e424b3
Filed Pursuant to
Rule 424(b)(3)
Registration No. 333-141637
462(b) Registration
No. 333-141675
Prospectus
Denbury Resources
Inc.
$150,000,000
71/2% Senior
Subordinated Notes due 2015
Interest payable June 15 and
December 15
Issue price: 100.5%, plus
accrued interest from December 15, 2006
The notes offered hereby constitute an additional issuance of
71/2% Senior
Subordinated Notes due 2015 pursuant to our Indenture, dated as
of December 7, 2005, under which our existing
$150.0 million in aggregate principal amount of
71/2% Senior
Subordinated Notes due 2015 were previously issued. The
additional notes offered hereby will trade as a single class
with our previously issued
71/2% Senior
Subordinated Notes due 2015. In this prospectus, the term
additional notes refers to the additional notes
offered hereby and the term notes refers to both the
additional notes and our previously issued
71/2% Senior
Subordinated Notes due 2015.
The notes will mature on December 15, 2015. The next
interest payment will be on June 15, 2007. We may redeem
the notes on and after December 15, 2010 at the redemption
prices described herein. Prior to December 15, 2008, we may
redeem up to 35% of the notes using proceeds of certain equity
offerings. There is no sinking fund for the notes.
The notes are our senior subordinated obligations. Our
obligations under the notes are guaranteed on a senior
subordinated basis by some of our current and future domestic
subsidiaries.
Investing in the notes involves risks. See Risk
factors beginning on page 8.
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Underwriting
discounts
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Proceeds to
Denbury
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Price to
public1
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and
commissions
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Resources
Inc.1
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Per note
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100.5%
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1.0%
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99.5%
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Total
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$150,750,000
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$1,507,500
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$149,242,500
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(1)
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Plus accrued interest from
December 15, 2006
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The additional notes will not be listed on any securities
exchange. Delivery of the additional notes, in book-entry form,
will be made on or about April 3, 2007 through The
Depository Trust Company.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities, or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
Sole book-running manager
JPMorgan
March 29, 2007
About this
prospectus
This prospectus relates to the offer and sale by us of the
additional notes. You should rely on the information contained
or incorporated by reference into this prospectus. We have not,
and the underwriters have not, authorized any other person to
provide you with different information. If anyone else provides
you with different or inconsistent information, you should not
rely on it. We and the underwriters are not making an offer to
sell the additional notes in any jurisdiction where the offer or
sale is not permitted. You should assume that the information
contained in this prospectus and the documents incorporated by
reference are accurate only as of their respective dates. Our
business, results of operations, financial condition and
prospects may have changed since those dates.
Table of
contents
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Page
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1
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8
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12
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12
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13
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14
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65
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72
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74
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74
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75
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Our principal executive office is located at 5100 Tennyson
Parkway, Suite 1200, Plano, Texas 75024 and our telephone
number is
(972) 673-2000.
We also have five primary field offices located in Houma,
Louisiana; Laurel, Mississippi; McComb, Mississippi; Brandon,
Mississippi; and Cleburne, Texas.
i
Forward-looking
statements
Some of the information included in this prospectus, any
prospectus supplement and the documents we have incorporated by
reference contain forward-looking statements. Forward-looking
statements use forward-looking terms such as
believe, expect, may,
intend, will, project,
budget, should or anticipate
or other similar words. These statements discuss
forward-looking information such as:
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CO2
availability, deliverability and tertiary production targets;
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other anticipated capital expenditures and budgets;
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future cash flows and borrowings;
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pursuit of potential future acquisition or drilling
opportunities; and
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sources of funding for exploration and development.
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These forward-looking statements are based on assumptions that
we believe are reasonable, but they are open to a wide range of
uncertainties and business risks, including the following:
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fluctuations of the prices received or demand for oil and
natural gas;
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uncertainty of drilling results, reserve estimates and reserve
replacement;
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operating hazards;
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acquisition risks;
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reservoir response to
CO2
injections;
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unexpected substantial variances in capital requirements;
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environmental matters; and
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general economic conditions.
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Other factors that could cause actual results to differ
materially from those anticipated are discussed in our periodic
filings with the SEC, including our Annual Report on
Form 10-K
for the year ended December 31, 2006.
When considering these forward-looking statements, you should
keep in mind the risk factors and other cautionary statements in
this prospectus, any prospectus supplement and the documents we
have incorporated by reference. We will not update these
forward-looking statements unless the securities laws require us
to do so.
ii
Where you can
find more information
We are subject to the informational requirements of the
Securities Exchange Act of 1934, which requires us to file
annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any
document that we file at the Public Reference Room of the SEC at
100 F Street, N.E., Washington, D.C. 20549. Please call the
SEC at
1-800-SEC-0330
for further information on the operation of its public reference
room. You may view our reports electronically at the SECs
Internet site at http://www.sec.gov, or at our own website at
http://www.denbury.com.
This prospectus constitutes part of a Registration Statement on
Form S-3
filed with the SEC under the Securities Act of 1933. It omits
some of the information contained in the Registration Statement,
and reference is made to the Registration Statement for further
information with respect to us and the securities we are
offering. Any statement contained in this prospectus concerning
the provisions of any document filed as an exhibit to the
Registration Statement or otherwise filed with the SEC is not
necessarily complete, and in each instance reference is made to
the copy of the filed document.
The SEC allows us to incorporate by reference the
information we file with them, which means that we can disclose
important information to you by referring you to those
documents. Any information referred to in this way is considered
part of this prospectus from the date we file that document. Any
reports filed by us with the SEC after the date of this
prospectus and before the date that the offering of the
securities by means of this prospectus is terminated will
automatically update and, where applicable, supercede any
information contained in this prospectus or incorporated by
reference in this prospectus. We incorporate by reference
(excluding any information furnished pursuant to Items 2.02
or 7.01 of any report on
Form 8-K)
the documents listed below and any future filings made with the
SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until we sell all the securities
covered by this prospectus:
1. Our Annual Report on
Form 10-K
for the year ended December 31, 2006 filed on March 1,
2007;
2. Our current Report on
Form 8-K/A
filed January 8, 2007.
You may request a copy of these filings at no cost, by writing
or telephoning Phil Rykhoek, Senior Vice President and Chief
Financial Officer, Denbury Resources Inc., 5100 Tennyson Pkwy.,
Suite 1200, Plano, Texas 75024, phone:
(972) 673-2000.
iii
Summary
In this prospectus, when we use the terms
Denbury, the Company, we or
our, we mean Denbury Resources Inc. and its
subsidiaries on a consolidated basis, unless otherwise indicated
or the context requires otherwise. References to oil and natural
gas prices used in this prospectus, mean the NYMEX WTI oil price
and the Henry Hub natural gas cash price per MMbtu, unless
otherwise indicated. Oil and natural gas terms used in this
prospectus are defined in the Glossary section.
The
company
We are a growing independent oil and gas company engaged in
acquisition, development and exploration activities in the
U.S. Gulf Coast region. We are the largest oil and natural
gas producer in Mississippi, own the largest reserves of carbon
dioxide
(CO2)
used for tertiary oil recovery east of the Mississippi River,
and hold significant operating acreage onshore Louisiana,
Alabama and in the Barnett Shale play near Forth Worth, Texas.
Our goal is to increase the value of acquired properties through
a combination of exploitation, drilling and proven engineering
extraction processes, including secondary (waterflood) and
tertiary recovery operations.
Since we acquired our first carbon dioxide tertiary flood in
Mississippi in 1999, we have gradually increased our emphasis on
these types of operations. During this time, we have learned a
considerable amount about tertiary operations and working with
carbon dioxide. Our interest in tertiary operations has
increased to the point that approximately 60% of our 2007
capital budget is dedicated to tertiary related operations. We
particularly like this play as (i) it has a lower risk and
is more predictable than most traditional exploration and
development activities, (ii) it provides a reasonable rate
of return at relatively low oil prices (generally around $30 a
barrel at todays cost levels, depending on the specific
field and area), and (iii) we have virtually no competition
for this type of activity in our geographic area. Generally,
from East Texas to Florida, there are no known significant
natural sources of carbon dioxide except our own, and these
large volumes of
CO2
that we own drive the play. Please refer to
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the section
entitled Results of
OperationsCO2
Operations contained in our
Form 10-K
for the year ended December 31, 2006 for further
information regarding these operations, their potential and the
ramifications of this focus.
Business
strategy
As part of our corporate strategy, we believe in the following
fundamental principles:
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remain focused in specific regions;
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acquire properties where we believe additional value can be
created through a combination of exploitation, development,
exploration and marketing, including secondary and tertiary
operations;
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acquire properties that give us a majority working interest and
operational control or where we believe we can ultimately obtain
it;
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maximize the value of our properties by increasing production
and reserves while reducing cost; and
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maintain a highly competitive team of experienced and
incentivized personnel.
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1
The
offering
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Issuer |
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Denbury Resources Inc. |
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Notes offered |
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$150,000,000 aggregate principal amount of additional
71/2% Senior
Subordinated Notes due 2015. On December 21, 2005, we
issued and sold $150,000,000 of
71/2% Senior
Subordinated Notes due 2015. The additional notes offered hereby
will trade as a single class of notes with our previously issued
71/2% Senior
Subordinated Notes due 2015. As used herein, the term
additional notes refers to the additional notes
offered hereby and the term notes refers to both the
additional notes and our previously issued
71/2% Senior
Subordinated Notes due 2015. |
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Maturity |
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December 15, 2015 |
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Interest |
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71/2% per
annum, payable semi-annually in arrears on June 15 and December
15 of each year, commencing June 15, 2007. |
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Optional redemption |
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Except as set forth below, we cannot redeem the notes before
December 15, 2010. On and after December 15, 2010, we
can redeem some or all of the notes in cash at the redemption
prices described in this prospectus, plus accrued and unpaid
interest to the date of redemption. In addition, at any time and
from time to time, on and before December 15, 2008, we may
redeem up to 35% of the notes with the proceeds of certain
equity offerings. |
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Change of control |
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If a change of control occurs, subject to certain conditions, we
must give holders of the notes an opportunity to sell us the
notes at a purchase price of 101% of the principal amount of the
notes, plus accrued and unpaid interest to the date of the
purchase. See Description of the notesChange of
control. |
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Guarantees |
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The payment of the principal, premium and interest on the notes
are fully and unconditionally guaranteed on a senior
subordinated basis by some of our current and future domestic
subsidiaries. The subsidiary guarantees are subordinated to all
existing and future senior indebtedness of our guarantor
subsidiaries, including their guarantees of our obligations
under our bank credit facility. See Description of the
notesGuarantees. |
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Ranking |
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The notes are our senior subordinated unsecured obligations. The
notes and the guarantees rank: |
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junior to all of our and the guarantors
existing and future senior indebtedness;
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equally with any of our and the guarantors
existing and future senior subordinated indebtedness; and
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senior to any of our and the guarantors
existing and future subordinated indebtedness.
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2
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As of December 31, 2006, after giving pro forma effect to
this offering and the application of the net proceeds from this
offering, we would not have had any outstanding senior secured
indebtedness under our bank credit facility senior to the notes.
See Description of the notesRanking. |
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Covenants |
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The indenture governing the notes contains covenants which limit
our ability and certain of our subsidiaries ability to: |
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incur additional debt;
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pay dividends on our capital stock or redeem,
repurchase or retire our capital stock or subordinated debt;
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make investments;
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create liens on our assets;
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create restrictions on the ability of our restricted
subsidiaries to pay dividends or make other payments to us;
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engage in transactions with our affiliates;
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transfer or sell assets; and
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consolidate, merge or transfer all or substantially
all of our assets and the assets of our subsidiaries.
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These covenants are subject to important exceptions and
qualifications, which are described under the caption
Description of the notesCertain covenants. |
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Use of proceeds |
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We plan to use the net proceeds from this offering to repay a
portion of our current borrowings under our bank credit
facility, which were approximately $180.0 million as of
March 25, 2007. See Use of proceeds. |
Risk
factors
See Risk factors beginning on page 8 of this
prospectus for a discussion of certain factors that you should
carefully consider before investing in the additional notes.
3
Summary
consolidated financial data
The summary historical consolidated financial data set forth
below as of and for each of the three years ended
December 31, 2004, 2005 and 2006 have been derived from our
audited consolidated financial statements. The summary
consolidated financial data are qualified in their entirety by
and should be read in conjunction with our consolidated
financial statements and related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included in our Annual
Report on
Form 10-K
for the year ended December 31, 2006, incorporated by
reference into this prospectus.
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Year ended
December 31,
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(dollars
in thousands)
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2004
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2005
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2006
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Statement of operations
Data:
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Revenues:
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Oil, natural gas and related
product sales
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$
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444,777
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$
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549,055
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$
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716,557
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CO2
sales
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6,276
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8,119
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9,376
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Loss on effective hedge contracts
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(70,469
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Interest income and other
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2,388
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3,218
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5,603
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Total revenues
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$
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382,972
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$
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560,392
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$
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731,536
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Expenses:
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Lease operating expenses
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87,107
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108,550
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167,271
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Production taxes and marketing
expenses
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18,737
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27,582
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36,351
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CO2
operating expenses
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1,338
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2,251
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3,190
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General and administrative
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21,461
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28,540
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43,014
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Depreciation, depletion, and
amortization
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97,527
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98,802
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149,165
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Interest, net of amounts
capitalized
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19,468
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17,978
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23,575
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Commodity derivative expense
(income)
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15,358
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28,962
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(19,828
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Total expenses
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$
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260,996
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$
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312,665
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$
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402,738
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Equity in net income (loss) of
Genesis Energy
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(136
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314
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776
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Income before income taxes
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$
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121,840
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$
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248,041
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$
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329,574
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Income tax provision:
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Current income taxes
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22,929
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27,177
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19,865
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Deferred income taxes
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16,463
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54,393
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107,252
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Total income taxes
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39,392
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81,570
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127,117
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Net income
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$
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82,448
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$
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166,471
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$
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202,457
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4
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Year ended
December 31,
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(dollars
in thousands)
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2004
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2005
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2006
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Other financial data:
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Oil and gas capital expenditures
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$
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178,070
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$
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379,236
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$
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826,327
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CO2
capital expenditures
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50,265
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78,726
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63,586
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Net cash provided by operating
activities
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168,652
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360,960
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461,810
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Net cash used for investing
activities1
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(93,550
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(383,687
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(856,627
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Net cash provided by (used for)
financing activities
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(66,251
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154,777
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283,601
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Balance sheet data (at end of
period):
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Oil and gas properties,
net2
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$
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659,855
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$
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940,786
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$
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1,612,688
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Total assets
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992,706
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1,505,069
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2,139,837
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Long-term debt, including current
portion
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227,956
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380,035
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514,844
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Stockholders equity
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541,672
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733,662
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1,106,059
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(1)
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Includes $187.5 million of
proceeds from sale of Denbury Offshore, Inc. for the year ended
December 31, 2004.
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(2)
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Excludes net book value of
CO2,
related property and equipment.
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5
Summary oil and
natural gas reserve data
The following table summarizes our estimates of net proved oil
and natural gas reserves as of the dates indicated and the
present value attributable to the reserves at such dates.
Estimates of our net proved oil and natural gas reserves as of
December 31, 2004, 2005 and 2006 were prepared by DeGolyer
and MacNaughton, an independent petroleum engineering firm
located in Dallas, Texas.
All reserve estimates were prepared using constant prices and
costs in accordance with the guidelines of the SEC based on the
prices received on a
field-by-field
basis as of December 31 of each year. Reserve estimates do
not include any value for probable or possible reserves which
may exist, nor do they include any value for undeveloped
acreage. The reserve estimates represent our net revenue
interest in our properties.
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As of
December 31,
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2004
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2005
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2006
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Estimated proved
reserves:
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Oil (MBbls)
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101,287
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106,173
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126,185
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Natural gas (MMcf)
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168,484
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278,367
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288,826
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Oil equivalent (MBOE)
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129,369
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152,568
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174,322
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Carbon Dioxide
(MMcf)1
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2,664,633
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4,645,702
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5,525,948
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Percentage of total
MBOE:
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Proved producing
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39%
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40%
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48%
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Proved non-producing
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16%
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16%
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17%
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Proved undeveloped
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45%
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44%
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35%
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Representative oil and gas
prices2:
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Oil
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$
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43.45
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$
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61.04
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$
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61.05
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Natural gas
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6.18
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10.08
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5.63
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Present values (in
thousands)3:
|
|
|
|
|
|
|
|
|
|
Discounted estimated future net
cash flow before income taxes
(PV-10 Value)
|
|
$
|
1,643,289
|
|
$
|
3,215,478
|
|
$
|
2,695,199
|
Standardized measure of discounted
future net cash flows after income taxes
|
|
$
|
1,129,196
|
|
$
|
2,084,449
|
|
$
|
1,837,341
|
Average reserve life
index4
|
|
|
10.7
|
|
|
14.0
|
|
|
13.0
|
|
|
|
|
|
(1)
|
|
Based on a gross working interest
basis and includes reserves dedicated to volumetric production
payments of 178.7 Bcf at December 31, 2004,
237.1 Bcf at December 31, 2005 and 210.5 Bcf at
December 31, 2006.
|
|
(2)
|
|
Oil reference prices as of each
respective period end were based on NYMEX WTI oil prices per Bbl
and natural gas reference prices as of each respective period
end were based on Henry Hub cash prices per MMBtu, with these
representative prices adjusted for differentials by field to
arrive at the appropriate net price we receive.
|
|
(3)
|
|
Determined based on period end
unescalated prices and costs in accordance with the guidelines
of the SEC, discounted at 10% per annum.
|
|
(4)
|
|
Average reserve life index is
calculated by dividing total reserves by our actual production
for the period.
|
6
Summary operating
data
The following table shows certain summary information with
respect to production and sales of oil and natural gas for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
Average daily production
volumes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (Bbls)
|
|
|
19,247
|
|
|
|
20,013
|
|
|
|
22,936
|
|
Natural gas
(Mcf)1
|
|
|
82,224
|
|
|
|
58,696
|
|
|
|
83,075
|
|
BOE2
|
|
|
32,951
|
|
|
|
29,795
|
|
|
|
36,782
|
|
Unit sales prices (excluding
impact of derivative settlements):
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per Bbl of oil
|
|
$
|
36.46
|
|
|
$
|
50.30
|
|
|
$
|
59.87
|
|
Price per Mcf of natural gas
|
|
|
6.24
|
|
|
|
8.48
|
|
|
|
7.10
|
|
Unit sales prices (including
impact of derivative settlements):
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per Bbl of oil
|
|
$
|
27.36
|
|
|
$
|
50.30
|
|
|
$
|
59.23
|
|
Price per Mcf of natural gas
|
|
|
5.57
|
|
|
|
7.70
|
|
|
|
7.10
|
|
Per BOE
data:2
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil, natural gas and related
product sales
|
|
$
|
36.88
|
|
|
$
|
50.49
|
|
|
$
|
53.37
|
|
Loss on settlements of derivative
contracts
|
|
|
(7.01
|
)
|
|
|
(1.54
|
)
|
|
|
(0.39
|
)
|
Lease operating expenses
|
|
|
(7.22
|
)
|
|
|
(9.98
|
)
|
|
|
(12.46
|
)
|
Production taxes and marketing
expenses
|
|
|
(1.55
|
)
|
|
|
(2.54
|
)
|
|
|
(2.71
|
)
|
|
|
|
|
|
|
Production netback
|
|
$
|
21.10
|
|
|
$
|
36.43
|
|
|
$
|
37.81
|
|
Non-tertiary
CO2
operating margin
|
|
|
0.41
|
|
|
|
0.54
|
|
|
|
0.46
|
|
General and administrative expenses
|
|
|
(1.78
|
)
|
|
|
(2.62
|
)
|
|
|
(3.20
|
)
|
Net cash interest expense
|
|
|
(1.34
|
)
|
|
|
(1.28
|
)
|
|
|
(1.26
|
)
|
Current income taxes and other
|
|
|
(1.78
|
)
|
|
|
(1.50
|
)
|
|
|
(0.41
|
)
|
Changes in assets and liabilities
relating to operations
|
|
|
(2.63
|
)
|
|
|
1.62
|
|
|
|
1.00
|
|
|
|
|
|
|
|
Cash flow from operations
|
|
$
|
13.98
|
|
|
$
|
33.19
|
|
|
$
|
34.40
|
|
|
|
|
|
|
(1)
|
|
Decrease in natural gas production
in 2005 is primarily related to the sale of Denbury Offshore,
Inc. in July 2004.
|
|
(2)
|
|
Barrel of oil equivalent using the
ratio of one Bbl of oil to six Mcf of natural gas.
|
7
Risk
factors
Investing in the additional notes involves risks. Before
purchasing any additional notes we offer, you should carefully
consider the risk factors that are incorporated by reference
herein from Item 1.A., captioned Risk Factors,
of our Annual Report on
Form 10-K
for the year ended December 31, 2006. There are additional
risk factors related to our indebtedness and notes, as described
below.
Risks related to
our indebtedness and the notes
Our level of
indebtedness may adversely affect operations and limit our
growth.
As of December 31, 2006, after giving pro forma effect to
this offering and the application of the net proceeds from this
offering as described under Use of proceeds, we
would not have had any bank debt outstanding against a borrowing
base of $500.0 million. The next semi-annual
redetermination of the borrowing base for our bank credit
facility will be on April 1, 2007. Our bank debt borrowing
base is adjusted at the banks discretion and is based in
part upon external factors over which we have no control. If our
then redetermined borrowing base is less than our outstanding
borrowings under the facility, we will be required to repay the
deficit over a period of six months.
