EXHIBIT 13
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE
Selected Financial Data ................................................... 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................. 22
Report of Management to Shareholders ...................................... 32
Independent Auditors' Report .............................................. 33
Consolidated Statements of Operations ..................................... 34
Consolidated Balance Sheets ............................................... 35
Consolidated Statements of Cash Flows ..................................... 36
Consolidated Statements of Shareholders' Equity ........................... 37
Notes to Consolidated Financial Statements ................................ 38
SELECTED FINANCIAL DATA
(Amounts in Thousands Except Per Share Data)
Year Ended December 31,
1996 1995 1994 1993 1992
==========================================================================================================================
Restated Restated Restated Restated
Revenues ......................................... $ 518,578 $ 408,426 $ 470,486 $ 452,232 $ 296,335
Net income (loss)(3)(4) .......................... 28,961 (1,738) (4,405) 34,095 3,842
Earnings (loss) per share(3)(4) .................. 0.45 (0.03) (0.07) 0.56 0.08
Net cash provided by operating
activities before changes in
operating assets and liabilities .............. 220,543 124,822 182,413 174,697 92,928
Net cash provided by
operating activities .......................... 256,419 118,034 209,114 139,292 78,900
Total assets ..................................... 1,515,063 1,359,125 1,454,050 1,286,391 1,233,828
Long-term portion of debt ........................ 573,455 557,107 622,080 459,787 608,066
Redeemable bearer shares(5) ...................... 16,059 16,591 17,467 18,375 --
Shareholders' equity ............................. 597,730 562,621 557,646 567,943 358,326
Capital expenditures ............................. 213,462 144,101 202,553 137,894 51,524
Acquisitions, net of cash acquired ............... 104,420 -- 193,859 29,470 401,888
Standardized measure of discounted
future net cash flows
before taxes .................................. 2,137,870 1,103,962 865,047 1,022,140 955,960
(1)Reference is made to the Consolidated Financial Statements of Seagull Energy
Corporation and Subsidiaries and Notes thereto, appearing on pages 33 through
64 of this Annual Report. As discussed in Note 1 to the Consolidated
Financial Statements, all periods have been restated to reflect Seagull's
merger with Global Natural Resources Inc. on October 3, 1996, which was
accounted for as a pooling of interests.
(2)Includes Seagull Mid-South Inc. since December 31, 1992, Seagull Energy
Canada Ltd. since January 4, 1994 and two Egyptian concessions since
September 10, 1996.
(3)1992 includes the cumulative effect of two changes in accounting principles
related to income taxes and postretirement benefits representing an increase
in earnings of approximately $2.3 million, or $0.09 per share.
(4)1995 includes a pre-tax, non-cash charge for the impairment of long-lived
assets of $48.8 million.
(5)See Note 9 to the Consolidated Financial Statements for discussion of
redeemable bearer shares.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
On October 3, 1996, the shareholders of Seagull Energy Corporation ("Seagull"
or the "Company") and Global Natural Resources Inc. ("Global") approved a merger
of a wholly owned subsidiary of Seagull into Global (the "Global Merger").
Pursuant to the Global Merger, each share of Global common stock was converted
into 0.88 shares of Seagull common stock. The Global Merger was accounted for as
a pooling of interests. Accordingly, the financial information for all periods
have been restated to combine the results of Seagull and Global. Certain
adjustments were made to the results of Seagull and Global to conform the
accounting policies and presentation used by Seagull and Global.
Information presented herein includes forward looking statements within the
meaning of Section 27A of the Securities Act of 1993 and Section 21E of the
Securities Exchange Act of 1934. Although Seagull believes that its expectations
are based on reasonable assumptions, it can give no assurance that its goals
will be achieved. Important factors that could cause actual results to differ
materially from those in the forward looking statements include political
developments in foreign countries, federal and state regulatory developments,
the timing and extent of changes in commodity prices, the timing and extent of
success in discovering, developing and producing or acquiring oil and gas
reserves, and conditions of the capital and equity markets during the periods
covered by the forward looking statements.
RESULTS OF OPERATIONS
CONSOLIDATED HIGHLIGHTS
(Amounts in Thousands Except Per Share Data)
1996 1995 1994
------------- ------------- ------------
Revenues: Restated Restated
Oil and gas operations(*) ................................................... $ 420,962 $ 310,656 $ 364,888
Alaska transmission and distribution ........................................ 97,616 97,770 105,598
------------- ------------- ------------
$ 518,578 $ 408,426 $ 470,486
============= ============= ============
Operating profit (loss):
Oil and gas operations(*) ................................................... $ 100,529 $ (33,721) $ 41,374
Alaska transmission and distribution ........................................ 26,026 23,141 21,865
General and administrative expenses ......................................... (21,500) (23,798) (14,603)
------------- ------------- ------------
$ 105,055 $ (34,378) $ 48,636
============= ============= ============
Net income (loss) ............................................................. $ 28,961 $ (1,738) $ (4,405)
Earnings (loss) per share ..................................................... $ 0.45 $ (0.03) $ (0.07)
Weighted average number of common shares outstanding .......................... 64,073 62,674 63,006
Net cash provided by operating activities before changes in operating assets
and liabilities ............................................................. $ 220,543 $ 124,822 $ 182,413
Net cash provided by operating activities ..................................... $ 256,419 $ 118,034 $ 209,114
(*)The Company reclassified its results of operations for 1995 and 1994 to
combine the former Exploration and Production segment and Pipeline and
Marketing segment into Oil and Gas Operations. Substantially all of the
Company's gas processing and gas gathering assets were sold in September
1995. The assets sold contributed $17.6 million and $26.4 million in revenues
and $6.2 million and $6.7 million in operating profit for 1995 and 1994,
respectively.
22
Seagull's $31 million and $138 million improvement in net income and cash
flow provided by operating activities, respectively, for 1996 is principally due
to two factors that substantially impacted the Oil and Gas Operations segment --
higher domestic gas prices and increasing levels of international oil
production.
Conversely, the Company's results of operations for 1995 were greatly
influenced by lower domestic gas prices and three unusual items discussed below.
See the "Oil and Gas Operations," section below for a further discussion of that
segment's operating profit.
The Company's results of operations were impacted by the following unusual
items in the last two years:
Merger expenses of $10.0 million ($9.0 million after taxes) were recorded in
the fourth quarter of 1996 representing investment banking fees, legal,
accounting and other expenses related to the Global Merger.
On September 25, 1995, Seagull and three other sellers completed the sale of
their disparate interests in 19 natural gas gathering systems and a gas
processing plant (the "Pipeline Assets"). The Company recorded a pre-tax gain on
the sale of $82 million ($54 million after taxes). The Pipeline Assets
contributed $17.6 million and $26.4 million in revenues and $6.2 million and
$6.7 million in operating profit for 1995 and 1994, respectively. With the sale
of the Pipeline Assets, Seagull's former Exploration and Production segment and
the Pipeline and Marketing segment have been reclassified into Oil and Gas
Operations.
Effective March 31, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." As a result of
the adoption of this standard, the Company recognized a pre-tax, non-cash charge
against earnings during 1995 of $48.8 million ($32 million after taxes) (the
"Long-Lived Asset Impairment").
Seagull recorded one-time pre-tax charges of $8 million in general and
administrative expenses resulting from the Company's workforce reduction and
consolidation implemented during the second quarter of 1995. The savings from
the workforce reduction and consolidation are primarily reflected in lower
operating expenses.
Natural gas is stated herein in billion cubic feet ("Bcf"), million cubic
feet ("MMcf") or thousand cubic feet ("Mcf"). Oil, condensate and natural gas
liquids ("NGL") are stated in thousand barrels ("MBbl") or barrels ("Bbl").
MMcfe and Mcfe represent the equivalent of one million and one thousand cubic
feet of natural gas, respectively. Oil, condensate and NGL are converted to gas
at a ratio of one barrel of liquids per six Mcf of gas, based on relative energy
content. MBOE and BOE represent one thousand barrels of oil equivalent and one
barrel of oil equivalent, respectively, with six Mcf of gas converted to one
barrel of liquid.
23
OIL AND GAS OPERATIONS
(Amounts in Thousands)
1996 1995 1994
---------- ---------- ----------
Revenues: Restated Restated
Natural gas .................................. $ 297,149 $ 218,039 $ 264,764
Oil and NGL .................................. 90,779 48,725 42,557
Other E&P .................................... (971) 991 156
Pipeline and marketing ....................... 34,005 42,901 57,411
---------- ---------- ----------
Total revenues .............................. 420,962 310,656 364,888
---------- ---------- ----------
Costs of Operations:
E&P direct operating expense ................. 87,255 71,632 75,192
E&P general operating expense ................ 14,419 13,393 15,378
Pipeline and marketing expenses .............. 23,578 30,674 39,949
Exploration charges .......................... 50,227 40,223 43,813
Depreciation, depletion and amortization ..... 144,954 139,613 149,182
Impairment of long-lived assets .............. -- 48,842 --
---------- ---------- ----------
Total operating costs ....................... 320,433 344,377 323,514
---------- ---------- ----------
Operating profit (loss) ........................ $ 100,529 $ (33,721) $ 41,374
========== ========== ==========
The $110 million increase in revenues for 1996 as compared to 1995 was
primarily the net result of two factors - (i) increases in the Company's average
realized price of natural gas for its domestic E&P activities and (ii) increases
in oil production and oil and gas price internationally. The domestic natural
gas prices increase from $1.62 per Mcf for 1995 to $2.17 per Mcf for 1996
accounted for approximately $63 million of the overall increase in revenues.
International production increased over 1995 as production in Egypt began in
November 1995 and the Company purchased interests in two additional Egyptian
concessions on September 10, 1996 (the "Esso Suez Acquisition"). Also,
production increased steadily during 1996 from Cote d'Ivoire where production
began in April 1995. The increases in production in Cote d'Ivoire and Egypt
contributed approximately $35 million of the overall increase in revenues.
Domestic gas production also increased slightly, providing approximately $6
million of the overall increase in revenues.
Revenues decreased $54 million from 1994 to 1995 primarily as the result of
substantial declines in the domestic and Canadian average natural gas prices and
a 5% decline in domestic natural gas production. The domestic and Canadian
natural gas price per Mcf decline from $1.88 to $1.62 and from $1.55 to $1.02,
respectively, was responsible for approximately $41 million of the decrease in
revenues and the 5% decline in domestic natural gas production was responsible
for an additional $9 million. The decrease in domestic production was primarily
due to voluntary curtailments coupled with lower sustainable deliverability
resulting from natural production declines and a substantially lower level of
development expenditures in late 1994 and all of 1995. Both the lower level of
development expenditures and voluntary curtailments were directly related to the
low natural gas price. The Company has had no voluntary curtailments in the U.S.
since October 1995.
In late 1995, Seagull initiated an active risk management program for a
portion of its own E&P production and third-party activities, utilizing such
derivative financial instruments as futures contracts, options and swaps. The
primary objective of the risk management program is to help ensure more stable
cash flow. The risk management program is also an important part of Seagull's
third-party marketing efforts, allowing the Company to convert a customer's
24
requested price to a price structure that is consistent with the Company's
overall pricing strategy. Seagull accounts for its commodity derivative
contracts as hedging activities and, accordingly, the effect is included in
revenues when the commodities are produced.
The Company recorded costs related to commodity hedging activities of $9.0
million, $0.5 million and none for 1996, 1995 and 1994, respectively. These
costs had the effect of reducing average gas prices by $0.06 mcfe for 1996 and
$0.004 mcfe for 1995.
In mid 1996, Seagull put price "collars" in place with respect to about a
third of its domestic gas deliverability for the first quarter of 1997 only.
These "collars" assured a minimum realization above $2.00 per Mcf in exchange
for a $2.50 per Mcf ceiling on that component of Seagull's production.
Additionally, the Company has commodity hedges in place for approximately 12
MMcf per day through December 1998 on properties associated with the Monetary
Production Payment (see Note 6 to the Consolidated Financial Statements). These
hedge positions will reduce first quarter 1997 E&P revenues. At December 31,
1996, there was $8.2 million of realized cost on commodity hedging activities
which was deferred and will reduce revenues in the month that the hedged
production occurred (January 1997). On the other hand, because of the drop in
commodity prices after January 1997, the Company expects actual net realizations
of above "collars" for February and March, 1997 to be slightly positive. Also at
December 31, 1996, there are $2.0 million of net unrealized and unrecognized
hedging cost related to the commodity hedges associated with the Monetary
Production Payment based on the difference between the strike price and the
futures price for the respective trading months at year end. Again as a result
of the intervening drop in commodity prices, the net unrealized and unrecognized
hedging cost would be substantially lower if current strike and futures prices
were used. Essentially all other hedging activities were realized prior to
year-end. The Company has no commodity hedges in place for equity production
after March 1997 other than those associated with the Monetary Production
Payment.
EXPLORATION AND PRODUCTION REVENUE BY AREA
(Amounts in Thousands)
1996 1995 1994
---------- ---------- ----------
Restated Restated
Gas Revenues:
Domestic ........................ $ 252,806 $ 183,478 $ 223,110
Canada .......................... 26,869 22,591 30,695
Cote d'Ivoire ................... 2,563 328 --
Indonesia ....................... 14,911 11,642 10,959
---------- ---------- ----------
$ 297,149 $ 218,039 $ 264,764
========== ========== ==========
Oil and NGL Revenues:
Domestic ........................ $ 29,706 $ 22,228 $ 24,879
Canada .......................... 6,048 5,186 4,940
Cote d'Ivoire ................... 10,235 4,050 --
Egypt ........................... 28,126 442 --
Russia .......................... 15,626 16,037 11,956
Indonesia ....................... 1,038 782 782
---------- ---------- ----------
$ 90,779 $ 48,725 $ 42,557
========== ========== ==========
25
EXPLORATION AND PRODUCTION OPERATING DATA
Net Daily Production Unit Price
1996 1995 1994 1996 1995 1994
--------- --------- --------- --------- --------- ---------
Restated Restated Restated Restated
Gas Sales(1):
Domestic ........................... 317.6 310.7 325.5 $ 2.17 $ 1.62 $ 1.88
Canada ............................. 57.9 60.5 54.1 1.27 1.02 1.55
Cote d'Ivoire ...................... 3.9 0.6 -- 1.77 1.61 --
Indonesia .......................... 12.1 10.8 12.3 3.36 2.96 2.45
--------- --------- --------- --------- --------- ---------
Total .............................. 391.5 382.6 391.9 $ 2.07 $ 1.56 $ 1.85
========= ========= ========= ========= ========= =========
Oil and NGL Sales(2):
Domestic ........................... 4,264 3,845 4,520 $ 19.03 $ 15.84 $ 15.08
Canada ............................. 985 1,092 1,170 16.77 13.01 11.57
Cote d'Ivoire ...................... 1,395 715 -- 20.04 15.51 --
Egypt .............................. 3,565 67 -- 21.56 17.97 --
Indonesia .......................... 147 125 129 19.58 17.18 16.58
Russia ............................. 3,053 2,909 2,307 13.98 15.11 14.21
--------- --------- --------- --------- --------- ---------
Total .............................. 13,409 8,753 8,126 $ 18.50 $ 15.53 $ 14.35
========= ========= ========= ========= ========= =========
(1) Volume in MMcf per day; Price in $ per Mcf.
(2) Volume in Bbl per day; Price in $ per Bbl.
