Exhibit 10.5
OPERATING AND MANAGEMENT AGREEMENT
This Operating and Management Agreement (the "Agreement") is made as of
the 22nd day of December, 2003 between QUEST CHEROKEE, LLC, a Delaware limited
liability company, ("Company") and QUEST ENERGY SERVICE, INC., a Kansas
corporation ("Manager") (each of Company and Manager being sometimes referred to
herein as a "Party" and collectively referred to herein as the "Parties").
W I T N E S S E T H
WHEREAS, pursuant to that certain Contribution, Conveyance, Assignment and
Assumption Agreement, dated of even date herewith, Manager, Quest Oil & Gas
Corporation, a Kansas corporation ("QOGC"); STP Cherokee, Inc., an Oklahoma
corporation ("STP Cherokee"); Ponderosa Gas Pipeline Company, Inc., a Kansas
corporation ("PGPC"); Producers Service, Incorporated, a Kansas corporation
("PSI"); and X-X Gas Gathering, L.L.C., a Kansas limited liability company
("X-X") (Manager, QOGC, STP Cherokee, PGPC, PSI, and X-X being collectively,
referred to as the "Quest Subsidiaries") (i) assigned to Company certain coal
bed methane properties and associated facilities, equipment and related assets
within the Cherokee Basin of southeastern Kansas and northeastern Oklahoma; and
(ii) assigned to Bluestem Pipeline, LLC, a Delaware limited liability company
("Bluestem") certain gathering systems and pipelines and appurtenant properties
in the Cherokee Basin; and
WHEREAS, Company is the sole owner of Bluestem; and
WHEREAS, Company desires to engage Manager to provide contract operating
services, as more fully described herein, with respect to the oil and gas
properties and gathering systems now owned or hereafter acquired by the Company
and its wholly-owned subsidiaries, including Bluestem.
NOW, THEREFORE, in consideration of the mutual covenants herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties agree as follows:
Article I. DEFINITIONS
Section 1.01 Defined Terms. The following terms, when used herein, shall
have the meanings set forth below:
"Affiliate" means, with respect to a Person, any Person that directly or
indirectly through one or more intermediaries controls, is controlled by, or is
under common control with such Person, and the term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management, activities or policies of any Person.
"Agreement" means this Agreement, as it may be amended from time to time.
"Acquisition" means any acquisition by the Company of (i) all or
substantially all of the interest in any company or business (whether by a
purchase of assets, purchase of stock, merger or
otherwise); or (ii) any acquisition by the Company of real or personal property
or other assets from any Person.
"Amended and Restated LLC Agreement" means the Amended and Restated
Limited Liability Company Agreement of the Company, as such may be amended from
time to time.
"Board" means the Board of Managers of the Company.
"Business" means the oil and gas exploration, development and production
and the gas gathering activities of the Company Group, as now or hereafter
conducted.
"Business Day" shall mean any day which is not a Saturday, Sunday or day
on which banks are authorized by law to close in the State of Texas or the State
of New York.
"Change of Control" has the meaning provided in the Amended and Restated
LLC Agreement.
"Company Group" means the Company and its wholly-owned subsidiaries,
including Bluestem.
"Divestiture" means the transfer, sale, lease, farmout, exchange,
abandonment, mortgage or pledge or other disposition (or related series of such
transactions) of all or any portion of the Properties.
"Fiscal Year" means the fiscal year of the Company for U.S. GAAP purposes.
"GAAP" means those generally accepted accounting principles and practices
which are recognized as such by the Financial Accounting Standards Board (or any
generally recognized successor).
"G&A Costs" shall have the meaning provided in Section 5.01.
"Governmental Authority" (or "Governmental") means a federal, state,
local, tribal or foreign governmental authority; a state, province,
commonwealth, territory or district thereof; a county or parish; a city, town,
township, village or other municipality; any executive, legislative or other
governing body of any of the foregoing; any agency, authority, board,
department, system, service, office, commission, committee, council or other
administrative body of any of the foregoing; any court or other judicial body;
and any officer, official or other representative of any of the foregoing.
"Hydrocarbons" shall mean oil, gas, casinghead gas, coal bed methane gas,
condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and all
products refined or extracted therefrom, together with all other minerals
produced in association with these substances.
"Law" means any applicable constitutional provision, statute, act, code,
law, regulation, rule, ordinance, order, decree, ruling, judgment, decision or
declaration of a Governmental Authority having valid jurisdiction.
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"Manager" has the meaning set forth in the above preamble.
"Manager's Fee" has the meaning provided in Section 5.01.
"Material Decisions" has the meaning provided in the Amended and Restated
LLC Agreement.
"Non-Public Information" means information and records furnished by the
Company with respect to the Company Group, the Business and/or the Properties,
together with any reports, analyses, summaries, spreadsheets, evaluations,
memoranda or other documents prepared or generated by Manager or its consultants
or agents on the basis of such information, whether in written, graphic,
electronic or any other format, to the extent such information is of a nature
that is customarily maintained as confidential and not disclosed by publicly
traded companies engaged in the oil and gas exploration and production business.
Such information includes, but is not limited to, seismic data, reserve reports,
prospect analyses, and privileged attorney-client communications.
"Permits" means licenses, permits, variances, exemptions, orders,
franchises, approvals and other authorizations of or from Governmental
Authorities.
