APPENDIX A FORM OF LIMITED PARTNERSHIP AGREEMENT OF ROCKIES REGION 2007 LIMITED PARTNERSHIP
Exhibit
3.0
APPENDIX
A
FORM
OF
OF
ROCKIES
REGION 2007 LIMITED PARTNERSHIP
TABLE
OF CONTENTS
Page
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ARTICLE
I: The Partnership
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1
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1.01
Organization
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1
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1.02
Partnership Name
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1
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1.03
Character of Business
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1
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1.04
Principal Place of Business
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1
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1.05
Term of Partnership
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1
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1.06
Filings
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1
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1.07
Independent Activities
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2
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1.08
Definitions
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2
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ARTICLE
II: Capitalization
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9
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2.01
Capital Contributions of the Managing General Partner and Initial Limited
Partner
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9
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2.02
Capital Contributions of the Investor Partners
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10
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2.03
Additional Contributions
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11
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ARTICLE
III: Capital Accounts and Allocations
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11
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3.01
Capital Accounts
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11
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3.02
Allocation of Profits and Losses
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12
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3.03
Depletion
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17
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3.04
Apportionment Among Partners
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17
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ARTICLE
IV: Distributions
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18
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4.01
Time of Distribution
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18
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4.02
Distributions
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18
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4.03
Capital Account Deficits
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18
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4.04
Liability Upon Receipt of Distributions
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18
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ARTICLE
V: Activities
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19
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5.01
Management
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19
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5.02
Conduct of Operations
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19
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5.03
Acquisition and Sale of Leases
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21
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5.04
Title to Leases
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21
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5.05
Farmouts
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21
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5.06
Release, Abandonment, and Sale or Exchange of Properties
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22
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5.07
Certain Transactions
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22
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ARTICLE
VI: Managing General Partner
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25
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6.01
Managing General Partner
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25
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6.02
Authority of Managing General Partner
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26
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6.03
Certain Restrictions on Managing General Partner's Power and
Authority
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27
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6.04
Indemnification of Managing General Partner
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28
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6.05
Withdrawal
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29
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6.06
Management Fee
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29
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6.07
Tax Matters and Financial Reporting Partner
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29
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ARTICLE
VII: Investor Partners
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30
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7.01
Management
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30
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7.02
Indemnification of Additional General Partners
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30
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7.03
Assignment of Units
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31
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7.04
Prohibited Transfers
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32
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7.05
Withdrawal by Investor Partners
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32
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7.06
Removal of Managing General Partner
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32
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7.07
Calling of Meetings
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33
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7.08
Additional Voting Rights
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33
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7.09
Voting by Proxy
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34
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7.10
Conversion of Additional General Partner Interests into Limited Partner
Interests
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34
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7.11
Liability of Partners
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35
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ARTICLE
VIII: Books and Records
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35
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8.01
Books and Records
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35
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8.02
Reports
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36
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8.03
Bank Accounts
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38
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8.04
Federal Income Tax Elections
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38
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ARTICLE
IX: Dissolution; Winding-up
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38
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9.01
Dissolution
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38
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9.02
Liquidation
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39
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9.03
Winding-up
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39
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ARTICLE
X: Power of Attorney
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40
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10.01
Managing General Partner as Attorney-in-Fact
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40
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10.02
Nature of Special Power
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40
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ARTICLE
XI: Miscellaneous Provisions
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41
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11.01
Liability of Parties
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41
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11.02
Notices
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41
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11.03
Paragraph Headings
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41
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11.04
Severability
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41
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11.05
Sole Agreement
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41
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11.06
Applicable Law
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42
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11.07
Execution in Counterparts
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42
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11.08
Waiver of Action for Partition
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42
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11.09
Amendments
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42
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11.10
Consent to Allocations and Distributions
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42
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11.11
Ratification
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42
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11.12
Substitution of Signature Pages
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43
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11.13
Incorporation by Reference
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43
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Signature
Page
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57
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FORM
OF
OF
ROCKIES
REGION 2007 LIMITED PARTNERSHIP,
A WEST
VIRGINIA LIMITED PARTNERSHIP
This
LIMITED PARTNERSHIP AGREEMENT (the "Agreement") is made as of this ___ day of
____________, 2007 by and among Petroleum Development Corporation, a Nevada
corporation, as managing general partner (the "Managing General Partner"),
Xxxxxx X. Xxxxxxxx, a resident of West Virginia, as the Initial Limited Partner,
and the Persons whose names are set forth on Exhibit A attached hereto, as
additional general partners (the "Additional General Partners") or as limited
partners (the "Limited Partners" and, collectively with Additional General
Partners, the "Investor Partners"), pursuant to the provisions of the West
Virginia Uniform Limited Partnership Act (the "Act"), on the following terms and
conditions:
ARTICLE
I
The
Partnership
1.01 Organization. Subject
to the provisions of this Agreement, the parties hereto do hereby form a limited
partnership (the "Partnership") pursuant to the provisions of the Act. The
Partners hereby agree to continue the Partnership as a limited partnership
pursuant to the provisions of the Act and upon the terms and conditions set
forth in this Agreement.
1.02 Partnership Name. The
name of the Partnership shall be Rockies Region 2007 Limited Partnership, a West
Virginia limited partnership, and all business of the Partnership shall be
conducted in such name. The Managing General Partner may change the name of the
Partnership upon ten days notice to the Investor Partners. The Partnership shall
hold all of its property in the name of the Partnership and not in the name of
any Partner.
1.03 Character of
Business. The principal business of the Partnership shall be to acquire
Leases, drill sites, and other interests in oil and/or gas properties and to
drill for oil, gas, hydrocarbons, and other minerals located in, on, or under
such properties, to produce and sell oil, gas, hydrocarbons, and other minerals
from such properties, and to invest and generally engage in any and all phases
of the oil and gas business. Such business purpose shall include without
limitation the purchase, sale, acquisition, disposition, exploration,
development, operation, and production of oil and gas properties of any
character. The Partnership shall not acquire property in exchange for Units.
Without limiting the foregoing, Partnership activities may be undertaken as
principal, agent, general partner, syndicate member, joint venturer,
participant, or otherwise.
1.04 Principal Place of
Business. The principal place of business of the Partnership shall be at
000 Xxxx Xxxx Xxxxxx, Xxxxxxxxxx, Xxxx Xxxxxxxx, 00000. The Managing General
Partner may change the principal place of business of the Partnership to any
other place within the State of West Virginia upon ten days notice to the
Investor Partners.
1.05 Term of Partnership.
The Partnership shall commence on the date the Partnership is organized, as set
forth in Section 1.01, and shall continue until terminated as provided in
Article IX hereof. Notwithstanding the foregoing, if Investor Partners agreeing
to purchase $11,000,000 in Units have not subscribed and paid for their Units by
the Offering Termination Date, then this Agreement shall be void in all
respects, and all investments of the Investor Partners shall be promptly
returned together with any interest earned thereon and without any deduction
therefrom. The Managing General Partner and its Affiliates may purchase up to
10% (and no more) of the Units subscribed for by Investor Partners in the
Partnership; however, not more than $50,000 of the Units purchased by the
Managing General Partner and/or its Affiliates will be applied to satisfying the
minimum.
1.06 Filings.
A-1
(a)
A Certificate of Limited Partnership (the "Certificate") has been filed in the
office of the Secretary of State of West Virginia in accordance with the
provisions of the Act. The Managing General Partner shall take any and all other
actions reasonably necessary to perfect and maintain the status of the
Partnership as a limited partnership under the laws of West Virginia. The
Managing General Partner shall cause amendments to the Certificate to be filed
whenever required by the Act.
(b)
The Managing General Partner shall execute and cause to be filed original or
amended Certificates and shall take any and all other actions as may be
reasonably necessary to perfect and maintain the status of the Partnership as a
limited partnership or similar type of entity under the laws of any other states
or jurisdictions in which the Partnership engages in business.
(c)
The agent for service of process on the Partnership shall be Xxxxxx X. Xxxxxxxx
or any successor as appointed by the Managing General Partner.
(d)
Upon the dissolution of the Partnership, the Managing General Partner (or any
successor managing general partner) shall promptly execute and cause to be filed
certificates of dissolution in accordance with the Act and the laws of any other
states or jurisdictions in which the Partnership has filed
certificates.
1.07 Independent
Activities. Each General Partner and each Limited Partner may,
notwithstanding this Agreement, engage in whatever activities they choose,
whether the same are competitive with the Partnership or otherwise, without
having or incurring any obligation to offer any interest in such activities to
the Partnership or any Partner. However, except as otherwise provided herein,
the Managing General Partner and any of its Affiliates may pursue business
opportunities that are consistent with the Partnership's investment objectives
for their own account only after they have determined that such opportunity
either cannot be pursued by the Partnership because of insufficient funds or
because it is not appropriate for the Partnership under the existing
circumstances. Neither this Agreement nor any activity undertaken pursuant
hereto shall prevent the Managing General Partner from engaging in such
activities, or require the Managing General Partner to permit the Partnership or
any Partner to participate in any such activities, and as a material part of the
consideration for the execution of this Agreement by the Managing General
Partner and the admission of each Investor Partner, each Investor Partner hereby
waives, relinquishes, and renounces any such right or claim of participation.
Notwithstanding the foregoing, the Managing General Partner still has an
overriding fiduciary obligation to the Investor Partners.
1.08 Definitions.
Capitalized words and phrases used in this Agreement shall have the following
meanings:
(a)
"Act" shall mean the Uniform Limited Partnership Act of the State of West
Virginia, as set forth in §§ 47-9-1 through 47-9-63 thereof, as amended from
time to time (or any corresponding provisions of succeeding law).
(b)
"Additional General Partner" shall mean an Investor Partner who purchases Units
as an additional general partner, and such partner's transferees and assigns.
"Additional General Partners" shall mean all such Investor Partners. "Additional
General Partner" shall not include, after a conversion, such Investor Partner
who converts his interest into a Limited Partnership interest pursuant to
Section 7.10 herein.
(c)
"Administrative Costs" shall mean all customary and routine expenses incurred by
the Managing General Partner for the conduct of partnership administration,
including legal, finance, accounting, secretarial, travel, office rent,
telephone, data processing and other items of a similar nature.
(d)
"Affiliate" of a specified person shall mean (a) any person directly or
indirectly owning, controlling, or holding with power to vote 10 percent or more
of the outstanding voting securities of such specified person; (b) any person 10
percent or more of whose outstanding voting securities are directly or
indirectly owned, controlled, or held with power to vote, by such specified
person; (c) any person directly or indirectly controlling, controlled by, or
under common control with such specified person; (d) any officer, director,
trustee or partner of such specified person, and (e) if such specified person is
an officer, director, trustee or partner, any person for which such person acts
in any such capacity.
A-2
(e)
"Agreement" or "Partnership Agreement" shall mean this Limited
Partnership Agreement, as amended from time to time.
(f)
"Capital Account" shall mean, with respect to any
Partner, the capital account maintained for such Partner pursuant to Section
3.01 hereof.
(g)
"Capital Available for Investment" shall mean the
sum of (a) Subscriptions, net of total underwriting and brokerage discounts,
commissions, and expenses, up to an aggregate of 10½% of Subscriptions, and the
Management Fee and (b) the Capital Contribution of the Managing General
Partner.
(h)
"Capital Contribution" shall mean the total
investment, including the original investment, assessments, and amounts
reinvested, by such Investor Partner to the capital of the Partnership pursuant
to Section 2.02 herein, and, with respect to the Managing General Partner and
the Initial Limited Partner, the total investment, including the original
investment, assessments, and amounts reinvested, to the capital of the
Partnership pursuant to Section 2.01 herein.
(i)
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time (or any corresponding provisions of succeeding
law).
(j)
"Cost," when used with respect to the sale of property
to the Partnership, shall mean (a) the sum of the prices paid by the seller to
an unaffiliated person for such property, including bonuses; (b) title insurance
or examination costs, brokers' commissions, filing fees, recording costs,
transfer taxes, if any, and like charges in connection with the acquisition of
such property; (c) a pro rata portion of the seller's actual necessary and
reasonable expenses for seismic and geophysical services; and (d) rentals and ad
valorem taxes paid by the seller with respect to such property to the date of
its transfer to the buyer, interest and points actually incurred on funds used
to acquire or maintain such property, and such portion of the seller's
reasonable, necessary and actual expenses for geological, engineering, drafting,
accounting, legal and other like services allocated to the property cost in
conformity with generally accepted accounting principles and industry standards,
except for expenses in connection with the past drilling of xxxxx which are not
producers of sufficient quantities of oil or gas to make commercially reasonable
their continued operations, and provided that the expenses enumerated in this
subsection (d) hereof shall have been incurred not more than 36 months prior to
the purchase by the Partnership; provided that such period may be extended, at
the discretion of the state securities administrator, upon proper justification.
When used with respect to services, "cost" means the reasonable, necessary and
actual expense incurred by the seller on behalf of the Partnership in providing
such services, determined in accordance with generally accepted accounting
principles. As used elsewhere, "cost" means the price paid by the seller in an
arm's-length transaction.
(k)
"Depreciation" shall mean, for each fiscal
year or other period, an amount equal to the depreciation, amortization, or
other cost recovery deduction allowable with respect to an asset for such year
or other period, except that if the Gross Asset Value of an asset differs from
its adjusted basis for federal income tax purposes at the beginning of such year
or other period, Depreciation shall be an amount which bears the same ratio to
such beginning Gross Asset Value as the federal income tax depreciation,
amortization, or other cost recovery deduction for such year or other period
bears to such beginning adjusted tax basis; provided, however, that if the
federal income tax depreciation, amortization, or other cost recovery deduction
for such year is zero, Depreciation shall be determined with reference to such
beginning Gross Asset Value using any reasonable method selected by the Managing
General Partner.
(l)
"Development Well" shall mean a well drilled within the proved
area of an oil or gas reservoir to the depth of a stratigraphic horizon known to
be productive.
A-3
(m) "Direct
Costs" shall mean all actual and necessary costs directly incurred for the
benefit of the Partnership and generally attributable to the goods and services
provided to the Partnership by parties other than the Managing General Partner
or its Affiliates. Direct costs shall not include any cost otherwise classified
as organization and offering expenses, administrative costs, operating costs or
property costs. Direct costs may include the cost of services provided by the
Managing General Partner or its Affiliates if such services are provided
pursuant to written contracts and in compliance with Section 5.07(e) of the
Partnership Agreement.
(n)
"Drilling and Completion Costs" shall mean all costs,
excluding Operating Costs, of drilling, completing, testing, equipping and
bringing a well into production or plugging and abandoning it, including all
labor and other construction and installation costs incident thereto, location
and surface damages, cementing, drilling mud and chemicals, drillstem tests and
core analysis, engineering and well site geological expenses, electric logs,
costs of plugging back, deepening, rework operations, repairing or performing
remedial work of any type, costs of plugging and abandoning any well
participated in by the Partnership, and reimbursements and compensation to well
operators, including charges paid to the Managing General Partner as unit
operator during the drilling and completion phase of a well, plus the cost of
the gathering system and of acquiring leasehold interests.
(o)
"Dry Hole" shall mean any well abandoned without having
produced oil or gas in commercial quantities.
(p)
"Exploratory Well" shall mean a well drilled to find
commercially productive hydrocarbons in an unproved area, to find a new
commercially productive horizon in a field previously found to be productive of
hydrocarbons at another horizon, or to significantly extend a known
prospect.
(q)
"Farmout" shall mean an agreement whereby the owner of
the leasehold or working interest agrees to assign his interest in certain
specific acreage to the assignees, retaining some interest such as an overriding
royalty interest, an oil and gas payment, offset acreage or other type of
interest, subject to the drilling of one or more specific xxxxx or other
performance as a condition of the assignment.
(r)
"General Partners" shall mean the Additional General
Partners and the Managing General Partner.
(s)
"Gross Asset Value" shall mean, with respect to
any asset, the asset's adjusted basis for federal income tax purposes, except as
follows:
(1)
The initial Gross Asset Value of any asset contributed by a
Partner to the Partnership shall be the gross fair market value of such asset,
as determined by the contributing Partner and the Partnership;
(2)
The Gross Asset Values of all Partnership assets shall
be adjusted to equal their respective gross fair market values, as determined by
the Managing General Partner, as of the following times: (a) the acquisition of
an additional interest in the Partnership by any new or existing Partner in
exchange for more than a de minimis Capital Contribution; (b) the distribution
by the Partnership Property as consideration for an interest in the Partnership;
and (c) the liquidation of the Partnership within the meaning of Treas. Reg.
Section 1.704-1(b)(2)(ii)(g); provided, however, that the adjustments pursuant
to clauses (a) and (b) in this subsection (2) shall be made only if the Managing
General Partner reasonably determines that such adjustments are necessary or
appropriate to reflect the relative economic interests of the Partners in the
Partnership;
(3)
The Gross Asset Value of any Partnership asset
distributed to any Partner shall be the gross fair market value of such asset on
the date of distribution; and
A-4
(4)
The Gross Asset Values of Partnership assets shall be
increased (or decreased) to reflect any adjustments to the adjusted basis of
such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to
the extent that such adjustments are taken into account in determining Capital
Accounts pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(m) and Section
3.02(g) hereof; provided, however, that Gross Asset Values shall not be adjusted
pursuant to this subsection (4) to the extent the Managing General Partner
determines that an adjustment pursuant to subsection (2) hereof is necessary or
appropriate in connection with a transaction that would otherwise result in an
adjustment pursuant to this subsection (4).