The increase in E&P direct operating expenses of $15.6 million from 1995 to
1996 is principally a result of the increased production in the United States
and Egypt. However, direct operating expense per equivalent unit of production
for the Company's E&P activities increased from $0.45 per Mcfe in 1995 to $0.51
per Mcfe in 1996 primarily due to increased domestic transportation expense.
Direct operating costs per equivalent unit of production are expected to
increase slightly during 1997 as the Company's international operations and oil
production (with higher associated direct operating costs) become increasingly
significant to the Company's total E&P operations.
Direct operating expense for the Company's E&P activities declined from 1994
to 1995 primarily due to the decline in domestic production and decreased export
taxes in Russia attributable to a one-year exemption from export tax in the
Company's Russian operations in 1995. Direct operating expenses per equivalent
unit of production declined from $0.47 per Mcfe in 1994 to $0.45 per Mcfe in
1995.
Oil and Gas Operations depreciation, depletion and amortization ("DD&A")
expense increased from $139.6 million in 1995 to $145.0 million in 1996
primarily due to increased production discussed above, partially offset by a
decrease in the average DD&A rate per equivalent unit of production from $0.86
per Mcfe in 1995 to $0.83 per Mcfe in 1996.
DD&A expense for Oil and Gas Operations decreased $6.6 million from 1994 to
1995 principally as a result of the decline in domestic production coupled with
a decrease in the average DD&A rate. Due to the Long-Lived Asset Impairment
discussed previously and a change in the mix of properties being produced, the
Company's average DD&A rate decreased from $0.89 per Mcfe in 1994 to $0.86 per
Mcfe in 1995.
OUTLOOK
At year-end 1996, the Company was producing about 375 MMcf per day of
26
natural gas and 18,500 Bbl per day of crude oil, condensate and NGL worldwide.
In the United States, Seagull expects to maintain its level of domestic gas
production of about 300 MMcf per day throughout 1997. U.S. liquids production
will increase when initial shipments begin from a recent discovery in the first
half of 1997.
In Canada, Seagull expects 1997 production to compare closely with year-end
1996 levels of between 50 and 55 MMcf per day of gas and 1,000 Bbl per day of
oil, condensate and NGL.
Internationally, production increases are anticipated in Egypt, where the
Company expects oil output for 1997 to average approximately 10,000 Bbl per day.
Elsewhere, Seagull expects production levels to grow more modestly in Cote
d'Ivoire and to be essentially unchanged in Indonesia and Russia.
The future results of the Oil and Gas Operations segment will be affected by
the market prices of oil and natural gas and the Company's degree of exploration
success. The availability of a ready market for oil, natural gas and liquid
products in the future will depend on numerous factors beyond the control of the
Company, including weather, production of other crude oil, natural gas and
liquid products, imports, marketing of competitive fuels, proximity and capacity
of oil and gas pipelines and other transportation facilities, any oversupply or
undersupply of oil, gas and liquid products, the regulatory environment, and
other international, regional and political events, none of which can be
predicted with certainty.
ALASKA TRANSMISSION AND DISTRIBUTION
(Dollars in Thousands Except Per Unit Data)
1996 1995 1994
---------- ---------- ----------
Revenues ..................................... $ 97,616 $ 97,770 $ 105,598
Cost of gas sold ............................. 42,600 46,328 54,465
---------- ---------- ----------
Gross margin............................... 55,016 51,442 51,133
Operations and maintenance expense ........... 21,045 20,504 21,516
Depreciation, depletion and amortization ..... 7,945 7,797 7,752
---------- ---------- ----------
Operating profit........................... $ 26,026 $ 23,141 $ 21,865
========== ========== ==========
OPERATING DATA:
Degree days(*) ............................... 10,975 9,997 10,291
Volumes (Bcf):
Gas sold ................................... 26.8 26.4 31.3
Gas transported ............................ 21.0 17.9 12.8
Combined ................................... 47.8 44.3 44.1
Margins (per Mcf):
Gas sold ................................... $ 1.70 $ 1.66 $ 1.49
Gas transported ............................ $ 0.46 $ 0.43 $ 0.35
Combined ................................... $ 1.15 $ 1.16 $ 1.16
Year-end customers ........................... 94,100 92,100 90,100
(*)A measure of weather severity calculated by subtracting the mean temperature
for each day from 65(degree)F. More degree days equate to colder weather.
27
Operating profit of the Alaska transmission and distribution segment (ENSTAR
Natural Gas Company, a division of the Company, and Alaska Pipeline Company, a
wholly owned subsidiary, (collectively referred to herein as "ENSTAR Alaska") is
primarily a function of the weather in the Anchorage, Alaska area during the
winter heating season. Cold weather equates to higher gas volumes delivered,
resulting in increased profits. This proved to be the case in 1996 as degree
days for the ENSTAR Alaska service area increased 10% to 10,975 compared with
1995, resulting in a 12% increase in operating profit.
Although degree days were down slightly in 1995, operating profit of ENSTAR
Alaska improved from 1994 primarily as a result of lower operations and
maintenance expense due to lower permit fees paid.
In the first quarter of 1995, two large military power plants that previously
purchased gas from ENSTAR Alaska began purchasing gas directly from gas
producers. However, ENSTAR Alaska has been approved by the Alaska Public
Utilities Commission to transport the customers' gas supplies for a fee that is
essentially comparable to the margin (revenues net of the associated cost of gas
sold) it previously earned. Accordingly, overall operating profit for the Alaska
transmission and distribution segment was basically unaffected by this change.
OUTLOOK
ENSTAR Alaska will continue to play a significant role in Seagull's future.
Even though it may not fit precisely into the Company's other E&P-oriented
activities, management expects it to be maintained as a major part of the
Company.
Future operating profit for this segment will be affected by weather,
regulatory action and customer growth in ENSTAR Alaska's service area. The
Company expects customer growth to continue to be relatively modest. During the
1996 summer construction season, approximately 56 miles of new distribution
pipeline were installed to connect some 2,000 new customers. In September 1995,
ENSTAR Alaska entered into a 33-year agreement to lease a 60-mile, 8-inch
diameter pipeline between Anchorage, Alaska and Whittier, Alaska. The new
pipeline is expected to add close to 1,500 new customers over the next few
years.
ENSTAR Alaska purchases all of its natural gas under long-term contracts in
which the price is indexed to changes in the price of crude oil futures
contracts. However, because ENSTAR Alaska's sales prices are adjusted to include
the projected cost of its natural gas, there has been and is expected to be
little or no impact on margins derived from ENSTAR Alaska's gas sales as a
result of fluctuation in oil prices due to worldwide political events and
changing market conditions.
OTHER
General and administrative expenses, excluding the $8 million charge for
workforce reduction and consolidation discussed previously, increased
approximately $5.7 million to $21.5 million in 1996 as a result of an increase
in incentive compensation expenses and the Company's expanding international
operations. Interest expense declined from $53.0 million in 1995 to $44.8
million for 1996 through utilization of the proceeds from the sale of the
Pipeline Assets in late 1995 to repay amounts outstanding under the Company's
existing credit facilities.
28
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL EXPENDITURES
(Amounts in Thousands)
1996 1995 1994
---------- ---------- ----------
Restated Restated
Exploration and production:
Leasehold ................................ $ 12,986 $ 18,000 $ 18,573
Exploration .............................. 77,774 46,575 67,135
Development .............................. 108,763 69,260 100,763
---------- ---------- ----------
199,523 133,835 186,471
Pipeline and marketing ...................... 228 441 2,503
---------- ---------- ----------
Oil and gas operations ...................... 199,751 134,276 188,974
Alaska transmission and distribution ........ 9,287 7,611 7,626
Corporate ................................... 4,424 2,214 5,953
---------- ---------- ----------
$ 213,462 $ 144,101 $ 202,553
========== ========== ==========
E&P CAPITAL EXPENDITURES BY GEOGRAPHIC REGION
(AMOUNTS IN MILLIONS)
Data for 1996 Actuals Chart
Domestic ............... $139.7
Canada ................. $ 15.2
Egypt .................. $ 33.0
Cote d'Ivoire .......... $ 6.9
Other .................. $ 4.7
Data for 1997 Plan Chart
Domestic .............. $114.2
Canada ................. $ 15.4
Egypt .................. $ 79.0
Cote d'Ivoire .......... $ 18.1
Other .................. $ 8.3
E&P is the Company's primary growth area. Historically, that growth has been
achieved primarily through acquisitions of proved oil and gas properties.
However, acquisitions are expected to play a much smaller role in Seagull's
near-term future growth.
In 1997, the Company's capital program is designed to hold domestic reserves
and deliverability to approximately year-end 1996 levels, while greater focus is
placed on Seagull's international drilling efforts.
E&P capital expenditures in 1996 totaled $199.5 million, up substantially
from $133.8 million in 1995. Spending outside the U.S. totaled $59.8 million, of
which $13.2 million was for exploration and $43.5 million for exploitation.
Seagull participated in the drilling of 46 exploratory wells during 1996,
of which 23 were successful. Another 15 wells were in progress at year-end. Of
the successes, 14 were in the U.S., 2 in Egypt, 2 in Cote d'Ivoire and 5 in
Canada. In addition, domestic exploitation activities picked up considerably
after being severely curtailed in 1995 due to the depressed U.S. gas prices.
On September 10, 1996, Seagull consummated the Esso Suez Acquisition for a
net purchase price of approximately $74 million in cash financed through
additional borrowings under Seagull's revolving credit (the "Revolving Credit
Facilities"). The assets purchased in the Esso Suez Acquisition include a 100%
interest in the East Zeit oil producing concession in the offshore Gulf of Suez
and the entire working interest in the South Hurghada concession located onshore
on the coast of the Gulf of Suez approximately 250 miles south of Cairo.
29
On September 10, 1996, the East Zeit concession area contained approximately
17 million net barrels of proved oil reserves. The 63,000-acre South Hurghada
concession contained several currently drillable exploratory prospects, plus two
existing oil discoveries.
In addition, Seagull's new program of relatively small domestic producing
property acquisitions initiated in 1996 resulted in the addition of 37.3 Bcfe
for a cost of $29.1 million.
Seagull's proved oil and gas reserves at December 31, 1996 totaled 257,957
MBOE compared with 243,152 MBOE at year-end 1995. Through drilling and proved
property acquisitions, the Company replaced 159% of its production during 1996
at a finding and development ("F&D") cost of $6.36 per BOE and 177% of its
production over the three year period 1994 through 1996 at a F&D cost of $5.76
per BOE.
The higher reserve volumes and the improved price environment that existed at
year-end 1996 combined to substantially increase the present value of future net
cash flows from the Company's proved reserves. Specifically, the standardized
measure of discounted future net cash flows before taxes from Seagull's proved
oil and gas reserves, calculated based on Securities and Exchange Commission
criteria, increased to $2.1 billion at December 31, 1996 compared with $1.1
billion at the end of 1995. Year-end 1996 calculations were made using prices of
$3.27 per Mcf for gas and $20.99 per Bbl for oil, condensate and NGL. The
Company's average realized price for the year ended December 31, 1996 were $2.07
per Mcf for gas and $18.50 per Bbl for oil, condensate and NGL. Because the
disclosure requirements are standardized, significant changes can occur in these
estimates based upon oil and gas prices in effect at year-end. The above
estimates should not be viewed as an estimate of fair market value. See Note 15
of Notes to Consolidated Financial Statements beginning on page 38 of this
Annual Report for additional information.
Plans for 1997 call for capital expenditures of approximately $250 million,
including about $235 million in E&P. Seagull anticipates spending approximately
$140 million for development, $10 million for leasehold and $85 million will be
devoted to exploration. Of this total, about $105 million is expected to be
spent outside North America. The 1997 capital program anticipates 35 to 40
exploratory wells in the U.S. and Canada and over 25 exploratory wells outside
of North America.
LIQUIDITY
The growth in the Oil and Gas Operations segment over the past eight years
has been accomplished primarily through acquisitions financed initially by bank
borrowings; however, since August 1990, the Company has utilized $520 million in
net proceeds from three separate Common Stock offerings and the July 1993 sale
of Senior and Senior Subordinated Notes, all in underwritten public offerings,
to reduce borrowings under its existing bank facilities. In addition, Seagull
reduced its borrowings under existing bank facilities in 1995 by $143 million
with the proceeds from the sale of the Pipeline Assets and the Internal Revenue
Code Section 29 Tax Credit-bearing gas properties.
In 1993, the Company entered into the Revolving Credit Facilities with a
group of major U. S. and international banks (the "Banks"). During 1996, the
terms of the Revolving Credit Facilities were amended and currently provide a
maximum commitment of $650 million. Under the terms of the Revolving Credit
Facilities, the commitments thereunder begin to decline in equal quarterly
amounts of $40 million commencing on March 31, 1999, with a final reduction of
$50 million on December 31, 2002. The amount of senior indebtedness available to
the Company under the provisions of the Revolving Credit Facilities is subject
to a borrowing base (the "Borrowing Base"), based upon certain of the Company's
proved oil and gas reserves and the financial performance of ENSTAR Alaska. The
Borrowing Base is generally determined annually but may be redetermined one
additional time each year, at the option of either Seagull or the Banks, and
upon the sale of certain assets included in the Borrowing
30
Base. With the Esso Suez Acquisition, Seagull requested and received a $50
million increase to the Borrowing Base to $550 million on October 1, 1996. See
Notes 4 and 6 of Notes to Consolidated Financial Statements beginning on page 38
of this Annual Report for additional information relating to acquisitions and
debt.
As of December 31, 1996, borrowings outstanding under the Revolving Credit
Facilities were $237 million, leaving immediately available unused commitments
of approximately $176 million, net of outstanding letters of credit of $20
million, $100 million of borrowings outstanding under the Senior Notes, and $17
million in borrowings outstanding under the Company's money market facilities.
The money market facilities are with two U.S. banks and have a combined
maximum commitment of $70 million. These lines of credit bear interest at rates
made available by the banks at their option and may be canceled at either
Seagull's or the banks' option.
Management believes that the Company's internally generated funds and bank
borrowing capabilities will be sufficient to finance current and forecasted
operations.
ENVIRONMENTAL
To date, compliance with applicable environmental and safety regulations by
the Company has not required any significant capital expenditures or materially
affected its business or earnings. The Company believes it is in substantial
compliance with environmental and safety regulations and foresees no material
expenditures in the future; however, the Company is unable to predict the impact
that compliance with future regulations may have on capital expenditures,
earnings and competitive position.
SELECTED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data (stated in thousands except per share
amounts) is as follows:
Quarter Ended(1)
-----------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ------------ -----------
1996:
Revenues ............................. $ 136,840 $ 112,437 $ 110,786 $ 158,515
Operating Profit ..................... $ 37,701 $ 13,826 $ 20,116 $ 33,412
Net Income (Loss) .................... $ 18,312 $ (2,934) $ 7,458 $ 6,125(6)
Earnings (Loss) per Share(2) ......... $ 0.29 $ (0.05) $ 0.12 $ 0.10
1995:
Revenues ............................. $ 112,427 $ 98,595 $ 85,381 $ 112,023
Operating Profit (Loss) .............. $ (47,469)(3) $ (2,114)(4) $ (1,475) $ 16,680
Net Income (Loss) .................... $ (42,766)(3) $ (10,063)(4) $ 43,692(5) $ 7,399
Earnings (Loss) per Share(2) ......... $ (0.69) $ (0.16) $ 0.70 $ 0.12
(1)As discussed in Note 1 to the Consolidated Financial Statements, all periods
have been restated to reflect the Global Merger on October 3, 1996.