"Person" means any individual, firm, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization, Governmental Authority or any other entity.
"Proceedings" means all proceedings, actions, claims, suits, and notices
of investigations by or before any arbitrator or Governmental Authority.
"Properties" means the oil and gas properties and gathering systems now
owned or hereafter acquired by the Company or its wholly-owned subsidiaries,
including, without limitation, oil and gas leases, mineral interests, pipelines,
flow lines, gathering lines, gathering systems, compressors, dehydration units,
separators, meters, injection facilities, salt water disposal xxxxx and
facilities, plants, xxxxx, downhole and surface equipment, fixtures,
improvements, easements, rights-of-way, surface leases, licenses, permits and
other surface rights, and other real or personal property appurtenant thereto or
used in conjunction therewith.
"Services" means the services provided by Manager pursuant to this
Agreement.
"Third Party" means any Person other than Manager or a member of Company
Group.
Article II. OPERATOR SERVICES
Section 2.01 Services to be provided by Operator. Manager shall perform all
operations and administrative services as may be required for the reasonable
conduct of the Business as presently or hereafter conducted, including, without
limitation the following:
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(a) Production Sales and Administration. Manager will provide, or will
contract with a Third Party acceptable to the Board to provide, services
relating to the sale of Hydrocarbons produced from the Properties, and will
provide contract administration services in connection with the
administration of the gathering, treating, processing, transportation and
sale of such production.
(b) Operations Services. With respect to Properties as to which any of
the Company Group is the designated operator, Manager will conduct physical
operation of the xxxxx, gathering lines, pipelines, plants, tanks and other
facilities comprising such Properties, including without limitation, the
following (collectively the "Operations Services"):
(i) Operating and maintaining all oil and gas well, gathering
systems, pipelines, plants, and associated equipment, personal
property, fixtures, and improvements;
(ii) Operating automated field systems and related computer
software and equipment, if any;
(iii) Preparing and submitting required regulatory filings with
Governmental Authorities;
(iv) Maintaining well files and records and providing the
necessary clerical and administrative assistance associated therewith;
(v) Maintaining production, drilling, work-over and well status
reports and records;
(vi) Arranging the Company's purchase of supplies, materials,
tools and equipment associated with operation of the Properties;
(vii) Subcontracting for services associated with ownership and
operation of the Properties; and
(viii) Negotiation, administration and review of contracts
associated with ownership and operation of the Properties.
(c) Land Administration Services. Manager shall provide all lease,
division order and other land administration services (collectively, "Land
Administration Services"), including, without limitation, the following:
(i) Administering and maintaining leases and agreements relating
to the Properties;
(ii) Maintaining and updating lease, ownership, contract and
property records and databases relating to the Properties;
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(iii) Maintaining and updating royalty payment and division order
reports and databases;
(iv) Generating, verifying, and processing internal and external
division orders and transfer orders required in the normal course of
business;
(v) Identifying, paying and invoicing rentals, rights of way,
shut-in payments and other payments required by the leases or other
agreements relating to the Properties;
(vi) Maintaining land, contract, division of interest, lease
files, and other files relating to the subject land administration
functions; and
(vii) Performing such other reasonable and customary land
administration services as Company deems necessary to administer or
maintain the leases or agreements relating to the Properties.
(d) Accounting Services. Manager shall provide financial, revenue, and
expense accounting services relating to the Properties (collectively,
"Accounting Services"), including, without limitation, the following:
(i) On or before forty-five (45) days after the end of every
calendar month, Manager shall prepare a settlement statement for each
member of Company Group indicating all cash, checks or other proceeds
received and expenses paid which relate to such Company Group member's
ownership or operation of Properties during the previous calendar
month. All remittances shall be deposited into, and all expenses shall
be paid from, the bank account of the respective Company Group member
to whom such remittances or expenses are attributable, as such bank
accounts may be designated by Company from time to time.
(ii) Manager shall perform revenue accounting functions relating
to the Properties including the disbursement of revenue proceeds to
working interest, third party, royalty and overriding royalty owners
as well as rental, severance or production taxes, right of way
payments, and leasehold, minimum or advance payments due in the normal
course of business;
(iii) Manager shall prepare and file on behalf of the Company
applicable reporting and filing requirements of Governmental
Authorities;
(iv) Manager shall perform expenditure accounting functions as
reasonably directed by Company relating to the Properties including
arranging the Company's payment of invoices and, where applicable,
subsequent billing of same to working interest owners;
(v) Manager shall provide to Company a monthly aged accounts
receivable report detailing uncollected joint interest xxxxxxxx issued
to Third Parties for operations conducted on the Properties;
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(vi) Manager shall prepare monthly gas balancing statements; and
(vii) Within forty-five (45) days after the end of each month,
Manager shall prepare a hedging report showing the Company's hedging
positions as of the last day of such month, and forecasting the
projected amount of production, by reserves category [proved developed
producing ("PDP") and non-proved developed producing ("non-PDP")],
that is hedged for the three year period following the date of such
report.
(e) Risk Management. Manager shall, at Company's cost and expense,
arrange for the benefit of Company Group insurance coverages with respect
to the Properties in accordance with the Company's risk management policies
as established from time to time or as required by the Company's
contractual obligations.
