e424b5
Filed pursuant to Rule 424(b)(5)
Registration No. 333-164630
Prospectus
Denbury Resources
Inc.
$1,000,000,000
81/4% Senior
Subordinated Notes due 2020
Interest payable
February 15 and August 15
Issue price: 100.0%
We are offering $1,000,000,000 aggregate principal amount of
81/4% Senior
Subordinated Notes due 2020 (the notes). The notes
will bear interest at
81/4%
per year and will mature on February 15, 2020. Interest
will be payable on February 15 and August 15 of each year,
beginning on August 15, 2010.
We may redeem the notes in whole or in part on and after
February 15, 2015 at the redemption price described herein.
In addition, except as noted below, prior to February 15,
2015 we may redeem the notes in whole or in part at a price
equal to 100% of the principal amount thereof plus a make
whole premium and accrued and unpaid interest. We may also
redeem up to 35% of the notes before February 15, 2013,
with the proceeds of certain equity offerings. If we sell all or
substantially all of our assets or experience specific kinds of
changes in control, we must offer to repurchase the notes. There
is no sinking fund for the notes.
The notes are being offered to finance in part our acquisition
of Encore Acquisition Company, or Encore. Upon consummation of
the offering of the notes, we will deposit the net proceeds from
this offering into escrow as described in Description of
the notes Escrow of proceeds; special mandatory
redemption. If the merger with Encore does not occur on or
prior to May 31, 2010, or if the merger agreement is
terminated at any time prior thereto, we will be required to
redeem all of the notes offered hereby at a redemption price
equal to the aggregate issue price of the notes, plus accrued
and unpaid interest.
Approximately $400.0 million of the net proceeds from this
offering will be used to fund a portion of the purchase price
for Encore and the remainder will be used to fund tender offers
or change of control offers for $600.0 million principal
amount of Encore senior subordinated notes. After the merger, to
the extent that fewer than $600.0 million principal amount of
Encore senior subordinated notes are tendered for repurchase by
August 1, 2010, we will be required to redeem an amount of notes
offered hereby equal to such shortfall at a redemption price
equal to the issue price of the notes, plus accrued and unpaid
interest. See Description of the notes Escrow
of proceeds; special mandatory redemption.
The notes are our senior subordinated obligations. The notes
will be unsecured and will rank equally with all of our existing
and future unsecured senior subordinated debt, will be
subordinated to all of our existing and future senior debt and
will rank senior to all of our existing and future subordinated
debt. Our obligations under the notes are guaranteed on a senior
subordinated basis by substantially all of our current and
future domestic subsidiaries.
Investing in the notes involves substantial risk. See
Risk factors beginning on page 22.
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Underwriting discounts
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Proceeds to Denbury
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Price to
public(1)
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and commissions
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Resources
Inc.(1)
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Per note
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100.0%
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2.0%
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98.0%
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Total
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$
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1,000,000,000
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$
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20,000,000
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$
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980,000,000
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(1)
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Plus accrued interest from
February 10, 2010, if any.
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The notes will not be listed on any securities exchange.
Currently there is no public market for the notes.
Delivery of the notes, in book-entry form, will be made on or
about February 10, 2010 through The Depository
Trust Company.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities, or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
Joint book-running
managers
Co-managers
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BNP PARIBAS
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Scotia Capital
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Credit Suisse
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CALYON
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Capital One Southcoast
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BBVA Securities
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Comerica Securities
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ING
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SunTrust Robinson Humphrey
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February 3, 2010
About this
prospectus
This prospectus relates to the offer and sale by us of the
notes. You should rely on the information contained or
incorporated by reference into this prospectus. We have not, and
the underwriters have not, authorized any other person to
provide you with different information. If anyone else provides
you with different or inconsistent information, you should not
rely on it. We and the underwriters are not making an offer to
sell the notes in any jurisdiction where the offer or sale is
not permitted. You should assume that the information contained
in this prospectus and the documents incorporated by reference
are accurate only as of their respective dates. Our business,
results of operations, financial condition and prospects may
have changed since those dates.
Table of
contents
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Page
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1
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22
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29
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30
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33
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34
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36
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55
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109
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115
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117
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117
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118
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Our principal executive office is located at 5100 Tennyson
Parkway, Suite 1200, Plano, Texas 75024 and our telephone
number is
(972) 673-2000.
We also have four primary field offices, located in Jackson,
Mississippi; Laurel, Mississippi; McComb, Mississippi; and
Pearland, Texas.
i
Cautionary
statements concerning forward-looking statements
This document and the documents incorporated by reference herein
include forward-looking statements about Denbury,
Encore and the combined company after the merger of Encore into
Denbury, within the meaning of Section 27A of the
Securities Act of 1933, as amended (which is referred to as the
Securities Act in this prospectus), Section 21E of the
Securities Exchange Act of 1934, as amended (which is referred
to as the Exchange Act in this prospectus), and the Private
Securities Litigation Reform Act of 1995, regarding the
financial position, business strategy, production and reserve
growth, possible or assumed future results of operations, and
other plans and objectives for the future operations of Denbury,
including following the merger, and statements regarding
integration of the businesses of Denbury and Encore and general
economic conditions. See SummaryThe merger and
Risk factors.
The events and circumstances referred to in forward-looking
statements are subject to numerous risks and uncertainties.
Although we believe that in making such statements our
expectations are based on reasonable assumptions, the events and
circumstances referred to may be influenced by factors that
could cause actual outcomes and results to be materially
different from those projected.
Except for its obligations to disclose material information
under United States federal securities laws, Denbury does not
undertake any obligation to release publicly any revision to any
forward-looking statement, to report events or circumstances
after the date of this document or to report the occurrence of
unanticipated events.
Statements that are predictive in nature, that depend upon or
refer to future events or conditions, or that include words such
as will, would, should,
plans, likely, expects,
anticipates, intends,
believes, estimates, thinks,
may and similar expressions, are forward-looking
statements. The following important factors, in addition to
those discussed under Risk factors and elsewhere in
this document, could affect the future results of the energy
industry in general, and Denbury after the merger in particular,
and could cause those results to differ materially from those
expressed in or implied by such forward-looking statements:
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uncertainties inherent in the development and production of and
exploration for oil and natural gas and in estimating reserves;
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unexpected difficulties in integrating the operations of Denbury
and Encore;
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the need to make unexpected future capital expenditures
(including the amount and nature thereof);
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the impact of oil and natural gas price fluctuations;
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the effects of our indebtedness and increases in interest rates
thereon, which could restrict our ability to operate, make us
vulnerable to general adverse economic and industry conditions,
place us at a competitive disadvantage compared to our
competitors that have less debt, and have other adverse
consequences;
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the effects of competition;
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the success of our risk management activities;
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the availability of acquisition or combination opportunities (or
lack thereof);
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the impact of current and future laws and governmental
regulations;
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environmental liabilities that are not covered by an effective
indemnification agreement or insurance; and
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general economic, market or business conditions.
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All written and oral forward-looking statements attributable to
Denbury or persons acting on behalf of Denbury are expressly
qualified in their entirety by such factors. For additional
information with respect to these factors, see Where you
can find more information.
Where you can
find more information
We are subject to the informational requirements of the
Securities Exchange Act of 1934, which requires us to file
annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any
document that we file at the Public Reference Room of the SEC at
100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for further information on the operation of its public reference
room. You may view our reports electronically at the SECs
Internet site at
http://www.sec.gov,
or at our own website at
http://www.denbury.com.
This prospectus constitutes part of a Registration Statement on
Form S-3
filed with the SEC under the Securities Act of 1933. It omits
some of the information contained in the Registration Statement,
and reference is made to the Registration Statement for further
information with respect to us and the securities we are
offering. Any statement contained in this prospectus concerning
the provisions of any document filed as an exhibit to the
Registration Statement or otherwise filed with the SEC is not
necessarily complete, and in each instance reference is made to
the filed document.
The SEC allows us to incorporate by reference the
information we file with it, which means that we can disclose
important information to you by referring you to that
information. Any information referred to in this way is
considered part of this prospectus from the date we file the
document containing it. Any reports filed by us with the SEC
after the date of this prospectus and before the date that the
offering of the securities by means of this prospectus is
terminated will automatically update and, where applicable,
supersede any information contained in this prospectus or
incorporated by reference in this prospectus. We incorporate by
reference (excluding any information furnished pursuant to
Item 2.02 or 7.01 of any report on
Form 8-K)
the documents listed below and any future filings made by us
with the SEC under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until we sell all the securities
covered by this prospectus:
Incorporated
documents
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Annual Report on
Form 10-K
for the year ended December 31, 2008;
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Quarterly Reports on
Form 10-Q
for the quarters ended March 31, 2009, June 30, 2009
and September 30, 2009; and
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Current Reports on
Form 8-K
filed with the SEC on January 7, 2009, February 5,
2009, February 6, 2009, February 17, 2009, May 6,
2009, July 7, 2009, November 2, 2009 (dated
November 1, 2009), November 5, 2009 (dated
October 31, 2009), November 13, 2009, December 3,
2009, December 7, 2009, December 23, 2009,
December 23, 2009, January 6, 2010, February 1,
2010, as amended on February 1, 2010, and February 2,
2010 (attaching as exhibits financial, oil and natural gas
reserves and other information of Encore).
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You may request a copy of these filings at no cost by writing or
telephoning Laurie Burkes, Investor Relations at Denbury
Resources Inc., 5100 Tennyson Pkwy., Suite 1200, Plano,
Texas 75024, phone:
(972) 673-2000.
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Summary
In this prospectus, when we use the term Denbury,
the Company, we, us or
our, we mean Denbury Resources Inc. and its
subsidiaries on a consolidated basis, unless otherwise indicated
or the context requires otherwise. The merger refers
to the merger of Encore with and into the Company. The use of
the phrase the merger and related financing
transactions refers to the merger of Encore with and into
the Company, the other transactions contemplated by the merger
agreement governing the merger (including the issuance of shares
of Denbury common stock), borrowings under our newly committed
credit facility and the issuance of the notes offered hereby.
References to oil and natural gas prices used in this prospectus
mean the NYMEX WTI oil price and the Henry Hub natural gas cash
price per MMbtu, unless otherwise indicated. Oil and natural gas
terms used in this prospectus are defined in the
Glossary section.
Denbury
Denbury is a Delaware corporation engaged in the acquisition,
development, operation and exploration of oil and natural gas
properties in the Gulf Coast region of the United States,
primarily in Mississippi, Louisiana, Texas and Alabama. We are
the largest oil and natural gas producer in Mississippi, and we
own the largest reserves of carbon dioxide
(CO2)
used for tertiary oil recovery east of the Mississippi River.
Our goal is to increase the value of acquired properties through
a combination of exploitation, drilling and proven engineering
extraction processes, with our most significant emphasis
relating to tertiary recovery operations.
Since we acquired our first
CO2
tertiary flood in Mississippi in 1999, we have gradually
increased our emphasis on these types of operations. Our
tertiary operations have grown to the point that, as of
December 31, 2009, approximately 65% of our proved reserves
were proved tertiary oil reserves. As of December 31, 2009,
we had total tertiary-related proved oil reserves of
approximately 134.5 MMBbls. Our production from tertiary
operations has increased from approximately 1,350 Bbls/d in
1999, the then existing production at Little Creek Field at the
time of acquisition, to a preliminary estimated average of
approximately 26,300 Bbls/d during the fourth quarter of
2009. We expect this production to continue to increase for
several years as we expand our tertiary operations to additional
fields that we own. We believe that there are many additional
oil fields in our operating areas that can be acquired and
flooded with
CO2,
providing potential growth opportunities beyond our existing
inventory of oil fields.
Our estimated total proved reserves at December 31, 2009
were 192.9 MMBbls of oil and 88 Bcf of natural gas,
based on the average first-day-of-the-month prices for each
month during 2009 which for NYMEX oil was a price of $61.18 per
barrel adjusted to prices received by field and for natural gas
was a Henry Hub cash price of $3.87 per MMBtu, also adjusted to
prices received by field. On a BOE basis, our proved reserves
were 207.5 MMBOE at December 31, 2009, of which
approximately 93% was oil and approximately 62% was proved
developed.
Strategy
Denburys strategy is focused on the following fundamental
principles:
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remain focused in specific regions where Denbury either has, or
believes it can create, a competitive advantage as a result of
its ownership or use of
CO2
reserves, oil fields and
CO2
infrastructure;
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acquire properties where management believes additional value
can be created through tertiary recovery operations and a
combination of other exploitation, development, exploration and
marketing techniques;
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acquire properties that give Denbury a majority working interest
and operational control or where management believes Denbury can
ultimately obtain them;
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maximize the value of company properties by increasing
production and reserves while controlling costs; and
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maintain a highly competitive team of experienced and
incentivized personnel.
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The
merger
On October 31, 2009, we entered into a merger agreement
with Encore, pursuant to which Encore will merge with and into
Denbury in a transaction valued at approximately
$4.5 billion at that time. As a result of the merger,
Encore will cease to exist and Denbury will continue as a public
company.
The acquisition of Encore by Denbury positions the combined
company as one of the largest crude oil-focused, independent
North American exploration and production companies, with oil
constituting approximately 79% of its combined proved reserves
and with future growth predominantly in oil. The merger will
nearly double (prior to the Conroe purchase discussed below)
Denburys inventory of oil reserves potentially recoverable
with
CO2
tertiary operations. The acquisition also creates one of the
largest
CO2
enhanced oil recovery (EOR) platforms in both the
Gulf Coast and Rocky Mountain regions, complemented by
Denburys ownership and control of the Jackson Dome
CO2
source in Mississippi and
CO2
supply contracts with potential anthropogenic sources of
CO2
in the Gulf Coast, Midwest and Rockies. Denbury expects the
combined companys size and scale, access to capital and
geographic presence to facilitate larger
CO2
projects, additional property acquisitions and opportunities to
partner with
CO2
emitters, in both the Gulf Coast and Rocky Mountain regions.
We expect to finance the cash portion of the Encore acquisition
(approximately $890 million), related costs and repayment
of certain Encore debt with a combination of the net proceeds
from this offering and borrowings under a new $1.6 billion
senior secured revolving credit facility that we expect to enter
into at the time of the merger (the newly committed credit
facility). See The transactionsFinancing
and Use of proceeds.
On or about the date of the consummation of this offering, we
intend to offer to purchase, at a price of 101.25% of principal
amount, any and all of three of the four series of Encores
outstanding senior subordinated notes: $150 million of
7.25% Senior Subordinated Notes due 2017, $300 million of
6.0% Senior Subordinated Notes due 2015 and $150 million of
6.25% Senior Subordinated Notes due 2014.
Under the terms of Encores outstanding senior subordinated
notes and upon consummation of the merger, we will be required
to make change of control offers to repurchase all four series
of Encores outstanding senior subordinated notes, to the
extent not tendered in the tender offers, at a price of 101% of
principal amount.
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Encore
Encore is a Delaware corporation engaged in the acquisition and
development of oil and natural gas reserves from onshore fields
in the United States. Since 1998, Encore has acquired producing
properties with proven reserves and leasehold acreage and grown
the production and proven reserves by drilling, exploring,
reengineering or expanding existing waterflood projects and
applying tertiary recovery techniques. Encores properties
and its oil and natural gas reserves are located in four core
areas:
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the Cedar Creek Anticline, or CCA, in the Williston Basin in
Montana and North Dakota;
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the Permian Basin in west Texas and southeastern New Mexico;
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the Rockies, which includes non-CCA assets in the Williston, Big
Horn and Powder River Basins in Wyoming, Montana and North
Dakota and the Paradox Basin in southeastern Utah; and
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the Mid-Continent region, which includes the Arkoma and Anadarko
Basins in Oklahoma, the North Louisiana Salt Basin and the East
Texas Basin.
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Encores total proved reserves at December 31, 2009
were 147.1 MMBbls of oil and 439.1 Bcf of natural gas,
based on the average first-day-of-the-month prices for each
month during 2009, which reflect an oil price of $61.18 per
barrel and a natural gas price of $3.83 per MMBtu. On a BOE
basis, Encores proved reserves were 220.3 MMBOE at
December 31, 2009, of which approximately 67% was oil and
approximately 80% was proved developed.
Rationale for
the merger
We believe that merging Encore into Denbury advances our
strategy, as described below:
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Encore owns legacy oil assets in Montana, North Dakota and
Wyoming with over 6 billion barrels of original oil in
place, assets that are distinguished by their long reserve life
and low decline rates and that have significant potential for
recovery of crude oil through
CO2
EOR.
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The merger will create one of the largest crude oil focused
independent exploration and production companies in North
America. The proved oil and gas reserves of the combined company
are expected to be approximately 79% oil reserves, an advantage
in light of the better profit margin for oil as reflected in
both the short-term and long-term marketplace for oil versus
natural gas.
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The merger will expand Denburys EOR platform, which is
already one of the countrys largest, by adding another
core area of focus, the Rocky Mountain region. Both
Denburys Gulf Coast core EOR area and the Rocky Mountain
region have a significant number of oil fields that are future
acquisition candidates for
CO2
flooding, providing multiple future growth opportunities for a
company of Denburys post-merger scale and geographic
presence.
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The merger will nearly double Denburys potential oil
reserves (prior to the Conroe purchase discussed below)
recoverable through EOR. Denbury expects its significant
expertise in EOR in the Gulf Coast to be directly applicable to
Encores Rocky Mountain oilfield assets.
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Encores Bakken oil properties and Haynesville gas
properties both provide reserves and production potential from
shale formations, as Encore owns over 300,000 acres in the
Bakken area (one of the largest positions in the field) and over
19,000 acres in the Haynesville area of north Louisiana.
Denbury anticipates that these shale assets will provide
short-term
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production growth and cash flow while longer-term EOR assets are
developed, and will provide potentially significant incremental
reserve growth.
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Denbury anticipates that EOR production from Encore properties
will provide production growth beginning in 2015, the time at
which Denburys current Gulf Coast EOR production is
presently predicted to peak.
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The merger will establish a leading North American
CO2
EOR company at a critical juncture in the environmental policy
shift regarding carbon capture and storage. Denbury anticipates
that the merger will enhance Denburys position as a buyer
of choice of mature oil properties that can benefit from EOR,
and a leading partner for
CO2
emitters in offsetting their carbon footprints.
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Denbury anticipates that the increased size, scale and
diversification of the combined company will allow it to
ultimately reduce its cost of capital and its operating costs
per equivalent barrel. Additionally, Denbury anticipates that it
will be in a position to undertake larger
CO2
projects because of the combined companys larger size.
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Denbury expects the combined company reserves and production to
double.
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Denbury expects the anticipated capital structure of the company
after the merger will provide significant liquidity and an
opportunity to focus capital deployment on those projects with
the optimal return opportunities.
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As part of the merger, Denbury will acquire the general partner
of Encore Energy Partners LP (ENP) and an
approximate 46% limited partner interest in that entity. ENP
affords a potential financing vehicle for the combined company
as a master limited partnership designed to provide a reduced
cost of capital for purchase of assets from the large inventory
of properties that will be owned by the combined company.
Dropdowns of acquired assets to ENP may provide Denbury an
attractive way to reduce its debt incurred as part of the
merger, to the extent ENP sells additional units to the public
instead of purchasing assets by incurring incremental debt.
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The diversified nature of Encores oil and natural gas
assets, many of which are located in areas generally highly
regarded in the industry, should enhance Denburys ability
to sell a portion of the acquired assets to third parties in
order to reduce the debt incurred to finance the merger, while
allowing Denbury to retain acquired assets that it judges to be
core to its strategy.
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Denbury anticipates that combining the companies will produce
significant synergies, leading to reduced costs in the corporate
general and administrative area (including accounting fees,
legal fees and executive management team costs) and in the
operational area (including engineering costs and discounts for
purchasing goods and services on a larger scale).
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Integration of the companies should be facilitated by the two
companies being headquartered within the same greater
metropolitan area.
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Recent
developments
Proposed
Genesis sale
On December 17, 2009, we and one of our subsidiaries
entered into a definitive agreement to sell all of the
subsidiarys Class A membership interests in Genesis
Energy, LLC, the general
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partner of Genesis Energy, L.P., or Genesis, to an affiliate of
Quintana Capital Group L.P. for net proceeds of approximately
(1) $100 million less (2) adjustments currently
estimated to be approximately $18 million (including those
related to Genesis management incentive compensation and other
selling costs), which upon closing will give the buyer control
of Genesis general partner. The sale of the general
partner does not include the sale of the approximately 10% of
the outstanding common units of Genesis we hold. The agreement
contains termination rights for both parties, including such
rights based on the failure to close the transaction by
February 28, 2010, and is subject to certain closing
conditions.
Conroe
purchase
On December 18, 2009, we purchased a 95% interest in the
Conroe Field, a significant potential tertiary flood north of
Houston, Texas, for approximately $256.4 million in cash
plus 11,620,000 shares of Denbury common stock. As part of
the transaction, we agreed to provide the sellers with resale
registration rights covering those shares. However, the sellers
may not sell any of these shares until the earlier of the
closing of the Encore merger, its termination or, under certain
circumstances, June 28, 2010. We have estimated that the
purchased interests have significant estimated net reserve
potential from
CO2
tertiary recovery. We have also preliminarily estimated that the
acquired Conroe Field interests had approximately 20 MMBOE
of proved conventional reserves as of December 1, 2009,
based on NYMEX oil futures prices near that time, nearly all of
which are proved developed. The Conroe Field assets are
currently producing around 2,500 BOE/d net to our acquired
interests. We will need to build a pipeline to transport
CO2
to this field, preliminarily estimated to cover approximately
80 miles, as an extension of Denburys Green pipeline.
Based on our preliminary estimates, we will spend an additional
$750 million to $1.0 billion, including the cost of
the
CO2
pipeline, to develop the Conroe Field as a tertiary flood.
Barnett
sale
On December 30, 2009, we sold our remaining 40% interest in
our Barnett Shale natural gas assets for $210 million in
cash to the privately held company that had purchased the 60%
interest in our Barnett Shale natural gas assets in mid-2009.
Production attributable to the 40% interest in the Barnett Shale
natural gas assets sold averaged approximately 4,596 BOE/d
during the third quarter of 2009.
Fourth quarter
production
Based on the preliminary unaudited data, our estimated average
daily production rate for our tertiary oil production during the
fourth quarter of 2009 is approximately 26,300 Bbls/d. Our
preliminarily estimated fourth quarter total production is
approximately 44,940 BOE/d, resulting in an average annual
production rate of approximately 48,280 BOE/d.
Encores estimated fourth quarter production averaged
45,143 BOE/d, consisting of 27,913 Bbls/d and
103,382 Mcf of natural gas per day.
5
The
offering
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Issuer |
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Denbury Resources Inc. |
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Notes offered |
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$1,000,000,000 aggregate principal amount of
81/4% Senior
Subordinated Notes due 2020. |
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Maturity |
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The notes will mature on February 15, 2020. |
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Interest |
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Interest on the notes will accrue at a rate of
81/4%
per annum, payable semi-annually in arrears on February 15
and August 15 of each year, commencing August 15, 2010. |
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Optional redemption |
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Except as set forth below, we cannot redeem the notes before
February 15, 2015. On and after February 15, 2015, we
can redeem some or all of the notes in cash at the redemption
prices described in this prospectus, plus accrued and unpaid
interest to the date of redemption. Interest will accrue from
February 10, 2010. |
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At any time prior to February 15, 2015, we may redeem all
or a portion of the notes at a price equal to 100% of the
principal amount of the notes to be redeemed plus a make
whole premium and accrued and unpaid interest. In
addition, at any time and from time to time, on and before
February 15, 2013, we may redeem up to 35% of the notes
with the proceeds of certain equity offerings, in each case, at
the redemption prices set forth in this prospectus, plus accrued
and unpaid interest. |
|
Escrow of proceeds; special mandatory redemption |
|
Upon consummation of the offering of the notes, we will deposit
the net proceeds into escrow. |
|
|
|
If the merger with Encore does not occur on or prior to
May 31, 2010, or if the merger agreement is terminated at
any time prior thereto, we will be required to redeem all of the
notes offered hereby, at a redemption price equal to the issue
price of the notes, plus accrued and unpaid interest. After the
merger, to the extent that fewer than $600.0 million principal
amount of Encore senior subordinated notes are tendered for
repurchase by August 1, 2010, we will be required to redeem
an amount of notes offered hereby equal to such shortfall at a
redemption price equal to the issue price of the notes, plus
accrued and unpaid interest. See Description of the
notesEscrow of proceeds; special mandatory
redemption. |
|
Change of control |
|
If a change of control occurs, subject to certain conditions, we
must give holders of the notes an opportunity to sell us the
notes at a purchase price of 101% of the principal amount of the
notes, plus accrued and unpaid interest to the date of the
purchase. See Description of the notesChange of
control. |
|
Guarantees |
|
The payment of the principal, premium and interest on the notes
will be fully and unconditionally guaranteed on a senior
subordinated basis by substantially all of our current and
future domestic subsidiaries, including after the merger, the
Encore subsidiaries. The subsidiary guarantees are subordinated
to all existing and future |
6
|
|
|
|
|
senior indebtedness of our guarantor subsidiaries, including
their guarantees of our obligations under our senior secured
credit facilities. See Description of the
notesGuarantees. |
|
Ranking |
|
The notes are our senior subordinated unsecured obligations. The
notes and the guarantees rank: |
|
|
|
junior to all of our and the guarantors
existing and future senior indebtedness, including our senior
secured credit facilities;
|
|
|
|
equally with any of our and the guarantors
existing and future senior subordinated indebtedness; and
|
|
|
|
senior to any of our and the guarantors
existing and future subordinated indebtedness.
|
|
|
|
The notes will be pari passu with our existing
$951.4 million in aggregate principal amount of senior
subordinated notes and up to $825 million of Encores
senior subordinated notes (the Existing Notes) if
the Existing Notes are not repurchased, and subordinate to our
bank indebtedness, capital lease obligations for pipelines and
other capital lease obligations, which totaled $1.1 billion
on an as-adjusted basis as of September 30, 2009. See
Description of the notesRanking. See also
Capitalization for an as-adjusted presentation of
the obligations of the combined company. |
|
Covenants |
|
We will issue the notes under an indenture with Wells Fargo
Bank, National Association, as trustee. The indenture governing
the notes will contain covenants that will limit our ability and
certain of our subsidiaries ability to: |
|
|
|
incur additional debt;
|
|
|
|
pay dividends on our capital stock or redeem,
repurchase or retire our capital stock or subordinated debt;
|
|
|
|
make investments;
|
|
|
|
create liens on our assets;
|
|
|
|
create restrictions on the ability of our restricted
subsidiaries to pay dividends or make other payments to us;
|
|
|
|
engage in transactions with our affiliates;
|
|
|
|
transfer or sell assets; and
|
|
|
|
consolidate, merge or transfer all or substantially
all of our assets and the assets of our subsidiaries.
|
|
|
|
These covenants are subject to important exceptions and
qualifications, which are described under the caption
Description of the notesCertain covenants. |
|
Use of proceeds |
|
We estimate that the net proceeds from the offering, after
deducting underwriters discounts and commissions and
before deducting other estimated offering expenses payable by
us, will be approximately $980.0 million. We will deposit
the net proceeds of this offering |
7
|
|
|
|
|
into escrow. Approximately $400.0 million of the net
proceeds from this offering will be used to fund a portion of
the purchase price for Encore and the remainder will be used to
fund tender offers or change of control offers for
$600.0 million principal amount of Encore senior
subordinated notes. After the merger, to the extent that fewer
than $600.0 million principal amount of Encore senior
subordinated notes are tendered for repurchase by August 1,
2010, we will be required to redeem an amount of notes offered
hereby equal to such shortfall at a redemption price equal to
the issue price of the notes, plus accrued and unpaid interest.
See Use of proceeds. |
|
Risk factors |
|
Investing in the notes involves substantial risk. See Risk
factors beginning on page 22 of this prospectus for a
discussion of certain factors that you should consider carefully
before investing in the notes. |
8
Selected
historical consolidated financial data
Denbury
The following table sets forth Denburys selected
consolidated historical financial information that has been
derived from (1) Denburys consolidated financial
statements as of December 31, 2008, 2007 and 2006, and the
years then ended and (2) Denburys consolidated
financial statements as of September 30, 2009 and 2008 and
the nine month periods then ended. This disclosure does not
include the effects of the merger. You should read this
financial information in conjunction with Denburys
consolidated financial statements and notes thereto in
Denburys 2008 Annual Report on
Form 10-K
and Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2009 incorporated by
reference in this document.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
September 30,
|
|
|
Year ended December 31,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006(a)
|
|
|
|
|
Consolidated statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues and other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil, natural gas and related product sales
|
|
$
|
600,942
|
|
|
$
|
1,128,548
|
|
|
$
|
1,347,010
|
|
|
$
|
952,788
|
|
|
$
|
716,557
|
|
CO2
sales and transportation fees
|
|
|
9,708
|
|
|
|
9,705
|
|
|
|
13,858
|
|
|
|
13,630
|
|
|
|
9,376
|
|
Interest income and other
|
|
|
1,948
|
|
|
|
3,525
|
|
|
|
4,834
|
|
|
|
6,642
|
|
|
|
5,603
|
|
|
|
|
|
|
|
Total revenues
|
|
|
612,598
|
|
|
|
1,141,778
|
|
|
|
1,365,702
|
|
|
|
973,060
|
|
|
|
731,536
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
|
241,908
|
|
|
|
228,134
|
|
|
|
307,550
|
|
|
|
230,932
|
|
|
|
167,271
|
|
Production taxes and marketing expenses
|
|
|
24,294
|
|
|
|
50,978
|
|
|
|
55,770
|
|
|
|
43,130
|
|
|
|
31,993
|
|
Transportation expenseGenesis
|
|
|
6,143
|
|
|
|
5,623
|
|
|
|
7,982
|
|
|
|
5,961
|
|
|
|
4,358
|
|
CO2
operating expenses
|
|
|
3,442
|
|
|
|
2,836
|
|
|
|
4,216
|
|
|
|
4,214
|
|
|
|
3,190
|
|
General and administrative
|
|
|
79,828
|
|
|
|
45,821
|
|
|
|
60,374
|
|
|
|
48,972
|
|
|
|
43,014
|
|
Interest, net of amounts
capitalized(b)
|
|
|
36,960
|
|
|
|
23,988
|
|
|
|
32,596
|
|
|
|
30,830
|
|
|
|
23,575
|
|
Depletion, depreciation and amortization
|
|
|
177,145
|
|
|
|
160,896
|
|
|
|
221,792
|
|
|
|
195,900
|
|
|
|
149,165
|
|
Commodity derivative expense (income)
|
|
|
177,061
|
|
|
|
43,591
|
|
|
|
(200,053
|
)
|
|
|
18,597
|
|
|
|
(19,828
|
)
|
Abandoned acquisition
cost(c)
|
|
|
|
|
|
|
30,426
|
|
|
|
30,601
|
|
|
|
|
|
|
|
|
|
Write-down of oil and natural gas
properties(c)
|
|
|
|
|
|
|
|
|
|
|
226,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
746,781
|
|
|
|
592,293
|
|
|
|
746,828
|
|
|
|
578,536
|
|
|
|
402,738
|
|
|
|
|
|
|
|
Equity in net income (loss) of Genesis
|
|
|
5,802
|
|
|
|
3,796
|
|
|
|
5,354
|
|
|
|
(1,110
|
)
|
|
|
776
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(128,381
|
)
|
|
|
553,281
|
|
|
|
624,228
|
|
|
|
393,414
|
|
|
|
329,574
|
|
Income tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income taxes
|
|
|
18,140
|
|
|
|
44,769
|
|
|
|
40,812
|
|
|
|
30,074
|
|
|
|
19,865
|
|
Deferred income taxes
|
|
|
(67,869
|
)
|
|
|
163,909
|
|
|
|
195,020
|
|
|
|
110,193
|
|
|
|
107,252
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(78,652
|
)
|
|
$
|
344,603
|
|
|
$
|
388,396
|
|
|
$
|
253,147
|
|
|
$
|
202,457
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
September 30,
|
|
|
Year ended December 31,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006(a)
|
|
|
|
|
Consolidated statements of cash flows data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas capital expenditures
|
|
$
|
452,644
|
|
|
$
|
440,133
|
|
|
$
|
622,732
|
|
|
$
|
662,736
|
|
|
$
|
826,327
|
|
CO2
capital expenditures, including pipelines
|
|
|
523,411
|
|
|
|
236,433
|
|
|
|
462,889
|
|
|
|
171,182
|
|
|
|
63,586
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
406,434
|
|
|
|
632,771
|
|
|
|
774,519
|
|
|
|
570,214
|
|
|
|
461,810
|
|
Investing activities
|
|
|
(736,390
|
)
|
|
|
(617,677
|
)
|
|
|
(994,659
|
)
|
|
|
(762,513
|
)
|
|
|
(856,627
|
)
|
Financing activities
|
|
|
334,576
|
|
|
|
100,109
|
|
|
|
177,102
|
|
|
|
198,533
|
|
|
|
283,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
As of December 31,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas properties,
net(d)
|
|
$
|
2,047,798
|
|
|
$
|
2,215,911
|
|
|
$
|
2,140,208
|
|
|
$
|
1,967,541
|
|
|
$
|
1,612,688
|
|
Total assets
|
|
|
3,903,260
|
|
|
|
3,468,532
|
|
|
|
3,589,674
|
|
|
|
2,771,077
|
|
|
|
2,139,837
|
|
Total long-term debt
|
|
|
1,196,061
|
|
|
|
776,991
|
|
|
|
852,767
|
|
|
|
680,330
|
|
|
|
507,786
|
|
Stockholders equity
|
|
|
1,790,659
|
|
|
|
1,787,985
|
|
|
|
1,840,068
|
|
|
|
1,404,378
|
|
|
|
1,106,059
|
|
|
|
|
|
|
(a)
|
|
Effective January 1, 2006,
Denbury adopted new guidance issued by the Financial Accounting
Standard Board (FASB) in the
Compensation-Stock Compensation topic of the FASB
Accounting Standards
Codificationtm
(FASC) which prospectively required Denbury to
record compensation expense for stock incentive awards.
|
|
(b)
|
|
Denburys capitalized interest
was $48.7 million and $19.5 million for the nine
months ended September 30, 2009 and 2008, respectively, and
$29.2 million, $20.4 million and $11.3 million
for the years ended December 31, 2008, 2007 and 2006,
respectively.
|
|
|
|
(c)
|
|
In 2008, Denbury had a full cost
ceiling test write-down of $226.0 million
($140.1 million net of tax) and pre-tax expense of
$30.6 million associated with a cancelled acquisition.
|
|
|
|
(d)
|
|
Excludes net book value of
CO2
related property and equipment.
|
Encore
The following table sets forth selected consolidated historical
financial information that has been derived from
(1) Encores consolidated financial statements as of
December 31, 2008, 2007 and 2006 and the years then ended
and (2) Encores consolidated financial statements as
of September 30, 2009 and 2008 and the nine months then
ended. This selected historical consolidated financial data
does not include the effect of the merger. You should read this
financial information in conjunction with Denburys Current
Report on Form 8-K filed with the SEC on February 2, 2010
containing, among other things, Encores
Managements Discussion and Analysis of Financial
Condition and Results of Operations and financial
statements and the notes thereto in Encores Current Report
on
Form 8-K
filed January 25, 2010 and Encores Quarterly Reports
on
Form 10-Q
for the quarters ended March 31, 2009, June 30, 2009,
and September 30, 2009, which is incorporated by reference in
this document.
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
September
30,(a)(b)
|
|
|
Year ended December
31,(a)(b)
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Consolidated statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
$
|
374,915
|
|
|
$
|
776,001
|
|
|
$
|
897,443
|
|
|
$
|
562,817
|
|
|
$
|
346,974
|
|
Natural gas
|
|
|
86,908
|
|
|
|
182,973
|
|
|
|
227,479
|
|
|
|
150,107
|
|
|
|
146,325
|
|
Marketing(d)
|
|
|
2,008
|
|
|
|
8,740
|
|
|
|
10,496
|
|
|
|
42,021
|
|
|
|
147,563
|
|
|
|
|
|
|
|
Total revenues
|
|
|
463,831
|
|
|
|
967,714
|
|
|
|
1,135,418
|
|
|
|
754,945
|
|
|
|
640,862
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating
|
|
|
122,817
|
|
|
|
130,013
|
|
|
|
175,115
|
|
|
|
143,426
|
|
|
|
98,194
|
|
Production, ad valorem and severance taxes
|
|
|
48,074
|
|
|
|
95,845
|
|
|
|
110,644
|
|
|
|
74,585
|
|
|
|
49,780
|
|
Depletion, depreciation and amortization
|
|
|
217,361
|
|
|
|
159,114
|
|
|
|
228,252
|
|
|
|
183,980
|
|
|
|
113,463
|
|
Impairment of long-lived
assets(e)
|
|
|
|
|
|
|
26,292
|
|
|
|
59,526
|
|
|
|
|
|
|
|
|
|
Exploration
|
|
|
43,801
|
|
|
|
30,462
|
|
|
|
39,207
|
|
|
|
27,726
|
|
|
|
30,519
|
|
General and administrative
|
|
|
40,743
|
|
|
|
36,549
|
|
|
|
48,421
|
|
|
|
39,124
|
|
|
|
23,194
|
|
Marketing(c)
|
|
|
1,612
|
|
|
|
9,362
|
|
|
|
9,570
|
|
|
|
40,549
|
|
|
|
148,571
|
|
Derivative fair value loss
(gain)(f)
|
|
|
(741
|
)
|
|
|
82,093
|
|
|
|
(346,236
|
)
|
|
|
112,483
|
|
|
|
(24,388
|
)
|
Provision for doubtful accounts
|
|
|
7,116
|
|
|
|
4
|
|
|
|
1,984
|
|
|
|
5,816
|
|
|
|
1,970
|
|
Other operating
|
|
|
22,303
|
|
|
|
9,801
|
|
|
|
12,975
|
|
|
|
17,066
|
|
|
|
8,053
|
|
|
|
|
|
|
|
Total expenses
|
|
|
503,086
|
|
|
|
579,535
|
|
|
|
339,458
|
|
|
|
644,755
|
|
|
|
449,356
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(39,255
|
)
|
|
|
388,179
|
|
|
|
795,960
|
|
|
|
110,190
|
|
|
|
191,506
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(57,009
|
)
|
|
|
(54,669
|
)
|
|
|
(73,173
|
)
|
|
|
(88,704
|
)
|
|
|
(45,131
|
)
|
Other
|
|
|
1,811
|
|
|
|
3,090
|
|
|
|
3,898
|
|
|
|
2,667
|
|
|
|
1,429
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(55,198
|
)
|
|
|
(51,579
|
)
|
|
|
(69,275
|
)
|
|
|
(86,037
|
)
|
|
|
(43,702
|
)
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(94,453
|
)
|
|
|
336,600
|
|
|
|
726,685
|
|
|
|
24,153
|
|
|
|
147,804
|
|
Income tax benefit (provision)
|
|
|
25,254
|
|
|
|
(118,595
|
)
|
|
|
(241,621
|
)
|
|
|
(14,476
|
)
|
|
|
(55,406
|
)
|
|
|
|
|
|
|
Consolidated net income (loss)
|
|
|
(69,199
|
)
|
|
|
218,005
|
|
|
|
485,064
|
|
|
|
9,677
|
|
|
|
92,398
|
|
Less: net loss (income) attributable to noncontrolling interest
|
|
|
9,669
|
|
|
|
(16,198
|
)
|
|
|
(54,252
|
)
|
|
|
7,478
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to EAC stockholders
|
|
$
|
(59,530
|
)
|
|
$
|
201,807
|
|
|
$
|
430,812
|
|
|
$
|
17,155
|
|
|
$
|
92,398
|
|
|
|
|
|
|
|
Consolidated statements of cash flows data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
633,153
|
|
|
$
|
528,987
|
|
|
$
|
663,237
|
|
|
$
|
319,707
|
|
|
$
|
297,333
|
|
Investing activities
|
|
|
(710,316
|
)
|
|
|
(536,094
|
)
|
|
|
(728,346
|
)
|
|
|
(929,556
|
)
|
|
|
(397,430
|
)
|
Financing activities
|
|
|
81,807
|
|
|
|
9,230
|
|
|
|
65,444
|
|
|
|
610,790
|
|
|
|
99,206
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30,(a)(b)
|
|
|
As of December
31,(a)(b)
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Consolidated balance sheets data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas properties, net
|
|
$
|
3,266,463
|
|
|
$
|
2,764,699
|
|
|
$
|
2,891,234
|
|
|
$
|
2,420,124
|
|
|
$
|
1,716,682
|
|
Total assets
|
|
|
3,713,814
|
|
|
|
3,286,141
|
|
|
|
3,633,195
|
|
|
|
2,784,561
|
|
|
|
2,006,900
|
|
Long-term debt
|
|
|
1,243,496
|
|
|
|
1,217,604
|
|
|
|
1,319,811
|
|
|
|
1,120,236
|
|
|
|
661,696
|
|
Equity
|
|
|
1,668,765
|
|
|
|
1,239,392
|
|
|
|
1,483,248
|
|
|
|
1,070,689
|
|
|
|
816,865
|
|
|
|
|
|
|
(a)
|
|
Encore acquired certain oil and
natural gas properties and related assets in the Mid-Continent
and east Texas regions in August 2009. Encore acquired certain
oil and natural gas properties and related assets in the Big
Horn and Williston Basins in March 2007 and April 2007,
respectively. The operating results of these acquisitions are
included in Encores Consolidated Statements of Operations
from the date of acquisition forward. Encore disposed of certain
oil and natural gas properties and related assets in the
Mid-Continent region in June 2007. The operating results of this
disposition are included in Encores Consolidated
Statements of Operations through the date of disposition.
|
|
(b)
|
|
Encores historical financial
information has been recast for the adoption of new guidance on
the accounting for noncontrolling interests issued by the FASB
in the Consolidations topic of the FASC and new
guidance on the accounting for the treatment of equity-based
payment transactions in the calculation of earnings per share
issued by the FASB in the Earnings per Share topic
of the FASC on January 1, 2009. The retrospective
application of the new guidance on noncontrolling interests
resulted in the reclassification of approximately
$169.1 million, $122.5 million and $125.2 million
from minority interest in consolidated partnership to
noncontrolling interest at December 31, 2008 and 2007 and
September 30, 2008, respectively. The retrospective
application of the new guidance on earnings per share reduced
Encores basic earnings per common share by $0.14 and $0.03
for the years ended December 31, 2008 and 2006,
respectively, reduced Encores diluted earnings per share
by $0.06, $0.01 and $0.01 for the years ended December 31,
2008, 2007 and 2006, respectively, and reduced Encores
basic and diluted earnings per share by $0.07 and $0.03,
respectively, for the nine months ended September 30, 2008.