Our bank debt as of December 31, 2006 was
$134 million. We have borrowed approximately
$46.0 million between January 1, 2007 and
March 25, 2007 generally for capital expenditures, and plan
to borrow an additional $50.0 million at the end of March
2007 primarily to fund a pending acquisition. We will incur
additional indebtedness in the future under our bank credit
facility in connection with our acquisition, development,
exploitation and exploration of oil and natural gas producing
properties as our projected 2007 capital expenditures are higher
than our projected 2007 cash flow from operations. Further, our
cash flow from operations is highly dependent on the prices that
we receive for oil and natural gas. If oil and natural gas
prices were to decline significantly, particularly for an
extended period of time, our degree of leverage could increase
substantially. The level of our indebtedness could have
important consequences to holders of the notes, including but
not limited to, the following:
|
|
|
a substantial portion of our cash flows from operations may be
dedicated to servicing our indebtedness and would not be
available for other purposes;
|
|
|
our business may not generate sufficient cash flow from
operations to enable us to continue to meet our obligations
under our indebtedness;
|
|
|
our level of indebtedness may impair our ability to obtain
additional financing in the future for working capital, capital
expenditures, acquisitions or general corporate and other
purposes;
|
|
|
our interest expense may increase in the event of increases in
interest rates, because certain of our borrowings are at
variable rates of interest;
|
|
|
our vulnerability to general adverse economic and industry
conditions may increase, potentially restricting us from making
acquisitions, introducing new technologies or exploiting
business opportunities;
|
8
|
|
|
our ability to borrow additional funds, dispose of assets, pay
dividends and make certain investments may be limited by the
covenants contained in the agreements governing our outstanding
indebtedness; and
|
|
|
our debt covenants may also affect our flexibility in planning
for, and reacting to, changes in the economy and in our
industry. Our failure to comply with such covenants could result
in an event of default under such debt instruments which, if not
cured or waived, could have a material adverse effect on us.
|
If we are unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments on our
indebtedness or if we otherwise fail to comply with the various
covenants in such indebtedness, including covenants in our bank
credit facility, we would be in default. This default would
permit the holders of such indebtedness to accelerate the
maturity of such indebtedness and could cause defaults under
other indebtedness, including the notes, or result in our
bankruptcy. Such defaults, or any bankruptcy resulting
therefrom, could result in a default on the notes and could
delay or preclude payment of principal of, or interest on, the
notes. Our ability to meet our obligations will depend upon our
future performance, which will be subject to prevailing economic
conditions and to financial, business and other factors,
including factors beyond our control.
Your right to
receive payments on the notes is junior to our existing senior
indebtedness and the existing senior indebtedness of our
subsidiary guarantors.
The indebtedness evidenced by the notes and the guarantees are
senior subordinated obligations of Denbury and our subsidiary
guarantors. The payment of the principal of, premium on, if any,
and interest on the notes and the payment of the subsidiary
guarantees are each subordinate in right of payment, as set
forth in the indenture, to the prior payment in full of all
senior indebtedness of Denbury or the senior indebtedness of our
subsidiary guarantors, as the case may be, including the
obligations of Denbury under, and the obligations of our
subsidiary guarantors with respect to, our bank credit facility.
Any future subsidiary guarantee will be similarly subordinated
to senior indebtedness of such subsidiary guarantor.
As of March 25, 2007, after giving pro forma effect to this
offering and the application of the net proceeds from this
offering as described under Use of proceeds, our
senior indebtedness would have been approximately
$37.1 million, representing approximately
$30.0 million of bank debt outstanding against a borrowing
base of $500.0 million and approximately $7.1 million
of capital lease obligations. Any additional borrowings on the
borrowing base would also be senior indebtedness if incurred.
Although the indenture contains limitations on the amount of
additional indebtedness that we may incur, under certain
circumstances the amount of such indebtedness could be
substantial and, in any case, such indebtedness may be senior
indebtedness. See Description of the notesCertain
covenantsLimitations on indebtedness.
Because the notes are unsecured and because of the subordination
provisions of the notes, in the event of our bankruptcy,
liquidation or dissolution or of any subsidiary guarantor, our
assets and the assets of the subsidiary guarantors would be
available to pay obligations under the notes only after all
payments had been made on our and the subsidiary
guarantors senior indebtedness, including under our bank
credit facility. We cannot assure you that sufficient assets
will remain after all these payments have been made to make any
payments on the notes, including payments of interest when due.
Also, because of these subordination provisions, you may recover
less ratably than our other creditors in a bankruptcy,
liquidation or dissolution. In
9
addition, all payments on the notes and the guarantees will be
prohibited in the event of a payment default on senior
indebtedness, including borrowings under our bank credit
facility, and may be prohibited for up to 180 days in the
event of non-payment defaults on certain of our senior
indebtedness, including the bank credit facility. See
Description of the notesRanking.
The notes are not
secured by our assets nor those of our subsidiary
guarantors.
The notes are our general unsecured obligations and are
effectively subordinated in right of payment to all of our
secured indebtedness. If we become insolvent or are liquidated,
our assets which serve as collateral under our secured
indebtedness would be made available to satisfy our obligations
under any secured debt before any payments are made on the
notes. Our obligations under our bank credit facility are
secured by substantially all of our producing oil and gas
properties.
If we undergo a
change of control, we may not have the ability to raise the
funds necessary to finance the change of control offer required
by the indenture governing the notes, which would violate the
terms of the notes.
Upon the occurrence of a change of control, holders of the notes
will have the right to require us to purchase all or any part of
such holders notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if
any, to the date of purchase. The events that constitute a
change of control under the indenture would constitute a default
under our bank credit facility, which prohibits the purchase of
the notes by us in the event of certain change of control
events, unless, and until, such time as our indebtedness under
the bank credit facility is repaid in full. There can be no
assurance that either we or our subsidiary guarantors would have
sufficient financial resources available to satisfy all of our
or their obligations under the bank credit facility and these
notes in the event of a change in control. Our failure to
purchase the notes as required under the indenture would result
in a default under the indenture and under the bank credit
facility, each of which could have material adverse consequences
for us and the holders of the notes. See Description of
the notesChange of control.
A subsidiary
guarantee could be voided if it constitutes a fraudulent
transfer under U.S. bankruptcy or similar state law, which
would prevent the holders of the notes from relying on that
subsidiary to satisfy claims.
Under U.S. bankruptcy law and comparable provisions of
state fraudulent transfer laws, a guarantee can be voided, or
claims under the guarantee may be subordinated to all other
debts of that guarantor if, among other things, the guarantor,
at the time it incurred the indebtedness evidenced by its
guarantee or, in some states, when payments become due under the
guarantee, received less than reasonably equivalent value or
fair consideration for the incurrence of the guarantee and:
|
|
|
was insolvent or rendered insolvent by reason of such incurrence;
|
|
|
was engaged in a business or transaction for which the
guarantors remaining assets constituted unreasonably small
capital; or
|
10
|
|
|
intended to incur, or believed that it would incur, debts beyond
its ability to pay those debts as they mature.
|
A guarantee may also be voided, without regard to the above
factors, if a court found that the guarantor entered into the
guarantee with the actual intent to hinder, delay or defraud its
creditors.
A court would likely find that a guarantor did not receive
reasonably equivalent value or fair consideration for its
guarantee if the guarantor did not substantially benefit
directly or indirectly from the issuance of the notes. If a
court were to void a guarantee, you would no longer have a claim
against the guarantor. Sufficient funds to repay the notes may
not be available from other sources, including the remaining
guarantors, if any. In addition, the court might direct you to
repay any amounts that you already received from the subsidiary
guarantor.
The measures of insolvency for purposes of fraudulent transfer
laws vary depending upon the governing law. Generally, a
guarantor would be considered insolvent if:
|
|
|
the sum of its debts, including contingent liabilities, was
greater than the fair saleable value of all its assets;
|
|
|
the present fair saleable value of its assets were less than the
amount that would be required to pay its probable liability on
its existing debts, including contingent liabilities, as they
became absolute and mature; or
|
|
|
it could not pay its debts as they became due.
|
Each subsidiary guarantee contains a provision intended to limit
the guarantors liability to the maximum amount that it
could incur without causing the incurrence of obligations under
its subsidiary guarantee to be a fraudulent transfer. This
provision may not be effective to protect the subsidiary
guarantees from being voided under fraudulent transfer law.
You cannot be
sure that there will be an active trading market for the
additional notes.
We do not intend to list the additional notes on any national
securities exchange or seek the admission of the additional
notes for quotation through the National Association of
Securities Dealers Automated Quotation System. The underwriters
intend to make a market in the notes, but they are not obligated
to do so and may cease their market-making activities at any
time. In addition, the liquidity of the trading market in the
notes, and the market price quoted for the notes, may be
adversely affected by changes in the overall market for high
yield securities and by changes in our financial performance or
prospects or in the financial performance or prospects of
companies in our industry generally. As a result, we cannot
assure you that an active trading market will develop or be
maintained for the additional notes offered hereby. If an active
market does not develop or is not maintained, the market price
and liquidity of the notes may be adversely affected.
11
Ratio of earnings
to fixed charges
The following table sets forth our ratio of earnings to fixed
charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
|
Ratio of earnings to fixed charges
|
|
|
3.6x
|
|
|
4.3x
|
|
|
7.0x
|
|
|
12.7x
|
|
|
9.5x
|
|
|
For purpose of computing the ratio of earnings to fixed charges,
earnings are defined as:
|
|
|
income from continuing operations before income taxes and equity
method earnings of affiliates;
|
|
|
plus fixed charges and distribution income of equity investees.
|
Fixed charges are defined as the sum of the following:
|
|
|
interest expense (including amounts capitalized);
|
|
|
amortization of debt discount and issuance cost (expensed and
capitalized); and
|
|
|
that portion of rental expense which we believe to be
representative of an interest factor.
|
Use of
proceeds
We estimate that the net proceeds from this offering will be
approximately $148.7 million, which together with cash on
hand will be used to repay $150.0 million of our current
borrowings under our bank credit facility.
As of March 25, 2007, our current borrowings under our bank
credit facility were approximately $180.0 million.
12
Capitalization
The following table sets forth our cash and capitalization as of
December 31, 2006:
|
|
|
on an actual basis.
|
|
|
on an as adjusted basis to give effect to this offering and the
application of the net proceeds of this offering.
|
|
|
|
|
|
|
|
|
|
|
December 31,
2006
|
(dollars
in thousands)
|
|
Actual
|
|
As
adjusted
|
|
|
Cash and cash equivalents
|
|
$
|
53,873
|
|
$
|
68,616
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
Capital lease
obligations1
|
|
$
|
6,387
|
|
$
|
6,387
|
Bank credit
facility2
|
|
|
134,000
|
|
|
|
71/2% Senior
Subordinated Notes due
20133
|
|
|
225,000
|
|
|
225,000
|
71/2% Senior
Subordinated Notes due
20154
|
|
|
150,000
|
|
|
300,000
|
|
|
|
|
|
|
Total long term debt
|
|
|
515,387
|
|
|
531,387
|
Stockholders equity
|
|
|
1,106,059
|
|
|
1,106,059
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
1,621,446
|
|
$
|
1,637,446
|
|
|
|
|
|
(1)
|
|
Excludes current portion of capital
lease obligations totaling $671,000.
|
|
(2)
|
|
As of March 25, 2007,
borrowings under our bank credit facility were approximately
$180.0 million.
|
|
(3)
|
|
Excludes unamortized discount of
approximately $1.2 million.
|
|
(4)
|
|
Excludes unamortized premium of
approximately $0.8 million.
|
13
Description of
the notes
Certain terms used in this description are defined under the
subheading Certain definitions. As used in
this section, the term Company refers only to
Denbury Resources Inc., the issuer of the Notes, and not to any
of its subsidiaries.
General
The Notes offered hereby are to be issued under the indenture,
dated as of December 7, 2005, as supplemented by a
Supplemental Indenture, to be dated on or about April 3,
2007 (as so supplemented, the Indenture), among the
Company, its subsidiaries and The Bank of New York Trust
Company, N.A., successor in interest to JPMorgan Chase Bank,
National Association, as Trustee (the Trustee). On
December 21, 2005, we issued and sold $150 million of
71/2% Senior
Subordinated Notes due 2015 under the Indenture. The Notes
offered hereby will have the same terms as our previously issued
and outstanding
71/2%
Senior Subordinated Notes due 2015. As used in this section,
Description of the notes, unless the context
otherwise requires, the term Notes refers to both
the $150 million of Notes offered hereby and our previously
issued $150 million of
71/2% Senior
Subordinated Notes due 2015. The $150 million of Notes
offered hereby will trade as a single class of notes with our
previously issued
71/2% Senior
Subordinated Notes due 2015. The terms of the Notes include
those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939
(the Trust Indenture Act). The following description
is only a summary of the material provisions of the Indenture.
We urge you to read the Indenture because it, not this
description, defines your rights as holders of the Notes. You
may request copies of the Indenture at our address set forth
under the heading Where You Can Find More
Information.
Terms of the
Notes
The $150 million aggregate principal amount of Notes
offered hereby will be unsecured senior subordinated obligations
of the Company, and when issued, will bring the aggregate
principal amount of Notes outstanding under the Indenture to
$300 million when added to our already outstanding
$150 million of Notes. The Notes will mature on
December 15, 2015 and bear interest at the rate per annum
shown on the cover page hereof either from the date of original
issuance in the case of the already outstanding
$150 million of Notes, or from the most recent date on
which interest has been paid or provided for in the case of the
$150 million Notes offered hereby, payable semiannually to
Holders (as defined in the Indenture) of record at the close of
business on the June 1 or December 1 immediately
preceding the interest payment date on June 15 and December 15
of each year, with the next interest payment date on
June 15, 2007. Interest on overdue principal and (to the
extent permitted by law) on overdue installments of interest
will accrue at 1% per annum in excess of such rate.
Interest on the Notes will be computed on the basis of a
360-day year
of twelve
30-day
months.
Principal of and interest on the Notes will be payable, and the
Notes may be exchanged or transferred, at our office or agency
in the Borough of Manhattan, The City of New York (which
initially shall be the corporate trust office of the Trustee),
except that, at our option, payment of interest may be made by
check mailed to the address of the Holders as such address
appears in the note register.
The Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of
$1,000. No service charge shall be made for any registration
14
of transfer or exchange of Notes, but we may require payment of
a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
Subject to the covenants described below under Certain
covenants and applicable law, the Company may issue
additional
71/2% Senior
Subordinated Notes due 2015 under the Indenture in an unlimited
principal amount (the Additional Notes). The Notes
offered hereby constitute Additional Notes under the Indenture.
The Notes and any Additional Notes subsequently issued would be
treated as a single class for all purposes under the Indenture.
Unless the context otherwise requires, for all purposes of the
Indenture and this Description of the notes,
references to the Notes include any Additional Notes actually
issued.
Optional
redemption
Except as set forth in the following paragraph, the Notes will
not be redeemable at the option of the Company prior to
December 15, 2010. Thereafter, the Notes will be
redeemable, at our option, in whole or in part, at any time or
from time to time, upon not less than 30 nor more than
60 days prior notice mailed by first-class mail to
each Holders registered address, at the following
redemption prices (expressed in percentages of principal
amount), plus accrued interest to the redemption date (subject
to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date), if
redeemed during the
12-month
period commencing on December 15, of the years set forth
below:
|
|
|
|
|
Period
|
|
Redemption
price
|
|
|
2010
|
|
|
103.75%
|
2011
|
|
|
102.50%
|
2012
|
|
|
101.25%
|
2013 and thereafter
|
|
|
100.00%
|
|
|
In addition, prior to December 15, 2008, we may at our
option on one or more occasions redeem Notes (which includes
Additional Notes, if any) in an aggregate principal amount not
to exceed 35% of the aggregate principal amount of the Notes
(which includes Additional Notes, if any) originally issued at a
redemption price (expressed as a percentage of principal amount)
of 107.50%, plus accrued and unpaid interest to the redemption
date, with the net cash proceeds from one or more Stock
Offerings; provided that
(1) at least 65% of such aggregate principal amount of
Notes (which includes Additional Notes, if any) remains
outstanding immediately after the occurrence of each such
redemption (other than Notes held, directly or indirectly, by
the Company or its Affiliates); and
(2) each such redemption occurs within 60 days after
the date of consummation of the related Stock Offering.
In the case of any partial redemption, selection of the Notes
for redemption will be made by the Trustee on a pro rata basis,
by lot or by such other method as the Trustee in its sole
discretion shall deem to be fair and appropriate, although no
Note of $1,000 in original principal amount or less shall be
redeemed in part. If any Note is to be redeemed in part only,
the notice of redemption relating to such Note shall state the
portion of the principal amount thereof to be redeemed. A new
Note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the Holder thereof upon
cancellation of the original Note.
15
Notes called for redemption become due on the date fixed for
redemption. On and after the redemption date, interest ceases to
accrue on Notes or portions of them called for redemption.
Mandatory
redemption; offers to purchase; open market purchases
We are not required to make any mandatory redemption or sinking
fund payments with respect to the Notes. However, under certain
circumstances, we may be required to offer to purchase Notes as
described under the captions Change of control
and Certain covenantsLimitation on sales of assets
and subsidiary stock. We may at any time and from time to
time purchase Notes in the open market or otherwise.
Guarantees
The Subsidiary Guarantors, jointly and severally, as primary
obligors and not merely as sureties, will irrevocably, fully and
unconditionally guarantee (each, a Subsidiary
Guarantee) on a senior subordinated basis the performance
and the punctual payment when due, whether at Stated Maturity,
by acceleration or otherwise, of all the obligations of the
Company under the Indenture and the Notes (all such obligations
guaranteed by the Subsidiary Guarantors being herein called the
Guaranteed Obligations). The Company derives a
substantial portion of its operating income and cash flow from
its subsidiaries, including the Subsidiary Guarantors, the
common stock of which may be pledged to secure the
Companys indebtedness outstanding under the Credit
Facilities. Each Subsidiary Guarantor will agree to pay, in
addition to the amount stated above, any and all expenses
(including reasonable counsel fees and expenses) incurred by the
Trustee and the Holders in enforcing any rights under the
Subsidiary Guarantee with respect to the Subsidiary Guarantor.
Each Subsidiary Guarantee will be limited in amount to an amount
not to exceed the maximum amount that can be guaranteed by the
applicable Subsidiary Guarantor without rendering the Subsidiary
Guarantee, as it relates to such Subsidiary Guarantor, voidable
under applicable law relating to fraudulent conveyance or
fraudulent transfer or similar laws affecting the rights of
creditors generally. If a Subsidiary Guarantee were to be
rendered voidable, it could be subordinated by a court to all
other indebtedness (including guarantees and other contingent
liabilities) of the applicable Subsidiary Guarantor, and
depending on the amount of such indebtedness, a Subsidiary
Guarantors liability on its Subsidiary Guarantee could be
reduced to zero. See Risk FactorsRisks related to
our indebtedness and the notesA subsidiary guarantee could
be voided if it constitutes a fraudulent transfer under
U.S. bankruptcy or similar state law, which would prevent
the holders of the notes from relying on that subsidiary to
satisfy claims.
Each Subsidiary Guarantor that makes a payment under its
Subsidiary Guarantee will be entitled to a contribution from
each other Subsidiary Guarantor in an amount equal to such other
Subsidiary Guarantors pro rata portion of such payment
based on the respective net assets of all the Subsidiary
Guarantors at the time of such payment determined in accordance
with GAAP.
Each Subsidiary Guarantee is a continuing guarantee and shall:
(1) subject to certain limited exceptions, remain in full
force and effect until payment in full of all the Guaranteed
Obligations;
(2) be binding upon the Subsidiary Guarantor; and
(3) enure to the benefit of and be enforceable by the
Trustee, the Holders and their successors, transferees and
assigns.
16
Pursuant to the Indenture, a Subsidiary Guarantor may
consolidate with, merge with or into, or transfer all or
substantially all its assets to any other Person to the extent
described below under Certain covenantsMerger
and consolidation; provided, however, that if such Person
is not the Company, the Subsidiary Guarantors obligations
under the Indenture and its Subsidiary Guarantee must be
expressly assumed by such other Person. However, upon the sale
or other disposition (including by way of consolidation or
merger) of a Subsidiary Guarantor or the sale or disposition of
all or substantially all the assets of a Subsidiary Guarantor
(in each case other than to the Company or an Affiliate of the
Company), such Subsidiary Guarantor will be released and
relieved from all its obligations under its Subsidiary
Guarantee. See Certain covenantsMerger and
consolidation.
Ranking
Senior
Indebtedness versus Notes
The indebtedness evidenced by the Notes and the Subsidiary
Guarantees will be unsecured, general obligations of the Company
and the relevant Subsidiary Guarantor, as the case may be,
subordinated in right of payment, as set forth in the Indenture,
to the prior payment of all Senior Indebtedness of the Company
or the relevant Subsidiary Guarantor, as the case may be,
whether outstanding on the Issue Date or thereafter incurred,
including the obligations of the Company under, and such
Subsidiary Guarantors guarantee, if any, of the
Companys obligations with respect to, the Credit
Facilities.
As of March 25, 2007, after giving pro forma effect to this
offering and the application of the net proceeds from this
offering as discussed under Use of Proceeds:
(1) the Senior Indebtedness of each of the Company and each
Subsidiary Guarantor other than Denbury Onshore, LLC would have
been approximately $30.0 million, representing either a
primary obligation for, or guarantee of, secured debt under the
Credit Agreement; and
(2) the Senior Indebtedness of Denbury Onshore, LLC, one of
the Subsidiary Guarantors, would have been approximately
$37.1 million, including its Indebtedness of approximately
$30.0 million under the Credit Agreement and approximately
$7.1 million of Capital Lease Obligations.
Although the Indenture contains limitations on the amount of
additional Indebtedness that the Company and the subsidiary
Guarantors may incur, under certain circumstances the amount of
such Indebtedness could be substantial and, in any case, such
Indebtedness may be Senior Indebtedness. See Certain
covenantsLimitation on indebtedness.
Other Senior
Subordinated Indebtedness versus Notes
Only Indebtedness of the Company or a Subsidiary Guarantor that
is Senior Indebtedness will rank senior to the Notes and the
relevant Subsidiary Guarantee in accordance with the provisions
of the Indenture. The Notes and each Subsidiary Guarantee will
in all respects rank pari passu with all other Senior
Subordinated Indebtedness of the Company and the relevant
Subsidiary Guarantor, respectively, including the obligations of
the Company and such Subsidiary Guarantor with respect to the
Companys
71/2% Senior
Subordinated Notes due 2013 (the Existing Notes).
17
As of March 25, 2007, after giving pro forma effect to this
offering and the application of the net proceeds from this
offering as described under Use of Proceeds:
(1) the Companys Senior Subordinated Indebtedness
would have been approximately $525.0 million, consisting
solely of the Notes and the Existing Notes; and
(2) the Senior Subordinated Indebtedness of each Subsidiary
Guarantor would have been approximately $525.0 million,
consisting of its primary obligations for, or guarantee of,
Senior Subordinated Indebtedness of the Company represented by
the Notes and the Existing Notes.
The Company and each Subsidiary Guarantor will agree in the
Indenture that they will not Incur, directly or indirectly, any
Indebtedness that is subordinate or junior in ranking in right
of payment to its Senior Indebtedness unless such Indebtedness
is Senior Subordinated Indebtedness or is expressly subordinated
in right of payment to Senior Subordinated Indebtedness. The
Indenture does not treat (i) unsecured Indebtedness as
subordinated or junior to Secured Indebtedness merely because it
is unsecured and (ii) Senior Indebtedness as subordinated
or junior to any other Senior Indebtedness merely because it has
a junior priority with respect to the same collateral.
Liabilities of
non-guarantor Subsidiaries versus Notes
A substantial portion of the operations of the Company are
currently conducted through its Subsidiaries. All of our
existing Restricted Subsidiaries are guaranteeing the Notes.