If the
Gross Asset Value of an asset has been determined or adjusted pursuant to
subsections (1), (2), or (4) hereof, such Gross Asset value shall thereafter be
adjusted by the Depreciation taken into account with respect to such asset for
purposes of computing Profits and Losses.
(t)
"IDC" shall mean intangible drilling and development
costs.
(u)
"Independent Expert" shall mean a person with no
material relationship with the Managing General Partner or its Affiliates who is
qualified and who is in the business of rendering opinions regarding the value
of oil and gas properties based upon the evaluation of all pertinent economic,
financial, geologic and engineering information available to the Managing
General Partner or its Affiliates.
(v)
"Initial Limited Partner" shall mean Xxxxxx X. Xxxxxxxx or any
successor to his interest.
(w) "Investor
Partner" shall mean any Person other than the Managing General Partner (i) whose
name is set forth on Exhibit A, attached hereto, as an Additional General
Partner or as a Limited Partner, or who has been admitted as an additional or
Substituted Investor Partner pursuant to the terms of this Agreement, and (ii)
who is the owner of a Unit. "Investor Partners" means all such Persons. All
references in this Agreement to a majority in interest or a specified percentage
of the Investor Partners shall mean Investor Partners holding more than 50% or
such specified percentage, respectively, of the outstanding Units then
held.
(x)
"Lease" shall mean full or partial interests in: (i) undeveloped oil
and gas leases; (ii) spacing or drilling units; (iii) oil and gas mineral
rights; (iv) licenses; (v) concessions; (vi) contracts; (vii) fee rights; or
(viii) other rights authorizing the owner thereof to drill for, reduce to
possession and produce oil and gas.
(y)
"Limited Partner" shall mean an Investor Partner who
purchases Units as a Limited Partner, such partner's transferees or assignees,
and an Additional General Partner who converts his interest to a limited
partnership interest pursuant to the provisions of the Agreement. "Limited
Partners" shall mean all such Investor Partners.
(z)
"Management Fee" shall mean that fee to which the
Managing General Partner is entitled pursuant to Section 6.06
hereof.
(aa) "Managing
General Partner" shall mean Petroleum Development Corporation or its successors,
in their capacity as the Managing General Partner.
(bb) "Managing
General Partner's Drilling Compensation" shall mean the amount paid to the
Managing General Partner for its services as managing general partner and
operator during drilling and completion activities.
(cc) "Mcf"
shall mean one thousand cubic feet of natural gas.
(dd) "Memorandum"
shall mean that Confidential Private Placement Offering Memorandum of which this
Agreement is a part, pursuant to which the Units are being offered and
sold.
A-5
(ee) "Net
Subscriptions" shall mean an amount equal to the total Subscriptions of the
Investor Partners less the amount of Organization and Offering Costs of the
Partnership.
(ff) "Nonrecourse
Deductions" shall have the meaning set forth in Treas. Reg. Section
1.704-2(b)(1). The amount of Nonrecourse Deductions for a Partnership fiscal
year shall equal the net increase in the amount of Partnership Minimum Gain
during that fiscal year reduced (but not below zero) by the aggregate
distributions during that fiscal year of proceeds of a Nonrecourse Liability
that are allocable to an increase in Partnership Minimum Gain, determined
according to the provisions of Treas. Reg. Section 1.704-2(c).
(gg) "Nonrecourse
Liability" shall have the meaning set forth in Treas. Reg. Section 1.704-2(b)(3)
and 1.752-1(a)(2).
(hh) "Offering
Termination Date" shall mean August 16, 2007, or such earlier or later date as
the Managing General Partner, in its sole and absolute discretion, shall
elect.
(ii)
"Oil and Gas Interest" shall mean any oil or gas
royalty or lease, or fractional interest therein, or certificate of interest or
participation or investment contract relative to such royalties, leases or
fractional interests, or any other interest or right which permits the
exploration of, drilling for, or production of oil and gas or other related
hydrocarbons or the receipt of such production or the proceeds
thereof.
(jj)
"Operating Costs" shall mean expenditures made and costs
incurred in producing and marketing oil or gas from completed xxxxx, including,
in addition to labor, fuel, repairs, hauling, materials, supplies, utility
charges and other costs incident to or therefrom, ad valorem and severance
taxes, insurance and casualty loss expense, and compensation to well operators
or others for services rendered in conducting such operations.
(kk) "Organization
and Offering Costs" shall mean all costs of organizing and selling the offering
including, but not limited to, total underwriting and brokerage discounts and
commissions (including fees of the underwriters' attorneys), expenses for
printing, engraving, mailing, salaries of employees while engaged in sales
activity, charges of transfer agents, registrars, trustees, escrow holders,
depositaries, engineers and other experts, expenses of qualification of the sale
of the securities under Federal and State law, including taxes and fees,
accountants' and attorneys' fees and other front end fees.
(ll)
"Overriding Royalty Interest" shall mean an interest in the
oil and gas produced pursuant to a specified oil and gas lease or leases, or the
proceeds from the sale thereof, carved out of the working interest, to be
received free and clear of all costs of development, operation, or
maintenance.
(mm) "Partner
Minimum Gain" shall mean an amount, with respect to each Partner Nonrecourse
Debt, equal to the Partnership Minimum Gain that would result if such Partner
Nonrecourse Debt were treated as a Nonrecourse Liability, determined in
accordance with Treas. Reg. Section 1.704-2(i).
(nn) "Partner
Nonrecourse Debt" shall have the meaning set forth in Treas. Reg. Section
1.704-2(b)(4).
(oo) "Partner
Nonrecourse Deductions" shall have the meaning set forth in Treas. Reg. Section
1.704- 2(i)(2). The amount of Partner Nonrecourse Deductions with respect to a
Partner Nonrecourse Debt for a Partnership fiscal year shall equal the net
increase in the amount of Partner Minimum Gain attributable to such Partner
Nonrecourse Debt during that fiscal year reduced (but not below zero) by
proceeds of the liability distributed during that fiscal year to the Partner
bearing the economic risk of loss for such liability that are both attributable
to the liability and allocable to an increase in Partner Minimum Gain
attributable to such Partner Nonrecourse Debt, determined in accordance with
Treas. Reg. Section 1.704-2(i)(3).
(pp) "Partners"
shall mean the Managing General Partner, the Initial Limited Partner, and the
Investor Partners. "Partner" shall mean any one of the Partners. All references
in this Agreement to a majority in interest or a specified percentage of the
Partners shall mean Partners holding more than 50% or such specified percentage,
respectively, of the outstanding Units then held.
A-6
(qq) "Partnership"
shall mean the partnership pursuant to this Agreement and the partnership
continuing the business of this Partnership in the event of dissolution as
herein provided.
(rr) "Partnership
Minimum Gain" shall have the meaning set forth in Treas. Reg. Section
1.704-2(b)(2) and 1.704-2(d)(1).
(ss) "Permitted
Transfer" shall mean any transfer of Units satisfying the provisions of Section
7.03 herein.
(tt) "Person"
shall mean any individual, partnership, corporation, trust, or other
entity.
(uu) "Profits"
and "Losses" shall mean, for each fiscal year or other period, an amount equal
to the Partnership's taxable income or loss for such year or period, determined
in accordance with Code Section 703(a) (for this purpose, all items of income,
gain, loss, or deduction required to be stated separately pursuant to Code
Section 703(a)(1) shall be included in taxable income or loss), with the
following adjustments:
(1)
Any income of the
Partnership that is exempt from federal income tax and not otherwise taken into
account in computing Profits or Losses pursuant to this Section 1.08(uu) shall
be added to such taxable income or loss;
(2)
Any expenditures of the
Partnership described in Code Section 705(a)(2)(B) or treated as Code Section
705(a)(2)(B) expenditures pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(i),
and not otherwise taken into account in computing Profits or Losses pursuant to
this Section 1.08(uu) shall be subtracted from such taxable income or
loss;
(3)
In the event the Gross Asset Value of
any Partnership asset is adjusted pursuant to Section 1.08(s)(2) or Section
1.08(s)(3) hereof, the amount of such adjustment shall be taken into account as
gain or loss from the disposition of such asset for purposes of computing
Profits or Losses.
(4)
Gain or loss resulting from any disposition
of Partnership Property with respect to which gain or loss is recognized for
federal income tax purposes shall be computed by reference to the Gross Asset
Value of the property disposed of, notwithstanding that the adjusted tax basis
of such property differs from its Gross Asset Value;
(5)
In lieu of the depreciation, amortization, and
other cost recovery deductions taken into account in computing such taxable
income or loss, there shall be taken into account Depreciation for such fiscal
year or other period, computed in accordance with Section 1.08(k) hereof;
and
(6)
Notwithstanding any other provisions of this Section
1.08(uu ), any items which are specially allocated pursuant to this Agreement
shall not be taken into account in computing Profits or Losses.
(vv) "Prospect"
shall be deemed to consist of the drilling or spacing unit on which the well
will be drilled by the Partnership which is the minimum area permitted by state
law or local practice on which one well may be drilled.
(ww) "Proved
Developed Oil and Gas Reserves" shall mean the reserves that can be expected to
be recovered through existing xxxxx with existing equipment and operating
methods. Additional oil and gas expected to be obtained through the application
of fluid injection or other improved recovery techniques for supplementing the
natural forces and mechanisms of primary recovery should be included as "proved
developed reserves" only after testing by a pilot project or after the operation
of an installed program has confirmed through production response that increased
recovery will be achieved.
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(xx) "Proved
Oil and Gas Reserves" shall mean the estimated quantities of crude oil, natural
gas, and natural gas liquids which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions, i.e., prices and
costs as of the date the estimate is made. Prices include consideration of
changes in existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.
(1)
Reservoirs are considered proved if economic productibility is supported
by either actual production or conclusive formation test. The area of a
reservoir considered proved includes (A) that portion delineated by drilling and
defined by gas-oil and/or oil-water contacts, if any, and (B) the immediately
adjoining portions not yet drilled, but which can be reasonably judged as
economically productive on the basis of available geological and engineering
data. In the absence of information on fluid contacts, the lowest known
structural occurrence of hydrocarbons controls the lower proved limit of the
reservoir.
(2)
Reserves which can be produced economically
through application of improved recovery techniques (such as fluid injection)
are included in the "proved" classification when successful testing by a pilot
project, or the operation of an installed program in the reservoir, provides
support for the engineering analysis on which the project or program was
based.
(3)
Estimates or proved reserves do not include the
following: (A) oil that may become available from known reservoirs but is
classified separately as "indicated additional reserves"; (B) crude oil, natural
gas, and natural gas liquids, the recovery of which is subject to reasonable
doubt because of uncertainty as to geology, reservoir characteristics, or
economic factors; (C) crude oil, natural gas, and natural gas liquids, that may
occur in undrilled prospects; and (D) crude oil, natural gas, and natural gas
liquids, that may be recovered from oil shales, coal, gilsonite and other such
sources.
(yy) "Proved
Undeveloped Reserves" shall mean the reserves that are expected to be recovered
from new xxxxx on undrilled acreage, or from existing xxxxx where a relatively
major expenditure is required for recompletion. Reserves on undrilled acreage
shall be limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for other
undrilled units can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Under no circumstances should estimates for proved undeveloped reserves be
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proved effective by actual tests in the area and in the same
reservoir.
(zz) "Reservoir"
shall mean a separate structural or stratigraphic trap containing an
accumulation of oil or gas.
(aaa) "Roll-Up"
shall mean a transaction involving the acquisition, merger, conversion, or
consolidation, either directly or indirectly, of the Partnership and the
issuance of securities of a roll-up entity. Such term does not
include:
(1)
a transaction involving
securities of the Partnership that have been listed for at least 12 months on a
national exchange or traded through the National Association of Securities
Dealers Automated Quotation National Market System; or
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(2)
a transaction involving the conversion to corporate,
trust or association form of only the Partnership if, as a consequence of the
transaction, there will be no significant adverse change in any of the
following:
(i)
voting rights;
(ii)
the term of existence of the Partnership;
(iii) sponsor
compensation; or
(iv) the
Partnership's investment objectives.
(bbb) "Roll-Up
Entity" shall mean a partnership, trust, corporation or other entity that would
be created or survive after the successful completion of a proposed roll-up
transaction.
(ccc) "Sponsor"
shall mean any person directly or indirectly instrumental in organizing, wholly
or in part, a partnership or any person who will manage or is entitled to manage
or participate in the management or control of a partnership. "Sponsor" includes
the managing and controlling general partner(s) and any other person who
actually controls or selects the person who controls 25% or more of the
exploratory, developmental or producing activities of the Partnership, or any
segment thereof, even if that person has not entered into a contract at the time
of formation of the Partnership. "Sponsor" does not include wholly independent
third parties such as attorneys, accountants, and underwriters whose only
compensation is for professional services rendered in connection with the
offering of units. Whenever the context of these guidelines so requires, the
term "sponsor" shall be deemed to include its affiliates.
(ddd) "Subscription"
shall mean the amount indicated on the Subscription Agreement that an Investor
Partner has agreed to pay to the Partnership as his Capital
Contribution.
(eee) "Subscription
Agreement" shall mean the Agreement, attached to the Memorandum as Appendix B,
pursuant to which an Investor subscribes to Units in the
Partnership.
(fff) "Substituted
Investor Partner" shall mean any Person admitted to the Partnership as an
Investor Partner pursuant to Section 7.03(c) hereof.
(ggg) "Treas.
Reg." or "Regulation" shall mean the income tax regulations promulgated under
the Code, as such regulations may be amended from time to time (including
corresponding provisions of succeeding regulations).
(hhh) "Unit"
shall mean an undivided interest of the Investor Partners in the aggregate
interest in the capital and profits of the Partnership. Each Unit represents
Capital Contributions of $20,000 to the Partnership.
(iii) "Working
Interest" shall mean an interest in an oil and gas leasehold which is subject to
some portion of the costs of development, operation, or
maintenance.
ARTICLE
II
Capitalization
2.01 Capital Contributions of the
Managing General Partner and Initial Limited Partner.
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(a)
On or before the Offering Termination Date, the Managing General
Partner shall make a Capital Contribution in cash to the Partnership of an
amount equal to not less than 43.07% of the aggregate Capital Contributions of
the Investor Partners.
(b)
The Managing General Partner shall pay all Lease and
tangible drilling costs as well as all Intangible Drilling Costs in excess of
such costs paid by the Investor Partners with respect to the Partnership; to the
extent that such costs are greater than the Managing General Partner's Capital
Contribution set forth in the previous subsection, the Managing General Partner
shall make such additional contributions in cash to the Partnership equal to
such additional Costs; in the event of such additional Capital Contribution, the
Managing General Partner's share of profits and losses and distributions shall
equal the percentage arrived at by dividing the Managing General Partner's
Capital Contribution by the total well costs, excluding the Managing General
Partner's Drilling Compensation, except that such percentage may be revised by
Sections 3.02.
(c)
In consideration of making its Capital
Contribution as reflected in this Section 2.01(a), becoming a General Partner,
subjecting its assets to the liabilities of the Partnership, and undertaking
other obligations as herein set forth, the Managing General Partner shall
receive the interest in the Partnership provided in Section 2.01(a) and
allocated in Article III hereof.
(d)
The Initial Limited Partner shall contribute $100
in cash to the capital of the Partnership. Upon the earlier of the conversion of
an Additional General Partner's interest into a Limited Partner's interest or
the admission of a Limited Partner to the Partnership, the Partnership shall
redeem in full, without interest or deduction, the Initial Limited Partner's
Capital Contribution, and the Initial Limited Partner shall cease to be a
Partner.
2.02 Capital Contributions of the
Investor Partners.
(a)
Upon execution of this Agreement, each Investor Partner
(whose names and addresses and number of Units to which Subscribed are set forth
in Exhibit A) shall contribute to the capital of the Partnership the sum of
$20,000 for each Unit purchased. The minimum subscription by an Investor Partner
is one Unit ($20,000).
(b)
The contributions of the Investor Partners pursuant to
subsection 2.02(a) hereof shall be in cash or by check subject to
collection.
(c)
Until the Offering Termination Date and until such subsequent time
as the contributions of the Investor Partners are invested in accordance with
the provisions of the Memorandum, all monies received from persons subscribing
as Investor Partners (i) shall continue to be the property of the investor
making such payment, (ii) shall be held in escrow for such investor in the
manner and to the extent provided in the Memorandum, and (iii) shall not be
commingled with the personal monies or become an asset of the Managing General
Partner or the Partnership.
(d)
Upon the original sale of Units by the Partnership,
subscribers shall be admitted as Partners no later than 15 days after the
release from the escrow account of the Capital Contributions to the Partnership,
in accordance with the terms of the Memorandum; subscriptions shall be accepted
or rejected by the Partnership within 30 days of their receipt; if rejected, all
subscription monies shall be returned to the subscriber forthwith.
(e)
Except as provided in Section 4.03 hereof, any proceeds
of the offering of Units for sale pursuant to the Memorandum not used, committed
for use, or reserved as operating capital in the Partnership's operations within
one year after the closing of such offering shall be distributed pro rata to the
Investor Partners as a return of capital and the Managing General Partner shall
reimburse such Investors for selling expenses, management fees, and offering
expenses allocable to the return of capital.
