, along
with all appurtenant facilities and including all additions and modifications
thereof.
"Lien" shall mean any pledge, assignment, hypothecation, mortgage,
security interest, deposit arrangement, option, conditional sale or title
retaining contract, sale and leaseback transaction, financing statement filing,
lessor's or lessee's interest under any lease, subordination of any claim or
right, or any other type of lien, charge, encumbrance, preferential arrangement
or other claim or right.
"Lenders" shall mean the Banks and the Private Placement Noteholders.
"Loans" shall mean the Revolving Credit Loans or the Revolving Credit
Loans and the Term Loan, collectively; "Loan" shall mean either a Revolving
Credit Loan or the Term Loan.
"Major Sales Contract" shall mean, at any time, any agreement between
the Company, any Restricted Subsidiary or any Partnership and any Person for
the sale of Hydrocarbons if the aggregate sales of Hydrocarbons to such Person
during the twelve months immediately preceding such time equals or exceeds 10%
of the aggregate sales of Hydrocarbons by the Company, any Restricted
Subsidiary or any Partnership during the twelve months immediately preceding
such time.
"Majority Banks" shall mean Banks holding not less than 61% of the
aggregate principal amount of the Advances then outstanding (or 61% of the
Commitments if no Advances are then outstanding).
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<PAGE> 15
"Majority Lenders" shall mean holders of at least 75% of the
liabilities of the Company under the Private Placement Notes and this
Agreement, with liabilities under the Private Placement Notes being measured as
the outstanding principal balance of the Private Placement Notes and
liabilities under this Agreement being the greater of the Available Portion or
the outstanding Advances, provided that once the Term Loan is made under this
Agreement and the Commitments are terminated, the liabilities under this
Agreement shall be the aggregate outstanding principal balance of the Term Loan
plus the outstanding S/L/Cs. Outstanding Advances and outstanding S/L/Cs shall
include, without limitation, the maximum amount that may be drawn under all
outstanding S/L/Cs and all unpaid reimbursement obligations under any S/L/C.
"Majority Private Placement Noteholders" shall mean Private Placement
Noteholders holding at least 51% of the liabilities of the Company under the
Private Placement Notes.
"Maturity Date" shall mean the date three years after the Term Loan is
made.
"Multiemployer Plan" shall mean any "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA or Section 414(f) of the Code.
"Net Income-Oil and Gas Interests" shall mean the difference of (a)
the aggregate of the proceeds payable to the Company and any Restricted
Subsidiary or to the Company and any Restricted Subsidiary as a partner in any
Partnership from the sale of Hydrocarbons attributable to Oil and Gas Interests
minus (b) the aggregate of all costs and expenses incurred in connection with
the production and sale of such Hydrocarbons and the generation of such
revenues, including without limitation: (i) all producing and operating costs
including expenses of development, extraction, treatment, maintenance,
processing, handling, storage, marketing, transportation, delivery, sale and
environmental remediation (if any); (ii) all taxes imposed or assessed with
respect to, or measured by, or charged against or attributable to, such
Hydrocarbons, including all applicable mineral, severance, ad valorem, windfall
profits, and property taxes; (iii) all capital expenditures calculated in
accordance with GAAP incurred in connection with such production and sales;
(iv) all royalties, overriding royalties, production payments and other
burdens, charges or fees to which such Hydrocarbons and revenues may be subject
which are not payable to the Company, any Restricted Subsidiary or any
Partnership; and (v) any other costs, expenses or other amounts deducted by the
Agent, or by each Bank in its own calculation of the Borrowing Base pursuant to
Section 9.6, in accordance with its customary and standard practices in lending
to oil and gas companies.
"Net Income-Kalkaska Plant" shall mean the difference of (a) the
aggregate amount of revenues payable to the Company from the ownership interest
of the Company with respect to the Kalkaska Processing Plant, minus (b) the
aggregate of all costs and expenses incurred in connection with such revenues
and all other amounts deductible in any manner from such revenues payable to
the Company.
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<PAGE> 16
"Non-Recourse Debt" shall mean any indebtedness which is described in
any of the four following clauses: (a) such indebtedness is non-recourse to the
Company or any of its Subsidiaries except with respect to the Special Project
Assets only, and neither the Company nor any of its Subsidiaries shall have any
liability whatsoever for any such indebtedness, obligations or other
liabilities of any kind, whether direct or indirect, contingent or otherwise,
other than recourse solely to the Special Project Assets for which such
Non-Recourse Debt was incurred, (b) such indebtedness is for borrowed money
incurred by NOMECO Equatorial Guinea Oil & Gas Co., which indebtedness is
non-recourse to the Company or any of its Subsidiaries other than NOMECO
Equatorial Guinea Oil & Gas Co., except with respect to the assets described in
clause (a) of the definition of Special Project Assets, and must also be
non-recourse against NOMECO Equatorial Guinea Oil & Gas Co. except with respect
to such assets owned in such project, (c) such indebtedness is other
non-recourse indebtedness on terms of non-recourse liability in all respects
material to the Banks equivalent to the foregoing indebtedness described in
clause (b) of this definition, or (d) other indebtedness which has limited
recourse on terms which are approved in writing by the Majority Banks in their
sole discretion.
"Notes" shall mean the Revolving Credit Notes and the Term Notes,
collectively; "Note" shall mean any Revolving Credit Note or any Term Note.
"Oil and Gas Interests" shall mean all leasehold interests, mineral
fee interests, overriding royalty and royalty interests, net revenue and net
working interests and other interests in reserves of Hydrocarbons.
"Overdue Rate" shall mean (a) in respect of principal on Prime Rate
Loans, a rate per annum that is equal to the sum of three percent (3%) per
annum plus the Adjusted Prime Rate, (b) in respect of Fixed Rate Loans, a rate
per annum that is equal to the sum of three percent (3%) per annum plus the per
annum rate then in effect thereon until the end of the then current Interest
Period for such Loan and, thereafter, a rate per annum that is equal to the sum
of three percent (3%) per annum plus the Adjusted Prime Rate and, (c) in
respect of other amounts payable by the Company hereunder (other than
interest), a per annum rate that is equal to the sum of three percent (3%) per
annum plus the Adjusted Prime Rate.
"Partnership" shall mean the Michigan Niagaran Reef Partnership and
each other partnership meeting each of the following requirements: (a) the
Company or a Restricted Subsidiary is a partner of such partnership, (b) such
partnership is primarily involved in oil and gas exploration, development or
production, and (c) such partnership shall have been approved in writing by all
Banks and the Majority Lenders, such approval to be in the sole discretion of
all Banks and the Majority Lenders.
"PBGC" shall mean the Pension Benefit Guaranty Corporation and any
entity succeeding to any or all of its functions under ERISA.
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<PAGE> 17
"Person" shall include an individual, a corporation, an association, a
partnership, a trust or estate, a joint stock company, an unincorporated
organization, a joint venture, a government (foreign or domestic), and any
agency or political subdivision thereof, or any other entity.
"Plan" shall mean, with respect to any Person, any employee benefit or
other plan (other than a Multiemployer Plan) maintained by such Person for its
employees and covered by Title IV of ERISA or to which Section 412 of the Code
applies.
"Prepayment Date" shall have the meaning ascribed thereto in Section
4.1(d) hereof.
"Prime Rate Loan" shall mean any Loan which bears interest at the
Adjusted Prime Rate.
"Private Placement Agreements" shall mean each Note Agreement dated as
of March 1, 1990 of the Company regarding the $25,000,000 9.30% Senior Serial
Notes, Series A due March 1, 1997 and $25,000,000 9.45% Senior Serial Notes,
Series B due March 1, 2000, as amended or modified from time to time.
"Private Placement Noteholders" shall mean all holders of the Private
Placement Notes.
"Private Placement Notes" shall mean the Company's senior serial notes
issued pursuant to the Private Placement Agreements in the approximate original
aggregate principal amount of $50,000,000.
"Pro Rata Share" shall mean, as to obligations of the Banks, the
percentage set forth opposite its name on the signature pages hereof or
otherwise established pursuant to Section 10.6. As to obligations owing to the
Banks, shall mean: (a) in the case of payments of principal and interest on
the Loans, in an amount with respect to each Bank equal to the product of such
amount received times the ratio which the outstanding principal balance of its
Note or Notes bears to the outstanding principal balance of all Notes, and (b)
in the case of all other amounts payable hereunder (other than as otherwise
noted with respect to fees) and other amounts, in an amount with respect to
each Bank equal to the product of such amount received times the ratio which
the Commitment of such Bank bears to the Commitments of all Banks.
"Related Entities" shall mean (a) each company which is wholly owned
by Enterprises, CMS or any wholly owned Subsidiary thereof and which now or
hereafter owns any capital stock of the Company, unless the aggregate amount of
all capital stock of the Company held by all such companies is less than five
(5%) percent of the voting securities of the Company, in which case no such
companies shall be included in this definition of Related Entities, (b)
Enterprises, and (c) CMS.
"Reportable Event" shall mean a reportable event as described in
Section 4043(b) of ERISA including those events as to which the thirty (30) day
notice period is waived under Part 2615 of the regulations promulgated by the
PBGC under ERISA.
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<PAGE> 18
"Required Principal Amount of Private Placement Notes" shall mean, as
of any Prepayment Date, (a) the amount by which Company Debt outstanding on
such Prepayment Date, after the Clause I Prepayment, if any, the Clause II
Prepayment, if any, and the Clause B Prepayment, if any, exceeds the Borrowing
Base, multiplied by (b) a fraction, the numerator of which shall be the
aggregate unpaid principal amount of the Private Placement Notes then
outstanding on such Prepayment Date and the denominator of which shall be the
aggregate unpaid principal amount of Company Debt outstanding on such
Prepayment Date, after subtracting the Clause I Prepayment, if any, the Clause
II Prepayment, if any, and the Clause B Prepayment, if any.
"Restricted Subsidiary" shall mean all Subsidiaries of which 80% or
more of the voting securities are owned by the Company.
"Revolving Credit Loans" shall mean loans made by the Banks to the
Company pursuant to Section 2.1.
"Revolving Credit Notes" shall mean the promissory notes of the
Company issued to the Banks in the form annexed hereto as Exhibit A, evidencing
borrowings under Section 2.1 hereof, as amended or modified from time to time
and together with any promissory note or notes issued in exchange or
replacement therefor.
"Significant Subsidiary" shall mean each Subsidiary of the Company
which, at the time of determination, satisfies either of the following two
conditions: (a) the total assets owned by such Subsidiary equals or exceeds an
amount equal to 5% of the Tangible Net Worth of the Company, as determined in
accordance with GAAP, or (b) meets the definition of a "significant subsidiary"
contained as of the date hereof in Regulation S-X of the Securities and
Exchange Commission.
"S/L/C" shall mean any Standby Letter of Credit issued by the Agent on
behalf of the Banks for the account of the Company under Section 2.3 hereof.
"S/L/C Advance" shall mean each issuance of an S/L/C under Section 2.3
hereof.
"S/L/C Application" shall mean each Standby Letter of Credit
Application and Reimbursement Agreement delivered by the Company to the Agent
pursuant to Section 2.3, in the form of Exhibit B hereto or other form then in
use by the Agent and agreed upon between the Agent and the Company.
"Special Project Assets" shall mean (a) all assets owned by the
Company or any of its Subsidiaries in the project involving development of the
Alba Gas-Condensate Field located offshore Bioco Island, Republic of Equatorial
Guinea, which project is further described in the Equatorial Guinea project
financing outline distributed to the Banks, including any production sharing
contract regarding such project and any proceeds thereof, and (b) all assets
and proceeds thereof owned by any Subsidiary of the Company formed or
maintained specifically for a project
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<PAGE> 19
for Hydrocarbon exploration, development, production, processing, refining
and/or other industrial use of Hydrocarbons, which Subsidiary is formed or
maintained solely to own such assets (and no other assets) and, after the date
hereof, seeks non-recourse financing for such project, provided that the terms
of non-recourse liability of the financing for such project are in all respects
material to the Banks structured similarly to those of the project described in
clause (a).
"Subordinated Debt" shall mean any Indebtedness for borrowed money of
the Company received after the Effective Date which (a) is expressly
subordinate and junior in right and priority of payment to the Loans and other
Indebtedness of the Company to the Agent and the Banks in manner and by written
subordination agreement satisfactory to all Banks and the Majority Lenders and
(b) also constitutes Subordinated Debt as defined in the Private Placement
Agreements, so long as the Private Placement Agreements remain in effect.
"Subsidiary" shall mean each Partnership and any corporation (whether
now existing or hereafter organized or acquired) in which (other than directors
qualifying shares required by law) at least a majority of the securities of
each class having ordinary voting power for the election of directors (other
than securities having such power only by reason of the happening of a
contingency), at the time as of which any determination is being made, is
owned, beneficially and of record, by the Company or by one or more of the
other Subsidiaries of the Company or by any combination thereof.
"Tangible Net Worth" of any Person shall mean, as of any date, (a) the
amount of any capital stock or similar ownership liability plus (or minus in
the case of a deficit) the capital surplus and retained earnings of such
Person and the amount of any foreign currency translation adjustment account
shown as a capital account of such Person, less (b) the net book value of all
items of the following character which are included in the assets of such
Person: (i) goodwill, including without limitation, the excess of cost over
book value of any asset, (ii) organization or experimental expenses, (iii)
unamortized debt discount and expense, (iv) stock discount and expense, (v)
patents, trademarks, trade names and copyrights, (vi) treasury stock, (vii)
deferred taxes and deferred charges, (viii) franchises, licenses and permits,
and (ix) other assets which are deemed intangible assets under GAAP; provided,
that such calculation of Tangible Net Worth under this definition shall not
include receivables of such Person which are owing by any Related Entity or
Consumers in excess of 90 days or subject to any dispute or offset or otherwise
unacceptable, or advances by such Person to any Related Entity or Consumers;
provided, however, that such calculation of Tangible Net Worth under this
definition shall not include any Special Project Assets or any Non-Recourse
Debt.
"Term Loan" shall mean the term loan made by the Banks to the Company
pursuant to Section 2.2.
"Term Notes" shall mean the promissory notes of the Company issued to
the Banks in the form annexed hereto as Exhibit C evidencing borrowings under
Section 2.2 hereof, as
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amended or modified from time to time and together with any promissory note or
notes issued in exchange or replacement thereof.
"Termination Date" shall mean the earlier to occur of (a) the date
three years after the Effective Date and (b) the date on which the Commitments
shall be terminated pursuant to Section 2.1 or 8.2.
"Total Liabilities" of any Person shall mean, as of any date, all
obligations which, in accordance with GAAP, are or should be classified as
liabilities on a balance sheet of such Person; provided, however, that (a)
items properly classified as deferred credits and reserves on the Company's
balance sheet shall not be classified as liabilities for purposes of this
definition, (b) items which may be classified as long-term liabilities on a
balance sheet as a result of the implementation of Statement of Financial
Accounting Standards No. 106 issued by the Financial Accounting Standards Board
shall not be classified as liabilities for purposes of this definition,
provided that any such liabilities shall not be required to be funded in any
manner different from the method of their current funding, and (c) Non-Recourse
Debt shall be excluded from the calculation of Total Liabilities.
1.2 Other Definitions; Rules of Construction. As used herein, the
terms "Agent," "Bank," "Company," "Prior Loan Agreement," and "this Agreement"
shall have the respective meanings ascribed thereto in the introductory
paragraph of this Agreement. Such terms, together with the other terms defined
in Section 1.1, shall include both the singular and the plural forms thereof
and shall be construed accordingly. All computations required hereunder and
all financial terms used herein shall be made or construed in accordance with
GAAP unless such principles are inconsistent with the express requirements of
this Agreement.
SECTION 2. The Commitments.
2.1 Revolving Credit Loans. Each Bank agrees, for itself only, to
lend and to relend, subject to the terms and conditions herein set forth, to
the Company at any time and from time to time from the Effective Date hereof
until the Termination Date amounts equal to such Bank's Pro Rata Share of such
aggregate amounts as the Company may from time to time request, provided that
no Advance may be made if the aggregate outstanding amount of all Advances
would exceed the amount of the Available Portion. Each borrowing or
reborrowing made hereunder shall be evidenced by the Revolving Credit Notes,
which shall be in the form of Exhibit A hereto and shall mature and bear
interest as set forth in Section 4 hereof and in such Revolving Credit Notes.
On the Effective Date, the Company shall issue and deliver to each Bank a
Revolving Credit Note in the principal amount of such Banks' Commitment for the
period beginning on the Effective Date in substitution for the promissory notes
previously issued under the Prior Loan Agreement. Each Bank is hereby
authorized by the Company to note on the schedule or other records attached to
such Revolving Credit Note, or elsewhere on such Bank's books and records, the
date, the amount of each Revolving Credit Loan, the amount of each payment or
prepayment of principal thereon, and the other information provided for on
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<PAGE> 21
such schedule, which schedule shall constitute prima facie evidence of the
information so noted, provided that failure of any Bank to make any such
notation shall not relieve the Company of its obligations to repay the
outstanding principal amount of the Revolving Credit Loans, or accrued interest
thereon and other amounts payable with respect thereto in accordance with the
terms of the Revolving Credit Notes and this Agreement. Subject to the terms
and conditions of this Agreement, the Company may borrow, prepay pursuant to
Section 4.1(c) and reborrow under this Section 2.1. The Company shall have the
right to terminate or reduce the Commitments at any time and from time to time,
provided that (a) the Company shall give notice of such termination or
reduction to the Agent specifying the amount and effective date thereof, (b)
each partial reduction of the Commitments shall be in a minimum amount of
$10,000,000 and in integral multiples of $1,000,000 and shall reduce the
Commitments of all of the Banks proportionally in accordance with the
respective Commitment amounts of each such Bank, (c) no such termination or
reduction, either in whole or part and including without limitation any
termination, shall be permitted with respect to any portion of the Commitments
as to which a request for an Advance is then pending, (d) the Commitments may
not be terminated if any Advances are then outstanding and may not be reduced
below the principal amount of Advances then outstanding, for the benefit of
Banks and (e) each reduction shall be accompanied by a payment to the Agent,
for its account and the account of the Banks, of an amount equal to
one-quarter of one percent (1/4%) of such reduction, payable upon the effective
date of such reduction provided that any termination in total of the
Commitments occurring two years after the Effective Date and any such reduction
which occurs due to any Bank's election to be prepaid under Section 7.1(g)
hereof after the occurrence of a Change of Control shall not be subject to the
payment specified in this clause (e). The Commitments or any portion thereof
so terminated or reduced may not be reinstated.
2.2 Term Loan. Each Bank further agrees, for itself only, to
lend, subject to the terms and conditions set forth herein, its Pro Rata Share
of a single Term Loan on the Termination Date, to the Company in an aggregate
amount not to exceed the Available Portion; provided, however, that a portion
of the proceeds of such Term Loan equal to the principal amount of all S/L/Cs
outstanding and not cash collateralized pursuant to Section 4.6 hereof on the
Termination Date shall be deposited on the Termination Date with the Agent to
cash collateralize all such S/L/Cs pursuant to Section 4.6. The borrowings
under this Section 2.2 shall be evidenced by the Term Notes in the form annexed
hereto as Exhibit C, dated the date of the borrowings and maturing and bearing
interest as provided in said Exhibit C and Section 4.1. At the time of
execution and delivery of the Term Notes, the Credit shall be terminated, and
may not be reinstated, and the Revolving Credit Notes shall thereupon mature
and shall be paid and discharged by surrender against the proceeds of the Term
Notes and payment by the Company of any excess of the outstanding principal
balance and accrued interest of the Revolving Credit Notes over the principal
amount of the Term Notes.
2.3 Standby Letters of Credit. The Agent further agrees to issue
S/L/C's for the account of the Company, and each Bank agrees to participate in
such S/L/C's in accordance with its Pro Rata Share, provided that all S/L/C
Advances under this Section 2.3 shall be in amounts of not less than $100,000,
the aggregate of all S/L/C Advances, when issued and added to all
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<PAGE> 22
other Advances, shall not exceed the Available Portion, and shall have an
Expiry Date not later than the Maturity Date; provided, however, that the
aggregate amount of all S/L/C Advances shall not exceed 45.4545% of the
Commitments. Each S/L/C shall be in conformity with the provisions of the
S/L/C Application delivered by the Company to the Agent pursuant to Section 3.1
and subject to the conditions described in the S/L/C and the S/L/C Application.
