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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 001-11899
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THE HOUSTON EXPLORATION COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF 22-2674487
INCORPORATION OR ORGANIZATION) (IRS EMPLOYER IDENTIFICATION NO.)
1100 LOUISIANA STREET, SUITE 2000
HOUSTON, TEXAS 77002-5219
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(713) 830-6800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
-------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of May 12, 1999, 23,895,040 shares of Common Stock, par value $.01
per share, were outstanding.
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THE HOUSTON EXPLORATION COMPANY
TABLE OF CONTENTS
<TABLE>
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Page
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FACTORS AFFECTING FORWARD LOOKING STATEMENTS...............................................................3
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets -- March 31, 1999 and December 31, 1998..........................4
Consolidated Statements of Operations -- Three Months Ended March 31, 1999 and 1998..........5
Consolidated Statements of Cash Flows -- Three Months Ended March 31, 1999 and 1998..........6
Notes to the Consolidated Financial Statements...............................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................20
SIGNATURES................................................................................................21
</TABLE>
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FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1993, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words "anticipate," "believe," "estimate," "expect," "project" and similar
expressions are intended to identify forward-looking statements. Without
limiting the foregoing, all statements under the caption "Item 2--Management's
Discussion and Analysis of Financial Condition and Results of Operations"
relating to the Company's anticipated capital expenditures, future cash flows
and borrowings, pursuit of potential future acquisition opportunities and
sources of funding for exploration and development are forward-looking
statements. Such statements are subject to certain risks and uncertainties, such
as the volatility of natural gas and oil prices, uncertainty of reserve
information and future net revenue estimates, reserve replacement risks,
drilling risks, operating risks of natural gas and oil operations, acquisition
risks, substantial capital requirements, government regulation, environmental
matters and competition. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, believed, estimated, expected or
projected. For additional discussion of such risks, uncertainties and
assumptions, see "Items 1 and 2. Business and Properties" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report on Form 10-K filed under the
Securities Exchange Act of 1934, as amended.
Unless otherwise indicated, references to "Houston Exploration" or the
"Company" refer to The Houston Exploration Company and its subsidiaries on a
consolidated basis.
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PART I. FINANCIAL INFORMATION
ITEMS 1. FINANCIAL STATEMENTS
THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
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<S> <C> <C>
(UNAUDITED)
ASSETS:
Cash and cash equivalents .......................................................... $ 1,948 $ 4,645
Accounts receivable ................................................................ 23,044 23,050
Accounts receivable--Affiliate ..................................................... 5,268 137
Inventories ........................................................................ 925 915
Prepayments and other .............................................................. 952 754
----------- -----------
Total current assets ...................................................... 32,137 29,501
Natural gas and oil properties, full cost method
Unevaluated properties ........................................................... 151,899 145,317
Properties subject to amortization ............................................... 849,942 828,168
Other property and equipment ....................................................... 9,496 9,464
----------- -----------
1,011,337 982,949
Less: Accumulated depreciation, depletion and amortization ......................... (463,445) (446,367)
----------- -----------
547,892 536,582
Other assets ....................................................................... 3,731 3,369
----------- -----------
TOTAL ASSETS .............................................................. $ 583,760 $ 569,452
=========== ===========
LIABILITIES:
Accounts payable and accrued expenses .............................................. $ 39,027 $ 32,743
Subordinated note--Affiliate ....................................................... 80,000 --
----------- -----------
Total current liabilities ................................................. 119,027 32,743
Long-term debt and notes ........................................................... 240,000 233,000
Subordinated note--Affiliate ....................................................... -- 80,000
Deferred federal income taxes ...................................................... 31,303 31,027
Other deferred liabilities ......................................................... 152 152
----------- -----------
TOTAL LIABILITIES ......................................................... 390,482 376,922
COMMITMENTS AND CONTINGENCIES (SEE NOTE 3)
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000 shares authorized and 23,895 shares issued
and outstanding at March 31, 1999 and December 31, 1998, respectively......... 239 239
Additional paid-in capital ......................................................... 230,933 230,931
Retained earnings (deficit) ........................................................ (37,894) (38,640)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ............................................... 193,278 192,530
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................... $ 583,760 $ 569,452
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
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<S> <C> <C>
(UNAUDITED)
REVENUES:
Natural gas and oil revenues ............................. $ 26,520 $ 32,884
Other .................................................... 345 200
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Total revenues ................................... 26,865 33,084
OPERATING COSTS AND EXPENSES:
Lease operating .......................................... 3,962 3,869
Severance tax ............................................ 999 1,118
Depreciation, depletion and amortization ................. 17,057 19,314
General and administrative, net .......................... 1,030 1,575
-------- ---------
Total operating expenses ......................... 23,048 25,876
Income from operations ..................................... 3,817 7,208
Interest expense, net ...................................... 3,021 300
-------- ---------
Net income before income taxes ............................. 796 6,908
Provision for federal income taxes ......................... 50 2,185
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NET INCOME ................................................. $ 746 $ 4,723
======== =========
Net income per share ....................................... $ 0.03 $ 0.20
======== =========
Net income per share--assuming dilution .................... $ 0.03 $ 0.20
======== =========
Weighted average shares outstanding ........................ 23,895 23,384
Weighted average shares outstanding--assuming dilution ..... 23,959 23,560
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
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THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
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<S> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES:
Net income ........................................................... $ 746 $ 4,723
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization ........................... 17,057 19,314
Deferred income tax expense ........................................ 276 2,185
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ...................... (5,125) 5,712
Increase in inventories ......................................... (198) (120)
Increase in prepayments and other ............................... (10) (131)
Increase in other assets and liabilities ........................ (362) (1,912)
Increase (decrease) in accounts payable and accrued expenses .... 6,284 (14,843)
--------- ---------
Net cash provided by operating activities ............................ 18,668 14,928
INVESTING ACTIVITIES:
Investment in property and equipment ................................. (28,367) (39,549)
--------- ---------
Net cash used in investing activities ................................ (28,367) (39,549)
FINANCING ACTIVITIES:
Proceeds from long term borrowings ................................... 12,000 121,000
Repayments of long term borrowings ................................... (5,000) (99,000)
Proceeds from issuance of common stock ............................... 2 14
--------- ---------
Net cash provided by financing activities ............................ 7,002 22,014
Decrease in cash and cash equivalents ................................ (2,697) (2,607)
Cash and cash equivalents, beginning of period ....................... 4,645 4,745
--------- ---------
Cash and cash equivalents, end of period ............................. $ 1,948 $ 2,138
========= =========
Cash paid for interest ............................................... $ 7,351 $ 2,034
========= =========
Cash paid for taxes .................................................. $ -- $ --
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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THE HOUSTON EXPLORATION COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Houston Exploration is an independent natural gas and oil company
engaged in the exploration, development, exploitation and acquisition of
domestic natural gas and oil properties. The Company's operations are currently
focused offshore in the Gulf of Mexico and onshore in South Texas, South
Louisiana, the Arkoma Basin, East Texas and West Virginia. Houston Exploration's
strategy is to utilize its geological and geophysical expertise to grow its
reserve base through a combination of exploratory drilling in the Gulf of Mexico
and lower risk, exploitation and development drilling onshore. At December 31,
1998, the Company had net proved reserves of 480 Bcfe, 98% of which were natural
gas and 80% of which were classified as proved developed.
Houston Exploration began exploring for natural gas and oil in December
1985 on behalf of The Brooklyn Union Gas Company ("Brooklyn Union") and in
September 1996 the Company completed an initial public offering of its common
stock. As of March 31, 1999, THEC Holdings Corp., a wholly owned subsidiary of
Brooklyn Union owned approximately 64% of the outstanding shares of Houston
Exploration's common stock. Brooklyn Union is a wholly-owned subsidiary of
MarketSpan Corporation, doing business as KeySpan Energy ("KeySpan"). KeySpan is
a diversified energy provider that: (i) distributes natural gas, through its
subsidiary Brooklyn Union, in the New York City and Long Island areas; (ii) is
contracted by Long Island Power Authority ("LIPA") to manage LILPA's electricity
service in the Long Island area; and (iii) through its unregulated subsidiaries,
is involved in gas retailing, power plant management and energy management
services.
Principles of Consolidation
The consolidated financial statements include the accounts of The
Houston Exploration Company and its wholly-owned subsidiary, Seneca Upshur
Petroleum Company (collectively the "Company"). All significant intercompany
balances and transactions have been eliminated.
Interim Financial Statements
The balance sheet of the Company at March 31, 1999 and the statements
of operations and cash flows for the periods indicated herein have been prepared
by the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, although the
Company believes that the disclosures contained herein are adequate to make the
information presented not misleading. The balance sheet at December 31, 1998 is
derived from the December 31, 1998 audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
The Interim Financial Statements should be read in conjunction with the Combined
Financial Statements and Notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.
In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary to present fairly the information in the
accompanying financial statements have been included. The results of operations
for such interim periods are not necessarily indicative of the results for the
full year.
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Reclassifications and Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The Company's most significant financial estimates are based
on remaining proved natural gas and oil reserves. Because there are numerous
uncertainties inherent in the estimation process, actual results could differ
from the estimates. Certain reclassifications for prior years have been made to
conform with current year presentation.
Net Income Per Share
Basic earnings per share ("EPS") is calculated by dividing net income
by the weighted average number of shares of common stock outstanding during the
period. No dilution for any potentially dilutive securities is included. Diluted
EPS assumes the conversion of all potentially dilutive securities and is
calculated by dividing net income by the weighted average number of shares of
common stock outstanding plus all potentially dilutive securities.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net income ....................................... $ 746 $ 4,723
========== ===========
Denominator:
Weighted average shares outstanding .............. 23,895 23,384
Add: dilutive securities
Options ................................ 64 176
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Total weighted average shares outstanding and
dilutive securities ............................ 23,959 23,560
========== ===========
Net income per share ............................. $ 0.03 $ 0.20
========== ===========
Net income per share--assuming dilution .......... $ 0.03 $ 0.20
========== ===========
</TABLE>
The computation of diluted EPS for the three months ended March 31,
1999 did not assume the conversion of the KeySpan Facility as their inclusion
would have been antidilutive. See Note 2--Long-Term Debt and Notes.
NOTE 2 -- LONG-TERM DEBT AND NOTES
<TABLE>
<CAPTION>
MARCH 31,1999 DECEMBER 31,1998
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<S> <C> <C>
(IN THOUSANDS)
SENIOR DEBT:
Bank revolving credit facility, due 2003 .......... $ 140,000 $ 133,000
SUBORDINATED DEBT:
8 5/8% Senior Subordinated Notes, due 2008......... 100,000 100,000
Subordinated Note--KeySpan, due 2000 -- 80,000
------------- ----------------
Total long-term debt and notes................. $ 240,000 $ 313,000
============= ================
</TABLE>
The carrying amount of borrowings outstanding under the Credit Facility
and the KeySpan Facility approximates fair value as the interest rates are tied
to current market rates. At March 31, 1999, the quoted market value of the
Company's $100 million of 8 5/8% Senior Subordinated Notes was 99% of the $100
million carrying value or $99 million.
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<PAGE> 9
Credit Facility
The Company has entered into a revolving credit facility ("Credit
Facility") with a syndicate of lenders led by Chase Bank of Texas, National
Association ("Chase"). The Credit Facility was amended March 30, 1999 and
provides a maximum commitment of $250 million, subject to borrowing base
limitations. At March 31, 1999, the conforming portion of the borrowing base or
threshold amount was $175 million. The Company has the option to increase the
threshold amount to a borrowing base of $200 million at an incremental interest
rate. Up to $2.0 million of the borrowing base is available for the issuance of
letters of credit to support performance guarantees. The Credit Facility matures
on March 1, 2003 and is unsecured. At March 31, 1999, $140.0 million was
outstanding under the Credit Facility and $0.4 million was outstanding in letter
of credit obligations. Subsequent to March 31, 1999, the Company borrowed an
additional $5 million, bringing borrowings and extensions of credit to $145.4
million as of May 12, 1999.
Interest is payable on borrowings under the Credit Facility, at the
Company's option, at (i) a fluctuating rate ("Base Rate") equal to the greater
of the Federal Funds rate plus 0.5% or Chase's prime rate, or (ii) a fixed rate
("Fixed Rate") equal to a quoted LIBOR rate plus a variable margin of 0.625% to
1.50%, depending on the amount outstanding under the Credit Facility. Interest
is payable at calendar quarters for Base Rate loans and at the earlier of
maturity or three months from the date of the loan for Fixed Rate loans. In
addition, the Credit Facility requires a commitment fee of: (i) between 0.50%
and 0.375% per annum on the unused portion of the designated borrowing base, and
(ii) 33% of the fee in (i) above on the difference between the lower of the
facility amount or the borrowing base and the designated borrowing base.
The Credit Facility contains covenants of the Company, including
certain restrictions on liens and financial covenants which require the Company
to, among other things, maintain (i) an interest coverage ratio of 2.5 to 1.0 of
earnings before interest, taxes and depreciation ("EBITDA") to cash interest and
(ii) a total debt to capitalization ratio of less than 60%. For purposes of the
total debt to capitalization ratio, the calculation of total capitalization
excludes the effects of non-cash charges related to the $84.5 million, after
tax, writedown of oil and gas properties incurred by the Company in the fourth
quarter of 1998. In addition to maintenance of certain financial ratios, cash
dividends and/or purchase or redemption of the Company's stock is restricted, as
well as the encumbering of the Company's gas and oil assets or the pledging of
the assets as collateral. As of March 31, 1999, the Company was in compliance
with all such covenants.
Senior Subordinated Notes
On March 2, 1998, the Company issued $100 million of 85/8% Senior
Subordinated Notes (the "Subordinated Notes") due January 1, 2008. The Notes
bear interest at a rate of 85/8% per annum with interest payable semi-annually
on January 1 and July 1, commencing July 1, 1998. The Notes are redeemable at
the option of the Company, in whole or in part, at any time on or after January
1, 2003 at a price equal to 100% of the principal amount plus accrued and unpaid
interest, if any, plus a specified premium if the Notes are redeemed prior to
January 1, 2006. Notwithstanding the foregoing, any time prior to January 1,
2001, the Company may redeem up to 35% of the original aggregate principal
amount of the Notes with the net proceeds of any equity offering, provided that
at least 65% of the original aggregate principal amount of the Notes remains
outstanding immediately after the occurrence of such redemption. Upon the
occurrence of a change of control (as defined), the Company will be required to
offer to purchase the Notes at a purchase price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any. The Notes
are general unsecured obligations of the Company and rank subordinate in right
of payment to all existing and future senior debt, including the Credit
Facility, and will rank senior or pari passu in right of payment to all existing
and future subordinated indebtedness, including the KeySpan Facility.
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KeySpan Facility
On November 30, 1998, the Company entered into a revolving credit
facility with KeySpan (the "KeySpan Facility"), which provides a maximum
commitment of $150 million. The KeySpan Facility ranks subordinate to the Credit
Facility and pari passu to the Subordinated Notes. Borrowings are unsecured and
mature January 1, 2000. Any principal amount that remains outstanding under the
KeySpan Facility at January 1, 2000 will be converted into common stock of the
Company, with the number of shares to be determined based upon the average of
the closing prices of the Company's common stock, rounded to three decimal
places, as reported under "NYSE Composite Transaction Reports" in the Wall
Street Journal during the 20 consecutive trading days ending three trading days
prior to January 1, 2000. Because the market value represents an average of the
Company's common stock over twenty consecutive trading days, ending three days
prior to the maturity date of the loan, the market price may be higher or lower
than the price of the common stock on the conversion date. Interest is payable
monthly and borrowings bear interest at LIBOR plus 1.4%. In addition, the
Company pays a commitment fee of 0.0125% on the unused portion of the maximum
commitment and has incurred an upfront fee of $50,000. As of March 31, 1999,
borrowings outstanding under the facility totaled $80 million and were
classified as current liabilities. For the three months ended March 31, 1999,
the Company incurred a total $1.3 million in interest and fees to KeySpan.
NOTE 3 -- COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in various claims and
lawsuits incidental to its business. In the opinion of management, the ultimate
liability thereunder, if any, will not have a material adverse affect on the
financial position or results of operations of the Company.
NOTE 4 -- RELATED PARTY TRANSACTIONS
KeySpan Facility.
See Note 2 -- Long-Term Debt and Notes.
Sale of Section 29 Tax Credits
Effective January 1, 1997, the Company entered into an agreement to
sell to a subsidiary of Brooklyn Union certain interests in onshore producing
wells of the Company that produce from formations that qualify for tax credits
under Section 29 of the Internal Revenue Code ("Section 29"). Section 29
provides for a tax credit from non- conventional fuel sources such as oil
produced from shale and tar sands and natural gas produced from geopressured
brine, Devonian shale, coal seams and tight sands formations. Brooklyn Union
acquired an economic interest in wells that are qualified for the tax credits
and in exchange, the Company (i) retained a volumetric production payment and a
net profits interest of 100% in the properties, (ii) received a cash down
payment of $1.4 million and (iii) receives a quarterly payment of $0.75 for
every dollar of tax credit utilized. The Company manages and administers the
daily operations of the properties in exchange for an annual management fee of
$100,000. The income statement effect for both of the three month periods ended
March 31, 1999 and 1998 was a $0.2 million reduction to income tax expense,
representing benefits received from the Section 29 tax credits.
KeySpan Joint Venture
On March 15, 1999, the Company signed a joint exploration agreement
(the "KeySpan Joint Venture") with a subsidiary of KeySpan, KeySpan Exploration
& Production, LLC, to explore for natural gas and oil over a term of three years
expiring December 31, 2001. The joint venture may be terminated at the option of
either party at the end of the then current calendar year. Houston Exploration
is joint venture manager and operator. Effective January 1, 1999, KeySpan will
commit up to $100 million per calendar year and Houston Exploration will commit
its proportionate share of the funds per calendar year necessary to fund a joint
exploration and development drilling program. Houston Exploration contributed
all of its undeveloped offshore leases as of January 1, 1999 to the joint
venture. KeySpan will
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receive 45% of Houston Exploration's working interest in all prospects to be
drilled under the program. Revenues will be shared 55% Houston Exploration and
45% KeySpan. During the term of the KeySpan Joint Venture, KeySpan will pay 100%
of actual intangible drilling costs up to a maximum of $20.7 million per year.
All additional intangible drilling costs incurred during such year will be paid
51.75% by KeySpan and 48.25% by Houston Exploration. In addition, Houston
Exploration will receive reimbursement of a portion of its general and
administrative costs during the term of the KeySpan Joint Venture. During the
first three months of 1999, KeySpan incurred approximately $4.2 million in
drilling costs and the Company received approximately $1.1 million in general
and administrative reimbursements pursuant to KeySpan Joint Venture.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in an understanding of
the Company's historical financial position and results of operations for the
three months ended March 31, 1999 and 1998. The Company's consolidated financial
statements and notes thereto included elsewhere in this report contain detailed
information that should be referred to in conjunction with the following
discussion.
GENERAL
Houston Exploration is an independent natural gas and oil company
engaged in the exploration, development, exploitation and acquisition of
domestic natural gas and oil properties. The Company's operations are currently
focused offshore in the Gulf of Mexico and onshore in South Texas, South
Louisiana, the Arkoma Basin, East Texas and West Virginia. Houston Exploration's
strategy is to utilize its geological and geophysical expertise to grow its
reserve base through a combination of exploratory drilling in the Gulf of Mexico
and lower risk, exploitation and development drilling onshore. At December 31,
1998, the Company had net proved reserves of 480 Bcfe, 98% of which were natural
gas and 80% of which were classified as proved developed.
Houston Exploration began exploring for natural gas and oil in December
1985 on behalf of The Brooklyn Union Gas Company ("Brooklyn Union") and in
September 1996 the Company completed an initial public offering its of common
stock. As of March 31, 1999, THEC Holdings Corp., a wholly owned subsidiary of
Brooklyn Union owned approximately 64% of the outstanding shares of Houston
Exploration's common stock. Brooklyn Union is a wholly-owned subsidiary of
MarketSpan Corporation, doing business as KeySpan Energy ("KeySpan"). KeySpan is
a diversified energy provider that: (i) distributes natural gas, through its
subsidiary Brooklyn Union, in the New York City and Long Island areas; (ii) is
contracted by Long Island Power Authority ("LIPA") to manage LILPA's electricity
service in the Long Island area; and (iii) through its unregulated subsidiaries,
is involved in gas retailing, power plant management and energy management
services.
As an independent oil and gas producer, the Company's revenue,
profitability and future rate of growth are substantially dependent upon
prevailing prices for natural gas, oil and condensate, which are dependent upon
numerous factors beyond the Company's control, such as economic, political and
regulatory developments and competition from other sources of energy. The energy
markets have historically been very volatile, as evidenced by the recent
volatility of natural gas and oil prices, and there can be no assurance that
commodity prices will not be subject to wide fluctuations in the future. A
substantial or extended decline in natural gas and oil prices could have a
material adverse effect on the Company's financial position, results of
operations, cash flows, quantities of natural gas and oil reserves that may be
economically produced and access to capital.
The Company uses the full cost method of accounting for its investment
in natural gas and oil properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of natural gas and oil
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved natural gas and
oil reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the present
value (using a 10% discount rate) of estimated future net cash flows from proved
natural gas and oil reserves and the lower of cost or fair value of unproved
properties, such excess costs are charged to operations. If a write down is
required, it would result in a charge to earnings but would not have an impact
on cash flows from operating activities. Once incurred, a write down of oil and
gas properties is not reversible at a later date even if oil and gas prices
increase.
Year 2000. Year 2000 issues result from the inability of computer
programs or computerized equipment to accurately calculate, store or use a date
subsequent to December 31, 1999. Typically, the year 2000 could be
misinterpreted as the year 1900. This date misinterpretation could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in normal business.
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<PAGE> 13
To ensure Year 2000 compliance, the Company has implemented a plan to
review all financial and operational systems and equipment involving a four
phase process: assessment, remediation and replacement, testing and
implementation. To date, the assessment phase has been fully completed, and the
Company is currently in the remediation phase which is approximately 95%
complete. The Company plans to begin testing systems and equipment during the
second quarter of 1999. Once testing is complete, systems will be ready for
immediate use. The Company expects testing and implementation to be
substantially complete by June 30, 1999. During 1998, the Company incurred
approximately $20,000 in expenses related to its Year 2000 compliance efforts
and during the first quarter of 1999, the Company has incurred approximately
$10,000. Year 2000 costs are currently being expensed as they are incurred.
However, in certain instances the Company may determine that replacing existing
equipment would be more efficient and the costs of these replacements would then
be capitalized. The Company currently expects that it will incur an additional
$100,000 in costs or expenses during 1999 to become Year 2000 compliant. The
Company believes that total costs or expenses to become Year 2000 compliant will
not exceed $500,000 and that such costs or expenses will not have a material
adverse effect on the Company's financial condition, operations or liquidity.
The foregoing timetable and assessment of costs to become Year 2000
compliant reflect management's current best estimates. These estimates are based
on many assumptions, including assumptions about the cost, availability and
ability of resources to locate, remediate and modify affected systems and
equipment. Based upon its activities to date, the Company does not believe that
these factors will cause results to differ significantly from those estimated.
However, the Company cannot reasonably estimate the potential impact on its
financial condition and operations if key third parties including, among others,
suppliers, contractors, joint venture partners, financial institutions,
customers, traders, and governments do not become Year 2000 compliant on a
timely basis. The Company is in the process of contacting many of these third
parties to determine the extent to which the Company is vulnerable to those
third parties' potential failure to remediate their own Year 2000 issues. The
Company expects its survey of key third parties to be fully complete by June 30,
1999.
The Company currently has no contingency plans in place in the event it
does not complete all phases of its Year 2000 program. The Company plans to
evaluate the status of completion of the Year 2000 compliance process by the end
of the second quarter of 1999 and determine whether such a contingency plan is
necessary.
In the event the Company is unable to complete the remediation or
replacement of critical computer software and equipment, establish alternative
procedures in a timely manner, or if those with whom the Company conducts
business are unsuccessful in implementing timely solutions, Year 2000 issues
could result in an interruption in, or a failure of certain normal business
activities that could result in a material adverse effect on the Company's
results of operations, liquidity and financial position. The Company's
remediation efforts are expected to reduce the Company's level of uncertainty
about Year 2000 compliance and the possibility of interruption of normal
operations. The Company believes that the potential impact, if any, of its
systems not being year 2000 compliant should not affect the Company's ability to
continue oil and gas exploration, drilling, production and sales activities.
However, there can be no guarantee that the Company, its business partners,
vendors or customers will successfully be able to identify and remedy all
potential Year 2000 problems and that a resulting system failure would not have
a material adverse effect on the Company.
In a recent Securities and Exchange Commission release regarding Year
2000 disclosures, the Securities and Exchange Commission stated that public
companies must disclose the most reasonably likely worst case Year 2000
scenario. Analysis of the most reasonably likely worst case Year 2000 scenario
that Houston Exploration may face leads to contemplation of the following
possibilities which, though unlikely in some or many cases, must be included in
any consideration of worst cases: widespread failure of electrical, gas, and
similar supplies by utilities serving the Company; widespread disruption of the
services of communications common carriers; similar disruption to means and
modes of transportation for Houston Exploration and its employees, contractors,
suppliers, and customers; significant disruption to Houston Exploration's
ability to gain access to, and remain working in, office buildings and other
facilities; the failure of substantial numbers of the Company's computer
hardware and software systems, including both internal business systems and
systems (such as those with embedded chips) controlling operational facilities
such as onshore and offshore oil and gas production facilities, gas meters and
pipelines, the effects of which would have a cumulative material adverse impact
on the Company. Among other things, the Company could face substantial claims by
customers or loss of revenues due to service interruptions, inability to fulfill
contractual obligations, inability to account for certain revenues or
obligations or to bill customers accurately and on a timely basis, and increased
expenses associated with litigation,
-13-
<PAGE> 14
stabilization of operations following systems failures, and the execution of
contingency plans. Houston Exploration could also experience an inability by
customers, traders, and others to pay, on a timely basis or at all, obligations
owed to the Company. Under these circumstances, the adverse effect on the
Company, and the reduction of the Company's revenues, would be material,
although not quantifiable at this time. Further in this scenario, the cumulative
effect of these failures could have a substantial adverse effect on the economy,
domestically and internationally. The adverse effect on Houston Exploration, and
the reduction of the Company's revenues, from a domestic or global recession or
depression is also likely to be material, although not quantifiable at this
time.
-14-
<PAGE> 15
RESULTS OF OPERATIONS
The following table sets forth the Company's historical natural gas and
oil production data during the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
PRODUCTION:
Natural gas (MMcf)......................... 16,135 15,135
Oil (MBbls)................................ 55 47
Total (MMcfe).............................. 16,465 15,417
AVERAGE SALES PRICES:
Natural gas (per Mcf) realized(1).......... $ 1.61 $ 2.13
Natural Gas (per Mcf) unhedged............. 1.61 2.06
Oil (per Bbl).............................. 10.51 14.17
EXPENSES (PER MCFE):
Lease operating............................ $ 0.24 $ 0.25
Severance tax.............................. 0.06 0.07
Depreciation, depletion and amortization 1.04 1.25
General and administrative, net............ 0.06 0.10
</TABLE>
- ---------------------------
(1) Reflects the effects of hedging.
RECENT FINANCIAL AND OPERATING RESULTS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1999
Production. Houston Exploration's production increased 7% from 15,417
MMcfe for the three months ended March 31, 1998 to 16,465 MMcfe for the three
months ended March 31, 1999. The increase in production was primarily
attributable new production added from the South Louisiana properties acquired
in late April 1998.
Natural Gas and Oil Revenues. Natural gas and oil revenues decreased
19% from $32.9 million for the three months ended March 31, 1998 to $26.5
million for the three months ended March 31, 1999 as a result of the 24%
decrease in average realized natural gas prices, from $2.13 per Mcf for the
three months ended March 31, 1998 to $1.61 per Mcf for the three months ended
March 31, 1999, offset in part by the 7% increase in production.
As a result of hedging activities, the Company realized an average gas
price of $1.61 per Mcf for the three months ended March 31, 1999, which was
equal to the average unhedged natural gas price and as a result, natural gas and
oil revenues were reduced slightly by $0.1 million for the three months ended
March 31, 1999. For the corresponding three month period of 1998, the average
realized gas price was $2.13 per Mcf, which was 103% of the unhedged average gas
price of $2.06 per Mcf, resulting in an increase in natural gas revenues of $1.1
million for the three months ended March 31, 1998.
Lease Operating Expenses and Severance Tax. Lease operating expenses
increased 2% from $3.9 million for the three months ended March 31, 1998 to $4.0
million for the three months ended March 31, 1999. On an Mcfe basis, lease
operating expenses decreased from $0.25 for the first three months of 1998 to
$0.24 for the first three months of 1999. Lease operating expenses during the
first three months of 1999 have remained relatively flat despite the addition of
a new core area of operations in South Louisiana since the first quarter of
1998. The Company continues to control costs where possible and has seen
operating costs begin to stabilize as the oil and gas industry is experiencing a
-15-
<PAGE> 16
downturn in activity. The decrease in the lease operating expenses per Mcfe is a
result of the increase in production combined with the minimal increase in costs
during the first three months of 1999 as compared to the corresponding period of
1998. Severance tax, which is a function of volume and revenues generated from
onshore production, decreased 10% from $1.1 million for the three months ended
March 31, 1998 to $1.0 million for the three months ended March 31, 1999. On an
Mcfe basis, severance tax decreased from $0.07 per Mcfe, for the first three
months of 1998 to $0.06 per Mcfe, for the first three months of 1998. The
decrease in severance tax per Mcfe is due to lower natural gas prices received
during the first three months of 1999 as compared to prices received during the
first three months of 1998.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense decreased 11% from $19.3 million for the three months ended
March 31, 1998 to $17.1 million for the three months ended March 31, 1999.
Depreciation, depletion and amortization expense per Mcfe decreased 17% from
$1.25 for the three months ended March 31, 1998 to $1.04 for the corresponding
three months in 1999. The decrease in depreciation, depletion and amortization
expense was a result of a lower depletion rate. The lower depletion rate is
primarily a result of the $84.5 million (net of tax) writedown in natural gas
and oil properties that was taken in the fourth quarter of 1998 due to weak
natural gas prices; combined with, an increase in production and a lower level
of capital spending during the first three months of 1999 as compared to the
corresponding period of 1998.
General and Administrative Expenses. General and administrative
expenses, net of overhead reimbursements received from other working interest
owners, of $0.2 million and $1.2 million, for the three months ended March 31,
1998 and 1999, respectively, decreased 38% from $1.6 million for the three
months ended March 31, 1998 to $1.0 for the three months ended March 31, 1999.
Included in reimbursements received from working interest owners were
reimbursements totaling $1.1 million received from KeySpan pursuant to the
KeySpan Joint Venture (see Note --4 Related Party Transactions). The Company
capitalized general and administrative expenses directly related to oil and gas
exploration and development activities of $2.0 million and $1.2 million,
respectively, for the three months ended March 31, 1998 and 1999. The decrease
in capitalized general and administrative expenses is a result of lower
aggregate general and administrative expenses during the first three months of
1999 as compared to the corresponding period of 1998. Aggregate general and
administrative expenses are lower during the first three months of 1999
primarily as a result of the Company's efforts to control and reduce expenses
where possible. On an Mcfe basis, general and administrative expenses decreased
40% from $0.10 for the three months ended March 31, 1998 to $0.06 for the three
months ended March 31, 1999. The lower rate per Mcfe during the first three
months of 1998 reflects a combination of an increase in production, a reduction
in aggregate general and administrative expenses and the effect of the KeySpan
Joint Venture reimbursements.
Interest Expense, Net. Interest expense, net of capitalized interest,
increased from $0.3 million for the three months ended March 31, 1998 to $3.0
million for the three months ended March 31, 1999. Capitalized interest
increased from $2.0 million for the first three months of 1998 to $2.8 million
for the first three months of 1999. The increase in aggregate interest expense
was attributable to higher average debt levels during the first three months of
1999 as compared to the corresponding period of 1998. With the issuance of the
Subordinated Notes in March 1998 and the implementation of the KeySpan Facility
in November 1998, the Company expects its 1999 average debt levels to exceed
those in 1998 and accordingly, expects an increase in net interest expense.
Income Tax Provision. The provision for income taxes decreased from an
expense of $2.2 for the first three months of 1998 to an expense of $0.05
million for the first three months of 1999. The decrease in income tax expense
for the three months ended March 31, 1999 as compared to the corresponding
period of 1998 is due to the 88% decrease in pretax income for the three months
ended March 31, 1999 as compared to the corresponding period of 1998.
Operating Income and Net Income. The 7% increase in production and the
11% decrease in operating expenses was not large enough to offset the 24%
decrease in natural gas prices for the three months ended March 31, 1999. As a
result, operating income decreased by 47% from $7.2 million for the first three
months of 1998 to $3.8 million for the first three months of 1999. Net income
decreased 83% from $4.7 million for the three months ended March 31, 1998 to
$0.8 million for the three months ended March 31, 1999 due to lower natural gas
prices and higher interest expense.
-16-
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, acquisitions,
capital expenditures and working capital requirements from cash flows from
operations, bank borrowings and, prior to the IPO, capital contributions from
Brooklyn Union. On March 2, 1998, the Company issued $100 million of senior
subordinated indebtedness. Net proceeds of approximately $97 million were used
to repay a portion of the outstanding indebtedness under the Company's revolving
bank credit facility (the "Credit Facility"). In November of 1998, the Company
established a $150 million subordinated revolving credit facility with KeySpan
(the "KeySpan Facility") and borrowed $80 million under this facility to fund a
portion of the November 1998 acquisition of producing natural gas and oil
properties in the Gulf of Mexico from Chevron U.S.A. Inc.(the "Chevron
Acquisition").
As of March 31, 1999, the Company had a working capital deficit of
$86.9 million, which includes current maturities of $80 million outstanding
under the KeySpan Facility, and $59.6 million of borrowing capacity available
under the Credit Facility and $70.0 million of borrowing capacity available
under the KeySpan Facility. Net cash provided by operating activities for the
three months ended March 31, 1999 was $18.7 million compared to $14.9 million
for the three months ended March 31, 1998. The Company's cash position was
increased during the first three months of 1999 by a net increase in borrowings
under the Credit Facility of $7 million. Funds used in investing activities
consisted of $28.4 million for investments in property and equipment. As a
result of these activities, cash and cash equivalents decreased $2.7 million
from $4.6 million at December 31, 1998 to $1.9 million at March 31, 1999.
Future Capital Requirements. The Company's capital expenditure budget
for 1999 of $90 million includes $42 million and $33 million, respectively, for
exploration and development, with the balance reserved for leasehold acquisition
costs. These amounts include development costs associated with recently acquired
properties and amounts that are contingent upon drilling success. The Company
will continue to evaluate its capital spending plans through the year. No
significant abandonment or dismantlement costs are anticipated through 1999.
Actual levels of capital expenditures may vary significantly due to a variety of
factors, including drilling results, natural gas prices, industry conditions and
outlook and future acquisitions of properties. The Company believes cash flows
from operations and borrowings under its Credit Facility will be sufficient to
fund these expenditures. The Company will continue to selectively seek
acquisition opportunities for proved reserves with substantial exploration and
development potential both offshore and onshore. The size and timing of capital
requirements for acquisitions is inherently unpredictable. The Company expects
to fund exploration and development through a combination of cash flow from
operations, borrowings under its Credit Facility, or the issuance of equity or
debt securities.
On March 15, 1999, the Company signed a joint exploration agreement (
the "KeySpan Joint Venture") with a subsidiary of KeySpan, KeySpan Exploration &
Production, LLC, to explore for natural gas and oil over a term of three years
expiring December 31, 2001. The joint venture may be terminated at the option of
either party at the end of the then current calendar year. Houston Exploration
is joint venture manager and operator. Effective January 1, 1999, KeySpan will
commit up to $100 million per calendar year and Houston Exploration will commit
its proportionate share of the funds per calendar year necessary to fund a joint
exploration and development drilling program. Houston Exploration contributed
all of its undeveloped offshore leases as of January 1, 1999 to the joint
venture. KeySpan will receive 45% of Houston Exploration's working interest in
all prospects to be drilled under the program. Revenues will be shared 55%
Houston Exploration and 45% KeySpan. During the term of the KeySpan Joint
Venture, KeySpan will pay 100% of actual intangible drilling costs up to a
maximum of $20.7 million per year. All additional intangible drilling costs
incurred during such year will be paid 51.75% by KeySpan and 48.25% by Houston
Exploration. In addition, Houston Exploration will receive reimbursement of a
portion of its general and administrative costs during the term of the KeySpan
Joint Venture. The Company plans to drill approximately eight to ten offshore
exploratory wells under the terms of the KeySpan Joint Venture during 1999. As
of March 31, 1999, the Company has drilled one unsuccessful exploratory well
(Mustang Island 859 #1) under the KeySpan Joint Venture.
Capital Structure. The Company has entered into a revolving credit
facility ("Credit Facility") with a syndicate of lenders led by Chase Bank of
Texas, National Association ("Chase"). The Credit Facility was amended March 30,
1999 and provides a maximum commitment of $250 million, subject to borrowing
base limitations. At March 31, 1999, the conforming portion of the borrowing
base or threshold amount was $175 million. The Company has the option to
increase the threshold amount to a borrowing base of $200 million at an
incremental interest rate. Up to $2.0 million of the borrowing base is available
for the issuance of letters of credit to support performance guarantees. The
Credit Facility matures on March 1, 2003 and is unsecured. At March 31, 1999,
$140.0 million was outstanding under the
-17-
<PAGE> 18
Credit Facility and $0.4 million was outstanding in letter of credit
obligations. Subsequent to March 31, 1999, the Company borrowed an additional $5
million, bringing borrowings and extensions of credit to $145.4 million as of
May 12, 1999.
Interest is payable on borrowings under the Credit Facility, at the
Company's option, at (i) a fluctuating rate ("Base Rate") equal to the greater
of the Federal Funds rate plus 0.5% or Chase's prime rate, or (ii) a fixed rate
("Fixed Rate") equal to a quoted LIBOR rate plus a variable margin of 0.625% to
1.50%, depending on the amount outstanding under the Credit Facility. Interest
is payable at calendar quarters for Base Rate loans and at the earlier of
maturity or three months from the date of the loan for Fixed Rate loans. In
addition, the Credit Facility requires a commitment fee of: (i) between 0.50%
and 0.375% per annum on the unused portion of the designated borrowing base, and
(ii) 33% of the fee in (i) above on the difference between the lower of the
facility amount or the borrowing base and the designated borrowing base.
The Credit Facility contains covenants of the Company, including
certain restrictions on liens and financial covenants which require the Company
to, among other things, maintain (i) an interest coverage ratio of 2.5 to 1.0 of
earnings before interest, taxes and depreciation ("EBITDA") to cash interest and
(ii) a total debt to capitalization ratio of less than 60%. For purposes of the
total debt to capitalization ratio, the calculation of total capitalization
excludes the effects of non-cash charges related to the $84.5 million, after
tax, writedown of oil and gas properties incurred by the Company in the fourth
quarter of 1998. In addition to maintenance of certain financial ratios, cash
dividends and/or purchase or redemption of the Company's stock is restricted, as
well as the encumbering of the Company's gas and oil assets or the pledging of
the assets as collateral. As of March 31, 1999, the Company was in compliance
with all such covenants.
On March 2, 1998, the Company issued $100 million of 85/8% Senior
Subordinated Notes (the "Notes") due January 1, 2008. The Notes bear interest at
a rate of 85/8% per annum with interest payable semi-annually on January 1 and
July 1, commencing July 1, 1998. The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after January 1, 2003 at a price
equal to 100% of the principal amount plus accrued and unpaid interest, if any,
plus a specified premium if the Notes are redeemed prior to January 1, 2006.
Notwithstanding the foregoing, at any time prior to January 1, 2001, the Company
may redeem up to 35% of the original aggregate principal amount of the Notes
with the net proceeds of any equity offering, provided that at least 65% of the
original aggregate principal amount of the Notes remains outstanding immediately
after the occurrence of such redemption. Upon the occurrence of a change of
control (as defined), the Company will be required to offer to purchase the
Notes at a purchase price equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any. The Notes are general
unsecured obligations of the Company and rank subordinate in right of payment to
all existing and future senior debt, including the Credit Facility, and will
rank senior or pari passu in right of payment to all existing and future
subordinated indebtedness including the KeySpan Facility.
On November 30, 1998, the Company entered into a revolving credit
facility with KeySpan, which provides a maximum commitment of $150 million. The
KeySpan Facility ranks subordinate to the Credit Facility and pari passu to the
Senior Subordinated Notes. Borrowings are unsecured. Any principal amount that
remains outstanding under the KeySpan Facility at January 1, 2000 will be
converted into common stock of the Company, with the number of shares to be
determined based upon the average of the closing prices of the Company's common
stock, rounded to three decimal places, as reported under "NYSE Composite
Transaction Reports" in the Wall Street Journal during the 20 consecutive
trading days ending three trading days prior to January 1, 2000. Because the
market value represents an average of the Company's common stock over twenty
consecutive trading days, ending three days prior to the maturity date of the
loan, the market price may be higher or lower than the price of the common stock
on the conversion date. Interest is payable monthly and borrowings bear interest
at LIBOR plus 1.4%. In addition, the Company pays a commitment fee of 0.0125% on
the unused portion of the maximum commitment and has incurred an upfront fee of
$50,000. As of December 31, 1998, outstanding borrowings under the facility were
$80 million. For the year ended December 31, 1998, the Company paid a total $0.5
million in interest and fees to KeySpan. Borrowings were used to finance a
portion of the November 1998 Chevron Acquisition.
-18-
<PAGE> 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Natural Gas Hedging. The Company utilizes derivative commodity
instruments to hedge future sales prices on a portion of its natural gas
production to achieve a more predictable cash flow, as well as to reduce its
exposure to adverse price fluctuations of natural gas. While the use of these
hedging arrangements limits the downside risk of adverse price movements, they
may limit future revenues from favorable price movements. The use of hedging
transactions also involves the risk that the counterparties will be unable to
meet the financial terms of such transactions. Hedging instruments used are
swaps, collars and options, and are generally placed with major financial
institutions that the Company believes are minimal credit risks. The Company
accounts for these transactions as hedging activities and, accordingly, gains or
losses are included in natural gas and oil revenues in the period the hedged
production occurs. Unrealized gains and losses on these contracts, if any, are
deferred and offset against the related settlement amounts.
As of March 31, 1999, the Company had entered into commodity price
hedging contracts with respect to its gas production as listed below. Natural
gas production during the month of April 1999 was 5,394 MMcf (5,541 MMMbtu).
<TABLE>
<CAPTION>
FIXED PRICE SWAPS COLLARS
------------------------- ---------------------------------------
NYMEX NYMEX
VOLUME CONTRACT VOLUME CONTRACT PRICE
PERIOD (MMMBTU) PRICE (MMMBTU) FLOOR CEILING
---------------- -------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
May 1999 775 $ 2.014 1,085 $ 2.026 $ 2.406
June 1999 -- -- 3,000 $ 2.074 $ 2.406
July 1999 -- -- 3,100 $ 2.074 $ 2.406
August 1999 -- -- 3,100 $ 2.074 $ 2.406
September 1999 -- -- 3,000 $ 2.074 $ 2.406
October 1999 -- -- 3,100 $ 2.074 $ 2.406
November 1999 -- -- 1,500 $ 2.400 $ 2.663
December 1999 -- -- 1,550 $ 2.500 $ 2.876
</TABLE>
As of May 12, 1999, the Company had no commodity hedging contracts
extending beyond December 31,1999 and had not entered into any basis swaps
during 1999.
These hedging transactions are settled based upon the average of the
reported settlement prices on the New York Mercantile Exchange (the "NYMEX") for
the last three trading days of a particular contract month (the "settlement
price"). With respect to any particular swap transaction, the counterparty is
required to make a payment to the Company in the event that the settlement price
for any settlement period is less than the swap price for such transaction, and
the Company is required to make payment to the counterparty in the event that
the settlement price for any settlement period is greater than the swap price
for such transaction. For any particular collar transaction, the counterparty is
required to make a payment to the Company if the settlement price for any
settlement period is below the floor price for such transaction, and the Company
is required to make payment to the counterparty if the settlement price for any
settlement period is above the ceiling price for such transaction. For any
particular floor transaction, the counterparty is required to make a payment to
the Company if the settlement price for any settlement period is below the floor
price for such transaction. The Company is not required to make any payment in
connection with a floor transaction. For option contracts, the Company has the
option, but not the obligation, to buy contracts at the strike price up to the
day before the last trading day for that NYMEX contract.
The Company periodically enters into basis swaps (either as part of a
particular hedging transaction or separately) tied to a particular NYMEX-based
transaction to eliminate basis risk. Because substantially all of the Company's
natural gas production is sold under spot contracts that have historically
correlated with the NYMEX price, the Company believes that it has no material
basis risk.
-19-
<PAGE> 20
PART II.
OTHER INFORMATION
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K:
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- -------- -----------
<S> <C> <C>
* 10.1 -- Exploration Agreement between The Houston
Exploration Company and KeySpan Exploration and Production,
L.L.C., dated March 15,1999.