(2)Quarterly earnings (loss) per common share may not total to the full year per
share amount, as the weighted average number of shares outstanding for each
quarter fluctuated as a result of the assumed exercise of stock options.
(3)Includes $48.8 million pre-tax non-cash charge relating to the impairment of
long-lived assets.
(4)Includes one-time pre-tax charges of $8 million for expenses involved in the
workforce reduction and consolidation.
(5)Includes $82 million pre-tax gain on the sale of the Pipeline Assets.
(6)Includes $10 million pre-tax merger expenses relating to the Global Merger.
31
REPORT OF MANAGEMENT TO SHAREHOLDERS
The management of Seagull Energy Corporation is responsible for the
preparation and integrity of financial statements and related data in this
Annual Report, whether audited or unaudited. The financial statements were
prepared in conformity with generally accepted accounting principles and are not
misstated due to material fraud or error. The financial statements include
certain estimates and judgments which management believes are reasonable under
the circumstances. The other information in the Annual Report is consistent with
that in the financial statements.
Management is responsible for and maintains a system of internal accounting
controls that is sufficient to provide reasonable assurance that assets are
safeguarded against loss or unauthorized use and that financial records are
reliable for preparing financial statements, as well as to prevent and detect
fraudulent financial reporting. The internal control system is supported by
written policies and procedures and the employment of trained, qualified
personnel. The Company has an internal auditing staff which reviews the adequacy
of the internal accounting controls and compliance with them. Management has
considered the recommendations of the internal auditing staff and KPMG Peat
Marwick LLP concerning the Company's system of internal controls and has
responded appropriately to those recommendations.
The accompanying consolidated financial statements of Seagull Energy
Corporation and Subsidiaries as of December 31, 1996 have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. Their audits were
made in accordance with generally accepted auditing standards and included a
review of the system of internal controls to the extent considered necessary to
determine the audit procedures required to support their opinion on the
consolidated financial statements. The Auditors' Report appears on page 33.
The Board of Directors, through its Audit Committee composed exclusively of
outside directors, meets periodically with representatives of management, the
internal auditing staff and the independent auditors to ensure the existence of
effective internal accounting controls and to ensure that financial information
is reported accurately and timely with all appropriate disclosures included. The
independent auditors and the internal auditing staff have full and free access
to, and meet with, the Audit Committee, with and without management present.
/s/ BARRY J. GALT
Barry J. Galt
Chairman and
Chief Executive Officer
/s/ WILLIAM L. TRANSIER
William L. Transier
Senior Vice President and
Chief Financial Officer
/s/ GORDON L. MCCONNELL
Gordon L. McConnell
Vice President and Controller
January 27, 1997
32
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Seagull Energy Corporation:
We have audited the accompanying consolidated balance sheets of Seagull
Energy Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Seagull
Energy Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 2 in 1995, the Company changed its method of accounting
for the impairment of long-lived assets and for long-lived assets to be disposed
of to adopt the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of."
/s/ KPMG Peat Marwick LLP
Houston, Texas
January 27, 1997
33
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amount in Thousands Except Per Share Data)
Year Ended December 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
Restated Restated
Revenues:
Oil and gas operations ................................... $ 420,962 $ 310,656 $ 364,888
Alaska transmission and distribution ..................... 97,616 97,770 105,598
---------- ---------- ----------
518,578 408,426 470,486
Costs of Operations:
Operations and maintenance ............................... 146,297 136,203 152,035
Alaska transmission and distribution cost of gas sold .... 42,600 46,328 54,465
Exploration charges ...................................... 50,227 40,223 43,813
Depreciation, depletion and amortization ................. 152,899 147,410 156,934
Impairment of long-lived assets .......................... -- 48,842 --
General and administrative ............................... 21,500 23,798 14,603
---------- ---------- ----------
413,523 442,804 421,850
---------- ---------- ----------
Operating Profit (Loss) .................................... 105,055 (34,378) 48,636
Other (Income) Expense:
Merger expense ........................................... 9,982 -- --
Interest expense ......................................... 44,842 52,978 51,674
Gain on sales of property, plant and equipment, net ...... (1,088) (83,388) (405)
Interest income and other ................................ (3,537) (5,012) (1,968)
---------- ---------- ----------
50,199 (35,422) 49,301
---------- ---------- ----------
Income (Loss) Before Income Taxes .......................... 54,856 1,044 (665)
Income Tax Expense ......................................... 25,895 2,782 3,740
---------- ---------- ----------
Net Income (Loss) .......................................... $ 28,961 $ (1,738) $ (4,405)
========== ========== ==========
Earnings (Loss) Per Share .................................. $ 0.45 $ (0.03) $ (0.07)
========== ========== ==========
Weighted Average Number of Common
Shares Outstanding ....................................... 64,073 62,674 63,006
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
34
CONSOLIDATED BALANCE SHEETS
(Amount in Thousands Except Share and Per Share Data)
December 31,
--------------------------
1996 1995
----------- -----------
Restated
ASSETS
Current Assets:
Cash and cash equivalents ....................................................... $ 15,284 $ 21,477
Short-term investments .......................................................... -- 5,004
Accounts receivable, net ........................................................ 193,659 133,190
Inventories ..................................................................... 12,285 5,488
Prepaid expenses and other ...................................................... 6,389 16,272
----------- -----------
Total Current Assets .......................................................... 227,617 181,431
Property, Plant and Equipment:
Oil and gas properties (successful efforts method) .............................. 1,750,784 1,494,773
Utility plant ................................................................... 238,091 229,883
Other ........................................................................... 60,481 58,507
----------- -----------
2,049,356 1,783,163
Accumulated Depreciation, Depletion and Amortization ............................. 804,715 652,985
----------- -----------
1,244,641 1,130,178
Other Assets ..................................................................... 42,805 47,516
----------- -----------
Total Assets ..................................................................... $ 1,515,063 $ 1,359,125
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities:
Accounts and note payable ....................................................... $ 166,775 $ 94,318
Accrued expenses ................................................................ 57,368 50,224
Current maturities of long-term debt ............................................ 7,227 1,650
----------- -----------
Total Current Liabilities ..................................................... 231,370 146,192
Long-Term Debt ................................................................... 573,455 557,107
Other Noncurrent Liabilities ..................................................... 65,428 53,237
Deferred Income Taxes ............................................................ 31,021 23,377
Redeemable Bearer Shares ......................................................... 16,059 16,591
Commitments and Contingencies .................................................... -- --
Shareholders' Equity:
Common Stock, $.10 par value; authorized 100,000,000 shares;
issued 63,073,287 in 1996 and 65,983,199 in 1995 .............................. 6,307 6,598
Additional paid-in capital ...................................................... 483,118 496,377
Retained earnings ............................................................... 115,805 86,844
Foreign currency translation adjustment ......................................... 51 389
Less: note receivable from employee stock ownership plan ....................... (4,284) (4,922)
Less: treasury stock, at cost; 361,314 shares in 1996 and 3,729,823 in 1995 .... (3,267) (22,665)
----------- -----------
Total Shareholders' Equity .................................................... 597,730 562,621
----------- -----------
Total Liabilities and Shareholders' Equity ...................................... $ 1,515,063 $ 1,359,125
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
35
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
Year Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
Operating Activities: Restated Restated
Net income (loss) ................................................................ $ 28,961 $ (1,738) $ (4,405)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation, depletion and amortization ...................................... 156,319 151,761 159,950
Impairment of long-lived assets ............................................... -- 48,842 --
Amortization of deferred financing costs ...................................... 2,969 3,429 3,841
Deferred income taxes ......................................................... 8,701 (16,292) (6,291)
Dry hole expense .............................................................. 23,671 22,153 27,166
Gains on sales of property, plant and equipment, net .......................... (1,088) (83,388) (405)
Other ......................................................................... 1,010 55 2,557
----------- ----------- -----------
220,543 124,822 182,413
Changes in operating assets and liabilities, net of acquisitions:
Decrease in short-term investments ......................................... 5,014 28,538 16,210
Decrease (increase) in accounts receivable ................................. (53,531) (21,721) 12,408
Decrease in inventories, prepaid expenses and other ........................ 9,731 1,793 3,046
Increase (decrease) in accounts payable .................................... 53,281 (15,551) 3,093
Increase (decrease) in accrued expenses and other .......................... 21,381 153 (8,056)
----------- ----------- -----------
Net Cash Provided By Operating Activities ................................. 256,419 118,034 209,114
Investing Activities:
Capital expenditures ............................................................. (213,462) (144,101) (202,553)
Acquisitions of oil and gas properties ........................................... (90,867) -- (222,780)
Acquisitions of other assets and liabilities, net of cash acquired ............... (13,553) -- 28,921
Proceeds from sales of property, plant and equipment ............................. 10,557 107,960 7,605
Other ............................................................................ 2,020 (307) (1,775)
----------- ----------- -----------
Net Cash Used In Investing Activities ...................................... (305,305) (36,448) (390,582)
Financing Activities:
Proceeds from debt ............................................................... 407,738 668,815 754,413
Principal payments on debt ....................................................... (368,754) (737,473) (582,827)
Proceeds from sale of common stock ............................................... 4,401 2,241 1,291
Acquisitions of treasury stock ................................................... -- -- (5,289)
Other ............................................................................ (1,051) (3,957) 624
----------- ----------- -----------
Net Cash Provided by (Used In) Financing Activities ........................ 42,334 (70,374) 168,212
Effect of exchange rate changes on cash ............................................ 359 (48) 1,641
----------- ----------- -----------
Increase (Decrease) In Cash And Cash Equivalents .......................... (6,193) 11,164 (11,615)
Cash And Cash Equivalents At Beginning Of Period ................................... 21,477 10,313 21,928
----------- ----------- -----------
Cash And Cash Equivalents At End Of Period ......................................... $ 15,284 $ 21,477 $ 10,313
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
36
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in Thousands)
Foreign Note
Additional Currency Receivable Treasury
Common Paid-in Retained Translation from Stock,
Stock Capital Earnings Adjustment ESOP at Cost Total
--------- --------- --------- --------- --------- --------- ---------
January 1, 1994 - Restated .............. $ 6,559 $ 492,110 $ 92,987 $ -- $ (6,029) $ (17,683) $ 567,944
Net loss for the period .............. -- -- (4,405) -- -- -- (4,405)
Acquisition of treasury stock ........ -- -- -- -- -- (5,289) (5,289)
Exercise of employee
stock options ...................... 18 1,273 -- -- -- -- 1,291
Foreign currency
translation adjustment ............. -- -- -- (2,684) -- -- (2,684)
Repayment of note
receivable by ESOP ................. -- -- -- -- 527 -- 527
Other ................................ -- 195 -- -- -- 70 265
--------- --------- --------- --------- --------- --------- ---------
December 31, 1994 - Restated ............ 6,577 493,578 88,582 (2,684) (5,502) (22,902) 557,649
Net loss for the period .............. -- -- (1,738) -- -- -- (1,738)
Exercise of employee stock options ... 21 2,220 -- -- -- -- 2,241
Treasury stock issued as executive
incentive compensation ............. -- 164 -- -- -- 171 335
Foreign currency
translation adjustment ............. -- -- -- 3,073 -- -- 3,073
Repayment of note
receivable by ESOP ................. -- -- -- -- 580 -- 580
Other ................................ -- 415 -- -- -- 66 481
--------- --------- --------- --------- --------- --------- ---------
December 31, 1995 - Restated ............ 6,598 496,377 86,844 389 (4,922) (22,665) 562,621
Net income for the period ............ -- -- 28,961 -- -- -- 28,961
Retirement of treasury stock
pursuant to the Global Merger ...... (335) (19,021) -- -- -- 19,356 --
Exercise of employee stock options ... 44 4,357 -- -- -- -- 4,401
Foreign currency
translation adjustment ............. -- -- -- (338) -- -- (338)
Repayment of note
receivable by ESOP ................. -- -- -- -- 638 -- 638
Other ................................ -- 1,405 -- -- -- 42 1,447
--------- --------- --------- --------- --------- --------- ---------
December 31, 1996 ....................... $ 6,307 $ 483,118 $ 115,805 $ 51 $ (4,284) $ (3,267) $ 597,730
========= ========= ========= ========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
37
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX
PAGE
1. Organization...................................................... 38
2. Summary of Significant Accounting Policies........................ 39
3. Supplemental Disclosures of Cash Flow Information................. 43
4. Acquisition and Disposition of Assets............................. 43
5. Other Noncurrent Assets........................................... 44
6. Debt.............................................................. 45
7. Other Noncurrent Liabilities...................................... 48
8. Fair Value of Financial Instruments............................... 48
9. Redeemable Bearer Shares.......................................... 49
10. Shareholders' Equity.............................................. 50
11. Benefit Plans..................................................... 51
12. Income Taxes...................................................... 55
13. Business Segments................................................. 57
14. Commitments and Contingencies..................................... 58
15. Supplemental Oil and Gas Information (Unaudited).................. 59
1. ORGANIZATION
Seagull is an international oil and gas company engaged in exploration and
development activities in the United States, Egypt, Cote d'Ivoire, Canada,
Indonesia and the Russian Republic of Tatarstan. It also transports, distributes
and markets natural gas, liquids products and petrochemicals in the U.S. and
Canada.
MERGER WITH GLOBAL NATURAL RESOURCES INC. - On October 3, 1996, the
shareholders of Seagull Energy Corporation (the "Company" or "Seagull") and
Global Natural Resources Inc. ("Global") approved a merger of a wholly owned
subsidiary of Seagull into Global (the "Global Merger"). Pursuant to the Global
Merger, each share of Global common stock was converted into 0.88 shares of
Seagull common stock with approximately 26.3 million shares issued to the
shareholders of Global. The Global Merger was accounted for as a pooling of
interests. Accordingly, the financial statements for periods prior to the Global
Merger have been restated to combine the results of Seagull and Global. Net
income for the year ended December 31, 1996 includes the effect of transaction
costs of the Global Merger of approximately $10 million ($9 million after tax).
The results of operations previously reported by the separate companies and
the combined amounts presented in the accompanying consolidated financial
statements are summarized below. Certain adjustments were made to the results of
Seagull and Global to conform
38
the accounting policies and presentation used by Seagull and Global. The
increase (decrease) in net income of these adjustments was $(1.4) million, $3.9
million and $0.6 million for the nine months ended September 30, 1996 and the
years ended December 31, 1995 and 1994, respectively. These adjustments were
primarily to reflect the change in the valuation allowance related to the
deferred tax assets associated with book to tax basis differences on domestic
property, plant and equipment generated during the applicable periods. These
deferred tax assets were not utilized by Global, but more likely than not will
be utilized by the combined company.
================================================================================
(Amounts In Thousands)
Nine Months Ended Year Ended December 31,
September 30, 1996 1995 1994
------------------ ---------- ----------
(Unaudited)
Revenues:
Seagull .............................. $ 281,640 $ 336,273 $ 408,104
Global ............................... 82,525 78,457 62,943
Conforming adjustments ............... (4,102) (6,304) (561)
------------------ ---------- ----------
Combined ............................. $ 360,063 $ 408,426 $ 470,486
================== ========== ==========
Net income (loss):
Seagull .............................. $ 10,572 $ 632 $ 3,246
Global ............................... 13,645 (6,307) (8,253)
Conforming adjustments ............... (1,381) 3,937 602
------------------ ---------- ----------
Combined ............................. $ 22,836 $ (1,738) $ (4,405)
================== ========== ==========
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The accompanying consolidated financial statements of Seagull have
been prepared according to generally accepted accounting principles and pursuant
to the rules and regulations of the Securities and Exchange Commission. These
accounting principles require the use of estimates, judgments and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates. Certain reclassifications have
been made in the 1995 and 1994 financial statements to conform to the
presentation used in 1996.