S/L/Cs shall only be issued for the account of the Company and only for
purposes occurring in the ordinary course of business of the Company, and shall
not be issued to guarantee any indebtedness of any Person other than the
Company or any Subsidiary. Any S/L/C issued by the Agent for the Company
outstanding as of the Effective Date shall be considered an Advance under this
Agreement. For purposes of this Agreement, an S/L/C Advance shall be deemed
outstanding in an amount equal to the sum of the maximum amount available to be
drawn and not drawn under the related S/L/C on or after the date of
determination and on or before the stated Expiry Date thereof plus the amount
of any draws under the related S/L/C which have not been reimbursed.
2.4 Limit on Advances. Notwithstanding anything herein to the
contrary (other than provisions of Section 3.1(a) permitting Revolving Credit
Loans to be automatically made in the amount of any reimbursement obligation
under an S/L/C), the Company shall not be entitled to obtain, and the Banks
shall not be obligated to make, any Advance if on the proposed Advance Date the
principal amount of such Advance, when added to the aggregate amount of all
Advances then outstanding, would exceed the Available Portion.
SECTION 3. The Advances
3.1 Disbursement of Advances. (a) The Company shall give notice
to the Agent of each requested Advance in substantially the form of Exhibit D
hereto, which notice shall be received by the Agent not later than 11:00 A.M.
(Detroit time) (a) three Eurodollar Business Days prior to the proposed Advance
Date in the case of any Eurodollar Rate Loan, (b) one Business Day prior to the
proposed Advance Date in the case of all other Loans and (c) three Business
Days prior to the Advance Date in the case of an S/L/C Advance, which notice
shall specify whether a CD Rate Loan, Eurodollar Rate Loan, Prime Rate Loan or
S/L/C Advance is requested and, in the case of each Fixed Rate Loan, the
Interest Period to be initially applicable to such Loan. Each such notice
shall be irrevocable and binding on the Company. The Agent shall provide
notice of such requested Advance to each Bank on the same Business Day such
notice is received from the Company and the Agent shall provide notice to such
Bank on each date on which it honors a draft under any S/L/C, specifying the
amount of such draft and any cost and expenses related thereto. If an S/L/C is
requested, the Company shall deliver together with such notice a fully
completed S/L/C Application with respect to such S/L/C. All obligations of the
Company arising under any S/L/C Application shall be deemed obligations of the
Company under this Agreement. The Agent will give each Bank oral notice (to be
confirmed promptly in writing) on each day on which it honors a draft to it
under any S/L/C, specifying the amount of such draft. Notwithstanding anything
in any S/L/C Application to the contrary, unless the Company shall have made
full payment (which shall include withdrawals
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from deposits of cash cover for any S/L/C) to the Agent on the day of any draw
under any S/L/C, the Company, the Agent and the Banks agree that the obligation
of the Company to reimburse the Agent in respect of amounts drawn under any
S/L/C (and any costs and expenses related thereto) shall be satisfied, on the
date due, by disbursement of a Revolving Credit Loan bearing interest at the
Adjusted Prime Rate in the amount to be so reimbursed. Such Revolving Credit
Loan shall be disbursed notwithstanding any failure to satisfy any conditions
for disbursement of any Loan set forth herein.
(b) Subject to the terms and conditions of this Agreement, the
proceeds of such requested Loan shall be made available to the Company by
depositing the proceeds thereof, in immediately available funds, on the Advance
Date for such Loan in an account maintained and designated by the Company at
the principal office of the Agent and in the case of an S/L/C Advance, by
delivery of the S/L/C to the Company or the beneficiary under such S/L/C,
provided, however, that disbursements of Revolving Credit Loans made pursuant
to the last sentence of Section 3.1(a) shall be made directly from each Bank in
respect of the reimbursement and related obligations of the Company. Each
Bank, on the Advance Date of each such Loan shall make its Pro Rata Share of
such Loan available in immediately available funds at the principal office of
the Agent for disbursement to the Company. Unless the Agent shall have
received notice from any Bank prior to the date of any requested Loan under
this Section 3.1 that such Bank will not make available to the Agent such
Bank's Pro Rata Share, the Agent may assume that such Bank has made such share
available to the Agent on the Advance Date of such Loan in accordance with this
Section 3.1(b). If and to the extent such Bank shall not have so made such Pro
Rata Share available to the Agent, the Agent may (but shall not be obligated,
except as required under any S/L/C, to) make such amount available to the
Company on the relevant Advance Date in the case of a Loan and to the
beneficiary in the case of a draw under an S/L/C, and such Bank agrees to pay
to the Agent forthwith on demand such amount together with interest thereon,
for each day from the date such amount is made available to the Company or such
beneficiary by the Agent until the date such amount is paid to the Agent, at a
rate per annum equal to the rate at which overnight borrowings are available to
the Agent from other banks in its regional federal funds market. If such Bank
shall pay to the Agent such amount, such amount so paid shall constitute a
Loan by such Bank as a part of such borrowing for purposes of this Agreement.
The failure of any Bank to make its Pro Rata Share of any such Loan available
to the Agent shall not relieve any other Bank of its obligations to make
available its Pro Rata Share of such Loan on the Advance Date of such Loan, but
no Bank shall be responsible for failure of any other Bank to make such Pro
Rata Share available to the Agent on the Advance Date of any such Loan.
3.2 Conditions of Advances. The Banks shall not be obligated to
make any Advance hereunder at any time unless:
(a) Prior to or simultaneously with the first Advance
hereunder, there shall have been delivered to each Bank the following
documents, in form and substance satisfactory to the Agent:
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<PAGE> 24
(i) the favorable opinion of William H. Stephens,
III, Vice President-Land and Legal of the Company, in the
form of Exhibit E hereto;
(ii) certified copies of such corporate documents
of the Company, including (A) certificates of recent date of
the appropriate authority or official of the Company's state
of incorporation listing all charter documents of the Company
on file in that office and certifying as to the good standing
and corporate existence of the Company together with copies of
such charter documents of the Company certified as of a recent
date by such authority or official and certified as true and
correct as of the Effective Date by a duly authorized officer
of the Company, (B) copies of the by-laws of the Company,
together with all authorizing resolutions and evidence of
other corporate action taken by the Company to authorize the
execution, delivery and performance by the Company of this
Agreement, the Notes and any S/L/C Application and the
consummation by the Company of the transactions contemplated
hereby, each certified as true and correct as of the Effective
Date by a duly authorized officer of the Company, and (C)
certificates of incumbency of the Company containing, and
attesting to the genuineness of, the signatures of those
officers authorized to act on behalf of the Company in
connection with this Agreement, the Notes and any S/L/C
Application, and the consummation by the Company of the
transactions contemplated hereby, certified as true and
correct as of the Effective Date by a duly authorized officer
of the Company;
(iii) the Revolving Credit Notes duly executed on
behalf of the Company;
(iv) copies of all Major Sales Contracts in effect
on the Effective Date, certified as true and correct by the
Company;
(v) payment in full of all liabilities of the
Company pursuant to the Prior Loan Agreement, provided that it
is acknowledged and agreed that all outstanding letters of
credit issued by the Agent for the account of the Company,
whether pursuant to the Prior Loan Agreement or otherwise, do
not need to be terminated or replaced, but instead shall be
deemed S/L/Cs outstanding under this Agreement;
(vi) an amendment to the Private Placement
Agreement executed by all parties thereto, in form and
substance satisfactory to the Majority
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<PAGE> 25
Banks, which amendment shall consent to the terms and
provisions of this Agreement and contain such other provisions
as may be required by the Majority Banks;
(vii) copies of each Private Placement Agreement
and all agreements, instruments and other documents executed
pursuant thereto, including without limitation all amendments
or modifications to any of the foregoing, certified as true
and correct by the Company; and
(viii) such other agreements, documents and
certificates as reasonably requested by the Majority Banks.
(b) The aggregate outstanding principal amount of all such
Advances, after giving effect to the proposed Advance, does not exceed the
Available Portion based on the most recently determined Borrowing Base.
(c) On and as of the date of each such Advance, the
representations and warranties contained in Section 6 hereof, except for
Section 6.5, shall be true and correct as if made on such date; provided,
however, that for purposes of this Section 3.2(c) the representations and
warranties contained in Section 6.6 hereof shall be deemed made with respect to
both the financial statements referred to therein and the most recent financial
statements delivered pursuant to Section 7.1(d)(ii) and (iii) except for the
representation and warranty contained in the last sentence of Section 6.6
hereof which shall be deemed made with respect to the date of the most recent
financial statements delivered pursuant to Section 7.1(d)(iii); provided,
further, that for purposes of this Section 3.2(c) the representations and
warranties contained in the first sentence of Section 6.4 hereof shall be
deemed made with respect to the most recent listing of Subsidiaries of the
Company delivered by the Company to the Banks and in Section 6.14 hereof shall
be deemed made with respect to the most recent Exhibit J delivered by the
Company to the Banks.
(d) No Event of Default and no event which might become such an
Event of Default with notice or lapse of time, or both, has occurred and is
continuing or will exist upon the disbursement of such Advance.
(e) On and as of the date of each such Advance, there are no
actions, suits or proceedings pending (other than those listed on Exhibit H
hereto) or, to the best of the Company's knowledge, threatened against or
affecting the Company or any of its Significant Subsidiaries before or by any
court, governmental authority, or arbitrator which, if adversely decided might
result, either individually or collectively, in any material adverse change in
the business, property, operations or conditions, financial or otherwise, of
the Company or any of its Significant Subsidiaries, and to the best of the
Company's knowledge, there is no basis for any such action, suit or proceeding.
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<PAGE> 26
(f) The Company shall have submitted a request pursuant to Section
3.1(a) hereof and, if an S/L/C is requested, shall have paid the fee required
by Section 4.5(d) hereof and delivered an appropriately completed S/L/C
Application.
3.3 Certification. Acceptance of the proceeds of any Advance
hereunder by the Company shall be deemed to be a certification by the Company
at such time with respect to the matters set forth in subparagraphs (c), (d)
and (e) of Section 3.2.
3.4 Subsequent Elections as to Loans. The Company may elect to
continue a Fixed Rate Loan of one type as a Fixed Rate Loan of the then
existing type or may elect to convert a Fixed Rate Loan of one type to a Loan
of another type by giving notice thereof to the Agent in substantially the form
of Exhibit F hereto not later than 11:00 a.m. Detroit time three Eurodollar
Business Days prior to the date any such continuation of or conversion to a
Eurodollar Rate Loan is to be effective and not later than 11:00 a.m. Detroit
time one Business Day prior to the date such continuation or conversion is to
be effective in all other cases, provided that an outstanding Fixed Rate Loan
may only be converted on the last day of the then current Interest Period with
respect to such Loan, and provided, further, if a continuation of a Loan as, or
a conversion of a Loan to, a Eurodollar Rate Loan or a CD Rate Loan is
requested, such notice shall also specify the Interest Period to be applicable
thereto upon such continuation or conversion. If the Company shall fail to
deliver timely such a notice with respect to any outstanding Fixed Rate Loan,
the Company shall be deemed to have elected to convert such Fixed Rate Loan to
a Prime Rate Loan on the last day of the then current Interest Period with
respect to such Loan.
3.5 Minimum Amounts; Limitation on Number of Loans. Except for
conversions or payments required pursuant to Section 5.3, each Loan and each
conversion thereof shall be in a minimum amount of $100,000 and in integral
multiples of $100,000 in the case of any Prime Rate Loan and in a minimum
amount of $500,000 or a larger integral multiple of $100,000 in the case of any
Fixed Rate Loan. The aggregate number of Fixed Rate Loans outstanding at any
one time under this Agreement may not exceed three.
3.6 Termination of Prior Loan Agreement. Subject to the
satisfaction of the conditions described in Section 3.2(a), the Prior Loan
Agreement is hereby terminated.
SECTION 4. Payment and Prepayment; Partnerships;
Elected Available Portion; Fees; Cash
Cover of S/L/C's; Indemnity
4.1 Principal Payments.
(a) Unless earlier payment is required under this Agreement, the
Company shall pay the outstanding principal amount of, and all accrued interest
on, the Revolving Credit Loans on the Termination Date.
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<PAGE> 27
(b) Unless earlier payment is required under the terms of this
Agreement, the principal amount of the Term Loan shall be payable in thirty-six
monthly installments each in an amount equal to one-thirty-sixth (1/36) of the
initial principal amount of the Term Loan, payable the last Business Day of the
first full month ending after the Termination Date and on the last Business Day
of each month thereafter to and including the Maturity Date, when the entire
outstanding principal amount of, and all accrued interest on, the Term Loan
shall be due and payable.
(c) The Company may from time to time prepay all or a portion of
the Loans without premium or penalty, provided, however, that (i) the Company
shall have given not less than one Business Day's prior written notice thereof
to the Agent, (ii) each such prepayment shall be in an integral multiple of
$50,000, (iii) the Company may not prepay any portion of any Loan as to which
an election for a continuation of or a conversion to any Fixed Rate Loan is
pending pursuant to Section 3.4, (iv) unless earlier payment is required under
this Agreement, any Fixed Rate Loan may only be prepaid on the last day of the
then current Interest Period with respect to such Loan, and (v) all such
prepayments on the Term Notes shall be applied to installments of principal
thereon in the inverse order of their maturities.
(d) On or prior to the 45th consecutive day after the Company
receives notice from the Agent that a Borrowing Base Deficiency existed (the
"Prepayment Date"), the Company shall:
(i) if no Private Placement Notes are outstanding on such
date, prepay the principal amount of outstanding Advances which
exceeds the most recently determined Borrowing Base; or
(ii) if the Private Placement Notes are outstanding on
such date, prepay outstanding Company Debt in the following manner:
(A) First, only in the event that on the Prepayment Date (1) the
difference between (x) the aggregate unpaid principal amount of all Debt then
outstanding minus (y) the aggregate unpaid principal amount of all Subordinated
Debt then outstanding is greater than $200,000,000 and (2) the aggregate unpaid
principal amount of Company Debt outstanding on such day exceeds 130% of the
Borrowing Base.
I. (together with the Clause II Prepayment) a principal
amount of the Advances outstanding on such day which is equal to the
amount by which Company Debt outstanding on such day exceeds 115% of
the Borrowing Base, multiplied by a fraction, the numerator of which
shall be the aggregate unpaid principal amount of Advances, and the
denominator of which shall be the aggregate unpaid principal amount
of Company Debt, in each case outstanding on such day (the "Clause I
Prepayment"), plus
II. (together with the Clause I Prepayment) pro rata to
the holders of the Private Placement Notes a principal amount of
Private Placement Notes outstanding on
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<PAGE> 28
such day which is equal to the amount by which Company Debt
outstanding on such day exceeds 115% of the Borrowing Base,
multiplied by a fraction, the numerator of which shall be the
aggregate unpaid principal amount of the Private Placement Notes then
outstanding on such day and the denominator of which shall be the
aggregate unpaid principal amount of Company Debt outstanding on such
day (the "Clause II Prepayment"), plus
(B) Second, the lesser of (1) the principal amount, if any, of
Advances outstanding on such day after the Clause I Prepayment, if any, or (2)
the principal amount of Advances outstanding on such day after the Clause I
Prepayment, if any, which exceeds 125% of the aggregate principal amount of the
outstanding Private Placement Notes after the Clause II Prepayment, if any (the
"Clause B Prepayment"), plus
(C) Third (together with the Clause D Prepayment), a principal
amount of Advances outstanding on such day after the Clause I Prepayment, if
any, and the Clause B Prepayment, if any, which is equal to the lesser of (1)
the principal amount of Advances outstanding on such day after the Clause I
Prepayment, if any, and the Clause B Prepayment, if any, or (2) the amount by
which Company Debt outstanding on such day after the Clause I Prepayment, if
any, the Clause II Prepayment, if any, and the Clause B Prepayment, if any,
exceeds such Borrowing Base, multiplied by a fraction, the numerator of which
shall be the principal amount of Advances, and the denominator of which shall
be the principal amount of Company Debt, in each case outstanding on such day
after the Clause I Prepayment, if any, the Clause II Prepayment, if any, and
the Clause B Prepayment, if any (the "Clause C Prepayment"), plus
(D) Third (together with the Clause C Prepayment), the Required
Principal Amount of Private Placement Notes pro rata to the holders of Private
Placement Notes which have given written notice to the Company at least five
days prior to the Prepayment Date that they accept the offer of the Company to
prepay Private Placement Notes pursuant to the Company {2.4 Notice, as that
term is currently defined in Section 2.4(a) of the form of Private Placement
Agreement that has been delivered to the Banks on the Effective Date pursuant
to Section 3.2(a)(vi) without giving effect to any amendments or modifications
thereto (the "Clause D Prepayment"), plus
(E) Fourth, a principal amount of Advances outstanding on such day
after the Clause I Prepayment, if any, the Clause B Prepayment, if any, and the
Clause C Prepayment, which is equal to the lesser of (1) the principal amount
of Advances outstanding on such day after the Clause I Prepayment, if any, the
Clause B Prepayment, if any, and the Clause C Prepayment, or (2) the amount by
which such Borrowing Base is less than Company Debt outstanding on such day
after subtracting from such Company Debt the Clause I Prepayment, if any, the
Clause II Prepayment, if any, the Clause B Prepayment, if any, the Clause C
Prepayment and the Clause D Prepayment.
4.2 Interest Payments. The Company shall pay interest to the
Banks on the unpaid principal amount of each Loan, for the period commencing on
the date such Loan is made until
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<PAGE> 29
such Loan is paid in full, on each Interest Payment Date and at maturity
(whether at stated maturity, by acceleration or otherwise), and thereafter on
demand, at the following rates per annum:
(a) During such periods that such Loan is a Prime Rate Loan, the
Adjusted Prime Rate.
(b) During such periods that such Loan is a CD Rate Loan, the CD
Rate applicable to such Loan for each related CD Interest Period.
(c) During such periods that such Loan is a Eurodollar Rate Loan,
the Eurodollar Rate applicable to such Loan for each related Eurodollar
Interest Period.
(d) Notwithstanding the foregoing paragraphs (a) through (c), the
Company hereby agrees to pay interest on demand at the Overdue Rate on the
outstanding principal amount of any loan and any other amount payable by the
Company hereunder (other than interest) upon and during the continuance of any
Event of Default.
4.3 Partnerships. It is expressly understood that if any of the
following events or conditions shall have occurred with respect to any
Partnership, all Net Income-Oil and Gas Interests attributable to the
interests of the Company or any Subsidiary in such Partnership shall be
excluded from the calculation of the Borrowing Base:
(a) such Partnership shall make or permit to remain outstanding,
loans, advances (except advances in the form of payments to third parties made
on behalf of such Partnership in the ordinary course of the business of such
Partnership), or other extensions of credit to, or become or remain a guarantor
or surety or pledge its credit or become liable in any manner (except by
endorsement of negotiable instruments for deposit in the ordinary course of
business) on undertakings of any other Person, firm, corporation or other
entity;
(b) such Partnership shall incur or permit to remain outstanding
any indebtedness for borrowed money or any other liability of any nature
whatsoever, other than current accounts and other obligations payable incurred
in the ordinary course of the business of such Partnership;
(c) such Partnership shall permit any Lien to exist on any of the
assets of such Partnership other than (i) Liens for taxes not delinquent or for
taxes being contested in good faith by appropriate proceedings and as to which
adequate financial reserves have been established on its books and records,
(ii) Liens created in connection with workmen's compensation, unemployment
insurance, and social security, or to secure the performance of bids, tenders
or contracts (other than for the repayment of borrowed money), leases,
statutory obligations, surety and appeal bonds, and other obligations of like
nature made in the ordinary course of business (iii) construction liens,
mechanics liens and liens pursuant to M.C.L.A. 570.251 or statutes of other
jurisdictions similar to M.C.L.A. 570.251 created in the ordinary course of
business if (x) payment of the obligation secured thereby is not yet due, (y)
such
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obligation is being contested in good faith by appropriate proceedings and for
which appropriate reserves have been established in accordance with GAAP, or
(z) as to all amounts of the obligations secured by such Liens which are in
default, such amount in the aggregate is not material and (iv) operator or
non-operator liens created, incurred or suffered to exist in the ordinary
course of the business of such Partnership if payment of the obligation secured
thereby is not yet due or such obligation is being contested in good faith by
appropriate proceedings and for which appropriate reserves have been
established in accordance with GAAP;
(d) the agreement forming such Partnership or any other
organizational document of such Partnership shall be amended or any waiver or
consent in connection therewith shall have been granted which shall adversely
affect the Company's and its Restricted Subsidiary's aggregate interest in such
partnership; and
(e) any material adverse change in the business, properties,
operations or conditions, financial or otherwise, of such Partnership shall
occur, or any event or condition shall occur which could be the basis for the
termination, liquidation, winding-up or dissolution of such Partnership, or any
default by such Partnership or any partner thereof shall occur under the
partnership agreement or other organizational documents of such Partnership
(including without limitation any event of a nature described in Section 8.1(h)
hereof).