The adoption of the revised guidance on earnings per share did
not have an impact on Encores basic earnings per share
during the year ended December 31, 2007. See Notes 2
and 11 to Encores unaudited consolidated financial
statements for the quarter ended September 30, 2009 and
Notes 2 and 11 to Encores audited consolidated
financial statements as of December 31, 2008 and 2007 and
for each year in the three year period ended December 31,
2008 which were attached as exhibits to Denburys
Form 8-K
filed with the SEC on February 2, 2010 for additional
information regarding the adoption of these accounting standards.
|
|
|
|
(c)
|
|
For the nine months ended
September 30, 2009 and 2008, Encore reduced oil and natural
gas revenues for net profits interests owned by others by
$21.5 million and $50.7 million, respectively. For
2008, 2007 and 2006, Encore reduced oil and natural gas revenues
for net profits interests owned by others by $56.5 million,
$32.5 million and $23.4 million, respectively.
|
|
|
|
(d)
|
|
In 2006, Encore began purchasing
third-party oil barrels from a counterparty other than a party
to whom the barrels were sold for aggregation and sale with
Encores own equity production in various markets. These
purchases assisted Encore in marketing Encores production
by decreasing Encores dependence on individual markets.
These activities allowed Encore to aggregate larger volumes,
facilitated Encores efforts to maximize the prices Encore
received for production, provided for a greater allocation of
future pipeline capacity in the event of curtailments, and
enabled Encore to reach other markets. In 2007, Encore
discontinued purchasing oil from third party companies as market
conditions changed and pipeline space was gained. Implementing
this change allowed Encore to focus on the marketing of
Encores own oil production, leveraging newly gained
pipeline space and delivering oil to various newly developed
markets in an effort to maximize the value of the oil at the
wellhead. In March 2007, ENP acquired a natural gas pipeline as
part of the Big Horn Basin asset acquisition. Natural gas
volumes are purchased from numerous gas producers at the inlet
to the pipeline and resold downstream to various local and
off-system markets.
|
|
(e)
|
|
During 2008, circumstances
indicated that the carrying amounts of certain oil and natural
gas properties, primarily four wells in the Tuscaloosa Marine
Shale, may not be recoverable. Encore compared the assets
carrying amounts to the undiscounted expected future net cash
flows, which indicated a need for an impairment charge. Encore
then compared the net carrying amounts of the impaired assets to
their estimated fair value, which resulted in a pretax
write-down of the value of proved oil and natural gas properties
of $59.5 million. Fair value was determined using estimates
of future production volumes and estimates of future prices
Encore might receive for these volumes, discounted to a present
value.
|
|
|
|
(f)
|
|
During July 2006, Encore elected to
discontinue hedge accounting prospectively for all of
Encores commodity derivative contracts, which were
previously accounted for as hedges. From that point forward,
mark-to-market
gains or losses on commodity derivative contracts are recorded
in Derivative fair value loss (gain) while in
periods prior to that point, only the ineffective portions of
commodity derivative contracts which were designated as hedges
were recorded in Derivative fair value loss (gain).
|
12
Summary
historical oil and natural gas reserves,
production information and other data
The following tables set forth certain historical information
with respect to Denburys and Encores estimated oil
and natural gas reserves, production and other data as of the
dates indicated.
Estimates of Denburys net proved oil and natural gas
reserves as of December 31, 2009, 2008 and 2007 were
prepared by DeGolyer and MacNaughton, an independent petroleum
engineering firm located in Dallas, Texas. Estimates of
Encores net proved oil and natural gas reserves as of
December 31, 2009, 2008 and 2007 were prepared by
Miller and Lents, Ltd. an independent petroleum engineering
firm located in Houston, Texas.
Estimates of reserves as of year-end 2009 were prepared using an
average price equal to the unweighted arithmetic average of
hydrocarbon prices on the first day of each month within the
12-month
period ended December 31, 2009, in accordance with revised
guidelines of the SEC applicable to reserves estimates as of
year-end 2009. Estimates of reserves as of year-end 2007 and
2008 were prepared using constant prices and costs in accordance
with the guidelines of the SEC based on hydrocarbon prices
received on a
field-by-field
basis as of December 31 of each year. Reserve estimates do not
include any value for probable or possible reserves that may
exist, nor do they include any value for undeveloped acreage.
The reserve estimates represent our net revenue interest in our
properties.
The following information should be read in conjunction with the
information contained in Denburys financial statements and
notes thereto incorporated by reference and Encores
financial statements and notes thereto incorporated by reference
to our
Form 8-K
filed on February 2, 2010.
Denbury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Summary oil and natural gas reserves data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated net proved reserves (at end of year prices):
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (MBbls)
|
|
|
192,879
|
|
|
|
179,126
|
|
|
|
134,978
|
|
Natural gas (MMcf)
|
|
|
87,975
|
|
|
|
427,955
|
|
|
|
358,608
|
|
Oil equivalent (MBOE)
|
|
|
207,542
|
|
|
|
250,452
|
|
|
|
194,746
|
|
Carbon dioxide
(MMcf)(a)
|
|
|
6,302,836
|
|
|
|
5,612,167
|
|
|
|
5,641,054
|
|
Percentage of total MBOE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved producing
|
|
|
51%
|
|
|
|
47%
|
|
|
|
56%
|
|
Proved non-producing
|
|
|
11%
|
|
|
|
11%
|
|
|
|
13%
|
|
Proved undeveloped
|
|
|
38%
|
|
|
|
42%
|
|
|
|
31%
|
|
Representative oil and natural gas
prices(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
OilNYMEX
|
|
$
|
61.18
|
|
|
$
|
44.60
|
|
|
$
|
95.98
|
|
Natural gasHenry Hub
|
|
$
|
3.87
|
|
|
|
5.71
|
|
|
|
6.80
|
|
Present values (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Discounted estimated future net cash flow before income taxes
(PV-10
Value)(c)
|
|
$
|
3,075,459
|
|
|
$
|
1,926,855
|
|
|
$
|
5,385,123
|
|
Standardized measure of discounted future net cash flow after
income
taxes(d)
|
|
|
(e
|
)
|
|
|
1,415,498
|
|
|
|
3,539,617
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Summary operating
data(f):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production (average daily):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (Bbls)
|
|
|
36,819
|
|
|
|
30,859
|
|
|
|
31,436
|
|
|
|
27,925
|
|
|
|
22,936
|
|
Natural gas (Mcf)
|
|
|
75,523
|
|
|
|
89,087
|
|
|
|
89,442
|
|
|
|
97,141
|
|
|
|
83,075
|
|
BOE (6:1)
|
|
|
49,406
|
|
|
|
45,707
|
|
|
|
46,343
|
|
|
|
44,115
|
|
|
|
36,782
|
|
Unit sales price (excluding impact of derivative
settlements):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per Bbl)
|
|
$
|
52.68
|
|
|
$
|
106.37
|
|
|
$
|
92.73
|
|
|
$
|
69.80
|
|
|
$
|
59.87
|
|
Natural gas (per Mcf)
|
|
|
3.46
|
|
|
|
9.39
|
|
|
|
8.56
|
|
|
|
6.81
|
|
|
|
7.10
|
|
Unit sales price (including impact of derivative
settlements):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (per Bbl)
|
|
$
|
67.25
|
|
|
$
|
102.74
|
|
|
$
|
90.04
|
|
|
$
|
68.84
|
|
|
$
|
59.23
|
|
Natural gas (per Mcf)
|
|
|
3.46
|
|
|
|
8.16
|
|
|
|
7.74
|
|
|
|
7.66
|
|
|
|
7.10
|
|
Costs per BOE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating
|
|
$
|
17.94
|
|
|
$
|
18.22
|
|
|
$
|
18.13
|
|
|
$
|
14.34
|
|
|
$
|
12.46
|
|
Production taxes and marketing expenses
|
|
|
2.26
|
|
|
|
4.52
|
|
|
|
3.76
|
|
|
|
3.05
|
|
|
|
2.71
|
|
Depletion, depreciation and amortization
|
|
|
13.13
|
|
|
|
12.85
|
|
|
|
13.08
|
|
|
|
12.17
|
|
|
|
11.11
|
|
General and
administrative(g)
|
|
|
5.92
|
|
|
|
3.66
|
|
|
|
3.56
|
|
|
|
3.04
|
|
|
|
3.20
|
|
Abandoned acquisition cost
|
|
|
|
|
|
|
|
|
|
|
1.80
|
|
|
|
|
|
|
|
|
|
Writedown of oil and natural gas properties
|
|
|
|
|
|
|
|
|
|
|
13.32
|
|
|
|
|
|
|
|
|
|
Costs incurred (in
thousands)(h):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved
|
|
$
|
247,060
|
|
|
$
|
5,094
|
|
|
$
|
32,781
|
|
|
$
|
15,531
|
|
|
$
|
147,655
|
|
Unevaluated
|
|
|
8,626
|
|
|
|
12,439
|
|
|
|
16,129
|
|
|
|
60,079
|
|
|
|
205,506
|
|
Development
|
|
|
249,843
|
|
|
|
421,764
|
|
|
|
575,947
|
|
|
|
553,315
|
|
|
|
443,866
|
|
Exploration
|
|
|
2,606
|
|
|
|
5,037
|
|
|
|
5,710
|
|
|
|
42,726
|
|
|
|
43,564
|
|
|
|
|
|
|
|
Total costs incurred
|
|
$
|
508,135
|
|
|
$
|
444,334
|
|
|
$
|
630,567
|
|
|
$
|
671,651
|
|
|
$
|
840,591
|
|
|
|
|
|
|
(a)
|
|
Based on gross working interest
basis and includes reserves dedicated to volumetric production
payments of 127.0 Bcf, 153.8 Bcf, and 182.3 Bcf
at December 31, 2009, 2008, and 2007, respectively.
|
|
(b)
|
|
The reference prices for 2009 were
based on the average first day of the month prices for each
month during 2009. The reference prices for 2008 and 2007 were
based on each respective year end prices. For all periods
presented, these representative prices were adjusted for
differentials by field to arrive at the appropriate net price
Denbury receives.
|
|
(c)
|
|
PV-10
Value is a non-GAAP measure and is different from the
Standardized Measure in that
PV-10 Value
is a pre-tax number and the Standardized Measure is an after-tax
number. The information used to calculate
PV-10 Value
is derived directly from data determined in accordance with the
FASC Extractive IndustriesOil and Gas topic.
Denbury believes that
PV-10 Value
is a useful supplemental disclosure to the Standardized Measure
because the Standardized Measure can be impacted by a
companys unique tax situation, and it is not practical to
calculate the Standardized Measure on a property by property
basis. Because of this,
PV-10 Value
is a widely used measure within the industry and is commonly
used by securities analysts, banks and credit rating agencies to
evaluate the estimated future net cash flows from proved
reserves on a comparative basis across companies or specific
properties.
PV-10 Value
is commonly used by Denbury and others in the industry to
evaluate properties that are bought and sold and to assess the
potential return on investment in these oil and gas properties.
PV-10 Value
is not a measure of financial or operating performance under
GAAP, nor should it be considered in isolation or as a
substitute for the Standardized Measure. The
PV-10 Value
and the Standardized Measure do not purport to represent the
fair value of the oil and natural gas reserves.
|
|
(d)
|
|
Determined in accordance with the
guidelines of the FASC Extractive IndustriesOil and
Gas topic.
|
|
(e)
|
|
Information not yet available for
year ended December 31, 2009.
|
|
(f)
|
|
In mid-2009, Denbury sold 60% of
its interest in its Barnett Shale natural gas assets. Denbury
sold its remaining 40% of Barnett Shale assets in late December
2009.
|
|
(g)
|
|
The increase in general and
administrative expense during the nine months ended
September 30, 2009 as compared to prior periods is
primarily due to higher employee costs, expense related to a
compensation arrangement with certain members of Genesis Energy
L.P. management and a compensation charge related to retirement
of Denburys CEO and President on June 30, 2009.
|
|
(h)
|
|
During the nine months ended
September 30, 2009 and 2008, Denbury spent
$523.4 million and $236.4 million, respectively, on
capital expenditures relating to
CO2
properties, equipment and pipelines which is not included in
total cost incurred. During 2008, 2007 and 2006, Denbury spent
$462.9 million, $171.2 million and $63.6 million,
respectively, on capital expenditures relating to
CO2
properties, equipment and pipelines which is not included in
total costs incurred.
|
14
Encore
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,(a)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Summary oil and natural gas reserves data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated net proved reserves (at end of period prices):
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (MBbls)
|
|
|
147,094
|
|
|
|
134,452
|
|
|
|
188,587
|
|
Natural gas (MMcf)
|
|
|
439,072
|
|
|
|
307,520
|
|
|
|
256,447
|
|
Oil equivalent (MBOE)
|
|
|
220,273
|
|
|
|
185,705
|
|
|
|
231,328
|
|
Percentage of total MBOE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved producing
|
|
|
78
|
%
|
|
|
77
|
%
|
|
|
66%
|
|
Proved non-producing
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
2%
|
|
Proved undeveloped
|
|
|
20
|
%
|
|
|
20
|
%
|
|
|
32%
|
|
Representative oil and natural gas prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
|
|
$
|
61.18
|
|
|
$
|
44.60
|
|
|
$
|
96.01
|
|
Natural gas
|
|
|
3.83
|
|
|
|
5.62
|
|
|
|
7.47
|
|
Present values (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Discounted estimated future net cash flow before income taxes
(PV-10
Value)(b)
|
|
$
|
2,130,005
|
|
|
$
|
1,399,330
|
|
|
$
|
4,462,452
|
|
Standardized measure of discounted future net cash flows after
income
taxes(c)
|
|
|
(d
|
)
|
|
|
1,219,954
|
|
|
|
3,291,709
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended,
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,(a)
|
|
|
Year Ended December
31,(a)
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Summary operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production (average daily):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (Bbls)
|
|
|
27,281
|
|
|
|
27,174
|
|
|
|
27,459
|
|
|
|
26,152
|
|
|
|
20,096
|
|
Natural gas (Mcf)
|
|
|
89,405
|
|
|
|
69,031
|
|
|
|
72,060
|
|
|
|
65,651
|
|
|
|
64,262
|
|
BOE (6:1)
|
|
|
42,182
|
|
|
|
38,679
|
|
|
|
39,470
|
|
|
|
37,094
|
|
|
|
30,807
|
|
Average realized prices (excluding the impact of derivative
settlements)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil ($/Bbl)
|
|
$
|
50.34
|
|
|
$
|
104.61
|
|
|
$
|
89.58
|
|
|
$
|
63.50
|
|
|
$
|
54.42
|
|
Natural gas ($/Mcf)
|
|
|
3.56
|
|
|
|
9.67
|
|
|
|
8.63
|
|
|
|
6.69
|
|
|
|
6.59
|
|
Average realized prices (including the impact of derivative
settlements)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil ($/Bbl)
|
|
$
|
50.34
|
|
|
$
|
104.23
|
|
|
$
|
89.30
|
|
|
$
|
58.96
|
|
|
$
|
47.30
|
|
Natural gas ($/Mcf)
|
|
|
3.56
|
|
|
|
9.67
|
|
|
|
8.63
|
|
|
|
6.26
|
|
|
|
6.24
|
|
Average costs per BOE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating
|
|
$
|
10.67
|
|
|
$
|
12.27
|
|
|
$
|
12.12
|
|
|
$
|
10.59
|
|
|
$
|
8.73
|
|
Production, ad valorem and severance taxes
|
|
|
4.17
|
|
|
|
9.04
|
|
|
|
7.66
|
|
|
|
5.51
|
|
|
|
4.43
|
|
Depletion, depreciation and amortization
|
|
|
18.88
|
|
|
|
15.01
|
|
|
|
15.80
|
|
|
|
13.59
|
|
|
|
10.09
|
|
Impairment of long-lived
assets(e)
|
|
|
|
|
|
|
2.48
|
|
|
|
4.12
|
|
|
|
|
|
|
|
|
|
Exploration
|
|
|
3.80
|
|
|
|
2.87
|
|
|
|
2.71
|
|
|
|
2.05
|
|
|
|
2.71
|
|
General and administrative
|
|
|
3.54
|
|
|
|
3.45
|
|
|
|
3.35
|
|
|
|
2.89
|
|
|
|
2.06
|
|
Marketing, net of
revenues(f)
|
|
|
(0.03
|
)
|
|
|
0.06
|
|
|
|
(0.06
|
)
|
|
|
(0.11
|
)
|
|
|
0.09
|
|
Cost incurred (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved properties
|
|
$
|
397,974
|
|
|
$
|
29,304
|
|
|
$
|
28,840
|
|
|
$
|
796,239
|
|
|
$
|
5,271
|
|
Unproved properties
|
|
|
6,004
|
|
|
|
95,916
|
|
|
|
128,635
|
|
|
|
52,306
|
|
|
|
24,462
|
|
Development:
|
|
|
95,217
|
|
|
|
250,911
|
|
|
|
362,609
|
|
|
|
270,161
|
|
|
|
253,631
|
|
Exploration:
|
|
|
140,138
|
|
|
|
179,217
|
|
|
|
256,437
|
|
|
|
97,453
|
|
|
|
95,205
|
|
|
|
|
|
|
|
Total costs incurred
|
|
$
|
639,333
|
|
|
$
|
555,348
|
|
|
$
|
776,521
|
|
|
$
|
1,216,159
|
|
|
$
|
378,569
|
|
|
|
|
|
|
(a)
|
|
Encore acquired certain oil and
natural gas properties and related assets in the Mid-Continent
and East Texas regions in August 2009. Encore acquired certain
oil and natural gas properties and related assets in the Big
Horn and Williston Basins in March 2007 and April 2007,
respectively. The operating results of these acquisitions are
included in Encores Consolidated Statements of Operations
from the date of acquisition forward. Encore disposed of certain
oil and natural gas properties and related assets in the
Mid-Continent region in June 2007. The operating results of this
disposition are included in Encores Consolidated
Statements of Operations through the date of disposition.
|
16
|
|
|
(b)
|
|
PV-10
Value is a non-GAAP measure and is different from the
Standardized Measure in that
PV-10 Value
is a pre-tax number and the Standardized Measure is an after-tax
number. The information used to calculate
PV-10 Value
is derived directly from data determined in accordance with the
FASC Extractive IndustriesOil and Gas topic.
Encore believes that
PV-10 Value
is a useful supplemental disclosure to the Standardized Measure
because the Standardized Measure can be impacted by a
companys unique tax situation, and it is not practical to
calculate the Standardized Measure on a property by property
basis. Because of this,
PV-10 Value
is a widely used measure within the industry and is commonly
used by securities analysts, banks and credit rating agencies to
evaluate the estimated future net cash flows from proved
reserves on a comparative basis across companies or specific
properties.
PV-10 Value
is commonly used by Encore and others in the industry to
evaluate properties that are bought and sold and to assess the
potential return on investment in these oil and gas properties.
PV-10 Value
is not a measure of financial or operating performance under
GAAP, nor should it be considered in isolation or as a
substitute for the Standardized Measure. The
PV-10 Value
and the Standardized Measure do not purport to represent the
fair value of the oil and natural gas reserves.
|
|
(c)
|
|
Determined in accordance with the
guidelines of the FASC Extractive IndustriesOil and
Gas topic.
|
|
(d)
|
|
Information not yet available for
year ended December 31, 2009.
|
|
(e)
|
|
During 2008, circumstances
indicated that the carrying amounts of certain oil and natural
gas properties, primarily four wells in the Tuscaloosa Marine
Shale, may not be recoverable. Encore compared the assets
carrying amounts to the undiscounted expected future net cash
flows, which indicated a need for an impairment charge. Encore
then compared the net carrying amounts of the impaired assets to
their estimated fair value, which resulted in a pretax
write-down of the value of proved oil and natural gas properties
of $59.5 million. Fair value was determined using estimates
of future production volumes and estimates of future prices
Encore might receive for these volumes, discounted to a present
value.
|
|
(f)
|
|
In 2006, Encore began purchasing
third-party oil barrels from a counterparty other than a party
to whom the barrels were sold for aggregation and sale with
Encores own equity production in various markets. These
purchases assisted Encore in marketing Encores production
by decreasing Encores dependence on individual markets.
These activities allowed Encore to aggregate larger volumes,
facilitated Encores efforts to maximize the prices Encore
received for production, provided for a greater allocation of
future pipeline capacity in the event of curtailments, and
enabled Encore to reach other markets. In 2007, Encore
discontinued purchasing oil from third party companies as market
conditions changed and pipeline space was gained. Implementing
this change allowed Encore to focus on the marketing of
Encores own oil production, leveraging newly gained
pipeline space and delivering oil to various newly developed
markets in an effort to maximize the value of the oil at the
wellhead. In March 2007, ENP acquired a natural gas pipeline as
part of the Big Horn Basin asset acquisition. Natural gas
volumes are purchased from numerous gas producers at the inlet
to the pipeline and resold downstream to various local and
off-system markets.
|
17
Summary unaudited
pro forma combined financial data
The following summary unaudited pro forma combined financial
data does not include the full unaudited pro forma combined
financial information set forth in the section of this
prospectus captioned Unaudited pro forma combined
financial information. The summary unaudited pro forma
statements of operations data and other financial data for the
year ended December 31, 2008 and the nine-month periods
ended September 30, 2008 and 2009 give effect to
Denburys mid-2009 and December 2009 sales of
Denburys Barnett Shale natural gas assets as if each
occurred on January 1, 2008, and further give effect to the
merger and related financing transaction as if they had occurred
on January 1, 2008. The summary unaudited pro forma
combined consolidated balance sheet data give effect to the sale
of Denburys remaining 40% interest in its Barnett Shale
natural gas assets as if it occurred September 30, 2009 and
further give effect to the merger and related financing
transactions as if they had occurred on September 30, 2009.
The pro forma adjustments are based upon available information
and certain assumptions that we believe are reasonable. The
summary unaudited pro forma combined consolidated financial data
do not purport to represent what our results of operations or
financial position actually would have been if the relevant
transactions had occurred at any date, and such data do not
purport to project our financial position as of any date or our
future results of operations for any future period.
See Unaudited pro forma combined consolidated financial
information for a complete description of the adjustments
and assumptions underlying these summary unaudited pro forma
combined consolidated financial data. The unaudited pro forma
combined consolidated financial data should be read together
with (1) the historical financial statements and related
notes of Denbury and Encore incorporated by reference in this
prospectus and (2) The transactions section
herein and the pro forma combined financial information provided
herein under the section Unaudited pro forma combined
financial information.
18
Unaudited pro
forma combined
statements of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months
|
|
|
|
|
|
|
ended,
|
|
|
Year ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
Statements of operations data:
|
|
|
|
|
|
|
|
|
Revenues and other income
|
|
|
|
|
|
|
|
|
Oil, natural gas and related product sales
|
|
$
|
999,935
|
|
|
$
|
2,237,071
|
|
CO2
sales and transportation fees
|
|
|
9,708
|
|
|
|
13,858
|
|
Interest income and other
|
|
|
5,863
|
|
|
|
19,704
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,015,506
|
|
|
|
2,270,633
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
|
366,578
|
|
|
|
472,775
|
|
Production taxes and marketing expenses
|
|
|
72,651
|
|
|
|
160,582
|
|
Transportation expenseGenesis
|
|
|
6,143
|
|
|
|
7,982
|
|
CO2
operating expenses
|
|
|
3,442
|
|
|
|
4,216
|
|
General and administrative
|
|
|
116,806
|
|
|
|
105,933
|
|
Interest, net of amounts capitalized
|
|
|
137,128
|
|
|
|
154,110
|
|
Depletion, depreciation and amortization
|
|
|
370,145
|
|
|
|
403,909
|
|
Commodity derivative expense
|
|
|
176,320
|
|
|
|
(546,289
|
)
|
Abandoned acquisition cost
|
|
|
|
|
|
|
30,601
|
|
Ceiling test write-down
|
|
|
|
|
|
|
226,000
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
59,526
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,249,213
|
|
|
|
1,079,345
|
|
|
|
|
|
|
|
Equity in net income of Genesis
|
|
|
5,802
|
|
|
|
5,354
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(227,905
|
)
|
|
|
1,196,642
|
|
Income tax provision (benefit)
|
|
|
(77,025
|
)
|
|
|
418,849
|
|
|
|
|
|
|
|
Consolidated income (loss)
|
|
|
(150,880
|
)
|
|
|
777,793
|
|
Income (loss) attributable to noncontrolling interest
|
|
|
(10,776
|
)
|
|
|
50,879
|
|
|
|
|
|
|
|
Net income (loss) attributable to stockholders
|
|
$
|
(140,104
|
)
|
|
$
|
726,914
|
|
|
|
19
Unaudited pro
forma combined
balance sheet as of September 30, 2009
|
|
|
|
|
|
|
|
|
Denbury
|
|
|
|
pro forma
|
|
(in thousands)
|
|
combined
|
|
|
|
|
Assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
218,372
|
|
Other current assets
|
|
|
399,883
|
|
Property and equipment, net
|
|
|
7,600,241
|
|
Goodwill
|
|
|
1,228,168
|
|
Other assets
|
|
|
340,628
|
|
|
|
|
|
|
|
|
$
|
9,787,292
|
|
|
|
|
|
|
Liabilities and equity
|
|
|
|
|
Current liabilities
|
|
$
|
569,479
|
|
Long-term debt
|
|
|
3,501,864
|
(1)
|
Other long-term liabilities
|
|
|
179,899
|
|
Deferred income taxes
|
|
|
1,329,053
|
|
Equity
|
|
|
4,206,997
|
|
|
|
|
|
|
|
|
$
|
9,787,292
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Long-term debt per the unaudited pro forma combined balance
sheet differs from as-adjusted long-term debt presented under
Capitalization, or the Capitalization table. Pro
forma long-term debt was prepared in accordance with SEC rules
related to pro forma presentation and assumes that the
$600 million par value of Encores Old Notes are
neither tendered in the tender offers nor in the change of
control tender offers. Because it would be economically
advantageous to the noteholders to do so, Denbury expects the
holders of all of Encores Old Notes to tender their
shares. As such, the Capitalization table assumes Encores
Old Notes are repurchased by Denbury. As-adjusted long-term debt
per the Capitalization table of $3,533 million exceeds pro
forma long-term debt presented above by $31 million
primarily due to (a) additional borrowings of
$12 million incurred to finance issuance costs on the
additional $600 million borrowings of the notes hereby
offered, (b) additional borrowings of $6 million to
finance the 1% change of control premium on Encores Old
Notes and (c) exclusion in the Capitalization table of
discounts and premiums on long-term debt of $14.7 million. |
20
Summary pro forma
combined oil and
natural gas reserve data
The following tables set forth summary pro forma information
with respect to Denburys and Encores pro forma
combined estimated net proved and proved developed oil and
natural gas reserves as of December 31, 2009. This pro
forma information gives effect to the merger as if it occurred
on December 31, 2009. Future exploration, exploitation and
development expenditures, as well as future commodity prices and
service costs, will affect the reserve volumes attributable to
the acquired properties and the standardized measure of
discounted future net cash flows.
Estimated
quantities of oil and natural gas reserves as of
December 31, 2009
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Denbury
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pro forma
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combined
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Estimated proved reserves:
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Oil (MBbl)
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339,973
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Natural Gas (MMcf)
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527,047
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MBOE
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427,815
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Estimated proved developed reserves:
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Oil (MBbl)
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237,592
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Natural Gas (MMcf)
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391,936
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MBOE
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302,915
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Present value of estimated net cash flow:
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|
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Present value of discounted estimated future net cash flow
before income taxes (PV-10 Value)(in thousands)
|
|
$
|
5,216,496
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|
21
Risk
factors
In this section captioned Risk Factors, when we
use the term Denbury, the Company,
we, us or our, we mean
Denbury Resources Inc. and its subsidiaries on a consolidated
basis including the subsidiaries of Encore following the
consummation of the merger, unless otherwise indicated or the
context requires otherwise. Investing in the notes involves
risks. Before purchasing any notes we offer, you should
carefully consider the risk factors that are incorporated by
reference herein from Item 1.A., captioned Risk
Factors, of our Annual Report on
Form 10-K
for the year ended December 31, 2008 and our Quarterly
Reports on
Form 10-Q
for the quarters ended March 31, 2009, June 30, 2009
and September 30, 2009, and in our
Form 8-K
filed on February 2, 2010 incorporating by reference risk
factors from Encores Annual Report on
Form 10-K
for the year ended December 31, 2009 and Encores
Quarterly Reports on
Form 10-Q
for the quarters ended March 31, 2009, June 30, 2009
and September 30, 2009. There are additional risk factors
related to our indebtedness and notes, as described below.
Risks relating to
the notes
Our level of
indebtedness may adversely affect operations and limit our
growth.
Denbury will be more leveraged after the merger than it has been
historically. Upon closing of the merger and the revolving
credit facility contemplated by the merger agreement, we will
have $1.975 billion of revolving credit facilities.
Borrowings under the newly committed credit facility combined
with Denburys existing debt and the notes offered hereby
are expected to be approximately $3.5 billion of total pro
forma combined long-term debt after the completion of the
merger. This level of indebtedness could result in Denbury
having difficulty accessing capital markets or raising capital
on favorable terms and Denburys financial results could be
negatively affected by its inability to raise capital or because
of the cost of such capital.
Our substantial debt following the merger and the issuance of
the notes could have important consequences for us. For example,
it could:
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increase our vulnerability to general adverse economic and
industry conditions;
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limit our ability to fund future working capital and capital
expenditures, to engage in future acquisitions or development
activities, or to otherwise realize the value of our assets and
opportunities fully because of the need to dedicate a
substantial portion of our cash flow from operations to payments
on our debt or to comply with any restrictive terms of our debt;
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limit our flexibility in planning for, or reacting to, changes
in the industry in which we operate; or
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place us at a competitive disadvantage as compared to our
competitors that have less debt.
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Realization of any of these factors could adversely affect our
financial condition. In addition, although we and Encore both
have hedges in place for 2010 and 2011, these hedges have
varying floors and ceilings and will only partially protect the
combined companys cash flow. A decline in commodity prices
may require that we reduce our planned capital expenditures,
which may have a corresponding negative effect on our
anticipated production growth.
If we are unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments on our
indebtedness or if we otherwise fail to comply with the various
covenants in such indebtedness, including covenants in our
senior secured credit facilities, we
22
would be in default. This default would permit the holders of
such indebtedness to accelerate the maturity of such
indebtedness and could cause defaults under other indebtedness,
including the notes, or result in our bankruptcy. Such defaults,
or any bankruptcy resulting therefrom, could result in a default
on the notes and could delay or preclude payment of principal
of, or interest on, the notes. Our ability to meet our
obligations will depend upon our future performance, which will
be subject to prevailing economic conditions, commodity prices,
and to financial, business and other factors, including factors
beyond our control.
Upon consummation of the merger, we and all of our restricted
subsidiaries must comply with various restrictive covenants
contained in our revolving credit facilities, the indentures
related to our senior subordinated notes and any of our future
debt arrangements. These covenants will, among other things,
limit our ability and the ability of all of our restricted
subsidiaries to:
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incur additional debt or liens;
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pay dividends;
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make payments in respect of or redeem or acquire any debt or
equity issued by us;
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sell assets;
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make loans or investments; and
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acquire or be acquired by other companies.
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Your right to
receive payments on the notes is junior to our existing senior
indebtedness and the existing senior indebtedness of our
subsidiary guarantors.
The indebtedness evidenced by the notes and the guarantees are
our and our subsidiaries senior subordinated obligations.
The payment of the principal of, premium on, if any, and
interest on the notes and the payment of the subsidiary
guarantees are each subordinate in right of payment, as set
forth in the indenture, to the prior payment in full of all
senior indebtedness of Denbury or the senior indebtedness of our
subsidiary guarantors, as the case may be, including the
obligations of Denbury under, and the obligations of our
subsidiary guarantors with respect to, our senior secured credit
facilities. Any future subsidiary guarantee will be similarly
subordinated to senior indebtedness of such subsidiary guarantor.
As of September 30, 2009, on an as-adjusted basis after
giving effect to the merger and related financing transactions,
our senior debt included $844.5 million of credit
facilities indebtedness, $248 million of pipeline capital
lease obligations, approximately $5 million of other
capital lease obligations. See Capitalization. As of
September 30, 2009, on an as-adjusted basis, we would have
had approximately $756 million additional borrowing
capacity under our newly committed credit facility. Any
additional bank borrowings would also be senior indebtedness
when incurred. Although the indenture contains limitations on
the amount of additional indebtedness that we may incur, under
certain circumstances the amount of such indebtedness could be
substantial and, in any case, such indebtedness may be senior
indebtedness. See Description of the notesCertain
covenantsLimitations on indebtedness.
Because the notes are unsecured and because of the subordination
provisions of the notes, in the event of our bankruptcy,
liquidation or dissolution of any subsidiary guarantor, our
assets and the assets of the subsidiary guarantors would be
available to pay obligations under the notes only after all
payments had been made on our and the subsidiary
guarantors senior
23
indebtedness, including under our senior secured credit
facilities. We cannot assure you that sufficient assets would
remain after we make all these payments to make any payments on
the notes, including payments of interest when due. Also,
because of these subordination provisions, you may recover less
ratably than our other creditors in a bankruptcy, liquidation or
dissolution. In addition, all payments on the notes and the
guarantees will be prohibited in the event of a payment default
on senior indebtedness, including borrowings under our senior
secured credit facilities, and may be prohibited for up to
180 days in the event of non-payment defaults on certain of
our senior indebtedness, including our senior secured credit
facilities. See Description of the
notesRanking.
The notes are not
secured by our assets or those of our subsidiary
guarantors.
The notes are our general unsecured obligations and are
effectively subordinated in right of payment to all of our
secured indebtedness. If we become insolvent or are liquidated,
our assets which serve as collateral under our secured
indebtedness would be made available to satisfy our obligations
under any secured debt before any payments are made on the
notes. Our obligations under our senior secured credit
facilities are secured by substantially all of our producing oil
and gas properties.
If we undergo a
change of control, we may not have the ability to raise the
funds necessary to finance the change of control offer required
by the indenture governing the notes, which would violate the
terms of the notes.
Upon the occurrence of a change of control, holders of the notes
will have the right to require us to purchase all or any part of
such holders notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if
any, to the date of purchase. The events that constitute a
change of control under the indenture would constitute a default
under our senior secured credit facilities, which prohibits the
purchase of the notes by us in the event of certain change of
control events, unless, and until, such time as our indebtedness
under the senior secured credit facilities is repaid in full.
There can be no assurance that either we or our subsidiary
guarantors would have sufficient financial resources available
to satisfy all of our or their obligations under the senior
secured credit facilities and these notes in the event of a
change in control. Our failure to purchase the notes as required
under the indenture would result in a default under the
indenture, the indentures governing our Existing Notes and under
the senior secured credit facilities, each of which could have
material adverse consequences for us and the holders of the
notes. See Description of the notesChange of
control.
In addition, you should note that recent case law suggests that,
in the event that incumbent directors are replaced as a result
of a contested election, issuers may nevertheless avoid
triggering a change of control under a clause similar to
clause (2) of the definition of Change of
Control under the caption Description of the
notesChange of control, if the outgoing directors
were to approve the new directors for the purpose of such change
of control clause.
A subsidiary
guarantee could be voided if it constitutes a fraudulent
transfer under U.S. bankruptcy or similar state law, which would
prevent the holders of the notes from relying on that subsidiary
to satisfy claims.
Under U.S. bankruptcy law and comparable provisions of
state fraudulent transfer laws, a guarantee can be voided, or
claims under the guarantee may be subordinated to all other
debts of that guarantor if, among other things, the guarantor,
at the time it incurred the indebtedness evidenced by its
guarantee or, in some states, when payments become due under
24
the guarantee, received less than reasonably equivalent value or
fair consideration for the incurrence of the guarantee and:
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was insolvent or rendered insolvent by reason of such incurrence;
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was engaged in a business or transaction for which the
guarantors remaining assets constituted unreasonably small
capital; or
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intended to incur, or believed that it would incur, debts beyond
its ability to pay those debts as they mature.
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A guarantee may also be voided, without regard to the above
factors, if a court found that the guarantor entered into the
guarantee with the actual intent to hinder, delay or defraud its
creditors.
A court would likely find that a guarantor did not receive
reasonably equivalent value or fair consideration for its
guarantee if the guarantor did not substantially benefit
directly or indirectly from the issuance of the notes. If a
court were to void a guarantee, you would no longer have a claim
against the guarantor. Sufficient funds to repay the notes may
not be available from other sources, including the remaining
guarantors, if any. In addition, the court might direct you to
repay any amounts that you had already received from the
subsidiary guarantor.
The measures of insolvency for purposes of fraudulent transfer
laws vary depending upon the governing law. Generally, a
guarantor would be considered insolvent if:
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the sum of its debts, including contingent liabilities, was
greater than the fair saleable value of all its assets;
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the present fair saleable value of its assets was less than the
amount that would be required to pay its probable liability on
its existing debts, including contingent liabilities, as they
became absolute and mature; or
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it could not pay its debts as they became due.
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Each subsidiary guarantee contains a provision intended to limit
the guarantors liability to the maximum amount that it
could incur without causing the incurrence of obligations under
its subsidiary guarantee to be a fraudulent transfer. This
provision may not be effective to protect the subsidiary
guarantees from being voided under fraudulent transfer law.
You cannot be
sure that there will be an active trading market for the
notes.
We do not intend to list the notes on any national securities
exchange or to seek the admission of the notes for quotation
through the National Association of Securities Dealers Automated
Quotation System. The underwriters intend to make a market for
the notes, but they are not obligated to do so and may cease
their market-making activities at any time. In addition, the
liquidity of the trading market in the notes, and the market
price quoted for the notes, may be adversely affected by changes
in the overall market for high yield securities and by changes
in our financial performance or prospects or in the financial
performance or prospects of companies in our industry generally.