CONSOLIDATION - The accompanying consolidated financial statements include
the accounts of Seagull Energy Corporation and its majority-owned entities. All
significant intercompany transactions have been eliminated.
REGULATION - The Company operates in Alaska through a division of the Company
and a wholly owned subsidiary (collectively referred to herein as "ENSTAR
Alaska"). ENSTAR Alaska is subject to regulation by the Alaska Public Utilities
Commission ("APUC"), which has jurisdiction over, among other things, rates,
accounting procedures and standards of service.
CASH EQUIVALENTS - The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
SHORT-TERM INVESTMENTS - Short-term investments include highly liquid
investments having a maturity at the date of purchase of more than three months.
As of December 31, 1995, short-term investments consisted entirely of U.S.
government securities.
39
INVENTORIES - Materials and supplies are valued at the lower of average cost
or market value (net realizable value).
OIL AND GAS PROPERTIES - The Company uses the successful efforts method of
accounting for its oil and gas operations whereby acquisition costs and
exploratory drilling costs related to properties with proved reserves and all
development costs including development dry holes are capitalized. The
acquisition costs of unproved leaseholds are capitalized pending the results of
exploration efforts. Unproved leaseholds with significant acquisition costs are
assessed periodically, on a property-by-property basis, and a loss is recognized
to the extent, if any, that the cost of the property has been impaired. Unproved
leaseholds whose acquisition costs are not individually significant are
aggregated, and the portion of such costs estimated to ultimately prove
nonproductive, based on experience, is amortized over an average holding period.
As unproved leaseholds are determined to be productive, the related costs are
transferred to proved leaseholds. Exploratory dry holes and geological and
geophysical charges are expensed as incurred. Capitalized costs are depleted
using the unit-of-production method based upon estimates of proved oil and gas
reserves on a depletable unit basis. Estimated costs (net of salvage value) of
dismantling and abandoning oil and gas production facilities are computed by the
Company's engineers and included when calculating depreciation and depletion
using the unit-of-production method. The total estimated future dismantlement
and abandonment cost being amortized as of December 31, 1996 was approximately
$26.6 million.
The Company performs a review for impairment of proved oil and gas properties
on a depletable unit basis when circumstances suggest the need for such a
review. For each depletable unit determined to be impaired, an impairment loss
equal to the difference between the carrying value and the fair value of the
depletable unit will be recognized. Fair value, on a depletable unit basis, is
estimated to be the present value of expected future net cash flows computed by
applying estimated future oil and gas prices, as determined by management, to
estimated future production of oil and gas reserves over the economic lives of
the reserves. As a result of the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 121, effective March 31, 1995, the Company recognized a
non-cash pre-tax charge against income of $46.1 million related to oil and gas
properties.
Prior to March 31, 1995, the Company determined the impairment of proved oil
and gas properties on a world-wide basis. Using the world-wide basis, if the net
capitalized costs exceeded the estimated future undiscounted after-tax net cash
flows from proved oil and gas reserves using period-end pricing, such excess
costs would be charged to expense.
Interest cost capitalized as property, plant and equipment amounted to
approximately $2.6 million, $1.2 million and $0.7 million in 1996, 1995 and
1994, respectively.
OTHER PROPERTY, PLANT AND EQUIPMENT - Depreciation of the utility plant, gas
gathering pipeline facilities, gas processing plants and other property is
computed principally using the straight-line method over their estimated useful
lives, which vary from 3 to 33 years.
Utility plant facilities are subject to APUC regulation. When utility
properties are disposed of or otherwise retired, the original cost of the
property, plus cost of retirement, less salvage value, is charged to accumulated
depreciation.
The Company groups and evaluates other property, plant and equipment for
impairment based on the ability to identify separate cash flows generated
therefrom. As a result of the adoption of SFAS No. 121, effective March 31,
1995, the Company recognized a pre-tax non-cash charge against income of $2.7
million for impairment of other property, plant and equipment.
Maintenance, repairs and renewals are charged to operations and maintenance
expense except that renewals which extend the life of the property are
capitalized.
TREASURY STOCK - The Company follows the average cost method of accounting
for treasury stock transactions.
40
REVENUE RECOGNITION - The Company records oil and natural gas revenue
following the entitlement method of accounting for production imbalances, in
which any excess amount received above the Company's share is treated as a
liability. If less than the Company's entitlement is received, the
underproduction is recorded as an asset.
ENSTAR Alaska's operating revenues are based on rates authorized by the APUC
which are applied to customers' consumption of natural gas. ENSTAR Alaska
records unbilled revenue, including amounts to be billed under a purchased gas
adjustment clause, at the end of each accounting period.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company enters into a variety of
commodity derivative contracts for non-trading purposes as a hedging strategy to
manage commodity prices associated with oil and gas sales and to reduce the
impact of price fluctuations. The Company primarily uses futures contracts,
price swaps and options when it determines it is appropriate to hedge its
commodity prices. While derivative financial instruments are intended to reduce
the Company's exposure to declines in the market price of oil and natural gas,
the derivative financial instruments may limit the Company's gain from increases
in the market price of oil and natural gas. Income and costs related to these
hedging activities are recognized in oil and gas revenues when the commodities
are produced. Any realized income and costs that are deferred at the balance
sheet date and any margin accounts for futures contracts are included as net
current assets. For the years ended December 31, 1996, 1995 and 1994, the
Company recorded $9.0 million, $0.5 million and none, respectively, in costs
from commodity hedging activities. At December 31, 1996, there was $8.2 million
of realized costs on commodity hedging activities which were deferred and will
be applied as a reduction in revenues in the month of physical sale of
production. Of this amount, $1.0 million is related to the commodity hedges
required in the sale of the Section 29 properties. In addition, there was $2.5
million of unrealized and unrecognized costs associated with open contracts at
December 31, 1996.
The Company recorded costs related to commodity hedging activities of $9.0
million, $0.5 million and none for 1996, 1995 and 1994, respectively. These
costs had the effect of reducing average gas prices by $0.06 mcfe for 1996 and
$0.004 mcfe for 1995.
In mid 1996, Seagull put price "collars" in place with respect to about a
third of its domestic gas deliverability for the first quarter of 1997 only.
These "collars" assured a minimum realization above $2.00 per Mcf in exchange
for a $2.50 per Mcf ceiling on that component of Seagull's production.
Additionally, the Company has commodity hedges in place for approximately 12
MMcf per day through December 1998 on properties associated with the Monetary
Production Payment (see Note 6). These hedge positions will reduce first quarter
1997 E&P revenues. At December 31, 1996, there was $8.2 million of realized
cost on commodity hedging activities which was deferred and will reduce
revenues in the month that the hedged production occurred (January 1997).
On the other hand, because of the drop in commodity prices after January 1997,
the Company expects actual net realizations of above "collars" for February and
March, 1997 to be slightly positive. Also at December 31, 1996, there are $2.0
million of net unrealized and unrecognized hedging cost related to the
commodity hedges associated with the Monetary Production Payment based on the
difference between the strike price and the futures price for the respective
trading months at year end. Again as a result of the intervening drop in
commodity prices, the net unrealized and unrecognized hedging cost would be
substantially lower if current strike and futures prices were used. Essentially
all other hedging activities were realized prior to year-end. The Company has
no commodity hedges in place for equity production after March 1997 other
than those associated with the Monetary Production Payment.
The Company has entered into interest rate swap agreements to manage the
impact of changes in interest rates. The differential interest to be paid or
received is accrued as interest rates change and is recognized over the life of
the agreements as a component of interest expense.
GENERAL AND ADMINISTRATIVE EXPENSE - General and administrative expenses
represent various overhead costs of corporate departments. All overhead expenses
directly related to the operations of the Company's business segments are
included in operations and maintenance expenses and exploration charges.
INCOME TAXES - The Company uses the liability method of accounting for income
taxes under which deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as part of the
provision for income taxes in the period that includes the enactment date.
FOREIGN CURRENCY TRANSLATION - The functional currency for the Company's
Canadian operations is the applicable local currency. Translation from Canadian
dollars to U. S. dollars is performed for balance sheet accounts using exchange
rates in effect at the balance sheet date and for revenue and expense accounts
using primarily a weighted average exchange rate during the period. Adjustments
resulting from such translation are included as a separate component of
shareholders' equity. Deferred income taxes have not been provided on
translation adjustments because any unremitted income from Seagull's foreign
operations is considered to be permanently invested.
The U.S. dollar is the functional currency for the Company's operations in
Russia. Monetary assets and liabilities denominated in rubles are translated
into U.S. dollars using the market rate, as set by the Central Bank of the
Russian Federation. Non-monetary assets and liabilities denominated in rubles
are translated at historical rates. Exchange gains
41
or losses arising from the translation of ruble denominated assets and
liabilities into U.S. dollars are included in net income.
The ruble is not a convertible currency outside the territory of Russia. In
addition, the economy in Russia has experienced hyperinflation, which has
resulted in a significant devaluation of the ruble. If hyperinflation continues,
additional devaluation of the ruble may occur. As of December 31, 1996, the
Company's consolidated financial statements include ruble denominated net
monetary liabilities of approximately 4.6 billion rubles, which have been
translated into approximately $0.8 million.
The U.S. dollar is the functional currency for all other foreign operations,
as predominantly all transactions in those operations are denominated in U.S.
dollars.
STOCK-BASED COMPENSATION - Effective January 1, 1996, the Company adopted
SFAS No. 123, "Accounting for Stock-Based Compensation." This SFAS allows a
Company to adopt a fair value based method of accounting for a stock-based
employee compensation plan or to continue to use the intrinsic value based
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company has chosen to continue
to account for stock-based compensation under the intrinsic value method. Under
this method, the Company records no compensation expense for stock options
granted when the exercise price of options granted is equal to the fair market
value of Seagull's common stock on the day of grant.
EARNINGS PER SHARE - The weighted average number of common shares outstanding
for the computation of earnings per share for the years ended December 31, 1996,
1995 and 1994 gives effect to the assumed exercise of stock options as of the
beginning of the year.
CONCENTRATIONS OF RISK - The future results of the oil and gas operations
segment will be affected by the market prices of oil and natural gas. The
availability of a ready market for natural gas, oil and liquid products in the
future will depend on numerous factors beyond the control of the Company,
including weather, production of other natural gas, crude oil and liquid
products, imports, marketing of competitive fuels, proximity and capacity of oil
and gas pipelines and other transportation facilities, any oversupply or
undersupply of gas, oil and liquid products, the regulatory environment, and
other regional and political events, none of which can be predicted with
certainty.
The Company operates in various phases of the oil and natural gas industries
with sales to resellers such as pipeline companies and local distribution
companies as well as to end-users such as commercial businesses, industrial
concerns and residential consumers. The Company's receivables include amounts
due from purchasers of oil and gas production and amounts due from joint venture
partners for their respective portions of operating expense and exploration and
development costs. The Company believes that no single customer or joint venture
partner exposes the Company to significant credit risk. While certain of these
customers and joint venture partners are affected by periodic downturns in the
economy in general or in their specific segment of the natural gas or oil
industry, the Company believes that its level of credit-related losses due to
such economic fluctuations has been immaterial and will continue to be
immaterial to the Company's results of operations in the long term. Trade
receivables are generally not collateralized; however, the Company analyzes
customers' and joint venture partners' historical credit positions prior to
extending credit.
The Company has a significant portion of its operations in various geographic
areas of the world. The Company's activities in these areas are subject to the
usual risks associated with foreign operations, including political and economic
uncertainties, risks of cancellation or unilateral modification of agreements,
operating restrictions, currency repatriation restrictions, expropriation,
export restrictions, the imposition of new taxes and the increase of existing
taxes, inflation, foreign exchange fluctuations and other risks arising out of
foreign government sovereignty over areas in which the operations are conducted.
The Company has endeavored to protect
42
itself against political and commercial risks inherent in these operations.
There is no certainty that the steps taken by the Company will provide adequate
protection.
Derivative financial instruments that hedge the price of oil and natural gas
and interest rates are generally executed with major financial or commodities
trading institutions which expose the Company to acceptable levels of market and
credit risks and may at times be concentrated with certain counterparties or
groups of counterparties. Although notional amounts are used to express the
volume of these contracts, the amounts potentially subject to credit risk, in
the event of non-performance by the counterparties, are substantially smaller.
The creditworthiness of counterparties is subject to continuing review and full
performance is anticipated.
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosures of cash flow information (stated in thousands) are as
follows:
================================================================================
Year Ended December 31,
1996 1995 1994
--------- --------- --------
Cash paid during the year for:
Interest, net of amount capitalized ........ $ 44,033 $ 46,804 $ 44,946
Income taxes ............................... $ 12,046 $ 14,074 $ 8,198
4. ACQUISITION AND DISPOSITION OF ASSETS
On September 10, 1996, Seagull purchased the stock of Esso Suez Inc. ("ESI")
and certain assets of Esso Egypt Limited (the "EEL Assets") for a net purchase
price of approximately $74 million in cash (the "Esso Suez Acquisition")
financed through additional borrowings under Seagull's revolving credit
facilities. The transaction was accounted for as a purchase. ESI holds a 100%
interest in the East Zeit oil producing concession in the offshore Gulf of Suez,
and the EEL Assets consist of the entire working interest in the South Hurghada
concession located onshore on the coast of the Gulf of Suez approximately 250
miles southeast of Cairo. As of September 10, 1996, the ESI concession area
contained approximately 17 million net barrels of proved oil reserves. The
63,000-acre South Hurghada concession contains several currently drillable
exploratory prospects, plus two existing oil discoveries.
===============================================================================
(Unaudited)
Year Ended December 31,
1996 1995
--------- ---------
Revenues ............................... $ 552,892 $ 466,639
Net income ............................. $ 37,030 $ 11,074
Earnings per share ..................... $ 0.58 $ 0.18
The table on page 43 (stated in thousands except per share data) presents the
unaudited pro forma results of the combined operations of Seagull, ESI and the
EEL Assets as though the Esso Suez Acquisition had occurred on January 1, 1995.
The unaudited pro forma information does not purport to be indicative of actual
results if the Esso Suez Acquisition had been in effect for the periods
indicated.
43
On September 25, 1995, the Company and three other sellers completed the sale
of their disparate interests in 19 natural gas gathering systems and a gas
processing plant (the "Pipeline Assets"). From its share of the proceeds,
Seagull realized a one-time, pre-tax gain of approximately $82 million recorded
in the third quarter of 1995. For the years ended December 31, 1995 and 1994,
the Pipeline Assets contributed $17.6 million and $26.4 million, respectively,
to the revenues and $6.2 million and $6.7 million, respectively, to the
operating profit (loss) of the oil and gas operations segment.
In September 1995, the Company sold certain Internal Revenue Code Section 29
Tax Credit-bearing gas properties (the "Section 29 Properties") to an investment
group which includes a Seagull subsidiary and two financial investors. For
accounting purposes, the Company has treated the sale as a non-recourse monetary
production payment reflected in long-term debt on the balance sheet (see Note
6).