(f) Bonding. Manager shall, at Company's cost and expense, arrange for
the Company's production tax withholding, plugging and abandonment and
surface restoration bonds, letters of credit or other surety required under
applicable Law with respect to the Properties.
(g) Engineering. Manager will, at Company's cost and expense, provide,
or contract with a nationally recognized third party engineering firm to
provide, engineering support relating to the Properties, including, but not
limited to, reserve evaluations and production forecasting, monitoring of
allowables, monitoring of well profitability, preparation and review of,
and making of recommendations and elections with respect to, proposals for
drilling, completion, workovers, or other operations with respect to the
Properties, and recommendation of opportunities for enhancement of existing
Hydrocarbon production.
(h) Exploration; Acquisitions and Divestitures. Manager will make
recommendations to Company with respect to the exploration and development
of the Company's Properties and recommendations for Acquisitions and
Divestitures, including, without limitation, the following:
(i) Geological and Geophysical. Manager will provide services
relating to the acquisition, processing and interpretation of seismic
data (whether internally or externally), and evaluation of internally
and externally developed prospect proposals and review of logs,
isopach maps, and structure maps;
(ii) Prospect Generation. Manager will provide services relating
to the generation of internal and evaluation of outside proposals for
the exploration and development of the Properties;
(iii) Acquisitions. Manager will make recommendations to the
Company with respect to potential Acquisitions;
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(iv) Divestitures. Manager will make recommendations to the
Company relating to proposed Divestitures, including recommendations
with respect to Divestiture of underperforming or non-core Properties;
(i) Purchasing. Manager shall provide services for procurement of
equipment, supplies and other goods and services reasonably necessary for
the efficient day to day operation of the Business.
(j) Compliance. Manager shall provide services relating to regulatory
compliance, including, but not limited to, arranging the application for,
or maintenance of, and compliance with all required Permits with respect to
the Company's properties or the Business; preparation and filing of all
applications, reports, notices, and other regulatory filings or reports
required by any Governmental Authority; and participation in hearings and
other administrative proceedings on behalf of Company.
(k) Reporting to the Company. Manager shall prepare and submit to the
Company the following information and reports:
(i) Annual Budget: On or before February 15, 2004 with respect to
the Fiscal Year ending May 31, 2004, and within sixty (60) days prior
to the end of each subsequent Fiscal Year, Manager will prepare for
the consideration and adoption of the Board a proposed annual
operating, capital expenditure, maintenance and acquisition budget,
and shall from time to time propose such amendments thereof as the
Manager deems necessary and appropriate (the "Annual Budget"). Such
Annual Budget shall set forth on a monthly basis at a minimum the
estimated receipts and expenditures (capital, operating and other) of
the Company in sufficient detail to provide an estimate of income,
cash flow, capital proceeds and other financial requirements of the
Company for such year. Each Annual Budget shall also include such
other information or other matters reasonably necessary in order to
enable the Board to make an informed decision with respect to approval
of such Annual Budget.
(ii) Monthly Financial Statements: Within forty-five (45) days
after the end of each month, Manager will provide a balance sheet and
income statement for the current month and year-to-date setting forth
the actual results for the periods presented together with a
comparison to the respective amounts in the Annual Budget. Such
financial statements shall be prepared in accordance with GAAP other
than footnotes and subject to year-end audit adjustments, and shall
contain a narrative description of variances to the Annual Budget.
(iii) Monthly Operating Reports: Within forty-five (45) days
after the end of each month, Manager will provide an operating report
containing a summary of operations of the Properties.
(iv) Audited Financial Statements: Manager will cause to be
prepared and will furnish to Company within ninety (90) days after the
end of each Fiscal Year, an audited balance sheet, income statement,
statement of cashflows and a statement of
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changes in members' equity in the Company, all prepared in accordance
with GAAP, together with an audit opinion from a big four nationally
recognized accounting firm that, to the extent reasonably within the
Manager's control, is unqualified.
(v) Tax Estimate Report: Manager will use commercially reasonable
efforts to cause the Company's auditor to furnish within thirty (30)
days after the end of each Fiscal Year an estimate of taxable income
for the Company and the amounts allocable to each member of Company
for the Fiscal Year.
(vi) Forecasted Distributions: Within forty-five (45) days after
the end of each quarter, Manager will furnish a forecast of the
Company's Net Cash Flow, as defined in the Amended and Restated LLC
Agreement of the Company, for the remainder of the Fiscal Year.
(vii) Income Tax Returns: The Manager shall cause to be prepared
Federal and required state income tax returns to be filed by the
Company within one hundred twenty (120) days after the end of a Fiscal
Year. Contemporaneously with filing by the Company, Manager shall
distribute copies of such returns and Schedule K-1 (or similar state
schedule) to the Company's members.
(viii) Other reports: The Manager shall provide the Board with
copies of (i) all material reports delivered to the Company and (ii)
all material information related to any pending or, to the knowledge
of Manager, threatened Proceedings, insurance or required permits,
together with such other reports and information relating to the
Business or the Services as the Company may reasonably request, to the
extent such information is in the possession of Manager or can be
readily obtained by Manager without undue effort or unreimbursed
expense.