As a result, we cannot assure you that an active trading market
will develop or be maintained for the notes offered hereby. If
an active market does not develop or is not maintained, the
market price and liquidity of the notes may be adversely
affected.
25
We will deposit
the net proceeds from this offering into escrow and will be
required to redeem all of the notes if we do not consummate the
merger, or to redeem some of the notes if we consummate the
merger and certain outstanding Encore notes are not tendered
pursuant to a tender offer or change of control offer.
This offering will be consummated before the closing of the
merger. We will deposit the net proceeds of this offering into
escrow. If the merger does not occur on or prior to May 31,
2010, or if the merger agreement is terminated at any time prior
thereto, then the indenture will require that we redeem all of
the notes at a redemption price equal to 100% of the aggregate
issue price of the notes plus accrued and unpaid interest to,
but not including, the redemption date. In addition, after the
merger, to the extent fewer than $600.0 million principal amount
of Encore senior subordinated notes are tendered, we will be
required to redeem an amount of notes offered hereby equal to
such shortfall at a redemption price equal to the issue price of
the notes, plus accrued and unpaid interest. See
Description of the notesEscrow of proceeds; special
mandatory redemption.
Your decision to invest in these notes is made at the time of
purchase. Changes in our business or financial condition, or the
terms of the merger or the financing thereof, between the
closing of this offering and the closing of the merger will have
no effect on your rights as a purchaser of the notes.
Risks relating to
the merger
If we do not
complete the merger on or prior to May 31, 2010, we will be
required to redeem the notes. We will be required to redeem some
of the notes if we complete the merger and certain outstanding
Encore notes are not tendered pursuant to a tender offer or
change of control offer. If we are required to redeem any notes,
you may not obtain your expected return on the notes.
We may not be able to consummate the merger within the timeframe
specified under Description of the notesEscrow of
proceeds; special mandatory redemption. Our ability to
consummate the merger is subject to various closing conditions,
many of which are beyond our control and we may not be able to
complete the merger. If we are not able to consummate the merger
on or prior to May 31, 2010, or the merger agreement is
terminated at any time prior to that date, we will be required
to redeem all notes at a redemption price equal to 100% of the
aggregate issue price thereof, plus accrued and unpaid interest
from the date of initial issuance to but not including the
special mandatory redemption date. In addition, after the
merger, to the extent fewer than $600.0 million principal amount
of Encore senior subordinated notes are tendered, we will be
required to redeem an amount of notes offered hereby equal to
such shortfall at a redemption price equal to the issue price of
the notes, plus accrued and unpaid interest. If your notes are
redeemed in either such case, you may not obtain your expected
return on the notes and may not be able to reinvest the proceeds
from a special mandatory redemption in an investment that
results in a comparable return. Your decision to invest in the
notes is made at the time of the offering of the notes. Changes
in our business or financial condition, or the terms of the
merger or the financing thereof, between the closing of this
offering and the closing of the merger will have no effect on
your rights as a purchaser of the notes.
26
Denbury and
Encore are parties to pending lawsuits in connection with the
merger.
Three shareholder lawsuits styled as class actions have been
filed against Encore and its board of directors. The lawsuits
are entitled Sanjay Israni, Individually and On Behalf of All
Others Similarly Situated vs. Encore Acquisition Company et al.
(filed November 4, 2009 in the District Court of
Tarrant County, Texas), Teamsters Allied Benefit Funds,
Individually and On Behalf of All Others Similarly Situated vs.
Encore Acquisition Company et al. (filed November 5,
2009 in the Court of Chancery in the State of Delaware) and
Thomas W. Scott, Jr., individually and on behalf of all
others similarly situated v. Encore Acquisition Company et
al. (filed November 6, 2009 in the District Court of
Tarrant County, Texas). The Teamsters and Scott
lawsuits also name Denbury as a defendant. The complaints
generally allege that (1) Encores directors breached
their fiduciary duties in negotiating and approving the merger
and by administering a sale process that failed to maximize
shareholder value and (2) Encore, and, in the case of the
Teamsters and Scott complaints, Denbury aided and
abetted Encores directors in breaching their fiduciary
duties. The Teamsters complaint also alleges that
Encores directors and executives stand to receive
substantial financial benefits if the transaction is consummated
on its current terms.
The plaintiffs in these lawsuits seek, among other things, to
enjoin the merger and to rescind the merger agreement. Encore
and Denbury believe that the lawsuits are without merit and that
they have valid defenses to all claims. Encore and Denbury will
defend this litigation vigorously.
A shareholder suit regarding a compensation matter brought as a
derivative action on behalf of Denbury against Denburys
board of directors, entitled Harbor Police Retirement
System v. Gareth Roberts, et al, in the District Court
of Dallas County, Texas, was amended in January 2010, to
generally allege breach of the Denbury directors fiduciary
duties based upon the further allegation that the directors
approved an unreasonably high purchase price in the merger. The
plaintiff seeks monetary damages and equitable relief. Denbury
believes these allegations are without merit and that its
directors have valid defenses to all claims. Denbury and its
directors intend to defend this litigation vigorously.
Business
uncertainties and contractual restrictions while the merger is
pending may have an adverse effect on Encore or
Denbury.
Uncertainty about the effect of the merger on employees,
suppliers, partners, regulators and customers may have an
adverse effect on Encore. These uncertainties may impair
Encores ability to attract, retain and motivate key
personnel until the merger is consummated and could cause
suppliers, customers and others that deal with Encore to defer
purchases or other decisions concerning Encore or seek to change
existing business relationships with Encore. In addition, the
merger agreement restricts both Denbury and Encore from making
certain acquisitions and taking other specified actions without
the others approval. Because these restrictions could
prevent either party from pursuing attractive business
opportunities that may arise prior to the completion of the
merger, the overall value of the combined company could be
negatively impacted.
27
Risks relating to
the combined company after the merger
We may not
realize the benefits of integrating our companies.
To be successful after the merger, Denbury will need to combine
and integrate our operations and the operations of Encore into
one company. Integration will require substantial management
attention and could detract attention from the
day-to-day
business of the combined company. We could encounter
difficulties in the integration process, such as the need to
revisit assumptions about reserves, future production, revenues,
capital expenditures and operating costs, including synergies,
the loss of key employees or commercial relationships or the
need to address unanticipated liabilities. If we cannot
successfully integrate our business with Encores business,
we may fail to realize the expected benefits of the merger.
The combined
company may be unable to secure sufficient amounts of carbon
dioxide to expand its
CO2
EOR operations into the Rocky Mountain region.
Our long-term growth strategy is focused on our
CO2
tertiary recovery operations. Production of crude oil from the
expansion of our tertiary operations into the Rocky Mountain
region depends on having access to sufficient amounts of
CO2
in this region. The ability to produce this oil and execute this
growth strategy would be hindered if we were unable to obtain
necessary
CO2
volumes in the Rocky Mountain region at a cost that is
economically viable.
The combined
company may experience an impairment of its goodwill.
We expect to recognize a substantial amount of goodwill in
connection with consummation of the merger and the allocation of
the purchase price thereto. We test goodwill for impairment
annually during the fourth quarter, or between annual tests if
an event occurs or circumstances change that may indicate the
fair value of a reporting unit is less than the carrying amount.
The need to test for impairment can be based on several
indicators, including but not limited to a significant reduction
in the price of oil or natural gas, a full cost ceiling
write-down of oil and natural gas properties, unfavorable
revisions to oil and natural gas reserves and significant
changes in the expected timing of production, or changes in the
regulatory environment.
Fair value calculated for the purpose of testing for impairment
of our goodwill is estimated using the expected present value of
future cash flows method and comparative market prices when
appropriate. A significant amount of judgment is involved in
performing these fair value estimates for goodwill since the
results are based on estimated future cash flows and assumptions
related thereto. Significant assumptions include estimates of
future oil and natural gas prices, projections of estimated
quantities of oil and natural gas reserves, estimates of future
rates of production, timing and amount of future development and
operating costs, estimated availability and cost of
CO2,
projected recovery factors of reserves and risk-adjusted
discount rates. We base our fair value estimates on projected
financial information which we believe to be reasonable.
However, actual results may differ from those projections.
28
Ratio of earnings
to fixed charges
The following table sets forth our ratio of earnings to fixed
charges:
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Nine months ended
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September 30,
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Year ended December 31,
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2009(1)
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2008(1)
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2007
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2006
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2005
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2004
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Ratio of earnings to fixed charges
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(2
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)
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9.9x
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7.7x
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9.5x
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12.7x
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7.0x
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(1)
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The pro forma ratio of earnings to
fixed charges is calculated as it relates only to Denbury and
its capital structure. It gives effect to the use of
$600 million of proceeds from the notes offered hereunder
and the higher interest expense assuming Encores
6% Senior Subordinated Notes, 6.25% Senior
Subordinated Notes, and 7.25% Senior Subordinated Notes
(collectively Encores Old Notes) will be
purchased either through tender offers or change of control
offers. The higher interest expense added to fixed charges
represents only incremental interest expense (approximately 2%)
to be incurred under the notes offered hereunder over the
weighted average interest rate of Encores Old Notes. The
pro forma ratio of earnings to fixed charges does not include
any adjustments for Encores historical earnings or fixed
charges, nor does it include any fixed charges associated with
the other $400 million of proceeds from the notes offered
hereunder used to effect the acquisition. Based upon these
assumptions, the ratio of pro forma earnings to fixed charges
for the year ended December 31, 2008 was 8.3x, and pro
forma earnings were inadequate to cover pro forma fixed charges
during the nine months ended September 30, 2009 by
$182.5 million.
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(2)
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Earnings were inadequate to cover
fixed charges for the nine months ended September 30, 2009
by $173.0 million.
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For purposes of computing the ratio of earnings to fixed
charges, earnings are defined as:
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income from continuing operations before income taxes and equity
method earnings of affiliates; plus
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fixed charges, distributed income of equity investees and
amortization of capitalized interest; less capitalized
interest.
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Fixed charges are defined as the sum of the following:
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interest expense (including amounts capitalized);
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amortization of debt discount and issuance cost (expensed and
capitalized); and
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that portion of rental expense which we believe to be
representative of an interest factor.
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29
The merger and
related financing transactions
The
merger
On October 31, 2009, Denbury and Encore agreed to combine
their businesses pursuant to a merger agreement described in
Denburys current report on
Form 8-K
filed with the SEC on November 5, 2009, to which the merger
agreement is attached as Exhibit 2.1. Pursuant to the
merger agreement, Encore will merge with and into Denbury. As a
result of the merger, Encore will cease to exist and Denbury
will continue as a public company. The following description of
the merger agreement does not purport to be complete and is
qualified in its entirety by reference to the full text of the
merger agreement.
Based on the number of shares of Encore common stock outstanding
as of a recent date, and including cash payments to Encore stock
option holders, the transaction value of the merger is
approximately $4.5 billion and the merger consideration will be
approximately $890 million in cash and between 115 and
146 million shares of Denbury common stock, due to the
share exchange ratio in the merger being subject to a collar
calculated with reference to future average prices of Denbury
common stock.
The merger agreement contains customary representations and
warranties by Denbury and Encore made to each other as of
specific dates. The merger agreement also contains customary
covenants and agreements, including with respect to the
operation of Denburys business and Encores business
between signing and closing, restrictions on solicitation of
proposals by Encore with respect to alternative transactions,
public disclosures and other matters.
The merger is subject to a number of closing conditions,
including, among others, the adoption of the merger agreement by
Encores and Denburys stockholders; no pending stop
order or proceeding seeking a stop order relating to our
registration statement on
Form S-4;
the receipt of tax opinions from counsel for each of Denbury and
Encore to the effect that the merger will be treated as a
reorganization under Section 368(a) of the Internal Revenue
Code of 1986, as amended, (the Code), and that each
of Denbury and Encore will be a party to the reorganization
within the meaning of Section 368(b) of the Code;
Denburys receipt of the financing contemplated by the
merger agreement; and other customary conditions, including the
absence of a material adverse effect on Denbury or Encore.
Either party to the merger agreement may choose to complete the
merger even though a condition has not been satisfied if the law
allows Encore and Denbury to do so; however, neither Denbury nor
Encore can give any assurance regarding when or if all of the
conditions to the merger will either be satisfied or waived or
that the merger will occur as intended.
The merger is intended to qualify as a reorganization for
federal income tax purposes.
The merger agreement contains certain termination rights for
Denbury and Encore. On a termination of the merger agreement
under certain circumstances, Encore may be required to pay
Denbury a termination fee of either $60 million or
$120 million, or Denbury may be required to pay Encore a
termination fee of $60 million, $120 million or
$300 million, in each case depending on the circumstances
of the termination. In addition, Encore is obligated to
reimburse Denbury for up to $10 million of its expenses
related to the merger if specified termination events occur.
30
Financing
Denbury received the revolving credit facility and bridge loan
financing commitments described below. The commitments are
subject to a number of conditions, including:
|
|
|
consummation of the merger in accordance with the merger
agreement;
|
|
|
the absence of a material adverse effect (as defined
in the merger agreement) regarding Encore or Denbury;
|
|
|
the lenders not becoming aware of any information or other
matter that in their reasonable judgment is inconsistent in a
material and adverse manner with disclosures prior to the date
of the merger agreement or that in the reasonable opinion of the
administrative agent makes it impossible to complete a
successful syndication of the credit facilities or the sale of
senior subordinated notes;
|
|
|
the absence of certain competing issues of debt securities of
Denbury or Encore;
|
|
|
closing no later than May 31, 2010;
|
|
|
delivery of certain reserve reports and historical and pro forma
financial information;
|
|
|
execution of certain guarantees and creation of first priority
security interests;
|
|
|
the initial availability for borrowing of not less than
(i) $50 million under the ENP facility and
(ii) $400 million under the newly committed credit
facility;
|
|
|
pro forma compliance with certain financial covenants and
requirements;
|
|
|
a 30-day
period for syndication of the credit facilities and for
marketing of senior subordinated notes, and delivery by Denbury
of an offering memorandum for such notes on or prior to
February 15, 2010;
|
|
|
as a condition to the funding of the bridge facility, the
revolving credit facility and the senior subordinated notes
having received ratings from Moodys Investors Service,
Inc. of at least B3 and from Standard & Poors
Ratings Services of at least B minus, in each case with stable
outlook or better; and
|
|
|
other customary financing conditions.
|
Revolving credit
facility
Denbury received a financing commitment, subject to customary
conditions, to underwrite a new senior secured revolving credit
facility. The newly committed credit facility, together with the
proceeds of this notes offering, will be used to fund a portion
of the cash consideration for the merger (inclusive of payments
due to Encore stock option holders), repay amounts outstanding
under Denburys existing $750 million revolving credit
facility, which had approximately $180 million outstanding
as of January 31, 2010, potentially retire and replace up
to $825 million of Encores senior subordinated notes
that are outstanding, which have a change of control put option
at 101% of par value, replace Encores existing revolving
credit facility which had approximately $155 million
outstanding as of January 31, 2010, pay Encores
severance costs, pay transaction fees and expenses and provide
additional liquidity. The aggregate commitment of the senior
secured lenders is $1.6 billion and the term of the newly
committed credit facility is four years. Denbury has been
advised by the co-arrangers of this
31
newly committed credit facility, J.P. Morgan and Bank of
America, N.A., that the syndication phase is complete, and
documentation for this facility is being prepared. Subject to
final documentation and satisfaction of closing conditions,
Denbury anticipates finalizing this facility prior to the
Denbury and Encore stockholder meetings.
Bridge
loan
Denbury also received a financing commitment for a
$1.25 billion unsecured bridge loan facility, which will be
available if and to the extent Denbury does not receive the
proceeds from this notes offering or has not secured alternate
financing prior to the closing of the merger. If not fully
drawn, Denbury may draw on the bridge loan one additional time
within 45 days after the closing of the merger. The bridge
facility, if drawn, will mature initially on the first
anniversary of the closing of the merger, at which time the
maturity of any outstanding loans thereunder will be extended
automatically to the seventh anniversary of the closing of the
merger, except to the extent they have been previously exchanged
by the lenders for exchange notes due on that seventh
anniversary. The amount available under the unsecured bridge
loan facility will be reduced by the proceeds of any debt
issuances, including the notes offered hereby.
32
Use of
proceeds
The net proceeds from the sale of the notes offered hereby,
after deducting underwriters discounts and commissions and
before deducting other offering expenses payable by us, are
estimated to be approximately $980.0 million. Upon
consummation of the offering of the notes, we will deposit the
net proceeds of this offering into escrow as described in
Description of the notes Escrow of proceeds;
special mandatory redemption. If the merger with Encore
does not occur on or prior to May 31, 2010, or if the
merger agreement is terminated at any time prior thereto, we
will use all of the proceeds from this offering, plus cash on
hand, to redeem the notes at a redemption price equal to 100% of
the issue price of the notes, plus accrued and unpaid interest
to, but not including, the special mandatory redemption date.
See Description of the notes Escrow of
proceeds; special mandatory redemption.
Upon the closing of the merger, $400.0 million of the
escrowed proceeds will be released to us to fund a portion of
the purchase price for Encore and the remainder will be used to
fund a tender offer or change of control offer for $600.0
million principal amount of Encore senior subordinated notes.
After the merger, to the extent that fewer than $600.0 million
principal amount of Encore senior subordinated notes are
tendered for repurchase by August 1, 2010, we will use the
amount remaining in escrow and cash on hand to redeem an amount
of notes offered hereby equal to such shortfall at a redemption
price equal to the issue price of the notes, plus accrued and
unpaid interest. See Description of the notes
Escrow of proceeds; special mandatory redemption.
33
Capitalization
The following table sets forth our cash and cash equivalents and
capitalization as of September 30, 2009 on (i) an
actual basis for Denbury, (ii) on an actual basis for
Encore, and (iii) on an as-adjusted basis giving effect to
the merger and related financing transactions as if they
occurred on September 30, 2009. The as-adjusted
presentation included below assumes the Encore 6% Senior
Subordinated Notes, 6.25% Senior Subordinated Notes and 7.25%
Senior Subordinated Notes (collectively Encores Old
Notes) with an aggregate par value of $600.0 million, are
repurchased in full by Denbury pursuant to a tender offer or
change of control offer, which cannot be assured, and assumes
Encores 9.5% Senior Subordinated Notes will not be
repurchased. This table should be read in conjunction with the
Denbury
Form 10-K
for the year ended December 31, 2008, the Denbury
Form 10-Q
for the quarter ended September 30, 2009 and the Denbury
Form 8-K
filed February 1, 2010 to which Encores unaudited
consolidated financial statements and historical consolidated
financial statements for the pertinent periods are attached and
incorporated by reference into this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
(dollars in thousands)
|
|
Denbury Actual
|
|
|
Encore Actual
|
|
|
As-Adjusted
|
|
|
|
|
Cash and cash
equivalents(a)
|
|
$
|
21,689
|
|
|
$
|
6,683
|
|
|
$
|
21,689
|
|
|
|
|
|
|
|
Long-term
debt(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
$
|
4,826
|
|
|
$
|
|
|
|
$
|
4,826
|
|
Denburys existing credit
facility(c)
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
Denburys newly committed credit facility
|
|
|
|
|
|
|
|
|
|
|
844,552
|
|
71/2% Senior
Subordinated Notes due
2013(d)
|
|
|
225,000
|
|
|
|
|
|
|
|
225,000
|
|
71/2% Senior
Subordinated Notes due
2015(e)
|
|
|
300,000
|
|
|
|
|
|
|
|
300,000
|
|
9.75% Senior Subordinated Notes due
2016(f)
|
|
|
426,350
|
|
|
|
|
|
|
|
426,350
|
|
EAC 6.25% Senior Subordinated Notes due
2014(g)
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
EAC 6% Senior Subordinated Notes due
2015(g)(h)
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
EAC 9.5% Senior Subordinated Notes due
2016(i)
|
|
|
|
|
|
|
225,000
|
|
|
|
225,000
|
|
EAC 7.25% Senior Subordinated Notes due
2017(g)(j)
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
81/4% Senior
Subordinated Notes due 2020 offered hereby
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
Pipeline Financings
|
|
|
247,525
|
|
|
|
|
|
|
|
247,525
|
|
EAC revolving credit
facility(k)
|
|
|
|
|
|
|
180,000
|
|
|
|
|
|
ENP revolving credit
facility(l)
|
|
|
|
|
|
|
260,000
|
|
|
|
260,000
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
1,223,701
|
|
|
|
1,265,000
|
|
|
|
3,533,253
|
|
Equity(m)
|
|
|
1,790,659
|
|
|
|
1,668,765
|
|
|
|
4,206,997
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
3,014,360
|
|
|
$
|
2,933,765
|
|
|
$
|
7,740,250
|
|
|
|
|
|
|
(a)
|
|
As of January 31, 2010, our
cash and cash equivalents totaled $73.1 million.
|
|
(b)
|
|
Excludes current portion of capital
lease obligations and pipeline financings totaling
$4.7 million.
|
34
|
|
|
(c)
|
|
As of January 31, 2010,
borrowings under our bank credit facility totaled
$180 million. This credit facility will be terminated once
the merger closes.
|
|
(d)
|
|
Excludes unamortized discount of
$0.7 million.
|
|
(e)
|
|
Excludes unamortized premium of
$0.5 million.
|
|
(f)
|
|
Excludes unamortized discount of
$27.5 million.
|
|
(g)
|
|
The as-adjusted presentation
assumes Denbury will repurchase Encores Old Notes.
|
|
(h)
|
|
Excludes a discount of
$3.6 million.
|
|
(i)
|
|
The Encore actual presentation
excludes a discount of $16.8 million. The as-adjusted
presentation excludes a premium of $12.9 million.
|
|
(j)
|
|
Excludes a discount of
$1.2 million.
|
|
(k)
|
|
As of January 31, 2010,
borrowings under EACs revolving credit facility totaled
$155 million. This credit facility will be terminated once
the merger closes.
|
|
(l)
|
|
As of January 31, 2010,
borrowings under ENPs bank credit facility totaled
$255.0 million.
|
|
(m)
|
|
As-adjusted equity increased due to
(1) the estimated fair value of Denbury common stock issued
in the acquisition of Encore ($1,947.2 million) and
(2) the fair value of the noncontrolling interest in ENP
($497.2 million). The increases to equity were partially
offset by a reduction reflecting banking, legal and accounting
fee expenses associated with the acquisition and related
financing transactions ($28.1 million).
|
35
The following unaudited pro forma combined financial information
is based on the historical consolidated financial statements of
Denbury Resources Inc. (Denbury) and Encore
Acquisition Company (Encore), adjusted to reflect
the proposed acquisition of Encore by Denbury and the related
financing transactions. Denburys historical consolidated
financial statements have also been adjusted to give effect to
the disposal of its Barnett Shale natural gas assets as
presented in Note 4 to the unaudited pro forma combined
financial information.
The unaudited pro forma combined balance sheet gives effect to
the acquisition of Encore by Denbury, the related financing
transactions and the disposition by Denbury of its remaining 40%
interest in its Barnett Shale natural gas assets (see
Note 4), as if they had occurred on September 30,
2009. The unaudited pro forma combined statements of operations
combine the results of operations of Denbury and Encore for the
year ended December 31, 2008 and the nine months ended
September 30, 2009. The unaudited pro forma combined
statements of operations give effect to the following events as
if they had occurred on January 1, 2008:
|
|
|
Denburys acquisition of Encore. The acquisition of Encore
will be accounted for using the acquisition method of
accounting. Encore owns the general partner interest and
approximately 46% of the outstanding common units of Encore
Energy Partners LP (ENP). Encore has historically
consolidated the financial position, results of operations and
cash flows of ENP with those of Encore. The unaudited pro forma
combined financial information reflects the allocation of
(1) the fair value of the consideration transferred and
(2) the fair value of the noncontrolling interest of ENP to
the underlying assets acquired and liabilities assumed of both
Encore and ENP based upon their estimated fair values;
|
|
|
Borrowings under Denburys newly committed
$1.6 billion credit facility (approximately
$826.6 million) and a portion of the proceeds from the
notes offered hereby (approximately $400.0 million).
Borrowings under the newly committed credit facility and a
portion of the proceeds from the notes offered hereby will be
used as follows:
|
|
|
|
|
|
fund the aggregate cash portion of the purchase price
(approximately $889.3 million), including payments to
Encore option holders of approximately $56.2 million;
|
|
|
|
repay a portion of Encores credit facilities
($180.0 million); and
|
|
|
|
pay debt and equity issuance costs (approximately
$89.5 million), severance costs (approximately
$39.6 million) and transaction expenses (approximately
$28.1 million) related to the acquisition.
|
|
|
|
Adjustments to conform the classification of expenses in
Encores historical statements of operations to
Denburys classification of similar expenses;
|
|
|
Adjustments to conform Encores historical accounting
policies related to oil and natural gas properties from
successful efforts to full cost accounting;
|
|
|
Estimated tax impact of pro forma adjustments; and
|
|
|
Denburys disposition of its Barnett Shale natural gas
assets (see Note 4 to the unaudited pro forma combined
financial information).
|
36
The unaudited pro forma combined statements of operations
exclude the impact of nonrecurring expenses Denbury and Encore
will incur as a result of the acquisition and related
financings, primarily non-capitalizable banking and legal fees.
The unaudited pro forma combined financial information should be
read in conjunction with the
Form 10-K
of Denbury for the year ended December 31, 2008, the
Form 10-Q
of Denbury for the quarter ended September 30, 2009 and
Denburys
Form 8-K
filed with the SEC on February 2, 2010 containing, among
other things, Encores historical consolidated financial
statements and the notes thereto for each of the three years
ended 2008, 2007, and 2006, as of December 31, 2008 and
2007, for the nine months ended September 30, 2009 and 2008
and as of September 30, 2009 and 2008 are incorporated by
reference into this prospectus.
The unaudited pro forma combined financial information is for
informational purposes only and is not intended to represent or
to be indicative of the combined results of operations or
financial position that Denbury or the pro forma combined
company would have reported had the Encore acquisition been
completed as of the dates set forth in this unaudited pro forma
combined financial information and should not be taken as
indicative of Denburys future combined results of
operations or financial position. The actual results may differ
significantly from that reflected in the unaudited pro forma
combined financial information for a number of reasons,
including, but not limited to, differences between the
assumptions used to prepare the unaudited pro forma combined
financial information and actual results.
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denbury
|
|
|
|
|
|
Pro forma
|
|
|
Denbury
|
|
|
|
pro forma
|
|
|
Encore
|
|
|
adjustments
|
|
|
pro forma
|
|
(In thousands)
|
|
(note 4)
|
|
|
historical
|
|
|
(note 2)
|
|
|
combined
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
211,689
|
|
|
$
|
6,683
|
|
|
$
|
|
|
|
$
|
218,372
|
|
Trade, accrued production and other receivables, net
|
|
|
168,931
|
|
|
|
113,305
|
|
|
|
|
|
|
|
282,236
|
|
Derivative assets
|
|
|
17,900
|
|
|
|
51,974
|
|
|
|
|
|
|
|
69,874
|
|
Deferred tax assets
|
|
|
5,637
|
|
|
|
|
|
|
|
|
|
|
|
5,637
|
|
Other current assets
|
|
|
|
|
|
|
41,704
|
|
|
|
432
|
(a)
|
|
|
42,136
|
|
|
|
|
|
|
|
Total current assets
|
|
|
404,157
|
|
|
|
213,666
|
|
|
|
432
|
|
|
|
618,255
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved
|
|
|
3,258,060
|
|
|
|
4,146,881
|
|
|
|
(946,202
|
)(a)
|
|
|
6,458,739
|
|
Unevaluated
|
|
|
213,170
|
|
|
|
104,931
|
|
|
|
1,071,069
|
(a)
|
|
|
1,389,170
|
|
CO2
properties, equipment and pipelines
|
|
|
1,422,981
|
|
|
|
|
|
|
|
|
|
|
|
1,422,981
|
|
Other
|
|
|
80,015
|
|
|
|
28,598
|
|
|
|
(15,360
|
)(a)
|
|
|
93,253
|
|
Less accumulated depreciation, depletion and amortization
|
|
|
(1,763,902
|
)
|
|
|
(1,001,449
|
)
|
|
|
1,001,449
|
(a)
|
|
|
(1,763,902
|
)
|
|
|
|
|
|
|
Net property and equipment
|
|
|
3,210,324
|
|
|
|
3,278,961
|
|
|
|
1,110,956
|
|
|
|
7,600,241
|
|
Derivative assets
|
|
|
|
|
|
|
47,694
|
|
|
|
|
|
|
|
47,694
|
|
Goodwill
|
|
|
138,830
|
|
|
|
60,606
|
|
|
|
(60,606
|
)(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,089,338
|
(a)
|
|
|
1,228,168
|
|
Other assets
|
|
|
52,343
|
|
|
|
112,887
|
|
|
|
(37,708
|
)(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,806
|
(b)
|
|
|
215,328
|
|
Investment in Genesis
|
|
|
77,606
|
|
|
|
|
|
|
|
|
|
|
|
77,606
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,883,260
|
|
|
$
|
3,713,814
|
|
|
$
|
2,190,218
|
|
|
$
|
9,787,292
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
188,420
|
|
|
$
|
142,541
|
|
|
$
|
|
|
|
$
|
330,961
|
|
Oil and gas production payable
|
|
|
86,038
|
|
|
|
16,658
|
|
|
|
|
|
|
|
102,696
|
|
Derivative liabilities
|
|
|
74,614
|
|
|
|
37,238
|
|
|
|
|
|
|
|
111,852
|
|
Deferred revenue Genesis
|
|
|
4,070
|
|
|
|
|
|
|
|
|
|
|
|
4,070
|
|
Deferred tax liability
|
|
|
|
|
|
|
63,968
|
|
|
|
(63,968
|
)(a)
|
|
|
|
|
Current maturities of long-term debt
|
|
|
4,698
|
|
|
|
|
|
|
|
|
|
|
|
4,698
|
|
Other current liabilities
|
|
|
|
|
|
|
15,202
|
|
|
|
|
|
|
|
15,202
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
357,840
|
|
|
|
275,607
|
|
|
|
(63,968
|
)
|
|
|
569,479
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt Genesis
|
|
|
250,681
|
|
|
|
|
|
|
|
|
|
|
|
250,681
|
|
Long-term debt
|
|
|
925,380
|
|
|
|
1,243,496
|
|
|
|
35,755
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(180,000
|
)(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,226,552
|
(d)
|
|
|
3,251,183
|
|
Asset retirement obligations
|
|
|
47,149
|
|
|
|
51,664
|
|
|
|
(14,732
|
)(a)
|
|
|
84,081
|
|
Deferred revenue Genesis
|
|
|
16,796
|
|
|
|
|
|
|
|
|
|
|
|
16,796
|
|
Deferred tax liability
|
|
|
458,940
|
|
|
|
431,075
|
|
|
|
439,038
|
(a)
|
|
|
1,329,053
|
|
Derivative liabilities
|
|
|
12,496
|
|
|
|
39,370
|
|
|
|
|
|
|
|
51,866
|
|
Other long-term liabilities
|
|
|
23,319
|
|
|
|
3,837
|
|
|
|
|
|
|
|
27,156
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
1,734,761
|
|
|
|
1,769,442
|
|
|
|
1,506,613
|
|
|
|
5,010,816
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity before noncontrolling interest
|
|
|
1,790,659
|
|
|
|
1,394,047
|
|
|
|
(1,394,047
|
)(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,947,216
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,084
|
)(g)
|
|
|
3,709,791
|
|
Noncontrolling interest
|
|
|
|
|
|
|
274,718
|
|
|
|
(274,718
|
)(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
497,206
|
(a)
|
|
|
497,206
|
|
|
|
|
|
|
|
Total equity
|
|
|
1,790,659
|
|
|
|
1,668,765
|
|
|
|
747,573
|
|
|
|
4,206,997
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
3,883,260
|
|
|
$
|
3,713,814
|
|
|
$
|
2,190,218
|
|
|
$
|
9,787,292
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
|
Denbury
|
|
|
|
|
|
reclassification
|
|
|
Pro forma
|
|
|
Denbury
|
|
|
|
pro forma
|
|
|
Encore
|
|
|
adjustments
|
|
|
adjustments
|
|
|
pro forma
|
|
(In thousands, except per share
amounts)
|
|
(note 4)
|
|
|
historical
|
|
|
(note 3)
|
|
|
(note 3)
|
|
|
combined
|
|
|
|
|
Revenues and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil, natural gas and related product sales
|
|
$
|
538,112
|
|
|
$
|
|
|
|
$
|
461,823
|
(a)
|
|
$
|
|
|
|
$
|
999,935
|
|
CO2
sales and transportation fees
|
|
|
9,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,708
|
|
Interest income and other
|
|
|
1,948
|
|
|
|
1,811
|
|
|
|
2,104
|
(b)
|
|
|
|
|
|
|
5,863
|
|
Oil revenue
|
|
|
|
|
|
|
374,915
|
|
|
|
(374,915
|
)(a)
|
|
|
|
|
|
|
|
|
Natural gas revenue
|
|
|
|
|
|
|
86,908
|
|
|
|
(86,908
|
)(a)
|
|
|
|
|
|
|
|
|
Marketing revenue
|
|
|
|
|
|
|
2,008
|
|
|
|
(2,008
|
)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
549,768
|
|
|
|
465,642
|
|
|
|
96
|
|
|
|
|
|
|
|
1,015,506
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
|
228,141
|
|
|
|
122,817
|
|
|
|
6,538
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,082
|
(d)
|
|
|
|
|
|
|
366,578
|
|
Production taxes and marketing expenses
|
|
|
19,946
|
|
|
|
|
|
|
|
38,992
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,101
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,612
|
(f)
|
|
|
|
|
|
|
72,651
|
|
Transportation expense Genesis
|
|
|
6,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,143
|
|
CO2
operating expenses
|
|
|
3,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,442
|
|
General and administrative
|
|
|
79,828
|
|
|
|
40,743
|
|
|
|
1,377
|
(g)
|
|
|
(5,142
|
)(k)
|
|
|
116,806
|
|
Interest, net of amounts capitalized
|
|
|
34,095
|
|
|
|
57,009
|
|
|
|
|
|
|
|
46,024
|
(l)
|
|
|
137,128
|
|
Depletion, depreciation and amortization
|
|
|
163,275
|
|
|
|
217,361
|
|
|
|
1,798
|
(h)
|
|
|
(12,289
|
)(j)
|
|
|
370,145
|
|
Commodity derivative expense (income)
|
|
|
177,061
|
|
|
|
(741
|
)
|
|
|
|
|
|
|
|
|
|
|
176,320
|
|
Production, ad valorem, and severance taxes
|
|
|
|
|
|
|
48,074
|
|
|
|
(48,074
|
)(d)
|
|
|
|
|
|
|
|
|
Exploration
|
|
|
|
|
|
|
43,801
|
|
|
|
|
|
|
|
(43,801
|
)(i)
|
|
|
|
|
Marketing
|
|
|
|
|
|
|
1,612
|
|
|
|
(1,612
|
)(f)
|
|
|
|
|
|
|
|
|
Other operating
|
|
|
|
|
|
|
29,419
|
|
|
|
96
|
(b)
|
|
|
(7,701
|
)(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,538
|
)(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,101
|
)(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,377
|
)(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,798
|
)(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
711,931
|
|
|
|
560,095
|
|
|
|
96
|
|
|
|
(22,909
|
)
|
|
|
1,249,213
|
|
|
|
|
|
|
|
Equity in net income of Genesis
|
|
|
5,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,802
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(156,361
|
)
|
|
|
(94,453
|
)
|
|
|
|
|
|
|
22,909
|
|
|
|
(227,905
|
)
|
Income tax provision (benefit)
|
|
|
(60,362
|
)
|
|
|
(25,254
|
)
|
|
|
|
|
|
|
8,591
|
(m)
|
|
|
(77,025
|
)
|
|
|
|
|
|
|
Consolidated net income (loss)
|
|
|
(95,999
|
)
|
|
|
(69,199
|
)
|
|
|
|
|
|
|
14,318
|
|
|
|
(150,880
|
)
|
Income attributable to noncontrolling interest
|
|
|
|
|
|
|
(9,669
|
)
|
|
|
|
|
|
|
(1,107
|
)(n)
|
|
|
(10,776
|
)
|
|
|
|
|
|
|
Net income (loss) attributable to stockholders
|
|
$
|
(95,999
|
)
|
|
$
|
(59,530
|
)
|
|
$
|
|
|
|
$
|
15,425
|
|
|
$
|
(140,104
|
)
|
|
|
|
|
|
|
Net loss per common share basic
|
|
$
|
(0.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.38
|
)
|
Net loss per common share diluted
|
|
$
|
(0.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.38
|
)
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
246,156
|
|
|
|
|
|
|
|
|
|
|
|
123,980
|
(o)
|
|
|
370,136
|
|
Diluted
|
|
|
246,156
|
|
|
|
|
|
|
|
|
|
|
|
123,980
|
(o)
|
|
|
370,136
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
|
Denbury
|
|
|
|
|
|
reclassification
|
|
|
Pro forma
|
|
|
Denbury
|
|
|
|
pro forma
|
|
|
Encore
|
|
|
adjustments
|
|
|
adjustments
|
|
|
pro forma
|
|
(In thousands, except per share
amounts)
|
|
(note 4)
|
|
|
historical
|
|
|
(note 3)
|
|
|
(note 3)
|
|
|
combined
|
|
|
|
|
Revenues and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil, natural gas and related product sales
|
|
$
|
1,112,149
|
|
|
$
|
|
|
|
$
|
1,124,922
|
(a)
|
|
$
|
|
|
|
$
|
2,237,071
|
|
CO2
sales and transportation fees
|
|
|
13,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,858
|
|
Interest income and other
|
|
|
4,834
|
|
|
|
3,898
|
|
|
|
10,972
|
(b)
|
|
|
|
|
|
|
19,704
|
|
Oil revenue
|
|
|
|
|
|
|
897,443
|
|
|
|
(897,443
|
)(a)
|
|
|
|
|
|
|
|
|
Natural gas revenue
|
|
|
|
|
|
|
227,479
|
|
|
|
(227,479
|
)(a)
|
|
|
|
|
|
|
|
|
Marketing revenue
|
|
|
|
|
|
|
10,496
|
|
|
|
(10,496
|
)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,130,841
|
|
|
|
1,139,316
|
|
|
|
476
|
|
|
|
|
|
|
|
2,270,633
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expense
|
|
|
283,509
|
|
|
|
175,115
|
|
|
|
14,151
|
(d)
|
|
|
|
|
|
|
472,775
|
|
Production taxes and marketing expenses
|
|
|
43,144
|
|
|
|
|
|
|
|
96,493
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,375
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,570
|
(f)
|
|
|
|
|
|
|
160,582
|
|
Transportation expense Genesis
|
|
|
7,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,982
|
|
CO2
operating expenses
|
|
|
4,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,216
|
|
General and administrative
|
|
|
60,374
|
|
|
|
48,421
|
|
|
|
1,391
|
(g)
|
|
|
(4,253
|
)(k)
|
|
|
105,933
|
|
Interest, net of amounts capitalized
|
|
|
29,003
|
|
|
|
73,173
|
|
|
|
|
|
|
|
51,934
|
(l)
|
|
|
154,110
|
|
Depletion, depreciation and amortization
|
|
|
177,540
|
|
|
|
228,252
|
|
|
|
1,361
|
(h)
|
|
|
(3,244
|
)(j)
|
|
|
403,909
|
|
Commodity derivative income
|
|
|
(200,053
|
)
|
|
|
(346,236
|
)
|
|
|
|
|
|
|
|
|
|
|
(546,289
|
)
|
Abandoned acquisition cost
|
|
|
30,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,601
|
|
Ceiling test write-down
|
|
|
226,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226,000
|
|
Production, ad valorem, and severance taxes
|
|
|
|
|
|
|
110,644
|
|
|
|
(110,644
|
)(d)
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
59,526
|
|
|
|
|
|
|
|
|
|
|
|
59,526
|
|
Exploration
|
|
|
|
|
|
|
39,207
|
|
|
|
|
|
|
|
(39,207
|
)(i)
|
|
|
|
|
Marketing
|
|
|
|
|
|
|
9,570
|
|
|
|
(9,570
|
)(f)
|
|
|
|
|
|
|
|
|
Other operating
|
|
|
|
|
|
|
14,959
|
|
|
|
(11,375
|
)(e)
|
|
|
(1,308
|
)(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,391
|
)(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,361
|
)(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
476
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
662,316
|
|
|
|
412,631
|
|
|
|
476
|
|
|
|
3,922
|
|
|
|
1,079,345
|
|
|
|
|
|
|
|
Equity in net income of Genesis
|
|
|
5,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,354
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
473,879
|
|
|
|
726,685
|
|
|
|
|
|
|
|
(3,922
|
)
|
|
|
1,196,642
|
|
Income tax provision (benefit)
|
|
|
178,699
|
|
|
|
241,621
|
|
|
|
|
|
|
|
(1,471
|
)(m)
|
|
|
418,849
|
|
|
|
|
|
|
|
Consolidated net income (loss)
|
|
|
295,180
|
|
|
|
485,064
|
|
|
|
|
|
|
|
(2,451
|
)
|
|
|
777,793
|
|
Income (loss) attributable to noncontrolling interest
|
|
|
|
|
|
|
54,252
|
|
|
|
|
|
|
|
(3,373
|
)(n)
|
|
|
50,879
|
|
|
|
|
|
|
|
Net income (loss) attributable to stockholders
|
|
$
|
295,180
|
|
|
$
|
430,812
|
|
|
$
|
|
|
|
$
|
922
|
|
|
$
|
726,914
|
|
|
|
|
|
|
|
Net income per common share basic
|
|
$
|
1.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.98
|
|
Net income per common share diluted
|
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.93
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
243,935
|
|
|
|
|
|
|
|
|
|
|
|
123,980
|
(o)
|
|
|
367,915
|
|
Diluted
|
|
|
252,530
|
|
|
|
|
|
|
|
|
|
|
|
123,980
|
(o)
|
|
|
376,510
|
|
|
|
40
Notes to
unaudited pro forma combined financial information
|
|
Note 1
|
Basis of
Presentation
|
On October 31, 2009, Denbury and Encore entered into a
definitive merger agreement which contemplates the merger of
Encore with and into Denbury, with Denbury surviving the merger.