However, our Unrestricted Subsidiaries will not, and certain
future Subsidiaries of the Company may not, be required to
guarantee the Notes. Claims of creditors of any non-guarantor
Subsidiaries, including trade creditors, secured creditors and
creditors holding guarantees issued by such non-guarantor
Subsidiaries, and claims of preferred stockholders (if any) of
such non-guarantor Subsidiaries generally would have priority
with respect to the assets and earnings of such non-guarantor
Subsidiaries over the claims of creditors of the Company,
including holders of the Notes, even though such obligations
would not constitute Senior Indebtedness of the Company. The
Notes, therefore, would be effectively subordinated to creditors
(including trade creditors) and preferred stockholders (if any)
of such non-guarantor Subsidiaries of the Company. Although the
Indenture limits the incurrence of Indebtedness and the issuance
of preferred stock of certain of the Companys
Subsidiaries, such limitation is subject to a number of
significant qualifications. Moreover, the Indenture does not
impose any limitation on the incurrence by such Subsidiaries of
liabilities that are not considered Indebtedness under the
Indenture. See Certain covenantsLimitation on
indebtedness.
Payment of
Notes
The Company may not pay principal of, premium (if any) or
interest on, the Notes or make any deposit pursuant to the
provisions described under Defeasance below or may
not repurchase, redeem or otherwise retire any Notes
(collectively, pay the Notes) if:
(1) any Designated Senior Indebtedness of the Company is
not paid when due; or
(2) any other default on Designated Senior Indebtedness of
the Company occurs and the maturity of such Designated Senior
Indebtedness is accelerated in accordance with its terms;
18
unless, in either case, the default has been cured or waived and
any such acceleration has been rescinded or such Designated
Senior Indebtedness has been paid in full. However, the Company
may pay the Notes without regard to the foregoing if the Company
and the Trustee receive written notice approving such payment
from the Representative of the applicable Designated Senior
Indebtedness with respect to which either of the events set
forth in clause (1) or (2) of the immediately
preceding sentence has occurred and is continuing. During the
continuance of any default (other than a default described in
clause (1) or (2) of the second preceding sentence)
with respect to any Designated Senior Indebtedness of the
Company pursuant to which the maturity thereof may be
accelerated immediately without further notice (except such
notice as may be required to effect such acceleration) or the
expiration of any applicable grace periods, the Company may not
pay the Notes for a period (a Payment Blockage
Period) commencing upon the receipt by the Trustee (with a
copy to the Company) of written notice (a Blockage
Notice) of such default from the Representative of the
holders of such Designated Senior Indebtedness specifying an
election to effect a Payment Blockage Period and ending
179 days thereafter (or earlier if such Payment Blockage
Period is terminated:
(1) by written notice to the Trustee and the Company from
the Person or Persons who gave such Blockage Notice;
(2) because the default giving rise to such Blockage Notice
is no longer continuing; or
(3) because such Designated Senior Indebtedness has been
repaid in full in cash).
Notwithstanding the provisions described in the immediately
preceding sentence, unless the holders of such Designated Senior
Indebtedness or the Representative of such holders have
accelerated the maturity of such Designated Senior Indebtedness,
the Company must resume payments on the Notes after the end of
such Payment Blockage Period. The Notes shall not be subject to
more than one Payment Blockage Period in any consecutive
360-day
period, irrespective of the number of defaults with respect to
Designated Senior Indebtedness of the Company during such period.
Upon any payment or distribution of the assets of the Company
upon a total or partial liquidation or dissolution or
reorganization or similar proceeding relating to the Company or
its property:
(1) the holders of Senior Indebtedness of the Company will
be entitled to receive payment in full in cash of such Senior
Indebtedness before the Noteholders are entitled to receive any
payment in respect of the Notes;
(2) until such Senior Indebtedness is paid in full in cash,
any payment or distribution to which Noteholders would be
entitled from the Company but for the subordination provisions
of the Indenture will be made to holders of such Senior
Indebtedness of the Company as their interests may appear; and
(3) if a distribution is made to Noteholders that, due to
the subordination provisions, should not have been made to them,
such Noteholders are required to hold it in trust for the
holders of Senior Indebtedness of the Company and pay it over to
them as their interests may appear.
If payment of the Notes is accelerated because of an Event of
Default, the Company or the Trustee shall promptly notify the
holders of Designated Senior Indebtedness of the Company or the
Representative of such holders of the acceleration.
19
The obligations of each Subsidiary Guarantor under its
Subsidiary Guarantee are unsecured senior subordinated
obligations. As such, the rights of Noteholders to receive
payment by a Subsidiary Guarantor pursuant to its Subsidiary
Guarantee will be subordinated in right of payment to the rights
of holders of Senior Indebtedness of such Subsidiary Guarantor.
The terms of the subordination provisions described above with
respect to the Companys obligations under the Notes apply
equally to each Subsidiary Guarantor and the obligations of each
such Subsidiary Guarantor under its respective Subsidiary
Guarantee.
By reason of the subordination provisions contained in the
Indenture, in the event of insolvency, creditors of the Company
or a Subsidiary Guarantor who are holders of Senior Indebtedness
of the Company or such Subsidiary Guarantor, as the case may be,
may recover more, ratably, than the Noteholders, and creditors
of the Company or a Subsidiary Guarantor who are not holders of
Senior Indebtedness of the Company or such Subsidiary Guarantor
may recover less, ratably, than holders of Senior Indebtedness
of the Company or such Subsidiary Guarantor, as the case may be,
and may recover more, ratably, than the Noteholders.
Notwithstanding the foregoing, payment from the money or the
proceeds of U.S. Government Obligations held in any
defeasance trust described under Defeasance
below will not be contractually subordinated in right of payment
to any Senior Indebtedness of the Company or subject to the
restrictions described herein.
Book-entry,
delivery and form
The Notes will be represented by one or more global notes in
registered, global form without interest coupons (collectively,
the Global Notes). The Global Notes initially will
be deposited upon issuance with the Trustee as custodian for The
Depository Trust Company, or DTC, in New York, New York, and
registered in the name of DTC or its nominee, in each case for
credit to an account of a direct or indirect participant as
described below.
Except as set forth below, the Global Notes may be transferred,
in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee. Beneficial interests in the
Global Notes may not be exchanged for Notes in certificated form
except in the limited circumstances described below. See
Exchange of Global Notes for Certificated
Notes. In addition, transfers of beneficial interests in
the Global Notes will be subject to the applicable rules and
procedures of DTC and its direct or indirect participants, which
may change from time to time.
The Notes may be presented for registration of transfer and
exchange at the offices of the registrar.
Depository
procedures
The following description of the operations and procedures of
DTC is provided solely as a matter of convenience. These
operations and procedures are solely within the control of the
respective settlement systems and are subject to changes by
them. We take no responsibility for these operations and
procedures and urge investors to contact the system or their
participants directly to discuss these matters.
DTC has advised us that DTC is a limited-purpose trust company
organized under the laws of the State of New York, a
banking organization within the meaning of the New
York Banking Law, a member of the Federal Reserve System, a
clearing corporation within the meaning of
20
the Uniform Commercial Code and a clearing agency
registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its
participating organizations (collectively, the
participants) and to facilitate the clearance and
settlement of transactions in those securities between
participants through electronic book-entry changes in accounts
of its participants. The participants include securities brokers
and dealers, banks, trust companies, clearing corporations and
certain other organizations. Access to DTCs system is also
available to other entities such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly
(collectively, the indirect participants). Persons
who are not participants may beneficially own securities held by
or on behalf of DTC only through the participants or the
indirect participants. The ownership interests in, and transfers
of ownership interests in, each security held by or on behalf of
DTC are recorded on the records of the participants and indirect
participants.
DTC has also advised us that, pursuant to procedures established
by it:
(1) upon deposit of the Global Notes, DTC will credit the
accounts of participants designated by the underwriters with
portions of the principal amount of the Global Notes; and
(2) ownership of these interests in the Global Notes will
be shown on, and the transfer of ownership of these interests
will be effected only through, records maintained by DTC (with
respect to the participants) or by the participants and the
indirect participants (with respect to other owners of
beneficial interests in the Global Notes).
Investors in the Global Notes who are participants in DTCs
system may hold their interests therein directly through DTC.
Investors in the Global Notes who are not participants may hold
their interests therein indirectly through organizations which
are participants in such system. All interests in a Global Note
may be subject to the procedures and requirements of DTC. The
laws of some states require that certain persons take physical
delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a
Global Note to such persons will be limited to that extent.
Because DTC can act only on behalf of participants, which in
turn act on behalf of indirect participants, the ability of a
person having beneficial interests in a Global Note to pledge
such interests to persons that do not participate in the DTC
system, or otherwise take actions in respect of such interests,
may be affected by the lack of a physical certificate evidencing
such interests.
Except as described below, owners of an interest in the
Global Notes will not have Notes registered in their names, will
not receive physical delivery of Notes in certificated form and
will not be considered the registered owners or
holders thereof under the Indenture for any
purpose.
Payments in respect of the principal of, and interest and
premium, if any, on a Global Note registered in the name of DTC
or its nominee will be payable to DTC in its capacity as the
registered holder under the Indenture. Under the terms of the
Indenture, we and the Trustee will treat the persons in whose
names the Notes, including the Global Notes, are registered as
the owners of the Notes for the purpose of receiving payments
and for all other purposes. Consequently, neither we, the
Trustee nor any agent of us or the Trustee has or will have any
responsibility or liability for:
(1) any aspect of DTCs records or any
participants or indirect participants records
relating to or payments made on account of beneficial ownership
interests in the Global Notes or for
21
maintaining, supervising or reviewing any of DTCs records
or any participants or indirect participants records
relating to the beneficial ownership interests in the Global
Notes; or
(2) any other matter relating to the actions and practices
of DTC or any of its participants or indirect participants.
DTC has advised us that its current practice, upon receipt of
any payment in respect of securities such as the Notes
(including principal and interest), is to credit the accounts of
the relevant participants with the payment on the payment date
unless DTC has reason to believe it will not receive payment on
such payment date. Each relevant participant is credited with an
amount proportionate to its beneficial ownership of an interest
in the principal amount of the relevant security as shown on the
records of DTC. Payments by the participants and the indirect
participants to the beneficial owners of Notes will be governed
by standing instructions and customary practices and will be the
responsibility of the participants or the indirect participants
and will not be the responsibility of DTC, the Trustee or us.
Neither we nor the Trustee will be liable for any delay by DTC
or any of its participants in identifying the beneficial owners
of the Notes, and we and the Trustee may conclusively rely on
and will be protected in relying on instructions from DTC or its
nominee for all purposes.
Transfers between participants in DTC will be effected in
accordance with DTCs procedures, and will be settled in
same-day
funds.
DTC has advised us that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more
participants to whose account DTC has credited the
interests in the Global Notes and only in respect of such
portion of the aggregate principal amount of the Notes as to
which such participant or participants has or have given such
direction. However, if there is an event of default under the
Notes, DTC reserves the right to exchange the Global Notes for
Legend Notes in certificated form, and to distribute such Notes
to its participants.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Notes among
participants, it is under no obligation to perform such
procedures, and such procedures may be discontinued or changed
at any time. Neither we, the Trustee nor any agent of us or the
Trustee will have any responsibility for the performance by DTC
or its participants or indirect participants of their respective
obligations under the rules and procedures governing their
operations.
Exchange of
Global Notes for Certificated Notes
A Global Note is exchangeable for definitive Notes in registered
certificated form (Certificated Notes) if:
(1) DTC (A) notifies us that it is unwilling or unable
to continue as depositary for the Global Notes or (B) has
ceased to be a clearing agency registered under the Exchange Act
and, in each case, a successor depositary is not appointed;
(2) we, at our option, notify the Trustee in writing that
we elect to cause the issuance of the Certificated Notes; or
(3) there has occurred and is continuing a default with
respect to the Notes.
In addition, beneficial interests in a Global Note may be
exchanged for Certificated Notes upon prior written notice given
to the Trustee by or on behalf of DTC in accordance with the
22
Indenture. In all cases, Certificated Notes delivered in
exchange for any Global Note or beneficial interests in Global
Notes will be registered in the names, and issued in any
approved denominations, requested by or on behalf of the
depositary (in accordance with its customary procedures).
Exchange of
Certificated Notes for Global Notes
Certificated Notes may not be exchanged for beneficial interests
in any Global Note unless the transferor first delivers to the
Trustee a written certificate (in the form provided in the
Indenture) to the effect that such transfer will comply with the
appropriate transfer restrictions applicable to such Notes.
Same day
settlement and payment
We will make payments in respect of the Notes represented by the
Global Notes (including principal, premium, if any, and
interest, if any) by wire transfer of immediately available
funds to the accounts specified by the Global Note holder. We
will make all payments of principal, interest and premium, if
any, with respect to Certificated Notes by wire transfer of
immediately available funds to the accounts specified by the
holders of the Certificated Notes or, if no such account is
specified, by mailing a check to each such holders
registered address. The Notes represented by the Global Notes
are expected to be eligible to trade in DTCs
Same-Day
Funds Settlement System, and any permitted secondary market
trading activity in such Notes will, therefore, be required by
DTC to be settled in immediately available funds. We expect that
secondary trading in any Certificated Notes will also be settled
in immediately available funds.
Change of
control
(a) Upon the occurrence of any of the following events
(each a Change of Control), each Holder shall have
the right to require that the Company repurchase such
Holders Notes at a purchase price in cash equal to 101% of
the principal amount thereof plus accrued and unpaid interest,
if any, to the date of purchase (subject to the right of Holders
of record on the relevant record date to receive interest on the
relevant interest payment date), in accordance with the terms
contemplated in paragraph (b) below:
(1) any person (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act), other than a
Permitted Holder, is or becomes the beneficial owner (as defined
in
Rules 13d-3
and 13d-5
under the Exchange Act, except that for purposes of this
clause (1) such person shall be deemed to have
beneficial ownership of all shares that such person
has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or
indirectly, of more than 40% of the total voting power of the
Voting Stock of the Company (for the purposes of this
clause (1), such person shall be deemed to beneficially own
any Voting Stock of a specified corporation held by a parent
corporation, if such person is the beneficial owner (as defined
in this clause (1)), directly or indirectly, of more than
40% of the voting power of the Voting Stock of such parent
corporation);
(2) during any period of two consecutive years from and
after the Issue Date, individuals who at the beginning of such
period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders
of the Company was approved by a vote of a majority of the
directors of the Company then still in office who were either
directors at the
23
beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors then in office;
(3) the shareholders of the Company shall have approved any
plan of liquidation or dissolution of the Company; or
(4) the merger or consolidation of the Company with or into
another Person or the merger of another Person with or into the
Company, or the sale, lease, conveyance or transfer of all or
substantially all the assets of the Company and its Restricted
Subsidiaries, taken as a whole, to another Person (other than a
Person that is controlled (as defined in the definition of
Affiliate) by the Permitted Holders), and, in the
case of any such merger or consolidation, the securities of the
Company that are outstanding immediately prior to such
transaction and which represent 100% of the aggregate voting
power of the Voting Stock of the Company are changed into or
exchanged for cash, securities or property, unless pursuant to
such transaction such securities are changed into or exchanged
for, in addition to any other consideration, securities of the
surviving corporation that represent immediately after such
transaction, at least a majority of the aggregate voting power
of the Voting Stock of the surviving corporation.
In the event that at the time of such Change of Control the
terms of the Indebtedness under the Credit Agreement restrict or
prohibit the repurchase of Notes pursuant to this covenant, then
prior to the mailing of the notice to Holders provided for in
paragraph (b) below, but in any event within
30 days following any Change of Control, the Company shall:
(1) repay in full the Indebtedness under the Credit
Agreement; or
(2) obtain the requisite consent under the agreements
governing the Indebtedness under the Credit Agreement to permit
the repurchase of the Notes as provided for in
paragraph (b) below.
(b) Within 30 days following a Change of Control, the
Company shall mail a notice to each Holder with a copy to the
Trustee stating: (1) that a Change of Control has occurred
and that such Holder has the right to require the Company to
purchase such Holders Notes at a purchase price in cash
equal to 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase (subject to the
right of Holders of record on the relevant record date to
receive interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding such
Change of Control (including information with respect to pro
forma historical income, cash flow and capitalization, in each
case after giving effect to such Change of Control);
(3) the purchase date (which shall be no earlier than
30 days nor later than 60 days from the date such
notice is mailed); and (4) the instructions determined by
the Company, consistent with this covenant, that a Holder must
follow in order to have its Notes purchased.
(c) The Company shall comply, to the extent applicable,
with the requirements of Section 14(e) of the Exchange Act
and any other securities laws or regulations in connection with
the repurchase of Notes pursuant to this covenant. To the extent
that the provisions of any securities laws or regulations
conflict with the provisions of this covenant, the Company shall
comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under this
covenant by virtue thereof.
24
The Change of Control purchase feature of the Notes may in
certain circumstances make more difficult or discourage a sale
or takeover of the Company and, thus, the removal of incumbent
management. The Change of Control purchase feature is a result
of negotiations between the Company and J.P. Morgan Securities
Inc. Management has no present intention to engage in a
transaction involving a Change of Control, although it is
possible that the Company would decide to do so in the future.
Subject to the limitations discussed below, the Company could,
in the future, enter into certain transactions, including
acquisitions, refinancing or other recapitalizations, that would
not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such
time or otherwise affect the Companys capital structure or
credit ratings. Restrictions on the ability of the Company to
Incur additional Indebtedness are contained in the covenants
described under Certain CovenantsLimitation on
Indebtedness and Limitation on Liens.
Such restrictions can only be waived with the consent of the
holders of a majority in principal amount of the Notes then
outstanding. Except for the limitations contained in such
covenants, however, the Indenture will not contain any covenants
or provisions that may afford holders of the Notes protection in
the event of a highly leveraged transaction.
The Credit Agreement prohibits the Company from purchasing any
Notes and also provides that the occurrence of certain change of
control events with respect to the Company would constitute a
default thereunder. In the event a Change of Control occurs at a
time when the Company is prohibited from purchasing Notes, the
Company could seek the consent of its lenders to the purchase of
Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent
or repay such borrowings, the Company will remain prohibited
from purchasing Notes. In such case, the Companys failure
to purchase tendered Notes would constitute an Event of Default
under the Indenture which would, in turn, constitute a default
under the Credit Agreement. In such circumstances, the
subordination provisions in the Indenture would likely restrict
payment to the Holders of Notes.
Future indebtedness of the Company may contain prohibitions on
the occurrence of certain events that would constitute a Change
of Control or require such indebtedness to be repurchased upon a
Change of Control. Moreover, the exercise by the Holders of
their right to require the Company to repurchase the Notes could
cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such
repurchase on the Company. Finally, the Companys ability
to pay cash to the holders of Notes following the occurrence of
a Change of Control may be limited by the Companys then
existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any
required repurchases.
The provisions under the Indenture relating to the
Companys obligation to make an offer to repurchase the
Notes as a result of a Change of Control may be waived or
modified with the written consent of the holders of a majority
in principal amount of the Notes.
The Company will not be required to make an offer to purchase
the Notes as a result of a Change of Control if a third party:
(1) makes such offer in the manner, at the times and
otherwise in compliance with the requirements set forth in the
Indenture relating to the Companys obligations to make
such an offer; and
(2) purchases all Notes validly tendered and not withdrawn
under such an offer.
25
Certain
covenants
The Indenture contains covenants including, among others, the
following:
Limitation on
indebtedness.
(a) The Company shall not, and shall not permit any
Restricted Subsidiary to, Incur, directly or indirectly, any
Indebtedness; provided, however, that the Company or a
Restricted Subsidiary may Incur Indebtedness if, on the date of
such Incurrence and after giving effect thereto, the
Consolidated Coverage Ratio equals or exceeds 2.25 to 1.0.
(b) Notwithstanding the foregoing paragraph (a), the
Company and any Restricted Subsidiary may Incur the following
Indebtedness:
(1) Indebtedness Incurred pursuant to any Credit Facility,
so long as the aggregate amount of all Indebtedness outstanding
under all Credit Facilities does not, at any one time, exceed
the aggregate amount of borrowing availability as of such date
under all Credit Facilities that determine availability on the
basis of a borrowing base or other asset-based calculation;
provided, however, that in no event shall such amount exceed the
greater of (x) $300 million and (y) 75% of ACNTA
as of the date of such Incurrence;
(2) Indebtedness owed to and held by the Company or any
Restricted Subsidiary; provided, however, that any subsequent
issuance or transfer of any Capital Stock which results in any
such Restricted Subsidiary ceasing to be a Restricted Subsidiary
or any subsequent transfer of such Indebtedness (other than to
the Company or another Restricted Subsidiary) shall be deemed,
in each case, to constitute the Incurrence of such Indebtedness
by the issuer thereof;
(3) The Notes (other than any Additional Notes);
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or
(3) of this covenant);
(5) Indebtedness of (A) a Restricted Subsidiary
Incurred and outstanding on or prior to the date on which such
Restricted Subsidiary was acquired by the Company (other than
Indebtedness Incurred in connection with, or to provide all or
any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and (B) the
Company or a Restricted Subsidiary Incurred for the purpose of
financing all or any part of the cost of acquiring oil and gas
properties, another Person (other than a Person that was,
immediately prior to such acquisition, a Subsidiary of the
Company) engaged in the Oil and Gas Business or all or
substantially all the assets of such a person; provided,
however, that, in the case of each of clause (A) and
clause (B) above, on the date of such Incurrence and
after giving effect thereto, the Consolidated Coverage Ratio
equals or exceeds 2.0 to 1.0;
(6) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to paragraph (a) or pursuant to
clause (3), (4), (5) above, this clause (6) or
clause (7) below; provided, however, that to the extent
such Refinancing Indebtedness directly or indirectly Refinances
Indebtedness or Preferred Stock of a Restricted Subsidiary
described in clause (5), such Refinancing Indebtedness
shall be Incurred only by such Restricted Subsidiary or the
Company;
26
(7) Non-recourse Purchase Money Indebtedness;
(8) Indebtedness with respect to Production Payments;
provided, however, that any such Indebtedness shall be Limited
Recourse Production Payments; provided further, however, that
the Net Present Value of the reserves related to such Production
Payments shall not exceed 30% of ACNTA at the time of Incurrence;
(9) Indebtedness consisting of the Subsidiary Guarantees
and any Guarantee by a Subsidiary Guarantor of Indebtedness
Incurred by the Company pursuant to clauses (1) and (3);
(10) Indebtedness consisting of Interest Rate Agreements
directly related to Indebtedness permitted to be Incurred by the
Company and its Restricted Subsidiaries pursuant to the
Indenture;
(11) Indebtedness under Oil and Gas Hedging Contracts and
Currency Agreements entered into in the ordinary course of
business for the purpose of limiting risks that arise in the
ordinary course of business of the Company and its Restricted
Subsidiaries;
(12) Indebtedness in respect of bid, performance or surety
obligations issued by or for the account of the Company or any
Restricted Subsidiary in the ordinary course of business,
including Guarantees and letters of credit functioning as or
supporting such bid, performance or surety obligations (in each
case other than for an obligation for money borrowed);
(13) Indebtedness of the Company or a Restricted Subsidiary
Incurred to finance capital expenditures and Refinancing
Indebtedness Incurred in respect thereof in an aggregate amount
which, when taken together with the amount of all other
Indebtedness Incurred pursuant to this clause (13) since
the Issue Date and then outstanding, does not exceed
$20 million;
(14) Permitted Marketing Obligations;
(15) In-kind obligations relating to oil and gas balancing
positions arising in the ordinary course of business; and
(16) Indebtedness in an aggregate amount which, together
with the amount of all other Indebtedness of the Company and its
Restricted Subsidiaries outstanding on the date of such
Incurrence (other than Indebtedness permitted by
clauses (1) through (15) above or paragraph (a))
does not exceed $30 million.