(ix) Meetings. At each meeting of the Board, Manager will provide
information relevant to (a) any Material Decision, together with
Manager's recommendation with respect thereto and reasons therefor,
and a summary of actions taken pursuant to Material Decisions since
the preceding meeting of the Board, (b) any material Proceedings which
are pending or, to the knowledge of Manager, threatened against the
Company or in connection with the Properties or the Business, and (c)
any other material developments with respect to the Properties or the
Business.
(l) Maintenance of Books and Records. Manager shall maintain the books
and records of the Company Group. Manager agrees to retain all such books
and records for the time periods specified in the commercially reasonable
records retention policies that may from time to time be adopted by the
Company. If Manager desires to destroy any such records prior to the
expiration of the time periods established in the Company's records
retention policy (or in the absence of a Company records retention policy),
then Manager shall notify the Company and obtain the Company's prior
approval prior to destroying any such records.
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(m) Other. Manager will perform such other functions not heretofore
enumerated in this Article II which were performed by Manager or its
Affiliates prior to the date hereof with respect to Properties owned by the
Company Group as of the date hereof.
Article III. MATTERS RESERVED TO COMPANY
Section 3.01 Execution of Contracts. Manager is an independent contractor
of Company. Manager may enter into subcontracts with service providers in
connection with the performance of its obligations hereunder, but Manager is not
authorized hereunder to execute contracts, assignments, certificates,
applications, authorizations, regulatory filings, or any other documents or
instruments in the Company Group's name. Company Group retains all
responsibility and authority for execution of any such instruments to which the
Company Group shall be a party. However, nothing herein shall preclude Company,
at its discretion, from appointing from time to time Manager as its agent or
attorney-in-fact for the purpose of executing and delivering instruments in
connection with the consummation of transactions relating to the Properties
which may be authorized hereunder or approved by the Company.
Article IV. STANDARD OF CARE
Section 4.01 Standard of Care. Manager shall perform the Services as a
reasonable prudent operator, in a good and workmanlike manner, with due
diligence and dispatch, in accordance with good oilfield practice, and in
compliance with applicable laws, regulations, contracts, leases, orders,
security instruments, and other agreements to which Company Group is a party or
by which Company Group or any of its Properties are bound; but in no event shall
it have any liability as Manager to Company Group for losses sustained or
liabilities incurred except such as may result from gross negligence or willful
misconduct; provided, however, that Manager shall have no liability for
omissions of Manager resulting from the Company's failure to approve or fund
actions recommended by the Manager.
Section 4.02 Procurement of Goods and Services. To the extent that Manager
arranges contracts with Third Parties for goods and services in connection with
the operation of the Properties, Manager shall use commercially reasonable
efforts (i) to obtain such goods and services at rates competitive with those
otherwise generally available in the area in which services or materials are to
be furnished; and (ii) to obtain from such Third Parties the best available
warranties and guarantees with respect to the goods and services so furnished.
Section 4.03 Protection from Liens. Manager agrees to timely pay all of its
subcontractors, materialmen, laborers, and vendors for labor, materials, and
supplies furnished by Manager in connection with the operation of the Properties
hereunder, and to allow no lien, encumbrance or charge arising from the
provision of
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services or material to become fixed upon any of the Properties other than liens
being contested in good faith by appropriate proceedings.
Section 4.04 Commingling of Assets. Manager shall separately maintain and
not commingle the assets of Company with those of Manager.
Section 4.05 Insurance. Manager shall obtain and maintain, from insurers
who are reliable and acceptable to the Company and authorized to do business in
the state or states or jurisdictions in which Services are to be performed by
Manager, insurance coverages in the types and minimum limits set forth on
Exhibit "A". Manager agrees to provide the Company with certificates of
insurance evidencing such insurance coverage and, upon request of Company, shall
furnish copies of such policies. Except with respect to workers' compensation
coverage, the policies shall name the Company Group as additional insureds and
shall contain waivers by the insurers of any and all rights of subrogation to
pursue any claims or causes of action against the Company Group. The policies
shall provide that they will not be cancelled or reduced without giving the
Company at least ten (10) days' prior written notice of such cancellation or
reduction.
Section 4.06 Intellectual Property Rights. If Manager uses intellectual
property owned by Third Party's in the performance of the Services, Manager
shall obtain and maintain any such licenses and authorizations necessary to
authorize its use of such intellectual property, and shall indemnify, defend and
hold Company Group harmless from any liability from Manager's infringement upon,
unauthorized use or misappropriation of, any intellectual property owned by or
belonging to any other person.
Article V. MANAGER'S COMPENSATION
Section 5.01 Manager's Fee. On the 1st day of each calendar month during
the term hereof, Company shall pay Manager the sum of $292,000 as a monthly fee
for Services rendered hereunder ("Manager's Fee"). Manager's Fee for any partial
month shall be prorated based on the number of days of Services rendered by
Manager during such month, with payment of Manager's Fee for services rendered
from the date hereof through December 31, 2003 to be due and payable on January
1, 2004. In the event the 1st day of the month is a day other than a Business
Day, payment shall be due on the next Business Day. Manager's Fee is intended to
reimburse Manager for all of its general and administrative costs and expenses
incurred in connection with the performance of the Services, including, without
limitation, the cost and expense of salaries, wages, and benefits paid to
Manager's employees (excluding field employees and First Level Supervisors, as
defined in Exhibit B attached hereto), office space, office equipment, office
services, office communications equipment, office computer equipment, vehicles
(excluding field vehicles), and Manager's liability insurance required pursuant
to Exhibit A (collectively, "G&A Costs"). In the event the Manager's Fee does
not
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reasonably reimburse Manager's G&A Costs, Manager may request an increase in the
Manager's Fee, such request to be accompanied by (i) reasonable documentation of
Manager's actual G&A Costs, and (ii) an explanation of the reasons for such
increased costs; provided, however, that the Manager's Fee shall not be adjusted
prior to the end of the Fiscal Year ending in 2007 except with the Board's
approval in connection with a material Acquisition approved by the Board, and
further provided that any increase shall be subject to approval by the Company's
creditors, if required under the Company's credit agreements.