(f)
Until proceeds from the public offering are invested in the
Partnership's operations, such proceeds may be temporarily invested in income
producing short-term, highly liquid investments, where there is appropriate
safety of principal, such as U.S. Treasury Bills. Any such income shall be
allocated pro rata to the Investor Partners providing such capital
contributions.
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2.03 Additional
Contributions. Except as otherwise provided in this Agreement, no
Investor Partner shall be required or obligated (a) to contribute any capital to
the Partnership other than as provided in Section 2.02 hereof, or (b) to lend
any funds to the Partnership. No interest shall be paid on any capital
contributed to the Partnership pursuant to this Article II and, except as
otherwise provided herein, no Partner, other than the Initial Limited Partner as
authorized herein, may withdraw his Capital Contribution. The Units are
nonassessable; however, General Partners are liable, in addition to their
Capital Contributions, for Partnership obligations and liabilities represented
by their ownership of interests as general partners, in accordance with West
Virginia law.
ARTICLE
III
Capital
Accounts and Allocations
3.01 Capital
Accounts.
(a)
General. A separate
Capital Account shall be established and maintained for each Partner on the
books and records of the Partnership. Capital Accounts shall be maintained in
accordance with Treas. Reg. Section 1.704-1(b) and any inconsistency between the
provisions of this Section 3.01 and such regulation shall be resolved in favor
of the regulation. In the event the Managing General Partner shall determine
that it is prudent to modify the manner in which the Capital Accounts, or any
debits or credits thereto (including, without limitation, debits or credits
relating to liabilities that are secured by contributed or distributed property
or that are assumed by the Partnership of the Partners), are computed in order
to comply with such regulations, the Managing General Partner may make such
modification, provided that it is not likely to have a material effect on the
amounts distributable to any Partner pursuant to Section 9.03 hereof upon the
dissolution of the Partnership. The Managing General Partner also shall (i) make
any adjustments that are necessary or appropriate to maintain equality between
the Capital Accounts of the Partners and the amount of Partnership capital
reflected on the Partnership's balance sheet, as computed for book purposes, in
accordance with Treas. Reg. Section 1.704-1(b)(2)(iv)(q), and (ii) make any
appropriate modifications in the event unanticipated events might otherwise
cause this Agreement not to comply with Treas. Reg. Section
1.704-1(b).
(b)
Increases to
Capital Accounts. Each Partner's Capital Account shall be credited with
(i) the amount of money contributed by him to the Partnership; (ii) the amount
of any Partnership liabilities that are assumed by him (within the meaning of
Treas. Reg. Section 1.704-1(b)(2)(iv)(c)), but not by increases in his share of
Partnership liabilities within the meaning of Code Section 752(a); (iii) the
Gross Asset Value of property contributed by him to the Partnership (net of
liabilities securing such contributed property that the Partnership is
considered to assume or take subject to under Code Section 752); and (iv)
allocations to him of Partnership Profits (or items thereof), including income
and gain exempt from tax and Income and gain described in Treas. Reg. Section
1.704- 1(b)(2)(iv)(g) (relating to adjustments to reflect book
value).
(c)
Decreases to
Capital Accounts. Each Partner's Capital Account shall be debited with
(i) the amount of money distributed to him by the Partnership; (ii) the amount
of his individual liabilities that are assumed by the Partnership (other than
liabilities described in Treas. Reg. Section 1.704-1(b)(2)(iv)(b)(2) that are
assumed by the Partnership and other than decreases in his share of Partnership
liabilities within the meaning of Code Section 752(b)); (iii) the Gross Asset
Value of property distributed to him by the Partnership (net of liabilities
securing such distributed property that he is considered to assume or take
subject to under Code Section 752); (iv) allocations to him of expenditures of
the Partnership not deductible in computing Partnership taxable income and not
properly chargeable to Capital Account (as described in Code Section
705(a)(2)(B)), and (v) allocations to him of Partnership Losses (or item
thereof), including loss and deduction described in Treas. Reg. Section
1.704-1(b)(2)(iv)(g) (relating to adjustments to reflect book value), but
excluding items described in (iv) above and excluding loss or deduction
described in Treas. Reg. Section 1.704-1(b)(4)(iii) (relating to excess
percentage depletion).
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(d) Adjustments to Capital
Accounts Related to Depletion.
(1)
Solely for purposes of maintaining the Capital Accounts, each year the
Partnership shall compute (in accordance with Treas. Reg. Section
1.704-1(b)(2)(iv)(k)) a simulated depletion allowance for each oil and gas
property using that method, as between the cost depletion method and the
percentage depletion method (without regard to the limitations of Code Section
613A(c)(3) which theoretically could apply to any Partner), which results in the
greatest simulated depletion allowance. The simulated depletion allowance with
respect to each oil and gas property shall reduce the Partners' Capital Accounts
in the same proportion as the Partners were allocated adjusted basis with
respect to such oil and gas property under Section 3.03(a) hereof. In no event
shall the Partnership's aggregate simulated depletion allowance with respect to
an oil and gas property exceed the Partnership's adjusted basis in the oil and
gas property (maintained solely for Capital Account purposes).
(2)
Upon the taxable disposition of an oil and gas property
by the Partnership, the Partnership shall determine the simulated (hypothetical)
gain or loss with respect to such oil and gas property (solely for Capital
Account purposes) by subtracting the Partnership's simulated adjusted basis for
the oil and gas property (maintained solely for Capital Account purposes) from
the amount realized by the Partnership upon such disposition. Simulated adjusted
basis shall be determined by reducing the adjusted basis by the aggregate
simulated depletion charged to the Capital Accounts of all Partners in
accordance with Section 3.01(d)(1) hereof. The Capital Accounts of the Partners
shall be adjusted upward by the amount of any simulated gain on such disposition
in proportion to such Partners' allocable share of the portion of total amount
realized from the disposition of such property that exceeds the Partnership's
simulated adjusted basis in such property. The Capital Accounts of the Partners
shall be adjusted downward by the amount of any simulated loss in proportion to
such Partners' allocable shares of the total amount realized from the
disposition of such property that represents recovery of the Partnership's
simulated adjusted basis in such property.
(e)
Restoration of Negative Capital Accounts. Except as
otherwise provided in this Agreement, neither an Investor Partner nor the
Initial Limited Partner shall be obligated to the Partnership or to any other
Partner to restore any negative balance in his Capital Account. The Managing
General Partner shall be obligated to restore the deficit balance in its Capital
Account.
3.02 Allocation of Profits and
Losses.
(a)
General. Except as
provided in this Section 3.02 or in Section 2.01(b) and Section 3.03 hereof,
Profits and Losses during the production phase of the Partnership shall be
allocated 63% to the Investor Partners and 37% to the Managing General Partner.
Notwithstanding the above allocations, the following special allocations shall
be employed:
(1) irrespective
of any revisions effected by Section 2.01(b), IDC and recapture of IDC shall be
allocated 100% to the Investor Partners and 0% to the Managing General Partner,
except as otherwise provided in the following clause; however, in the event that
a portion of the Capital Contribution of the Managing General Partner is
utilized for IDC, as provided by Section 2.01(b), then IDC and recapture of IDC
shall be allocated to the Investor Partners and the Managing General Partner in
a percentage equal to their respective contribution to IDC;
(2)
irrespective of any revisions effected
by Section 2.01(b), the following provisions shall apply: Organization and
Offering Costs net of commissions, due diligence expenses and wholesaling fees
payable to the dealer-manager and the soliciting dealers shall be paid by the
Managing General Partner; such commissions, due diligence expenses and
wholesaling fees payable to the dealer manager and the soliciting dealers shall
be allocated 100% to the Investor Partners and 0% to the Managing General
Partner; except that Organization and Offering Costs in excess of 10½% of
Subscriptions shall be allocated 100% to the Managing General Partner and 0% to
the Investor Partners;
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(3)
irrespective of any revisions effected by Section 2.01(b), the
Management Fee shall be allocated 100% to the Investor Partners and 0% to the
Managing General Partner;
(4)
irrespective of any revisions effected by Section 2.01(b), Costs of
Leases and Costs of tangible equipment, including depreciation or cost recovery
benefits, shall be allocated 0% to the Investor Partners and 100% to the
Managing General Partner and revenues from the sale of equipment shall be
allocated 63% to the Investor Partners and 37% to the Managing General
Partner;
(5)
Drilling and Completion Costs shall be allocated 63% to
the Investor Partners and 37% to the Managing General Partner;
(6)
Direct Costs and Operating Costs shall be allocated 63% to the
Investor Partners and 37% to the Managing General Partner; and
(7)
irrespective of any revisions effected by Section 2.01(b),
Administrative Costs shall be borne 100% by and allocated 100% to the Managing
General Partner.
(b)
Capital Account
Deficits. Notwithstanding anything to the contrary in Section 3.02(a), no
Investor Partner shall be allocated any item to the extent that such allocation
would create or increase a deficit in such Investor Partner's Capital
Account.
(1)
Obligations to
Restore. For purposes of this Section 3.02(b), in determining whether an
allocation would create or increase a deficit in a Partner's Capital Account,
such Capital Account shall be reduced for those items described in Treas. Reg.
Section 1.704-1(b)(2)(ii)(d)(4), (5), and (6) and shall be increased by any
amounts which such Partner is obligated to restore or is deemed obligated to
restore pursuant to the penultimate sentences of Treas. Reg. Sections
1.704-2(g)(1) and 1.704-2(i)(5). Further, such Capital Accounts shall otherwise
meet the requirements of Treas. Reg. Section 1.704-1(b)(2)(ii)(d).
(2)
Reallocations. Any
loss or deduction of the Partnership, the allocation of which to any Partner is
prohibited by this Section 3.02(b), shall be reallocated to those Partners not
having a deficit in their Capital Accounts (as adjusted in Section 3.02(b)(1))
in the proportion that the positive balance of each such Partner's adjusted
Capital Account bears to the aggregate balance of all such Partners' adjusted
Capital Accounts, with any remaining losses or deductions being allocated to the
Managing General Partner.
(3)
Qualified Income
Offset. In the event any Investor Partner unexpectedly receives any
adjustments, allocations, or distributions described in Treas. Reg. Section
1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Partnership income and gain shall
be specifically allocated to such Partner in an amount and manner sufficient to
eliminate (to the extent required by the Regulations) the total of the deficit
balance in his Capital Account (as adjusted in Section 3.02(b)(1)) created by
such adjustments, allocations, or distributions, provided that an allocation
pursuant to this Section 3.02(b)(3) shall be made if and only to the extent that
such Partner would have a deficit in his Capital Account (as adjusted in Section
3.02(b)(1)) after all other allocations provided for in this Section 3 have been
tentatively made as if this Section 3.02(b)(3) were not in the
Agreement.
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(4)
Gross Income
Allocations. In the event an Investor Partner has a deficit Capital
Account at the end of any Partnership fiscal year which is in excess of the sum
of (i) the amount such Partner is obligated to restore pursuant to any provision
of this Agreement and (ii) the amount such Partner is deemed to be obligated to
restore pursuant to the penultimate sentences of Treas. Reg. Sections
1.704-2(g)(1) and 1.704-2(i)(5), such Partner shall be specially allocated items
of Partnership income and gain in the amount of such excess as quickly as
possible, provided that an allocation pursuant to this Section 3.02(b)(4) shall
be made only if and to the extent that such Partner would have a deficit Capital
Account in excess of such sum after all other allocations provided for in this
Section 3 have been made as if Section 3.02(b)(3) hereof and this Section
3.02(b)(4) were not in the Agreement.
(c)
Minimum Gain
Chargeback. Notwithstanding any other provision of this Section 3.02, if
there is a net decrease in Partnership Minimum Gain during any taxable year,
pursuant to Treas. Reg. Section 1.704-2(f)(1), all Partners shall be allocated
items of partnership income and gain for that year equal to that partner's share
of the net decrease in Partnership Minimum Gain (within the meaning of Treas.
Reg. Section 1.704-2(g)(2)). Notwithstanding the preceding sentence, no such
chargeback shall be made to the extent one or more of the exceptions and/or
waivers provided for in Treas. Reg. Section 1.704-2(f)(2)-(5) applies.
Allocations pursuant to the previous sentence shall be made in proportion to the
respective amounts required to be allocated to each Partner pursuant thereto.
The items to be so allocated shall be determined in accordance with Treas. Reg.
Section 1.704- 2(f)(6). This Section 3.02(c) is intended to comply with the
minimum gain chargeback requirement in such Section of the Regulations and shall
be interpreted consistently therewith. To the extent permitted by such Section
of the Regulations and for purposes of this Section 3.02(c) only, each Partner's
Capital Account (as adjusted in Section 3.02(b)(1)) shall be determined prior to
any other allocations pursuant to this Section 3 with respect to such tax year
and without regard to any net decrease in Partner Minimum Gain during such
fiscal year.
(d)
Partner Minimum Gain
Chargeback. Notwithstanding any other provision of this Section 3 except
Section 3.02(c), if there is a net decrease in Partner Minimum Gain attributable
to a Partner Nonrecourse Debt during any Partnership fiscal year, rules similar
to those contained in Section 3.02(c) shall apply in a manner consistent with
Treas. Reg. Section 1.704-2(i)(4). This Section 3.02(d) is intended to comply
with the minimum gain chargeback requirement in such Section of the Regulations
and shall be interpreted consistently therewith. Solely for purposes of this
Section 3.02(d), each Person's Capital Account deficit (as so adjusted) shall be
determined prior to any other allocations pursuant to this Section 3 with
respect to such fiscal year, other than allocations pursuant to Section 3.02(c)
hereof.
(e)
Nonrecourse
Deductions. Nonrecourse Deductions for any fiscal year or other period
shall be specially allocated to the Partners (in proportion to their Units), in
accordance with Treas. Reg. Section 1.704-2.
(f)
Partner Nonrecourse
Deductions. Any Partner Nonrecourse Deductions for any fiscal year or
other period shall be specially allocated to the Partner who bears the economic
risk of loss with respect to the Partner Nonrecourse Debt to which such Partner
Nonrecourse Deductions are attributable in accordance with Treas. Reg. Section
1.704-2(i).
(g)
Code Section 754
Adjustments. To the extent an adjustment to the adjusted tax basis of any
Partnership asset pursuant to Code Section 734(b) or 743(b) is required,
pursuant to Treas. Reg. Section 1.704- 1(b)(2)(iv)(m), to be taken into account
in determining Capital Accounts, the amount of such adjustment to the Capital
Accounts shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such basis) and such
gain or loss shall be specially allocated to the Partners in a manner consistent
with the manner in which their Capital Accounts are required to be adjusted
pursuant to such Section of the Regulations.
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(h)
Curative
Allocations.
(1)
The "Regulatory Allocations" consist of the "Basic
Regulatory Allocations," as defined in Section 3.02(h)(2) hereof, the
"Nonrecourse Regulatory Allocations," as defined in Section 3.02(h)(3) hereof,
and the "Partner Nonrecourse Regulatory Allocations," as defined in Section
3.02(h)(4) hereof.
(2)
The "Basic Regulatory Allocations" consist of allocations
pursuant to Section 3.02(b)(2), (3), and (4) hereof. Notwithstanding any other
provision of this Agreement, other than the Regulatory Allocations, the Basic
Regulatory Allocations shall be taken into account in allocating items of
income, gain, loss, and deduction among the Partners so that, to the extent
possible, the net amount of such allocations of other items and the Basic
Regulatory Allocations to each Partner shall be equal to the net amount that
would have been allocated to each such Partner if the Basic Regulatory
Allocations had not occurred. For purposes of applying the foregoing sentence,
allocations pursuant to this Section 3.02(h)(2) shall only be made with respect
to allocations pursuant to Section 3.02(g) hereof to the extent the Managing
General Partner reasonably determines that such allocations will otherwise be
inconsistent with the economic agreement among the parties to this
Agreement.
(3)
The "Nonrecourse Regulatory Allocations" consist
of all allocations pursuant to Section 3.02(c) and 3.02(e) hereof.
Notwithstanding any other provision of this Agreement, other than the Regulatory
Allocations, the Nonrecourse Regulatory Allocations shall be taken into account
in allocating items of income, gain, loss, and deduction among the Partners so
that, to the extent possible, the net amount of such allocations of other items
and the Nonrecourse Regulatory Allocations to each Partner shall be equal to the
net amount that would have been allocated to each Partner if the Nonrecourse
Regulatory Allocations had not occurred. For purposes of applying the foregoing
sentence (i) no allocations pursuant to this Section 3.02(h)(3) shall be made
prior to the Partnership fiscal year during which there is a net decrease in
Partnership Minimum Gain, and then only to the extent necessary to avoid any
potential economic distortions caused by such net decrease in Partnership
Minimum Gain, and (ii) allocations pursuant to this Section 3.02(h)(iii) shall
be deferred with respect to allocations pursuant to Section 3.02(e) hereof to
the extent the Managing General Partner reasonably determines that such
allocations are likely to be offset by subsequent allocations pursuant to
Section 3.02(c).
(4)
The "Partner Nonrecourse Regulatory Allocations"
consist of all allocations pursuant to Sections 3.02(d) and 3.02(f) hereof.
