AGREEMENT OF LIMITED PARTNERSHIP
Mallard ▇▇▇▇▇▇ ▇.▇.
Dated as of May 23, 2000
TABLE OF CONTENTS
Page
ARTICLE I Formation of Partnership............................1
Section 1.1. Formation...........................................1
Section 1.2. Name................................................1
Section 1.3. Business............................................1
Section 1.4. Places of Business, Registered Agent and Addresses..2
Section 1.5. Term................................................2
Section 1.6. Filings.............................................2
ARTICLE II Certain Definitions and References..................3
Section 2.1. Certain Defined Terms...............................3
Section 2.2. References and Construction........................11
ARTICLE III Capitalization.....................................12
Section 3.1. Capital Contributions of General Partner...........12
Section 3.2. Capital Contributions of Limited Partner...........12
Section 3.3. Request for Additional Capital Contributions
of Limited Partner............................13
Section 3.4. Reduced Capital Contributions of Limited Partner...16
Section 3.5. Payments of Capital Contributions..................16
Section 3.6. Non-payment of Capital Contributions...............17
Section 3.7. Interest on and Return of Capital Contributions....20
ARTICLE IV Allocations and Distributions......................20
Section 4.1. Allocation of Profits and Losses...................20
Section 4.2. Special Allocations................................20
Section 4.3. Distributions......................................22
ARTICLE V Partnership Property...............................23
Section 5.1. Title to Partnership Property......................23
Section 5.2. Acquisition of the Assets..........................23
Section 5.3. Additional Acquisitions............................24
Section 5.4. Lease Sales........................................25
Section 5.5. Sales of Production................................25
Section 5.6. Operations on Partnership Assets...................26
Section 5.7. Hedge Arrangement..................................26
Section 5.8. Production.........................................27
Section 5.9. Environmental, Health and Safety Program...........27
ARTICLE VI Management.........................................28
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Section 6.1. Power and Authority of General Partner.............28
Section 6.2. Certain Restrictions on General Partner's Power
and Authority.................................28
Section 6.3. Duties and Services of General Partner.............30
Section 6.4. Liability of General Partner.......................31
Section 6.5. Limitations on Indemnification.....................31
Section 6.6. Costs, Expenses and Reimbursement..................31
Section 6.7. Organization and Third Party Acquisition Costs.....32
Section 6.8. Insurance..........................................33
Section 6.9. Tax Elections......................................33
Section 6.10. Tax Returns........................................34
Section 6.11. Appointment of Trustee to Receive Payments.........34
ARTICLE VII Rights and Obligations of Limited Partner..........35
Section 7.1. Rights of Limited Partner..........................35
Section 7.2. Limitations on Limited Partner.....................35
Section 7.3. Liability of Limited Partner.......................35
Section 7.4. Access of Limited Partner to Data..................36
Section 7.5. Withdrawal and Return of Capital Contribution......36
ARTICLE VIII Books, Records, Reports and Bank Accounts..........36
Section 8.1. Capital Accounts, Books and Records................36
Section 8.2. Reports............................................39
Section 8.3. Bank Accounts......................................41
Section 8.4. Information Relating to the Partnership............41
Section 8.5. Certain Notices....................................41
ARTICLE IX Assignments of Interests and Substitutions.........42
Section 9.1. Assignments by Limited Partner.....................42
Section 9.2. Assignment by General Partner......................43
Section 9.3. Merger or Consolidation............................43
Section 9.4. Removal of General Partner.........................43
Section 9.5. Right of General Partner Upon Removal..............44
Section 9.6 Right of First Offer...............................45
ARTICLE X Dissolution, Liquidation and Termination...........45
Section 10.1. Dissolution........................................45
Section 10.2. Withdrawal by General Partner and Reconstitution...47
Section 10.3. Liquidation and Termination........................47
Section 10.4. Cancellation of Certificate........................49
Section 10.5. Certain Additional Agreements Regarding
Piggyback Rights..............................49
ARTICLE XI Representations and Warranties.....................50
Section 11.1. Representations and Warranties of General Partner..50
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Section 11.2. Representations and Warranties of Limited Partner..52
ARTICLE XII Miscellaneous......................................53
Section 12.1. Notices............................................53
Section 12.2. Amendments.........................................53
Section 12.3. Partition..........................................53
Section 12.4. Entire Agreement...................................53
Section 12.5. No Waiver..........................................53
Section 12.6. Applicable Law.....................................53
Section 12.7. Successors and Assigns.............................53
Section 12.8. Exhibits...........................................53
Section 12.9. Survival of Representations and Warranties.........54
Section 12.10. No Third Party Benefit................................54
Section 12.11. Public Announcements..................................54
Section 12.12. Counterparts..........................................54
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AGREEMENT OF LIMITED PARTNERSHIP
Mallard ▇▇▇▇▇▇ ▇.▇.
THIS AGREEMENT OF LIMITED PARTNERSHIP (this "Agreement") is made and
entered into this 23rd day of May, 2000, by and between, Magnum Hunter
Production, Inc., a Texas corporation (herein sometimes called the "General
Partner"), and TIFD III-X Inc., a Delaware corporation (herein sometimes called
the "Limited Partner"). In consideration of the mutual covenants and agreements
contained herein, the parties hereto agree as follows:
ARTICLE I
Formation of Partnership
Section 1.1. Formation. Subject to the provisions of this Agreement, the
parties hereto do hereby form a limited partnership (the "Partnership") pursuant
to the provisions of the Texas Revised Limited Partnership Act (Article 6132a-1,
Vernon's Texas Civil Statutes) (such Act, as amended from time to time, or any
successor statute or statutes thereto, being called the "Act").
Section 1.2. Name. The name of the Partnership shall be Mallard ▇▇▇▇▇▇ ▇.▇.
Subject to all applicable laws, the business of the Partnership shall be
conducted in the name of the Partnership unless under the law of some
jurisdiction in which the Partnership does business such business must be
conducted under another name. In such a case, the business of the Partnership in
such jurisdiction may be conducted under such other name or names as the General
Partner shall determine to be necessary so long as it does not affect adversely
the limited liability of the Limited Partner hereunder or jeopardize in any
manner the title to or ownership of any Partnership Leases (as herein defined)
or other assets. The General Partner shall cause to be filed on behalf of the
Partnership such partnership or assumed or fictitious name certificate or
certificates or similar instruments as may from time to time be required by law.
Section 1.3. Business. Subject to the other provisions of this Agreement,
the business of the Partnership shall be: (a) to acquire the Assets (as defined
herein); (b) to acquire additional Leases (as defined herein); (c) to hold,
maintain, renew, explore, drill, develop and operate the Assets and such
additional Leases; (d) to produce, collect, store, treat, deliver, market, sell
or otherwise dispose of oil, gas and related hydrocarbons and minerals from the
Assets and such additional Leases; (e) to farm-out, sell, abandon and otherwise
dispose of the Assets, additional Leases and other Partnership assets; (f) to
enter into swaps, options, future contracts and other transactions to hedge or
to otherwise minimize the risk associated with the fluctuation of prices to be
received by the Partnership from the sale of oil, gas and related hydrocarbons
and minerals from the Assets and any additional Leases acquired pursuant to the
terms hereof; and (g) to take all such other actions incidental to any of the
foregoing as the General Partner may determine to
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be necessary or appropriate. Notwithstanding the foregoing and any other
provision of this Agreement, the Partnership shall not (i) acquire (A) any
additional Leases, except as expressly provided herein, (B) any carbon-dioxide
removal, sulfur removal or other equipment for the processing or treatment of
gas or other hydrocarbons, whether on or off the Assets or additional Leases
acquired pursuant to the terms hereof (other than equipment acquired as part of
and at the same time as the acquisition of the Assets or an additional Lease or
otherwise in accordance with this Agreement), (C) any refining facilities or (D)
any transportation facilities except pipelines and gathering systems connecting
the Assets or additional Leases acquired pursuant to the terms hereof with other
gathering systems or transmission pipelines, or (ii) engage in the contract
drilling business or any other business except as expressly permitted herein.
Section 1.4. Places of Business, Registered Agent and Addresses.
(a) The principal United States office and place of business of the
Partnership and its street address shall be ▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇., ▇▇▇▇▇ ▇▇▇▇,
▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇. The General Partner, at any time and from time to time, may
change the location of the Partnership's principal United States office and
place of business as the General Partner shall determine to be necessary or
appropriate, provided notice thereof is concurrently given to the Limited
Partner.
(b) The registered office of the Partnership in Texas shall be ▇▇▇ ▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇., ▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇, and the registered agent for
service of process on the Partnership shall be the General Partner, whose
business address is the same as the Partnership's registered office. The General
Partner, at any time and from time to time, may change the Partnership's
registered office or registered agent or both by complying with the applicable
provisions of the Act and giving concurrent notice thereof to the Limited
Partner and may establish, appoint and change additional registered offices and
registered agents of the Partnership in such other states as the General Partner
shall determine to be necessary or advisable.
Section 1.5. Term. The Partnership shall be formed and commence upon the
completion of filing for record of an initial certificate of limited partnership
of the Partnership with the Secretary of State of the State of Texas.
Section 1.6. Filings. Upon the request of the General Partner, the Limited
Partner shall promptly execute and deliver all such certificates and other
instruments conforming hereto as shall be necessary for the General Partner to
accomplish all filing, recording, publishing and other acts appropriate to
comply with all requirements for the formation and operation of the Partnership
as a limited partnership under the laws of the State of Texas and for the
qualification or reformation and operation of the Partnership as a limited
partnership in all other jurisdictions where the Partnership shall propose to
conduct business. Prior to the conducting of any business in any jurisdiction,
the General Partner shall: (a) to the full extent necessary to establish limited
liability for the Limited Partner under the laws of such jurisdiction and
otherwise to comply with the laws of such jurisdiction, cause the Partnership to
comply with all requirements for the registration,
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qualification or reformation of the Partnership to conduct business as a limited
partnership in such jurisdiction and (b) at the request of the Limited Partner,
obtain an opinion of reputable counsel in such jurisdiction satisfactory in all
respects to the Limited Partner as to such registration, qualification or
reformation and as to the limited liability of the Limited Partner under the
laws of such jurisdiction. Thereafter, the General Partner shall cause the
Partnership to continue to comply with all such requirements and all other
requirements necessary to maintain the limited liability of the Limited Partner
in each jurisdiction where the Partnership does business and, upon timely
request of the Limited Partner and within 60 days after the end of each calendar
year commencing with the calendar year ending December 31, 2000, the General
Partner shall furnish to the Limited Partner an opinion or opinions of legal
counsel for the Partnership as to compliance with such requirements and such
limited liability.
ARTICLE II
Certain Definitions and References
Section 2.1. Certain Defined Terms. When used in this Agreement, the
following terms shall have the respective meanings assigned to them in this
Section 2.1 or in the sections, subsections or other subdivisions referred to
below:
"Acquisition Cost" shall mean, (a) with respect to the purchase by the
Partnership from the General Partner or its Affiliates of any Lease (exclusive
of the acquisition of the Assets), the costs as described in clause (b)
immediately below incurred by the General Partner and/or its Affiliates in
acquiring such Lease and (b) with respect to the acquisition by the Partnership
of any Lease other than those purchased pursuant to clause (a) immediately
above, the sum of (i) the price paid or contractually agreed to be paid for such
Lease to the lessor, assignor or grantor of such Lease, including lease bonuses,
advance rentals and other acquisition costs and (ii) title insurance or
examination costs, broker's commissions, attorneys' fees, due diligence fees,
filing fees, recording costs, and transfer and sales taxes, if any, and other
similar costs incurred with respect to such Lease in connection with its
acquisition, but excluding any actual, allocated or imputed interest expense.
"Act" shall have the meaning assigned to such term in Section 1.1.
"Adjusted Capital Account" shall mean the capital account maintained for
each Partner as of the end of each fiscal year (a) increased by (i) the amount
of any unpaid Capital Contributions unconditionally agreed to be contributed by
such Partner under Article III, if any, and (ii) an amount equal to such
Partner's allocable share of the Partnership's Minimum Gain, as computed on the
last day of such fiscal year in accordance with applicable Treasury Regulations,
and (b) reduced by (i) the amount of all depletion deductions reasonably
expected to be allocated to such Partner in subsequent years and charged to such
Partner's capital account, (ii) the amount of
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all losses and deductions reasonably expected to be allocated to such Partner in
subsequent years under Sections 704(e)(2) and 706(d) of the Internal Revenue
Code and Treasury Regulation ss. 1.751-1(b)(2)(ii), and (iii) the amount of all
distributions reasonably expected to be made to such Partner to the extent they
exceed offsetting increases to such Partner's capital account that are
reasonably expected to occur during (or prior to) the year in which such
distributions are reasonably expected to be made.
"Affiliate" shall mean (a) any person directly or indirectly owning,
controlling or holding with power to vote 10% or more of the outstanding voting
securities of the General Partner, (b) any person 10% or more of whose
outstanding voting securities are directly or indirectly owned, controlled or
held with power to vote by the General Partner, (c) any person directly or
indirectly controlling, controlled by or under common control with the General
Partner, (d) any officer, director, member, manager or partner of the General
Partner or any person described in clause (a), (b) or (c) of this paragraph, or
(e) any person related by blood, adoption or marriage to any person referred to
in clause (c) or clause (d) of this paragraph. As used in this Agreement, the
term "person" shall include an individual, an estate, a corporation, a
partnership, a limited liability company, an association or other entity, a
joint stock company and a trust.
"Agreed Rate" shall mean a rate per annum which is equal to the lesser of
(a) a rate which is one percent (1%) above the prime rate of interest of Chase
Bank, New York, New York, as announced or published by such bank from time to
time (adjusted from time to time to reflect any changes in such rate determined
hereunder) or (b) the maximum rate from time to time permitted by applicable
law.
"Agreement" shall mean this Agreement, as hereafter changed, modified or
amended in accordance with the terms hereof.
"Area of Mutual Interest" shall mean the areas covered by each Lease
acquired by the Partnership pursuant to the terms hereof plus all areas within a
one-half mile radius of the boundary lines of such Lease.
"Assets" shall mean the "Properties," as such term is defined in the
Purchase Agreement.
"Capital Contributions" shall mean for any Partner at the particular time
in question the aggregate of the dollar amounts of any cash contributed to the
capital of the Partnership, or, if the context in which such term is used so
indicates, the dollar amounts of cash agreed to be contributed, or requested to
be contributed, by such Partner to the capital of the Partnership.
"Capital Costs" shall mean (a) all geological and geophysical costs
incurred by the Partnership to the extent any of such costs are incurred in
connection with Partnership ▇▇▇▇▇ drilled or proposed to be drilled on the
Assets or any additional Lease acquired pursuant to the terms hereof, (b) all
costs incurred by the Partnership in locating, drilling, completing, equipping,
4
deepening or sidetracking a well located on the Assets or any additional Lease
acquired pursuant to the terms hereof, including (i) the costs of surveying and
staking such well, the costs of any surface damages and the costs of clearing,
coring, testing, logging and evaluating such well, (ii) the costs of casing,
cement and cement services for such well, (iii) the cost of plugging and
abandoning such well (including standard and customary remediation activities
associated therewith) if it is determined that such well would not produce in
commercial quantities and should be abandoned and (iv) all direct charges and
overhead chargeable to the Partnership with respect to such well under any
applicable operating agreement until such time as all operations are carried out
as required by applicable regulations and sound engineering practices to make
such well ready for production, including the installation and testing of
wellhead equipment, or to plug and abandon a dry hole; (c) all costs incurred by
the Partnership in recompleting or plugging back any Partnership well; (d) all
costs incurred by the Partnership in reworking any Partnership well when the
Partnership's reasonably anticipated share of such costs is greater than
$50,000; (e) all costs incurred by the Partnership in locating, drilling,
completing, equipping, deepening or sidetracking any enhanced recovery producer
or injector well (including the costs of all necessary surface equipment such as
steam generators, compressors, water treating facilities, injection pumps, flow
lines and steam lines) or otherwise conducting Enhanced Recovery Operations; and
(f) all costs incurred by the Partnership in constructing production facilities,
pipelines and other facilities necessary to develop the Assets and additional
Leases acquired pursuant to the terms hereof and produce, collect, store, treat,
deliver, market, sell or otherwise dispose of oil, gas and other hydrocarbons
and minerals therefrom; but such term shall not include any Lease Operating and
Production Costs, Acquisition Costs, or Catastrophe Costs.
"Catastrophe Costs" shall mean all costs, expenses and damages incurred by
the Partnership as a result of the failure of the General Partner to cause the
Partnership to obtain or carry the types or amounts of insurance coverage agreed
upon from time to time by the Partners in accordance with Section 6.8, but such
term shall not include (a) the deductible amounts under any insurance coverage
arranged by or on behalf of the Partnership or with respect to its property or
operations to the extent such deductible amounts have been approved or agreed to
by the Limited Partner in accordance with Section 6.8 and (b) any costs,
expenses and damages incurred by the Partnership that are in excess of the
agreed upon insurance coverage maintained in accordance with the terms hereof.
"Change in Control" shall mean the occurrence during the term of the
Partnership of any of the following: (a) any person (as such term is used in
Section 13(d) and 14(d(2) of the Securities and Exchange Act of 1934, as amended
(the "Exchange Act")) is or becomes the "beneficial owner" (as defined in Rule
13d-3 of the Exchange Act), directly or indirectly, of securities of Parent
representing 40% or more of the combined voting power of the General Partner's
then outstanding securities; (b) if, during any period of two consecutive years,
individuals who at the beginning of such period constitute the board of
directors of the Parent cease for any reason to constitute at least a majority
thereof, unless the election or nomination for the election by the Parent's
stockholders of each new director was approved by a vote of at least two-third
of the
5
directors then still in office who were directors at the beginning of such
period; or (c) Parent ceases to own at least 80% of the voting securities of the
General Partner.
"Contributing Partner" shall have the meaning assigned to such term in
Section 3.6(d).