(c) Notwithstanding the foregoing, the Company shall not,
and shall not permit any Subsidiary Guarantor to, Incur any
Indebtedness pursuant to the foregoing
paragraph (b) if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinated
Obligations unless such Indebtedness shall be subordinated to
the Notes or the relevant Subsidiary Guarantor, as the case may
be, to at least the same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with the
foregoing covenant:
(1) in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described
above, the Company, in its sole discretion, will classify such
item of Indebtedness at the time of Incurrence and only be
required to include the amount and type of such Indebtedness in
one of the above clauses; provided that any Indebtedness
27
outstanding under the Credit Agreement on the Issue Date will be
treated as Incurred on the Issue Date under clause (1) of
paragraph (b) above; and
(2) an item of Indebtedness may be divided and classified
in more than one of the types of Indebtedness described above.
Incurrence of
layered indebtedness.
Notwithstanding paragraphs (a) and (b) of the
covenant described above under Limitation on
indebtedness, the Company shall not, and the Company shall
not permit any Subsidiary Guarantor to, Incur any Indebtedness
if such Indebtedness is subordinate or junior in ranking in any
respect to any Senior Indebtedness of the Company or such
Subsidiary Guarantor, as applicable, unless such Indebtedness is
Senior Subordinated Indebtedness or is expressly subordinated in
right of payment to Senior Subordinated Indebtedness of such
Person.
Limitation on
restricted payments.
(a) The Company shall not, and shall not permit any
Restricted Subsidiary, directly or indirectly, to make a
Restricted Payment if at the time the Company or such Restricted
Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or
would result therefrom);
(2) the Company is not able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant
described under Limitation on Indebtedness; or
(3) the aggregate amount of such Restricted Payment and all
other Restricted Payments since the Issue Date would exceed the
sum of (without duplication):
(A) 50% of the aggregate Consolidated Net Income of the
Company accrued on a cumulative basis commencing on
December 31, 2002 and ending on the last day of the fiscal
quarter ending on or immediately preceding the date of such
proposed Restricted Payment (or, if such aggregate Consolidated
Net Income shall be a deficit, minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company
from the issuance or sale of its Capital Stock (other than
Disqualified Stock) subsequent to the Issue Date (other than an
issuance or sale to a Subsidiary of the Company and other than
an issuance or sale to an employee stock ownership plan or to a
trust established by the Company or any of its Subsidiaries for
the benefit of their employees);
(C) the aggregate Net Cash Proceeds received by the Company
from the issue or sale subsequent to the Issue Date of its
Capital Stock (other than Disqualified Stock) to an employee
stock ownership plan; provided, however, that if such employee
stock ownership plan incurs any Indebtedness with respect
thereto, such aggregate amount shall be limited to an amount
equal to any increase in the Consolidated Net Worth of the
Company resulting from principal repayments made by such
employee stock ownership plan with respect to such Indebtedness;
(D) the amount by which Indebtedness of the Company is
reduced on the Companys balance sheet upon the conversion
or exchange (other than by a Subsidiary of the
28
Company) subsequent to the Issue Date, of any Indebtedness of
the Company convertible or exchangeable for Capital Stock (other
than Disqualified Stock) of the Company (less the amount of any
cash, or the fair value of any other property, distributed by
the Company upon such conversion or exchange); and
(E) an amount equal to the sum of (i) the net
reduction in Investments made subsequent to the Issue Date by
the Company or any Restricted Subsidiary in any Person resulting
from dividends, repayments of loans or advances or other
transfers of assets, in each case to the Company or any
Restricted Subsidiary from such Person, and (ii) the
portion (proportionate to the Companys equity interest in
such Subsidiary) of the fair market value of the net assets of
an Unrestricted Subsidiary at the time such Unrestricted
Subsidiary is designated a Restricted Subsidiary; provided,
however, that the foregoing sum shall not exceed, in the case of
any such Person or Unrestricted Subsidiary, the amount of
Investments previously made (and treated as a Restricted
Payment) by the Company or any Restricted Subsidiary in such
Person or Unrestricted Subsidiary.
At January 1, 2007, the Company would have been able to
make approximately $264.4 million of Restricted Payments
under the foregoing calculation specified in this
paragraph (a)(3).
(b) The provisions of the foregoing
paragraph (a) shall not prohibit:
(1) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend
would have complied with this covenant; provided, however, that
at the time of payment of such dividend, no other Default shall
have occurred and be continuing (or result therefrom); provided
further, however, that such dividend shall be included in the
calculation of the amount of Restricted Payments;
(2) any purchase or redemption of Capital Stock or
Subordinated Obligations of the Company made by exchange for, or
out of the proceeds of the substantially concurrent sale of,
Capital Stock of the Company (other than Disqualified Stock and
other than Capital Stock issued or sold to a Subsidiary of the
Company or an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the
benefit of their employees); provided, however, that
(A) such purchase or redemption shall be excluded in the
calculation of the amount of Restricted Payments and
(B) the Net Cash Proceeds from such sale shall be excluded
from the calculation of amounts under clause (3)
(B) of paragraph (a) above (but only to the
extent that such Net Cash Proceeds were used to purchase or
redeem such Capital Stock as provided in this clause (2));
(3) any purchase, repurchase, redemption, defeasance or
other acquisition or retirement for value of Subordinated
Obligations of the Company made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Subordinated
Obligations of the Company; provided, however, that such
purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value shall be excluded in the
calculation of the amount of Restricted Payments;
(4) the repurchase of shares of, or options to purchase
shares of, common stock of the Company or any of its
Subsidiaries from employees, former employees, directors or
former directors of the Company or any of its Subsidiaries (or
permitted transferees of such employees, former employees,
directors or former directors), pursuant to the terms of the
agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors under
which such individuals purchase or sell or are granted the
29
option to purchase or sell, shares of such common stock;
provided, however, that the aggregate amount of such repurchases
shall not exceed $2 million in any calendar year; provided
further, however, that such repurchases shall be excluded in the
calculation of the amount of Restricted Payments;
(5) loans made to officers, directors or employees of the
Company or any Restricted Subsidiary approved by the Board of
Directors (or a duly authorized officer), the net cash proceeds
of which are used solely (A) to purchase common stock of
the Company in connection with a restricted stock or employee
stock purchase plan, or to exercise stock options received
pursuant to an employee or director stock option plan or other
incentive plan, in a principal amount not to exceed the exercise
price of such stock options or (B) to refinance loans,
together with accrued interest thereon, made pursuant to item
(A) of this clause (5); provided, however, that such
loans shall be excluded in the calculation of the amount of
Restricted Payments; or
(6) other Restricted Payments in an aggregate amount not to
exceed $20 million; provided, however, that such Restricted
Payments shall be excluded in the calculation of the amount of
Restricted Payments.
Limitation on
restrictions on distributions from restricted
subsidiaries.
The Company shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or
become effective any consensual encumbrance or restriction on
the ability of any Restricted Subsidiary (a) to pay
dividends or make any other distributions on its Capital Stock
or pay any Indebtedness owed to the Company or a Restricted
Subsidiary, (b) to make any loans or advances to the
Company or a Restricted Subsidiary or (c) to transfer any
of its property or assets to the Company or a Restricted
Subsidiary, except:
(1) any encumbrance or restriction in the Credit Agreement
on the Issue Date or pursuant to any other agreement in effect
on the Issue Date;
(2) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary on or prior
to the date on which such Restricted Subsidiary was acquired by
the Company (other than Indebtedness Incurred as consideration
in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted
Subsidiary became a Restricted Subsidiary or was acquired by the
Company) and outstanding on such date;
(3) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (1) or (2) of this
covenant or this clause (3) or contained in any amendment
to an agreement referred to in clause (1) or (2) of
this covenant or this clause (3); provided, however, that
the encumbrances and restrictions with respect to such
Restricted Subsidiary contained in any such refinancing
agreement or amendment are no less favorable to the Noteholders
than encumbrances and restrictions with respect to such
Restricted Subsidiary contained in such agreements;
(4) any such encumbrance or restriction consisting of
customary nonassignment provisions in leases governing leasehold
interests to the extent such provisions restrict the transfer of
the lease or the property leased thereunder;
30
(5) in the case of clause (c) above, restrictions
contained in security agreements or mortgages securing
Indebtedness of a Restricted Subsidiary to the extent such
restrictions restrict the transfer of the property subject to
such security agreements or mortgages; and
(6) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or
assets of such Restricted Subsidiary pending the closing of such
sale or disposition.
Limitation on
sales of assets and subsidiary stock.
(a) In the event and to the extent that the Net Available
Cash received by the Company or any Restricted Subsidiary from
one or more Asset Dispositions (other than an Asset Disposition
referred to in clause (c) below) occurring on or after the
Issue Date in any period of 12 consecutive months exceeds 15% of
Adjusted Consolidated Net Tangible Assets as of the beginning of
such
12-month
period, then the Company shall:
(1) within 180 days (in the case of (A) below) or
18 months (in the case of (B) below) after the date
such Net Available Cash so received exceeds such 15% of Adjusted
Consolidated Net Tangible Assets (A) apply an amount equal
to such excess Net Available Cash to repay Senior Indebtedness
of the Company or a Subsidiary Guarantor or Indebtedness of a
Restricted Subsidiary that is not a Subsidiary Guarantor, in
each case owing to a Person other than the Company or any
Affiliate of the Company or (B) invest an equal amount, or
the amount not so applied pursuant to clause (A), in Additional
Assets or Permitted Business Investments; or
(2) apply such excess Net Available Cash (to the extent not
applied pursuant to clause (1)) as provided in the
following paragraphs of this covenant. The amount of such excess
Net Available Cash required to be applied during the applicable
period and not applied as so required by the end of such period
shall constitute Excess Proceeds.
(b) If, as of the first day of any calendar month, the
aggregate amount of Excess Proceeds not theretofore subject to
an Excess Proceeds Offer (as defined below) totals at least
$10 million, the Company must, not later than the fifteenth
Business Day of such month, make an offer (an Excess
Proceeds Offer) to purchase from the Holders on a pro rata
basis an aggregate principal amount of Notes equal to the Excess
Proceeds (rounded down to the nearest multiple of $1,000) on
such date, at a purchase price equal to 100% of the principal
amount of such Notes, plus, in each case, accrued interest (if
any) to, the date of purchase (the Excess Proceeds
Payment), but, if the terms of any other Senior
Subordinated Indebtedness require that an offer be made for such
Senior Subordinated Indebtedness contemporaneously with the
Excess Proceeds Offer, then the Excess Proceeds shall be
prorated between the Excess Proceeds Offer and the offer for
such other Senior Subordinated Indebtedness in accordance with
the aggregate outstanding principal amounts (or, in the case of
other Senior Subordinated Indebtedness issued with significant
original issue discount, accreted value) of the Notes and such
other Senior Subordinated Indebtedness, and the aggregate
principal amount of Notes for which the Excess Proceeds Offer is
made shall be reduced accordingly.
The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any
other securities laws or regulations thereunder in the event
that such Excess Proceeds are received by the Company under this
covenant and the Company is required to repurchase Notes as
described above. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of
this covenant, the Company shall comply with the
31
applicable securities laws and regulations and shall not be
deemed to have breached its obligations under this covenant by
virtue thereof.
(c) In the event of an Asset Disposition by the Company or
any Restricted Subsidiary that consists of a sale of
hydrocarbons and results in Production Payments, the Company or
such Restricted Subsidiary shall apply an amount equal to the
Net Available Cash received by the Company or such Restricted
Subsidiary to:
(1) reduce Senior Indebtedness of the Company or a
Subsidiary Guarantor or Indebtedness of a Restricted Subsidiary
that is not a Subsidiary Guarantor, in each case owing to a
Person other than the Company or any Affiliate of the Company,
within 180 days after the date such Net Available Cash is
so received; or
(2) invest in Additional Assets or Permitted Business
Investments within 18 months after the date such Net
Available Cash is so received.
Limitation on
affiliate transactions.
(a) The Company shall not, and shall not permit any
Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of
any property, employee compensation arrangements or the
rendering of any service) with any Affiliate of the Company (an
Affiliate Transaction) unless the terms thereof:
(1) are no less favorable to the Company or such Restricted
Subsidiary than those that could be obtained at the time of such
transaction in arms-length dealings with a Person who is
not such an Affiliate;
(2) if such Affiliate Transaction involves an amount in
excess of $15 million, are set forth in writing and have
been approved by the Board of Directors, including a majority of
the members of the Board of Directors having no personal stake
in such Affiliate Transaction; and
(3) if such Affiliate Transaction involves an amount in
excess of $25 million, have been determined by a nationally
recognized investment banking firm or other qualified
independent appraiser to be fair, from a financial standpoint,
to the Company and its Restricted Subsidiaries.
(b) The provisions of the foregoing
paragraph (a) shall not prohibit:
(1) any sale of hydrocarbons or other mineral products to
an Affiliate of the Company or the entering into or performance
of Oil and Gas Hedging Contracts, gas gathering, transportation
or processing contracts or oil or natural gas marketing or
exchange contracts with an Affiliate of the Company, in each
case, in the ordinary course of business, so long as the terms
of any such transaction are approved by a majority of the
members of the Board of Directors who are disinterested with
respect to such transaction;
(2) the sale to an Affiliate of the Company of Capital
Stock of the Company that does not constitute Disqualified
Stock, and the sale to an Affiliate of the Company of
Indebtedness (including Disqualified Stock) of the Company in
connection with an offering of such Indebtedness in a market
transaction and on terms substantially identical to those of
other purchasers in such market transaction;
32
(3) transactions contemplated by any employment agreement
or other compensation plan or arrangement existing on the Issue
Date or thereafter entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business;
(4) the payment of reasonable fees to directors of the
Company and its Restricted Subsidiaries who are not employees of
the Company or any Restricted Subsidiary;
(5) transactions between or among the Company and its
Restricted Subsidiaries;
(6) transactions between the Company or any of its
Restricted Subsidiaries and Persons that are controlled (as
defined in the definition of Affiliate) by the
Company (an Unrestricted Affiliate); provided that
no other Person that controls (as so defined) or is under common
control with the Company holds any Investments in such
Unrestricted Affiliate;
(7) Restricted Payments that are permitted by the
provisions of the Indenture described above under the caption
Limitation on Restricted Payments;
(8) loans or advances to employees in the ordinary course
of business and approved by the Companys Board of
Directors in an aggregate principal amount not to exceed
$2.5 million outstanding at any one time; and
(9) purchase and supply transactions with Genesis Energy,
L.P. or its Affiliates in the ordinary course of business
consistent with past practice.
Limitation on
liens.
The Company shall not, and shall not permit any Restricted
Subsidiary to, directly or indirectly, enter into, create,
incur, assume or suffer to exist any Lien on or with respect to
any property of the Company or such Restricted Subsidiary,
whether owned on the Issue Date or acquired after the Issue
Date, or any interest therein or any income or profits
therefrom, unless the Notes or any Subsidiary Guarantee of such
Restricted Subsidiary, as applicable, are secured equally and
ratably with (or prior to) any and all other Indebtedness
secured by such Lien, except that the Company and its Restricted
Subsidiaries may enter into, create, incur, assume or suffer to
exist Permitted Liens and Liens securing Senior Indebtedness.
Merger and
consolidation.
The Company shall not consolidate with or merge with or into, or
convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all the assets of the Company
and its Restricted Subsidiaries, taken as a whole, to, any
Person, unless:
(1) (A) the resulting, surviving or transferee Person
(the Successor Company) shall be a Person organized
and existing under the laws of the United States of America, any
State thereof or the District of Columbia and (B) the
Successor Company (if not the Company) shall expressly assume,
by an indenture supplemental thereto, executed and delivered to
the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Notes and the Indenture;
(2) immediately after giving effect to such transaction
(and treating any Indebtedness which becomes an obligation of
the Successor Company or any Subsidiary as a result of such
transaction as having been Incurred by such Successor Company or
such Subsidiary at the time of such transaction), no Default
shall have occurred and be continuing;
33
(3) immediately after giving effect to such transaction,
the Successor Company would be able to Incur an additional $1.00
of Indebtedness pursuant to paragraph (a) of the
covenant described under Limitation on
Indebtedness;
(4) immediately after giving effect to such transaction,
the Successor Company shall have Adjusted Consolidated Net
Tangible Assets that are not less than the Adjusted Consolidated
Net Tangible Assets prior to such transaction;
(5) in the case of a conveyance, transfer or lease of all
or substantially all the assets of the Company and its
Restricted Subsidiaries, taken as a whole, such assets shall
have been so conveyed, transferred or leased as an entirety or
virtually as an entirety to one Person; and
(6) the Company shall have complied with certain additional
conditions set forth in the Indenture;
provided, however, that clauses (3) and (4) shall not
be applicable to any such transaction solely between the Company
and any Restricted Subsidiary.
The Successor Company shall be the successor to the Company and
shall succeed to, and be substituted for, and may exercise every
right and power of, the Company under the Indenture, and the
predecessor Company, except in the case of a lease, shall be
released from the obligation to pay the principal of and
interest on the Notes.
The Company will not permit any Subsidiary Guarantor to
consolidate with or merge with or into, or convey, transfer or
lease, in one transaction or a series of transactions, all or
substantially all of its assets to any Person unless:
(1) the resulting, surviving or transferee Person (if not
such Subsidiary) shall be a Person organized and existing under
the laws of the jurisdiction under which such Subsidiary was
organized or under the laws of the United States of America, or
any State thereof or the District of Columbia, and such Person
shall expressly assume, by executing a Guarantee Agreement, all
the obligations of such Subsidiary, if any, under its Subsidiary
Guarantee;
(2) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness
which becomes an obligation of the resulting, surviving or
transferee Person as a result of such transaction as having been
issued by such Person at the time of such transaction), no
Default shall have occurred and be continuing;
(3) in the case of a conveyance, transfer or lease of all
or substantially all the assets of a Subsidiary Guarantor, such
assets shall have been so conveyed, transferred or leased as an
entirety or virtually as an entirety to one Person; and
(4) the Company shall have complied with certain additional
conditions contained in the Indenture.
The provisions of clauses (1) and (2) above shall not
apply to any one or more transactions which constitute an Asset
Disposition if the Company has complied with the applicable
provisions of the covenant described under
Limitation on Sales of Assets and Subsidiary
Stock above.
SEC
reports.
Notwithstanding that the Company may not at any time be subject
to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company shall file with the SEC and
34
provide the Trustee and Noteholders with such annual reports and
such information, documents and other reports as are specified
in Sections 13 and 15(d) of the Exchange Act and applicable
to a U.S. corporation subject to such Sections, such
information, documents and other reports to be so filed and
provided at the times specified for the filing of such
information, documents and reports under such Sections.
Future subsidiary
guarantors.
The Company shall cause each Restricted Subsidiary that
represents at least 10% of the book assets of, or 10% of the
ACNTA of, the Company and its Restricted Subsidiaries, taken as
a whole, and that has an aggregate of $15.0 million or more
of Indebtedness and Preferred Stock outstanding at any time to
promptly Guarantee the Notes pursuant to a Subsidiary Guarantee
on the terms and conditions set forth in the Indenture.
Defaults
An Event of Default is defined in the Indenture as:
(1) a default in the payment of interest on the Notes when
due, continued for 30 days;
(2) a default in the payment of principal of any Note when
due at its Stated Maturity, upon optional redemption, upon
required purchase, upon declaration of acceleration or otherwise;
(3) the failure by the Company to comply with its
obligations under Certain CovenantsMerger and
Consolidation above;
(4) the failure by the Company to comply for 30 days
after notice with any of its obligations in the covenants
described above under Change of Control (other than
a failure to purchase Notes), Certain
Covenants, Limitation on Indebtedness,
Limitation on Restricted Payments,
Limitation on Restrictions on Distributions from
Restricted Subsidiaries, Limitation on Sales
of Assets and Subsidiary Stock (other than a failure to
purchase Notes), Limitation on Affiliate
Transactions, Limitation on Liens,
Future Subsidiary Guarantors or SEC
Reports;
(5) the failure by the Company to comply for 60 days
after notice with its other agreements contained in the
Indenture;
(6) Indebtedness of the Company (other than Limited
Recourse Production Payments and Nonrecourse Purchase Money
Indebtedness) is not paid within any applicable grace period
after final maturity or the maturity of such Indebtedness is
accelerated by the holders thereof because of a default (and
such acceleration is not rescinded or annulled) and the total
amount of such Indebtedness unpaid or accelerated exceeds
$10 million (the cross acceleration provision);
(7) certain events of bankruptcy, insolvency or
reorganization of the Company or a Significant Subsidiary (the
bankruptcy provisions);
(8) any judgment or decree for the payment of money in an
uninsured or unindemnified amount in excess of $10 million
or its foreign currency equivalent at the time is rendered
against the Company or a Significant Subsidiary, remains
outstanding for a period of 60 days
35
following such judgment and is not discharged, waived, bonded or
stayed within 10 days after notice (the judgment
default provision); or
(9) any Subsidiary Guarantee ceases or otherwise fails to
be in full force and effect (other than in accordance with the
terms thereof) or a Subsidiary Guarantor denies or disaffirms
its obligations under its Subsidiary Guarantee if such default
continues for a period of ten days after notice thereof to the
Company (the guarantee default provision).