* 10.2 -- Amended Credit Agreement among The Houston Exploration Company
and Chase Bank of Texas, National Association, dated March 30,
1999.
* 27.1 -- Financial Data Schedule.
</TABLE>
- ---------------------------
* Filed herewith.
(b) Reports on Form 8-K:
None
-20-
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
THE HOUSTON EXPLORATION COMPANY
By: /s/ James G. Floyd
--------------------------------------
James G. Floyd
Date: May 12, 1999 President and Chief Executive Officer
By: /s/ James F. Westmoreland
--------------------------------------
James F. Westmoreland
Date: May 12, 1999 Vice President, Chief Accounting Officer,
Comptroller and Secretary
-21-
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
* 10.1 -- Exploration Agreement between The Houston
Exploration Company and KeySpan Exploration and Production,
L.L.C., dated March 15,1999.
* 10.2 -- Amended Credit Agreement among The Houston Exploration Company
and Chase Bank of Texas, National Association, dated March 30,
1999.
* 27.1 -- Financial Data Schedule.
</TABLE>
- ------------
* Filed herewith.
<PAGE> 1
EXPLORATION AGREEMENT
THIS EXPLORATION AGREEMENT ("Agreement") is made and entered into on
the 15th day of March, 1999, between THE HOUSTON EXPLORATION COMPANY , a
Delaware corporation, of 1100 Louisiana Street, Suite 2000, Houston, Texas 77002
("THEC") and KEYSPAN EXPLORATION AND PRODUCTION, L.L.C., a Delaware limited
liability company, of One Metro Tech Center, 18th Floor, Brooklyn, New York
11201 ("KE&P").
W I T N E S S E T H:
A. THEC owns interests or rights to acquire interests in undeveloped
Oil and Gas Leases covering submerged lands in the State of Texas and in the
Outer Continental Shelf; and
B. THEC and KE&P desire to join together in the exploration and
development of such leases in accordance with the terms and provisions of this
Agreement.
NOW, THEREFORE, FOR A VALUABLE CONSIDERATION, THEC and KE&P agree as
follows:
ARTICLE I.
DEFINITIONS
For purposes of this Agreement, unless otherwise expressly provided,
the terms defined below shall have the meanings assigned to them in this
Article. Other terms shall have the meaning assigned to them in the following
Articles. Such meanings shall apply equally to the singular and the plural,
unless the context in which they are used clearly requires otherwise.
1.1 Abandonment Costs. The actual and direct costs, expenses and
liabilities incurred in the plugging and abandoning of a well, conducting
necessary site clearance relating to such well and removing any facilities used
in connection with such well.
<PAGE> 2
1.2 Acquisition Date. The later to occur of (a) the Commencement Date
or (b) the date on which THEC acquires a Working Interest in a Lease.
1.3 AFE. An Authority for Expenditure.
1.4 Burdens. All royalties, overriding royalties, net profit interests,
production payments, back-in working interests and other burdens on production
from a Lease existing on the Acquisition Date of such Lease.
1.5 Code: The Internal Revenue Code of 1986, as amended.
1.6 Development Costs. All of the actual and direct costs, expenses and
liabilities, except Intangible Costs, incurred for a Development Operation in
connection with a Lease.
1.7 Development Operation. Any operation on a Lease after a Platform
Decision has been made on such Lease for which THEC prepares an internal or
external AFE, whether or not required by the relevant Operating Agreement,
including but not limited to, the drilling, completing and workover of wells,
the construction and installation of Platforms and other facilities and the
installation of gathering lines and pipelines.
1.8 Drilling Costs. All of the actual and direct costs, expenses and
liabilities, except Intangible Costs, incurred in connection with the
preparation for and the drilling, casing, testing, and logging of an Exploratory
Well on a Lease, and, if such well is plugged and abandoned, and the Abandonment
Costs relating to such well.
1.9 Encumbrance. Any pledge, restriction, charge, lease, lien,
mortgage, security interest, contract obligation, option, claim, or other
encumbrance of any kind or character whatsoever.
2
<PAGE> 3
1.10 Exploratory Well. Any well drilled on a Lease included within a
Prospect pursuant to this Agreement before a Platform Decision has been made on
such Lease.
1.11 G and A Costs. The actual costs incurred by THEC during the term
of this Agreement which are properly chargeable to THEC's Gross General and
Administrative Expense Account, the Office Furniture and Fixture Depreciation
Account and the Payroll Taxes Account in accordance with generally accepted
accounting principles as such accounts were maintained and compiled in THEC's
fiscal 1998 financial statements; provided that, such costs shall not be
included in any Drilling Costs, Development Costs or Operating Costs as either
an AFE cost or otherwise.
1.12 Governmental Authority. The United States of America, any state,
commonwealth, territory or possession of the United States and any political
subdivision of any of the foregoing, including but not limited to courts,
departments, commissions, boards, bureaus, agencies or other instrumentalities.
1.13 Hydrocarbons. Oil, gas, casinghead gas, gas condensate and all
other liquid and gaseous hydrocarbons (any one or more of them).
1.14 Intangible Costs. All of the actual and direct costs, expenses and
liabilities incurred in connection with the preparation for and the drilling,
casing, testing, logging and, if necessary, plugging and abandoning of Wells on
the Leases that may be deducted as an expense under Section 263(c) of the Code.
1.15 KE&P's Yearly Commitment. The sum of (a) 100 million dollars per
year during the Primary Term plus (b) that portion of prior years' Yearly
Commitments that have not been expended or committed for expenditure under this
Agreement which sum shall be used to pay all costs attributable to KE&P under
this Agreement, including G and A Costs, during the relevant year.
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1.16 Leasehold Costs. All of the actual and direct costs, expenses and
liabilities incurred in acquiring Working Interests in the Leases (other than
THEC's Original Working Interests in the Leases described on Schedule I) under
Section 7.5 of this Agreement.
1.17 Leases. The Oil and Gas Leases described on Schedule I and such
additional Oil and Gas leases as may be acquired under Section 7.5 of this
Agreement.
1.18 Legal Requirements. Any law, statute, ordinance, decree,
requirement, order, judgment, rule or regulation of, including the terms of any
license or permit issued by, any Governmental Authority.
1.19 Marketing Costs. All actual and direct costs, expenses and
liabilities paid to third parties relating to the treatment, gathering,
transportation, processing, and marketing of Hydrocarbons produced from a Lease.
1.20 Net Proceeds. All gross revenues received from the sale of
Hydrocarbons produced from the Leases after deduction of all Burdens, Marketing
Costs and Taxes.
1.21 Operating Agreement. The existing operating agreement relating to
a Lease or, if there is no such operating agreement relating to a Lease, the
operating agreement subsequently negotiated between THEC and the Working
Interest owners in such Lease other than KE&P, or if there are no other such
owners, an operating agreement in the form attached hereto as Schedule II with
Exhibit "A" thereto being completed to contain the information with respect to
such Lease.
1.22 Operating Costs. All of the actual and direct costs, expenses and
liabilities, of operating Wells and Leases, other than Drilling Costs,
Development Costs, G and A Costs, Marketing Costs, Abandonment Costs and Seismic
Costs, for which THEC does not prepare an internal or external AFE.
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1.23 Person: Any individual or legal entity, including but not limited
to, corporations, partnerships, limited liability companies and limited
partnerships.
1.24 Platform. An offshore structure whether fixed, compliant, or
floating, and the components of that structure, including, but not limited to,
caissons or well protectors, rising above the water line and used for the
exploration, development, or production of Hydrocarbons from a Lease. The term
"Platform" shall also mean an offshore subsea structure or template (excluding
templates used for drilling operations) and any component thereof (including,
but not limited to, flow lines and control systems, other than those installed
in connection with completion of a well), that is attached to the sea floor and
used to obtain production of Hydrocarbons from the Lease.
1.25 Platform Decision. An affirmative decision made by THEC relating
to a Well or Wells drilled on a Lease pursuant to this Agreement to set and pay
for a Platform and attempt to go on production.
1.26 Payout. The first day of the month following that point in time
when (a) the sum of (i) the amount of the total Net Proceeds attributable to a
Program Year received by KE&P plus (ii) the Program Year Tax Cash Benefits
Realized for such Program Year equals (b) the sum of (i) the amount of all
Abandonment Costs, Development Costs, Drilling Costs, Intangible Costs,
Leasehold Costs, Marketing Costs, Operating Costs, and Seismic Costs paid by
KE&P relating to the Program Leases included in such Program Year and the Wells
located thereon and (ii) the amount of G and A Costs paid by KE&P during such
Program Year.
1.27 Program Lease. A Lease will be a Program Lease for the particular
Program Year in which (a) the first Exploratory Well is spudded on such Lease or
(b) the first Exploratory Well is spudded on a Prospect which includes such
lease, whichever occurs first.
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1.28 Program Year. Each calendar year during the Primary Term of this
Agreement. A cost under this Agreement for purposes of Payout shall be
attributable to the Program Year in which the first Exploratory Well is spudded
on the Lease to which such cost relates. If an Exploratory Well is not spudded
on a Lease during the Primary Term of this Agreement, the costs relating to such
Lease shall be used in the calculation of Payout for the Program Year in which
they were incurred. Net Proceeds shall be attributable to the Program Year in
which the first Exploratory Well is spudded on the Lease to which such proceeds
relate.
1.29 Program Year Tax Cash Benefits Realized. The actual cash amount by
which the federal, state and local income tax of the MarketSpan Corporation
d/b/a KeySpan Energy consolidated group of companies was reduced as a result of
the deductibility of the Intangible Costs from the Leases and Wells paid by KE&P
attributable to a Program Year. Such amount shall be calculated separately for
each Program Year.
1.30 Prospect. A geographical area, covered by one or more of the
Leases designated by THEC which appears to meet reasonable geologic, land and
economic criteria for the drilling of an Exploratory Well. After an Exploratory
Well is drilled on a Prospect, from time to time, THEC shall, if necessary,
enlarge or reduce the geographical area within such Prospect, both horizontally
and vertically, or either, to reflect geological, geophysical or economic
information not available at the time the Prospect is originally designated.
1.31 Seismic Costs. All actual and direct costs, expenses and
liabilities of geological and geophysical information, including seismic data,
paid by THEC to third parties after the Commencement Date relating to the
Leases.
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1.32 Taxes. All local, state or federal, ad valorem, property, gross
production, severance, windfall profit, excise, occupation, gathering, and other
taxes and assessments of any kind whatsoever (but excluding taxes measured by or
based on income) based upon, measured by or charged against a Lease, the
production of Hydrocarbons or the receipt of proceeds therefrom.
1.33 THEC's Original Working Interest. The Working Interest owned by
THEC in a Lease as set forth on Schedule I and any additional Working Interests
acquired by THEC pursuant to Section 7.5 of this Agreement.
1.34 THEC's Program Budget. The sum of money for a calendar year that
THEC intends to expend on its share of the costs contemplated under this
Agreement.
1.35 Well. Any well drilled on a Lease under this Agreement.
1.36 Working Interest. A right to search for and to produce
Hydrocarbons, or one or more of the components thereof, whether such right is
derived from ownership of lands in fee, from a lease covering lands, from a
record title interest or operating rights interest, from any contractual
relationship conferring such right, or from any other ownership or circumstances
granting such right, and which right bears the costs connected with the
exploration and drilling for and the production of Hydrocarbons.
ARTICLE II.
TERMS
2.1 Primary Term. This Agreement shall be for a primary term (the
"Primary Term") commencing on January 1, 1999 ("Commencement Date") and ending
on the earliest to occur of the following:
(a) 12/31/2001;
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(b) the end of any calendar year if either party notifies the
other party in writing on or before sixty (60) days before the end of such year
of its election to terminate the Primary Term at the end of such year; or
(c) the mutual agreement of the parties.
2.2 Secondary Term. This Agreement shall be for a secondary term (the
"Secondary Term") as to each Program Year commencing on the day the Primary Term
ends and ending on the earlier of:
(a) Payout of such Program Year; or
(b) the mutual agreement of the parties.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THEC
THEC represents and warrants unto KE&P as follows:
3.1 Organization and Good Standing. THEC is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to own and lease
the properties and assets it currently owns and leases and to carry on its
business as such business is currently conducted. THEC is duly licensed or
qualified to do business as a foreign corporation and is in good standing in all
jurisdictions in which the character of the properties and assets now owned or
leased by it or the nature of the business now conducted by it requires it to be
so licensed or qualified.
3.2 Authority and Authorization of Agreement. THEC has all requisite
corporate power and authority to execute and deliver this Agreement, to
consummate the transactions contemplated
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by this Agreement and to perform all the terms and conditions of this Agreement
to be performed by THEC. The execution and delivery of this Agreement by THEC,
the performance by it of all the terms and conditions to be performed by it and
the consummation of the transactions contemplated by this Agreement have been
duly authorized and approved by all necessary corporate action.
3.3 Due Execution and Binding Obligation. This Agreement has been duly
executed and delivered on behalf of THEC and constitutes the valid and binding
obligation of THEC, enforceable against it in accordance with its terms, except
as such enforceability may be limited by bankruptcy, insolvency or other laws
relating to or affecting the enforcement of creditors' rights generally and
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
3.4 No Violations. This Agreement and its execution and delivery by
THEC does not, and the fulfillment and compliance with the terms and conditions
of this Agreement and the consummation of the transactions contemplated will
not:
(a) conflict with, or require the consent of any Person under
the Certificate of Incorporation or Bylaws of THEC;
(b) violate any provision of, or, require any filing, consent,
authorization, notice or approval under, any Legal Requirement applicable to or
binding upon THEC (assuming receipt of all routine governmental consents
typically received after consummation of transactions of the nature contemplated
by this Agreement);
(c) conflict with, result in a breach of, constitute a default
under (without regard to requirements of notice or the lapse of time or both),
accelerate or permit the acceleration of the performance required by, or require
any consent, authorization or approval under (i) any mortgage,
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indenture, loan, credit agreement or other agreement or instrument evidencing
indebtedness for borrowed money to which THEC is a party or by which it is bound
or to which any of the Leases are subject or (ii) any license, contract or other
agreement or instrument to which THEC is a party or by which it is bound or
which any of its properties is subject; or
(d) result in the creation or imposition of any lien, charge
or other encumbrance upon the Leases.
3.5 No Default. THEC is not in material default under, and no condition
exists that with notice or lapse of time or both would constitute a default by
it under, (i) any order, judgment or decree of any Governmental Authority or
(ii) any agreement, contract, lease, license, permit or other instrument.
3.6 Compliance. THEC is in material compliance with all Legal
Requirements applicable to its current business and operations and the Leases.
3.7 Rights and Consents. Except as set forth on Schedule I, none of the
Leases are subject to a preferential right to purchase or a consent to assign
which has not been waived or obtained.
3.8 Environmental Matters. The Leases have been operated and are in
substantial compliance with all applicable environmental Legal Requirements.
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3.9 Status and Operation of the Leases.
(a) The Leases and other agreements under which THEC holds the
THEC Original Working Interests in the Leases are in full force and effect in
accordance with their respective terms;
(b) THEC has not received a written notice of default that
remains outstanding or uncured under the Leases or other agreements under which
THEC holds the THEC Original Working Interests in the Leases;
(c) THEC's Original Working Interests in the Leases are not
subject to any advance, "take-or-pay" or other similar payments under production
sales contracts that entitle the buyers to "make up" or otherwise receive
deliveries of Hydrocarbons at any time without paying at such time the
applicable contract price; and
(d) There is no personal property, mixed property or real
property located on the Leases for which THEC has any responsibility.
3.10 Litigation.
(a) There is no material action, suit or proceeding pending
or, to the best of THEC's knowledge, threatened against THEC or the Leases; and
(b) THEC is not charged with a written violation of, or to the
best of THEC's knowledge, threatened with a charge of a violation of, any Legal
Requirement relating to the Leases or any aspect of its business relating to the
Leases.
3.11 Descriptions. Schedule I contains an accurate description of the
Leases and THEC's Original Working Interests in such Leases.
3.12 Liens. THEC's Original Working Interests in the Leases are not
subject to any mortgage, deed of trust, security agreement, financing statement
or other lien.
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ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF KE&P
4.1 Organization and Good Standing. KE&P is a limited liability company
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization.
4.2 Authority and Authorization of Agreement. KE&P has all requisite
power and authority to execute and deliver this Agreement, to consummate the
transactions contemplated by this Agreement and to perform all the terms and
conditions of this Agreement to be performed by KE&P. The execution and delivery
of this Agreement by KE&P, the performance by KE&P of all the terms and
conditions to be performed by it and the consummation of the transactions
contemplated by this Agreement have been duly authorized and approved by all
necessary action.
4.3 Due Execution and Binding Obligation. This Agreement has been duly
executed and delivered by KE&P and constitutes the valid and binding obligation
of KE&P, enforceable against it in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency or other laws relating
to or affecting the enforcement of creditors' rights generally and general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
4.4 No Violations. This Agreement and its execution and delivery by
KE&P do not, and the fulfillment and compliance with the terms and conditions of
this Agreement and the consummation of the transactions contemplated will not:
(a) conflict with, or require the consent of any Person under
the organizational documents of KE&P;
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(b) violate any provision of, or, require any filing, consent,
authorization or approval under, any Legal Requirement applicable to or binding
upon KE&P (assuming receipt of all routine governmental consents typically
received after consummation of transactions of the nature contemplated by this
Agreement); or
(c) conflict with, result in a breach of, constitute a default
under (without regard to requirement of notice or the lapse of time or both),
accelerate or permit the acceleration of the performance required by, or require
any consent, authorization or approval under, (i) any mortgage, indenture, loan,
credit agreement or other agreement or instrument evidencing indebtedness for
borrowed money to which KE&P is a party or by which KE&P is bound or to which
any of its properties is subject or (ii) any lease, license, contract or other
agreement or instrument to which KE&P is a party or by which it is bound or to
which any of its properties is subject.
4.5 Litigation. There is no action, suit, proceeding or governmental
investigation or inquiry pending, or to the knowledge of KE&P, threatened
against KE&P or any of its properties that might delay, prevent or hinder the
consummation of the transactions contemplated by this Agreement.
4.6 Knowledgeable Investor. KE&P is an experienced and knowledgeable
investor in the oil and gas business. Prior to entering into this Agreement,
KE&P was advised by, and it has relied solely on, its own legal, tax and other
professional counsel concerning this Agreement, the Leases and their value. KE&P
is acquiring interests in the Leases under this Agreement for its own account
and not for distribution.
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ARTICLE V.
ALLOCATION AND PAYMENT OF COSTS
5.1 Allocation of IDCs. Subject to Section 5.4, during each
year of the Primary Term, KE&P shall pay one hundred percent (100%) of all
Intangible Costs attributable to THEC's Original Working Interests in the Leases
until KE&P has paid Intangible Costs for such year totaling 20.725 million
dollars and, thereafter during such year KE&P shall pay fifty one and seventy
five one hundredths percent (51.75%) of all Intangible Costs attributable to
THEC's Original Working Interests in the Leases and THEC shall pay forty eight
and twenty five one hundredths percent (48.25%) of all Intangible Costs
attributable to THEC's Original Working Interest in the Leases. If during any of
such years, one hundred percent (100%) of the Intangible Costs attributable to
THEC's Original Working Interests in the Leases are less than 20.725 million
dollars, the shortage shall be added to the following year and KE&P shall pay
during such following year one hundred percent (100%) of all Intangible Costs
attributable to THEC's Original Working Interests in the Leases until KE&P has
paid Intangible Costs for such year totaling 20.725 million dollars plus the
shortage from the preceding year(s). Subject to the preceding sentence, during
the Secondary Term, KE&P shall pay all Intangible Costs attributable to THEC's
Original Working Interest in the Leases until such shortage from the Primary
Term, if any, is expended and thereafter shall pay fifty one and seventy five
one hundredths percent (51.75%) of all Intangible Costs attributable to THEC's
Original Working Interest in the Leases and THEC shall pay forty eight and
twenty five one hundredths percent (48.25%) of all Intangible Costs attributable
to THEC's Original Working Interest in the Leases.
5.2 Allocation of G and A Costs. Subject to Section 5.4, during the
Primary Term, KE&P shall pay forty five percent (45%) of seventy percent (70%)
of all actual G and A Costs. THEC shall pay all remaining G and A Costs.
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5.3 Allocation of Remaining Costs. Subject to Section 5.4 and 5.8,
during the Primary Term and the Secondary Term, KE&P shall pay forty five
percent (45%) of all Drilling Costs, Development Costs, Seismic Costs, Leasehold
Costs, Abandonment Costs and Operating Costs attributable to THEC's Original
Working Interest in the Leases and THEC shall pay fifty five percent (55%) of
all Drilling Costs, Development Costs, Seismic Costs, Leasehold Costs,
Abandonment Costs and Operating Costs attributable to THEC's Original Working
Interest in the Leases.
5.4 Primary Term Commitment. KE&P's obligation to pay the costs
specified in Sections 5.1 to 5.3 incurred during any year of the Primary Term is
limited to KE&P's Yearly Commitment subject to the following:
(a) If THEC determines that the allocation to KE&P of its
share of the Drilling Costs and Intangible Costs of the first Exploratory Well
on a Lease will result in KE&P's Yearly Commitment being exceeded, THEC shall
notify KE&P in writing of such fact prior to commencing such Well. Within
fifteen (15) days (or such lesser period specified in the notice if the proposed
spud date of such Well is less than thirty (30) days from the date of such
notice) after receiving such notice, KE&P shall notify THEC in writing whether
or not it approves such Well. If KE&P approves such Well, KE&P's share of the
Drilling Costs and Intangible Costs of such Well shall be deemed "Excess Costs";
and, to the extent the Excess Costs result in KE&P's Yearly Commitment being
exceeded, such commitment shall be increased accordingly for such year. If KE&P
does not approve such Well or fails to notify THEC of its decision, KE&P shall
forfeit its interests in such Well and the Lease on which it is located.
(b) Except as provided in Section 5.4(a), if KE&P is not
obligated to pay a portion of its share of the costs specified in Sections 5.1
to 5.3 during any year of the Primary Term, because its share exceeds in whole
or in part KE&P's Yearly Commitment, and THEC pays such costs,
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KE&P shall reimburse THEC for such costs out of KE&P's Yearly Commitment for the
following year on or before January 31 of such year or, if the Primary Term has
ended, THEC shall receive KE&P's share of Net Proceeds from all Wells drilled
under this Agreement until such time as THEC has received a sum of money
(exclusive of all Burdens, Marketing Costs and Taxes) out of such share equal to
KE&P's share of costs which were paid by THEC, provided, however, that the
amount to be paid by KE&P as contemplated above shall not exceed twenty percent
(20%) of KE&P's Yearly Commitment without its written consent.
(c) KE&P's Yearly Commitment shall first be applied to G and A
Costs, Seismic Costs, Leasehold Costs and Operating Costs and the remainder to
the Intangible Costs, Drilling Costs, Development Costs and Abandonment Costs.
(d) All Drilling Costs, Intangible Costs and Development Costs
for purposes of applying the limitations of KE&P's Yearly Commitment shall, at
the election of THEC, be deemed to have been incurred entirely on the date THEC
submits to KE&P the information set forth in Section 7.3 relating to the
applicable operation or the date of the AFE relating to the expenditure of such
costs, rather than on the dates such costs are actually incurred.
5.5 Invoices. THEC shall invoice KE&P monthly for KE&P's share of all
costs, except G and A Costs, as they accrue. At the beginning of each calendar
year, THEC shall estimate the G and A Costs for such year and shall invoice KE&P
at the beginning of each calendar quarter for its share of one fourth (1/4) of
such estimate. After the actual G and A Costs for such year are determined, THEC
shall make appropriate adjustments and shall either invoice KE&P for its share
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of any amounts in excess of such estimate or shall refund to KE&P its share of
the amount by which actual costs are less than such estimate.
5.6 Prepaid Costs. If THEC is required to prepay, either directly or
through an escrow arrangement, all or any portion of any costs, THEC shall
immediately invoice KE&P for KE&P's share of such prepayment.
5.7 Payment. KE&P shall pay all invoices within thirty (30) days of
their receipt except KE&P shall pay all invoices relating to G and A Costs
within forty-five (45) days after their receipt. In the event an invoice should
not be timely paid, the amount of such invoice shall bear interest at ten
percent (10%) per annum until such invoice and interest thereon is paid to THEC.
5.8 Abandonment Costs. At the end of the Secondary Term for a Program
Year, THEC shall prepare and submit to KE&P a reasonable good faith estimate of
the Abandonment Costs related to those Wells and Platforms jointly owned by THEC
and KE&P and located on the Program Leases for such Program Year. To the extent
KE&P has not previously paid its share of such Abandonment Costs, KE&P shall
either immediately pay to THEC forty-five percent (45%) of such costs or THEC
shall be entitled to all revenues to which KE&P is entitled under the Net
Profits Agreement relating to such Program Year until THEC has received an
amount equal to forty-five percent (45%) of such costs. After recovering such
costs, THEC shall be solely responsible for the Abandonment Costs related to
such Wells and Platforms.
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ARTICLE VI.
LAND AND EXPLORATION PROGRAM
6.1 Prospects. During the Primary Term of this Agreement, THEC, on
behalf of THEC and KE&P, shall use reasonable good faith efforts to:
(a) identify Prospects within the Leases; and
(b) drill one (1) or more Exploratory Wells on each Prospect,
where warranted, as determined solely by THEC, and will supervise the drilling
of such well or wells as a prudent operator where it is the "Operator" under the
relevant Operating Agreement; provided that, KE&P acknowledges that THEC may
determine not to drill some of the Leases because of changed conditions or new
information or interpretations that may exist at the time of such determination.
6.2 Operations. During the Primary Term and the Secondary Term, THEC,
where it is the "Operator" under the applicable Operating Agreements, on behalf
of THEC and KE&P, shall use reasonable good faith efforts to:
(a) develop each Lease jointly owned by THEC and KE&P as a
prudent operator in accordance with the Operating Agreement relating to such
Lease; and
(b) operate the Wells located on each Lease as a prudent
operator in accordance with the Operating Agreement relating to such Lease as
long as it reasonably believes it is in the best interest of KE&P and THEC for
it to do so.
6.3 Initial Assignment. Subject to Section 6.4, as soon after the
execution of this Agreement as KE&P is qualified with the Minerals Management
Service of the Department of the Interior ("MMS") to own Oil and Gas Leases in
the Outer Continental Shelf, THEC shall assign and
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convey to KE&P legal title to an undivided forty five (45%) percent of THEC's
Original Working Interests in and to the Leases. THEC and KE&P acknowledge that
for federal income tax purposes the assignment of such legal title shall be
treated as a capital contribution by THEC to a partnership as provided in
Section 4 of the Tax Agreement attached hereto as Schedule V. Each assignment
shall comport substantially with the form of assignment attached hereto as
Schedule III, shall contain a special warranty of title and shall provide that
the Working Interests assigned and conveyed shall bear and be burdened by a
proportionate part of:
(a) the terms, provisions and obligations set forth in the
Leases;
(b) the terms, provisions and obligations set forth in any
contract, agreement or assignment relating to the assigned Working Interests;
(c) all Burdens to which the acquired Working Interests are
subject as of the Acquisition Date;
(d) the terms, provisions and obligations set forth in the
Operating Agreements;
(e) the terms, provisions and obligations set forth in this
Agreement;
(f) the obligation of KE&P to reassign to THEC at the end of
the Primary Term its entire interest in those Leases, free and clear of all
Encumbrances, that are not included in Prospect upon which an Exploratory Well
has been drilled; and
(g) the obligation of KE&P to reassign to THEC at the end of
the Secondary Term relating to a Program Year all its remaining interests in the
Program Leases for such Program Year, such reassignment to contain the same
special warranty of title contained in the initial assignment.
6.4 Inability to Assign. In the event THEC cannot assign to KE&P its
undivided forty five percent (45%) of THEC's Original Working Interest in a
Lease because of an existing
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contractual requirement, a Legal Requirement or the unadviseability of doing so
in the reasonable opinion of THEC, THEC shall hold KE&P's interest in such Lease
as nominee and on behalf of KE&P.
6.5 Reassignment. At the end of the Primary Term, KE&P shall assign and
convey to THEC its acquired Working Interests in those Leases, free and clear of
all Encumbrances, that are not included in a Prospect, upon which an Exploratory
Well has been drilled. At the end of the Secondary Term relating to a Program
Year, KE&P shall assign to THEC all of its acquired Working Interest in the
Program Leases for such Program Year free and clear of all Encumbrances. For
federal income tax purposes, THEC and KE&P agree that any such assignments shall
be treated as a distribution to THEC of assets in kind by a partnership in
accordance with Section 6 of the Tax Agreement attached hereto as Schedule V.
6.6 Net Profits Agreement. At the end of the Secondary Term relating to
a Program Year, THEC shall execute and deliver to KE&P the Conveyance of Net
Profits Interest (the "Net Profits Agreement") attached hereto as Schedule IV
(with Exhibit A thereto completed to include the Program Leases for such Program
Year and the Wells located within such Program Leases) entitling KE&P to
forty-five percent (45%) of the Net Proceeds, as defined therein, derived from
such Wells.
6.7 Qualification. As soon as possible after the execution of this
Agreement, KE&P will qualify with the MMS to own Oil and Gas Leases in the Outer
Continental Shelf.
6.8 Bond. As soon as possible after the execution of this Agreement,
KE&P will take all necessary action so that on the assignment to it of the
Working Interests described in Section 6.1, it can meet all bonding requirements
of the MMS. Thereafter, KE&P shall take all necessary action to remain in
compliance with all bonding requirements of the MMS and shall pay its
proportionate
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share of any supplemental bonds required of THEC by the MMS relating to the
Leases. In addition, if at any time THEC determines in its sole discretion that
a reserve fund is necessary to meet any future Abandonment Costs, KE&P shall pay
all of its share of Net Proceeds relating to the Leases to THEC until such time
as THEC has collected sufficient funds to pay KE&P's share of such costs. After
THEC has recovered such costs from KE&P, THEC shall be solely responsible for
such costs.
6.9 Transfer. If at any time THEC believes in its sole discretion that
it is advisable to assign, farmout, trade or otherwise transfer (collectively, a
"Transfer") a Lease or pool or unitize a Lease or a part thereof, KE&P at the
request of THEC shall join with THEC in such action as long as KE&P receives its
proportionate share of the consideration for such Transfer. If all or part of
such consideration is an interest in an Oil and Gas Lease, such lease shall
become a Lease under the term of this Agreement. For the purposes of this
Agreement, THEC's Original Working Interests in such Lease or Leases shall be
the Working Interest in such Lease acquired by both THEC and KE&P.
ARTICLE VII.
MANAGEMENT OF OPERATIONS
7.1 Personnel. During the terms of this Agreement, THEC shall use and
maintain:
(a) an experienced and trained exploration staff to conduct
geological and geophysical evaluations;
(b) an experienced and trained engineering staff or
engineering consultants to supervise drilling, completion and operation of all
Wells drilled pursuant to the provisions of this Agreement;
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(c) an experienced and trained accounting staff to provide
accounting services required pursuant to the provisions of this Agreement,
including reconciliations of the expenses incurred by the parties;
(d) an experienced and trained land and lease records staff
for maintenance of all leaseholds including the payment of bonuses, delay
rentals, royalties and other functions considered necessary; and
(e) such lease brokers, professional consultants and such
other third party services as are necessary to implement this Agreement.
7.2 Decisions.
(a) Except as provided in (b), below, during the terms of this
Agreement, all decisions relating to the geological, geophysical and economic
evaluations of the Leases, the incurrence of costs, expenses and liabilities
relating to the Leases, the drilling of Exploratory Wells on the Leases, the
conducting of Development Operations on the Leases and all other operational
matters pertaining to the Leases and the Wells drilled thereon shall be within
the sole and exclusive discretion of THEC provided, however, that all decisions
made by THEC regarding KE&P's interests shall be consistent with the decisions
made by THEC regarding its interests. Any decision granted to KE&P under an
Operating Agreement shall be made by KE&P in a manner consistent with the
direction and instruction of THEC.
(b) During the Secondary Term, if KE&P's Working Interest
share of the AFE cost of any operation on a Lease, other than an operation
mandated by any Governmental Authority or Legal Requirement, would exceed one
million dollars ($1,000,000), KE&P shall have the option not to participate in
such operation. On or before sixty (60) days before such operation is to
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commence, THEC shall notify KE&P in writing of such operation and the existence
of KE&P's option not to participate in such operation. On or before thirty (30)
days after its receipt of such notice, KE&P shall notify THEC in writing if it
elects not to participate in such operation. If KE&P fails to timely notify THEC
of its election not to participate, KE&P shall have waived its option. In the
event KE&P timely notifies THEC of its election not to participate in such
operation, KE&P shall not be obligated to pay its Working Interest share of the
costs of such operation, but if such operation is the drilling of a well, KE&P
shall relinquish to THEC all of its interest in such well and all subsequent
wells drilled on the relevant Lease; if the operation is the construction and
installation of a Platform, KE&P shall relinquish to THEC all of its interest in
any wells drilled or produced in connection with such Platform; and if such
operation is any other operation necessary to commence, enhance or restore
production, KE&P shall relinquish to THEC all of its interest in the production
commenced, enhanced or restored; provided that, if such operation is necessary
to maintain the relevant Lease in force and effect, KE&P shall relinquish to
THEC its entire interest in such lease. KE&P shall immediately assign to THEC
the relinquished interest and such interest shall be excluded from the Net
Profits Agreement relating to the relevant Program Year.
7.3 Information. Upon the commencement of an Exploratory Well or a
Development Operation on a Lease, if THEC has not previously done so, THEC shall
submit to KE&P the following:
(a) if the commenced operation is a well, an AFE reflecting
the estimated dry hole and completion costs (or temporary abandonment) to be
incurred in the drilling of the well to the proposed depth at the location
specified therein, testing, completing and equipping or plugging and abandoning
the same;
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(b) if the commenced operation is other than a well, an AFE
reflecting the estimated cost of the operation and a brief description of the
operation and the intended results of such operation; and
(c) such other information or data relating to the well as
KE&P may reasonably request and THEC may have reasonably available. If THEC
fails to submit any of the foregoing, or fails to submit any changes in the
foregoing to KE&P, THEC shall do so immediately on request by KE&P, but such
failure shall not reduce or affect KE&P's obligations under this Agreement.
7.4 Reports and Tests. At the request of KE&P, THEC shall furnish to
KE&P daily drilling reports and copies of logs, drill stem tests and electrical
surveys, as well as reports of geologists or other consultants furnished to THEC
in the course of the exploration, drilling or any other operations on the
Leases. Subject to reasonable limitations by THEC, KE&P or its duly authorized
representatives shall have access at all reasonable times, at its and their sole
risk and expense, to the platform or derrick floor of any Well drilled
hereunder; provided that, all such access must be prearranged through THEC.
7.5 Additional Working Interest. During the terms of this Agreement,
the decision to acquire an additional Working Interest in a Lease or to acquire
a Working Interest in a new Oil and Gas Lease shall be in the sole discretion of
THEC. All Working Interests in Oil and Gas Leases acquired by THEC in the Outer
Continental Shelf and in State waters offshore Texas or Louisiana during the
Primary Term, except Working Interests in Oil and Gas Leases acquired at a MMS
sale or State sale that are not contiguous to one or more of the Leases, shall
be added to this Agreement and shall constitute Leases hereunder. Any additional
Working Interest in a Lease acquired by
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THEC shall be owned by THEC and KE&P in the same proportion as the other Working
Interests in the Lease owned by them and any Working Interest in a new Oil and
Gas Lease shall be owned by them in the proportion of forty five (45%) for KE&P
and fifty five percent (55%) for THEC and the cost of such acquisition in both
cases shall constitute a Leasehold Cost. If KE&P should have the opportunity to
acquire a Working Interest in a Lease by means other than under this Agreement,
KE&P shall immediately notify THEC of such opportunity and THEC shall have the
right to exercise such opportunity.
7.6 Meetings. THEC and KE&P agree to meet monthly during the first year
of this Agreement and thereafter at quarterly intervals to discuss the overall
management of the Prospects and the latest developments in connection therewith
to the end that both parties will be fully informed as to the status thereof and
plans for the evaluation of the Leases and the drilling and producing of Wells
situated thereon.
7.7 Reporting. Commencing at the end of the Primary Term and continuing
annually thereafter, KE&P shall deliver to THEC a report setting forth the
cumulative Program Year Tax Cash Benefits Realized for each Program Year.
ARTICLE VIII.
NET PROCEEDS, MARKETING AND HEDGES
8.1 Net Proceeds. During the terms of this Agreement, THEC shall pay to
KE&P its Working Interest share of Net Proceeds from the Leases within thirty
(30) days after such proceeds are received by THEC.
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8.2 Marketing. During the terms of this Agreement, THEC shall market
KE&P's Working Interest share of the Hydrocarbons produced from the Leases. If
at any time KE&P elects to market its Working Interest share of such
Hydrocarbons, KE&P shall notify THEC in writing at least thirty (30) days before
such election is to be effective and shall be responsible for all Burdens, Taxes
and Marketing Costs relating to its Working Interest share of such Hydrocarbons
during the period such election is in force.
8.3 Hedging. During the terms of this Agreement, THEC, on behalf of
KE&P, will follow THEC's hedging strategy insofar as KE&P's share of the
Hydrocarbons produced from the Leases unless KE&P notifies THEC in writing
otherwise.
ARTICLE IX.
NO PARTNERSHIP AND NO FIDUCIARY
9.1 No Partnership etc. This Agreement and the operations contemplated
under this Agreement are not intended to and shall not be construed to create a
partnership, joint venture, mining partnership or other partnership or
association or to render THEC and KE&P liable as partners other than for income
tax purposes. THEC and KE&P expressly agree that neither party shall be
responsible for the obligations of the other party, each party being severally
responsible only for its obligations arising hereunder and liable only for its
allocated share of the costs and expenses incurred hereunder.
9.2 Fiduciary. It is expressly agreed and acknowledged that THEC shall
not have any fiduciary obligations to KE&P under this Agreement and, except as
otherwise expressly provided in this Agreement, THEC's sole obligation to KE&P
shall be as an "Operator" to a "Non-Operator"
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under the Operating Agreements where THEC is the Operator under such Operating
Agreements. Further, it is agreed and acknowledged that this Agreement is
strictly limited to the Leases, and except as provided in Sections 6.9 and 7.5,
THEC shall have no obligation whatsoever to KE&P relating to any other Oil and
Gas Lease or other property it currently owns or may acquire in the future even
if such leases or leases competes with one or more of the Leases for the
production of Hydrocarbons.
ARTICLE X.
ACCOUNTING, RECORDS AND BUDGET
10.1 G and A Costs. During the Primary Term of this Agreement, THEC
shall submit to KE&P:
(a) within sixty (60) days of the end of each quarter, the G
and A Costs for the pertinent period, including a certification by the chief
accounting officer of THEC that the Gross General and Administration Account,
the Office Furniture and Fixtures Depreciation Account and Payroll Taxes Account
have been compiled in accordance with generally accepted accounting principles;
and
(b) within sixty (60) days of the end of each fiscal year of
THEC, an opinion prepared by a national firm of certified public accountants
opining that the Gross General and Administration Account, the Office Furniture
and Fixture Depreciation Account and Payroll Taxes Account set forth in the
quarterly and annual financial statements for such fiscal year were prepared in
accordance with generally accepted accounting principles.
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10.2 Accounting. As soon as practicable after the end of each month
during the term of this Agreement, THEC shall submit to KE&P a statement of all
receipts and disbursements for such month relating to the operations under this
Agreement.
10.3 Audit. THEC shall make available to KE&P or its representatives,
at its reasonable request and at reasonable times, such records, invoices,
receipts and other materials within its control which are reasonably necessary
for a complete and proper audit by KE&P of any of the operations conducted by
THEC under this Agreement or the Operating Agreements. THEC shall provide any
and all assistance reasonably requested by KE&P or its representatives in
connection with a review or audit of such operations.
10.4 Budgets. THEC shall submit annually to the Management Committee
THEC's Program Budget and a yearly budget setting forth the anticipated
financial requirements of KE&P under this Agreement. Such budgets for the first
year shall be submitted on or before March 31, 1999 and the budgets for the
following years during the terms on or before the first day of such years.
10.5 Management Committee. The Management Committee shall be composed
of the President, Treasurer and Controller of THEC and the President, Chief
Financial Officer and Controller of KE&P.
ARTICLE XI.
INSURANCE
11.1 Coverage. During the terms of this Agreement, THEC shall maintain
for the benefit of THEC and KE&P insurance coverage consistent with good policy
and the cost of such coverage shall be included in Operating Costs.
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ARTICLE XII.
CONFIDENTIALITY OF INFORMATION
12.1 Agreement. THEC and KE&P shall hold the terms and conditions
hereof, as well as the existence of this Agreement, in strict confidence, and
shall make no disclosure with respect hereto, publicly or privately, other than
(a) as agreed upon by the parties, (b) as necessary to their respective
advisers, (c) as required by applicable law, or (d) if, in the opinion of
counsel to THEC or KE&P, such disclosure is necessary by reason of stock
exchange requirements or S.E.C. requirements; provided, however, that in any
event the disclosing party shall notify the other party and provide such party
with a copy of any disclosure document prior to such disclosure and an
opportunity to discuss the contents thereof with the disclosing Party.
12.2 Information. THEC and KE&P shall hold all information relating to
the Leases and Prospects in strict confidence other than (a) as agreed upon by
the parties, (b) as required by applicable law, (c) as necessary to their
respective advisers, (d) as required by contracts between THEC and third
parties, and (e) as required by responsible reserve engineering firms and
financial institutions.
ARTICLE XIII.
INCOME TAXES
13.1 Tax Matters. All matters relating to income taxes shall be
administered as set forth in the Tax Agreement attached hereto as Schedule V.
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ARTICLE XIV.
EXTENT OF REPRESENTATIONS
AND WARRANTIES AND INDEMNIFICATIONS
14.1 Scope of Representations of THEC.
(a) EXCEPT AS AND TO THE EXTENT EXPRESSLY SET FORTH IN THIS
AGREEMENT, THEC MAKES NO REPRESENTATIONS OR WARRANTIES WHATSOEVER, AND DISCLAIMS
ALL LIABILITY AND RESPONSIBILITY FOR ANY REPRESENTATION, WARRANTY, STATEMENT OR
INFORMATION MADE OR COMMUNICATED (ORALLY OR IN WRITING) TO KE&P (INCLUDING ANY
OPINION, INFORMATION OR ADVICE WHICH MAY HAVE BEEN PROVIDED TO KE&P BY ANY
AFFILIATE, OFFICER, DIRECTOR, STOCKHOLDER, PARTNER, EMPLOYEE, AGENT, CONSULTANT
OR REPRESENTATIVE OF THEC OR BY ANY INVESTMENT BANK OR INVESTMENT BANKING FIRM,
ANY PETROLEUM ENGINEER OR ENGINEERING FIRM, THEC'S COUNSEL OR ANY OTHER AGENT,
CONSULTANT OR REPRESENTATIVE).
(b) KE&P acknowledges and affirms that it has had full access
to information with respect to the Leases. KE&P has made its own independent
investigation, analysis and evaluation of the transactions contemplated by this
Agreement (including KE&P's own estimate and appraisal of the extent and value
of THEC's Hydrocarbon reserves attributable to the Leases and an independent
assessment and appraisal of the environmental risks associated with the
acquisition of the Leases).
14.2 INDEMNIFICATION OF THEC. THEC AGREES TO RELEASE, INDEMNIFY AND
HOLD KE&P HARMLESS FROM AND AGAINST, ANY LOSS, DAMAGE, EXPENSE (INCLUDING
REASONABLE ATTORNEYS' FEES) CAUSE OF
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ACTION, FINE, PENALTY OR LIABILITY SUSTAINED BY KE&P ARISING OUT OF OR RESULTING
FROM (a) ANY BREACH OF ANY OF THE REPRESENTATIONS, WARRANTIES OR COVENANTS MADE
BY THEC IN THIS AGREEMENT OR (b) ANY MATTER, EVENT, CONDITION, CIRCUMSTANCE,
ACTION OR OMISSION RELATING TO A LEASE TO THE EXTENT SUCH LOSS, DAMAGE EXPENSE
(INCLUDING REASONABLE ATTORNEYS' FEES) CAUSE OF ACTION, FINE, PENALTY OR
LIABILITY EXCEEDS KE&P'S WORKING INTEREST PERCENTAGE OF THE TOTAL LOSS, DAMAGE
OR EXPENSE RELATING TO SUCH LEASE.