Under the merger agreement, Encore stockholders will receive
$50.00 per share for each share of Encore common stock,
comprised of $15.00 in cash and $35.00 in Denbury common stock
subject to both an election feature and a collar mechanism on
the stock portion of the consideration. The final number of
Denbury shares to be issued will be adjusted based on the
volume-weighted average price of Denbury common stock on the
NYSE for the
twenty-day
trading period ending on the second day prior to closing. Based
on the collar mechanism, if Denbury common stock trades between
$13.29 and $16.91, the Encore stockholders electing to receive a
mix of cash and stock and non-electing stockholders will receive
$15.00 in cash and between 2.0698 and 2.6336 shares of
Denbury common stock for each of their shares of Encore common
stock, but not higher or lower than these share amounts if
Denbury common stock trades outside this range. In the
aggregate, assuming 55.5 million shares of Encore common
stock are outstanding immediately prior to the effective time of
the merger (the number of Encore outstanding common shares at
January 13, 2010) and including approximately
$56.2 million in cash payments to Encore stock option
holders, this represents aggregate merger consideration of
approximately $889.3 million in cash and between 115 and
146 million shares of Denbury common stock. If Denbury
common stock trades outside of this range, the number of Denbury
common shares that will be issued to effect the acquisition will
be fixed at the minimum (approximately 115 million Denbury
common shares) or maximum (approximately 146 million
Denbury common shares) as determined by the collar mechanism.
The unaudited pro forma combined balance sheet as of
September 30, 2009 assumes that Encore stockholders will
receive 2.232 shares of Denbury common stock for each share
of Encore common stock (approximately 124.0 million common
shares in the aggregate), the ratio of which was determined
using the volume-weighted average price of Denbury common stock
of $15.68 per share for the
twenty-day
trading period ending on January 13, 2010.
Denbury received a financing commitment letter from
J.P. Morgan and JPMorgan Chase subject to certain funding
conditions, for a proposed new $1.6 billion senior secured
revolving credit facility with a term of four years (Newly
Committed Credit Facility) and a $1.25 billion bridge
facility (Bridge Facility) that will be available to
the extent Denbury does not secure alternate financing prior to
the end of the bridge take-down period. The unaudited pro forma
combined financial information assumes that Denbury does not
borrow under the Bridge Facility and that only a portion of the
Newly Committed Credit Facility has been drawn upon to effect
the transaction described herein, and that the proceeds from the
portions drawn, along with $400 million of the net proceeds
of Denburys
81/4%
Senior Subordinated Notes due 2020 (the New Senior
Subordinated Notes), will be used as follows (in
thousands):
|
|
|
|
|
Sources:
|
|
|
|
|
New Senior Subordinated
Notes(1)
|
|
$
|
400,000
|
|
Newly Committed Credit Facility
Borrowings(2)
|
|
|
826,552
|
|
|
|
|
|
|
Total Sources of Cash
|
|
$
|
1,226,552
|
|
|
|
|
|
|
41
Notes (continued)
|
|
|
|
|
Uses:
|
|
|
|
|
Fund cash portion of purchase
price(3)
|
|
$
|
889,322
|
|
Repay a portion of Encores credit facilities
|
|
|
180,000
|
|
Pay debt, equity and transaction costs
|
|
|
117,640
|
|
Pay Encores severance costs
|
|
|
39,590
|
|
|
|
|
|
|
Total Uses of Cash
|
|
$
|
1,226,552
|
|
|
|
|
|
|
(1)
|
|
Denbury has a $1.25 billion
unsecured bridge facility, which will be available to the extent
Denbury does not complete the sale of the New Senior
Subordinated Notes prior to the closing of the merger. If not
fully drawn, Denbury may draw on the bridge loan one additional
time within 45 days after the closing of the merger. In
accordance with the SEC rules related to pro forma presentation,
we have assumed that the $600 million par value of
Encores Old Notes are not tendered pursuant to a tender
offer or change of control offer, and thus $600 million of
notes offered hereby will be redeemed at a price equal to the
issue price of the notes. See Note 1 (Basis of
PresentationEffect of Modified Assumption on Repurchase of
Encore Senior Subordinated Notes) for incremental interest
expense if Encores Old Notes are tendered.
|
|
(2)
|
|
The Newly Committed Credit Facility
will be a $1.6 billion facility.
|
|
(3)
|
|
Includes payments to Encore option
holders of $56.2 million.
|
The accompanying unaudited pro forma combined balance sheet at
September 30, 2009 has been prepared to give effect to the
merger and the related financing transactions as if they had
occurred on September 30, 2009 and the unaudited pro forma
combined statements of operations have been prepared to give
effect to the merger and the related financing transactions as
if they had occurred on January 1, 2008.
The unaudited pro forma combined financial information includes
adjustments to conform Encores accounting for oil and gas
properties to the full cost method. Denbury follows the full
cost method of accounting for oil and gas properties while
Encore follows the successful efforts method of accounting for
oil and gas properties. Certain costs that are capitalized under
the full cost method are expensed under the successful efforts
method. These costs consist primarily of unsuccessful
exploration drilling costs, geological and geophysical costs,
delay rental on leases, abandonment costs and general and
administrative expenses directly related to exploration and
development activities. Under the successful efforts method of
accounting, proved property acquisition costs are amortized on a
unit-of-production
basis over total proved reserves and costs of wells, related
equipment and facilities are depreciated over the life of the
proved developed reserves that will utilize those capitalized
assets on a
field-by-field
basis. Under the full cost method of accounting, property
acquisition costs, costs of wells, related equipment and
facilities and future development costs are included in a single
full cost pool, which is amortized on a
unit-of-production
basis over total proved reserves.
Denburys unaudited pro forma condensed consolidated
balance sheet and statements of operations, which are included
in the unaudited pro forma combined financial information, also
include the pro forma effects of the disposal of its Barnett
Shale natural gas assets that occurred during 2009.
Denburys unaudited pro forma condensed consolidated
balance sheet includes the pro forma effect of the sale of the
remaining 40% of Denburys Barnett Shale natural gas assets
as if the sale occurred on September 30, 2009.
Denburys unaudited pro forma condensed consolidated
statements of operations include the pro forma effects of the
sale of 60%, and subsequent sale of 40%, of Denburys
Barnett Shale natural gas assets as if the sales occurred on
January 1, 2008. Denburys disposal of its Barnett
Shale natural gas assets is unrelated to the
42
Notes (continued)
Encore acquisition. The pro forma effects of these transactions
are presented in Note 4 to the unaudited pro forma combined
financial information.
Effect of
Modified Assumption on Repurchase of Encore Senior Subordinated
Notes
Each of Encores four series of senior subordinated notes
has a change in control put option at 101% of par value, which
would require Denbury to offer to repurchase, at the option of
the noteholder, the notes at 101% of par value within a
specified period after consummation of the merger. Three of
these series, Encores 6% Senior Subordinated Notes,
its 6.25% Senior Subordinated Notes and its
7.25% Senior Subordinated Notes (collectively
Encores Old Notes) with an aggregate par value
of $600 million, have traded at prices below 101% of par
value both before and since announcement of the merger. Because
it would be economically advantageous to the noteholders to do
so, Denbury expects the holders of all of Encores Old
Notes to tender their notes pursuant to a tender offer or change
of control offer.
If Denbury were to assume exercise of their put options by the
holders of all of Encores Old Notes requiring Denbury to
tender their notes pursuant to a tender offer or change of
control offer, and the repurchase is funded through proceeds
from the sale of the New Senior Subordinated Notes, it would
(i) incrementally increase pro forma interest expense by an
additional amount of approximately $11 million for the nine
months ended September 30, 2009 and $15 million for
the twelve months ended December 31, 2008, and
(ii) increase Denburys pro forma long-term debt as of
September 30, 2009 by approximately $17 million.
|
|
Note 2
|
Unaudited Pro
forma Combined Balance Sheet
|
The acquisition of Encore will be accounted for using the
acquisition method of accounting. Denbury will receive carryover
tax basis in Encores assets and liabilities because the
merger will not be a taxable transaction under the United States
Internal Revenue Code. The sum of the estimated fair value of
consideration transferred and the estimated fair value of the
noncontrolling interest of ENP was allocated based on a
preliminary assessment of the estimated fair value of the assets
acquired and liabilities assumed at September 30, 2009
using currently available information. Denbury expects to
finalize its allocation of the purchase consideration as soon
after completion of the proposed acquisition as practicable. The
final purchase price allocation and the resulting effect on
results of operations and financial position may significantly
differ from the pro forma amounts included herein.
The purchase price allocation is preliminary and is subject to
change due to several factors, including:
|
|
|
changes in the estimated number of shares of Denbury common
stock issued if Denburys common stock trades within the
collar mechanism;
|
|
|
changes in the estimated fair value of the stock consideration
transferred depending on its estimated fair value at the date of
closing (i.e. last trading price);
|
|
|
changes in the estimated fair value of the noncontrolling
interest of ENP resulting from changes in ENPs common unit
price at the merger closing date;
|
43
Notes (continued)
|
|
|
changes in the estimated fair values of Encores assets and
liabilities as of the acquisition date, which could result from
changes in expected future product prices, changes in reserve
estimates as well as other changes; and
|
|
|
the tax basis of Encores assets and liabilities at the
acquisition date.
|
The consideration to be transferred, fair value of assets
acquired and liabilities assumed and resulting goodwill was
calculated as follows (in thousands):
|
|
|
|
|
Pro forma consideration and noncontrolling interest
|
|
|
|
|
Fair value of Denbury common stock to be
issued(1)
|
|
$
|
1,948,966
|
|
Cash payment to Encore
stockholders(2)
|
|
|
889,322
|
|
Severance payments
|
|
|
39,590
|
|
|
|
|
|
|
Pro forma consideration
|
|
|
2,877,878
|
|
Fair value of noncontrolling interest of
ENP(3)
|
|
|
497,206
|
|
|
|
|
|
|
Pro forma consideration and noncontrolling interest of
ENP(4)
|
|
$
|
3,375,084
|
|
|
|
|
|
|
Add: fair value of liabilities assumed
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
142,541
|
|
Oil and gas production payable
|
|
|
16,658
|
|
Current derivative liabilities
|
|
|
37,238
|
|
Other current liabilities
|
|
|
15,202
|
|
Long-term debt
|
|
|
1,279,251
|
|
Asset retirement obligations
|
|
|
36,932
|
|
Long-term derivative liabilities
|
|
|
39,370
|
|
Long-term deferred tax liability
|
|
|
870,113
|
|
Other long-term liabilities
|
|
|
3,837
|
|
|
|
|
|
|
Amount attributable to liabilities assumed
|
|
$
|
2,441,142
|
|
|
|
|
|
|
Less: fair value of assets acquired
|
|
|
|
|
Cash
|
|
$
|
6,683
|
|
Trade and other receivables
|
|
|
113,305
|
|
Current derivative assets
|
|
|
51,974
|
|
Other current assets
|
|
|
42,136
|
|
Oil and natural gas properties proved
|
|
|
3,200,679
|
|
Oil and natural gas properties unevaluated
|
|
|
1,176,000
|
|
Other plant, property and equipment
|
|
|
13,238
|
|
Long-term derivative assets
|
|
|
47,694
|
|
Other long-term assets
|
|
|
75,179
|
|
|
|
|
|
|
Amount attributable to assets acquired
|
|
$
|
4,726,888
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,089,338
|
|
|
|
|
|
|
(1)
|
|
124.0 million Denbury common
shares at $15.72 per share (closing price as of January 13,
2010).
|
|
(2)
|
|
55.5 million Encore shares at
$15.00 per share plus cash payment to stock option holders
of $56.2 million.
|
|
(3)
|
|
Represents approximate fair value
of the noncontrolling interest of ENP assuming 45.3 million
ENP common units are outstanding (based on ENP common units
outstanding as of January 13, 2010) at $20.34 per
ENP common unit (closing price as of January 13, 2010). As
of September 30, 2009, Encore owned approximately 46% of
outstanding ENP common units.
|
44
Notes (continued)
|
|
|
(4)
|
|
The sum of the pro forma
consideration and noncontrolling interest and the fair value of
Encores long-term debt assumed totals approximately
$4.7 billion, representing the approximate aggregate
purchase price, based on currently available information.
|
Pursuant to the acquisition method of accounting, the fair value
of shares issued is determined using the closing price of
Denbury common stock at the acquisition date. As discussed in
Note 1, Basis of Presentation, the number of
shares that Denbury will issue in the merger transaction is
dependent upon the volume-weighted average price of Denbury
stock for the
twenty-day
period ending on the second day prior to closing. Therefore, the
price of Denbury common stock used to determine the number of
shares that will be issued as consideration will likely be
different than the price of Denburys stock used to
determine the fair value of consideration transferred for
accounting purposes. The pro forma purchase price allocation
assumes Encore stockholders will receive 2.232 shares of
Denbury common stock for each share of Encore common stock
(124.0 million common shares in the aggregate), the ratio
of which was determined using the
twenty-day
volume-weighted average price of Denburys common stock for
the
twenty-day
period ending January 13, 2010 of $15.68. The purchase
price allocation also assumes the closing price of
Denburys common stock on the closing date is $15.72, which
was determined using the closing price of Denbury common stock
on January 13, 2010. Assuming Denbury issues
124.0 million common shares to effect the Encore
acquisition, a $1.00 increase (decrease) in the closing price of
Denbury common stock on the closing date would increase
(decrease) goodwill by approximately $124.0 million. If
Denburys common stock trades at or below the low-end or at
or greater than the high end of the collar ($13.29 minimum and
$16.91 maximum) and the acquisition date fair value of
Denburys common stock is $15.72, the impact on the
unaudited pro forma combined balance sheet would be as follows:
|
|
|
|
|
|
|
|
Twenty-day
|
|
|
|
|
|
|
volume-weighted
|
|
|
|
|
|
|
average
|
|
|
|
Increase (decrease) in
|
|
Increase (decrease) in
|
price of
|
|
exchange
|
|
aggregate shares
|
|
goodwill/equity
|
denbury stock
|
|
ratio
|
|
(in thousands)
|
|
(in thousands)
|
|
|
$13.29
|
|
2.6336
|
|
22,296
|
|
$ 350,489
|
$16.91
|
|
2.0698
|
|
(9,018)
|
|
$(141,766)
|
|
|
45
Notes (continued)
Additionally, the unaudited pro forma combined net income (loss)
per common share would be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denbury common stock $13.29
|
|
|
Denbury common stock $16.91
|
|
|
|
Nine months ended
|
|
|
Year ended
|
|
|
Nine months ended
|
|
|
Year ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Net income (loss) per common
share basic
|
|
$
|
(0.36
|
)
|
|
$
|
1.86
|
|
|
$
|
(0.39
|
)
|
|
$
|
2.03
|
|
Net income (loss) per common
share diluted
|
|
$
|
(0.36
|
)
|
|
$
|
1.82
|
|
|
$
|
(0.39
|
)
|
|
$
|
1.98
|
|
Weighted average common shares outstanding (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
392,432
|
|
|
|
390,211
|
|
|
|
361,118
|
|
|
|
358,897
|
|
Diluted
|
|
|
392,432
|
|
|
|
398,806
|
|
|
|
361,118
|
|
|
|
367,492
|
|
|
|
Goodwill is measured as the excess of the fair value of the
consideration transferred plus the estimated fair value of the
noncontrolling interest of ENP over the acquisition-date
estimated fair value of the assets acquired less liabilities
assumed.
The fair value of the noncontrolling interest of ENP was
calculated using the ENP closing common unit price on
January 13, 2010 of $20.34. If ENPs common unit price
were to increase (decrease) by $1.00, goodwill would increase
(decrease) by $24.8 million.
Pro Forma
Adjustments to the Unaudited Pro Forma Combined Balance
Sheet
(a) Represents pro forma adjustments to:
|
|
|
allocate the sum of the estimated fair value of consideration
transferred and the estimated fair value of the noncontrolling
interest of ENP to the estimated fair value of assets acquired
and liabilities assumed;
|
|
|
eliminate Encores historical goodwill and accumulated
depreciation, depletion and amortization balances;
|
|
|
eliminate deferred financing costs on a portion of Encores
credit facilities; and
|
|
|
record an increase in deferred tax liabilities primarily
resulting from fair value adjustments to Encores oil
and natural gas properties. Denbury will receive carryover tax
basis in Encores assets and liabilities because the merger
will not be a taxable transaction under the United States
Internal Revenue Code.
|
(b) Represents the new deferred financing costs
attributable to the Newly Committed Credit Facility and the
Bridge Facility.
(c) Represents the repayment of a portion of Encores
credit facilities ($180.0 million).
46
Notes (continued)
(d) Represents Denburys borrowings under the Newly
Committed Credit Facility and the Bridge Facility. Assumes
Denburys pro forma debt will consist of the following (in
thousands):
|
|
|
|
|
New
Financing(1)
|
|
|
|
|
New Senior Subordinated
Notes(2)
|
|
$
|
400,000
|
|
Newly Committed Credit
Facility(3)
|
|
|
826,552
|
|
|
|
|
|
|
Total new financing
|
|
$
|
1,226,552
|
|
Denburys Existing Debt
|
|
|
|
|
9.75% Senior Subordinated Notes due
2016(4)
|
|
$
|
398,855
|
|
7.5% Senior Subordinated Notes due
2015(5)
|
|
|
300,535
|
|
7.5% Senior Subordinated Notes due
2013(6)
|
|
|
224,320
|
|
Pipeline financings
|
|
|
250,744
|
|
Capital lease obligations
|
|
|
6,305
|
|
|
|
|
|
|
Denburys existing debt
|
|
$
|
1,180,759
|
|
Encores Existing Debt
|
|
|
|
|
7.25% Senior Subordinated Notes due
2017(7)
|
|
$
|
150,750
|
|
9.5% Senior Subordinated Notes due
2016(8)
|
|
|
237,938
|
|
6% Senior Subordinated Notes due 2015
|
|
|
300,000
|
|
6.25% Senior Subordinated Notes due
2014(9)
|
|
|
150,563
|
|
ENP revolving credit facility
|
|
|
260,000
|
|
|
|
|
|
|
Encores existing debt
|
|
$
|
1,099,251
|
|
|
|
|
|
|
Total combined debt
|
|
$
|
3,506,562
|
|
Less current obligations
|
|
|
(4,698
|
)
|
|
|
|
|
|
Pro forma combined long-term
debt(10)
|
|
$
|
3,501,864
|
|
|
|
|
|
|
(1)
|
|
If Denbury were to assume the
holders of all of Encores Old Notes tendered their notes
and the repurchase of all $600 million of those notes was
funded with the proceeds from the sale of the New Senior
Subordinated Notes, long-term debt at September 30, 2009
would increase by approximately $17 million (see
Note 1, Basis of Presentation Effect of
Modified Assumption on Repurchase of Encore Senior Subordinated
Notes).
|
|
(2)
|
|
We are issuing $1 billion
principal amount of notes in this offering, but have assumed for
this purpose that $600 million of the notes offered hereby
are redeemed because no Encore senior subordinated notes are
repurchased in a tender offer or change of control offer.
|
|
(3)
|
|
The Newly Committed Credit Facility
will be a $1.6 billion facility.
|
|
(4)
|
|
Includes unamortized discount of
$27.5 million.
|
|
(5)
|
|
Includes unamortized premium of
$0.5 million.
|
|
(6)
|
|
Includes unamortized discount of
$0.7 million.
|
|
(7)
|
|
Includes unamortized premium of
$0.8 million.
|
|
(8)
|
|
Includes unamortized premium of
$12.9 million.
|
|
(9)
|
|
Includes unamortized premium of
$0.6 million.
|
|
(10)
|
|
Includes Long-term debt
Genesis of $250.7 million.
|
(e) Represents the elimination of Encores historical
equity in connection with the acquisition method of accounting.
47
Notes (continued)
(f) Represents the increase in Denburys common stock
resulting from the issuance of Denbury shares to Encore
stockholders to effect the acquisition as follows (in thousands,
except per share amounts):
|
|
|
|
|
Denbury common shares issued
|
|
|
123,980
|
|
Price of Denbury stock
|
|
$
|
15.72
|
|
|
|
|
|
|
Fair value of common stock issued
|
|
|
1,948,966
|
|
Less stock-issuance costs
|
|
|
(1,750
|
)
|
|
|
|
|
|
Net fair value of common stock issued
|
|
$
|
1,947,216
|
|
|
|
(g) Represents the estimated $28.1 million of
transaction costs incurred by Denbury and Encore not reflected
in the September 30, 2009 balance sheets, including
estimated banking fees ($25.4 million) and estimated legal
and accounting fees ($2.7 million) that are not
capitalizable as part of the transaction. These costs are
reflected in the unaudited pro forma balance sheet as a
reduction of equity as the costs will be expensed by Denbury at
the acquisition date.
|
|
Note 3
|
Unaudited Pro
forma Combined Statements of Operations
|
Adjustments (a) (h) to the Statement of
Operations for the nine months ended September 30, 2009 and
the year ended December 31, 2008 include reclassifications
required to conform Encores revenue and expense items to
Denburys presentation as follows:
(a) Represents the reclassification of Encores oil
and natural gas product sales to conform to Denburys
presentation.
(b) Represents the reclassification of marketing revenue
and gains on sale of other assets to conform to Denburys
presentation.
(c) Represents the reclassification of the impairment
charge related to pipe inventory to Lease operating
expense to conform to Denburys presentation.
(d) Represents the reclassification of severance taxes to
Production taxes and marketing expense and the
transfer of ad valorem taxes to Lease operating
expense to conform to Denburys presentation.
(e) Represents the reclassification of transportation costs
to Production taxes and marketing expenses to
conform to Denburys presentation.
(f) Represents the reclassification of marketing expenses
to Production taxes and marketing expenses to
conform to Denburys presentation.
(g) Represents the reclassification of franchise taxes and
bad debt expense to General and administrative
expenses to conform to Denburys presentation.
(h) Represents the reclassification of accretion expense on
Encores asset retirement obligations to Depletion,
depreciation and amortization expense to conform to
Denburys presentation.
48
Notes (continued)
Adjustments (i) - (o) to the Statements of Operations for
the nine months ended September 30, 2009 and the year ended
December 31, 2008 include pro forma adjustments to reflect
the merger, related financing transactions and the conversion of
Encores method of accounting for oil and natural gas
properties from the successful efforts method of accounting to
the full cost method of accounting.
(i) Represents the capitalization of unsuccessful
exploration costs, geological and geophysical costs and delay
rentals attributable to the development of oil and gas
properties in accordance with the full cost method of accounting
for oil and natural gas properties.
(j) Represents the change in depreciation, depletion and
amortization primarily resulting from the pro forma calculation
of the combined entitys depletion expense under the full
cost method of accounting for oil and natural gas properties.
The pro forma depletion adjustment utilizes a depletion rate of
$15.14 per BOE for the nine months ended September 30,
2009 and $13.54 per BOE for the year ended
December 31, 2008.
(k) Represents the decrease to general and administrative
expense due to the reduction in ongoing executive salaries.
Encores named executive officers will not be retained as
employees of Denbury following the effective time of the merger.
(l) Represents the adjustment to historical interest
expense on debt to be retired and interest expense on the Newly
Committed Credit Facility and the New Senior Subordinated Notes
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Year ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Decrease in interest due to paydown of Encores credit
facility
|
|
$
|
(6,628
|
)
|
|
$
|
(21,646
|
)
|
Increase in interest due to:
|
|
|
|
|
|
|
|
|
Denburys Newly Committed Credit Facility
|
|
|
19,731
|
|
|
|
26,308
|
|
New Senior Subordinated Notes
|
|
|
25,500
|
|
|
|
34,000
|
|
|
|
|
|
|
|
Pro forma increase to cash interest expense
|
|
$
|
38,603
|
|
|
$
|
38,662
|
|
Decrease in amortization of deferred financing costs
|
|
$
|
(2,652
|
)
|
|
$
|
(3,118
|
)
|
Increase in amortization of deferred financing costs due to:
|
|
|
|
|
|
|
|
|
Denburys Newly Committed Credit Facility
|
|
|
9,680
|
|
|
|
13,786
|
|
New Senior Subordinated Notes
|
|
|
2,546
|
|
|
|
3,395
|
|
Change in discount/premium on Encores senior subordinated
notes
|
|
|
(2,153
|
)
|
|
|
(791
|
)
|
|
|
|
|
|
|
Pro forma increase to noncash interest expense
|
|
$
|
7,421
|
|
|
$
|
13,272
|
|
|
|
|
|
|
|
Pro forma increase to interest expense
|
|
$
|
46,024
|
|
|
$
|
51,934
|
|
|
|
Pro forma borrowings at September 30, 2009 under the Newly
Committed Credit Facility are $826.6 million. Interest on
the Newly Committed Credit Facility is variable at LIBOR plus
2%-3%. Pro forma interest expense under the Newly Committed
Credit Facility assumes an interest rate of 2.72% which was
calculated using LIBOR rates at January 13, 2010. Each 1/8%
fluctuation in the credit facility interest rate would change
pro forma interest expense by approximately
49
Notes (continued)
$0.8 million and $1.1 million for the nine months
ended September 30, 2009 and the year ended
December 31, 2008, respectively.
Pro forma interest expense assumes an interest rate of 8.50% on
$400 million of New Senior Subordinated Notes. Each 1/8%
fluctuation in the interest rate on the New Senior Subordinated
Notes would change pro forma interest expense by approximately
$0.4 million and $0.5 million for the nine months
ended September 30, 2009 and the year ended
December 31, 2008, respectively.
If Denbury were to assume exercise of their contractual put
option by holders of all of Encores Old Notes at 101% of
par value and Denburys repurchase of all $600 million
of those notes, funded through the remainder of the net proceeds
from the sale of the New Senior Subordinated Notes, interest
expense would increase by approximately $11 million for the
nine months ended September 30, 2009 and approximately
$15 million for the year ended December 31, 2008 (see
Note 1, Basis of Presentation Effect of
Modified Assumption on Repurchase of Encore Senior Subordinated
Notes).
(m) Represents the income tax effect of pro forma
adjustments (i) (l) at Denburys estimated
combined statutory tax rate of 37.5%. The effective tax rate of
the combined company could be significantly different (either
higher or lower) depending on post-merger activities.
(n) Represents the allocable portion of adjustments (i) and
(j) to earnings relating to the noncontrolling interest of ENP.
(o) Represents additional shares of Denbury common stock
estimated to be issued to Encore stockholders at the acquisition
date.
|
|
Note 4
|
Denburys
Unaudited Pro forma Condensed Consolidated Balance Sheet and
Statements of Operations
|
Denburys unaudited pro forma condensed consolidated
balance sheet and statements of operations included in the
unaudited pro forma combined balance sheet and statements of
operations give effect to the following transactions:
May 2009 Sale of 60% of Denburys Barnett Shale Natural
Gas Assets. In May 2009, Denbury entered into an agreement
to sell 60% of its Barnett Shale natural gas assets to Talon Oil
and Gas LLC (Talon), a privately held company, for
$270 million (before closing adjustments). The effective
date under the agreement was June 1, 2009, and consequently
operating net revenues after June 1, net of capital
expenditures, along with any other purchase price adjustments,
were adjustments to the selling price. In June 2009, Denbury
completed approximately three-quarters of the sale and closed
the remaining portion of the sale in July 2009. Combined net
proceeds were $259.8 million (after closing adjustments and
net of $8.1 million for natural gas swaps transferred in
the sale). Denbury used the net proceeds from the sale to repay
bank debt. Denbury did not record a gain or loss on the sale in
accordance with the full cost method of accounting.
December 2009 Sale of Remaining 40% of Denburys
Barnett Shale Natural Gas Assets. In December 2009,
Denbury closed the sale of its remaining 40% interest in Barnett
Shale
50
Notes (continued)
natural gas assets to Talon for $210 million (before
closing adjustments). The effective date under the agreement was
December 1, 2009. The proceeds of this sale were used to
reduce outstanding bank debt. Denbury does not expect to record
a gain or loss on the sale in accordance with the full cost
method of accounting. Further, the sale was structured as a
deferred like-kind exchange in conjunction with Denburys
December 2009 purchase of Conroe Field in order to defer
most of the tax impacts of the sale.
Denburys unaudited pro forma condensed consolidated
balance sheet gives effect to the sale of 40% of its Barnett
Shale natural gas assets as if it occurred on September 30,
2009. The effect of the May 2009 sale of 60% of Denburys
Barnett Shale natural gas assets is included in Denburys
historical condensed consolidated balance sheet as of
September 30, 2009 as the sale occurred prior to
September 30, 2009.
Denburys unaudited pro forma condensed consolidated
statements of operations include the effect of the sale of 60%,
and subsequent sale of 40%, of its Barnett Shale natural gas
assets as if each occurred on January 1, 2008.
51
Notes (continued)
Unaudited pro
forma condensed consolidated
balance sheet as of September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denbury
|
|
|
Pro forma
|
|
|
Denbury
|
|
(in thousands)
|
|
historical
|
|
|
adjustments
|
|
|
pro forma
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,689
|
|
|
$
|
190,000
|
(a)
|
|
$
|
211,689
|
|
Trade, accrued production and other receivables, net
|
|
|
168,931
|
|
|
|
|
|
|
|
168,931
|
|
Derivative assets
|
|
|
17,900
|
|
|
|
|
|
|
|
17,900
|
|
Current deferred tax assets
|
|
|
5,637
|
|
|
|
|
|
|
|
5,637
|
|
|
|
|
|
|
|
|
|
|
214,157
|
|
|
|
190,000
|
|
|
|
404,157
|
|
|
|
|
|
|
|
Oil and natural gas properties
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved
|
|
|
3,468,060
|
|
|
|
(210,000
|
)(a)
|
|
|
3,258,060
|
|
Unevaluated
|
|
|
213,170
|
|
|
|
|
|
|
|
213,170
|
|
CO2
properties, equipment and pipelines
|
|
|
1,422,981
|
|
|
|
|
|
|
|
1,422,981
|
|
Other
|
|
|
80,015
|
|
|
|
|
|
|
|
80,015
|
|
Less accumulated depreciation, depletion and amortization
|
|
|
(1,763,902
|
)
|
|
|
|
|
|
|
(1,763,902
|
)
|
|
|
|
|
|
|
Net property and equipment
|
|
|
3,420,324
|
|
|
|
(210,000
|
)
|
|
|
3,210,324
|
|
Goodwill
|
|
|
138,830
|
|
|
|
|
|
|
|
138,830
|
|
Other assets
|
|
|
52,343
|
|
|
|
|
|
|
|
52,343
|
|
Investment in Genesis
|
|
|
77,606
|
|
|
|
|
|
|
|
77,606
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,903,260
|
|
|
$
|
(20,000
|
)
|
|
$
|
3,883,260
|
|
|
|
|
|
|
|
Liabilities and Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
188,420
|
|
|
$
|
|
|
|
$
|
188,420
|
|
Oil and gas production payable
|
|
|
86,038
|
|
|
|
|
|
|
|
86,038
|
|
Derivative liabilities
|
|
|
74,614
|
|
|
|
|
|
|
|
74,614
|
|
Deferred revenueGenesis
|
|
|
4,070
|
|
|
|
|
|
|
|
4,070
|
|
Current maturities of long-term debt
|
|
|
4,698
|
|
|
|
|
|
|
|
4,698
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
357,840
|
|
|
|
|
|
|
|
357,840
|
|
|
|
|
|
|
|
Long-term debtGenesis
|
|
|
250,681
|
|
|
|
|
|
|
|
250,681
|
|
Long-term debt
|
|
|
945,380
|
|
|
|
(20,000
|
)(a)
|
|
|
925,380
|
|
Asset retirement obligations
|
|
|
47,149
|
|
|
|
|
|
|
|
47,149
|
|
Deferred revenueGenesis
|
|
|
16,796
|
|
|
|
|
|
|
|
16,796
|
|
Deferred tax liability
|
|
|
458,940
|
|
|
|
|
|
|
|
458,940
|
|
Derivative liabilities
|
|
|
12,496
|
|
|
|
|
|
|
|
12,496
|
|
Other
|
|
|
23,319
|
|
|
|
|
|
|
|
23,319
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
1,754,761
|
|
|
|
(20,000
|
)
|
|
|
1,734,761
|
|
Equity
|
|
|
1,790,659
|
|
|
|
|
|
|
|
1,790,659
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
3,903,260
|
|
|
$
|
(20,000
|
)
|
|
$
|
3,883,260
|
|
|
|
52
Notes (continued)
Unaudited pro
forma condensed consolidated
statement of operations for the nine months ended
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denbury
|
|
|
Pro forma
|
|
|
Denbury
|
|
(in thousands)
|
|
historical
|
|
|
adjustments
|
|
|
pro forma
|
|
|
|
|
Revenues and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil, natural gas and related product sales
|
|
$
|
600,942
|
|
|
$
|
(62,830
|
)(b)
|
|
$
|
538,112
|
|
CO2
sales and transportation fees
|
|
|
9,708
|
|
|
|
|
|
|
|
9,708
|
|
Interest income and other
|
|
|
1,948
|
|
|
|
|
|
|
|
1,948
|
|
|
|
|
|
|
|
Total revenues
|
|
|
612,598
|
|
|
|
(62,830
|
)
|
|
|
549,768
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
|
241,908
|
|
|
|
(13,767
|
)(c)
|
|
|
228,141
|
|
Production taxes and marketing expenses
|
|
|
24,294
|
|
|
|
(4,348
|
)(c)
|
|
|
19,946
|
|
Transportation expenseGenesis
|
|
|
6,143
|
|
|
|
|
|
|
|
6,143
|
|
CO2
operating expenses
|
|
|
3,442
|
|
|
|
|
|
|
|
3,442
|
|
General and administrative
|
|
|
79,828
|
|
|
|
|
|
|
|
79,828
|
|
Interest, net of amounts capitalized
|
|
|
36,960
|
|
|
|
(2,865
|
)(d)
|
|
|
34,095
|
|
Depletion, depreciation and amortization
|
|
|
177,145
|
|
|
|
(13,870
|
)(c)
|
|
|
163,275
|
|
Commodity derivative expense
|
|
|
177,061
|
|
|
|
|
|
|
|
177,061
|
|
|
|
|
|
|
|
Total expenses
|
|
|
746,781
|
|
|
|
(34,850
|
)
|
|
|
711,931
|
|
|
|
|
|
|
|
Equity in net income of Genesis
|
|
|
5,802
|
|
|
|
|
|
|
|
5,802
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(128,381
|
)
|
|
|
(27,980
|
)
|
|
|
(156,361
|
)
|
|
|
|
|
|
|
Income tax benefit
|
|
|
(49,729
|
)
|
|
|
(10,633
|
)(e)
|
|
|
(60,362
|
)
|
|
|
|
|
|
|
Net loss
|
|
$
|
(78,652
|
)
|
|
$
|
(17,347
|
)
|
|
$
|
(95,999
|
)
|
|
|
|
|
|
|
Net loss per common sharebasic
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
$
|
(0.39
|
)
|
Net loss per common sharediluted
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
$
|
(0.39
|
)
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
246,156
|
|
|
|
|
|
|
|
246,156
|
|
Diluted
|
|
|
246,156
|
|
|
|
|
|
|
|
246,156
|
|
|
|
53
Notes (continued)
Unaudited pro
forma condensed consolidated
statement of operations for the year ended
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denbury
|
|
|
|
Denbury
|
|
|
Pro forma
|
|
|
historical
|
|
(in thousands)
|
|
historical
|
|
|
adjustments
|
|
|
pro forma
|
|
|
|
|
Revenues and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil, natural gas and related product sales
|
|
$
|
1,347,010
|
|
|
$
|
(234,861
|
)(b)
|
|
$
|
1,112,149
|
|
CO2
sales and transportation fees
|
|
|
13,858
|
|
|
|
|
|
|
|
13,858
|
|
Interest income and other
|
|
|
4,834
|
|
|
|
|
|
|
|
4,834
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,365,702
|
|
|
|
(234,861
|
)
|
|
|
1,130,841
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expense
|
|
|
307,550
|
|
|
|
(24,041
|
)(c)
|
|
|
283,509
|
|
Production taxes and marketing expenses
|
|
|
55,770
|
|
|
|
(12,626
|
)(c)
|
|
|
43,144
|
|
Transportation expenseGenesis
|
|
|
7,982
|
|
|
|
|
|
|
|
7,982
|
|
CO2
operating expenses
|
|
|
4,216
|
|
|
|
|
|
|
|
4,216
|
|
General and administrative
|
|
|
60,374
|
|
|
|
|
|
|
|
60,374
|
|
Interest, net of amounts capitalized
|
|
|
32,596
|
|
|
|
(3,593
|
)(d)
|
|
|
29,003
|
|
Depletion, depreciation and amortization
|
|
|
221,792
|
|
|
|
(44,252
|
)(c)
|
|
|
177,540
|
|
Commodity derivative income
|
|
|
(200,053
|
)
|
|
|
|
|
|
|
(200,053
|
)
|
Abandoned acquisition cost
|
|
|
30,601
|
|
|
|
|
|
|
|
30,601
|
|
Write-down of oil and natural gas properties
|
|
|
226,000
|
|
|
|
|
|
|
|
226,000
|
|
|
|
|
|
|
|
Total expenses
|
|
|
746,828
|
|
|
|
(84,512
|
)
|
|
|
662,316
|
|
|
|
|
|
|
|
Equity in net income of Genesis
|
|
|
5,354
|
|
|
|
|
|
|
|
5,354
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
624,228
|
|
|
|
(150,349
|
)
|
|
|
473,879
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
|
235,832
|
|
|
|
(57,133
|
)(e)
|
|
|
178,699
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
388,396
|
|
|
$
|
(93,216
|
)
|
|
$
|
295,180
|
|
|
|
|
|
|
|
Net income per common sharebasic
|
|
$
|
1.59
|
|
|
|
|
|
|
$
|
1.21
|
|
Net income per common sharediluted
|
|
$
|
1.54
|
|
|
|
|
|
|
$
|
1.17
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
243,935
|
|
|
|
|
|
|
|
243,935
|
|
Diluted
|
|
|
252,530
|
|
|
|
|
|
|
|
252,530
|
|
|
|
Denburys unaudited pro forma condensed consolidated
balance sheet and statements of operations include the following
adjustments:
|
|
|
(a)
|
|
Represents the increase in cash of
$190 million, reduction in debt of $20 million and
reduction in oil and natural gas properties of $210 million
resulting from the sale of the remaining 40% of Denburys
Barnett Shale natural gas assets. Denburys bank debt
outstanding as of September 30, 2009 was $20 million.