However, a default under clauses (4), (5), (8) and
(9) will not constitute an Event of Default until the
Trustee or the holders of 25% in principal amount of the
outstanding Notes notify the Company of the default and the
Company does not cure such default within the time specified
after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or
the holders of at least 25% in principal amount of the
outstanding Notes may declare the principal of and accrued but
unpaid interest on all the Notes to be due and payable. Upon
such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain
events of bankruptcy, insolvency or reorganization of the
Company occurs and is continuing, the principal of and interest
on all the Notes will ipso facto become and be immediately due
and payable without any declaration or other act on the part of
the Trustee or any holders of the Notes. Under certain
circumstances, the holders of a majority in principal amount of
the outstanding Notes may rescind any such acceleration with
respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the
duties of the Trustee, in case an Event of Default occurs and is
continuing, the Trustee will be under no obligation to exercise
any of the rights or powers under the Indenture at the request
or direction of any of the holders of the Notes unless such
holders have furnished to the Trustee reasonable indemnity or
security against any loss, liability or expense. Except to
enforce the right to receive payment of principal, premium (if
any) or interest when due, no holder of a Note may pursue any
remedy with respect to the Indenture or the Notes unless:
(1) such holder has previously given the Trustee notice
that an Event of Default is continuing;
(2) holders of at least 25% in principal amount of the
outstanding Notes have requested the Trustee to pursue the
remedy;
(3) such holders have furnished the Trustee reasonable
security or indemnity against any loss, liability or expense;
(4) the Trustee has not complied with such request within
60 days after the receipt thereof and the offer of security
or indemnity; and
(5) the holders of a majority in principal amount of the
outstanding Notes have not given the Trustee a direction
inconsistent with such request within such
60-day
period.
Subject to certain restrictions, the holders of a majority in
principal amount of the outstanding Notes are given the right to
direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or of exercising any
trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or
the Indenture or that the Trustee determines is unduly
prejudicial to the rights of any other holder of a Note or that
would involve the Trustee in personal liability.
36
The Indenture provides that if a Default occurs and is
continuing and is known to the Trustee, the Trustee must mail to
each holder of the Notes notice of the Default within
90 days after it occurs. Except in the case of a Default in
the payment of principal of or interest on any Note, the Trustee
may withhold notice if and so long as a committee of its trust
officers determines that withholding notice is not opposed to
the interest of the holders of the Notes. In addition, the
Company is required to deliver to the Trustee, within
120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that
occurred during the previous year. The Company also is required
to deliver to the Trustee, within 30 days after the
occurrence thereof, written notice of any event which would
constitute certain Defaults, their status and what action the
Company is taking or proposes to take in respect thereof.
Amendments and
waivers
Subject to certain exceptions, the Indenture may be amended with
the consent of the holders of a majority in principal amount of
the Notes then outstanding (including consents obtained in
connection with a tender offer or exchange for the Notes) and
any past default or compliance with any provisions may also be
waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding. However, without
the consent of each holder of an outstanding Note affected
thereby, an amendment or waiver may not, among other things:
(1) reduce the amount of Notes whose holders must consent
to an amendment;
(2) reduce the rate of or extend the time for payment of
interest on any Note;
(3) reduce the principal of or extend the Stated Maturity
of any Note;
(4) reduce the premium payable upon the redemption of any
Note or change the time at which any Note may be redeemed as
described under Optional Redemption;
(5) make any Note payable in money other than that stated
in the Note;
(6) impair the right of any holder of the Notes to receive
payment of principal of and interest on such holders Notes
on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such
holders Notes;
(7) make any change in the amendment provisions which
require each holders consent or in the waiver provisions;
(8) make any change to the subordination provisions of the
Indenture that would adversely affect the Noteholders; or
(9) make any change in any Subsidiary Guarantee that could
adversely affect such holder.
Without the consent of any holder of the Notes, the Company, the
Subsidiary Guarantors and the Trustee may amend the Indenture to:
(1) cure any ambiguity, omission, defect or inconsistency;
(2) provide for the assumption by a successor corporation
of the obligations of the Company or the Subsidiary Guarantors
under the Indenture;
37
(3) provide for uncertificated Notes in addition to or in
place of certificated Notes (provided that the uncertificated
Notes are issued in registered form for purposes of
Section 163(f) of the Code, or in a manner such that the
uncertificated Notes are described in Section 163(f)(2)(B)
of the Code);
(4) make any change in the subordination provisions of the
Indenture that would limit or terminate the benefits available
to any holder of Senior Indebtedness of the Company or any
Subsidiary Guarantor thereunder;
(5) add guarantees with respect to the Notes (including any
Subsidiary Guarantee);
(6) secure the Notes;
(7) add to the covenants of the Company for the benefit of
the holders of the Notes or surrender any right or power
conferred upon the Company or any Subsidiary Guarantor;
(8) make any change that does not adversely affect the
rights of any holder of the Notes; or
(9) comply with any requirement of the SEC in connection
with the qualification of the Indenture under the Trust
Indenture Act.
However, no amendment may be made to the subordination
provisions of the Indenture that adversely affects the rights of
any holder of Senior Indebtedness of the Company or a Subsidiary
Guarantor then outstanding unless the holders of such Senior
Indebtedness (or their Representative) consent to such change.
The consent of the holders of the Notes is not necessary under
the Indenture to approve the particular form of any proposed
amendment. It is sufficient if such consent approves the
substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the
Company is required to mail to holders of the Notes a notice
briefly describing such amendment. However, the failure to give
such notice to all holders of the Notes, or any defect therein,
will not impair or affect the validity of the amendment.
Transfer
The Notes will be issued in registered form and will be
transferable only upon the surrender of the Notes being
transferred for registration of transfer. The Company may
require payment of a sum sufficient to cover any tax, assessment
or other governmental charge payable in connection with certain
transfers and exchanges.
Defeasance
The Company at any time may terminate all its obligations under
the Notes and the Indenture (legal defeasance),
except for certain obligations, including those respecting the
defeasance trust and obligations to register the transfer or
exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in
respect of the Notes. The Company at any time may terminate its
obligations under Change of Control and under the
covenants described under Certain Covenants
(other than the covenant described under Merger and
Consolidation), the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Significant
Subsidiaries, the judgment default provision
38
and the guarantee default provision described under
Defaults above and the limitations contained
in clauses (3) and (4) under the first and third
paragraphs of Certain CovenantsMerger and
Consolidation above (covenant defeasance).
The Company may exercise its legal defeasance option
notwithstanding its prior exercise of its covenant defeasance
option. If the Company exercises its legal defeasance option,
payment of the Notes may not be accelerated because of an Event
of Default with respect thereto. If the Company exercises its
covenant defeasance option, payment of the Notes may not be
accelerated because of an Event of Default specified in
clause (4), (6), (7) (with respect only to Significant
Subsidiaries) or (8) under Defaults above
or because of the failure of the Company to comply with
clause (3) or (4) under the first or third paragraph
of Certain CovenantsMerger and
Consolidation above. If the Company exercises its legal
defeasance option or its covenant defeasance option, each
Subsidiary Guarantor will be released from all its obligations
with respect to its Subsidiary Guarantee.
In order to exercise either defeasance option, the Company must
irrevocably deposit in trust (the defeasance trust)
with the Trustee money or U.S. Government Obligations for
the payment of principal and interest on the Notes to redemption
or maturity, as the case may be, and must comply with certain
other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will
not recognize income, gain or loss for Federal income tax
purposes as a result of such deposit and defeasance and will be
subject to Federal income tax on the same amounts and in the
same manner and at the same times as would have been the case if
such deposit and defeasance had not occurred (and, in the case
of legal defeasance only, such Opinion of Counsel must be based
on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
Concerning the
trustee
The Bank of New York Trust Company, N.A., successor in interest
to JPMorgan Chase Bank, National Association, is the Trustee
under the Indenture and has been appointed by the Company as
Registrar and Paying Agent with regard to the Notes.
The Indenture contains certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain
payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or
otherwise. The Trustee will be permitted to engage in other
transactions; provided, however, if it acquires any conflicting
interest it must either eliminate such conflict within
90 days, apply to the SEC for permission to continue or
resign.
The Holders of a majority in principal amount of the outstanding
Notes will have the right to direct the time, method and place
of conducting any proceeding for exercising any remedy available
to the Trustee, subject to certain exceptions. The Indenture
provides that if an Event of Default occurs (and is not cured),
the Trustee will be required, in the exercise of its power, to
use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers
under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security
and indemnity satisfactory to it against any loss, liability or
expense and then only to the extent required by the terms of the
Indenture.
39
Governing
law
The Indenture and the Notes will be governed by, and construed
in accordance with, the laws of the State of New York.
Certain
definitions
Additional Assets means:
(1) any property or assets (other than Indebtedness and
Capital Stock) in the Oil and Gas Business;
(2) the Capital Stock of a Person that becomes a Restricted
Subsidiary as a result of the acquisition of such Capital Stock
by the Company or another Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any
Person that at such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described
in clauses (2) or (3) above is primarily engaged in
the Oil and Gas Business.
Adjusted Consolidated Net Tangible Assets or
ACNTA means (without duplication), as of the date of
determination:
(a) the sum of:
(1) discounted future net revenue from proved crude oil and
natural gas reserves of the Company and its Restricted
Subsidiaries calculated in accordance with SEC guidelines before
any state or federal income taxes, as estimated in a reserve
report prepared as of the end of the Companys most
recently completed fiscal year, which reserve report is prepared
or reviewed by independent petroleum engineers, as increased by,
as of the date of determination, the discounted future net
revenue of (A) estimated proved crude oil and natural gas
reserves of the Company and its Restricted Subsidiaries
attributable to acquisitions consummated since the date of such
year-end reserve report, and (B) estimated crude oil and
natural gas reserves of the Company and its Restricted
Subsidiaries attributable to extensions, discoveries and other
additions and upward determinations of estimates of proved crude
oil and natural gas reserves (including previously estimated
development costs incurred during the period and the accretion
of discount since the prior year end) due to exploration,
development or exploitation, production or other activities
which reserves were not reflected in such year-end reserve
report which would, in the case of determinations made pursuant
to clauses (A) and (B), in accordance with standard
industry practice, result in such determinations, in each case
calculated in accordance with SEC guidelines (utilizing the
prices utilized in such year-end reserve report), and decreased
by, as of the date of determination, the discounted future net
revenue attributable to (C) estimated proved crude oil and
natural gas reserves of the Company and its Restricted
Subsidiaries reflected in such year-end reserve report produced
or disposed of since the date of such year-end reserve report
and (D) reductions in the estimated crude oil and natural
gas reserves of the Company and its Restricted Subsidiaries
reflected in such year-end reserve report since the date of such
year-end reserve report attributable to downward determinations
of estimates of proved crude oil and natural gas reserves due to
exploration, development or exploitation, production or other
activities conducted or otherwise occurring since the date of
such
40
year-end reserve report which would, in the case of
determinations made pursuant to clauses (C) and (D),
in accordance with standard industry practice, result in such
determinations, in each case calculated in accordance with SEC
guidelines (utilizing the prices utilized in such year-end
reserve report); provided, however, that, in the case of each of
the determinations made pursuant to
clauses (A) through (D), such increases and decreases
shall be as estimated by the Companys engineers, except
that if as a result of such acquisitions, dispositions,
discoveries, extensions or revisions, there is a Material Change
which is an increase, then such increases and decreases in the
discounted future net revenue shall be confirmed in writing by
an independent petroleum engineer;
(2) the capitalized costs that are attributable to crude
oil and natural gas properties of the Company and its Restricted
Subsidiaries to which no proved crude oil and natural gas
reserves are attributed, based on the Companys books and
records as of a date no earlier than the date of the
Companys latest annual or quarterly financial statements;
(3) the Net Working Capital on a date no earlier than the
date of the Companys latest annual or quarterly financial
statements; and
(4) the greater of (I) the net book value on a date no
earlier than the date of the Companys latest annual or
quarterly financial statements and (II) the appraised
value, as estimated by independent appraisers, of other tangible
assets of the Company and its Restricted Subsidiaries as of a
date no earlier than the date of the Companys latest
audited financial statements (provided that the Company shall
not be required to obtain such an appraisal of such assets if no
such appraisal has been performed); minus
(b) to the extent not otherwise taken into account in the
immediately preceding clause (a), the sum of:
(1) minority interests;
(2) any natural gas balancing liabilities of the Company
and its Restricted Subsidiaries reflected in the Companys
latest audited financial statements;
(3) the discounted future net revenue, calculated in
accordance with SEC guidelines (utilizing the same prices
utilized in the Companys year-end reserve report),
attributable to reserves subject to participation interests,
overriding royalty interests or other interests of third
parties, pursuant to participation, partnership, vendor
financing or other agreements then in effect, or which otherwise
are required to be delivered to third parties;
(4) the discounted future net revenue, calculated in
accordance with SEC guidelines (utilizing the same prices
utilized in the Companys year-end reserve report),
attributable to reserves that are required to be delivered to
third parties to fully satisfy the obligations of the Company
and its Restricted Subsidiaries with respect to Volumetric
Production Payments on the schedules specified with respect
thereto; and
(5) the discounted future net revenue, calculated in
accordance with SEC guidelines, attributable to reserves subject
to Dollar-Denominated Production Payments that, based on the
estimates of production included in determining the discounted
future net revenue specified in the immediately preceding
clause (a)(1) (utilizing the same prices utilized in the
Companys year-end reserve report), would be necessary to
satisfy fully
41
the obligations of the Company and its Restricted Subsidiaries
with respect to Dollar-Denominated Production Payments on the
schedules specified with respect thereto.
Affiliate of any specified Person means any other
Person, directly or indirectly, controlling or controlled by or
under direct or indirect common control with such specified
Person. For the purposes of this definition, control
when used with respect to any Person means the power to direct
the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities,
by contract or otherwise; and the terms controlling
and controlled have meanings correlative to the foregoing.
For purposes of the provisions described under
Certain CovenantsLimitation on Restricted
Payments, Certain CovenantsLimitation on
Affiliate Transactions and Certain
CovenantsLimitations on Sales of Assets and Subsidiary
Stock only, Affiliate shall also mean any
beneficial owner of Capital Stock representing 10% or more of
the total voting power of the Voting Stock (on a fully diluted
basis) of the Company or of rights or warrants to purchase such
Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner
pursuant to the first sentence hereof.
Asset Disposition means any sale, lease, transfer or
other disposition (or series of related sales, leases, transfers
or dispositions) by the Company or any Restricted Subsidiary,
including any disposition by means of a merger, consolidation or
similar transaction (each referred to for the purposes of this
definition as a disposition), of:
(1) any shares of Capital Stock of a Restricted Subsidiary
(other than directors qualifying shares or shares required
by applicable law to be held by a Person other than the Company
or a Restricted Subsidiary);
(2) all or substantially all the assets of any division or
line of business of the Company or any Restricted Subsidiary; or
(3) any other assets of the Company or any Restricted
Subsidiary outside of the ordinary course of business of the
Company or such Restricted Subsidiary.
Notwithstanding the foregoing, none of the following shall be
deemed to be an Asset Disposition:
(1) a disposition by a Restricted Subsidiary to the Company
or by the Company or a Restricted Subsidiary to a Wholly Owned
Subsidiary;
(2) for purposes of the covenant described under
Certain CovenantsLimitation on Sales of Assets
and Subsidiary Stock only, a disposition that constitutes
a Restricted Payment permitted by the covenant described under
Certain CovenantsLimitation on Restricted
Payments, a disposition of all or substantially all the
assets of the Company in compliance with Certain
CovenantsMerger and Consolidation or a disposition
that constitutes a Change of Control pursuant to clause (3)
of the definition thereof;
(3) the sale or transfer (whether or not in the ordinary
course of business) of crude oil and natural gas properties or
direct or indirect interests in real property; provided,
however, that at the time of such sale or transfer such
properties do not have associated with them any proved reserves;
(4) the abandonment, farm-out, lease or sublease of
developed or undeveloped crude oil and natural gas properties in
the ordinary course of business;
42
(5) the trade or exchange by the Company or any Restricted
Subsidiary of any crude oil and natural gas property owned or
held by the Company or such Restricted Subsidiary for any crude
oil and natural gas property owned or held by another Person; or
(6) the sale or transfer of hydrocarbons or other mineral
products or surplus or obsolete equipment;
in each case in the ordinary course of business.
Attributable Debt in respect of a Sale/Leaseback
Transaction means, as at the time of determination, the present
value (discounted at the interest rate implicit in the
Sale/Leaseback Transaction, compounded annually) of the total
obligations of the lessee for rental payments during the
remaining term of the lease included in such Sale/Leaseback
Transaction (including any period for which such lease has been
extended).
Average Life means, as of the date of determination,
with respect to any Indebtedness or Preferred Stock, the
quotient obtained by dividing
(1) the sum of the products of the numbers of years from
the date of determination to the dates of each successive
scheduled principal payment of such Indebtedness or redemption
or similar payment with respect to such Preferred Stock
multiplied by the amount of such payment by
(2) the sum of all such payments.
Board of Directors means the Board of Directors of
the Company or any committee thereof duly authorized to act on
behalf of such Board.
Business Day means each day which is not a Legal
Holiday (as defined in the Indenture).
Capital Lease Obligation means an obligation that is
required to be classified and accounted for as a capital lease
for financial reporting purposes in accordance with GAAP, and
the amount of Indebtedness represented by such obligation shall
be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be
the date of the last payment of rent or any other amount due
under such lease prior to the first date upon which such lease
may be terminated by the lessee without payment of a penalty.
Capital Stock of any Person means any and all
shares, interests, rights to purchase, warrants, options,
participations or other equivalents of or interests in (however
designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such
equity.
Code means the Internal Revenue Code of 1986, as
amended.
Consolidated Coverage Ratio as of any date of
determination means the ratio of
(x) the aggregate amount of EBITDA for the period of the
most recent four consecutive fiscal quarters ending at least
45 days prior to the date of such determination to
(y) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that:
(1) if the Company or any Restricted Subsidiary has
Incurred any Indebtedness since the beginning of such period
that remains outstanding or if the transaction giving rise to
the need to calculate the Consolidated Coverage Ratio is an
Incurrence of Indebtedness, or both, EBITDA and Consolidated
Interest Expense for such period shall be calculated
43
after giving effect on a pro forma basis to such Indebtedness as
if such Indebtedness had been Incurred on the first day of such
period and the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds
of such new Indebtedness as if such discharge had occurred on
the first day of such period;
(2) if the Company or any Restricted Subsidiary has repaid,
repurchased, defeased or otherwise discharged any Indebtedness
since the beginning of such period or if any Indebtedness is to
be repaid, repurchased, defeased or otherwise discharged on the
date of the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio, EBITDA and Consolidated Interest
Expense for such period shall be calculated on a pro forma basis
as if such discharge had occurred on the first day of such
period and as if the Company or such Restricted Subsidiary has
not earned the interest income actually earned during such
period in respect of cash or Temporary Cash Investments used to
repay, repurchase, defease or otherwise discharge such
Indebtedness;
(3) if since the beginning of such period the Company or
any Restricted Subsidiary shall have made any Asset Disposition
(other than an Asset Disposition involving assets having a fair
market value of less than the greater of two and one-half
percent (2.5%) of Adjusted Consolidated Net Tangible Assets as
of the end of the Companys then most recently completed
fiscal year and $3.0 million), then EBITDA for such period
shall be reduced by an amount equal to EBITDA (if positive)
directly attributable to the assets which are the subject of
such Asset Disposition for such period, or increased by an
amount equal to EBITDA (if negative), directly attributable
thereto for such period and Consolidated Interest Expense for
such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Restricted Subsidiary repaid,
repurchased, defeased or otherwise discharged with respect to
the Company and its continuing Restricted Subsidiaries in
connection with such Asset Disposition for such period (or, if
the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary
to the extent the Company and its continuing Restricted
Subsidiaries are no longer liable for such Indebtedness after
such sale);
(4) if since the beginning of such period the Company or
any Restricted Subsidiary (by merger or otherwise) shall have
made an Investment in any Restricted Subsidiary (or any person
which becomes a Restricted Subsidiary) or an acquisition
(including by way of lease) of assets, including any acquisition
of assets occurring in connection with a transaction requiring a
calculation to be made hereunder, EBITDA and Consolidated
Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of any
Indebtedness) as if such Investment or acquisition occurred on
the first day of such period; and
(5) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with
or into the Company or any Restricted Subsidiary since the
beginning of such period) shall have made any Asset Disposition,
any Investment or acquisition of assets that would have required
an adjustment pursuant to clause (3) or (4) above if
made by the Company or a Restricted Subsidiary during such
period, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto as if
such Asset Disposition, Investment or acquisition occurred on
the first day of such period.
44
For purposes of this definition, whenever pro forma effect is to
be given to an acquisition of assets, the amount of income or
earnings relating thereto and the amount of Consolidated
Interest Expense associated with any Indebtedness Incurred in
connection therewith, the pro forma calculations shall be
determined in good faith by a responsible financial or
accounting Officer of the Company. If any Indebtedness bears a
floating rate of interest and is being given pro forma effect,
the interest on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the
applicable rate for the entire period (taking into account any
Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of
12 months).
Consolidated Current Liabilities as of the date of
determination means the aggregate amount of liabilities of the
Company and its consolidated Restricted Subsidiaries which would
properly be classified as current liabilities (including taxes
accrued as estimated), on a consolidated balance sheet of the
Company and its Restricted Subsidiaries at such date, after
eliminating:
(1) all intercompany items between the Company and any
Restricted Subsidiary; and
(2) all current maturities of long-term Indebtedness, all
as determined in accordance with GAAP consistently applied.
Consolidated Interest Expense means, for any period,
the total interest expense of the Company and its Restricted
Subsidiaries for such period, determined on a consolidated basis
in accordance with GAAP, plus, to the extent not included in
such total interest expense, and to the extent incurred by the
Company or its Restricted Subsidiaries, without duplication:
(1) interest expense attributable to Capital Lease
Obligations and imputed interest with respect to Attributable
Debt;
(2) capitalized interest;
(3) non-cash interest expense;
(4) commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers acceptance
financing;
(5) net costs (including amortization of fees and up-front
payments) associated with interest rate caps and other interest
rate and currency options that, at the time entered into,
resulted in the Company and its Restricted Subsidiaries being
net payees as to future payouts under such caps or options, and
interest rate and currency swaps and forwards for which the
Company or any of its Restricted Subsidiaries has paid a premium;
(6) dividends (excluding dividends paid in shares of
Capital Stock which is not Disqualified Stock) in respect of all
Disqualified Stock held by Persons other than the Company or a
Wholly Owned Subsidiary;
(7) interest accruing on any Indebtedness of any other
Person to the extent such Indebtedness is Guaranteed by the
Company or any Restricted Subsidiary or secured by a Lien on
assets of the Company or any Restricted Subsidiary to the extent
such Indebtedness constitutes Indebtedness of the Company or any
Restricted Subsidiary (whether or not such Guarantee or Lien is
called upon); provided, however, Consolidated Interest
Expense shall not include any (x) amortization of
costs relating to original debt issuances other than the
amortization of debt discount related to the issuance of zero
coupon securities or other securities with an original issue
price of not more than 90% of the principal thereof,
45
(y) Consolidated Interest Expense with respect to any
Indebtedness Incurred pursuant to clause (b) (8) of
the covenant described under Certain
CovenantsLimitation on Indebtedness and
(z) noncash interest expense Incurred in connection with
interest rate caps and other interest rate and currency options
that, at the time entered into, resulted in the Company and its
Restricted Subsidiaries being either neutral or net payors as to
future payouts under such caps or options.