"Cumulative Payout" shall mean, with respect to each month, X minus Y,
where:
"X"= the sum of (i) such month's Monthly Payout plus (ii) all previous
months' Monthly Payouts; and
"Y" = the sum of (i) the Capital Contribution made by the Limited Partner
pursuant to the terms hereof during such month times the Payout Discount Factor
for such month plus (ii) each Capital Contribution previously made by the
Limited Partner pursuant to the terms hereof times the Payout Discount Factor
for the month in which such Capital Contribution was made.
"Defaulting Partner" shall have the meaning assigned to such term in
Section 3.6(d).
"Deficit Partner" shall have the meaning assigned to such term in Section
4.3(i).
"Delivery Date" shall mean the date on which this Agreement has been fully
and unconditionally executed and delivered by each of the parties hereto.
"Depletable Property" shall have the meaning assigned to such term in
Section 4.3(b).
"Enhanced Recovery Operations" shall mean any operations or project
intended to increase the recovery of oil and/or gas from a pool by artificial
means or by the application of energy extrinsic to the pool, which artificial
means or application shall include pressuring, cycling, pressure maintenance,
injection to the pool of a substance or form of energy, or other operations or
projects that would be commonly considered secondary or tertiary operations or
projects, but such term shall not include the injection in a well of a substance
or form of energy for the sole purpose of (a) aiding in the lifting of fluids in
the well, or (b) stimulation of the pool at or near the well by mechanical,
chemical, thermal or explosive means.
"Environmental Laws" shall mean all applicable federal, state and local
laws, rules and regulations, orders, judgments, decrees and other legal
requirements relating to pollution or the regulation and protection of human
health, safety, the environment or natural resources, including, but not limited
to, the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended (42 U.S.C.ss.9601 et seq.); the Hazardous Material
Transportation Act, as amended (49 U.S.C.ss.180 et seq.); the Federal
Insecticide, Fungicide, and Rodenticide Act, as amended (7 U.S.C.ss.136 et
seq.); the Resource Conservation and Recovery Act, as amended (42 U.S.C.ss.6901
et seq.); the Toxic Substance Control Act, as amended (42 U.S.C.ss.7401 et
seq.); the Clean Air Act, as amended (42 U.S.C.ss.740 et seq.); the Federal
Water Pollution Control Act, as
6
amended (33 U.S.C.ss.1251 et seq.); the Occupational Safety and Health Act,
as amended (29 U.S.C. ss.651 et seq.); the Safe Drinking Water Act, as amended
(42 U.S.C.ss.300f et seq.); and their state and local counterparts or
equivalents and any transfer of ownership notification or approval statute.
"Event of Default" shall have the meaning assigned to such term in Section
3.6(b).
"General Partner" shall mean Magnum Hunter Production, Inc., a Texas
corporation, in its capacity as general partner of the Partnership and any
person who becomes a substituted general partner of the Partnership pursuant to
the terms hereof.
"GP Monthly Cash Distribution" shall mean, with respect to any month:
(a) the Production Sales Proceeds received during such month and
attributable to any Hedging Transaction multiplied by the GP Sharing Percentage
for such month plus the Production Sales Proceeds received during such month
from the sale of hydrocarbons (other than in connection with a Hedging
Transaction) multiplied by the GP Sharing Percentage for such month; less
(b) Lease Operating and Production Costs paid during such month multiplied
by the GP Sharing Percentage for such month; less
(c) Hedge Costs paid during such month multiplied by the GP Sharing
Percentage for such month; less
(d) the amounts which the General Partner reasonably determines should be
added to the Partnership's cash reserves multiplied by the GP Sharing Percentage
(it being agreed that the Partnership's cash reserves, including all additions
thereto, shall not exceed the remainder of the total Partnership costs and
expenses the General Partner reasonably anticipates will be incurred within a 60
day period commencing as of the date of the determination of the GP Monthly Cash
Distribution, minus the total Production Sales Proceeds the General Partner
reasonably anticipates will be received by the Partnership during such period);
plus
(e) any cash reserves which the General Partner reasonably believes are no
longer necessary to retain multiplied by the GP Sharing Percentage for such
month; plus
(f) the net proceeds derived from the sale of Partnership properties
multiplied by the GP Sharing Percentage for such month; plus
(g) any other funds received by the Partnership during such month
(including insurance proceeds, to the extent not expended by the Partnership)
multiplied by the GP Sharing Percentage for such month; less
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(h) payments made during such month on principal and interest on permitted
Partnership indebtedness multiplied by the GP Sharing Percentage for such month;
less
(i) the Management Fee multiplied by the GP Sharing Percentage for such
month; less
(j) other direct, third party out-of-pocket costs paid by the Partnership
for such month (e.g.'s, costs of obtaining audits of the Partnership's books and
records, fees and expenses attributable to the preparation of the Partnership's
tax returns) multiplied by the GP Sharing Percentage for such month.
"GP Sharing Percentage" shall mean, when used with respect to any month,
100% minus the LP Sharing Percentage in effect during such month.
"Guaranty" shall mean that certain Guaranty dated as of even date herewith
executed by Parent in favor of the Partnership and the Limited Partner.
"Hedge Costs" shall mean the costs of arranging, modifying or terminating a
Hedging Transaction, or which otherwise arise in respect or as a result of a
Hedging Transaction.
"Hedging Transaction" shall mean any commodity hedging transaction
pertaining to oil, gas and related hydrocarbons and minerals, whether in the
form of a swap agreement, option to acquire or dispose of a futures contract,
whether on an organized commodities exchange or otherwise, or similar type of
financial transaction classified as "notional principal contracts" pursuant to
Treasury Regulation Section 1.512(b)-1(a)(1). Any Hedging Transaction shall be
identified in the books and records of the Partnership as a "hedging
transaction" in the manner and at the times prescribed by Treasury Regulation
ss.1.1221-2(e).
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and any successor statute or statutes.
"Lease" shall mean a lease, mineral interest, royalty or overriding
royalty, fee right, mineral servitude, license, concession or other right
covering oil, gas and related hydrocarbons (or a contractual right to acquire
such an interest) or an undivided interest therein or portion thereof, together
with all appurtenances, easements, permits, licenses, servitudes and
rights-of-way situated upon or used or held for future use in connection with
such an interest or the exploration, development or operation thereof. A "Lease"
shall also mean and include all rights and interests in all lands and interests
unitized or pooled therewith pursuant to any law, rule, regulation or agreement.
"Lease Operating and Production Costs" shall mean all costs incurred by the
Partnership in connection with the maintenance of the Assets and any additional
Leases acquired pursuant to
8
the terms hereof (except drilling and similar obligations) and the production
and marketing of oil, gas and related hydrocarbons from completed ▇▇▇▇▇
(including ▇▇▇▇▇ which have been involved in Enhanced Recovery Operations) in
which the Partnership has an interest pursuant to this Agreement, including
costs incurred for all delay rentals, shut-in royalties and similar payments,
royalties on lost or flared gas or gas used for which payment is required,
labor, fuel, repairs, transportation, supplies, utility charges, ad valorem,
severance, excise and similar taxes, the cost of reworking any well (except to
the extent provided in the definition of Capital Costs), the costs of plugging
and abandoning any well (except to the extent provided in the definition of
Capital Costs) and compensation to well operators, consultants and others and
insurance in connection with the foregoing; but such term shall not include any
Capital Costs, Catastrophe Costs or Acquisition Costs.
"Limited Partner" shall mean TIFD III-X Inc., a Delaware corporation, and
any person who becomes a substituted limited partner of the Partnership pursuant
to the terms hereof.
"LP Monthly Cash Distribution" shall mean, with respect to any month:
(a) the Production Sales Proceeds received during such month and
attributable to any Hedging Transaction multiplied by the LP Sharing Percentage
for such month plus the Production Sales Proceeds received during such month
from the sale of hydrocarbons (other than in connection with a Hedging
Transaction) multiplied by the LP Sharing Percentage for such month; less
(b) Lease Operating and Production Costs paid during such month multiplied
by the LP Sharing Percentage for such month; less
(c) Hedge Costs paid during such month multiplied by the LP Sharing
Percentage for such month; less
(d) the amounts which the General Partner reasonably determines should be
added to the Partnership's cash reserves multiplied by the LP Sharing Percentage
(it being agreed that the Partnership's cash reserves, including all additions
thereto, shall not exceed the remainder of the total Partnership costs and
expenses the General Partner reasonably anticipates will be incurred within a 60
day period commencing as of the date of the determination of the LP Monthly Cash
Distribution, minus the total Production Sales Proceeds the General Partner
reasonably anticipates will be received by the Partnership during such period);
plus
(e) any cash reserves which the General Partner reasonably believes are no
longer necessary to retain multiplied by the LP Sharing Percentage for such
month; plus
9
(f) the net proceeds derived from the sale of Partnership properties
multiplied by the LP Sharing Percentage for such month; plus
(g) any other funds received by the Partnership during such month
(including insurance proceeds, to the extent not expended by the Partnership)
multiplied by the LP Sharing Percentage for such month; less
(h) payments made during such month on principal and interest on permitted
Partnership indebtedness multiplied by the LP Sharing Percentage for such month;
less
(i) the Management Fee multiplied by the LP Sharing Percentage for such
month; less
(j) other direct, third party out-of-pocket costs paid by the Partnership
for such month (e.g.'s, costs of obtaining audits of the Partnership's books and
records, fees and expenses attributable to the preparation of the Partnership's
tax returns) multiplied by the LP Sharing Percentage for such month.
"LP Sharing Percentage" shall mean, (a) when used with respect to each
month during the Phase I Period, 99%, and (b) when used with respect to each
month during the Phase II Period, 65%.
"Management Fee" shall have the meaning assigned to such term in Section
6.6(b).
"Minimum Gain" shall mean (a) with respect to Partnership Nonrecourse
Liabilities, the amount of gain that would be realized by the Partnership if it
disposed of (in a taxable transaction) all Partnership properties which are
subject to Partnership Nonrecourse Liabilities in full satisfaction of such
liabilities, computed in accordance with applicable Treasury Regulations and (b)
with respect to each Partner Nonrecourse Debt, the amount of gain that would be
realized by the Partnership if it disposed of (in a taxable transaction) the
Partnership property that is subject to such liability in full satisfaction of
such liability, computed in accordance with applicable Treasury Regulations.
"Monthly Payout" shall mean, with respect to any month, an amount equal to
the LP Monthly Cash Distribution received by the Limited Partner during such
month times the Payout Discount Factor.
"Organization and Third Party Acquisition Costs" shall have the meaning
assigned to such term in Section 6.7.
"Parent" shall mean Magnum Hunter Resources, Inc.
10
"Partner Nonrecourse Debt" shall mean any nonrecourse debt of the
Partnership (or portions thereof) for which any Partner bears the economic risk
of loss.
"Partner Nonrecourse Deductions" shall mean the amount of deductions,
losses and expenses equal to the net increase during the year in Minimum Gain
attributable to a Partner Nonrecourse Debt, reduced (but not below zero) by
proceeds of such Partner Nonrecourse Debt distributed during the year to the
Partners who bear the economic risk of loss for such debt, as determined in
accordance with applicable Treasury Regulations.
"Partners" shall mean the General Partner and the Limited Partner.
"Partnership" shall have the meaning assigned to it in Section 1.1.
"Partnership Nonrecourse Liabilities" shall mean any nonrecourse
liabilities (or portions thereof) of the Partnership for which no Partner bears
the economic risk of loss.
"Payout Discount Factor" shall mean, as of any given month, the value for
such month as set forth in Exhibit 2.1--Cash Discount Factor Table.
"Phase I Period" shall mean the period from the Delivery Date until the end
of the first month in which Cumulative Payout is greater than or equal to zero.
"Phase II Period" shall mean the period commencing immediately upon the
expiration of the Phase I Period and ending upon the liquidation and termination
of the Partnership.
"Positive Partner" shall have the meaning assigned to such term in Section
4.3(i).
"Production Sales Proceeds" shall mean revenues received from the sale of
production from the Partnership's Assets and any additional Leases acquired
pursuant to the terms hereof, net of any royalties, overriding royalty interests
and other similar interests burdening such Assets and Leases, plus production
taxes and ad valorem taxes paid with respect to such Assets and Leases.
"Purchase Agreement" shall have the meaning assigned to such term in
Section 5.2(a).
"Purchase Price" shall have the meaning assigned to such term in the
Purchase Agreement.
"Retained Outside Interest" shall mean (a) the properties and interests
described in Section 2.2 of the Purchase Agreement and (b) any other interest in
the Assets or other Leases hereafter acquired by the Partnership pursuant to the
terms hereof which the General Partner or an Affiliate acquires and owns for its
own account in accordance with the terms of this Agreement.
"Seller" shall have the meaning assigned to such term in the Purchase
Agreement.
11
"Simulated Basis", "Simulated Gain", "Simulated Depletion" and "Simulated
Loss" shall have the respective meanings assigned to such terms in Section
8.1(b).
Section 2.2. References and Construction.
(a) All references in this Agreement to articles, sections, subsections and
other subdivisions refer to corresponding articles, sections, subsections and
other subdivisions of this Agreement unless expressly provided otherwise.
(b) Titles appearing at the beginning of any of such subdivisions are for
convenience only and shall not constitute part of such subdivisions and shall be
disregarded in construing the language contained in such subdivisions.
(c) The words "this Agreement", "this instrument", "herein", "hereof",
"hereby", "hereunder" and words of similar import refer to this Agreement as a
whole and not to any particular subdivision unless expressly so limited.
(d) Words in the singular form shall be construed to include the plural and
vice versa, unless the context otherwise requires.
(e) Examples shall not be construed to limit, expressly or by implication,
the matter they illustrate.
(f) The word "or" is not exclusive and the word "includes" and its
derivatives means "includes, but is not limited to" and corresponding derivative
expressions.
(g) No consideration shall be given to the fact or presumption that one
party had a greater or lesser hand in drafting this Agreement.
(h) All references herein to $ or dollars shall mean to United States
dollars.
(i) Unless the context otherwise requires or unless otherwise provided
herein, the terms defined in this Agreement which refer to a particular
agreement, instrument or document also refer to and include all renewals,
extensions, modifications, amendments or restatements of such agreement,
instrument or document, provided that nothing contained in this subsection shall
be construed to authorize such renewal, extension, modification, amendment or
restatement.
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ARTICLE III
Capitalization
Section 3.1. Capital Contributions of General Partner. The General Partner
shall contribute in cash to the Partnership such amounts as shall be necessary
to pay timely the costs and expenses allocated and charged to the General
Partner in Sections 3.3 and 4.1 and elsewhere herein. Such Capital Contributions
shall be paid to the Partnership by the General Partner from time to time in the
appropriate amounts concurrently with each payment to the Partnership by the
Limited Partner of its Capital Contributions or, with respect to costs allocated
solely to the General Partner, when necessary for the Partnership to pay timely
such costs.
Section 3.2. Capital Contributions of Limited Partner.
(a) Subject to the provisions of this Section 3.2 and Section 3.5(a) and
except as otherwise provided herein, the Limited Partner shall make a Capital
Contribution to the Partnership in an aggregate amount not to exceed
$22,918,500, which Capital Contribution shall be used exclusively by the
Partnership for the payment of the Limited Partner's allocated share (in
accordance with Section 4.1) of the Purchase Price.
(b) Subject to the provisions of this Section 3.2 and Section 3.5(b) and
except as otherwise provided herein, the Limited Partner shall make a Capital
Contribution to the Partnership in an aggregate amount not to exceed $200,000,
which Capital Contributions shall be used exclusively by the Partnership for the
payment of the Limited Partner's allocated share (in accordance with Section
4.1) of Organization and Third Party Acquisition Costs.
(c) Subject to the provisions of this Section 3.2 and Section 3.5(b) and
except as otherwise provided herein, the Limited Partner shall make Capital
Contributions to the Partnership in an aggregate amount not to exceed its
allocated share (in accordance with Section 4.1) of Hedge Costs, which Capital
Contributions shall be used exclusively by the Partnership for such purpose.
(d) Notwithstanding anything to the contrary herein, the Capital
Contributions referenced in subsections (a), (b) and (c) above shall be the
maximum contribution to the Partnership that the Limited Partner shall be
required to make (unless the Limited Partner otherwise elects as provided in
Section 3.3) and shall be subject to reduction as provided in Section 3.4.
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Section 3.3. Request for Additional Capital Contributions of Limited
Partner.
(a) Subject to this Section 3.3 and the other terms and provisions hereof,
the General Partner may request additional Capital Contributions from the
Limited Partner to be used exclusively for the payment of its allocated share
(pursuant to Section 4.1) of (i) Capital Costs of the type described in clause
(a) of the definition thereof, (ii) Capital Costs of the type described in
clause (b) of the definition thereof, (iii) Capital Costs of the type described
in clause (c) of the definition thereof, (iv) Capital Costs of the type
described in clause (d) of the definition thereof, (v) Capital Costs of the type
described in clause (e) of the definition thereof, (vi) Capital Costs of the
type described in clause (f) of the definition thereof, (vii) Acquisition Costs
under the circumstances described in Section 5.3, and (viii) cost overruns
associated with any project or operation with respect to which the Limited
Partner has previously agreed to make Capital Contributions hereunder. Each of
the categories of expenditures described in clauses (i), (ii), (iii), (iv), (v),
(vi), (vii) and (viii) of this Section 3.3(a) may include such contingent
amounts as the General Partner in good faith shall determine to be appropriate
under the circumstances.
(b) Requests for additional Capital Contributions pursuant to this Section
3.3 shall be made by the General Partner and agreed to by the Limited Partner
separately with respect to each operation or acquisition included in any given
category of expenditures as specified in subsection (a) above. Requests pursuant
to this Section 3.3 shall not be made more often than quarterly each year (i)
except for requests pursuant to clause (vii) or clause (ix) of subsection (a)
above, (ii) except in the event the request is attributable to a proposal from
an unrelated third party or (iii) unless an emergency or some other urgent need
for funds exists outside of the reasonable control of the General Partner.