5. OTHER NONCURRENT ASSETS
Other noncurrent assets include the following (stated in thousands):
===============================================================================
December 31,
1996 1995
--------- ---------
Oil and gas imbalances ................. $ 24,673 $ 24,382
Deferred financing costs ............... 10,255 12,979
Other .................................. 7,877 10,155
--------- ---------
$ 42,805 $ 47,516
========= =========
OIL AND GAS IMBALANCES - As discussed in Note 2, the Company records oil and
gas revenues following the entitlement method of accounting for production
imbalances. The Company records revenue from gas marketing sales net of the cost
of gas and third-party delivery fees, with any resulting transportation
imbalances recorded as a current receivable or payable.
The Company's oil, gas and transportation imbalance assets and liabilities were
as follows:
===============================================================================
December 31,
1996 1995
--------------------- ---------------------
AMOUNT VOLUME Amount Volume
(THOUSANDS) (BCFE) (Thousands) (Bcfe)
------------ ------ ------------ ------
ASSETS:
Current ......................... $ 17,650 9.8 $ 12,693 8.2
Noncurrent ...................... 24,673 15.9 24,382 16.1
------------ ------ ------------ ------
$ 42,323 25.7 $ 37,075 24.3
============ ====== ============ ======
LIABILITIES:
Current ......................... $ 12,060 6.5 $ 11,219 7.6
Noncurrent ...................... 20,047 13.4 20,439 13.8
------------ ------ ------------ ------
$ 32,107 19.9 $ 31,658 21.4
============ ====== ============ ======
44
DEFERRED FINANCING COSTS - Deferred financing costs represent financing costs
incurred in connection with the execution of various facilities entered into or
securities issued by the Company. These costs are capitalized and amortized to
interest expense over the life of the related debt. As discussed in Note 6, the
Company has a $650 million revolving credit line which matures in 2002.
Financing costs initially incurred in 1992 of approximately $16.7 million were
capitalized in connection with this facility and will be amortized over periods
ending December 31, 2002. Approximately $5.0 million in financing costs incurred
in connection with the Company's July 1993 issuance of $250 million in senior
and senior subordinated notes was capitalized and will be amortized over periods
ending August 1, 2005 (see Note 6).
6. DEBT
MONEY MARKET FACILITIES - Seagull has money market facilities with two U.S.
banks with a combined maximum commitment of $70 million. These lines of credit
bear interest at rates made available by the banks at their discretion (7.5% and
6.6% at December 31, 1996 and 1995, respectively) and may be canceled at either
Seagull's or the banks' discretion. At December 31, 1996, the total amounts
outstanding under the money market facilities of $17 million were classified as
a current liability and included in accounts and note payable since it is
Seagull's intent to repay these amounts in 1997. At December 31, 1995, all
amounts outstanding under the money market facilities of approximately $27.5
million were classified as long-term debt since it was Seagull's intent to
refinance these amounts on a long-term basis with proceeds from its revolving
credit facilities.
Long-term debt for 1996 and 1995 (stated in thousands) was as follows:
===============================================================================
December 31,
1996 1995
-------- --------
Revolving credit ............................... $236,620 $164,396
Senior notes ................................... 100,000 100,000
Senior subordinated notes ...................... 150,000 150,000
Monetary production payment .................... 34,378 43,856
Money market facilities ........................ -- 27,527
International Finance Corporation loan ......... -- 12,200
ENSTAR Alaska:
Unsecured industrial development bonds ....... 10,230 11,140
Other unsecured notes ........................ 50,450 50,750
Other debt ................................... 10 14
-------- --------
581,688 559,883
Less: Current maturities ...................... 7,227 1,650
Unamortized debt discount ............... 1,006 1,126
-------- --------
$573,455 $557,107
======== ========
45
REVOLVING CREDIT - During 1996, the terms of the Company's unsecured
revolving credit agreements (the "Revolving Credit Facilities") were amended and
currently provide a maximum commitment of $650 million. Under the terms of the
Revolving Credit Facilities, the commitments thereunder begin to decline on
March 31, 1999 in equal quarterly reductions of approximately $40 million and a
final reduction of $50 million on December 31, 2002. The Revolving Credit
Facilities bear interest, at Seagull's option, at various market-sensitive rates
plus an applicable margin or competitive bid rate. These rates varied from 3.7%
to 6.3% and 6.2% to 6.9% at December 31, 1996 and 1995, respectively.
The Revolving Credit Facilities contain certain covenants and restrictive
provisions among which are limitations on the incurrence of additional debt or
liens, the declaration or payment of dividends and the repurchase or redemption
of capital stock and the maintenance of certain financial ratios. Under the most
restrictive of these provisions, approximately $133 million was available for
payment of cash dividends on Common Stock or to repurchase Common Stock as of
December 31, 1996.
Under provisions included in the Revolving Credit Facilities, the amount of
senior indebtedness available to the Company is subject to a borrowing base (the
"Borrowing Base") based upon certain of the Company's proved oil and gas
reserves and the financial performance of the Alaska transmission and
distribution segment. The Borrowing Base is generally determined annually, but
may be redetermined, at the option of either Seagull or the banks, one
additional time each year, and will be redetermined upon the sale of certain
assets included in the Borrowing Base. With the Esso Suez Acquisition, Seagull
requested and received a $50 million increase to the Borrowing Base to $550
million on October 1, 1996. If the Borrowing Base is redetermined in such a
manner that the amount outstanding under the Revolving Credit Facilities
(together with any other permitted senior debt facility) exceeds the new
Borrowing Base, then the Company must repay the Revolving Credit Facilities or
such other indebtedness in an amount necessary to cure the deficiency. If such
deficiency has not been cured within 30 days, such deficiency must be cured in
three equal quarterly installments.
During 1995, Global executed a $35 million credit agreement (the "Global
Credit Agreement") with a bank. At December 31, 1995, under this agreement,
there were no loans outstanding and approximately $18 million in letters of
credit had been issued. These letters of credit are primarily associated with
the Redeemable Bearer Shares (see Note 9). During 1995, Global also executed a
$17.5 million financing agreement with the International Finance Corporation, a
subsidiary of the World Bank, (the "IFC Loan"). As of December 31, 1995, the
weighted average interest rate was 8.4% for the IFC Loan. Subsequent to the
Merger, the IFC Loan was repaid with proceeds from the Revolving Credit
Facilities and both the Global Credit Agreement and the IFC Loan were canceled.
The letters of credit associated with the Redeemable Bearer Shares were reissued
under the Revolving Credit Facilities.
As of December 31, 1996, borrowings outstanding under the Revolving Credit
Facilities were approximately $237 million, leaving immediately available unused
commitments of approximately $176 million, net of outstanding letters of credit
of $20 million, $100 million of borrowings outstanding under the Senior Notes
(defined below), and $17 million in borrowings outstanding under the money
market facilities.
SENIOR AND SENIOR SUBORDINATED NOTES - In July 1993, Seagull sold $100
million of senior notes (the "Senior Notes") and $150 million of senior
subordinated notes (the "Senior Subordinated Notes") (collectively the "Notes")
in an underwritten public offering. The Senior Notes bear interest at 7 7/8% per
annum, are not redeemable prior to maturity or subject to any sinking fund and
mature on August 1, 2003. The Senior Subordinated Notes bear interest at 8 5/8%
per annum, are not
46
subject to any sinking fund and mature on August 1, 2005. On or after August 1,
2000, the Senior Subordinated Notes are redeemable at the option of the Company,
in whole or in part, at redemption prices declining from 102.59% in 2000 to
100.00% in 2003 and thereafter (expressed as a percentage of principal amount),
plus accrued interest to the redemption date. The Notes were issued at par and
interest is paid semiannually.
The Notes represent unsecured obligations of the Company. The Senior Notes
rank pari passu with senior indebtedness of the Company while the Senior
Subordinated Notes are subordinate in right of payment to all existing and
future senior indebtedness of the Company. The Notes contain conditions and
restrictive provisions including, among other things, restrictions on additional
indebtedness by the Company and by its subsidiaries, the right of each note
holder to have the notes repurchased by the Company at 101% of the principal
amount upon a change in control, as well as restrictions on the incurrence of
secured debt and entering into sale and leaseback transactions.
MONETARY PRODUCTION PAYMENT - On September 1, 1995, the Company sold the
Section 29 Properties for $46.3 million in net proceeds. The transaction was
recorded as a monetary production payment for accounting purposes. The investors
receive the operating cash flow from the properties, less funds required for
working capital purposes, and are expected to recoup their investment plus their
required after-tax rate of return by 2002. Seagull's pre-tax effective interest
rate is currently estimated to be approximately 4%.
ENSTAR ALASKA - All long-term debt of ENSTAR Alaska is issued by a wholly
owned subsidiary of Seagull in the form of senior unsecured notes. These
unsecured notes bear interest at various fixed rates ranging from 7.75% to 12.8%
with principal repayments due 1997 through 2009. These senior unsecured notes of
the subsidiary provide for restrictions on dividends, additional borrowings and
purchases, redemptions or retirements of shares of capital stock, other than in
stock of the subsidiary. Under the most restrictive provisions of these
financing arrangements, ENSTAR Alaska had approximately $16.1 million available
for the making of restricted investments, restricted stock payments and
restricted subordinated debt payments as of December 31, 1996.
INTEREST RATE SWAP AGREEMENTS - The Company enters into interest rate swap
agreements to manage the impact of changes in interest rates. At December 31,
1996, the Company had outstanding interest rate swaps with a notional amount of
$100 million whereby the Company pays a floating interest rate and receives a
fixed interest rate ranging from 5.43% to 5.635%. These interest rate swaps will
expire on January 31, 1997 and are not expected to have a material impact on the
Company's results of operations or cash flow for 1997.
While notional amounts are used to express the volume of the interest rate
swap transactions discussed above, the amount potentially subject to credit
risk, in the event of nonperformance by Seagull's counterparties, is
significantly smaller. For the years ended December31, 1996, 1995 and 1994,
interest expense included approximately $1.7 million, $0.6 million and $2.3
million, respectively, relating to these agreements.
ANNUAL MATURITIES - At December 31, 1996, the Company's aggregate annual
maturities of long-term debt are $7.2 million, $7.1 million, $7.1 million, $27.8
million and $34.2 million for the years 1997, 1998, 1999, 2000 and 2001,
respectively.
47
7. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities (stated in thousands) include the following:
===============================================================================
December 31,
1996 1995
--------- ---------
Oil and gas imbalances (see Note 5) .............. $ 20,047 $ 20,439
Refundable customer advances for construction .... 11,567 11,037
Other ............................................ 33,814 21,761
--------- ---------
$ 65,428 $ 53,237
========= =========
Refundable customer advances for construction represent customer deposits
received by ENSTAR Alaska for construction of main extensions refundable either
wholly or in part over a period not to exceed 10 years.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments (stated in
thousands) are summarized as follows:
===============================================================================
December 31,
-------------------------------------------------
1996 1995
---------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- --------- ----------
Assets:
Cash and cash equivalents .................... $ 15,284 $ 15,284 $ 21,477 $ 21,477
Short-term investments ....................... -- -- 5,004 5,004
Liabilities:
Refundable customer advances and deposits .... (14,075) (11,405) (14,866) (11,986)
Long-term debt ............................... (580,682) (589,815) (558,757) (558,197)
Redeemable bearer shares ....................... (16,059) NA (16,591) NA
Derivative transactions:
Interest rate swap agreements:
In a receivable position .................. -- -- -- 440
In a payable position ..................... -- (107) -- (1,604)
Commodity hedging instruments:
In a receivable position .................. (42) 247 -- 981
In a payable position ..................... (291) (10,798) (105) (3,688)
CASH AND CASH EQUIVALENTS - The carrying amount approximates fair value
because of the short maturity of these instruments.
SHORT-TERM INVESTMENTS - The carrying amount approximates fair value which is
estimated based upon quoted market prices.
REFUNDABLE CUSTOMER ADVANCES AND DEPOSITS - The fair value is based on
discounted cash flow analyses utilizing a discount rate of 8.25% and 8.75% at
December 31, 1996 and 1995, respectively, with monthly payments ratably over the
estimated period of deposit or advance refunding.
LONG-TERM DEBT - The fair value of the Senior Notes, Senior Subordinated
Notes and ENSTAR Alaska debt is estimated based on quoted market prices for the
same or similar issues. The fair value of the monetary production payment is
estimated using discounted cash flow analyses utilizing a discount rate of
48
approximately 3.8% at December 31, 1996 and 1995. The carrying amount of all
other debt approximates fair value because these instruments bear interest at
rates tied to current market rates.
REDEEMABLE BEARER SHARES - The fair value is not determinable because
reductions in the outstanding balance are on demand only to the extent necessary
to redeem bearer shares presented for exchange until July 2008 with any
remaining balance reverting to the Company. The Company is not able to determine
when the bearer shares will be presented and how many will not be redeemed.
INTEREST RATE SWAP AGREEMENTS - The fair values are obtained from the
financial institutions that are counterparties to the transactions. These values
represent the estimated amount the Company would pay or receive to terminate the
agreements, taking into consideration current interest rates and the current
creditworthiness of the counterparties. Seagull's interest rate swap agreements
are off balance sheet transactions and, accordingly, no respective carrying
amounts for these transactions are included in the accompanying consolidated
balance sheets as of December 31, 1996 and 1995.
COMMODITY RELATED TRANSACTIONS -- The fair value of the Company's commodity
hedging instruments is the estimated amount the Company would receive or pay to
settle the applicable commodity hedging instrument at the reporting date, taking
into account the difference between New York Mercantile Exchange ("NYMEX")
prices or index prices at year-end and the contract price of the commodity
hedging instrument.
The estimated fair value amounts have been determined by the Company using
available market information and valuation methodologies described above.
Considerable judgment is required in interpreting market data to develop the
estimates of fair value. The use of different market assumptions or valuation
methodologies may have a material effect on the estimated fair value amounts.
9. REDEEMABLE BEARER SHARES
The Company through its merger with Global became the successor issuer to
Global Natural Resources PLC, a United Kingdom company ("U.K. Company"). On July
26, 1983 pursuant to the terms of a Scheme of Arrangement (the "Arrangement")
under Section 206 of the English Companies Act, the domicile of the parent
company was moved to the United States from the United Kingdom.
Under the terms of the Arrangement, 24,270,876 registered common shares of
Global were registered in the name of Hambros Trust ("Trust Shares"). The Trust
Shares were held for the owners of bearer share warrants issued by the U.K.
Company. Holders of bearer shares were entitled to receive at their election
either cash or Global shares on a share-for-share basis until July 1993. After
July 1993, holders of bearer shares are entitled to receive only cash. The
Arrangement provided that Trust Shares not claimed by July 26, 1988 could be
sold by the Trust and the proceeds from such sale together with earned interest
be used to satisfy future claims by the holders of share warrants to bearer.
In August 1993, Global received $19.2 million, the remaining cash held by the
Trust, in the form of an interest-free loan. The loan is repayable on demand
only to the extent necessary to redeem bearer share warrants presented for
exchange until July 2008. Each bearer share warrant presented during this period
will be redeemed for $6.66. As of December 31, 1996 and 1995, there were
2,463,008 and 2,575,947 outstanding bearer share warrants, respectively. The
loan is secured by a letter of credit which is issued under the Revolving Credit
Facilities. During 1996 and 1995 there were no drawings under the letter of
credit. In July 2008, the obligation of the Company to holders of bearer share
warrants will cease, the
49
interest-free loan will terminate, and any remaining cash will revert to the
Company and will be accounted for as an increase in additional paid-in capital.