14.3 INDEMNIFICATION OF KE&P. KE&P AGREES TO RELEASE, INDEMNIFY AND
HOLD THEC HARMLESS FROM AND AGAINST, ANY LOSS, DAMAGE, EXPENSE (INCLUDING
REASONABLE ATTORNEYS' FEES) CAUSES OF ACTION, FINE, PENALTY OR LIABILITY
SUSTAINED BY THEC (a) ARISING OUT OF OR RESULTING FROM ANY BREACH OF ANY OF THE
REPRESENTATIONS, WARRANTIES OR COVENANTS MADE BY KE&P IN THIS AGREEMENT, (b) ANY
MATTER, EVENT, CONDITION, CIRCUMSTANCE, ACTION OR OMISSION RELATING TO A LEASE
(OTHER THAN AS A RESULT OF THEC'S GROSS NEGLIGENCE OR WILFUL MISCONDUCT) TO THE
EXTENT OF KE&P'S WORKING INTEREST PERCENTAGE OF THE TOTAL LOSS, DAMAGE, EXPENSE
(INCLUDING REASONABLE ATTORNEYS' FEES) RELATING TO SUCH LEASE;
14.4 COMPLIANCE WITH THE EXPRESS NEGLIGENCE TEST. THE PARTIES AGREE
THAT THE OBLIGATIONS OF THE INDEMNIFYING PARTY TO INDEMNIFY THE INDEMNIFIED
PARTY SHALL BE WITHOUT REGARD TO THE NEGLIGENCE OR STRICT LIABILITY OF THE
INDEMNIFIED PARTY (BUT NOT THE GROSS
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NEGLIGENCE OR WILFUL MISCONDUCT), WHETHER THE NEGLIGENCE OR STRICT LIABILITY IS
ACTIVE, PASSIVE, JOINT, CONCURRENT OR SOLE.
14.5 Indemnification Procedures. All claims for indemnification under
this Agreement will be asserted and resolved as follows:
(a) An indemnified party will promptly (i) notify an
indemnifying party of any third-party claim asserted against the indemnified
party and (ii) transmit to the indemnifying party a claim notice relating to
such third-party claim, a copy of all papers served with respect to such claim
(if any), an estimate of the amount of damages attributable to the third-party
claim and the basis of the indemnified party's request for indemnification under
this Agreement. Within thirty (30) days of such notice (the "Election Period")
the indemnifying party will notify an indemnified party (A) whether the
indemnifying party disputes its potential liability to the indemnified party
with respect to such third-party claim and (B) whether the indemnifying party
desires, at the sole cost and expense of such indemnifying party, to defend the
indemnified party against such third-party claim.
(b) If an indemnifying party notifies an indemnified party
within the Election Period that the indemnifying party does not dispute its
potential liability to the indemnified party under this Agreement and that the
indemnifying party elects to assume the defense of the third-party claim, then
the indemnifying party will have the right to defend, at its sole cost and
expense, such third-party claim by all appropriate proceedings, which
proceedings will be prosecuted diligently by the indemnifying party to a final
conclusion or settled at the discretion of the indemnifying party in accordance
with this Section 14.5(b). The indemnifying party will have full control of such
defense and proceedings, including any compromise or settlement of the
third-party claim; provided that, any settlement entailing nonmonetary
consideration must be approved, in advance, by the indemnified party, which
approval will not be unreasonably withheld. The indemnified party is authorized,
at
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the sole cost and expense of the indemnifying party (but only if the indemnified
party is actually entitled to indemnification under this Agreement or if the
indemnifying party assumes the defense with respect to the third-party claim),
to file, during the Election Period, any motion, answer or other pleadings which
the indemnified party deems necessary or appropriate to protect its interests or
those of the indemnifying party and not prejudicial to the indemnifying party
(it being understood and agreed that if an indemnified party knowingly or
wilfully takes any such action that is prejudicial and conclusively causes a
final adjudication adverse to the indemnifying party, the indemnifying party
will be relieved of its obligations under this Agreement with respect to such
third-party claim). If requested by the indemnifying party, the indemnified
party agrees, at the sole cost and expense of the indemnifying party, to
cooperate with the indemnifying party and its counsel in contesting any
third-party claim that the indemnifying party elects to contest, including the
making of any related counterclaim against the Person asserting the third-party
claim or any cross complaint against any Person. The indemnified party may
participate in, but not control, any defense or settlement of any third-party
claim controlled by the indemnifying party pursuant to this Section 14.5, and
will bear its own costs and expenses with respect to any such participation.
(c) If an indemnifying party fails to notify an indemnified
party within the Election Period that the indemnifying party elects to defend
the indemnified party pursuant to Section 14.5(b), or if the indemnifying party
elects to defend the indemnified party pursuant to Section 14.5(b) but fails
diligently and promptly to prosecute or settle the third-party claim, then the
indemnified party will have the right to defend, at the sole cost and expense of
the indemnifying party, the third-party claim by all appropriate proceedings,
which proceedings will be promptly and vigorously prosecuted by the indemnified
party to a final conclusion or settled. The indemnified
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party will have full control of such defense and proceedings, provided that
without the indemnifying party's consent, which will not be unreasonably
withheld, the indemnified party may not enter into any compromise or settlement
of such third-party claim; and provided that if requested by the indemnified
party, the indemnifying party will, at the sole cost and expense of the
indemnifying party, cooperate with the indemnified party and its counsel in
contesting an third-party claim that the indemnified party is contesting, or, if
appropriate and related to the third-party claim in question, in making any
counterclaim against the Person asserting the third-party claim or any cross
complaint against any Person. Notwithstanding the foregoing, if the indemnifying
party has delivered a written notice to the indemnified party to the effect that
the indemnifying party disputes its potential liability to the indemnified party
under this Agreement and if such dispute is resolved in favor of the
indemnifying party by a final, nonappealable order of a court of competent
jurisdiction, the indemnifying party will not be required to bear the costs and
expenses of the indemnified party's defense pursuant to this Section 14.5 or of
the indemnifying party's participation at the indemnified party's request, and
the indemnified party will reimburse the indemnifying party in full for all
costs and expenses of such litigation. The indemnifying party may participate
in, but not control, any defense or settlement controlled by the indemnified
party pursuant to this Section 14.5 and the indemnifying party will bear its own
costs and expenses with respect to any such participation.
14.6 Limitations of Liability.
In no event shall THEC or KE&P ever be liable to the other for any
consequential, special, loss of profits, punitive or exemplary damages relating
to or arising out of this Agreement.
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ARTICLE XV.
PREFERENTIAL RIGHT AND CHANGE OF CONTROL
15.1 Preferential Right. If at anytime KE&P enters into a binding
agreement to sell, exchange or otherwise transfer to a third Person its interest
in all or any portion of the Leases, KE&P shall immediately submit to THEC a
copy of such agreement. On or before thirty (30) days after its receipt of a
copy of such agreement, THEC may elect to acquire such interest from KE&P on the
same terms as contained in such agreement. If THEC elects to acquire such
interest, it shall give KE&P written notice of such election on or before the
expiration of such thirty (30) day period. Thereafter, such transaction shall be
consummated between KE&P and THEC on the terms contained in such agreement
except that the closing thereof shall be no less than sixty (60) days after THEC
provided its written notice to KE&P. If any of the consideration to be received
by KE&P under such agreement is property other than cash, KE&P and THEC shall
endeavor in good faith to determine the fair market value of such other property
and the amount so determined shall be paid in cash to KE&P in lieu of such other
property. If such fair market value cannot be determined by KE&P and THEC, such
fair market value shall be determined as quickly as possible in accordance with
the rules of the American Arbitration Association by three arbitrators, one
appointed by THEC, one appointed by KE&P, and the third by THEC and KE&P or, if
they cannot agree on such third arbitrator, by the Senior Federal Judge for the
Southern District of Texas (Houston Division) on application by either THEC or
KE&P. The decision of the arbitrators shall be binding on both KE&P and THEC and
the expenses of such arbitrator shall be shared equally by KE&P and THEC.
15.2 Change of Control. During the terms of this Agreement, if any
Person or two or more Persons acting as a group acquire beneficial ownership of
more than thirty five percent (35%) of the outstanding common stock of
MarketSpan Corporation d/b/a KeySpan Energy ("KeySpan Energy"), measured by
voting power, or if a simple majority of the directors of KeySpan Energy shall
consist of Persons not nominated by KeySpan Energy's Board of Directors
(collectively, a "Change of
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Control"), KE&P shall promptly give THEC written notice of such Change of
Control. On or before ninety (90) days after its receipt of such notice, THEC
may elect to acquire KE&P's entire interest in the Leases. If THEC elects to
acquire such interest, it shall give KE&P written notice of such election on or
before the expiration of such ninety (90) day period. Thereafter, THEC and KE&P
shall submit to Netherland Sewell & Assoc. Incorporated, independent petroleum
reservoir engineers (the "Engineer") all information in their possession
reasonably related to the determination of the fair market value of KE&P's
interest in the Leases. Within sixty (60) days after its receipt of such
information, the Engineer shall determine the fair market value of such interest
based on such factors, circumstances, conditions and opinions as it deems in its
sole discretion to be relevant in the determination of such value. The Engineer
shall provide to THEC and KE&P its opinion of such fair market value, the proven
reserves attributable to such interest and the value per Mcfe for such reserves
("KE&P's per Mcfe Value") calculated by dividing such fair market value by such
proven reserves. Within sixty (60) days after such determination, as long as the
KE&P's per Mcfe Value is not materially different from the per Mcfe value of
THEC's proved reserves (computed by dividing the total enterprise value/market
capitalization [debt plus equity market value] of THEC by the amount of THEC's
total proved reserves as determined by the Engineer), THEC shall purchase from
KE&P such interest at its fair market value as determined by the Engineer for
cash and on such other terms as are customary in purchase and sales agreements
relating to oil and gas producing properties. For purposes of the foregoing, a
material difference shall exist if KE&P's per Mcfe Value is less than seventy
seven and one half percent (77.5%) of THEC's per Mcfe Value calculated as
described above. In the event there is a material difference, the fair market
value of KE&P's interest in the Leases shall be determined as quickly as
possible by three arbitrators pursuant to the procedures set forth in Section
15.1 and THEC shall purchase from KE&P such interest at its
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fair market value as determined by such arbitrators for cash and on such terms
as are customary in purchase and sales agreements relating to oil and gas
producing properties.
ARTICLE XVI.
MISCELLANEOUS
16.1 Amendments, Waivers and Consents. Neither this Agreement nor any
term or provision of this Agreement may be changed, amended, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, amendment, waiver, discharge or
termination is sought. Neither any course of dealing on the part of either party
to this Agreement or their respective officers or employees, nor any failure or
delay on the part of either party, or their respective officers or employees, in
exercising any right, power or privilege under this Agreement shall operate as a
waiver of any such right, power or privilege, and any single or partial exercise
of any right, power or privilege shall not preclude any later exercise thereof
or any exercise of any other right, power or privilege under this Agreement.
16.2 Notices. Ail notices, requests, demands, consents and other
communications under this Agreement, except as otherwise provided, shall be by
telecopy or by registered mail and shall be deemed to have been duly given:
(a) If to THEC, at 1100 Louisiana, Suite 2000, Houston, Texas
77002, Attention: James G. Floyd, President and CEO, or at such other latest
address as THEC may have furnished to KE&P in writing; or
(b) If to KE&P, at One Metro Tech Center, 18th Floor,
Brooklyn, New York 11201, Attention: Neil Nichols, President, or to such other
latest address as KE&P may have furnished to THEC in writing.
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16.3 Entire Agreement. This Agreement and the Schedules attached
hereto, which are incorporated herein for all purposes, embody all agreements
and understandings between THEC and KE&P and supersede all prior agreements and
understandings relating to the subject matter of this Agreement. In the event of
any conflict between the terms of any Operating Agreement between THEC and KE&P
and this Agreement, this Agreement shall control.
16.4 LAW GOVERNING. THIS AGREEMENT, TO THE EXTENT PERMITTED BY LAW,
SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS WITHOUT REGARD TO ITS CONFLICT OF LAWS.
16.5 Headings. The headings in this Agreement are for purposes of
reference only, and shall not limit, enlarge or otherwise affect any of the
terms or provisions of this Agreement.
16.6 Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
16.7 Assignment. All the terms and provisions of this Agreement shall
be binding upon and inure to the benefit of and be enforceable by the parties to
this Agreement and their respective successors and assigns; provided that,
during the terms of this Agreement, neither party may assign or transfer its
rights, benefits or obligations under this Agreement or its Working Interests in
the Leases without the prior written consent of the other party other than to an
affiliate or as specified in 15.1 and 15.2.
16.8 Third Party Beneficiary. There is no third party beneficiary to
this Agreement and the terms and provisions of this Agreement shall not impart
rights enforceable by any Person not a party or not a successor or assign of a
party to this Agreement
16.9 Joint Preparation. This Agreement was prepared jointly by the
parties hereto, and not by either party to the exclusion of the other.
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IN WITNESS WHEREOF, this instrument is executed effective as of January
1, 1999 although actually executed on the date hereinbefore first written.
THE HOUSTON EXPLORATION COMPANY
By: /s/ James G. Floyd
---------------------------------------
James G. Floyd, President and CEO
KEYSPAN EXPLORATION AND
PRODUCTION, L.L.C.
By: /s/ Zain Mirza
---------------------------------------
Zain Mirza, Vice President
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SCHEDULE I
Attached to and made a part of Exploration Agreement dated
__________________ Between The Houston Exploration Company and Keyspan
Exploration and Production, L.L.C.
<TABLE>
<CAPTION>
THEC ORIGINAL
PROSPECT WORKING INTEREST
- -------- ----------------
<S> <C>
EAST CAMERON BLOCK 82 E/2 100.00%
Oil and Gas Lease of Submerged Lands dated July 1, 1997, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering E/2 of Block 82, East Cameron Area (OCS-G 17842)
EAST CAMERON BLOCK 123 100.00%
Oil and Gas Lease of Submerged Lands dated July 1, 1998, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block 123, East Cameron Area (OCS-G 19741)
EAST CAMERON BLOCK 132 100.00%
Oil and Gas Lease of Submerged Lands dated August 1, 1998 between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block 132, East Cameron Area (OCS-G 19742)
WEST CAMERON BLOCK 250 100.00%
Oil and Gas Lease of Submerged Lands dated August 1, 1997 between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block 250, West Cameron Area (OCS-G 17773)
WEST CAMERON BLOCK 284 40.00%
Oil and Gas Lease of Submerged Lands dated June 1, 1997 between United
States of America, Lessor, and The Houston Exploration Company, et al,
Lessee, covering All of Block 284, West Cameron Area (OCS-G 17776)
WEST CAMERON, SOUTH ADDITION, BLOCK 493 100.00%
Oil and Gas Lease of Submerged Lands dated July 1, 1996, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block 493, West Cameron Area, South Addition (OCS-G 16196)
</TABLE>
1
<PAGE> 41
<TABLE>
<CAPTION>
THEC ORIGINAL
PROSPECT WORKING INTEREST
- -------- ----------------
<S> <C>
SOUTH TIMBALIER, SOUTH ADDITION, BLOCK 318 100.00%
Oil and Gas Lease of Submerged Lands dated August 1, 1997, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block 318, South Timbalier, South Addition (OCS-G 18060)
VERMILION BLOCK 185 100.00%
Oil and Gas Lease of Submerged Lands dated August 1, 1996, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block 185, Vermilion Area (OCS-G 16302)
VERMILION BLOCK 198 100.00%
Oil and Gas Lease of Submerged Lands dated July 1, 1997, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block 198, Vermilion Area (OCS-G 17907)
VERMILION BLOCK 204 100.00%
Oil and Gas Lease of Submerged Lands dated July 1, 1995, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block 204, Vermilion Area (OCS-G 15187)
BRAZOS BLOCK A-40 25.00%
Oil and Gas Lease of Submerged Lands dated January 1, 1996, between United
States of America, Lessor, and Hardy Oil & Gas USA Inc., et al, Lessee,
covering All of Block A-40, Brazos Area (OCS-G 15738)
BRAZOS, SOUTH ADDITION, BLOCK A-101 100.00%
Oil and Gas Lease of Submerged Lands dated October 1, 1998, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block A-101, Brazos Area, South Addition (OCS-G 20619)
BRAZOS, SOUTH ADDITION, BLOCK A-110 100.00%
Oil and Gas Lease of Submerged Lands dated December 1, 1998, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering All of Block A-110, Brazos Area, South Addition (OCS-G
20620)
</TABLE>
2
<PAGE> 42
<TABLE>
<CAPTION>
THEC ORIGINAL
PROSPECT WORKING INTEREST
- -------- ----------------
<S> <C>
BRAZOS, SOUTH ADDITION, BLOCK A-111 100.00%
Oil and Gas Lease of Submerged Lands dated November 1, 1996, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering All of Block A-111, Brazos Area, South Addition (OCS-G
17117)
BRAZOS, SOUTH ADDITION, BLOCK A-126 100.00%
Oil and Gas Lease of Submerged Lands dated December 1, 1998, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering All of Block A-126, Brazos Area, South Addition (OCS-G
20622)
BRAZOS, SOUTH ADDITION, BLOCK A-127 100.00%
Oil and Gas Lease of Submerged Lands dated November 1, 1996, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering All of Block A-127, Brazos Area, South Addition (OCS-G
17118)
BRAZOS BLOCK 366 33.33%
Oil and Gas Lease of Submerged Lands dated January 1, 1998, between United
States of America, Lessor, and Apache Corporation, et al, Lessee, covering
All of Block 366, Brazos Area, seaward of the Federal/State Boundary
(OCS-G 18892)
BRAZOS BLOCK 578 100.00%
Oil and Gas Lease of Submerged Lands dated January 1, 1997, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block 578, Brazos Area (OCS-G 17112)
BRAZOS BLOCK 608 100.00%
Oil and Gas Lease of Submerged Lands dated January 1, 1998, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block 608, Brazos Area (OCS-G 18901)
EAST BREAKS BLOCK 122 100.00%
Oil and Gas Lease of Submerged Lands dated February 1, 1997, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering All of Block 122, East Breaks (OCS-G 17229)
</TABLE>
3
<PAGE> 43
<TABLE>
<CAPTION>
THEC ORIGINAL
PROSPECT WORKING INTEREST
- -------- ----------------
<S> <C>
EAST BREAKS BLOCK 167 100.00%
Oil and Gas Lease of Submerged Lands dated December 1, 1998, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering All of Block 167, East Breaks (OCS-G 20682)
EAST BREAKS BLOCK 252 100.00%
Oil and Gas Lease of Submerged Lands dated February 1, 1997, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering All of Block 252, East Breaks (OCS-G 17244)
GALVESTON BLOCK 190 55.00%
Oil and Gas Lease of Submerged Lands dated January 1, 1999, between United
States of America, Lessor, and The Houston Exploration Company, et al,
Lessee, covering that portion of Block190, Galveston Area, seaward of the
3 Marine League Line (OCS-G 20623)
GALVESTON, SOUTH ADDITION, BLOCK A-192 100.00%
Oil and Gas Lease of Submerged Lands dated December 1, 1994, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering All of Block A-192, Galveston Area, South Addition (OCS-G
14848)
GALVESTON BLOCK 241 N/2 100.00%
Oil and Gas Lease of Submerged Lands dated February 1, 1997, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering N/2 of Block 241, Galveston Area (OCS-G 17124)
GALVESTON, SOUTH ADDITION, BLOCK A-243 100.00%
Oil and Gas Lease of Submerged Lands dated December 1, 1998, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering All of Block A-243, Galveston Area, South Addition (OCS-G
20652)
HIGH ISLAND BLOCK A-16 100.00%
Oil and Gas Lease of Submerged Lands dated January 1, 1998, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block A-16, High Island Area (OCS-G 18942)
</TABLE>
4
<PAGE> 44
<TABLE>
<CAPTION>
THEC ORIGINAL
PROSPECT WORKING INTEREST
- -------- ----------------
<S> <C>
HIGH ISLAND BLOCK A-26 100.00%
Oil and Gas Lease of Submerged Lands dated December 1, 1997, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering All of Block A-26, High Island Area (OCS-G 18943)
HIGH ISLAND BLOCK 67 100.00%
Oil and Gas Lease of Submerged Lands dated October 1, 1997, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block 67, High Island Area (OCS-G 18928)
HIGH ISLAND BLOCK 115 100.00%
Oil and Gas Lease of Submerged Lands dated January 1, 1998, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block 115, High Island Area (OCS-G 18936)
MATAGORDA ISLAND BLOCK 655 100.00%
Oil and Gas Lease of Submerged Lands dated February 1, 1997, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering All of Block 655, Matagorda Island Area (OCS-G 17097)
MUSTANG ISLAND BLOCK A-33 100.00%
Oil and Gas Lease of Submerged Lands dated January 1, 1998, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block A-33, Mustang Island Area (OCS-G 18878)
MUSTANG ISLAND, EAST ADDITION, BLOCKS A-113 & A-114 75.00%
Oil and Gas Lease of Submerged Lands dated February 1, 1997, between
United States of America, Lessor, and Mariner Energy, Inc., et al, Lessee,
covering All of Block A-113, Mustang Island Area, East Addition (OCS-G
17083)
Oil and Gas Lease of Submerged Lands dated January 1, 1997, between United
States of America, Lessor, and Mariner Energy, Inc., et al, Lessee,
covering All of Block A-114, Mustang Island Area, East Addition (OCS-G
17084)
</TABLE>
5
<PAGE> 45
<TABLE>
<CAPTION>
THEC ORIGINAL
PROSPECT WORKING INTEREST
- -------- ----------------
<S> <C>
MUSTANG ISLAND, EAST ADDITION, BLOCKS A-117 & A-118 75.00%
Oil and Gas Lease of Submerged Lands dated January 1, 1998, between United
States of America, Lessor, and Mariner Energy, Inc., et al, Lessee,
covering All of Block A-117, Mustang Island Area, East Addition (OCS-G
18883)
Oil and Gas Lease of Submerged Lands dated January 1, 1997, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block A-118, Mustang Island Area, East Addition (OCS-G
17086)
MUSTANG ISLAND, EAST ADDITION, BLOCK A-138 100.00%
Oil and Gas Lease of Submerged Lands dated January 1, 1997, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block A-138, Mustang Island Area, East Addition (OCS-G
17089)
MUSTANG ISLAND, EAST ADDITION, BLOCK A-139 55.00%
Oil and Gas Lease of Submerged Lands dated January 1, 1997, between United
States of America, Lessor, and The Houston Exploration Company, et al,
Lessee, covering All of Block A-139, Mustang Island Area, East Addition
(OCS-G 17090)
MUSTANG ISLAND BLOCK 725 100.00%
Oil and Gas Lease of Submerged Lands dated December 1, 1998, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering All of Block 725, Mustang Island Area (OCS-G 20604)
MUSTANG ISLAND BLOCK 726 100.00%
Oil and Gas Lease of Submerged Lands dated December 1, 1998, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering All of Block 726, Mustang Island Area (OCS-G 20605)
MUSTANG ISLAND BLOCK 727 100.00%
Oil and Gas Lease of Submerged Lands dated December 1, 1998, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering All of Block 727, Mustang Island Area (OCS-G 20606)
</TABLE>
6
<PAGE> 46
<TABLE>
<CAPTION>
THEC ORIGINAL
PROSPECT WORKING INTEREST
- -------- ----------------
<S> <C>
MUSTANG ISLAND, EAST ADDITION, BLOCK 760 95.00%
Oil and Gas Lease of Submerged Lands dated January 1, 1996, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block 760, Mustang Island Area, East Addition (OCS-G
15711)
MUSTANG ISLAND BLOCK 857 100.00%
Oil and Gas Lease of Submerged Lands dated January 1, 1998, between United
States of America, Lessor, and The Houston Exploration Company, Lessee,
covering All of Block 857, Mustang Island Area (OCS-G 18876)
BLOCK 859 PROSPECT 100.00%
Oil and Gas Lease of Submerged Lands dated November 1, 1994, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering that portion of Block 838, Mustang Island Area, seaward
of Federal/State Boundary (OCS-G 14769)
Oil and Gas Lease of Submerged Lands dated November 1, 1994, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering that portion of Block 842, Mustang Island Area, seaward
of Federal/State Boundary (OCS-G 14770)
Oil and Gas Lease of Submerged Lands dated November 1, 1994, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering that portion of Block 843, Mustang Island Area, seaward
of Federal/State Boundary (OCS-G 14771)
Oil and Gas Lease of Submerged Lands dated November 1, 1994, between
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering that portion of Block 859, Mustang Island Area, seaward
of Federal/State Boundary (OCS-G 14774)
Oil and Gas Lease dated April 5, 1994, between The State of Texas, Lessor,
and Crasheil Resources, Inc., Lessee, covering S/2 of NE/4 of Tract 842-L,
Gulf of Mexico, Kleberg County, Texas (M-95912)
Oil and Gas Lease dated April 5, 1994, between The State of Texas, Lessor,
and Crasheil Resources, Inc., Lessee, covering All of SE/4 of Tract 842-L
Northwest of Three Marine League Line, Gulf of Mexico, Kleberg County,
Texas (M-95913)
</TABLE>
7
<PAGE> 47
<TABLE>
<CAPTION>
THEC ORIGINAL
PROSPECT WORKING INTEREST
- -------- ----------------
<S> <C>
BLOCK 859 PROSPECT, CON'T.
Oil and Gas Lease dated April 5, 1994, between The State of Texas, Lessor,
and Crasheil Resources, Inc., Lessee, covering NW/4 and SW/4 of Tract
843-L, Northwest of Three Marine League Line, Gulf of Mexico, Kleberg
County, Texas (M-95914)
Oil and Gas Lease dated October 4, 1994, between The State of Texas,
Lessor, and The Houston Exploration Company, Lessee, covering All of SW/4
of Tract 838-L Northwest of Three Marine League Line, Gulf of Mexico,
Kleberg County, Texas (M-96148)
Oil and Gas Lease dated October 7, 1997, between The State of Texas,
Lessor, and The Houston Exploration Company., Lessee, covering NE/4 and
SE/4 of Tract 859-L North of Three Marine League Line, Gulf of Mexico,
Kleberg County, Texas (M-098751)
Oil and Gas Lease dated October 7, 1997, between The State of Texas,
Lessor, and The Houston Exploration Company, Lessee, covering N/2 NW/4 of
Tract 859-L, Gulf of Mexico, Kleberg County, Texas (M-098752)
Oil and Gas Lease dated October 7, 1997, between The State of Texas,
Lessor, and The Houston Exploration Company, Lessee, covering S/2 NW/4 of
Tract 859-L, Gulf of Mexico, Kleberg County, Texas (M-098753)
Oil and Gas Lease dated October 7, 1997, between The State of Texas,
Lessor, and The Houston Exploration Company, Lessee, covering N/2 SW/4 of
Tract 859-L, Gulf of Mexico, Kleberg County, Texas (M-098754)
Oil and Gas Lease dated October 7, 1997, between The State of Texas,
Lessor, and The Houston Exploration Company, Lessee, covering N/2 SE/4 of
Tract 860-L, Gulf of Mexico, Kleberg County, Texas (M-098755)
MUSTANG ISLAND BLOCK 866 100.00%
Oil and Gas Lease of Submerged Lands dated January 1, 1998, between the
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering All of Block 866, Mustang Island Area (OCS-G 18877)
MUSTANG ISLAND BLOCK 879 100.00%
Oil and Gas Lease of Submerged Lands dated November 1, 1994, between the
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering that portion of Block 879, Mustang Island Area, seaward
of Federal/State Boundary (OCS-G 14775)
</TABLE>
8
<PAGE> 48
<TABLE>
<CAPTION>
THEC ORIGINAL
PROSPECT WORKING INTEREST
- -------- ----------------
<S> <C>
NORTH PADRE ISLAND BLOCK 897 100.00%
Oil and Gas Lease of Submerged Lands dated November 1, 1994, between the
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering All of Block 897, North Padre Island Area (OCS-G 14754)
SOUTH PADRE ISLAND BLOCK 1030 100.00%
Oil and Gas Lease of Submerged Lands dated October 1, 1997, between The
United States of America, Lessor, and The Houston Exploration Company,
Lessee, covering All of Block 1030, South Padre Island Area (OCS-G 18850)
STATE TRACTS 863/880 PROSPECT 100.00%
Oil and Gas Lease dated April 5, 1994, between The State of Texas, Lessor,
and Crasheil Resources, Inc., Lessee, covering S/2 SE/4 of Tract 863-L,
Gulf of Mexico, Kleberg County, Texas (M-95915)
Oil and Gas Lease dated October 4, 1994, between The State of Texas,
Lessor, and The Houston Exploration Company, Lessee, covering S/2 SE/4 of
Tract 860-L, Gulf of Mexico, Kleberg County, Texas (M-96149)
Oil and Gas Lease dated October 4, 1994, between The State of Texas,
Lessor, and The Houston Exploration Company, Lessee, covering N/2 NE/4 of
Tract 863-L, Gulf of Mexico, Kleberg County, Texas (M-96150)
Oil and Gas Lease dated April 5, 1994, between The State of Texas, Lessor,
and Crasheil Resources, Inc., Lessee, covering N/2 NE/4 of Tract 880-L,
Gulf of Mexico, Kleberg County, Texas (M-95916)
Oil and Gas Lease dated October 4, 1994, between The State of Texas,
Lessor, and The Houston Exploration Company, Lessee, covering S/2 NE/4 of
Tract 863-L, Gulf of Mexico, Kleberg County, Texas (M-96151)
Oil and Gas Lease dated October 4, 1994, between The State of Texas,
Lessor, and The Houston Exploration Company, Lessee, covering N/2 SE/4 of
Tract 863-L, Gulf of Mexico, Kleberg County, Texas (M-96152)
Oil and Gas Lease dated April 5, 1994, between The State of Texas, Lessor,
and Crasheil Resources, Inc., Lessee, covering S/2 NE/4 of Tract 880-L,
Gulf of Mexico, Kleberg County, Texas (M-95917)
Oil and Gas Lease dated April 5, 1994, between The State of Texas, Lessor,
and Crasheil Resources, Inc., Lessee, covering N/2 SE/4 of Tract 880-L,
Gulf of Mexico, Kleberg County, Texas (M-95918)
</TABLE>
9
<PAGE> 49
<TABLE>
<CAPTION>
THEC ORIGINAL
PROSPECT WORKING INTEREST
- -------- ----------------
<S> <C>
STATE TRACTS 863/880, con't.
Oil and Gas Lease dated October 4, 1994, between The State of Texas,
Lessor, and The Houston Exploration Company, Lessee, covering S/2 SE/4 of
Tract 880-L, Northwest of Three Marine League Line, Gulf of Mexico,
Kleberg County, Texas (M-96153)
Oil and Gas Lease dated October 4, 1994, between The State of Texas,
Lessor, and The Houston Exploration Company, Lessee, covering NE/4 of
Tract 883-L, West of Three Marine League Line, Gulf of Mexico, Kenedy and
Kleberg Counties, Texas (M-96147)
Oil and Gas Lease dated October 4, 1994, between The State of Texas,
Lessor, and The Houston Exploration Company, Lessee, covering SE/4 of
Tract 883-L, West of Three Marine League Line, Gulf of Mexico, Kenedy
Countys, Texas (M-96146)
STATE TRACT 990-S PROSPECT 100.00% *
Oil and Gas Lease dated April 7, 1998, between The State of Texas, Lessor,
and The Houston Exploration Company, Lessee, covering S/2 of Tract 990-S,
Gulf of Mexico, Kleberg County, Texas (M-099277)
Oil and Gas Lease dated April 7, 1998, between The State of Texas, Lessor,
and The Houston Exploration Company, Lessee, covering N/2 of Tract 990-S,
Gulf of Mexico, Kleberg County, Texas (M-099276)
</TABLE>
* SUBJECT TO 25% WI REVERSIONARY RIGHTS OF SHELL OFFSHORE
10
<PAGE> 50
SCHEDULE II
OFFSHORE OPERATING AGREEMENT
EFFECTIVE _______, 1999
THE HOUSTON EXPLORATION COMPANY
AS OPERATOR
AND
----------------------------------------
AS NON-OPERATOR
COVERING
OCS-G ______
--------------------
BLOCK _____
FEDERAL OFFSHORE TEXAS/LOUISIANA
<PAGE> 51
OFFSHORE OPERATING AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C> <C>
Preliminary Recitals ...............................................1
ARTICLE 1
DEFINITIONS
1.1 Application To Separate Leases .....................................1
ARTICLE 2
DEFINITIONS
2.1 Development Operations .............................................1
2.2 Development Well ...................................................1
2.3 Exploratory Operations .............................................1
2.4 Non-Consent Operations .............................................1
2.5 Non-Consent Platform ...............................................1
2.6 Non-Consent Well ...................................................1
2.7 Oil and Gas ........................................................2
2.8 Operator ...........................................................2
2.9 Non-Operator .......................................................2
2.10 Participating Interest .............................................2
2.11 Participating Party ................................................2
2.12 Non-Participating Party ............................................2
2.13 Producible Well ....................................................2
2.14 Leases .............................................................2
2.15 Facilities .........................................................2
2.16 Working Interest ...................................................2
2.17 Reservoir ..........................................................2
2.18 Platform ...........................................................3
ARTICLE 3
EXHIBITS
3.1 Exhibits ...........................................................3
3.1.1 Exhibit A: Description of Lease and Working
Interest of the Parties ...........................3
3.1.2 Exhibit B: Insurance Provisions ..............................3
3.1.3 Exhibit C: Accounting Procedure ..............................3
3.1.4 Exhibit D: Nondiscrimination Provisions ......................3
3.1.5 Exhibit E: Tax Provision .....................................3
3.1.5 Exhibit F: Gas Balancing Agreement ...........................3
ARTICLE 4
OPERATOR
4.1 Operator ...........................................................3
4.2 Resignation ........................................................3
4.3 Removal of Operator ................................................3
4.4 Selection of Successor .............................................4
4.5 Delivery of Property ...............................................4
ARTICLE 5
AUTHORITY AND DUTY OF OPERATOR
5.1 Exclusive Right To Operate .........................................4
5.2 Workmanlike Conduct ................................................4
</TABLE>
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<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
5.3 Liens and Encumbrances ..............................................4
5.4 Employees ...........................................................5
5.5 Records .............................................................5
5.6 Compliance ..........................................................5
5.7 Drilling ............................................................5
5.8 Reports .............................................................5
5.9 Information To Participating Parties ................................5
5.10 Information To Non-Participating Parties ............................6
ARTICLE 6
VOTING AND VOTING PROCEDURES
6.1 Designation of Representatives ......................................6
6.2 Voting Procedures ...................................................6
6.2.1 Voting Interest ...............................................6
6.2.2 Vote Required .................................................6
6.2.3 Votes .........................................................6
6.2.4 Meetings ......................................................6
ARTICLE 7
ACCESS
7.1 Access To Lease .....................................................7
7.2 Reports .............................................................7
7.3 Confidentiality......................................................7
7.4 Limited Disclosure ..................................................7
ARTICLE 8
EXPENDITURES
8.1 Basis of Charges To the Parties .....................................7
8.2 Authorization .......................................................8
8.3 Advance Billings ....................................................8
8.4 Commingling of Funds ................................................8
8.5 Security Rights .....................................................8
8.6 Unpaid Charges ......................................................8
8.7 Default .............................................................9
8.8 Carved-Out Interests ................................................9
ARTICLE 9
NOTICES
9.1 Giving and Receiving Notices .......................................10
9.2 Content of Notice ..................................................10
9.3 Response To Notices ................................................10
9.3.1 Platform Construction ........................................10
9.3.2 Proposal Without Platform ....................................11
9.3.3 Other Matters ................................................11
9.4 Failure To Respond .................................................11
ARTICLE 10
EXPLORATORY WELLS
10.1 Operations By All Parties ..........................................11
10.2 Second Opportunity To Participate ..................................11
10.3 Operations By Fewer Than All Parties ...............................11
10.3.1 First Exploratory Well Drilled On Lease .....................12
10.3.2 Exploratory Wells Other Than The First
Exploratory Well Drilled On Lease ...........................12
</TABLE>
ii
<PAGE> 53
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
10.4 Course of Action After Drilling To Initial
Objective Depth ...................................................12
ARTICLE 11
DEVELOPMENT WELL OPERATIONS
11.1 Operations By All Parties ..........................................13
11.2 Second Opportunity To Participate ..................................14
11.3 Operations By Fewer Than All Parties ...............................14
11.4 Course of Action After Drilling To Initial
Objective Depth ....................................................14
11.5 Timely Operations ..................................................14
11.6 Deeper Drilling ....................................................14
ARTICLE 12
NON-CONSENT OPERATIONS
12.1 Non-Consent Operations .............................................15
12.1.1 Non-Interference ............................................15
12.1.2 Multiple Completion Limitation ..............................15
12.1.3 Metering ....................................................15
12.1.4 Non-Consent Well ............................................15
12.1.5 Cost Information ............................................15
12.1.6 Completions .................................................16
12.2 Forfeiture of Interest .............................................16
12.2.1 Production Reversion Penalties ..............................16
12.2.2 Non-Production Reversion ....................................17
12.3 Deepening of Non-Consent Well ......................................17
12.4 Operations From Non-Consent Platforms ..............................18
12.5 Discovery or Extension From Mobile Drilling
Operations .........................................................18
12.6 Allocation of Platform Costs To Non-Consent
Operations .........................................................18
12.6.1 Charges .....................................................18
12.6.2 Operating and Maintenance Charges ...........................19
12.6.3 Payments ....................................................19
12.7 Operations To Maintain Lease .......................................19
12.8 Allocation of Costs Between Zones ..................................20
12.8.1 If The Well Is Completed In Only One Zone ...................20
12.8.2 If The Well Is Completed In Dual or
Multiple Zones .............................................21
12.8.3 If The Well Is a Dry Hole ...................................23
ARTICLE 13
FACILITIES
13.1 Approval ...........................................................23
13.2 Contracts ..........................................................23
ARTICLE 14
ABANDONMENT AND SALVAGE
14.1 Platform Salvage and Removal Costs .................................24
14.2 Abandonment of Producing Well ......................................24
14.3 Assignment of Interest .............................................24
14.4 Abandonment Operations Required By Governmental
Authority ..........................................................24
</TABLE>
iii
<PAGE> 54
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
ARTICLE 15
WITHDRAWAL
15.1 Withdrawal .........................................................25
15.2 Limitations On Withdrawal ..........................................25
ARTICLE 16
RENTALS, ROYALTIES AND OTHER PAYMENTS
16.1 Creation of Overriding Royalty .....................................26
16.2 Payment of Rentals and Minimum Royalties ...........................26
16.3 Non-Participation In Payments ......................................26
16.4 Royalty Payments ...................................................26
ARTICLE 17
TAXES
17.1 Property Taxes .....................................................26
17.2 Contest of Property Tax Valuation ..................................26
17.3 Production and Severance Taxes .....................................27
17.4 Other Taxes and Assessments ........................................27
ARTICLE 18
INSURANCE
18.1 Insurance ..........................................................27
ARTICLE 19
LIABILITY, CLAIMS AND LAWSUITS
19.1 Individual Obligations .............................................27
19.2 Notice of Claim or Lawsuit .........................................27
19.3 Settlements ........................................................27
19.4 Legal Expense ......................................................28
19.5 Liability For Losses, Damages, Injury or Death .....................28
19.6 Indemnification ....................................................28
ARTICLE 20
INTERNAL REVENUE PROVISION
20.1 Internal Revenue Provision..........................................28
ARTICLE 21
CONTRIBUTIONS
21.1 Notice of Contributions Other Than Advances For
Sale of Production .................................................28
21.2 Cash Contributions .................................................29
21.3 Acreage Contributions ..............................................29
ARTICLE 22
DISPOSITION OF PRODUCTION
22.1 Facilities To Take In Kind .........................................29
22.2 Right To Take In Kind ..............................................29
22.3 Failure To Take In Kind ............................................29
22.4 Expenses of Delivery In Kind .......................................30
22.5 Gas Balancing Provisions ...........................................30
</TABLE>
iv
<PAGE> 55
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
ARTICLE 23
APPLICABLE LAW
23.1 Applicable Law ....................................................30
ARTICLE 24
LAWS, REGULATIONS AND NONDISCRIMINATION
24.1 Laws and Regulations ..............................................30
24.2 Nondiscrimination .................................................30
ARTICLE 25
FORCE MAJEURE
25.1 Force Majeure .....................................................30
25.2 Notice ............................................................31
ARTICLE 25
SUCCESSORS AND ASSIGNS
26.1 Successors and Assigns ............................................31
26.2 Assignments .......................................................31
ARTICLE 27
TERM
27.1 Term ..............................................................31
ARTICLE 28
COUNTERPART EXECUTION
28.1 Counterpart Execution .............................................31
</TABLE>
v
<PAGE> 56
EXHIBIT "A"
I.
THE LEASE
II.
NAMES AND ADDRESSES OF THE PARTIES
III.
LEASEHOLD INTERESTS OF THE PARTIES
<PAGE> 57
EXHIBIT "B"
INSURANCE
<PAGE> 58
OFFSHORE OPERATING AGREEMENT
THIS AGREEMENT, made effective the _________ day of _____, 1999, by the
signers hereof, herein referred to as "Parties" and individually as "Party".
WITNESSETH
WHEREAS, the Parties are owners of the Oil and Gas Lease as set out in
Exhibit "A", and desire to explore, develop, produce and operate said Lease;
NOW THEREFORE, in consideration of the premises and of the mutual
agreements herein, it is agreed as follows:
ARTICLE 1
APPLICATION TO SEPARATE LEASE
1.1 Application to Separate Leases. If more than one lease is
identified in Exhibit "A", this Agreement shall be applicable to each such
lease separately for the purpose herein, and each such lease shall be
considered as being covered by a separate operating agreement.
ARTICLE 2
DEFINITIONS
2.1 Development Operations. Operations subsequent to the date on which
one (1) or more parties owning fifty-one percent (51%) or more interest in the
Lease determine that production capability sufficient to justify development
has been established.
2.2 Development Well. Any well proposed as a Development Operation.
2.3 Exploratory Operations. Operations prior to Development
Operations.
2.4 Non-Consent Operations. Operations conducted by less than all, but
one (1) or more Parties owning fifty-one percent (51%) or more interest in the
Lease.
2.5 Non-Consent Platform. A platform ordered or constructed by less
than all, but one (1) or more Parties owning fifty-one percent (51%) or more
interest in the Lease.
2.6 Non-Consent Well. A well drilled as a Non-Consent Operation.
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2.7 Oil and Gas. Oil, gas, casinghead gas, gas condensate and all
other liquid or gaseous hydrocarbons (or any of them) in, on and under that may
be produced from the Lease.
2.8 Operator. The Party designated under Article 4 of this Agreement
to conduct exploration, development and operation of the Lease.
2.9 Non-Operator. Any party to this Agreement other than the Operator.
2.10 Participating Interest. The respective percentage of participation
of each Party electing to participate in each of the operations conducted
hereunder, including the production of oil and gas, based on ownership in the
Lease.
2.11 Participating Party. A Party who joins in an operation conducted
pursuant to this Agreement.
2.12 Non-Participating Party. Any Party other than a Participating
Party.
2.13 Producible Well. A well producing oil or gas or, if not producing
oil or gas, a well determined to be capable of producing oil or gas in paying
quantities pursuant to any applicable order issued by or finding made by
appropriate governmental authority.
2.14 Lease(s). Each oil and gas lease identified in Exhibit "A" of this
Agreement and the lands affected thereby.
2.15 Facilities. All physical assets, excluding platforms, on the Lease
beyond the wellhead connections; including, but not limited to, equipment for
storage, treating, compression and production handling. The cost of those
physical assets will include, but not be limited to material, fabrication,
transportation and installation.
2.16 Working Interest. The ownership of each Party in and to the Lease
as set forth in Exhibit "A".
2.17 Reservoir. An underground accumulation of porous and permeable
rocks containing hydrocarbons which is bounded either by physical changes
within such rocks or by other rocks so as to prevent efficient and effective
migration of such hydrocarbons across such boundaries.
2
<PAGE> 60
2.18 Platform. An offshore structure, including a structure that
solely supports Facilities, whether fixed, compliant, or floating, and the
components of that structure, including, but not limited to, caissons or well
protectors, rising above the water line and used for exploration, development
or production of hydrocarbons from the Lease. The term "Platform" shall also
mean an offshore subsea structure or template (excluding templates used for
drilling operations) and any component thereof (including, but not limited to,
flow lines and control systems, other than those installed in connection with
completion of a well) that is attached to the sea floor and used to obtain
production of hydrocarbons from the Lease.
ARTICLE 3
EXHIBITS
3.1 Attached hereto are the following exhibits which are incorporated
herein by reference:
3.1.1. Exhibit A. Description of the Lease and Working Interest of
the Parties
3.1.2. Exhibit B. Insurance Provisions
3.1.3. Exhibit C. Accounting Procedure
3.1.4. Exhibit D. Non-Discrimination Provisions
3.1.5. Exhibit E. Tax Partnership
3.1.6. Exhibit F. Gas Balancing Agreement
ARTICLE 4
OPERATOR
4.1 Operator. THE HOUSTON EXPLORATION COMPANY is hereby designated as
Operator.
4.2 Resignation. Operator may resign at any time by giving notice to
the Parties. Such resignation shall become effective at 7:00 a.m. on the first
day of the month following a period of ninety (90) days after said notice,
unless a successor Operator has assumed the duties of Operator prior to that
date.
3
<PAGE> 61
4.3 Removal of Operator. Should Operator or any successor Operator
hereunder (1) dissolve, liquidate or terminate its corporate existence, (2)
become insolvent, bankrupt or subject to receivership, or (3) no longer own an
interest in the Lease, or (4) fail to perform its duties hereunder, Operator may
be removed by an affirmative vote of the Parties having a combined Working
Interest of fifty-one percent (51%) or more after excluding Operator's Working
Interest.
