with any sale or other disposition of all the capital stock of a subsidiary guarantor; (iii) if designated to
be an unrestricted subsidiary; (iv) upon legal defeasance or satisfaction and discharge of the indenture;
(v) upon the liquidation or dissolution of such subsidiary guarantor provided no default or event of
default has occurred or is continuing; or (vi) at such time as such subsidiary guarantor does not have
outstanding any guarantee of any of our or any of our subsidiary guarantor’s indebtedness (other than
the notes) in excess of $10.0 million in aggregate principal amount. The Senior Notes rank senior in
right of payment to all of our existing and future subordinated indebtedness;
pari passu
in right of
payment with any of our existing and future unsecured indebtedness that is not by its terms
subordinated to the Senior Notes; effectively junior to our existing and future secured indebtedness,
including indebtedness under our senior revolving credit facility and the Plains Offshore senior credit
facility, to the extent of our assets constituting collateral securing that indebtedness; and effectively
subordinate to all existing and future indebtedness and other liabilities (other than indebtedness and
liabilities owed to us) of our non-guarantor subsidiaries. In the event of a change of control, as defined
in the indenture, we will be required to make an offer to repurchase the Senior Notes at 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of repurchase.
The indentures governing the Senior Notes contain covenants that, among other things, limit our
ability and the ability of our restricted subsidiaries to incur additional debt; make certain investments or
pay dividends or distributions on our capital stock or purchase or redeem or retire capital stock; sell
assets, including capital stock of our restricted subsidiaries; restrict dividends or other payments by
restricted subsidiaries; create liens that secure debt; enter into transactions with affiliates; and merge
or consolidate with another company.
Debt Extinguishment Costs
. During 2011, we recognized $121.0 million of debt extinguishment
costs, including $30.9 million of unamortized debt issue costs and original issue discount, in connection
with the retirement of a portion of our 7
3
⁄
4
% Senior Notes, 10% Senior Notes and 7% Senior Notes.
During 2010 and 2009, we recognized $1.2 million and $12.1 million, respectively, of debt
extinguishment costs in connection with reductions in our borrowing base and commitments under our
senior revolving credit facility.
Subsequent Event
In February 2012, our borrowing base was increased from $1.8 billion to $2.3 billion until the next
scheduled redetermination date on or before May 1, 2013. The commitments remained unchanged at
$1.4 billion.
Note 6 — Commodity Derivative Contracts
General
We are exposed to various market risks, including volatility in oil and gas commodity prices and
interest rates. The level of derivative activity we engage in depends on our view of market conditions,
available derivative prices and operating strategy. A variety of derivative instruments, such as swaps,
collars, puts, calls and various combinations of these instruments, may be utilized to manage our
exposure to the volatility of oil and gas commodity prices. Currently, we do not use derivatives to
manage our interest rate risk. The interest rate on our senior revolving credit facility and Plains
Offshore’s senior credit facility is variable, while our senior notes are at fixed rates.
All derivative instruments are recorded on the balance sheet at fair value. If a derivative does not
qualify as a hedge or is not designated as a hedge, the changes in fair value, both realized and
unrealized, are recognized in our income statement as a gain or loss on mark-to-market derivative
contracts. Cash flows are only impacted to the extent the actual settlements under the contracts result
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