4.4 Elected Available Portion. The Company shall elect in writing
to the Banks the Elected Available Portion on the following dates: (a) the
Effective Date, and (b) within five Business Days after receipt by the Company
of each Borrowing Base determination. Each such election pursuant to the
preceding sentence shall remain in effect from the date of such election until
the date of the next available election. If the Company fails to make any such
election, the Elected Available Portion shall be an amount equal to the
Available Portion. Notwithstanding anything herein to the contrary, the
Elected Available Portion shall not be less than the difference between the
Borrowing Base minus the principal amount outstanding of the Private Placement
Notes. If any Advance causes the total outstanding Advances (including such
Advance) at any time to exceed the Elected Available Portion, the Elected
Available Portion automatically shall be increased thereafter by such excess.
4.5 Fees. (a) The Company agrees to pay to the Agent, for the pro
rata account of the Banks, a commitment fee computed at the rate of
three-eighths of one percent (3/8%) per annum on the amount by which the
Elected Available Portion (without giving effect to any reduction therein
caused by the Borrowing Base limitations) exceeds the aggregate outstanding
principal amount of the Loans, for the period from the Effective Date until the
Termination Date or the earlier termination of the Credit. Said fee shall be
paid quarterly, on the last day of each March, June, September and December
commencing on the first such date after the Effective Date, and the date of
each reduction or termination of the Credit, for the preceding period for which
such fee has not been paid.
(b) If any Advance causes the aggregate outstanding Advances,
including such Advance, at any time to exceed the Elected Available Portion,
the Company shall pay an
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additional fee to the Agent, for its account and the account of the Banks, on
the date of such Advance equal to three-eighths of one percent (3/8%) per
annum, computed for the period from and including the date of the most recent
election by the Company of the Elected Available Portion under Section 4.4
hereof to and including the date of such Advance, of the amount of such excess.
(c) The Company agrees to pay to the Agent a fee computed at the
rate of one and one-quarter of one percent (1-1/4%) per annum (with the Agent
retaining for its own account one-quarter of one percent per annum of such fee,
and with the remainder of such fee being paid to the Banks according to their
Pro Rata Share) of the maximum amount available to be drawn from time to time
under each S/L/C for a period from and including the date of the issuance of
such S/L/C to and including the Stated Expiry Date of such S/L/C. Such fee
shall be payable annually in advance on or before the date of the issuance of
each S/L/C and on each anniversary thereof if such S/L/C is then outstanding.
Such fees are non-refundable and the Company shall not be entitled to any
rebate of any portion thereof if such S/L/C does not remain outstanding through
the end of the annual or shorter period for which such fee was paid.
Notwithstanding the foregoing, it is understood that if the period from and
including the date of the issuance of an S/L/C to and including the Stated
Expiry Date of such S/L/C is less than one year, the fee payable hereunder will
be payable for the period of time during which such S/L/C may be outstanding
and not payable for a one year period. The Company further agrees to pay to
the Agent, on demand, such other customary administrative fees, charges and
expenses of the Agent in respect of the issuance, negotiation, acceptance,
amendment, transfer and payment of such S/L/C or otherwise payable pursuant to
the S/L/C Application and related documentation under which such S/L/C is
issued.
4.6 Cash Cover of S/L/Cs. The Company may reduce all or any part
of the outstanding S/L/C Advances (provided that such reduction is in a minimum
amount of $100,000 and in a whole multiple of $100,000) prior to any Expiry
Date with respect to any S/L/C by the provision of cash cover in a manner
satisfactory to the Banks to meet the maximum contingent obligations of the
Banks under such S/L/C. Upon the delivery of such cash cover to the Agent, the
Banks shall have a lien thereon and a security interest therein and in all
interest and other proceeds thereof to secure the obligations of the Company to
the Banks in connection with this Agreement, and the Company shall provide to
the Banks such evidence as the Banks may request to establish the legality,
validity and enforceability of such lien and security interest. The Agent
agrees to deposit such cash cover in an interest bearing account at the main
office of the Agent or in an investment acceptable to the Agent. The amount of
such S/L/C Advance shall be reduced by the amount of cash cover deposited. If
the Company shall have so provided to the Banks cash cover for any S/L/C, the
Banks shall make available to the Company promptly after the Expiry Date of
such S/L/C the amount of any such cash cover and interest thereon in excess of
amounts thereof required by the Banks and the Agent, if any, to satisfy and pay
any obligations of the Company to the Banks then due and payable.
4.7 Indemnity. The Company assumes all risks of the acts or
omissions of any beneficiary under any S/L/C issued pursuant to this Agreement
with respect to the use by such
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<PAGE> 32
beneficiary of such S/L/C. In addition to all undertakings and indemnities of
the Company contained in the S/L/C Applications delivered by the Company to the
Agent pursuant to Section 3.1, the Company acknowledges that neither the Banks,
the Agent nor any of their officers or directors shall be liable or responsible
for (i) the use which may be made of any S/L/C or for any acts or omissions of
any beneficiary in connection therewith, (ii) the validity, sufficiency or
genuineness of any documents delivered in connection with any S/L/C, or of any
endorsements thereon, even if such documents should in fact prove to be in any
or all respects invalid, insufficient, fraudulent or forged, or (iii) any other
circumstances whatsoever in connection with honoring or dishonoring any S/L/C,
except that the Company shall have a claim against the Agent, and the Agent
shall be liable to the Company, to the extent, but only to the extent, of any
direct damages suffered by the Company which the Company proves were caused by
the Agent's wrongful dishonor of a draft under any S/L/C after presentation to
the Agent by the beneficiary thereunder of documents strictly complying with
the terms and conditions of such S/L/C or by the Agent's wrongful honor of a
draft under any S/L/C after presentation to the Agent by the beneficiary
thereunder of documents not substantially complying with the terms and
conditions of such S/L/C, but in no event shall the Banks or the Agent be
liable for any special, punitive, exemplary or consequential damages. In
furtherance and not in limitation of the foregoing, the Agent may accept
documents that appear on their face to be in order, without responsibility for
further investigation regardless of any notice or information to the contrary.
The Company hereby indemnifies the Banks and the Agent and agrees to keep the
Banks and the Agent at all times indemnified against all liabilities which the
Banks may incur or which may be claimed against any Bank or the Agent by any
Person or entity by reason of or relating to any matters arising in connection
with any S/L/C or any of the transactions contemplated thereby, provided,
however, that the Company shall not be required to so indemnify any Bank or the
Agent for any such liabilities or claims to the extent, but only to the extent,
caused by such Bank's or the Agent's gross negligence or willful misconduct
under this Agreement. If any law, rule, regulation, directive or request of
general applicability, or the interpretation thereof by any court or
administrative or governmental authority charged with the administration
thereof (whether or not having the force of law), shall either (i) impose,
modify or deem applicable any taxation, reserve, special deposit or any other
requirement or condition with respect to S/L/Cs issued hereunder (including
without limitation the imposition of any reserve requirement by the Federal
Deposit Insurance Corporation in respect of any S/L/C), or (ii) impose on any
Bank any other requirement or condition regarding this Agreement or its S/L/C
issued hereunder or any of the transactions contemplated hereby, and as a
result of any such event, or by reason of such Bank's compliance therewith, the
cost to such Bank of issuing or maintaining its S/L/C or related obligation, or
its participation in related obligations of the Company, or engaging in any of
the transactions contemplated hereby shall be increased, then, upon demand by
such Bank, the Company agrees to pay immediately to such Bank, from time to
time, additional amounts which shall be sufficient to compensate such Bank for
such increased cost, together with interest on each such amount from the date
demanded until payment in full thereof at the Overdue Rate, provided, however,
that any such claims shall not duplicate any claims under Section 5.1. Such
amounts shall be due and payable on the Business Day following presentation to
the Company by such Bank of a certificate as to such increased cost incurred
by such Bank, prepared by such
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Bank and showing the calculation of such cost in reasonable detail, which
calculation shall be conclusive absent manifest error in computation.
4.8 Payment Method. All payments to be made by the Company
hereunder will be made in Dollars and in immediately available funds to the
Agent at its address set forth in Section 10.2 not later than 11:00 a.m.
Detroit time on the date on which such payment shall become due. Payments
received after 11:00 a.m. Detroit time shall be deemed to be payments made
prior to 11:00 a.m. Detroit time on the next succeeding Business Day. At the
time of making each such payment, the Company shall specify to the Agent that
obligation of the Company hereunder to which such payment is to be applied, or,
in the event that the Company fails to so specify or if an Event of Default
shall have occurred and be continuing, the Agent may apply such payments as it
may determine in its sole discretion. On the day such payments are received,
the Agent shall remit to the Banks their respective Pro Rata Shares of such
payments, in immediately available funds.
4.9 No Setoff or Deduction. All payments of principal of and
interest on the Advances and other amounts payable by the Company hereunder
shall be made by the Company without setoff or counterclaim, and free and clear
of, and without deduction or withholding for, or on account of, any present or
future taxes, levies, imposts, duties, fees, assessments, or other charges of
whatever nature, imposed by any governmental authority, or by any department,
agency or other political subdivision or taxing authority.
4.10 Payment on Non-Business Day; Payment Computations. Except as
otherwise provided in this Agreement to the contrary, whenever any installment
of principal of, or interest on, any Advance outstanding hereunder or any other
amount due hereunder, becomes due and payable on a day which is not a Business
Day, the maturity thereof shall be extended to the next succeeding Business Day
and, in the case of any installment of principal, interest shall be payable
thereon at the rate per annum determined in accordance with this Agreement
during such extension. Computations of interest and other amounts due under
this Agreement shall be made on the basis of a year of 360 days for the actual
number of days elapsed, including the first day but excluding the last day of
the relevant period.
4.11 Agent's Fees. The Company agrees to pay to the Agent agency,
engineering, closing and servicing fees for its services under this Agreement
in such amounts as may from time to time be agreed upon by the Company and the
Agent. Notwithstanding anything herein to the contrary, unless otherwise
agreed to by the Agent, such fees shall be retained solely by the Agent.
SECTION 5. Yield Protection and Contingencies
5.1 Additional Costs. (a) In the event that any applicable law,
treaty, rule or regulation (whether domestic or foreign) now or hereafter in
effect and whether or not presently applicable to any Bank, or any
interpretation or administration thereof by any governmental
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authority charged with the interpretation or administration thereof, or
compliance by any Bank with any request or directive of any such authority
(whether or not having the force of law), shall (i) affect the basis of
taxation of payments to any Bank of any amounts payable by the Company under
this Agreement (other than taxes imposed on the overall net income of any Bank
by the jurisdiction, or by any political subdivision or taxing authority of any
such jurisdiction, in which such Bank has its principal office), or (ii) shall
impose, modify or deem applicable any risk-based capital, reserve, special
deposit, deposit insurance or similar requirement against assets of, deposits
with or for the account of, or credit extended by such Bank, or (iii) shall
impose any other condition with respect to this Agreement, the Notes or the
Advances, and the result of any of the foregoing is to increase the cost to any
Bank of making or maintaining any Fixed Rate Loan or to reduce the amount of
any such receivable by such Bank thereon, then the Company shall pay to such
Bank, from time to time, upon request by such Bank additional amounts
sufficient to compensate such Bank for such increased cost or reduced sum
receivable to the extent such Bank is not compensated therefor in the
computation of the interest rate applicable to such Fixed Rate Loan. All
claims under this Section 5.1(a) and under Section 5.1(b) shall not duplicate
any claims under Section 4.7. A detailed statement as to the amount of such
increased cost or reduced sum receivable, prepared in good faith and submitted
by such Bank to the Company, shall be conclusive and binding for all purposes
absent manifest error in computation. The Banks agree that such costs under
this Section 5.1(a) and the compensation requested under Section 5.1(b) shall
(i) not be requested if they are not requested of other borrowers similar to
the Company, provided that the Banks' determination of similar borrowers shall
be conclusive and binding, and (ii) only be charged when actually incurred by
any Bank, and if any Bank is refunded such costs after charging the Company for
such costs, then such Bank shall refund to the Company such costs to the extent
such Bank receives a refund, net of any costs or expenses incurred in pursuing
such refund.
(b) In the event that any applicable law, treaty, rule or
regulation (whether domestic or foreign) now or hereafter in effect and whether
or not presently applicable to any Bank or the Agent, or any interpretation or
administration thereof by any governmental authority charged with the
interpretation or administration thereof, or compliance by any Bank or the
Agent with any guideline, request or directive of any such authority (whether
or not having the force of law), affects or would affect the amount of capital
required or expected to be maintained by such Bank or the Agent or any
corporation controlling such Bank or the Agent and such Bank or the Agent, as
the case may be, determines that the amount of such capital is increased by or
based upon the existence of such Bank's or the Agent's obligations hereunder
and such increase has the effect of reducing the rate of return on such Bank's
or the Agent's capital as a consequence of its obligations hereunder to a level
below that which such Bank or the Agent could have achieved but for such
circumstances (taking into consideration its policies with respect to capital
adequacy) by an amount deemed by such Bank or the Agent to be material, then
the Company shall pay to such Bank or the Agent, as the case may be, from time
to time, upon request by such Bank (with a copy of such request to be provided
to the Agent) or the Agent, additional amounts sufficient to compensate such
Bank or the Agent for any increase in the amount of capital and reduced rate of
return which such Bank or the Agent reasonably determines to be allocable to
the existence of such Bank's or the Agent's obligations hereunder. A statement
as
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<PAGE> 35
to the amount of such compensation, prepared in good faith and in reasonable
detail by such Bank or the Agent, as the case may be, and submitted by such
Bank or the Agent to the Company, shall be conclusive and binding for all
purposes absent manifest error in computation.
5.2 Limitation of Requests and Elections. Notwithstanding any
other provision of this Agreement to the contrary, if, upon receiving a request
for a Fixed Rate Loan pursuant to Section 3.1, or a request for a continuation
of a Fixed Rate Loan as a Fixed Rate Loan of the then existing type pursuant to
Section 3.4, or conversion of a Loan to a Fixed Rate Loan pursuant to Section
3.4, (a) in the case of any Eurodollar Rate Loan or CD Rate Loan, deposits in
Dollars for periods approximately equal to the Interest Period elected by the
Company are not available to any Bank in the relevant interbank or secondary
market, or (b) the CD Rate or the Eurodollar Rate, as the case may be, for
periods approximately equal to the Interest Period elected by the Company will
not adequately and fairly reflect the cost to any Bank of making or maintaining
the related CD Rate Loan or Eurodollar Rate Loan, as the case may be, or (c) by
reason of national or international financial, political or economic conditions
or by reason of any applicable law, treaty, rule or regulation (whether
domestic or foreign) now or hereafter in effect and whether or not presently
applicable to any Bank, or the interpretation or administration thereof by any
governmental authority charged with the interpretation or administration
thereof, or compliance by any Bank with any request or directive of such
authority (whether or not having the force of law), including without
limitation exchange controls, it is impracticable, unlawful or impossible for
any Bank (i) to make the relevant Fixed Rate Loan or (ii) to continue such
Fixed Rate Loan as a Fixed Rate Loan of the then existing type or (iii) to
convert a Loan to such a Fixed Rate Loan, then the Company shall not be
entitled, so long as such circumstances continue, to request from each such
Bank a Fixed Rate Loan of the affected type pursuant to Section 3.1 or a
continuation of or conversion to a Fixed Rate Loan of the affected type
pursuant to Section 3.4; provided, however, that nothing in this Section 5.2
shall affect such Bank's obligations under this Agreement to make or continue a
Prime Rate Loan. In the event that such circumstances no longer exist, such
Bank shall again accept, provided that the other terms and conditions of this
Agreement are satisfied, requests for Fixed Rate Loans of the affected type
pursuant to Section 3.1, and requests for continuations of and conversions to
Fixed Rate Loans of the affected type pursuant to Section 3.4.
5.3 Illegality and Impossibility. In the event that any
applicable law, treaty, rule or regulation (whether domestic or foreign) now or
hereafter in effect and whether or not presently applicable to any Bank, or any
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof, or compliance by any Bank
with any request or directive of such authority (whether or not having the
force of law), including without limitation exchange controls, or any change in
such law, treaty, rule, regulation, interpretation or administration shall make
it unlawful or impossible for any Bank to maintain any Fixed Rate Loan under
this Agreement, the Company shall upon receipt of notice thereof from such
Bank, repay in full to such Bank the then outstanding principal amount of each
Fixed Rate Loan so affected together with all accrued interest thereon to the
date of payment and all amounts due to such Bank under Section 5.4 (a) on the
last day of the then current Interest Period applicable to such Loan if such
Bank may lawfully continue to maintain
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such Loan to such day, or (b) immediately if such Bank may not continue to
maintain such Loan to such day.
5.4 Indemnification. If the Company makes any payment of
principal with respect to any Fixed Rate Loan on any date other than the last
day of an Interest Period applicable thereto (whether pursuant to Section
4.1(d), Section 5.3, Section 7.1(i), Section 8.2 or otherwise), or if the
Company fails to borrow any Fixed Rate Loan after notice has been given in
accordance with Section 3.1, or fails to make any payment of principal or
interest in respect of a Fixed Rate Loan when due, the Company shall reimburse
each Bank on demand for any resulting loss or expense incurred by each such
Bank, including without limitation any loss incurred in obtaining, liquidating
or employing deposits from third parties. A detailed statement as to the
amount of such loss or expense, certified by such Bank as having been prepared
in good faith and as being accurate to the best of such Bank's knowledge and
submitted by such Bank to the Company, shall be conclusive and binding for all
purposes absent manifest error in computation.
SECTION 6. Representations and Warranties
The Company represents and warrants that:
6.1 Corporate Existence and Power. The Company and each
Significant Subsidiary are corporations duly organized, validly existing and in
good standing under the laws of the state of their respective incorporation,
and are duly qualified to do business and are in good standing in each
additional jurisdiction where such qualification is necessary under applicable
law. The Company has all requisite corporate power to own its properties and
to carry on its business as now being conducted and as proposed to be
conducted, and to execute and deliver this Agreement, the Notes and the S/L/C
Applications and to engage in the transactions contemplated by this Agreement.
6.2 Corporate Authority. The execution, delivery and performance
by the Company of this Agreement, the Notes and the S/L/C Applications are
within its corporate powers, have been duly authorized by all necessary
corporate action and are not in contravention of any law, rule or regulation,
or any judgment, decree, writ, injunction, order or award of any arbitrator,
court or governmental authority, or of the terms of the Company's charter or
by-laws, or of any contract or undertaking to which the Company is a party or
by which the Company or its property may be bound or affected.
6.3 Binding Effect. This Agreement is, and the Notes and the
S/L/C Applications when delivered hereunder will be, legal, valid and binding
obligations of the Company enforceable against the Company in accordance with
their respective terms.