Section 5.02 Other Expenditures. Except for Manager's G&A Costs (which,
subject to the Company's payment of Manager's Fee, shall be borne by Manager),
and except for matters for which the Company is entitled to indemnification from
Manager pursuant to Article VI herein, all other costs and expenses incurred by
Manager in performing Services hereunder shall be charged to the Company,
without xxxx-up or profit to Manager, including, without limitation, expenses
incurred in the exploration, development and operation of the Properties and
other costs and expenses which constitute "direct charges" as provided in
Exhibit B attached hereto; provided, however, that Manager shall not charge as a
third-party expense the cost of performing general and administrative functions
of the types contemplated in Section 5.01 with respect to the Properties owned
as of the date hereof that were customarily performed in-house by Manager prior
to the date hereof and outsourced after the date hereof.
Section 5.03 Cash Advances. On or before the 15th day of each month,
Manager shall submit a statement to Company specifying the expenditures
estimated to be made by Manager in the following month with respect to the
performance of Services authorized by Company. Manager shall xxxx Company for
the amount of such estimated expenses and Company shall advance such amount to
Manager on or before the first day of the month for which such advance is
required. In the event actual expenditures are less than the amount advanced by
the Company, Manager shall apply any excess advance to the following month's
estimated expenditures, unless requested by the Company to return the amount of
such excess.
Article VI. INDEMNIFICATION
Section 6.01 Indemnification by Manager. Manager hereby agrees to defend,
indemnify and hold harmless each member of Company Group and their respective
officers, managers, members, employees, agents and Affiliates (collectively, the
"Company Indemnitees") from any and all threatened or actual claims, demands,
causes of action, suits, proceedings, losses, damages, fines, penalties,
liabilities, costs and expenses of any nature, including attorneys' fees and
court costs (collectively, "Liabilities") sustained or incurred by or asserted
against the Company Indemnitees arising from Manager's gross negligence or
willful misconduct in the performance of the Services.
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Section 6.02 Indemnification by Company. Except for matters as to which
Manager is obligated to indemnify Company Group pursuant to Section 6.01 above,
Company hereby agrees to defend, indemnify and hold harmless Manager and its
officers, directors and employees (collectively, the "Manager Indemnitees") from
any and all Liabilities sustained or incurred or asserted against the Manager
Indemnitees in connection with the performance of the Services.
Section 6.03 Negligence; Strict Liability. THE INDEMNITY OBLIGATIONS HEREIN
SHALL APPLY REGARDLESS OF CAUSE OR OF ANY NEGLIGENT ACTS OR OMISSIONS (INCLUDING
SOLE NEGLIGENCE, CONCURRENT NEGLIGENCE OR STRICT LIABILITY), BREACH OF DUTY
(STATUTORY OR OTHERWISE), VIOLATION OF LAW, OR OTHER FAULT OF ANY INDEMNITEE, OR
ANY PRE-EXISTING DEFECT; PROVIDED, HOWEVER, THAT MANAGER INDEMNITEES SHALL NOT
BE ENTITLED TO INDEMNIFICATION IN RESPECT OF LIABILITIES ARISING FROM THE
MANAGER INDEMNITEES' GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
Section 6.04 Survival. The provisions of this Article VI shall survive the
termination of this Agreement.
Article VII. CONFIDENTIALITY
Section 7.01 Confidentiality. Manager shall maintain the confidentiality of
all Non-Public Information with respect to Company Group, the Business and/or
the Properties; provided, however, that Manager may disclose such Non-Public
Information (i) in any judicial or alternative dispute resolution proceeding to
resolve disputes between Company and Manager arising hereunder; (ii) to the
extent disclosure is legally required under applicable Laws (including, without
limitation, applicable securities and tax laws) or any agreement to which any
member of Company Group is a party or by which it is bound, provided, however,
that prior to making any legally required disclosures in any judicial,
regulatory or dispute resolution proceeding, Manager shall, if so advised by
counsel, seek a protective order or other relief to prevent or reduce the scope
of such disclosure; and (iii) to Company's existing or potential lenders,
investors, joint interest owners, purchasers, or other parties with whom Company
may enter into contractual relationships, to the extent deemed by Manager to be
reasonably necessary or desirable to enable it to perform the Services, provided
that Manager shall require such Third Parties to execute agreements to maintain
the confidentiality of the Non-Public Information so disclosed; and (iv) if
authorized by the Board. Manager acknowledges that the Non-Public Information is
being furnished to Manager for the sole and exclusive purpose of enabling it to
perform the Services, and the Non-Public Information may not be used by it for
any other purpose. The provisions of this Section shall survive the termination
of this Agreement.