4.4 Selection of Successor. Upon resignation or removal of Operator, a
successor Operator shall be selected by an affirmative vote of the Parties
having a combined Working Interest of fifty-one percent (51%) or more; however,
if the removed or resigned Operator fails to vote or votes only to succeed
itself, the successor Operator shall be selected by an affirmative vote of the
Parties having a combined Working Interest of fifty-one percent (51%) or more
of the remaining Working Interest left after excluding the Working Interest of
the removed or resigned Operator.
4.5 Delivery of Property. Prior to the effective date of resignation
or removal, Operator shall deliver promptly to successor operator the
possession of everything owned by the Parties pursuant to this Agreement.
ARTICLE 5
AUTHORITY AND DUTY OF OPERATOR
5.1 Exclusive Right to Operate. Unless otherwise provided, Operator
shall have the exclusive right and duty to conduct all operations pursuant to
this Agreement.
5.2 Workmanlike Conduct. Operator shall conduct all operations in a
good and workmanlike manner, as would a prudent operator under the same or
similar circumstances. Operator shall not be liable to the Parties for losses
sustained or liabilities incurred except such as may result from its gross
negligence or willful misconduct. Unless otherwise provided, Operator shall
consult with the Parties and keep them informed of all important matters.
5.3 Liens and Encumbrances. Operator shall endeavor to keep the Lease
and equipment free from all liens and encumbrances occasioned by operations
hereunder, except those provided for in
4
<PAGE> 62
Section 8.5.
5.4 Employees. Operator shall select employees and determine their
number, hours of labor, and compensation. Such employees shall be employees of
Operator.
5.5 Records. Operator shall keep accurate books, accounts and records
of operations which shall be available to Non-Operators pursuant to provisions
of Exhibit "C".
5.6 Compliance. Operator shall comply with and require all agents and
contractors to comply with all applicable laws, rules, regulations, and orders
of any governmental agency having jurisdiction.
5.7 Drilling. Operator shall have all drilling operations conducted by
qualified and responsible independent contractors under competitive contracts.
However, Operator may employ its equipment and personnel in the conduct of such
operations, at competitive rates, pursuant to a written agreement among the
Participating Parties.
5.8 Reports. Operator shall make reports to governmental authorities
that it has a duty to make as Operator and shall furnish copies of such reports
to Participating Parties. Operator shall give timely written notice to the
Parties of all litigation and hearings affecting the Lease or operations
hereunder.
5.9 Information to Participating Parties. Operator shall furnish each
Participating Party the following information pertaining to each well being
drilled:
a) copy of application for permit to drill and all amendments
thereto;
b) daily drilling reports;
c) complete report of all core analyses;
d) any logs or surveys as run;
e) copies of any well test results, bottom-hole pressure
surveys, gas and condensate analyses, or, similar
information;
f) copies of reports made to regulatory agencies; and
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<PAGE> 63
g) twenty-four (24) hours advance notice of logging, coring
and testing operations; and, upon written request, samples
of cuttings and cores marked as to depth, to be packaged
and shipped at the expense of the requesting Party.
5.10 Information to Non-Participating Parties. Operator shall furnish
to each Non-Participating Party copies of all non-confidential reports made to
regulatory agencies.
ARTICLE 6
VOTING AND VOTING PROCEDURES
6.1 Designation of Representatives. The names and addresses of the
representatives and alternate, who are authorized to represent and bind each
Party with respect to operations hereunder, are set forth in Exhibit "A". The
designated representative or alternate may be changed by written notice to
the other Parties.
6.2 Voting Procedures. Unless otherwise provided, any matter requiring
approval of the Parties shall be determined as follows:
6.2.1 Voting Interest. Each Party shall have a voting interest equal to
its Working Interest or its Participating Interest as applicable.
6.2.2 Vote Required. Proposals requiring approval of the Parties shall
be decided by an affirmative vote of one or more Parties having a
combined voting interest of fifty-one percent (51%) or more.
6.2.3 Votes. The Parties may vote at meetings; by telephone, promptly
confirmed in writing to Operator; or by letter, telegram, telex,
or telecopier. Operator shall give prompt notice of the results
of such voting to each Party.
6.2.4 Meetings. Meetings of the Parties may be called by Operator upon
its own motion or at the request of any Party. Except in the case
of emergency, or except when agreed by unanimous consent, no
meetings shall be called on less than seven (7) days' advance
written notice, including the agenda. The representative of
Operator shall be Chairman of each meeting.
6
<PAGE> 64
ARTICLE 7
ACCESS
7.1 Access to Lease. Each Party shall have access to the Lease at its
sole risk and expense at all reasonable times to inspect operations and wells in
which it participates and records and data pertaining thereto.
7.2 Reports. Upon written request, Operator shall furnish to a
requesting party any information to which such Party is entitled hereunder. The
costs of gathering and furnishing information not otherwise furnished under
Article 5 shall be charged to the requesting Party.
7.3 Confidentiality. Except as provided in Section 7.4 and except for
necessary disclosures to governmental agencies, no Party shall release any
geological, geophysical, or reservoir information or any logs or other
information pertaining to the progress, tests, or results of any well unless
agreed to by the participating Parties.
7.4 Limited Disclosure. Any Party may make confidential data available
to (a) reputable engineering firms and gas transmission companies for
hydrocarbon reserve and other technical evaluations, (b) reputable financial
institutions and investment banking firms for study prior to financial or
business transactions of such Party, its parent or affiliates and (c) affiliates
of such Party as long as such affiliates do not engage in exploration and
production operations in the Outer Continental Shelf. The confidential data made
available shall not be removed from the custody or premises of the Party making
such data available. Any third party permitted such access shall first agree in
writing neither to disclose such data to others nor to use such data except for
the purpose for which it is disclosed.
ARTICLE 8
EXPENDITURES
8.1 Basis of Charge to the Parties. Operator shall pay all costs and
each Party shall reimburse Operator in proportion to its Participating Interest.
All charges, credits, and accounting for expenditures shall be pursuant to
Exhibit "C". The provisions of this Agreement shall prevail in the event of
conflict with Exhibit "C".
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<PAGE> 65
8.2 Authorization. Operator shall neither make any single expenditure
nor undertake any project costing in excess of Sixty Thousand Dollars ($60,000)
without prior approval of the Parties. Operator shall furnish written
information to all the Parties on any expenditures in excess of Thirty Thousand
Dollars ($30,000). Subject to any election provided in Articles 10 and 11,
approval of a well operation shall include approval of all necessary
expenditures through installation of the wellhead. In the event of an
emergency, Operator may immediately make such expenditures as in its opinion
are required to deal with the emergency. Operator shall report to the Parties,
as promptly as possible, the nature of the emergency and action taken.
8.3 Advance Billings. Operator shall have the right to require each
Party to advance its respective share of estimated expenditures pursuant to
Exhibit "C".
8.4 Commingling of Funds. Funds received by Operator under this
Agreement may be commingled with its own funds.
8.5 Security Rights. In addition to any other security right and
remedies provided by law with respect to services rendered or materials and
equipment furnished under this Agreement, Operator shall have a first lien upon
each Party's Working Interest, including the production and equipment credited
thereto, in order to secure payment of charges against such Party, together with
interest thereon at the rate set forth in Exhibit "C" or the maximum rate
allowed by law, whichever is less, plus attorneys' fees, court costs, and other
related collection costs. If any Party does not pay such charges when due,
Operator shall have the additional right to collect from the purchaser the
proceeds from the sale of such Party's share of production until the amount owed
has been paid. Each purchaser shall be entitled to rely on Operator's statement
concerning the amount owed. Each Non-Operator shall have comparable security
rights on Operator's Working Interest.
8.6 Unpaid Charges. If any Party fails to pay the charges due
8
<PAGE> 66
hereunder within sixty (60) days after rendition of Operator's statement, the
other Participating Parties shall, upon Operator's request, pay the unpaid
amount in proportion to their interests. Each Party so paying its share of the
unpaid amount shall be subrogated to Operator's security rights to the extent of
such payment.
8.7 Default. If any Party does not pay its share of the charges when
due, Operator may give such Party notice that unless payment is made within
fifteen (15) days, such Party shall be in default. Any Party in default shall
have no further access to the maps, records, data, interpretations, or other
information obtained in connection with operations. A defaulting Party shall
not be entitled to vote on any matter until such time as said Party's payments
are current. The voting interest of each non-defaulting Party shall be in the
proportion its Participating Interest bears to the total non-defaulting
Participating Interest. As to any operation approved during the time a Party is
in default, such Party shall be deemed to be a Non-Participating Party.
8.8 Carved-Out Interests. Any overriding royalty, production payment,
net proceeds interest, carried interest, or other burden carved out of a Working
Interest in the Lease (other than the existing burdens recited in Exhibit "A"
shall be subject to the rights of the Parties to this Agreement, and any Party
whose Working Interest is so encumbered shall be responsible therefor. If a
Party does not pay its share of expense and the proceeds from the sale of
production under Section 8.5 are insufficient for that purpose, the security
rights provided for therein may be applied against the carved-out interests with
which such Working Interest is burdened. It is clearly understood by the parties
hereto that such overriding royalty, production payment, net proceeds interest,
carried interest or other burdens carved out of a Working Interest shall not be
held accountable for any other liability except forfeiture of its interest
during the period of time that such Working Interest is in default. In such
event, the rights of the
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owner of such carved-out interest shall be subordinate to the security rights
granted by Section 8.5.
ARTICLE 9
NOTICES
9.1 Giving and Receiving Notices. All notices shall be in writing and
delivered in person or by mail, telex, telegraph, telecopier, or cable;
however, if a drilling rig is on location and standby charges are accumulating,
such notices shall be given by telephone and immediately confirmed in writing.
Notice shall be deemed given only when received by the Party to whom such
notice is directed, except that any notice by certified mail or equivalent,
telegraph, or cable properly addressed, pursuant to Section 6.1, and with all
postage and charges prepaid shall be deemed given seventy-two (72) hours after
such notice is deposited in the mail or twenty-four (24) hours after such
notice is sent by facsimile (receipt confirmed), or filed with an operating
telegraph or cable company for immediate transmission.
9.2 Content of Notice. Any notice which requires a response shall
indicate the maximum response time specified in Section 9.3. If a proposal
involves a platform or Facility, the notice shall contain a description of
same, including location and the estimated costs of fabrication, transportation
and installation. If a proposal involves a well operation, the notice shall
include the proposed depth, the objective zone or zones to be tested, the
surface and bottom-hole locations, applicable details regarding directional
drilling, the equipment to be used, and the estimated costs of the operation
including all necessary expenditures through installation of the wellhead.
9.3 Response to Notices. Each Party's response to proposal shall be in
writing to all other Parties. Except for those notices in Articles 10, 11, 15
and 16, the maximum response times shall be as follows:
9.3.1 Platform Construction. When any proposal for well operations
involves the construction of a platform, the maximum response
time shall be sixty (60) days.
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9.3.2 Proposal Without Platform. When any proposal for well
operations does not require construction of a platform,
maximum response time shall be thirty (30) days; however, if
a drilling rig is on location and standby charges are
accumulating, the maximum response time shall be forty-eight
(48) hours.
9.3.3 Other Matters. For all other matters requiring notice, the
maximum response time shall be thirty (30) days.
9.4 Failure to Respond. Failure of any Party to respond to a notice
within the required period shall be deemed to be a negative response.
ARTICLE 10
EXPLORATORY WELLS
10.1 Operations by All Parties. Any Party may propose an Exploratory
Well by notifying the other Parties. If all the Parties agree to participate in
drilling the proposed well, Operator shall drill same at their cost and risk.
The well shall be commenced within one hundred twenty (120) days after the last
applicable election date. If no operations are begun within such time period,
the effect shall be as if the proposal had not been made.
10.2 Second Opportunity to Participate. If fewer than all but one or
more Parties having a combined Working Interest of fifty-one percent (51%) or
more elect to participate, the proposing Party shall inform the Parties of the
elections made, whereupon any Party originally electing not to participate may
then elect to participate by notifying the proposing Party within forty-eight
(48) hours after receipt of such information.
10.3 Operations by Fewer Than All Parties. If fewer than all but one
or more Parties having a combined Working Interest of fifty-one percent (51%)
or more elect to participate in and agree to bear the cost and risk of drilling
the proposed well, Operator,
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or another Party if Operator is not a Participating Party, shall drill such well
as Operator under this Agreement.
10.3.1 First Exploratory Well Drilled on Lease. Notwithstanding
anything to the contrary herein contained, the penalty for
non-participation in the initial test well drilled on the
Lease shall be forfeiture of the Non-Participating Party's
entire interest in the Lease.
As of the last applicable election date, each Non-
Participating Party shall be deemed to have relinquished to
the Participating Parties in proportion to their interests,
its interest in the Lease.
If the first Exploratory Well is commenced within one hundred
twenty (120) days after the last applicable election date,
and is drilled as proposed in accordance with this Agreement,
each Non-Participating Party will execute an assignment
covering such relinquished interest; otherwise, no
relinquishment or assignment shall occur.
10.3.2 Exp1oratory Wells Other Than First Well Drilled on Lease. If
the well is commenced within one hundred twenty (120) days
after the date of the last applicable election date and is
drilled as proposed in accordance with this Agreement, any
Party electing not to participate shall be deemed to have
relinquished its operating rights in such well as if it were
a Non-Consent Well. Recoupment of costs shall be determined
by Article 12 and the drilling of such well shall be governed
by Article 12.
10.4 Course of Action After Drilling to Initial Objective Depth. At
such time as an Exploratory Well has been drilled as proposed, Operator shall
notify the Participating Parties setting forth Operator's recommendations for
further operations. Such
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Parties, within twenty-four (24) hours after receipt of such recommendations,
may accept or make additional recommendations. If additional recommendations are
made, the Participating Parties shall have an additional twenty-four (24) hours
to respond. The action taken shall be that decided by one or more Parties having
a combined Participating Interest of fifty-one percent (51%) or more. If this
vote is not obtained within the time limits specified above, further operations
shall be disposed of in the following descending order of priority: additional
testing, completion at the initial objective depth, completions in ascending
order, deepening, side-tracking and plugging and abandoning. If the decision is
to drill deeper, a Party may be relieved of the obligation and liability as to
such deepening by paying its proportionate share of the estimated costs of
plugging and abandoning the well at the initial objective depth. If drilling to
the initial objective depth does not result in a Producible Well and the
decision is to drill deeper, each original Non-Participating Party shall be
notified by the Operator and may participate by notifying the Operator, within
twenty-four (24) hours after receiving notice of the decision, that it will join
in deepening and pay its proportionate share of the cost of drilling such well
to the initial objective depth. As of the last applicable election date, each
Non-Participating Party shall be deemed to have relinquished to the
Participating Parties in proportion to their interests, its operating rights in
the well, as to those depths below the initial objective depth. The deepening of
such well shall be governed by the terms of Article 12.
ARTICLE 11
DEVELOPMENT WELL, OPERATIONS
11.1 Operations by All Parties. Any Party may propose Development Well
operations, including any platform required by such operations, by notifying the
other Parties. If all Parties elect to participate in the proposed operation,
Operator shall conduct such operation at their cost and risk.
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11.2 Second Opportunity to Participate. If fewer than all but one or
more Parties having a combined Working Interest of fifty-one percent (51%) or
more elect to participate, the proposing Party shall inform the Parties of the
elections made, whereupon any Party originally electing not to participate may
then elect to participate by notifying the proposing Party within forty-eight
(48) hours after receipt of such information.
11.3 Operations by Fewer Than All Parties. If fewer than all but one or
more Parties having a combined Working Interest of fifty-one percent (51%) or
more elect to participate in and agree to bear the cost and risk of a
Development Operation, Operator shall conduct such operation pursuant to Article
12.
11.4 Course of Action After Drilling To Initial Objective Depth. After
a Development Well has been drilled to initial objective depth, the identical
procedures and alternatives set out in Section 10.4 shall apply.
11.5 Timely Operations. Operations shall be commenced within one
hundred twenty (120) days following the date upon which the last applicable
election may be made. If no operations are begun within such time period, the
effect shall be as if the proposal had not been made. Operations shall be deemed
to have commenced (a) on the date the contract for a new platform is let, if the
notice indicated the need for such platform; or (b) on the date rigging-up
operations are commenced.
11.6 Deeper Drilling. If a well is proposed to be drilled below the
deepest producible zone penetrated by a Producible well, any Party may elect to
participate either in the well as proposed or to the base of the deepest
producible zone. A Party electing to participate in such well to the base of
said zone shall bear its proportionate part of the cost and risk of drilling to
said zone including completion or abandonment. All operations below the depth to
which such Party agreed to participate shall be governed by Article 12.
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<PAGE> 72
ARTICLE 12
NON-CONSENT OPERATIONS
12.1 Non-Consent Operations. Operator shall conduct Non-Consent
Operations at the sole risk and expense of the Participating Parties, in
accordance with the following provisions:
12.1.1 Non-Interference. Non-Consent Operations shall not
interfere unreasonably with operations being conducted by
all Parties.
12.1.2 Multiple Completion Limitation. Non-Consent Operations
shall not be conducted in a well having multiple
completions unless: (a) each completion is owned by the
same Parties in the same proportions; (b) the well is
incapable of producing from any of its completions; or (c)
all Participating Parties in the well consent to such
operations.
12.1.3 Metering. In Non-Consent Operations, production need not
be separately metered but may be determined on the basis
of well tests.
12.1.4 Non-Consent Well. Operations on a Non-Consent Well shall
not be conducted in any producible zone penetrated by a
Producible Well without approval of each Non-Participating
Party unless: (a) such zone shall have been designated in
the notice as a completion zone; (b) completion of such
well in said zone will not increase the well density
governmentally prescribed or approved for such zone; and
(c) the horizontal distance between the vertical
projections of the midpoint of the zone in such well and
any existing well in the same zone will be at least one
thousand (1000) feet if an oil-well completion or two
thousand (2000) feet if a gas-well completion.
12.1.5 Cost Information. Operator shall, within one
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hundred twenty (120) days after completion of a Non-Consent
Well, furnish the Parties an inventory and an itemized
statement of the cost of such well and equipment pertaining
thereto. Operator shall furnish to the Parties a monthly
statement showing operating expenses and the proceeds from
the sale of production from the well for the preceding
month.
12.1.6 Completions. For the purposes of determinations hereunder,
each completion shall be considered a separate well.
12.2 Forfeiture of Interest. Upon commencement of Non-Consent
Operations, each Non-Participating Party's interest and leasehold operating
rights in the Non-Consent Operation and title to production therefrom shall be
owned by and vested in each Participating Party in proportion to its
Participating Interest for as long as the operations originally proposed are
being conducted or production is obtained, subject to the following:
12.2.1 Production Reversion Penalties. Such interest, rights and
title shall revert to each Non-Participating Party when
the Participating Parties have recouped out of the
proceeds of production from such Non-Consent Operations an
amount equal to the sum of the following:
a) Six hundred fifty percent (650%) of the cost of
drilling, completing, recompleting, deepening,
deviating, or plugging back each Non-Consent
Exploratory Well, and equipping it through the well
head connections, reduced by any contribution
received under Section 21.2; plus,
b) Five hundred percent (500%) of the cost of
drilling, completing, recompleting, deepening,
deviating or plugging back each Non-Consent
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Development Well and equipping it through the
wellhead connections, reduced by any contribution
received under Section 21.2; plus,
c) Five hundred percent (500%) of the cost of
Facilities necessary to carry out the operation;
plus,
d) Five hundred percent (500%) of the cost of any
Non-Consent Platform which must be installed to
carry out the operation; plus,
e) Two hundred percent (200%) of the cost of using
platform already installed; plus
f) the cost of operating expenses, royalties and
severance, gathering and production taxes.
Upon the recoupment of such costs, a Non-Participating Party shall become a
Participating Party in such operations.
12.2.2 Non-Production Reversion. If such Non-Consent
Operations fail to obtain production or if such
operations result in production which ceases prior
to recoupment by the Participating Parties of the
penalties provided for above, such operating rights
shall revert to each Non-Participating Party except
that all Non-Consent Wells, platforms and
Facilities shall remain vested in the Participating
Parties; however, any salvage in excess of the sum
remaining under Section 12.2.1 shall be credited to
all Parties.
12.3 Deepening of Non-Consent Well. If any Participating Party
proposes to deepen a Non-Consent Well, a Non-Participating Party may
participate by notifying the operator within five (5) days after receiving the
proposal that it will join in the deepening operation and by paying to the
Participating Parties an amount equal to such Non-Participating Party's share
of the actual costs of drilling and casing such well. The Participating Parties
shall continue to be entitled to recoup the full sum specified in
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Section 12.2.1 applicable to the Non-Consent Well out of the proceeds of
production from the non-consent portion of the well.
12.4 Operations from Non-Consent Platforms. A Party which did not
originally participate in a platform shall be a Non-Participating Party as to
all operations from such platform and shall be subject to the provisions of
Section 12.2. Reversion shall occur only after the original Participating
Parties have recouped the sum set forth in Section 12.2.1 for the platform and
the Non-Consent Operations thereon.
12.5 Discovery or Extension from Mobile Drilling and Operations. If a
Non-Consent Well drilled from a mobile drilling rig or floating drilling vessel
results in the discovery or extension of productive formations and if within
six (6) months from the date the drilling equipment is released, a platform is
ordered and if the platform location is within three thousand (3000) feet from
the vertical projection of the bottom-hole location of any such well, the
recoupment of amounts applicable to such well under Section 12.2.1 shall be out
of all production from such Non-Consent Well and one-half of production from
all other wells on the platform in which the Non-Participating Party in such
Non-Consent Well has a Participating Interest.
12.6 Allocation of Platform Costs to Non-Consent Operations.
Non-Consent operations shall be subject to further conditions as follows:
12.6.1 Charges. If a Non-Consent Well is drilled from a
platform, the Participating Parties in such well
shall pay to the operator for credit to the owners
of such platform a charge for the right to use the
platform and its Facilities as follows:
a) Such Participating Parties shall pay a sum
equal to that portion of the total costs of
the platform, which one platform slot bears
to the total number of slots on the
platform. If the Non-Consent Well is
abandoned, the right of
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Participating Parties to use that platform
slot shall terminate, unless such Parties
commence drilling a substitute well from
the same slot within ninety (90) days after
abandonment.
b) If the Non-Consent Well production is
handled through the Facilities, the
Participating Parties shall pay a sum equal
to that portion of the total cost of such
Facilities which one well bears to the total
number of wells utilizing the Facilities.
12.6.2 Operating and Maintenance Charges. The Participating
Parties shall pay all costs necessary to connect a
Non-Consent Well to the Facilities and that
proportionate part of the expense of operating and
maintaining the platform and Facilities applicable
to the Non-Consent Well. Platform operating and
maintenance expenses shall be allocated equally to
all wells served, and operating and maintenance
expenses for the Facilities shall be allocated
equally to all producing wells.
12.6.3 Payments. Payment of sums pursuant to Section
12.6.1 is not a purchase of an additional interest
in the platform or Facilities. Such payments shall
be included in the total amount which the
Participating Parties are entitled to recoup out of
production from the Non-Consent Well.
12.7 Operations to Maintain Lease. The provisions of this Article 12
shall not be applicable to any operation necessary to maintain the Lease. If it
becomes necessary to conduct an operations to maintain the Lease, any one or
more of the Parties may do so and each Non-Participating Party as to such
operation shall assign to the Participating Parties its interest in the Lease,
but shall not be relieved of any obligation accruing prior to such assignment.
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12.8 Allocation of Costs Between Zones. For the purpose of allocating
costs of any well in which the ownership is not the same for the entire depth
or the completion(s) thereof, the cost of drilling, completing and equipping
said well shall be allocated on the following basis, to-wit:
12.8.1 If the Well is Completed in Only One Zone:
a) Material costs, including wellhead equipment,
casing and tubing strings, etc., from the surface
to a depth 100 feet below the base of the completed
zone shall be charged to the owners or Parties
participating in that zone.
b) Casing strings and material costs other than tubing
from a depth 100 feet below the base of the
completed zone to total depth shall be charged to
the owners or Parties participating in the costs to
total depth.
c) Intangible drilling and completion costs, including
non-controllable materials, from the surface to a
depth 100 feet below the base of the completed
zone shall be charged to the owners or Parties
participating in that zone.
d) Intangible drilling and completion costs, including
non-controllable materials from a depth 100 feet
below the base of the completed zone to a total
depth shall be charged to the owners of Parties
participating in the costs to own total depth.
e) Intangible drilling and completion costs, including
non-controllable materials, shall be allocated
between zones on a drilling day ratio basis, where
the factor for each zone (the completed zone and
zone below the completed zone to total depth) is
determined by a
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fraction of which the numerator is the number of
drilling and completion days applicable to that
zone and the denominator is the total number of
days spent on the well beginning on the date the
rig arrives on location and terminating when the
rig is released.
12.8.2 If the Well is Completed in Dual or Multiple Zones:
a) Material costs, including wellhead equipment and
casing strings, etc. other than tubing from the
surface to a depth 100 feet below the base of the
upper completed zone shall be divided equally
between the completed zones and charged to the
owners thereof or to the Parties participating in
each zone.
b) Casing strings and material costs other than tubing
from a depth 100 feet below the base of the upper
completed zone to a depth 100 feet below the base
of the second completed zone shall be divided
equally between the second and any other zone
completed below such depth and charged to the
owners thereof or to the Parties participating in
each such zone. If the well is completed in triple
or quadruple zones, etc., the costs applicable to
the triple and quad zones shall be determined and
charged to the owners thereof in the same manner as
described for the dual zone.
c) Casing strings and controllable material costs
other than tubing from a depth of 100 feet below
the base of the lower completed zone to total depth
shall be charged to the owners or to the Parties
participating in the costs to total depth.
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d) Tubing strings serving each separate zone shall be
charged to the owners or to the Parties
participating in such zone.
e) Intangible drilling and completion costs including
non-controllable materials from the surface to a
depth 100 feet below the base of the upper
completed zone shall be divided equally between
the completed zones and charged to the owners or to
the Parties participating in each zone.
f) Intangible drilling and completion costs including
non-controllable materials from a depth 100 feet
below the base of the upper completed zone to a
depth of 100 feet below the base of the second
completed zone shall be divided equally between the
second completed zone and any other zones completed
below such depth and charged to the owners or to
the Parties participating in each such zone. If the
well is completed in triple or quadruple zones,
etc., the costs applicable to the triple or quad
zones, etc. shall be determined and charged to the
owners thereof in the like manner as described for
the dual zone.
g) Intangible drilling and completion costs including
non-controllable materials from a depth 100 feet
below the base of the lower completed zone to a
total depth shall be charged to the owners or to
the Parties participating in the costs to total
depth.
h) Intangible drilling and completing costs including
non-controllable materials shall be allocated
between zones including the interval from the lower
completed zone to a total depth, on a drilling day
ratio basis, where the factor
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for each zone is determined by a fraction of which
the numerator is the number of drilling and
completion days applicable to that zone and the
denominator is the total number of days spent on
the well beginning on the date the rig arrives on
location and terminating when the rig is released.
For the purpose of allocating tangible and intangible costs under 12.8.2 above,
between zones that occur at less than 100 foot intervals, the distance from the
base of the upper zone to the top of the next lower zone shall be allocated
equally between zones.
12.8.3 If the Well is a Dry Hole:
a) The costs to drill, plug and abandon a well proposed
for completion in single, dual, or multiple zones
shall be charged to the Parties participating
therein in the same manner as if the well were
completed as a producer in all zones as proposed.
b) Plugging and abandoning of any well following any
deepening operation, completion attempt, or other
operation shall be at the sole risk and expense of
the Parties participating in such operation.
ARTICLE 13
FACILITIES
13.1 Approval. Any Party may propose the installation of Facilities by
notice to the other Parties with information adequate to describe the proposed
Facilities and the estimated costs. The affirmative vote of one or more Parties
having a combined Working Interest of fifty-one percent (51%) or more in the
wells to be served shall constitute approval which shall be binding on all
owners of the wells to be served; however, nothing hereunder shall limit a
Party's rights under Section 22.1.
13.2 Contracts. Operator may enter into contracts with
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independent contractors for the Facilities and, insofar as is reasonable, shall
utilize competitive bidding.
ARTICLE 14
ABANDONMENT AND SALVAGE
14.1 Platform Salvage and Removal Costs. When the Parties owning a
platform mutually agree to dispose of such platform, it shall be disposed of by
the Operator as approved by such Parties. The costs, risks, and net proceeds,
if any, resulting from such disposition shall be shared by such Parties in
proportion to their Participating Interests.
14.2 Abandonment of Producing Well. Any Party may propose the
abandonment of a well by notifying the other Parties. No well shall be abandoned
without the mutual consent of the Participating Parties. The Participating
Parties not consenting to the abandonment shall pay to each Participating Party
desiring to abandon its share of the current value of the well's salvageable
material and equipment as determined pursuant to Exhibit "C", less the estimated
current costs a of salvaging same and of plugging and and abandoning the well as
determined by the Participating Parties.
14.3 Assignment of Interest. Each Participating Party desiring to
abandon a well pursuant to Section 14.2 shall assign effective as of the last
applicable election date, to the nonabandoning Parties, in proportion to their
Participating Interests, its interest in such well and the equipment therein
and its ownership in the production from such well. Any Party so assigning
shall be relieved from any further liability with respect to said well.
14.4 Abandonment Operations Required by Governmental Authority. Any
well abandonment or platform removal required by governmental authority shall be
accomplished by Operator with the costs, risks, and net proceeds, if any, to be
shared by the Parties owning such well or platform in proportion to their
Participating Interests.
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ARTICLE 15
WITHDRAWAL
15.1 Withdrawal. A Party may withdraw from this Agreement as to a
Lease by assigning, to the other Parties who do not desire to withdraw, all its
interest in such Lease and the wells, platforms and Facilities used in
operations on such Lease; provided that such assignment shall not relieve such
Party from any obligation or liability incurred prior to the first day of the
month following receipt of the assignment by assignees. The assignees, in
proportion to the respective interests so acquired, shall pay the assignor for
its interest in the wells, platforms and Facilities, the current salvage value
thereof less its share of the estimated current cost of salvaging same,
plugging and abandoning of wells, and removal of all platforms and Facilities,
as determined by the Parties. In the event such withdrawing Party's interest in
such salvage value is less than such Party's share of the estimated costs, the
withdrawing Party shall pay the Operator, for benefit of the non-withdrawing
Parties, a sum equal to the deficiency. Within sixty (60) days after receiving
notice of the assignment, Operator shall render a final statement to the
withdrawing Party for its share of all expenses incurred through the first day
of the month following the date of receipt of the assignment, plus any
deficiency in salvage value. Providing all such expenses, including any
deficiency hereunder, due from the withdrawing Party have been paid within
thirty (30) days after the rendering of such final payment, the assignment
shall be effective the first day of the month following its receipt, and, the
withdrawing Party shall thereafter be relieved from all further obligations and
liabilities with respect to such Lease.
15.2 Limitations on Withdrawal. No Party shall be relieved of its
obligations hereunder during a blowout, fire, or other emergency, but may
withdraw from this Agreement after termination of such emergency, provided such
Party shall remain liable for its share of all costs arising from said
emergency.
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ARTICLE 16
RENTALS, ROYALTIES AND OTHER PAYMENTS
16.1 Creation of Overriding Royalty. Any Party whose interest in the
Lease is encumbered by an overriding royalty or other burden shall hold all
other Parties free and harmless from such encumbrances.
16.2 Payment of Rentals and Minimum Royalties. Operator shall pay in a
timely manner all rentals, minimum royalties, or similar payments accruing
under the terms of the Lease and submit evidence of each such payment to the
Parties.
16.3 Non-Participation in Payments. Should any Party elect not to pay
its share of any rental, minimum royalty, or similar payment, such Party shall
notify the other Parties at least sixty (60) days prior to the date on which
such payment is due; and, in this event, Operator shall make such payment for
the benefit of all the Participating Parties. In such event the
Non-Participating Party shall, upon the request of the Participating Parties,
assign to them such portions of its interest in the Lease as would be
maintained by such payment. Unless otherwise agreed, such assigned interest
shall be owned by each Participating Party in proportion to its Participating
Interest.
16.4 Royalty Payments. Each Party shall pay or cause to be paid all
royalty and other amounts payable out of its share of production. During any
time in which the Participating Parties in a Non-Consent Operation are entitled
to receive a Non-Participating Party's Share of production, the Participating
Parties shall bear the Lease royalty on such production.
ARTICLE 17
TAXES
17.1 Property Taxes. Operator shall render property covered by this
Agreement as may be subject to ad valorem taxation, and shall pay such property
taxes for the benefit of each Party. Operator shall charge each Party its share
of such tax payments.
17.2 Contest of Property Tax Valuation. Operator shall timely
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and diligently protest to a final determination any valuation it deems
unreasonable. Pending such determination, Operator may elect to pay under
protest. Upon final determination, Operator shall pay the taxes and any
interest, penalty or cost accrued as a result of such protest. In either event,
Operator shall charge each Party its share.
17.3 Production and Severance Taxes. Each Party shall pay, or cause to
be paid, all production and severance taxes due on any production which it
receives pursuant to the terms of this Agreement.
17.4 Other Taxes and Assessments. Operator shall pay other applicable
taxes or assessments and charge each Party its share.
ARTICLE 18
INSURANCE
18.1 Insurance. Operator shall obtain the insurance provided in Exhibit
"B" and charge each Party its proportionate share of the cost of such coverage.
ARTICLE 19
LIABILITY, CLAIMS, AND LAWSUITS
19.1 Individual Obligations. The obligations, duties, and liabilities
of the Parties shall be several and not joint or collective; and nothing
contained herein shall ever be construed as creating a partnership of any
kind, joint venture, association, or other character of business entity
recognizable in law for any purpose. Each Party shall hold all the other
Parties harmless from liens and encumbrances on the Lease arising as a result
of its acts.
19.2 Notice of Claim or Lawsuit. If a claim is made against any Party
or if any Party is sued on account of any matter arising from operations
hereunder, such Party shall give prompt written notice to the other Parties.
19.3 Settlements. Operator may settle any single damage claim or suit
involving operations hereunder if the expenditure does not exceed Fifty
Thousand Dollars ($50,000) and if the payment
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<PAGE> 85
is in complete settlement of such claim or suit. If the amount required for
settlement exceeds such amount, the Parties shall determine the further
handling of the claim or suit.
19.4 Legal Expense. Legal expenses shall be handled pursuant to
Exhibit "C".
19.5 Liability for Losses, Damages, Injury, or Death. Liability for
losses, damages, injury, or death arising from operations under this Agreement
shall be borne by the Parties in proportion to their Participating Interests in
the operations out of which such liability arises, except when such liability
results from the gross negligence or willful misconduct Operator, in which case
Operator shall be liable.
19.6 Indemnification. The Participating Parties agree to hold the
Non-Participating Parties harmless and to indemnify and protect them against
all claims, demands, liabilities, and liens for property damage or personal
injury, including death, caused by or otherwise arising out of Non-Consent
Operations, and any loss and cost suffered by any Non-Participating Party as an
incident thereof.
ARTICLE 20
INTERNAL REVENUE PROVISION
20.1 Internal Revenue Provision. Attached hereto and made a part
hereof is Exhibit "E", entitled "Tax Partnership Provisions", which contains
the agreement of the Parties with regard to Income Tax matters under this
Agreement.
ARTICLE 21
CONTRIBUTIONS
21.1 Notice of Contributions Other Than Advances for Sale of
Production. Each Party shall promptly notify the other Parties of all
contributions which it may obtain, or is attempting to obtain, concerning the
drilling of any well on the Lease. Payments received as consideration for
entering into a contract for sale of production from the Lease, loans, and
other financing arrangements shall not be considered contributions for the
purposes of this Article.
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21.2 Cash Contributions. In the event a Party receives a cash
contribution toward the drilling of a well, said cash contribution shall be
paid to Operator and Operator shall credit the amount thereof to the Parties in
proportion to their Participating Interest. If such well is a Non-Consent Well,
the amount of the contribution shall be deducted from the cost specified in
Section 12.2.1.a.
21.3 Acreage Contributions. In the event a Party receives an acreage
contribution toward the drilling of a well, said acreage contribution shall be
shared by each Participating Party who accepts in proportion to its
Participating Interest in the well.
ARTICLE 22
DISPOSITION OF PRODUCTION
22.1 Facilities to Take in Kind. Any Party shall have the right, at
its sole risk and expense, to construct Facilities for taking its share of
production in kind, provided that such Facilities at the time of installation do
not interfere with continuing operations on the Lease.
22.2 Right to Take in Kind. Each Party shall have the right to take in
kind or separately dispose of its share of the oil and gas produced and saved
from the Lease.
22.3 Failure to Take in Kind. If any Party fails to take in kind or
dispose of its share of the oil and gas, Operator may either (a) purchase oil
at Operator's posted price or, in the absence of a posted price, at the price
prevailing in the area for oil of the same kind, gravity, and quality, or (b)
sell such oil or gas to others at the best price obtainable by Operator,
subject to revocation at will by the non-taking Party. All contracts of sale by
Operator of any Party's share of oil or gas shall be only for such reasonable
periods of time as are consistent with the minimum needs of the industry under
the circumstances, but in no event shall any contract be for a period in excess
of one (1) year. Proceeds of all sales made by Operator pursuant to this
Section shall be paid to the Parties entitled thereto. Unless required by
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governmental authority or judicial process, no Party shall be forced to share
an available market with any non-taking Party.
22.4 Expenses of Delivery in Kind. Any cost incurred by Operator in
making delivery of any Party's share of oil and gas, or disposing of same
pursuant to Section 22.3, shall be borne by such Party.
22.5 Gas Balancing Provisions. Attached hereto is Exhibit "F",
entitled "Gas Balancing Agreement", containing an agreement of the parties
which is incorporated into this Agreement as if copied at length herein.
ARTICLE 23
APPLICABLE LAW
23.1 Applicable Law. This Agreement shall be interpreted according to
the laws of the State of Texas.
ARTICLE 24
LAWS, REGULATIONS, AND NONDISCRIMINATION
24.1 Laws and Regulations. This Agreement and operations hereunder are
subject to all applicable laws, rules, regulations, and orders, and any
provision of this Agreement found to be contrary to or inconsistent with any
such law, rule, regulation, or order shall be deemed modified accordingly.
24.2 Nondiscrimination. In the performance of work under this
Agreement, the Parties agree to comply, and Operator shall require each
independent contractor to comply, with the governmental requirements set forth
in Exhibit "D" and with all of the provisions of Section 202 (1) to (7),
inclusive, of Executive Order No. 11246, as amended.
ARTICLE 25
FORCE MAJEURE
25.1 Force Majeure. All obligations imposed by this Agreement on each
Party, except for the payment of money, shall be suspended while compliance is
prevented, in whole or in part, by a labor dispute, fire, flood, war, civil
disturbance, or act of God; by laws; by governmental rules, regulations, action
or inaction, or
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orders; by inability to secure materials; or by any other cause, whether
similar or dissimilar, beyond the reasonable control of the said Party;
provided, however, that performance shall be resumed within a reasonable time
after such cause has been removed; and provided further that no Party shall be
required against its will to settle any labor dispute.
25.2 Notice. Whenever a Party's obligations are suspended under
Section 25.1, such Party shall immediately notify the other Parties and give
full particulars of the reason for such suspension.
ARTICLE 26
SUCCESSORS AND ASSIGNS
26.1 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Parties and their respective heirs, successors,
representatives and assigns and shall constitute a covenant running with the
Lease. Each Party shall incorporate in any assignment of an interest in the
Lease a provision that such assignment is subject to this Agreement.
26.2 Assignments. Any assignment, vesting or relinquishment of
interest between the Parties shall be without warranty of title.
ARTICLE 27
TERM
27.1 Term. This Agreement shall remain in effect so long as the Lease
shall remain in effect; however, all property belonging to the Parties shall be
disposed of and final settlement shall be made under this Agreement.
ARTICLE 28
COUNTERPART EXECUTION
28.1 Counterpart Execution. This Agreement may be executed by signing
the original or a counterpart thereof. If this Agreement is executed in
counterparts, all counterparts taken together shall have the same effect as if
all the Parties had signed the same instrument.
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IN WITNESS WHEREOF, this instrument is executed this _____________ day of
___________, 1999, to be effective as of the date first stated above.
OPERATOR:
THE HOUSTON EXPLORATION COMPANY
By
------------------------------------------
Sammye L. Dees
Vice President-Land
NON-OPERATOR:
By
------------------------------------------
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[COPAS LETTERHEAD]
EXHIBIT " C "
Attached to and made a part of
ACCOUNTING PROCEDURE
OFFSHORE JOINT OPERATIONS
I. GENERAL PROVISIONS
1. DEFINITIONS
"Joint Property" shall mean the real and personal property subject to the
Agreement to which this Accounting Procedure is attached.
"Joint Operations" shall mean all operations necessary or proper for the
development, operation, protection and maintenance of the Joint Property.
"Joint Account" shall mean the account showing the charges paid and credits
received in the conduct of the Joint Operations and which are to be shared by
the Parties.
"Operator" shall mean the party designated to conduct the Joint Operations.
"Non-Operators" shall mean the Parties of this Agreement other than the
Operator.
"Parties" shall mean Operator and Non-Operators.
"First Level Supervisors" shall mean those employees whose primary function
in Joint Operations is the direct supervision of other employees and/or
contract labor directly employed on the Joint Property in a field operating
capacity.
"Technical Employees" shall mean those employees having special and specific
engineering, geological or other professional skills, and whose primary
function in Joint Operations is the handling of specific operating conditions
and problems for the benefit of the Joint Property.
"Personal Expenses" shall mean travel and other reasonable reimbursable
expenses of Operator's employees.
"Material" shall mean personal property, equipment or supplies acquired or
held for use on the Joint Property.
"Controllable Material" shall mean Material which at the time is so
classified in the Material Classification Manual as most recently recommended
by the Council of Petroleum Accountants Societies of North America.
"Shore Base Facilities" shall mean onshore support facilities that during
drilling, development, maintenance and producing operations provide such
services to the Joint Property as receiving and transshipment point for
supplies, materials and equipment; debarkation point for drilling and
production personnel and services; communication, scheduling and dispatching
center; other associated functions benefiting the Joint Property.
"Offshore Facilities" shall mean platforms and support systems such as oil
and gas handling facilities, living quarters, offices, shops, cranes,
electrical supply equipment and systems, fuel and water storage and piping,
heliport, marine docking installations, communication facilities, navigation
aids, and other similar facilities necessary in the conduct of offshore
operations.
2. STATEMENTS AND BILLINGS
Operator shall bill Non-Operators on or before the last day of each month
for their proportionate share of the Joint Account for the preceding month.
Such bills will be accompanied by statements which identify the authority
for expenditure, lease or facility, and all charges and credits, summarized
by appropriate classifications of investment and expense, except that items
of Controllable Material and unusual charges and credits shall be separately
identified and fully described in detail.
3. ADVANCES AND PAYMENTS BY NON-OPERATORS
A. Unless otherwise provided for in the Agreement, the Operator may require
the Non-Operators to advance their share of estimated cash outlay for the
succeeding month's operation within fifteen (15) days after receipt of the
billing or by the first day of the month for which the advance is
required, whichever is later. Operator shall adjust each monthly billing
to reflect advances received from the Non-Operators.
B. Each Non-Operator shall pay its proportion of all other bills within
thirty (30) days after receipt.
C. Subject to Paragraph 3A and 3B of this Section I, if payment is not made
as required, the unpaid balance shall bear interest monthly at the rate of
one percent (1%) per annum over prime of State Street Bank, Boston, Mass.
or the maximum contract rate permitted by the applicable usury laws of the
jurisdiction in which the Joint Property is located, whichever is the
lesser, plus attorney's fees, court costs, and other costs in connection
with the collection of unpaid amounts.
4. ADJUSTMENTS
Payment of any such bills shall not prejudice the right of any Non-Operator
to protest or question the correctness thereof; provided, however, all bills
and statements rendered to Non-Operators by Operator during any calendar
year shall conclusively be presumed to be true and correct after twenty-four
(24) months following the end of any such calendar year, unless within the
said twenty-four (24) month period a Non-Operator takes written exception
thereto and makes claim on Operator for adjustment. No adjustment favorable
to Operator shall be made unless it is made within the same prescribed
period. The provisions of this paragraph shall not prevent adjustments
resulting from a physical inventory of Controllable Material as provided for
in Section V.
5. AUDITS
Non-Operator, upon notice in writing to Operator and all other
Non-Operators, shall have the right to audit Operator's accounts and records
relating to the Joint Account for any calendar year within the twenty-four
(24) month period following the end of such calendar year; provided,
however, the making of an audit shall not extend the time for the taking of
written exception to and the adjustments of accounts as provided for in
Paragraph 4 of this Section I. Where there are two or more Non-Operators,
the Non-Operators shall make every reasonable effort to conduct joint or
simultaneous audits in a manner which will result in a minimum of
inconvenience to the Operator. Operator shall bear no portion of the
Non-Operators' audit cost incurred under this paragraph unless agreed to by
the Operator.