As such, the pro forma adjustment reflects the pay down of
$20 million of bank debt. Denbury incurred additional debt
in December 2009 and utilized the $210 million in
proceeds to pay down bank debt in December 2009.
|
|
|
|
(b)
|
|
Represents the decrease in revenues
from the sale of oil and natural gas resulting from the disposal
of Denburys Barnett Shale natural gas assets.
|
|
(c)
|
|
Represents the reduction in lease
operating expense, production expenses and depletion
attributable to the disposal of Denburys Barnett Shale
natural gas assets. Denburys estimated pro forma oil and
natural gas depletion rate was $13.16 per BOE for the nine
months ended September 30, 2009 and $12.03 per BOE for
the year ended December 31, 2008. Denburys historical
oil and natural gas depletion rate was $11.44 for the nine
months ended September 30, 2009 and $11.55 per BOE for
the year ended December 31, 2008.
|
|
(d)
|
|
Denbury utilized the proceeds from
the sale of its 60% interest in its Barnett Shale natural gas
assets to repay a portion of its credit facility. The adjustment
to interest expense reflects the reduction in interest expense
as if the repayment occurred on January 1, 2008. Denbury
used the proceeds from the sale of the remaining 40% of its
interest in its Barnett Shale natural gas assets to reduce
outstanding bank debt.
|
|
(e)
|
|
Represents the income tax effect of
the pro forma adjustments at Denburys approximate
statutory tax rate of 38%.
|
54
Description of
the notes
Certain terms used in this description are defined under the
subheading Certain definitions. As used in
this section, the terms Company, we,
us and our refer only to Denbury
Resources Inc., the issuer of the senior subordinated notes, and
not to any of its subsidiaries.
General
The Company will issue $1.0 billion of
81/4% Senior
Subordinated Notes due 2020 (the Notes) under an
indenture, dated on or about February 10, 2010 (the
Indenture), among the Company, its subsidiaries and
Wells Fargo Bank, National Association, as Trustee.
The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the
Trust Indenture Act of 1939 (the Trust Indenture
Act). The following description is only a summary of the
material provisions of the Indenture and the escrow agreement.
We urge you to read the Indenture because it, not this
description, defines your rights as holders of the Notes. You
may request copies of the Indenture at our address set forth
under the heading Where you can find more
information.
Principal of and interest on the Notes will be payable, and the
Notes may be exchanged or transferred, at our office or agency
in the Borough of Manhattan, The City of New York (which
initially shall be the corporate trust office of the Trustee),
except that, at our option, payment of interest may be made by
check mailed to the address of the Holders as such address
appears in the note register.
The Notes will be issued only in fully registered form, without
coupons, in denominations of $2,000 and any integral multiple of
$1,000. No service charge shall be made for any registration of
transfer or exchange of Notes, but we may require payment of a
sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
The Company will issue Notes with an initial aggregate principal
amount of $1.0 billion. Subject to the covenants described
below under Certain covenants and applicable law,
the Company may issue additional
81/4%
Senior Subordinated Notes due 2020 under the Indenture in an
unlimited principal amount (the Additional Notes).
The Notes of a series and any Additional Notes subsequently
issued under the Indenture would be treated as a single class
for all purposes under the Indenture, in each case including,
without limitation, waivers, amendments, redemptions and offers
to purchase. Unless the context otherwise requires, for all
purposes of the Indenture and this Description of the
notes, references to the Notes include any Additional
Notes actually issued.
Terms of the
notes
The $1.0 billion aggregate principal amount of Notes
offered hereby will be unsecured senior subordinated obligations
of the Company. The Notes will mature on February 15, 2020
and bear interest at the rate per annum shown on the cover page
hereof from the date of original issuance, or from the most
recent date to which interest has been paid or provided for,
payable semiannually to Holders (as defined in the Indenture) of
record at the close of business (whether or not a Business Day)
on the February 1 or August 1 immediately preceding
the interest payment date on February 15 and August 15
of each year, beginning August 15, 2010. Interest on
overdue principal and (to the extent permitted by law) on
overdue installments of
55
interest will accrue at 1% per annum in excess of such rate.
Interest on the Notes will be computed on the basis of a
360-day year
of twelve
30-day
months.
Optional
redemption
Except as set forth in the following two paragraphs, the Notes
will not be redeemable at the option of the Company prior to
February 15, 2015. Thereafter, the Notes will be
redeemable, at our option, in whole or in part, at any time or
from time to time, upon not less than 30 nor more than
60 days prior notice mailed by first-class mail to
each Holders registered address, at the following
redemption prices (expressed in percentages of principal
amount), plus accrued and unpaid interest to the redemption date
(subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest
payment date), if redeemed during the
12-month
period commencing on February 15, of the years set forth
below:
|
|
|
|
|
|
|
Period
|
|
Redemption price
|
|
|
|
|
2015
|
|
|
104.125%
|
|
2016
|
|
|
102.750%
|
|
2017
|
|
|
101.375%
|
|
2018 and thereafter
|
|
|
100.00%
|
|
|
|
Prior to February 15, 2013, we may at our option on one or
more occasions redeem the Notes (which includes Additional
Notes, if any) in an aggregate principal amount not to exceed
35% of the aggregate principal amount of the Notes (which
includes Additional Notes, if any) originally issued at a
redemption price (expressed as a percentage of principal amount)
of 108.25%, plus accrued and unpaid interest to the redemption
date, with the net cash proceeds from one or more Stock
Offerings; provided that at least 65% of such aggregate
principal amount of Notes (which includes Additional Notes, if
any) remains outstanding immediately after the occurrence of
each such redemption (excluding Notes held, directly or
indirectly, by the Company or its Affiliates) and each such
redemption occurs within 60 days after the date of
consummation of the related Stock Offering.
In addition, at any time prior to February 15, 2015, upon
not less than 30 nor more than 60 days prior notice
mailed by first-class mail to each Holders registered
address, the Company may redeem the Notes, in whole but not in
part, at a redemption price equal to 100% of the principal
amount thereof plus the Applicable Premium, plus accrued and
unpaid interest, if any, to the redemption date (subject to the
right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date).
Selection
In the case of any partial redemption, selection of the Notes
for redemption will be made by the Trustee on a pro rata basis,
by lot or by such other method as the Trustee in its sole
discretion shall deem to be fair and appropriate, although no
Note of $1,000 in original principal amount or less shall be
redeemed in part. If any Note is to be redeemed in part only,
the notice of redemption relating to such Note shall state the
portion of the principal amount thereof to be redeemed. A new
Note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the Holder thereof upon
cancellation of the original Note.
56
Notes called for redemption become due on the date fixed for
redemption. On and after the redemption date, interest ceases to
accrue on Notes or portions of them called for redemption.
Mandatory
redemption; offers to purchase; open market purchases
Except as set forth in Escrow of proceeds; special
mandatory redemption, we are not required to make any
mandatory redemption or sinking fund payments with respect to
the Notes. However, under certain circumstances, we may be
required to offer to purchase Notes as described under the
captions Change of control and Certain
covenantsLimitation on sales of assets and subsidiary
stock. We may at any time and from time to time purchase
Notes in the open market or otherwise.
Escrow of
proceeds; special mandatory redemption
The offering of the Notes will be consummated prior to the
closing of the merger. On the Issue Date, the Company will enter
into an escrow agreement with the Trustee in its capacity as
escrow agent (the Escrow Agent) for the ratable
benefit of the Holders of the Notes. Upon consummation of the
offering of the Notes, we will deposit the net proceeds from
this offering into escrow. The merger refers to the
merger of Encore Acquisition Company (Encore) with
and into the Company.
If the closing of the merger does not occur on or prior to
May 31, 2010, or if the merger agreement is terminated at
any time prior thereto, we will be required to redeem the Notes
upon not less than one Business Days and no more than ten
Business Days notice, or such other minimum period as is
required by The Depository Trust Company, or DTC, at a
redemption price equal to 100% of the aggregate issue price of
the Notes being redeemed plus accrued and unpaid interest to,
but not including, the redemption date.
If the closing of the merger does occur prior to May 31,
2010, then upon closing, $400 million of the funds in
escrow will be released to us. We intend to use those proceeds
to fund a portion of the purchase price for Encore. The
remainder of the proceeds in escrow will be used to fund tender
offers or change of control offers for $600.0 million principal
amount of Encore senior subordinated notes. After the merger, to
the extent that fewer than $600.0 million principal amount of
Encore senior subordinated notes are tendered for repurchase by
August 1, 2010, we will use the amount remaining in escrow and
cash on hand to redeem an amount of notes offered hereby equal
to such shortfall at a redemption price equal to the issue price
of the notes, plus accrued and unpaid interest to, but not
including, the date of redemption. Pending release of the funds
in the escrow accounts, the funds will be invested in Government
Securities.
The Company will be entitled to direct the escrow agent to
release the escrowed funds from the escrow accounts only in
accordance with the escrow agreement. Pursuant to the escrow
agreement, the escrow agent will release the escrowed funds to
or at the Companys direction upon the satisfaction of
certain conditions, including presentation of an officers
certificate certifying (1) that the merger will be
consummated on a specified date or when a tender offer or change
of control offer will be consummated on one or more specified
dates, as applicable, (2) no Default or Event of Default
shall have occurred and be continuing under the Indenture and
(3) following the release of the escrowed funds, the
escrowed funds will be used as described under Use of
proceeds.
The Trustee will select the Notes to be redeemed in the manner
described under Selection.
57
Guarantees
The Subsidiary Guarantors, jointly and severally, as primary
obligors and not merely as sureties, will irrevocably, fully and
unconditionally guarantee (each, a Subsidiary
Guarantee) on a senior subordinated basis the performance
and the punctual payment when due, whether at Stated Maturity,
by acceleration or otherwise, of all the obligations of the
Company under the Indenture and the Notes (all such obligations
guaranteed by the Subsidiary Guarantors being herein called the
Guaranteed Obligations). The Company derives a
substantial portion of its operating income and cash flow from
its subsidiaries, including the Subsidiary Guarantors, the
common stock of which may be pledged to secure the
Companys indebtedness outstanding under the Credit
Facilities. Each Subsidiary Guarantor will agree to pay, in
addition to the amount stated above, any and all expenses
(including reasonable counsel fees and expenses) incurred by the
Trustee and the Holders in enforcing any rights under the
Subsidiary Guarantee with respect to the Subsidiary Guarantor.
Each Subsidiary Guarantee will be limited in amount to an amount
not to exceed the maximum amount that can be guaranteed by the
applicable Subsidiary Guarantor without rendering the Subsidiary
Guarantee, as it relates to such Subsidiary Guarantor, voidable
under applicable law relating to fraudulent conveyance or
fraudulent transfer or similar laws affecting the rights of
creditors generally. If a Subsidiary Guarantee were to be
rendered voidable, it could be subordinated by a court to all
other indebtedness (including guarantees and other contingent
liabilities) of the applicable Subsidiary Guarantor, and
depending on the amount of such indebtedness, a Subsidiary
Guarantors liability on its Subsidiary Guarantee could be
reduced to zero. See Risk FactorsRisks related to
the notesA subsidiary guarantee could be voided if it
constitutes a fraudulent transfer under U.S. bankruptcy or
similar state law, which would prevent the holders of the notes
from relying on that subsidiary to satisfy claims.
Each Subsidiary Guarantor that makes a payment under its
Subsidiary Guarantee will be entitled to a contribution from
each other Subsidiary Guarantor in an amount equal to such other
Subsidiary Guarantors pro rata portion of such payment
based on the respective net assets of all the Subsidiary
Guarantors at the time of such payment determined in accordance
with GAAP.
Each Subsidiary Guarantee is a continuing guarantee and shall:
(1) subject to certain limited exceptions, remain in full
force and effect until payment in full of all the Guaranteed
Obligations;
(2) be binding upon the Subsidiary Guarantor; and
(3) inure to the benefit of and be enforceable by the
Trustee, the Holders and their successors, transferees and
assigns.
Pursuant to the Indenture, a Subsidiary Guarantor may
consolidate with, merge with or into, or transfer all or
substantially all its assets to any other Person to the extent
described below under Certain covenantsMerger
and consolidation; provided, however, that
if such Person is not the Company, the Subsidiary
Guarantors obligations under the Indenture and its
Subsidiary Guarantee must be expressly assumed by such other
Person. However, upon the sale or other disposition (including
by way of consolidation or merger) of a Subsidiary Guarantor or
the sale or disposition of all or substantially all the assets
of a Subsidiary Guarantor (in each case other than to the
Company or an Affiliate of the Company), such Subsidiary
Guarantor will be released and relieved from all its obligations
under its Subsidiary Guarantee. See Certain
covenantsMerger and consolidation.
58
Ranking
Senior
indebtedness versus notes
The indebtedness evidenced by the Notes and the Subsidiary
Guarantees will be unsecured, general obligations of the Company
and the relevant Subsidiary Guarantor, as the case may be,
subordinated in right of payment, as set forth in the Indenture,
to the prior payment of all Senior Indebtedness of the Company
or the relevant Subsidiary Guarantor, as the case may be,
whether outstanding on the Issue Date or thereafter incurred,
including the obligations of the Company under, and such
Subsidiary Guarantors guarantee, if any, of the
Companys obligations with respect to, the Credit
Facilities.
On an as-adjusted basis, as of September 30, 2009 after
giving effect to the merger and related financing transactions,
the Senior Indebtedness of the Company and each Subsidiary
Guarantor would have been approximately $1,097 million,
including $844.5 million representing either a primary
obligation for, or guarantee of, secured debt under the Credit
Agreement, approximately $248 million of pipeline Capital
Lease Obligations and $5 million of other Capital Lease
Obligations.
Although the Indenture contains limitations on the amount of
additional Indebtedness that the Company and the subsidiary
Guarantors may incur, under certain circumstances the amount of
such Indebtedness could be substantial and, in any case, such
Indebtedness may be Senior Indebtedness. See Certain
covenantsLimitation on indebtedness.
Other senior
subordinated indebtedness versus notes
Only Indebtedness of the Company or a Subsidiary Guarantor that
is Senior Indebtedness will rank senior to the Notes and the
relevant Subsidiary Guarantee in accordance with the Indenture.
The Notes and each Subsidiary Guarantee will in all respects
rank pari passu with all other Senior Subordinated Indebtedness
of the Company and the relevant Subsidiary Guarantor,
respectively, including the obligations of the Company and such
Subsidiary Guarantor with respect to the Companys
71/2% Senior
Subordinated Notes due 2013, the Companys
71/2% Senior
Subordinated Notes due 2015, and the Companys
9.75% Senior Subordinated Notes due 2016 (collectively, the
Existing Notes). To the extent that holders of
Encores 6.25% senior subordinated notes due 2014,
Encores 6.0% senior subordinated notes due 2015,
Encores 9.5% senior subordinated notes due 2016 and
Encores 7.25% senior subordinated notes due 2017
(collectively, the Encore Senior Subordinated
Notes) do not tender their notes in connection with the
tender offers described under Summary The
merger, or exercise their put rights pursuant to the terms
of the indentures relating to the Encore Senior Subordinated
Notes, such Encore Senior Subordinated Notes will in all
respects rank pari passu with the Existing Notes.
On a pro forma basis as of September 30, 2009 after giving
effect to the merger and related financing transactions:
(1) the Companys Senior Subordinated Indebtedness
would have been approximately $2.176 billion, consisting
solely of the Notes, Encores 9.5% senior subordinated
notes due 2016 and Denburys existing senior subordinated
notes; and
(2) the Senior Subordinated Indebtedness of each Subsidiary
Guarantor would have been approximately $2.176 billion,
consisting of its primary obligations for, or guarantee of,
59
Senior Subordinated Indebtedness of the Company represented by
the Notes, Encores 9.5% senior subordinated notes and
Denburys existing senior subordinated notes.
The Company and each Subsidiary Guarantor will agree in the
Indenture that they will not Incur, directly or indirectly, any
Indebtedness that is subordinate or junior in ranking in right
of payment to its Senior Indebtedness unless such Indebtedness
is Senior Subordinated Indebtedness or is expressly subordinated
in right of payment to Senior Subordinated Indebtedness. The
Indenture does not treat (i) unsecured Indebtedness as
subordinated or junior to Secured Indebtedness merely because it
is unsecured or (ii) Senior Indebtedness as subordinated or
junior to any other Senior Indebtedness merely because it has a
junior priority with respect to the same collateral.
Liabilities of
non-guarantor subsidiaries versus notes
Substantial portions of the operations of the Company are
currently conducted through its Subsidiaries. All of our
existing Restricted Subsidiaries are guaranteeing the Notes.
However, our Unrestricted Subsidiaries will not, and certain
future Subsidiaries of the Company may not, be required to
guarantee the Notes. Claims of creditors of any non-guarantor
Subsidiaries, including trade creditors, secured creditors and
creditors holding guarantees issued by such
non-guarantor
Subsidiaries, and claims of preferred stockholders (if any) of
such non-guarantor Subsidiaries generally would have priority
with respect to the assets and earnings of such non-guarantor
Subsidiaries over the claims of creditors of the Company,
including holders of the Notes, even though such obligations
would not constitute Senior Indebtedness of the Company. The
Notes, therefore, would be effectively subordinated to creditors
(including trade creditors), as of January 31, 2010, and
preferred stockholders (if any) of such non-guarantor
Subsidiaries of the Company, including $255.0 million under
the Encore MLP Facility and approximately $15.0 million of
liabilities of Genesis Energy, LLC. Although the Indenture
limits the incurrence of Indebtedness and the issuance of
preferred stock of certain of the Companys Subsidiaries,
such limitation is subject to a number of significant
qualifications. Moreover, the Indenture does not impose any
limitation on the incurrence by such Subsidiaries of liabilities
that are not considered Indebtedness under the Indenture. See
Certain covenantsLimitation on
indebtedness.
Payment of
notes
The Company may not pay principal of, premium (if any) or
interest on, the Notes or make any deposit pursuant to the
provisions described under Defeasance below and may
not repurchase, redeem or otherwise retire any Notes
(collectively, pay the Notes) if:
(1) any Designated Senior Indebtedness of the Company is
not paid when due; or
(2) any other default on Designated Senior Indebtedness of
the Company occurs and the maturity of such Designated Senior
Indebtedness is accelerated in accordance with its terms;
unless, in either case, the default has been cured or waived and
any such acceleration has been rescinded or such Designated
Senior Indebtedness has been paid in full. However, the Company
may pay the Notes without regard to the foregoing if the Company
and the Trustee receive written notice approving such payment
from the Representative of the applicable Designated Senior
Indebtedness with respect to which either of the events set
forth in clause (1) or (2) of the immediately
preceding sentence has occurred and is continuing. During the
continuance of any default (other than a default described in
clause (1) or (2) of the second immediately preceding
sentence) with respect to any Designated Senior Indebtedness of
the Company
60
pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be
required to effect such acceleration) or the expiration of any
applicable grace periods, the Company may not pay the Notes for
a period (a Payment Blockage Period) commencing upon
the receipt by the Trustee (with a copy to the Company) of
written notice (a Blockage Notice) of such default
from the Representative of the holders of such Designated Senior
Indebtedness specifying an election to effect a Payment Blockage
Period and ending 179 days thereafter (or earlier if such
Payment Blockage Period is terminated:
(1) by written notice to the Trustee and the Company from
the Person or Persons who gave such Blockage Notice;
(2) because the default giving rise to such Blockage Notice
is no longer continuing; or
(3) because such Designated Senior Indebtedness has been
repaid in full in cash).
Notwithstanding the provisions described in the immediately
preceding sentence, unless the holders of such Designated Senior
Indebtedness or the Representative of such holders have
accelerated the maturity of such Designated Senior Indebtedness,
the Company must resume payments on the Notes after the end of
such Payment Blockage Period. The Notes shall not be subject to
more than one Payment Blockage Period in any period of
360 consecutive days irrespective of the number of defaults
with respect to Designated Senior Indebtedness of the Company
during such period.
Upon any payment or distribution of the assets of the Company
upon a total or partial liquidation or dissolution or
reorganization or similar proceeding relating to the Company or
its property:
(1) the holders of Senior Indebtedness of the Company will
be entitled to receive payment in full in cash of such Senior
Indebtedness before the Noteholders are entitled to receive any
payment in respect of the Notes;
(2) until such Senior Indebtedness is paid in full in cash,
any payment or distribution to which Noteholders would be
entitled from the Company but for the subordination provisions
of the Indenture will be made to holders of such Senior
Indebtedness of the Company as their interests may
appear; and
(3) if a distribution is made to Noteholders that, due to
the subordination provisions, should not have been made to them,
such Noteholders are required to hold it in trust for the
holders of Senior Indebtedness of the Company and pay it over to
them as their interests may appear.
If payment of the Notes is accelerated because of an Event of
Default, the Company or the Trustee shall promptly notify the
holders of Designated Senior Indebtedness of the Company or the
Representative of such holders of the acceleration.
The obligations of each Subsidiary Guarantor under its
Subsidiary Guarantee are unsecured senior subordinated
obligations. As such, the rights of Noteholders to receive
payment by a Subsidiary Guarantor pursuant to its Subsidiary
Guarantee will be subordinated in right of payment to the rights
of holders of Senior Indebtedness of such Subsidiary Guarantor.
The terms of the subordination provisions described above with
respect to the Companys obligations under the Notes apply
equally to each Subsidiary Guarantor and the obligations of each
such Subsidiary Guarantor under its respective Subsidiary
Guarantee.
By reason of the subordination provisions contained in the
Indenture, in the event of insolvency, creditors of the Company
or a Subsidiary Guarantor who are holders of Senior Indebtedness
of
61
the Company or such Subsidiary Guarantor, as the case may be,
may recover more, ratably, than the Noteholders, and creditors
of the Company or a Subsidiary Guarantor who are not holders of
Senior Indebtedness of the Company or such Subsidiary Guarantor
may recover less, ratably, than holders of Senior Indebtedness
of the Company or such Subsidiary Guarantor, as the case may be,
and may recover more, ratably, than the Noteholders.
Notwithstanding the foregoing, payment from the money or the
proceeds of U.S. Government Obligations held in any
defeasance trust described under Defeasance
below will not be contractually subordinated in right of payment
to any Senior Indebtedness of the Company or subject to the
restrictions described herein.
Book-entry,
delivery and form
The Notes will be represented by one or more global notes in
registered, global form without interest coupons (collectively,
the Global Notes). The Global Notes initially will
be deposited upon issuance with the Trustee as custodian for DTC
in New York, New York, and registered in the name of DTC or
its nominee, in each case for credit to an account of a direct
or indirect participant as described below.
Except as set forth below, the Global Notes may be transferred,
in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee. Beneficial interests in the
Global Notes may not be exchanged for Notes in certificated form
except in the limited circumstances described below. See
Exchange of global notes for certificated
notes. In addition, transfers of beneficial interests in
the Global Notes will be subject to the applicable rules and
procedures of DTC and its direct or indirect participants, which
may change from time to time.
The Notes may be presented for registration of transfer and
exchange at the offices of the registrar.
Depository
procedures
The following description of the operations and procedures of
DTC is provided solely as a matter of convenience. These
operations and procedures are solely within the control of the
respective settlement systems and are subject to changes by
them. We take no responsibility for these operations and
procedures and urge investors to contact the system or their
participants directly to discuss these matters.
DTC has advised us that DTC is a limited-purpose trust company
organized under the laws of the State of New York, a
banking organization within the meaning of the New
York Banking Law, a member of the Federal Reserve System, a
clearing corporation within the meaning of the
Uniform Commercial Code and a clearing agency
registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its
participating organizations (collectively, the
participants) and to facilitate the clearance and
settlement of transactions in those securities between
participants through electronic book-entry changes in accounts
of its participants. The participants include securities brokers
and dealers, banks, trust companies, clearing corporations and
certain other organizations. Access to DTCs system is also
available to other entities such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly
(collectively, the indirect participants). Persons
who are not participants may beneficially own
62
securities held by or on behalf of DTC only through the
participants or the indirect participants. The ownership
interests in, and transfers of ownership interests in, each
security held by or on behalf of DTC are recorded on the records
of the participants and indirect participants.
DTC has also advised us that, pursuant to procedures established
by it:
(1) upon deposit of the Global Notes, DTC will credit the
accounts of participants designated by the underwriters with
portions of the principal amount of the Global Notes; and
(2) ownership of these interests in the Global Notes will
be shown on, and the transfer of ownership of these interests
will be effected only through, records maintained by DTC (with
respect to the participants) or by the participants and the
indirect participants (with respect to other owners of
beneficial interests in the Global Notes).
Investors in the Global Notes who are participants in DTCs
system may hold their interests therein directly through DTC.
Investors in the Global Notes who are not participants may hold
their interests therein indirectly through organizations which
are participants in such system. All interests in a Global Note
may be subject to the procedures and requirements of DTC. The
laws of some states require that certain persons take physical
delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a
Global Note to such persons will be limited to that extent.
Because DTC can act only on behalf of participants, which in
turn act on behalf of indirect participants, the ability of a
person having beneficial interests in a Global Note to pledge
such interests to persons that do not participate in the DTC
system, or otherwise take actions in respect of such interests,
may be affected by the lack of a physical certificate evidencing
such interests.
Except as described below, owners of an interest in the
Global Notes will not have notes registered in their names, will
not receive physical delivery of Notes in certificated form and
will not be considered the registered owners or
holders thereof under the Indenture for any
purpose.
Payments in respect of the principal of, and interest and
premium, if any, on a Global Note registered in the name of DTC
or its nominee will be payable to DTC in its capacity as the
registered holder under the Indenture. Under the terms of the
Indenture, we and the Trustee will treat the Persons in whose
names the Notes, including the Global Notes, are registered as
the owners of the Notes for the purpose of receiving payments
and for all other purposes. Consequently, neither we, the
Trustee nor any agent of us or the Trustee has or will have any
responsibility or liability for:
(1) any aspect of DTCs records or any
participants or indirect participants records
relating to or payments made on account of beneficial ownership
interests in the Global Notes or for maintaining, supervising or
reviewing any of DTCs records or any participants or
indirect participants records relating to the beneficial
ownership interests in the Global Notes; or
(2) any other matter relating to the actions and practices
of DTC or any of its participants or indirect participants.
DTC has advised us that its current practice, upon receipt of
any payment in respect of securities such as the Notes
(including principal and interest), is to credit the accounts of
the relevant participants with the payment on the payment date
unless DTC has reason to believe it will not receive payment on
such payment date. Each relevant participant is credited with an
amount
63
proportionate to its beneficial ownership of an interest in the
principal amount of the relevant security as shown on the
records of DTC. Payments by the participants and the indirect
participants to the beneficial owners of Notes will be governed
by standing instructions and customary practices and will be the
responsibility of the participants or the indirect participants
and will not be the responsibility of DTC, the Trustee or us.
Neither we nor the Trustee will be liable for any delay by DTC
or any of its participants in identifying the beneficial owners
of the Notes, and we and the Trustee may conclusively rely on
and will be protected in relying on instructions from DTC or its
nominee for all purposes.
Transfers between participants in DTC will be effected in
accordance with DTCs procedures, and will be settled in
same-day
funds.
DTC has advised us that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more
participants to whose account DTC has credited the interests in
the Global Notes and only in respect of such portion of the
aggregate principal amount of the Notes as to which such
participant or participants has or have given such direction.
However, if there is an event of default under the Notes, DTC
reserves the right to exchange the Global Notes for Legend Notes
in certificated form, and to distribute such Notes to its
participants.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Notes among
participants, it is under no obligation to perform such
procedures, and such procedures may be discontinued or changed
at any time. Neither we, the Trustee nor any agent of us or the
Trustee will have any responsibility for the performance by DTC
or its participants or indirect participants of their respective
obligations under the rules and procedures governing their
operations.
Exchange of
global notes for certificated notes
A Global Note is exchangeable for definitive Notes in registered
certificated form (Certificated Notes) if:
(1) DTC (A) notifies us that it is unwilling or unable
to continue as depositary for the Global Notes or (B) has
ceased to be a clearing agency registered under the Exchange Act
and, in each case, a successor depositary is not appointed;
(2) we, at our option, notify the Trustee in writing that
we elect to cause the issuance of the Certificated Notes; or
(3) there has occurred and is continuing a default with
respect to the Notes.
In addition, beneficial interests in a Global Note may be
exchanged for Certificated Notes upon prior written notice given
to the Trustee by or on behalf of DTC in accordance with the
Indenture. In all cases, Certificated Notes delivered in
exchange for any Global Note or beneficial interests in Global
Notes will be registered in the names, and issued in any
approved denominations, requested by or on behalf of the
depositary (in accordance with its customary procedures).
Exchange of
certificated notes for global notes
Certificated Notes may not be exchanged for beneficial interests
in any Global Note unless the transferor first delivers to the
Trustee a written certificate (in the form provided in the
64
Indenture) to the effect that such transfer will comply with the
appropriate transfer restrictions applicable to such Notes.
Same day
settlement and payment
We will make payments in respect of the Notes represented by the
Global Notes (including principal, premium, if any, and
interest, if any) by wire transfer of immediately available
funds to the accounts specified by the Global Note holder. We
will make all payments of principal, interest and premium, if
any, with respect to Certificated Notes by wire transfer of
immediately available funds to the accounts specified by the
holders of the Certificated Notes or, if no such account is
specified, by mailing a check to each such holders
registered address. The Notes represented by the Global Notes
are expected to be eligible to trade in DTCs
Same-Day
Funds Settlement System, and any permitted secondary market
trading activity in such Notes will, therefore, be required by
DTC to be settled in immediately available funds. We expect that
secondary trading in any Certificated Notes will also be settled
in immediately available funds.
Change of
control
(a) Upon the occurrence of any of the following events
(each a Change of Control), each Holder shall have
the right to require that the Company repurchase such
Holders Notes at a purchase price in cash equal to 101% of
the principal amount thereof plus accrued and unpaid interest,
if any, to the date of purchase (subject to the right of Holders
of record on the relevant record date to receive interest on the
relevant interest payment date), in accordance with the terms
contemplated in paragraph (b) below:
(1) any person (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act), other than a
Permitted Holder, is or becomes the beneficial owner (as defined
in
Rules 13d-3
and 13d-5
under the Exchange Act, except that for purposes of this
clause (1) such person shall be deemed to have
beneficial ownership of all shares that such person
has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or
indirectly, of more than 40% of the total voting power of the
Voting Stock of the Company (for the purposes of this clause
(1), such person shall be deemed to beneficially own any Voting
Stock of a specified corporation held by a parent corporation,
if such person is the beneficial owner (as defined in this
clause (1)), directly or indirectly, of more than 40% of the
voting power of the Voting Stock of such parent corporation);
(2) during any period of two consecutive years from and
after the Issue Date, individuals who at the beginning of such
period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders
of the Company was approved by a vote of a majority of the
directors of the Company then still in office who were either
directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors
then in office;
(3) the shareholders of the Company shall have approved any
plan of liquidation or dissolution of the Company; or
(4) the merger or consolidation of the Company with or into
another Person or the merger of another Person with or into the
Company, or the sale, lease, conveyance or transfer of all
65
or substantially all the assets of the Company and its
Restricted Subsidiaries, taken as a whole, to another Person
(other than a Person that is controlled (as defined in the
definition of Affiliate) by the Permitted Holders),
and, in the case of any such merger or consolidation, the
securities of the Company that are outstanding immediately prior
to such transaction and which represent 100% of the aggregate
voting power of the Voting Stock of the Company are changed into
or exchanged for cash, securities or property, unless pursuant
to such transaction such securities are changed into or
exchanged for, in addition to any other consideration,
securities of the surviving corporation that represent
immediately after such transaction, at least a majority of the
aggregate voting power of the Voting Stock of the surviving
corporation; provided that this clause (4) shall exclude the
merger of Encore into the Company.
In the event that at the time of such Change of Control the
terms of the Indebtedness under the Credit Agreement restrict or
prohibit the repurchase of Notes pursuant to this covenant, then
prior to the mailing of the notice to Holders provided for in
paragraph (b) below, but in any event within 30 days
following any Change of Control, the Company shall:
(1) repay in full the Indebtedness under the Credit
Agreement; or
(2) obtain the requisite consent under the agreements
governing the Indebtedness under the Credit Agreement to permit
the repurchase of the Notes as provided for in paragraph
(b) below.
(b) Within 30 days following a Change of Control, the
Company shall mail a notice to each Holder with a copy to the
Trustee stating: (1) that a Change of Control has occurred
and that such Holder has the right to require the Company to
purchase such Holders Notes at a purchase price in cash
equal to 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase (subject to the
right of Holders of record on the relevant record date to
receive interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding such
Change of Control (including information with respect to pro
forma historical income, cash flow and capitalization, in each
case after giving effect to such Change of Control);
(3) the purchase date (which shall be no earlier than
30 days nor later than 60 days from the date such
notice is mailed); and (4) the instructions determined by
the Company, consistent with this covenant, that a Holder must
follow in order to have its Notes purchased.
(c) The Company shall comply, to the extent applicable,
with the requirements of Section 14(e) of the Exchange Act
and any other securities laws or regulations in connection with
the repurchase of Notes pursuant to this covenant. To the extent
that the provisions of any securities laws or regulations
conflict with the provisions of this covenant, the Company shall
comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under this
covenant by virtue thereof.
The Change of Control purchase feature of the Notes may in
certain circumstances make more difficult or discourage a sale
or takeover of the Company and, thus, the removal of incumbent
management. The Change of Control purchase feature is a result
of negotiations between the Company and J.P. Morgan
Securities Inc. Management has no present intention to engage in
a transaction involving a Change of Control, although it is
possible that the Company would decide to do so in the future.
Subject to the limitations discussed below, the Company could,
in the future, enter into certain transactions, including
acquisitions, refinancing or other recapitalizations, that would
not constitute a Change of Control under the Indenture, but that
66
could increase the amount of Indebtedness outstanding at such
time or otherwise affect the Companys capital structure or
credit ratings. Restrictions on the ability of the Company to
Incur additional Indebtedness are contained in the covenants
described under Certain covenants Limitation on
indebtedness and Limitation on liens.
Such restrictions can only be waived with the consent of the
holders of a majority in principal amount of the Notes then
outstanding. Except for the limitations contained in such
covenants, however, the Indenture will not contain any covenants
or provisions that may afford holders of the Notes protection in
the event of a highly leveraged transaction.
The Credit Agreement prohibits the Company from purchasing any
Notes and also provides that the occurrence of certain change of
control events with respect to the Company would constitute a
default thereunder. In the event a Change of Control occurs at a
time when the Company is prohibited from purchasing Notes, the
Company could seek the consent of its lenders to the purchase of
Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent
or repay such borrowings, the Company will remain prohibited
from purchasing Notes. In such case, the Companys failure
to purchase tendered Notes would constitute an Event of Default
under the Indenture which would, in turn, constitute a default
under the Credit Agreement. In such circumstances, the
subordination provisions in the Indenture would likely restrict
payment to the Holders of Notes.
Future indebtedness of the Company may contain prohibitions on
the occurrence of certain events that would constitute a Change
of Control or require such indebtedness to be repurchased upon a
Change of Control. Moreover, the exercise by the Holders of
their right to require the Company to repurchase the Notes could
cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such
repurchase on the Company. Finally, the Companys ability
to pay cash to the holders of Notes following the occurrence of
a Change of Control may be limited by the Companys then
existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any
required repurchases.
The provisions under the Indenture relating to the
Companys obligation to make an offer to repurchase the
Notes as a result of a Change of Control may be waived or
modified with the written consent of the holders of a majority
in outstanding principal amount of the Notes.
The Company will not be required to make an offer to purchase
the Notes as a result of a Change of Control if a third party:
(1) makes such offer in the manner, at the times and
otherwise in compliance with the requirements set forth in the
Indenture relating to the Companys obligations to make
such an offer; and
(2) purchases all Notes validly tendered and not withdrawn
under such an offer.
Certain
covenants
The Indenture contains covenants including, among others, the
following:
Limitation on
indebtedness
(a) The Company shall not, and shall not permit any
Restricted Subsidiary to, Incur, directly or indirectly, any
Indebtedness; provided, however, that the Company
or a Restricted Subsidiary
67
may Incur Indebtedness if, on the date of such Incurrence and
after giving effect thereto, the Consolidated Coverage Ratio
equals or exceeds 2.25 to 1.0.
(b) Notwithstanding the limitation described in the
foregoing paragraph (a), the Company and any Restricted
Subsidiary may Incur the following Indebtedness:
(1) Indebtedness Incurred pursuant to any Credit Facility,
so long as the aggregate amount of all Indebtedness outstanding
under all Credit Facilities does not, at any one time, exceed
the aggregate amount of borrowing availability as of such date
under all Credit Facilities that determine availability on the
basis of a borrowing base or other asset-based calculation;
provided, however, that in no event shall such
amount exceed the greater of (x) $500 million and
(y) 75% of ACNTA as of the date of such Incurrence;
(2) Indebtedness owed to and held by the Company or any
Restricted Subsidiary; provided, however, that any
subsequent issuance or transfer of any Capital Stock which
results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of such
Indebtedness (other than to the Company or another Restricted
Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Indebtedness by the issuer thereof;
(3) The Notes (other than any Additional Notes);
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of
this covenant);
(5) Indebtedness of (A) a Restricted Subsidiary
Incurred and outstanding on or prior to the date on which such
Restricted Subsidiary was acquired by the Company (other than
Indebtedness Incurred in connection with, or to provide all or
any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and (B) the
Company or a Restricted Subsidiary Incurred for the purpose of
financing all or any part of the cost of acquiring oil and gas
properties, another Person (other than a Person that was,
immediately prior to such acquisition, a Subsidiary of the
Company) engaged in the Oil and Gas Business or all or
substantially all the assets of such a Person; provided,
however, that, in the case of each of clause (A) and
clause (B) above, on the date of such Incurrence and after
giving effect thereto, the Consolidated Coverage Ratio equals or
exceeds 2.0 to 1.0;
(6) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to paragraph (a) or pursuant to clause
(3), (4), or (5) above, this clause (6) or
clause (7) below; provided, however, that to
the extent such Refinancing Indebtedness directly or indirectly
Refinances Indebtedness or Preferred Stock of a Restricted
Subsidiary described in clause (5), such Refinancing
Indebtedness shall be Incurred only by such Restricted
Subsidiary or the Company;
(7) Non-recourse Purchase Money Indebtedness;
(8) Indebtedness with respect to Production Payments;
provided, however, that any such Indebtedness
shall be Limited Recourse Production Payments; provided
further, however, that the Net Present Value of the
reserves related to such Production Payments shall not exceed
30% of ACNTA at the time of Incurrence;
68
(9) Indebtedness consisting of the Subsidiary Guarantees
and any Guarantee by a Subsidiary Guarantor of Indebtedness
Incurred by the Company pursuant to clauses (1) and (3);
(10) Indebtedness consisting of Interest Rate Agreements
directly related to Indebtedness permitted to be Incurred by the
Company and its Restricted Subsidiaries pursuant to the
Indenture;
(11) Indebtedness under Oil and Gas Hedging Contracts and
Currency Agreements entered into in the ordinary course of
business for the purpose of limiting risks that arise in the
ordinary course of business of the Company and its Restricted
Subsidiaries;
(12) Indebtedness in respect of bid, performance or surety
obligations issued by or for the account of the Company or any
Restricted Subsidiary in the ordinary course of business,
including Guarantees and letters of credit functioning as or
supporting such bid, performance or surety obligations (in each
case other than for an obligation for money borrowed);
(13) Indebtedness of the Company or a Restricted Subsidiary
Incurred to finance capital expenditures and Refinancing
Indebtedness Incurred in respect thereof in an aggregate amount
which, when taken together with the amount of all other
Indebtedness Incurred pursuant to this clause (13) since
the Issue Date and then outstanding, does not exceed
$20 million;
(14) Permitted Marketing Obligations;
(15) In-kind obligations relating to oil and gas balancing
positions arising in the ordinary course of business; and
(16) Indebtedness in an aggregate amount which, together
with the amount of all other Indebtedness of the Company and its
Restricted Subsidiaries outstanding on the date of such
Incurrence (other than Indebtedness permitted by
clauses (1) through (15) above or paragraph (a)) does
not exceed $100 million.