Notwithstanding any other provision of this Agreement, other than the Regulatory
Allocations, the Partner Nonrecourse Regulatory Allocations shall be taken into
account in allocating items of income, gain, loss, and deduction among the
Partners so that, to the extent possible, the net amount of such allocations of
other items and the Partner Nonrecourse Regulatory Allocations to each Partner
shall be equal to the net amount that would have been allocated to each such
Partner if the Partner Nonrecourse Regulatory Allocations had not occurred. For
purposes of applying the foregoing sentence (i) no allocations pursuant to this
Section 3.02(h)(4) shall be made with respect to allocations pursuant to Section
3.02(f) relating to a particular Partner Nonrecourse Debt prior to the
Partnership fiscal year during which there is a net decrease in Partner Minimum
Gain attributable to such Partner Nonrecourse Debt, and then only to the extent
necessary to avoid any potential economic distortions caused by such net
decrease in Partner Minimum Gain, and (ii) allocations pursuant to this Section
3.02(h)(4) shall be deferred with respect to allocations pursuant to Section
3.02(f) hereof relating to a particular Partner Nonrecourse Debt to the extent
the Managing General Partner reasonably determines that such allocations are
likely to be offset by subsequent allocations pursuant to Section 3.02(d)
hereof.
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(5)
The Managing General Partner shall have reasonable discretion
with respect to each Partnership fiscal year, to apply the provisions of
Sections 3.02(h)(2), (3), and (4) hereof among the Partners in a manner that is
likely to minimize such economic distortions.
(i)
Other Allocations.
Except as otherwise provided in this Agreement, all items of Partnership income,
loss, deduction, and any other allocations not otherwise provided for shall be
divided among the Unit Holders in the same proportions as they share Profits or
Losses, as the case may be, for the year.
(j)
Agreement to be
Bound. The Partners are aware of the income tax consequences of the
allocations made by this Section 3.02 and hereby agree to be bound by the
provisions of this Section 3.02 in reporting their shares of Partnership income
and loss for income tax purposes.
(k)
Excess Nonrecourse
Liabilities. Solely for purposes of determining a Partner's proportionate
share of the "excess nonrecourse liabilities" of the Partnership within the
meaning of Treas. Reg. Section 1.752-3(a)(3), the Partners' interests in
Partnership profits are as follows: Investor Partners, 63% (in proportion to
their Units) and the Managing General Partner, 37%.
(l)
Allocation
Variations. The Managing General Partner shall have the authority to vary
allocations to preserve and protect the intention of the Partners as
follows:
(1)
It is the intention of the Partners that each Partner's
distributive share of income, gain, loss, deduction or credit (or any item
thereof) shall be determined and allocated in accordance with this Article 3 to
the fullest extent permitted by Code Section 704(b). In order to preserve and
protect the allocations provided for in this Article 3, the Managing General
Partner shall have the authority to allocate income, gain, loss, deduction or
credit (or any item thereof) arising in any year differently than that expressly
provided for in this Article 3, if and to the extent that determining and
allocating income, gain, loss, deduction or credit (or any item thereof) in the
manner expressly provided for in this Article 3 would cause the allocations of
each Partner's distributive share of income, gain, loss, deduction or credit (or
any item thereof) not to be permitted by Code Section 704(b) and the Regulations
promulgated thereunder. Any allocation made pursuant to this Section 3.02(l)
shall be deemed to be a complete substitute for any allocation otherwise
expressly provided for in this Article 3, and no amendment of this Agreement or
further consent of any Partner shall be required therefor.
(2)
In making any such allocation (the "new allocation")
under this Section 3.02(l) the Managing General Partner shall be authorized to
act only after having been advised by the Partnership's accountants and/or
counsel that, under Code Section 704(b) and the Regulations thereunder, (i) the
new allocation is necessary, and (ii) the new allocation is the minimum
modification of the allocations otherwise expressly provided for in this Article
3 which is necessary in order to assure that, either in the then current year or
in any preceding year, each Partner's distributive share of income, gain, loss,
deduction or credit (or any item thereof) is determined and allocated in
accordance with this Article 3 to the fullest extent permitted by Code Section
704(b) and the Regulations thereunder.
(3)
If the Managing General Partner is required by
this Section 3.02(l) to make any new allocation in a manner less favorable to
the Investor Partners than is otherwise expressly provided for in this Article
3, then the Managing General Partner shall have the authority, only after having
been advised by the Partnership's accountants and/or counsel that they are
permitted by Code Section 704(b), to allocate income, gain, loss, deduction or
credit (or any item thereof) arising in later years in such a manner as will
make the allocations of income, gain, loss, deduction or credit (or any item
thereof) to the Investor Partners as comparable as possible to the allocations
otherwise expressly provided for or contemplated by this Article
3.
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(4)
Any new allocation made by the Managing General Partner under this Section
3.02(l) in reliance upon the advice of the Partnership's accountants and/or
counsel shall be deemed to be made pursuant to the fiduciary obligation of the
Managing General Partner to the Partnership and the Investor Partners, and no
such new allocation shall give rise to any claim or cause of action by any
Investor Partner.
(m) Tax Allocations: Code
Section 704(c). In accordance with Code Section 704(c) and the
Regulations thereunder, income, gain, loss, and deduction with respect to any
property contributed to the capital of the Partnership shall, solely for tax
purposes, be allocated among the Partners so as to take account of any variation
between the adjusted basis of such property to the Partnership for federal
income tax purposes and its initial Gross Asset Value (computed in accordance
with Section 1.08(s)(1).
In the
event the Gross Asset Value of any Partnership asset is adjusted pursuant to
Section 1.08(s)(1) hereof, subsequent allocations of income, gain, loss, and
deduction with respect to such asset shall take account of any variation between
the adjusted basis of such asset for federal income tax purposes and its Gross
Asset Value in the same manner as under Code Section 704(c) and the Regulations
thereunder.
Any
elections or other decisions relating to such allocations shall be made by the
Managing General Partner in any manner that reasonably reflects the purpose and
intention of this Agreement. Allocations pursuant to this Section 3.02(m) are
solely for purposes of federal, state, and local taxes and shall not affect, or
in any way be taken into account in computing, any Person's Capital Account or
share of Profits, Losses, other items, or distributions pursuant to any
provision of this Agreement.
3.03 Depletion.
(a)
The depletion deduction with respect to each oil and gas
property of the Partnership shall be computed separately for each Partner in
accordance with Code Section 613A(c)(7)(D) for Federal income tax purposes. For
purposes of such computation, the adjusted basis of each oil and gas property
shall be allocated in accordance with the Partners' interests in the capital of
the Partnership. Among the Investor Partners, such adjusted basis shall be
apportioned among them in accordance with the number of Units held.
(b)
Upon the taxable disposition of an oil or gas property by the
Partnership, the amount realized from and the adjusted basis of such property
shall be allocated among the Partners (for purposes of calculating their
individual gain or loss on such disposition for Federal income tax purposes) as
follows:
(1)
The portion of the total amount
realized upon the taxable disposition of such property that represents recovery
of its simulated adjusted tax basis therein (as calculated pursuant to Section
3.01(d) hereof) shall be allocated to the Partners in the same proportion as the
aggregate adjusted basis of such property was allocated to such Partners (or
their predecessors in interest) pursuant to Section 3.03(a) hereof;
and
(2)
The portion of the total amount realized
upon the taxable disposition of such property that represents the excess over
the simulated adjusted tax basis therein shall be allocated in accordance with
the provisions of Section 3.02 hereof as if such gain constituted an item of
Profit.
3.04
Apportionment Among
Partners.
(a)
Except as otherwise provided in this Agreement, all allocations and
distributions to the Investor Partners shall be apportioned among them pro rata
based on Units held by the Partners.
(b)
For purposes of Section 3.04(a) hereof, an Investor Partner's pro rata
share in Units shall be calculated as of the end of the taxable year for which
such allocation has been made; provided, however, that if a transferee of a Unit
is admitted as an Investor Partner during the course of the taxable year, the
apportionment of allocations and distributions between the transferor and
transferee of such Unit shall be made in the manner provided in Section 3.04(c)
hereof.
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(c)
If, during any taxable year of the
Partnership, there is a change in any Partner's interest in the Partnership,
each Partner's allocation of any item of income, gain, loss, deduction, or
credit of the Partnership for such taxable year, other than "allocable cash
basis items" shall be determined by taking into account the varying interests of
the Partners pursuant to such method as is permitted by Code Section 706(d) and
the regulations thereunder. Each Partner's share of "allocable cash basis items"
shall be determined in accordance with Code Section 706(d)(2) by (i) assigning
the appropriate portion of each item to each day in the period to which it is
attributable, and (ii) allocating the portion assigned to any such day among the
Partners in proportion to their interests in the Partnership at the close of
such day. "Allocable cash basis item" shall have the meaning ascribed to it by
Code Section 706(d)(2)(B) and the regulations thereunder.
ARTICLE
IV
Distributions
4.01 Time of Distribution. Cash available
for distribution shall be determined by the Managing General Partner. The
Managing General Partner shall distribute, in its discretion, such cash deemed
available for distribution, but such distributions shall be made not less
frequently than quarterly.
4.02 Distributions.
(a)
Except as otherwise provided in Section 2.01(b), all distributions
(other than those made to wind up the Partnership in accordance with Section
9.03 hereof) shall be made 63% to the Investor Partners and 37% to the Managing
General Partner.
(b)
The Partnership shall not require that Investor Partners reinvest their
share of cash available for distribution in the Partnership. In no event shall
funds be advanced or borrowed for purposes of distributions, if the amount of
such distributions would exceed the Partnership's accrued and received revenues
for the previous four quarters, less paid and accrued operating costs with
respect to such revenues. The determination of such revenues and costs shall be
made in accordance with generally accepted accounting principles, consistently
applied. Except for the repayment of loans made by the Managing General Partner
to the Partnership, cash distributions from the Partnership to the Managing
General Partner shall be made only in conjunction with distributions to Investor
Partners and only out of funds properly allocated to the Managing General
Partner's account.
4.03 Capital Account Deficits. No
distributions shall be made to any Investor Partner to the extent such
distribution would create or increase a deficit in such Partner's Capital
Account (as adjusted in Section 3.02(b)(1)). Any distribution which is hereby
prohibited shall be made to those Partners not having a deficit in their Capital
Accounts (as adjusted in Section 3.02(b)(1)) in the proportion that the positive
balance of each such Partner's adjusted Capital Account bears to the aggregate
balance of all such Partners' adjusted Capital Accounts. Any cash available for
distribution remaining after reduction of all adjusted Capital Accounts to zero
shall be distributed to the Managing General Partner.
4.04 Liability Upon Receipt of
Distributions.
(a)
If a Partner has received a return of any part of his Capital Contribution
without violation of the Partnership Agreement or the Act, he is liable to the
Partnership for a period of one year thereafter for the amount of such returned
contribution, but only to the extent necessary to discharge the Partnership's
liabilities to creditors who extended credit to the Partnership during the
period the Capital Contribution was held by the Partnership.
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(b)
If a Partner has received a return of any part of his Capital
Contribution in violation of either the Partnership Agreement or the Act, he is
liable to the Partnership for a period of six years thereafter for the amount of
the Capital Contribution wrongfully returned.
(c)
A Partner receives a return of his Capital Contribution
to the extent that the distribution to him reduces his share of the fair value
of the net assets of the Partnership below the value, as set forth in the
records required to be kept by West Virginia law, of his Capital Contribution
which has not been distributed to him.
ARTICLE
V
Activities
5.01 Management. The
Managing General Partner shall conduct, direct, and exercise full and exclusive
control over all activities of the Partnership. Investor Partners shall have no
power over the conduct of the affairs of the Partnership or otherwise commit or
bind the Partnership in any manner. The Managing General Partner shall manage
the affairs of the Partnership in a prudent and businesslike fashion and shall
use its best efforts to carry out the purposes and character of the business of
the Partnership.
5.02 Conduct of
Operations.
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(a)
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(1)
The Managing General Partner shall establish a
program of operations for the Partnership which shall be in conformance
with the following policies: (x) no less than 80% of the Capital
Contributions net of Organization and Offering Costs and the Management
Fee shall be applied to drilling and completing Development Xxxxx; and no
more than 20% of the Capital Contributions net of Organization and
Offering Costs and the Management Fee may be applied to drilling and
completing one or more Exploratory Xxxxx; (y) the Partnership shall drill
all of its xxxxx in West Virginia, Ohio, Pennsylvania, Colorado, New York,
Kentucky, Michigan, Indiana, Kansas, Montana, South Dakota, Tennessee,
Utah, Wyoming, Nebraska, North Dakota, Alabama, Texas and/or Oklahoma; and
(z) the Partnership shall acquire the Prospects pursuant to an arrangement
whereby the Partnership will acquire up to 100% of the Working Interest,
subject to landowners' royalty interests and the royalty interests payable
to unaffiliated third parties in varying amounts, provided that the
average of the maximum royalty interests for all Prospects of the
Partnership shall not exceed 25%.
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(2)
The Investor Partners agree to participate
in the Partnership's program of operations as established by the Managing
General Partner; provided, that no well drilled to the point of setting casing
need be completed if, in the Managing General Partner's opinion, such well is
unlikely to be productive of oil or gas in quantities sufficient to justify the
expenditures required for well completion. The Partnership may participate with
others in the drilling of xxxxx and it may enter into joint ventures,
partnerships, or other such arrangements.
(3) The
Managing General Partner in its discretion may conduct recompletion and further
development services with respect to the Partnership's xxxxx in the Greater
Wattenberg Field Area that the Managing General Partner determines may enhance
the recovery of oil and natural gas from such xxxxx.
(b)
All transactions between the Partnership and the Managing
General Partner or its Affiliates shall be on terms no less favorable than those
terms which could be obtained between the Partnership and independent third
parties dealing at arm's-length, subject to the provisions of Section 5.07
hereof.
(c)
The Partnership shall not participate in any joint operations
on any co-owned Lease unless there has been acquired or reserved on behalf of
the Partnership the right to take in kind or separately dispose of its
proportionate share of the oil and gas produced from such Lease exclusive of
production which may be used in development and production operations on the
Lease and production unavoidably lost, and, if the Managing General Partner is
the operator of such Lease, the Managing General Partner has entered into
written agreements with every other person or entity owning any working or
operating interest reserving to such person or entity a similar right to take
in-kind, unless, in the opinion of counsel to the Partnership, the failure to
reserve such right to take in-kind will not result in the Partnership being
treated as a member of an association taxable as a corporation for Federal
income tax purposes.
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(d)
The relationship of the Partnership and the
Managing General Partner (or any Affiliate retaining or acquiring an interest)
as co-owners in Leases, except to the extent superseded by an Operating
Agreement consistent with the preceding paragraph and except to the extent
inconsistent with this Partnership Agreement, shall be governed by the AAPL Form
610 Model Operating Agreement-1982, with a provision reserving the right to take
production in-kind, naming the Managing General Partner as operator and the
Partnership as a non-operator, and with the accounting procedure to govern as
the accounting procedures under such Operating Agreements.
(e)
The Managing General Partner is generally expected to
act as the operator of Partnership xxxxx, and the Managing General Partner may
designate such other persons as it deems appropriate to conduct the actual
drilling and producing operations of the Partnership. If the Managing General
Partner retains another person as operator, the contract of retention shall
provide that the new operator will have capabilities that are comparable to
those of the Managing General Partner, including the availability of technical
expertise and adequate response time.
(f)
As operator of Partnership xxxxx, the Managing General Partner
or its Affiliates shall receive perwell charges for each producing well based on
the Working Interest acquired by the Partnership. These per-well charges shall
be subject to annual adjustment beginning January 1, 2009 as provided in the
accounting procedures of the operating agreements.
(g)
The Managing General Partner shall drill xxxxx
pursuant to drilling contracts with the Partnership at the lesser of cost or
competitive prices and terms in the geographic area of operations. The Managing
General Partner's Drilling Compensation shall be its compensation for serving as
managing general partner and operator and for contributing its leases at
cost.
(h)
The Managing General Partner shall be reimbursed by the
Partnership for Direct Costs. The Managing General Partner shall not be
reimbursed for any Administrative Costs. All other expenses shall be borne by
the Partnership.
(i)
The Managing General Partner and its Affiliates may
enter into other transactions (embodied in a written contract) with the
Partnership during production operations, such as providing services, supplies,
and equipment, and shall be entitled to compensation for such services at prices
and on terms that are competitive in the geographic area of
operations.
(j)
The Partnership shall make no loans to the Managing General
Partner or any Affiliate thereof.
(k)
The Partnership may borrow funds in furtherance of its
operations from the Managing General Partner and/or its Affiliates or from
independent persons. If the Managing General Partner or any Affiliate loans or
advances funds to the Partnership, the Managing General Partner or Affiliate
shall not receive interest on such loan or advancement in excess of its interest
costs, nor shall the Managing General Partner or Affiliate receive interest in
excess of the amounts which would be charged the Partnership (without reference
to the Managing General Partner's financial abilities or guarantees) by
unrelated banks on comparable loans for the same purpose, and the Managing
General Partner or Affiliate shall not receive points or other financial charges
or fees, regardless of the amount.
(l)
The funds of the Partnership shall not be commingled with the
funds of any other Person.
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(m) Notwithstanding
any provision herein to the contrary, no creditor shall receive, as a result of
making any loan, a direct or indirect interest in the profits, capital, or
property of the Partnership other than as a secured creditor.