6. APPROVAL BY NON-OPERATORS
Where an approval or other agreement of the Parties or Non-Operators is
expressly required under other sections of this Accounting Procedure and if
the agreement to which this Accounting Procedure is attached contains no
contrary provisions in regard thereto, Operator shall notify all
Non-Operators of the Operator's proposal, and the agreement or approval of a
majority in interest of the Non-Operators shall be controlling on all
Non-Operators.
<PAGE> 91
COPAS
II. DIRECT CHARGES
Operator shall charge the Joint Account with the following items:
1. RENTALS AND ROYALTIES
Lease rentals and royalties paid by Operator for the Joint Operations.
2. LABOR
A. (1) Salaries and wages of Operator's field employees directly employed
on the Joint Property in the conduct of Joint Operations.
(2) Salaries and wages of Operator's employees directly employed on
Shore Based Facilities or other Offshore Facilities serving the
Joint Property if such costs are not charged under Paragraph 7 of
this Section II.
(3) Salaries of First Level Supervisors in the field.
(4) Salaries and wages of Technical Employees directly employed on the
Joint Property if such charges are excluded from the Overhead rates.
B. Operator's cost of holiday, vacation, sickness and disability benefits
and other customary allowances paid to employees whose salaries and
wages are chargeable to the Joint Account under Paragraph 2A of this
Section II. Such costs under this Paragraph 2B may be charged on a "when
and as paid basis" or by "percentage assessment" on the amount of
salaries and wages chargeable to the Joint Account under Paragraph 2A of
this Section II. If percentage assessment is used, the rate shall be
based on the Operator's cost experience.
C. Expenditures or contributions made pursuant to assessments imposed by
governmental authority which are applicable to Operator's costs
chargeable to the Joint Account under Paragraphs 2A and 2B of this
Section II.
D. Personal Expenses of those employees whose salaries and wages are
chargeable to the Joint Account under Paragraph 2A of this Section II.
3. EMPLOYEE BENEFITS
Operator's current costs of established plans for employees' group life
insurance, hospitalization, pension, retirement, stock purchase, thrift,
bonus, and other benefit plans of a like nature, applicable to Operator's
labor cost chargeable to the Joint Account under Paragraphs 2A and 2B of
this Section II shall be Operator's actual cost not to exceed twenty
percent (20%) or percent most recently recommended by the Council of
Petroleum Accountants Societies of North America.
4. MATERIAL
Material purchased or furnished by Operator for use on the Joint Property
as provided under Section IV. Only such Material shall be purchased for or
transferred to the Joint Property as may be required for immediate use and
is reasonably practical and consistent with efficient and economical
operations. The accumulation of surplus stocks shall be avoided.
5. TRANSPORTATION
Transportation of employees and Material necessary for the Joint Operations
but subject to the following limitations:
A. If Material is moved to the Joint Property from the Operator's warehouse
or other properties, no charge shall be made to the Joint Account for a
distance greater than the distance from the nearest reliable supply
store, recognized barge terminal, or railway receiving point where like
material is normally available, unless agreed to by the Parties.
B. If surplus Material is moved to Operator's warehouse or other storage
point, no charge shall be made to the Joint Account for a distance
greater than the distance to the nearest reliable supply store,
recognized barge terminal, or railway receiving point unless agreed to
by the Parties. No charge shall be made to the Joint Account for moving
Material to other properties belonging to Operator, unless agreed to by
the Parties.
C. In the application of Subparagraphs A and B above, there shall be no
equalization of actual gross trucking cost of $200 or less excluding
accessorial charges.
6. SERVICES
The cost of contract services, equipment and utilities provided by outside
sources, except services excluded by Paragraph 9 of Section II and
Paragraph I of Section III. The cost of professional consultant services
and contract services of technical personnel directly engaged on the Joint
Property if such charges are excluded from the Overhead rates. The cost of
professional consultant services or contract services of technical
personnel not directly engaged on the Joint Property shall not be charged
to the Joint Account unless previously agreed to by the Parties.
7. EQUIPMENT AND FACILITIES FURNISHED BY OPERATOR
A. Operator shall charge the Joint Account for use of Operator-owned
equipment and facilities, including Shore Base and/or Offshore
Facilities, at rates commensurate with costs of ownership and operation.
Such rates may include labor, maintenance, repairs, other operating
expense, insurance, taxes, depreciation and interest on depreciated
investment not to exceed eight percent (8%) per annum. In addition, for
platforms only, the rate may include an element of the estimated cost of
platform dismantlement. Such rates shall not exceed average commercial
rates currently prevailing in the immediate area of the Joint Property.
B. In lieu of charges in Paragraph 7A above, Operator may elect to use
average commercial rates prevailing in the immediate area of the Joint
Property less twenty percent (20%). For automotive equipment, Operator
may elect to use rates published by the Petroleum Motor Transport
Association.
8. DAMAGES AND LOSSES TO JOINT PROPERTY
All costs or expenses necessary for the repair or replacement of Joint
Property made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident, or other causes, except those resulting from
Operator's gross negligence or willful misconduct. Operator shall furnish
Non-Operator written notice of damages or losses incurred as soon as
practicable after a report thereof has been received by Operator.
9. LEGAL EXPENSE
Expense of handling, investigating and settling litigation or claims,
discharging of liens, payments of judgements and amounts paid for
settlement of claims incurred in or resulting from operations under the
Agreement or necessary to protect or recover the Joint Property, except
that no charge for services of Operator's legal staff or fees or expense of
outside attorneys shall be made unless previously agreed to by the Parties.
All other legal expense is considered to be covered by the overhead
provisions of Section III unless otherwise agreed to by the Parties, except
as provided in Section I, Paragraph 3.
10. TAXES
All taxes of every kind and nature assessed or levied upon or in connection
with the Joint Property, the
<PAGE> 92
[COPAS LOGO]
operation thereof, or the production therefrom, and which taxes have been
paid by the Operator for the benefit of the Parties.
11. INSURANCE
Net premiums paid for insurance required to be carried for the Joint
Operations for the protection of the Parties. In the event Joint Operations
are conducted at offshore locations in which Operator may act as
self-insurer for Workmen's Compensation and Employer's Liability, Operator
may include the risk under its self-insurance program in providing coverage
under State and Federal laws and charge the Joint Account at Operator's
cost not to exceed manual rates.
12. COMMUNICATIONS
Costs of acquiring, leasing, installing, operating, repairing and
maintaining communication systems including radio and microwave facilities
between the Joint Property and the Operator's nearest Shore Base Facility.
In the event communication facilities/systems serving the Joint Property
are Operator-owned, charges to the Joint Account shall be made as provided
in Paragraph 7 of Section II.
13. ECOLOGICAL AND ENVIRONMENTAL
Costs incurred on the Joint Property as a result of statutory regulations
for archaeological and geophysical surveys relative to identification and
protection of cultural resources and/or other environmental or ecological
surveys as may be required by the Bureau of Land Management or other
regulatory authority. Also, costs to provide or have available pollution
containment and removal equipment plus costs of actual control and cleanup
and resulting responsibilities of oil spills as required by applicable laws
and regulations.
14. OTHER EXPENDITURES
Any other expenditure not covered or dealt with in the foregoing provisions
of this Section II, or in Section III, and which is incurred by the
Operator in the necessary and proper conduct of the Joint Operations.
III. OVERHEAD
1. OVERHEAD - DRILLING AND PRODUCING OPERATIONS
i. As compensation for administrative, supervision, office services and
warehousing costs, Operator shall charge drilling and producing
operations on either:
[X] Fixed Rate Basis, Paragraph 1A, or
[ ] Percentage Basis, Paragraph 1B
Unless otherwise agreed to by the Parties, such charge shall be in lieu
of costs and expenses of all offices and salaries or wages plus
applicable burdens and expenses of all personnel, except those directly
chargeable under Section II. The cost and expense of services from
outside sources in connection with matters of taxation, traffic,
accounting or matters before or involving governmental agencies shall be
considered as included in the Overhead rates provided for in the
above-selected Paragraph of this Section III unless such cost and
expense are agreed to by the Parties as a direct charge to the Joint
Account.
ii. The salaries, wages and Personal Expenses of Technical Employees and/or
the cost of professional consultant services and contract services of
technical personnel directly employed on the Joint Property:
[ ] shall be covered by the Overhead rates
[X] shall not be covered by the Overhead rates.
A. Overhead - Fixed Rate Basis
(1) Operator shall charge the Joint Account at the following rates per
well per month:
Drilling Well Rate $25,500
Producing Well Rate $2,550
(2) Application of Overhead - Fixed Rate Basis for Drilling Well Rate
shall be as follows:
(a) Charges for drilling wells shall begin on the date when drilling
or completion equipment arrives on location and terminate on the
date the drilling or completion equipment moves off location or
rig is released, whichever occurs first, except that no charge
shall be made during suspension of drilling operations for
fifteen (15) or more consecutive days.
(b) Charges for wells undergoing any type of workover or
recompletion for a period of five (5) consecutive days or more
shall be made at the drilling well rate. Such charges shall be
applied for the period from date workover operations with rig or
wireline unit commence through date of rig or wireline unit
release except that no charge shall be made during suspension
of operations for fifteen (15) or more consecutive days.
(3) Application of Overhead - Fixed Rate Basis for Producing Well Rate
shall be as follows:
(a) An active well either produced or injected into for any portion
of the month shall be considered as a one-well charge for the
entire month.
(b) Each active completion in a multi-completed well in which
production is not commingled down hole shall be considered as a
one-well charge providing each completion is considered a
separate well by the governing regulatory authority.
(c) An inactive gas well shut in because of overproduction or
failure of purchaser to take the production shall be considered
as a one-well charge providing the gas well is directly
connected to a permanent sales outlet.
(d) A one-well charge may be made for the month in which plugging
and abandonment operations are completed on any well.
(e) All other inactive wells (including but not limited to inactive
wells covered by unit allowable, lease allowable, transferred
allowable, etc.) shall not qualify for an overhead charge.
(4) The well rates shall be adjusted as of the first day of April each
year following the effective date of the agreement to which this
Accounting Procedure is attached. The adjustment shall be computed
by multiplying the rate currently in use by the percentage increase
or decrease in the average weekly earnings of Crude Petroleum and
Gas Production Workers for the last calendar year compared to the
calendar year preceding as shown by the index of average weekly
earnings of Crude Petroleum and Gas Fields Production Workers as
published by the United States Department of Labor, Bureau of Labor
Statistics, or the equivalent Canadian index as published by
Statistics Canada, as applicable. The adjusted rates shall be the
rates currently in use, plus or minus the computed adjustment.
B. Overhead - Percentage Basis
(1) Operator shall charge the Joint Account at the following rates:
<PAGE> 93
(a) Development
______ Percent ( %) of cost of Development of the Joint Property
exclusive of costs provided under Paragraph 9 of Section II and all
salvage credits.
(b) Operating
______ Percent ( %) of the cost of Operating the Joint Property
exclusive of costs provided under Paragraphs 1 and 9 of Section II,
all salvage credits, the value of injected substances purchased
for secondary recovery and all taxes and assessments which are
levied, assessed and paid upon the mineral interest in and to the
Joint Property.
(2) Application of Overhead - Percentage Basis shall be as follows:
For the purpose of determining charges on a percentage basis under
Paragraph 1B of this Section III, development shall include all costs
in connection with drilling, redrilling, deepening or any remedial
operations on any or all wells involving the use of drilling crew and
equipment; also, preliminary expenditures necessary in preparation for
drilling and expenditures incurred in abandoning when the well is not
completed as a producer, and original cost of construction or
installation of fixed assets, the expansion of fixed assets and any
other project clearly discernible as a fixed asset, except Major
Construction as defined in Paragraph 2 of this Section III. All other
costs shall be considered as Operating except that catastrophe costs
shall be assessed overhead as provided in Section III, Paragraph 3.
2. OVERHEAD - MAJOR CONSTRUCTION
To compensate operator for overhead costs incurred in the construction and
installation of fixed assets, the expansion of fixed assets, and any other
project clearly discernible as a fixed asset required for the development
and operation of the Joint Property, or in the dismantling for abandonment
of platforms and related production facilities, Operator shall either
negotiate a rate prior to the beginning of construction, or shall charge the
Joint Account for Overhead based on the following rates for any Major
Construction project in excess of $25,000.
A. If the Operator absorbs the engineering, design and drafting costs
related to the project:
(1) 5% of total costs if such costs are more than $25,000 but less than
$100,000; plus
(2) 3% of total costs in excess of $100,000 but less than $1,000,000; plus
(3) 2% of total costs in excess of $1,000,000.
B. If the Operator charges contract engineering, design and drafting costs
related to the project directly to the Joint Account:
(1) 3% of total costs if such costs are more than $25,000, but less than
$100,000; plus
(2) 2% of total costs in excess of $100,000, but less than $1,000,000;
plus
(3) 1% of total costs in excess of $1,000,000.
Total cost shall mean the gross cost of any one project. For the purpose
of this paragraph, the component parts of a single project shall not be
treated separately and the cost of drilling and workover wells shall be
excluded.
On each project, Operator shall advise Non-Operator(s) in advance which
of the above options shall apply.
In the event of any conflict between the provisions of this paragraph and
those provisions under Section II, Paragraph 2 or Paragraph 6, the
provisions of this paragraph shall govern.
3. OVERHEAD - CATASTROPHE
To compensate Operator for overhead costs incurred in the event of
expenditures resulting from a single occurrence due to oil spill, blowout,
explosion, fire, storm, hurricane, or other catastrophies as agreed to by
the Parties, which are necessary to restore the Joint Property to the
equivalent condition that existed prior to the event causing the
expenditures, Operator shall either negotiate a rate prior to charging the
Joint Account or shall charge the Joint Account for overhead based on the
following rates:
(1) 5% of total costs through $100,000; plus
(2) 3% of total costs in excess of $100,000, but less than $1,000,000; plus
(3) 2% of total costs in excess of $1,000,000.
Expenditures subject to the overheads above will not be reduced by insurance
recoveries, and no other overhead provisions of this Section III shall apply.
4. AMENDMENT OF RATES
The Overhead rates provided for in this Section III may be amended from time
to time only by mutual agreement between the Parties hereto if, in practice,
the rates are found to be insufficient or excessive.
IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS
Operator is responsible for Joint Account Material and shall make proper and
timely charges and credits for all material movements affecting the Joint
Property. Operator shall provide all Material for use on the Joint Property;
however, at Operator's option, such Material may be supplied by the
Non-Operator. Operator shall make timely disposition of idle and/or surplus
Material, such disposal being made either through sale to Operator or
Non-Operator, division in kind, or sale to outsiders. Operator may purchase, but
shall be under no obligation to purchase, interest of Non-Operators in surplus
condition A or B Material. The disposal of surplus Controllable Material not
purchased by the Operator shall be agreed to by the Parties.
1. PURCHASES
Material purchased shall be charged at the price paid by Operator after
deduction of all discounts received. In case of Material found to be
defective or returned to vendor for any other reason, credit shall be passed
to the Joint Account when adjustment has been received by the Operator.
2. TRANSFERS AND DISPOSITIONS
Material furnished to the Joint Property and Material transferred from the
Joint Property or disposed of by the Operator, unless otherwise agreed to by
the Parties, shall be priced on the following basis exclusive of cash
discounts:
A. New Material (Condition A)
(1) Tubular goods, except line pipe, shall be priced at the current new
price in effect on date of movement on a maximum carload or barge
load weight basis, regardless of quantity transferred, equalized to
the lowest published price f.o.b. railway receiving point or
recognized barge terminal nearest the Joint Property where such
Material is normally available.
<PAGE> 94
[COPAS LETTERHEAD]
(2) Line Pipe
(a) Movement of less than 30,000 pounds shall be priced at the current
new price, in effect at date of movement, as listed by a reliable
supply store nearest the Joint Property where such Material is
normally available.
(b) Movement of 30,000 pounds or more shall be priced under provisions
of tubular goods pricing in Paragraph 2A (1) of this Section IV.
(3) Other Material shall be priced at the current new price, in effect at
a date of movement, as listed by a reliable supply store or f.o.b.
railway receiving point nearest the Joint Property where such Material
is normally available.
B. Good Used Material (Condition B)
Material in sound and serviceable condition and suitable for reuse without
reconditioning:
(1) Material moved to the Joint Property
(a) At seventy-five percent (75%) of current new price, as determined
by Paragraph 2A of this Section IV.
(2) Material moved from the Joint Property
(a) At seventy-five percent (75%) of current new price, as determined
by Paragraph 2A of this Section IV, if Material was originally
charged to the Joint Account as new Material, or
(b) At sixty-five percent (65%) of current new price, as determined by
Paragraph 2A of this Section IV, if Material was originally
charged to the Joint Account as good used Material at seventy-five
percent (75%) of current new price.
The cost of reconditioning, if any, shall be absorbed by the transferring
property.
C. Other Used Material (Condition C and D)
(1) Condition C
Material which is not in sound and serviceable condition and not
suitable for its original function until after reconditioning shall be
priced at fifty percent (50%) of current new price as determined by
Paragraph 2A of this Section IV. The cost of reconditioning shall be
charged to the receiving property, provided Condition C value plus
cost of reconditioning does not exceed Condition B value.
(2) Condition D
All other Material, including junk, shall be priced at a value
commensurate with its use or at prevailing prices. Material no longer
suitable for its original purpose but usable for some other purpose,
shall be priced on a basis comparable with that of items normally used
for such other purpose. Operator may dispose of Condition D Material
under procedures normally utilized by the Operator without prior
approval of Non-Operators.
D. Obsolete Material
Material which is serviceable and usable for its original function but
condition and/or value of such Material is not equivalent to that which
would justify a price as provided above may be specially priced as agreed
to by the Parties. Such price should result in the Joint Account being
charged with the value of the service rendered by such Material.
E. Pricing Conditions
(1) Loading and unloading costs may be charged to the Joint Account at the
rate of fifteen cents ($0.15) per hundred weight on all tubular goods
movements, in lieu of loading and unloading costs sustained, when
actual hauling cost of such tubular goods are equalized under
provisions of Paragraph 5 of Section II.
(2) Material involving erection costs shall be charged at applicable
percentage of the current knocked-down price of new Material.
3. PREMIUM PRICES
Whenever Material is not readily obtainable at published or listed prices
because of national emergencies, strikes or other unusual causes over which
the Operator has no control, the Operator may charge the Joint Account for
the required Material at the Operator's actual cost incurred in providing
such Material, in making it suitable for use, and in moving it to the Joint
Property; provided notice in writing is furnished to Non-Operators of the
proposed charge prior to billing Non-Operators for such Material. Each
Non-Operator shall have the right, by so electing and notifying Operator
within ten days after receiving notice from Operator, to furnish in kind all
or part of his share of such Material suitable for use and acceptable to
Operator.
4. WARRANTY OF MATERIAL FURNISHED BY OPERATOR
Operator does not warrant the Material furnished. In case of defective
Material, credit shall not be passed to the Joint Account until adjustment
has been received by Operator from the manufacturers or their agents.
V. INVENTORIES
The Operator shall maintain detailed records of Controllable Material.
1. PERIODIC INVENTORIES, NOTICE AND REPRESENTATION
At reasonable intervals, Inventories shall be taken by Operator of the Joint
Account Controllable Material. Written notice of intention to take inventory
shall be given by Operator at least thirty (30) days before any inventory is
to begin so that Non-Operators may be represented when any inventory is
taken. Failure of Non-Operators to be represented at an inventory shall bind
Non-Operators to accept the inventory taken by Operator.
2. RECONCILIATION AND ADJUSTMENT OF INVENTORIES
Reconciliation of a physical inventory with the Joint Account shall be made,
and a list of overages and shortages shall be furnished to the Non-Operators
within six months following the taking of the inventory. Inventory
adjustments shall be made by Operator with the Joint Account for overages
and shortages, but Operator shall be held accountable only for shortages due
to lack of reasonable diligence.
3. SPECIAL INVENTORIES
Special Inventories may be taken whenever there is any sale or change of
interest in the Joint Property. It shall be the duty of the Party selling to
notify all other Parties as quickly as possible after the transfer of
interest takes place. In such cases, both the seller and the purchaser shall
be governed by such inventory.
4. EXPENSE OF CONDUCTING PERIODIC INVENTORIES
The expense of conducting periodic Inventories shall not be charged to the
Joint Account unless agreed to by the Parties.
<PAGE> 95
EXHIBIT "D"
ATTACHED TO AND MADE A PART OF OFFSHORE OPERATING AGREEMENT DATED EFFECTIVE
_______________, 1999, BETWEEN THE HOUSTON EXPLORATION COMPANY, OPERATOR, AND
____________________, NON-OPERATOR, COVERING ALL OF BLOCK _______, ___________
AREA, _______ ADDITION, FEDERAL OFFSHORE _____________.
I. Compliance with Applicable Laws, Etc.
A. Compliance Generally. This contract shall be performed by operator in
compliance with all applicable laws, proclamations, orders, rules and
regulations, including without limitation, Executive Order 11246 signed
by the President of the United States of America on September 24, 1965,
as amended, and the rules, regulations and orders issued thereunder.
B. Executive Order 11246. During the performance of this agreement and to
the extent required by Executive Order 11246 or any contract between
Operator and any government contracting agency, Operator agrees to
comply with the Equal Opportunity clause set forth in Section 60-1.4 of
Title 41 of Code of Federal Regulations issued pursuant to Executive
Order 11246, such regulations are incorporated herein by reference (as
permitted by Section 60-1.4(d) of said Regulations), as if set out in
full at this point, and the term "Contractor" as used therein shall be
deemed to be references to Operator.
C. Certification of Nonsegregated Facilities. Operator certifies that it
does not and will not maintain or provide for its employees any
segregated facilities at any of its establishments and that it does not
and will not permit its employees to perform their services at any
location, under its control, where segregated facilities are maintained.
Operator agrees that a breach of this certification is a violation of
the Equal Opportunity clause required by Executive Order 11246 of
September 24, 1965.
As used in this certification, the term "segregated facilities" includes
facilities which are segregated by explicit directive or are in fact
segregated on the basis of race, creed, color or national origin,
because of habit, local custom or otherwise.
Operator further agrees and understands that a breach of the assurances
contained herein subjects it to the provisions of the Order of the
Secretary of Labor at 41 CFR 60, dated May 28, 1968, and the provisions
of the Equal Opportunity clause enumerated in applicable contracts.
Operator further agrees that (except where it has obtained identical
certifications from proposed subcontractors for specific time periods)
it will obtain identical certifications from proposed subcontractors
prior to the award of subcontracts exceeding $10,000 which are not
exempt from the provisions of the Equal Opportunity clause; that it will
retain such certifications in its file; and that it will forward the
following notice to such proposed subcontractors (except where the
proposed subcontractors have submitted identical certifications for
specific time periods).
<PAGE> 96
NOTICE TO PROSPECTIVE SUBCONTRACTORS
OF REQUIREMENT FOR CERTIFICATIONS
OF NONSEGREGATED FACILITIES
A certification of Nonsegregated Facilities, as required by the May 9,
1967 order of Elimination of Segregated Facilities, by the Secretary of
Labor (32 Fed. Reg. 7439, May 19, 1967), must be submitted prior to the
award of a subcontract exceeding $10,000 which is not exempt from the
provisions of the Equal Opportunity clause. The certification may be
submitted either for each subcontract or for all subcontracts during a
period (i.e., quarterly, semiannually or annually).
(Note: Whoever knowingly and willfully makes any false, fictitious or
fraudulent representation may be liable to criminal prosecution
under 18 U.S.C. 1001.)
II. Affirmative Action for Disabled Veterans and Veterans of the Vietnam Era
(41 CFR 60-250): (Applicable only to contracts for $10,000 or more.)
The Affirmative Action Clause prescribed in Section 60-250.4 of Title 41
of the Code of Federal Regulations is incorporated herein by reference
(as permitted by Section 60-250.22 of said Regulations) as if set out in
full at this point. If the Operator (a) has 50 or more employees and (b)
this contract is for $50,000 or more, then within 120 days from the
effectiveness of this contract, Operator shall prepare and maintain an
affirmative action program at each establishment which shall set forth
the Operator's policies, practices and procedures in accordance with
Section 60-250.6 of said Regulations.
III. Affirmative Action for Handicapped Workers (41 CFR 60-741.4):
(Applicable only to contracts for $2,500 or more.)
The Affirmative Action Clause prescribed in Section 60-741.4 of Title 41
of the Code of Federal Regulations is incorporated herein by reference
(as permitted by Section 60-741.22 of said Regulations) as if set out in
full at this point. If Operator (a) has 50 or more employees and (b)
this contract is for $50,000 or more, then, within 120 days of the
effectiveness of this contract, Operator shall prepare and maintain an
affirmative action program at each establishment, which program shall
set forth Operator's policies, practices and procedures in accordance
with Section 60-741.6 of said Regulations.
IV. Minority Business Enterprises (Federal Procurement Regulations 1-1.13):
A. Utilization of Minority Business Enterprises: (Applicable only to
contracts which may exceed $10,000.)
1. It is the policy of the Government that minority business
enterprises shall have the maximum practicable opportunity to
participate in the performance of Government contracts.
2. Operator agrees to use its best effort to carry out this policy in
the award of its subcontracts to the fullest extent consistent
with the efficient performance of this contract. As used in this
contract, the term "minority business enterprise" means a
business, at least 50 percent of which is owned by minority group
members or, in case of publicly owned businesses, at least 51
percent of the stock of which is owned by minority group
2
<PAGE> 97
members. For the purposes of this definition, minority group
members are Negroes, Spanish-speaking American persons,
American-Orientals, American-Indians, American-Eskimos, and
American Aleuts. Operator may rely on written representations by
subcontractors regarding their status as minority business
enterprises in lieu of an independent investigation.
B. Minority Business Enterprises Subcontracting Program: (Applicable
only to contracts which may exceed $500,000 and which offer
substantial subcontracting possibilities.)
1. Operator agrees to establish and conduct a program which will
enable minority business enterprises (as defined in the clause
entitled "Utilization of Minority Business Enterprises") to be
considered fairly as subcontractors and suppliers under this
contract. In this connection, Operator shall:
a. Designate a liaison officer who will administer Operator's
minority business enterprises program.
b. Provide adequate and timely consideration of the potentialities
of known minority business enterprises in all "make-or-buy"
decisions.
c. Assure that known minority business enterprises will have an
equitable opportunity to compete for subcontracts, particularly
by arranging solicitations, time for the preparation of bids,
quantities, specifications, and delivery schedules so as to
facilitate the participation of minority business enterprises.
d. Maintain records showing (1) procedures which have been adopted
to comply with the policies set forth in this clause, including
the establishment of a source list of minority business
enterprises, (ii) awards to minority business enterprises on
the source list, and (iii) specific efforts to identify and
award contracts to minority business enterprises.
e. Include the Utilization of Minority Business Enterprises clause
in subcontracts which offer substantial minority business
enterprises subcontracting opportunities.
f. Cooperate with the Contracting Officer in any studies and
surveys of Operator's minority business enterprises procedures
and practices that the Contracting Officer may from time to
time conduct.
g. Submit periodic reports of subcontracting to known minority
business enterprises with respect to the records referred to in
subparagraph (d) above, in such form and manner and at such
time (not more often than quarterly) as the Contracting Officer
may prescribe.
2. Operator further agrees to insert, in any subcontract hereunder
which may exceed $500,000, provisions which shall conform
substantially to the language of this clause, including this
paragraph (2), and to notify the Contracting Officer of the names
of such subcontractors.
3
<PAGE> 98
EXHIBIT "E"
TAX PARTNERSHIP PROVISIONS
<PAGE> 99
EXHIBIT "F"
GAS BALANCING AGREEMENT ("AGREEMENT")
ATTACHED TO AND MADE A PART Of THE OFFSHORE OPERATING AGREEMENT
DATED __________________, 1999, BY AND BETWEEN
THE HOUSTON EXPLORATION COMPANY
AND
________________________________
("THE OPERATING AGREEMENT") COVERING
_____________________________________
FEDERAL OFFSHORE TEXAS/LOUISIANA
1. DEFINITIONS
The following definitions shall apply to this Agreement:
1.01 "Arms Length Agreement" shall mean any gas sales agreement with an
unaffiliated purchaser or any gas sales agreement with an affiliated purchaser
where the sales price and delivery conditions under such agreement are
representative of prices and delivery conditions existing under other similar
agreements in the area between unaffiliated parties at the same time for
natural gas of comparable quality and quantity.
1.02 "Balancing Area" shall mean each well subject to the Operating Agreement
that produces Gas or is allocated a share of Gas production. If a single well is
completed in two or more producing intervals, each producing interval from which
Gas is not commingled in the wellbore shall be considered a separate well.
1.03 "Full Share of Current Production" shall mean the Percentage Interest of
each Party in the Gas actually produced from the Balancing Area during each
month.
1.04 "Gas" shall mean all hydrocarbons produced or producible from the Balancing
Area, whether from a well classified as an oil well or gas well by the
regulatory agency having jurisdiction in such matters, which are or may be made
available for sale or separate disposition by the Parties, excluding oil,
condensate and other liquids recovered by field equipment operated for the joint
account. "Gas" does not include gas used in joint operations, such as for fuel,
recycling or reinjection, or which is vented or lost prior to its sale or
delivery from the Balancing Area.
1.05 "Makeup Gas" shall mean any Gas taken by an Underproduced Party from the
Balancing Area in excess of its Full Share of Current Production, whether
pursuant to Section 3.3 or Section 4.1 hereof.
1.06 "Mcf" shall mean one thousand cubic feet. A cubic foot of Gas shall mean
the volume of gas contained in one cubic foot of space at a standard pressure
base and at a standard temperature base.
1.07 "MMBtu" shall mean one million British Thermal Units. A British Thermal
Unit shall mean the quantity of heat required to raise one pound avoirdupois of
pure water from 58.5 degrees Fahrenheit to 59.5 degrees Fahrenheit at a
constant pressure of 14.73 pounds per square inch absolute.
1.08 "Operator" shall mean the individual or entity designated under the
terms of the Operating Agreement or, in the event this Agreement is not
employed in connection with an operating agreement, the individual or entity
designated as operator of the well(s) located in the Balancing Area.
1.09 "Overproduced Party" shall mean any Party having taken a greater quantity
of Gas from the Balancing Area than the Percentage Interest of such Party in
the cumulative quantity of all Gas produced from the Balancing Area.
1.10 "Overproduction" shall mean the cumulative quantity of Gas taken by a
Party in excess of its Percentage Interest in the cumulative quantity of all
Gas produced from the Balancing Area.
1.11 "Party" shall mean those individuals or entities subject to this
Agreement, and their respective heirs, successors, transferees and assigns.
1.12 "Percentage Interest" shall mean the percentage or decimal interest of
each Party in the Gas produced from the Balancing Area pursuant to the
Operating Agreement covering the Balancing Area.
1.13 "Royalty" shall mean payments on production of Gas from the Balancing Area
to all owners of royalties, overriding royalties, production payments or
similar interests.
1.14 "Underproduced Party" shall mean any Party having taken a lesser quantity
of Gas from the Balancing Area than the Percentage Interest of such Party in
the cumulative quantity of all Gas produced from the Balancing Area.
1.15 "Underproduction" shall mean the deficiency between the cumulative
quantity of Gas taken by a Party and its Percentage Interest in the cumulative
quantity of all Gas produced from the Balancing Area.
1.16 "Winter Period" shall mean the months of November through February.
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2. BALANCING AREA
2.1 If this Agreement covers more than one Balancing Area, it shall be applied
as if each Balancing Area were covered by separate but identical agreements. All
balancing hereunder shall be on the basis of Gas taken from the Balancing Area
measured in MMBtus.
2.2 In the event that all or part of the Gas deliverable from the Balancing Area
is or becomes subject to one or more maximum lawful prices, any Gas not subject
to price controls shall be considered as produced from a single Balancing Area
and Gas subject to each maximum lawful price category shall be considered as
produced from a separate Balancing Area.
3. RIGHT OF PARTIES TO TAKE GAS
3.1 Each Party desiring to take Gas will notify the Operator, or cause the
Operator to be notified of the volumes nominated, the name of the transporting
pipeline, the pipeline contract number (If available) and meter station related
to such delivery, sufficiently in advance for the Operator, acting with
reasonable diligence, to meet all nomination and other requirements. Operator is
authorized to deliver the volumes so nominated and confirmed (If confirmation is
required) to the transporting pipeline in accordance with the terms of this
Agreement.
3.2 Each Party shall make a reasonable, good faith effort to take its Full Share
of Current Production each month, to the extent that such production is required
to maintain leases in effect, to protect the producing capacity of a well or
reservoir, to preserve correlative rights or to maintain oil production.
3.3 When a Party fails to take its Full Share of Current Production (as such
share may be reduced by the right of the other Parties to make up for
Underproduction as provided herein), the other Parties shall be entitled, but
not obligated, to take any Gas not taken by such Party. To the extent
practicable, such Gas shall initially be made available to each Underproduced
Party in the proportion that its Percentage Interest bears to the total
Percentage Interests of all Underproduced Parties desiring to take such Gas. If
all such Gas is not taken by the Underproduced Parties, that portion not taken
shall then be made available to the other Parties In the proportion that their
respective Percentage Interests bear to the total Percentage Interests of all
such Parties.
3.4 All Gas taken by a Party in accordance with the provisions of this
Agreement, regardless of whether such Party is underproduced or overproduced,
shall be regarded as Gas taken for its own account with title thereto being
vested in such taking Party.
3.5 Notwithstanding the provisions of Section 3.3 hereof, no Overproduced Party
shall be entitled in any month to take any Gas in excess of two hundred percent
(200%) of its Percentage Interest of the Balancing Area's then-current Maximum
Monthly Availability; provided, however, that this limitation shall not apply to
the extent that it would preclude production that is required to maintain leases
in effect, to protect the producing capacity of the well or reservoir, to
preserve the correlative rights, or to maintain oil production. "Maximum Monthly
Availability" shall mean the maximum average monthly rate of production at which
Gas can be delivered from the Balancing Area, as determined by the Operator,
considering the maximum effective rate for each well within the Balancing Area,
the maximum allowable(s) set by the appropriate regulatory agency, mode of
operation, production facility capabilities and pipeline pressures.
3.6 In the event that a Party fails to make arrangements to take its Full Share
of Current Production as required to maintain leases in effect, to protect the
producing capacity of the well or reservoir, to preserve correlative rights, or
to maintain oil production, the Operator may sell any part of such Party's Full
Share of Current Production for the account of such Party and render to such
Party, on a current basis, the full proceeds of the sale, less any reasonable
marketing, compression, treating, gathering or transportation costs incurred
directly in connection with the sale thereof. In making the sale contemplated
herein, the Operator shall be obligated only to obtain such price and conditions
for the sale as are reasonable under the circumstances and shall not be
obligated to share any of its markets. Any such sale by Operator under the terms
hereof shall be only for such reasonable periods of time as are consistent with
the minimum needs of the industry under the particular circumstances, but in no
event for a period in excess of one (1) year. Notwithstanding the provisions of
Section 3.4 hereof, Gas sold by Operator for a Party under the provisions hereof
shall be deemed to be Gas taken for the account of such Party.
4. IN-KIND BALANCING
4.1 Effective the first day of any calendar month following at least twenty (20)
days prior written notice to the Operator of its Intent to commence taking
Makeup Gas and the period during which such Gas will be taken (which in no event
shall be less than one (1) calendar month), any Underproduced Party may begin
taking, in addition to its Full Share of Current Production and any Makeup Gas
taken pursuant to Section 3.3 above, a share of the current production
determined by multiplying fifty percent (50%) of the Full Shares of Current
Production of all Overproduced Parties by a fraction, the numerator of which is
the Percentage Interest of such Underproduced Party and the denominator of which
is the total of the Percentage Interests of all Underproduced Parties desiring
to take Makeup Gas. In no event will an Overproduced Party be required to
provide more than fifty percent (50%) of its Full Share of Current Production
for Makeup Gas. The Operator will promptly notify all Overproduced Parties of
the election of an Underproduced Party to begin taking Makeup Gas.
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<PAGE> 101
4.2 Notwithstanding the provisions of Section 4.1, no Overproduced Party shall
be required to provide more than twenty-five percent (25%) of its Full Share of
Current Production for Makeup Gas during the Winter Period.
4.3 Notwithstanding any other provision of this Agreement, at such time and for
so long as Operator, or (insofar as concerns Overproduction by the Operator) any
Underproduced Party, determines in good faith that an Overproduced Party has
produced all of its share of the ultimate recoverable reserves in the Balancing
Area, such Overproduced Party may be required to make available for Makeup Gas,
upon demand by Operator or any Underproduced Party, up to one hundred percent
(100%) of such Overproduced Party's Full Share of Current Production. As used
herein, the term "ultimate recoverable reserves" shall mean the combination of
the total cumulative gas production and the remaining proven gas reserves
attributable to the Balancing Area.
5. STATEMENT OF GAS BALANCES
5.1 The Operator shall, on a monthly and cumulative basis, maintain appropriate
accounting of the volumes of Gas that each Party is entitled to receive and the
volumes of Gas actually taken or sold for each Party's account. Within
forty-five (45) days after the month of production, the Operator shall furnish a
statement for such month showing (1) each Party's Full Share of Current
Production, (2) the total volume of Gas actually taken or sold for each Party's
account, (3) the difference between the volume taken by each Party and that
Party's Full Share of Current Production, (4) the Overproduction and
Underproduction of each Party, and (5) other data as recommended by the
provisions of the Council of Petroleum Accountants Societies Bulletin No. 24, as
amended or supplemented hereafter. Each Party taking Gas shall promptly provide
to the Operator any data required by the Operator for the preparation of the
statements required hereunder.
5.2 If any Party fails to provide the required data for four (4) consecutive
production months, the Operator, or where the Operator has failed to provide the
data, another Party, may audit the production and Gas sales and transportation
volumes of the non-reporting Party in order to provide the required data. The
audit shall be conducted only after reasonable notice and during normal business
hours in the offices of the Party whose records are being audited. All costs
associated with the audit shall be charged to the account of the Party failing
to provide the required data.
6. PAYMENTS ON PRODUCTION
6.1 Each Party taking Gas shall pay or cause to be paid all production and
severance taxes due on all volumes of Gas actually taken by such Party.
6.2 Each Party shall pay or cause to be paid Royalty due with respect to Royalty
owners to whom it is accountable based on the volume of Gas actually taken for
its account.
6.3 In the event that any governmental authority requires that Royalty payments
be made on any other basis than that provided in this Section 6, each Party
agrees to make such Royalty payments accordingly, commencing on the effective
date required by such governmental authority, and the method provided herein
shall be thereby superseded.
7. CASH SETTLEMENTS
7.1 Upon the earlier of the plugging and abandonment of the last producing
interval in the Balancing Area, the termination of the Operating Agreement or
any pooling or unit agreement covering the Balancing Area, or at any time no Gas
is taken from the Balancing Area for twelve (12) consecutive months, any Party
may give written notice calling for cash settlement of the Gas production
imbalances among the Parties. Such notice shall be given to all Parties in the
Balancing Area.
7.2 Within sixty (60) days after the notice calling for cash settlement under
Section 7.1, the Operator will distribute to each Party a Final Gas Settlement
Statement detailing the quantity of Overproduction owed by each Overproduced
Party to each Underproduced Party and identifying the month to which such
Overproduction is attributed, pursuant to the methodology set out in Section
7.4.
7.3 Within sixty (60) days after receipt of the Final Gas Settlement Statement,
each Overproduced Party will send its cash settlement, accompanied by
appropriate accounting detail, to the Operator. The Operator will distribute the
monies so received, along with any settlement owed by the Operator as an
Overproduced Party, to each Underproduced Party to whom settlement is due within
ninety (90) days after issuance of the Final Gas Settlement Statement. In the
event that any Overproduced Party fails to pay any settlement due hereunder, the
Operator may turn over the responsibility for the collection of such settlement
to the Party to whom it is owed, and the Operator will have no further
responsibility with regard to such settlement.
7.3.1 Any Party shall have the right, at any time upon thirty (30) days prior
written notice to all other Parties, to demand that any settlements due such
Party for Overproduction be paid directly to such Party by the Overproduced
Party, rather than being paid through Operator. In the event that an
Overproduced Party pays the Operator any sums due to an Underproduced Party at
any time after thirty (30) days following the receipt of the notice provided
for herein, the Overproduced Party will continue to be liable to such
Underproduced Party for any sums so paid, until payment is actually received by
the Underproduced Party.
7.4 The amount of the cash settlement will be based on the proceeds received by
the Overproduced Party under an Arm's Length Agreement for the Gas taken from
time to time by the Overproduced Party in excess of the
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<PAGE> 102
Overproduced Party's Full Share of Current Production. Any Makeup Gas taken by
the Underproduced Party prior to monetary settlement hereunder will be applied
to offset Overproduction chronologically in the order of accrual.
7.5 The values used for calculating the cash settlement under Section 7.4 will
include all proceeds received for the sale of the Gas by the Overproduced Party
calculated at the Balancing Area, after deducting any production or severance
taxes paid and any Royalty actually paid by the Overproduced Party to an
Underproduced Party's Royalty owner(s), to the extent said payments amounted to
a discharge of said Underproduced Party's Royalty obligation, as well as any
reasonable marketing, compression, treating, gathering or transportation costs
incurred directly in connection with the sale of the Overproduction.
7.5.1 For Overproduction processed for the account of the Overproduced Party at
a gas processing plant, the values used for calculating cash settlement will
Include the proceeds received by the Overproduced Party for the sale of the
liquid hydrocarbons extracted from the Overproduction, less the actual
reasonable costs incurred by the Overproduced Party to process the
Overproduction and to transport, fractionate and handle the liquid hydrocarbons
extracted therefrom prior to sale.
7.6 To the extent the Overproduced Party did not sell all Overproduction under
an Arm's Length Agreement, the cash settlement will be based on the weighted
average price received by the Overproduced Party for any Gas sold from the
Balancing Area under Arm's Length Agreements during the months to which such
Overproduction is attributed. In the event that no sales under Arm's Length
Agreements were made during any such month, the cash settlement for such month
will be based on the greater of (a) the price actually received by the
Overproduced Party for the overproduced volumes at the time sold or (b) the
price upon which the Overproduced Party paid Royalty to the Lessor or (c) the
price as reported for the first of the month delivery for the applicable
pipeline in Inside F.E.R.C.'s Gas Market Report for each month in question.
7.7 Interest compounded at the rate of twelve percent (12%) per annum or the
maximum lawful rate of interest applicable to the Balancing Area, whichever is
less, will accrue for all amounts due under Section 7.1, beginning the first
day following the date payment is due pursuant to Section 7.3. Such interest
shall be borne by the Operator or any Overproduced Party in the proportion that
their respective delays beyond the deadlines set out in Sections 7.2 and 7.3
contributed to the accrual of the interest.
7.8 In lieu of the cash settlement required by Section 7.3, an Overproduced
Party may deliver to the Underproduced Party an offer to settle its
Overproduction in-kind and at such rates, quantities, times and sources as may
be agreed upon by the Underproduced Party. If the Parties are unable to agree
upon the manner in which such in-kind settlement gas will be furnished within
sixty (60) days after the Overproduced Party's offer to settle in-kind, which
period may be extended by agreement of the Parties, the Overproduced Party shall
make a cash settlement as provided in Section 7.3. The making of an in-kind
settlement offer under this Section 7.8 will not delay the accrual of interest
on the cash settlement should the Parties fail to reach agreement on an in-kind
settlement.
7.9 At any time during the term of this Agreement, any Overproduced Party may,
at its sole discretion, make cash settlements with the Underproduced Parties
covering all or part of its outstanding Gas Imbalance, provided that such
settlements must be made with all Underproduced Parties proportionately based
on the relative imbalances of the Underproduced Parties, and provided further
that such settlements may not be made more often than once every twenty-four
(24) months. Such settlements shall be calculated in the same manner as
provided above for final cash settlements. The Overproduced Party will provide
Operator a detailed accounting of any such cash settlement within thirty (30)
days after the settlement is made.
8. TESTING
Notwithstanding any provision of this Agreement to the contrary, any Party
shall have the right, from time to time, to produce and take up to one hundred
percent (100%) of a well's entire Gas stream to meet the reasonable
deliverability test(s) required by such Party's Gas purchaser, and the right to
take any Makeup Gas shall be subordinate to the right of any Party to conduct
such tests; provided, however, that such tests shall be conducted in accordance
with prudent operating practices only after fifteen (15) days prior written
notice to the Operator and shall last no longer than seventy-two (72) hours.
9. OPERATING COSTS
Nothing in this Agreement shall change or affect any Party's obligation to pay
its proportionate share of all costs and liabilities incurred in operations on
or in connection with the Balancing Area, as its share thereof is set forth in
the Operating Agreement, Irrespective of whether any Party is at any time
selling or using Gas or whether such sales or use are in proportion to its
Percentage Interest in the Balancing Area.
10. LIQUIDS
The Parties shall share proportionately in and own all liquid hydrocarbons
recovered with Gas by field equipment operated for the joint account in
accordance with their Percentage Interests in the Balancing Area.