Payments of any additional Capital Contributions agreed to be made by the
Limited Partner pursuant to this Section 3.3 shall be requested by the General
Partner and made by the Limited Partner in the manner provided for in Section
3.5(c).
(c) Notice of any request for additional Capital Contributions made by the
General Partner shall be in writing and sent to the Limited Partner at its
address as provided in Section 12.1. With respect to the category of costs
described in clauses (i), (ii), (iii), (iv), (v) and (vi) of Section 3.3(a),
each request shall cover all of the Capital Costs intended to be incurred during
the next three months (and with respect to any Partnership well or Enhanced
Recovery Operation or facility, the costs estimated to be incurred in connection
with such well or operation or facility). With respect to the category of costs
described in clause (vii) of Section 3.3(a), each request shall contain the
information specified in Section 5.3. With respect to the category of costs
described in clause (viii) of Section 3.3(a), each request shall cover the
reasonably anticipated overruns associated with the subject operation or
project. Each such request shall also set forth (i) the date by which the
Limited Partner must elect in writing to make the requested additional Capital
Contributions, which date shall not be less than 30 days from the date the
General Partner mails or sends such request, unless a shorter period is provided
to the General Partner under any applicable "authority for expenditure"
submitted by an operator other than the General Partner or an Affiliate, in
which event such shorter period shall also be applicable to the election period
of the Limited Partner (provided that in no
14
event shall such shorter period be less than 15 days), (ii) the purpose or
purposes for which the proceeds of the requested additional Capital
Contributions are to be used, (iii) a copy of the applicable "authority for
expenditure" submitted in connection with the well or operation, (iv) to the
extent practicable, a summary of the pertinent geological data relating to each
well or operation with respect to which the proceeds that are requested are to
be expended and financial projections with respect to the expenditure of such
additional Capital Contributions and the revenue projected to be received
therefrom, (v) with respect to any well or operation with respect to which the
proceeds requested are to be expended, a statement as to whether or not the
General Partner recommends the Partnership participate therein, and (vi) a
summary of the action that the General Partner anticipates it will take under
Section 3.3(d) and any applicable operating agreement if the Limited Partner
does not elect to make such requested additional Capital Contributions. In
connection with any request pertaining to an Enhanced Recovery Operation, the
General Partner shall endeavor to confine such request to the extent possible in
accordance with generally accepted industry standards to those matters or items
which should be conducted in conjunction with each other. Thereafter, the
General Partner shall promptly furnish to the Limited Partner such additional
information concerning the use and application of the requested additional
Capital Contributions as the Limited Partner shall reasonably request. In the
event the Limited Partner does not elect to pay all of the categories of
requested additional Capital Contributions (or operations or acquisitions within
a given category), it may elect to pay all of the Capital Contributions
requested to be used for any of the remaining categories of costs designated in
the General Partner's request as provided above (or, as to a given category, the
costs associated with any other operation or acquisition within such category).
The General Partner shall not use any Capital Contributions received from the
Limited Partner pursuant to this Section 3.3 and designated for payment of one
category of costs to pay any other category of costs.
(d) If the Limited Partner declines to make any additional Capital
Contributions requested by the General Partner or fails to give timely notice to
the General Partner pursuant to a request for additional Capital Contributions
made pursuant to Section 3.3(a), the General Partner may elect to take any
action specified in paragraphs (1) through (7) below with respect to each Lease,
Partnership well, operation or project to which the request pertains, if
appropriate:
(1) With respect to the acquisition of Leases pursuant to Section 5.3, the
General Partner or its Affiliates may purchase or retain for its or their own
account the Leases not acquired by the Partnership.
(2) The General Partner may cause the Partnership (to the extent it can do
so under any applicable operating agreement) to abandon the operation or
project, in which event all costs (if any) thereafter incurred in abandoning the
operation or project shall be borne by the Partnership.
(3) The General Partner may cause the Partnership to sell, farm-out or
otherwise dispose of the well or Lease (or the applicable part thereof) to which
such operation or
15
project pertains to any person; provided, however, that no such sale,
farm-out or other disposition may be made to the General Partner or any
Affiliate thereof without the prior written consent of the Limited Partner.
(4) In the event a well or Lease to which such proposed operation or
project pertains is subject to an operating agreement, the General Partner may
cause the Partnership to elect not to participate in a proposed operation and to
assume the status of a "non- consenting party" under such operating agreement;
provided, however, that neither the General Partner nor any of its Affiliates
shall be permitted to pay or shall pay the Partnership's non-consenting share of
costs or expenses or any part thereof with respect to such operation or project
under such operating agreement;
(5) The General Partner may (provided that it has recommended under Section
3.3(c) that the Partnership participate in such proposed operation or project)
pay the requested additional Capital Contributions the Limited Partner declined
to pay, and the amount so paid by the General Partner with respect to such well
shall be credited to a separate account, which separate account shall be charged
and credited as follows:
(x) Subject to subparagraph (y) of this Section 3.3(d)(5), all of the
Limited Partner's share of costs and expenses with respect to such well shall be
charged to such separate account, and such separate account shall be credited
with the Limited Partner's share of revenues from such well (after deducting all
production, severance, excise and similar taxes relating thereto). Until the
total amount credited to such separate account equals the amount specified in
subparagraph (y) of this Section 3.3(d)(5) with respect to such well, the
General Partner shall be allocated all of the costs and expenses charged to such
separate account, and the Limited Partner shall be deemed to have relinquished
to the General Partner, and the General Partner shall have allocated to it and
be entitled to receive, all of the revenues credited to such separate account.
(y) If, as and when the total amount of revenues received by and credited
and allocated to the General Partner under subparagraph (x) of this Section
3.3(d)(5) shall equal the sum of the following to the extent they are
appropriate:
a. 200% of the amount charged to such separate account for Capital Costs;
and
b. 100% of the amount charged to such separate account for Lease Operating
and Production Costs;
no further amounts shall be charged or credited to such separate account,
and the Limited Partner's share of all revenues and costs and expenses
thereafter arising
16
or accruing with respect to such well shall be allocated, charged and
credited to the Limited Partner.
(6) With respect to a request pertaining to the category of costs specified
in clause (vi) of Section 3.3(a), the General Partner shall take such action as
shall be mutually agreed upon by the Partners.
(7) The General Partner may take such other actions as may be mutually
agreed upon by the Partners.
Section 3.4. Reduced Capital Contributions of Limited Partner. In the event
the Partnership or the General Partner properly retains a portion of the Limited
Partner's share of Partnership revenues for the purpose of paying any
Acquisition Costs, Capital Costs, Hedge Costs or Organization and Third Party
Acquisition Costs allocated to the Limited Partner hereunder in accordance with
Section 4.3, the amount so retained and not distributed shall reduce pro tanto
the amount of Capital Contributions the Limited Partner is required to
thereafter make.
Section 3.5. Payments of Capital Contributions.
(a) The Limited Partner shall pay the Capital Contributions referenced in
Section 3.2(a) on the Delivery Date.
(b) The Limited Partner shall pay the Capital Contributions referenced in
Section 3.2(b) within five business days after receipt by the Limited Partner of
a request from the General Partner for such purpose.
(c) The Limited Partner shall pay the Capital Contributions referenced in
Section 3.2(c) promptly after receipt by the Limited Partner of a request from
the General Partner for such purpose.
(d) Except as otherwise provided in subsections (a), (b) and (c) above, the
Limited Partner shall pay its Capital Contributions monthly upon request by the
General Partner in such amounts as are required to pay its share of all costs
and expenses properly allocated to it hereunder. The General Partner may request
on a monthly basis additional payments of the Capital Contributions agreed to be
made by the Limited Partner for the Limited Partner's share of (i) all costs and
expenses estimated to have been and/or to be incurred by the Partnership during
that calendar month except those for which advances have previously been made or
for which payment will be made from another source and (ii) those costs and
expenses estimated to be incurred by the Partnership during the next succeeding
calendar month. Each monthly request for payment shall be adjusted to the extent
the Limited Partners' cumulative share of actual Partnership disbursements for
the preceding calendar month's costs and expenses is either greater or less than
the amounts previously contributed by the Limited Partner for such purpose. Any
request for payment by the
17
Limited Partner of Capital Contributions shall be in writing and shall set
forth (1) the type, nature or items of Partnership costs or expenses for which
such payment will be used by the Partnership, including a division of the costs
and expenses as contemplated in clauses (i) and (ii) of this Section 3.5(d) and
the adjustment referred to in this Section 3.5(d), (2) the net amount of the
Capital Contributions to be paid by the Limited Partner and (3) the date by
which payment of such Capital Contributions shall be received, which shall not
be less than five business days from the date the notice is received by the
Limited Partner.
(e) Payments by the Limited Partner of its Capital Contributions shall be
made by wire transfer of immediately available funds to the Partnership's
account as designated by the General Partner by notice to the Limited Partner
pursuant to Section 12.1.
(f) Any additional Capital Contributions agreed to be made by the Limited
Partner pursuant to Section 3.3 may be requested only during the period
commencing on the date they were originally requested by the General Partner
under Section 3.3 and ending three months thereafter with respect to Capital
Contributions to be used to pay Acquisition Costs and six months thereafter with
respect to Capital Contributions to be used to pay Capital Costs and shall only
be requested for and expended on the respective purposes for which they were
agreed to be made.
Section 3.6. Non-payment of Capital Contributions.
(a) Except as otherwise provided in the following sentence, the Partnership
shall have the right to pursue the remedies described in this Section 3.6 and
any remedy existing at law or in equity for the collection of the unpaid amount
of the Capital Contributions agreed to be made in Sections 3.1 and 3.2 or
hereafter agreed to be made in accordance with Section 3.3, including the
prosecution of a suit against a defaulting Partner. In the event of a default by
a Partner of its obligation to make Capital Contributions with respect to its
allocable share hereunder of Hedge Costs, the provisions of subsection (d) below
shall be the exclusive remedy of the Partnership and the other Partner.
(b) In the event that the Limited Partner fails or refuses to make when due
its share of Capital Contributions, the General Partner shall be entitled (but
shall not be obligated) to make such Capital Contributions to the Partnership
which the Limited Partner is obligated to make and the amount so advanced shall
be treated as a loan to the Limited Partner and shall bear interest from the
date of such advance at a rate equal to the Agreed Rate. The General Partner
shall notify the Limited Partner of any such advance and request payment by the
Limited Partner of the amount so advanced, together with interest thereon from
the date of the advance. If the Limited Partner fails or refuses to pay to the
General Partner the amount so advanced, together with interest thereon from the
date of the advance, and if such failure or refusal persists for a period of 30
days following notice from the General Partner to the Limited Partner (such
occurrence being called herein an "Event of Default"), the General Partner shall
be entitled to proceed under this Section 3.6(b). In addition to the rights in
Section 3.6(a), the Limited Partner hereby grants to the Partnership a
18
lien upon and security interest in the Limited Partner's interest in the
Partnership and in or to all assets attributable to and proceeds of and from
such interest in the Partnership to secure the payment of contributions required
under this Agreement, and authorizes the General Partner, upon the occurrence of
an Event of Default, if it elects to proceed under this alternative, to
foreclose such lien or security interest in any manner provided for by the laws
of the State of Texas for the foreclosure of such lien or security interest
(including the exercise of the rights of a secured party under the Texas Uniform
Commercial Code). If the General Partner elects this alternative, the Limited
Partner shall be liable for all costs and expenses of the General Partner in
instituting and prosecuting such suit or foreclosing such lien or security
interest, including all reasonable attorneys' fees expended in connection
therewith. The Limited Partner hereby agrees that the General Partner may file
one or more financing statements with respect to the security interest granted
hereby in order to perfect such security interest, and the Limited Partner
hereby agrees to execute such financing statements at the request of the General
Partner. The Limited Partner further hereby appoints the General Partner as its
agent and attorney-in-fact for the purpose of signing and filing any such
financing statements, which appointment is coupled with an interest and
expressly made irrevocable. In the event of a non-judicial foreclosure, the
proceeds of the disposition of the Partnership interest of the Limited Partner
shall be applied as follows: (i) first, to the reasonable expenses incurred by
the Partnership in collecting such proceeds; and (ii) next, to the satisfaction
of the portion of the Limited Partner's contribution then due. The Limited
Partner shall be liable for any deficiency, and the General Partner shall
account to the Limited Partner for any surplus. Any purchaser of the Limited
Partner's interest in the Partnership shall assume the obligations of the
Limited Partner under this Agreement and shall succeed to the right of the
Limited Partner as to the allocation of profits and losses of, and as to
distributions from, the Partnership thereafter. The defaulting Limited Partner
hereby grants the General Partner an irrevocable special power of attorney,
coupled with an interest, which shall survive the dissolution, bankruptcy, or
legal disability of the Limited Partner, to take all actions necessary on its
behalf to sell, assign or transfer the Partnership interest of the Limited
Partner to such person or persons as shall acquire such Partnership interest as
provided in this Section 3.6(b) should an Event of Default be deemed to have
occurred with respect to the Limited Partner. In the event that the General
Partner elects to foreclose upon the Limited Partner's interest in the
Partnership, the Partners agree that 30 days prior notice shall be reasonable
notice of any proposed public or private foreclosure sale. Notwithstanding the
foregoing, the General Partner shall not foreclose upon the interest of the
Limited Partner in the Partnership if the Event of Default giving rise to the
exercise of remedies under this Section 3.6 arises out of a bona fide dispute
regarding the interpretation or implementation of this Agreement.
(c) The Partnership may retain any revenues otherwise distributable to the
Limited Partner pursuant to this Agreement in an amount equal to the amount the
Limited Partner failed or refused to contribute as required pursuant to the
terms of this Agreement, together with interest on such past-due amounts at a
rate equal to the Agreed Rate. Any amount so withheld shall be deemed, for all
purposes of this Agreement, to have been distributed to the Limited Partner and,
other than that portion of such amounts representing interest, be deemed to have
been recontributed
19
by the Limited Partner to the capital of the Partnership for the purposes
for which contributions were initially requested. If any dispute as to whether
an Event of Default existed is resolved in favor of the Limited Partner, then
the General Partner shall pay to the Partnership for distribution to the Limited
Partner an amount equal to any amounts wrongly paid by the Limited Partner to
the Partnership which should have instead been paid to the Partnership by the
General Partner, or any amounts distributed by the Partnership to the General
Partner instead of the Limited Partner, in connection with such Event of Default
together with interest thereon at a rate equal to the Agreed Rate, and all costs
and expenses of the Limited Partner in resolving such dispute, including all
attorneys' fees expended in connection therewith. The General Partner shall give
notice of its election of the alternatives listed above to the Limited Partner,
and if the General Partner elects the alternative provided under Section 3.6(a)
and/or Section 3.6(b), the General Partner shall be free at any time also to
proceed under this Section 3.6(c).
(d) If a Partner (the "Defaulting Partner") fails or refuses to make
Capital Contributions to the Partnership hereunder when due to pay its allocable
share hereunder of Hedge Costs and the other Partner (the "Contributing
Partner") in the Defaulting Partner's stead makes such Capital Contributions to
the Partnership, then the terms and provisions of this Section 3.6(d) shall be
operative. Specifically, in the instance described above, the Contributing
Partner may exercise either of the following options:
(i) The Contributing Partner may treat the payment by it of the Defaulting
Partner's Capital Contributions as a loan to the Defaulting Partner, which loan
shall bear interest from the date the payment is made at a rate equal to the
Agreed Rate. Further, as between the Contributing Partner and the Defaulting
Partner, the terms and provisions of Section 3.6(b) shall be applicable, mutatis
mutandis, except that the last sentence of such Section shall be disregarded.
(ii) The Contributing Partner may treat the payment by it of the Defaulting
Partner's Capital Contributions as Capital Contributions from the Contributing
Partner, in which case the Contributing Partner shall be entitled to receive all
of the distributions that would otherwise be paid to the Defaulting Partner
hereunder until that point in time at which the Contributing Partner has
received from such distributions an amount equal to 300% of the amount of the
Capital Contributions made by the Contributing Partner in the Defaulting
Partner's stead; provided, however, that if this option is elected, the
Defaulting Partner's share of the Hedge Costs paid with such Capital
Contributions, and any deductions or losses relating thereto for state or
federal income tax purposes, shall be allocated to the Contributing Partner; and
provided further, that the Defaulting Partner's share of Partnership revenues,
and any income or gain relating thereto for state or federal income tax
purposes, shall be allocated to the Contributing Partner until the revenues so
allocated equal the distributions to be made to the Contributing Partner under
this paragraph (ii).
20
Section 3.7. Interest on and Return of Capital Contributions.
(a) No interest shall accrue on any contributions to the capital of the
Partnership; however, all interest which accrues on Partnership funds shall be
allocated and credited to the Partners in accordance with Section 4.2.
(b) No Partner shall have the right to withdraw or be repaid any capital
contributed by such Partner except (a) as provided in Sections 10.2 and 10.3 or
(b) in the instance when the Partnership receives a return of cash funds under
the Purchase Agreement due to an adjustment to the Purchase Price (in which
event the General Partner shall cause the Partnership to refund immediately to
the Partners their respective allocable share of such cash funds).
ARTICLE IV
Allocations and Distributions
Section 4.1. Allocation of Profits and Losses. Except as provided in
Section 4.2, each item of profit and loss of the Partnership, and all related
items of income, gain, loss, deduction and credit for income tax purposes, shall
be allocated for each fiscal year of the Partnership to the General Partner in
accordance with its GP Sharing Percentage, and to the Limited Partner in
accordance with its LP Sharing Percentage; provided, however, that all
Catastrophe Costs and any deductions or losses relating thereto shall be
allocated to the General Partner. The General Partner shall make the foregoing
allocations as of the last day of each fiscal year, taking into account whether
and when the end of the Phase I Period has occurred.
Section 4.2. Special Allocations.