Consolidated Net Income means, for any period, the
net income of the Company and its Subsidiaries determined on a
consolidated basis in accordance with GAAP; provided, however,
that there shall not be included in such Consolidated Net Income:
(1) any net income of any Person (other than the Company)
if such Person is not a Restricted Subsidiary, except that:
(A) subject to the exclusion contained in clause (4)
below, the Companys equity in the net income of any such
Person for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Company or
a Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution paid
to a Restricted Subsidiary, to the limitations contained in
clause (3) below); and
(B) the Companys equity in a net loss of any such
Person for such period shall be included in determining such
Consolidated Net Income;
(2) any net income (or loss) of any Person acquired by the
Company or a Subsidiary in a pooling of interests transaction
for any period prior to the date of such acquisition;
(3) any net income of any Restricted Subsidiary (other than
a Subsidiary Guarantor) if such Restricted Subsidiary is subject
to restrictions, directly or indirectly, on the payment of
dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that:
(A) subject to the exclusion contained in clause (4)
below, the Companys equity in the net income of any such
Restricted Subsidiary for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Restricted Subsidiary during such
period to the Company or another Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a
dividend or other distribution paid to another Restricted
Subsidiary, to the limitation contained in this clause); and
(B) the Companys equity in a net loss of any such
Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income;
(4) any gain or loss realized upon the sale or other
disposition of any assets of the Company or its Subsidiaries
(including pursuant to any
sale-and-leaseback
arrangement) which is not sold or otherwise disposed of in the
ordinary course of business and any gain or loss realized upon
the sale or other disposition of any Capital Stock of any Person;
(5) extraordinary gains or losses;
(6) any non-cash compensation expense realized for grants
of performance shares, stock options or stock awards to
officers, directors and employees of the Company or any of its
Restricted Subsidiaries;
46
(7) any write-downs of noncurrent assets; provided,
however, that any ceiling limitation writedowns under SEC
guidelines shall be treated as capitalized costs, as if such
write-downs had not occurred; and
(8) the cumulative effect of a change in accounting
principles.
Notwithstanding the foregoing, for the purposes of the covenant
described under Certain CovenantsLimitation on
Restricted Payments only, there shall be excluded from
Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted
Subsidiaries to the Company or a Restricted Subsidiary to the
extent such dividends, repayments or transfers increase the
amount of Restricted Payments permitted under such covenant
pursuant to clause (a)(3)(E) thereof.
Consolidated Net Tangible Assets, as of any date of
determination, means the total amount of assets (less
accumulated depreciation and amortization, allowances for
doubtful receivables, other applicable reserves and other
properly deductible items) which would appear on a balance sheet
of the Company and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, and after giving
effect to purchase accounting and after deducting therefrom
Consolidated Current Liabilities and, to the extent otherwise
included, the amounts of:
(1) minority interests in Restricted Subsidiaries held by
Persons other than the Company or a Restricted Subsidiary;
(2) excess of cost over fair value of assets of businesses
acquired, as determined in good faith by the Board of Directors;
(3) any revaluation or other
write-up in
book value of assets subsequent to the Issue Date as a result of
a change in the method of valuation in accordance with GAAP
consistently applied;
(4) unamortized debt discount and expenses and other
unamortized deferred charges, goodwill, patents, trademarks,
service marks, trade names, copyrights, licenses, organization
or developmental expenses and other intangible items;
(5) treasury stock;
(6) cash set apart and held in a sinking or other analogous
fund established for the purpose of redemption or other
retirement of Capital Stock to the extent such obligation is not
reflected in Consolidated Current Liabilities; and
(7) Investments in and assets of Unrestricted Subsidiaries.
Consolidated Net Worth means the total of the
amounts shown on the balance sheet of the Company and its
Subsidiaries, determined on a consolidated basis in accordance
with GAAP, as of the end of the most recent fiscal quarter of
the Company ending at least 45 days prior to the taking of
any action for the purpose of which the determination is being
made, as the sum of:
(1) the par or stated value of all outstanding Capital
Stock of the Company, plus
(2) paid-in capital or capital surplus relating to such
Capital Stock, plus
(3) any retained earnings or earned surplus
less (A) any accumulated deficit and (B) any amounts
attributable to Disqualified Stock.
47
Credit Agreement means that certain Fifth Amended
and Restated Credit Agreement, dated September 1, 2004, as
amended, by and among the Company, Denbury Onshore, LLC and
JPMorgan Chase Bank, National Association (or any successor
thereto or replacement thereof), as administrative agent and as
a lender, and certain other institutions, as lenders, including
any related notes, guarantees, collateral documents, instruments
and agreements executed in connection therewith, and in each
case as amended, restated, modified, renewed, refunded,
replaced, refinanced or increased in whole or in part from time
to time.
Credit Facilities means, with respect to the Company
or any Restricted Subsidiary, one or more debt facilities
(including the Credit Agreement) or commercial paper facilities
with banks or other institutional lenders providing for
revolving credit loans, term loans, production payments,
receivables financing (including through the sale of receivables
to such lenders or to special purpose entities formed to borrow
from such lenders against such receivables) or letters of
credit, in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time
to time.
Currency Agreement means in respect of a Person any
foreign exchange contract, currency swap agreement or other
similar agreement to which such Person is a party or a
beneficiary.
Default means any event which is, or after notice or
passage of time or both would be, an Event of Default.
Designated Senior Indebtedness in respect of a
Person means:
(1) all the obligations of such Person under any Credit
Facilities (including the Credit Agreement); and
(2) any other Senior Indebtedness of such Person which, at
the date of determination, has an aggregate principal amount
outstanding of, or under which, at the date of determination,
the holders thereof are committed to lend up to, at least
$20 million and is specifically designated by such Person
in the instrument evidencing or governing such Senior
Indebtedness as Designated Senior Indebtedness for
purposes of the Indenture.
Disqualified Stock means, with respect to any
Person, any Capital Stock that by its terms (or by the terms of
any security into which it is convertible or for which it is
exchangeable) or upon the happening of any event:
in each case described in the immediately preceding
clauses (1), (2) or (3), on or prior to the Stated
Maturity of the Notes; provided, however, that any Capital Stock
that would not constitute Disqualified Stock but not provisions
thereof giving holders thereof the right to require such Person
to purchase or redeem such Capital Stock upon the occurrence of
an asset sale or change of control
occurring prior to the Stated Maturity of the Notes shall not
(1) mature or is mandatorily redeemable pursuant to a
sinking fund obligation or otherwise; is
(2) convertible or exchangeable for Indebtedness or
Disqualified Stock; or is redeemable, in whole
(3) or in part, at the option of the holder thereof;
48
constitute Disqualified Stock if:
(x) the asset sale or change of
control provisions applicable to such Capital Stock are
not more favorable to the holders of such Capital Stock than the
provisions described under Certain
CovenantsLimitation on Sales of Assets and Subsidiary
Stock and Certain CovenantsChange of
Control; and
(y) any such requirement only becomes operative after
compliance with such corresponding terms applicable to the
Notes, including the purchase of any Notes tendered pursuant
thereto.
The amount of any Disqualified Stock that does not have a fixed
redemption, repayment or repurchase price will be calculated in
accordance with the terms of such Disqualified Stock as if such
Disqualified Stock were redeemed, repaid or repurchased on any
date on which the amount of such Disqualified Stock is to be
determined pursuant to the Indenture; provided, however, that if
such Disqualified Stock could not be required to be redeemed,
repaid or repurchased at the time of such determination, the
redemption, repayment or repurchase price will be the book value
of such Disqualified Stock as reflected in the most recent
financial statements of such Person.
Dollar-Denominated Production Payments means
production payment obligations recorded as liabilities in
accordance with GAAP, together with all undertakings and
obligations in connection therewith.
EBITDA for any period means the sum of Consolidated
Net Income, plus Consolidated Interest Expense plus the
following to the extent deducted in calculating such
Consolidated Net Income:
(1) provision for taxes based on income or profits;
(2) depletion and depreciation expense;
(3) amortization expense;
(4) exploration expense (if applicable to the Company after
the Issue Date);
(5) unrealized foreign exchange losses; and
(6) all other non-cash charges, including non-cash charges
taken pursuant to FAS 133 (excluding any such non-cash
charge to the extent that it represents an accrual of or reserve
for cash charges in any future period or amortization of a
prepaid cash expense that was paid in a prior period except such
amounts as the Company determines in good faith are
nonrecurring);
and less, to the extent included in calculating such
Consolidated Net Income and in excess of any costs or expenses
attributable thereto and deducted in calculating such
Consolidated Net Income, the sum of:
(1) the amount of deferred revenues that are amortized
during such period and are attributable to reserves that are
subject to Volumetric Production Payments;
(2) amounts recorded in accordance with GAAP as repayments
of principal and interest pursuant to Dollar-Denominated
Production Payments; and
(3) unrealized foreign exchange gains.
49
Notwithstanding the foregoing, the provision for taxes based on
the income or profits of, and the depletion, depreciation,
amortization and exploration and other non-cash charges of, a
Restricted Subsidiary shall be added to Consolidated Net Income
to compute EBITDA only to the extent (and in the same
proportion) that the net income of such Restricted Subsidiary
was included in calculating Consolidated Net Income and only if
a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Restricted
Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to such Restricted
Subsidiary or its stockholders.
Exchange Act means the Securities Exchange Act of
1934, as amended.
FAS 133 means Financial Accounting Standards
Board Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities.
GAAP means generally accepted accounting principles
in the United States of America as in effect on the Issue Date,
including those set forth in:
(1) the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public
Accountants;
(2) statements and pronouncements of the Financial
Accounting Standards Board;
(3) such other statements by such other entity as approved
by a significant segment of the accounting profession; and
(4) the rules and regulations of the SEC governing the
inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to
Section 13 of the Exchange Act, including opinions and
pronouncements in staff accounting bulletins and similar written
statements from the accounting staff of the SEC.
Guarantee means, without duplication, any
obligation, contingent or otherwise, of any Person directly or
indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such
Person:
(1) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness of such Person
(whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities
or services, to
take-or-pay
or to maintain financial statement conditions or otherwise); or
(2) entered into for the purpose of assuring in any other
manner the obligee of such Indebtedness of the payment thereof
or to protect such obligee against loss in respect thereof (in
whole or in part);
provided, however, that the term Guarantee shall not
include endorsements for collection or deposit in the ordinary
course of business. The term Guarantee used as a
verb has a corresponding meaning. The term Guarantor
shall mean any Person Guaranteeing any obligation.
Guarantee Agreement means a supplemental indenture,
in a form satisfactory to the Trustee, pursuant to which a
Subsidiary Guarantor or any other Person becomes subject to the
applicable terms and conditions of the Indenture.
50
Hedging Obligations of any Person means the
obligations of such Person pursuant to any Oil and Gas Hedging
Contract, Interest Rate Agreement or Currency Agreement.
Holder or Noteholder means the Person in
whose name a Note is registered on the Registrars books.
Incur means issue, assume, Guarantee, incur or
otherwise become liable for; provided, however, that any
Indebtedness or Capital Stock of a Person existing at the time
such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be
Incurred by such Subsidiary at the time it becomes a Subsidiary.
The term Incurrence when used as a noun shall have a
correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall not be
deemed the Incurrence of Indebtedness.
Indebtedness means, with respect to any Person on
any date of determination (without duplication):
(1) the principal of and premium (if any) in respect of
(A) indebtedness of such Person for money borrowed and
(B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person
is responsible or liable;
(2) all Capital Lease Obligations of such Person and all
Attributable Debt in respect of Sale/ Leaseback Transactions
entered into by such Person;
(3) all obligations of such Person issued or assumed as the
deferred purchase price of property (which purchase price is due
more than six months after the date of taking delivery of title
to such property), including all obligations of such Person for
the deferred purchase price of property under any title
retention agreement (but excluding trade accounts payable
arising in the ordinary course of business);
(4) all obligations of such Person for the reimbursement of
any obligor on any letter of credit, bankers acceptance or
similar credit transaction (other than obligations with respect
to letters of credit securing obligations (other than
obligations described in clauses (1) through
(3) above) entered into in the ordinary course of business
of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the tenth Business Day following
receipt by such Person of a demand for reimbursement following
payment on the letter of credit);
(5) the amount of all obligations of such Person with
respect to the redemption, repayment or other repurchase of any
Disqualified Stock (but excluding any accrued dividends);
(6) all obligations of such Person relating to any
Production Payment;
(7) all obligations of the type referred to in
clauses (1) through (6) of other Persons and all
dividends of other Persons for the payment of which, in either
case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by
means of any Guarantee (including, with respect to any
Production Payment, any warranties or guarantees of production
or payment by such Person with respect to such Production
Payment but excluding other contractual obligations of such
Person with respect to such Production Payment);
(8) all obligations of the type referred to in
clauses (1) through (7) of other Persons secured by
any Lien on any property or asset of such first-mentioned Person
(whether or not such
51
obligation is assumed by such first-mentioned Person), the
amount of such obligation being deemed to be the lesser of the
value of such property or assets or the amount of the obligation
so secured; and
(9) to the extent not otherwise included in this
definition, Hedging Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability,
assuming the contingency giving rise to the obligation were to
have occurred on such date, of any Guarantees outstanding at
such date.
None of the following shall constitute Indebtedness:
(1) indebtedness arising from agreements providing for
indemnification or adjustment of purchase price or from
guarantees securing any obligations of the Company or any of its
Subsidiaries pursuant to such agreements, incurred or assumed in
connection with the disposition of any business, assets or
Subsidiary of the Company, other than guarantees or similar
credit support by the Company or any of its Subsidiaries of
Indebtedness incurred by any Person acquiring all or any portion
of such business, assets or Subsidiary for the purpose of
financing such acquisition;
(2) any trade payables or other similar liabilities to
trade creditors and other accrued current liabilities incurred
in the ordinary course of business as the deferred purchase
price of property;
(3) any liability for Federal, state, local or other taxes
owed or owing by such Person;
(4) amounts due in the ordinary course of business to other
royalty and working interest owners;
(5) obligations arising from guarantees to suppliers,
lessors, licensees, contractors, franchisees or customers
incurred in the ordinary course of business;
(6) obligations (other than express Guarantees of
indebtedness for borrowed money) in respect of Indebtedness of
other Persons arising in connection with (A) the sale or
discount of accounts receivable, (B) trade acceptances and
(C) endorsements of instruments for deposit in the ordinary
course of business;
(7) obligations in respect of performance bonds provided by
the Company or its Subsidiaries in the ordinary course of
business and refinancing thereof;
(8) obligations arising from the honoring by a bank or
other financial institution of a check, draft or similar
instrument drawn against insufficient funds in the ordinary
course of business, provided, however that such obligation is
extinguished within two Business Days of its Incurrence; and
(9) obligations in respect of any obligations under
workers compensation laws and similar legislation.
Interest Rate Agreement means any interest rate swap
agreement, interest rate cap agreement or other financial
agreement or arrangement designed to protect the Company or any
Restricted Subsidiary against fluctuations in interest rates.
52
Investment in any Person means any direct or
indirect advance, loan (other than advances to customers or
joint interest partners or drilling partnerships sponsored by
the Company or any Restricted Subsidiary in the ordinary course
of business that are recorded as accounts receivable on the
balance sheet of the lender) or other extensions of credit
(including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services
for the account or use of others), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person. Except as otherwise provided
for herein, the amount of an Investment shall be its fair value
at the time the Investment is made and without giving effect to
subsequent changes in value.
For purposes of the definition of Unrestricted
Subsidiary, the definition of Restricted
Payment and the covenant described under
Certain CovenantsLimitation on Restricted
Payments:
(1) Investment shall include the portion
(proportionate to the Companys equity interest in such
Subsidiary) of the fair market value of the net assets of any
Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that
upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a
permanent Investment in an Unrestricted Subsidiary
equal to an amount (if positive) equal to (x) the
Companys Investment in such Subsidiary at the
time of such redesignation less (y) the portion
(proportionate to the Companys equity interest in such
Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and
(2) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time
of such transfer, in each case as determined in good faith by
the Board of Directors.
Issue Date means the date on which the Notes are
originally issued.
Lien means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any
conditional sale or other title retention agreement or lease in
the nature thereof).
Limited Recourse Production Payments means, with
respect to any Production Payments, Indebtedness, the terms of
which limit the liability of the Company and its Restricted
Subsidiaries solely to the hydrocarbons covered by such
Production Payments; provided, however, that no default with
respect to such Indebtedness would permit any holder of any
other Indebtedness of the Company or any Restricted Subsidiary
to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated
maturity.
Material Change means an increase or decrease
(excluding changes that result solely from changes in prices and
changes resulting from the Incurrence of previously estimated
future development costs) of more than 25% during a fiscal
quarter in the discounted future net revenues from proved crude
oil and natural gas reserves of the Company and its Restricted
Subsidiaries, calculated in accordance with clause (a)(1)
of the definition of Adjusted
53
Consolidated Net Tangible Assets; provided, however, that the
following will be excluded from the calculation of Material
Change:
(1) any acquisitions during the fiscal quarter of oil and
gas reserves that have been estimated by independent petroleum
engineers and with respect to which a report or reports of such
engineers exist; and
(2) any disposition of properties existing at the beginning
of such fiscal quarter that have been disposed of in compliance
with the covenant described under Certain
CovenantsLimitation on Sales of Assets and Subsidiary
Stock.
Moodys means Moodys Investors
Service, Inc. and its successors.
Net Available Cash from an Asset Disposition means
cash payments received therefrom (including any cash payments
received by way of deferred payment of principal pursuant to a
note or installment receivable or otherwise, but only as and
when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness
or other obligations relating to such properties or assets or
received in any other noncash form), in each case net of:
(1) all legal, title and recording tax expenses,
commissions and other fees (including financial and other
advisory fees) and expenses incurred, and all Federal, state,
provincial, foreign and local taxes required to be accrued as a
liability under GAAP, as a consequence of such Asset Disposition;
(2) all payments made on any Indebtedness which is secured
by any assets subject to such Asset Disposition, in accordance
with the terms of any Lien upon or other security agreement of
any kind with respect to such assets, or which must by its
terms, or in order to obtain a necessary consent to such Asset
Disposition, or by applicable law, be repaid out of the proceeds
from such Asset Disposition;
(3) all distributions and other payments required to be
made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition; and
(4) the deduction of appropriate amounts provided by the
seller as a reserve, in accordance with GAAP, against any
liabilities associated with the property or other assets
disposed in such Asset Disposition and retained by the Company
or any Restricted Subsidiary after such Asset Disposition.
Net Cash Proceeds, with respect to any issuance or
sale of Capital Stock, means the cash proceeds of such issuance
or sale net of attorneys fees, accountants fees,
underwriters or placement agents fees, discounts or
commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of
taxes paid or payable as a result thereof.
Net Present Value means, with respect to any proved
hydrocarbon reserves, the discounted future net cash flows
associated with such reserves, determined in accordance with the
rules and regulations (including interpretations thereof) of the
SEC in effect on the Issue Date.
Net Working Capital means:
(1) all current assets of the Company and its Restricted
Subsidiaries; minus
54
(2) all current liabilities of the Company and its
Restricted Subsidiaries, except current liabilities included in
Indebtedness;
determined in accordance with GAAP.
Non-recourse Purchase Money Indebtedness means
Indebtedness (other than Capital Lease Obligations) of the
Company or any Subsidiary Guarantor incurred in connection with
the acquisition by the Company or such Subsidiary Guarantor in
the ordinary course of business of fixed assets used in the Oil
and Gas Business (including office buildings and other real
property used by the Company or such Subsidiary Guarantor in
conducting its operations) with respect to which:
(1) the holders of such Indebtedness agree that they will
look solely to the fixed assets so acquired which secure such
Indebtedness, and neither the Company nor any Restricted
Subsidiary (a) is directly or indirectly liable for such
Indebtedness or (b) provides credit support, including any
undertaking, Guarantee, agreement or instrument that would
constitute Indebtedness (other than the grant of a Lien on such
acquired fixed assets); and
(2) no default or event of default with respect to such
Indebtedness would cause, or permit (after notice or passage of
time or otherwise), any holder of any other Indebtedness of the
Company or a Subsidiary Guarantor to declare a default or event
of default on such other Indebtedness or cause the payment,
repurchase, redemption, defeasance or other acquisition or
retirement for value thereof to be accelerated or payable prior
to any scheduled principal payment, scheduled sinking fund
payment or maturity.
Oil and Gas Business means the business of the
exploration for, and exploitation, development, acquisition,
production, processing (but not refining), marketing, storage
and transportation of, hydrocarbons, and other related energy
and natural resource businesses (including oil and gas services
businesses related to the foregoing).
Oil and Gas Hedging Contract means any oil and gas
purchase or hedging agreement, and other agreement or
arrangement, in each case, that is designed to provide
protection against oil and gas price fluctuations.
Oil and Gas Liens means:
(1) Liens on any specific property or any interest therein,
construction thereon or improvement thereto to secure all or any
part of the costs incurred for surveying, exploration, drilling,
extraction, development, operation, production, construction,
alteration, repair or improvement of, in, under or on such
property and the plugging and abandonment of wells located
thereon (it being understood that, in the case of oil and gas
producing properties, or any interest therein, costs incurred
for development shall include costs incurred for all
facilities relating to such properties or to projects, ventures
or other arrangements of which such properties form a part or
which relate to such properties or interests);
(2) Liens on an oil or gas producing property to secure
obligations Incurred or guarantees of obligations Incurred in
connection with or necessarily incidental to commitments for the
purchase or sale of, or the transportation or distribution of,
the products derived from such property;
(3) Liens arising under partnership agreements, oil and gas
leases, overriding royalty agreements, net profits agreements,
production payment agreements, royalty trust agreements,
incentive compensation programs on terms that are reasonably
customary in the Oil and Gas
55
Business for geologists, geophysicists and other providers of
technical services to the Company or a Restricted Subsidiary,
master limited partnership agreements, farm-out agreements,
farm-in agreements, division orders, contracts for the sale,
purchase, exchange, transportation, gathering or processing of
oil, gas or other hydrocarbons, unitizations and pooling
designations, declarations, orders and agreements, development
agreements, operating agreements, production sales contracts,
area of mutual interest agreements, gas balancing or deferred
production agreements, injection, repressuring and recycling
agreements, salt water or other disposal agreements, seismic or
geophysical permits or agreements, and other agreements which
are customary in the Oil and Gas Business; provided, however,
that in all instances such Liens are limited to the assets that
are the subject of the relevant agreement, program, order or
contract;
(4) Liens arising in connection with Production Payments;
and
(5) Liens on pipelines or pipeline facilities that arise by
operation of law.