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Article VIII. TERM AND TERMINATION
Section 8.01 Term. This Agreement shall remain in force and effect until
terminated (a) by mutual agreement of the parties; or (b) by Company upon the
occurrence of any of the following: (i) Manager's gross negligence or willful
misconduct in the performance of the Services; (ii) Manager's material breach of
this Agreement, if such breach is not remedied within sixty (60) days after
Manager's receipt of Company's written notice thereof, or such longer period as
is reasonably required to cure such breach, provided that Manager commences to
cure such breach within such sixty (60) day period and proceeds with due
diligence to cure such breach; (iii) the conviction of Manager or any chairman,
vice-chairman, president, chief executive officer, chief operating officer,
chief financial officer, senior vice president or other senior officer of
Manager of any felony (other than vehicular offenses); (iv) Manager's
undertaking of material activities with respect to the Property that are not
authorized by the Company or Manager's disregard of the Board's lawful
instructions; (v) a Change in Control of Manager or Manager's parent entity; or
(vi) the sale of all or substantially all of the Properties, either in a single
transaction or series of transactions, or a winding-up of the Business.
Section 8.02 Post-Termination Transition. Upon termination of this
Agreement, Manager will:
(a) provide to the Company all original files and records in Manager's
possession or under Manager's control relating to the Properties or the
Services rendered by Manager hereunder, excluding, however, employee
records;
(b) to the extent assignable, assign to Company or its designee all
permits and licenses held by Manager that are necessary or desirable for
the operation of the Properties in the manner in which they were operated
upon termination of this Agreement;
(c) cooperate with the Company's transfer of the operations of the
Properties and execute such instruments and take such further action as the
Company may reasonably request to transfer operations; and
(d) at the Company's request, provide transition services for up to 60
days after termination of this Agreement in order to facilitate the
transfer of operations of the Properties to a new operator designated by
the Company; provided that during such transition period, Company shall
continue to pay Manager the Manager's Fee, prorated to the number of days
of transition services provided by Manager and continue to reimburse
Manager, as provided in Section 5.02, for costs and expenses incurred by
Manager in connection with transition services.
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Article IX. AUDIT RIGHTS AND DISPUTE RESOLUTION
Section 9.01 Audit Rights. At any time during the term of this Agreement,
during Manager's normal business hours, Company shall have the right to review
and, at Company's expense, to copy the books and records maintained by Manager
relating to the Properties. In addition, to the extent necessary to verify the
performance by Manager of its obligations under this Agreement, the Company
shall have the right, at Company's expense, exercisable no more than once in any
twelve-month period, to audit, examine and make copies of or extracts from the
books and records of Manager (the "Audit Right"). Company may exercise the Audit
Right through such auditors as the Board may determine in its sole discretion.
Company shall (i) exercise the Audit Right only upon reasonable notice to
Manager and (ii) use reasonable efforts to conduct the Audit Right in such a
manner as to minimize the inconvenience and disruption to Manager.
Section 9.02 Dispute Resolution. The Parties shall use the dispute
resolution procedures set forth in Exhibit C to the Amended and Restated LLC
Agreement to resolve in good faith any dispute, controversy or claim related to
this Agreement, including any dispute over the payment of indemnification
pursuant to the provisions of Article VI.
Article X. MISCELLANEOUS PROVISIONS
Section 10.01 Notices. All notices or advices required or permitted to be
given by or pursuant to this Agreement, shall be given in writing. All such
notices and advices shall be (i) delivered personally, (ii) delivered by
facsimile or delivered by U.S. Registered or Certified Mail, Return Receipt
Requested mail, or (iii) delivered for overnight delivery by a nationally
recognized overnight courier service. Such notices and advices shall be deemed
to have been given (i) on the date of delivery if delivered personally or by
facsimile, (ii) on the third Business Day following the date of mailing if
mailed by U.S. Registered or Certified Mail, Return Receipt Requested, or (iii)
on the date of receipt if delivered for overnight delivery by a nationally
recognized overnight courier service. All such notices and advices and all other
communications related to this Agreement shall be given as follows:
If to Company:
Quest Cherokee, LLC
0000 X. Xxxxxxx, Xxxxx 000
Xxxxxxxx Xxxx, XX 00000
Attn: President/CEO
Telephone: (000) 000-0000
Fax: (000) 000-0000
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With a copy to:
Cherokee Energy Partners LLC
000 Xxxxxxxxx Xxxxxx, 00xx Xxxxx
Xxxxxx, XX 00000
Attn: General Counsel
Telephone: (000) 000-0000
Fax: (000) 000-0000
If to Manager:
Quest Energy Service, Inc.
0000 X. Xxxxxxx, Xxxxx 000
Xxxxxxxx Xxxx, XX 00000
Attn: Xxxxx X. Xxxx
Telephone: (000) 000-0000
Fax: (000) 000-0000
or to such other address as the party may have furnished to the other parties in
accordance herewith, except that notice of change of addresses shall be
effective only upon receipt.
Section 10.02 Waiver of Consequential Damages. NEITHER PARTY NOR ITS
AFFILIATES SHALL, IN ANY EVENT, BE LIABLE TO ANY OTHER PARTY OR ANY OF ITS
RESPECTIVE AFFILIATES FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OF SUCH
OTHER PARTY, INCLUDING, BUT NOT LIMITED TO, LOSS OF REVENUE, COST OF CAPITAL,
LOSS OF BUSINESS REPUTATION OR OPPORTUNITY WHETHER SUCH LIABILITY ARISES OUT OF
CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR OTHERWISE.