(a) Cost and percentage depletion deductions and the gain or loss on the
sale or other disposition of property the production from which is subject to
depletion (herein sometimes called "Depletable Property") shall be computed
separately by the Partners rather than the Partnership. For purposes of Section
613A(c)(7)(D) of the Internal Revenue Code, the Partnership's adjusted basis in
each Depletable Property shall be allocated to the General Partner in accordance
with its GP Sharing Percentage and to the Limited Partner in accordance with its
LP Sharing Percentage at the time of the acquisition of the Depletable Property,
and the amount realized on the sale or other disposition of each Depletable
Property shall be allocated first to the Partners in proportion to each
Partner's respective share of the Simulated Basis in the Depletable Property
sold, and then in such amounts as to cause, as nearly as possible, the total
amount realized from such sale or disposition allocated to the Partners to be in
proportion to the amounts they are entitled to receive under Section 4.3.
(b) All recapture of income tax deductions resulting from the sale or other
disposition of Partnership property shall, to the maximum extent possible, be
allocated to the Partner to whom
21
the deduction that gave rise to such recapture was allocated hereunder to
the extent that such Partner is allocated any gain from the sale or other
disposition of such property.
(c) Notwithstanding any of the foregoing provisions of this Article IV to
the contrary: ----------
(i) If during any fiscal year of the Partnership there is a net increase in
Minimum Gain attributable to a Partner Nonrecourse Debt that gives rise to
Partner Nonrecourse Deductions, each Partner bearing the economic risk of loss
for such Partner Nonrecourse Debt shall be allocated items of Partnership
deductions and losses for such year (consisting first of cost recovery or
depreciation deductions with respect to property that is subject to such Partner
Nonrecourse Debt and then, if necessary, a pro rata portion of the Partnership's
other items of deductions and losses, with any remainder being treated as an
increase in Minimum Gain attributable to Partner Nonrecourse Debt in the
subsequent year) equal to such Partner's share of Partner Nonrecourse
Deductions, as determined in accordance with applicable Treasury Regulations.
(ii) If for any fiscal year of the Partnership there is a net decrease in
Minimum Gain attributable to Partnership Nonrecourse Liabilities, each Partner
shall be allocated items of Partnership income and gain for such year
(consisting first of gain recognized, including Simulated Gain, from the
disposition of Partnership property subject to one or more Partnership
Nonrecourse Liabilities and then, if necessary, a pro rata portion of the
Partnership's other items of income and gain, and if necessary, for subsequent
years) equal to such Partner's share of such net decrease (except to the extent
such Partner's share of such net decrease is caused by a change in debt
structure with such Partner commencing to bear the economic risk of loss as to
all or part of any Partnership Nonrecourse Liability or by such Partner
contributing capital to the Partnership that the Partnership uses to repay a
Partnership Nonrecourse Liability), as determined in accordance with applicable
Treasury Regulations.
(iii) If for any fiscal year of the Partnership there is a net decrease in
Minimum Gain attributable to a Partner Nonrecourse Debt, each Partner shall be
allocated items of Partnership income and gain for such year (consisting first
of gain recognized, including Simulated Gain, from the disposition of
Partnership property subject to Partner Nonrecourse Debt, and then, if
necessary, a pro rata portion of the Partnership's other items of income and
gain, and if necessary, for subsequent years) equal to such Partner's share of
such net decrease (except to the extent such Partner's share of such net
decrease is caused by a change in debt structure or by the Partnership's use of
capital contributed by such Partner to repay Partner Nonrecourse Debt) as
determined in accordance with applicable Treasury Regulations.
(d) The General Partner shall use all reasonable efforts to prevent any
allocation or distribution from causing a negative balance in the Limited
Partner's Adjusted Capital Account. Consistent therewith, and notwithstanding
any of the foregoing provisions of this Section 4.2 to the contrary, if for any
fiscal year of the Partnership the allocation of any loss or deduction (net of
any income or gain) to any Partner would cause or increase a negative balance in
such Partner's Adjusted Capital Account as of the end of such fiscal year (the
"Deficit Partner") after taking into account the provisions of subsection (c) of
this Section 4.2, only the amount of such loss or deduction that reduces the
balance to zero shall be allocated to such Deficit Partner and the remaining
loss or
22
deduction shall be allocated to the Partner whose Adjusted Capital Account
has a positive balance remaining at such time (the "Positive Partner"). After
any such allocation, any Partnership income or gain (including Simulated Gain)
that would otherwise be allocated to the Deficit Partner shall be allocated
instead to the Positive Partner up to an amount equal to the Partnership loss or
deduction allocated to the Positive Partner under the preceding sentence;
provided, however, that no allocation of income or gain realized shall be made
under this sentence if the effect of such allocation would be to cause the
Adjusted Capital Account of the Deficit Partner to be less than zero. If, after
taking into account the allocation in the first sentence of this Section 4.2(d),
the Adjusted Capital Account balance of the Deficit Partner remains less than
zero at the end of a fiscal year, a pro rata portion of each item of Partnership
income or gain (including Simulated Gain) otherwise allocable to the Positive
Partners for such fiscal year (or if there is no such income or gain allocable
to the Positive Partners for such fiscal year, all such income or gain
(including Simulated Gain) so allocable in the succeeding fiscal year or years)
shall be allocated to the Deficit Partner in an amount necessary to cause its
Adjusted Capital Account balance to equal zero; provided, that no allocation
under this sentence shall have the effect of causing the Positive Partner's
Adjusted Capital Account to be less than zero. After any such allocation, any
Partnership gain (including Simulated Gain) resulting from the sale or other
disposition of Partnership property that would otherwise be allocated to the
Deficit Partner for any fiscal year shall be allocated instead to the Positive
Partner until the amount of gain so allocated equals the amount of gain
(including Simulated Gain) previously allocated to such Deficit Partner under
the preceding sentence of this Section 4.2(d); provided, however, that no
allocation of gain (including Simulated Gain) shall be made under this sentence
if the effect of such allocation would be to cause the Adjusted Capital Account
of a Deficit Partner to be less than zero.
Section 4.3. Distributions.
(a) Within five days after the end of each month, the General Partner shall
cause the Partnership to make a distribution (i) to the Limited Partner of its
LP Monthly Cash Distribution for such month and (ii) to the General Partner of
its GP Monthly Cash Distribution for such month.
(b) Notwithstanding the foregoing or any other provision contained in this
Agreement, (i) unless the Limited Partner otherwise consents in writing or
defaults in the payment of any Capital Contributions previously agreed to be
made by it, the General Partner shall not be entitled to cause the Partnership
to retain any of the Limited Partner's share of Partnership revenues for the
purpose of paying (directly or indirectly) any Acquisition Costs, Capital Costs,
Hedge Costs or Organization and Third Party Acquisition Costs, or (ii) the
Partnership may retain such insurance proceeds and other amounts as the General
Partner shall reasonably determine are necessary to pay Partnership liabilities
and expenses upon the occurrence of an accident (e.g., a blowout), catastrophe
or similar event (and, in connection therewith, to restore, preserve or protect
Partnership property) or to comply with all applicable environmental laws,
ordinances, rules and regulations.
(c) Payment of all distributions made by the Partnership to the Limited
Partner shall be made by wire transfer of immediately available funds in
accordance with such written instructions to the General Partner as may be
provided by the Limited Partner from time to time.
(d) Nothing contained in this Section 4.3 shall relieve the General Partner
from its obligation to bear 100% of Catastrophe Costs pursuant to Section
4.1(a), and any Catastrophe Costs
23
shall be charged against and reduce the GP Monthly Cash Distribution only
and shall have no impact on the LP Monthly Cash Distribution.
(e) All distributions in liquidation of a Partner's interest in the
Partnership shall be made in accordance with Section 10.3.
ARTICLE V
Partnership Property
Section 5.1. Title to Partnership Property. All property owned by the
Partnership, whether real or personal, tangible or intangible, shall be deemed
to be owned by the Partnership as an entity, and no Partner, individually, shall
have any ownership of such property. The Partnership shall hold all of its
assets in the name of the Partnership unless under the law of some jurisdiction
in which the Partnership owns assets such assets must be held in another name.
In such a case, such assets in such jurisdiction shall be held under such other
name or names (except the name of the General Partner, any Affiliate of the
General Partner or the name of the Limited Partner) as the General Partner shall
determine to be necessary so long as it does not affect adversely the limited
liability of the Limited Partner hereunder or jeopardize in any manner the title
to or ownership of any Partnership Leases or other assets. The General Partner
shall promptly take all such action as it shall deem necessary or appropriate,
or as may be required by law, to perfect and preserve the ownership interest of
the Partnership in all Leases, and (if requested by the Limited Partner) upon
recordation of title to a Lease shall promptly supply the Limited Partner with a
copy of such recorded title. In the event the Partnership acquires assets in a
jurisdiction which prohibits the Partnership from holding such assets in the
name of the Partnership and such assets are held in another name, the General
Partner shall obtain an opinion of reputable counsel in such jurisdiction
addressed to the Limited Partner and satisfactory in all respects to the Limited
Partner that the Partnership has taken all action necessary and appropriate, or
required by law, to perfect and preserve the ownership interest of the
Partnership in all such assets.
Section 5.2. Acquisition of the Assets. Contemporaneously with the
execution and delivery of this Agreement by the Partners, the General Partner is
hereby authorized to, and shall, (a) execute and deliver on behalf of the
Partnership that certain Purchase and Sale Agreement dated as of even date
herewith (the "Purchase Agreement") by and between the Partnership, as buyer,
and Magnum Hunter Production, Inc., as seller, and (b) cause the Partnership to
consummate the acquisition of the Assets pursuant thereto.
Section 5.3. Additional Acquisitions.
(a) During the 180-day period commencing on the date hereof, the General
Partner and its Affiliates shall be permitted to acquire for their own separate
account an additional 10% working interest in any of the Leases comprising the
▇▇▇▇▇▇ Creek Unit.
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(b) Except to the extent otherwise provided in subsection (a) above, if,
during the term of this Agreement, the General Partner or an Affiliate thereof
acquires (or proposes to acquire) a Lease or Leases within the Area of Mutual
Interest (in this Section called the "Subject Leases"), the terms and provisions
of this Section 5.3(b) shall be operative. Specifically, upon the acquisition
(or proposed acquisition) under the circumstances described above, the General
Partner shall notify the Limited Partner, which notice shall (i) specify the
interest the General Partner or its Affiliates have acquired (or propose to
acquire) in the Subject Leases, (ii) specify the purchase price (or proposed
purchase price), (iii) describe the development and/or Enhanced Recovery
Operations, if any, the General Partner reasonably anticipates will be engaged
in on the Subject Leases and the estimated costs associated therewith, (iv)
include a summary of the pertinent geological and geophysical data relating to
the Subject Leases or proposed development/Enhanced Recovery Operations, (v)
include financial projections relating to the Subject Leases and any internally
or externally prepared related engineering or reserve reports, (vi) describe the
nature and extent of planned title examination and property related due
diligence (including, without limitation, environmental due diligence) and (vii)
such other information as the General Partner deems material. Thereafter, the
General Partner shall promptly furnish to the Limited Partner any additional
information concerning the Subject Leases or the proposed development/Enhanced
Recovery Operations as the Limited Partner may reasonably request (including,
without limitation, the reports of consultants and outside engineers). Subject
to the Limited Partner agreeing to make additional Capital Contributions to the
Partnership with respect to the Subject Leases pursuant to Section 3.3, the
Partnership shall acquire the Applicable Percentage (as defined in subsection
(c) below) of the interest of the General Partner and its Affiliates in such
Subject Leases (or, if applicable, which the General Partner or its Affiliates
propose to acquire therein). Prior to the acquisition by the Partnership of the
Subject Leases, the General Partner shall notify the Limited Partner of any
material change in the nature and extent of the title examination and property
related due diligence plan and the reason therefor and of any fact discovered in
due diligence that materially adversely affects the economics or risks
associated with the Subject Leases; provided that no such notice need be given
to the Limited Partner if the Limited Partner has elected not to make additional
Capital Contributions with respect thereto. The Limited Partner may withdraw its
election to make additional Capital Contributions with respect to the proposed
acquisition and related activity, at any time prior to the Partnership
committing to acquire the Subject Leases, by so notifying the General Partner in
writing if (A) there is discovered during due diligence a fact or facts not
presented to the Limited Partner in the initial evaluation of the proposed
acquisition that materially adversely affects the economics or risks associated
with the Subject Leases to be acquired and such material adverse effect cannot
be remedied to the reasonable satisfaction of the Limited Partner prior to the
acquisition by the Partnership or (B) more than three months have passed since
the Limited Partner notified the General Partner of such Limited Partner's
election to make Capital Contributions with respect to such acquisition and
related activity. The interest in each Lease assigned by the General Partner and
each Affiliate thereof to the Partnership pursuant to this Section 5.3 shall be
assigned, conveyed and transferred without warranty of title, either express or
implied, except as to all persons claiming or to claim the same or any part
thereof by, through and under the General Partner or such Affiliate but not
otherwise and with a further
25
warranty that the General Partner or such Affiliate has not placed any
lien, encumbrance, burden or other restriction on such Lease or, if the General
Partner or such Affiliate has previously placed a lien, encumbrance, burden or
other restriction on such Lease, that such lien, encumbrance, burden or other
restriction is being concurrently released or has been released. In connection
with any acquisition of Leases by the Partnership pursuant to this Section 5.3,
the General Partner or an Affiliate thereof shall not retain from or otherwise
burden the interest in any Lease assigned to the Partnership with any overriding
royalty, net profits interest, carried interest, reversionary interest,
production payment or other burden in favor of itself, its officers, directors
and employees or any other person, except in connection with an acquisition by
the General Partner or such Affiliate pursuant to a transaction where an
unrelated third party transferring the Lease retains such an interest or burden
with respect to all of the Lease acquired by the General Partner or Affiliate.
With respect to each Lease acquired by the Partnership pursuant to this Section
5.3, such acquisition shall include all rights to all horizons under such Lease
which were available for purchase and considered appropriate for acquisition by
the Partnership. Under no circumstances shall the General Partner or any
Affiliate of either thereof acquire rights to any separate horizon within or
under a Lease in which the Partnership has an interest without first offering
such rights to the Partnership under this Section 5.3.
(c) As used in subsection (b) above, the term "Applicable Percentage" shall
mean (i) when used with reference to an acquisition under subsection (b) of an
interest in the ▇▇▇▇▇▇ Creek Unit, 50%, and (ii) when used with reference to an
acquisition under subsection (b) other than as provided in clause (i) above, a
percentage computed by reference to the Partnership's pro rata portion of the
then existing aggregate interest held by the Partnership and the General Partner
(or an Affiliate of the General Partner) in the Subject Leases or the field or
other applicable portion or area of the Area of Mutual Interest in which the
Subject Leases are located.
Section 5.4. Lease Sales.
(a) Except as provided in this Section 5.4, in Section 6.2(d) and elsewhere
herein, the General Partner may sell, farm-out, abandon or otherwise dispose of
any Partnership Lease, on such terms as the General Partner deems reasonable and
in the best interests of the Partnership and the Limited Partner.
(b) Except as expressly permitted in Section 10.3, neither the General
Partner or any of its Affiliates nor any of their employees shall acquire,
directly or indirectly, any Lease (or any interest therein) from the Partnership
unless the Limited Partner has previously approved in writing such acquisition.
Section 5.5. Sales of Production. The General Partner shall have the right
to cause the Partnership to sell any oil or gas produced by or for the account
of the Partnership, including but not limited to crude oil, condensate, natural
gas liquids and natural gas (including casinghead gas) which may be produced
from or allocated to the Assets or any additional Leases acquired pursuant
26
to the terms hereof, to such purchaser and on such terms and conditions as
the General Partner shall determine to be in the best interest of the
Partnership; provided, however, that all such sales shall be upon terms and
conditions which are the best terms and conditions available as determined in
good faith by the General Partner taking into account all relevant
circumstances, including but not limited to, price, quality of production,
access to markets, minimum purchase guarantees, identity of purchaser, and
length of commitment and, in any event, on terms no less favorable to the
Partnership than the General Partner or any Affiliate thereof has recently
obtained or is obtaining for arm's length sales, exchanges or dispositions of
the General Partner's or such Affiliate's production of similar quantity and
quality in the same geographic area where the Partnership's production is
located.
Section 5.6. Operations on Partnership Assets. The General Partner or an
Affiliate, shall act as operator in connection with operations on each
Partnership Lease unless (a) another person is currently serving as operator
under an agreement to which a Lease is subject or (b) any third party or third
parties (not Affiliates of the General Partner) jointly owning such Lease and
with a controlling interest will not otherwise agree. As to those Partnership
Leases with respect to which the General Partner is not the operator, the
General Partner shall take such actions and exercise such rights and remedies
which are reasonably available to it to cause the actual operator to properly
develop, maintain and operate such Leases. In the event the Partnership and any
third party jointly own any Lease and operations thereon are conducted pursuant
to an operating agreement, (i) if the third party is designated as operator
thereunder, the Partnership shall pay the costs and expenses charged to it
thereunder and (ii) if the General Partner or any of its Affiliates is
designated as operator, the General Partner or such Affiliate shall receive for
its account from the third party such third party's share of all compensation
and reimbursement provided to the operator thereunder; provided, however, that
the charges to the Partnership by the General Partner or any of its Affiliates
when acting as the designated operator (regardless of whether there is an
operating agreement or regardless of whether or not a third party is also a
party thereto) shall not exceed those set forth in or permitted by this
Agreement or the "Accounting Procedure" (as herein called) attached hereto as
Exhibit 5.6. In no event shall the terms of any operating or similar agreement
under which the General Partner or an Affiliate is designated as operator vary
or effect this Agreement or the Accounting Procedure or the duties and
obligations of the General Partner hereunder (and in the event of a conflict the
terms and provisions of this Agreement shall prevail). The General Partner, or
any Affiliate, shall not substitute another party as operator or assign its
obligations as operator with respect to any Partnership Lease where it acts as
operator, unless the Limited Partner requests in the event the General Partner
is removed as such pursuant to Section 9.4 or the Limited Partner dissolves the
Partnership pursuant to any of subsections (c), (e), (f), (g) or (i) of Section
10.1 (and the General Partner agrees to use its reasonable best efforts to cause
the person designated by the Limited Partner to be the successor operator).