10. SHAREHOLDERS' EQUITY
The following table reflects the activity in shares of the Company's Common
Stock and Treasury Stock during the three years ended December 31, 1996.
===============================================================================
1996 1995 1994
----------- ----------- -----------
Common Stock Issued
Shares at beginning of year ....................................... 65,983,199 65,767,743 65,586,112
Exercise of employee stock options ................................ 449,256 215,104 181,631
Executive compensation ............................................ 3,000 -- --
Retirement of treasury stock pursuant to the Global Merger ........ (3,361,185) -- --
Other ............................................................. (983) 352 --
----------- ----------- -----------
Shares at end of year ............................................. 63,073,287 65,983,199 65,767,743
=========== =========== ===========
Treasury Stock
Shares at beginning of year ....................................... 3,729,823 3,759,425 3,130,782
Acquisition of treasury stock ..................................... -- -- 641,134
Issuance of treasury stock to 401(k) plan ......................... (7,324) (11,602) (12,491)
Executive incentive compensation .................................. -- (18,000) --
Retirement of treasury stock pursuant to the Global Merger ........ (3,361,185) -- --
----------- ----------- -----------
Shares at end of year ............................................. 361,314 3,729,823 3,759,425
=========== =========== ===========
TREASURY STOCK - Pursuant to the terms of the Global Merger, 3,819,525 shares
of Global Common Stock (equivalent to 3,361,185 shares of Seagull Common Stock
on an as-converted basis) were retired.
PREFERRED STOCK - The Company is authorized to issue 5,000,000 shares of
preferred stock, par value $1.00 per share, in one or more series. There were no
shares issued or outstanding as of December 31, 1996 and 1995.
PREFERRED SHARE PURCHASE RIGHTS - In 1989, Seagull adopted a Share Purchase
Rights Plan to protect the Company's shareholders from coercive or unfair
takeover tactics. Under the Plan, each outstanding share and each share of
Common Stock subsequently issued has attached to it one Right, exercisable at
$32.75, subject to certain adjustments. Generally, in the event a person or
group acquires 20% or more of the outstanding Common Stock other than pursuant
to a cash tender offer for all shares of such Common Stock (provided that the
tender offer increases the acquiring person's or group's ownership to at least
85% of the outstanding Common Stock), or in the event the Company is acquired in
a merger or other business combination or 50% or more of the Company's
consolidated assets or earning power is sold, each Right entitles the holder to
purchase shares of Common Stock of the Company or of the acquiring company,
having a value of twice the exercise price. The Rights, under certain
circumstances, are redeemable at the option of Seagull's Board of Directors at a
price of $0.01 per Right, within 10 days (subject to extension) following the
day on which the acquiring person or group exceeds the 20% threshold. The Rights
expire on March 22, 1999.
50
11. BENEFIT PLANS
STOCK OPTION PLANS - The Company currently has various stock option plans.
The stock options become exercisable over a three to six year period and all
options expire 10 years after the date of grant. The majority of Seagull's
options may be granted at the fair market value of Seagull's Common Stock on
the New York Stock Exchange on the date of grant. The remaining stock options
may have an exercise price not less than 50% of the fair market value of
Seagull's Common Stock on the date of grant. All outstanding options, other than
44,000 granted by Global in 1993, were issued at the fair market value of
Seagull's Common Stock. Accordingly as discussed in Note 2, no compensation
expense relating to these options is recognized in the Company's results of
operations. At December 31, 1996, approximately 1.5 million shares of Common
stock were available for grant.
Information relating to stock options is summarized as follows:
===============================================================================
1996 1995 1994
------------------------------ ------------------------------ ------------------------------
EXERCISE PRICE Exercise Price Exercise Price
SHARES PER SHARE Shares Per Share Shares Per Share
----------- --------------- ------------ --------------- ------------ ---------------
Balance outstanding -
Beginning of year.............. 4,501,920 $ 5.89 - 26.38 4,065,084 $ 5.89 - 26.38 3,627,600 $ 5.89 - 26.38
Granted....................... 844,000 $ 10.69 - 24.50 766,640 $ 8.81 - 18.88 665,900 $ 8.17 - 25.50
Exercised..................... (449,256) $ 6.31 - 14.88 (215,104) $ 5.89 - 17.38 (183,164) $ 5.89 - 14.88
Canceled...................... (149,872) (114,700) (45,252)
----------- --------------- ------------ --------------- ------------ ---------------
Balance outstanding -
End of year.................... 4,746,792 $ 5.89 - 26.38 4,501,920 $ 5.89 - 26.38 4,065,084 $ 5.89 - 26.38
=========== =============== ============ =============== ============ ===============
Options exercisable -
End of year.................... 2,417,492 2,265,809 2,009,062
=========== ============ ============
The weighted average fair value of stock options granted during 1996, 1995
and 1994 was $10.77, $8.36 and $12.95 per share, respectively. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
options-pricing model. The model assumed expected volatility of 43%, 41% and
38%, weighted average risk-free interest rates of 6.5%, 6.1% and 7.0%, for
grants in 1996, 1995 and 1994, respectively, and an expected life of three years
after the vesting term. As Seagull has not declared dividends since it became a
public entity, no dividend yield was used. Actual value realized, if any, is
dependent on the future performance of Seagull Common Stock and overall stock
market conditions. There is no assurance the value realized by an optionee will
be at or near the value estimated by the Black-Scholes model.
51
Information relating to stock options outstanding at December 31, 1996 is
summarized as follows:
===============================================================================
Options Outstanding Options Exercisable
-------------------------------------------------------- -------------------------------------
Number Weighted Average Weighted Number Exercisable Weighted
Range of Outstanding at Remaining Average at December 31, Average
Exercise Prices December 31, 1996 Contractual Life Exercise Price 1996 Exercise Price
-------------- ------------------ ----------------- ------------ ------------------ -------------
$ 5.89 -- $ 8.44 966,540 3 years $ 7.13 934,068 $ 7.12
$ 8.45 -- $ 12.00 1,071,988 6 years $ 10.34 893,540 $ 10.23
$ 12.01 -- $ 19.00 992,264 7 years $ 16.05 370,884 $ 14.87
$ 19.01 -- $ 26.00 1,214,000 9 years $ 24.32 26,200 $ 25.27
$ 26.01 -- $ 26.38 502,000 6 years $ 26.38 192,800 $ 26.38
---------- ------- --------- --------- ---------
$ 5.89 -- $ 26.38 4,746,792 6 years $ 16.15 2,417,492 $ 11.19
========== ======= ========= ========= =========
As discussed above, no compensation expense has been recorded in 1996, 1995
or 1994 for the Company's stock options. Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant dates
for awards made after December 31, 1994 under those plans, the Company's net
income (loss) (stated in thousands) and earnings (loss) per share would have
been reduced to the pro forma amounts indicated below:
===============================================================================
Year Ended December 31,
1996 1995
---------- ----------
Net income (loss) As reported................................... $ 28,961 $ (1,738)
Pro forma..................................... $ 26,429 $ (2,443)
Earnings (loss) per share As reported................................... $ 0.45 $ (0.03)
Pro forma..................................... $ 0.41 $ (0.04)
Under the provisions of SFAS No. 123, the pro forma disclosures above include
only the effects of stock options granted by Seagull subsequent to December 31,
1994. During this initial phase-in period, the pro forma disclosures as required
by SFAS No. 123 are not representative of the effects on reported net income for
future years as options vest over several years and additional awards are
generally made each year.
PROFIT SHARING PLANS - ENSTAR Alaska has trusteed profit sharing plans for
salaried employees and union employees. Annual contributions for each plan are
determined by the Company's Board of Directors pursuant to formulae which
contain minimum contribution requirements. Profit sharing expense was
approximately $0.4 million for 1996 and $0.3 million for both 1995 and 1994, and
is included in operations and maintenance expenses.
THRIFT PLANS - The Company has various thrift plans which are qualified
employee savings plans in accordance with the provisions of Section 401(k) of
the Internal Revenue Code of 1986, as amended, or the provisions of the Income
Tax Act of Canada, as applicable. Company contributions to these plans
(collectively, the "Thrift Plans") were approximately $1.8 million for each of
the years 1996, 1995 and 1994. The Thrift Plans' costs are included in
operations and maintenance expenses and general and administrative expenses.
One of the Thrift Plans, the Employees 401(k) Savings Plan ("ESP"), was a
defined contribution plan which covered substantially all of Global's U.S.
employees. Employees' contributions were matched by the Company with treasury
shares of common stock. The Company recorded expense of approximately $0.1
million in each of the years 1996, 1995 and 1994 relating to its contributions
of 7,324, 11,602, and 12,491 shares, respectively, of Seagull Common Stock to
the ESP. Subsequent to December 31, 1996, contributions to
52
the ESP will be suspended and those employees eligible to contribute to the ESP
prior to the Merger will be eligible to contribute to the Seagull Thrift Plan.
DEFINED BENEFIT PLANS - The Company has an unfunded retirement plan which
provides for supplemental benefits to certain officers and key employees. As of
December 31, 1996, only one person was designated to participate in such plan.
Total expenses of the plan were approximately $0.2 million for both 1996 and
1995 and $0.3 million for 1994. The retirement plan's costs are included in
general and administrative expenses.
ENSTAR Alaska has two defined benefit retirement plans which cover salaried
employees and operating employees. Determination of benefits for the salaried
employees is based upon a combination of years of service and final monthly
compensation. Benefits for operating employees are based solely on years of
service. ENSTAR Alaska's policy is to fund the minimum contributions required by
applicable regulations. The net pension costs are included in operations and
maintenance expenses.
Global sponsored a defined benefit pension plan which covered substantially
all of Global's U.S. employees. The plan provides benefits based on the
employee's years of service and compensation during the years immediately
preceding retirement. Global made annual contributions to the plan to comply
with the minimum funding provisions of the Employee Retirement Income Security
Act. The plan investments consist primarily of common equities and fixed income
securities. The Company has terminated this defined benefit pension plan and
intends to pay participants the present value of their accrued benefits.
Settlement of this plan is not expected to have a material effect on Seagull's
financial position or results of operations.
The following table (stated in thousands) details the components of pension
income and expense, the funded status of the Company's plans, amounts recognized
in the Company's consolidated balance sheets and major assumptions used to
determine these projected benefit obligations. Certain assumptions are based on
factors, such as interest rates and long-term rates of return on investments,
which are subject to change due to forces beyond the Company's control. Changes
in the various assumptions utilized could have a significant effect on the
amounts reported.
53
===============================================================================
1996 1995
--------- ---------
Actuarial present value of benefit obligations:
Vested benefit obligation ....................................................... $ (16,242) $ (14,678)
========= =========
Accumulated benefit obligation .................................................. $ (16,278) $ (15,053)
========= =========
Projected benefit obligation for services rendered to date ........................ $ (17,740) $ (18,043)
Plan assets at fair value, primarily listed stocks and corporate and U. S. bonds .. 15,520 13,376
--------- ---------
Plan assets at fair value less than projected benefit obligation .................. (2,220) (4,667)
Unrecognized prior service cost ................................................... 91 274
Unrecognized net loss ............................................................. 753 2,843
Unrecognized net obligation arising out of the initial application of
SFAS No. 87, amortized over 15 years to 18 years ................................ 394 533
Additional minimum liability ...................................................... -- (1,321)
--------- ---------
Accrued pension cost .............................................................. $ (982) $ (2,338)
========= =========
Net pension cost includes the following components:
Service cost - benefits earned during the period ................................ $ 1,025 $ 812
Interest cost on projected benefit obligation ................................... 1,212 1,054
Actual return on plan assets .................................................... (2,605) (3,094)
Net amortization and deferral ................................................... 1,835 2,464
--------- ---------
Net periodic pension cost ......................................................... $ 1,467 $ 1,236
========= =========
Assumptions:
Discount rate ................................................................... 7% 7%
Rate of increase in future compensation ......................................... 2% 4%
Expected long-term rate of return on plan assets ................................ 8% 8%
EMPLOYEE STOCK OWNERSHIP PLAN - On November 15, 1989, the Company formed the
Seagull Employee Stock Ownership Plan (the "ESOP") for the benefit of the
non-Alaskan employees of the Company. The ESOP borrowed from the Company $7.7
million at an interest rate of 10 percent per annum to be repaid in twelve equal
annual installments of principal and interest. The ESOP used the borrowed funds
and the 1989 contributions from the Company to purchase 948,150 shares of Common
Stock at $8.438 per share from Seagull's treasury. The purchase price was based
upon the closing price of the Common Stock on the New York Stock Exchange on the
date the ESOP was formed.
The promissory note has been and will be funded entirely by contributions
from Seagull. Company contributions of approximately $0.6 million in both 1996
and 1995 and $0.5 million in 1994 are included in operations and maintenance
expenses and general and administrative expenses.
POSTRETIREMENT MEDICAL PLAN - ENSTAR Alaska has a postretirement medical plan
which covers all of its salaried employees. Determination of benefits is based
upon the combined age of the retiree and years of service at retirement. The
Company accrues for such benefits during the years the plan participants render
service. Expenses related to the postretirement medical plan of $0.3 in 1996 and
$0.2 million in both 1995 and 1994 are included in operations and maintenance
expenses.
54
12. INCOME TAXES
The income (loss) before income taxes and the components of income tax
expense (stated in thousands) for each of the years ended December 31, 1996,
1995 and 1994 were as follows:
===============================================================================
1996 1995 1994
--------- --------- ---------
Income (loss) before income taxes:
Domestic ............................................... $ 38,200 $ 6,841 $ 2,886
Foreign ................................................ 16,656 (5,797) (3,551)
--------- --------- ---------
$ 54,856 $ 1,044 $ (665)
========= ========= =========
Current income tax expense:
Federal ................................................ $ (643) $ 6,236 $ 1,675
Foreign ................................................ 17,737 9,376 7,031
State .................................................. 100 3,462 1,325
--------- --------- ---------
Total current ......................................... 17,194 19,074 10,031
--------- --------- ---------
Deferred income tax expense (benefit):
Federal ................................................ 7,605 (13,570) (7,257)
Foreign ................................................ 815 (1,935) 1,256
State .................................................. 281 (787) (290)
--------- --------- ---------
Total deferred ........................................ 8,701 (16,292) (6,291)
--------- --------- ---------
Income tax expense ....................................... 25,895 2,782 3,740
Additional paid-in capital for compensation expense for
tax purposes in excess of amounts recognized for
financial reporting purposes ........................... (1,244) (374) (160)
--------- --------- ---------
$ 24,651 $ 2,408 $ 3,580
========= ========= =========
The provision for income taxes for each of the years ended December 31, 1996,
1995 and 1994 was different than the amount computed using the federal statutory
rate (35%) for the following reasons (stated in thousands):
===============================================================================
1996 1995 1994
--------- --------- ---------
Amount computed using the statutory rate ................................ $ 19,200 $ 365 $ (233)
Increase (Reduction) in taxes resulting from:
Utilization of Internal Revenue Code
Section 29 (Tight Sands) credits ..................................... (171) (3,096) (5,534)
State income taxes, net of federal income tax benefits ................ 248 1,739 673
Taxation of foreign operations, net of federal income tax benefits .... 13,613 8,494 7,272
Decrease in deferred tax asset valuation allowance .................... (8,430) (6,194) (982)
Adjustments to beginning-of-the-year tax bases
per the 1994 tax returns and effects of IRS exam ..................... -- (1,385) --
Other ................................................................. 1,435 2,859 2,544
--------- --------- ---------
Income tax expense ...................................................... $ 25,895 $ 2,782 $ 3,740
========= ========= =========
55
The net decrease in the valuation allowance for the year ended December 31,
1996 of approximately $8.4 million included $6.2 million related to the
utilization in 1996 of net operating losses. The remaining change for 1996 and
the changes for 1995 and 1994 are related to management's belief that, due to
events occurring in the year of change, it is more likely than not that such
deferred tax assets, for which a valuation allowance had previously been
established, will be realized.