(c) Notwithstanding the foregoing, the Company shall not,
and shall not permit any Subsidiary Guarantor to, Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the
proceeds thereof are used, directly or indirectly, to Refinance
any Subordinated Obligations unless such Indebtedness shall be
subordinated to the Notes or the relevant Subsidiary Guarantor,
as the case may be, to at least the same extent as such
Subordinated Obligations.
(d) For purposes of determining compliance with the
foregoing covenant:
(1) in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described
above, the Company, in its sole discretion, will classify such
item of Indebtedness at the time of Incurrence and only be
required to include the amount and type of such Indebtedness in
one of the above clauses; provided that any Indebtedness
outstanding under the Credit Agreement on the Issue Date will be
treated as Incurred on the Issue Date under clause (1) of
paragraph (b) above; and
(2) an item of Indebtedness may be divided and classified
in more than one of the types of Indebtedness described above.
69
Incurrence of
layered indebtedness
Notwithstanding paragraphs (a) and (b) of the covenant
described above under Limitation on
indebtedness, the Company shall not, and the Company shall
not permit any Subsidiary Guarantor to, Incur any Indebtedness
if such Indebtedness is subordinate or junior in ranking in any
respect to any Senior Indebtedness of the Company or such
Subsidiary Guarantor, as applicable, unless such Indebtedness is
Senior Subordinated Indebtedness or is expressly subordinated in
right of payment to Senior Subordinated Indebtedness of such
Person.
Limitation on
restricted payments
(a) The Company shall not, and shall not permit any
Restricted Subsidiary, directly or indirectly, to make a
Restricted Payment if at the time the Company or such Restricted
Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or
would result therefrom);
(2) the Company is not able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant
described under Limitation on
indebtedness; or
(3) the aggregate amount of such Restricted Payment and all
other Restricted Payments since the Issue Date would exceed the
sum of (without duplication):
(A) 50% of the aggregate Consolidated Net Income of the
Company accrued on a cumulative basis commencing on
December 31, 2002 and ending on the last day of the fiscal
quarter ending on or immediately preceding the date of such
proposed Restricted Payment (or, if such aggregate Consolidated
Net Income shall be a deficit, minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company
from the issuance or sale of its Capital Stock (other than
Disqualified Stock) subsequent to December 31, 2005 (other
than an issuance or sale to a Subsidiary of the Company and
other than an issuance or sale to an employee stock ownership
plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees);
(C) the aggregate Net Cash Proceeds received by the Company
from the issue or sale subsequent to December 31, 2005 of
its Capital Stock (other than Disqualified Stock) to an employee
stock ownership plan; provided, however, that if
such employee stock ownership plan incurs any Indebtedness with
respect thereto, such aggregate amount shall be limited to an
amount equal to any increase in the Consolidated Net Worth of
the Company resulting from principal repayments made by such
employee stock ownership plan with respect to such Indebtedness;
(D) the amount by which Indebtedness of the Company is
reduced on the Companys balance sheet upon the conversion
or exchange (other than by a Subsidiary of the Company)
subsequent to December 31, 2005, of any Indebtedness of the
Company convertible or exchangeable for Capital Stock (other
than Disqualified Stock) of the Company (less the amount of any
cash, or the fair value of any other property, distributed by
the Company upon such conversion or exchange); and
(E) an amount equal to the sum of (i) the net
reduction in Investments made subsequent to December 31,
2005 by the Company or any Restricted Subsidiary in any
70
Person resulting from dividends, repayments of loans or advances
or other transfers of assets, in each case to the Company or any
Restricted Subsidiary from such Person, and (ii) the
portion (proportionate to the Companys equity interest in
such Subsidiary) of the fair market value of the net assets of
an Unrestricted Subsidiary at the time such Unrestricted
Subsidiary is designated a Restricted Subsidiary;
provided, however, that the foregoing sum shall
not exceed, in the case of any such Person or Unrestricted
Subsidiary, the amount of Investments previously made (and
treated as a Restricted Payment) by the Company or any
Restricted Subsidiary in such Person or Unrestricted Subsidiary.
At December 31, 2009, the Company would have been able to
make approximately $800 million of Restricted Payments
under the foregoing calculation specified in this
paragraph (a)(3).
(b) The provisions of the foregoing paragraph
(a) shall not prohibit:
(1) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend
would have complied with this covenant; provided,
however, that at the time of payment of such dividend, no
other Default shall have occurred and be continuing (or result
therefrom); provided further, however, that such
dividend shall be included in the calculation of the amount of
Restricted Payments;
(2) any purchase or redemption of Capital Stock or
Subordinated Obligations of the Company made by exchange for, or
out of the proceeds of the substantially concurrent sale of,
Capital Stock of the Company (other than Disqualified Stock and
other than Capital Stock issued or sold to a Subsidiary of the
Company or an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the
benefit of their employees); provided, however,
that (A) such purchase or redemption shall be excluded in
the calculation of the amount of Restricted Payments and
(B) the Net Cash Proceeds from such sale shall be excluded
from the calculation of amounts under clause (3)(B) of
paragraph (a) above (but only to the extent that such Net
Cash Proceeds were used to purchase or redeem such Capital Stock
as provided in this clause (2));
(3) any purchase, repurchase, redemption, defeasance or
other acquisition or retirement for value of Subordinated
Obligations of the Company made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Subordinated
Obligations of the Company; provided, however,
that such purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value shall be excluded in the
calculation of the amount of Restricted Payments;
(4) the repurchase of shares of, or options to purchase
shares of, common stock of the Company or any of its
Subsidiaries from employees, former employees, directors or
former directors of the Company or any of its Subsidiaries (or
permitted transferees of such employees, former employees,
directors or former directors), pursuant to the terms of the
agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors under
which such individuals purchase or sell or are granted the
option to purchase or sell, shares of such common stock;
provided, however, that the aggregate amount of
such repurchases shall not exceed $2 million in any
calendar year; provided further, however, that
such repurchases shall be excluded in the calculation of the
amount of Restricted Payments;
71
(5) loans made to officers, directors or employees of the
Company or any Restricted Subsidiary approved by the Board of
Directors (or a duly authorized officer), the net cash proceeds
of which are used solely (A) to purchase common stock of
the Company in connection with a restricted stock or employee
stock purchase plan, or to exercise stock options received
pursuant to an employee or director stock option plan or other
incentive plan, in a principal amount not to exceed the exercise
price of such stock options or (B) to refinance loans,
together with accrued interest thereon, made pursuant to item
(A) of this clause (5); provided, however,
that such loans shall be excluded in the calculation of the
amount of Restricted Payments; or
(6) other Restricted Payments in an aggregate amount not to
exceed $40 million; provided, however, that
such Restricted Payments shall be excluded in the calculation of
the amount of Restricted Payments.
Limitation on
restrictions on distributions from restricted
subsidiaries
The Company shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or
become effective any consensual encumbrance or restriction on
the ability of any Restricted Subsidiary (A) to pay
dividends or make any other distributions on its Capital Stock
or pay any Indebtedness owed to the Company or a Restricted
Subsidiary, (B) to make any loans or advances to the
Company or a Restricted Subsidiary or (C) to transfer any
of its property or assets to the Company or a Restricted
Subsidiary, except:
(1) any encumbrance or restriction in the Credit Agreement
on the Issue Date or pursuant to any other agreement in effect
on the Issue Date;
(2) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary on or prior
to the date on which such Restricted Subsidiary was acquired by
the Company (other than Indebtedness Incurred as consideration
in, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted
Subsidiary became a Restricted Subsidiary or was acquired by the
Company) and outstanding on such date;
(3) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (1) or (2) of this
covenant or this clause (3) or contained in any amendment
to an agreement referred to in clause (1) or (2) of
this covenant or this clause (3); provided,
however, that the encumbrances and restrictions with
respect to such Restricted Subsidiary contained in any such
refinancing agreement or amendment are no less favorable to the
Noteholders than encumbrances and restrictions with respect to
such Restricted Subsidiary contained in such agreements;
(4) any such encumbrance or restriction consisting of
customary nonassignment provisions in leases governing leasehold
interests to the extent such provisions restrict the transfer of
the lease or the property leased thereunder;
(5) in the case of clause (c) above, restrictions
contained in security agreements or mortgages securing
Indebtedness of a Restricted Subsidiary to the extent such
restrictions restrict the transfer of the property subject to
such security agreements or mortgages; and
72
(6) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or
assets of such Restricted Subsidiary pending the closing of such
sale or disposition.
Limitation on
sales of assets and subsidiary stock
(a) The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, consummate any
Asset Disposition unless:
(1) the Company or such Restricted Subsidiary receives
consideration at least equal to the fair market value (such fair
market value to be determined on the date of contractually
agreeing to such Asset Disposition in good faith by an Officer
or an officer of such Restricted Subsidiary with responsibility
for such transaction, or the Board of Directors if the Asset
Disposition exceeds $50.0 million, which determination
shall be conclusive evidence of compliance with this provision),
of the equity and assets subject to such Asset Disposition;
(2) at least 75% of the consideration received by the
Company or such Restricted Subsidiary is in the form of cash or
cash equivalents, Additional Assets or any combination thereof
(collectively, the Cash Consideration); and
(3) an amount equal to 100% of the Net Available Cash from
such Asset Disposition is applied by the Company (or such
Restricted Subsidiary, as the case may be):
(A) first, to the extent the Company elects (or is
required by the terms of any Indebtedness), to prepay, repay,
redeem or purchase Senior Indebtedness of the Company or any
Subsidiary Guarantor or Indebtedness (other than any
Disqualified Stock) of a Wholly Owned Subsidiary that is not a
Subsidiary Guarantor (in each case other than Indebtedness owed
to the Company or an Affiliate of the Company) within
540 days from the later of the date of such Asset
Disposition or the receipt of such Net Available Cash, provided
such prepayment, repayment, redemption or purchase permanently
retires, or reduces the related loan commitment (if any) for,
such Indebtedness in an amount equal to the principal amount so
prepaid, repaid, redeemed or purchased;
(B) second, to the extent of the balance of such Net
Available Cash after application in accordance with clause (A),
to the extent the Company elects, to acquire Additional Assets
or to make capital expenditures in the Oil and Gas Business
within 540 days from the later of the date of such Asset
Disposition or the receipt of such Net Available Cash; and
(C) third, to the extent of the balance of such Net
Available Cash after application in accordance with
clauses (A) and (B), to make an offer to the holders of the
Notes (and to holders of other Senior Subordinated Indebtedness
of the Company designated by the Company) to purchase Notes (and
such other Senior Subordinated Indebtedness of the Company)
pursuant to and subject to the conditions contained in the
Indenture, which purchase permanently reduces the outstanding
amount of such Notes (and such other Senior Subordinated
Indebtedness) in an amount equal to the principal amount
purchased.
Pending application of Net Available Cash pursuant to this
covenant, such Net Available Cash shall be invested in Temporary
Cash Investments or applied to temporarily reduce revolving
credit Indebtedness.
73
Notwithstanding the foregoing provisions of this covenant, the
Company and the Restricted Subsidiaries will not be required to
apply any Net Available Cash in accordance with this covenant
except to the extent that the aggregate Net Available Cash from
all Asset Dispositions, which is not applied in accordance with
this covenant, exceeds $40.0 million during any calendar
year.
For the purposes of this covenant, the following are deemed to
be cash or cash equivalents:
(1) any liabilities, as shown on the Companys or such
Restricted Subsidiarys most recent balance sheet, of the
Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated
to the Notes or any Subsidiary Guaranty) that are assumed by the
transferee of any such Asset Disposition pursuant to (1) a
customary novation agreement that releases the Company or such
Restricted Subsidiary from further liability or (2) an
assignment agreement that includes, in lieu of such a release,
the agreement of the transferee or its parent company to
indemnify and hold harmless the Company or such Restricted
Subsidiary from and against any loss, liability or cost in
respect of such assumed liability;
(2) any non-Cash Consideration received by the Company or
any Restricted Subsidiary from the transferee that is converted,
monetized, sold or exchanged by the Company or such Restricted
Subsidiary into cash or cash equivalents within 120 days of
receipt.
Notwithstanding the foregoing, the 75% limitation referred to in
paragraph (a) (2) above shall be deemed satisfied with
respect to any Asset Disposition in which the cash or cash
equivalents portion of the consideration received therefrom,
determined in accordance with the foregoing provision on an
after-tax basis, is equal to or greater than what the after-tax
proceeds would have been had such Asset Disposition complied
with the aforementioned 75% limitation.
The requirement of clause (a) (3) (B) above shall be deemed
to be satisfied if an agreement (including a lease, whether a
capital lease or an operating lease) committing to make the
acquisitions or expenditures referred to therein is entered into
by the Company or its Restricted Subsidiary within the time
period specified in such clause and such Net Available Cash is
subsequently applied in accordance with such agreement within
six months following such agreement.
(b) In the event of an Asset Disposition that requires the
purchase of Notes (and other Senior Subordinated Indebtedness of
the Company) pursuant to clause (a) (3) (C) of this
covenant, the Company shall make such offer to purchase Notes
(an Offer) on or before the 541st day
after the later of the date of such Asset Disposition or the
receipt of such Net Available Cash, and shall purchase Notes
tendered pursuant to an offer by the Company for the Notes (and
such other Senior Subordinated Indebtedness of the Company) at a
purchase price of 100% of their principal amount (or, in the
event such other Senior Subordinated Indebtedness of the Company
was issued with original issue discount greater than 2.5%, 100%
of the accreted value thereof) without premium, plus accrued but
unpaid interest (or, in respect of such other Senior
Subordinated Indebtedness of the Company, such lesser price, if
any, as may be provided for by the terms of such Senior
Subordinated Indebtedness of the Company) in accordance with the
procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate
purchase price of the securities tendered exceeds the Net
Available Cash allotted to their purchase, the Company will
select the securities to be purchased on a pro rata basis but in
round denominations, which in the
74
case of the Notes will be denominations of $1,000 principal
amount or multiples thereof. The Company shall not be required
to make such an offer to purchase Notes (and other Senior
Subordinated Indebtedness of the Company) pursuant to this
covenant if the Net Available Cash not applied or invested as
provided in clause (a) (3) (A) or (B) of this covenant
is less than $20.0 million (which lesser amount shall be
carried forward for purposes of determining whether such an
offer is required with respect to the Net Available Cash from
any subsequent Asset Disposition). Upon completion of such an
offer to purchase, Net Available Cash will be deemed to be
reduced by the aggregate amount of such offer.
(c) The Company will comply, to the extent applicable, with
the requirements of Section 14(e) of the Exchange Act and
any other securities laws or regulations in connection with the
repurchase of Notes pursuant to this covenant. To the extent
that the provisions of any securities laws or regulations
conflict with provisions of this covenant, the Company will
comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under this
covenant by virtue of its compliance with such securities laws
or regulations.
Limitation on
affiliate transactions
(a) The Company shall not, and shall not permit any
Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of
any property, employee compensation arrangements or the
rendering of any service) with any Affiliate of the Company (an
Affiliate Transaction) unless the terms thereof:
(1) are no less favorable to the Company or such Restricted
Subsidiary than those that could be obtained at the time of such
transaction in arms-length dealings with a Person who is
not such an Affiliate;
(2) if such Affiliate Transaction involves an amount in
excess of $15 million, are set forth in writing and have
been approved by the Board of Directors, including a majority of
the members of the Board of Directors having no personal stake
in such Affiliate Transaction; and
(3) if such Affiliate Transaction involves an amount in
excess of $25 million, have been determined by a nationally
recognized investment banking firm or other qualified
independent appraiser to be fair, from a financial standpoint,
to the Company and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph
(a) shall not prohibit:
(1) any sale of hydrocarbons or other mineral products to
an Affiliate of the Company or the entering into or performance
of Oil and Gas Hedging Contracts, gas gathering, transportation
or processing contracts or oil or natural gas marketing or
exchange contracts with an Affiliate of the Company, in each
case, in the ordinary course of business, so long as the terms
of any such transaction are approved by a majority of the
members of the Board of Directors who are disinterested with
respect to such transaction;
(2) the sale to an Affiliate of the Company of Capital
Stock of the Company that does not constitute Disqualified
Stock, and the sale to an Affiliate of the Company of
Indebtedness (including Disqualified Stock) of the Company in
connection with an offering of such Indebtedness in a market
transaction and on terms substantially identical to those of
other purchasers in such market transaction;
75
(3) transactions contemplated by any employment agreement
or other compensation plan or arrangement existing on the Issue
Date or thereafter entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business;
(4) the payment of reasonable fees to directors of the
Company and its Restricted Subsidiaries who are not employees of
the Company or any Restricted Subsidiary;
(5) transactions between or among the Company and its
Restricted Subsidiaries;
(6) transactions between the Company or any of its
Restricted Subsidiaries and Persons that are controlled (as
defined in the definition of Affiliate) by the
Company (an Unrestricted Affiliate); provided
that no other Person that controls (as so defined) or is
under common control with the Company holds any Investments in
such Unrestricted Affiliate;
(7) Restricted Payments that are permitted by the
provisions of the Indenture described above under the caption
Limitation on restricted payments;
(8) loans or advances to employees in the ordinary course
of business and approved by the Companys Board of
Directors in an aggregate principal amount not to exceed
$2.5 million outstanding at any one time; and
(9) purchase and supply transactions with Genesis Energy,
L.P., or if applicable, Encore Energy Partners LP or their
respective Affiliates in the ordinary course of business
consistent with past practice.
Limitation on
liens
The Company shall not, and shall not permit any Restricted
Subsidiary to, directly or indirectly, enter into, create,
incur, assume or suffer to exist any Lien on or with respect to
any property of the Company or such Restricted Subsidiary,
whether owned on the Issue Date or acquired after the Issue
Date, or any interest therein or any income or profits
therefrom, unless the Notes or any Subsidiary Guarantee of such
Restricted Subsidiary, as applicable, are secured equally and
ratably with (or prior to) any and all other Indebtedness
secured by such Lien, except that the Company and its Restricted
Subsidiaries may enter into, create, incur, assume or suffer to
exist Permitted Liens and Liens securing Senior Indebtedness.
Merger and
consolidation
The Company shall not consolidate with or merge with or into, or
convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all the assets of the Company
and its Restricted Subsidiaries, taken as a whole, to, any
Person, unless:
(1) (A) the resulting, surviving or transferee Person
(the Successor Company) shall be a Person organized
and existing under the laws of the United States of America, any
State thereof or the District of Columbia and (B) the
Successor Company (if not the Company) shall expressly assume,
by an indenture supplemental thereto, executed and delivered to
the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Notes and the Indenture;
(2) immediately after giving effect to such transaction
(and treating any Indebtedness which becomes an obligation of
the Successor Company or any Subsidiary as a result of such
76
transaction as having been Incurred by such Successor Company or
such Subsidiary at the time of such transaction), no Default
shall have occurred and be continuing;
(3) immediately after giving effect to such transaction,
the Successor Company would be able to Incur an additional $1.00
of Indebtedness pursuant to paragraph (a) of the covenant
described under Limitation on indebtedness;
(4) immediately after giving effect to such transaction,
the Successor Company shall have Adjusted Consolidated Net
Tangible Assets that are not less than the Adjusted Consolidated
Net Tangible Assets prior to such transaction;
(5) in the case of a conveyance, transfer or lease of all
or substantially all the assets of the Company and its
Restricted Subsidiaries, taken as a whole, such assets shall
have been so conveyed, transferred or leased as an entirety or
virtually as an entirety to one Person; and
(6) the Company shall have complied with certain additional
conditions set forth in the Indenture;
provided, however, that clauses (3) and
(4) shall not be applicable to any such transaction solely
between the Company and any Restricted Subsidiary.
The Successor Company shall be the successor to the Company and
shall succeed to, and be substituted for, and may exercise every
right and power of, the Company under the Indenture, and the
predecessor Company, except in the case of a lease, shall be
released from the obligation to pay the principal of and
interest on the Notes.
The Company will not permit any Subsidiary Guarantor to
consolidate with or merge with or into, or convey, transfer or
lease, in one transaction or a series of transactions, all or
substantially all of its assets to any Person unless:
(1) the resulting, surviving or transferee Person (if not
such Subsidiary) shall be a Person organized and existing under
the laws of the jurisdiction under which such Subsidiary was
organized or under the laws of the United States of America, or
any State thereof or the District of Columbia, and such Person
shall expressly assume, by executing a Guarantee Agreement, all
the obligations of such Subsidiary, if any, under its Subsidiary
Guarantee;
(2) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness
which becomes an obligation of the resulting, surviving or
transferee Person as a result of such transaction as having been
issued by such Person at the time of such transaction), no
Default shall have occurred and be continuing;
(3) in the case of a conveyance, transfer or lease of all
or substantially all the assets of a Subsidiary Guarantor, such
assets shall have been so conveyed, transferred or leased as an
entirety or virtually as an entirety to one Person; and
(4) the Company shall have complied with certain additional
conditions contained in the Indenture.
The provisions of clauses (1) and (2) above shall not
apply to any one or more transactions which constitute an Asset
Disposition if the Company has complied with the applicable
provisions of the covenant described under
Limitation on sales of assets and subsidiary
stock above.
77
SEC
reports
Notwithstanding that the Company may not at any time be subject
to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company shall file with the SEC and provide
the Trustee and Noteholders with such annual reports and such
information, documents and other reports as are specified in
Sections 13 and 15(d) of the Exchange Act and applicable to
a U.S. corporation subject to such Sections, such
information, documents and other reports to be so filed and
provided at the times specified for the filing of such
information, documents and reports under such Sections.
Future subsidiary
guarantors
The Company shall cause each Restricted Subsidiary that
represents at least 10% of the book assets of, or 10% of the
ACNTA of, the Company and its Restricted Subsidiaries, taken as
a whole, and that has an aggregate of $15.0 million or more
of Indebtedness and Preferred Stock outstanding at any time to
promptly Guarantee the Notes pursuant to a Subsidiary Guarantee
on the terms and conditions set forth in the Indenture.
Defaults
An Event of Default is defined in the Indenture as:
(1) a default in the payment of interest on the Notes when
due, continued for 30 days;
(2) a default in the payment of principal of any Note when
due at its Stated Maturity, upon optional redemption, upon
required purchase, upon declaration of acceleration or otherwise;
(3) the failure by the Company to comply with its
obligations under Certain covenantsMerger and
consolidation above;
(4) the failure by the Company to comply for 30 days
after notice with any of its obligations in the covenants
described above under Change of control (other than
a failure to purchase Notes), Certain
covenants, Limitation on indebtedness,
Limitation on restricted payments,
Limitation on restrictions on distributions from
restricted subsidiaries, Limitation on sales
of assets and subsidiary stock (other than a failure to
purchase Notes), Limitation on affiliate
transactions, Limitation on liens,
Future subsidiary guarantors or SEC
reports;
(5) the failure by the Company to comply for 60 days
after notice with its other agreements contained in such
Indenture;
(6) Indebtedness of the Company (other than Limited
Recourse Production Payments and Nonrecourse Purchase Money
Indebtedness) is not paid within any applicable grace period
after final maturity or the maturity of such Indebtedness is
accelerated by the holders thereof because of a default (and
such acceleration is not rescinded or annulled) and the total
amount of such Indebtedness unpaid or accelerated exceeds
$20 million (the cross acceleration provision);
(7) certain events of bankruptcy, insolvency or
reorganization of the Company or a Significant Subsidiary (the
bankruptcy provisions);
78
(8) any judgment or decree for the payment of money in an
uninsured or unindemnified amount in excess of $20 million
or its foreign currency equivalent at the time is rendered
against the Company or a Significant Subsidiary, remains
outstanding for a period of 60 days following such judgment
and is not discharged, waived, bonded or stayed within
10 days after notice (the judgment default
provision); or
(9) any Subsidiary Guarantee ceases or otherwise fails to
be in full force and effect (other than in accordance with the
terms thereof) or a Subsidiary Guarantor denies or disaffirms
its obligations under its Subsidiary Guarantee if such default
continues for a period of ten days after notice thereof to the
Company (the guarantee default provision).
However, a default under clauses (4), (5), (8) and
(9) will not constitute an Event of Default until the
Trustee or the holders of 25% in principal amount of the
outstanding Notes notify the Company of the default and the
Company does not cure such default within the time specified
after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or
the holders of at least 25% in principal amount of the
outstanding Notes may declare the principal of and accrued but
unpaid interest on all the Notes to be due and payable. Upon
such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain
events of bankruptcy, insolvency or reorganization of the
Company occurs and is continuing, the principal of and interest
on all the Notes will ipso facto become and be immediately due
and payable without any declaration or other act on the part of
the Trustee or any holders of the Notes. Under certain
circumstances, the holders of a majority in principal amount of
the outstanding Notes may rescind any such acceleration with
respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the
duties of the Trustee, in case an Event of Default occurs and is
continuing, the Trustee will be under no obligation to exercise
any of the rights or powers under the Indenture at the request
or direction of any of the holders of the Notes unless such
holders have furnished to the Trustee reasonable indemnity or
security against any loss, liability or expense. Except to
enforce the right to receive payment of principal, premium (if
any) or interest when due, no holder of a Note may pursue any
remedy with respect to the Indenture or the Notes unless:
(1) such holder has previously given the Trustee notice
that an Event of Default is continuing;
(2) holders of at least 25% in principal amount of the
outstanding Notes have requested the Trustee to pursue the
remedy;
(3) such holders have furnished the Trustee reasonable
security or indemnity against any loss, liability or expense;
(4) the Trustee has not complied with such request within
60 days after the receipt thereof and the offer of security
or indemnity; and
(5) the holders of a majority in principal amount of the
outstanding Notes have not given the Trustee a direction
inconsistent with such request within such
60-day
period.
Subject to certain restrictions, the holders of a majority in
principal amount of the outstanding Notes are given the right to
direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or of exercising any
trust or power conferred on the
79
Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the
Trustee determines is unduly prejudicial to the rights of any
other holder of a Note or that would involve the Trustee in
personal liability.
The Indenture provides that if a Default occurs and is
continuing and is known to the Trustee, the Trustee must mail to
each holder of the Notes notice of the Default within
90 days after it occurs. Except in the case of a Default in
the payment of principal of or interest on any Note, the Trustee
may withhold notice if and so long as a committee of its trust
officers determines that withholding notice is not opposed to
the interest of the holders of the Notes. In addition, the
Company is required to deliver to the Trustee, within
120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that
occurred during the previous year. The Company also is required
to deliver to the Trustee, within 30 days after the
occurrence thereof, written notice of any event which would
constitute certain Defaults, their status and what action the
Company is taking or proposes to take in respect thereof.
Amendments and
waivers
Subject to certain exceptions, the Indenture may be amended with
the consent of the holders of a majority in principal amount of
the Notes then outstanding (including consents obtained in
connection with a tender offer or exchange for the Notes) and
any past default or compliance with any provisions may also be
waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding. However, without
the consent of each holder of an outstanding Note affected
thereby, an amendment or waiver may not, among other things:
(1) reduce the amount of Notes whose holders must consent
to an amendment;
(2) reduce the rate of or extend the time for payment of
interest on any Note;
(3) reduce the principal of or extend the Stated Maturity
of any Note;
(4) reduce the premium payable upon the redemption of any
Note or change the time at which any Note may be redeemed as
described under Optional redemption;
(5) make any Note payable in money other than that stated
in the Note;
(6) impair the right of any holder of the Notes to receive
payment of principal of and interest on such holders Notes
on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such
holders Notes;
(7) make any change in the amendment provisions which
require each holders consent or in the waiver provisions;
(8) make any change to the subordination provisions of the
Indenture that would adversely affect the Noteholders; or
(9) make any change in any Subsidiary Guarantee that could
adversely affect such holder.
Without the consent of any holder of the Notes, the Company, the
Subsidiary Guarantors and the Trustee may amend the Indenture to:
(1) cure any ambiguity, omission, defect or inconsistency;
80
(2) provide for the assumption by a successor corporation
of the obligations of the Company or the Subsidiary Guarantors
under the Indenture;
(3) provide for uncertificated Notes in addition to or in
place of certificated Notes (provided that the uncertificated
Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated
Notes are described in Section 163 (f)(2)(B) of the Code);
(4) make any change in the subordination provisions of the
Indenture that would limit or terminate the benefits available
to any holder of Senior Indebtedness of the Company or any
Subsidiary Guarantor thereunder;
(5) add guarantees with respect to the Notes (including any
Subsidiary Guarantee);
(6) secure the Notes;
(7) add to the covenants of the Company for the benefit of
the holders of the Notes or surrender any right or power
conferred upon the Company or any Subsidiary Guarantor;
(8) make any change that does not adversely affect the
rights of any holder of the Notes; or
(9) comply with any requirement of the SEC in connection
with the qualification of the Indenture under the
Trust Indenture Act.
However, no amendment may be made to the subordination
provisions of the Indenture that adversely affects the rights of
any holder of Senior Indebtedness of the Company or a Subsidiary
Guarantor then outstanding unless the holders of such Senior
Indebtedness (or their Representative) consent to such change.
The consent of the holders of the Notes is not necessary under
the Indenture to approve the particular form of any proposed
amendment. It is sufficient if such consent approves the
substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the
Company is required to mail to holders of the Notes a notice
briefly describing such amendment. However, the failure to give
such notice to all holders of the Notes, or any defect therein,
will not impair or affect the validity of the amendment.
Transfer
The Notes will be issued in registered form and will be
transferable only upon the surrender of the Notes being
transferred for registration of transfer. The Company may
require payment of a sum sufficient to cover any tax, assessment
or other governmental charge payable in connection with certain
transfers and exchanges.
Defeasance
The Company at any time may terminate all its obligations under
the Notes and the Indenture (legal defeasance),
except for certain obligations, including those respecting the
defeasance trust and obligations to register the transfer or
exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in
respect of the Notes. The Company at any time may terminate its
obligations under Change of control and under the
covenants described under Certain covenants
(other than the covenant described
81
under Merger and consolidation), the operation
of the cross acceleration provision, the bankruptcy provisions
with respect to Significant Subsidiaries, the judgment default
provision and the guarantee default provision described under
Defaults above and the limitations contained
in clauses (3) and (4) under the first and third
paragraphs of Certain covenantsMerger and
consolidation above (covenant defeasance).
The Company may exercise its legal defeasance option
notwithstanding its prior exercise of its covenant defeasance
option. If the Company exercises its legal defeasance option,
payment of the Notes may not be accelerated because of an Event
of Default with respect thereto. If the Company exercises its
covenant defeasance option, payment of the Notes may not be
accelerated because of an Event of Default specified in clause
(4), (6), (7) (with respect only to Significant Subsidiaries) or
(8) under Defaults above or because of
the failure of the Company to comply with clause (3) or
(4) under the first or third paragraph of
Certain covenantsMerger and
consolidation above. If the Company exercises its
legal defeasance option or its covenant defeasance option, each
Subsidiary Guarantor will be released from all its obligations
with respect to its Subsidiary Guarantee.
In order to exercise either defeasance option, the Company must
irrevocably deposit in trust (the defeasance trust)
with the Trustee money or U.S. Government Obligations for
the payment of principal and interest on the Notes to redemption
or maturity, as the case may be, and must comply with certain
other conditions, including delivery to the Trustee of an
opinion of counsel to the effect that holders of the Notes will
not recognize income, gain or loss for Federal income tax
purposes as a result of such deposit and defeasance and will be
subject to Federal income tax on the same amounts and in the
same manner and at the same times as would have been the case if
such deposit and defeasance had not occurred (and, in the case
of legal defeasance only, such opinion of counsel must be based
on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
Concerning the
trustee
Wells Fargo Bank, National Association, is the Trustee under the
Indenture and has been appointed by the Company as Registrar and
Paying Agent with regard to the Notes.
The Indenture contains certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain
payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or
otherwise. The Trustee will be permitted to engage in other
transactions; provided, however, if it acquires
any conflicting interest it must either eliminate such conflict
within 90 days, apply to the SEC for permission to continue
or resign.
The Holders of a majority in principal amount of the outstanding
Notes will have the right to direct the time, method and place
of conducting any proceeding for exercising any remedy available
to the Trustee, subject to certain exceptions. The Indenture
provides that if an Event of Default occurs (and is not cured),
the Trustee will be required, in the exercise of its power, to
use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers
under the Indenture at the request of any Holder of Notes,
unless such Holder shall have furnished to the Trustee security
and indemnity satisfactory to it against any loss, liability or
expense and then only to the extent required by the terms of the
Indenture.
82
Governing
law
The Indenture will provide that it and the Notes will be
governed by, and construed in accordance with, the laws of the
State of New York.
Certain
definitions
Additional Assets means:
(1) any property or assets (other than Indebtedness and
Capital Stock) in the Oil and Gas Business;
(2) the Capital Stock of a Person that becomes a Restricted
Subsidiary as a result of the acquisition of such Capital Stock
by the Company or another Restricted Subsidiary; or
(3) Capital Stock constituting a non-controlling interest
in any Person that at such time is a Restricted Subsidiary;
provided, however, that any such Restricted
Subsidiary described in clauses (2) or (3) above is
primarily engaged in the Oil and Gas Business.
Adjusted Consolidated Net Tangible Assets or
ACNTA means (without duplication), as of the date of
determination:
(a) the sum of:
(1) discounted future net revenue from proved crude oil and
natural gas reserves of the Company and its Restricted
Subsidiaries calculated in accordance with SEC guidelines before
any state or federal income taxes, as estimated in a reserve
report prepared as of the end of the Companys most
recently completed fiscal year, which reserve report is prepared
or reviewed by independent petroleum engineers, as increased by,
as of the date of determination, the discounted future net
revenue of (A) estimated proved crude oil and natural gas
reserves of the Company and its Restricted Subsidiaries
attributable to acquisitions consummated since the date of such
year-end reserve report, and (B) estimated crude oil and
natural gas reserves of the Company and its Restricted
Subsidiaries attributable to extensions, discoveries and other
additions and upward determinations of estimates of proved crude
oil and natural gas reserves (including previously estimated
development costs incurred during the period and the accretion
of discount since the prior year end) due to exploration,
development or exploitation, production or other activities
which reserves were not reflected in such year-end reserve
report which would, in the case of determinations made pursuant
to clauses (A) and (B), in accordance with standard
industry practice, result in such determinations, in each case
calculated in accordance with SEC guidelines (utilizing the
prices utilized in such year-end reserve report), and decreased
by, as of the date of determination, the discounted future net
revenue attributable to (C) estimated proved crude oil and
natural gas reserves of the Company and its Restricted
Subsidiaries reflected in such year-end reserve report produced
or disposed of since the date of such year-end reserve report
and (D) reductions in the estimated crude oil and natural
gas reserves of the Company and its Restricted Subsidiaries
reflected in such year-end reserve report since the date of such
year-end reserve report attributable to downward determinations
of estimates of proved crude oil and natural gas reserves due to
exploration, development or exploitation, production or other
activities conducted or otherwise occurring since the date of
such year-end reserve report which would, in the case of
83
determinations made pursuant to clauses (C) and (D), in
accordance with standard industry practice, result in such
determinations, in each case calculated in accordance with SEC
guidelines (utilizing the prices utilized in such year-end
reserve report); provided, however, that, in the
case of each of the determinations made pursuant to
clauses (A) through (D), such increases and decreases shall
be as estimated by the Companys engineers, except that if
as a result of such acquisitions, dispositions, discoveries,
extensions or revisions, there is a Material Change which is an
increase, then such increases and decreases in the discounted
future net revenue shall be confirmed in writing by an
independent petroleum engineer;
(2) the capitalized costs that are attributable to crude
oil and natural gas properties of the Company and its Restricted
Subsidiaries to which no proved crude oil and natural gas
reserves are attributed, based on the Companys books and
records as of a date no earlier than the date of the
Companys latest annual or quarterly financial statements;
(3) the Net Working Capital on a date no earlier than the
date of the Companys latest annual or quarterly financial
statements; and
(4) the greater of (I) the net book value on a date no
earlier than the date of the Companys latest annual or
quarterly financial statements and (II) the appraised
value, as estimated by independent appraisers, of other tangible
assets of the Company and its Restricted Subsidiaries as of a
date no earlier than the date of the Companys latest
audited financial statements (provided that the Company shall
not be required to obtain such an appraisal of such assets if no
such appraisal has been performed); minus
(b) to the extent not otherwise taken into account in the
immediately preceding clause (a), the sum of:
(1) non-controlling interests;
(2) any natural gas balancing liabilities of the Company
and its Restricted Subsidiaries reflected in the Companys
latest audited financial statements;
(3) the discounted future net revenue, calculated in
accordance with SEC guidelines (utilizing the same prices
utilized in the Companys year-end reserve report),
attributable to reserves subject to participation interests,
overriding royalty interests or other interests of third
parties, pursuant to participation, partnership, vendor
financing or other agreements then in effect, or which otherwise
are required to be delivered to third parties;
(4) the discounted future net revenue, calculated in
accordance with SEC guidelines (utilizing the same prices
utilized in the Companys year-end reserve report),
attributable to reserves that are required to be delivered to
third parties to fully satisfy the obligations of the Company
and its Restricted Subsidiaries with respect to Volumetric
Production Payments on the schedules specified with respect
thereto; and
(5) the discounted future net revenue, calculated in
accordance with SEC guidelines, attributable to reserves subject
to Dollar-Denominated Production Payments that, based on the
estimates of production included in determining the discounted
future net revenue specified in the immediately preceding clause
(a)(1) (utilizing the same prices utilized in the Companys
year-end reserve report), would be necessary to satisfy fully
the obligations of the Company and its Restricted Subsidiaries
with respect to Dollar-Denominated Production Payments on the
schedules specified with respect thereto.
84
Affiliate of any specified Person means any other
Person, directly or indirectly, controlling or controlled by or
under direct or indirect common control with such specified
Person. For the purposes of this definition, control
when used with respect to any Person means the power to direct
the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities,
by contract or otherwise; and the terms controlling
and controlled have meanings correlative to the foregoing.
For purposes of the provisions described under
Certain covenantsLimitation on restricted
payments, Certain covenantsLimitation on
affiliate transactions and Certain
covenantsLimitation on sales of assets and subsidiary
stock only, Affiliate shall also mean any
beneficial owner of Capital Stock representing 10% or more of
the total voting power of the Voting Stock (on a fully diluted
basis) of the Company or of rights or warrants to purchase such
Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner
pursuant to the first sentence hereof.
Applicable Premium means, with respect to a Note on
any date of redemption, the greater of:
(1) 1.0% of the principal amount of such Note and
(2) the excess, if any, of (a) the present value as of
such date of redemption of (i) the redemption price of such
Note on February 15, 2015 (each such redemption price being
described under Optional Redemption) plus
(ii) all required interest payments due on such Note
through February 15, 2015 (excluding accrued but unpaid
interest to the date of redemption), computed using a discount
rate equal to the Treasury Rate as of such date of redemption
plus 50 basis points, over (b) the then-outstanding
principal of such Note.
Asset Disposition means any sale, lease, transfer or
other disposition (or series of related sales, leases, transfers
or dispositions) by the Company or any Restricted Subsidiary,
including any disposition by means of a merger, consolidation or
similar transaction (each referred to for the purposes of this
definition as a disposition), of:
(1) any shares of Capital Stock of a Restricted Subsidiary
(other than directors qualifying shares or shares required
by applicable law to be held by a Person other than the Company
or a Restricted Subsidiary);
(2) all or substantially all the assets of any division or
line of business of the Company or any Restricted
Subsidiary; or
(3) any other assets of the Company or any Restricted
Subsidiary outside of the ordinary course of business of the
Company or such Restricted Subsidiary.