(n)
The Managing General Partner shall have a fiduciary responsibility
for the safekeeping and use of all funds and assets of the Partnership, whether
or not in the Managing General Partner's possession or control, and shall not
employ or permit another to employ such funds or assets in any manner except for
the exclusive benefit of the Partnership.
5.03
Acquisition and Sale of
Leases.
(a)
To the extent the Partnership does not acquire a full interest
in a Lease from the Managing General Partner, the remainder of the interest in
such Lease may be held by the Managing General Partner which may either retain
and exploit it for its own account or sell or otherwise dispose of all or a part
of such remaining interest. Profits from such exploitation and/or disposition
shall be for the benefit of the Managing General Partner to the exclusion of the
Partnership. Any Leases acquired by the Partnership from the Managing General
Partner shall be acquired only at the Managing General Partner's Cost, unless
the Managing General Partner shall have reason to believe that Cost is in excess
of the fair market value of such property, in which case the price shall not
exceed the fair market value. The Managing General Partner shall obtain an
appraisal from a qualified independent expert with respect to sales of
properties of the Managing General Partner and its Affiliates to the
Partnership. Neither the Managing General Partner nor any Affiliate shall
acquire or retain any carried, reversionary, or Overriding Royalty Interest on
the Lease interests acquired by the Partnership.
(b)
The Partnership shall acquire only Leases reasonably expected to
meet the stated purposes of the Partnership. No Leases shall be acquired for the
purpose of a subsequent sale or farmout unless the acquisition is made after a
well has been drilled to a depth sufficient to indicate that such an acquisition
would be in the Partnership's best interest.
(c)
Neither the Managing General Partner nor its Affiliates, except other
partnerships sponsored by them, shall purchase any productive properties from
the Partnership.
5.04 Title to
Leases.
(a)
Record title to each Lease acquired by the Partnership may be temporarily
held in the name of the Managing General Partner, or in the name of any nominee
designated by the Managing General Partner, as agent for the Partnership until a
productive well is completed on a Lease. Thereafter, record title to Leases
shall be assigned to and placed in the name of the Partnership.
(b)
The Managing General Partner shall take the necessary steps in its best
judgment to render title to the Leases to be assigned to the Partnership
acceptable for the purposes of the Partnership. No operation shall be commenced
on any Prospect acquired by the Partnership unless the Managing General Partner
is satisfied that the undertaking of such operation would be in the best
interest of Investor Partners and the Partnership. The Managing General Partner
shall be free, however, to use its own best judgment in waiving title
requirements and shall not be liable to the Partnership or the Investor Partners
for any mistakes of judgment unless such mistakes were made in a manner not in
accordance with general industry standards in the geographic area and such
mistakes were not the result of negligence by the Managing General Partner; nor
shall the Managing General Partner or its Affiliates be deemed to be making any
warranties or representations, express or implied, as to the validity or
merchantability of the title to any Lease assigned to the Partnership or the
extent of the interest covered thereby.
5.05
Farmouts.
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(a)
No Partnership Lease shall be farmed out, sold, or otherwise
disposed of unless the Managing General Partner determines that (i) the
Partnership lacks sufficient funds to drill on such Lease and is unable to
obtain suitable financing, (ii) the Leases have been downgraded by events
occurring after assignment to the Partnership, (iii) drilling on the Leases
would result in an excessive concentration of Partnership funds creating, in the
Managing General Partner's opinion, undue risk to the Partnership, or (iv) the
Managing General Partner, exercising the standard of a prudent operator,
determines that the farmout is in the best interests of the
Partnership.
(b)
Farmouts between the Partnership and the Managing General Partner or
its Affiliates, including any other affiliated limited partnership, shall be
effected on terms deemed fair by the Managing General Partner. The Managing
General Partner, exercising the standard of a prudent operator, shall determine
that the farmout is in the best interest of the Partnership and the terms of the
farmout are consistent with and, in any case, no less favorable to the
Partnership than those utilized in the geographic area of operations for similar
arrangements. The respective obligations and revenue sharing of all affiliated
parties to the transactions shall be substantially the same, and the
compensation arrangement or any other interest or right of either the Managing
General Partner or its Affiliates shall be substantially the same in each
participating partnership or, if different, shall be reduced to reflect the
lower compensation arrangement.
5.06 Release, Abandonment, and
Sale or Exchange of Properties. Except as provided elsewhere in this
Article V and in Section 6.03, the Managing General Partner shall have full
power to dispose of the production and other assets of the Partnership,
including the power to determine which Leases shall be released or permitted to
terminate, those xxxxx to be abandoned, whether any Lease or well shall be sold
or exchanged, and the terms therefor. In the event the Managing General Partner
sells, transfers, or otherwise disposes of nonproducing property of the
Partnership, the sale, transfer, or disposition shall, to the extent possible,
be made at a price which is the higher of the fair market value of the property
on the date of the sale, transfer, or disposition or the Cost of such property
to the Partnership.
5.07 Certain
Transactions.
(a)
A Prospect shall be deemed to consist of the drilling or spacing
unit on which the well will be drilled by the Partnership, which is the minimum
area permitted by state law or local practice on which one well may be drilled,
for xxxxx drilled on the Company's Xxxxxxx or Chevron leasehold in Garfield
County, Colorado; on the Company's Xxxxxx or Xxxxxx leasehold located in North
Dakota or on development prospects in the Greater Wattenberg Field Area in
Colorado.
(1)
In the event that an
exploratory well is drilled on PDC's acreage located in the above areas, and the
well proves up reserves on the immediately adjacent spacing units, to the extent
that PDC owns an interest in the adjacent units, PDC will assign the Partnership
an interest equivalent to that owned in the exploratory well, proportionately
reduced if PDC owns less than a 100% interest in the adjacent spacing
unit.
(2)
If the area constituting the
Partnership's Prospect is subsequently enlarged, by the drilling of a successful
exploratory well by the Partnership, to encompass any area in which the Managing
General Partner or an Affiliate (excluding another program in which the interest
of the Managing General Partner or its Affiliates is substantially similar to or
less than their interest in the Partnership) owns a separate property interest
and the activities of the Partnership were material in establishing the
existence of Proved Undeveloped Reserves that are attributable to the separate
property interest, then the separate property interest or a portion thereof must
be sold, transferred, or conveyed to the Partnership as set forth in this
section (a).
(3)
Notwithstanding the foregoing, Prospects
shall not be enlarged or contracted if the Prospect was limited to the drilling
or spacing unit or portion thereof, as outlined above.
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(b)
The Partnership shall not purchase properties from or sell
properties to any other affiliated partnership. This prohibition, however, shall
not apply to transactions among affiliated partnerships by which property is
transferred from one to another in exchange for the transferee's obligation to
conduct drilling activities on such property or to joint ventures among such
affiliated partnerships, provided that the respective obligations and revenue
sharing of all parties to the transaction are substantially the same and the
compensation arrangement or any other interest or right of either the Managing
General Partner or its Affiliates is the same in each affiliated partnership,
or, if different, the aggregate compensation of the Managing General Partner is
reduced to reflect the lower compensation arrangement.
(c)
During the existence of the Partnership, and
before it has ceased operations, neither the Managing General Partner nor any of
its Affiliates (excluding another partnership where the Managing General
Partner's or its Affiliates' interest in such partnership is identical to or
less than their interest in the Partnership) shall acquire, retain, or drill for
their own account any oil and gas interest in any Prospect in which the
Partnership possesses an interest, except for transactions whereby the Managing
General Partner or such Affiliate acquires or retains a proportionate Working
Interest, the respective obligations of the Managing General Partner or the
Affiliate and the Partnership are substantially the same after the sale of the
interest to the Partnership, and the Managing General Partner's or Affiliate's
interest in revenues does not exceed the amount proportionate to its Working
Interest.
(d)
Any services, equipment, or supplies which the Managing General Partner or
an Affiliate furnishes to the Partnership shall be furnished at the lesser of
the Managing General Partner's or the Affiliate's Cost or a competitive rate
which could be obtained in the geographical area of operations unless the
Managing General Partner or any Affiliate is engaged to a substantial extent, as
an ordinary and ongoing business, in providing such services, equipment, or
supplies to others in the industry, in which event, the services, supplies, or
equipment may be provided by such person to the Partnership at prices
competitive with those charged by others in the geographical area of operations
which would be available to the Partnership. If such entity is not engaged in
the business as set forth above, then such compensation, price or rental shall
be the cost of such services, equipment or supplies to such entity, or the
competitive rate which could be obtained in the area, whichever is less. No
turnkey drilling contracts shall be made between the Managing General Partner or
its Affiliates and the Partnership. Neither the Managing General Partner nor its
Affiliates shall profit by drilling in contravention of its fiduciary
obligations to the Partnership. Any such services for which the Managing General
Partner or an Affiliate is to receive compensation shall be embodied in a
written contract which precisely describes the services to be rendered and all
compensation to be paid.
(e)
Advance payments by the Partnership to the Managing General Partner
are prohibited, except where necessary to secure tax benefits of prepaid
drilling costs. These payments, if any, shall not include nonrefundable payments
for completion costs prior to the time that a decision is made that the well or
xxxxx warrant a completion attempt.
(f)
Neither the Managing General Partner nor its Affiliates
shall make any future commitments of the Partnership's production which do not
primarily benefit the Partnership, nor shall the Managing General Partner or any
Affiliate utilize Partnership funds as compensating balances for the benefit of
the Managing General Partner or the Affiliate.
(g)
No rebates or give-ups may be received by the Managing
General Partner or any of its Affiliates, nor may the Managing General Partner
or any Affiliate participate in any reciprocal business arrangements which would
circumvent these restrictions.
(h)
If the Partnership acquires property pursuant to a farmout or
joint venture from an affiliated program, the Managing General Partner's and/or
its Affiliates' aggregate compensation associated with the property and any
direct and indirect ownership interest in the property may not exceed the lower
of the compensation and ownership interest the Managing General Partner and/or
its Affiliates could receive if the property were separately owned or retained
by either one of the programs.
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(i)
Neither the Managing General Partner nor any Affiliate, including
affiliated programs, may purchase or acquire any property from the Partnership,
directly or indirectly, except pursuant to transactions that are fair and
reasonable to the Investor Partners of the Partnership and then subject to the
following conditions:
(1)
A sale, transfer or conveyance, including a farmout, of an
undeveloped property from the Partnership to the Managing General Partner or an
Affiliate, other than an affiliated program, must be made at the higher of cost
or fair market value.
(2)
A sale, transfer or conveyance of a developed property
from the Partnership to the Managing General Partner or an Affiliate, other than
an affiliated program in which the interest of the Managing General Partner is
substantially similar to or less than its interest in the subject Partnership,
shall not be permitted except in connection with the liquidation of the
Partnership and then only at fair market value.
(3)
Except in connection with farmouts or joint
ventures made in compliance with Section 5.07(h) above, a transfer of an
undeveloped property from the Partnership to an affiliated drilling program must
be made at fair market value if the property has been held for more than two
years. Otherwise, if the Managing General Partner deems it to be in the best
interest of the Partnership, the transfer may be made at cost.
(4)
Except in connection with farmouts or joint ventures made in
compliance with Section 5.07(h) above, a transfer of any type of property from
the Partnership to an affiliated production purchase or income program must be
made at fair market value if the property has been held for more than six months
or there have been significant expenditures made in connection with the
property. Otherwise, if the Managing General Partner deems it to be in the best
interest of the Partnership, the transfer may be made at cost as adjusted for
intervening operations.
(j)
If the Partnership participates in other
partnerships or joint ventures (multi-tier arrangements), the terms of any such
arrangements shall not result in the circumvention of any of the requirements or
prohibitions contained in this Partnership Agreement, including the
following:
(1)
there will be no duplication or increase in organization and
offering expenses, the Managing General Partner's compensation, Partnership
expenses or other fees and costs;
(2)
there will be no substantive alteration in
the fiduciary and contractual relationship between the Managing General Partner
and the Investor Partners; and
(3)
there will be no diminishment in the voting rights
of the Investor Partners.
(k)
In connection with a proposed Roll-Up, the following shall
apply:
(1)
An appraisal of all Partnership assets shall be
obtained from a competent independent expert. If the appraisal will be included
in a Memorandum used to offer the securities of a Roll- Up Entity, the appraisal
shall be filed with the Securities and Exchange Commission and the Administrator
as an exhibit to the registration statement for the offering. The appraisal
shall be based on all relevant information, including current reserve estimates
prepared by an independent petroleum consultant, and shall indicate the value of
the Partnership's assets assuming an orderly liquidation as of a date
immediately prior to the announcement of the proposed Roll-Up transaction. The
appraisal shall assume an orderly liquidation of Partnership assets over a 12-
month period. The terms of the engagement of the independent expert shall
clearly state that the engagement is for the benefit of the Partnership and the
Investor Partners. A summary of the independent appraisal, indicating all
material assumptions underlying the appraisal, shall be included in a report to
the Investor Partners in connection with a proposed Roll-Up.
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(2)
In connection with a proposed Roll-Up, Investor Partners who
vote "no" on the proposal shall be offered the choice of:
(i)
accepting the securities of the Roll-Up Entity offered
in the proposed Roll-Up; or
(ii)
(a) remaining as Investor Partners in the
Partnership and preserving their interests therein on the same terms and
conditions as existed previously; or (b) receiving cash in an amount equal to
the Investor Partners' pro-rata share of the appraised value of the net assets
of the Partnership.
(3)
The Partnership shall not participate in any
proposed Roll-Up which, if approved, would result in the diminishment of any
Investor Partner's voting rights under the Roll-Up Entity's chartering
agreement. In no event shall the democracy rights of Investor Partners in the
Roll-Up Entity be less than those provided for under Sections 7.07 and 7.08 of
this Agreement. If the Roll- Up Entity is a corporation, the democracy rights of
Investor Partners shall correspond to the democracy rights provided for in this
Agreement to the greatest extent possible.
(4)
The Partnership shall not participate in any proposed Roll-Up
transaction which includes provisions which would operate to materially impede
or frustrate the accumulation of shares by any purchaser of the securities of
the Roll-Up Entity (except to the minimum extent necessary to preserve the tax
status of the Roll-Up Entity); nor shall the Partnership participate in any
proposed Roll-Up transaction which would limit the ability of an Investor
Partner to exercise the voting rights of its securities of the Roll-Up Entity on
the basis of the number of Partnership Units held by that Investor
Partner.
(5)
The Partnership shall not participate in a Roll-Up in
which Investor Partners' rights of access to the records of the Roll-Up Entity
will be less than those provided for under Section 8.01 of this
Agreement.
(6)
The Partnership shall not participate in any proposed
Roll-Up transaction in which any of the costs of the transaction would be borne
by the Partnership if the Roll-Up is not approved by the Investor
Partners.
(7)
The Partnership shall not participate in a Roll-Up
transaction unless the Roll-Up transaction is approved by at least 66 2/3% in
interest of the Investor Partners.
ARTICLE
VI
Managing
General Partner
6.01 Managing General
Partner. The Managing General Partner shall have the sole and exclusive
right and power to manage and control the affairs of and to operate the
Partnership and to do all things necessary to carry on the business of the
Partnership for the purposes described in Section 1.03 hereof and to conduct the
activities of the Partnership as set forth in Article V hereof. No financial
institution or any other person, firm, or corporation dealing with the Managing
General Partner shall be required to ascertain whether the Managing General
Partner is acting in accordance with this Agreement, but such financial
institution or such other person, firm, or corporation shall be protected in
relying solely upon the deed, transfer, or assurance of and the execution of
such instrument or instruments by the Managing General Partner. The Managing
General Partner shall devote so much of its time to the business of the
Partnership as in its judgment the conduct of the Partnership's business shall
reasonably require and shall not be obligated to do or perform any act or thing
in connection with the business of the Partnership not expressly set forth
herein. The Managing General Partner may engage in business ventures of any
nature and description independently or with others and neither the Partnership
nor any of its Investor Partners shall have any rights in and to such
independent ventures or the income or profits derived therefrom. However, except
as otherwise provided herein, the Managing General Partner and any of its
Affiliates may pursue business opportunities that are consistent with the
Partnership's investment objectives for their own account only after they have
determined that such opportunity either cannot be pursued by the Partnership
because of insufficient funds or because it is not appropriate for the
Partnership under the existing circumstances.