The significant components of deferred income tax expense (benefit)
attributable to income from continuing operations for the years ended December
31, 1996, 1995 and 1994 (stated in thousands) were as follows:
===============================================================================
1996 1995 1994
--------- --------- ---------
Deferred tax expense (benefit) (exclusive of the effects
of other components listed below) ........................ $ 17,131 $ (10,098) $ (5,309)
Decrease in deferred tax asset valuation allowance ......... (8,430) (6,194) (982)
--------- --------- ---------
$ 8,701 $ (16,292) $ (6,291)
========= ========= =========
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax liabilities and deferred tax assets as of December
31, 1996, 1995 and 1994 (stated in thousands) were as follows:
===============================================================================
1996 1995 1994
--------- --------- ---------
Deferred tax liabilities:
Property, plant and equipment, due to
differences in depreciation, depletion and amortization ....... $ 66,242 $ 50,783 $ 60,723
Other .......................................................... 583 197 1,077
--------- --------- ---------
Deferred tax liabilities ......................................... 66,825 50,980 61,800
--------- --------- ---------
Deferred tax assets:
Minimum tax credit carryforwards ............................... (15,972) (18,950) (15,301)
Investment tax credit carryforwards ............................ (1,851) (1,682) (3,466)
Net operating loss carryforwards ............................... (1,727) (7,129) (10,267)
Foreign tax credit carryforwards ............................... -- -- (1,545)
Deferred compensation/retirement related
items accrued for financial reporting purposes ................ (5,464) (4,349) (3,965)
Contingent consideration related to acquisitions/dispositions .. (5,018) (651) (1,052)
Notes receivable ............................................... (6,209) (5,333) (5,248)
Other .......................................................... (3,636) (3,178) (1,774)
--------- --------- ---------
Deferred tax assets .............................................. (39,877) (41,272) (42,618)
Less - valuation allowance ....................................... -- 8,430 14,624
--------- --------- ---------
Net deferred tax assets .......................................... (39,877) (32,842) (27,994)
Less - reclassification to current deferred tax assets ........... 4,073 5,239 4,118
--------- --------- ---------
Non-current deferred tax assets .................................. (35,804) (27,603) (23,876)
--------- --------- ---------
Net non-current deferred tax liabilities ......................... $ 31,021 $ 23,377 $ 37,924
========= ========= =========
For federal income tax purposes, as of December 31, 1996, the Company has
unused investment tax credits of approximately $1.9 million which will expire in
the years 1999 and 2000, unused operating loss carryforwards of approximately
$4.9 million which will expire in the years 1997 through 1999 and unused minimum
tax credits of approximately $16.0 million which are available over an
indefinite period.
56
13. BUSINESS SEGMENTS
Information on the Company's operations by business segment (stated in
thousands) is summarized as follows for the years ended December 31:
===============================================================================
1996 1995 1994
----------- ----------- -----------
REVENUES:
Oil and gas operations ......................... $ 420,962 $ 310,656 $ 364,888
Alaska transmission and distribution ........... 97,616 97,770 105,598
----------- ----------- -----------
$ 518,578 $ 408,426 $ 470,486
=========== =========== ===========
OPERATING PROFIT (LOSS):
Oil and gas operations(1) ...................... $ 100,529 $ (33,721) $ 41,374
Alaska transmission and distribution ........... 26,026 23,141 21,865
General and administrative expense ............. (21,500) (23,798) (14,603)
----------- ----------- -----------
$ 105,055 $ (34,378) $ 48,636
=========== =========== ===========
DEPRECIATION, DEPLETION AND AMORTIZATION:
Oil and gas operations(1) ...................... $ 144,954 $ 188,455 $ 149,182
Alaska transmission and distribution ........... 7,945 7,797 7,752
Corporate ...................................... 3,420 4,351 3,016
----------- ----------- -----------
$ 156,319 $ 200,603 $ 159,950
=========== =========== ===========
IDENTIFIABLE ASSETS:
Oil and gas operations ......................... $ 1,267,481 $ 1,118,216 $ 1,188,341
Alaska transmission and distribution ........... 189,867 189,081 190,087
Corporate ...................................... 57,715 51,828 75,622
----------- ----------- -----------
$ 1,515,063 $ 1,359,125 $ 1,454,050
=========== =========== ===========
CAPITAL EXPENDITURES:
Exploration and production:
Leasehold ..................................... $ 12,986 $ 18,000 $ 18,573
Exploration ................................... 77,774 46,575 67,135
Development ................................... 108,763 69,260 100,763
----------- ----------- -----------
199,523 133,835 186,471
Pipeline and marketing ......................... 228 441 2,503
----------- ----------- -----------
Oil and gas operations ......................... 199,751 134,276 188,974
Alaska transmission and distribution ........... 9,287 7,611 7,626
Corporate ...................................... 4,424 2,214 5,953
----------- ----------- -----------
$ 213,462 $ 144,101 $ 202,553
=========== =========== ===========
ACQUISITIONS, NET OF CASH ACQUIRED:
Acquisitions of oil and gas properties ........... $ 90,867 $ -- $ 222,780
Acquisitions of other assets and liabilities ..... 13,553 -- (28,921)
----------- ----------- -----------
$ 104,420 $ -- $ 193,859
=========== =========== ===========
(1) Includes $48.8 million relating to the impairment of long-lived assets for
the year ended December 31, 1995.
Identifiable assets by geographic area is stated in thousands and summarized as
follows:
1996 1995 1994
---------- ---------- ----------
United States ..................... $1,138,619 $1,074,787 $1,185,890
Canada ............................ 200,352 211,040 224,656
Cote d'Ivoire ..................... 28,854 33,167 10,949
Egypt ............................. 119,680 11,003 2,772
Indonesia ......................... 3,487 4,237 4,535
Russia ............................ 21,152 21,120 19,228
Other(2) .......................... 2,919 3,771 6,020
---------- ---------- ----------
$1,515,063 $1,359,125 $1,454,050
========== ========== ==========
(2)Other includes Malaysia, the United Kingdom and Vietnam.
57
14. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS - The Company leases certain office space and equipment
under operating lease arrangements which contain renewal options and escalation
clauses. Future minimum rental payments under these leases range between $2.1
million and $2.9 million in each of the years 1997-2001, and total $10.4 million
for all subsequent years. Total rental expense under operating leases for each
of the years 1996, 1995 and 1994 was approximately $3.2 million.
LITIGATION - The Company is a party to ongoing litigation in the normal
course of business or other litigation with respect to which the Company is
indemnified pursuant to various purchase agreements or other contractual
arrangements. Management regularly analyzes current information and, as
necessary, provides accruals for probable liabilities on the eventual
disposition of these matters. While the outcome of lawsuits or other proceedings
against the Company cannot be predicted with certainty, management believes that
any adverse effect on the Company's financial condition, results of operations
or cash flows will not be material.
58
15. SUPPLEMENTAL OIL AND GAS INFORMATION (Unaudited)
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES (AMOUNTS IN
THOUSANDS)
===============================================================================
United Cote
States Canada d'Ivoire Egypt Indonesia Russia Other Total
---------- ---------- -------- ---------- --------- ---------- -------- ---------
At December 31, 1996:
Proved ........................ $1,312,448 $ 239,323 $ 32,648 $ 98,407 $ 3,962 $ 17,056 $ -- $1,703,844
Unproved ...................... 33,959 2,525 664 5,584 -- -- 4,208 46,940
---------- ---------- -------- ---------- -------- ---------- -------- ----------
1,346,407 241,848 33,312 103,991 3,962 17,056 4,208 1,750,784
Accumulated depreciation,
depletion and amortization ... 620,602 49,561 6,245 7,442 2,911 4,979 1,441 693,181
---------- ---------- -------- ---------- -------- ---------- -------- ----------
$ 725,805 $ 192,287 $ 27,067 $ 96,549 $ 1,051 $ 12,077 $ 2,767 $1,057,603
========== ========== ======== ========== ======== ========== ======== ==========
At December 31, 1995:
Proved ........................ $1,168,219 $ 234,437 $ 27,146 $ 9,331 $ 3,962 $ 13,103 $ 134 $1,456,332
Unproved ...................... 30,278 2,722 118 897 -- -- 4,426 38,441
---------- ---------- -------- ---------- -------- ---------- -------- ----------
1,198,497 237,159 27,264 10,228 3,962 13,103 4,560 1,494,773
Accumulated depreciation,
depletion and amortization ... 511,174 34,015 2,100 134 2,779 2,635 815 553,652
---------- ---------- -------- ---------- -------- ---------- -------- ----------
$ 687,323 $ 203,144 $ 25,164 $ 10,094 $ 1,183 $ 10,468 $ 3,745 $ 941,121
========== ========== ======== ========== ======== ========== ======== ==========
COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT
ACTIVITIES (AMOUNTS IN THOUSANDS)
===============================================================================
United Cote
States Canada d'Ivoire Egypt Indonesia Russia Other Total
--------- --------- --------- --------- --------- --------- --------- ---------
Year Ended December 31, 1996:
Acquisition costs:
Proved ........................ $ 29,102 $ 1,000 $ -- $ 56,051 $ -- $ -- $ -- $ 86,153
Unproved ...................... 10,371 862 782 5,584 -- -- 101 17,700
Exploration costs ............... 64,066 3,332 2,823 6,934 -- -- 619 77,774
Development costs ............... 65,309 10,992 3,255 25,176 -- 4,031 -- 108,763
--------- --------- --------- --------- --------- --------- --------- ---------
$ 168,848 $ 16,186 $ 6,860 $ 93,745 $ -- $ 4,031 $ 720 $ 290,390
========= ========= ========= ========= ========= ========= ========= =========
Year Ended December 31, 1995:
Acquisition costs:
Proved ........................ $ 3,193 $ 553 $ -- $ -- $ -- $ -- $ -- $ 3,746
Unproved ...................... 13,036 873 126 13 -- -- 206 14,254
Exploration costs ............... 38,762 764 (29) 3,412 -- 312 3,354 46,575
Development costs ............... 39,669 2,507 18,359 4,792 -- 3,933 -- 69,260
--------- --------- --------- --------- --------- --------- --------- ---------
$ 94,660 $ 4,697 $ 18,456 $ 8,217 $ -- $ 4,245 $ 3,560 $ 133,835
========= ========= ========= ========= ========= ========= ========= =========
Year Ended December 31, 1994:
Acquisition costs:
Proved ........................ $ 7,934 $ 218,871 $ -- $ -- $ -- $ -- $ -- $ 226,805
Unproved ...................... 8,021 3,216 -- 885 -- -- 2,426 14,548
Exploration costs ............... 54,604 801 3,032 2,022 -- 496 6,180 67,135
Development costs ............... 73,782 18,830 2,624 -- -- 5,527 -- 100,763
--------- --------- --------- --------- --------- --------- --------- ---------
$ 144,341 $ 241,718 $ 5,656 $ 2,907 $ -- $ 6,023 $ 8,606 $ 409,251
========= ========= ========= ========= ========= ========= ========= =========
59
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES (AMOUNTS IN
THOUSANDS)
===============================================================================
United Cote
States Canada d'Ivoire Egypt
---------- ---------- ---------- ----------
Year Ended December 31, 1996:
Revenues ............................. $ 280,540 $ 33,911 $ 12,798 $ 28,126
Direct operating expense(1) .......... 61,206 11,849 2,454 3,851
General operating expense(1).......... 6,610 2,169 215 1,945
Exploration charges .................. 35,629 4,295 5,401 2,725
DD&A(2) .............................. 110,691 16,985 4,151 7,416
Income tax expense(3) ................ 23,047 1,375 2,158 5,579
---------- ---------- ---------- ----------
Results of activities ................ $ 43,357 $ (2,762) $ (1,581) $ 6,610
========== ========== ========== ==========
Year Ended December 31, 1995:
Revenues ............................. $ 205,596 $ 28,837 $ 4,377 $ 442
Direct operating expense(1) .......... 53,298 11,078 1,010 56
General operating expense(1).......... 8,486 1,856 390 --
Exploration charges .................. 26,156 2,866 471 2,086
DD&A(2) .............................. 113,430 18,046 2,106 136
Impairment of oil and gas properties . 46,122 -- -- --
Income tax expense (benefit)(3) ...... (20,776) (2,233) 832 --
---------- ---------- ---------- ----------
Results of activities ................ $ (21,120) $ (2,776) $ (432) $ (1,836)
========== ========== ========== ==========
Year Ended December 31, 1994:
Revenues ............................. $ 246,491 $ 37,068 $ -- $ --
Direct operating expense(1) .......... 55,918 11,440 -- --
General operating expense(1).......... 11,356 1,574 -- --
Exploration charges .................. 34,926 2,308 -- --
DD&A(2) .............................. 124,179 16,558 -- --
Income tax expense (benefit)(3) ...... (2,405) 2,300 -- --
---------- ---------- ---------- ----------
Results of activities ................ $ 22,517 $ 2,888 $ -- $ --
========== ========== ========== ==========
Indonesia Russia Other Total
---------- ---------- ---------- ----------
Year Ended December 31, 1996:
Revenues ............................. $ 15,892 $ 15,633 $ 57 $ 386,957
Direct operating expense(1) .......... -- 7,895 -- 87,255
General operating expense(1).......... -- 3,467 13 14,419
Exploration charges .................. -- (133) 2,310 50,227
DD&A(2) .............................. 131 2,830 877 143,081
Income tax expense(3) ................ 8,899 541 -- 41,599
---------- ---------- ---------- ----------
Results of activities ................ $ 6,862 $ 1,033 $ (3,143) $ 50,376
========== ========== ========== ==========
Year Ended December 31, 1995:
Revenues ............................. $ 12,418 $ 16,078 $ 7 $ 267,755
Direct operating expense(1) .......... -- 6,190 -- 71,632
General operating expense(1).......... -- 2,682 (21) 13,393
Exploration charges .................. -- 367 8,277 40,223
DD&A(2) .............................. 131 2,111 536 136,496
Impairment of oil and gas properties . -- -- -- 46,122
Income tax expense (benefit)(3) ...... 6,953 1,066 -- (14,158)
---------- ---------- ---------- ----------
Results of activities ................ $ 5,334 $ 3,662 $ (8,785) $ (25,953)
========== ========== ========== ==========
Year Ended December 31, 1994:
Revenues ............................. $ 11,738 $ 12,170 $ 10 $ 307,477
Direct operating expense(1) .......... -- 7,834 -- 75,192
General operating expense(1).......... -- 2,335 113 15,378
Exploration charges .................. -- 498 6,081 43,813
DD&A(2) .............................. 131 1,555 630 143,053
Income tax expense (benefit)(3) ...... 6,577 55 -- 6,527
---------- ---------- ---------- ----------
Results of activities ................ $ 5,030 $ (107) $ (6,814) $ 23,514
========== ========== ========== ==========
(1)Direct operating expense represents costs incurred to operate and maintain
wells and related equipment and facilities. These costs include, among other
things, repairs and maintenance, labor, materials, supplies, property taxes,
insurance, severance taxes and transportation costs. General operating
expense represents all overhead expenses directly related to oil and gas
producing activities.