Notwithstanding the foregoing, none of the following shall be
deemed to be an Asset Disposition:
(1) a disposition by a Restricted Subsidiary to the Company
or by the Company or a Restricted Subsidiary to a Wholly Owned
Subsidiary;
(2) for purposes of the covenant described under
Certain covenantsLimitation on sales of assets
and subsidiary stock only, a disposition that constitutes
a Restricted Payment permitted by the covenant described under
Certain covenantsLimitation on restricted
payments, a disposition of all or substantially all the
assets of the Company in compliance with Certain
covenantsMerger and consolidation or a disposition
that constitutes a Change of Control pursuant to clause (3)
of the definition thereof;
85
(3) the sale or transfer (whether or not in the ordinary
course of business) of crude oil and natural gas properties or
direct or indirect interests in real property; provided,
however, that at the time of such sale or transfer such
properties do not have associated with them any proved reserves;
(4) the abandonment, farm-out, lease or sublease of
developed or undeveloped crude oil and natural gas properties in
the ordinary course of business;
(5) the trade or exchange by the Company or any Restricted
Subsidiary of any crude oil and natural gas property owned or
held by the Company or such Restricted Subsidiary for any crude
oil and natural gas property owned or held by another Person;
(6) the sale or transfer of hydrocarbons or other mineral
products or surplus or obsolete equipment; or
(7) a single transaction or series of related transactions
that involve the disposition of assets with a fair market value
of less than $20.0 million;
in each case in the ordinary course of business.
Attributable Debt in respect of a Sale/Leaseback
Transaction means, as at the time of determination, the present
value (discounted at the interest rate implicit in the
Sale/Leaseback Transaction, compounded annually) of the total
obligations of the lessee for rental payments during the
remaining term of the lease included in such Sale/Leaseback
Transaction (including any period for which such lease has been
extended).
Average Life means, as of the date of determination,
with respect to any Indebtedness or Preferred Stock, the
quotient obtained by dividing
(1) the sum of the products of the numbers of years from
the date of determination to the dates of each successive
scheduled principal payment of such Indebtedness or redemption
or similar payment with respect to such Preferred Stock
multiplied by the amount of such payment by
(2) the sum of all such payments.
Board of Directors means the Board of Directors of
the Company or any committee thereof duly authorized to act on
behalf of such Board.
Business Day means each day which is not a Legal
Holiday (as defined in the applicable Indenture).
Capital Lease Obligation means an obligation that is
required to be classified and accounted for as a capital lease
for financial reporting purposes in accordance with GAAP, and
the amount of Indebtedness represented by such obligation shall
be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be
the date of the last payment of rent or any other amount due
under such lease prior to the first date upon which such lease
may be terminated by the lessee without payment of a penalty.
Capital Stock of any Person means any and all
shares, interests, rights to purchase, warrants, options,
participations or other equivalents of or interests in (however
designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such
equity.
86
Code means the Internal Revenue Code of 1986, as
amended.
Consolidated Coverage Ratio as of any date of
determination means the ratio of
(x) the aggregate amount of EBITDA for the period of the
most recent four consecutive fiscal quarters ending at least
45 days prior to the date of such determination to
(y) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that:
(1) if the Company or any Restricted Subsidiary has
Incurred any Indebtedness since the beginning of such period
that remains outstanding or if the transaction giving rise to
the need to calculate the Consolidated Coverage Ratio is an
Incurrence of Indebtedness, or both, EBITDA and Consolidated
Interest Expense for such period shall be calculated after
giving effect on a pro forma basis to such Indebtedness as if
such Indebtedness had been Incurred on the first day of such
period and the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds
of such new Indebtedness as if such discharge had occurred on
the first day of such period;
(2) if the Company or any Restricted Subsidiary has repaid,
repurchased, defeased or otherwise discharged any Indebtedness
since the beginning of such period or if any Indebtedness is to
be repaid, repurchased, defeased or otherwise discharged on the
date of the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio, EBITDA and Consolidated Interest
Expense for such period shall be calculated on a pro forma basis
as if such discharge had occurred on the first day of such
period and as if the Company or such Restricted Subsidiary has
not earned the interest income actually earned during such
period in respect of cash or Temporary Cash Investments used to
repay, repurchase, defease or otherwise discharge such
Indebtedness;
(3) if since the beginning of such period the Company or
any Restricted Subsidiary shall have made any Asset Disposition
(other than an Asset Disposition involving assets having a fair
market value of less than the greater of two and one-half
percent (2.5%) of Adjusted Consolidated Net Tangible Assets as
of the end of the Companys then most recently completed
fiscal year and $3.0 million), then EBITDA for such period
shall be reduced by an amount equal to EBITDA (if positive)
directly attributable to the assets which are the subject of
such Asset Disposition for such period, or increased by an
amount equal to EBITDA (if negative), directly attributable
thereto for such period and Consolidated Interest Expense for
such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Restricted Subsidiary repaid,
repurchased, defeased or otherwise discharged with respect to
the Company and its continuing Restricted Subsidiaries in
connection with such Asset Disposition for such period (or, if
the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary
to the extent the Company and its continuing Restricted
Subsidiaries are no longer liable for such Indebtedness after
such sale);
(4) if since the beginning of such period the Company or
any Restricted Subsidiary (by merger or otherwise) shall have
made an Investment in any Restricted Subsidiary (or any person
which becomes a Restricted Subsidiary) or an acquisition
(including by way of lease) of assets, including any acquisition
of assets occurring in connection with a transaction requiring a
calculation to be made hereunder, EBITDA and Consolidated
Interest Expense for such period
87
shall be calculated after giving pro forma effect thereto
(including the Incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such
period; and
(5) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with
or into the Company or any Restricted Subsidiary since the
beginning of such period) shall have made any Asset Disposition,
any Investment or acquisition of assets that would have required
an adjustment pursuant to clause (3) or (4) above if
made by the Company or a Restricted Subsidiary during such
period, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto as if
such Asset Disposition, Investment or acquisition occurred on
the first day of such period.
For purposes of this definition, whenever pro forma effect is to
be given to an acquisition of assets, the amount of income or
earnings relating thereto and the amount of Consolidated
Interest Expense associated with any Indebtedness Incurred in
connection therewith, the pro forma calculations shall be
determined in good faith by a responsible financial or
accounting Officer of the Company. If any Indebtedness bears a
floating rate of interest and is being given pro forma effect,
the interest on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the
applicable rate for the entire period (taking into account any
Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of
12 months).
Consolidated Current Liabilities as of the date of
determination means the aggregate amount of liabilities of the
Company and its consolidated Restricted Subsidiaries which would
properly be classified as current liabilities (including taxes
accrued as estimated), on a consolidated balance sheet of the
Company and its Restricted Subsidiaries at such date, after
eliminating:
(1) all intercompany items between the Company and any
Restricted Subsidiary; and
(2) all current maturities of long-term Indebtedness, all
as determined in accordance with GAAP consistently applied.
Consolidated Interest Expense means, for any period,
the total interest expense of the Company and its Restricted
Subsidiaries for such period, determined on a consolidated basis
in accordance with GAAP, plus, to the extent not included in
such total interest expense, and to the extent incurred by the
Company or its Restricted Subsidiaries, without duplication:
(1) interest expense attributable to Capital Lease
Obligations and imputed interest with respect to Attributable
Debt;
(2) capitalized interest;
(3) non-cash interest expense;
(4) commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers acceptance
financing;
(5) net costs (including amortization of fees and up-front
payments) associated with interest rate caps and other interest
rate and currency options that, at the time entered into,
resulted in the Company and its Restricted Subsidiaries being
net payees as to future payouts under such caps or options, and
interest rate and currency swaps and forwards for which the
Company or any of its Restricted Subsidiaries has paid a premium;
88
(6) dividends (excluding dividends paid in shares of
Capital Stock which is not Disqualified Stock) in respect of all
Disqualified Stock held by Persons other than the Company or a
Wholly Owned Subsidiary; and
(7) interest accruing on any Indebtedness of any other
Person to the extent such Indebtedness is Guaranteed by the
Company or any Restricted Subsidiary or secured by a Lien on
assets of the Company or any Restricted Subsidiary to the extent
such Indebtedness constitutes Indebtedness of the Company or any
Restricted Subsidiary (whether or not such Guarantee or Lien is
called upon); provided, however,
Consolidated Interest Expense shall not include any
(x) amortization of costs relating to original debt
issuances other than the amortization of debt discount related
to the issuance of zero coupon securities or other securities
with an original issue price of not more than 90% of the
principal thereof, (y) Consolidated Interest Expense with
respect to any Indebtedness Incurred pursuant to clause (b)
(8) of the covenant described under Certain
covenantsLimitation on indebtedness and
(z) noncash interest expense Incurred in connection with
interest rate caps and other interest rate and currency options
that, at the time entered into, resulted in the Company and its
Restricted Subsidiaries being either neutral or net payors as to
future payouts under such caps or options.
Consolidated Net Income means, for any period, the
net income of the Company and its Subsidiaries determined on a
consolidated basis in accordance with GAAP; provided,
however, that there shall not be included in such
Consolidated Net Income:
(1) any net income of any Person (other than the Company)
if such Person is not a Restricted Subsidiary, except that:
(A) subject to the exclusion contained in clause (4)
below, the Companys equity in the net income of any such
Person for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Company or
a Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution paid
to a Restricted Subsidiary, to the limitations contained in
clause (3) below); and
(B) the Companys equity in a net loss of any such
Person for such period shall be included in determining such
Consolidated Net Income;
(2) any net income (or loss) of any Person acquired by the
Company or a Subsidiary in a pooling of interests transaction
for any period prior to the date of such acquisition;
(3) any net income of any Restricted Subsidiary (other than
a Subsidiary Guarantor) if such Restricted Subsidiary is subject
to restrictions, directly or indirectly, on the payment of
dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that:
(A) subject to the exclusion contained in clause (4)
below, the Companys equity in the net income of any such
Restricted Subsidiary for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Restricted Subsidiary during such
period to the Company or another Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a
dividend or other distribution paid to another Restricted
Subsidiary, to the limitation contained in this clause); and
89
(B) the Companys equity in a net loss of any such
Restricted Subsidiary for such period shall be included in
determining such Consolidated Net Income;
(4) any gain or loss realized upon the sale or other
disposition of any assets of the Company or its Subsidiaries
(including pursuant to any
sale-and-leaseback
arrangement) which is not sold or otherwise disposed of in the
ordinary course of business and any gain or loss realized upon
the sale or other disposition of any Capital Stock of any Person;
(5) extraordinary gains or losses;
(6) any non-cash compensation expense realized for grants
of performance shares, stock options or stock awards to
officers, directors and employees of the Company or any of its
Restricted Subsidiaries;
(7) any write-downs of noncurrent assets; provided,
however, that any ceiling limitation write-downs under
SEC guidelines shall be treated as capitalized costs, as if such
write-downs had not occurred; and
(8) the cumulative effect of a change in accounting
principles.
Notwithstanding the foregoing, for the purposes of the covenant
described under Certain covenantsLimitation on
restricted payments only, there shall be excluded from
Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted
Subsidiaries to the Company or a Restricted Subsidiary to the
extent such dividends, repayments or transfers increase the
amount of Restricted Payments permitted under such covenant
pursuant to clause (a)(3)(E) thereof.
Consolidated Net Tangible Assets, as of any date of
determination, means the total amount of assets (less
accumulated depreciation and amortization, allowances for
doubtful receivables, other applicable reserves and other
properly deductible items) which would appear on a balance sheet
of the Company and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, and after giving
effect to purchase accounting and after deducting therefrom
Consolidated Current Liabilities and, to the extent otherwise
included, the amounts of:
(1) non-controlling interests in Restricted Subsidiaries
held by Persons other than the Company or a Restricted
Subsidiary;
(2) excess of cost over fair value of assets of businesses
acquired, as determined in good faith by the Board of Directors;
(3) any revaluation or other
write-up in
book value of assets subsequent to the Issue Date as a result of
a change in the method of valuation in accordance with GAAP
consistently applied;
(4) unamortized debt discount and expenses and other
unamortized deferred charges, goodwill, patents, trademarks,
service marks, trade names, copyrights, licenses, organization
or developmental expenses and other intangible items;
(5) treasury stock;
(6) cash set apart and held in a sinking or other analogous
fund established for the purpose of redemption or other
retirement of Capital Stock to the extent such obligation is not
reflected in Consolidated Current Liabilities; and
90
(7) Investments in and assets of Unrestricted Subsidiaries.
Consolidated Net Worth means the total of the
amounts shown on the balance sheet of the Company and its
Subsidiaries, determined on a consolidated basis in accordance
with GAAP, as of the end of the most recent fiscal quarter of
the Company ending at least 45 days prior to the taking of
any action for the purpose of which the determination is being
made, as the sum of:
(1) the par or stated value of all outstanding Capital
Stock of the Company, plus
(2) paid-in capital or capital surplus relating to such
Capital Stock, plus
(3) any retained earnings or earned surplus
less (A) any accumulated deficit and (B) any amounts
attributable to Disqualified Stock.
Credit Agreement means, before the merger, the Sixth
Amended and Restated Credit Agreement among Denbury Onshore,
LLC, as Borrower, the Company as Parent Guarantor and JPMorgan
Chase Bank, N.A., as Administrative Agent and certain other
financial institutions, dated September 14, 2006, as
amended, and after the merger, an agreement of the Company with
respect to a secured revolving credit facility with a four year
term and an aggregate commitment of senior secured lenders of
$1.6 billion (or any successor thereto or replacement
thereof), including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection
therewith, and in each case as amended, restated, modified,
renewed, refunded, replaced, refinanced or increased in whole or
in part from time to time.
Credit Facilities means, with respect to the Company
or any Restricted Subsidiary, one or more debt facilities
(including the Credit Agreement) or commercial paper facilities
with banks or other institutional lenders providing for
revolving credit loans, term loans, production payments,
receivables financing (including through the sale of receivables
to such lenders or to special purpose entities formed to borrow
from such lenders against such receivables) or letters of
credit, in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time
to time.
Currency Agreement means in respect of a Person any
foreign exchange contract, currency swap agreement or other
similar agreement to which such Person is a party or a
beneficiary.
Default means any event which is, or after notice or
passage of time or both would be, an Event of Default.
Designated Senior Indebtedness in respect of a
Person means:
(1) all the obligations of such Person under any Credit
Facilities (including the Credit Agreement); and
(2) any other Senior Indebtedness of such Person which, at
the date of determination, has an aggregate principal amount
outstanding of, or under which, at the date of determination,
the holders thereof are committed to lend up to, at least
$20 million and is specifically designated by such Person
in the instrument evidencing or governing such Senior
Indebtedness as Designated Senior Indebtedness for
purposes of the Indenture.
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Disqualified Stock means, with respect to any
Person, any Capital Stock that by its terms (or by the terms of
any security into which it is convertible or for which it is
exchangeable) or upon the happening of any event:
in each case described in the immediately preceding clauses (1),
(2) or (3), on or prior to the Stated Maturity of the
Notes; provided, however, that any Capital Stock
that would not constitute Disqualified Stock but not provisions
thereof giving holders thereof the right to require such Person
to purchase or redeem such Capital Stock upon the occurrence of
an asset sale or change of control
occurring prior to the Stated Maturity of the Notes shall not
(1) mature or is mandatorily redeemable pursuant to a
sinking fund obligation or otherwise; is
(2) convertible or exchangeable for Indebtedness or
Disqualified Stock; or is redeemable, in whole
(3) or in part, at the option of the holder thereof;
constitute Disqualified Stock if:
(x) the asset sale or change of
control provisions applicable to such Capital Stock are
not more favorable to the holders of such Capital Stock than the
provisions described under Certain
covenantsLimitation on sales of assets and subsidiary
stock and Certain covenantsChange of
control; and
(y) any such requirement only becomes operative after
compliance with such corresponding terms applicable to the
Notes, including the purchase of any Notes tendered pursuant
thereto.
The amount of any Disqualified Stock that does not have a fixed
redemption, repayment or repurchase price will be calculated in
accordance with the terms of such Disqualified Stock as if such
Disqualified Stock were redeemed, repaid or repurchased on any
date on which the amount of such Disqualified Stock is to be
determined pursuant to the Indenture; provided,
however, that if such Disqualified Stock could not be
required to be redeemed, repaid or repurchased at the time of
such determination, the redemption, repayment or repurchase
price will be the book value of such Disqualified Stock as
reflected in the most recent financial statements of such Person.
Dollar-Denominated Production Payments means
production payment obligations recorded as liabilities in
accordance with GAAP, together with all undertakings and
obligations in connection therewith.
EBITDA for any period means the sum of Consolidated
Net Income, plus Consolidated Interest Expense plus the
following to the extent deducted in calculating such
Consolidated Net Income:
(1) provision for taxes based on income or profits;
(2) depletion and depreciation expense;
(3) amortization expense;
(4) exploration expense (if applicable to the Company after
the Issue Date);
(5) unrealized foreign exchange losses; and
(6) all other non-cash charges, including non-cash charges
taken pursuant to the Derivatives and Hedging topic
of the FASC (excluding any such non-cash charge to the extent
that it represents an accrual of or reserve for cash charges in
any future period or
92
amortization of a prepaid cash expense that was paid in a prior
period except such amounts as the Company determines in good
faith are nonrecurring);
and less, to the extent included in calculating such
Consolidated Net Income and in excess of any costs or expenses
attributable thereto and deducted in calculating such
Consolidated Net Income, the sum of:
(1) the amount of deferred revenues that are amortized
during such period and are attributable to reserves that are
subject to Volumetric Production Payments;
(2) amounts recorded in accordance with GAAP as repayments
of principal and interest pursuant to Dollar-Denominated
Production Payments;
(3) unrealized foreign exchange gains; and
(4) all other non-cash unrealized gains, including non-cash
unrealized gains taken pursuant to the Derivatives and
Hedging topic of the FASC.
Notwithstanding the foregoing, the provision for taxes based on
the income or profits of, and the depletion, depreciation,
amortization and exploration and other non-cash charges of, a
Restricted Subsidiary shall be added to Consolidated Net Income
to compute EBITDA only to the extent (and in the same
proportion) that the net income of such Restricted Subsidiary
was included in calculating Consolidated Net Income and only if
a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Restricted
Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to such Restricted
Subsidiary or its stockholders.
Encore means Encore Acquisition Company, a Delaware
corporation.
Encore MLP Facility means that certain credit
agreement, dated March 7, 2007, by and among Encore Energy
Partners Operating LLC, Encore Energy Partners LP, Bank of
America, N.A., as administrative agent and L/C Issuer, Banc of
America Securities LLC, as sole lead arranger and sole book
manager, and other lenders, and in each case as amended,
restated, modified, renewed, refunded, replaced, refinanced or
increased in whole or in part from time to time.
Exchange Act means the Securities Exchange Act of
1934, as amended.
FASC means Financial Accounting Standards
Codification Issued by the Financial Accounting Standards Board.
GAAP means generally accepted accounting principles
in the United States of America as in effect on the Issue Date,
including those set forth in:
(1) the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public
Accountants;
(2) statements and pronouncements of the Financial
Accounting Standards Board;
(3) such other statements by such other entity as approved
by a significant segment of the accounting profession; and
(4) the rules and regulations of the SEC governing the
inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant
93
to Section 13 of the Exchange Act, including opinions and
pronouncements in staff accounting bulletins and similar written
statements from the accounting staff of the SEC.
Government Securities means securities that are:
(1) direct obligations of the United States of America for
the timely payment of which its full faith and credit is
pledged; or
(2) obligations of a Person controlled or supervised by and
acting as an agency or instrumentality of the United States of
America the timely payment of which is unconditionally
guaranteed as a full faith and credit obligation by the United
States of America,
which, in either case, are not callable or redeemable at the
option of the issuers thereof, and shall also include a
depository receipt issued by a bank (as defined in
Section 3(a)(2) of the Securities Act), as custodian with
respect to any such Government Securities or a specific payment
of principal of or interest on any such Government Securities
held by such custodian for the account of the holder of such
depository receipt; provided that (except as required by
law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depository receipt from
any amount received by the custodian in respect of the
Government Securities or the specific payment of principal of or
interest on the Government Securities evidenced by such
depository receipt.
Guarantee means, without duplication, any
obligation, contingent or otherwise, of any Person directly or
indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such
Person:
(1) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness of such Person
(whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities
or services, to
take-or-pay
or to maintain financial statement conditions or
otherwise); or
(2) entered into for the purpose of assuring in any other
manner the obligee of such Indebtedness of the payment thereof
or to protect such obligee against loss in respect thereof (in
whole or in part);
provided, however, that the term
Guarantee shall not include endorsements for
collection or deposit in the ordinary course of business. The
term Guarantee used as a verb has a corresponding
meaning. The term Guarantor shall mean any Person
Guaranteeing any obligation.
Guarantee Agreement means a supplemental indenture,
in a form satisfactory to the Trustee, pursuant to which a
Subsidiary Guarantor or any other Person becomes subject to the
applicable terms and conditions of the Indenture.
Hedging Obligations of any Person means the
obligations of such Person pursuant to any Oil and Gas Hedging
Contract, Interest Rate Agreement or Currency Agreement.
Holder or Noteholder means the Person in
whose name a Note is registered on the Registrars books.
Incur means issue, assume, Guarantee, incur or
otherwise become liable for; provided, however,
that any Indebtedness or Capital Stock of a Person existing at
the time such Person
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becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term
Incurrence when used as a noun shall have a
correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall not be
deemed the Incurrence of Indebtedness.
Indebtedness means, with respect to any Person on
any date of determination (without duplication):
(1) the principal of and premium (if any) in respect of
(A) indebtedness of such Person for money borrowed and
(B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person
is responsible or liable;
(2) all Capital Lease Obligations of such Person and all
Attributable Debt in respect of Sale/ Leaseback Transactions
entered into by such Person;
(3) all obligations of such Person issued or assumed as the
deferred purchase price of property (which purchase price is due
more than six months after the date of taking delivery of title
to such property), including all obligations of such Person for
the deferred purchase price of property under any title
retention agreement (but excluding trade accounts payable
arising in the ordinary course of business);
(4) all obligations of such Person for the reimbursement of
any obligor on any letter of credit, bankers acceptance or
similar credit transaction (other than obligations with respect
to letters of credit securing obligations (other than
obligations described in clauses (1) through
(3) above) entered into in the ordinary course of business
of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the tenth Business Day following
receipt by such Person of a demand for reimbursement following
payment on the letter of credit);
(5) the amount of all obligations of such Person with
respect to the redemption, repayment or other repurchase of any
Disqualified Stock (but excluding any accrued dividends);
(6) all obligations of such Person relating to any
Production Payment;
(7) all obligations of the type referred to in
clauses (1) through (6) of other Persons and all
dividends of other Persons for the payment of which, in either
case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by
means of any Guarantee (including, with respect to any
Production Payment, any warranties or guarantees of production
or payment by such Person with respect to such Production
Payment but excluding other contractual obligations of such
Person with respect to such Production Payment); and
(8) all obligations of the type referred to in
clauses (1) through (7) of other Persons secured by
any Lien on any property or asset of such first-mentioned Person
(whether or not such obligation is assumed by such
first-mentioned Person), the amount of such obligation being
deemed to be the lesser of the value of such property or assets
or the amount of the obligation so secured.
The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability,
assuming the contingency giving rise to the obligation were to
have occurred on such date, of any Guarantees outstanding at
such date.
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None of the following shall constitute Indebtedness:
(1) indebtedness arising from agreements providing for
indemnification or adjustment of purchase price or from
guarantees securing any obligations of the Company or any of its
Subsidiaries pursuant to such agreements, incurred or assumed in
connection with the disposition of any business, assets or
Subsidiary of the Company, other than guarantees or similar
credit support by the Company or any of its Subsidiaries of
Indebtedness incurred by any Person acquiring all or any portion
of such business, assets or Subsidiary for the purpose of
financing such acquisition;
(2) any trade payables or other similar liabilities to
trade creditors and other accrued current liabilities incurred
in the ordinary course of business as the deferred purchase
price of property;
(3) any liability for Federal, state, local or other taxes
owed or owing by such Person;
(4) amounts due in the ordinary course of business to other
royalty and working interest owners;
(5) obligations arising from guarantees to suppliers,
lessors, licensees, contractors, franchisees or customers
incurred in the ordinary course of business;
(6) obligations (other than express Guarantees of
indebtedness for borrowed money) in respect of Indebtedness of
other Persons arising in connection with (A) the sale or
discount of accounts receivable, (B) trade acceptances and
(C) endorsements of instruments for deposit in the ordinary
course of business;
(7) obligations in respect of performance bonds provided by
the Company or its Subsidiaries in the ordinary course of
business and refinancing thereof;
(8) obligations arising from the honoring by a bank or
other financial institution of a check, draft or similar
instrument drawn against insufficient funds in the ordinary
course of business; provided, however that such
obligation is extinguished within two Business Days of its
Incurrence;
(9) obligations in respect of any obligations under
workers compensation laws and similar legislation;
(10) any obligation in respect of any Oil and Gas Hedging
Contract; and
(11) any unrealized losses or charges in respect of Hedging
Obligations (including those resulting from the application of
the Derivatives and Hedging topic of the FASC).
Interest Rate Agreement means any interest rate swap
agreement, interest rate cap agreement or other financial
agreement or arrangement designed to protect the Company or any
Restricted Subsidiary against fluctuations in interest rates.
Investment in any Person means any direct or
indirect advance, loan (other than advances to customers or
joint interest partners or drilling partnerships sponsored by
the Company or any Restricted Subsidiary in the ordinary course
of business that are recorded as accounts receivable on the
balance sheet of the lender) or other extensions of credit
(including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services
for the account or use of others), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar
96
instruments issued by such Person. Except as otherwise provided
for herein, the amount of an Investment shall be its fair value
at the time the Investment is made and without giving effect to
subsequent changes in value.
For purposes of the definition of Unrestricted
Subsidiary, the definition of Restricted
Payment and the covenant described under
Certain covenantsLimitation on restricted
payments:
(1) Investment shall include the portion
(proportionate to the Companys equity interest in such
Subsidiary) of the fair market value of the net assets of any
Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided,
however, that upon a redesignation of such Subsidiary as
a Restricted Subsidiary, the Company shall be deemed to continue
to have a permanent Investment in an Unrestricted
Subsidiary equal to an amount (if positive) equal to
(x) the Companys Investment in such
Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Companys equity interest in
such Subsidiary) of the fair market value of the net assets of
such Subsidiary at the time of such redesignation; and
(2) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time
of such transfer, in each case as determined in good faith by
the Board of Directors.
Issue Date means the date on which the Notes are
originally issued.
Lien means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any
conditional sale or other title retention agreement or lease in
the nature thereof).
Limited Recourse Production Payments means, with
respect to any Production Payments, Indebtedness, the terms of
which limit the liability of the Company and its Restricted
Subsidiaries solely to the hydrocarbons covered by such
Production Payments; provided, however, that no
default with respect to such Indebtedness would permit any
holder of any other Indebtedness of the Company or any
Restricted Subsidiary to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity.
Material Change means an increase or decrease
(excluding changes that result solely from changes in prices and
changes resulting from the Incurrence of previously estimated
future development costs) of more than 25% during a fiscal
quarter in the discounted future net revenues from proved crude
oil and natural gas reserves of the Company and its Restricted
Subsidiaries, calculated in accordance with clause (a)(1) of the
definition of Adjusted Consolidated Net Tangible Assets;
provided, however, that the following will be
excluded from the calculation of Material Change:
(1) any acquisitions during the fiscal quarter of oil and
gas reserves that have been estimated by independent petroleum
engineers and with respect to which a report or reports of such
engineers exist; and
(2) any disposition of properties existing at the beginning
of such fiscal quarter that have been disposed of in compliance
with the covenant described under Certain
covenantsLimitation on sales of assets and subsidiary
stock.
Moodys means Moodys Investors
Service, Inc. and its successors.
97
Net Available Cash from an Asset Disposition means
cash payments received therefrom (including any cash payments
received by way of deferred payment of principal pursuant to a
note or installment receivable or otherwise, but only as and
when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness
or other obligations relating to such properties or assets or
received in any other noncash form), in each case net of:
(1) all legal, title and recording tax expenses,
commissions and other fees (including financial and other
advisory fees) and expenses incurred, and all Federal, state,
provincial, foreign and local taxes required to be accrued as a
liability under GAAP, as a consequence of such Asset Disposition;
(2) all payments made on any Indebtedness which is secured
by any assets subject to such Asset Disposition, in accordance
with the terms of any Lien upon or other security agreement of
any kind with respect to such assets, or which must by its
terms, or in order to obtain a necessary consent to such Asset
Disposition, or by applicable law, be repaid out of the proceeds
from such Asset Disposition;
(3) all distributions and other payments required to be
made to non-controlling interest holders in Subsidiaries or
joint ventures as a result of such Asset Disposition; and
(4) the deduction of appropriate amounts provided by the
seller as a reserve, in accordance with GAAP, against any
liabilities associated with the property or other assets
disposed in such Asset Disposition and retained by the Company
or any Restricted Subsidiary after such Asset Disposition.
Net Cash Proceeds, with respect to any issuance or
sale of Capital Stock, means the cash proceeds of such issuance
or sale net of attorneys fees, accountants fees,
underwriters or placement agents fees, discounts or
commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of
taxes paid or payable as a result thereof.
Net Present Value means, with respect to any proved
hydrocarbon reserves, the discounted future net cash flows
associated with such reserves, determined in accordance with the
rules and regulations (including interpretations thereof) of the
SEC in effect on the Issue Date.
Net Working Capital means:
(1) all current assets of the Company and its Restricted
Subsidiaries; minus
(2) all current liabilities of the Company and its
Restricted Subsidiaries, except current liabilities included in
Indebtedness;
determined in accordance with GAAP.
Non-recourse Purchase Money Indebtedness means
Indebtedness (other than Capital Lease Obligations) of the
Company or any Subsidiary Guarantor incurred in connection with
the acquisition by the Company or such Subsidiary Guarantor in
the ordinary course of business of fixed assets used in the Oil
and Gas Business (including office buildings and other real
property
98
used by the Company or such Subsidiary Guarantor in conducting
its operations) with respect to which:
(1) the holders of such Indebtedness agree that they will
look solely to the fixed assets so acquired which secure such
Indebtedness, and neither the Company nor any Restricted
Subsidiary (a) is directly or indirectly liable for such
Indebtedness or (b) provides credit support, including any
undertaking, Guarantee, agreement or instrument that would
constitute Indebtedness (other than the grant of a Lien on such
acquired fixed assets); and
(2) no default or event of default with respect to such
Indebtedness would cause, or permit (after notice or passage of
time or otherwise), any holder of any other Indebtedness of the
Company or a Subsidiary Guarantor to declare a default or event
of default on such other Indebtedness or cause the payment,
repurchase, redemption, defeasance or other acquisition or
retirement for value thereof to be accelerated or payable prior
to any scheduled principal payment, scheduled sinking fund
payment or maturity.
Officer means the Chairman of the Board, the
President, any Vice Chairman of the Board, Vice President, the
Chief Financial Officer, the Treasurer, any Assistant Treasurer,
the Controller, the Secretary or any Assistant Secretary of a
Person.
Oil and Gas Business means the business of the
exploration for, and exploitation, development, acquisition,
production, processing (but not refining), marketing, storage
and transportation of, hydrocarbons, and other related energy
and natural resource businesses (including oil and gas services
businesses related to the foregoing).
Oil and Gas Hedging Contract means any oil and gas
purchase or hedging agreement, and other agreement or
arrangement, in each case, that is designed to provide
protection against oil and gas price fluctuations.
Oil and Gas Liens means:
(1) Liens on any specific property or any interest therein,
construction thereon or improvement thereto to secure all or any
part of the costs incurred for surveying, exploration, drilling,
extraction, development, operation, production, construction,
alteration, repair or improvement of, in, under or on such
property and the plugging and abandonment of wells located
thereon (it being understood that, in the case of oil and gas
producing properties, or any interest therein, costs incurred
for development shall include costs incurred for all
facilities relating to such properties or to projects, ventures
or other arrangements of which such properties form a part or
which relate to such properties or interests);
(2) Liens on an oil or gas producing property to secure
obligations Incurred or guarantees of obligations Incurred in
connection with or necessarily incidental to commitments for the
purchase or sale of, or the transportation or distribution of,
the products derived from such property;
(3) Liens arising under partnership agreements, oil and gas
leases, overriding royalty agreements, net profits agreements,
production payment agreements, royalty trust agreements,
incentive compensation programs on terms that are reasonably
customary in the Oil and Gas Business for geologists,
geophysicists and other providers of technical services to the
Company or a Restricted Subsidiary, master limited partnership
agreements, farm-out agreements, farm-in agreements, division
orders, contracts for the sale, purchase,
99
exchange, transportation, gathering or processing of oil, gas or
other hydrocarbons, unitizations and pooling designations,
declarations, orders and agreements, development agreements,
operating agreements, production sales contracts, area of mutual
interest agreements, gas balancing or deferred production
agreements, injection, repressuring and recycling agreements,
salt water or other disposal agreements, seismic or geophysical
permits or agreements, and other agreements which are customary
in the Oil and Gas Business; provided, however,
that in all instances such Liens are limited to the assets that
are the subject of the relevant agreement, program, order or
contract;
(4) Liens arising in connection with Production
Payments; and
(5) Liens on pipelines or pipeline facilities that arise by
operation of law.
Permitted Business Investment means any investment
made in the ordinary course of, and of a nature that is or shall
have become customary in, the Oil and Gas Business including
investments or expenditures for actively exploiting, exploring
for, acquiring, developing, producing, processing, gathering,
marketing or transporting oil and gas through agreements,
transactions, interests or arrangements which permit one to
share risks or costs, comply with regulatory requirements
regarding local ownership or satisfy other objectives
customarily achieved through the conduct of Oil and Gas Business
jointly with third parties, including:
(1) ownership interests in oil and gas properties,
processing facilities, gathering systems, pipelines or ancillary
real property interests; and
(2) Investments in the form of or pursuant to operating
agreements, processing agreements, farm-in agreements, farm-out
agreements, development agreements, area of mutual interest
agreements, unitization agreements, pooling agreements, joint
bidding agreements, service contracts, joint venture agreements,
partnership agreements (whether general or limited),
subscription agreements, stock purchase agreements and other
similar agreements (including for limited liability companies)
with third parties, excluding, however, Investments in
corporations other than Restricted Subsidiaries.
Permitted Investment means an Investment by the
Company or any Restricted Subsidiary in:
(1) a Restricted Subsidiary or a Person that will, upon the
making of such Investment, become a Restricted Subsidiary;
provided, however, that the primary business of
such Restricted Subsidiary is an Oil and Gas Business;
(2) another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the
Company or a Restricted Subsidiary; provided,
however, that such Persons primary business is an
Oil and Gas Business;
(3) Temporary Cash Investments;
(4) receivables owing to the Company or any Restricted
Subsidiary if created or acquired in the ordinary course of
business and payable or dischargeable in accordance with
customary trade terms; provided, however, that
such trade terms may include such concessionary trade terms as
the Company or any such Restricted Subsidiary deems reasonable
under the circumstances;
100
(5) payroll, travel and similar advances to cover matters
that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in
the ordinary course of business;
(6) loans or advances to employees made in the ordinary
course of business;
(7) stock, obligations or securities received in settlement
of debts created in the ordinary course of business and owing to
the Company or any Restricted Subsidiary or in satisfaction of
judgments;
(8) any Person to the extent such Investment represents the
noncash portion of the consideration received for an Asset
Disposition as permitted pursuant to the covenant described
under Certain covenantsLimitation on sales of
assets and subsidiary stock;
(9) Permitted Business Investments;
(10) Investments intended to promote the Companys
strategic objectives in the Oil and Gas Business in an aggregate
amount not to exceed 5.0% of ACNTA (determined as of the date of
the making of any such Investment) at any one time outstanding
(which Investments shall be deemed to be no longer outstanding
only upon and to the extent of the return of capital
thereof); and
(11) Investments made pursuant to Hedging Obligations of
the Company and the Restricted Subsidiaries.
Permitted Liens means, with respect to any Person:
(1) Liens existing as of the Issue Date;
(2) Liens securing the Notes, any Subsidiary Guarantee and
other obligations arising under the Indenture;
(3) any Lien existing on any property of a Person at the
time such Person is merged or consolidated with or into the
Company or a Restricted Subsidiary or becomes a Restricted
Subsidiary (and not incurred in anticipation of or in connection
with such transaction); provided that such Liens are not
extended to other property of the Company or the Restricted
Subsidiaries;
(4) any Lien existing on any property at the time of the
acquisition thereof (and not incurred in anticipation of or in
connection with such transaction); provided that such
Liens are not extended to other property of the Company or the
Restricted Subsidiaries;
(5) any Lien incurred in the ordinary course of business
incidental to the conduct of the business of the Company or the
Restricted Subsidiaries or the ownership of their property
(including (i) easements, rights of way and similar
encumbrances, (ii) rights or title of lessors under leases
(other than Capital Lease Obligations), (iii) rights of
collecting banks having rights of setoff, revocation, refund or
chargeback with respect to money or instruments of the Company
or the Restricted Subsidiaries on deposit with or in the
possession of such banks, (iv) Liens imposed by law,
including Liens under workers compensation or similar
legislation and mechanics, carriers,
warehousemens, materialmens, suppliers and
vendors Liens, (v) Liens incurred to secure
performance of obligations with respect to statutory or
regulatory requirements, performance or
return-of-money
bonds, surety bonds or other obligations of a like nature and
incurred in a manner consistent with industry practice and
101
(vi) Oil and Gas Liens, in each case which are not incurred
in connection with the borrowing of money, the obtaining of
advances or credit or the payment of the deferred purchase price
of property (other than trade accounts payable arising in the
ordinary course of business));
(6) Liens for taxes, assessments and governmental charges
not yet due or the validity of which are being contested in good
faith by appropriate proceedings, promptly instituted and
diligently conducted, and for which adequate reserves have been
established to the extent required by GAAP as in effect at such
time;
(7) Liens incurred to secure appeal bonds and judgment and
attachment Liens, in each case in connection with litigation or
legal proceedings that are being contested in good faith by
appropriate proceedings, so long as reserves have been
established to the extent required by GAAP as in effect at such
time and so long as such Liens do not encumber assets by an
aggregate amount (together with the amount of any unstayed
judgments against the Company or any Restricted Subsidiary but
excluding any such Liens to the extent securing insured or
indemnified judgments or orders) in excess of $10.0 million;
(8) Liens securing Hedging Obligations of the Company and
its Restricted Subsidiaries;
(9) Liens securing purchase money Indebtedness or Capital
Lease Obligations; provided that such Liens attach only
to the property acquired with the proceeds of such purchase
money Indebtedness or the property which is the subject of such
Capital Lease Obligations;
(10) Liens securing Non-recourse Purchase Money
Indebtedness granted in connection with the acquisition by the
Company or any Restricted Subsidiary in the ordinary course of
business of fixed assets used in the Oil and Gas Business
(including the office buildings and other real property used by
the Company or such Restricted Subsidiary in conducting its
operations); provided that (i) such Liens attach
only to the fixed assets acquired with the proceeds of such
Non-recourse Purchase Money Indebtedness; and (ii) such
Non-recourse Purchase Money Indebtedness is not in excess of the
purchase price of such fixed assets;
(11) Liens resulting from the deposit of funds or evidences
of Indebtedness in trust for the purpose of decreasing or
legally defeasing Indebtedness of the Company or any Restricted
Subsidiary so long as such deposit of funds is permitted by the
provisions of the Indenture described under Certain
covenantsLimitation on restricted payments;
(12) Liens resulting from a pledge of Capital Stock of a
Person that is not a Restricted Subsidiary to secure obligations
of such Person and any refinancing thereof;
(13) Liens to secure any permitted extension, renewal,
refinancing, refunding or exchange (or successive extensions,
renewals, refinancing, refunding or exchanges), in whole or in
part, of or for any Indebtedness secured by Liens referred to in
clauses (1), (2), (3), (4), (9) and (10) above;
provided, however, that (i) such new Lien
shall be limited to all or part of the same property (including
future improvements thereon and accessions thereto) subject to
the original Lien and (ii) the Indebtedness secured by such
Lien at such time is not increased to any amount greater than
the sum of (A) the outstanding principal amount or, if
greater, the committed amount of the Indebtedness secured by
such original Lien immediately prior to such extension, renewal,
refinancing, refunding or exchange and (B) an
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amount necessary to pay any fees and expenses, including
premiums, related to such refinancing, refunding, extension,
renewal or replacement; and
(14) Liens in favor of the Company or a Restricted
Subsidiary.