6.4 Subsidiaries. Exhibit G hereto correctly sets forth the
corporate name, jurisdiction of incorporation and ownership percentage with
respect to each Subsidiary of the Company
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which is a corporation and designates whether such Subsidiary is also a
Significant Subsidiary. Each Significant Subsidiary and each person becoming
a Significant Subsidiary of the Company after the date hereof is and will be a
corporation or partnership duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or formation, as
the case may be, and is and will be duly qualified to do business in each
additional jurisdiction where such qualification is or may be necessary under
applicable law. Each Significant Subsidiary of the Company has and will have
all requisite corporate or partnership power, as the case may be, to own its
properties and to carry on its business as now being conducted and as proposed
to be conducted. All outstanding shares of capital stock of each class of each
Significant Subsidiary of the Company which is a corporation have been and will
be validly issued and are fully paid and nonassessable and, except as otherwise
indicated in Exhibit G hereto or disclosed in writing to the Banks from time to
time, are and will be owned, beneficially and of record, by the Company or
another Significant Subsidiary of the Company free and clear of any Lien.
6.5 Litigation. Except as disclosed on Exhibit H hereto, there is
no action, suit or proceeding pending or, to the best of the Company's
knowledge, threatened against or affecting the Company or any of its
Significant Subsidiaries before or by any court, governmental authority, or
arbitrator which if adversely decided might result, either individually or
collectively, in any material adverse change in the business, property,
operations or conditions, financial or otherwise, of the Company or any of its
Significant Subsidiaries and, to the best of the Company's knowledge, there is
no basis for any such action, suit or proceeding.
6.6 Financial Condition. The Consolidated balance sheet of the
Company and its Subsidiaries and the Consolidated statements of income and cash
flow of the Company and its Subsidiaries for the fiscal year ended December 31,
1992, and reported on by Arthur Andersen & Co., independent certified public
accountants, and the unaudited interim Consolidated balance sheet and interim
Consolidated statements of income and cash flow of the Company and its
Subsidiaries, as of or for the seven-month period ended on July 31, 1993,
copies of which have been furnished to the Banks, fairly present the
Consolidated financial position of the Company and its Subsidiaries as at the
respective dates thereof, and the Consolidated results of operations of the
Company and its Subsidiaries for the respective periods indicated, all in
accordance with GAAP (subject, in the case of said interim statements, to
year-end audit adjustments). There has been no material adverse change in the
business, properties, operations or condition, financial or otherwise, of the
Company or any of its Subsidiaries since December 31, 1992.
6.7 Use of Advances. The Company will use the proceeds of the
Advances for its general purposes. Neither the Company nor any of its
Subsidiaries extends or maintains, in the ordinary course of business, credit
for the purpose, whether immediate, incidental, or ultimate, of buying or
carrying margin stock (within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System), and no part of the proceeds of any
Advance will be used for the purpose, whether immediate, incidental, or
ultimate, of buying or carrying any such margin stock or maintaining or
extending credit to others for such purpose. After applying the proceeds of
each Advance, such margin stock will not constitute more than 25% of the value
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of the assets (either of the Company alone or of the Company and its
Subsidiaries on a consolidated basis) that are subject to any provisions of
this Agreement that may cause the Advances to be deemed secured, directly or
indirectly, by margin stock.
6.8 Consents, Etc. No consent, approval or authorization of or
declaration, registration or filing with any governmental authority or any
nongovernmental Person or entity, including without limitation any creditor or
stockholder of the Company or any of its Subsidiaries or any partner of any
Partnership, is required on the part of the Company in connection with the
execution, delivery and performance of this Agreement, the Notes, the S/L/C
Applications, or the transactions contemplated hereby or as a condition to the
legality, validity or enforceability of this Agreement, the Notes, the S/L/C
Applications.
6.9 Taxes. The Company and its Significant Subsidiaries have
filed all tax returns (federal, state and local) required to be filed and have
paid all taxes shown thereon to be due, including interest and penalties, or
have established financial reserves in accordance with GAAP on their respective
books and records for payment thereof. CMS files a consolidated federal income
tax return which includes all federal income tax filings required of the
Company and its Subsidiaries. Exhibit I hereto describes the manner in which
CMS computes its and its Subsidiaries' tax liabilities and the manner in which
such liabilities are paid.
6.10 Liens and Title to Properties. The Company and its
Subsidiaries have good and marketable title to, and a valid ownership interest
in, all of their respective material properties and material assets (provided
that, among other properties and assets, all Borrowing Base Assets shall be
considered material), free and clear of any Lien except such as are permitted
by Sections 4.3(c) and 7.2(f) hereof. The Company and the Partnerships are the
owners as of the Effective Date of all Borrowing Base Assets, subject only to
such Liens permitted by Sections 4.3(c) and 7.2(f)(i), (ii), (iii), (iv), (v),
(vii), (viii) and (ix), and the Company, its Restricted Subsidiaries and the
Partnerships will be the owners of all Borrowing Base Assets, and all Borrowing
Base Assets are described in the annual reserve report referred to in Section
7.1(d)(ix) hereof (the "Reserve Report") other than those, if any, acquired
after the date of the most recent Reserve Report, subject only to such Liens
permitted by Sections 4.3(c) and 7.2(f)(i), (ii), (iii), (iv), (v), (vii),
(viii) and (ix). The most recent Reserve Report accurately reflects in all
material aspects the respective gross working interests and net revenue
interests of the Company and its Subsidiaries in all Oil and Gas Interests
owned, directly or indirectly, by the Company or any of its Subsidiaries as of
the date of such Reserve Report, including those derived from investments of
the Company and its Subsidiaries in the Partnerships, subject only to such
Liens as are permitted by Sections 4.3(c) and 7.2(f) hereof. No Borrowing Base
Asset is subject to any Lien permitted by Section 7.2(f)(vi).
6.11 Partnerships. Each of the Partnerships is a partnership duly
organized, validly existing and in good standing under the laws of the state of
its organization, and is duly authorized to do business in all states where the
conduct of its business or the ownership of the properties makes such
authorization necessary. All interests of the Company and any
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Subsidiary in each Partnership are the legal, valid, binding and enforceable
interests and rights of the Company and such Subsidiary, enforceable in
accordance with their respective terms.
6.12 ERISA. The Company, each of its Significant Subsidiaries and
each ERISA Affiliate and their respective Plans are in compliance in all
material respects with those provisions of ERISA and of the Code which are
applicable to any Plan. No Prohibited Transaction, within the meaning of
Section 4975(c) of the Code, (other than a Prohibited Transaction exempt from
the prohibitions provided in Section 4975(c) of the Code pursuant to Section
4975(d) of the Code or otherwise) and no Reportable Event have occurred with
respect to any such Plan which provides a reasonable basis for the imposition
of any liability. The Company, each Significant Subsidiary of the Company and
each ERISA Affiliate have met the minimum funding requirements under ERISA and
the Code with respect to each of their respective Plans, if any, and do not
have any liability to the PBGC which remains outstanding, other than for the
payment of premiums not yet due, and have not terminated any Plan or taken any
other action which provides a reasonable basis for the imposition of any such
liability to the PBGC. There is no material unfunded benefit liability,
determined in accordance with Section 4001(a)(18) of ERISA, with respect to any
Plan of the Company, any of its Significant Subsidiaries or any ERISA
Affiliate. Neither the Company, any of its Significant Subsidiaries nor any
ERISA Affiliate is currently contributing to, or ever has contributed to, any
Multiemployer Plan and none of such entities is currently or ever has been
obligated to contribute to a Multiemployer Plan.
6.13 Disclosure. This Agreement and all other documents,
certificates, reports or statements or other information furnished to any Bank
or the Agent in writing by or on behalf of the Company in connection with the
negotiation or administration of this Agreement or any transactions
contemplated hereby when read together do not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements contained herein and therein not misleading. There is no fact
known to the Company which materially and adversely affects, or which in the
future may (so far as the Company can now foresee) materially and adversely
affect, the business, properties, operations or condition, financial or
otherwise, of the Company or any Subsidiary (except for any economic conditions
which affect generally the industry in which the Company, its Subsidiaries and
the Partnerships conduct business), which has not been set forth in this
Agreement or in the other documents, certificates, statements, reports and
other information furnished in writing to the Banks by or on behalf of the
Company in connection with the transactions contemplated hereby.
6.14 Environmental and Safety Matters. Except as set forth on
Exhibit J hereto, the Company and each Subsidiary and each Partnership are in
substantial compliance with all federal, state and local laws, ordinances and
regulations relating to safety and industrial hygiene or to the environmental
condition, including without limitation all Environmental Laws in jurisdictions
in which the Company or any Subsidiary or any Partnership owns or operates, or
has owned or operated, a facility or site, or arranges or has arranged for
disposal or treatment of hazardous substances, solid waste, or other wastes,
accepts or has accepted for transport any hazardous substances, solid wastes or
other wastes or holds or has held any interest in real
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property or otherwise. Except as described on Exhibit J hereto, no demand,
claim, notice, suit, suit in equity, action, administrative action, or inquiry
or, to the knowledge of the Company, any investigation, whether brought by any
governmental authority, private Person or otherwise, arising under, relating to
or in connection with any Environmental Laws is pending or threatened against
the Company or any of its Subsidiaries or any Partnership or with respect to
any real property in which the Company or any such Subsidiary or any
Partnership holds or has held an interest or with respect to any past or
present operation of the Company or any Subsidiary or any Partnership. Except
as described on Exhibit J hereto, neither the Company nor any of its
Subsidiaries nor any Partnership (a) is, to the Company's knowledge, the
subject of any federal or state investigation evaluating whether any remedial
action is needed to respond to a release of any toxic substances, radioactive
materials, hazardous wastes or related materials into the environment, (b) has
received any notice of any toxic substances, radioactive materials, hazardous
waste or related materials in, or upon any of its properties in violation of
any Environmental Laws, or (c) knows of any basis for any such investigation,
notice or violation. The aggregate maximum liability that may be incurred by
the Company, its Subsidiaries and the Partnerships with respect to the matters
disclosed on Exhibit J does not exceed $5,000,000. No release, threatened
release or disposal of hazardous waste, solid waste or other wastes is
occurring or has occurred on, under or to any real property in which the
Company or any of its Subsidiaries or any Partnership holds any interest or
performs any of its operations, in violation of any Environmental Law, which
could result in an aggregate liability in excess of $15,000,000.
SECTION 7. Covenants
7.1 Affirmative Covenants. The Company covenants and agrees that,
until payment in full of the principal of and accrued interest on the Notes,
the expiration of all S/L/Cs and this Agreement, and the payment and
performance of all other obligations of the Company under this Agreement,
unless the Majority Banks, or all Banks if required by Section 10.1 hereof,
shall otherwise consent in writing, it shall, and shall cause each of its
Significant Subsidiaries to:
(a) Preservation of Corporate Existence, Etc. Preserve and
maintain its corporate existence, rights and privileges and, except for
terminations in the ordinary course of business deemed appropriate by the
Company, its licenses, franchises and permits, and qualify and remain qualified
as a validly existing corporation in good standing in each jurisdiction in
which such qualification is necessary under applicable law.
(b) Compliance with Laws, Etc. Comply in all material respects
with all applicable laws, rules, regulations and orders of any governmental
authority, noncompliance with which could materially and adversely affect the
financial condition or operations of the Company or any of its Significant
Subsidiaries or the legality, validity or enforceability of this Agreement, the
Notes or the S/L/C Applications (such compliance to include, without
limitation, paying before the same become delinquent all taxes, assessment and
governmental charges imposed upon it or upon its property), except to the
extent that compliance with any of the foregoing is
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then being contested in good faith by appropriate proceedings and with respect
to which financial reserves in accordance with GAAP have been established on
the books and records of the Company or such Significant Subsidiary.
(c) Maintenance of Properties; Insurance. Maintain, or cause to
be maintained, in good repair, working order and condition all of the material
property used or useful in the business of the Company and its Significant
Subsidiaries and from time to time will make or cause to be made all
appropriate material repairs and renewals thereto and replacements thereof and
maintain insurance with responsible and reputable insurance companies or
associations in such amounts and covering such risks as is usually carried by
companies engaged in similar businesses and owning similar properties similarly
situated.
(d) Reporting Requirements. Furnish to the Banks, in form and
substance satisfactory to the Banks, the following:
(i) Promptly and in any event within three calendar days
after becoming aware of the occurrence of (A) any Event of Default or
any event or condition which, with notice or lapse of time, or both,
would constitute an Event of Default, (B) the commencement of any
material litigation against, by or affecting, or any material
liability pursuant to any Environmental Law of, the Company or any of
its Significant Subsidiaries, and, upon request by any Bank, any
material developments therein, or (C) entering into any material
contract or undertaking by the Company or any Significant Subsidiary
that is not entered into in the ordinary course of business, (D) any
development in the business or affairs of the Company or any
Significant Subsidiary which has resulted in or which is likely in the
reasonable judgment of the Company, to result in a material adverse
change in the business, properties, operations or condition, financial
or otherwise of the Company or any Significant Subsidiary, or (E) any
Reportable Event under, or the institution of steps by the Company or
a Significant Subsidiary to withdraw from, or the institution of any
steps to terminate, any Plan, a statement of the chief financial
officer of the Company setting forth details of such Event of Default
or such event or condition or such litigation and the action which the
Company or such Significant Subsidiary, as the case may be, has taken
and proposes to take with respect thereto;
(ii) As soon as available and in any event within 30 days
after the end of each month, the Consolidated balance sheet of the
Company and its Subsidiaries as of the end of such month, and the
related Consolidated statements of income and cash flow for the period
commencing at the end of the previous fiscal year and ending with the
end of such month, setting forth in each case in comparative form the
corresponding figures for the corresponding date or period of the
preceding fiscal year, all in reasonable detail and, in the case of
such statements for the months of March, June, September and December,
duly certified (subject to year-end audit adjustments) by the chief
financial officer of the Company as having been prepared on a basis
consistent with that used in previous years
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and substantially consistent with the previous year-end audited
financial statements, together with a certificate of the Company in
the form of Exhibit K hereto;
(iii) As soon as available and in any event within 105 days
after the end of each fiscal year of the Company, a copy of the
Consolidated balance sheet of the Company and its Subsidiaries as of
the end of such fiscal year and the related Consolidated statements of
income and cash flow of the Company and its Subsidiaries for such
fiscal year, with a customary audit report of Arthur Andersen & Co.,
or other independent certified public accountants selected by the
Company and acceptable to the Majority Banks, without qualifications
unacceptable to the Majority Banks, together with a certificate of
such accountants stating that they have reviewed this Agreement and
stating further that in making their examination of such financial
statements in accordance with generally accepted auditing standards
nothing came to their attention that made them believe that any
default by the Company in the fulfillment of any of the terms,
covenants, provisions or conditions of Section 7, insofar as they
pertain to accounting matters has occurred and is continuing, or if
their examination has disclosed the existence of any such condition,
specifying the nature, period of existence and status thereof;
(iv) As soon as possible and in any event within 60 days
of the end of each calendar month, a schedule of oil, gas, and other
mineral production attributable to the Oil and Gas Interests of the
Company and its Subsidiaries;
(v) Promptly, all title or other information received
after the Effective Date by the Company or any Subsidiary which
discloses any material defect in the title to any Borrowing Base
Asset;
(vi) Promptly, upon the request of any Bank, reserve
reports prepared by an independent engineering firm of recognized
standing acceptable to such Bank with respect to any Oil and Gas
Interest of the Company or any Subsidiary for which there is any
significant variance between (A) the information for such Oil and Gas
Interest on the reserve reports furnished by the Company pursuant to
Sections 7.1(d)(ix) and 7.1(h) and (B) prior reserve reports or other
information received by such Bank with respect to such Oil and Gas
Interest;
(vii) As soon as possible and in any event within 15 days
after the date of execution thereof, copies of (A) any amendment of
any Major Sales Contract, and (B) any Major Sales Contract entered
into after the Effective Date;
(viii) Promptly and in any event within 15 days after
becoming aware of the occurrence of any material default under or
termination of any Major Sales Contract, notice of such event;
(ix) As soon as available and in any event within 105 days
after the end of each calender year, an annual reserve report with
respect to all Hydrocarbon reserves of
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the Company, its Subsidiaries and the Partnerships, prepared by the
Company in accordance with accepted industry practices and including
without limitation all Borrowing Base Assets, which annual reserve
report will be reviewed and favorably opined upon by an independent
engineering firm of recognized standing acceptable to the Majority
Banks;
(x) Promptly upon their execution, copies of any
amendments or modifications of any of the Private Placement Agreements
or any agreements, instruments or documents executed or delivered in
connection therewith, and the supplemental or other agreements,
instruments or documents executed in connection therewith after the
Effective Date, provided that it is agreed that the Company will not
amend, modify or supplement the Private Placement Agreements without
the prior written consent of the Majority Banks;
(xi) Promptly, written notice of any Subsidiary which at
any time becomes a Significant Subsidiary; and
(xii) Promptly, such other information respecting the
business, properties or the condition or operations, financial or
otherwise, including, without limitation, geological and engineering
data of the Company or any of its Subsidiaries or the Partnerships and
any title work with respect to any Oil and Gas Interests of the
Company or any Subsidiary as any Bank may from time to time reasonably
request.
(e) Access to Records, Books, Etc. At any reasonable time and
from time to time, permit any Bank or any agents or representatives thereof, at
their own expense (unless pursuant to any action to enforce rights and remedies
after an Event of Default), to examine and make copies of and abstracts from
the records and books of account of, and visit the properties of, the Company
and its Subsidiaries, and to discuss the affairs, finances and accounts of the
Company and its Subsidiaries with their respective officers and employees.
Without limiting the foregoing, the Company agrees that at any reasonable time
and from time to time, the Company will permit any Bank or any agents or
representatives thereof to inspect, at the office of the Company listed on its
signature page hereto, all opinions with respect to title and other material
work received by the Company or any Subsidiary with respect to any Borrowing
Base Asset.
(f) Maintenance of Records, Books, Etc. Maintain all records and
books of account separate from those of Consumers and any Related Entity.
(g) Change of Control. Upon the occurrence of a Change of
Control, the Company will, at the one-time request of any Bank, repay all
Advances of such Bank, provide cash cover for such Bank's Pro Rata Share of all
outstanding S/L/Cs and repay such Banks' Pro Rata Share of all other
liabilities under this Agreement, including without limitation all accrued
interest and fees, after which each such Banks' Commitment shall terminate.
The Banks' right to make such request shall expire 90 days after they are
notified that a Change of Control has occurred. A "Change of Control" will
occur on the first day on which any Person, or group of related
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Persons, (other than any company, all the capital stock of which is owned by
CMS or any wholly directly or indirectly owned Subsidiary thereof), acquires
(i) beneficial ownership of a majority interest of the outstanding voting stock
of the Company, or (ii) all or substantially all of the assets of the Company.
(h) Additional Reserve Reports. Upon the request of any Bank when
the Borrowing Base is re-evaluated pursuant to Section 9.6(a) hereof and in any
event at least once annually, the Agent will determine if reserves constituting
at least 75% of the value of the Borrowing Base Assets shall have been
evaluated by an independent engineering firm of recognized standing acceptable
to the Majority Banks at least once since production commenced from the
formation relating to such reserves, and if this condition is not satisfied the
Company will within 90 days after written notice from the Agent that such
condition is not satisfied, procure such evaluations to satisfy this
requirement and deliver them to the Banks.
(i) Prepayments. Notwithstanding anything herein to the contrary,
the Company will not prepay any Private Placement Note at any time when there
is a Borrowing Base Deficiency unless (i) such prepayments are made in the
order and in accordance with Section 4.1(d), and (ii) in the case of any
prepayment of the Private Placement Note pursuant to Section 4.1(d)(ii)(A) or
(D), at the time of such prepayment and after giving effect thereto, no Event
of Default shall exist. In the event that the Company is prevented from making
any prepayment of the Private Placement Debt in order to cure any Borrowing
Base Deficiency due to the existence of an Event of Default, the Company shall,
within 45 days after notice shall have been given to the Company by the Agent
of the Borrowing Base Deficiency, prepay the Company Debt in such amount as
shall be required to cure the Borrowing Base Deficiency. Any such prepayment
shall be made pro rata to all holders of the Company Debt in accordance with
the then outstanding principal amounts of the Company Debt held by each such
holder. Except for the prepayments required by Section 4.1(d) or this Section
7.1(i) pursuant to the curing of any Borrowing Base Deficiency and in the order
permitted thereby, the Company will not make any optional prepayment of the
Private Placement Notes if an Event of Default then exists or if such
prepayment would cause an Event of Default.