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6.02 Authority of Managing
General Partner. The Managing General Partner is specifically authorized
and empowered, on behalf of the Partnership, and by consent of the Investor
Partners herein given, to do any act or execute any document or enter into any
contract or any agreement of any nature necessary or desirable, in the opinion
of the Managing General Partner, in pursuance of the purposes of the
Partnership. Without limiting the generality of the foregoing, in addition to
any and all other powers conferred upon the Managing General Partner pursuant to
this Agreement and the Act, and except as otherwise prohibited by law or
hereunder, the Managing General Partner shall have the power and authority
to:
(a)
Acquire Leases and other interests in oil and/or gas properties in
furtherance of the Partnership's business;
(b)
Enter into and execute pooling agreements, farm out agreements, operating
agreements, unitization agreements, dry and bottom hole and acreage contribution
letters, construction contracts, joint venture or other arrangements with or on
behalf of the Partnership, loan and financing agreements as permitted by Section
5.02(k) of this Agreement, and any and all documents or instruments customarily
employed in the oil and gas industry in connection with the acquisition, sale,
exploration, development, or operation of oil and gas properties, and all other
instruments deemed by the Managing General Partner to be necessary or
appropriate to the proper operation of oil or gas properties or to effectively
and properly perform its duties or exercise its powers hereunder;
(c)
Make expenditures and incur any obligations it deems necessary
to implement the purposes of the Partnership; employ and retain such personnel
as it deems desirable for the conduct of the Partnership's activities, including
employees, consultants, and attorneys; and exercise on behalf of the
Partnership, in such manner as the Managing General Partner in its sole judgment
deems best, of all rights, elections, and obligations granted to or imposed upon
the Partnership;
(d)
Manage, operate, and develop any Partnership property, and
enter into operating agreements with respect to properties acquired by the
Partnership, including an operating agreement with the Managing General Partner
as described in the Memorandum, which agreements may contain such terms,
provisions, and conditions as are usual and customary within the industry and as
the Managing General Partner shall approve;
(e)
Compromise, xxx, or defend any and all claims in favor of or against the
Partnership;
(f)
Subject to the provisions of Section 8.04 hereof, make
or revoke any election permitted the Partnership by any taxing
authority;
(g)
Perform any and all acts it deems necessary or appropriate for
the protection and preservation of the Partnership assets;
(h)
Maintain at the expense of the Partnership such insurance coverage
for public liability, fire and casualty, and any and all other insurance
necessary or appropriate to the business of the Partnership in such amounts and
of such types as it shall determine from time to time;
(i)
Buy, sell, or lease property or assets on behalf of the
Partnership;
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(j)
Enter into agreements to hire services of any kind or
nature;
(k)
Assign interests in properties to the
Partnership;
(l)
Enter into soliciting dealer agreements and perform all of the
Partnership's obligations thereunder, to issue and sell Units pursuant to the
terms and conditions of this Agreement, the Subscription Agreements, and the
Memorandum, to accept and execute on behalf of the Partnership Subscription
Agreements, and to admit original and substituted Partners; and
(m) Perform
any and all acts, and execute any and all documents it deems necessary or
appropriate to carry out the purposes of the Partnership.
6.03 Certain Restrictions on
Managing General Partner's Power and Authority. Notwithstanding any other
provisions of this Agreement to the contrary, neither the Managing General
Partner nor any Affiliate of the Managing General Partner shall have the power
or authority to, and shall not, do, perform, or authorize any of the
following:
(a)
Use any revenues from Partnership operations for the
purposes of acquiring Leases in new or unrelated Prospects or paying any
Organization and Offering Expenses; provided, however, that revenues from
Partnership operations may be used for other Partnership operations, including
without limitation for the purposes of drilling, completing, maintaining,
recompleting, and operating xxxxx on existing Partnership Prospects and
acquiring and developing new Leases to the extent such Leases are considered by
the Managing General Partner in its sole discretion to be a part of a Prospect
in which the Partnership then owns a Lease;
(b)
Without having first received the prior consent of the holders
of a majority of the then outstanding Units entitled to vote,
(1)
sell all or substantially all of the assets of the
Partnership (except upon liquidation of the Partnership pursuant to Article IX
hereof), unless cash funds of the Partnership are insufficient to pay the
obligations and other liabilities of the Partnership;
(2)
dispose of the good will of the Partnership;
(3)
do any other act which would make it impossible to carry
on the ordinary business of the Partnership; or
(4)
agree to the termination or amendment of any operating
agreement to which the Partnership is a party, or waive any rights of the
Partnership thereunder, except for amendments to the operating agreement which
the Managing General Partner believes are necessary or advisable to ensure that
the operating agreement conforms to any changes in or modifications to the Code
or that do not adversely affect the Investor Partners in any material
respect;
(c)
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 other than the Partnership;
(d)
Bind or obligate the Partnership with respect to
any matter outside the scope of the Partnership business;
(e)
Use the Partnership name, credit, or property for
other than Partnership purposes;
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(f)
Take any action, or permit any other person to take any
action, with respect to the assets or property of the Partnership which does not
benefit the Partnership, including, among other things, utilization of funds of
the Partnership as compensating balances for its own benefit or the commitment
of future production;
(g)
Benefit from any arrangement for the marketing of
oil and gas production or other relationships affecting the property of the
Managing General Partner and the Partnership, unless such benefits are fairly
and equitably apportioned among the Managing General Partner, its Affiliates,
and the Partnership;
(h)
Utilize Partnership funds to invest in the
securities of another person except in the following instances:
(1)
investments in working interests or
undivided lease interests made in the ordinary course of the Partnership's
business;
(2)
temporary investments made in compliance with Section
2.02(f) of this Agreement;
(3)
investments involving less than 5% of Partnership
capital which are a necessary and incidental part of a property acquisition
transaction; and
(4)
investments in entities established solely to
limit the Partnership's liabilities associated with the ownership or operation
of property or equipment, provided, in such instances duplicative fees and
expenses shall be prohibited; or
(i)
Sell, transfer, or assign its interest (except for a
collateral assignment which may be granted to a bank or other financial
institution) in the Partnership, or any part thereof, or otherwise to withdraw
as Managing General Partner of the Partnership without one hundred twenty (120)
days prior written notice to and the written consent of Investor Partners owning
a majority of the then outstanding Units.
6.04 Indemnification of Managing
General Partner. The Managing General Partner shall have no liability to
the Partnership or to any Investor Partner for any loss suffered by the
Partnership which arises out of any action or inaction of the Managing General
Partner if the Managing General Partner, in good faith, determined that such
course of conduct was in the best interest of the Partnership, that the Managing
General Partner was acting on behalf of or performing services for the
Partnership, and that such course of conduct did not constitute negligence or
misconduct of the Managing General Partner. The Managing General Partner shall
be indemnified by the Partnership against any losses, judgments, liabilities,
expenses, and amounts paid in settlement of any claims sustained by it in
connection with the Partnership, provided that the Managing General Partner has
determined in good faith that the course of conduct which caused the loss or
liability was in the best interests of the Partnership, that the Managing
General Partner was acting on behalf of or performing services for the
Partnership, and that the same were not the result of negligence or misconduct
on the part of the Managing General Partner. Indemnification of the Managing
General Partner is recoverable only from the tangible net assets of the
Partnership, including the insurance proceeds from the Partnership's insurance
policies and the insurance and indemnification of the Partnership's
subcontractors, and is not recoverable from the Investor Partners.
Notwithstanding
the above, the Managing General Partner and any person acting as a broker-dealer
shall not be indemnified for liabilities arising under Federal and state
securities laws unless (a) there has been a successful adjudication on the
merits of each count involving securities law violations, (b) such claims have
been dismissed with prejudice on the merits by a court of competent
jurisdiction, or (c) a court of competent jurisdiction approves a settlement of
such claims against a particular indemnitee and finds that indemnification of
the settlement and the related costs should be made, and the court considering
the request for indemnification has been advised of the position of the
Securities and Exchange Commission and of any state securities regulatory
authority in which securities of the Partnership were offered or sold as to
indemnification for violations of securities laws; provided however, the court
need only be advised of the positions of the securities regulatory authorities
of those states (i) which are specifically set forth in the partnership
agreement and (ii) in which plaintiffs claim they were offered or sold
partnership units.
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In any
claim for indemnification for Federal or state securities laws violations, the
party seeking indemnification shall place before the court the position of the
Securities and Exchange Commission, the Massachusetts Securities Division, and
the Tennessee Securities Division or respective state securities division, as
the case may be, with respect to the issue of indemnification for securities law
violations.
The
advancement of Partnership funds to a sponsor or its affiliates for legal
expenses and other costs incurred as a result of any legal action for which
indemnification is being sought is permissible only if the Partnership has
adequate funds available and the following conditions are
satisfied:
(a)
the legal action relates to acts or
omissions with respect to the performance of duties or services on behalf of the
Partnership, and
(b)
the legal action is initiated by a third
party who is not a participant, or the legal action is initiated by a
participant and a court of competent jurisdiction specifically approves such
advancement, and
(c)
the sponsor or its affiliates undertake to repay
the advanced funds to the Partnership, together with the applicable legal rate
of interest thereon, in cases in which such party is found not to be entitled to
indemnification.
The
Partnership shall not incur the cost of the portion of any insurance which
insures the Managing General Partner against any liability as to which the
Managing General Partner is herein prohibited from being
indemnified.
6.05 Withdrawal.
(a)
Notwithstanding the limitations contained in Section
6.03(i) hereof, the Managing General Partner shall have the right, by giving
written notice to the other Partners, to substitute in its stead as managing
general partner any successor entity or any entity controlled by the Managing
General Partner, provided that the successor Managing General Partner must have
a tangible net worth of at least $5 million, and the Investor Partners, by
execution of this Agreement, expressly consent to such a transfer, unless it
would adversely affect the status of the Partnership as a partnership for
federal income tax purposes.
(b)
The Managing General Partner may not voluntarily
withdraw from the Partnership prior to the Partnership's completion of its
primary drilling and/or acquisition activities, and then only after giving 120
days written notice. The Managing General Partner may not partially withdraw its
property interests held by the Partnership unless such withdrawal is necessary
to satisfy the bona fide request of its creditors or approved by a
majority-in-interest vote of the Investor Partners. The Managing General Partner
shall fully indemnify the Partnership against any additional expenses which may
result from a partial withdrawal of property interests and such withdrawal may
not result in a greater amount of direct costs or administrative costs being
allocated to the Investor Partners. The withdrawing Managing General Partner
shall pay all expenses incurred as a result of its withdrawal.
6.06 Management Fee. The
Partnership shall pay the Managing General Partner, on the date the Partnership
is organized (as set forth in Section 1.01), a one-time management fee equal to
1½% of the total Subscriptions.
6.07 Tax Matters and Financial
Reporting Partner. The Managing General Partner shall serve as the Tax
Matters Partner for purposes of Code Sections 6221 through 6233 and as the
Financial Reporting Partner. The Partnership may engage its accountants and/or
attorneys to assist the Tax Matters Partner in discharging its duties
hereunder.
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ARTICLE
VII
Investor
Partners
7.01 Management. No
Investor Partner shall take part in the control or management of the business or
transact any business for the Partnership, and no Investor Partner shall have
the power to sign for or bind the Partnership. Any action or conduct of Investor
Partners on behalf of the Partnership is hereby expressly prohibited. Any
Investor Partner who violates this Section 7.01 shall be liable to the remaining
Investor Partners, the Managing General Partner, and the Partnership for any
damages, costs, or expenses any of them may incur as a result of such violation.
The Investor Partners hereby grant to the Managing General Partner or its
successors or assignees the exclusive authority to manage and control the
Partnership business in its sole discretion and to thereby bind the Partnership
and all Partners in its conduct of the Partnership business. Investor Partners
shall have the right to vote only with respect to those matters specifically
provided for in these Articles. No Investor Partner shall have the authority
to:
(a)
Assign the Partnership property in trust for creditors or on
the assignee's promise to pay the debts of the Partnership;
(b)
Dispose of the goodwill of the business;
(c)
Do any other act which would make it impossible to carry on the ordinary
business of the Partnership;
(d)
Confess a judgment;
(e)
Submit a Partnership claim or liability to
arbitration or reference;
(f)
Make a contract or bind the Partnership to any agreement
or document;
(g)
Use the Partnership's name, credit, or property for any
purpose;
(h)
Do any act which is harmful to the Partnership's assets or business
or by which the interests of the Partnership shall be imperiled or prejudiced;
or
(i)
Perform any act in violation of any applicable law or
regulations thereunder, or perform any act which is inconsistent with the terms
of this Agreement.
7.02 Indemnification of
Additional General Partners. The Managing General Partner agrees to
indemnify each of the Additional General Partners for the amounts of
obligations, risks, losses, or judgments of the Partnership or the Managing
General Partner which exceed the amount of applicable insurance coverage and
amounts which would become available from the sale of all Partnership assets.
Such indemnification applies to casualty losses and to business losses, such as
losses incurred in connection with the drilling of an unproductive well, to the
extent such losses exceed the Additional General Partners' interest in the
undistributed net assets of the Partnership. If, on the other hand, such excess
obligations are the result of the negligence or misconduct of an Additional
General Partner, or the contravention of the terms of the Partnership Agreement
by the Additional General Partner, then the foregoing indemnification by the
Managing General Partner shall be unenforceable as to such Additional General
Partner and such Additional General Partner shall be liable to all other
Partners for damages and obligations resulting therefrom.
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7.03 Assignment of
Units.
(a)
An Investor Partner may transfer all or any portion of his
Units and the transferee shall become a Substituted Investor Partner (subject to
all duties and obligations of an Investor Partner, including those contained in
Section 4.04 herein, except to the extent excepted in the Act) subject to the
following conditions (any transfer of such Units satisfying such conditions
being referred to herein as a "Permitted Transfer"):
(1)
Except in the case of a
transfer of Units at death or involuntarily by operation of law, the transferor
and transferee shall execute and deliver to the Partnership such documents and
instruments of conveyance as may be necessary or appropriate in the opinion of
counsel to the Partnership to effect such transfer and to confirm the agreement
of the transferee to be bound by the provisions of this Article VII. In any case
not described in the preceding sentence, the transfer shall be confirmed by
presentation to the Partnership of legal evidence of such transfer, in form and
substance satisfactory to counsel to the Partnership. In all cases, the
Partnership shall be reimbursed by the transferor and/or transferee for all
costs and expenses that it reasonably incurs in connection with such
transfer;
(2)
The transferor and transferee
shall furnish the Partnership with the transferee's taxpayer identification
number and sufficient information to determine the transferee's initial tax
basis in the Units transferred;
(3)
The Transferee shall have satisfied
the suitability standards that have been established for an investment in the
Partnership, including being an accredited investor as defined by Regulation D
under the Securities Act of 1933; and
(4)
The written consent of the Managing General
Partner to such transfer shall have been obtained.
(b)
A Person who acquires one or more Units but who is not admitted as a
Substituted Investor Partner pursuant to Section 7.03(c) hereof shall be
entitled only to allocations and distributions with respect to such Units in
accordance with this Agreement, but shall have no right to any information or
accounting of the affairs of the Partnership, shall not be entitled to inspect
the books or records of the Partnership, and shall not have any of the rights of
an Additional General Partner or a Limited Partner under the Act or the
Agreement.
(c)
Subject to the other provisions of this Article VII, a transferee of
Units may be admitted to the Partnership as a Substituted Investor Partner only
upon satisfaction of the conditions set forth below in this Section
7.03(c):
(1)
The Managing General
Partner consents to such admission;
(2)
The Units with respect to which
the transferee is being admitted were acquired by means of a Permitted
Transfer;
(3)
The transferee becomes a party to this
Agreement as a Partner and executes such documents and instruments as the
Managing General Partner may reasonably request (including, without limitation,
amendments to the Certificate of Limited Partnership) as may be necessary or
appropriate to confirm such transferee as a Partner in the Partnership and such
transferee's agreement to be bound by the terms and conditions
hereof;
(4)
The transferee pays or reimburses the
Partnership for all reasonable legal, filing, and publication costs that the
Partnership incurs in connection with the admission of the transferee as a
Partner with respect to the transferred Units; and
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(5)
If the transferee is not an individual of legal
majority, the transferee provides the Partnership with evidence satisfactory to
counsel for the Partnership of the authority of the transferee to become a
Partner and to be bound by the terms and conditions of this
Agreement.
(6)
In any calendar quarter in which a Substituted Investor
Partner is admitted to the Partnership, the Managing General Partner shall amend
the certificate of limited partnership to effect the substitution of such
Substituted Investor Partners, although the Managing General Partner may do so
more frequently. In the case of assignments, where the assignee does not become
a Substituted Investor Partner, the Partnership shall recognize the assignment
not later than the last day of the calendar month following receipt of notice of
assignment and required documentation.
(d)
Each Investor Partner hereby covenants and agrees
with the Partnership for the benefit of the Partnership and all Partners that
(i) he is not currently making a market in Units and (ii) he will not transfer
any Unit on an established securities market or a secondary market (or the
substantial equivalent thereof) within the meaning of Code Section 7704(b) (and
any regulations, proposed regulations, revenue rulings, or other official
pronouncements of the Service or Treasury Department that may be promulgated or
published thereunder). Each Investor Partner further agrees that he will not
transfer any Unit to any Person unless such Person agrees to be bound by this
Section 7.03 and to transfer such Units only to Persons who agree to be
similarly bound.
(e)
Restrictions on assignment of Units or the
substitution of Investor Partners shall be allowed only to the extent necessary
to preserve the tax status of the Partnership or the classification of
Partnership income for tax purposes or to satisfy the suitability standards
required by state or federal law and any restriction shall be supported by an
opinion of the Partnership's counsel as to its legal necessity.
7.04 Prohibited
Transfers.
(a)
Any purported Transfer of Units that is not a Permitted Transfer
shall be null and void and of no effect whatever; provided, that, if the
Partnership is required to recognize a transfer that is not a Permitted Transfer
(or if the Managing General Partner, in its sole discretion, elects to recognize
a transfer that is not a Permitted Transfer), the interest transferred shall be
strictly limited to the transferor's rights to allocations and distributions as
provided by this Agreement with respect to the transferred Units, which
allocations and distributions may be applied (without limiting any other legal
or equitable rights of the Partnership) to satisfy the debts, obligations, or
liabilities for damages that the transferor or transferee of such Units may have
to the Partnership.