Section 5.7. Hedge Arrangement. The General Partner covenants and agrees
that, at the request of the Limited Partner, the General Partner will cause the
Partnership to hedge up to 85% of (a) the Partnership's proved producing gas
reserves attributable to the Assets for not
27
less than 60 months and (b) oil reserves attributable to the Assets for the
period of not less than 24 months, on such terms and conditions as are
satisfactory to the Limited Partner. The General Partner covenants and agrees
that, at the request of the Limited Partner, it will execute on behalf of the
Partnership such additional Hedging Transactions of the Partnership's proved
producing reserves attributable to the Assets and any additional Leases acquired
pursuant to the terms hereof on such terms and conditions as are satisfactory to
the Limited Partner. Any Hedging Transaction contemplated hereunder shall be a
"hedging transaction" as described in Treasury Regulation ss.1.1221-2 to reduce
the risk of price changes for oil and gas produced by the Partnership in volumes
equal to the notional amounts provided in the documents evidencing such Hedging
Transaction. At the time of the execution and delivery by the Partnership of the
documents evidencing a Hedging Transaction, the General Partner shall take such
additional steps as may be necessary to identify the Hedging Transaction in the
books and records of the Partnership as a "hedging transaction" in the manner
and at the time prescribed by Treasury Regulation ss.1.1221- 2(e).
Section 5.8. Production. Throughout the term of the Partnership, the
General Partner shall instruct any operator of any Partnership Lease to produce
on behalf of the Partnership not less than the Partnership's entire working
interest in the production attributable to such Lease; provided, however, the
General Partner shall not be so obligated (a) in circumstances when it is
necessary to restrict production on such Lease for the purpose of performing
general maintenance and workover activities thereon in connection with
maintaining production; (b) if the Partnership is precluded from so doing by any
applicable state, local or federal law, order or regulation; (c) if the
Production Sales Proceeds attributable to such Lease are inadequate to cover
Lease Operating and Production Expenses attributable thereto; or (d) if the
General Partner gives notice to the Limited Partner that due to a cause or
causes beyond the reasonable control of the General Partner, including, for
purposes of illustration, an act of God, strike, act of public enemy, war,
blockade, public riot, lightening, fire, violent storm, flood, explosion or
governmental restraint, it is unable to do so.
Section 5.9. Environmental, Health and Safety Program. The General Partner,
at the cost and expense of the Partnership, shall implement, and maintain a
formal, comprehensive written environmental health and safety (in this Section,
"EH&S") program (in this Section, the "EH&S Program"), including regular review
and evaluations, aimed at ensuring that the Partnership's operations on the
Assets or any additional Leases acquired pursuant to the terms hereof are
conducted in compliance with all applicable Environmental Laws. At a minimum,
the EH&S Program shall include: (i) identification of environmental concerns
associated with any environmental regulations applicable to the Partnership's
operations; (ii) adoption and implementation of an environmental management
system to assess and control the environmental impacts of the Partnership's
operations; and (iii) implementation of periodic EH&S audits conducted either
internally or by independent consultants with documented corrective action
responding to such audits. The EH&S Program shall involve senior management of
the General Partner, include a formal written corporate environmental policy,
and identify by name or position the person with overall responsibility for EH&S
compliance, as well as those person(s) who are responsible for specific EH&S
areas.
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ARTICLE VI
Management
Section 6.1. Power and Authority of General Partner. Except as provided in
Section 6.2 and elsewhere in this Agreement and except as otherwise provided by
applicable law, the General Partner shall have full and exclusive power and
authority on behalf of the Partnership to manage, control, administer and
operate the properties, business and affairs of the Partnership in accordance
with this Agreement and to do or cause to be done any and all acts deemed by the
General Partner to be necessary or appropriate thereto.
Section 6.2. Certain Restrictions on General Partner's Power and Authority.
Notwithstanding any other provisions of this Agreement to the contrary, the
General Partner shall not have the power or authority to, and shall not, do,
perform or authorize any of the following without the prior written consent of
the Limited Partner:
(a) To borrow any money in the name or on behalf of the Partnership, or
otherwise draw, make, execute and issue promissory notes and other negotiable or
non-negotiable instruments and evidences of indebtedness, except that the
General Partner may borrow money in the name and on behalf of the Partnership in
such amounts as the General Partner shall reasonably determine are necessary to
preserve and protect Partnership property upon the occurrence of an accident
(e.g., a blowout), catastrophe or similar event or to comply with all applicable
Environmental Laws, ordinances, rules and regulations;
(b) To mortgage, pledge, assign in trust or otherwise encumber any
Partnership property, or to assign any monies owing or to be owing to the
Partnership, except to secure the payment of any borrowing permitted in Section
6.2(a) and except for customary liens contained in or arising under any
operating agreements, construction contracts and similar agreements executed by
or binding on the Partnership with respect to amounts not yet due or not yet
delinquent (or, if delinquent, that are being contested by the General Partner
in good faith) or except for statutory liens for amounts not yet due or not yet
delinquent (or, if delinquent, that are being contested by the General Partner
in good faith), provided that in no event shall the General Partner mortgage,
pledge, assign in trust or otherwise encumber the Partnership's right to receive
Capital Contributions from the Limited Partner;
(c) To guarantee in the name or on behalf of the Partnership the payment of
money or the performance of any contract or other obligation of any person
except for responsibilities customarily assumed under operating agreements
considered standard in the industry;
29
(d) To sell, assign, farm-out, abandon or otherwise dispose of any
Partnership Lease except (i) where the Lease disposed of consists solely of
horizons or depths which do not have attributable to them any proved reserves,
(ii) as provided in Sections 3.3(d)(2) and 3.3(d)(3), (iii) with respect to any
given calendar year, for sales or other dispositions by the Partnership during
such year up to (but not to exceed) an aggregate (non-cumulative) amount equal
to $10,000 in proceeds received by the Partnership or (iv) for such Leases or
interests therein or other assets as the General Partner shall reasonably
determine to be necessary to raise funds to pay Partnership liabilities and
expenses (other than Catastrophe Costs) upon the occurrence of an accident,
catastrophe or similar event (and, in connection therewith, to restore, preserve
and protect Partnership property) or to comply with all applicable environmental
or other laws, ordinances, rules and regulations;
(e) To make any advance payments of compensation or other consideration to
the General Partner or any of its Affiliates;
(f) To bind or obligate the Partnership with respect to any matter outside
the scope of the Partnership business;
(g) To merge or consolidate the Partnership with any partnership or other
person or entity, convert the Partnership to a general partnership or other
entity or agree to an exchange of interests with any other person;
(h) To use the Partnership name, credit or property for other than
Partnership purposes;
(i) To loan any Partnership funds to the General Partner or any of its
Affiliates;
(j) To enter into a Hedging Transaction, except as provided in Section 5.7,
and to amend or terminate any agreements or other document evidencing a Hedging
Transaction or waive any rights of the Partnership thereunder;
(k) To acquire any Lease in violation of the terms of this Agreement;
(l) To alter, supplement, modify or amend the Purchase Agreement or any
other document or instrument executed in connection therewith in any material
respect, waive any of the General Partners' or the Partnership's rights or any
of Seller's duties and obligations thereunder in any material respect, or make
any material election, determination or agreement thereunder;
(m) To compromise or settle any lawsuit, administrative matter or other
dispute where the amount the Partnership may recover or might be obligated to
pay, as applicable, is in excess of $25,000;
30
(n) To enter into any contract or agreement with the General Partner or any
Affiliate thereof for the rendering of services or the sale or lease of supplies
(except that the foregoing shall not preclude (i) the General Partner or an
Affiliate (including Gruy Petroleum Management Company) from serving as operator
in accordance with Section 5.6 or (ii) the Partnership contracting with Hunter
Gathering, Inc., an Affiliate of the General Partner, for the gathering,
transporting, processing and marketing of Partnership production, provided that
any charges to the Partnership by such Affiliate for such services shall be no
less favorable to the Partnership than those available from unrelated third
parties in the area engaged in the business of rendering comparable services and
shall in no event exceed the charges currently being assessed by such Affiliate
as of the date hereof with respect to such production); or
(o) Except as expressly provided herein, to take any action with respect to
the assets or property of the Partnership which benefits the General Partner or
any of its Affiliates to the detriment of the Limited Partner or the
Partnership, including, among other things, utilization of funds of the
Partnership as compensating balances for its own benefit.
Section 6.3. Duties and Services of General Partner.
(a) The General Partner shall comply in all respects with the terms of this
Agreement and shall use its best efforts (i) to cause its Affiliates to comply
with the terms of this Agreement and (ii) in the conduct of the business and
operations of the Partnership to cause the Partnership (A) to comply in all
material respects with the terms and provisions of all agreements to which the
Partnership is a party or to which its properties are subject, (B) to comply in
all material respects with all applicable laws, ordinances or governmental rules
and regulations to which the Partnership is subject (including all applicable
Environmental Laws) and (C) to obtain and maintain all licenses, permits,
franchises and other governmental authorizations necessary with respect to the
ownership of Partnership properties and the conduct of Partnership business and
operations.
(b) With respect to the maintenance, exploration, development and operation
of the Assets and any additional Leases acquired pursuant to the terms hereof,
the General Partner shall have the standard of care of a reasonably prudent and
diligent operator. With respect to the Limited Partner and its interests in the
Partnership, the General Partner shall have the duties set forth in Section 4.04
of the Texas Revised Partnership Act and shall discharge such as provided in
Section 4.04(d) of the Texas Revised Partnership Act, provided that (i) the
General Partner shall at all times act with integrity and in good faith and
utilize its reasonable best efforts in all activities relating to the conduct of
the business of the Partnership and in resolving conflicts of interest; (ii)
during the existence of the Partnership, the General Partner shall devote such
time and effort to the Partnership business and operations as shall be necessary
to promote fully the interests of the Partnership and the mutual best interests
of the Partners; however, and subject to the foregoing and the other express
provisions of this Agreement, it is specifically understood and agreed that the
General Partner shall not be required to devote full time to Partnership
business; and (iii) subject to the other express provisions of this Agreement,
the Limited Partner acknowledges that
31
the General Partner currently engages in and possesses, and agrees that the
General Partner may continue to engage in and possess, interests in other
business ventures of any and every type and description, independently or with
others, including the ownership, acquisition, exploration, development,
operation and management of oil and gas properties, oil and gas drilling
programs and partnerships similar to this Partnership, and neither the
Partnership nor the Limited Partner shall by virtue of this Agreement have any
right, title or interest in or to such independent ventures. With respect to the
maintenance and safekeeping of Partnership funds, the General Partner shall owe
the Partnership and the Limited Partner a fiduciary duty.
(c) The General Partner covenants and agrees that it will at all times
retain and have available to it and the Partnership a professional staff and
outside consultants which together will be reasonably adequate in size,
experience and competency to discharge properly the duties and functions of the
General Partner hereunder and under any applicable operating and other
agreements, including, engineers, geologists and other technical personnel,
attorneys, accountants and secretarial and clerical personnel.
Section 6.4. Liability of General Partner. The General Partner shall not be
liable, responsible or accountable in damages or otherwise to the Partnership or
the Limited Partner for, and (subject to Section 6.5) the Partnership shall
indemnify and save harmless the General Partner from any costs, expenses, losses
or damages (including attorneys' fees and expenses, court costs, judgments and
amounts paid in settlement) incurred by reason of its being General Partner,
provided it has acted in good faith on behalf of the Partnership and the Limited
Partner and in a manner reasonably believed by it to be within the scope of the
authority granted to it by this Agreement and in the best interests of the
Partnership, and provided further that (i) the General Partner was not guilty of
a breach of this Agreement, gross negligence, willful or wanton misconduct or,
if applicable, breach of a fiduciary duty owed by the General Partner with
respect to such acts or omissions, and (ii) the satisfaction of any
indemnification and any saving harmless shall be from and limited to Partnership
assets (which shall be converted to cash to the extent necessary in a manner
appropriate to protect the interests of all Partners) and not from any Capital
Contributions to be made by the Limited Partner hereunder, and the Limited
Partner shall not have any personal liability on account thereof.
Section 6.5. Limitations on Indemnification. The rights of the General
Partner under Section 6.4 with respect to indemnification from the Partnership
shall be subject to the provisions of Article 11 of the Act. Any indemnification
under Section 6.4 shall be made by the Partnership only as permitted herein and,
unless the General Partner was wholly successful on the merits, only upon a
determination by a court upon the request of the General Partner or by
independent legal counsel selected by the General Partner and satisfactory to
the Limited Partner in a written opinion that indemnification of the General
Partner is permitted (a) under the circumstances because it has met the
applicable standard of conduct set forth in Section 6.4 and (b) pursuant to
Article 11 of the Act.
32
Section 6.6. Costs, Expenses and Reimbursement.
(a) Subject to the other express provisions of this Agreement, all direct,
third-party out of pocket costs and expenses reasonably incurred in the
Partnership's business shall be paid from Partnership funds, including costs of
obtaining audits of the Partnership's books and records (including the fees and
expenses of the Partnership's independent public accountants), the fees and
expenses attributable to the preparation of the Partnership's tax returns and
reports, the fees and expenses of the independent petroleum engineer referenced
in Section 8.2(f), outside legal costs, general taxes, fees, costs and expenses
in connection with the winding up and termination of the Partnership's business
and affairs, and other direct, third-party out of pocket costs and expenses of
the Partnership.
(b) Commencing on the Delivery Date and subject to the last sentence of
this subsection (b), the Partnership shall pay, and the General Partner shall be
entitled to receive, a monthly fee (the "Management Fee") in an amount equal to
the lesser of (i) 1% of Net Operating Income (as defined below) for such month
or (ii) $8,000; provided, that the General Partner shall not be paid the
Management Fee for any month (or portion thereof) in which the Partnership's
right to receive revenues has been assigned to a trustee pursuant to Section
6.11, if the General Partner withdraws from the Partnership or if the General
Partner has been removed as provided herein; provided further, that the General
Partner shall not be paid the Management Fee for any month (or portion thereof)
during which the business and affairs of the Partnership are being wound up for
liquidation purposes pursuant to Section 10.3, if the General Partner is not
acting as liquidator hereunder. With respect to the month during which the
Delivery Date occurs and the last month during which the Management Fee is
payable hereunder if the obligation to pay such fee terminates prior to the last
day of such month, the monthly Management Fee shall be prorated based on the
number of days during such month in which the General Partner is entitled to
receive the Management Fee divided by the total number of days in such month. As
used in this subsection (b), the term "Net Operating Income" shall mean, with
respect to a given month, (i) the gross proceeds for such month received by the
Partnership and attributable to any Hedging Transaction plus (ii) the gross
proceeds for such month received by the Partnership from the sale of
hydrocarbons (other than in connection with any Hedging Transaction) produced
from or otherwise attributable to the Assets and any additional Leases acquired
pursuant to the terms hereof less (iii) any Hedging Costs for such month less
(iv) Lease Operating and Production Costs for such month less (v) direct, third-
party out of pocket costs and expenses reasonably incurred in connection with
the administration of the Partnership for such month, including the costs
referenced in Section 6.6(a). Notwithstanding the foregoing, if at the end of
any calendar year during the term of the Partnership (or portion of such
calendar year if the Partnership is in existence for less than the full calendar
year), X is less than Y (with "X" being equal to the aggregate Management Fees
actually paid to the General Partner for such calendar year (or portion
thereof), and "Y" being equal to the lesser of (A) 1% of aggregate Net Operating
Income for such calendar year (or portion thereof) or (B) $96,000 (or a pro rata
portion thereof if less than a full calendar year)), then the General Partner
33
shall be entitled to receive, and the Partnership shall pay to the General
Partner, a cash amount equal to the difference between X and Y.
(c) Except as provided in this Section and in Sections 5.6 and 6.7, the
General Partner and its Affiliates shall not be paid any fee, compensation or
reimbursement or be entitled to or charge the Partnership for or on account of
their services, services of their officers, employees or consultants, fees or
compensation of those geologists, geophysicists and engineers who are employed
by them or otherwise retained by them, office expense, overhead or any other
general or administrative costs or expense.
Section 6.7. Organization and Third Party Acquisition Costs. The
Partnership from time to time shall pay directly, or shall reimburse the General
Partner and the Limited Partner for any payment by them of, the following fees,
costs and expenses incurred in connection with the initial organization of the
Partnership and the acquisition of the Assets ("Organization and Third Party
Acquisition Costs"): (a) all reasonable fees and expenses incurred by them
(including fees for outside legal services) in connection with the preparation
and filing of all certificates, opinions and documents required pursuant to
Sections 1.2 and 1.6; (b) the fees, costs and expenses of the outside
consultants retained by the Limited Partner in connection with its proposed
investment in the Partnership; (c) all reasonable fees, costs and expenses of
legal counsel to the Limited Partner in connection with (i) the negotiation,
preparation and execution (or review, as applicable) of this Agreement, the
Purchase Agreement and all related documents, (ii) a due diligence review of the
Assets and (iii) the closing of the transactions contemplated under the Purchase
Agreement; and (d) all reasonable fees and expenses of legal counsel to the
Limited Partner in connection with the Limited Partner's consideration of any
waiver of its rights under this Agreement or any proposed amendment or
supplement to this Agreement.