7.2 Negative Covenants. Until payment in full of the principal of
and accrued interest on the Notes, the expiration of all S/L/Cs and this
Agreement and the payment and performance of all other obligations of the
Company under this Agreement, the Company agrees that, unless the Majority
Banks, or all Banks if required by Section 10.1 hereof, shall otherwise consent
in writing it shall not, and shall not permit any Subsidiary to:
(a) Borrowing Base. Permit or suffer a Borrowing Base Deficiency
at any time for a period in excess of 45 days after notice thereof shall have
been given to the Company by the Agent.
(b) Current Ratio. Permit or suffer the ratio of Consolidated
Current Assets of the Company and its Subsidiaries to Consolidated Current
Liabilities of the Company and its Subsidiaries to be less than 0.75 to 1.0 at
any time.
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(c) Total Liabilities to Tangible Net Worth. Permit or suffer the
ratio of Consolidated Total Liabilities of the Company and its Subsidiaries to
Consolidated Tangible Net Worth of the Company and its Subsidiaries to be
greater than 0.75 to 1.0 at any time.
(d) Tangible Net Worth. Permit or suffer Consolidated Tangible
Net Worth of the Company and its Subsidiaries to be less than $150,000,000 at
any time.
(e) Debt Service. Permit or suffer, as of the last day of each
fiscal quarter of the Company, the ratio of Consolidated Cash Flow of the
Company and its Subsidiaries less cash dividends, as calculated for the fiscal
quarter then ended plus the three immediately preceding fiscal quarters, to
Consolidated Fixed Charges of the Company and its Subsidiaries, as calculated
for the fiscal quarter then ended plus the three immediately preceding fiscal
quarters, to be less than 2.0 to 1.0.
(f) Liens. Create, incur or suffer to exist any Lien on any of
the property, real, personal or mixed, tangible or intangible, of the Company
or any of its Subsidiaries other than the following:
(i) Liens for taxes not delinquent or for taxes being
contested in good faith by appropriate proceedings and as to which
financial reserves in accordance with GAAP have been established on
its books and records;
(ii) Liens created in connection with workmen's
compensation, unemployment insurance, and social security, or to
secure the performance of bids, tenders or contracts, leases,
statutory obligations, surety and appeal bonds, and other obligations
of like nature made in the ordinary course of business and not in
connection with the borrowing of money, provided in each case, the
obligation secured is not overdue or, if overdue, is being contested
in good faith by appropriate actions or proceedings;
(iii) Liens, in form and substance satisfactory to the
Majority Banks, securing Subordinated Debt only;
(iv) Construction Liens, mechanics Liens and Liens
pursuant to M.C.L.A. 570.251 or statutes of other jurisdiction similar
to M.C.L.A. 570.251 created in the ordinary course of business if (x)
payment of the obligation secured thereby is not yet due, (y) such
obligation is being contested in good faith by appropriate proceedings
and for which appropriate reserves have been established in accordance
with GAAP, or (z) as to all amounts of the obligations secured by such
Liens which are in default, such amount in the aggregate is not
material;
(v) Operator and non-operator Liens created in the
ordinary course of business under operating and similar agreements if
(x) payment of the obligation secured thereby is not yet due, (y) such
obligation is being contested in good faith by appropriate proceedings
and for which appropriate reserves have been established in accordance
with
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GAAP, or (z) as to all amounts of the obligations secured by such
Liens which are in default, such amount in the aggregate is not
material;
(vi) Any Lien created to secure payment of a portion of
the purchase price of any fixed asset which satisfy each of the
following requirements: (A) such Lien attached at the time of the
purchase of such fixed asset relating thereto, (B) the outstanding
principal amount of the Indebtedness secured by such Lien does not at
any time exceed the purchase price paid by the Company or any
Subsidiary for such fixed asset, (C) such Lien does not attach to any
other asset at any time owned by the Company or any Subsidiary, and
(D) if more than one such Lien burdens any such fixed asset at any one
time the aggregate outstanding principal amount of the Indebtedness
secured by all such Liens shall not at any time exceed the purchase
price paid by the Company or any Subsidiary for such fixed asset;
(vii) Zoning and use restrictions, easements, right-of-way,
reservations or other similar encumbrances on real property incurred
in the ordinary course of business which, in the aggregate, are not
substantial in amount and do not materially detract from the value of
property subject thereto or interfere with the ordinary conduct of the
business of the Company or any of its Subsidiaries;
(viii) Judgment Liens in existence less than 15 days after
the entry thereof or with respect to which execution has been stayed
or the payment of which is covered in full (subject to a customary
deductible which is not material) by insurance and the insurer has
accepted responsibility for payment without reservation;
(ix) Liens which are normal and customary in the industry
in which the Company and its Subsidiaries conduct business, and which
satisfy each of the following requirements: (A) such Liens are
incurred in the ordinary course of business of the Company and its
Subsidiaries, (B) such Liens were not incurred in connection with the
borrowing of money or the obtaining of advances or credit of any kind,
and (C) such Liens, in the aggregate, do not materially detract from
the value of the property subject thereto or interfere with the
ordinary conduct of the business of the Company or any of its
Subsidiaries; and
(x) Mortgages, liens and security interests on the
Special Project Assets securing the Non-Recourse Debt.
The Company further covenants and agrees that the total of all Indebtedness
secured by Liens under (i), (ii), (vi), (viii) and (ix) above shall not exceed
10% of the Consolidated Tangible Net Assets and, additionally, the total of all
Indebtedness secured by Liens under (vi) above shall not exceed 5% of the
Consolidated Tangible Net Assets.
(g) Investments. Make investments in, or advances or loans to,
any Person or entity other than (i) investments in one or more Restricted
Subsidiaries; (ii) investments made for (A)
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<PAGE> 47
the ordinary course of the Company's or its Restricted Subsidiaries' business
relating to oil and gas exploration, development and production or the
acquisition of oil and gas reserves or (B) all or a substantial portion of the
shares of stock or other ownership interests of any Person primarily involved
in oil and gas exploration, development or production; (iii) advances for
services or equipment in connection with the exploration and the development
for, and production of and sale of, oil and gas; (iv) advances or loans by any
Subsidiary to the Company; (v) direct obligations of the United States of
America or any agencies thereof maturing within one year from the date
acquired; (vi) certificates of deposit maturing within one year from the date
acquired issued by a bank or trust company organized under the laws of the
United States and having capital, surplus and undivided profits aggregating at
least $100,000,000; (vii) commercial paper given at least A1/P1 rating, or
equivalent rating by a nationally recognized credit rating agency, and maturing
not more than 270 days from the date acquired; (viii) time deposits not
exceeding 60 days of Barclays Bank PLC or Bank of Montreal; and (ix) other
investments not to exceed, in the aggregate, 10% of the Consolidated Tangible
Net Worth of the Company and its Subsidiaries.
(h) Disposal of Subsidiaries, Sale of Assets.
(i) Sell, lease, transfer or otherwise dispose of a
substantial portion of its assets or business to any Person, whether in one or
a series of transactions, provided that the Company and its Subsidiaries may
(A) sell any assets which are not Borrowing Base Assets; (B) transfer any
assets from the Company or any Subsidiary to a Significant Subsidiary or to the
Company; (C) transfer any assets from any Subsidiary which is not a Significant
Subsidiary to a Subsidiary which is not a Significant Subsidiary; (D) sell any
Subsidiary which is not a Significant Subsidiary; and (E) sell a Significant
Subsidiary, provided the Company gives the Banks at least 30 days prior written
notice of such sale and if such sale would not create a Borrowing Base
Deficiency; provided, however, each of the foregoing (A), (B), (C), (D) and (E)
shall be prohibited if an Event of Default exists or it would result in an
Event of Default or any event or condition which might become an Event of
Default with notice or lapse of time, or both.
(ii) Notwithstanding anything in this Section 7.2(h) or
anything elsewhere in this Agreement to the contrary, the Company agrees that
(A) any Restricted Subsidiary which is a Domestic Subsidiary and now or
hereafter becomes a Significant Subsidiary, or (B) if any Borrowing Base Assets
are transferred to or otherwise owned by any Restricted Subsidiary which is a
Domestic Subsidiary, the Company shall cause each such Restricted Subsidiary to
deliver to all holders of Company Debt an irrevocable, unconditional Guaranty
of payment of the Indebtedness of the Company to such holders of Company Debt
under the Notes, under the Private Placement Notes and this Agreement. Any
payment pursuant to any such Guaranty shall be paid to each holder of Company
Debt pro rata in accordance with the unpaid principal amount of Company Debt
held by each such holder at the time of such payment. Each such Guaranty shall
be in form, substance and amount satisfactory to the holders of at least
66-2/3% in aggregate principal amount of the outstanding Private Placement
Notes and the holders of at least 61% in aggregate principal amount of the
outstanding Advances (or the Commitments if no
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Advances are then outstanding) and delivered together with all officer's
certificates, resolutions, charter documents of such Restricted Subsidiary,
opinions of counsel for such Restricted Subsidiary and all other documents in
connection therewith requested by the holders of at least 66-2/3% in aggregate
principal amount of the outstanding Private Placement Notes or the holders of
at least 61% in aggregate principal amount of the outstanding Advances (or the
Commitments if no Advances are then outstanding), each in form and substance
satisfactory to the holders of at least 66-2/3% in aggregate principal amount
of the outstanding Private Placement Notes and Advances (or the Commitments if
no Advances are then outstanding). Any Guaranty of a Restricted Subsidiary
provided under this Section 7.2(h)(ii) shall terminate upon any sale of such
Restricted Subsidiary in compliance with Section 7.2(h)(i) hereof.
(iii) Notwithstanding anything in the foregoing Section
7.2(h)(i) or anything elsewhere in this Agreement to the contrary, the Company
shall give the Banks at least 30 days prior written notice of any sale of any
Borrowing Base Assets; except for (a) assets, the sales price of which, when
added to the sales price of all other assets subject to this exception and sold
within the previous twelve months, does not exceed $1,000,000 and (b) sales in
the ordinary course of business. The Borrowing Base will then be redetermined
to reflect such sales and on the date that such sale is effective the sum of
the Private Placement Notes and the Advances must be less than or equal to the
new Borrowing Base.
(iv) Restrictions on disposition of assets shall not
prevent the Company from transferring, directly or indirectly, any assets to a
corporation which then and thereafter owns all of the capital stock of the
Company, provided: (A) such corporation is engaged in the business of
exploring, developing, producing and selling Hydrocarbons; (B) subsequent to
the transfer, such corporation directly owns the assets so transferred; (C)
prior to such transfer, such corporation agrees to be bound by the terms and
conditions of this Agreement in the same manner and to the same extent the
Company is bound, including without limitation being jointly and severally
liable with the Company on all indebtedness and liabilities pursuant to this
Agreement, and the Company and such corporation shall execute such agreements
and instruments, and provide such documents and opinions of counsel in
connection therewith as may be reasonably requested by the Agent; and (D) no
Event of Default or any event which might become such an Event of Default with
notice or lapse of time, or both, then exists or would be caused by the
transaction in connection with such transfer of assets other than by reason of
such transfer.
(i) Mergers or Consolidation. Merge or consolidate with any other
Person; nor make any substantial change in the nature of its business; nor
become, or remain, an obligor with respect to any obligation of any other
Person if the obligation of such Person would constitute Indebtedness of such
Person, provided that (A) the Company and its Subsidiaries may become or remain
an obligor or guarantor (subject to the limitations of Section 7.2(k)(vii)
hereof) with respect to Indebtedness of the Company and its Subsidiaries, (B) a
Subsidiary may merge or consolidate with the Company, provided that the Company
shall be the surviving corporation, and (C) any Subsidiary may merge or
consolidate with any other Subsidiary.
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(j) Dividends. Make, pay, declare or authorize any dividend,
distribution or other payment in respect of any class of its capital stock or
any payment in connection with the redemption, purchase, retirement or other
acquisition, directly or indirectly, of any shares of its capital stock (other
than such dividends, distributions or other payments to the extent payable
solely in shares of the capital stock of the Company) if any Event of Default,
or any event which might become an Event of Default with notice or lapse of
time or both, has occurred and is continuing or will exist after giving effect
to such dividend, distribution or other payment. For purposes of this Section
7.2(i), "capital stock" shall include capital stock and any securities
exchangeable for or convertible into capital stock and any warrants, rights or
other options to purchase or otherwise acquire capital stock or such
securities.
(k) Indebtedness. Create, incur, assume, guaranty or in any
manner become liable in respect of, or suffer to exist, any Indebtedness other
than:
(i) The Advances;
(ii) The Indebtedness described on the audited balance
sheet for the year ending December 31, 1992 described in Section 6.6,
hereof having the same terms as those then existing, but no increase
in the amount thereof shall be permitted;
(iii) Indebtedness which is secured by one or more liens
permitted by Section 7.2(f), and, as to Section 7.2(f)(vi), which is
approved in writing by the Majority Banks before it is incurred;
(iv) Indebtedness incurred by the Company or any
Subsidiary owing to the Company or to any other Subsidiary (provided
that loans or other advances creating Indebtedness may not be made by
the Company to any Subsidiary which has not executed a Guaranty);
(v) Subordinated Debt;
(vi) Non-Recourse Debt, provided that such Non-Recourse
Debt must be incurred in connection with the financing, refinancing or
other refunding of Special Project Assets;
(vii) (A) Obligations, including those under surety or
other bonds, of the Company or a Subsidiary incurred in the ordinary
course of business which assure performance by third parties of
obligations under oil and gas exploration, development or operating
agreements or which assure performance of obligations under oil and
gas exploration, development or operating agreements undertaken by the
Company or any of its Subsidiaries, or (B) Guaranties executed by
Restricted Subsidiaries required by Section 7.2(h)(ii) hereof;
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(viii) The Private Placement Notes, provided both of the
following conditions are satisfied: (A) the aggregate principal amount
of Indebtedness under or pursuant to the Private Placement Notes does
not exceed $45,000,000, as such amount is reduced from time to time,
and (B) after giving effect to the Indebtedness that would be incurred
under the Private Placement Notes and the transactions contemplated by
the Private Placement Agreement, no Event of Default, and no event or
condition which might become such an Event of Default with notice or
lapse of time, or both, shall exist or shall have occurred and be
continuing and the representations and warranties contained in Section
6 hereof shall be true and correct on as of the date the Private
Placement Notes are issued as if such representations and warranties
were made on and as of such date;
(ix) Obligations of the Company or a Subsidiary under any
surety or similar bonds not to exceed (A) $2,500,000 in the aggregate
for any appeal bond or similar surety securing the appeal of the case
entitled Travelers Exploration Company v. NOMECO Oil & Gas Co., U.S.
Court of Appeals, Fifth Circuit, Case No. 93-2396, and (B) in addition
to the amount allowed under the foregoing clause (A), $2,000,000 in
the aggregate obtained to secure financial obligations of the Company
or any of its Subsidiaries; and
(x) Indebtedness of the Company or any Subsidiaries
constituting obligations in respect of any interest rate or currency
swap, rate cap or similar transaction.
(l) Transactions with Affiliates. Enter into or be a party to any
transaction or arrangement with any Affiliate (including, without limitation,
the purchase from, sale to or exchange of property with, or the rendering of
any service by or for, any Affiliate), except in the ordinary course of and
pursuant to the reasonable requirements of the Company's or such Subsidiaries'
business and upon fair and reasonable terms no less favorable to the Company or
such Subsidiary that would be obtained in a comparable arms-length transaction
with a Person other than an Affiliate.
SECTION 8. Default
8.1 Events of Default. The occurrence of any one of the following
events or conditions shall be deemed an "Event of Default" hereunder unless
waived by the Majority Banks pursuant to Section 10.1:
(a) The Company shall fail to pay when due any principal of or
interest on any Note, any amount due under any S/L/C Application (unless paid
with proceeds of Revolving Credit Loans under Section 3.1) or any fees or any
other amount payable hereunder; or
(b) Any representation or warranty made by the Company in Section
6 hereof, in any S/L/C Application or any other document or certificate
furnished by or on behalf of the
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Company in connection with this Agreement, shall prove to have been incorrect
in any material respect when made; or
(c) The Company shall fail to perform or observe any term,
covenant or agreement contained in Sections 7.1(a), (b), (e), (f), (g), (h) or
(i), Section 7.1(d)(i), (v), (vi), (vii), (viii) or (x) or 7.2 hereof; or
(d) The Company shall fail to perform or observe any other term,
covenant or agreement contained in this Agreement or in any S/L/C Application,
and any such failure shall remain unremedied for 15 calendar days after notice
thereof shall have been given to the Company by any Bank; or
(e) Failure by the Company or any of its Significant Subsidiaries
to pay when due any Indebtedness (not including the Indebtedness hereunder, but
specifically including without limitation any Indebtedness pursuant to the
Private Placement Notes) which individually or together with any such
Indebtedness as to which any such failure exists has an aggregate outstanding
principal amount in excess of $5,000,000; or failure by the Company or any of
its Significant Subsidiaries to perform or observe any term, covenant or
agreement contained in a document evidencing or relating to any such
Indebtedness having such aggregate outstanding principal amount, or under which
any such Indebtedness was issued or created, beyond any period of grace, if
any, provided with respect thereto if the effect of such failure is to either
(i) to cause or permit the holders of such Indebtedness (or a trustee on behalf
of such holders) to cause, a payment in respect of such Indebtedness to become
due prior to its due date or (ii) to permit the holders of such Indebtedness
(or a trustee on behalf of such holders) to elect a majority of the board of
directors of the Company.