(b)
In the case of a transfer or attempted transfer of Units that is not a
Permitted Transfer, the parties engaging or attempting to engage in such
transfer shall be liable to indemnify and hold harmless the Partnership and the
other Partners from all cost, liability, and damage that any of such indemnified
Persons may incur (including, without limitation, incremental tax liability and
lawyers' fees and expenses) as a result of such transfer or attempted transfer
and efforts to enforce the indemnity granted hereby.
7.05 Withdrawal by Investor
Partners. Neither a Limited Partner nor an Additional General Partner may
withdraw from the Partnership, except as otherwise provided in this
Agreement.
7.06 Removal of Managing General
Partner.
(a)
The Managing General Partner may be removed at any time with the consent
of Investor Partners owning a majority of the then outstanding Units, and upon
the selection of a successor managing general partner or partners by Investor
Partners owning a majority of the then outstanding Units.
(b)
Any successor Managing General Partner may be removed upon the terms and
conditions provided in this Section.
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(c)
In the event a managing general partner is
removed, its respective interest in the assets of the Partnership shall be
determined by independent appraisal by a qualified independent petroleum
engineering consultant who shall be selected by mutual agreement of the Managing
General Partner and the incoming sponsor. Such appraisal will take into account
an appropriate discount to reflect the risk of recovery of oil and gas reserves,
and, at its election, the removed managing general partner's interest in the
Partnership assets may be distributed to it or the interest of the managing
general partner in the Partnership may be retained by it as a Limited Partner in
the successor limited partnership; provided, however, that if immediate payment
to the removed managing general partner would impose financial or operational
hardship upon the Partnership, as determined by the successor managing general
partner in the exercise of its fiduciary duties to the Partnership, payment
(plus reasonable interest) to the removed managing general partner may be
postponed to that time when, in the determination of the successor managing
general partner, payment will not cause a hardship to the Partnership. The cost
of such appraisal shall be borne by the Partnership. The successor managing
general partner shall have the option to purchase at least 20% of the removed
managing general partner's interest for the value determined by the independent
appraisal. The removed managing general partner, at the time of its removal
shall cause, to the extent it is legally possible, its successor to be
transferred or assigned all its rights, obligations, and interests in contracts
entered into by it on behalf of the Partnership. In any event, the removed
managing general partner shall cause its rights, obligations, and interests in
any such contract to terminate at the time of its removal.
(d)
Upon effectiveness of the removal of the managing general
partner, the assets, books, and records of the Partnership shall be surrendered
to the successor managing general partner, provided that the successor managing
general partner shall have first (i) agreed to accept the responsibilities of
the managing general partner, and (ii) made arrangements satisfactory to the
original managing general partner to remove such managing general partner from
personal liability on any Partnership borrowings or, if any Partnership creditor
will not consent to such removal, agreed to indemnify the original managing
general partner for any subsequent liabilities in respect to such borrowings.
Immediately after the removal of the managing general partner, the successor
managing general partner shall prepare, execute, file for recordation, and cause
to be published, such notices or certificates as may be required by the
Act.
7.07 Calling of Meetings.
Investor Partners owning 10% or more of the then outstanding Units entitled to
vote shall have the right to request that the Managing General Partner call a
meeting of the Partners. The Managing General Partner shall call such a meeting
and shall deposit in the United States mails within fifteen days after receipt
of such request, written notice to all Investor Partners of the meeting and the
purpose of the meeting, which shall be held on a date not less than thirty nor
more than sixty days after the date of mailing of such notice, at a reasonable
time and place. Investor Partners shall have the right to submit proposals to
the Managing General Partner for inclusion in the voting materials for the next
meeting of Investor Partners for consideration and approval by the Investor
Partners. Investor Partners shall have the right to vote in person or by
proxy.
7.08 Additional Voting
Rights. Investor Partners shall be entitled to all voting rights granted
to them by and under this Agreement and as specified by the Act. Each Unit is
entitled to one vote on all matters; each fractional Unit is entitled to that
fraction of one vote equal to the fractional interest in the Unit. Except as
otherwise provided herein or in the Memorandum, at any meeting of Investor
Partners, a vote of a majority in interest of Units represented at such meeting,
in person or by proxy, with respect to matters considered at the meeting at
which a quorum is present shall be required for approval of any such matters. In
addition, except as otherwise provided in this Section and in Section 5.07(k),
holders of a majority in interest of the then outstanding Units may, without the
concurrence of the Managing General Partner, vote to (a) approve or disapprove
the sale of all or substantially all of the assets of the Partnership or the
merger of the Partnership with another entity, (b) dissolve the Partnership, (c)
remove the Managing General Partner and elect a new managing general partner,
(d) amend the Agreement; but any such amendment may not increase the duties or
liabilities of any Investor Partner or the Managing General Partner or increase
or decrease the profit or loss sharing or required capital contribution of any
Investor Partner or the Managing General Partner without the approval of such
Investor Partner or Managing General Partner; and any such amendment may not
affect the classification of the Partnership's income or loss for federal income
tax purposes without the unanimous approval of all Investor Partners, (e) elect
a new managing general partner if the managing general partner elects to
withdraw from the Partnership, and (f) cancel any contract for services with the
Managing General Partner or any Affiliates without penalty upon sixty days'
notice. The Partnership shall not participate in a Roll-Up unless the Roll-Up is
approved by at least 66 2/3% in interest of the Investor Partners. A majority in
interest of the then outstanding Units entitled to vote shall constitute a
quorum. In determining the requisite percentage in interest of Units necessary
to approve a matter on which the Managing General Partner and its Affiliates may
not vote or consent, any Units owned by the Managing General Partner and its
Affiliates shall not be included.
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7.09 Voting by Proxy. The
Investor Partners may vote either in person or by proxy.
7.10 Conversion of Additional
General Partner Interests into Limited Partner Interests.
(a)
The Managing General Partner shall convert the interests of
all Additional General Partners in the Partnership to interests of Limited
Partners in the Partnership upon completion of drilling of the
Partnership.
(b)
The Managing General Partner shall notify all Additional General
Partners at least 30 days prior to any material change in the amount of the
Partnership's insurance coverage. Within this 30-day period, and notwithstanding
Section 7.10(a), Additional General Partners shall have the right to immediately
convert their Units into Units of limited partnership interest by giving written
notice to the Managing General Partner.
(c)
As provided herein, Additional General Partners may elect to convert, transfer,
and exchange their interests for Limited Partner interests in the Partnership
upon receipt by the Managing General Partner of written notice of such election.
An Additional General Partner may request conversion of his interests for
Limited Partner interests at any time after one year following the closing of
the securities offering which relates to the Agreement and the disbursement to
the Partnership of the proceeds of such securities offering.
(d)
The Managing General Partner shall cause the conversion to be
effected as promptly as possible as prudent business judgment dictates.
Conversion of an Additional General Partnership interest to a Limited
Partnership interest in the Partnership shall be conditioned upon a finding by
the Managing General Partner that such conversion will not cause a termination
of the Partnership for federal income tax purposes, and will be effective upon
the Managing General Partner's filing an amendment to its Certificate of Limited
Partnership. The Managing General Partner is obligated to file an amendment to
its Certificate at any time during the full calendar month after receipt of the
required notice of the Additional General Partner and a determination of the
Managing General Partner that the conversion will not constitute a termination
of the Partnership for tax purposes. Effecting conversion is subject to the
satisfaction of the condition that the electing Additional General Partner
provide written notice to the Managing General Partner of such intent to
convert. Upon such transfer and exchange, such Additional General Partners shall
be Limited Partners; however, they will remain liable to the Partnership for any
additional Capital Contribution(s) required for their proportionate share of the
Partnership obligation or liability arising prior to the
conversion.
(e)
Limited Partners may not convert and/or exchange their
interests for Additional General Partner interests.
7.11 Unit Repurchase
Program.
(a)
Beginning with the third anniversary after the date of the first
cash distribution of the Partnership, Investor Partners may request the Managing
General Partner to repurchase their Units, subject to the Managing General
Partner's available borrowing capacity under its loan agreements to repurchase.
If the Managing General Partner receives requests for repurchase of Units and
subject to such borrowing capacity, the Managing General Partner shall annually
repurchase for cash up to 10% of the Units originally subscribed to in the
Partnership.
(b)
The Unit Repurchase Program shall be subject to the following
conditions:
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(1)
The Managing General Partner must receive written
notification from the particular Investor Partner of such Partner's intention to
exercise the repurchase right; and
(2)
The Managing General Partner shall provide the Investor
Partner a written notice of a specified price for purchase of the particular
Units within 30 days of the Managing General Partner's receipt of written
notification; and
(3)
The Managing General Partner's offer shall remain open
for 30 days after the Managing General Partner's mailing of the price notice to
the Investor Partner.
(c)
The Managing General Partner shall not favor one
particular Partnership of which it is a Managing General Partner over another in
the repurchase of Units. Each Partnership shall stand on equal footing before
the Managing General Partner. To the extent that the Managing General Partner is
unable, due to limitations imposed by the Code or insufficient borrowing
capacity under the Managing General Partner's loan agreement(s) with banks, to
repurchase all Units requested for repurchase, each Investor Partner requesting
repurchase shall be entitled to have his Units repurchased on a "first
come-first served" basis, regardless of Partnership, provided that the Managing
General Partner determines that the repurchase of a particular Investor
Partner's Units will not result in the termination of the Partnership for
federal income tax purposes and in the Partnership's being treated as a
"publicly traded partnership." If Investor Partners request the repurchase of
more than 10% of the Units of a particular Partnership during that Partnership's
taxable year, Units shall be purchased on a "first come-first served" basis with
respect to that Partnership. To the extent that the Managing General Partner is
unable to repurchase all Units requested for repurchase at the same time by
Partners of any Partnership, the Managing General Partner shall repurchase those
particular Units on a pro-rata basis.
(d)
The offer price which the Managing General Partner
shall make shall be a cash amount equal to four times cash distributions
attributable to the subject Unit from production for the 12 months prior to the
month in which the above-referenced written notification is actually received by
the Managing General Partner at its corporate offices. The Managing General
Partner may, in its sole and absolute discretion, increase the repurchase price
for Units requested for repurchase.
(e)
Upon any repurchase, the Managing General Partner
shall hold such purchased Units for its own use and not for resale and it shall
not create a market in the Units.
7.12 Liability of
Partners. Except as otherwise provided in this Agreement or as otherwise
provided by the Act, each General Partner shall be jointly and severally liable
for the debts and obligations of the Partnership. In addition, each Additional
General Partner shall be jointly and severally liable for any wrongful acts or
omissions of the Managing General Partner and/or the misapplication of money or
property of a third party by the Managing General Partner acting within the
scope of its apparent authority to the extent such acts or omissions are
chargeable to the Partnership.
ARTICLE
VIII
Books and
Records
8.01 Books and
Records.
(a)
For accounting and income tax purposes, the Partnership shall
operate on a calendar year.
(b)
The Managing General Partner shall keep just and true records and books of
account with respect to the operations of the Partnership and shall maintain and
preserve during the term of the Partnership and for four years thereafter all
such records, books of account, and other relevant Partnership documents. The
Managing General Partner shall maintain for at least six years all records
necessary to substantiate the fact that Units were sold only to purchasers for
whom such Units were suitable. Such books shall be maintained at the principal
place of business of the Partnership and shall be kept on the accrual method of
accounting.
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(c)
The Managing General Partner shall keep or cause to be kept
complete and accurate books and records with respect to the Partnership's
business, which books and records shall at all times be kept at the principal
office of the Partnership. Any records maintained by the Partnership in the
regular course of its business, including the names and addresses of Investor
Partners, books of account, and records of Partnership proceedings, may be kept
on or be in the form of RAM disks, magnetic tape, photographs, micrographics, or
any other information storage device, provided that the records so kept are
convertible into clearly legible written form within a reasonable period of
time. The books and records of the Partnership shall be made available for
review and copying by any Investor Partner or his representative at any
reasonable time.
(d)
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(1) An
alphabetical list of the names, addresses and business telephone numbers
of the Investor Partners of the Partnership along with the number of Units
held by each of them (the "participant list") shall be maintained as a
part of the books and records of the Partnership and shall be available
for the inspection by any Investor Partner or its designated agent at the
home office of the Partnership upon the request of the Investor
Partner;
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(2)
The participant list shall be updated at least quarterly
to reflect changes in the information contained therein;
(3)
A copy of the participant list shall be mailed to any
Investor Partner requesting the participant list within ten days of the request.
The copy of the participant list shall be printed in alphabetical order, on
white paper, and in a readily readable type size (in no event smaller than 10-
point type). A reasonable charge for copy work may be charged by the
Partnership.
(4)
The purposes for which an Investor Partner may request a
copy of the participant list include, without limitation, matters relating to
voting rights under the Partnership Agreement and the exercise of Investor
Partners' rights under federal proxy laws; and
(5)
If the Managing General Partner of the Partnership
neglects or refuses to exhibit, produce, or mail a copy of the participant list
as requested, the Managing General Partner shall be liable to any Investor
Partner requesting the list for the costs, including attorneys' fees, incurred
by that Investor Partner for compelling the production of the participant list,
and for actual damages suffered by any Investor Partner by reason of such
refusal or neglect. It shall be a defense that the actual purpose and reason for
the requests for inspection or for a copy of the participant list is to secure
the list of Investor Partners or other information for the purpose of selling
such list or information or copies thereof, or of using the same for a
commercial purpose other than in the interest of the applicant as an Investor
Partner relative to the affairs of the Partnership. The Managing General Partner
may require the Investor Partner requesting the participant list to represent
that the list is not requested for a commercial purpose unrelated to the
Investor Partner's interest in the Partnership. The remedies provided hereunder
to Investor Partners requesting copies of the participant list are in addition
to, and shall not in any way limit, other remedies available to Investor
Partners under federal law, or the laws of any state.
8.02 Reports. The Managing
General Partner shall deliver to each Investor Partner the following financial
statements and reports at the times indicated below:
(a)
Within 75 days after the end of the first six months of each fiscal
year (for such six month period) and within 120 days after the end of each
fiscal year (for such year), financial statements, including a balance sheet and
statements of income, Partners' equity, and cash flows, all of which shall be
prepared in accordance with generally accepted accounting principles. The annual
financial statements shall be accompanied by (i) a report of an independent
certified public accountant designated by the Managing General Partner stating
that an audit of such financial statements has been made in accordance with
generally accepted auditing standards and that in its opinion such financial
statements present fairly the financial condition, results of operations, and
cash flow of the Partnership in accordance with generally accepted accounting
principles and (ii) a reconciliation of such financial statements with the
information furnished to the Investor Partners for federal income tax reporting
purposes.
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(b)
Annually by March 15 of each year, a report containing such
information as may be deemed to enable each Investor Partner to prepare and file
his federal income tax return and any required state income tax
return.
(c)
Annually within 120 days after the end of each fiscal year,
(i) a summary of the computations of the total estimated proved oil and gas
reserves of the Partnership as of the end of such fiscal year and the dollar
value thereof at then existing prices and a computation of each Investor
Partner's interest in such value, such reserve computations to be based upon
engineering reports prepared by qualified independent petroleum engineers, (ii)
an estimate of the time required for the extraction of such proved reserves and
the present worth thereof (discounted at a rate generally accepted in the oil
and gas industry and undiscounted), and (iii) a statement that because of the
time period required to extract such reserves the present value of revenues to
be obtained in the future is less than if such revenues were immediately
receivable. Each such reported shall be prepared in accordance with customary
and generally accepted standards and practices for petroleum engineers and shall
be prepared by a recognized independent petroleum engineer selected from time to
time by the Managing General Partner. No later than 90 days following the
occurrence of an event resulting in a reduction in an amount of 10% or more of
the estimated value of the proved oil and gas reserves as last reported to the
Investor Partners, other than a reduction resulting from normal production,
sales of reserves, or product price changes, a new summary conforming to the
requirements set forth above in this Section 8.02(c) shall be delivered to the
Investor Partners.
(d)
Within 75 days after the end of the first six months of
each fiscal year and within 120 days after the end of each fiscal year, a
schedule reflecting (A) the total costs of the Partnership (and, where
applicable, the costs pertaining to each Lease) and the costs paid by the
Managing General Partner and by the Investor Partners and (B) the total revenues
of the Partnership and the revenues received by or credited to the accounts of
the Managing General Partner and the Investing Partners. Each semi-annual report
delivered by the Managing General Partner may contain summary estimates of the
information described in subdivision (i) of Section 8.02(c).
(e)
Monthly within 15 days after the end of each
calendar month while the Partnership is participating in the drilling and
completion of xxxxx in which it has an interest until the end of such activity,
and thereafter for a period of three years within 75 days after the end of the
first six months of each fiscal year and within 120 days after the end of each
fiscal year, (i) a description of each Prospect or field in which the
Partnership owns Leases including the cost, location, number of acres under
lease, and the interest owned therein by the Partnership (provided that after
the initial description of each such Prospect or field has been provided to the
Investor Partners only material changes, if any, with respect to such Prospect
or field need be described), (ii) a description of all farmins, farmouts and
joint ventures of the Partnership made since the date of the last such report,
including the reason therefor, the location and timing thereof, the person to
whom made and the terms thereof, and (iii) a summary of the xxxxx drilled by the
Partnership, indicating whether each of such xxxxx has been completed, a
statement of the cost of each well completed or abandoned and the reason for
abandoning any well after commencement of production. Each report delivered by
the Managing General Partner may contain summary estimates of the information
described in subsection (iii).