Section 6.8. Insurance. The General Partner shall cause the Partnership to
obtain (and maintain during the entire term of the Partnership), or the General
Partner shall carry for the benefit of the Partnership, insurance coverage in
such amounts, with provisions for such deductible amounts and for such purposes
as the General Partner and the Limited Partner have agreed upon below and
thereafter shall agree upon in writing on or about July 1 of each year or such
other time as shall be mutually agreed upon by the Partners. Where appropriate,
the General Partner may include the Partnership or the Limited Partner as
additional insureds on any policies otherwise carried by the General Partner and
the costs thereof shall be allocated to the Partnership on a basis mutually
agreed upon in writing by the General Partner and the Limited Partner from time
to time. The Partners hereby agree that the General Partner shall initially
carry for the benefit of the Partnership insurance coverage in the amounts, with
provisions for such deductible amounts and for the purposes, specified in
Exhibit 6.8. Thereafter, the Partners shall review and agree upon the
Partnership's insurance coverage as provided above.
Section 6.9. Tax Elections.
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(a) The General Partner shall make the following elections on behalf of the
Partnership:
(i) To elect, in accordance with Section 263(c) of the Internal Revenue
Code and applicable regulations and comparable state law provisions, to deduct
as an expense all intangible drilling and development costs with respect to
productive and non-productive ▇▇▇▇▇ and the preparation of ▇▇▇▇▇ for the
production of oil or gas;
(ii) To elect the calendar year as the Partnership's fiscal year if
permitted by applicable law;
(iii) To elect the accrual method of accounting;
(iv) If requested by the Limited Partner, to elect, in accordance with
Sections 734, 743 and 754 of the Internal Revenue Code and applicable
regulations and comparable state law provisions, to adjust basis in the event
any Partnership interest is transferred in accordance with this Agreement or any
Partnership property is distributed to any Partner;
(v) To elect to treat all organizational and start-up costs of the
Partnership as deferred expenses amortizable over 60 months under Sections 195
and 709 of the Internal Revenue Code; and
(vi) To elect with respect to such other federal, state and local tax
matters as the General Partner and the Limited Partner shall agree upon from
time to time.
(b) No Partner shall elect or cause the Partnership to elect to be treated
as an association taxable as a corporation.
(c) The General Partner agrees to use its best efforts to cause any tax
partnership which governs any of the Assets or any Additional Leases acquired
pursuant to the terms hereof to make an election under Section 754 of the
Internal Revenue Code if such election would be beneficial to the Partnership.
Section 6.10. Tax Returns. The General Partner shall prepare and timely
file all federal, state and local income and other tax returns and reports as
may be required as a result of the business of the Partnership. Not less than 30
days prior to the date (as extended) on which the Partnership intends to file
its federal income tax return or any state income tax return, the return
proposed to be filed by the General Partner shall be furnished to the Limited
Partner for review and comments. In addition, not more than 10 days after the
date on which the Partnership actually files its federal income tax return or
any state income tax return, a copy of the return so filed by the General
Partner shall be furnished to the Limited Partner. The General Partner shall be
designated the tax matters partner under Section 6231 of the Internal Revenue
Code and shall promptly notify the Limited Partner if any tax return or report
of the Partnership is audited or if
35
any adjustments are proposed by any governmental body. In addition, the
General Partner shall promptly furnish to the Limited Partner all notices
concerning administrative or judicial proceedings relating to federal income tax
matters as required under the Internal Revenue Code. During the pendency of any
such administrative or judicial proceeding, the General Partner shall furnish to
the Limited Partner periodic reports, not less often than monthly, concerning
the status of any such proceeding. Without the consent of the Limited Partner,
the General Partner shall not extend the statute of limitations, file a request
for administrative adjustment, file suit concerning any tax refund or deficiency
relating to any Partnership administrative adjustment or enter into any
settlement agreement relating to any Partnership item of income, gain, loss,
deduction or credit for any fiscal year of the Partnership.
Section 6.11. Appointment of Trustee to Receive Payments. The Limited
Partner may cause the Partnership at the Partnership's expense to assign the
Partnership's right to receive revenues to a trustee named by the Limited
Partner (a) if the General Partner has committed fraud, willful or intentional
misconduct or gross negligence in the performance of its duties hereunder, (b)
if the General Partner is in default in the performance or observance of any
material agreement, covenant, term, condition or obligation hereunder, (c) if a
representation or warranty made by the General Partner herein or by the General
Partner or any of its officers in any writing furnished in connection with or
pursuant to this Agreement shall be false in material respect on the date as of
which made, or (d) upon the occurrence of any of the events described in either
Section 4.02(a)(4) or in Section 4.02(a)(5) of the Act (except that with respect
to Section 4.02(a)(5) the operative number of days shall be 60 instead of those
set forth in such Section). Such trustee shall receive and hold Partnership
revenues for the benefit of all the Partners, but shall not have the rights of
the General Partner hereunder. The trustee's sole right and responsibility shall
be to receive Partnership funds and disburse them in accordance with the other
provisions of this Agreement. In the event a trustee is appointed pursuant to
this Section 6.11 and the default is cured or the action or event under or with
respect to the bankruptcy law is completely dismissed or eliminated, the General
Partner and the Limited Partner shall, at the request of either the General
Partner or the Limited Partner, cause the trustee to be discharged at the
Partnership's expense; provided that in the judgment of the Limited Partner, its
interest under this Agreement will not be adversely affected by any such
discharge.
ARTICLE VII
Rights and Obligations of Limited Partner
Section 7.1. Rights of Limited Partner. In addition to the other rights
specifically set forth herein, the Limited Partner shall have the right to: (a)
have the Partnership books and records (including those required in Section 1.07
of the Act) kept at the principal United States office of the Partnership and at
all reasonable times to inspect and copy any of them, (b) have dissolution and
winding up by decree of court as provided for in the Act, (c) consult with or
advise the General
36
Partner and (d) exercise all rights of a limited partner under the Act
(except to the extent otherwise specifically provided for herein).
Section 7.2. Limitations on Limited Partner. The Limited Partner shall not
have the authority or power in its capacity as a Limited Partner to act as agent
for or on behalf of the Partnership or any other Partner, to do any act which
would be binding on the Partnership or any other Partner, or to incur any
expenditures on behalf of or with respect to the Partnership. The General
Partner shall not hold out or represent to any third party that the Limited
Partner has any such right or power or that the Limited Partner is anything
other than a "limited partner" in the Partnership.
Section 7.3. Liability of Limited Partner. The Limited Partner shall not be
liable for the debts, liabilities, contracts or other obligations of the
Partnership except to the extent of any unpaid Capital Contributions agreed to
be made by the Limited Partner as set forth in Section 3.2 (which shall be
subject to reduction as provided for in Section 3.4), any additional Capital
Contributions hereafter agreed to be made by the Limited Partner in accordance
with Section 3.3 (which shall also be subject to reduction as provided for in
Section 3.4) and the Limited Partner's share of the assets (including
undistributed revenues) of the Partnership; and in all events, the Limited
Partner shall be liable and obligated to make payments of its Capital
Contributions only as and when such payments are due in accordance with the
terms of this Agreement, and the Limited Partner shall not be required to make
any loans to the Partnership. The Partnership shall indemnify and hold harmless
the Limited Partner in the event it (a) becomes liable for any debt, liability,
contract or other obligation of the Partnership except to the extent expressly
provided in the preceding sentence or (b) is directly or indirectly required to
make any payments with respect thereto.
Section 7.4. Access of Limited Partner to Data. During the term of the
Partnership, the Partnership may acquire or have access to geophysical,
geological and other similar data and information. The Limited Partner and its
agents and representatives, at any time either during the term of or after
termination of the Partnership, shall have the right to inspect, review and copy
any such data or information (or studies, maps, evaluations or reports derived
therefrom) which relates to the Assets or other Leases which the Partnership
owns or has owned or which has been paid for with Partnership funds and to
consult with the Partnership's independent certified public accountants and
independent petroleum engineers and the General Partner's technical personnel
with respect to Partnership matters. Upon liquidation of the Partnership, copies
of all such documents shall be distributed to the General Partner and to the
Limited Partner if so requested by it. Notwithstanding the foregoing, the
Limited Partner shall not have the right to inspect, review or copy geophysical,
geological and other similar data and information if the Partnership or the
General Partner is subject to a valid, bona fide agreement prohibiting such
inspection, review or copying. If requested by the Limited Partner, the General
Partner shall attempt to obtain an amendment or waiver of any such agreement to
permit such data or other information to be provided to the Limited Partner upon
the execution by the Limited Partner of a similar agreement
37
and in any event shall attempt in advance of execution of any such
agreement to obtain permission for the Limited Partner to inspect, review and
copy any such data or other information.
Section 7.5. Withdrawal and Return of Capital Contribution. The Limited
Partner shall not be entitled to (a) withdraw from the Partnership except upon
the assignment by the Limited Partner of all of its interest in the Partnership
and the substitution of such Limited Partner's assignee as a Limited Partner of
the Partnership in accordance with Section 9.1, or (b) the return of its Capital
Contributions except to the extent, if any, that distributions made pursuant to
the express terms of this Agreement may be considered as such by law or by
unanimous agreement of the Partners, or upon dissolution and liquidation of the
Partnership, and then only to the extent expressly provided for in this
Agreement and as permitted by law.
ARTICLE VIII
Books, Records, Reports and Bank Accounts
Section 8.1. Capital Accounts, Books and Records.
(a) Except as may otherwise be required by this Agreement, the General
Partner shall keep books of account for the Partnership in accordance with
generally accepted accounting principles consistently applied in accordance with
the terms of this Agreement. Such books shall be maintained at the principal
United States office of the Partnership and shall be maintained by the General
Partner for review by the Limited Partner during the term of the Partnership and
for a period of five years thereafter. The calendar year shall be selected as
the accounting year of the Partnership and the books of account shall be
maintained on an accrual basis.
(b) An individual capital account shall be maintained by the Partnership
for each Partner as provided below:
(i) The capital account of each Partner shall, except as otherwise provided
herein, be (A) credited by such Partner's Capital Contributions when made, (B)
credited by the fair market value of any property contributed to the Partnership
by such Partner (net of liabilities secured by such contributed property that
the Partnership is considered to assume or take subject to under Section 752 of
the Internal Revenue Code), (C) credited with the amount of any item of taxable
income or gain and the amount of any item of income or gain exempt from tax
allocated to such Partner (taking into account any reallocation pursuant to
Sections 3.3 and 3.6), (D) credited with the Partner's share of Simulated Gain
as provided in paragraph (ii) of this Section 8.1(b), (E) debited by the amount
of any item of tax deduction or loss allocated to such Partner (taking into
account any reallocation pursuant to Sections 3.3 and 3.6), (F) debited with the
Partner's share of Simulated Loss and Simulated Depletion as provided in
paragraph (ii) of this Section 8.1(b), (G) debited by such
38
Partner's allocable share of expenditures of the Partnership not deductible
in computing the Partnership's taxable income and not properly chargeable as
capital expenditures, including any non-deductible book amortizations of
capitalized costs, and (H) debited by the amount of cash or the fair market
value of any property distributed to such Partner (net of liabilities secured by
such distributed property that such Partner is considered to assume or take
subject to under Section 752 of the Internal Revenue Code). Immediately prior to
any distribution of assets by the Partnership that is not pursuant to a
liquidation of the Partnership or all or any portion of a Partner's interest
therein, the Partners' capital accounts shall be adjusted by (X) assuming that
the distributed assets were sold by the Partnership for cash at their respective
fair market values as of the date of distribution by the Partnership and (Y)
crediting or debiting each Partner's capital account with its respective share
of the hypothetical gains or losses, including Simulated Gains and Simulated
Losses, resulting from such assumed sales in the same manner as each such
capital account would be debited or credited for gains or losses on actual sales
of such assets. Notwithstanding the foregoing sentence, the Partnership shall
not distribute any property in kind to any Partner except as provided in Section
10.3.
(ii) The allocation of basis prescribed by Section 613A(c)(7)(D) of the
Internal Revenue Code and provided for in Section 4.3(b) and each Partner's
separately computed depletion deductions shall not reduce such Partner's capital
account, but such Partner's capital account shall be decreased by an amount
equal to the product of the depletion deductions that would otherwise be
allocable to the Partnership in the absence of Section 613A(c)(7)(D) of the
Internal Revenue Code (computed without regard to any limitations which
theoretically could apply to any Partner) times such Partner's percentage share
of the adjusted basis of the property (determined under Section 4.3(b)) with
respect to which such depletion is claimed (herein called "Simulated
Depletion"). The Partnership's basis in any Depletable Property as adjusted from
time to time for the Simulated Depletion allocable to all Partners (and where
the context requires, each Partner's allocable share thereof, which share shall
be determined in the same manner as the allocation of basis prescribed in
Section 4.3(b)) is herein called "Simulated Basis". No Partner's capital account
shall be decreased, however, by Simulated Depletion deductions attributable to
any Depletable Property to the extent such deductions exceed such Partner's
allocable share of the Partnership's remaining Simulated Basis in such property.
The Partnership shall compute simulated gain ("Simulated Gain") or simulated
loss ("Simulated Loss") attributable to the sale or other disposition of a
Depletable Property based on the difference between the amount realized from
such sale or other disposition and the Simulated Basis of such property, as
theretofore adjusted. Any Simulated Gain shall be allocated to the Partners and
shall increase their respective capital accounts in the same manner as the
amount realized from such sale or other disposition in excess of Simulated Basis
shall have been allocated pursuant to Section 4.3(b). Any Simulated Loss shall
be allocated to the Partners and shall reduce their respective capital accounts
in the same percentages as the costs of the property sold were allocated up to
an
39
amount equal to each Partner's share of the Partnership's Simulated Basis
in such property at the time of such sale.
(iii) Any adjustments of basis of Partnership property provided for under
Sections 734 and 743 of the Internal Revenue Code and comparable provisions of
state law (resulting from an election under Section 754 of the Internal Revenue
Code or comparable provisions of state law) and any election by an individual
Partner under Section 59(e)(4) of the Internal Revenue Code to amortize such
Partner's share of intangible drilling and development costs shall not affect
the capital accounts of the Partners (unless otherwise required by applicable
Treasury Regulations), and the Partners' capital accounts shall be debited or
credited pursuant to the terms of this Section 8.1 as if no such election had
been made.
(iv) Capital accounts shall be adjusted, in a manner consistent with this
Section 8.1, to reflect any adjustments in items of Partnership income, gain,
loss or deduction that result from amended returns filed by the Partnership or
pursuant to an agreement by the Partnership with the Internal Revenue Service or
a final court decision.
(v) In the case of property carried on the books of the Partnership at an
amount which differs from its adjusted basis, the Partners' capital accounts
shall be debited or credited for items of depreciation, cost recovery, Simulated
Depletion, amortization and gain or loss (including Simulated Gain or Simulated
Loss) with respect to such property computed in the same manner as such items
would be computed if the adjusted tax basis of such property were equal to such
book value, in lieu of the capital account adjustments provided above for such
items, all in accordance with Treasury Regulation ss. 1.704-1(b)(2)(iv)(g).
(vi) It is the intention of the Partners that the capital accounts of each
Partner be kept in the manner required under Treasury Regulation ss.
1.704-1(b)(2)(iv). To the extent any additional adjustment to the capital
accounts is required by such regulation, the General Partner is hereby
authorized to make such adjustment after notice to the Limited Partner.
Section 8.2. Reports. The General Partner shall deliver to the Limited
Partner the following financial statements and reports at the times indicated
below:
(a) Daily, via facsimile, when the Partnership has any direct drilling
operations in progress, a drilling report detailing the progress as reported by
the subject drilling superintendent.
(b) Monthly, within 30 days after the end of the month for which such
report is given, (i) a general description of the Assets and any additional
Leases acquired pursuant to the terms hereof, except succeeding reports need
contain only material changes (if any) regarding the Assets and such Leases, and
(ii) a description of each sale, farmout or other transfer or disposition by the
Partnership of any Lease occurring during such month, including the reasons
therefor, parties
40
thereto and terms thereof; provided, that if there is no activity to report
with respect to a given month, the report may so state that.
(c) Monthly, within 30 days after the end of each month for which such
schedule is given, (i) a schedule prepared on a cash basis for such month and
substantially in the form of Exhibit 8.2(c)(i) in all material respects and (ii)
a schedule prepared on a cash basis for all months of the Partnership's term
prior to such month, not to exceed twelve months, and substantially in the form
of Exhibit 8.2(c)(ii) in all material respects.
(d) Monthly, within 60 days after the end of each month for which such
report is given and prepared on a production month basis, a schedule with
respect to such month and for all months of the Partnership's term prior to such
month, not to exceed twelve months, substantially in the form of Exhibit 8.2(d)
in all material respects. For purposes of preparing such schedule, projected
amounts shall be derived from that certain engineering report with respect to
the Assets as of May 1, 2000, prepared by ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇ & Associates, Inc.
and identified in writing by the Partners on the Delivery Date.
(e) Quarterly within 60 days after the end of each fiscal quarter of the
Partnership and annually within 120 days after the end of each fiscal year of
the Partnership, (i) financial statements as of the end of and for such period,
including a balance sheet and statements of income, Partners' equity, status of
Cumulative Payout and cash flows, prepared in accordance with generally accepted
accounting principles and, with respect to the annual financial statements,
accompanied by a report of the Partnership's independent certified public
accountants stating that (A) their examination was made in accordance with
generally accepted auditing standards and that in their opinion such financial
statements fairly present the Partnership's financial position, results of
operations and cash flow in accordance with generally accepted accounting
principles consistently applied, and (B) in the normal course of making the
examination and reporting on the financial statements described above, nothing
came to their attention which caused them to believe that the revenues and costs
and expenses allocated to the Partners hereunder were not allocated in
accordance with the specific allocation provisions of this Agreement, (ii) a
schedule reflecting for such period the total costs of the Partnership and the
costs charged to the General Partner and the costs charged to the Limited
Partner, the total revenues of the Partnership and the revenues credited to the
account of the General Partner and to the account of the Limited Partner and a
reconciliation of such expenses and revenues to the provisions of Article IV and
Sections 3.3 and 3.6, (iii) a summary itemization by type and/or classification
of the total fees, compensation and reimbursement paid by the Partnership (or
indirectly on behalf of the Partnership) to the General Partner and its
Affiliates, which summaries shall be accompanied by a report of the
Partnership's independent certified public accountants stating that in preparing
such summaries nothing came to their attention which caused them to believe that
any transaction between the General Partner or an Affiliate thereof and the
Partnership did not comply with Section 6.2(n) or Section 6.6, or if they did so
conclude, a statement specifying such noncompliance, and (iv) a schedule
reflecting the capital account balances of each Partner prepared pursuant to the
provisions of Section 8.1(b). The
41
independent certified public accountants for the Partnership shall be
Deloitte & Touche LLP or such other nationally recognized firm of independent
certified public accountants as shall be designated by the General Partner and
approved by the Limited Partner.