11. AUDIT RIGHTS
Notwithstanding any provision in this Agreement or any other agreement between
the parties hereto, and further, notwithstanding any termination or
cancellation of this Agreement, for a period of two (2) years from
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<PAGE> 103
the end of the calendar year in which any information to be furnished under
Sections 5 or 7 hereof is supplied, any Party shall have the right to audit the
records of any other Party regarding quantity, including, but not limited to,
information regarding Btu-content. Any Underproduced Party shall have the right
for a period of two (2) years from the end of the calendar year in which any
cash settlement is received pursuant to Section 7 hereof to audit the records of
any Overproduced Party as to all matters concerning values, including, but not
limited to, information regarding prices and disposition of Gas from the
Balancing Area. Any audit shall be conducted at the expense of the Party or
Parties desiring such audit, after reasonable notice and during normal business
hours in the office of the Party whose records are being audited. Each Party
hereto agrees to maintain records as to the volumes and prices of Gas sold each
month and the volumes of Gas used in its own operations, including the Royalty
paid on any Gas so used. The audit rights in this Section 11 shall be in
addition to those provided in Section 5.2 hereof.
12. MISCELLANEOUS
12.1 As between the Parties, in the event of any conflict between the provisions
of this Agreement and the provisions of any gas sales contract, or in the event
of any conflict between the provisions of this Agreement and those of the
Operating Agreement, the provisions of this Agreement shall control.
12.2 Each Party agrees to defend, indemnify and hold harmless all other Parties
from and against any and all liability for any claims which may be asserted by
any third party which now or hereafter stands in a contractual relationship with
such indemnifying Party and which arise out of the operation of this Agreement
or any activities of such indemnifying Party under the provisions of this
Agreement and does further agree to save the other Parties harmless from all
judgements or damages sustained and costs incurred in connection therewith.
12.3 Except as otherwise provided in this Agreement, Operator is authorized to
administer the provisions hereof but shall have no liability to the other
Parties for losses sustained or liability incurred which arise out of or in
connection with the performance of Operator's duties hereunder, except such as
may result from Operator's gross negligence or willful misconduct. Operator
shall not be liable to any Underproduced Party for the failure of any
Overproduced Party (other than Operator) to pay any amounts owed pursuant to the
terms and provisions hereof.
12.4 This Agreement shall remain in full force and effect for as long as the
Operating Agreement shall remain in force and effect as to the Balancing Area
and, thereafter, until the Gas accounts between the Parties are settled in full
and shall inure to the benefit of and be binding upon the Parties hereto and
their respective heirs, successors, legal representatives and assigns. The
Parties agree to give notice of the existence of this Agreement to any successor
in interest of any such Party and to provide that any successor shall he bound
by this Agreement and, further, that the transfer of any interest shall be
subject to the Operating Agreement and the terms and provisions hereof.
13. ASSIGNMENT AND RIGHTS UPON ASSIGNMENT
13.1 Subject to the provisions of Sections 13.2 and 13.3 hereof, and
notwithstanding anything in this Agreement or in the Operating Agreement to the
contrary, if any Party assigns (including any sale, exchange or other transfer)
any of its Percentage interest in the Balancing Area at a time when such Party
is an Overproduced Party or an Underproduced Party, the assignment or other act
of transfer shall, insofar as the Parties hereto are concerned, include all
interest of the assigning or transferring Party in the Gas, all rights to
receive or obligations to provide or take Makeup Gas and all rights to receive
or obligations to make any monetary payment which may ultimately be due
hereunder, as applicable. Operator and each of the other Parties hereto shall
thereafter treat the assignment accordingly and the assigning or transferring
Party shall look solely to its assignee or other transferee for any interest in
the Gas or monetary payment that such Party may have or to which it may be
entitled and shall cause its assignee or other transferee to assume its
obligations hereunder.
13.2 Notwithstanding anything in this Agreement (including but not limited to
Section 31.1) or in the Operating Agreement to the contrary, and subject to the
provisions of Section 13.3 hereof, in the event an Overproduced Party intends to
sell, assign, exchange or otherwise transfer any of its Percentage Interest in
the Balancing Area, such Overproduced Party shall notify, in writing, all other
Parties to the Balancing Area of such fact not less than thirty (30) days prior
to the scheduled date for closing such transaction. Thereafter, any
Underproduced Party may demand from such Overproduced Party in writing, within
fifteen (15) days following receipt of the Overproduced Party's notice, a cash
settlement of its Underproduction from the Balancing Area. The Operator shall be
notified of any such demand and of any cash settlement pursuant to this Section
13.2 and the Overproduction and Underproduction of each Party shall be adjusted
accordingly. Any cash settlement pursuant to this Section 13.2 shall be paid by
the Overproduced Party on or before the earlier to occur of (i) sixty (60) days
after receipt of the Underproduced Party's demand or (ii) at the closing of the
transaction in which the Overproduced Party sells, assigns exchanges or
otherwise transfers its Percentage Interest in the Balancing Area on the same
basis as otherwise set forth in Sections 7.3 through 7.6 hereof and shall bear
interest at the rate set forth in Section 7.7 hereof beginning sixty (60) days
after closing of Overproduced Party's transaction as to any amounts not paid.
Provided, however, if any Underproduced Party does not so demand cash settlement
of its Underproduction, such Underproduced Party shall look exclusively to the
assignee or other successor in interest of the Overproduced Party for settlement
of its Underproduction.
13.3 The provisions of Section 13.2 shall not be applicable in the event any
Party disposes of its Percentage Interest by merger, reorganization,
consolidation or sale of substantially all of its assets to a subsidiary or
parent company or to any company in which any parent or subsidiary of such Party
owns a majority of the stock.
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<PAGE> 104
SCHEDULE III
ASSIGNMENT OF INTEREST IN OIL AND GAS LEASE
OCS-G-_______
UNITED STATES OF AMERICA
KNOW AL MEN BY THESE PRESENTS:
OUTER CONTINENTAL SHELF
That The Houston Exploration Company, a Delaware corporation, whose
address is 1100 Louisiana, Suite 2000, Houston, Texas 77002 ("Assignor"), for
and in consideration of the sum of Ten Dollars ($10.00) and other good and
valuable considerations, the receipt and sufficiency of which is hereby
acknowledged, does hereby ASSIGN, TRANSFER, CONVEY and DELIVER unto Keyspan
Exploration and Production, L.L.C., a Delaware limited liability company, whose
address is One Metro Tech Center, 18th Floor, Brooklyn, New York 11201
("Assignee"), an undivided _____ ____ percent (__.00%) record title [operating
right] interest in and to the following described oil and gas lease (the
"Lease"), to wit:
[Description of Lease]
This assignment is subject to all rights, terms, conditions, burdens
and provisions of the following:
1. The Lease.
2. Exploration Agreement effective January 1, 1999 between The
Houston Exploration Company and Keyspan Exploration and
Production, L.L.C.
3. [the applicable operating agreement]
4. [burdens on production, if applicable]
5. [any other matters]
<PAGE> 105
TO HAVE AND TO HOLD said undivided interest unto Assignee and its
successors and assigns, forever, subject to the approval of Minerals Management
Service of this assignment.
This assignment is made with warranty of title, by, through or under
Assignor, but not otherwise.
IN WITNESS WHEREOF, this assignment is executed this _____ day of
_____________, _____, but effective ______________________ ____, ______.
ASSIGNOR:
N.O. Misc. No. 1046 THE HOUSTON EXPLORATION COMPANY
By:
-------------------------------------
Sammye L. Dees
Vice President - Land
ASSIGNEE:
N.O. Misc. No. ______ KEYSPAN EXPLORATION AND
PRODUCTION, L.L.C.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
NOTE: Assignments of State Leases will be on forms prescribed by the General
Land Office of the State of Texas.
<PAGE> 106
THE STATE OF TEXAS )
)
COUNTY OF HARRIS )
This instrument was acknowledged before me on this _____ day of
__________________, 1999, by Sammye L. Dees, Vice President - Land of The
Houston Exploration Company, a Delaware corporation, on behalf of said
corporation.
-----------------------------------------
Notary Public in and for
the State of TEXAS
-----------------------------------------
(Printed Name of Notary)
My Commission Expires:
------------------
THE STATE OF TEXAS )
)
COUNTY OF HARRIS )
This instrument was acknowledged before me on this _____ day of
__________________, 1999, by ______________, ______________________ of
_______________________________, a Delaware corporation, on behalf of said
corporation.
-----------------------------------------
Notary Public in and for
the State of TEXAS
-----------------------------------------
(Printed Name of Notary)
My Commission Expires:
------------------
<PAGE> 107
SCHEDULE IV
CONVEYANCE OF NET PROFITS INTEREST
The Houston Exploration Company, a Delaware corporation with offices
at 1100 Louisiana Street, Houston, Texas 77002 ("Assignor"), for and in
consideration of the sum of $10.00 and other good and valuable consideration
paid by KeySpan Exploration and Production, L.L.C., a Delaware limited
liability company with offices at One Metro Tech Center, 23rd Floor, Brooklyn,
New York 11201 ("Assignee"), the receipt and sufficiency of which are hereby
acknowledged, has BARGAINED, SOLD, GRANTED, CONVEYED, TRANSFERRED, ASSIGNED,
SET OVER, and DELIVERED, and by these presents does hereby BARGAIN, SELL,
GRANT, CONVEY, TRANSFER, ASSIGN, SET OVER, and DELIVER unto Assignee, effective
as of the "Effective Date", a net profit interest (the "Net Profit Interest")
entitling Assignee to forty five percent (45%) of the Net Proceeds attributable
to the Wells.
TO HAVE AND TO HOLD the Net Profits Interest, together with all and
singular the rights and appurtenances thereto in anywise belonging unto
Assignee, its successors and assigns, subject, however, to the terms and
provisions of this Conveyance.
ARTICLE I
As used herein, the following words, terms and phrases shall have the
following meanings:
Section 1.01. Affiliate means, as to the party specified, any Person
controlling, controlled by or under common control with such party, with the
concept of control in such context meaning the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of another, whether through the ownership of voting securities, by
contract or otherwise.
Section 1.02. Business Day means any day which is not a Saturday,
Sunday, or other day on which national banking institutions in the city of
Houston, Texas are closed as authorized or required by law.
Section 1.03. Conveyance means this Conveyance of Net Profits
Interest.
Section 1.04. Costs for any month means, on an accrual accounting
method, all in accordance with generally accepted accounting principles, and
<PAGE> 108
whether capital or non-capital in nature, the sum of the following costs (to
the extent not deducted for purposes of calculating Gross Proceeds and without
duplication) incurred after the Effective Date attributable to Subject Cost
Interests in the Wells:
(i) Excess Costs at the end of the preceding month;
(ii) the costs, expenses and liabilities incurred in constructing and
installing platforms for the Wells, equipping the Wells,
constructing and installing gathering lines and pipelines for
the Wells, and doing any other thing necessary for the
production and marketing of Minerals from the Wells;
(iii) the costs, expenses and liabilities incurred in working over,
recompleting or conducting any other operation on the Wells in
an attempt to restore, enhance or improve the production of
Minerals;
(iv) the costs, expenses and liabilities incurred in operating the
Wells and treating, processing, marketing and gathering Minerals
produced from the Wells;
(v) the costs, expenses and liabilities incurred in plugging and
abandoning the Wells and removing all platforms and facilities
used in connection with the Wells and conducting all necessary
site clearance work to the extent but only to the extent such
costs, expenses and liabilities are not an assumed obligation of
THEC under the Exploration Agreement effective January 1, 1999
by and between Assignor and Assignee.
(vi) if Gas (defined in Section 1.07(b) below) produced from the
Wells is processed by Assignor at any Gas processing plant, the
costs, if any, incurred by Assignor in processing Gas pursuant
to the applicable processing agreement or contracts (or if there
exists no such agreement or contract, an amount equal to costs
incurred under processing agreements or contracts then available
in the market from unaffiliated parties relating to similar Gas
processing arrangements);
(vii) any amounts paid by Assignor, whether as refund, interest, or
penalty, to a Purchaser or any governmental agency or other
Person as a refund of any "take-or-pay" payment or because the
amount initially received by Assignor as sales price was
2
<PAGE> 109
more, or allegedly more, than permitted by the terms of any
applicable contract, statute, regulation, order, decree or other
obligation; provided such amounts (in the case of a refund), or
the amounts with respect to which the interest or penalty was
paid, were previously included in Gross Proceeds;
(viii) all Production Taxes, less any refunds thereof to which
Assignor is entitled; and
(ix) all amounts properly chargeable to the joint account under the
operating agreements relating to the Wells.
provided, however, that (1) all general and administrative costs of Assignor's
office and staff shall be excluded from such sum; (2) costs incurred relating
to treating, processing, marketing and transporting Minerals produced from the
Wells shall be included in such sum only if not deducted in the determination
of Gross Proceeds; (3) there shall be excluded from Costs the amounts by which
(x) exceeds (y), where (x) is Assignor's costs relating to non-consent
operations in which Assignor participates but other holders of working
interests in a Well have elected not to participate, and (y) is the costs that
would have been incurred by Assignor relating to such operations had all
working interest owners consented to such operations; and (4) in no event shall
Costs during any month be less than zero.
Section 1.05. Effective Date means 7:00 a.m., local time in effect at
the location of the Wells on the first day of the month following "Payout" as
defined in Exploration Agreement effective January 1, 1999 by and between
Assignor and Assignee.
Section 1.06. Excess Costs at the end of any month means an amount
equal to the excess, if any, of Costs for such month over Gross Proceeds for
such month.
Section 1.07. Gross Proceeds for any month means, on an accrual
accounting method, the amount recorded as revenues from the sale of Minerals
attributable to Subject Revenue Interests in the Wells, all in accordance with
generally accepted accounting principles (except to the extent that treatment
of amounts received pursuant to paragraph (j) of this Section 1.07 may vary
therefrom), subject to the following:
(a) On oil, condensate and other liquid hydrocarbons recovered by
conventional field-type primary separation processes (collectively,
the "Liquids"),
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(i) when sold by Assignor, Gross Proceeds shall mean the
amounts recorded by Assignor from the sale of such Liquids at the
Well; and
(ii) when used by Assignor, except in connection with the
Wells, Gross Proceeds shall mean the amount so used, calculated in the
same manner as if said Liquids had been sold under the contract then
in existence between Assignor and the Purchaser of Liquids from the
Well or, in the event there is no such contract, Gross Proceeds shall
mean the fair market value of such Liquids at the Well.
(b) On gas, including casinghead gas or other gaseous substances,
remaining after separation of the associated Liquids by conventional,
field-type primary separation processes ("Gas"),
(i) when sold by Assignor, Gross Proceeds shall mean the
amounts recorded by Assignor from such sale at the Well; and
(ii) when used by Assignor, except in connection with the
Wells, Gross Proceeds shall mean the amount so used, calculated in the
same manner as if said Gas had been sold under the contract then in
existence between Assignor and the Purchaser of Gas from the Well or,
in the event there is no such contract, Gross Proceeds shall mean the
fair market value thereof at the Well,
provided, however, that in the event at any time Assignor elects to process, or
to have processed, Gas produced from any of the Wells in a Gas processing
plant, whether or not owned by Assignor, Gross Proceeds shall mean the amounts
determined in accordance with the following provisions (c) and (d) of this
Section 1.07.
(c) on liquid or liquefiable hydrocarbons or other products
manufactured or extracted from Gas as a result of processing of Gas at
a gas processing plant (collectively the "Products"),
(i) when sold by Assignor, Gross Proceeds shall mean the
amounts recorded by Assignor at the tailgate of the plant from the
sale by Assignor of such Products allocable to the Well; and
(ii) when used by Assignor other than as fuel for operating
the plant, Gross Proceeds shall mean the amount so used, calculated in
the same manner as if such Products had been sold under the
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contract then in existence between Assignor and the Purchaser of such
Products or, in the event there is no such contract, Gross Proceeds
shall mean the fair market value at the plant of the Products so used
on the date of use allocable to the Well.
(d) On the residue gas remaining after the removal of Products at a
gas processing plant ("Residue Gas"),
(i) when sold by Assignor, Gross Proceeds shall mean the
amounts recorded by Assignor at the tailgate of the plant from the
sale of such Residue Gas allocable to the Well; and
(ii) when used by Assignor other than as fuel for operating
the plant, Gross Proceeds shall mean the amount so used, calculated in
the same manner as if such Residue Gas had been sold under the
contract then in existence between Assignor and the Purchaser of such
Residue Gas or, in the event there is no such contract, Gross Proceeds
shall mean the fair market value at the plant of the Residue Gas so
used on the date of use allocable to the Well;
provided, however, that nothing herein shall obligate Assignor to process, or
have processed, Gas from any well.
(e) on sulfur and other Minerals (other than Liquids, Gas, Products or
Residue Gas), Gross Proceeds shall mean the amounts recorded by
Assignor from the sale thereof at the Well.
(f) In the event Assignor elects not to participate in any operations
on a Well under any present or future operating agreement, contract
for development or other similar agreement affecting or pertaining to
any of the Wells, or any portion thereof, which allows parties who
elect to so participate to conduct those operations ("non-consent
operations"), Gross Proceeds shall not include any amounts with
respect to production resulting from or arising out of those non
consent operations until such time, if ever, that Assignor shall
record the proceeds attributable to or derived from production
resulting from the non-consent operations in which it did not
participate. In the event Assignor elects to participate in
non-consent operations in which other parties elect not to so
participate, Gross Proceeds shall include and be limited to such
amounts which would have been recorded by Assignor with respect to
production resulting from or arising out of such non-consent
operations had all working interest owners consented to such
operations.
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(g) There shall be excluded from Gross Proceeds any amount received by
Assignor as a bonus for any Well or assignment of any Well, as the
purchase price for the sale of any Well, as payment in connection with
the drilling or deferring of drilling of any Well, as payment made as
an adjustment of, or payment for, any Well and leasehold equipment
upon unitization of any of the Wells, as dry hole or bottom hole
payments, as proceeds from sales of surplus equipment, as payments
from third parties for the use of facilities relating to the Wells for
such things as compression, dehydration, gathering and platform space
rental, as proceeds of insurance or other payments with respect to
damage to, loss of, or as payments on disposition of property (other
than Minerals) used in connection with the Wells.
(h) There shall be excluded from Gross Proceeds any amount for
Minerals flared or unavoidably lost in the production thereof or used
by Assignor for drilling and production (including gas injection,
secondary recovery, pressure maintenance, repressuring, cycling
operations or shrinkage) conducted for the purpose of producing
Minerals from the Wells or from any unit to which any of the Wells are
committed.
(i) Amounts received by Assignor as payments from a Purchaser of
Minerals pursuant to contractual provisions providing for
"take-or-pay" payments (including pre-initial delivery payments but
excluding penalty amounts) shall be considered to be recorded from the
sale of Minerals; provided that amounts recorded from the sale of
Minerals at the time of later delivery pursuant to any such provisions
shall be reduced by amounts previously considered to be recorded as
Gross Proceeds pursuant to the first clause of this paragraph (i). As
used in this paragraph (i), the term penalty amounts" means amounts in
excess of (x) the then current contract price multiplied by (y) the
difference between the amount of Minerals required to be taken under
the contract and the actual amount taken.
(j) There shall be excluded from Gross Proceeds amounts received by
Assignor as production payment loans, advance gas payments or similar
payments, provided that if such production payment loans, advance gas
payments or similar payments are extinguished or repaid through the
future delivery of Minerals, there shall be included in Gross Proceeds
at the time of such delivery an amount for the Minerals so delivered,
calculated in accordance with the sales contract (without regard to
the repayment or extinguishment of such
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loan or payments) then in existence between Assignor and the Purchaser
of such Minerals from the Well or, in the event there is no such sales
contract, calculated at the fair market value of said Minerals at the
Well.
Section 1.08. Leases means the Oil and Gas Leases described in Exhibit
A, attached hereto, upon which the Wells are located.
Section 1.09. Minerals means oil, gas and associated hydrocarbons and
sulfur produced from the Wells.
Section 1.10. Monthly Record Date means the fifteenth (15th) day of
each month, provided that if the fifteenth (15th) day of any such month is not
a Business Day, then the Monthly Record Date shall be the first Business Day
following the fifteenth (15th) day of such month.
Section 1.11. Net Proceeds for any period of time means the excess (if
any) of Gross Proceeds relating to the Wells during such period of time over
Costs relating to the Wells for such period of time.
Section 1.12. Payment Amounts shall have the meaning ascribed thereto
in Section 3.01 hereof.
Section 1.13. Person means any individual, corporation, limited
liability company, partnership, trust, estate or other entity or organization.
Section 1.14. Production Taxes means all ad valorem, severance, gross
production, windfall profit, excise, occupation, gathering, pipeline regulating
and other taxes and assessments of any kind whatsoever, other than income
taxes, imposed or assessed with respect to or measured by or charged against
the Wells or required by law to be deducted from the proceeds attributable to
the Wells.
Section 1.15. Purchaser means a purchaser of the Minerals produced
from the Wells, or any portion thereof.
Section 1.16. Subject Cost Interest means Assignor's cost bearing
interest, expressed as a percentage, in the relevant Well on the Effective
Date.
Section 1.17. Subject Revenue Interest means Assignor's net revenue
interest, expressed as a percentage, in the relevant Well on the Effective
Date.
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Section 1.18. Wells means the Wells listed on Exhibit A, attached
hereto and made a part hereof and any additional wells that become "Wells"
under Article IX.
ARTICLE II
Section 2.01. Notwithstanding anything to the contrary contained in
this Conveyance, Assignee, and its successors and assigns, shall not have the
right to take in kind the production of Minerals attributable to the Net
Profits Interest.
Section 2.02. Except as provided in Section 9.01, below, in no event
shall Assignee ever be liable or responsible in any way for payment of any
Costs or other costs, expenses or liabilities incurred by Assignor or other
lessees attributable to the Wells or to the Minerals produced therefrom.
Section 2.03. This Conveyance is subject to the valid terms and
provisions of the Leases and all assignments, operating agreements, marketing
or processing agreements, pooling and unitization agreements and all other
agreements of any nature in existence, at the Effective Date. Assignor shall
have the full right and power, without the joinder of Assignee, to enter into
operating, marketing or processing agreements relating to the Wells.
Section 2.04. The payment of delay rentals, the conduct of any
operations relating to the Leases or Wells, and the extent and duration
thereof, shall be solely at the will of Assignor.
Section 2.05. Assignor reserves the right from time to time, at
Assignor's discretion, to execute releases with respect to all or any part of
its interests within a Lease without the necessity of the joinder or consent of
Assignee; and any such release shall be fully effective to terminate all or the
applicable part of the interests involved (including the Net Profits Interest
attributable thereto); and Assignor shall have no liability or responsibility
to Assignee in connection therewith.
Section 2.06. Assignor shall have the right and power, without any
approval by Assignee, to pool or unitize any of the Wells and to alter, change
or amend or terminate any pooling or unitization agreements heretofore or
hereafter entered into upon such terms and provisions as Assignor shall in its
sole discretion determine. If and whenever through the exercise of such right
and power, or
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pursuant to any law now existing or hereafter enacted, or any rule, regulation
or order of any governmental body hereafter promulgated, any of the Wells are
pooled or unitized in any manner, the Net Profits Interest shall also be pooled
and unitized, and in such event Assignee shall be entitled to receive the Net
Profits Interest which accrues to the Wells under and by virtue of the pooling
and unitization.
ARTICLE III
Section 3.01. Assignor shall pay to Assignee the amounts attributable
to the Net Profits Interest ("Payment Amounts") in accordance with this Section
3.01. Payment Amounts with respect to the Net Proceeds for each month shall be
paid on the Monthly Record Date for the second month following such month.
ARTICLE IV
Section 4.01. In the event of a loss or failure in title to any of
Assignor's interests in any of the Wells, the Net Profits Interest attributable
to any such Well shall be reduced in the same proportion that the interest of
Assignor in production from said Well is reduced.
ARTICLE V
Section 5.01. Assignor shall endeavor to market or cause to be
marketed the Minerals at the best prices and on the best terms that Assignor in
its sole discretion shall deem reasonably obtainable under the circumstances.
For such purpose, sales of Minerals may continue to be made by Assignor in
accordance with existing sales contracts. Assignor may amend such existing
sales contracts or enter into new sales contracts without prior consent or
approval of the Assignee.
Section 5.02. Assignor shall have the right and option, but not the
obligation, to sell to any Affiliate all or any part of the Minerals. Each such
sale shall be provided for in a contract of sale and purchase between Assignor
and the Affiliate. Each such contract shall provide for a price and contain
terms and conditions no less favorable to Assignor than those otherwise
available to Assignor in the market place from independent third parties at the
time such contract is executed.
Section 5.03. Assignor shall have the right and option, but not the
obligation, to process Gas from the Wells at any Gas processing plant owned by
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any Affiliate. Each such processing arrangement entered into after the
Effective Date shall be provided for in a contract relating to the processing
of the Gas between Assignor and the Affiliate. Each such contract shall provide
for a processing fee (which may consist of a portion of the Products) and
contain terms and conditions no less favorable to Assignor than those otherwise
available to Assignor in the market place from independent third parties at the
time such contract is executed.
Section 5.04. In addition to the foregoing, Assignor shall have the
right and power, but not the obligation, to enter into other contracts and
arrangements with Affiliates relating to the Wells, provided that Assignor
shall deal with such Affiliates, and shall cause such Affiliates to deal with
Assignor in a manner which Assignor in good faith reasonably believes not to be
contrary to the best interests of Assignee when compared to alternatives
arrived at in an arm's length manner with independent third parties.
ARTICLE VI
Section 6.01. Assignor shall have the right to sell, exchange,
mortgage or pledge its interest in the Wells, or any part thereof, subject to
the Net Profits Interest and the terms and provisions of this Conveyance.
Assignee shall have the right to sell, assign, mortgage, pledge or otherwise
transfer its entire Net Profits Interest, but shall not have the right to
transfer only a part of its Net Profits Interest.
Section 6.02. If Assignor assigns less than all of its interest in the
Wells, and if Assignor does not elect to sell and convey the Net Profits
Interest relating to such Wells pursuant to Section 6.03, then effective as of
the date of such conveyance, in computing the Net Profits Interest with respect
to production from such assigned interest in such Wells, Gross Proceeds and
Costs attributable to the assigned interest shall be computed separately from
the unassigned interest in such Wells.
Section 6.03. By acceptance of this Conveyance, Assignee agrees that
Assignor may exercise the following rights of purchase or disposition with
respect to the Net Profits Interest:
If Assignor elects to make a sale of all or any part of its
interest in the Wells (the "Sold Interest") to any party
("Purchaser"), then Assignor shall have the right and option, but not
the obligation, simultaneously to buy from Assignee, all of the Net
Profits Interest which is applicable to the Sold Interest (the
"Applicable NPI"). In the
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event Assignor elects to so buy the Applicable NPI, the purchase price
(the "Purchase Price") shall be an amount equal forty five percent
(45%) of the amount received or to be received by Assignor for the
Sold Interest. Thereafter, upon the sale and conveyance of the
Applicable NPI by Assignee to Assignor, the Purchase Price shall be
paid directly to Assignee by Assignor. Assignee agrees to execute and
deliver any instruments of assignment and conveyance to Assignor or to
any other party designated by Assignor as may be required to
effectively and properly transfer and convey, with special warranty of
title by Assignee, the Applicable NPI. After Assignor pur chases the
Applicable NPI from Assignee, it is intended that such interests shall
merge into and become a part of Assignor's interests in the Well or
Wells and that any subsequent sale and assignment by Assignor to the
Purchaser, shall be made free and clear of the terms and provisions of
this Conveyance, so that such interests in the Wells shall not
thereafter be considered for the purposes of calculating Costs, Gross
Proceeds or Net Proceeds hereunder, or for any purpose hereunder.
Section 6.04. If Assignee receives and desires to accept an offer for
the purchase or exchange of the entire Net Profits Interest (the "Offered
Interest"), from a prospective third party purchaser who is ready, willing and
able to purchase or exchange the same, then Assignee shall have the right to
sell or exchange such Offered Interest, but only after complying with the
following terms and provisions:
(a) The offer shall first be reduced to writing and signed by Assignee
and the offeror. Assignee shall give Assignor written notice of its
receipt of, and its desire to accept such written offer, together with
a copy of such written offer signed by the prospective third party
purchaser and containing all of the material terms and conditions of
such offer. The date such written notice is given is herein sometimes
called the "Original Date".
(b) Assignor shall thereafter have an option to purchase the Offered
Interest upon the same terms set forth in said offer, which option may
be exercised by written notice thereof given to Assignee within 30
days after the Original Date.
(c) If the Offered Interest is not purchased by Assignor pursuant to
the foregoing provisions of this paragraph, then Assignee shall have
the right to sell or exchange the Offered Interest to the prospective
third party purchaser named in such offer, provided that such sale or
exchange is consummated within 90 days from the expiration date of
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the option of Assignor created by this instrument and provided that
such sale or exchange is made in strict conformity with the terms of
such offer.
(d) If such sale is not consummated in accordance with paragraph (c),
above, Assignor's failure to exercise the above-stated option insofar
as such sale shall not be a waiver of its right to exercise such
option on any future occasion when such option again becomes
applicable.
ARTICLE VII
Section 7.01. This Conveyance is made without warranty of title,
express or implied, but is made with full substitution and subrogation of
Assignee in and to all covenants of warranty by others heretofore given or made
with respect to the Wells or any part thereof or interest therein.
ARTICLE VIII
Section 8.01. Assignor shall maintain true and correct books and
records sufficient to enable Assignee's designated representatives to verify
the correctness of the amounts paid and payable to Assignee as the owner of the
Net Profits Interest.
Section 8.02. Assignor shall:
(a) furnish Assignee, within ninety (90) days after the end of the
calendar year, an annual statement setting forth all information
relating to the Net Profits Interest for the preceding calendar year
as is reasonably required by Assignee for the completion of its
federal, state and other tax returns;
(b) furnish Assignee, within thirty (30) days of the end of each
calendar quarter, a quarterly statement of cumulative Gross Proceeds,
Costs and Net Proceeds for each calendar quarter on a separate
Well-by-Well basis, during the duration of the Net Profits Interest;
(c) furnish Assignee such additional information concerning the Net
Profits Interest as Assignee may reasonably request and to which
Assignor has access; and
(d) provide Assignee or its representative upon request access to
copies of all agreements or contracts relating to the sale, production
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or processing of Minerals,
ARTICLE IX
Section 9.01. After the Effective Date, if Assignor intends to drill
or participate in the drilling of any new well on a location within a Lease to
a reservoir that was considered to be proven by Assignor's independent
reservoir engineers as of the Effective Date or any extension of such reservoir
as determined after the Effective Date, Assignee shall have the right to
participate in such Well by paying forty five percent (45%) of the costs,
expenses and liabilities of such Well incurred by Assignor prior to the
commencement of production from such well. On or before thirty (30) days before
the spudding of any such well, Assignor shall notify Assignee in writing of
such well ("Well Notice") and shall deliver to Assignee such information in its
possession as Assignee may reasonably need to evaluate such well. On or before
fifteen (15) days after its receipt of the Well Notice Assignee shall notify
Assignor in writing whether or not it elects to participate in such well. If
Assignee fails to timely notify Assignor that it elects to participate in such
well, Assignee shall have no interest in such well. If Assignee timely elects
to participate, Assignee shall pay as they accrue forty five percent (45%) of
all costs, expenses and liabilities of such well incurred by Assignor prior to
commencement of production from such Well and Assignor shall assign to Assignee
as of the commencement of production a Net Profits Interest in such well on the
same terms as this Net Profits Interest; provided that, the Subject Cost
Interest applicable to such Net Profits Interest shall be Assignor's cost
bearing interest in such well on the date of Assignor's Well Notice to Assignee
and the Subject Revenue Interest shall be Assignor's net revenue interest in
such well as of the date of Assignor's Well Notice to Assignee.
ARTICLE X
Section 10.01. Upon request by any of the parties hereto, the parties
shall from time to time execute and deliver to one another any documents which
may be necessary to confirm their respective rights pursuant to the provisions
hereof.
Section 10.02. Subject to the restrictions on assignment contained
herein, this Conveyance shall be binding on and inure to the benefit of
Assignor and Assignee and their successors and assigns.
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EXECUTED this day of March 15, 1999, but effective as of the Effective
Date.
ASSIGNOR THE HOUSTON EXPLORATION COMPANY
By: /s/ James G. Floyd
-------------------------------------
Name: James G. Floyd
-----------------------------------
Title: President and CEO
----------------------------------
ASSIGNEE KEYSPAN EXPLORATION AND
PRODUCTION, L.L.C.
By: /s/ Zain Mirza
-------------------------------------
Name: Zain Mirza
-----------------------------------
Title: Vice President and CFO
----------------------------------
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SCHEDULE V
AGREEMENT CONCERNING RELATIONSHIP
OF PARTIES FOR TAX PURPOSES
SECTION 1: DEFINITIONS
All capitalized but undefined terms used in this Tax Agreement shall
have the meaning given to such terms in the Exploration Agreement.
1.01 Agreement. The Exploration Agreement, as modified by the Tax
Agreement.
1.02 Code. The Internal Revenue Code of 1986, as amended.
1.03 Exploration Agreement. The Exploration Agreement to which this
schedule is attached, including this Schedule V and all other schedules
attached to the Exploration Agreement.
1.04 Joint Operations. All operations conducted by or on behalf of
THEC and KE&P pursuant to the Exploration Agreement.
1.05 Parties. THEC and KE&P. The capitalized term "Party" means any of
the "Parties."
1.06 Partnership. The partnership for tax purposes formed under the
Agreement.
1.07 Regulations. Regulations promulgated by the United States
Department of the Treasury pursuant to the Code.
1.08 Section 704(b) Regulations. The Regulations under Section 704(b)
of the Code.
1.10 Tax Agreement. The Agreement Concerning Relationship of Parties
for Tax Purposes attached to the Exploration Agreement as Schedule V.
SECTION 2: RELATIONSHIP OF PARTIES; ELECTION; TERM; NAME
2.01 Relationship of Parties. The Agreement is not intended to create
nor shall it be construed as creating any mining partnership, commercial
partnership or other partnership or joint venture under any state law. Rather,
the intent and purpose of the Agreement is to create a relationship which is
limited to the development and the extraction and processing of oil and gas for
division in kind or for sale for the accounts of the Parties, and in which the
liabilities of each of the Parties will be several and not joint or collective.
The Parties recognize, however, that for federal income tax purposes (and for
state
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income tax purposes under the income tax laws of certain states) the
relationship of the Parties under the Agreement constitutes a partnership.
2.02 Election with Respect to Subchapter K. Notwithstanding anything
to the contrary in the Agreement, each of the Parties agrees, with respect to
all Joint Operations:
(a) not to elect to be excluded from the application of
Subchapter K of Chapter 1 of Subtitle A of the Code; and
(b) to join in the execution of such additional documents and
elections as may be required by the Internal Revenue Service in order to
effectuate the foregoing.
In addition, if any applicable state income tax laws contain provisions similar
to those contained in Subchapter K of chapter 1 of Subtitle A of the Code, each
of the Parties hereby agrees not to elect to exclude all or any part of the
Joint Operations from the application of said provisions.
2.03 Term. The Partnership shall commence upon the execution of the
Exploration Agreement and shall terminate upon the first to occur of the events
described in Paragraph 6.01.
2.04 Name. The name of the Partnership for purposes of filing income
tax information returns shall be THEC/KE&P Tax Partnership.
SECTION 3: RETURNS AND ELECTIONS; TAX MATTERS PARTNER
3.01 Returns.
(a) In general. For so long as required by applicable law, THEC
shall prepare and file partnership tax returns for the Partnership and make the
partnership income tax elections provided for in Paragraph 3.02 in such
returns. The Parties agree to furnish to THEC promptly upon THEC's request the
information necessary for the proper preparation of these returns. The annual
federal income tax return and any required state income tax return for the
Partnership for each year shall be filed no later than the due date for such
returns (determined after taking into account timely filed extension requests),
and shall be furnished to each Party for review and comment at least 15 days
prior to filing. THEC shall use its best efforts to properly prepare such
returns but shall not be liable for any damage or penalty incurred by any Party
relating to the improper preparation and filing of such returns.
(b) Reimbursement. THEC shall be reimbursed for any costs
incurred by THEC in connection with its preparation of Partnership tax returns.
3.02 Elections. THEC shall make the following elections in the
Partnership tax returns to be filed for the first and subsequent tax years of
the Partnership:
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(a) Method of Accounting. The election to utilize the accrual
method of accounting;
(b) Taxable Year. The election to adopt the calendar year;
(c) Deduct Intangible Drilling and Development Costs. The
election pursuant to section 263(c) of the Code and Regulation Section 1.612-4
to deduct as paid all intangible drilling and development costs;
(d) Depreciation and Cost Recovery. The election to compute
depreciation or cost recovery deductions by whatever method is deemed by THEC,
in the exercise of its reasonable business judgment, to result in the most
accelerated recovery of the greatest proportion of the tax basis of the
property subject to such deductions;
(e) Section 754. If requested by any Party, the election under
section 754 of the Code;
(f) Section 709. The election under section 709 of the Code to
amortize over the shortest permissible period all deferred organizational
expenses;
(g) Section 195. The election under section 195 of the Code to
amortize over the shortest permissible period all deferred business start-up
expenses;
(h) Property Elections. Such elections under section 614 of the
Code as may be deemed necessary or desirable by THEC to result in the least tax
to those Parties who are entitled to compute depletion using the percentage
method with respect to their share of Partnership oil and gas production; and
(i) Other Elections. Such other elections under the Code deemed
necessary or desirable by THEC so as to result in the least tax to the Parties.
3.03 Tax Matters Partner.
(a) THEC. THEC shall be the Tax Matters Partner (the "TMP"), as
that term is defined in section 6231(a)(7) of the Code, for the Partnership.
The TMP and other Parties shall use their best efforts to comply with the
responsibilities outlined in this Paragraph 3.03 and in sections 6222 through
6231 and 6050K (including the Regulations thereunder), but in so doing shall
not incur any liability to any other party. The TMP shall be reimbursed for any
expenses it incurs in acting as TMP.
(b) Information Requested by TMP. The Parties shall promptly
furnish to the TMP such information (including information specified in
sections 6230(e) and 6050K of the Code) as the TMP may reasonably request to
permit it to provide the Internal Revenue Service ("Service")
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with sufficient information to discharge its duties as TMP and for purposes of
complying with section 6050K of the Code.
(c) TMP Agreements with the Service. The TMP shall not agree to
any extension of the statute of limitations on behalf of the Partnership or any
other Party without first obtaining the consent of the Party or Parties
affected. The TMP shall not bind the Partnership nor any other Party to a
settlement agreement in tax audits without obtaining the concurrence of any
affected Party. Any other Party who enters into a settlement agreement with the
Service with respect to any partnership items (as defined by section 6231(a)(3)
of the Code) shall promptly notify the other Parties of such settlement
agreement and its terms.
(d) Inconsistent Treatment of Partnership Items. If any Party
intends to file a notice of inconsistent treatment under section 6222(b)(1) of
the Code, such Party shall, prior to the filing of such notice, notify the TMP
of such intent and the manner in which the Party's intended treatment of a
partnership item is (or may be) inconsistent with the treatment of that item by
the Partnership. The TMP shall promptly remit copies of such notice to other
Parties.
(e) Requests for Administrative Adjustment. No Party shall file a
request pursuant to section 6227 of the Code for an administrative adjustment
of partnership items for any Partnership taxable year without first notifying
all other Parties. If all other Parties agree with the requested adjustment,
the TMP shall file the request for administrative adjustment on behalf of the
Partnership. If unanimous consent is not obtained, any Party, including the
TMP, may file a request for administrative adjustment on its own behalf.
(f) Judicial Proceedings. Prior to filing a petition under
sections 6226, 6228 or any other section of the Code with respect to any
Partnership item or other tax matters involving the Partnership, a Party shall
give the other Parties 30 days' written notice. If the TMP intends to file such
petition, such notice shall be given within a reasonable time to allow the
other Parties to participate in choosing the forum in which such petition will
be filed. If the Parties do not agree with the TMP on the appropriate forum,
then the appropriate forum shall be decided by a vote in accordance with the
Parties working interests for the year under audit. If a majority cannot agree,
the TMP shall choose the forum. If a Party intends to seek review of any court
decision rendered as a result of such a proceeding, such Party shall give the
other Parties 30 days' written notice.
SECTION 4: CAPITAL CONTRIBUTIONS
Each Party's capital contribution to the Partnership shall be (a) the
undivided interest of such Party in the oil and gas properties subject to the
Agreement, which shall be deemed to be contributed to the Partnership on the
date the Partnership commences, and (b) all amounts contributed by such Party
to pay its share of the costs and expenditures required for Joint Operations,
which shall be deemed to be contributed to the Partnership at the time such
amounts are actually paid to, or by, THEC or, if earlier, are actually applied
to the payment of costs and expenditures for Joint Operations.
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SECTION 5: CAPITAL ACCOUNTS AND ALLOCATIONS
5.01 Partnership Capital Accounts.
(a) General Rules. A separate capital account shall be maintained
for each Party. The capital accounts shall be maintained in accordance with the
principles of the Section 704(b) Regulations, including the following general
principles: (1) each Party's capital account shall be increased by: (A) the
amount of money contributed by the Party to the Partnership, (B) the fair
market value of property contributed by the Party to the Partnership (net of
liabilities securing such contributed property that the Partnership is
considered to assume or take subject to under section 752 of the Code), and (C)
allocations to the Party of Partnership income and gain (as determined under
the Section 704(b) Regulations and in accordance with the Parties' shares of
such items under Paragraph 5.02); and (2) each Party's capital account shall be
decreased by: (A) the amount of money distributed to the Party by the
Partnership, (B) the fair market value of property distributed to the Party by
the Partnership (net of liabilities securing such distributed property that
such Party is considered to assume or take subject to under section 752 of the
Code), and (C) allocations of Partnership loss and deduction (as determined
under the Section 704(b) Regulations and in accordance with the Parties' shares
of such items under Paragraph 5.02). The fair market value of Partnership
property shall be determined as provided in Section 6.02(a)(1) of this Tax
Agreement.
(b) THEC's Discretion. In making the credits and debits to the
Parties' capital accounts in accordance with the Section 704(b) Regulations,
THEC shall make such elections, allocations and adjustments as are provided in
the Section 704(b) Regulations as it deems necessary or appropriate to maintain
the validity of the allocations set forth in this Tax Agreement. In allocating
depletion, and the amount realized on the disposition of oil or gas properties,
the capital accounts may, at the discretion of THEC, be adjusted in accordance
with section 1.704 l(b)(2)(iv)(k)(2) of the Section 704(b) Regulations to
reflect simulated depletion and simulated gain or loss.
5.02 Allocation of Items For Capital Account Purposes. The Parties
agree that for purposes of maintaining the Parties' capital accounts, each
Party's share of each item of Partnership income, gain, loss or deduction shall
be determined in accordance with this Paragraph 5.02. For purposes of this
Paragraph 5.02, a Party's share of the basis of Partnership property (as
maintained for capital account purposes) shall be proportionate to its share of
the tax basis of such property (as determined under Paragraph 5.03).
(a) Oil and Gas Production. ACTUAL OR DEEMED INCOME FROM THE
SALE, EXCHANGE, DISTRIBUTION OF OR DISPOSITION OF OIL, GAS AND OTHER
HYDROCARBON PRODUCTION SHALL BE ALLOCATED TO THE PARTY ENTITLED TO SUCH
PRODUCTION OR THE NET PROCEEDS FROM THE SALE OF SUCH PRODUCTION, AS SET FORTH
IN ARTICLE VIII OF THE EXPLORATION AGREEMENT OR IN THE NET PROFITS AGREEMENT,
AS APPLICABLE.
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(b) Intangible Costs. Deductions attributable to Intangible Costs
shall be allocated to each Party in accordance with its respective contribution
to the payment of Intangible Costs as set forth in Section 5.1 of the
Exploration Agreement.
(c) G and A Costs. Deductions attributable to G and A Costs shall
be allocated to each Party in accordance with its respective contributions to
the payment of G and A Costs pursuant to Section 5.2 of the Exploration
Agreement.
(d) Abandonment Costs. Deductions attributable to Abandonment
Costs shall be allocated to each Party in accordance with its respective
contributions to the payment of Abandonment Costs as set forth in Sections 5.3
and 5.8 of the Exploration Agreement.
(e) Other Costs. Deductions attributable to all other costs
(including, but not limited to, Development Costs, Drilling Costs, Marketing
Costs, Operating Costs and Seismic Costs) shall be allocated to each Party in
accordance with its respective contributions to the payment of such costs as
set forth in Section 5.3 of the Exploration Agreement. If THEC arranges for
advance payment of any of such costs and not all Parties participate in the
advance payment, then deductions attributable to the advance payment shall be
allocated solely to the Parties participating in the advance payment.
(f) Depletion. If the simulated method of depletion is used,
depletion shall be computed on the basis of the property as maintained for
capital account purposes. Simulated depletion shall be allocated among the
Parties' in proportion to the manner in which adjusted tax basis was allocated
under Paragraph 5.03(b). If actual depletion is used, each Party's actual
depletion shall be reflected in the capital accounts.
(g) Gain or Loss--Oil and Gas Properties. In determining the
amount of Partnership gain or loss allocable to each Party on the disposition
of a Partnership oil and gas property, the amount realized with respect to such
property shall be first allocated among the Parties in proportion to their
respective shares of the undepleted basis of such property and any amount
realized in excess of the basis of such property shall be allocated so that, to
the extent possible, the capital accounts of the Parties following the
allocation will be proportionate to the Parties' interests in the Partnership's
oil and gas properties, determined without regard to this Tax Agreement. For
this purpose, the basis maintained for capital account purposes shall be used
if the simulated method of computing depletion and gain or loss is used, and
the tax basis of the property shall be used if the actual method of computing
depletion and gain or loss is used.