(2)"DD&A" represents depreciation, depletion and amortization.
(3)Income tax expense (benefit) is calculated by applying the applicable tax
rate to operating profit for that country and, in the U.S., also providing
the benefit of any Internal Revenue Code Section 29 Tax Credits.
60
RESERVE QUANTITY INFORMATION - THOUSAND EQUIVALENT BARRELS OF OIL (MBOE)
===============================================================================
United Cote
States Canada d'Ivoire Egypt Indonesia Russia Total
--------- --------- --------- --------- --------- --------- ---------
Proved reserves:
January 1, 1996 ................... 153,794 45,816 6,521 8,151 13,300 15,570 243,152
Revisions of previous estimates ... 4,021 (2,713) (900) 386 (518) 651 927
Extensions and discoveries ........ 12,769 5,261 263 1,798 -- 1,234 21,325
Purchases of reserves in place .... 6,217 288 -- 16,935 -- -- 23,440
Sales of reserves in place ........ (20) (2,075) -- -- -- -- (2,095)
Production ........................ (20,934) (3,895) (752) (1,305) (789) (1,117) (28,792)
--------- --------- --------- --------- --------- --------- ---------
December 31, 1996(1) .............. 155,847 42,682 5,132 25,965 11,993 16,338 257,957
========= ========= ========= ========= ========= ========= =========
January 1, 1995 ................... 158,848 48,714 5,282 3,520 14,397 13,157 243,918
Revisions of previous estimates ... 3,515 363 118 4,656 (396) 1,497 9,753
Extensions and discoveries ........ 11,242 1,054 1,416 -- -- 1,978 15,690
Purchases of reserves in place .... 1,254 323 -- -- -- -- 1,577
Sales of reserves in place ........ (748) (563) -- -- -- -- (1,311)
Production ........................ (20,317) (4,075) (295) (25) (701) (1,062) (26,475)
--------- --------- --------- --------- --------- --------- ---------
December 31, 1995(1) .............. 153,794 45,816 6,521 8,151 13,300 15,570 243,152
========= ========= ========= ========= ========= ========= =========
January 1, 1994 ................... 179,437 -- -- -- 14,289 7,297 201,023
Revisions of previous estimates ... (10,225) 760 -- -- 901 2,109 (6,455)
Extensions and discoveries ........ 11,198 5,580 5,282 3,520 -- 4,593 30,173
Purchases of reserves in place .... 1,623 46,554 -- -- -- -- 48,177
Sales of reserves in place ........ (1,734) (460) -- -- -- -- (2,194)
Production ........................ (21,451) (3,720) -- -- (793) (842) (26,806)
--------- --------- --------- --------- --------- --------- ---------
December 31, 1994 ................. 158,848 48,714 5,282 3,520 14,397 13,157 243,918
========= ========= ========= ========= ========= ========= =========
Proved developed reserves:
December 31, 1996 ................. 127,871 37,150 3,092 14,502 9,528 10,806 202,949
December 31, 1995 ................. 122,918 40,787 3,623 265 10,652 9,176 187,421
December 31, 1994 ................. 125,520 44,094 -- -- 11,707 8,866 190,187
(1)At December 31, 1996 and 1995, includes approximately 14,072 MBOE and 14,733
MBOE, respectively, of oil equivalents dedicated to the monetary production
payment (see Note 4).
The reserve volumes presented are estimates only and should not be construed
as being exact quantities. These reserves may or may not be recovered and may
increase or decrease as a result of future operations of the Company and changes
in economic conditions.
61
RESERVE QUANTITY INFORMATION - OIL (MBBL)
===============================================================================
United Cote
States Canada d'Ivoire Egypt Indonesia Russia Total
--------- --------- --------- --------- --------- --------- ---------
Proved reserves:
January 1, 1996 ................... 20,163 3,667 3,010 7,918 1,153 15,570 51,481
Revisions of previous estimates ... (800) (47) (1,038) 384 23 651 (827)
Extensions and discoveries ........ 1,656 916 64 1,792 -- 1,234 5,662
Purchases of reserves in place .... 429 21 -- 16,935 -- -- 17,385
Sales of reserves in place ........ (2) (471) -- -- -- -- (473)
Production ........................ (1,561) (361) (511) (1,305) (51) (1,117) (4,906)
--------- --------- --------- --------- --------- --------- ---------
December 31, 1996(1) .............. 19,885 3,725 1,525 25,724 1,125 16,338 68,322
========= ========= ========= ========= ========= ========= =========
January 1, 1995 ................... 15,481 4,051 2,210 3,520 1,066 13,157 39,485
Revisions of previous estimates ... 4,000 (164) 72 4,423 132 1,497 9,960
Extensions and discoveries ........ 1,382 258 989 -- -- 1,978 4,607
Purchases of reserves in place .... 781 74 -- -- -- -- 855
Sales of reserves in place ........ (78) (153) -- -- -- -- (231)
Production ........................ (1,403) (399) (261) (25) (45) (1,062) (3,195)
--------- --------- --------- --------- --------- --------- ---------
December 31, 1995(1) .............. 20,163 3,667 3,010 7,918 1,153 15,570 51,481
========= ========= ========= ========= ========= ========= =========
January 1, 1994 ................... 16,249 -- -- -- 1,005 7,297 24,551
Revisions of previous estimates ... (210) 685 -- -- 108 2,109 2,692
Extensions and discoveries ........ 1,123 878 2,210 3,520 -- 4,593 12,324
Purchases of reserves in place .... 82 2,923 -- -- -- -- 3,005
Sales of reserves in place ........ (113) (8) -- -- -- -- (121)
Production ........................ (1,650) (427) -- -- (47) (842) (2,966)
--------- --------- --------- --------- --------- --------- ---------
December 31, 1994 ................. 15,481 4,051 2,210 3,520 1,066 13,157 39,485
========= ========= ========= ========= ========= ========= =========
Proved developed reserves:
December 31, 1996 ................. 12,855 2,913 1,035 14,336 936 10,806 42,881
December 31, 1995 ................. 11,205 3,196 1,720 265 1,022 9,176 26,584
December 31, 1994 ................. 8,967 3,587 -- -- 870 8,866 22,290
(1) At December 31, 1996 and 1995, includes approximately 2,248 Mbbl and 2,281
Mbbl, respectively, of oil dedicated to the monetary production payment (see
Note 4).
62
RESERVE QUANTITY INFORMATION - GAS (MMCF)
===============================================================================
United Cote
States Canada d'Ivoire Egypt Indonesia Total
---------- ---------- ---------- ---------- ---------- ----------
Proved reserves:
January 1, 1996 ................... 801,797 252,892 21,066 1,399 72,892 1,150,046
Revisions of previous estimates ... 28,925 (15,994) 828 13 (3,246) 10,526
Extensions and discoveries ........ 66,678 26,071 1,195 35 -- 93,979
Purchases of reserves in place .... 34,729 1,603 -- -- -- 36,332
Sales of reserves in place ........ (110) (9,625) -- -- -- (9,735)
Production ........................ (116,238) (21,203) (1,445) -- (4,429) (143,315)
---------- ---------- ---------- ---------- ---------- ----------
December 31, 1996(1) .............. 815,781 233,744 21,644 1,447 65,217 1,137,833
========== ========== ========== ========== ========== ==========
January 1, 1995 ................... 860,209 267,980 18,432 -- 79,990 1,226,611
Revisions of previous estimates ... (2,908) 3,159 278 1,399 (3,165) (1,237)
Extensions and discoveries ........ 59,157 4,773 -- -- -- 63,930
Purchases of reserves in place .... 2,840 1,494 2,559 -- -- 6,893
Sales of reserves in place ........ (4,019) (2,457) -- -- -- (6,476)
Production ........................ (113,482) (22,057) (203) -- (3,933) (139,675)
---------- ---------- ---------- ---------- ---------- ----------
December 31, 1995(1) .............. 801,797 252,892 21,066 1,399 72,892 1,150,046
========== ========== ========== ========== ========== ==========
January 1, 1994 ................... 979,128 -- -- -- 79,706 1,058,834
Revisions of previous estimates ... (60,087) 449 -- -- 4,757 (54,881)
Extensions and discoveries ........ 60,451 28,212 18,432 -- -- 107,095
Purchases of reserves in place .... 9,247 261,785 -- -- -- 271,032
Sales of reserves in place ........ (9,726) (2,711) -- -- -- (12,437)
Production ........................ (118,804) (19,755) -- -- (4,473) (143,032)
---------- ---------- ---------- ---------- ---------- ----------
December 31, 1994 ................. 860,209 267,980 18,432 -- 79,990 1,226,611
========== ========== ========== ========== ========== ==========
Proved developed reserves:
December 31, 1996 ................. 690,095 205,422 12,344 993 51,554 960,408
December 31, 1995 ................. 670,277 225,544 11,415 -- 57,777 965,013
December 31, 1994 ................. 699,317 243,042 -- -- 65,021 1,007,380
(1)At December 31, 1996 and 1995, includes approximately 70,914 MMcf and 74,713
MMcf, respectively, of gas dedicated to the monetary production payment (see
Note 4).
The Company's standardized measure of discounted future net cash flows as of
December 31, 1996 and 1995 and changes therein for each of the years 1996, 1995
and 1994 are provided based on the present value of future net revenues from
proved oil and gas reserves estimated by independent petroleum engineers in
accordance with guidelines established by the Securities and Exchange
Commission. These estimates were computed by applying appropriate year-end
prices for oil and gas to estimated future production of proved oil and gas
reserves over the economic lives of the reserves and assuming continuation of
existing economic conditions. Year-end 1996 calculations were made using prices
of $3.27 per Mcf and $20.99 per Bbl for gas and oil, respectively. The Company's
average realized prices for the year ended December 31, 1996 were $2.07 per Mcf
and $18.50 per Bbl for gas and oil, respectively. Because the disclosure
requirements are standardized, significant changes can occur in these estimates
based upon oil and gas prices in effect at year-end. The following estimates
should not be viewed as an estimate of fair market value. Income taxes are
computed by applying the statutory income tax rate in the jurisdiction to the
net cash inflows relating to proved oil and gas reserves less the tax bases of
the properties involved and giving effect to appropriate net operating loss
carryforwards, tax credits and allowances relating to such properties.
63
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (AMOUNTS IN THOUSANDS)
===============================================================================
United Cote
States Canada d'Ivoire Egypt
----------- ----------- ----------- -----------
December 31, 1996:
Future cash inflows ......................... $ 3,489,097 $ 481,159 $ 80,526 $ 604,613
Future development costs .................... (169,240) (20,487) (15,529) (115,639)
Future production costs ..................... (712,881) (129,313) (17,700) (122,697)
----------- ----------- ----------- -----------
Future net cash flows before income taxes ... 2,606,976 331,359 47,297 366,277
10% annual discount ......................... (1,086,947) (153,161) (11,121) (114,772)
----------- ----------- ----------- -----------
Discounted future net cash flows
before income taxes ....................... 1,520,029 178,198 36,176 251,505
Discounted income taxes ..................... (383,032) (63,079) (5,072) (75,306)
----------- ----------- ----------- -----------
Standardized measure of discounted future
net cash flows ........................... $ 1,136,997 $ 115,119 $ 31,104 $ 176,199
=========== =========== =========== ===========
December 31, 1995:
Future cash inflows ......................... $ 1,985,934 $ 345,380 $ 103,820 $ 144,528
Future development costs .................... (180,175) (20,297) (16,971) (43,459)
Future production costs ..................... (515,802) (113,917) (18,993) (34,972)
----------- ----------- ----------- -----------
Future net cash flows before income taxes ... 1,289,957 211,166 67,856 66,097
10% annual discount ......................... (522,907) (98,399) (18,973) (21,867)
----------- ----------- ----------- -----------
Discounted future net cash flows
before income taxes ....................... 767,050 112,767 48,883 44,230
Discounted income taxes ..................... (123,479) (33,286) (11,851) (19,181)
----------- ----------- ----------- -----------
Standardized measure of discounted future
net cash flows ........................... $ 643,571 $ 79,481 $ 37,032 $ 25,049
=========== =========== =========== ===========
Indonesia Russia Total
----------- ----------- -----------
December 31, 1996:
Future cash inflows ......................... $ 229,497 $ 266,304 $ 5,151,196
Future development costs .................... -- (30,896) (351,791)
Future production costs ..................... (41,640) (121,137) (1,145,368)
----------- ----------- -----------
Future net cash flows before income taxes ... 187,857 114,271 3,654,037
10% annual discount ......................... (95,995) (54,171) (1,516,167)
----------- ----------- -----------
Discounted future net cash flows
before income taxes ....................... 91,862 60,100 2,137,870
Discounted income taxes ..................... (48,623) (18,236) (593,348)
----------- ----------- -----------
Standardized measure of discounted future
net cash flows ........................... $ 43,239 $ 41,864 $ 1,544,522
=========== =========== ===========
December 31, 1995:
Future cash inflows ......................... $ 179,534 $ 261,880 $ 3,021,076
Future development costs .................... -- (29,422) (290,324)
Future production costs ..................... (36,305) (118,768) (838,757)
----------- ----------- -----------
Future net cash flows before income taxes ... 143,229 113,690 1,891,995
10% annual discount ......................... (71,042) (54,846) (788,034)
----------- ----------- -----------
Discounted future net cash flows
before income taxes ....................... 72,187 58,844 1,103,961
Discounted income taxes ..................... (35,479) (19,334) (242,610)
----------- ----------- -----------
Standardized measure of discounted future
net cash flows ........................... $ 36,708 $ 39,510 $ 861,351
=========== =========== ===========
PRINCIPAL SOURCES OF CHANGE IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS (AMOUNTS IN THOUSANDS)
===============================================================================
Year Ended December 31,
1996 1995 1994
----------- ----------- -----------
Beginning of year ................................................ $ 861,351 $ 728,303 $ 836,850
Revisions of previous quantity estimates less related costs ... 3,825 54,287 (36,088)
Extensions and discoveries less related costs ................. 209,860 163,131 99,909
Purchases of reserves in place ................................ 219,510 11,967 197,301
Sales of reserves in place .................................... (6,593) (5,238) (12,047)
Net changes in prices and production costs .................... 785,928 166,325 (366,431)
Change in development costs during the period ................. 108,763 69,260 100,763
Sales of oil and gas produced, net of lifting costs ........... (299,702) (196,123) (232,285)
Accretion of discount ......................................... 110,396 86,151 103,740
Net change in income taxes .................................... (350,738) (105,655) 66,378
Changes in production, timing and other ....................... (98,078) (111,057) (29,787)
----------- ----------- -----------
683,171 133,048 (108,547)
----------- ----------- -----------
End of year ...................................................... $ 1,544,522 $ 861,351 $ 728,303
=========== =========== ===========
64