Section 10.03 Governing Law. This Agreement shall be subject to, and
interpreted by and in accordance with, the laws (excluding conflict of law
provisions) of the State of Kansas.
Section 10.04 Attorneys' Fees and Expenses. In any action brought by a
party hereto to enforce the obligations of any other party hereto, the
prevailing party shall be entitled to collect from the opposing party to such
action such party's reasonable litigation costs and attorneys fees and expenses
(including court costs, reasonable fees of accountants and experts, and other
expenses incidental to the litigation).
Section 10.05 Entire Agreement. This Agreement is the entire Agreement of
the parties respecting the subject matter hereof. There are no other agreements,
representations or warranties, whether oral or written, respecting the subject
matter hereof.
15
Section 10.06 Construction. This Agreement, and all the provisions of this
Agreement, shall be deemed drafted by all of the Parties hereto, and shall not
be construed against either Party on the basis of that Party's role in drafting
this Agreement.
Section 10.07 Further Assurances. In connection with this Agreement, each
Party shall execute and deliver any additional documents and instruments and
perform any additional acts that may be necessary or appropriate to effectuate
and perform the provisions of this Agreement.
Section 10.08 Successors and Assigns. This Agreement may not be assigned by
either Party hereto without the prior written consent of the other Party. This
Agreement shall be binding upon and shall inure to the benefit of the Parties
and their respective successors and permitted assigns.
Section 10.09 No Third Party Beneficiaries. Nothing in this Agreement
(except as provided in Article VI) shall provide any benefit to any Third Party
or entitle any Third Party to any claim, cause of action, remedy or right of any
kind, it being the intent of the Parties that this Agreement shall not be
construed as a Third Party beneficiary contract.
Section 10.10 Relationship of the Parties. Nothing in this Agreement shall
be construed to create a partnership or joint venture, nor to authorize either
Party to act as agent for or representative of the other Party. Each Party shall
be deemed an independent contractor and neither Party shall act as, or hold
itself out as acting as, agent for any other Party.
Section 10.11 No Waiver. A Party to this Agreement may decide not to
require, or fail to require, full or timely performance of any obligation
arising under this Agreement. The decision not to require, or failure of a Party
to require, full or timely performance of any obligation arising under this
Agreement (whether on a single occasion or on multiple occasions) shall not be
deemed a waiver of any such obligation. No such decisions or failures shall give
rise to any claim of estoppel, laches, course of dealing, amendment of this
Agreement by course of dealing, or other defense of any nature to any obligation
arising hereunder.
Section 10.12 Amendments. This Agreement may be amended or modified only in
a writing signed by both Parties which specifically references this Agreement.
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Section 10.13 Unenforceability. In the event any provision of this
Agreement, or the application of such provision to any person or set of
circumstances, shall be determined to be invalid, unlawful, or unenforceable to
any extent for any reason, the remainder of this Agreement, and the application
of such provision to Persons or circumstances other than those as to which it is
determined to be invalid, unlawful, or unenforceable, shall not be affected and
shall continue to be enforceable to the fullest extent permitted by law.
Section 10.14 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which
together shall constitute but a single agreement.
17
EXECUTED this 22nd day of December, 2003.
"MANAGER"
QUEST ENERGY SERVICE, INC.
By: /s/ Xxxxx Xxxx
---------------------------
Xxxxx X. Xxxx
Co-Chief Executive Officer
"COMPANY"
QUEST CHEROKEE, LLC
By: /s/ Xxxxx Xxxx
---------------------------
Xxxxx X. Xxxx
Manager
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EXHIBIT "A"
INSURANCE TO BE MAINTAINED BY MANAGER
1. Worker's Compensation Insurance, written to cover the employees of MANAGER
in compliance with the state having jurisdiction over each employee, with
the following endorsements and limits:
Endorsements Limits
------------ ------
Basic Workers' Compensation Policy Statutory Limits (or,
if no such statutory
limits, the combined
single limit per
occurrence of $1,000,000)
Employers' Liability Combined Single Limit per
occurrence of $1,000,000
2. Commercial General Liability Insurance, written to include the following
endorsements and limits:
Endorsements Limits
------------ ------
Personal Injury Combined Single Limit per
Bodily Injury occurrence of $1,000,000
Products & Completed Operations
Broad Form Contractual
Liability
Broad Form Property Damage
Premises
Independent Contractors
3. Comprehensive Automobile Liability Insurance, written to include the
following endorsements and limits:
Endorsements Limits
------------ ------
Owned Vehicles Combined Single Limit per
Non-owned Vehicles occurrence of $1,000,000
Hired Vehicles
Form MCS-90 (if applicable)
(Endorsed on)
4. If Watercraft are provided by MANAGER and used by MANAGER in MANAGER's
operations:
A. Protection and Indemnity Insurance written to include the following
endorsements and limits (or, in the alternative, deletion of the
watercraft exclusion from the Comprehensive General Liability Policy):
Endorsements Limits
------------ ------
Chartered Vessel Combined Single Limit per
Members of Crew occurrence of $5,000,000
Marine Contractual
Tower's Liability
In Rem
Collision Liability
Removal of "other than owner" clause
regarding Limitation of Liability
Removal of any clause limiting coverage to
"as owner of the vessel"
X. Xxxx and Machinery Insurance written to include the following
endorsements and limits:
Endorsements Limits
------------ ------
Collision Liability Value of Vessel or $1,000,000
Removal of "other than owner" whichever greater
clause regarding Limitation of
Liability
5. If Aircraft, including helicopters, are provided by MANAGER and/or used by
MANAGER in MANAGER's operation, Aircraft Liability, Passenger Liability,
and Property Damage Liability Insurance, written to include the following
endorsements and limits:
Endorsements Limits
------------ ------
Owned Aircraft Combined Single Limit
Non-owned Aircraft per occurrence of
Hired Aircraft $10,000,000
6. Excess Umbrella Insurance
MANAGER shall provide commercial general liability insurance ("Umbrella
Policy") with limits not less than $5,000,000.