(h) Gain--Other Property. Gains from each disposition of property
by the Partnership (other than oil, gas or other hydrocarbon substances and oil
or gas properties) shall be allocated so that, to the extent possible, the
Parties' capital accounts are proportionate to the Parties' interest in the
Partnership's oil and gas properties, determined without regard to this Tax
Agreement.
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(i) Loss--Other Property. Losses from each abandonment or
disposition of property by the Partnership (other than oil, gas or other
hydrocarbon substances and oil or gas properties) shall be allocated among the
Parties proportionate to their respective contributions to the basis (as
maintained for capital account purposes) of such property.
(j) Other Items. Each item of income, gain, loss or deduction,
not falling within Paragraphs 5.02(a) through 5.03(i) shall be allocated to
each Party on the basis of and in accordance with its interest in or its
contribution to such item.
5.03 Allocation of Items For Tax Purposes. The Parties agree that for
federal and state income tax reporting purposes, each Party's share of each
item of Partnership income, gain, loss, deduction, credit and recapture shall
be determined in accordance with this Section 5.03, except to the extent
required or permitted under Sections 704(b) or 704(c) of the Code or the
Regulations thereunder. The proportionate share of each Party in the adjusted
tax basis of any property subject to the Agreement shall be equal to the
Party's contribution of funds used to acquire such property, the contribution
of funds used by the Partnership to increase the Partnership's adjusted tax
basis in such property and the Party's interest in the adjusted tax basis of
such property at the time of its contribution to the Partnership.
(a) General Allocations. Except as provided in this Paragraph
5.03, the allocation of Partnership items of income, gain, loss or deduction
shall be proportionate to the allocation of those as items set forth in
Paragraph 5.02.
(b) Depletion; Amount Realized on Disposition of Oil and Gas
Properties. The deduction for depletion with respect to each separate oil and
gas property shall be computed separately by each Party rather than by the
Partnership in accordance with section 613A(c)(7)(D) of the Code. For purposes
of such computation, each Party shall be considered to own, and shall be
allocated, its proportionate share of the adjusted basis in each oil and gas
property subject to this Agreement. Each of the Parties shall keep records of
its share of the adjusted tax basis in each oil and gas property, shall adjust
such share of the adjusted tax basis pursuant to section 1016 of the Code and
shall use, in accordance with section 613A(c)(7)(D) of the Code, such adjusted
basis in a yearly computation of its cost depletion or in its computation of
gain or loss on the disposition of such property. Upon THEC's request, each
Party shall furnish its percentage or cost depletion calculation to THEC. In
determining its gain or loss on the Partnership's disposition of an oil and gas
property, the Party's share of the amount realized on the disposition of the
property shall be determined by reference to the amount realized attributable
to such Party under Paragraph 5.02(g) with respect to such property.
(c) Recapture. Within the limits of the overall allocation of
gain or amount realized hereunder, gain treated as ordinary income by reason of
sections 1245, 1250 or 1254 of the Code shall be allocated among the Parties in
the ratio in which the deductions resulting in such ordinary income were
previously allocated to them.
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(d) Section 29 Tax Credits. For purposes of the tax credit
allocated under Section 29 of the Code, each Party shall be entitled to claim
the credit for its proportionate share of production qualifying for such
credit.
5.04 Transfers. If a Party transfers all or a portion of its interest
in the Partnership, the income, gains, losses, deductions and credits with
respect to such transferred interest shall be allocated between the transferor
and the transferee on the basis of the ownership of such interest at the time
the income or gain is realized, the loss or deduction is incurred, or the
credit is earned, as the case may be, under the Partnership's method of
accounting and not in a pro rata manner.
SECTION 6: TERMINATION AND WINDING UP
6.01 Events Causing Termination. The Partnership shall terminate for
federal income tax purposes upon the first to occur of (a) an actual
termination of the Exploration Agreement, (b) a deemed termination of the
Partnership under section 708(b)(1)(B) of the Code, (c) the effectiveness of an
election for the Joint Operations to be excluded from Subchapter K of Chapter 1
of the Code (if and when the Parties unanimously agree to make such an
election), or (d) the occurrence of any other event which causes the
Partnership to terminate as a matter of law.
6.02 Procedure Upon Termination.
(a) Upon termination of the Partnership for federal income tax
purposes, the Parties hereby agree and obligate themselves as follows:
(1) The capital accounts shall be adjusted for gain or loss
which would be allocable to each Party under Paragraph 5.02 upon a
disposition of such assets for fair market value as agreed by the
Parties. If the Parties cannot reach unanimous agreement as to the
fair market value of any such asset, THEC shall cause a nationally
recognized, independent reservoir engineering firm to determine the
fair market value of such property. THEC shall notify each Party of
the engineering firm's determination of value prior to the
distribution of any asset. If any Party gives THEC written notice of
its disagreement with the engineering firm's determination of value
within 30 days after receiving THEC's notification of value, the
matter shall be submitted to binding arbitration according to the
rules and practices of the American Arbitration Association.
(2) Following the application of Paragraph 6.02(a)(1), any
Party who has a capital account whose balance is less than zero shall
contribute an amount of cash to the Partnership sufficient to achieve
a zero balance capital account.
(3) Following the application of Paragraphs 6.02(a)(1) and
6.02(a)(2), if the Parties' capital accounts are not in proportion to
their Working Interests in the Partnership properties, the Parties
shall take one or more of the following actions to cause the capital
accounts to be placed in balance:
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(i) The Parties with the relatively lower capital account
balances shall be allocated items of gross income or gain which are
sufficient to place the capital accounts in balance.
(ii) The Parties with the relatively higher capital
accounts shall be allocated items of deduction or loss which are
sufficient to place the capital accounts in balance.
(iii) Such other actions to which the Parties unanimously
agree at the time which place the capital accounts in balance.
(4) Following the adjustments under Paragraphs 6.02(a)(i),
6.02(a)(ii), and 6.02(a)(iii), all remaining Partnership properties
shall be distributed among the Parties in accordance with their
respective interests in Partnership properties under the Exploration
Agreement.
(b) All contributions, distributions or deemed distributions of
property made in connection with the termination of the Partnership shall be
made within the time periods required by the Section 704(b) Regulations.
6.03 Division of Capital Accounts. For purposes of determining whether
the Parties' capital accounts are in balance and for purposes of placing the
Parties' capital accounts in balance if necessary, the Partnership may, to the
extent consistent with the Section 704(b) Regulations, divide each Party's
capital account into separate capital accounts for each portion of the
Partnership's properties in which the Parties have differing undivided
interests. The capital accounts as so divided shall then be placed in balance
separately with respect to each portion of the Partnership's properties in
which the Parties have differing undivided interests.
6.04 Dispositions. No provisions hereof shall be deemed to authorize
any actual joint disposition of oil and gas properties or other Partnership
assets not specifically authorized by the Exploration Agreement and otherwise
by sound oil field practices, nor shall this provision apply to dispositions by
the Parties of their separate undivided interests in Partnership assets.
SECTION 7: CONFLICTS; MODIFICATIONS; MISCELLANEOUS
7.01 Conflicts. In the event of any conflict between the terms of this
Tax Agreement and the terms of the Exploration Agreement (excluding this
Schedule IV), the terms of this Tax Agreement shall control.
7.02 Modifications. The Parties have provided in this schedule for
various allocations of items of income, gain, loss, deduction, credit and
recapture for federal income tax purposes. In order that those allocations will
be considered to have substantial economic effect and therefore be recognized
as valid for federal income tax purposes, the Parties have provided for the
maintenance
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and recognition of capital accounts, generally on a tax basis, as required or
permitted by the Regulations promulgated pursuant to section 704(b) of the
Code. The recognition of the Parties' capital accounts may cause one or more of
the Parties, on termination of the Partnership, to receive an interest in
Partnership properties which is less than his interest under the Exploration
Agreement (excluding this Tax Agreement). The Parties agree that they intend
that each Party realize upon termination of the Partnership the full benefit of
his interest in the Partnership's properties under the Exploration Agreement
(excluding this Tax Agreement), limited only to the extent that the maintenance
and recognition of capital accounts required to substantiate the allocations
provided for in this Tax Agreement yield a different result. If upon
termination of the Partnership any party will, under Paragraph 6.02, receive a
share of the Partnership's assets different from his share under the
Exploration Agreement (excluding this Tax Agreement), and if the difference
could be mitigated by an adjustment to the method of maintaining or recognizing
the Parties' capital accounts without jeopardizing the effectiveness for
federal income tax purposes of any of the allocations made under this Tax
Agreement, then the method of maintaining or recognizing the capital accounts
shall be modified so as to achieve such mitigation. No modification to the
method of maintaining or recognizing the capital accounts shall be made unless
the Parties agree unanimously to the proposed modification, but each Party
agrees not to unreasonably withhold its consent to a proposed modification
which otherwise satisfies the conditions of this Paragraph 7.02.
7.03 Headings. The descriptive headings in this Tax Agreement are for
convenience of reference only and are not intended to be and shall not be
considered in the interpretation of this Tax Agreement.
7.04 Cross-references. References in this Tax Agreement to Sections
and Paragraphs are references to the indicated Sections and Paragraphs of this
Tax Agreement, unless the context indicates to the contrary.
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<PAGE> 1
AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of March 30, 1999
Among
THE HOUSTON EXPLORATION COMPANY,
as the Company;
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION,
as Administrative Agent;
THE BANK OF NOVA SCOTIA,
as Syndication Agent;
FIRST UNION NATIONAL BANK,
as Documentation Agent;
PNC BANK NATIONAL ASSOCIATION,
as Managing Agent;
and
THE LENDERS SIGNATORY HERETO
$250,000,000 Revolving Credit Facility
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I
Definitions and Accounting Matters
Section 1.01 Terms Defined Above.....................................................2
Section 1.02 Certain Defined Terms...................................................2
Section 1.03 Accounting Terms and Determinations....................................15
ARTICLE II
Commitments
Section 2.01 Loans and Letters of Credit............................................16
Section 2.02 Borrowings, Continuations, Conversions, and Issuances..................17
Section 2.03 Changes of Commitments.................................................19
Section 2.04 Fees...................................................................19
Section 2.05 Applicable Lending Offices.............................................22
Section 2.06 Several Obligations....................................................22
Section 2.07 Notes..................................................................22
Section 2.08 Prepayments............................................................23
Section 2.09 Borrowing Base; Threshold Amount.......................................23
ARTICLE III
Payments of Principal and Interest
Section 3.01 Repayment of Loans.....................................................25
Section 3.02 Interest...............................................................25
ARTICLE IV
Payments; Pro Rata Treatment; Computations; Etc.
Section 4.01 Payments...............................................................26
</TABLE>
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<TABLE>
<S> <C> <C>
Section 4.02 Pro Rata Treatment.....................................................27
Section 4.03 Computations...........................................................27
Section 4.04 Non-receipt of Funds by the Agent......................................27
Section 4.05 Sharing of Payments, Etc...............................................28
Section 4.06 Assumption of Risks....................................................29
Section 4.07 Obligation to Reimburse and to Repay...................................29
Section 4.08 Obligations for Letters of Credit......................................31
ARTICLE V
Yield Protection; Illegality; Etc.
Section 5.01 Additional Costs.......................................................31
Section 5.02 Limitation on Types of Loans...........................................33
Section 5.03 Illegality.............................................................33
Section 5.04 Certain Base Rate Loans pursuant to Sections 5.01 and 5.03.............34
Section 5.05 Certain Compensation...................................................34
ARTICLE VI
Conditions Precedent
Section 6.01 Initial Loan...........................................................35
Section 6.02 Initial and Subsequent Loans...........................................36
Section 6.03 Conditions Relating to Letters of Credit...............................36
Section 6.04 Subsequent Environmental Audits--New Acquisitions......................37
Section 6.05 Guarantors.............................................................37
ARTICLE VII
Representations and Warranties
Section 7.01 Corporate Existence....................................................38
Section 7.02 Financial Condition....................................................38
Section 7.03 Liabilities; Litigation................................................39
Section 7.04 No Breach..............................................................39
Section 7.05 Corporate Action.......................................................39
</TABLE>
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<TABLE>
<S> <C> <C>
Section 7.06 Approvals..............................................................40
Section 7.07 Use of Loans...........................................................40
Section 7.08 ERISA..................................................................40
Section 7.09 Taxes..................................................................40
Section 7.10 Titles, etc............................................................40
Section 7.11 No Material Misstatements..............................................41
Section 7.12 Investment Company Act.................................................41
Section 7.13 Public Utility Holding Company Act.....................................41
Section 7.14 Subsidiaries and Partnerships..........................................41
Section 7.15 Location of Business and Offices.......................................41
Section 7.16 Gas Imbalances.........................................................41
Section 7.17 Rate Filings...........................................................41
Section 7.18 Environmental Matters..................................................42
Section 7.19 Defaults...............................................................43
Section 7.20 Compliance with the Law................................................43
Section 7.21 Insurance..............................................................43
Section 7.22 Credit Agreements......................................................43
Section 7.23 Solvency...............................................................44
ARTICLE VIII
Affirmative Covenants
Section 8.01 Financial Statements and Other Reports.................................44
Section 8.02 Litigation.............................................................47
Section 8.03 Corporate Existence, Etc...............................................47
Section 8.04 Engineering and Other Reports..........................................47
Section 8.05 Further Assurances.....................................................49
Section 8.06 Performance of Obligations.............................................49
Section 8.07 MarketSpan Credit Facility.............................................49
ARTICLE IX
Negative Covenants
Section 9.01 Debt...................................................................49
Section 9.02 Guaranties, Etc........................................................50
Section 9.03 Liens..................................................................50
Section 9.04 Leases.................................................................52
</TABLE>
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<TABLE>
<S> <C> <C>
Section 9.05 Investments............................................................52
Section 9.06 Dividends..............................................................53
Section 9.07 Sale of Assets.........................................................53
Section 9.08 Stock of Subsidiaries, Etc.............................................53
Section 9.09 Transactions with Affiliates...........................................53
Section 9.10 Mergers, Etc...........................................................54
Section 9.11 Acquisitions...........................................................54
Section 9.12 Interest Coverage Ratio................................................54
Section 9.13 Debt to Total Capitalization Ratio.....................................54
Section 9.14 Negative Pledge Agreements.............................................54
Section 9.15 Sale of Oil and Gas Properties.........................................54
Section 9.16 Environmental Matters..................................................55
Section 9.17 ERISA Compliance.......................................................55
Section 9.18 Hedging Agreements.....................................................56
Section 9.19 Subsidiaries and Partnerships..........................................56
Section 9.20 Changes to the MarketSpan Credit Facility .............................56
ARTICLE X
Events of Default
Section 10.01 Events of Default......................................................56
Section 10.02 Cash Collateral for Letters of Credit..................................59
ARTICLE XI
The Agent
Section 11.01 Appointment, Powers and Immunities.....................................60
Section 11.02 Reliance by Agent......................................................60
Section 11.03 Defaults...............................................................60
Section 11.04 Rights as a Lender.....................................................61
Section 11.05 Indemnification........................................................61
Section 11.06 Non-Reliance on Agent and other Lenders................................61
Section 11.07 Failure to Act.........................................................62
Section 11.08 Resignation or Removal of Agent........................................62
</TABLE>
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<TABLE>
<S> <C> <C>
ARTICLE XII
Miscellaneous
Section 12.01 Waiver.................................................................62
Section 12.02 Notices................................................................63
Section 12.03 Payment of Expenses, Indemnities, etc..................................63
Section 12.04 Amendments, Etc........................................................64
Section 12.05 Successors and Assigns.................................................65
Section 12.06 Assignments and Participations.........................................65
Section 12.07 Invalidity.............................................................67
Section 12.08 Counterparts...........................................................67
Section 12.09 References.............................................................67
Section 12.10 Termination of Agreement; Survival of Obligations......................67
Section 12.11 Captions...............................................................68
Section 12.12 Governing Law..........................................................68
Section 12.13 Interest...............................................................69
Section 12.14 Waiver of Jury Trial...................................................70
Section 12.15 Exculpation Provisions.................................................70
Section 12.16 No Oral Agreements.....................................................70
</TABLE>
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<PAGE> 7
Exhibit A - Form of Letter of Credit Agreement -- Agent
Exhibit B - Form of Revolving Credit Note
Exhibit C - Form of Compliance Certificate
Exhibit D - Form of Opinion
Exhibit E - Form of Borrowing, Continuation or Conversion Form
Exhibit F - Form of Assignment and Acceptance
Exhibit G - MarketSpan Loan Agreement
Exhibit H - MarketSpan Subordination Agreement
Schedule 1.02(b) - Existing Letters of Credit
Schedule 7.03 - Litigation and Liabilities
Schedule 7.08 - ERISA Obligations
Schedule 7.10 - Disclosure of Liens other than Excepted Liens
Schedule 7.14 - Listing of Subsidiaries and Partnerships
Schedule 7.16 - Gas Imbalances
Schedule 7.18 - Environmental Matters
Schedule 7.21 - Insurance
Schedule 7.22 - Credit Agreements, Etc.
Schedule 9.01 - Debt not reflected in Financial Statements
Schedule 9.17 - Accumulated Funding Deficiencies
Schedule 9.18 - Hedging Agreements
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<PAGE> 8
THIS AMENDED AND RESTATED CREDIT AGREEMENT dated as of March 30, 1999
is among THE HOUSTON EXPLORATION COMPANY, a corporation duly organized and
validly existing under the laws of the State of Delaware (the "Company"); each
of the financial institutions that is now or hereafter becomes a signatory
hereto, including the hereinafter defined "Chase" (together with their
respective successors or assigns, individually, a "Lender" and, collectively,
the "Lenders"); CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, as Administrative
Agent for the Lenders (in such capacity, together with its successors in such
capacity, the "Agent"); THE BANK OF NOVA SCOTIA, as Syndication Agent; FIRST
UNION NATIONAL BANK, as Documentation Agent; and PNC BANK NATIONAL ASSOCIATION,
as Managing Agent.
.
RECITALS
A. Pursuant to that certain Credit Agreement dated as of July 2, 1996,
by and among the Company, the Agent and the lenders party thereto (such Credit
Agreement, as heretofore amended and supplemented, the "Existing Credit
Agreement"), the Company received certain loans and extensions of credit under
a revolving credit facility made available to the Company under the Existing
Credit Agreement.
B. Pursuant to the Existing Credit Agreement a Borrowing Base and a
Threshold Amount (as defined therein) are periodically determined by the Agent
and the Lenders such that the Borrowing Base amount is determined by use of
different criteria than those used to determine the Threshold Amount which has
resulted in the amount of the Borrowing Base being greater than the Threshold
Amount.
C. The parties have agreed that from the date of this Agreement until
the redetermination of the Borrowing Base to occur on or about September 1,
1999, the Borrowing Base shall be $200,000,000 and the Threshold Amount shall
be $175,000,000.
D, The parties have agreed that with regard to the redetermination of
the Borrowing Base to occur on or about September 1, 1999 and for each
redetermination thereafter, the Borrowing Base shall be set using the criteria
previously used in determining the Threshold Amount (which will result in the
amount of the Borrowing Base at such time and thereafter being lower than the
existing Borrowing Base) and that, as a result, at such time and thereafter the
Borrowing Base and the Threshold Amount shall be equal to one another.
E. The Company, the Agent and the Lenders mutually desire to amend and
restate in its entirety the Existing Credit Agreement to, among other things,
provide for the modifications described above.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained and of the loans and commitments hereinafter
referred to, the parties hereto hereby agree
<PAGE> 9
that the Existing Credit Agreement is hereby amended and restated in its
entirety to read herein and as follows:
ARTICLE I
Definitions and Accounting Matters
Section 1.01 Terms Defined Above. As used in this Credit
Agreement, the terms "Agent", "Company", "Lender" and "Lenders" shall have the
meanings indicated above.
Section 1.02 Certain Defined Terms. As used herein, the
following terms shall have the following meanings (all terms defined in this
Article I or in other provisions of this Credit Agreement in the singular to
have the same meanings when used in the plural and vice versa):
"Acceptable Acquisition" means any Acquisition of (a) a corporation in
the same line of business as the Company which has been either (i) approved by
the Board of Directors of the corporation which is the subject of such
Acquisition, or (ii) recommended by such Board to the shareholders of such
corporation, (b) all or substantially all of the business or assets of any
corporation or other business entity in the same line of business as the
Company, and (c) Oil and Gas Properties in the normal course of business, so
long as all other terms and conditions of this Agreement are complied with.
"Acquisition" means any transaction pursuant to which the Company or
any of its Subsidiaries (a) acquires equity securities (or warrants, options or
other rights to acquire such securities) of any corporation other than the
Company or any corporation which is not then a Subsidiary of the Company,
pursuant to a solicitation of tenders therefor, or in one or more negotiated
block, market or other transactions not involving a tender offer, or a
combination of any of the foregoing, or (b) makes any corporation a Subsidiary
of the Company, or causes any such corporation to be merged into the Company or
any of its Subsidiaries, in any case pursuant to a merger, purchase of assets
or any reorganization providing for the delivery or issuance to the holders of
such corporation's then outstanding securities, in exchange for such
securities, of cash or securities of the Company or any of its Subsidiaries, or
a combination thereof, (c) purchases all or substantially all of the business
or assets of any corporation or (d) acquires Oil and Gas Properties in the
normal course of business, so long as all other terms and conditions of this
Agreement are complied with.
"Additional Costs" shall have the meaning assigned to that term in
Section 5.01.
"Affected Loans" shall have the meaning assigned to that term in
Section 5.04.
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<PAGE> 10
"Affiliate" of any Person shall mean (i) any Person directly or
indirectly controlled by, controlling or under common control with such first
Person, and (ii) any director, officer, partner or stockholder of such first
Person or of any Person referred to in clause (i) above.
"Agreement" shall mean this Credit Agreement, as the same may from
time to time be amended or supplemented.
"Alternate Reserve Report" shall have the meaning provided in
Subsection 8.04(c).
"Applicable Lending Office" shall mean, for each Lender and for each
type of Loan, the lending office of such Lender (or an affiliate of such
Lender) designated for such type of Loan on the signature pages hereof or such
other offices of such Lender (or of an affiliate of such Lender) as such Lender
may from time to time specify to the Agent and the Company as the office by
which its Loans of such type are to be made and maintained.
"Applicable Margin" shall mean at the time of calculation, with
respect to any Loan, calculated as a function of the type of such Loan, the
following rate per annum as applicable:
<TABLE>
<CAPTION>
THRESHOLD AMOUNT FIXED RATE LOAN APPLICABLE BASE RATE LOAN APPLICABLE
UTILIZATION MARGIN PERCENTAGE MARGIN PERCENTAGE
---------------- -------------------------- -------------------------
<S> <C> <C>
Less than 50% .625% 0%
Greater than or equal to 50% .75% 0%
but less than 65%
Greater than or equal to 65% 1.00% 0%
but less than 85%
Greater than or equal to 85% 1.125% 0%
but less than 100%
Greater than or equal to 1.375% 0%
100% but less than 115%
Greater than or equal to 1.50% 0%
115%
</TABLE>
"Assignment and Acceptance" shall have the meaning assigned such term
in Section 12.06(b).
-3-
<PAGE> 11
"Base Rate" shall mean, with respect to any Base Rate Loan, for any
day, the higher of (a) the Federal Funds Rate for such day plus 1/2 of 1%, or
(b) the Prime Rate for such day. Each change in any interest rate provided for
herein based upon the Base Rate resulting from a change in the Base Rate shall
take effect at the time of such change in the Base Rate.
"Base Rate Loans" shall mean Loans that bear interest at rates based
upon the Base Rate.
"Borrowing Base" shall mean at any time an amount equal to the amount
determined as the Borrowing Base in accordance with Section 2.09.
"BUG" shall mean The Brooklyn Union Gas Company.
"Business Day" shall mean any day on which commercial banks are not
authorized or required to close in the State of Texas and, where such term is
used in the definition of "Quarterly Dates" in this Section 1.02 or if such day
relates to a borrowing of, a payment or prepayment of principal of or interest
on, or a conversion of or into, or the Interest Period for, a Fixed Rate Loan
or a notice by the Company with respect to any such borrowing, payment,
prepayment, conversion or Interest Period, any day which is also a day on which
dealings in Dollar deposits are carried out in the London Interbank Market.
"Capital Lease" shall mean any lease which has been or should be
capitalized on the books of the lessee in accordance with GAAP.
"Change in Control" shall mean any change in ownership of the shares
of stock of (a) THEC Holdings such that a Person (or group of Persons acting
together) other than BUG acquires shares of stock of THEC Holdings, or (b) the
Company such that a Person (or group of Persons acting together) other than
THEC Holdings acquires a direct or indirect interest in more than 50% of the
voting power of the voting stock of the Company.
"Chase" shall mean Chase Bank of Texas, National Association (formerly
known as Texas Commerce Bank National Association), individually and not as
Agent.
"Closing Date" shall mean March 30, 1999.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commitment" shall mean, as to each Lender, the obligation of such
Lender to make Loans to the Company or of the Agent to issue, reissue, renew or
extend Letters of Credit on behalf of such Lender for the account of the
Company, in an aggregate amount at any one time outstanding equal to the amount
set forth opposite such Lender's name on the signature pages hereof under the
caption "Commitment" (as the same may be reduced or increased from time to time
pursuant to Section 2.03
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<PAGE> 12
hereof); provided, however, the total Commitments of all Lenders shall be
subject to the Borrowing Base pursuant to the terms of this Agreement
including, without limitation, Sections 2.01(a) and (b).
"Consolidated Net Income" shall mean, for any period, the amount
which, in conformity with GAAP, would be set forth opposite the caption "net
income or loss" (or any like caption) on a consolidated income statement of the
Company and its Subsidiaries for such period.
"Consolidated Net Worth" shall mean, at a particular date, all amounts
which would be included under shareholder's equity on a consolidated balance
sheet of the Company and its Subsidiaries, as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Total Capitalization" shall mean the sum of (a)
Consolidated Total Debt and (b) the total capital represented by the capital
stock of the Company at such time outstanding based, in the case of stock
having a par value, upon its par value, and, in the case of stock of no par
value, upon the value stated on the books of the Company, plus the total amount
of paid-in capital surplus and earned surplus of the Company (or minus the
amount of any net deficit in the surplus account of the Company), plus the
amount of any premium on capital stock of the Company not included in surplus,
minus the amount, if any, by which capital surplus has at any time been
increased as a result of a restatement of the amount at which any assets of the
Company are recorded on the books of the Company and minus non-cash charges
related to the write-down of oil and gas reserves..
"Consolidated Total Debt" shall mean Total Debt of the Company and its
Subsidiaries, as determined on a consolidated basis in accordance with GAAP.
"Debt" shall mean, for any Person, the sum of the following (without
duplication): (a) all obligations of such Person for borrowed money or
evidenced by bonds, debentures, notes or other similar instruments; (b) all
obligations of such Person (whether contingent or otherwise) in respect of
letters of credit, bankers' acceptances, surety or other bonds and similar
instruments; (c) all obligations of such Person to pay the deferred purchase
price of Property or services, except trade accounts payable (other than for
borrowed money) arising in the ordinary course of business of such Person; (d)
all obligations under Capital Leases; (e) all Debt and other obligations
secured by a Lien on any asset of such Person, whether or not such Debt is
assumed by such Person; (f) guaranties, endorsements (other than for collection
in the ordinary course of business) and other contingent obligations to
purchase, to provide funds for payment, to supply funds to invest in any
Person, or otherwise to assure a creditor against loss; (g) all obligations or
undertakings of such Person to maintain or cause to be maintained the financial
position or covenants of other Persons; and (h) all obligations of such Person
under or in connection with Hedging Agreements once such obligations become
"debt" according to GAAP.
"Default" shall mean the occurrence of any event which with notice or
lapse of time or both would become an Event of Default.
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<PAGE> 13
"Designated Borrowing Base" shall have the meaning assigned to that
term in Section 2.09.
"Dollars" and "$" shall mean lawful money of the United States of
America.
"Drawdown Termination Date" shall mean March 1, 2003, unless the
Commitment shall be sooner terminated pursuant to Section 2.03(a) or Section
10.01, or unless extended pursuant to Section 2.01(c).
"EBITDA" shall mean, for any period, the sum of Consolidated Net
Income for such period plus the following expenses or charges to the extent
deducted from Consolidated Net Income in such period: interest, taxes,
depreciation, depletion and amortization.
"Engagement Letter" shall mean that certain letter dated of even date
herewith from the Agent to and accepted by the Company relating to certain fees
payable by the Company to the Agent.
"Engineering Reports" shall have the meaning assigned to that term in
Section 2.09(c).
"Environmental Laws" shall mean any and all laws, statutes,
ordinances, rules, regulations, orders, or determinations, whether now existing
or hereafter existing or rendered, of any Governmental Authority pertaining to
the environment applicable to the Company or its Subsidiaries or any of their
respective Property in effect in any and all jurisdictions in which the Company
or its Subsidiaries are conducting or at any time have conducted business, or
where the Properties of the Company and its Subsidiaries are located, or where
any hazardous substances generated by or disposed of by the Company or its
Subsidiaries are located, including but not limited to the Oil Pollution Act of
1990 ("OPA"), the Clean Air Act, as amended, the Comprehensive Environmental,
Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the
Federal Water Pollution Control Act, as amended, the Occupational Safety and
Health Act of 1970, as amended, the Resource Conservation and Recovery Act of
1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, and other environmental conservation
or protection laws. The terms "hazardous substance," "release" and "threatened
release" shall have the meanings specified in CERCLA, and the terms "solid
waste" and "disposal" (or "disposed") shall have the meanings specified in RCRA
and the term "oil" shall have the meaning specified in OPA; provided, however,
that (i) in the event either CERCLA, RCRA or OPA is amended so as to broaden
the meaning of any term defined thereby, such broader meaning shall apply
subsequent to the effective date of such amendment with respect to all
provisions of this Agreement other than Article VII hereof, (ii) to the extent
the laws of the state or states in which any Property of the Company or its
Subsidiaries is located establish a meaning for "hazardous substance,"
"release," "threatened release," "solid waste", "disposal" or "oil" which is
broader than that specified in CERCLA, RCRA or OPA, such broader meaning shall
apply.
-6-
<PAGE> 14
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
"ERISA Affiliate" shall mean any corporation or trade or business
which is a member of the same controlled group of corporations (within the
meaning of Section 414(b) of the Code) as the Company or a Subsidiary or is
under common control (within the meaning of Section 414(c) of the Code) with
the Company or a Subsidiary.
"Event of Default" shall have the meaning assigned to that term in
Article X.
"Excepted Liens" shall mean: (i) Liens for taxes, assessments or other
governmental charges or levies not yet due and payable or, if due and payable,
being contested in good faith by appropriate action and for which appropriate
reserves are maintained; (ii) Liens in connection with workmen's compensation,
unemployment insurance or other social security, old age pension or public
liability obligations not yet due or which are being contested in good faith by
appropriate action; (iii) operator's, vendors', carriers', warehousemen's,
repairmen's, mechanics', workmen's, materialmen's, construction or other like
Liens arising by operation of law in the ordinary course of business or
incident to the exploration, development, operation and maintenance of Oil and
Gas Properties of the Company and its Subsidiaries and statutory landlord's
liens in respect of obligations none of which shall remain unpaid more than 90
days or which are being contested in good faith by appropriate proceedings;
(iv) any Liens securing indebtedness, neither assumed nor guaranteed by the
Company or any Subsidiary nor on which the Company or any Subsidiary pays
interest, existing upon real estate or rights in or relating to real estate
acquired by the Company or any Subsidiary for substation, metering station,
pump station, storage, gathering line, transmission line, transportation line,
distribution line or right of way purposes, and any Liens reserved in leases
for rent and for com pliance with the terms of the leases in the case of
leasehold estates, to the extent that any such Lien referred to in this clause
(iv) does not materially impair the use of the Property covered by such Lien
for the purposes for which such Property is held by the Company or a
Subsidiary; and (v) encumbrances (other than to secure the payment of borrowed
money or the deferred purchase price of Property or services), easements,
restrictions, servitudes, permits, conditions, covenants, exceptions or
reservations in any rights of way or other Property of the Company or its
Subsidiaries for the purpose of roads, pipelines, transmission lines,
transportation lines, distribution lines for the removal of gas, oil, coal or
other minerals or timber, and other like purposes, or for the joint or common
use of real estate, rights of way, facilities and equipment, and defects,
irregularities and deficiencies in title of any rights of way or other Property
which in the aggregate do not materially impair the use of such rights of way
or other Property for the purposes of which such rights of way and other
Property are held by the Company or a Subsidiary.
"Federal Funds Rate" shall mean, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds
-7-
<PAGE> 15
brokers on such day, as published by the Federal Reserve Bank of Dallas on the
Business Day next succeeding such day, provided that (i) if the date for which
such rate is to be determined is not a Business Day, the Federal Funds Rate for
such day shall be such rate on such transactions on the next succeeding
Business Day, and (ii) if such rate is not so published for any day, the
Federal Funds Rate for such day shall be the average rate charged to Chase on
such day on such transactions as determined by the Agent.
"Financial Statements" shall mean the financial statement or
statements of the Company de scribed or referred to in Section 7.02.
"Fixed Base Rate" shall mean with respect to any Fixed Rate Loan, the
rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%)
quoted by the Agent at approximately 11:00 a.m. London time (or as soon
thereafter as practicable) two Business Days prior to the first day of the
Interest Period for such Loan for the offering by the Agent to leading banks in
the London interbank market as determined by the Agent in its sole discretion
of Dollar deposits having a term comparable to such Interest Period and in an
amount comparable to the principal amount of the Fixed Rate Loan to be made by
the Agent for such Interest Period.
"Fixed Rate" shall mean, for any Fixed Rate Loan, a rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by the
Agent to be equal to the quotient of (i) the Fixed Base Rate for such Loan for
the Interest Period therefor, divided by (ii) one minus the Reserve Requirement
for such Loan for such Interest Period.
"Fixed Rate Loans" shall mean any Loan when and to the extent the
interest rate therefor is determined on the basis of rates referred to in the
definition of "Fixed Base Rate".
"GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time, applied on a basis
consistent with those used in the preparation of the Financial Statements
(except for changes concurred in by the Company's independent public
accountants).
"Governmental Authority" shall include the United States, the state,
county, parish, province, municipal and political subdivisions in which any
Property of the Company or the Subsidiaries is located or which exercises
jurisdiction over any such Property, and any court, agency, department,
commission, board, bureau or instrumentality of any of them which exercises
jurisdiction over any such Property.
"Governmental Requirement" shall mean any law, statute, code,
ordinance, order, rule, regulation, judgment, decree, injunction, franchise,
permit, certificate, license, authorization or other direction or requirement
(including, without limitation, Environmental Laws, energy regulations and
occupational, safety and health standards or controls) of any Governmental
Authority.
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<PAGE> 16
"Guarantors" shall mean each Significant Subsidiary, if any, which may
execute a Guaranty Agreement after the date hereof pursuant to Section 9.19
hereof.
"Guaranty Agreements" shall mean the guaranty agreements, if any,
dated as of the date of their respective execution, executed by each of the
Guarantors after the date hereof pursuant to Section 9.19 hereof, as same may
be amended from time to time, guaranteeing prompt payment and/or performance of
the Indebtedness.
"Hedging Agreement" shall mean (i) any interest or currency rate swap,
rate cap, rate floor, rate collar, exchange transaction, put or call option,
forward agreement, foreign exchange or other exchange or rate protection
agreement or any option with respect to any such transaction and (ii) any cap,
floor, collar, exchange transaction, contract for sale for future delivery of
oil or gas (whether or not the subject oil or gas is to be delivered), hedging
contract, forward contract, swap agreement, futures contract, call or put
option or any other similar agreement or other exchange or protection agreement
relating to Hydrocarbons or any option with respect to any such transaction
(whether or not any of the foregoing contemplates physical deliveries or only
financial contracts).
"Highest Lawful Rate" shall mean, with respect to each Lender, the
maximum nonusurious interest rate, if any, that at any time or from time to
time may be contracted for, taken, reserved, charged or received on the Notes
or on other Indebtedness under laws applicable to such Lender which are
presently in effect or, to the extent allowed by law, under such applicable
laws which may hereafter be in effect and which allow a higher maximum
nonusurious interest rate than applicable laws now allow.
"Hydrocarbon Interests" shall mean all rights, titles, interests and
estates now owned or hereafter acquired in and to oil and gas leases, oil, gas
and mineral leases, or other liquid or gaseous hydrocarbon leases, mineral fee
interests, overriding royalty and royalty interests, net profit interests and
production payment interests, including any reserve or residual interest of
whatever nature.
"Hydrocarbons" shall mean oil, gas, casinghead gas, drip gasoline,
natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous
hydrocarbons and all products refined therefrom and all other minerals
customarily produced in association therewith.
"Indebtedness" shall mean (i) any and all amounts owing or to be owing
by the Company to the Agent and/or the Lenders in connection with the Notes,
any Letter of Credit or Letter of Credit Agreement, any Security Instrument,
including this Agreement, or any Hedging Agreement (to the extent of net
obligations owed in connection therewith), between the Company and the Agent or
any Lender or any Affiliate of any Lender, and (ii) all renewals, extensions,
replacements, amendments and/or rearrangements thereof.
"Indemnity Matters" shall have the meaning assigned to that term in
Section 12.03(c).
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<PAGE> 17
"Initial Funding" shall mean the funding of the initial Loans pursuant
to Section 6.01 hereof.
"Initial Reserve Report" shall mean, collectively, the reports of
Netherland, Sewell and Associates dated as of December 31, 1999 and Miller &
Lents dated December 31, 1999, with respect to Oil and Gas Properties of the
Company, a copy of which has been delivered to the Lenders.
"Interest Coverage Ratio" shall have the meaning assigned to that term
in Section 9.12.
"Interest Period" shall mean the period commencing on the date a Loan
is made and ending, as the Company may select pursuant to Section 2.02: (a) in
the case of Base Rate Loans, on the next succeeding Quarterly Date; and (b) in
the case of Fixed Rate Loans, on the numerically corresponding day in the
first, second, third, or sixth calendar month thereafter, provided that each
such Interest Period which commences on the last Business Day of a calendar
month (or on any day for which there is no numerically corresponding day in the
appropriate subsequent calendar month) shall end on the last Business Day of
the appropriate calendar month. Notwithstanding the foregoing: (i) no Interest
Period may commence before and end after the scheduled maturity of the Notes;
(ii) each Interest Period which would otherwise end on a day which is not a
Business Day shall end on the next succeeding Business Day (or, if such next
succeeding Business Day falls in the next succeeding calendar month, on the
next preceding Business Day); and (iii) no Interest Period on Fixed Rate Loans
shall have a duration of less than one month.
"LC Exposure" shall mean at any time the aggregate undrawn face amount
of all outstanding Letters of Credit and the aggregate of all amounts drawn
under Letters of Credit and not yet reimbursed or funded as a Loan pursuant to
Section 4.07(b).
"Letter of Credit Agreements" shall mean the written agreements
between the Company and the Agent executed or hereafter executed in connection
with the issuance by the Agent of the Letters of Credit, such agreements to be
in substantially the form attached hereto as Exhibit A, or on any other
customary form for letters of credit of comparable amount and purpose, as from
time to time agreed to by the Company and the Agent.
"Letters of Credit" shall mean (i) the letters of credit outstanding
on the Closing Date and described on Schedule 1.02(b) hereof, together with all
renewals, replacements, extensions and substitutions thereof, (ii) the letters
of credit hereafter issued by the Agent on behalf of the Lenders pursuant to
Section 2.01(b), and (iii) all reimbursement obligations pertaining to any such
letters of credit; and "Letter of Credit" shall mean any one of the Letters of
Credit and the reimbursement obligation pertaining thereto.
"Liens" shall mean, with respect to any asset, any mortgage, lien,
pledge, charge (including, without limitation, production payments and the like
payable out of Oil and Gas Properties), security
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<PAGE> 18
interest or encumbrance of any kind in respect of such asset. For the purposes
of this Agreement, the Company and the Subsidiaries shall be deemed to own
subject to a Lien any asset which they have acquired or hold subject to the
interest of a vendor or lessor under any conditional sale agreement, Capital
Lease or other title retention agreement relating to such asset.
"Loans" shall mean the Revolving Credit Loans.
"Majority Lenders" shall mean, at any time, Lenders having at least
sixty-six and two thirds percent (66 2/3%) of the aggregate principal amount of
all outstanding Loans or, if no Loans are outstanding, of the aggregate amount
of the Commitments.
"MarketSpan" shall mean MarketSpan Corporation d/b/a KeySpan Energy.
"MarketSpan Loan Agreement" shall mean that certain Subordinated Loan
Agreement dated as of November 30, 1998, by and between the Company and
MarketSpan, as heretofore amended, modified or supplemented, a true and
complete copy of which is attached hereto as Exhibit G.
"MarketSpan Credit Facility" shall mean the $150,000,000 credit
facility under the MarketSpan Loan Agreement, the obligations under which have
been subordinated to the full and final payment of the Indebtedness pursuant to
the MarketSpan Subordination Agreement.
"MarketSpan Subordination Agreement" shall mean that certain
Subordination Agreement dated as of November 25, 1998, by and among MarketSpan,
the Company and the Agent, as heretofore amended, modified or supplemented, a
true and complete copy of which is attached hereto as Exhibit H.
"Material Adverse Effect" shall mean any material and adverse effect
on (i) the assets, liabilities, financial condition, business, operations,
affairs or circumstances of the Company and its Subsidiaries on a combined
basis from those reflected in the Financial Statements or from the facts
represented or warranted in this Agreement or any other Security Instrument, or
(ii) the ability of the Company and its Subsidiaries on a combined basis to
carry out their respective business as at the date of this Agreement or as
proposed at the date of this Agreement to be conducted or meet their respective
obligations under the Notes, the Letters of Credit and Letter of Credit
Agreements, this Agreement or the other Security Instruments on a timely basis.
"Material Change" shall mean a Change in Control.
"Multiemployer Plan" shall mean a Plan defined as such in Section
3(37) of ERISA to which contributions have been made by the Company or any
ERISA Affiliate and which is covered by Title IV of ERISA.
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<PAGE> 19
"Notes" shall mean the Revolving Credit Notes.
"Oil and Gas Properties" shall mean Hydrocarbon Interests; the
Properties now or hereafter pooled or unitized with Hydrocarbon Interests; all
presently existing or future unitization, pooling agreements and declarations
of pooled units and the units created thereby (including without limitation all
units created under orders, regulations and rules of any governmental body or
agency having jurisdiction) which may affect all or any portion of the
Hydrocarbon Interests; all operating agreements, contracts and other agreements
which relate to any of the Hydrocarbon Interests or the production, sale,
purchase, exchange or processing of Hydrocarbons from or attributable to such
Hydrocarbon Interests; all Hydrocarbons in and under and which may be produced
and saved or attributable to the Hydrocarbon Interests, the lands covered
thereby and all oil in tanks and all rents, issues, profits, proceeds,
products, revenues and other income from or attributable to the Hydrocarbon
Interests; all tenements, hereditaments, appurtenances and Properties in
anywise appertaining, belonging, affixed or incidental to the Hydrocarbon
Interests, Properties, rights, titles, interests and estates described or
referred to above, including any and all Property, real or personal, now owned
or hereinafter acquired and situated upon, used, held for use or useful in
connection with the operating, working or development of any of such
Hydrocarbon Interests or Property (excluding drilling rigs, automotive
equipment or other personal property which may be on such premises for the
purpose of drilling a well or for other similar temporary uses) and including
any and all oil wells, gas wells, injection wells or other wells, buildings,
structures, fuel separators, liquid extraction plants, plant compressors,
pumps, pumping units, field gathering systems, tanks and tank batteries,
fixtures, valves, fittings, machinery and parts, engines, boilers, meters,
apparatus, equipment, appliances, tools, implements, cables, wires, towers,
casing, tubing and rods, surface leases, rights-of-way, easements and
servitudes together with all additions, substitutions, replacements, accessions
and attachments to any and all of the foregoing.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"Person" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated organization or
government or any agency, instrumentality or political subdivision thereof, or
any other form of entity.
"Phase I Audit" shall mean an inspection of property and an evaluation
of operations conducted thereon of a scope and in such detail as would be
conducted by a reasonably prudent purchaser, lender, or investor in light of
all relevant facts and circumstances to identify adverse environmental
conditions or violations of Environmental Laws that would subject a past,
present, or future owner or operator of such property to liabilities under
applicable Environmental Laws as a result of such environmental conditions
and/or violations of Environmental Laws; provided, however, that the scope and
detail of the inspection and evaluation shall be no less extensive than
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<PAGE> 20
the minimum standards set forth in the most recent version of ASTM Standard E
1527, as adopted by the American Society for Testing and Materials.
"Plan" shall mean an employee pension benefit or other plan
established or maintained by the Company or any Subsidiary or any ERISA
Affiliate and which is covered by Title IV of ERISA, other than a Multiemployer
Plan.