(f) A judgment or order for the payment of money, which together
with other such judgments or orders exceeds the aggregate amount of $1,000,000,
shall be rendered against the Company or any of its Significant Subsidiaries
and either (i) enforcement proceedings shall have been commenced by any
creditor upon such judgment or order and such judgment or order shall have
remained unsatisfied and such proceedings shall have remained unstayed for a
period of 20 consecutive days, or (ii) for a period of 30 consecutive days,
such judgment or order shall have remained unsatisfied and a stay of
enforcement thereof, by reason of pending appeal or otherwise, shall not have
been in effect; or
(g) The occurrence of a Reportable Event that results in or could
result in liability of the Company, any Significant Subsidiary of the Company
or their ERISA Affiliates to the PBGC or to any Plan and such Reportable Event
is not corrected within thirty (30) days after the occurrence thereof; or the
occurrence of any Reportable Event which could constitute grounds for
termination of any Plan of the Company, its Significant Subsidiaries or their
ERISA Affiliates by the PBGC or for the appointment by the appropriate United
States District Court of a trustee to administer any such Plan and such
Reportable Event is not corrected within thirty (30) days after the occurrence
thereof; or the filing by the Company, any Significant Subsidiary of the
Company or any of their ERISA Affiliates of a notice of intent to terminate a
Plan or the
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institution of other proceedings to terminate a Plan; or the Company, any
Significant Subsidiary of the Company or any of their ERISA Affiliates shall
fail to pay when due any liability to the PBGC or to a Plan; or the PBGC shall
have instituted proceedings to terminate, or to cause a trustee to be appointed
to administer, any Plan of the Company, its Significant Subsidiaries or their
ERISA Affiliates; or any Person engages in a Prohibited Transaction with
respect to any Plan which results in or could result in liability of the
Company, any Significant Subsidiary of the Company, any of their ERISA
Affiliates, any Plan of the Company, its Significant Subsidiaries or their
ERISA Affiliates or fiduciary of any such Plan; or failure by the Company, any
Significant Subsidiary of the Company or any of their ERISA Affiliates to make
a required installment or other payment to any Plan within the meaning of
Section 302(f) of ERISA or Section 412(n) of the Code that results in or could
result in liability of the Company, any Significant Subsidiary of the Company
or any of their ERISA Affiliates to the PBGC or any Plan; or the withdrawal of
the Company, any of its Significant Subsidiaries or any of their ERISA
Affiliates from a Plan during a plan year in which it was a "substantial
employer" as defined in Section 4001(a)(2) of ERISA; or the Company, any of its
Significant Subsidiaries or any of their ERISA Affiliates becomes an employer
with respect to any Multiemployer Plan without the prior written consent of the
Majority Banks; provided, however, that the occurrence of any event described
in this paragraph (g), other than an occurrence described in the final clause
above relating to becoming an employer with respect to a Multiemployer Plan,
shall be deemed to be an "Event of Default" only if it singly or in the
aggregate, after taking into account other such events of default which
previously occurred, results in, or provides a reasonable basis for the
imposition of, a material liability to the Company, any Significant Subsidiary
of the Company or any ERISA Affiliate; or
(h) The Company or any of its Significant Subsidiaries shall make
a general assignment for the benefit of creditors, or shall institute, or there
shall be instituted against the Company or any of its Significant Subsidiaries,
any proceeding or case seeking to adjudicate it a bankrupt or insolvent or
seeking liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief or protection of debtors or
seeking the entry of an order for relief or the appointment of a receiver,
trustee, custodian or other similar official for it or for any substantial part
of its property, and, if such proceeding is instituted against the Company or
such Significant Subsidiary and is being contested by the Company or such
Significant Subsidiary, as the case may be, in good faith by appropriate
proceedings, such proceedings shall remain undismissed or unstayed for a period
of 60 days; or the Company or such Significant Subsidiary shall take any action
(corporate or other) to authorize or further any of the actions described above
in this subsection; or
(i) Any Related Entity shall institute, or there shall be
instituted against any Related Entity, any proceeding or case seeking to
adjudicate such Related Entity bankrupt or insolvent or seeking liquidation,
winding up, reorganization, arrangement, adjustment, protection, relief or
composition of it or its debts under any law relating to bankruptcy, insolvency
or reorganization or relief or protection of debtors or seeking the entry of an
order or the appointment of a receiver, trustee, custodian or other similar
official for it or for any substantial
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part of its property, and, if such proceeding is instituted against such
Related Entity, and is being contested by such Related Entity in good faith by
appropriate proceedings, such proceedings shall remain undismissed or unstayed
for a period of 60 days; or such Related Entity shall take any action
(corporate or other) to authorize or further any of the actions described above
in this subsection; or
(j) Any event of default or other default described in any
Guaranty shall have occurred and be continuing, or any material provision of
any Guaranty shall at any time for any reason cease to be valid, binding and
enforceable against any obligor thereunder, or the validity, binding effect or
enforceability thereof shall be contested by any Person, or any obligor shall
deny that it has any or further liability or obligation thereunder, or any
Guaranty shall be terminated, invalidated or set aside, or be declared
ineffective or inoperative or in any manner cease to give or provide to the
Banks and the Agent the benefits purported to be created thereby; or
(k) If the payment of the Company's and its Subsidiaries' taxes
fail to continue to be done on a basis consistent with that described on
Exhibit I hereto, if such failure would have a material adverse effect on the
financial condition of the Company or any of its Significant Subsidiaries.
8.2 Remedies.
(a) Upon the occurrence and during the continuance of any Event of
Default, the Agent shall, upon being directed to do so by the Majority Banks
or, in the case of any Event of Default arising under Section 8.1(a) upon being
directed to do so by Banks holding not less than 51% of the principal amount of
the Advances then outstanding (or 51% of the Commitments if no Advances are
then outstanding), by notice to the Company terminate the Commitments or
declare the outstanding principal of, and accrued interest on, the Notes and
all other amounts due under this Agreement, and cash cover with respect to any
outstanding S/L/C, to be immediately due and payable, or all of the above,
whereupon the Commitments shall terminate forthwith and all such amounts shall
become immediately due and payable, or both, as the case may be, provided that
in the case of any event or condition described in Section 8.1(h) with respect
to the Company, the Commitments shall automatically terminate forthwith and all
such amounts shall automatically become immediately due and payable without
notice; in each case without demand, presentment, protest, diligence, notice of
dishonor or other formality, all of which are hereby expressly waived.
(b) Upon the occurrence and during the continuance of such Event
of Default, the Agent shall, upon being directed to do so by the Majority Banks
or, in the case of any Event of Default arising under Section 8.1(a) upon being
directed to do so by Banks holding not less than 51% of the principal amount of
the Advances then outstanding (or 51% of the Commitments if no Advances are
then outstanding), in addition to the remedies provided in Section 8.2(a),
enforce its rights either by suit in equity, or by action at law, or by other
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appropriate proceedings, whether for the specific performance (to the extent
permitted by law) of any covenant or agreement contained in this Agreement or
in any then outstanding Note or any S/L/C Application or in aid of the exercise
of any power granted in this Agreement, any then outstanding Note or any S/L/C
Application, and may enforce the payment of any then outstanding Notes and any
of the other rights of the Agent and the Banks available at law or in equity.
(c) Upon the occurrence and during the continuance of any Event of
Default hereunder, each Bank may at any time and from time to time, without
notice to the Company (any requirement for such notice being expressly waived
by the Company) set off and apply against any and all of the obligations of the
Company now or hereafter existing under this Agreement, any of the Notes or the
S/L/C Applications, any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time owing
by such Bank to or for the credit or the account of the Company and any
property of the Company from time to time in possession of such Bank,
irrespective of whether or not any Bank shall have made any demand hereunder
and although such obligations may be contingent and unmatured. The rights of
the Banks under this Section 8.2(c) are in addition to other rights and
remedies (including, without limitation, other rights of setoff) which the
Banks may have.
SECTION 9. The Agent and the Banks
9.1 Appointment of Agent. NBD Bank, N.A. is hereby appointed
Agent for the Banks and accepts such appointment and agrees to act as such upon
the conditions herein set forth. The Agent shall have no duties or
responsibilities except those expressly set forth in this Agreement, and shall
not, by reason of this Agreement, have a fiduciary relationship with any Bank.
9.2 Scope of Agency. Neither the Agent nor any of its directors,
officers or agents shall be liable to the Banks for any action taken or omitted
by any of them hereunder or under the Notes or the S/L/C's, except for its, his
or her own gross negligence or willful misconduct and except as provided in
Section 9.3 hereof; or be responsible to the Banks for any recitals, warranties
or representations herein or in the Notes or the S/L/C Applications or for the
execution or validity of this Agreement, the Notes or the S/L/C Applications;
or be required to make any inquiry concerning the performance by the Company of
any of its obligations under this Agreement, the Notes or the S/L/C
Applications. In the absence of gross negligence or willful misconduct, the
Agent shall be entitled to rely, without liability therefor, upon any
certificate or other document or other communication believed by it to be
genuine and correct and to have been signed or sent by the proper officer or
Person and upon the advice of legal counsel (which may be legal counsel for the
Company), independent public accountants and other experts concerning all
matters pertaining to the agency. To the extent that the Company shall fail to
pay or to reimburse the Agent for the payment of the same, each Bank shall
reimburse the Agent in accordance with such Bank's Pro Rata Share, and any such
amount so paid shall be immediately due and payable to the Banks by the
Company. The Banks shall
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indemnify the Agent ratably in accordance with their Pro Rata Share of the
Commitments for any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind or nature whatsoever which may be imposed on, incurred by or asserted
against the Agent in any way relating to or arising out of this Agreement or
the transactions contemplated hereby, provided that no Bank shall be liable for
any of the foregoing to the extent they arise from the Agent's gross negligence
or willful misconduct.
9.3 Duties of Agent. In carrying out the agency, the Agent shall
have only the duties and responsibilities expressly set forth in this Agreement
and in performing such duties and responsibilities the Agent shall exercise the
same degree of care as it would if the Loans were entirely for its own account,
but the Agent shall not be deemed to have knowledge of the occurrence of any
Event of Default, or any event or condition which with notice or lapse of time,
or both, could become such an Event of Default and need not take or continue
any action with respect thereto or toward the enforcement of this Agreement,
the Notes or the S/L/C Applications, nor prosecute or defend any suit with
respect to this Agreement, the Notes or the S/L/C Applications, unless directed
to do so by the Banks and unless indemnified to its satisfaction against any
loss, cost, liability or expense which it might incur as a consequence of
taking such action. The Agent may employ agents and attorneys and shall not be
answerable for the negligence or misconduct of any such agents or attorneys
selected by it with reasonable care. The Agent in its capacity as a Bank
hereunder shall have the same rights and powers hereunder as any other Bank and
may exercise the same as though it were not acting as the Agent hereunder.
Each Bank agrees that it has, independently and without reliance on the Agent
or any other Bank, and based on such documents and information as it has deemed
appropriate, made its own credit analysis of the Company and its Subsidiaries
in connection with its decision to enter into this Agreement and that it will,
independently and without reliance upon the Agent or any other Bank, and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own analysis and decisions in taking or not taking action
under this Agreement.
9.4 Resignation of Agent. The Agent may resign as such at any
time upon thirty days' prior written notice to the Company and the Banks. In
the event of any such resignation, the Banks shall, by an instrument in writing
delivered to the Company and the Agent, appoint a successor which shall be an
incorporated bank or trust company. If a successor is not so appointed or does
not accept such appointment at least five days before the Agent's resignation
becomes effective, the Agent may appoint a temporary successor to act until
such appointment by the Banks is made and accepted. Any successor to the Agent
shall be reasonably acceptable to the Company, have adequate expertise in oil
and gas lending and execute and deliver to the Company and the Banks an
instrument accepting such appointment and thereupon such successor Agent,
without further act, deed, conveyance or transfer shall become vested with all
of the properties, rights, interests, powers, authorities and obligations of
its predecessor hereunder with like effect as if originally named as Agent
hereunder. Upon request of such successor Agent, the Company and the Agent
ceasing to act shall execute and deliver such instruments of conveyance,
assignment and further assurance and do such other things as may reasonably be
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required for more fully and certainly vesting and confirming in such successor
Agent all such properties, rights, interests, powers, authorities and
obligations.
9.5 Pro Rata Sharing by Banks. Each Bank agrees with every other
Bank that, in the event that it shall receive and retain any payment on account
of the Company's obligations under this Agreement, the Notes or the S/L/C
Applications in a greater proportion than that received by any other Bank,
whether such payment be voluntary, involuntary or by operation of law, by
application of set-off of any indebtedness or otherwise, then such Bank shall
promptly purchase from the other Banks, without recourse, for cash and at face
value, ratably in accordance with its Pro Rata Share, in such an amount that
each Bank shall have received payment in respect of such obligations in
accordance with its Pro Rata Share; provided, that if any such purchase be made
by any Bank and if any such excess payment relating thereto or any part thereof
is thereafter recovered from such Bank, appropriate adjustment in the related
purchase from the other Banks shall be made by rescission and restoration of
the purchase price as to the portion of such excess payment so recovered. It
is further agreed that, to the extent there is then owing by the Company to any
Bank indebtedness other than that evidenced by this Agreement, the Notes and
the S/L/C Applications to which such Bank may apply any involuntary payments of
indebtedness by the Company, including those resulting from exercise of rights
of set-off or similar rights, such Bank shall apply all such involuntary
payments first to obligations of the Company to the Banks hereunder and under
the Notes and the S/L/C Applications and then to such other indebtedness owed
to it by the Company. In addition, it is further agreed that any and all
proceeds resulting from a sale or other disposition of any collateral which may
be hereafter granted for the benefit of the Banks to secure the obligations of
the Company hereunder, shall be applied first to obligations of the Company to
the Banks hereunder and under the Notes and the S/L/C Applications, and then
ratably to any other indebtedness owed by the Company to the Banks which is
secured by such collateral.
9.6 Determination of Borrowing Base, Etc. (a) Any determination of
the Borrowing Base shall be made by the Agent, and then shall be submitted to
the Banks. If any Bank(s) holding not less than 20% of the aggregate principal
amount of the Advances then outstanding, or 20% of the Commitments if no
Advances are outstanding (the "20% Banks") determines that such determination
made by the Agent is understated or overstated by more than 5% based on the
determination of the Borrowing Base by each Bank, in accordance with its
customary and standard practices in lending to oil and gas companies, such 20%
Banks may object to such determination by the Agent provided such objection is
made within fifteen Business Days of such 20% Banks receiving such
determination. If the Agent and the 20% Banks cannot mutually agree upon a
determination of the Borrowing Base within three days of such objection, then
the Borrowing Base shall be immediately redetermined and equal to the weighted
average of the determinations of the Borrowing Base of each Bank, weighted in
accordance with their Pro Rata Share. Such determination of the Borrowing Base
and related determinations shall then become effective, subject to any
subsequent reduction that may occur pursuant to Section 9.6(b) hereof. The
Borrowing Base may be re-evaluated from time to time as determined by the
Banks, and will be re- evaluated upon the request of the Company (provided that
the Company cannot request any re-evaluation of the Borrowing Base more than
two times in any twelve month period), but
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will be re-evaluated upon receipt of any document referred to in Section
7.1(d)(vi) hereof or the occurrence of any event referred to in Section
7.2(h)(iii) or 7.1(d)(viii) hereof and, in addition, at least twice annually as
follows: promptly upon receipt of the annual reserve report referred to in
Section 7.1(d)(ix) hereof and each six months thereafter. Except for the
scheduled re-evaluations of the Borrowing Base upon receipt of the annual
reserve report and each six months thereafter, each Bank requesting a
re-evaluation of the Borrowing Base agrees to give notice to the Company of
such request. The Company acknowledges that the Borrowing Base may also be
re-evaluated upon the request of the holders of at least 66-2/3% in aggregate
principal amount of the outstanding Private Placement Notes one time in any
twelve month period and as reasonably requested by the holders of at least 30%
in aggregate principal amount of the outstanding Private Placement Notes after
an Event of Default under the Private Placement Agreement, under the conditions
described in the letter agreement of approximately even date herewith among the
Agent, the Banks and a Private Placement Noteholders, and the Company agrees
that the expenses of any such re-evaluation at the request of such holders
shall be borne by the Company.
(b) Upon any determination by the Agent and the Banks pursuant to
Section 9.6(a) hereof, the Company shall submit such determination to the
Private Placement Noteholders, and unless the Majority Private Placement
Noteholders determine that the Borrowing Base determination determined by the
Agent and the Banks as described in Section 9.6(a) is overstated by more than
5% and notify the Agent and the Banks in writing of such objection within ten
business days of the submission of such Borrowing Base determination to the
Private Placement Noteholders, the determination of the Borrowing Base by the
Agent and the Banks described above shall be final. If the Majority Private
Placement Noteholders do so timely object, such objection must be accompanied
by appropriate calculations and engineering support for such objection and the
Banks and the Private Placement Noteholders thereafter shall negotiate in good
faith toward the determination of a new Borrowing Base and the Agent shall
resubmit additional determinations of the Borrowing Base until the Majority
Lenders approve a Borrowing Base. Until such agreement has been reached among
the Majority Lenders, the determination of the Borrowing Base pursuant to
Section 9.6(a) shall remain in effect. Under no circumstances may the Private
Placement Noteholders effect an increase in the Borrowing Base determined under
Section 9.6(a).
SECTION 10. Miscellaneous
10.1 Amendments; Etc. This Agreement and any term or provision
hereof may be amended, waived or terminated by an instrument in writing
executed by the Company and the Majority Banks, provided, that, notwithstanding
anything in this Agreement to the contrary, except by an instrument in writing
executed by the Company and all of the Banks, no such amendment, waiver or
termination shall:
(a) Authorize or permit the extension of the time or times of
payment of the principal of, or interest on, the Notes or the obligations under
the S/L/C Applications or any of them, or
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the reduction in principal amount thereof or the rate of interest thereon, or
any fees payable hereunder, or increase the Commitment of any Bank without such
Bank's consent or increase the aggregate Commitments of all Banks to an amount
greater than $135,000,000, or increase the aggregate Commitments beyond
$110,000,000 without making modifications, if any, to this Agreement necessary
to insure that NBD Bank, N.A., Bank of Montreal and Banque Paribas each qualify
as a 20% Bank under Section 9.6, or amend this Section 10.1 or the definition
of Majority Banks; or
(b) Any such amendment, waiver or termination shall be effective
only in the specific instance and for the specific purpose for which given.
10.2 Notices. (a) Except as otherwise provided in Section 10.2(c)
hereof, all notices, requests, consents and other communications hereunder
shall be in writing and shall be delivered or sent to the Company, the Banks
and the Agent at the respective addresses for notices set forth on the
signature pages hereof, or to such other address as may be designated by the
Company, the Agent or any Bank by notice to the other parties hereto. All
notices shall be deemed to have been given at the time of actual delivery
thereof to such address, or if sent by the Agent or any Bank to the Company by
certified or registered mail, postage prepaid, to such address, on the fifth
day after the date of mailing.
(b) Notices by the Company to the Agent with respect to requests
for Advances pursuant to Section 3.1 and notices of prepayment pursuant to
Section 4.1(c) shall be irrevocable and binding on the Company.
(c) Any notice to be given by the Company to the Agent pursuant to
Section 4.1(c) or Section 3.1 and any notice to be given by the Agent or any
Bank hereunder, may be given by telephone, by telex or by facsimile
transmission and must be immediately confirmed in writing in the manner
provided in Section 10.2(a). Any such notice given by telephone, telex or
facsimile transmission shall be deemed effective upon receipt thereof by the
party to whom such notice is given.
10.3 Conduct No Waiver; Remedies Cumulative. No course of dealing
on the part of the Agent or the Banks, nor any delay or failure on the part of
the Agent or any Bank in exercising any right, power or privilege hereunder
shall operate as a waiver of such right, power or privilege or otherwise
prejudice the Agent's or the Banks' rights and remedies hereunder; nor shall
any single or partial exercise thereof preclude any further exercise thereof or
the exercise of any other right, power or privilege. No right or remedy
conferred upon or reserved to the Agent or the Banks under this Agreement is
intended to be exclusive of any other right or remedy, and every right and
remedy shall be cumulative and in addition to every other right or remedy given
hereunder or now or hereafter existing under any applicable law. Every right
and remedy given by this Agreement or by applicable law to the Agent or the
Banks may be exercised from time to time and as often as may be deemed
expedient by them.
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10.4 Reliance on and Survival of Various Provisions. All terms,
covenants, agreements, representations and warranties of the Company made
herein or in any certificate or other document delivered pursuant hereto shall
be deemed to be material and to have been relied upon by the Banks,
notwithstanding any investigation heretofore or hereafter made by any Bank or
on any Bank's behalf, and those covenants and agreements of the Company set
forth in Section 10.5 hereof shall survive the repayment in full of the Loans
and other obligations of the Company hereunder and under S/L/C Applications and
the termination of the Commitment.
10.5 Expenses; Indemnification. (a) The Company agrees to pay and
save the Agent and the Banks harmless from liability for the payment of the
reasonable fees and expenses of Messrs. Dickinson, Wright, Moon, Van Dusen &
Freeman or any other counsel the Agent shall employ, in connection with the
preparation, execution and delivery of this Agreement, the Notes and the S/L/C
Applications and the consummation of the transactions contemplated hereby
(including, without limitation, such fees and expenses in connection with any
action or proceeding relating to any court order, injunction or other process
or decree restraining or seeking to restrain the Agent from paying any amount
under any S/L/C), and in connection with any amendments, waivers or consents in
connection therewith, and all reasonable costs and expenses of the Agent and
the Banks (including reasonable fees and expenses of counsel) in connection
with any Event of Default or the enforcement of this Agreement, the Notes or
the S/L/C Applications.