EXHIBIT B
to
Operating and Management Agreement
Direct Charges
1. Ecological and Environmental
Costs incurred for the benefit of the Properties as a result of
requirements of Governmental Authorities to satisfy environmental
considerations applicable to the Properties. Such costs may include
surveys of an ecological or archaeological nature and pollution control
procedures as required by applicable Laws.
2. Rentals and Royalties
Lease rentals and royalties paid by Manager for the Properties.
3. Labor
(a) Salaries and wages of Manager's field employees and employees whose
primary function is the direct supervision of other employees and/or
contract labor directly employed in the performance of the Services
in a field operating capacity ("First Level Supervisors") directly
employed on the Properties.
(b) Manager's cost of holiday, vacation, sickness and disability benefits
and other customary allowances paid to employees whose salaries and
wages are chargeable to the Company under Paragraph 3(a). Such costs
under this Paragraph 3(b) may be charged on a "when and as paid
basis" or by "percentage assessment" on the amount of salaries and
wages chargeable to the Company under Paragraph 3(a). If percentage
assessment is used, the rate shall be based on the Manager's cost
experience.
(c) Expenditures or contributions made pursuant to assessments imposed by
governmental authority which are applicable to Manager's costs
chargeable to the Company under Paragraphs 3(a) and 3(b).
(d) Travel and other reimburseable expenses of those employees whose
salaries and wages are chargeable to the Company under Paragraph
3(a).
4. Employee Benefits
Manager's current costs of established plans for employees' group life
insurance, hospitalization, pension, retirement, stock purchase, thrift,
bonus, and other benefit plans of a like nature, applicable to Manager's
labor cost chargeable to the Company under Paragraphs 3(a) and 3(b) shall
be Manager's actual cost not to exceed the percent most recently
recommended by the Council of Petroleum Accountants Societies.
5. Material
Material purchased or furnished by Manager for use on the Properties. Only
such material shall be purchased for or transferred to the Properties as
may be required for immediate use and as is reasonably practical and
consistent with efficient and economical operations. The accumulation of
surplus stocks shall be avoided.
6. Transportation
Transportation of employees and material necessary for operations on the
Properties.
7. Services
The cost of contract services, equipment and utilities provided by outside
sources.
8. Equipment and Facilities Furnished by Manager
(a) Manager shall charge the Company for use of Manager-owned field
equipment and facilities at rates commensurate with costs of
ownership and operation. Such rates shall include costs of
maintenance, repairs, other operating expense, insurance, taxes,
depreciation, and interest on gross investment less accumulated
depreciation not to exceed eight percent (8%) per annum. Such rates
shall not exceed average commercial rates currently prevailing in the
immediate area of the Properties.
(b) In lieu of charges in Paragraph 8(a) above, Manager may elect to use
average commercial rates prevailing in the immediate area of the
Properties less 20%. For automotive equipment, Manager may elect to
use rates published by the Petroleum Motor Transport Association.
9. Damages and Losses to Joint Property
All costs or expenses necessary for the repair or replacement of
Properties made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident, or other cause, except those resulting from
Manager's gross negligence or willful misconduct. Manager shall furnish
Company written notice of damages or losses incurred as soon as
practicable after a report thereto has been received by Manager.
10. Legal Expense
Expense of handling, investigating and settling litigation or claims,
discharging of liens, payment of judgments and amounts paid for settlement
of claims incurred in or resulting from operations under the agreement or
necessary to protect or recover the Properties, except that no charge for
service of Manager's legal staff or fees or expense of outside attorneys
shall be made unless previously agreed to by the Company. All other legal
expense is considered to be covered by Manager's G&A Costs.
11. Taxes
Taxes of every kind and nature assessed or levied upon or in connection
with the Properties, the operation thereof, or the production therefrom.
12. Insurance
Premiums paid for insurance obtained for the benefit of the Company or the
Properties.
13. Abandonment and Reclamation
Costs incurred for abandonment of the Properties, including costs required
by Governmental Authorities.
14. Communication
Cost of acquiring, leasing, installing, operating, repairing and
maintaining communication systems, including radio and microwave
facilities directly serving the Properties.
15. Other Costs and Expenses
Any other expenditure not covered above which is of direct benefit to the
Properties and is incurred by Manager in the necessary and proper conduct
of operations of the Properties, excluding Manager's G&A Costs.