(f) Annually within 90 days after the end of each fiscal year of the
Partnership, beginning with the fiscal year ending December 31, 2000, a report
containing (i) an estimation of the oil and gas reserves, classified by
appropriate categories, as of the end of the preceding fiscal year attributable
to the interest of the Partnership and of the Limited Partner therein, (ii) a
projection of the rate of production of and net income from such reserves with
respect to each such interest, (iii) a calculation of the present worth of such
net income discounted at a rate or rates designated from time to time by the
Limited Partner, and (iv) a schedule or complete description of all assumptions,
estimates and projections made or used in the preparation of such report,
including estimated future product prices, capital expenditures, operating
expenses and taxes. Each such report shall be prepared in accordance with
customary and generally accepted standards and practices for petroleum
engineers, and shall be based on such assumptions as to costs, product prices
and similar factors as (x) prescribed by Rule 4-10 of Regulation S-X promulgated
by the Securities and Exchange Commission and (y) the Limited Partner shall
designate from time to time and shall be prepared by an independent petroleum
engineer designated by the General Partner and approved by the Limited Partner.
(g) Promptly upon their becoming available, copies of all financial
statements, reports, notices and proxy statements sent by the General Partner to
its stockholders and all registration statements, periodic reports and other
statements filed by the General Partner with any securities exchange or any
similar governmental authority.
(h) Quarterly, within 45 days after the end of each fiscal quarter of the
Partnership, a description and the status of any environmental investigation and
remediation activities then being conducted by the Partnership.
(i) Annually, within 90 days after the end of each fiscal year of the
Partnership, a statement from the General Partner to the effect that, to the
best of its knowledge, the Partnership is in compliance in all material respects
with all applicable environmental laws and regulations (provided, that if the
General Partner is unable to make such statement on an unqualified basis, the
General Partner shall generally describe any qualifications or exceptions to
such statement).
(j) Such other reports and financial statements as the General Partner
shall determine or as the Limited Partner shall reasonably request from time to
time.
The cost of such reporting paid to third parties (except pursuant to
Section 8.2(g)) shall be paid by the Partnership as a Partnership expense.
42
Section 8.3. Bank Accounts. The General Partner shall cause one or more
accounts to be maintained in the name of the Partnership in one or more banks
which each have capital, surplus and undivided profits of at least $250,000,000,
which accounts shall be used for the payment of expenditures incurred by the
Partnership in connection with the business of the Partnership and in which
shall be deposited any and all receipts of the Partnership. All amounts shall be
and remain the property of the Partnership and shall be received, held and
disbursed by the General Partner for the purposes specified in this Agreement.
There shall not be deposited in any of such accounts any funds other than funds
belonging to the Partnership, and no other funds shall in any way be commingled
with such funds.
Section 8.4. Information Relating to the Partnership. The Limited Partner
shall have on demand true and full information of all things affecting the
Partnership and its activities and a formal account of Partnership affairs
whenever circumstances render it just and reasonable. During normal and ordinary
business hours, the Limited Partner and its authorized agents and
representatives shall have reasonable access to all books, records and materials
in the Partnership's offices regarding the Partnership or its activities and, at
the sole risk of the Limited Partner, to the drill site of each Partnership
well.
Section 8.5. Certain Notices. Without limiting its obligations hereunder,
the General Partner shall promptly notify the Limited Partner in writing:
(a) of the occurrence of any material adverse change in the Partnership's
operations or properties;
(b) of the occurrence of any material adverse change in the General
Partner's financial condition taken on a consolidated basis;
(c) of any default by the General Partner in the performance of any of its
obligations hereunder;
(d) of any inspection by governmental authorities, notice of violations
issued by any such entities, pending administrative or judicial proceeding,
claim or any violation identified by the General Partner, to the extent any such
inspection, notice, proceeding, claim or violation relate to compliance by the
Partnership with Environmental Laws and could reasonably be expected to result
in a fine, penalty, loss or damage to the Partnership of $50,000 or more;
(e) in the event the General Partner changes the location of its principal
office or principal place of business; and
(f) in the event the Limited Partner becomes entitled to remove the General
Partner pursuant to Section 9.4, immediately after the General Partner becomes
aware of such event.
43
ARTICLE IX
Assignments of Interests and Substitutions
Section 9.1. Assignments by Limited Partner.
(a) The interest of the Limited Partner in the Partnership shall be
assignable in whole or in part, subject to the following: (i) no such assignment
shall be made if such assignment would result in the violation of any applicable
federal or state securities laws; (ii) the General Partner shall have given its
consent to such assignment (which consent shall not be unreasonably withheld)
and (iii) the Partnership shall not be required to recognize any such assignment
until the instrument conveying such interest has been delivered to the General
Partner for recordation on the books of the Partnership.
(b) Unless an assignee becomes a substituted Limited Partner in accordance
with the provisions set forth below, such assignee shall not be entitled to any
of the rights granted to the Limited Partner hereunder, other than the right to
receive allocations of income, gain, loss, deduction, credit and similar items
and distributions to which the assignor would otherwise be entitled, to the
extent such items are assigned. In the event of multiple assignees, the General
Partner shall have the right to request that one person be designated to act on
behalf of all assignees.
(c) An assignee of the interest of the Limited Partner, or any portion
thereof, shall become a substituted Limited Partner entitled to all of the
rights of the Limited Partner if, and only if (i) the assignor gives the
assignee such right, (ii) the General Partner consents to such substitution
(which consent shall not be unreasonably withheld) and (iii) the assignee
executes and delivers such instruments, in form and substance reasonably
satisfactory to the General Partner, as the General Partner may deem necessary
or desirable to effect such substitution and to confirm the agreement of the
assignee to be bound by all of the terms and provisions of this Agreement. Upon
the satisfaction of such requirements, the General Partner shall concurrently
(or as of such later date as shall be provided for in any applicable written
instruments furnished to the General Partner) admit any such assignee as a
substituted Limited Partner of the Partnership and reflect such admission and
the date thereof in the records of the Partnership.
(d) The Partnership and the General Partner shall be entitled to treat the
record owner of any Partnership interest as the absolute owner thereof in all
respects and shall incur no liability for distributions of cash or other
property made in good faith to such owner until such time as a written
assignment of such interest that complies with the terms of this Agreement has
been received by the General Partner.
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Section 9.2. Assignment by General Partner. The interest of the General
Partner in the Partnership shall not be assigned, mortgaged, pledged, subjected
to a security interest or otherwise encumbered, in whole or in part, without the
prior written consent of the Limited Partner in its sole and absolute
discretion.
Section 9.3. Merger or Consolidation. Notwithstanding the provisions of
Sections 9.1 or 9.2, the merger or consolidation by a Partner with another
entity shall not be considered an assignment of an interest in the Partnership,
and upon the merger or consolidation of such Partner, the resulting entity shall
continue as a Partner.
Section 9.4. Removal of General Partner.
(a) Subject to the provisions hereof, the Limited Partner may remove the
General Partner with cause and select a new General Partner to operate and carry
on the business and affairs of the Partnership. As used in this Section 9.4 and
in Section 9.5, "with cause" shall mean the occurrence of any of the following:
(i) the commission by the General Partner of fraud, willful or intentional
misconduct, or gross negligence in the performance of its duties hereunder; (ii)
a default by the General Partner in the performance or observation of any
material agreement, covenant, term, condition or obligation hereunder; (iii) a
representation or warranty made by the General Partner herein or by the General
Partner or any of its officers in any writing furnished in connection with or
pursuant to this Agreement shall be false in any material respect on the date as
of which made; (iv) the occurrence of any of the events described in Section
4.02(a)(4) or Section 4.02(a)(5) of the Act (except that with respect to Section
4.02(a)(5), the operative number of days shall be 60 instead of the numbers set
forth in such Section); (v) a Change in Control; (vi) a default by Parent in the
performance or observation of any agreement, covenant, term, condition or
obligation of the Guaranty; or (vii) a representation or warranty made by Parent
or by Parent or any of its officers in any writing furnished in connection with
or pursuant to this Agreement or the Guaranty shall be false in any material
respect on the date as of which made.
(b) In the event the Limited Partner elects to remove the General Partner
in accordance with the provisions of Section 9.4(a) hereinabove, any successor
General Partner will be named in, and its appointment as such will be effective
as of a date specified in, a notice to the General Partner from the Limited
Partner exercising its right to remove the General Partner and select the
successor General Partner. The removal of the General Partner shall be effective
only if and when the following conditions have been satisfied: (i) a successor
General Partner shall have been selected and shall have agreed to accept the
responsibilities of a General Partner; and (ii) this Agreement and the
Certificate of Limited Partnership of the Partnership shall have been duly
amended to name the new General Partner. To the extent required by the laws of
any jurisdiction to which the Partnership or this Agreement is subject, the
Partners hereby unanimously consent to the admission of such successor General
Partner and hereby appoint such successor General Partner as the agent and
attorney in fact for each Partner (including the retiring General Partner) for
the purpose of signing, swearing to and filing an amendment to the certificate
of limited
45
partnership of the Partnership and all other necessary or appropriate
documents in connection with the substitution of such successor General Partner.
(c) The provisions of this Section 9.4 shall not be the sole remedy of the
Limited Partner in the event the General Partner is removed with cause, and in
such event the Partnership and/or the Limited Partner shall have all other
rights and remedies as shall be available to them pursuant to this Agreement, at
law or in equity to redress any wrong or damage arising from the event or
circumstances giving rise to the General Partner's removal with cause.
Section 9.5. Right of General Partner Upon Removal. In the event the
General Partner is removed in accordance with Section 9.4, the incoming General
Partner shall have the right to purchase from the removed General Partner a one
percent general partner interest in the Partnership at a price equal to the
appraised value thereof. Such appraised value shall be determined by a qualified
independent appraiser who is mutually agreed upon by both the removed General
Partner and the incoming General Partner within 30 days after the selection of
the incoming General Partner. If the removed General Partner and the incoming
General Partner cannot mutually agree upon a single independent appraiser within
such period, they shall each select their own independent appraiser and those
two appraisers shall select a third independent appraiser. The cost of such
appraisal shall be borne by the removed General Partner. The incoming General
Partner's option to acquire such interests must be exercised by notice in
writing to the removed General Partner not more than 20 days after the selection
of the incoming General Partner and the purchase price for such interest shall
be paid in cash not more than 30 days after receipt by the parties of the report
of the appraiser setting forth the appraised value. In the event the incoming
General Partner does not elect to purchase the one percent general partner
interest of the removed General Partner pursuant to the provisions of this
Section 9.4, such interest shall be converted to a limited partner interest in
the Partnership. Further, in any event any remaining general partner interest of
the removed General Partner in the Partnership (i.e., the additional interests
to be received after Cumulative Payout) shall be converted to a limited partner
interest in the Partnership and the removed General Partner shall continue as a
limited partner, but without any right to vote, consent, approve or otherwise
make any determination under this Agreement; provided, that after such
conversion any amendment to this Agreement that would change (a) the status of
the removed General Partner as a limited partner hereof, (b) the removed General
Partner's participation in the income, gain, loss, credits or distributions of
the Partnership, (c) the removed General Partner's obligation to contribute
capital to the Partnership or (d) this proviso, shall require the written
consent of the removed General Partner.
Section 9.6 Right of First Offer.
(a) If the Limited Partner proposes to make any sale or other disposition
of all or any portion of its interest in the Partnership (other than a sale or
other disposition to a person controlling, controlled by or under common control
with the Limited Partner and whether or not the Limited Partner has received an
offer for such interest), the Limited Partner shall so inform
46
the General Partner by notice in writing (in this Section 9.6, the
"Transfer Notice") describing the interest (or portion thereof) that is the
subject of such proposed disposition (in this Section 9.6, the "Offered
Interest") and requesting that the General Partner submit an offer to purchase
the Offered Interest. The General Partner shall thereupon have thirty days after
receipt of the Transfer Notice to submit an offer in writing to the Limited
Partner to purchase the Offered Interest, which offer shall be in reasonable
detail. Failure of the General Partner to submit an offer in writing to the
Limited Partner to purchase the Offered Interest within such thirty day period
shall be deemed an election by the General Partner not to submit an offer. If
the General Partner submits an offer in writing to purchase the Offered Interest
in accordance with this Section, the Limited Partner shall have the option to
accept such offer, to decline the offer and retain the Offered Interest, or to
sell the Offered Interest to a third party, provided that (i) any sale to a
third party is consummated within 120 days after the expiration of the above
thirty day period and is on terms and conditions no less favorable to the
Limited Partner than those contained in the offer submitted by the General
Partner and (ii) the terms of Section 9.1 are complied with. If the General
Partner elects not to, or fails to, deliver any such offer in writing to the
Limited Partner within such thirty-day period, the Limited Partner shall have
the option to sell the Offered Interest to a third party on such terms and
conditions as agreed upon between them, provided that any such sale is
consummated within 120 days after the expiration of the above thirty day period
and the terms of Section 9.1 are complied with.
(b) If the Limited Partner elects to accept an offer of the General Partner
to purchase the Offered Interest as provided in subsection (b) above, the
closing of the purchase and sale of an Offered Interest shall take place on the
fifteenth day following the date of delivery to the General Partner of the
Limited Partner's election to accept such offer (or if such day is a Saturday,
Sunday, or legal holiday in the State of Connecticut, the first day thereafter
that is not a Saturday, Sunday, or legal holiday) at 10:00 a.m., local time, in
the offices of the Limited Partner set forth on the Limited Partner's signature
page of this Agreement, or on such other date and at such other time and place
as may be agreed to by both Partners. At the closing, the Limited Partner shall
take all action necessary to convey the Offered Interest to the General Partner,
free of all liens and encumbrances, against receipt of the purchase price
therefor.
ARTICLE X
Dissolution, Liquidation and Termination
Section 10.1. Dissolution. The Partnership shall be dissolved upon the
occurrence of any of the following:
(a) The occurrence of December 31, 2020.
(b) The consent in writing of the General Partner and the Limited Partner.
47
(c) The election of the Limited Partner by written notice to the General
Partner if at the time such notice is given (i) the General Partner has
committed fraud, willful or intentional misconduct or gross negligence in the
performance of its duties hereunder, (ii) the General Partner has defaulted in
the performance or observation of any material agreement, covenant, term,
condition or obligation hereunder, or (iii) a representation or warranty made by
the General Partner herein or by the General Partner or any of its officers in
any writing furnished in connection with or pursuant to this Agreement shall be
false in any material respect on the date as of which made.
(d) The sale or other disposition of all or substantially all of the assets
of the Partnership.
(e) The occurrence of an event of withdrawal from the Partnership by the
General Partner as provided for in Section 4.02(a) of the Act.
(f) The election of the Limited Partner by written notice to the General
Partner if at the time such notice is given (i) the General Partner has breached
Section 9.2 or (ii) the General Partner has merged or consolidated with another
entity without the prior written consent of the Limited Partner.
(g) The election of the Limited Partner by written notice to the General
Partner at any time after the third anniversary of the Delivery Date.
(h) The election of the Limited Partner by written notice to the General
Partner (i) upon a default by Parent in the performance or observation of any
agreement, covenant, term, condition or obligation under the Guaranty,(ii) if a
representation or warranty made by Parent or by Parent or any of its officers in
any writing furnished in connection with or pursuant to this Agreement or the
Guaranty shall be false in any material respect on the date as of which made, or
(iii) upon the occurrence of any of the events described in Section 4.02(a)(4)
or Section 4.02(a)(5) of the Act with respect to Parent (except that with
respect to Section 4.02(a)(5), the operative number of days shall be 60 instead
of the numbers set forth in such Section).
(i) The election of the Limited Partner by written notice to the General
Partner upon a Change in Control.
(j) The occurrence of any other event which under the Act causes the
dissolution of a limited partnership.
Section 10.2. Withdrawal by General Partner and Reconstitution.
(a) Except as specifically permitted in Section 9.2, the General Partner
covenants and agrees not to (i) withdraw voluntarily from the Partnership,
either directly, by dissolution, by transfer of its Partnership interest or by
any other voluntary act (including any event of withdrawal
48
from the Partnership by the General Partner as provided in Section 4.02(a)
of the Act) or (ii) allow seizure, attachment, garnishment, foreclosure or other
taking of its Partnership interest. If the General Partner breaches any
provision of this Section 10.2 or Section 9.2, if an event described in Section
10.1(e) occurs, or if an election is made by the Limited Partner to dissolve the
Partnership pursuant to Section 10.1(f) or Section 10.1(i): (A) and such breach,
event or election occurs prior to Cumulative Payout, all interests and amounts
which the General Partner would otherwise receive under Section 10.3 (as General
Partner, unless a limited partnership interest is held by the General Partner as
a result of Section 9.4 of this Agreement if the General Partner has been
removed for cause) shall be reduced by 90%; and (B) and such breach, event or
election occurs after Cumulative Payout, all interests and amounts which the
General Partner would otherwise receive under Section 10.3 (as General Partner,
unless a limited partnership interest is held by the General Partner as a result
of Section 9.4 of this Agreement if the General Partner has been removed for
cause) shall be reduced by 15%. The distribution to the Limited Partner of
assets under the immediately preceding sentence which would otherwise be
distributable to the General Partner in accordance with this Section 10.2 shall
constitute liquidated damages to the Limited Partner for a violation by the
General Partner prior to Cumulative Payout of the covenant and agreement
contained in the first sentence of this Section 10.2, the parties having agreed
that the amount of actual damages would be difficult or impossible to calculate.