(b) In consideration of the execution and delivery of this
Agreement by each Bank and the extension of the Commitments, the Company hereby
indemnifies, exonerates and holds the Agent, each Bank and each of their
respective officers, directors, employees and agents (collectively, the
"Indemnified Parties") free and harmless from and against any and all actions,
causes of action, suits, losses, costs, liabilities and damages, and expenses
incurred in connection therewith (irrespective of whether any such Indemnified
Party is a party to the action for which indemnification hereunder is sought),
including reasonable attorneys' fees and disbursements (collectively, the
"Indemnified Liabilities"), incurred by the Indemnified Parties or any of them
as a result of, or arising out of, or relating to:
(i) any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of any Loan;
(ii) the entering into and performance of this Agreement and any
other agreement or instrument executed in connection herewith by any of the
Indemnified Parties (including any action brought by or on behalf of the
Company as the result of any determination by the Majority Banks not to fund
any Advance);
(iii) any investigation, litigation or proceeding related to any
acquisition or proposed acquisition by the Company or any of its Subsidiaries
of any portion of the stock or assets of any Person, whether or not the Agent
or such Bank is party thereto;
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(iv) any investigation, litigation or proceeding related to any
environmental cleanup, audit, compliance or other matter relating to any
release by the Company or any of its Subsidiaries of any hazardous material or
any violations of Environmental Laws; or
(v) the presence on or under, or the escape, seepage, leakage,
spillage, discharge, emission, discharging or releases from, any real property
owned or operated by the Company or any Subsidiary thereof 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, the Company or such Subsidiary,
except for any such Indemnified Liabilities arising for the account of a
particular Indemnified Party by reason of the activities of the Indemnified
Party on the property of the Company conducted subsequent to a foreclosure on
such property by the Banks or by reason of the relevant Indemnified Party's
gross negligence or wilful misconduct or breach of this Agreement, and if and
to the extent that the foregoing undertaking may be unenforceable for any
reason, the Company hereby agrees to make the maximum contribution to the
payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law. The Company shall be obligated to indemnify
the Indemnified Parties for all Indemnified Liabilities subject to and pursuant
to the foregoing provisions, regardless of whether the Company or any of its
Subsidiaries had knowledge of the facts and circumstances giving rise to such
Indemnified Liability.
10.6 Successors and Assigns. (a) This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns, provided that the Company may not, without the prior
consent of the Majority Banks, assign its rights or obligations hereunder or
under the Notes and the Banks shall not be obligated to make any Advance
hereunder to any entity other than the Company.
(b) Any Bank may sell a participation interest to any financial
institution or institutions, and such financial institution or institutions may
further sell, a participation interest (undivided or divided) in, the Advances
and such Bank's rights and benefits under this Agreement and the Notes and to
the extent of that participation, such participant or participants shall have
the same rights and benefits against the Company under Section 8.2(c) as it or
they would have had if participation of such participant or participants were
the Bank making the Advances to the Company hereunder, provided, however, that
(i) such Bank's obligations under this Agreement shall remain unmodified and
fully effective and enforceable against such Bank, (ii) such Bank shall remain
solely responsible to the other parties hereto for the performance of such
obligations, (iii) such Bank shall remain the holder of its Note for all
purposes of this Agreement, (iv) the Company, the Agent and the other Banks
shall continue to deal solely and directly with such Bank in connection with
such Bank's rights and obligations under this Agreement, and (v) such Bank
shall not grant to its participant any rights to consent or withhold consent to
any action taken by such Bank or the Agent under this Agreement other than
action requiring the consent of all of the Banks hereunder. The Agent from
time to time in its sole discretion may appoint agents for the purpose of
servicing and administering this Agreement and
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the transactions contemplated hereby and enforcing or exercising any rights or
remedies of the Agent provided under this Agreement, the Notes, or otherwise.
In furtherance of such agency, the Agent may from time to time direct that the
Company provide notices, reports and other documents contemplated by this
Agreement (or duplicates thereof) to such agent. The Company hereby consents
to the appointment of such agent and agrees to provide all such notices,
reports and other documents and to otherwise deal with such agent acting on
behalf of the Agent in the same manner as would be required if dealing with the
Agent itself.
(c) Each Bank may, with the prior consent of the Company and the
Agent, assign to one or more banks or other entities all or a portion of its
rights and obligations under this Agreement (including, without limitation, all
or a portion of its Commitment, the Advances owing to it and the Note or Notes
held by it); provided, however, that (i) each such assignment shall be of a
uniform, and not a varying, percentage of all rights and obligations, (ii)
except in the case of an assignment of all of a Bank's rights and obligations
under this Agreement, (A) the amount of the Commitment of the assigning Bank
being assigned pursuant to each such assignment (determined as of the date of
the Assignment and Acceptance with respect to such assignment) shall in no
event be less than $5,000,000, and in integral multiples of $1,000,000
thereafter, or such lesser amount as the Company and the Agent may consent to
and (B) after giving effect to each such assignment, the amount of the
Commitment of the assigning Bank shall in no event be less than $5,000,000, and
(iii) the parties to each such assignment shall execute and deliver to the
Agent, for its acceptance and recording in the Register, an Assignment and
Acceptance in the form of Exhibit L hereto (an "Assignment and Acceptance"),
together with any Note or Notes subject to such assignment and a processing and
recordation fee of $3,000. Upon such execution, delivery, acceptance and
recording, from and after the effective date specified in such Assignment and
Acceptance, (x) the assignee thereunder shall be a party hereto and, to the
extent that rights and obligations hereunder have been assigned to it pursuant
to such Assignment and Acceptance, have the rights and obligations of a Bank
hereunder and (y) the Bank assignor thereunder shall, to the extent that rights
and obligations hereunder have been assigned by it pursuant to such Assignment
and Acceptance, relinquish its rights and be released from its obligations
under this Agreement (and, in the case of an Assignment and Acceptance covering
all of the remaining portion of an assigning Bank's rights and obligations
under this Agreement, such Bank shall cease to be a party hereto).
(d) By executing and delivering an Assignment and Acceptance, the
Bank assignor thereunder and the assignee thereunder confirm to and agree with
each other and the other parties hereto as follows: (i) other than as provided
in such Assignment and Acceptance, such assigning Bank makes no representation
or warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Agreement or
the execution, legality, validity, enforceability, genuineness, sufficiency or
value of this Agreement or any other instrument or document furnished pursuant
hereto; (ii) such assigning Bank makes no representation or warranty and
assumes no responsibility with respect to the financial condition of the
Company or the performance or observance by the Company of any of its
obligations under this Agreement or any other instrument or document furnished
pursuant hereto; (iii) such assignee confirms that it has received a copy of
this Agreement, together with
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copies of the financial statements referred to in Section 6.6 and such other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into such Assignment and Acceptance; (iv) such
assignee will, independently and without reliance under the Agent, such
assigning Bank or any other Bank and based on such documents and information as
it shall deem appropriate at the time, continue to make its own credit
decisions in taking or not taking action under this Agreement; (v) such
assignee appoints and authorizes the Agent to take such action as agent on its
behalf and to exercise such powers and discretion under this Agreement as are
delegated to the Agent by the terms hereof, together with such powers and
discretion as are reasonably incidental thereto; and (vi) such assignee agrees
that it will perform in accordance with their terms all of the obligations that
by the terms of this Agreement are required to be performed by it as a Bank.
(e) The Agent shall maintain at its address designated on the
signature pages hereof a copy of each Assignment and Acceptance delivered to
and accepted by it and a register for the recordation of the names and
addresses of the Banks and the Commitment of, and principal amount of the
Advances owing to, each Bank from time to time (the "Register"). The entries
in the Register shall be conclusive and binding for all purposes, absent
manifest error, and the Company, the Agent and the Banks may treat each Person
whose name is recorded in the Register as a Bank hereunder for all purposes of
this Agreement. The Register shall be available for inspection by the Company
or any Bank at any reasonable time and from time to time upon reasonable prior
notice.
(f) Upon its receipt of an Assignment and Acceptance executed by
an assigning Bank and an assignee, together with any Note or Notes subject to
such assignment, the Agent shall, if such Assignment and Acceptance has been
completed, (i) accept such Assignment and Acceptance, (ii) record the
information contained therein in the Register and (iii) give prompt notice
thereof to the Company. Within five Business Days after its receipt of such
notice, the Company, at its own expense, shall execute and deliver to the Agent
in exchange for the surrendered Note or Notes a new Note to the order of such
assignee in an amount equal to the Commitment assumed by it pursuant to such
Assignment and Acceptance and, if the assigning Bank has retained a Commitment
hereunder, a new Note to the order of the assigning Bank in an amount equal to
the Commitment retained by it hereunder. Such new Note or Notes shall be in an
aggregate principal amount equal to the aggregate principal amount of such
surrendered Note or Notes, shall be dated the effective date of such Assignment
and Acceptance and shall otherwise be in substantially the form of Exhibit L
hereto.
(g) The Company shall not be liable for any costs or expenses of
any Bank in effectuating any participation or assignment under this Section
10.6.
(h) The Banks may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this Section
10.6, disclose to the assignee or participant or proposed assignee or
participant, any information relating to the Company, provided that prior to
any such disclosure, each assignee or participant or proposed assignee or
participant
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shall agree by executing a confidentiality letter in favor of the Company in
form and substance equivalent to the confidentiality agreement described in
Section 10.12 hereof.
(i) Additional lenders may also become Banks hereunder, with the
prior written consent of the Company and the Agent, by executing an Assumption
Agreement substantially in the form of Exhibit M hereto, provided that without
the prior written consent of the Majority Banks, the aggregate Commitments of
all Banks may not exceed $110,000,000. Any Bank, subject to the prior written
approval of the Majority Banks, the Agent and the Company and subject to being
paid in full or all outstanding liabilities owing to such Bank, may be
terminated as a Bank hereunder and upon such termination the Company shall have
the option to select a bank to replace such terminating bank and to assume the
rights and obligations of such terminated Bank hereunder, provided that such
replacement bank is acceptable to the Agent and executes an Assumption
Agreement substantially in the form of Exhibit M hereto. Upon any Bank being
added hereto or terminated, a new schedule will be distributed by the Agent to
all Banks and the Company showing Commitment amount and the Pro Rata Share of
each Bank.
10.7 Governing Law. This Agreement is a contract made under, and
the rights and obligations of the parties hereunder shall be governed by and
construed in accordance with, the laws of the State of Michigan applicable to
contracts made and to be performed entirely within such State.
10.8 Table of Contents and Headings. The table of contents and the
headings of the various subdivisions hereof are for the convenience of
reference only and shall in no way modify any of the terms or provisions
hereof.
10.9 Construction of Certain Provisions. All computations required
hereunder and all financial terms used herein shall be made or construed in
accordance with GAAP unless such principles are inconsistent with the express
requirements of this Agreement. If any provision of this Agreement refers to
any action to be taken by any Person, or which such Person is prohibited from
taking, such provision shall be applicable whether such action is taken
directly or indirectly by such Person, whether or not expressly specified in
such provision.
10.10 Integration and Severability. This Agreement embodies the
entire agreement and understanding between the Company and the Banks, and
supersedes all prior agreements and understandings, relating to the subject
matter hereof. In case any one or more of the obligations of the Company under
this Agreement, the Notes or any S/L/C Application shall be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality and enforceability
of the remaining obligations of the Company shall not in any way be affected or
impaired thereby, and such invalidity, illegality or unenforceability in one
jurisdiction shall not affect the validity, legality or enforceability of the
obligations of the Company under this Agreement, the Notes or any S/L/C
Application in any other jurisdiction.
10.11 Interest Rate Limitation. Notwithstanding any provisions of
this Agreement, the Notes or any S/L/C Application, in no event shall the
amount of interest paid or agreed to be
58
<PAGE> 64
paid by the Company exceed an amount computed at the highest rate of interest
permissible under applicable law. If, from any circumstances whatsoever,
fulfillment of any provision of this Agreement, the Notes or any S/L/C
Application at the time performance of such provision shall be due, shall
involve exceeding the interest rate limitation validly prescribed by law which
a court of competent jurisdiction may deem applicable hereto, then, ipso facto,
the obligations to be fulfilled shall be reduced to an amount computed at the
highest rate of interest permissible under applicable law, and if for any
reason whatsoever the Banks shall ever receive as interest an amount which
would be deemed unlawful under such applicable law such interest shall be
automatically applied to the payment of principal of the Loans outstanding and
other obligations of the Company hereunder (whether or not then due and
payable) and not to the payment of interest, or shall be refunded to the
Company if such principal has been paid in full. Anything herein to the
contrary notwithstanding, the obligations of the Company under this Agreement
shall be subject to the limitation that payments of interest shall not be
required to the extent that receipt of any such payment by the Banks would be
contrary to provisions of law applicable to the Banks which limits the maximum
rate of interest which may be charged or collected by the Banks.
10.12 Confidentiality. The Banks and the Agent shall hold all
confidential information obtained pursuant to the requirements of this
Agreement which has been identified as such by the Company in accordance with
their customary procedures for handling confidential information of this nature
and in accordance with safe and sound banking practices and in any event may
make disclosure to its examiners, affiliates, outside auditors, counsel and
other professional advisors in connection with this Agreement or as reasonably
required by any bona fide transferee or participant in connection with the
contemplated transfer of any Note or participation therein, provided that any
Bank shall give notice to the Company of such disclosure to any such transferee
or participant, or as required by any governmental agency or representative
thereof or pursuant to legal process. Without limiting the foregoing, it is
expressly understood that such confidential information shall not include
information which, at the time of disclosure is in the public domain or, which
after disclosure, becomes part of the public domain or information which any
Bank or the Agent had obtained prior to the time of disclosure and
identification by the Company under this Section, or information received by
any Bank or the Agent from a third party. Nothing in this Section or otherwise
shall prohibit any Bank or the Agent from disclosing any confidential
information to the other Banks or the Agent or render any of them liable in
connection with any such disclosure.
10.13 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.
10.14 Independence of Covenants. All covenants hereunder shall be
given independent effect so that if a particular action or condition is not
permitted by any such covenant, the fact that it would be permitted by an
exception to, or would be otherwise within the limitations of, another covenant
shall not avoid the occurrence of an Event of Default or any event or condition
59
<PAGE> 65
which with notice or lapse of time, or both, could become such an Event of
Default if such action is taken or such condition exists.
10.15 Jury Trial Waiver. The Agent, the Banks and the Company,
after consulting or having had the opportunity to consult with counsel,
knowingly, voluntarily and intentionally waive any right any of them may have
to a trial by jury in any litigation based upon or arising out of this
Agreement or any related instrument or agreement or any of the transactions
contemplated by this Agreement or any course of conduct, dealing, statements
(whether oral or written) or actions of any of them. Neither the Agent, the
Banks nor the Company shall seek to consolidate, by counterclaim or otherwise,
any such action in which a jury trial has been waived with any other action in
which a jury trial cannot be or has not been waived. These provisions shall
not be deemed to have been modified in any respect or relinquished by either
the Agent and the Banks or the Company except by a written instrument executed
by all of them.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered as of this 1st day of November, 1993, which
shall be the Effective Date of this Agreement, notwithstanding the day and year
first above written.
Address for Notices:
<TABLE>
<S> <C>
One Jackson Square NOMECO OIL & GAS COMPANY
P.O. Box 1150
Jackson, Michigan 49204
Attention: Paul E. Geiger By: /s/ Paul E. Geiger
Telephone No: (517) 787-9011 -----------------------------------------
Facsimile No: (517) 787-6360
Its: Vice President, Secretary
------------------------------------
and Treasurer
--------------------
611 Woodward Avenue NBD BANK, N.A., individually
Energy Division as a Bank and as Agent
Detroit, Michigan 48226
Attention: Energy Division By: /s/ James L. Caldwell, IV
Telephone No: (313) 225-2818 -----------------------------------------
Facsimile No: (313) 225-2649
Commitment: $48,000,000 Its: First Vice President
Pro Rata Share: 60% ------------------------------------
</TABLE>
60
<PAGE> 66
<TABLE>
<S> <C>
115 S. LaSalle Street BANK OF MONTREAL
11th Floor West
Chicago, Illinois 60603
Attention: Michael Linton By: /s/ J. Michael Linton
Telephone No: (312) 750-4370 --------------------------------------
Facsimile No: (312) 750-4314
Commitment: $32,000,000 Its: Director
Pro Rata Share: 40% ---------------------------------
</TABLE>
61
<PAGE> 1
Exhibit 10.29(b)
Execution Copy
SECOND AMENDMENT TO CREDIT AGREEMENT
AND ASSUMPTION AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT AND ASSUMPTION
AGREEMENT, dated as of March 1, 1995 (this "Amendment"), is among CMS NOMECO
OIL & GAS CO., formerly known as NOMECO OIL & GAS CO., a Michigan corporation
(the "Company"), the banks set forth on the signature pages hereof
(collectively, the "Banks") and NBD BANK, formerly known as NBD BANK, N.A., as
agent for the Banks (in such capacity, the "Agent").
RECITALS
A. The Company, the Banks and the Agent are parties to
an Amended and Restated Credit Agreement, dated as of November 1, 1993, amended
by a First Amendment to Credit Agreement dated December 23, 1994 (the "Credit
Agreement").
B. The Company has requested that the Agent and the
Banks amend the Credit Agreement as set forth herein.
TERMS
In consideration of the premises and of the mutual agreements
herein contained, the parties agree as follows:
ARTICLE I. AMENDMENTS AND ADDITION OF ABN-AMRO BANK N.V., CHICAGO BRANCH.
Upon the satisfaction of the condition precedent described in Article III
hereof, the Credit Agreement shall be amended as follows:
1.1 NBD Bank, N.A. has changed its name to NBD
Bank and NOMECO Oil & Gas Co. has changed its name to CMS NOMECO Oil & Gas Co.
Accordingly, all references to NBD Bank, N.A. and NOMECO Oil & Gas Co.
contained in the Credit Agreement, the Notes and all other documents and
agreements executed in connection with the Credit Agreement shall be deemed
references to NBD Bank and CMS NOMECO Oil & Gas Co., respectively.
<PAGE> 2
1.2 ABN-AMRO Bank N.V., Chicago Branch (the "New
Bank") has agreed to become a Bank under the Credit Agreement, with its
Commitment and Pro Rata Share and address for notice as described next to its
signature below. The New Bank (i) confirms that it has received a copy of the
Credit Agreement and related documents, the First Amendment to Credit Agreement
dated December 23, 1994, together with copies of the financial statements
referred to in Section 6.6 thereof and such other documents and information as
it has deemed appropriate to make its own credit analysis and decision to enter
into this Assumption Agreement; (ii) agrees that it will, independently and
without reliance upon the Agent or any Bank and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under the Credit Agreement;
(iii) appoints and authorizes the Agent to take such action as agent on its
behalf and to exercise such powers and discretion under the Credit Agreement as
are delegated to the Agent by the terms thereof, together with such powers and
discretion as are reasonably incidental thereto; (iv) agrees that it will
perform in accordance with their terms of all of the obligations that by the
terms of the Credit Agreement are required to be performed by it as a Bank; and
(v) if the New Bank is organized under the laws of a jurisdiction outside the
United States, attaches the forms prescribed by the Internal Revenue Service of
the United States certifying as to the New Bank's status for purposes of
determining exemption from United States withholding taxes with respect to all
payments to be made to the New Bank under the Credit Agreement and the Notes or
such other documents as are necessary to indicate that all such payments are
subject to such taxes at a rate reduced by an applicable tax treaty.
1.3 The Commitment and Pro Rata Share of each
Bank under the Credit Agreement shall be as described next to its signature
below, which shall be deemed to amend and modify the Pro Rata Share of NBD
Bank, Bank of Montreal and Banque Paribas, New York Branch as currently
described in the Credit Agreement. The New Bank shall be a Bank for all
purposes under the Credit Agreement.
1.4 Simultaneously herewith, the Company shall
deliver a Revolving Credit Note duly executed to the New Bank in the amount of
its Commitment (the "Additional Note"). All references to the Revolving Credit
Notes in the Credit Agreement and in any agreement or the document executed in
connection therewith shall be deemed references to the existing Revolving
Credit Notes and the Additional Note, as amended or modified from time to time
and together with any promissory note or notes issued in exchange or
replacement therefor.
1.5 All references to "20%" in Section 9.6(a)
shall be deleted and "15%" shall be substituted in each place thereof.
1.6 Reference in Section 10.6(i) to
"$110,000,000" shall be deleted and "$130,000,000" shall be substituted in
place thereof.