Permitted Business Investment means any investment
made in the ordinary course of, and of a nature that is or shall
have become customary in, the Oil and Gas Business including
investments or expenditures for actively exploiting, exploring
for, acquiring, developing, producing, processing, gathering,
marketing or transporting oil and gas through agreements,
transactions, interests or arrangements which permit one to
share risks or costs, comply with regulatory requirements
regarding local ownership or satisfy other objectives
customarily achieved through the conduct of Oil and Gas Business
jointly with third parties, including:
(1) ownership interests in oil and gas properties,
processing facilities, gathering systems, pipelines or ancillary
real property interests; and
(2) Investments in the form of or pursuant to operating
agreements, processing agreements, farm-in agreements, farm-out
agreements, development agreements, area of mutual interest
agreements, unitization agreements, pooling agreements, joint
bidding agreements, service contracts, joint venture agreements,
partnership agreements (whether general or limited),
subscription agreements, stock purchase agreements and other
similar agreements (including for limited liability companies)
with third parties, excluding, however, Investments in
corporations other than Restricted Subsidiaries.
Permitted Investment means an Investment by the
Company or any Restricted Subsidiary in:
(1) a Restricted Subsidiary or a Person that will, upon the
making of such Investment, become a Restricted Subsidiary;
provided, however, that the primary business of such Restricted
Subsidiary is an Oil and Gas Business;
(2) another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the
Company or a Restricted Subsidiary; provided, however, that such
Persons primary business is an Oil and Gas Business;
(3) Temporary Cash Investments;
(4) receivables owing to the Company or any Restricted
Subsidiary if created or acquired in the ordinary course of
business and payable or dischargeable in accordance with
customary trade terms; provided, however, that such trade terms
may include such concessionary trade terms as the Company or any
such Restricted Subsidiary deems reasonable under the
circumstances;
56
(5) payroll, travel and similar advances to cover matters
that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in
the ordinary course of business;
(6) loans or advances to employees made in the ordinary
course of business;
(7) stock, obligations or securities received in settlement
of debts created in the ordinary course of business and owing to
the Company or any Restricted Subsidiary or in satisfaction of
judgments;
(8) any Person to the extent such Investment represents the
noncash portion of the consideration received for an Asset
Disposition as permitted pursuant to the covenant described
under Certain CovenantsLimitation on Sales of
Assets and Subsidiary Stock;
(9) Permitted Business Investments;
(10) Investments intended to promote the Companys
strategic objectives in the Oil and Gas Business in an aggregate
amount not to exceed 5.0% of ACNTA (determined as of the date of
the making of any such Investment) at any one time outstanding
(which Investments shall be deemed to be no longer outstanding
only upon and to the extent of the return of capital thereof);
and
(11) Investments made pursuant to Hedging Obligations of
the Company and the Restricted Subsidiaries.
Permitted Liens means, with respect to any Person:
(1) Liens existing as of the Issue Date;
(2) Liens securing the Notes, any Subsidiary Guarantee and
other obligations arising under the Indenture;
(3) any Lien existing on any property of a Person at the
time such Person is merged or consolidated with or into the
Company or a Restricted Subsidiary or becomes a Restricted
Subsidiary (and not incurred in anticipation of or in connection
with such transaction), provided that such Liens are not
extended to other property of the Company or the Restricted
Subsidiaries;
(4) any Lien existing on any property at the time of the
acquisition thereof (and not incurred in anticipation of or in
connection with such transaction), provided that such Liens are
not extended to other property of the Company or the Restricted
Subsidiaries;
(5) any Lien incurred in the ordinary course of business
incidental to the conduct of the business of the Company or the
Restricted Subsidiaries or the ownership of their property
(including (i) easements, rights of way and similar
encumbrances, (ii) rights or title of lessors under leases
(other than Capital Lease Obligations), (iii) rights of
collecting banks having rights of setoff, revocation, refund or
chargeback with respect to money or instruments of the Company
or the Restricted Subsidiaries on deposit with or in the
possession of such banks, (iv) Liens imposed by law,
including Liens under workers compensation or similar
legislation and mechanics, carriers,
warehousemens, materialmens, suppliers and
vendors Liens, (v) Liens incurred to secure
performance of obligations with respect to statutory or
regulatory requirements, performance or
return-of-money
bonds, surety bonds or other obligations of a like nature and
incurred in a manner consistent with industry practice and
57
(vi) Oil and Gas Liens, in each case which are not incurred
in connection with the borrowing of money, the obtaining of
advances or credit or the payment of the deferred purchase price
of property (other than trade accounts payable arising in the
ordinary course of business);
(6) Liens for taxes, assessments and governmental charges
not yet due or the validity of which are being contested in good
faith by appropriate proceedings, promptly instituted and
diligently conducted, and for which adequate reserves have been
established to the extent required by GAAP as in effect at such
time;
(7) Liens incurred to secure appeal bonds and judgment and
attachment Liens, in each case in connection with litigation or
legal proceedings that are being contested in good faith by
appropriate proceedings, so long as reserves have been
established to the extent required by GAAP as in effect at such
time and so long as such Liens do not encumber assets by an
aggregate amount (together with the amount of any unstayed
judgments against the Company or any Restricted Subsidiary but
excluding any such Liens to the extent securing insured or
indemnified judgments or orders) in excess of $10.0 million;
(8) Liens securing Hedging Obligations of the Company and
its Restricted Subsidiaries;
(9) Liens securing purchase money Indebtedness or Capital
Lease Obligations, provided that such Liens attach only to the
property acquired with the proceeds of such purchase money
Indebtedness or the property which is the subject of such
Capital Lease Obligations;
(10) Liens securing Non-recourse Purchase Money
Indebtedness granted in connection with the acquisition by the
Company or any Restricted Subsidiary in the ordinary course of
business of fixed assets used in the Oil and Gas Business
(including the office buildings and other real property used by
the Company or such Restricted Subsidiary in conducting its
operations), provided that (i) such Liens attach only to
the fixed assets acquired with the proceeds of such Non-recourse
Purchase Money Indebtedness; and (ii) such Non-recourse
Purchase Money Indebtedness is not in excess of the purchase
price of such fixed assets;
(11) Liens resulting from the deposit of funds or evidences
of Indebtedness in trust for the purpose of decreasing or
legally defeasing Indebtedness of the Company or any Restricted
Subsidiary so long as such deposit of funds is permitted by the
provisions of the Indenture described under
Limitation on restricted payments;
(12) Liens resulting from a pledge of Capital Stock of a
Person that is not a Restricted Subsidiary to secure obligations
of such Person and any refinancing thereof;
(13) Liens to secure any permitted extension, renewal,
refinancing, refunding or exchange (or successive extensions,
renewals, refinancing, refunding or exchanges), in whole or in
part, of or for any Indebtedness secured by Liens referred to in
clauses (1), (2), (3), (4), (9) and (10) above;
provided, however, that (i) such new Lien shall be limited
to all or part of the same property (including future
improvements thereon and accessions thereto) subject to the
original Lien and (ii) the Indebtedness secured by such
Lien at such time is not increased to any amount greater than
the sum of (A) the outstanding principal amount or, if
greater, the committed amount of the Indebtedness secured by
such original Lien immediately prior to such extension, renewal,
refinancing, refunding or exchange and (B) an amount
necessary to pay any fees and expenses, including premiums,
related to such refinancing, refunding, extension, renewal or
replacement; and
58
(14) Liens in favor of the Company or a Restricted
Subsidiary.
Notwithstanding anything in this definition to the contrary, the
term Permitted Liens shall not include Liens
resulting from the creation, incurrence, issuance, assumption or
Guarantee of any Production Payments other than:
(1) any such Liens existing as of the Issue Date;
(2) Production Payments in connection with the acquisition
of any property after the Issue Date; provided that any such
Lien created in connection therewith is created, incurred,
issued, assumed or Guaranteed in connection with the financing
of, and within 60 days after the acquisition of, such
property;
(3) Production Payments other than those described in
clauses (1) and (2), to the extent such Production Payments
constitute Asset Dispositions made pursuant to and in compliance
with the provisions of the Indenture described under
Limitation on sales of assets and subsidiary
stock; and
(4) incentive compensation programs for geologists,
geophysicists and other providers of technical services to the
Company and any Restricted Subsidiary;
provided, however, that, in the case of the immediately
foregoing clauses (1), (2), (3) and (4), any Lien
created in connection with any such Production Payments shall be
limited to the property that is the subject of such Production
Payments.
Permitted Marketing Obligations means Indebtedness
of the Company or any Restricted Subsidiary under letter of
credit or borrowed money obligations, or in lieu of or in
addition to such letters of credit or borrowed money, guarantees
of such Indebtedness or other obligation, of the Company or any
Restricted Subsidiary by any other Restricted Subsidiary, as
applicable, related to the purchase by the Company or any
Restricted Subsidiary of hydrocarbons for which the Company or
such Restricted Subsidiary has contracts to sell; provided,
however, that in the event that such Indebtedness or obligations
are guaranteed by the Company or any Restricted Subsidiary, then
either:
(1) the Person with which the Company or such Restricted
Subsidiary has contracts to sell has an investment grade credit
rating from S&P or Moodys, or in lieu thereof, a
Person guaranteeing the payment of such obligated Person has an
investment grade credit rating from S&P or Moodys; or
(2) such Person posts, or has posted for it, a letter of
credit in favor of the Company or such Restricted Subsidiary
with respect to all such Persons obligations to the
Company or such Restricted Subsidiary under such contracts.
Person means any individual, corporation,
partnership, limited liability company, joint venture,
association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision
thereof or any other entity.
Preferred Stock, as applied to the Capital Stock of
any Person, means Capital Stock of any class or classes (however
designated) which is preferred as to the payment of dividends or
distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such
Person.
59
The term principal of a Note means the principal of
the Note plus the premium, if any, payable on the Note which is
due or overdue or is to become due at the relevant time.
Production Payments means, collectively,
Dollar-Denominated Production Payments and Volumetric Production
Payments.
Refinance means, in respect of any Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease
or retire, or to issue other Indebtedness in exchange or
replacement for, such Indebtedness. Refinanced and
Refinancing shall have correlative meanings.
Refinancing Indebtedness means Indebtedness that
Refinances any Indebtedness of the Company or any Restricted
Subsidiary existing on the Issue Date or Incurred in compliance
with the Indenture, including Indebtedness that Refinances
Refinancing Indebtedness; provided, however, that:
(1) such Refinancing Indebtedness has a Stated Maturity no
earlier than the Stated Maturity of the Indebtedness being
Refinanced;
(2) such Refinancing Indebtedness has an Average Life at
the time such Refinancing Indebtedness is Incurred that is equal
to or greater than the Average Life of the Indebtedness being
Refinanced;
(3) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount,
an aggregate issue price) that is equal to or less than the
aggregate principal amount (or if Incurred with original issue
discount, the aggregate accreted value) then outstanding or
committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; and
(4) if the Indebtedness being Refinanced is Non-recourse
Purchase Money Indebtedness, such Refinancing Indebtedness
satisfies clauses (1) and (2) of the definition of
Non-recourse Purchase Money Indebtedness; provided
further, however, that Refinancing Indebtedness shall not include
(x) Indebtedness of a Subsidiary that Refinances
Indebtedness of the Company or
(y) Indebtedness of the Company or a Restricted Subsidiary
that Refinances Indebtedness of an Unrestricted Subsidiary.
Representative means any trustee, agent or
representative (if any) for an issue of Senior Indebtedness of
the Company or of a Subsidiary Guarantor.
Restricted Payment with respect to any Person means:
(1) the declaration or payment of any dividends or any
other distributions of any sort in respect of its Capital Stock
(including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the
direct or indirect holders of its Capital Stock (other than
(x) dividends or distributions payable solely in its
Capital Stock (other than Disqualified Stock),
(y) dividends or distributions payable solely to the
Company or a Restricted Subsidiary, and (z) pro rata
dividends or other distributions made by a Subsidiary that is
not a
60
Wholly Owned Subsidiary to minority stockholders (or owners of
an equivalent interest in the case of a Subsidiary that is an
entity other than a corporation));
(2) the purchase, redemption or other acquisition or
retirement for value of any Capital Stock of the Company held by
any Person or of any Capital Stock of a Restricted Subsidiary
held by any Affiliate of the Company (other than a Restricted
Subsidiary), including the exercise of any option to exchange
any Capital Stock (other than into Capital Stock of the Company
that is not Disqualified Stock);
(3) the purchase, repurchase, redemption, defeasance or
other acquisition or retirement for value, prior to scheduled
maturity, scheduled repayment or scheduled sinking fund payment
of any Subordinated Obligations of such Person (other than the
purchase, repurchase or other acquisition of Subordinated
Obligations purchased in anticipation of satisfying a sinking
fund obligation, principal installment or final maturity, in
each case due within one year of the date of acquisition); or
(4) the making of any Investment (other than a Permitted
Investment) in any Person. Restricted Subsidiary
means any Subsidiary of the Company that is not an Unrestricted
Subsidiary.
S&P means Standard & Poors Rating
Services, a division of The McGraw-Hill Company, Inc., and its
successors.
Sale/Leaseback Transaction means an arrangement
relating to property owned on the Issue Date or thereafter
acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a
Restricted Subsidiary leases it from such Person, provided that
the fair market value of such property (as reasonably determined
by the Board of Directors acting in good faith) is
$10 million or more.
Secured Indebtedness means any Indebtedness of the
Company secured by a Lien. Senior Indebtedness means
with respect to any Person:
(1) Indebtedness of such Person, and all obligations of
such Person under any Credit Facility, whether outstanding on
the Issue Date or thereafter Incurred; and
(2) accrued and unpaid interest (including interest
accruing on or after the filing of any petition in bankruptcy or
for reorganization relating such Person to the extent
post-filing interest is allowed in such proceeding) in respect
of (A) indebtedness of such Person for money borrowed and
(B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person
is responsible or liable;
unless, with respect to obligations described in the immediately
preceding clause (1) or (2), in the instrument creating or
evidencing the same or pursuant to which the same is
outstanding, it is provided that such obligations are not
superior in right of payment to the Notes or the applicable
Subsidiary Guarantee; provided, however, that Senior
Indebtedness shall not include:
(1) any obligation of such Person to any Subsidiary of such
Person;
(2) any liability for Federal, state, local or other taxes
owed or owing by such Person;
(3) any accounts payable or other liability to trade
creditors arising in the ordinary course of business (including
guarantees thereof or instruments evidencing such liabilities);
61
(4) any Indebtedness of such Person (and any accrued and
unpaid interest in respect thereof) which is subordinate or
junior in any respect to any other Indebtedness or other
obligation of such Person; or
(5) that portion of any Indebtedness which at the time of
Incurrence is Incurred in violation of the Indenture (other
than, in the case of the Company or any Subsidiary Guarantor
that Guarantees any Credit Facility, Indebtedness under any
Credit Facility that is Incurred on the basis of a
representation by the Company or the applicable Subsidiary
Guarantor to the applicable lenders that such Person is
permitted to Incur such Indebtedness under the Indenture).
Senior Subordinated Indebtedness means:
(1) with respect to the Company, the Notes, the Existing
Notes and any other Indebtedness of the Company that
specifically provides that such Indebtedness is to rank pari
passu with the Notes in right of payment and is not subordinated
by its terms in right of payment to any Indebtedness or other
obligation of the Company which is not Senior Indebtedness of
the Company; and
(2) with respect to each Subsidiary Guarantor, its
Subsidiary Guarantee of the Notes, the Existing Notes and any
other Indebtedness of such Person that specifically provides
that such Indebtedness rank pari passu with its applicable
Subsidiary Guarantee in right of payment and is not subordinated
by its terms in right of payment to any Indebtedness or other
obligation of such Person which is not Senior Indebtedness of
such Person.
Significant Subsidiary means any Restricted
Subsidiary that would be a Significant Subsidiary of
the Company within the meaning of
Rule 1-02
under
Regulation S-X
promulgated by the SEC.
Stated Maturity means, with respect to any security,
the date specified in such security as the fixed date on which
the final payment of principal of such security is due and
payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof
upon the happening of any contingency unless such contingency
has occurred).
Stock Offering means a primary offering, whether
public or private, of shares of common stock of the Company.
Subordinated Obligation means any Indebtedness of
the Company or any Subsidiary Guarantor (whether outstanding on
the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to, in the case of the Company, the
Notes or, in the case of a Subsidiary Guarantor, its Subsidiary
Guarantee pursuant to a written agreement to that effect.
Subsidiary means, in respect of any Person, any
corporation, association, partnership or other business entity
of which more than 50% of the total voting power of shares of
Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or
indirectly, by:
(1) such Person;
62
(2) such Person and one or more Subsidiaries of such
Person; or (3) one or more Subsidiaries of such Person.
Subsidiary Guarantor means each Subsidiary of the
Company that executes the Indenture as a guarantor and each
other Subsidiary of the Company that thereafter Guarantees the
Notes pursuant to the terms of the Indenture.
Temporary Cash Investments means any of the
following:
(1) any investment in direct obligations of the United
States of America or any agency thereof or obligations
guaranteed by the United States of America or any agency thereof;
(2) investments in time deposit accounts, certificates of
deposit and money market deposits maturing within one year of
the date of acquisition thereof issued by a bank or trust
company which is organized under the laws of the United States
of America, any state thereof or any foreign country recognized
by the United States, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of
$200.0 million (or the foreign currency equivalent thereof)
and has outstanding debt which is rated A (or such
similar equivalent rating) or higher by at least one nationally
recognized credit rating organization (as defined in
Rule 436 under the Securities Act) or any money-market fund
sponsored by a registered broker dealer or mutual fund
distributor whose assets consist of obligations of the types
described in clauses (1), (2), (3), (4) and
(5) hereof;
(3) repurchase obligations with a term of not more than
30 days for underlying securities of the types described in
clause (1) above entered into with a bank meeting the
qualifications described in clause (2) above;
(4) investments in commercial paper, maturing not more than
180 days after the date of acquisition, issued by a Person
(other than an Affiliate of the Company) organized and in
existence under the laws of the United States of America or any
foreign country recognized by the United States of America with
a rating at the time as of which any investment therein is made
of
P-2
(or higher) according to Moodys or
A-2
(or higher) according to S&P or R-1 (or higher)
by Dominion Bond Rating Service Limited or Canadian Bond Rating
Service, Inc. (in the case of a Canadian issuer);
(5) investments in securities with maturities of six months
or less from the date of acquisition issued or fully guaranteed
by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority
thereof, and rated at least A by S&P or
A by Moodys; and
(6) investments in asset-backed securities maturing within
one year of the date of acquisition thereof with a long-term
rating at the time as of which any investment therein is made of
A3 (or higher) by Dominion Bond Rating Service
Limited or Canadian Bond Rating Service, Inc. (in the case of a
Canadian issuer).
Unrestricted Subsidiary means:
(1) Genesis Energy, Inc.;
(2) any Subsidiary of the Company that at the time of
determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below; and
(3) any Subsidiary of an Unrestricted Subsidiary.
63
The Board of Directors may designate any Subsidiary of the
Company (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary unless such
Subsidiary or any of its Subsidiaries owns any Capital Stock or
Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a
Subsidiary of the Subsidiary to be so designated; provided,
however, that either (A) the Subsidiary to be so designated
has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation
would be permitted under the covenant described under
Certain CovenantsLimitation on Restricted
Payments. The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided,
however, that immediately after giving effect to such
designation (x) the Company could Incur $1.00 of additional
Indebtedness under paragraph (a) of the covenant
described under Certain CovenantsLimitation on
Indebtedness and (y) no Default shall have occurred
and be continuing. Any such designation by the Board of
Directors shall be evidenced by the Company to the Trustee by
promptly filing with the Trustee a copy of the board resolution
giving effect to such designation and an Officers
Certificate certifying that such designation complied with the
foregoing provisions.
U.S. Government Obligations means direct
obligations (or certificates representing an ownership interest
in such obligations) of the United States of America (including
any agency or instrumentality thereof) for the payment of which
the full faith and credit of the United States of America is
pledged and which are not callable at the issuers option.
Volumetric Production Payments means production
payment obligations recorded as deferred revenue in accordance
with GAAP, together with all undertakings and obligations in
connection therewith.
Voting Stock of a Person means all classes of
Capital Stock or other interests (including partnership
interests) of such Person then outstanding and normally entitled
(without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof.
Wholly Owned Subsidiary means a Restricted
Subsidiary all the Capital Stock of which (other than
directors qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law
to be held by a Person other than the Company or a Restricted
Subsidiary) is owned by the Company or one or more Wholly Owned
Subsidiaries.
64
Material
U.S. federal income tax considerations
The following is a general discussion of the material
U.S. federal income tax considerations relating to the
purchase, ownership and disposition of the notes offered hereby
by investors thereof who are U.S. Holders (as defined
below) and certain U.S. federal income tax considerations
of the purchase, ownership and disposition of the notes offered
hereby by investors who are
Non-U.S. Holders
(as defined below). As used in this section, Material
U.S. federal income tax considerations, unless the
context otherwise requires, the term note or
notes refers to the $150 million of notes
offered hereby. This discussion is based on currently existing
provisions of the Internal Revenue Code of 1986, as amended (the
Code), existing, temporary and proposed Treasury
regulations promulgated thereunder, and administrative and
judicial interpretations thereof, all as in effect or proposed
on the date hereof and all of which are subject to change,
possibly with retroactive effect, or different interpretations.
This discussion does not address the U.S. federal income
tax consequences to subsequent purchasers of notes and is
limited to investors who (i) purchase the notes pursuant to
this offering at the public offering price set forth on the
cover page of this prospectus and (ii) hold the notes as
capital assets within the meaning of section 1221 of the
Code. Moreover, this discussion is for general information only
and does not address all of the tax consequences that may be
relevant to particular investors in light of their personal
circumstances or to certain types of investors (such as persons
having a functional currency other than the U.S. dollar,
persons subject to special rules applicable to former citizens
and residents of the U.S., certain financial institutions,
persons subject to the alternative minimum tax, grantor trusts,
real estate investment trusts, insurance companies, tax-exempt
entities, dealers in securities or currencies, persons holding
the notes in connection with a hedging transaction, straddle,
conversion transaction or other integrated transaction,
corporations treated as personal holding companies, controlled
foreign corporations, passive foreign investment companies or
Non-U.S. Holders
that are owned or controlled by U.S. Holders).
Baker & Hostetler LLP has reviewed the discussion below
and is of the opinion that the discussion, to the extent it
addresses matters of U.S. federal income tax law or legal
conclusions, accurately summarizes the U.S. federal income
tax considerations of the purchase, ownership and disposition of
the notes that are likely to be material to investors. The
opinion is based on various assumptions, including assumptions
regarding the accuracy of factual representations made by us and
is subject to limitations. Their opinion is not binding on the
Internal Revenue Service or any court. The Internal Revenue
Service may challenge part or all of their opinion and such a
challenge could be successful.