(b) Notwithstanding the foregoing Section 10.2(a) or any other provision of
this Agreement, (i) the Partnership may be reconstituted and its business
continued without being wound up as provided for in Section 8.03 of the Act and
(ii) the provisions of Section 6.02 (including subsection (b) thereof) of the
Act shall be applicable to the Partnership except that the right to recover
damages from the withdrawing General Partner pursuant to Section 6.02(a) of the
Act shall be governed by Section 10.2(a) of this Agreement.
Section 10.3. Liquidation and Termination. Upon dissolution of the
Partnership (unless it is reconstituted and its business continued without being
wound up as provided for in Section 10.2(b)), the General Partner shall act as
liquidator or may appoint in writing one or more liquidators who shall have full
authority to wind up the affairs of the Partnership and make final distribution
as provided herein; provided, however, that if one of the events specified in
Section 10.1(c),(e), (f), (g), (h) or (i) has occurred as a result of an act by
the General Partner, the liquidator shall be a person selected in writing by the
Limited Partner. The liquidator shall continue to operate the Partnership
properties with all of the power and authority of the General Partner. The steps
to be accomplished by the liquidator are as follows:
(a) As promptly as possible after dissolution and again after final
liquidation, the liquidator shall cause a proper accounting to be made by the
Partnership's independent accountants of the Partnership's assets, liabilities
and operations through the last day of the month in which the dissolution occurs
or the final liquidation is completed, as appropriate.
(b) The liquidator shall pay all of the debts and liabilities of the
Partnership or otherwise make adequate provision therefor (including the
establishment of a cash escrow fund for contingent liabilities in such amount
and for such term as the liquidator may reasonably determine). After
49
making payment or provision for all debts and liabilities of the
Partnership, the Partners' capital accounts shall then be adjusted by (i)
assuming the sale of all remaining assets of the Partnership for cash at their
respective fair market values (as determined by an appraiser selected by the
Limited Partner within 30 days after receipt by the Limited Partner of notice
that the liquidator has paid or made provision for all debts and liabilities of
the Partnership) as of the date of termination of the Partnership, (ii) assuming
the distribution of such cash at such time in the percentages required under
Sections 4.3, taking into account whether the end of the Phase I Period has
occurred or would occur as a result of such distribution, and (iii) debiting or
crediting each Partner's capital account with its respective share of the
hypothetical gains or losses resulting from such assumed sales in the same
manner as each such capital account would be debited or credited for gains or
losses on actual sales of such assets. In the event that the Limited Partner
fails to notify the General Partner of its selection of an appraiser pursuant to
the preceding sentence within the time period specified therein, the General
Partner shall be entitled to select such appraiser. The liquidator shall then
distribute all remaining cash and property to the Partners in the percentages
provided in Section 4.3 with any distribution of property (valued as of the date
of distribution at its fair market value by the appraiser selected in the manner
provided above) being treated as a distribution of cash for purposes of
determining whether the end of the Phase I Period has occurred or will occur as
a result of such distribution. To the extent possible and provided that the
ownership of such property would not be in violation of any rule or regulation
then applicable to the Limited Partner, such a distribution shall be in kind
unless otherwise agreed to by the General Partner and the Limited Partner. In
making any distributions of property, the liquidator shall distribute, to the
extent possible, undivided interests in each Lease in the same percentages as
the Partners share revenues from such Lease. It is intended that the foregoing
distributions to each Partner will be equal to each Partner's respective
positive capital account balance as determined after giving effect to the
foregoing adjustments and to all adjustments attributable to allocations of
items of income, gain, loss and deduction realized by the Partnership during the
taxable year in question and all adjustments attributable to contributions and
distributions of money and property effected prior to such distribution. To the
extent that any such Partner's positive capital account balance does not
correspond to such distribution, the allocations provided for in Section 4.1 and
Section 4.2 shall be adjusted, to the least extent necessary, to produce a
capital account balance for the Partner which corresponds to the amount of such
distribution. Each Partner shall have the right to designate another person to
receive any property which otherwise would be distributed in kind to that
Partner pursuant to this Section 10.3 and Section 10.2 if that Section is
applicable. Any distributions to the Partners in liquidation of the Partnership
shall be made by the later of the end of the taxable year in which the
liquidation occurs, or 90 days after the date of such liquidation. For purposes
of the preceding sentence, the term "liquidation" shall have the same meaning as
set forth in Treasury Regulation ss. 1.704-1(b)(2)(ii)(g) as in effect at such
time.
(c) Any Leases distributed to the Partners shall be subject to the
operating agreements then in effect with respect to such Leases; provided,
however, that if any of such Leases is subject to an operating agreement to
which an unaffiliated third person is not a party, such Leases shall be subject
to a standard form operating agreement as shall be agreed upon by the Partners.
Upon written request made by any Partner, the liquidator shall sell the
Partnership Leases and other properties and assets that otherwise would be
distributable to such Partner under this Section 10.3 at the best cash price
available therefor and distribute such cash (after deducting all expenses
reasonably relating to such sale) to such Partner. Such sale shall be on behalf
of such Partner and shall be treated as the
50
sale by such Partner of its interest in such properties, and any gain or
loss attributable to such sale and any proceeds therefrom shall be for the
account of such Partner.
(d) The provisions of subsections (b) and (c) of this Section 10.3 shall be
subject to the effect of Section 10.2 if that Section is applicable.
(e) Except as expressly provided herein, the liquidator shall comply with
any applicable requirements of the Act and all other applicable laws pertaining
to the winding up of the affairs of the Partnership and the final distribution
of its assets.
(f) The distribution of cash and/or property to the Limited Partners in
accordance with the provisions of this Section 10.3 shall constitute a complete
return to the Limited Partner of its Capital Contributions and a complete
distribution to the Limited Partner of its interests in the Partnership and all
Partnership property.
(g) No Partner with a negative balance in its capital account shall be
liable to the Partnership or any other Partner for the amount of such negative
balance upon dissolution and liquidation.
Section 10.4. Cancellation of Certificate. Upon the completion of the
distribution of Partnership assets as provided herein, the Partnership shall be
terminated, and the liquidator (or the Partners if necessary) shall cause the
cancellation of the certificate of limited partnership of the Partnership and
shall take such other actions as may be necessary to terminate the Partnership.
Section 10.5. Certain Additional Agreements Regarding Piggyback Rights.
(a) In the event the General Partner receives an offer to purchase all or a
portion of its Retained Outside Interest, the General Partner agrees that it
will not consummate any such sale unless the proposed purchaser has also
submitted a bona fide written offer to the Partnership to purchase an equivalent
pro rata portion of Partnership's interest in the same assets on the same terms
and conditions as those offered to the General Partner (except to the extent
proportionately adjusted to take into account the relative interests of the
parties in such assets).
(b) In the event the Partnership receives an offer to purchase all or a
portion of its assets, the Partners agree that the Partnership will not
consummate any such sale unless the proposed purchaser has also submitted a bona
fide written offer to the General Partner to purchase an equivalent pro rata
portion of the General Partner's interest in the same assets (which interest is
a part of the Retained Outside Interest) on the same terms and conditions as
those offered to the Partnership (except to the extent proportionately adjusted
to take into account the relative interests of the parties in such assets).
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ARTICLE XI
Representations and Warranties
Section 11.1. Representations and Warranties of General Partner. The
General Partner represents, warrants and covenants to the Limited Partner as
follows:
(a) The General Partner is a corporation duly organized, validly existing
and in good standing under the laws of the State of Texas.
(b) The General Partner is duly qualified or will qualify to transact
business in every jurisdiction where the character of the properties owned or
held by the Partnership or where the nature of the business transacted by the
Partnership makes qualification by it necessary or appropriate in order for the
Partnership to conduct its business.
(c) The General Partner has the requisite power and authority to execute
and deliver this Agreement and to perform its obligations hereunder (including,
without limitation, the power and authority to act as General Partner of the
Partnership).
(d) The execution, delivery and performance by the General Partner of this
Agreement has been duly and validly authorized by all requisite corporate
action, and no other director or shareholder action is required to be taken to
authorize such execution, delivery and performance.
(e) The execution, delivery and performance by the General Partner of this
Agreement is within its corporate powers and will not (i) be in contravention of
or violate any provisions of its charter or other governing documents, as
amended to the date hereof, or (ii) be in contravention of or result in any
breach or constitute a default under any applicable law, rule, regulation,
judgment, license, permit or order or any loan, note or other agreement or
instrument to which the General Partner is a party or by which it or any of its
properties are bound.
(f) When delivered to the Limited Partner, this Agreement will have been
duly and validly executed and will be binding upon the General Partner and
enforceable in accordance with the terms hereof.
(g) Except for a change of law over which the General Partner has no
control (and the General Partner shall immediately notify the Limited Partner
when the General Partner learns of such occurrence), the foregoing
representations, warranties and covenants shall remain true and accurate during
the term of the Partnership, and the General Partner will neither take action
nor permit action to be taken which would cause any of the foregoing
representations to become untrue or inaccurate.
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(h) No consent, approval, authorization or order of any court or
governmental agency or authority or of any third party which has not been
obtained is required in connection with the execution, delivery and performance
by the General Partner of this Agreement.
(i) Neither the General Partner nor any of its Affiliates has employed or
retained any broker, agent or finder in connection with this Agreement or the
transactions contemplated herein, or paid or agreed to pay any brokerage fee,
finder's fee, commission or similar payment to any person on account of this
Agreement or the transactions provided for herein; and the General Partner shall
indemnify and hold harmless the Partnership and the Limited Partner from any
costs, including attorneys' fees, and liability arising from the claim of any
broker, agent or finder employed or retained by the General Partner in
connection with the Partnership or this Agreement.
(j) As of the date hereof none of the financial statements or other written
documents or information delivered herewith or heretofore by or on behalf of the
General Partner or Parent to the Limited Partner in connection with the General
Partner, Parent, this Agreement, the Assets and the operations to be conducted
hereunder contains any untrue statement of a material fact or omits to state any
material fact (other than facts which the Limited Partner recognizes to be
industry risks normally associated with the oil and gas business) necessary to
keep the statements contained herein or therein from being misleading. There is
no fact peculiar to the General Partner, Parent or the Assets (other than facts
which the Limited Partner recognizes to be industry risks normally associated
with the oil and gas business) which materially adversely affects or in the
future may (so far as the General Partner can now foresee) materially adversely
affect (i) the business, property or assets, or financial condition of the
General Partner or Parent or (ii) the Assets, and which has not been set forth
in this Agreement or in the other documents, certificates and statements
furnished to the Limited Partner by or on behalf of the General Partner or
Parent prior to the date hereof in connection with the transactions contemplated
hereby.
(l) To the best knowledge of the General Partner, the General Partner and
its Affiliates and persons acting on their behalf have not taken any action, or
failed to take any action, which has caused the organization of the Partnership
and the issuance of the interests in the Partnership to come within the
registration requirements of the Securities Act of 1933, as amended, or any
applicable state blue sky laws.
(m) There is no pending or, to the best of the General Partner's knowledge,
threatened judicial, administrative or arbitral action, suit or proceeding
against or investigation of the General Partner which is not fully insured
against (except standard deductible amounts) and which might materially and
adversely affect the financial condition of the General Partner or its ability
to perform its obligations under this Agreement.
(n) During the preceding 12-month period, the General Partner and its
Affiliates and persons acting on their behalf have not sold (except to a limited
number of persons who have represented themselves to be accredited investors, as
defined in Rule 501 promulgated by the
53
Securities and Exchange Commission) any interest in the Partnership or
similar interests; with respect to any sales of interests similar to the
Partnership by the General Partner and its Affiliates and persons acting on
their behalf subsequent to the Delivery Date, the General Partner shall do
nothing which would require the registration of these interests under the
Securities Act of 1933, and the rules and regulations promulgated thereunder, as
well as applicable state securities laws.
Section 11.2. Representations and Warranties of Limited Partner. The
Limited Partner represents, warrants and covenants to the General Partner as
follows:
(a) The Limited Partner is duly organized, validly existing and in good
standing under the laws of its state of incorporation.
(b) The Limited Partner has all requisite power and authority to execute
and deliver this Agreement and to perform its obligations hereunder.
(c) The execution, delivery and performance by the Limited Partner of this
Agreement are within its powers and do not and will not (i) contravene or
violate any provisions of its Certificate of Incorporation or Bylaws, as amended
to the date hereof, or (ii) contravene or result in any breach of or constitute
a default under any applicable law, rule or regulation or any loan, note or
other agreement or instrument to which it is a party or by which it or any of
its properties are bound.
(d) When delivered to the General Partner, this Agreement will be duly and
validly executed by the Limited Partner and will be binding upon it in
accordance with the terms hereof.
(e) Neither the Limited Partner nor any person acting on its behalf has
employed or retained any broker, agent or finder in connection with the
transactions provided for herein, or agreed to pay any brokerage fee, finder's
fee, commission or similar payment to any person on account of the transactions
provided for herein; and the Limited Partner shall indemnify and hold harmless
the Partnership and the General Partner from any costs, including attorneys'
fees, and liability arising from the claim of any broker, agent or finder
employed or retained by the Limited Partner in connection with the Partnership
or this Agreement.
(f) It is acquiring its interest in the Partnership as an investment and
not with a view to the resale or other distribution to the public; provided,
however, that the disposition of its interest shall at all times be and remain
within its control.
(g) As of the Delivery Date, it is a wholly-owned subsidiary of General
Electric Capital Corporation.
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ARTICLE XII
Miscellaneous
Section 12.1. Notices. All notices, elections, demands or other
communications required or permitted to be made or given pursuant to this
Agreement shall be in writing and shall be considered as properly given or made
if given by (a) personal delivery, (b) expedited delivery service with proof of
delivery, (c) first class mail postage prepaid, or (d) prepaid telegram, telex
or facsimile (provided that such telegram, telex or facsimile is confirmed by
expedited delivery service in the manner previously described). Each Partner's
address for notices and other communications hereunder shall be that set forth
opposite such Partner's signature hereto. The Limited Partner may change its
address by giving notice in writing to the General Partner of its new address,
and the General Partner may change its address by giving notice in writing to
the Limited Partner of its new address.
Section 12.2. Amendments. This Agreement may be changed, modified, or
amended only by an instrument in writing duly executed by all Partners.
Section 12.3. Partition. Each of the Partners hereby irrevocably waives for
the term of the Partnership any right that such Partner may have to maintain any
action for partition with respect to the Partnership property.
Section 12.4. Entire Agreement. This Agreement and the other documents
contemplated hereunder constitute the full and complete agreement of the parties
hereto with respect to the subject matter hereof and supersedes all prior
agreements and understandings, both written and oral, between the parties hereto
with respect to the subject matter hereof.
Section 12.5. No Waiver. The failure of any Partner to insist upon strict
performance of a covenant hereunder or of any obligation hereunder, irrespective
of the length of time for which such failure continues, shall not be a waiver of
such Partner's right to demand strict compliance in the future. No consent or
waiver, express or implied, to or of any breach or default in the performance of
any obligation hereunder shall constitute a consent or waiver to or of any other
breach or default in the performance of the same or any other obligation
hereunder.
Section 12.6. Applicable Law. This Agreement and the rights and obligations
of the parties hereunder shall be governed by and interpreted, construed and
enforced in accordance with the laws of the State of Texas.
Section 12.7. Successors and Assigns. Subject to Article IX, this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
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Section 12.8. Exhibits. Exhibits 2.1--Cash Factor Discount Table, 5.6, 6.8,
8.2(c)(i), 8.2(c)(ii) and 8.2(d) to this Agreement are attached hereto. Each
Exhibit is incorporated herein by reference and made a part hereof for all
purposes and references to this Agreement shall also include such Exhibit unless
the context in which used shall otherwise require.
Section 12.9. Survival of Representations and Warranties. All
representations, warranties and covenants made by the General Partner or the
Limited Partner in this Agreement or any other document contemplated thereby or
hereby shall be considered to have been relied upon by the other party hereto
and shall survive the execution and delivery of this Agreement or such other
document, regardless of any investigation made by or on behalf of any such
party.
Section 12.10. No Third Party Benefit. Nothing in this Agreement, either
express or implied, is intended to or shall confer upon any person other than
the parties hereto, and their respective successors and permitted assigns, any
rights, benefits, or remedies of any nature whatsoever under or by reason of
this Agreement.
Section 12.11. Public Announcements. Except as may be required by
applicable law or by obligations pursuant to any listing agreement with any
national securities exchange, neither the General Partner nor the Limited
Partner shall issue any press release or otherwise make any public statement
with respect to this Agreement or the transactions contemplated hereby without
the prior written approval of the other party, which approval shall not be
unreasonably withheld. Any such press release or public statement required by
applicable law or by obligations pursuant to any listing agreement with any
national securities exchange shall only be made after reasonable notice to the
other party.
Section 12.12. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original and all of which shall
constitute but one and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the
day and year first above written.
GENERAL PARTNER:
MAGNUM HUNTER PRODUCTION, INC.
By:
-----------------------------
ADDRESS FOR NOTICE PURPOSES:
▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇., ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇ ▇▇▇▇
Telecopy No.: (▇▇▇)▇▇▇-▇▇▇▇
SIGNATURE PAGE--Agreement of Limited Partnership providing for the
formation of Mallard ▇▇▇▇▇▇ ▇.▇.
57
IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the
day and year first above written.
LIMITED PARTNER:
TIFD III-X INC.
By:
-----------------------
ADDRESS FOR NOTICE PURPOSES:
c/o GE Capital Corp.--SFG
▇▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇ - ▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
Attention: Global Asset Management
Operations
Telecopy No.: ▇▇▇-▇▇▇-▇▇▇▇
SIGNATURE PAGE--Agreement of Limited Partnership providing for the
formation of Mallard ▇▇▇▇▇▇ ▇.▇.
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