(f)
The Managing General Partner shall cause the
Partnership's independent auditors to audit the financial statements of the
Partnership in accordance with generally accepted auditing standards. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, which would include an assessment as to
whether or not the method used to make the allocations of costs was consistent
with the method described in the Memorandum. If the Managing General Partner
subsequently decides to allocate expenses in a manner different from the manner
described in the Memorandum, such change shall be reported by the A-38 Managing
General Partner to the Investor Partners together with an explanation of why
such change was made and the basis for determining the reasonableness of the new
allocation method.
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(g)
Such other reports and financial statements as the
Managing General Partner shall determine from time to time.
(h)
Concurrently with their transmittal to Investor
Partners and as required, the Managing General Partner shall file a copy of each
such report with the California Commissioner of Corporations and with the
securities divisions of other states.
8.03 Bank Accounts. All
funds of the Partnership shall be deposited in such separate bank account or
accounts, short term obligations of the U.S. Government or its agencies, or
other interest-bearing investments and money market or liquid asset mutual funds
as shall be determined by the Managing General Partner. All withdrawals
therefrom shall be made upon checks signed by the Managing General Partner or
any person authorized to do so by the Managing General Partner.
8.04 Federal Income Tax
Elections.
(a)
Except as otherwise provided in this Section 8.04, all
elections required or permitted to be made by the Partnership under the Code
shall be made by the Managing General Partner in its sole discretion. Each
Partner agrees to provide the Partnership with all information necessary to give
effect to any election to be made by the Partnership.
(b)
The Partnership shall elect to currently deduct IDC as an
expense for income tax purposes and shall require any partnership, joint
venture, or other arrangement in which it is a party to make such an
election.
ARTICLE
IX
Dissolution;
Winding-up
9.01 Dissolution.
(a)
Except as otherwise provided herein, the retirement, withdrawal, removal,
death, insanity, incapacity, dissolution, or bankruptcy of any Investor Partner
shall not dissolve the Partnership. The successor to the rights of such Investor
Partner shall have all the rights of an Investor Partner for the purpose of
settling or administering the estate or affairs of such Investor Partner;
provided, however, that no successor shall become a substituted Investor Partner
except in accordance with Article VII hereof; provided, further, that upon the
withdrawal of an Additional General Partner, the Partnership shall be dissolved
and wound up unless at that time there is at least one other General Partner, in
which event the business of the Partnership shall continue to be carried on.
Neither the expulsion of any Investor Partner nor the admission or substitution
of an Investor Partner shall work a dissolution of the Partnership. The estate
of a deceased, insane, incompetent, or bankrupt Investor Partner shall be liable
for all his liabilities as an Investor Partner.
(b)
The Partnership shall be dissolved upon the earliest to occur
of: (i) the written consent of the Investor Partners owning a majority in
interest of the then-outstanding Units to dissolve and wind up the affairs of
the Partnership; (ii) subject to the provisions of Subsection (c) below, the
retirement, withdrawal, removal, death, adjudication of insanity or incapacity,
or bankruptcy (or, in the case of a corporate managing general partner, the
withdrawal, removal, filing of a certificate of dissolution, liquidation, or
bankruptcy) of the Managing General Partner; (iii) the sale, forfeiture, or
abandonment of all or substantially all of the Partnership's property; (iv)
December 31, 2057; (v) a dissolution event described in Subsection (a) above; or
(vi) any event causing dissolution of the Partnership under the
Act.
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(c)
In the case of any event described in Subsection
(b)(ii) above, if a successor Managing General Partner is selected by Partners
owning a majority in interest of the then outstanding Units within ninety (90)
days after such Section 9.01(b)(ii) event, and if such Investor Partners agree,
within such 90 day period to continue the business of the Partnership, or if the
remaining managing general partner, if any, continues the business of the
Partnership, then the Partnership shall not be dissolved.
(d)
If the retirement, withdrawal, removal, death, insanity,
incapacity, dissolution, liquidation, or bankruptcy of any Partner, or the
assignment of a Partner's interest in the Partnership, or the substitution or
admission of a new Partner, shall be deemed under the Act to cause a dissolution
of the Partnership, then, except as provided in Section 9.01(c), the remaining
Partners may, in accordance with the Act, continue the Partnership business as a
new partnership and all such remaining Partners agree to be bound by the
provisions of this Agreement.
9.02 Liquidation. Upon a
dissolution and final termination of the Partnership, the Managing General
Partner, or in the event there is no Managing General Partner, any other person
or entity selected by the Investor Partners (hereinafter referred to as a
"Liquidator") shall cause the affairs of the Partnership to be wound up and
shall take account of the Partnership's assets (including contributions, if any,
of the Managing General Partner pursuant to Section 3.01(e) herein) and
liabilities, and the assets shall, subject to the provisions of Section 9.03(b)
herein, be liquidated as promptly as is consistent with obtaining the fair
market value thereof, and the proceeds therefrom (which dissolution and
liquidation may be accomplished over a period spanning one or more tax years in
the sole discretion of the Managing General Partner or Liquidator), to the
extent sufficient therefor, shall be applied and distributed in accordance with
Section 9.03.
9.03 Winding-up.
(a)
Upon the dissolution of the Partnership and winding up of its
affairs, the assets of the Partnership shall be distributed as
follows:
(1)
all of the Partnership's debts and liabilities to
persons other than the Managing General Partner shall be paid and
discharged;
(2)
all outstanding debts and liabilities to the Managing
General Partner shall be paid and discharged;
(3)
assets shall be distributed to the Partners to the extent of
their positive Capital Account balances, pro rata, in accordance with such
positive Capital Account balances; and
(4)
any assets remaining after the Partners' Capital Accounts have been
reduced to zero pursuant to Section 9.03(c) herein shall be distributed 63% to
the Investor Partners and 37% to the Managing General Partner, except as
otherwise revised pursuant to Section 2.01(a).
(b)
Distributions pursuant to this Section 9.03 shall be made in cash or in
kind to the Partners, at the election of the Partners. Notwithstanding the
provision of this Section 9.03(b), in no event shall the Partners reserve the
right to take in kind and separately dispose of their share of
production.
(c)
Any in kind property distributions to the Investor Partners
shall be made to a liquidating trust or similar entity for the benefit of the
Investor Partners, unless at the time of the distribution:
(1)
the Managing General Partner shall
offer the individual Investor Partners the election of receiving in kind
property distributions and the Investor Partners accept such offer after being
advised of the risks associated with such direct ownership; or
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(2)
there are alternative arrangements in place which assure
the Investor Partners that they will not, at any time, be responsible for the
operation or disposition of Partnership properties.
The
winding up of the affairs of the Partnership and the distribution of its assets
shall be conducted exclusively by the Managing General Partner or the
Liquidator, who is hereby authorized to do any and all acts and things
authorized by law for these purposes.
ARTICLE
X
Power of
Attorney
10.01 Managing General Partner as
Attorney-in-Fact. The undersigned makes, constitutes, and appoints the
Managing General Partner the true and lawful attorney for the undersigned, and
in the name, place, and stead of the undersigned from time to time to make,
execute, sign, acknowledge, and file:
(a)
Any notices or certificates as may be
required under the Act and under the laws of any other state or jurisdiction in
which the Partnership shall engage, or seek to engage, to do business and to do
such other acts as are required to constitute the Partnership as a limited
partnership under such laws.
(b)
Any amendment to the Agreement pursuant to and
which complies with Section 11.09 herein.
(c)
Such certificates, instruments, and documents as may be
required by, or may be appropriate under the laws of any state or other
jurisdiction in which the Partnership is doing or intends to do business and
with the use of the name of the Partnership by the Partnership.
(d)
Such certificates, instruments, and documents as may be required by,
or as may be appropriate for the undersigned to comply with, the laws of any
state or other jurisdiction to reflect a change of name or address of the
undersigned.
(e)
Such certificates, instruments, and documents as may be required to be filed
with the Department of Interior (including any bureau, office or other unit
thereof, whether in Washington, D.C. or in the field, or any officer or employee
thereof), as well as with any other federal or state agencies, departments,
bureaus, offices, or authorities and pertaining to (i) any and all offers to
lease, leases (including amendments, modifications, supplements, renewals, and
exchanges thereof) of, or with respect to, any lands under the jurisdiction of
the United States or any state including without limitation lands within the
public domain, and acquired lands, and provides for the leasing thereof; (ii)
all statements of interest and holdings on behalf of the Partnership or the
undersigned; (iii) any other statements, notices, or communications required or
permitted to be filed or which may hereafter be required or permitted to be
filed under any law, rule, or regulation of the United States, or any state
relating to the leasing of lands for oil or gas exploration or development; (iv)
any request for approval of assignments or transfers of oil and gas leases, any
unitization or pooling agreements and any other documents relating to lands
under the jurisdiction of the United States or any state; and (v) any other
documents or instruments which said attorney-in-fact in its sole discretion
shall determine should be filed.
(f)
Any further document, including furnishing verified
copies of the Agreement and/or excerpts therefrom, which said attorney-in-fact
shall consider necessary or convenient in connection with any of the foregoing,
hereby giving said attorney-in-fact full power and authority to do and perform
each and every act and thing whatsoever requisite and necessary to be done in
and about the foregoing as fully as the undersigned might and could do if
personally present, and hereby ratifying and confirming all that said
attorney-in-fact shall lawfully do to cause to be done by virtue
hereof.
10.02 Nature of Special
Power. The foregoing grant of authority:
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(a)
is a special Power of Attorney coupled with an interest,
is irrevocable, and shall survive the death of the undersigned;
(b)
shall survive the delivery of any assignment by the
undersigned of the whole or any portion of his Units; except that where the
assignee thereof has been approved by the Managing General Partner for admission
to the Partnership as a substitute general or limited Partner as the case may
be, the Power of Attorney shall survive the delivery of such assignment for the
sole purpose of enabling said attorney-in-fact to execute, acknowledge, and file
any instrument necessary to effect such substitution; and
(c)
may be exercised by said attorney-in-fact with full power of substitution
and resubstitution and may be exercised by a listing of all of the Partners
executing any instrument with a single signature of said
attorney-in-fact.
ARTICLE
XI
Miscellaneous
Provisions
11.01 Liability of
Parties. By entering into this Agreement, no party shall become liable
for any other party's obligations relating to any activities beyond the scope of
this Agreement, except as provided by the Act. If any party suffers, or is held
liable for, any loss or liability of the Partnership which is in excess of that
agreed upon herein, such party shall be indemnified by the other parties, to the
extent of their respective interests in the Partnership, as provided
herein.
11.02 Notices. Any notice, payment, demand,
or communication required or permitted to be given by any provision of this
Agreement shall be deemed to have been sufficiently given or served for all
purposes if delivered personally to the party or to an officer of the party to
whom the same is directed or sent by registered or certified mail, postage and
charges prepaid, addressed as follows (or to such other address as the party
shall have furnished in writing in accordance with the provisions of this
Section):
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—
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If
to the Managing General Partner, 000 Xxxxxxx Xxxxxxxxx, Xxxxxxxxxx, Xxxx
Xxxxxxxx 00000;
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—
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If
to an Investor Partner, at such Investor Partner's address for purposes of
notice which is set forth on Exhibit A attached
hereto.
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Unless
otherwise expressly set forth in this Agreement to the contrary, any such notice
shall be deemed to be given on the date on which the same was deposited in a
regularly maintained receptacle for the deposit of United States mail, addressed
and sent as aforesaid.
11.03 Paragraph Headings. The headings in
this Agreement are inserted for convenience and identification only and are in
no way intended to describe, interpret, define, or limit the scope, extent, or
intent of this Agreement or any provision hereof.\
11.04 Severability. Every portion of this
Agreement is intended to be severable. If any term or provision hereof is
illegal or invalid by any reason whatsoever, such illegality or invalidity shall
not affect the validity of the remainder of this Agreement.
11.05 Sole Agreement. This Agreement
constitutes the entire understanding of the parties hereto with respect to the
subject matter hereof and no amendment, modification, or alteration of the terms
hereof shall be binding unless the same be in writing, dated subsequent to the
date hereof and duly approved and executed by the Managing General Partner and
such percentage of Investor Partners as provided in Section 11.09 of this
Agreement.
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11.06 Applicable Law. This
Agreement, which shall be governed exclusively by its terms, is intended to
comply with the Code and with the Act and shall be interpreted consistently
therewith.
11.07 Execution in
Counterparts. This Agreement may be executed in any number of
counterparts with the same effect as if all parties hereto had all signed the
same document. All counterparts shall be construed together and shall constitute
one agreement.
11.08 Waiver of Action for
Partition. Each of the parties irrevocably waives, during the term of the
Partnership, any right that it may have to maintain any action for partition
with respect to the Partnership and the property of the
Partnership.
11.09 Amendments.
(a)
Unless otherwise specifically herein provided, this Agreement shall
not be amended without the consent of the Investor Partners owning a majority of
the then outstanding Units entitled to vote.
(b)
The Managing General Partner may, without notice to, or consent of, any
Investor Partner, amend any provisions of these Articles, or consent to and
execute any amendment to these Articles, to reflect:
(1)
A change in the name or location of the principal place
of business of the Partnership;
(2)
The admission of substituted or additional Investor Partners
in accordance with these Articles;
(3)
A reduction in, return of, or withdrawal of, all or a portion of any
Investor Partner's Capital Contribution;
(4)
A correction of any typographical error or omission;
(5)
A change which is necessary in order to qualify the Partnership as a limited
partnership under the laws of any other state or which is necessary or
advisable, in the opinion of the Managing General Partner, to ensure that the
Partnership will be treated as the partnership and not as an association taxable
as a corporation for federal income tax purposes;
(6)
A change in the allocation provisions, in accordance with the
provisions of Section 3.02(l) herein, in a manner that, in the sole opinion of
the Managing General Partner (which opinion shall be determinative), would
result in the most favorable aggregate consequences to the Investor Partners as
nearly as possible consistent with the allocations contained herein, for such
allocations to be recognized for federal income tax purposes due to developments
in the federal income tax laws or otherwise; or
(7)
Any other amendment similar to the foregoing;
provided,
however, that the Managing General Partner shall have no authority, right, or
power under this Section to amend the voting rights of the Investor
Partners.
11.10 Consent to Allocations and
Distributions. The methods herein set forth by which allocations and
distributions are made and apportioned are hereby expressly consented to by each
Partner as an express condition to becoming a Partner.
11.11 Ratification. The
Investor Partner whose signature appears at the end of this Article hereby
specifically adopts and approves every provision of this Agreement to which the
signature page is attached.
A-42
11.12 Substitution of Signature
Pages. This Agreement has been executed in duplicate by the undersigned
Investor Partners and one executed copy of the signature page is attached to the
undersigned's copy of this Agreement. It is agreed that the other executed copy
of such signature page may be attached to an identical copy of this Agreement
together with the signature pages from counterpart Agreements which may be
executed by other Investor Partners.
11.13 Incorporation by
Reference. Every exhibit, schedule, and other appendix attached to this
Agreement and referred to herein is hereby incorporated in this Agreement by
reference.
* * * *
*
A-43
SIGNATURE
PAGE
IN
WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and
year first written above.
MANAGING GENERAL
PARTNER
|
INITIAL LIMITED
PARTNER
|
|||
Petroleum
Development Corporation
|
Xxxxxx
X. Xxxxxxxx
|
|||
000
Xxxxxxx Xxxxxxxxx
|
000
Xxxxxxx Xxxxxxxxx
|
|||
Bridgeport
West Virginia 26330
|
Bridgeport,
West Virginia 26330
|
|||
By:
|
/s/
Xxxxxx X. Xxxxxxxx
|
/s/
Xxxxxx X. Xxxxxxxx
|
||
Xxxxxx
X. Xxxxxxxx
|
Xxxxxx
X. Xxxxxxxx
|
|||
Chief
Executive Officer
|
INVESTOR
PARTNERS
COMPLETE
TO INVEST AS ADDITIONAL GENERAL PARTNER
ADDITIONAL
GENERAL PARTNER(S)
|
|||||||
NUMBER
OF UNITS
|
Name:
|
||||||
PURCHASED
|
(Print
Name)
|
||||||
(Signature)
|
|||||||
SUBSCRIPTION
PRICE
|
|||||||
$
|
Address:
|
||||||
By:
|
Petroleum
Development Corporation
|
||||||
By:
|
/s/
Xxxxxx X. Xxxxx
|
||||||
Its:
|
|||||||
Attorney-in-Fact
|
COMPLETE
TO INVEST AS LIMITED PARTNER
LIMITED
PARTNER(S)
|
|||||||
NUMBER
OF UNITS
|
Name:
|
||||||
PURCHASED
|
(Print
Name)
|
||||||
(Signature)
|
A-44
SUBSCRIPTION
PRICE
|
|||||||
$
|
Address:
|
||||||
By:
|
Petroleum
Development Corporation
|
||||||
By:
|
/s/
Xxxxxx X. Xxxxxxxx
|
||||||
Its:
|
|||||||
Attorney-in-Fact
|
A-45
EXHIBIT
A
TO
AGREEMENT
OF LIMITED PARTNERSHIP
OF
ROCKIES
REGION 2007 LIMITED PARTNERSHIP,
A WEST
VIRGINIA LIMITED PARTNERSHIP
Names and Addresses of
Investors
|
Nature of
Interest
|
Number of
Units
|
A-46