Prospective investors are urged to consult their own tax
advisors as to the particular tax consequences to them of their
participation in the offering and their ownership and
disposition of the notes, including the applicability of any
U.S. federal tax laws or any state, local or foreign tax
laws or any treaty, and any changes (or proposed changes) in
applicable tax laws or interpretations thereof.
Considerations
relating to U.S. Holders
As used herein, the term U.S. Holder means a
beneficial owner of a note that is, for U.S. federal income
tax purposes:
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an individual citizen or resident of the U.S.;
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a corporation (or any other entity treated as a corporation for
U.S. federal income tax purposes) created or organized in or
under the laws of the U.S., any state thereof or the District of
Columbia;
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an estate whose income is includible in gross income for
U.S. federal income tax purposes, regardless of its
source; or
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a trust whose administration is subject to the primary
supervision of a U.S. court and which has one or more
U.S. persons who have the authority to control all
substantial decisions of the trust, or that has a valid
election in effect under applicable Treasury regulations to be
treated as a U.S. person.
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If a partnership holds notes, the tax treatment of a partner
will generally depend upon the status of the partner and upon
the activities of the partnership. We suggest that partners of a
partnership holding notes consult their tax advisors.
Pre-issuance
accrued interest
A portion of the purchase price of the notes issued pursuant to
this offering is attributable to interest accrued prior to the
date the notes were issued. The portion of the purchase price of
the notes attributable to pre-issuance accrued interest may be
subtracted from the purchase price to determine a holders
initial tax basis in the notes. In such case the portion of the
first stated interest payment equal to the interest accrued
prior to the date the notes were issued will be treated as a
non-taxable return of a portion of the purchase price and
accordingly will not be subject to tax as interest on the notes.
Payments of
qualified stated interest
The notes pay interest at a stated rate of
71/2%.
The stated interest paid on the notes will be treated as
qualified stated interest and a U.S. Holder will be required to
include ordinary interest income on each note in his, her or its
income in accordance with such U.S. Holders method of
accounting for U.S. federal income tax purposes.
Original issue
discount
If the issue price of a note is less than its stated redemption
price at maturity, then the note will be treated as being issued
with original issue discount (OID) for
U.S. federal income tax purposes unless the difference
between the notes issue price and its stated redemption
price at maturity is less than a statutory de minimis
amount (one-fourth of one percent of the stated redemption
price at maturity of the note times the number of complete years
from issuance to maturity). Generally, the issue
price of a note is the first price at which a substantial
amount of the notes is sold to purchasers other than bond
houses, brokers or similar persons or organizations acting in
the capacity of underwriters, placement agents or wholesalers.
The stated redemption price at maturity of a note is
the total of all payments to be made under the note other than
qualified stated interest (generally, stated interest that is
unconditionally payable in cash or property at least annually at
a single fixed rate or at certain floating rates that properly
take into account the length of the interval between stated
interest payments). In this case, the stated redemption price at
maturity of the notes equals or exceeds the principal amount of
the notes. Since the issue price equals or exceeds the stated
redemption price at maturity of the notes, the notes will not be
treated as having been issued with OID.
66
Amortizable bond
premium
If a U.S. Holder purchases a debt instrument for an amount
that is greater than the sum of all amounts payable on the debt
instrument after the purchase date, other than payments of
qualified stated interest, such U.S. Holder will be
considered to have purchased the debt instrument with
amortizable bond premium. In general, amortizable
bond premium with respect to a note will be equal in amount to
the excess, if any, of a U.S. Holders initial tax basis in
the note over the sum of all amounts payable on the debt
instrument other than qualified stated interest. However, in the
case of a debt instrument that may be redeemed prior to maturity
at the option of the issuer (such as the notes), the amount of
amortizable bond premium is determined by substituting the first
date on which the debt instrument may be redeemed (the
redemption date) for the maturity date and the
applicable redemption price on the redemption date for the
amount payable at maturity, if the result would maximize the
U.S. Holders yield to maturity (i.e., result
in a smaller amount of amortizable bond premium properly
allocable to the period before the redemption date). If the
issuer does not in fact exercise its right to redeem the debt
instrument on the applicable redemption date, the debt
instrument will be treated (solely for purposes of the
amortizable bond premium rules) as having matured and then as
having been reissued for the U.S. Holders
adjusted acquisition price, which is an amount equal
to the U.S. Holders basis in the debt instrument (as
determined under the applicable Treasury regulations), less the
sum of (i) any amortizable bond premium allocable to prior
accrual periods and (ii) any payments previously made on
the debt instrument (other than payments of qualified stated
interest). The debt instrument deemed to have been reissued will
again be subject to the amortizable bond premium rules with
respect to the remaining dates on which the debt instrument is
redeemable.
A U.S. Holder may elect to amortize bond premium on a debt
instrument over the remaining term of the debt instrument. Once
made, the election applies to all taxable debt instruments then
owned and thereafter acquired by the U.S. Holder on or
after the first day of the taxable year to which such election
applies, and may be revoked only with the consent of the
Internal Revenue Service. The election, therefore, should only
be made in consultation with a tax advisor. In general, a
U.S. Holder amortizes bond premium by offsetting the
qualified stated interest allocable to an accrual period with
the bond premium allocable to the accrual period, which is
determined under a constant yield method pursuant to the
applicable Treasury regulations. If the bond premium allocable
to an accrual period exceeds the qualified stated interest
allocable to such period, the excess is treated by the
U.S. Holder as a bond premium deduction. The bond premium
deduction for each accrual period is limited to the amount by
which the U.S. Holders total interest inclusions on
the debt instrument in prior accrual periods exceed the total
amount treated by such U.S. Holder as a bond premium
deduction on the debt instrument in prior accrual periods. Any
amounts not deductible in an accrual period may be carried
forward to the next accrual period and treated as bond premium
allocable to that period.
Additional
payments
The U.S. Holders of notes have the right to require us to
repurchase all or any part of such holders notes upon a
Change of Control. See Description of the
notes Change of control. Under the contingent
payment debt rules of the original issue discount regulations,
certain possible payments are not treated as contingencies or
are excepted from consideration for purposes of calculating
original issue discount (for example, in cases which the
possible payments are remote, incidental, or fit certain other
exceptions). We intend to take the position that a repurchase at
the option of a U.S. Holder if a Change of Control occurs
is remote.
67
Therefore, we do not intend, on the issuance date, to treat the
repurchase option as affecting the computation of the
yield-to-maturity of the notes. In addition, we have the right
to redeem all of the notes or a portion thereof from and after
December 15, 2010, or up to 35% of the notes prior to
December 15, 2008, if certain conditions are met, with the
net cash proceeds of equity offerings. See Description of
the notes Optional redemption. Under
applicable Treasury regulations, an unconditional option to
redeem a debt instrument will be assumed to be exercised if such
exercise will lower the
yield-to-maturity
of the debt instrument. We do not intend, on the issuance date,
to treat any of our redemption rights as affecting the
computation of the
yield-to-maturity
of the notes. Accordingly, we intend to take the position (which
generally will be binding on a U.S. Holder unless the
U.S. Holder explicitly discloses a different position on
his, her or its timely filed U.S. federal income tax
return) that the notes are not issued with original issue
discount. The Internal Revenue Service may take a different
position regarding the payment or potential payment of amounts
in excess of qualified stated interest or principal, in which
case the timing, amount and character of income with respect to
a note may be different, and a U.S. Holder could be
required to treat as ordinary interest income any gain
recognized on the disposition of a note. Prospective holders are
urged to consult their own tax advisors regarding the potential
effect, if any, of these matters on their particular situation.
Sale, retirement
or disposition
Subject to the discussion of Additional payments
above, upon the sale, retirement at maturity or other
disposition of a note, a U.S. Holder generally will
recognize taxable gain or loss equal to the difference between
(i) the sum of cash plus the fair market value of all other
property received on such disposition (except to the extent such
cash or property is attributable to accrued but unpaid interest,
which will be taxable as ordinary income to the extent not
previously included in income) and (ii) such
U.S. Holders adjusted tax basis in the note. A
U.S. Holders adjusted tax basis in a note generally
will equal the cost of the note to such U.S. Holder, less
(i) amounts attributable to pre-issuance accrued interest
and (ii) any amortizable bond premium taken with respect to
such note. Gain or loss recognized on the disposition of a note
generally will be capital gain or loss and will be long-term
capital gain or loss if, at the time of such disposition, the
U.S. Holders holding period for the note is more than
one year. The current maximum tax rate on long-term capital
gains to non-corporate U.S. Holders is generally 15% (for
taxable years ending on or prior to December 31, 2010). The
deductibility of capital losses by a U.S. Holder is subject
to limitations.
Backup
withholding and information reporting
Information reporting requirements generally will apply to
payments of principal and interest made by us on, or the
proceeds of the sale or other disposition prior to maturity of,
the notes. Backup withholding tax, currently at a rate of 28%
may apply to such payments if the U.S. Holder fails to:
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furnish his, her or its taxpayer identification number (social
security or employer identification number);
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certify that his, her or its number is correct;
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certify that he, she, or it is not subject to backup
withholding; or
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otherwise comply with the applicable requirements of the backup
withholding rules.
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68
Certain U.S. Holders are not subject to backup withholding
and information reporting requirements. Any amounts withheld
under the backup withholding rules from a payment to a
U.S. Holder will be allowed as a credit against such
U.S. Holders U.S. federal income tax liability
and may entitle the holder to a refund, provided that the
required information is furnished to the Internal Revenue
Service.
Considerations
relating to
Non-U.S. Holders
As used herein, the term
Non-U.S. Holder
means a beneficial owner of a note that is an individual,
corporation, trust or estate and is not a U.S. Holder.
Payment of
interest
In general, payments of interest received by a
Non-U.S. Holder
will not be subject to U.S. federal withholding tax,
provided that:
(i) the
Non-U.S. Holder,
as beneficial owner,
(a) does not actually or constructively own 10% or more of
the total combined voting power of all of our classes of stock
entitled to vote;
(b) is not a controlled foreign corporation that is related
to us actually or constructively through stock ownership; and
(c) is not a bank receiving the interest pursuant to a loan
agreement entered into in its ordinary course of business;
(ii) the interest payments are not effectively connected
with the conduct by the
Non-U.S. Holder
of a U.S. trade or business, and
(iii) the
Non-U.S. Holder,
as beneficial owner, satisfies the certification requirement.
The certification requirement is generally satisfied if the
beneficial owner of a note certifies on IRS
Form W-8BEN
(or a suitable substitute or successor form), under penalties of
perjury, that he, she or it is not a U.S. person and
provides his, her or its name and address, and
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such beneficial owner timely files the IRS
Form W-8BEN
with the withholding agent; or
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in the case of notes held on behalf of a beneficial owner by a
securities clearing organization, bank or other financial
institution that holds customers securities in the
ordinary course of its trade or business, the financial
institution files with the withholding agent a statement that it
has received the
Form W-8BEN
(or a suitable substitute or successor form) from the
Non-U.S. Holder
or from another financial institution acting on behalf of that
Non-U.S. Holder,
timely furnishes the withholding agent with a copy thereof and
otherwise complies with the applicable certification
requirements. A withholding agent, as used herein, is generally
the last U.S. payor (or a
non-U.S. payor
who is a qualified intermediary, U.S. branch of a foreign
person, or a withholding foreign partnership) in the chain of
payment prior to payment to a
Non-U.S. Holder
(which itself is not a withholding agent).
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Other alternative procedures exist in order to satisfy the
certification requirement, depending upon the circumstances
applicable to the
Non-U.S. Holder,
including but not limited to situations where the notes are held
by certain intermediaries or partnerships. The certification
requirement is not met if either we or the withholding agent
have actual knowledge or reason to know that
69
the beneficial owner is a U.S. Holder or that the
conditions of any exemption are not, in fact, satisfied.
Non-U.S. Holders,
should consult their own tax advisors regarding the
certification requirements for
Non-U.S. Holders
and the effect, if any, of the certification requirements on
their particular situation.
Payments of interest not exempt from U.S. federal
withholding tax as described above will be subject to such
withholding tax at the rate of 30%, unless (i) subject to
reduction under an applicable income tax treaty or (ii) the
interest is effectively connected to a U.S. trade or
business and the holder provides IRS
Form W-8ECI
(or a suitable substitute or successor form) to the withholding
agent and meets any other applicable certification requirements.
In order to claim a reduced or zero withholding rate under an
applicable income tax treaty, the beneficial owner of the note
must, under penalties of perjury, provide the withholding agent
with a properly completed and executed IRS
Form W-8BEN
(or a suitable substitute or successor form) claiming an
exemption from, or reduction in the rate of, withholding under
the benefit of such applicable income tax treaty and meet any
other applicable certification requirements.
Sale, retirement
or disposition
A
Non-U.S. Holder
generally will not be subject to U.S. federal income tax
(and generally no tax will be withheld) with respect to gain
(excluding gain representing accrued interest, in which case the
rules for interest apply) realized on the sale, retirement at
maturity or other disposition of a note unless:
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the
Non-U.S. Holder
is an individual who is present in the U.S. for a period or
periods aggregating 183 or more days in the taxable year of the
disposition and certain other conditions are met; or
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such gains are effectively connected with the conduct by the
Non-U.S. Holder
of a trade or business within the U.S. (and, if required by an
applicable income tax treaty, are attributable to a U.S.
permanent establishment of the Non-U.S. Holder).
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U.S. trade
or business
If a
Non-U.S. Holder
holds a note in connection with the conduct of a trade or
business in the U.S. (and, if required by an applicable income
tax treaty, the note is attributable to a U.S. permanent
establishment of the Non-U.S. Holder):
(i) any interest on the note, and any gain from disposing
of the note, generally will be subject to income tax at regular
U.S. federal income tax rates as if the holder were a
U.S. Holder, and
(ii) Non-U.S. Holders
that are corporations may be subject to the branch profits
tax on earnings that are connected with a U.S. trade
or business, including earnings from the note. This tax is 30%
of the dividend equivalent amount, subject to
adjustment, but may be reduced or eliminated by an applicable
income tax treaty or otherwise adjusted.
Backup
withholding and information reporting
The withholding agent must report annually to the Internal
Revenue Service and to each
Non-U.S. Holder
on IRS
Form 1042-S
(or a suitable substitute or successor form) the amount of
interest paid on a note, regardless of whether withholding was
required, and any tax withheld with respect to interest. Under
the provisions of certain U.S. income tax treaties and
other applicable agreements, copies of these information returns
may be available to the tax
70
authorities of the country in which the
Non-U.S. Holder
resides. Backup withholding generally will not apply to payments
of interest to a
Non-U.S. Holder
if the certification requirements described above under
Considerations relating to
Non-U.S. HoldersPayment
of interest are met, provided the payor does not have
actual knowledge or reason to know that the holder is a
U.S. Holder or that the conditions of any other exemption
are not, in fact, satisfied. Moreover, payment of the principal
or the proceeds of a sale, exchange, retirement or other
disposition of a note are generally not subject to information
reporting and backup withholding if the certification
requirements described above under Considerations relating
to
Non-U.S. HoldersPayment
of interest are met, provided the payor does not have
actual knowledge or reason to know that the holder is a
U.S. Holder or that the conditions of any other exemption
are not, in fact, satisfied.
Non-U.S. Holders
of notes should consult their tax advisors regarding the
application of information reporting and backup withholding in
their particular situations, the availability of an exemption
therefrom, and the procedure for obtaining such an exemption, if
available. Any amounts withheld under the backup withholding
rules from a payment to a
Non-U.S. Holder
will be allowed as a credit against such
Non-U.S. Holders
U.S. federal income tax liability and may entitle the
holder to a refund, provided that the required information is
furnished to the Internal Revenue Service.
71
Underwriting
Subject to the terms and conditions in the underwriting
agreement between us and the underwriters, we have agreed to
sell to each underwriter, and each underwriter has severally
agreed to purchase from us, the principal amount of notes that
appears opposite its name in the table below:
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Underwriter
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Principal
amount
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J.P. Morgan Securities Inc.
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$
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135,000,000
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Johnson Rice & Company
L.L.C.
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15,000,000
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Total
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$
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150,000,000
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The underwriting agreement provides that the underwriters will
purchase all the notes if any of them are purchased.
In the underwriting agreement, we have agreed that we will
indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
The additional notes do not have an established trading market.
We do not intend to apply for the notes to be listed on any
securities exchange or to arrange for the additional notes to be
quoted on any quotation system. The underwriters have advised us
that they intend to make a market in the notes. However, they
are not obligated to do so and may discontinue any market making
at any time in its sole discretion. Therefore, we cannot assure
you that a liquid trading market will develop for the additional
notes, that you will be able to sell your additional notes at a
particular time or that the prices that you receive when you
sell will be favorable.
The underwriters initially propose to offer part of the
additional notes directly to the public at the offering price
described on the cover page of this prospectus and part to
certain dealers at prices that represent a concession not in
excess of 0.375% of the principal amount of the additional
notes. The underwriters may allow, and any such dealer may
re-allow, a concession not in excess of 0.25% of the principal
amount of the additional notes to certain other dealers. After
the initial offering of the additional notes, the underwriters
may from time to time vary the offering prices and other selling
terms.
In connection with this offering of the additional notes, the
underwriters may engage in overallotments, stabilizing
transactions and syndicate covering transactions in accordance
with Regulation M under the Securities Exchange Act of
1934. Overallotment involves sales in excess of the offering
size, which creates a short position for the underwriters.
Stabilizing transactions involve bids to purchase the notes in
the open market for the purpose of pegging, fixing or
maintaining the price of the notes, as applicable. Syndicate
covering transactions involve purchases of the notes in the open
market after the distribution has been completed in order to
cover short positions. Stabilizing transactions and syndicate
covering transactions may cause the price of the notes to be
higher than it would otherwise be in the absence of those
transactions. If the underwriters engage in stabilizing or
syndicate covering transactions, they may discontinue them at
any time.
J.P. Morgan Securities Inc. performs investment banking and
commercial banking services for us in the normal course of
business. JPMorgan Chase Bank, National Association, an
affiliate of J.P. Morgan Securities Inc., is the lead agent bank
and a lender on our credit facility and will be receiving a
portion of the proceeds from the offering as repayment of our
outstanding balance on the credit facility.
72
We intend to use more than 10% of the net proceeds from the sale
of the additional notes to repay indebtedness owed by us to an
affiliate of J.P. Morgan Securities Inc. who is a lender under
our bank credit facility. Accordingly, the offering is being
made in compliance with the requirements of Rule 2710(h) of
the Conduct Rules of the National Association of Securities
Dealers, Inc. This rule provides generally that if more than 10%
of the net proceeds from the sale of debt securities, not
including underwriting compensation, is paid to the underwriters
of such debt securities or their affiliates, the yield on the
debt securities may not be lower than that recommended by a
qualified independent underwriter meeting certain
standards. Accordingly, Johnson Rice & Company L.L.C.
is assuming the responsibilities of acting as the qualified
independent underwriter in pricing the offering and conducting
due diligence. The yield on the notes, when sold to the public
at the public offering price set forth on the cover page of this
prospectus, is no lower than that recommended by Johnson
Rice & Company L.L.C.
73
Legal
matters
Certain legal matters with respect to the additional notes
offered hereby and related guarantees will be passed upon for us
by Baker & Hostetler LLP, Houston, Texas. The validity
of the additional notes offered hereby and related guarantees
will be passed upon for the underwriters by Simpson Thacher
& Bartlett LLP, New York, New York.
Experts
The financial statements and managements assessment of the
effectiveness of internal control over financial reporting
(which is included in Managements Report on Internal
Control over Financial Reporting, incorporated in this
Prospectus by reference to the Annual Report on
Form 10-K
for the year ended December 31, 2006) have been so
incorporated in reliance on the report of PricewaterhouseCoopers
LLP, an independent registered public accounting firm, given on
the authority of said firm as experts in auditing and accounting.
Certain estimates of our oil and natural gas reserves and
related information as of December 31, 2004, 2005 and 2006
included in this prospectus
and/or
incorporated by reference in this prospectus have been derived
from engineering reports prepared by DeGolyer and MacNaughton,
and all such information has been so included on the authority
of such firms as experts regarding the matters contained in
their reports.
74
Glossary
The terms defined in this section are used throughout this
prospectus:
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Bbl |
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One stock tank barrel, of 42 U.S gallons liquid volume, used
herein in reference to crude oil or other liquid hydrocarbons. |
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Bbls/d |
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Barrels of oil produced per day. |
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Bcf |
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One billion cubic feet of natural gas or
CO2. |
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BOE |
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One barrel of oil equivalent using the ratio of one barrel of
crude oil, condensate or natural gas liquids to 6 Mcf of
natural gas. |
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BOE/d |
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BOEs per day. |
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Btu |
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British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5
degrees Fahrenheit. |
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CO2 |
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Carbon Dioxide. |
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MBbls |
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One thousand barrels of crude oil or other liquid hydrocarbons. |
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MBOE |
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One thousand BOEs. |
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Mbtu |
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One thousand Btu. |
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Mcf |
|
One thousand cubic feet of natural gas or
CO2. |
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Mcf/d |
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One thousand cubic feet of natural gas or
CO2
produced per day. |
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Mcfe |
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One thousand cubic feet of natural gas equivalent using the
ratio of one barrel of crude oil, condensate or natural gas
liquids to 6 Mcf of natural gas. |
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Mcfe/d |
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Mcfes produced per day. |
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MMBbls |
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One million barrels of crude oil or other liquid hydrocarbons. |
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MMBOE |
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One million BOEs. |
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MMBtu |
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One million Btus. |
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MMcf |
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One million cubic feet of natural gas or
CO2. |
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PV-10 Value |
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When used with respect to oil and natural gas reserves,
PV-10 Value
means the estimated future gross revenue to be generated from
the production of proved reserves, net of estimated production
and future development costs and abandonment, using prices and
costs in effect at the determination date, and before income
taxes, discounted to a present value using an annual discount
rate of 10% in accordance with the guidelines of the Securities
and Exchange Commission. |
75
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Proved Developed Reserves* |
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Reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods. |
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Proved Reserves* |
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The estimated quantities of crude oil, natural gas and natural
gas liquids that geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating
conditions. |
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Proved Undeveloped Reserves* |
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Reserves that are expected to be recovered from new wells on
undrilled acreage or from existing wells where a relatively
major expenditure is required. |
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*
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This definition is an abbreviated
version of the complete definition as defined by SEC in
Rule 4-10(a)
of
Regulation S-X.
See www.sec.gov/divisions/corpfin/forms/regs-x.pdf for the
complete definition.
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76