Notwithstanding anything in this definition to the contrary, the
term Permitted Liens shall not include Liens
resulting from the creation, incurrence, issuance, assumption or
Guarantee of any Production Payments other than:
(1) any such Liens existing as of the Issue Date;
(2) Production Payments in connection with the acquisition
of any property after the Issue Date; provided that any
such Lien created in connection therewith is created, incurred,
issued, assumed or Guaranteed in connection with the financing
of, and within 60 days after the acquisition of, such
property;
(3) Production Payments other than those described in
clauses (1) and (2), to the extent such Production Payments
constitute Asset Dispositions made pursuant to and in compliance
with the provisions of the Indenture described under
Certain covenantsLimitation on sales of assets and
subsidiary stock; and
(4) incentive compensation programs for geologists,
geophysicists and other providers of technical services to the
Company and any Restricted Subsidiary;
provided, however, that, in the case of the
immediately foregoing clauses (1), (2), (3) and (4), any
Lien created in connection with any such Production Payments
shall be limited to the property that is the subject of such
Production Payments.
Permitted Marketing Obligations means Indebtedness
of the Company or any Restricted Subsidiary under letter of
credit or borrowed money obligations, or in lieu of or in
addition to such letters of credit or borrowed money, guarantees
of such Indebtedness or other obligation, of the Company or any
Restricted Subsidiary by any other Restricted Subsidiary, as
applicable, related to the purchase by the Company or any
Restricted Subsidiary of hydrocarbons for which the Company or
such Restricted Subsidiary has contracts to sell;
provided, however, that in the event that such
Indebtedness or obligations are guaranteed by the Company or any
Restricted Subsidiary, then either:
(1) the Person with which the Company or such Restricted
Subsidiary has contracts to sell has an investment grade credit
rating from S&P or Moodys, or in lieu thereof, a
Person guaranteeing the payment of such obligated Person has an
investment grade credit rating from S&P or
Moodys; or
(2) such Person posts, or has posted for it, a letter of
credit in favor of the Company or such Restricted Subsidiary
with respect to all such Persons obligations to the
Company or such Restricted Subsidiary under such contracts.
Person means any individual, corporation,
partnership, limited liability company, joint venture,
association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision
thereof or any other entity.
Preferred Stock, as applied to the Capital Stock of
any Person, means Capital Stock of any class or classes (however
designated) which is preferred as to the payment of dividends or
103
distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such
Person.
The term principal of a Note means the principal of
the Note plus the premium, if any, payable on the Note which is
due or overdue or is to become due at the relevant time.
Production Payments means, collectively,
Dollar-Denominated Production Payments and Volumetric Production
Payments.
Refinance means, in respect of any Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease
or retire, or to issue other Indebtedness in exchange or
replacement for, such Indebtedness. Refinanced and
Refinancing shall have correlative meanings.
Refinancing Indebtedness means Indebtedness that
Refinances any Indebtedness of the Company or any Restricted
Subsidiary existing on the Issue Date or Incurred in compliance
with the Indenture, including Indebtedness that Refinances
Refinancing Indebtedness; provided, however, that:
(1) such Refinancing Indebtedness has a Stated Maturity no
earlier than the Stated Maturity of the Indebtedness being
Refinanced;
(2) such Refinancing Indebtedness has an Average Life at
the time such Refinancing Indebtedness is Incurred that is equal
to or greater than the Average Life of the Indebtedness being
Refinanced;
(3) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount,
an aggregate issue price) that is equal to or less than the
aggregate principal amount (or if Incurred with original issue
discount, the aggregate accreted value) then outstanding or
committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being
Refinanced; and
(4) if the Indebtedness being Refinanced is Non-recourse
Purchase Money Indebtedness, such Refinancing Indebtedness
satisfies clauses (1) and (2) of the definition of
Non-recourse Purchase Money Indebtedness;
provided further, however, that Refinancing
Indebtedness shall not include
(x) Indebtedness of a Subsidiary that Refinances
Indebtedness of the Company or
(y) Indebtedness of the Company or a Restricted Subsidiary
that Refinances Indebtedness of an Unrestricted Subsidiary.
Representative means any trustee, agent or
representative (if any) for an issue of Senior Indebtedness of
the Company or of a Subsidiary Guarantor.
Restricted Payment with respect to any Person means:
(1) the declaration or payment of any dividends or any
other distributions of any sort in respect of its Capital Stock
(including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the
direct or indirect holders of its Capital Stock (other than
(x) dividends or distributions payable solely in its
Capital Stock (other than Disqualified Stock),
(y) dividends or distributions payable solely to the
Company or a Restricted Subsidiary, and
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(z) pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority
stockholders (or owners of an equivalent interest in the case of
a Subsidiary that is an entity other than a corporation));
(2) the purchase, redemption or other acquisition or
retirement for value of any Capital Stock of the Company held by
any Person or of any Capital Stock of a Restricted Subsidiary
held by any Affiliate of the Company (other than a Restricted
Subsidiary), including the exercise of any option to exchange
any Capital Stock (other than into Capital Stock of the Company
that is not Disqualified Stock);
(3) the purchase, repurchase, redemption, defeasance or
other acquisition or retirement for value, prior to scheduled
maturity, scheduled repayment or scheduled sinking fund payment
of any Subordinated Obligations of such Person (other than the
purchase, repurchase or other acquisition of Subordinated
Obligations purchased in anticipation of satisfying a sinking
fund obligation, principal installment or final maturity, in
each case due within one year of the date of
acquisition); or
(4) the making of any Investment (other than a Permitted
Investment) in any Person.
Restricted Subsidiary means any Subsidiary of the
Company that is not an Unrestricted Subsidiary.
S&P means Standard & Poors
Rating Services, a division of The McGraw-Hill Company, Inc.,
and its successors.
Sale/Leaseback Transaction means an arrangement
relating to property owned on the Issue Date or thereafter
acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a
Restricted Subsidiary leases it from such Person; provided
that the fair market value of such property (as reasonably
determined by the Board of Directors acting in good faith) is
$10 million or more.
Secured Indebtedness means any Indebtedness of the
Company secured by a Lien.
Senior Indebtedness means with respect to any Person:
(1) Indebtedness of such Person, and all obligations of
such Person under any Credit Facility, whether outstanding on
the Issue Date or thereafter Incurred; and
(2) accrued and unpaid interest (including interest
accruing on or after the filing of any petition in bankruptcy or
for reorganization relating such Person to the extent
post-filing interest is allowed in such proceeding) in respect
of (A) indebtedness of such Person for money borrowed and
(B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person
is responsible or liable;
unless, with respect to obligations described in the immediately
preceding clause (1) or (2), in the instrument creating or
evidencing the same or pursuant to which the same is
outstanding, it is provided that such obligations are not
superior in right of payment to the Notes or the applicable
Subsidiary Guarantee; provided, however, that
Senior Indebtedness shall not include:
(1) any obligation of such Person to any Subsidiary of such
Person;
(2) any liability for Federal, state, local or other taxes
owed or owing by such Person;
105
(3) any accounts payable or other liability to trade
creditors arising in the ordinary course of business (including
guarantees thereof or instruments evidencing such liabilities);
(4) any Indebtedness of such Person (and any accrued and
unpaid interest in respect thereof) which is subordinate or
junior in any respect to any other Indebtedness or other
obligation of such Person; or
(5) that portion of any Indebtedness which at the time of
Incurrence is Incurred in violation of the Indenture (other
than, in the case of the Company or any Subsidiary Guarantor
that Guarantees any Credit Facility, Indebtedness under any
Credit Facility that is Incurred on the basis of a
representation by the Company or the Subsidiary Guarantor to the
applicable lenders that such Person is permitted to Incur such
Indebtedness under such Indenture).
Senior Subordinated Indebtedness means:
(1) with respect to the Company, the Notes, Encores
9.5% senior subordinated notes, the Existing Notes and any other
Indebtedness of the Company that specifically provides that such
Indebtedness is to rank pari passu with the Notes in right of
payment and is not subordinated by its terms in right of payment
to any Indebtedness or other obligation of the Company which is
not Senior Indebtedness of the Company; and
(2) with respect to each Subsidiary Guarantor, its
Subsidiary Guarantee of the Notes, the Existing Notes and any
other Indebtedness of such Person that specifically provides
that such Indebtedness rank pari passu with its applicable
Subsidiary Guarantee in right of payment and is not subordinated
by its terms in right of payment to any Indebtedness or other
obligation of such Person which is not Senior Indebtedness of
such Person.
Significant Subsidiary means any Restricted
Subsidiary that would be a Significant Subsidiary of
the Company within the meaning of
Rule 1-02
under
Regulation S-X
promulgated by the SEC.
Stated Maturity means, with respect to any security,
the date specified in such security as the fixed date on which
the final payment of principal of such security is due and
payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof
upon the happening of any contingency unless such contingency
has occurred).
Stock Offering means a primary offering, whether
public or private, of shares of common stock of the Company.
Subordinated Obligation means any Indebtedness of
the Company or any Subsidiary Guarantor (whether outstanding on
the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to, in the case of the Company, the
Notes or, in the case of a Subsidiary Guarantor, its Subsidiary
Guarantee pursuant to a written agreement to that effect.
Subsidiary means, in respect of any Person, any
corporation, association, partnership or other business entity
of which more than 50% of the total voting power of shares of
Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or
indirectly, by:
(1) such Person;
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(2) such Person and one or more Subsidiaries of such
Person; or (3) one or more Subsidiaries of such Person.
Subsidiary Guarantor means each Subsidiary of the
Company that executes the applicable Indenture as a guarantor
and each other Subsidiary of the Company that thereafter
Guarantees the Notes pursuant to the terms of the Indenture.
Temporary Cash Investments means any of the
following:
(1) any investment in direct obligations of the United
States of America or any agency thereof or obligations
guaranteed by the United States of America or any agency thereof;
(2) investments in time deposit accounts, certificates of
deposit and money market deposits maturing within one year of
the date of acquisition thereof issued by a bank or trust
company which is organized under the laws of the United States
of America, any state thereof or any foreign country recognized
by the United States, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of
$200.0 million (or the foreign currency equivalent thereof)
and has outstanding debt which is rated A (or such
similar equivalent rating) or higher by at least one nationally
recognized credit rating organization (as defined in
Rule 436 under the Securities Act) or any money-market fund
sponsored by a registered broker dealer or mutual fund
distributor whose assets consist of obligations of the types
described in clauses (1), (2), (3), (4) and (5) hereof;
(3) repurchase obligations with a term of not more than
30 days for underlying securities of the types described in
clause (1) above entered into with a bank meeting the
qualifications described in clause (2) above;
(4) investments in commercial paper, maturing not more than
180 days after the date of acquisition, issued by a Person
(other than an Affiliate of the Company) organized and in
existence under the laws of the United States of America or any
foreign country recognized by the United States of America with
a rating at the time as of which any investment therein is made
of
P-2
(or higher) according to Moodys or
A-2
(or higher) according to S&P or R-1 (or higher)
by Dominion Bond Rating Service Limited or Canadian Bond Rating
Service, Inc. (in the case of a Canadian issuer);
(5) investments in securities with maturities of six months
or less from the date of acquisition issued or fully guaranteed
by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority
thereof, and rated at least A by S&P or
A by Moodys; and
(6) investments in asset-backed securities maturing within
one year of the date of acquisition thereof with a long-term
rating at the time as of which any investment therein is made of
A3 (or higher) by Dominion Bond Rating Service
Limited or Canadian Bond Rating Service, Inc. (in the case of a
Canadian issuer).
Treasury Rate means as of any date of redemption of
Notes the yield to maturity at the time of computation of United
States Treasury securities with a constant maturity (as compiled
and published in the most recent Federal Reserve Statistical
Release H.15 (519) that has become publicly available at least
two Business Days prior to the redemption date (or, if such
Statistical Release is no longer published, any publicly
available source or similar market data)) most nearly equal to
the period from the redemption date to February 15, 2015;
provided, however, that if the period from the redemption
date to February 15, 2015 is not equal to the constant
maturity of a United States
107
Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear Interpolation
(calculated to the nearest one-twelfth of a year) from the
weekly average yields of United States Treasury securities for
which such yields are given, except that if the period from the
redemption date to February 15, 2015 is less than one year,
the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year
will be used.
Unrestricted Subsidiary means:
(1) Genesis Energy, LLC;
(2) any Subsidiary of the Company that at the time of
determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below;
(3) any Subsidiary of an Unrestricted Subsidiary; and
(4) Encore Energy Partners GP LLC, if applicable.
The Board of Directors may designate any Subsidiary of the
Company (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary unless such
Subsidiary or any of its Subsidiaries owns any Capital Stock or
Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a
Subsidiary of the Subsidiary to be so designated;
provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or
less or (B) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the covenant
described under Certain covenantsLimitation on
restricted payments. The Board of Directors may designate
any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided, however, that immediately after giving
effect to such designation (x) the Company could Incur
$1.00 of additional Indebtedness under paragraph (a) of the
covenant described under Certain
covenantsLimitation on indebtedness and (y) no
Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced by the
Company to the Trustee by promptly filing with the Trustee a
copy of the board resolution giving effect to such designation
and an Officers Certificate certifying that such
designation complied with the foregoing provisions.
U.S. Government Obligations means direct
obligations (or certificates representing an ownership interest
in such obligations) of the United States of America (including
any agency or instrumentality thereof) for the payment of which
the full faith and credit of the United States of America is
pledged and which are not callable at the issuers option.
Volumetric Production Payments means production
payment obligations recorded as deferred revenue in accordance
with GAAP, together with all undertakings and obligations in
connection therewith.
Voting Stock of a Person means all classes of
Capital Stock or other interests (including partnership
interests) of such Person then outstanding and normally entitled
(without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof.
Wholly Owned Subsidiary means a Restricted
Subsidiary all the Capital Stock of which (other than
directors qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law
to be held by a Person other than the Company or a Restricted
Subsidiary) is owned by the Company or one or more Wholly Owned
Subsidiaries.
108
Material U.S.
federal income tax considerations
The following is a general discussion of the material
U.S. federal income tax considerations relating to the
purchase, ownership and disposition of the notes offered hereby
by investors who are U.S. Holders (as defined below) and
certain U.S. federal income tax considerations of the
purchase, ownership and disposition of the notes offered hereby
by investors who are
Non-U.S. Holders
(as defined below). As used in this section, Material
U.S. federal income tax considerations, unless the
context otherwise requires, the term note or
notes refers to the notes offered hereby. This
discussion is based on currently existing provisions of the
Internal Revenue Code of 1986, as amended (the
Code), existing, temporary and proposed Treasury
regulations promulgated thereunder, and administrative and
judicial interpretations thereof, all as in effect or proposed
on the date hereof and all of which are subject to change,
possibly with retroactive effect, or different interpretations.
This discussion does not address the U.S. federal income
tax consequences to subsequent purchasers of notes and is
limited to investors who (i) purchase the notes pursuant to
this offering at the public offering price of notes set forth on
the cover page of this prospectus and (ii) hold the notes
as capital assets within the meaning of section 1221 of the
Code. Moreover, this discussion is for general information only
and does not address all of the tax consequences that may be
relevant to particular investors in light of their personal
circumstances or to certain types of investors (such as
U.S. Holders having a functional currency other than the
U.S. dollar, persons subject to special rules applicable to
former citizens and residents of the U.S., certain financial
institutions, persons subject to the alternative minimum tax,
grantor trusts, real estate investment trusts, insurance
companies, tax-exempt entities, dealers in securities or
currencies, persons holding the notes in connection with a
hedging transaction, straddle, conversion transaction or other
integrated transaction, corporations treated as personal holding
companies, controlled foreign corporations, passive foreign
investment companies or
Non-U.S. Holders
that are owned or controlled by U.S. Holders).
Baker & Hostetler LLP has reviewed the discussion
below and is of the opinion that the discussion, to the extent
it addresses matters of U.S. federal income tax law or
legal conclusions, accurately summarizes the U.S. federal
income tax considerations of the purchase, ownership and
disposition of the notes that are likely to be material to
investors. The opinion is based on various assumptions,
including assumptions regarding the accuracy of factual
representations made by us, and is subject to limitations. Their
opinion is not binding on the Internal Revenue Service or any
court. The Internal Revenue Service may challenge part or all of
their opinion and such a challenge could be successful.
Prospective investors are urged to consult their own tax
advisors as to the particular tax consequences to them of their
participation in the offering and their ownership and
disposition of the notes, including the applicability of any
U.S. federal tax laws or any state, local or foreign tax
laws or any treaty, and any changes (or proposed changes) in
applicable tax laws or interpretations thereof.
Considerations
relating to U.S. holders
As used herein, the term U.S. Holder means a
beneficial owner of a note that is, for U.S. federal income
tax purposes:
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an individual citizen or resident of the U.S.;
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a corporation (or any other entity treated as a corporation for
U.S. federal income tax purposes) created or organized in
or under the laws of the U.S., any state thereof or the District
of Columbia;
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an estate whose income is includible in gross income for
U.S. federal income tax purposes, regardless of its
source; or
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a trust whose administration is subject to the primary
supervision of a U.S. court and which has one or more
U.S. persons who have the authority to control all
substantial decisions of the trust, or that has a valid election
in effect under applicable Treasury regulations to be treated as
a U.S. person.
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If a partnership holds notes, the tax treatment of a partner
will generally depend upon the status of the partner and upon
the activities of the partnership. We suggest that partners of a
partnership holding notes consult their tax advisors.
Payments of
qualified stated interest
The notes pay interest at a stated rate of
81/4%.
The stated interest paid on the notes will be treated as
qualified stated interest (as discussed below under
Original issue discount) and a U.S. Holder will
be required to include interest on each note in his, her or its
income as ordinary income in accordance with such
U.S. Holders method of accounting for
U.S. federal income tax purposes.
Original issue
discount
If the issue price of a note is less than its stated redemption
price at maturity, then the note will be treated as being issued
with original issue discount (OID) for
U.S. federal income tax purposes unless the difference
between the notes issue price and its stated redemption
price at maturity is less than a statutory de minimis
amount (one-fourth of one percent of the stated redemption
price at maturity of the note times the number of complete years
from issuance to maturity). Generally, the issue
price of a note is the first price at which a substantial
amount of notes is sold to purchasers other than bond houses,
brokers or similar persons or organizations acting in the
capacity of underwriters, placement agents or wholesalers. The
stated redemption price at maturity of a note is the
total of all payments to be made under the note other than
qualified stated interest (generally, stated interest that is
unconditionally payable in cash or property at least annually at
a single fixed rate or at certain floating rates that properly
take into account the length of the interval between stated
interest payments). The notes issued pursuant to this offering
will not be issued with OID.
The holders of the notes have the right to require us to
repurchase all or any part of such holders notes upon a
Change of Control. See Description of the
notesChange of control. In addition, we will be
required to repurchase all of the notes if, for any reason,
(i) the proposed merger of Encore into Denbury is not
completed on or prior to May 31, 2010, or (ii) the
merger agreement is terminated on or prior to May 31, 2010.
See Description of the notesEscrow of proceeds;
special mandatory redemption. After the merger, to the
extent that fewer than $600.0 million principal amount of
Encore senior subordinated notes are tendered for repurchase by
August 1, 2010, we will redeem an amount of notes offered
hereby equal to such shortfall at a redemption price equal to
the issue price of the notes, plus accrued and unpaid interest.
See Description of the notes - Escrow of proceeds; special
mandatory redemption.
110
Under the contingent payment debt rules of the original issue
discount regulations, certain possible payments are not treated
as contingencies or are excepted from consideration for purposes
of calculating original issue discount (for example, in cases
which the possible payments are remote, incidental, or fit
certain other exceptions). We intend to take the position that a
repurchase at the option of a holder if a Change of Control
occurs, the mandatory repurchase of the notes due to the failure
of the merger to timely occur, and the repurchase of the notes
to the extent fewer than $600.0 million principal amount of
Encore senior subordinated notes are tendered for repurchase by
August 1, 2010 are all remote. Therefore, we do not intend,
on the issuance date, to treat the repurchase option or the
repurchase obligations as affecting the computation of the
yield-to-maturity
of the notes.
In addition, we have the right to redeem the notes prior to
their stated maturity. See Description of the
notesOptional redemption. Under applicable Treasury
regulations, an unconditional option to redeem a debt instrument
will be assumed to be exercised if such exercise will lower the
yield-to-maturity
of the debt instrument. We do not intend, on the issuance date,
to treat any of our redemption rights as affecting the
computation of the
yield-to-maturity
of the notes. The Internal Revenue Service may take a different
position regarding the payment or potential payment of amounts
in excess of qualified stated interest or principal, in which
case the timing, amount and character of income with respect to
the notes may be different, and a U.S. Holder could be
required to treat as ordinary interest income any gain
recognized on the disposition of a note. Prospective holders are
urged to consult their own tax advisors regarding the potential
effect, if any, of these matters on their particular situation.
Sale, retirement
or disposition
Upon the sale, retirement at maturity or other disposition of a
note, a U.S. Holder generally will recognize taxable gain
or loss equal to the difference between (i) the sum of cash
plus the fair market value of all other property received on
such disposition (except to the extent such cash or property is
attributable to accrued but unpaid interest, which will be
taxable as ordinary income to the extent not previously included
in income) and (ii) such U.S. Holders adjusted
tax basis in the note. A U.S. Holders adjusted tax
basis in a note generally will equal the cost of the note to
such U.S. Holder, increased by any OID previously included
in income with respect to such note. Gain or loss recognized on
the disposition of a note generally will be capital gain or loss
and will be long-term capital gain or loss if, at the time of
such disposition, the U.S. Holders holding period for
the note is more than one year. The current maximum tax rate on
long-term capital gains to non-corporate U.S. Holders is
generally 15% (for taxable years beginning on or prior to
December 31, 2010). The deductibility of capital losses by
a U.S. Holder is subject to limitations.
Backup
withholding and information reporting
Information reporting requirements generally will apply to
payments of principal and interest (including any OID) made by
us on, or the proceeds of the sale or other disposition prior to
maturity of, the notes. Backup withholding tax, currently at a
rate of 28%, may apply to such payments if the U.S. Holder
fails to:
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furnish his, her or its taxpayer identification number (social
security or employer identification number);
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certify that his, her or its number is correct;
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111
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certify that he, she, or it is not subject to backup
withholding; or
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otherwise comply with the applicable requirements of the backup
withholding rules.
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Certain U.S. Holders are not subject to backup withholding
and information reporting requirements. Any amounts withheld
under the backup withholding rules from a payment to a
U.S. Holder will be allowed as a credit against such
U.S. Holders U.S. federal income tax liability
and may entitle the holder to a refund, provided that the
required information is furnished to the Internal Revenue
Service.
Considerations
relating to
non-U.S.
holders
As used herein, the term
Non-U.S. Holder
means a beneficial owner of a note that is an individual,
corporation, trust or estate and is not a U.S. Holder.
Payment of
interest
In general, payments of interest (which, for purposes of this
discussion, includes any OID) received by a
Non-U.S. Holder
will not be subject to U.S. federal withholding tax,
provided that:
(i) the
Non-U.S. Holder,
as beneficial owner,
(a) does not actually or constructively own 10% or more of
the total combined voting power of all of our classes of stock
entitled to vote;
(b) is not a controlled foreign corporation that is related
to us actually or constructively through stock
ownership; and
(c) is not a bank receiving the interest pursuant to a loan
agreement entered into in its ordinary course of business;
(ii) the interest payments are not effectively connected
with the conduct by the
Non-U.S. Holder
of a U.S. trade or business, and
(iii) the
Non-U.S. Holder,
as beneficial owner, satisfies the certification requirement.
The certification requirement is generally satisfied if the
beneficial owner of a note certifies on IRS
Form W-8BEN
(or a suitable substitute or successor form), under penalties of
perjury, that he, she or it is not a U.S. person and
provides his, her or its name and address, and
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such beneficial owner timely files the IRS
Form W-8BEN
with the withholding agent; or
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in the case of notes held on behalf of a beneficial owner by a
securities clearing organization, bank or other financial
institution that holds customers securities in the
ordinary course of its trade or business, the financial
institution files with the withholding agent a statement that it
has received the
Form W-8BEN
(or a suitable substitute or successor form) from the
Non-U.S. Holder
or from another financial institution acting on behalf of that
Non-U.S. Holder,
timely furnishes the withholding agent with a copy thereof and
otherwise complies with the applicable certification
requirements. A withholding agent, as used herein, is generally
the last U.S. payor (or a
non-U.S. payor
who is a qualified intermediary, U.S. branch of a foreign
person, or a withholding foreign partnership) in the chain of
payment prior to payment to a
Non-U.S. Holder
(which itself is not a withholding agent).
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Other alternative procedures exist in order to satisfy the
certification requirement, depending upon the circumstances
applicable to the
Non-U.S. Holder,
including but not limited to situations where the notes are held
by certain intermediaries or partnerships. The certification
requirement is not met if either we or the withholding agent
have actual knowledge or reason to know that the beneficial
owner is a U.S. Holder or that the conditions of any
exemption are not, in fact, satisfied.
Non-U.S. Holders
should consult their own tax advisors regarding the
certification requirements for
Non-U.S. Holders
and the effect, if any, of the certification requirements on
their particular situation.
Payments of interest (including any OID) not exempt from
U.S. federal withholding tax as described above will be
subject to such withholding tax at the rate of 30%, unless
(i) subject to reduction under an applicable income tax
treaty or (ii) the interest is effectively connected to a
U.S. trade or business and the holder provides IRS
Form W-8ECI
(or a suitable substitute or successor form) to the withholding
agent and meets any other applicable certification requirement.
In order to claim a reduced or zero withholding rate under an
applicable income tax treaty, the beneficial owner of the note
must, under penalties of perjury, provide the withholding agent
with a properly completed and executed IRS
Form W-8BEN
(or a suitable substitute or successor form) claiming an
exemption from, or reduction in the rate of, withholding under
the benefit of such applicable income tax treaty and meet any
other applicable certification requirements.
Sale, retirement
or disposition
A
Non-U.S. Holder
generally will not be subject to U.S. federal income tax
(and generally no tax will be withheld) with respect to gain
(excluding gain representing accrued interest, in which case the
rules for interest apply) realized on the sale, retirement at
maturity or other disposition of a note unless:
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the
Non-U.S. Holder
is an individual who is present in the U.S. for a period or
periods aggregating 183 or more days in the taxable year of the
disposition and certain other conditions are met; or
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such gain is effectively connected with the conduct by the
Non-U.S. Holder
of a trade or business within the U.S. (and, if required by
an applicable income tax treaty, the note is attributable to a
U.S. permanent establishment of the
Non-U.S. Holder).
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U.S. trade or
business
If a
Non-U.S. Holder
holds a note in connection with the conduct of a trade or
business in the U.S. (and, if required by an applicable
income tax treaty, the note is attributable to a
U.S. permanent establishment of the
Non-U.S. Holder):
(i) any interest (including any OID) on the note, and any
gain from disposing of the note, generally will be subject to
income tax at U.S. federal income tax rates as if the
holder were a U.S. Holder, and
(ii) Non-U.S. Holders
that are corporations may be subject to the branch profits
tax on earnings that are connected with a U.S. trade
or business, including earnings from the note.
The branch profits tax is 30% of the dividend equivalent
amount, subject to adjustment, but may be reduced or
eliminated by an applicable income tax treaty or otherwise
adjusted.
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Backup
withholding and information reporting
The withholding agent must report annually to the Internal
Revenue Service and to each
Non-U.S. Holder
on IRS
Form 1042-S
(or a suitable substitute or successor form) the amount of
interest (including any OID) paid on a note, regardless of
whether withholding was required, and any tax withheld with
respect to interest. Under the provisions of certain
U.S. income tax treaties and other applicable agreements,
copies of these information returns may be available to the tax
authorities of the country in which the
Non-U.S. Holder
resides. Backup withholding generally will not apply to payments
of interest (including any OID) to a
Non-U.S. Holder
if the certification requirements described above under
Considerations relating to
non-U.S. holdersPayment
of interest are met, provided the payor does not have
actual knowledge or reason to know that the holder is a
U.S. Holder or that the conditions of any other exemption
are not, in fact, satisfied. Moreover, payment of the principal
or the proceeds of a sale, exchange, retirement or other
disposition of a note are generally not subject to information
reporting and backup withholding if the certification
requirements described above under Considerations relating
to
non-U.S. holdersPayment
of interest are met, provided the payor does not have
actual knowledge or reason to know that the holder is a
U.S. Holder or that the conditions of any other exemption
are not, in fact, satisfied.
Non-U.S. Holders
of notes should consult their tax advisors regarding the
application of information reporting and backup withholding in
their particular situations, the availability of an exemption
therefrom, and the procedure for obtaining such an exemption, if
available. Any amounts withheld under the backup withholding
rules from a payment to a
Non-U.S. Holder
will be allowed as a credit against such
Non-U.S. Holders
U.S. federal income tax liability and may entitle the
holder to a refund, provided that the required information is
furnished to the Internal Revenue Service.
Recently proposed legislation (which was passed by the House of
Representatives) would generally impose, effective for payments
made after December 31, 2012, a withholding tax of 30% on
interest income from, and the gross proceeds of a disposition
of, notes paid to certain foreign entities unless various
information reporting requirements are satisfied. There can be
no assurance as to whether or not this proposed legislation will
be enacted, and, if it is enacted, what form it will take or
when it will be effective.
Non-U.S. Holders
are encouraged to consult their own tax advisors regarding the
possible implications of this proposed legislation on their
investment in the notes.
114
Underwriting
We intend to offer the notes through the underwriters. Subject
to the terms and conditions in the underwriting agreement
between us and the underwriters, we have agreed to sell to each
underwriter, and each underwriter has severally agreed to
purchase from us, the principal amount of notes that appears
opposite its name in the table below:
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Underwriter
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Principal amount
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J.P. Morgan Securities Inc.
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$
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330,000,000
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Banc of America Securities LLC
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220,000,000
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RBC Capital Markets Corporation
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55,000,000
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UBS Securities LLC
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55,000,000
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Wells Fargo Securities, LLC
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55,000,000
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BNP Paribas Securities Corp.
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55,000,000
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Credit Suisse Securities (USA) LLC
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55,000,000
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Scotia Capital (USA) Inc.
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55,000,000
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Calyon Securities (USA) Inc.
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30,000,000
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BBVA Securities Inc.
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30,000,000
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Capital One Southcoast, Inc.
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30,000,000
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Comerica Securities, Inc.
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10,000,000
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SunTrust Robinson Humphrey, Inc.
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10,000,000
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ING Financial Markets LLC
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10,000,000
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Total
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$
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1,000,000,000
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The underwriting agreement provides that the underwriters will
purchase all the notes if any of them are purchased.
In the underwriting agreement, we have agreed that we will
indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as
amended, or to contribute to payments the underwriters may be
required to make in respect of those liabilities.
The notes do not have an established trading market. We do not
intend to apply for the notes to be listed on any securities
exchange or to arrange for the notes to be quoted on any
quotation system. The underwriters have advised us that they
intend to make a market in the notes. However, they are not
obligated to do so and may discontinue any market making at any
time in their sole discretion. Therefore, we cannot assure you
that a liquid trading market will develop for the notes, that
you will be able to sell your notes at a particular time or that
the prices that you receive when you sell will be favorable.
The underwriters initially propose to offer part of the notes
directly to the public at the offering prices described on the
cover page of this prospectus and part to certain dealers at
prices that represent a concession not in excess of 0.375% of
the principal amount of the notes. The underwriters may allow,
and any such dealer may re-allow, a concession not in excess of
0.250% of the principal amount of the notes to certain other
dealers. After the initial offering of the notes, the
underwriters may from time to time vary the offering prices and
other selling terms.
The expenses of the offering, not including the underwriting
discount, are estimated at $950,000 and are payable by us.
In connection with this offering of the notes, the underwriters
may engage in overallotments, stabilizing transactions and
syndicate covering transactions in accordance with
Regulation M
115
under the Securities Exchange Act of 1934. Overallotment
involves sales in excess of the offering size, which creates a
short position for the underwriters. Stabilizing transactions
involve bids to purchase the notes in the open market for the
purpose of pegging, fixing or maintaining the price of the
notes, as applicable. Syndicate covering transactions involve
purchases of the notes in the open market after the distribution
has been completed in order to cover short positions.
Stabilizing transactions and syndicate covering transactions may
cause the price of the notes to be higher than it would
otherwise be in the absence of those transactions. If the
underwriters engage in stabilizing or syndicate covering
transactions, they may discontinue them at any time.
Each of J.P. Morgan Securities Inc., Banc of America
Securities LLC, RBC Capital Markets Corporation, UBS Securities
LLC, Wells Fargo Securities, LLC, BBVA Securities Inc., BNP
Paribas Securities Corp., Calyon Securities (USA) Inc., Capital
One Southcoast, Inc., Credit Suisse Securities (USA) LLC, ING
Financial Markets LLC, Scotia Capital (USA) Inc., SunTrust
Robinson Humphrey, Inc.
and/or their
respective affiliates performs investment banking, commercial
banking and financial advisory services for us in the normal
course of business. JPMorgan Chase Bank, National Association,
an affiliate of J.P. Morgan Securities Inc., is the lead
administrative agent on our credit facility, and JPMorgan Chase
Bank, National Association, Banc of America Securities LLC,
Wells Fargo Bank, N.A., an affiliate of Wells Fargo Securities,
LLC, Comerica Bank, an affiliate of Comerica Securities, Inc.,
Calyon New York Branch, an affiliate of Calyon Securities (USA)
Inc., ING Financial Markets LLC, Scotia Capital (USA) Inc. and
SunTrust Robinson Humphrey, Inc. or their affiliates are lenders
on our existing senior secured credit facility and we expect
will be lenders under our newly committed credit facility.
J.P. Morgan Securities Inc. and Banc of America Securities
LLC will be co-arrangers under our newly committed credit
facility. In addition, affiliates of certain of the underwriters
have agreed to provide us with interim financing in the amount
of $1.25 billion in the event this offering is not
consummated.
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Legal
matters
Certain legal matters with respect to the notes offered hereby
and related guarantees are being passed upon for us by
Baker & Hostetler LLP, Houston, Texas. The validity of
the notes offered hereby and related guarantees will be passed
upon for the underwriters by Simpson Thacher &
Bartlett LLP, New York, New York.
Experts
Denbury
The consolidated financial statements and managements
assessment of the effectiveness of internal control over
financial reporting (which is included in Managements
Report on Internal Control Over Financial Reporting)
incorporated in this Prospectus by reference to the
Denbury Resources Inc. Annual Report on
Form 10-K
for the year ended December 31, 2008 have been so
incorporated in reliance on the report of PricewaterhouseCoopers
LLP, an independent registered public accounting firm, given on
the authority of said firm as experts in auditing and accounting.
Certain information with respect to the oil and gas reserves
associated with Denburys oil and gas properties is derived
from the reports of DeGolyer and MacNaughton, an independent
petroleum engineering firm, and has been included in this
document upon the authority of said firm as experts with respect
to the matters covered by such reports and in giving such
reports.
Encore
The consolidated financial statements of Encore Acquisition
Company appearing in Denbury Resources Inc.s Current
Report on
Form 8-K
dated February 2, 2010 and the effectiveness of Encore
Acquisition Companys internal control over financial
reporting as of December 31, 2008 have been audited by
Ernst & Young LLP, independent registered public
accounting firm, as set forth in their reports thereon, included
therein, and incorporated herein by reference. Such consolidated
financial statements and Encore Acquisition Company
managements assessment of the effectiveness of internal
control over financial reporting as of December 31, 2008
are incorporated herein by reference in reliance upon such
reports given on the authority of such firm as experts in
accounting and auditing.
Certain information with respect to the oil and natural gas
reserves associated with Encores oil and natural gas
properties is derived from the reports of Miller and Lents,
Ltd., an independent petroleum engineering firm, and has been
included in this document upon the authority of said firm as
experts with respect to the matters covered by such reports and
in giving such reports.
117
Glossary
The following are abbreviations and definitions of certain terms
commonly used in the oil and gas industry and this document:
Bbl. One stock tank barrel of 42 U.S. gallons
liquid volume, used in reference to crude oil or other liquid
hydrocarbons.
Bbls/d. Barrels of oil produced per day.
Bcf. One billion cubic feet of gas or
CO2.
BOE. One barrel of oil equivalent, using the ratio
of one barrel of crude oil, condensate or natural gas liquids to
six Mcf of natural gas.
BOE/d. BOE per day.
CO2. Carbon
dioxide.
Development costs.* Costs incurred to obtain access
to proved reserves and to provide facilities for extracting,
treating, gathering and storing the oil and gas.
Differential. The difference between the net
realized commodity prices received on a per unit basis, as
compared to the actual NYMEX prices posted on a per unit basis.
Field.* An area consisting of a single reservoir or
multiple reservoirs all grouped on or related to the same
individual geological structural feature
and/or
stratigraphic condition.
MBbls. One thousand barrels of crude oil or other
liquid hydrocarbons.
Mcf. One thousand cubic feet of natural gas or
CO2.
MBOE. One thousand BOEs.
MMBbls. One million barrels of crude oil or other
liquid hydrocarbons.
MMBOE. One million BOEs.
MMBtu. One million British thermal units. One
British thermal unit is the amount of heat required to raise the
temperature of a one pound mass of water from 58.5 to 59.5
degrees Fahrenheit.
MMcf. One million cubic feet of natural gas or
CO2.
NYMEX. New York Mercantile Exchange.
Production costs.* Costs incurred to operate and
maintain wells and related equipment and facilities, including
depreciation and applicable operating costs of support equipment
and facilities and other costs of operating and maintaining
those wells and related equipment and facilities.
Proved developed reserves.* Crude oil, natural gas
and natural gas liquids reserves that can be expected to be
recovered through existing wells with existing equipment and
operating methods.
Proved properties. Properties with proved reserves.
118
Proved reserves.* The estimated quantities of crude
oil, natural gas, and natural gas liquids that geological and
engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic and operating conditions, i.e., prices and costs as of
the date the estimate is made.
PV-10
Value. When used with respect to oil and natural gas
reserves,
PV-10 Value
means the estimated future gross revenue to be generated from
the production of proved reserves, net of estimated future
production, development and abandonment costs and before income
taxes, discounted to a present value using an annual discount
rate of 10%.
PV-10 Values
calculated as of December 31, 2009 were prepared using an
average price equal to the unweighted arithmetic average of
hydrocarbon prices on the first day of each month within a
12-month
period ended December 31, 2009.
PV-10 Values
calculated prior to December 31, 2009 were prepared using
prices and costs in effect at the determination date.
Reservoir. A porous and permeable underground
formation containing a natural accumulation of producible oil
and/or gas
that is confined by impermeable rock or water barriers and is
individual and separate from other reservoirs.
Standardized measure. The present value, discounted
at 10% per year, of estimated future net revenues from the
production of proved reserves, computed by applying sales prices
and deducting the estimated future costs to be incurred in
developing, producing and abandoning the proved reserves
(computed based on current costs and assuming continuation of
existing economic conditions). Future income taxes are
calculated by applying the statutory federal and state income
tax rate to pre-tax future net cash flows, net of the tax basis
of the properties involved and utilization of available tax
carryforwards related to oil and natural gas operations. Sales
prices as of year-end 2009 were prepared using an average price
equal to the unweighted arithmetic average of hydrocarbon prices
on the first day of each month within the
12-month
period ended December 31, 2009 (except for consideration of
price changes to the extent provided by contractual
arrangements). Sales prices as of year-end 2007 and 2008 were
prepared using prices in effect as of the dates of such
estimates and held constant throughout the productive life of
the reserves (except for consideration of price changes to the
extent provided by contractual arrangements).
Tertiary recovery operations. An enhanced recovery
operation that normally occurs after waterflooding, in which
chemicals or natural gases
(CO2)
are used as the injectant.
* This definition is an
abbreviated version of the complete definition as defined by the
SEC in
Rule 4-10(a)
of Regulation S-X. For the complete definition
see:http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=20c66c74f60c4bb8392bcf9ad6fccea3&rgn=
div5&view=text&node=17:2.0.1.1.8&id-no=17#17:2.0.1.1.8.0.21.43.
119