2
<PAGE> 3
ARTICLE II. REPRESENTATIONS. The Company represents and warrants to the Agent
and the Banks that:
2.1 The execution, delivery and performance of this
Amendment and the Additional Note are within its powers, have been duly
authorized and are not in contravention with any law, of the terms of its
Articles of Incorporation or By-laws, or any undertaking to which it is a party
or by which it is bound.
2.2 This Amendment and the Additional Note are the legal,
valid and binding obligations of the Company enforceable against it in
accordance with their terms.
2.3 After giving effect to the amendments herein
contained, the representations and warranties contained in Section 6 of the
Credit Agreement are true on and as of the date hereof with the same force and
effect as if made on and as of the date hereof.
2.4 No Event of Default or any event or condition which
might become an Event of Default with notice or lapse of time, or both, exists
or has occurred and is continuing on the date hereof.
2.5 The most recent amendment to the Private Placement
Agreements was the Second Amendment to Note Agreements dated as of November 1,
1993, a complete copy of which was delivered to the Banks, and no further
modification or amendment thereto is currently contemplated.
2.6 Other than NOMECO Colombia Oil Company and
Explotaciones NOMECO, Inc., each of which has delivered a Guaranty, and Walter
International which will be joining in the Guaranty pursuant hereto, as the
transactions contemplated by the Purchase Documents have been completed, no
other Restricted Subsidiary is required to deliver a Guaranty pursuant to
Section 7.2(h)(ii) of the Credit Agreement.
ARTICLE III. CONDITIONS PRECEDENT.
3.1 This Amendment shall not become effective until (a)
the Company delivers to the Agent and the Banks copies of resolutions adopted
by the Board of Directors of the Company evidencing the due authorization of
this Amendment and the Additional Note by the Company, (b) the Company shall
have executed the Additional Note, (c) Walter International shall join in the
Guaranty and deliver a board resolution to the Banks, each in form satisfactory
to the Majority Banks, (d) general counsel to the Company shall deliver a
letter to the New Bank authorizing the New Bank to rely on his opinion issued
to the Banks and (e) the Company, the Agent, the Majority Banks and the New
Bank shall execute this Amendment.
3
<PAGE> 4
ARTICLE IV. MISCELLANEOUS.
4.1 References in the Credit Agreement or in any Note,
certificate, instrument or other document to the Credit Agreement shall be
deemed to be references to the Credit Agreement as amended hereby and as
further amended from time to time.
4.2 The Company agrees to pay and to save the Agent
harmless for the payment of all costs and expenses arising in connection with
this Amendment, including the reasonable fees of counsel to the Agent in
connection with preparing this Amendment and the related documents.
4.3 Except as expressly amended hereby, the Company
agrees that (a) the Credit Agreement, the Notes and all other documents and
agreements executed by the Company in connection with the Credit Agreement in
favor of the Agent or the Banks are ratified and confirmed and shall remain in
full force and effect and (b) it has no set off, counterclaim, defense or other
claim or dispute with respect to any of the foregoing. Terms used but not
defined herein shall have the respective meanings ascribed thereto in the
Credit Agreement.
4.4 This Amendment may be signed upon any number of
counterparts with the same effect as if the signatures thereto and hereto were
upon the same instrument, and telecopied signatures shall be effective.
IN WITNESS WHEREOF, the parties signing this Amendment have
caused this Amendment to be executed and delivered as of the day and year first
above written, which shall be the effective date of this Amendment.
CMS NOMECO OIL & GAS CO.
By: /s/ Paul E. Geiger
-----------------------------------
Its: Vice President, Secretary
------------------------------
and Treasurer
-----------------------------
NBD BANK, as a Bank and as Agent
Commitment: $45,000,000 By: /s/ W. Scott Bennett
----------------------------------
Pro Rata Share: 34.6154% Its: Vice President
--------------------------------
4
<PAGE> 5
BANK OF MONTREAL
Commitment: $40,000,000 By: /s/ J. Michael Linton
----------------------------------
Pro Rata Share 30.7692% Its: Director
-----------------------------
BANQUE PARIBAS
Commitment: $25,000,000 By:/s/ Clark K. Thompson
----------------------------------
Pro Rata Share 19.2308% Its: Group Vice President
-----------------------------
135 South LaSalle Street ABN-AMRO BANK N.V.,
Chicago, Illinois 60603 CHICAGO BRANCH
Attention: James R. Morgan
Telephone No: (312) 904-5216 By: /s/ James R. Morgan
Telecopy No: (312) 606-8425 ----------------------------------
Commitment: $20,000,000
Its: Vice President
-----------------------------
Pro Rate Share: 15.3846%
And: /s/ John Wm. Stanger
---------------------------------
Its: Group Vice President
-----------------------------
5
<PAGE> 1
EXHIBIT 10.29(c)
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT, dated as of August
31, 1995 (this "Amendment"), is among CMS NOMECO OIL & GAS CO., a Michigan
corporation (the "Company"), the banks set forth on the signature pages hereof
(collectively, the "Banks") and NBD BANK, as agent for the Banks (in such
capacity, the "Agent").
RECITAL
The Company, the Banks and the Agent are parties to an Amended
and Restated Credit Agreement, dated as of November 1, 1993, amended by a First
Amendment to Credit Agreement dated December 23, 1994 and by a Second Amendment
to Credit Agreement and Assumption Agreement dated as of March 1, 1995 (the
"Credit Agreement"), and the Company has requested that the Agent and the Banks
amend the Credit Agreement as set forth herein.
TERMS
In consideration of the premises and of the mutual agreements
herein contained, the parties agree as follows:
ARTICLE I. AMENDMENTS. The Credit Agreement shall be amended as follows:
1.1 Section 7.2(f) is amended by deleting the period at the end of
clause 7.2(f)(x) and substituting "; and" in place thereof and adding the
following new Section 7.2(f)(xi) to read as follows: "(xi) The Liens described
on Schedule 7.2(f) hereto, but no increase in the amount secured thereby."
1.2 Section 7.2(k) is amended by deleting the period at the end of
Section 7.2(k)(x) and substituting "; and" in place thereof and adding the
following new Section 7.2(k)(xi) to read as follows: "(xi) The Indebtedness
described on Schedule 7.2(f) hereto, but no increase in the amount thereof."
1.3 Schedule 7.2(f) attached hereto is hereby added to the Credit
Agreement as Schedule 7.2(f).
ARTICLE II. REPRESENTATIONS. The Company represents and warrants to the Agent
and the Banks that:
2.1 The execution, delivery and performance of this
Amendment are within its powers, have been duly authorized and are not in
contravention with any law, of the terms of its Articles of Incorporation or
By-laws, or any undertaking to which it is a party or by which it is bound.
<PAGE> 2
2.2 This Amendment is the legal, valid and binding
obligations of the Company enforceable against it in accordance with its terms.
2.3 After giving effect to the amendments herein
contained, the representations and warranties contained in Section 6 of the
Credit Agreement are true on and as of the date hereof with the same force and
effect as if made on and as of the date hereof.
2.4 No Event of Default or any event or condition which
might become an Event of Default with notice or lapse of time, or both, exists
or has occurred and is continuing on the date hereof.
ARTICLE III. MISCELLANEOUS.
3.1 References in the Credit Agreement or in any Note,
certificate, instrument or other document to the Credit Agreement shall be
deemed to be references to the Credit Agreement as amended hereby and as
further amended from time to time.
3.2 The Company agrees to pay and to save the Agent
harmless for the payment of all costs and expenses arising in connection with
this Amendment, including the reasonable fees of counsel to the Agent in
connection with preparing this Amendment and the related documents.
3.3 Except as expressly amended hereby, the Company
agrees that (a) the Credit Agreement, the Notes and all other documents and
agreements executed by the Company in connection with the Credit Agreement in
favor of the Agent or the Banks are ratified and confirmed and shall remain in
full force and effect and (b) it has no set off, counterclaim, defense or other
claim or dispute with respect to any of the foregoing. Terms used but not
defined herein shall have the respective meanings ascribed thereto in the
Credit Agreement.
3.4 This Amendment may be signed upon any number of
counterparts with the same effect as if the signatures thereto and hereto were
upon the same instrument, and telecopied signatures shall be effective.
3.5 The Company represents that it is acquiring Terra
Energy, Ltd., which will become a Subsidiary of the Company. Upon Terra
Energy, Ltd. becoming a Subsidiary, the Company will (a) pay for the
acquisition of Terra Energy, Ltd. by obtaining Subordinated Debt from CMS
Enterprises Company ("Enterprises") in an amount greater than $60,000,000 but
less than $65,000,000 and the Company will execute the subordinated promissory
note in the form of Exhibit A hereto, and will cause Enterprises to execute the
Subordination Agreement in the form of Exhibit B attached hereto, and (b) cause
Terra Energy, Ltd. to execute a Joinder Agreement in the form of Exhibit C
attached hereto and deliver all corporate documents and legal opinions
reasonably requested by the Majority Banks in connection therewith.
THIRD AMENDMENT TO CREDIT AGREEMENT PAGE 3
<PAGE> 3
IN WITNESS WHEREOF, the parties signing this Amendment have
caused this Amendment to be executed and delivered as of the day and year first
above written, which shall be the effective date of this Amendment.
CMS NOMECO OIL & GAS CO.
By: /s/ Paul E. Geiger
Its: Vice President, Secretary
and Treasurer
NBD BANK, as a Bank and as Agent
By: /s/ W. Scott Bennett
Its: Vice President
BANK OF MONTREAL
By: /s/ Howard H. Turner
Its: Director
BANQUE PARIBAS
By: /s/ Charles Thompson
Its: GVP
ABN-AMRO BANK N.V.,
CHICAGO BRANCH
By: /s/ James R. Morgan
Its: Vice President
And: /s/ Andrew K. Miller
Its: Assistant Vice President
THIRD AMENDMENT TO CREDIT AGREEMENT PAGE 4
<PAGE> 4
CONSENT
Each of the undersigned Guarantors consents to the above Third
Amendment and acknowledges and agrees that its Guaranty shall continue in full
force and effect and that is has no set-off, counterclaim, defense or other
claim or dispute thereunder.
CMS NOMECO COLOMBIA OIL COMPANY
By: /s/ Paul E. Geiger
Its: Vice President, Secretary
and Treasurer
EXPLOTACIONES CMS NOMECO, INC.
By: /s/ Paul E. Geiger
Its: Vice President, Secretary
and Treasurer
CMS NOMECO INTERNATIONAL, INC.
By: Paul E. Geiger
Its: Vice President, Secretary
and Treasurer
THIRD AMENDMENT TO CREDIT AGREEMENT PAGE 5
<PAGE> 1
EXHIBIT 15.1
Independent Accountants' Review Report
To the Board of Directors,
CMS NOMECO Oil & Gas Co.:
We have reviewed the accompanying consolidated balance sheet of CMS NOMECO Oil
& Gas Co. (a Michigan corporation and wholly owned subsidiary of CMS
Enterprises Company) and subsidiaries as of September 30, 1995, and the
related consolidated statements of income, stockholder's equity and cash flows
for the nine months ended September 30, 1995. These consolidated financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Detroit, Michigan
October 20, 1995.
<PAGE> 2
EXHIBIT 15.1
To CMS NOMECO Oil & Gas Co.:
We are aware that CMS NOMECO Oil & Gas Co. has included in this registration
statement our report dated October 20, 1995, covering our review of the
unaudited interim financial information contained therein. Pursuant to
Regulation C of the Securities Act of 1933, that report is not considered a
part of the registration statement prepared or certified by our Firm or a
report prepared or certified by our Firm within the meaning of Sections 7 and
11 of the Act.
Arthur Andersen LLP
Detroit, Michigan
October 23, 1995.
<PAGE> 1
EXHIBIT 15.2
Independent Accountants' Review Report
The Board of Directors
The Nuevo Congo Company and
Walter International Congo, Inc.
(formerly Amoco Congo Exploration and
Petroleum Companies):
We have reviewed the accompanying combined balance sheet of Amoco Congo
Exploration and Petroleum Companies (Amoco Congo) as of January 31, 1995, and
the related combined statements of operations, stockholder's equity, and cash
flows for the month then ended. These combined financial statements are the
responsibility of the Companies' management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly we do not express such an opinion.
Based on our review we are not aware of any material modifications that should
be made to the combined financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
October 17, 1995
<PAGE> 2
EXHIBIT 15.2
CMS NOMECO Oil & Gas Co.
Jackson, Michigan
Re: Registration Statement No. 33-_______
Ladies and Gentlemen:
With respect to the subject registration statement, we acknowledge our
awareness of the use therein of our report dated October 17, 1995 related to
our review of the combined interim financial information of Amoco Congo
Exploration and Petroleum Companies.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the
meaning of sections 7 and 11 of the Act.
Very truly yours,
KPMG Peat Marwick LLP
Houston, Texas
October 23, 1995.
<PAGE> 1
Exhibit 21.1
CMS NOMECO OIL & GAS CO.
CORPORATE STRUCTURE
(ALL ENTITIES 100% OWNED UNLESS OTHERWISE INDICATED)
CMS NOMECO Oil & Gas Co.
CMS NOMECO Colombia Oil Company
NOMECO Ecuador Oil Company
NOMECO Thailand Oil Company
Comeco Petroleum Holdings, Inc. - 50% Shareholder
CMS NOMECO Pipeline Company
CMS NOMECO PNG Oil Co.
Explotaciones CMS NOMECO Inc.
CMS NOMECO Services Company
CMS NOMECO Peru Company
CMS NOMECO China Oil Co.
CMS NOMECO Equatorial Guinea Oil & Gas Co.
NOMECO Australia Pty. Limited
NOMECO Exploration (Thailand) Limited
CMS NOMECO Holdings Ltd.
CMS NOMECO International Ltd.
CMS NOMECO Ecuador LDC
CMS NOMECO Argentina LDC
CMS NOMECO Venezuela LDC
CMS NOMECO Alba LDC
CMS NOMECO E.G. LDC
CMS NOMECO International Inc.
Walter International Colombia, Inc.
Walter International Morocco, Inc.
Walter International Senegal, Inc.
Walter International France, Inc.
Walter International Guinea-Bissau, Inc.
Walter International Kenya, Inc.
Walter International Espana, Inc.
Walter International Gabon, Inc.
Walter International Tunisia, Inc.
CMS NOMECO International Equatorial Guinea, Inc.
Walter International Transportation, Inc.
CMS NOMECO International Venezuela, Inc.
Walter Congo Holdings, Inc.
Walter International Congo, Inc.
<PAGE> 2
Terra Energy, Ltd.
Terra Pipeline Company
Kristin Corporation
Energy Acquisition Operating Corporation
Wellcorps LLC (55%)
Thunder Bay Pipeline Company, LLC (50%)
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
prospectus of our report dated January 27, 1995 on the consolidated financial
statements of CMS NOMECO Oil & Gas Co. and subsidiaries as of December 31, 1993
and 1994, and for the three years ended December 31, 1994, our report dated
October 16, 1995 on the Pro Forma Consolidated Statement of Income for the year
ended December 31, 1994, our report dated July 17, 1995 on the consolidated
financial statements of CMS NOMECO International, Inc. and subsidiaries as of
December 31, 1994, and for the year then ended, and our report dated July 14,
1995 on the consolidated financial statements of Terra Energy Ltd. and
subsidiaries as of December 31, 1994, and for the year then ended all included
herein and to all references to our Firm included in this prospectus.
Arthur Andersen LLP
Detroit, Michigan,
October 23, 1995.
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
CMS Nomeco Oil & Gas Co.
Detroit, Michigan
We consent to the use in this Registration Statement of CMS Nomeco Oil & Gas
Co. on Form S-1 of our report dated June 24, 1994 (July 31, 1994, as to Note 8)
(such report expresses an unqualified opinion and includes an explanatory
paragraph referring to substantial doubt about Walter International, Inc.'s
ability to continue as a going concern), appearing in the Prospectus, which is
a part of this Registration Statement, and to the references to us under the
heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Houston, Texas
October 23, 1995.
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
CMS NOMECO Oil & Gas Co.:
We consent to the use of our audit report dated April 18, 1995, on the combined
financial statements of Amoco Congo Exploration and Petroleum Companies as of
December 31, 1994 and 1993, and for each of the years in the three-year period
then ended included herein and to the reference to our firm under the heading
"Experts" in the prospectus.
KPMG Peat Marwick LLP
Houston, Texas
October 23, 1995.
<PAGE> 1
Exhibit 23.5
CONSENT OF RYDER SCOTT COMPANY
We hereby consent to the reference to our firm under the caption
"Experts" and the references to the results of our reserve report, dated
October 2, 1995 (the "Reserve Letter") and the inclusion of the summary
letter relating to such reserve report, together with appropriate attachments
thereto, in the Registration Statement and related Prospectus of CMS NOMECO
Oil & Gas Co. (the "Company") on Form S-1 filed with the Securities and
Exchange Commission.
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
October 26, 1995
<PAGE> 1
Exhibit 24.1
October 23, 1995
Mr. Alan M. Wright
Mr. William H. Stephens, III and
Mr. Paul E. Geiger
CMS NOMECO Oil & Gas Co.
One Jackson Square
Jackson, MI 49201
CMS NOMECO Oil & Gas Co. proposes to file a registration statement with the
Securities and Exchange Commission with respect to the proposed issue and sale
of up to 20% of the issued and outstanding shares of its Common Stock (on a
fully diluted basis) to the public.
Each of the persons executing this instrument hereby appoints each of you
lawful attorney for him and in his name to sign and cause to be filed with the
Securities and Exchange Commission and The New York Stock Exchange a
registration statement(s) and/or any appropriate amendment or amendments to
said registration statements(s) (including any pre-effective or post-effective
amendments) and other necessary documents required to be filed with the
Securities and Exchange Commission or The New York Stock Exchange.
/s/ Richard J. Burgess
- ------------------------- -------------------------
Richard J. Burgess Charles R. Owens
/s/ Frank M. Burke, Jr. /s/ S. Kinnie Smith, Jr.
- ------------------------- -------------------------
Frank M. Burke, Jr. S. Kinnie Smith, Jr.
/s/ Victor J. Fryling /s/ P. W. J. Wood
- ------------------------- -------------------------
Victor J. Fryling P. W. J. Wood
/s/ J. Stuart Hunt /s/ Alan M. Wright
- ------------------------- -------------------------
J. Stuart Hunt Alan M. Wright
/s/ Thomas K. Matthews, II /s/ Gordon L. Wright
- ------------------------- -------------------------
Thomas K. Matthews, II Gordon L. Wright
/s/ William T. McCormick, Jr.
- -------------------------
William T. McCormick, Jr.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF INCOME AND BALANCE SHEET, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1993 DEC-31-1994
<PERIOD-START> JAN-01-1994 JAN-01-1995
<PERIOD-END> DEC-31-1994 SEP-30-1995
<CASH> 6,086 9,068
<SECURITIES> 0 0
<RECEIVABLES> 14,809 69,074
<ALLOWANCES> 226 226
<INVENTORY> 0 0
<CURRENT-ASSETS> 22,104 91,342
<PP&E> 934,460 1,073,981
<DEPRECIATION> 496,403 526,038
<TOTAL-ASSETS> 472,700 662,406
<CURRENT-LIABILITIES> 16,494 66,371
<BONDS> 119,462 192,371
<COMMON> 14,600 14,600
0 0
0 0
<OTHER-SE> 274,286 326,489
<TOTAL-LIABILITY-AND-EQUITY> 472,700 662,406
<SALES> 66,735 78,350
<TOTAL-REVENUES> 79,068 96,088
<CGS> 973 773
<TOTAL-COSTS> 23,161 36,256
<OTHER-EXPENSES> 40,531 26,667
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,023 6,455
<INCOME-PRETAX> 4,274 20,850
<INCOME-TAX> (5,523) 386
<INCOME-CONTINUING> 9,797 20,464
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (987)
<CHANGES> 0 0
<NET-INCOME> 9,797 19,477
<EPS-PRIMARY> .43 .76
<EPS-DILUTED> 0 0
</TABLE>