"Post-Default Rate" shall mean, with respect to the principal of any
Loan and, to the extent permitted by law, any other amount payable by the
Company under this Agreement or any Note or any Letter of Credit Agreement that
is not paid when due (whether at stated maturity, by acceleration or
otherwise), a rate per annum during the period from and including the due date,
to, but excluding the date on which such amount is paid in full equal to 2%
above the Base Rate as in effect from time to time plus the Applicable Margin
(if any) (provided that, if the amount so in default is principal of a Fixed
Rate Loan and the due date thereof is a day other than the last day of the
Interest period therefor, the "Post-Default Rate" for such principal shall be,
for the period from and including the due date and to but excluding the last
day of the Interest period therefor, 2% above the interest rate for such Loan
as provided in Section 3.02 hereof and, thereafter, the rate provided for above
in this definition).
"Prime Rate" shall mean the rate of interest from time to time
determined by Chase at the Principal Office as its prime commercial lending
rate. Such rate is set by Chase as a general reference rate of interest, taking
into account such factors as Chase may deem appropriate, it being understood
that many of Chase's commercial or other loans are priced in relation to such
rate, that it is not necessarily the lowest or best rate actually charged to
any customer and that Chase may make various commercial or other loans at rates
of interest having no relationship to such rate. Changes in the rate of
interest on that portion of any Loans maintained as Base Rate Loans will take
effect simultaneously with each change in the Prime Rate. The Agent will give
notice promptly to the Company of changes in the Prime Rate.
"Principal Office" shall mean the principal office of the Agent and
Chase, presently located at 712 Main Street, Houston, Texas 77002.
"Property" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"Quarterly Dates" shall mean the last day of each March, June,
September, and December in each year, the first of which shall be the first
such day after the Closing Date; provided that if any such day is not a
Business Day, then such Quarterly Date shall be the next succeeding Business
Day.
"Regulation D" shall mean Regulation D of the Board of Governors of
the Federal Reserve System (or any successor), as the same may be amended or
supplemented from time to time.
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<PAGE> 21
"Regulatory Change" shall mean, with respect to any Lender, any change
after the date of this Agreement in United States Federal, state or foreign law
or regulations (including Regulation D) or the adoption or making after such
date of any interpretations, directives or requests applying to a class of
lenders or insurance companies (including such Lender or its Applicable Lending
Office) of or under any United States Federal, state or foreign law or
regulations (whether or not having the force of law) by any court or
governmental or monetary authority charged with the interpretation or
administration thereof.
"Required Payment" shall have the meaning assigned to that term in
Section 4.04.
"Reserve Report" shall have the meaning assigned to that term in
Section 8.04(a).
"Reserve Requirement" shall mean, for any Interest Period for any
Fixed Rate Loan, the average maximum rate at which reserves (including any
marginal, supplemental or emergency reserves) are required to be maintained
during the Interest Period for such Loan under Regulation D by member banks of
the Federal Reserve System in Dallas with deposits exceeding $1,000,000,000
against "Eurocurrency liabilities" (as such term is used in Regulation D).
Without limiting the effect of the foregoing, the Reserve Requirement shall
also reflect any other reserves required to be maintained by such member banks
by reason of any Regulatory Change against (i) any category of liabilities
which includes deposits by reference to which the Fixed Base Rate for Fixed
Rate Loans is to be determined as provided in the definition of "Fixed Base
Rate" in this Section 1.01, or (ii) any category of extensions of credit or
other assets which include Fixed Rate Loans.
"Revolving Credit Loans" shall mean the revolving credit loans as
provided for by Section 2.01(a).
"Revolving Credit Notes" shall mean the promissory notes of the
Company provided for in Section 2.07 and being in the form of Exhibit B hereto,
together with any and all renewals, extensions for any period, increases or
rearrangements thereof.
"Security Instruments" shall mean this Agreement, the Notes, the
Letter of Credit Agreements, and any and all other agreements or instruments
now or hereafter executed and delivered by the Company, a Subsidiary or any
other Person (other than participation or similar agreements between any Lender
and any other bank or creditor with respect to any Indebtedness pursuant to
this Agreement) in connection with, or as security for the payment or
performance of, the Notes, any Letter of Credit or Letter of Credit Agreement,
or this Agreement, as such instruments or agreements may be amended or
supplemented from time to time.
"Significant Subsidiary" shall mean a "significant subsidiary" as
defined in Section 1-02(y) of Regulation S-X under the Securities and Exchange
Act of 1934, as amended.
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<PAGE> 22
"Solvent" shall mean with respect to any Person on a particular date,
the condition that, on such date, (a) the fair value of the Property of such
Person is greater than the total amount of liabilities, including, without
limitation, contingent liabilities, of such Person, (b) the present fair
salable value of the assets of such Person is not less than the amount that
will be required to pay the probable liability of such Person on its debts as
they become absolute and matured, (c) such Person does not intend to, and does
not believe that it will, incur debts or liabilities beyond such Person's
ability to pay as such debts and liabilities mature, and (d) such Person is not
engaged in business or a transaction, and is not about to engage in business or
a transaction, for which such Person's Property would constitute an
unreasonably small amount of capital.
"Subsidiary" shall mean any corporation, partnership, joint venture or
other entity of which at least a majority of the outstanding shares of stock or
other equity interests having by the terms thereof ordinary voting power or
economic interests to elect a majority of the board of directors or other
managers of such corporation, partnership, joint venture or other entity
(irrespective of whether or not at the time stock or other equity interests of
any other class or classes of such corporation, partnership, joint venture or
other entity shall have or might have voting power by reason of the happening
of any contingency) is at the time directly or indirectly owned or controlled
by the Company or one or more of the Subsidiaries, or by the Company and one or
more of the Subsidiaries.
"THEC Holdings" shall mean THEC Holdings Corp., a Delaware corporation.
"Threshold Amount" shall mean (i) during the period from and including
the Closing Date to and including the date of the redetermination of the
Borrowing Base scheduled to occur September 1, 1999, $175,000,000, and (ii)
thereafter, the amount equal to the Borrowing Base.
"Threshold Amount Utilization" shall mean the quotient of (i) the sum
of (A) the aggregate principal amount of Loans outstanding hereunder, plus (B)
the LC Exposure, divided by (ii) the lesser of (A) the Threshold Amount in
effect at the time of calculation, or (B) the aggregate amount of the
Commitments.
"Total Debt" means (a) all Debt for money borrowed or for the purchase
price of Property, (b) trade Debt incurred in the ordinary course of business
which is not paid when due, (c) liabilities under any bond, note, security,
letter of credit (other than Letters of Credit issued for trade credit but
including Letters of Credit issued as performance guarantees), acceptance
facility, or similar agreement, (d) all obligations under direct or indirect
guaranties in respect of, and obligations (contingent or otherwise) to purchase
or otherwise acquire, or otherwise to assure a creditor against loss in respect
of, Debt or obligations of other Persons, (e) Capital Lease obligations, and
(f) all obligations under or in connection with Hedging Agreements once such
obligations become "debt" according to GAAP.
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<PAGE> 23
Section 1.03 Accounting Terms and Determinations. Unless
otherwise specified herein, all accounting terms used herein shall be
interpreted, all determinations with respect to accounting matters hereunder
shall be made, and all financial statements and certificates and reports as to
financial matters required to be furnished to the Agent or the Lenders
hereunder shall be prepared, in accordance with GAAP, applied on a basis
consistent with the Financial Statements (except for changes concurred with by
the Company's independent public accountants).
ARTICLE II
Commitments
Section 2.01 Loans and Letters of Credit. Each Lender severally
agrees, on the terms of this Agreement, to make the following Loans to the
Company, and the Agent on behalf of the Lenders agrees to issue, reissue, renew
and extend Letters of Credit for the account of the Company in accordance with
the following:
(a) Revolving Credit Loans - during the period from and including the
Closing Date to and including the Drawdown Termination Date, Revolving Credit
Loans in an aggregate principal amount at any one time outstanding up to, but
not exceeding, the amount of such Lender's Commitment as then in effect;
provided, however, that the aggregate principal amount of all Revolving Credit
Loans made by all Lenders hereunder at any one time outstanding shall not
exceed, in the aggregate (A) the lesser of (1) the Borrowing Base or (2) the
aggregate Commitments, as then in effect, minus (B) the LC Exposure. Subject to
the terms of this Agreement, during the period from the Closing Date to and
including the Drawdown Termination Date, the Company may borrow, repay and
reborrow the amount of the Commitments, as then in effect.
Subject to the other terms and provisions of this Agreement, at the option of
the Company unless otherwise provided herein, the Loans may be Base Rate Loans
or Fixed Rate Loans (each a "type" of Loan). For purposes of this Section
2.01(a), Fixed Rate Loans having different Interest Periods, regardless of
whether they commence on the same date, shall be considered separate Loans.
(b) Letters of Credit:
(i) During the period from and including the Closing Date to
and including the Drawdown Termination Date, the Lenders agree to
extend credit to the Company at any time and from time to time by
participating in the issuance, renewal, extension or reissuance of
Letters of Credit pursuant to this Agreement; provided, that all such
Letters of Credit issued on or after the Closing Date shall be issued
by the Agent; and further provided, however, the aggregate amount of
all Letters of Credit at any one time outstanding shall not exceed (A)
the lesser of (1) $2,000,000, or (2) the lesser of (x) the Borrowing
Base, or (y) the aggregate
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<PAGE> 24
Commitments, as then in effect, minus (B) the aggregate principal
amount of all Loans then outstanding.
(ii) Each of the Letters of Credit issued after the Closing
Date shall (A) be issued by the Agent, (B) contain such terms and
provisions as are required by the Letter of Credit Agreement executed
in connection therewith and (to the extent not in conflict with the
Letter of Credit Agreement) those then customarily used by the Agent
in letters of credit, (C) be for the account of the Company, (D) be
issued to support trade payables and performance guarantees, and (E)
expire not later than the Drawdown Termination Date.
(iii) In conjunction with the issuance of a Letter of Credit,
the Company shall execute a Letter of Credit Agreement. In the event
of any conflict between any provision of a Letter of Credit Agreement
and this Agreement, the Company, the Agent and the Lenders hereby
agree that the provisions of this Agreement shall govern.
(c) Extensions - With the unanimous written consent of the Lenders,
which may or may not be granted in the discretion of the Lenders, the Company
may, on an annual basis, obtain one year extensions of the Drawdown Termination
Date by delivering a written request for same to the Agent not more than four
(4) months and not less than sixty (60) days prior to the Drawdown Termination
Date.
Section 2.02 Borrowings, Continuations, Conversions, and Issuances.
(a) The Company shall give the Agent (which shall promptly notify the
Lenders) advance notice as hereinafter provided of each borrowing,
continuation, and conversion and each request for issuance, renewal or
extension of a Letter of Credit hereunder which request shall be in the form of
Exhibit E hereto, which shall specify the aggregate amount of such Loan or such
Letter of Credit, the date (which shall be a Business Day) of the Loans to be
borrowed, continued or converted, or the Letters of Credit to be issued,
renewed or extended, the type of Loan to be borrowed, continued or converted,
the beneficiary and other terms of such Letter of Credit, and in the case of
Fixed Rate Loans, the duration of the Interest Period therefor, all of which
(other than the beneficiary) must not conflict with the other terms and
provisions of this Agreement.
(b) All Base Rate Loans (as part of the same borrowing) shall be in
aggregate amounts among all Lenders of at least $5,000,000 (or increments of
$1,000,000 in excess thereof) or the remaining unused portion of the
Commitments, or the amount disbursed under a Letter of Credit and advanced
hereunder pursuant to Section 4.07(b) hereof, if less. All Fixed Rate Loans (as
part of the same borrowing) shall be in aggregate amounts among all Lenders of
at least $5,000,000 (or increments of $1,000,000 in excess thereof).
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<PAGE> 25
(c) All borrowings, continuations and conversions of Loans, or
requests for issuance, renewal, extension or reissuance of Letters of Credit
shall require advance written notice from the Company to the Agent, which in
each case (other than the issuance, renewal, extension or reissuance of Letters
of Credit) shall be irrevocable and effective only upon receipt by the Agent
and shall be received by the Agent not later than 10:00 a.m. Houston time on a
day which is not less than the number of Business Days prior to the date of
such borrowing, continuation or conversion specified below opposite the type of
such Loans:
<TABLE>
<CAPTION>
Number of
Type Business Days
---- -------------
<S> <C>
Base Rate Loans 0
Fixed Rate Loans 3;
</TABLE>
and four (4) Business Days prior to the date such Letter of Credit is to be
issued, renewed, extended or reissued.
(d) Not later than 12:00 noon Houston time on the date specified for
each borrowing hereunder, each Lender shall make available in immediately
available funds the amount of the Loan to be made by such Lender on such date
to the Agent, to an account which the Agent shall specify for the account of
the Company. The amounts so received by the Agent shall, subject to the terms
and conditions of this Agreement, be made available to the Company by
depositing the same, in immediately available funds, in an account of the
Company designated by the Company and main tained with Chase at the Principal
Office.
(e) On the date specified for the issuance, renewal or extension of a
Letter of Credit, the Agent shall issue such Letter of Credit to the
beneficiary thereof.
(f) Subject to the terms of this Agreement, the Company may elect to
continue all or any part of any Fixed Rate Loan beyond the expiration of the
then current Interest Period relating thereto by giving advance notice to the
Agent of such election, specifying the amount of such Loan to be continued and
the Interest Period therefor. In the absence of such a timely and proper
election in accordance with the terms of Section 2.02(a) and (c), the Company
shall be deemed to have elected to convert such Fixed Rate Loan to a Base Rate
Loan. All or any part of any Fixed Rate Loan may be continued as provided
herein, provided that (i) any continuation of any such Loan shall be (as to
each Loan as continued for an applicable Interest Period) in the principal
amount of at least $5,000,000 (or increments of $1,000,000 in excess thereof),
and (ii) no Event of Default shall have occurred and be continuing. If an Event
of Default shall have occurred and be continuing, each Fixed Rate Loan shall be
converted to a Base Rate Loan on the last day of the Interest Period applicable
thereto.
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<PAGE> 26
(g) Subject to the terms of this Agreement:
(i) The Company may elect to convert any Fixed Rate Loan on
the last day of the then current Interest Period relating thereto to a
Base Rate Loan by giving advance notice to the Agent of such election.
(ii) The Company may elect to convert all or any part of a
Base Rate Loan at any time and from time to time to a Fixed Rate Loan
by giving advance notice to the Agent of such election. All or any
part of any outstanding Loan may be converted as provided herein,
provided that any conversion of any Base Rate Loan into a Fixed Rate
Loan shall be (as to each such Loan into which there is a conversion
for an applicable Interest Period) in the prin cipal amount not less
than $1,000,000. If no Event of Default shall have occurred and be
continuing, each Loan may be converted as provided in this Section. If
an Event of Default shall have occurred and be continuing, no Loan may
be converted into a Fixed Rate Loan.
Section 2.03 Changes of Commitments.
(a) The Company shall have the right to terminate or to reduce the
amount of the Commitments at any time or from time to time upon not less than
three (3) Business Day's prior written notice to the Agent (which shall
promptly notify the Lenders) of each such termination or reduction, which
notice shall specify the effective date thereof and the amount of any such
reduction (which shall not be less than $5,000,000 or any increment of
$5,000,000 in excess thereof) and shall be irrevocable and effective only upon
receipt by the Agent.
(b) The Commitments once terminated or reduced may not be reinstated.
(c) The Company shall have the right, without the consent of the
Lenders but with the prior approval of the Agent, not to be unreasonably
withheld, to cause from time to time an increase in the aggregate Commitments
of the Lenders by adding to this Agreement one or more additional Lenders or by
allowing one or more Lenders to increase their respective Commitments; provided
however (i) no Event of Default shall have occurred hereunder which is
continuing, (ii) no such increase shall result in the aggregate Commitments
hereunder to exceed $250,000,000, (iii) no Lender's Commitment shall be
increased without such Lender's consent, and (iv) on the effective date of any
such increase, there shall be no outstanding Fixed Rate Loans hereunder.
Section 2.04 Fees.
(a) The Company shall pay to the Agent, for the account of each
Lender, the following commitment fees:
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(i) A commitment fee on the daily average of the amount by
which the Designated Borrowing Base exceeds the sum of (A) the LC
Exposure, plus (B) the aggregate principal amount of all outstanding
Loans, for the period from and including the last Borrowing Base
determination date to the earlier of the date the Commitments are
terminated or the date of the next effective Borrowing Base
determination date at the following rate per annum as applicable:
<TABLE>
<CAPTION>
THRESHOLD AMOUNT
UTILIZATION COMMITMENT FEE
---------------- --------------
<S> <C>
Less than 50% .25%
Greater than or equal to 50% but less than 65% .25%
Greater than or equal to 65% but less than 100% .30%
Greater than or equal to 100% but less than
115% .375%
Greater than or equal to 115% .375%
</TABLE>
(ii) An unavailable commitment fee on the daily average
difference between the Designated Borrowing Base and the lesser of (A)
the Commitments or (B) the Borrowing Base for the period from and
including the last Borrowing Base determination date to the earlier of
the date the Commitments are terminated or the date of the next
Borrowing Base determination at a rate per annum equal 33% of the
applicable rate per annum outlined in clause (i) above.
(iii) If the Designated Borrowing Base is increased pursuant
to the proviso of Section 2.09(d), an additional commitment fee for
the period beginning on the most recent semi-annual regularly
scheduled Borrowing Base determination date (pursuant to Section 2.09)
to the date on which the Designated Borrowing Base is so increased at
the applicable rate per annum set forth in clause (i) above.
All such commitment fees shall be calculated on the basis of a year of
365 (or, in a leap year, 366) days for the actual number of days elapsed. The
accrued commitment fees shall be due and payable in arrears upon any reduction
or termination of the Commitments and on the last Business Day of each
December, March, June and September and on the Drawdown Termination Date,
commencing on the first such date after the Closing Date.
(b) The Company shall pay to the Agent a fee for the issuance of
Letters of Credit (calculated separately for each Letter of Credit) under this
Agreement at the following rate per
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<PAGE> 28
annum as applicable, computed on the aggregate amount available to be drawn
under each Letter of Credit:
<TABLE>
<CAPTION>
THRESHOLD AMOUNT
UTILIZATION ISSUANCE FEE
---------------- ------------
<S> <C>
Less than 50% .625%
Greater than or equal to 50% but less
than 65% .75%
Greater than or equal to 65% but less
than 85% 1.00%
Greater than or equal to 85% but less
than 100% 1.125%
Greater than or equal to 100% but less
than 115% 1.375%
Greater than 115% 1.50%
</TABLE>
provided, however, each Letter of Credit shall bear a minimum fee of $300.00.
Such fees shall be payable semi-annually in advance, commencing on the date of
issuance of such Letter of Credit and shall be non-refundable. 1/8% of 1% of
each such fee shall be retained by the Agent for its own account, with the
remaining portion of each such fee being shared pro rata by the Lenders.
(c) For the period from and including the Closing Date to the Drawdown
Termination Date, the Company agrees to pay to the Agent on the date which is
one (1) year after on the Closing Date and on the same day of each calendar
year thereafter an engineering fee of $18,000. Eight thousand dollars of each
such engineering fee shall be retained by the Agent with the balance being
shared by the Lenders (excluding Chase, unless Chase is the only Lender) pro
rata in proportion to their Commitments.
(d) If the Company exercises its option to cause the Lenders to
redetermine the Borrowing Base pursuant to Section 2.09(e), then for each
exercise of such option, the Company shall pay (i) a fee to the Agent, the
amount of which to be negotiated by the Agent and the Company at the time of
each exercise of such option, and (ii) a fee of $1,250 to each Lender
(excluding Chase).
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<PAGE> 29
(e) The Company shall pay to the Agent as compensation for its
services hereunder an administrative fee in cash or such other type of
compensation as may be mutually agreed in the amount heretofore mutually agreed
and any and other fees heretofore mutually agreed upon, all as set forth in the
Engagement Letter. The administrative fee shall be due and payable on the date
which is one (1) year after the Closing Date and on each anniversary thereof
during the term of this Agreement. Upon termination of this Agreement, such fee
shall be appropriately pro rated based on the fraction of a year that has
elapsed between the latest anniversary of the Closing Date and the date the
Commitments and all other obligations of the Lenders and the Agent under this
Agreement are terminated.
Section 2.05 Applicable Lending Offices. The Loans of each type made
by each Lender shall be made and maintained at such Lender's Applicable Lending
Office for Loans of such type.
Section 2.06 Several Obligations. The failure of any Lender to make
any Loan to be made by it or to provide funds for disbursements under Letters
of Credit on the date specified therefor shall not relieve any other Lender of
its obligation to make its Loan or provide such funds on such date, but no
Lender shall be responsible for the failure of any other Lender to make a Loan
to be made by such other Lender or to provide such funds to be provided by such
other Lender.
Section 2.07 Notes.
(a) The Revolving Credit Loans made by each Lender shall be evidenced
by a single promissory note of the Company in substantially the form of Exhibit
B hereto, dated (i) the Closing Date or (ii) the effective date of an
Assignment pursuant to Section 12.06(b), payable to the order of such Lender in
a principal amount equal to the maximum amount of its Commitment as originally
in effect and otherwise duly completed. The date, amount, type, interest rate
and maturity date of each Loan made by each Lender, and all payments made on
account of the principal thereof, shall be recorded by such Lender on its books
and, prior to any transfer of a Note held by it, endorsed by such Lender on the
schedule attached to such Note or any continuation thereof; provided, however,
such Lender shall have no liability to the Company if it fails to record any
such information and in no event shall such failure diminish or impair the
Company's obligation to repay all amounts owing to such Lender under such Note.
(b) No Lender shall be entitled to have its Note subdivided, by
exchange for promissory notes of lesser denominations or otherwise, except in
connection with a permitted assignment of all or any portion of such Lender's
Commitment, Loans and Note pursuant to Subsection 12.06(b).
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<PAGE> 30
Section 2.08 Prepayments.
(a) The Company may prepay Loans on any Business Day upon notice to
the Agent (which shall promptly notify the Lenders), which notice shall be
given by the Company not later than 10:00 a.m. Houston time three (3) Business
Days' prior to the date of such prepayment, shall specify the amount of the
prepayment (which shall be not less than $1,000,000 (or increments of
$1,000,000 in excess thereof) or the remaining balance of any Loans
outstanding, if less) and shall be irrevocable and effective only upon receipt
by the Agent, provided that interest on the principal prepaid, accrued to the
prepayment date, shall be paid on the next quarterly interest payment date
unless the prepayment is of the remaining balance of all Loans outstanding. Any
prepayment of any Fixed Rate Loans shall be subject to the provisions of
Section 5.05 hereof.
(b) If at any time the sum of the outstanding aggregate principal
amount of the Loans and the LC Exposure exceeds the lesser of the then
effective Borrowing Base or the aggregate amount of the Commitments, then the
Company shall (i) within 30 days following such event, pay or prepay the amount
of such excess amount for application first, towards reduction of all amounts
previously drawn under Letters of Credit, but not yet funded as a Revolving
Credit Loan pursuant to Section 4.07(b) or reimbursed, second, if necessary,
towards reduction of the outstanding principal balance of the Notes by
prepaying Base Rate Loans, if any, then outstanding, and third, if necessary,
at the election of the Company, either toward a reduction of the outstanding
principal balance of the Notes by prepaying Fixed Rate Loans, if any, then
outstanding or by paying such amount to the Agent as cash collateral for
outstanding Letters of Credit, which amount shall be held by the Agent as cash
collateral to secure the Company's obligation to reimburse the Agent and the
Lenders for drawings under the Letters of Credit, or (ii) within 30 days
following such event, provide the Lenders with additional collateral acceptable
to the Lenders to eliminate such Borrowing Base deficiency. The Company shall
also pay any amounts payable pursuant to Section 5.05 in connection with any
payment or prepayment made pursuant to this Section 2.08(b).
Section 2.09 Borrowing Base; Threshold Amount.
(a) During the period from and after the Closing Date to and including
the effective date of the redetermination of the Borrowing Base scheduled to
occur September 1, 1999, the amount of (i) the Borrowing Base shall be
$200,000,000 (subject to any redetermination occurring pursuant to the second
paragraph of Section 2.09(c) below), and (ii) the Threshold Amount shall be
$175,000,000. The redetermination of the Borrowing Base scheduled to occur
September 1, 1999, and each redetermination of the Borrowing Base thereafter
shall be made using the same criteria used by the Agent and the Lenders prior
to the Closing Date to determine the Threshold Amount. On and after the
effective date of the redetermination of the Borrowing Base scheduled to occur
September 1, 1999, the Threshold Amount shall be equal to the amount of the
Borrowing Base then in effect.
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<PAGE> 31
(b) On the effective date of the redetermination of the Borrowing Base
scheduled to occur September 1, 1999, and on the first day of each March and
September thereafter (provided that the Company shall have furnished the
Engineering Reports in a timely and complete manner), the Agent shall
redetermine the amount of the Borrowing Base for recommendation to the Lenders
in accordance with this Section 2.09.
(c) Upon receipt of the reports required by Section 8.04 and such
other reports, data, and supplemental information as may, from time to time, be
reasonably requested by the Agent or the Required Lenders (the "Engineering
Reports"), together with a certificate from the President or chief financial
officer of the Company that, to the best of his knowledge and in all material
respects, (i) the information upon which the Engineering Reports are based is
true and correct, (ii) the certificate identifies the properties covered by the
Engineering Reports that have not been previously included in any prior
Engineering Reports, and (iii) no Oil and Gas Properties of the Company, its
Affiliates or its Subsidiaries have been sold since the date of the last
Borrowing Base determination except as set forth on an exhibit to the
certificate, which certificate shall list all Oil and Gas Properties of the
Company, its Affiliates and its Subsidiaries sold in compliance with Section
9.15 and in such detail as reasonably required by the Agent, the Agent and the
Lenders will evaluate the Properties covered by the Engineering Reports. Based
upon such information and such other information as the Agent or the Required
Lenders deems appropriate, the Agent will redetermine the Borrowing Base for
recommendation to the Lenders. Such redetermination shall be accomplished not
later than the first day of each March and September commencing on September 1,
1999 (provided that the Company shall have furnished the Engineering Reports in
a timely and complete manner). Each redetermination of the Borrowing Base must
be approved by the Majority Lenders; provided, however, the redetermination of
the Borrowing Base scheduled to occur on September 1, 1999, must be approved by
all of the Lenders.
Each redetermination of the Borrowing Base shall be effective and
applicable for all purposes of this Agreement until the effective date of the
next redetermination, except as provided elsewhere in this Agreement and except
for such redetermination as the Majority Lenders may conduct in good faith and
at their sole discretion, after notice to the Company of their intention to so
redetermine the Borrowing Base (and, in the case of such a redetermination
prior to the redetermination scheduled to occur September 1, 1999, the
Threshold Amount), upon the occurrence of any event or change having a Material
Adverse Effect or a material change in the value or nature of the Property
included in the Borrowing Base. The Agent will promptly notify the Company in
writing of each redetermination of the Borrowing Base made in accordance with
this Section 2.09. Until such notification, the Borrowing Base established for
the directly preceding period shall remain in effect, and thereafter the new
Borrowing Base as set forth in such notification shall be in effect.
(d) Upon the Company's receipt of written notice from the Agent of the
amount of the Borrowing Base then in effect, the Company may accept all or a
lesser amount of such Borrowing Base (the "Designated Borrowing Base") by
providing written notice to the Agent of the amount of
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<PAGE> 32
the Designated Borrowing Base within 5 Business Days following receipt of said
notice from the Agent; provided, however, the Designated Borrowing Base shall
not be less than the lower of (i) the amount of the Borrowing Base then in
effect, or (ii) $125,000,000, and shall not be greater than the lower of (x)
the Borrowing Base then in effect, or (y) the aggregate amount of the
Commitments. If the Company does not provide such written notice to the Agent
within such 5 Business Day period, the Designated Borrowing Base shall be equal
to the amount of the Borrowing Base as set forth in the aforementioned written
notice from the Agent to the Company; provided, however, that during each
Borrowing Base period and after the expiration of such 5 Business Day period,
the Company shall have an opportunity to adjust the Designated Borrowing Base
by providing the Agent with written notice anytime at least 5 Business Days in
advance of its intent to designate a different Designated Borrowing Base based
upon the Agent's most recent written notice to the Company of the Borrowing
Base and subject to the limitations set forth above. During the period from and
after the Closing Date to and including the effective date of the next
designation of the Designated Borrowing Base in accordance with this Section
2.09, the amount of the Designated Borrowing Base shall be $200,000,000
(e) The Company shall have the option to cause the Lenders to
redetermine the Borrowing Base once between each scheduled semi-annual
Borrowing Base determination occurring after the redetermination scheduled to
occur on September 1, 1999; provided, however, any such redetermination must be
approved by the Majority Lenders, and each request for such redetermination
must be accompanied by such information, reports and certificates as the Agent
or the Required Lenders shall reasonably require to support such redetermined
Borrowing Base.
(f) At no time shall the Threshold Amount exceed the Borrowing Base.
ARTICLE III
Payments of Principal and Interest
Section 3.01 Repayment of Loans. The Company will pay to the Agent for
account of each Lender the then outstanding principal amount of each Loan made
by such Lender on or before the Drawdown Termination Date.
Section 3.02 Interest.
(a) The Company will pay to the Agent for account of each Lender
interest on the unpaid principal amount of each Loan made by such Lender for
the period commencing on the date of such Loan to but excluding the date such
Loan shall be paid in full, at the following rates per annum:
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<PAGE> 33
(i) if such Loan is a Base Rate Loan, the Base Rate (as in
effect from time to time) plus the Applicable Margin, if any, but in
no event to exceed the Highest Lawful Rate; and
(ii) if such Loan is a Fixed Rate Loan, for each Interest
Period relating thereto (excluding the last day thereof), the Fixed
Rate for such Loan plus the Applicable Margin, but in no event to
exceed the Highest Lawful Rate.
Notwithstanding the foregoing, the Company will pay to the Agent for
the account of each Lender interest at the applicable Post-Default Rate on any
principal of any Loan made by such Lender and, to the fullest extent permitted
by law, on any other amount payable by the Company hereunder, under any Note or
under any other Security Instrument, which shall not be paid in full when due
(whether at stated maturity, by acceleration or otherwise), for the period
commencing on the due date thereof until the same is paid in full, but in no
event to exceed the Highest Lawful Rate.
(b) Accrued interest on each Base Rate Loan shall be payable quarterly
on each Quarterly Date and accrued interest on each Fixed Rate Loan shall be
payable on the last day of the Interest Period therefor and, if an Interest
Period is longer than three months or 90 days, at three month intervals
following the first day of such Interest Period, except that interest payable
at the Post-Default Rate shall be payable from time to time on demand and
interest on any Fixed Rate Loan that is converted into a Base Rate Loan
(pursuant to Section 5.04) shall be payable on the date of conversion (but only
to the extent so converted).
(c) Promptly after the determination of any interest rate provided for
herein or any change therein, the Agent shall notify the Lenders to which such
interest is payable and the Company thereof.
ARTICLE IV
Payments; Pro Rata Treatment; Computations; Etc.
Section 4.01 Payments. Except to the extent otherwise provided herein,
all payments of principal, interest and other amounts to be made by the Company
under this Agreement, the Notes and the Letter of Credit Agreements shall be
made in Dollars, in immediately available funds, to the Agent at such account
as the Agent shall specify by notice to the Company from time to time, not
later than 10:00 a.m. Houston time on the date on which such payments shall
become due (each such payment made after such time on such due date to be
deemed to have been made on the next succeeding Business Day). The Company
shall, at the time of making each payment under this Agreement, any Note or any
Letter of Credit Agreement, specify to the Agent the Loans or other amounts
payable by the Company hereunder to which such payment is to be applied (and in
the event that it fails to so specify, or if an Event of Default has occurred
and is continuing, the Agent
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may distribute such payment to the Lenders in such manner as it or the Majority
Lenders determine to be appropriate, subject to Section 4.02). Each payment
received by the Agent under this Agreement or any Note for account of a Lender
shall be paid promptly to such Lender, in immediately available funds, for
account of such Lender's Applicable Lending Office for the Loan in respect of
which such payment is made. If the due date of any payment under this
Agreement, any Note or any Letter of Credit Agreement, would otherwise fall on
a day which is not a Business Day, such due date shall be extended to the next
succeeding Business Day and interest shall be payable for any principal so
extended for the period of such extension.
Section 4.02 Pro Rata Treatment. Except to the extent otherwise
provided herein: (a) each borrowing from the Lenders under Section 2.01 shall
be made from the Lenders, each payment of commitment fee or other fees under
Section 2.04 shall be made for account of the Lenders unless otherwise provided
in Section 2.04, and each termination or reduction of the amount of the
Commitments under Section 2.03 shall be applied to the Commitments of the
Lenders, pro rata according to the amounts of their respective unused
Commitments, (b) each payment of principal of Loans by the Company shall be
made for account of the Lenders pro rata in accordance with the respective
unpaid principal amount of the Loans held by the Lenders and (c) each payment
of interest on Loans by the Company shall be made for account of the Lenders
pro rata in accordance with the amounts of interest due and payable to the
respective Lenders.
Section 4.03 Computations. Interest on Fixed Rate Loans shall be
computed on the basis of a year of 360 days and actual days elapsed (including
the first day but excluding the last day) occurring in the period for which
payable, unless such calculation would result in a usurious rate, in which case
interest shall be calculated on the per annum basis of a year of 365 or 366
days, as the case may be. Interest on Base Rate Loans and fees shall be
computed on the basis of (a) a year of 365 or 366 days, as the case may be, and
actual days elapsed (including the first day but excluding the last day)
occurring in the period for which payable with respect to the Prime Rate, and
(b) a year of 360 days and actual days elapsed (including the first day but
excluding the last day) occurring in the period for which payable, unless such
calculation would result in a usurious rate, in which case interest shall be
calculated on a per annum basis of a year of 365 or 366 days, as the case may
be, with respect to the Federal Funds Rate.
Section 4.04 Non-receipt of Funds by the Agent. Unless the Agent shall
have been notified by a Lender or the Company prior to the date on which such
notifying party is scheduled to make payment to the Agent of (in the case of a
Lender) the proceeds of a Loan to be made by it hereunder or (in the case of
the Company) a payment to the Agent for account of one or more of the Lenders
hereunder (such payment being herein called the "Required Payment"), which
notice shall be effective upon receipt, that it does not intend to make the
Required Payment to the Agent, the Agent may assume that the Required Payment
has been made and may, in reliance upon such assumption (but shall not be
required to), make the amount thereof available to the intended recipient(s) on
such date and, if such Lender or the Company (as the case may be) has not in
fact made the Required
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Payment to the Agent, the recipient(s) of such payment shall, on demand, repay
to the Agent the amount so made available together with interest thereon in
respect of each day during the period commencing on the date such amount was so
made available by the Agent until the date the Agent recovers such amount at a
rate per annum equal to (i) the Federal Funds Rate (but not to exceed the
Highest Lawful Rate), for Required Payments required to be made by any Lender,
or (ii) the Post-Default Rate (but not to exceed the Highest Lawful Rate), for
Required Payments required to be made by the Company.
Section 4.05 Sharing of Payments, Etc. The Company agrees that, in
addition to (and without limitation of) any right of set-off, Lenders' lien or
counterclaim a Lender may otherwise have, each Lender shall be entitled (upon
consent of the Agent), at its option, to offset balances held by it for account
of the Company at any of its offices, in Dollars or in any other currency,
against any principal of or interest on any of such Lender's Loans, or any
other amount payable to such Lender hereunder or under any Letter of Credit
Agreement, which is not paid when due (regardless of whether such balances are
then due to the Company), in which case such Lender shall promptly notify the
Company and the Agent thereof, provided that such Lender's failure to give such
notice shall not affect the validity thereof. If any Lender shall obtain
payment of any principal of or interest on any Loan made by it to the Company
under this Agreement or payment of any reimbursement obligation under a Letter
of Credit Agreement through the exercise of any right of set-off, Lenders's
lien or counterclaim or similar right or otherwise, and, as a result of such
payment, such Lender shall have received a greater percentage of the principal
or interest then due hereunder or under the respective Letter of Credit
Agreement, as the case may be, by the Company to such Lender than the
percentage received by any other Lenders, such Lender shall promptly rebate
such excess amount to the Agent for distribution in accordance with the terms
of Section 4.02 hereof, and the Lenders shall make such other adjustments from
time to time as shall be equitable, to the end that all the Lenders shall share
the benefit of such excess payment (net of any expenses which may be incurred
by such Lender in obtaining or preserving such excess payment) pro rata in
accordance with the unpaid principal and/or interest on the Loans held by each
of the Lenders or pro rata in accordance with the unpaid reimbursement
obligation owed to each of the Lenders. To such end, all the Lenders shall make
appropriate adjustments among themselves if such payment is rescinded or must
otherwise be restored. Nothing contained herein shall require any Lender to
exercise any such right or shall affect the right of any Lender to exercise any
such right with respect to any other indebtedness or obligation of the Company
to such Lender; provided, however, with respect to the Indebtedness or any
other indebtedness owed by the Company or any Subsidiary to any Lender or any
Affiliate of a Lender, all the Lenders shall share the benefit of any set-off
pertaining to the Indebtedness or such other indebtedness pro rata in
accordance with the unpaid principal and/or interest on the Loans held by each
of the Lenders and the aforementioned other indebtedness or pro rata in
accordance with the unpaid reimbursement owed to each of the Lenders and the
aforementioned other indebtedness. If under any applicable bankruptcy,
insolvency or other similar law, any Lender receives a secured claim in lieu of
a set-off to which this Section 4.05 applies, such Lender shall, to the extent
practicable, exercise its rights in respect of such secured claim in a manner
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consistent with the rights of the Lenders entitled under this Section 4.05 to
share the benefits of any recovery on such secured claim.
Section 4.06 Assumption of Risks. The Company assumes all risks of the
acts or omissions of beneficiaries of any of the Letters of Credit with respect
to its use of the Letters of Credit. Except in the case of gross negligence or
willful misconduct on the part of the Agent or any of its employees, neither
the Agent, the Agent's correspondent Lenders, nor any Lender shall be
responsible: (i) for the validity or genuineness of certificates or other
documents, even if such certificates or other documents should in fact prove to
be invalid, fraudulent or forged; (ii) for errors, omissions, interruptions or
delays in transmissions or delivery of any messages by mail, telex, or
otherwise, whether or not they be in code; (iii) for errors in translation or
for errors in interpretation of technical terms; or (iv) for any other
consequences arising from causes beyond the Agent's control. In addition,
neither the Agent nor any Lender shall be responsible for any error, neglect,
or default of any of the Agent's correspondent Lenders; and none of the above
shall affect, impair or prevent the vesting of any of the Agent's rights or any
Lender's rights or powers hereunder or under the Letter of Credit Agreements,
all of which rights shall be cumulative. The Agent and the Agent's
correspondent Lenders may accept certificates or other documents that appear on
their face to be in order, without responsibility for further investigation. In
furtherance and not in limitation of the foregoing provisions, the Company
agrees that any action, inaction or omission taken or not taken by the Agent or
any correspondent Lender in absence of gross negligence or willful misconduct
by the Agent or any correspondent Lender in connection with any Letter of
Credit, or any related drafts, certificates, documents or instruments, shall be
binding on the Company and shall not put the Agent or the Agent's correspondent
Lenders or any Lender under any resulting liability to the Company. The Agent
agrees to use reasonable judgment in its selection of correspondent Lenders.
Section 4.07 Obligation to Reimburse and to Repay.
(a) If any draft or claim shall be presented for payment under a
Letter of Credit, after confirming that such draft or claim complies with all
requirements of the relevant Letter of Credit, the Agent shall promptly notify
the Company of the date and the amount of the draft or claim presented for
payment and shall promptly notify each Lender thereof and of the Business Day
on which such draft or claim is to be honored and the ratable share of such
draft or claim attributable to such Lender on the basis of its Commitment.
(b) If a disbursement by the Agent is made under any Letter of Credit
and no Event of Default under this Agreement shall have occurred and be
continuing, the Company may elect to have the amount of such disbursement up to
the amount of the Commitments then available treated as a Revolving Credit Loan
to the Company as provided in Section 2.01(a) hereof, subject to the terms and
conditions set forth in this Agreement. To evidence such election, the Company
shall (promptly after receipt of notice that a Letter of Credit has been drawn
upon) give written notice of same to the Agent contemporaneously with delivery
of the notice of borrowing (in the form attached as Exhibit
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E hereto). With respect to any disbursement under a Letter of Credit for which
no such election is made or after and during the continuance of an Event of
Default, the Company shall pay to the Agent promptly after notice of any such
disbursement is received by the Company in federal or other immediately
available funds, the amount of each such disbursement made by the Agent under
the Letter of Credit (if such payment is not sooner effected as may be required
hereunder or under other provisions of the Letter of Credit Agreement),
together with interest on the amount disbursed from and including the date of
disbursement until payment in full of such disbursed amount at a varying rate
per annum equal to (x) the Base Rate (as in effect from time to time) plus the
Applicable Margin for Base Rate Loans (but in no event to exceed the Highest
Lawful Rate) for the first Business Day following the date of such disbursement
and (y) the Post-Default Rate for Base Rate Loans (but in no event to exceed
the Highest Lawful Rate) for the period from and including the second Business
Day following the date of such disbursement to and including the date of
repayment in full of such disbursed amount.
(c) The Company's obligation to make each such payment shall be
absolute and unconditional and shall not be subject to any defense or be
affected by any right of setoff, counterclaim or recoupment which the Company
may now or hereafter have against any beneficiary of any Letter of Credit, the
Agent, any Lender, or any other Person for any reason whatsoever (but, without
prejudice to any other provisions hereof, any such payment shall not waive,
impair or otherwise adversely affect any claim, if any, that the Company may
have against any beneficiary of a Letter of Credit, the Agent, any Lender or
any other Person).
(d) In the event of the occurrence of any Event of Default, upon
request of the Majority Lenders made during the continuation of such
occurrence, an amount equal to the entire remaining obligation of the Agent
under each outstanding Letter of Credit shall be deemed to be forthwith due and
owing by the Company to the Agent as of the date of any such occurrence to be
held by the Agent as cash collateral, and the Company's obligation to pay such
amount shall be absolute and unconditional, without regard to whether any
beneficiary of any such Letter of Credit has attempted to draw down all or a
portion of such amount under the terms of a Letter of Credit. In addition, the
Company's obligation shall not be subject to any defense or be affected by a
right of setoff, counterclaim or recoupment which the Company may now or
hereafter have against any such beneficiary, the Agent, any Lender, or any
other Person for any reason whatsoever (but, without prejudice to any other
provisions hereof, any such payment shall not waive, impair or otherwise
adversely affect any claim, if any, that the Company may have against any
beneficiary of a Letter of Credit, the Agent, any Lender or any other Person).
The Company hereby grants a security interest in any such amounts to the Agent
for the benefit of the Lenders as security for all Indebtedness now or
hereafter owing hereunder. In the event of any such deposit (or prepayment of
Letters of Credit pursuant to Section 2.08) by the Company of amounts
contingently owing under outstanding Letters of Credit and in the event that
thereafter drafts or other demands for payment complying with the terms of such
Letters of Credit are not made prior to the respective expiration dates
thereof, the Agent agrees, if no Event of Default has occurred and is
continuing or if no other
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amounts are then due and payable under this Agreement, any Note or the Security
Instruments, to remit to the Company amounts of such cash collateral, deposits
or prepayments for which the contingent obligations evidenced by such Letters
of Credit have ceased.
Section 4.08 Obligations for Letters of Credit.
(a) Immediately upon issuance of any Letter of Credit by the Agent,
each Lender shall be deemed to be a participant through the Agent in the
obligation of the Agent under such Letter of Credit. Upon the delivery by such
Lender to the Agent of funds requested for a disbursement pursuant to Section
4.08(c) hereof, such Lender shall be deemed as having purchased a participating
interest in the Company's reimbursement obligations with respect to such Letter
of Credit in an amount equal to such funds delivered to the Agent.
(b) Each Lender severally agrees with the Agent and the Company that
it shall be unconditionally liable, without regard to the occurrence of any
Event of Default, for its pro-rata share based upon the ratio of its Commitment
to the total Commitments of all Lenders, to reimburse on demand, the Agent for
the amount of each disbursement under a Letter of Credit; provided, however,
notwithstanding anything to the contrary contained in this Section 4.08(b), if
due to the gross negligence or willful misconduct of the Agent a Letter of
Credit is improperly issued or improperly honored, the Lenders shall not be
liable to reimburse the Agent for their pro rata share of any disbursement
under such Letter of Credit.
(c) The Agent shall promptly request from each Lender its ratable
share of any disbursement under any Letter of Credit that the Company has not
elected hereunder to treat as a Revolving Credit Loan pursuant to Section 4.07,
which amount shall be made available by each Lender to the Agent at its
Principal Office in immediately available funds no later than 2:00 p.m. Houston
time on the date requested. If such amount due to the Agent is made available
later than 2:00 p.m. Houston time on the date requested, then such Lender shall
pay to the Agent such amount with interest thereon in respect of each day
during the period commencing on the date such amount was requested until the
date the Agent receives such amount at a rate per annum equal to the Federal
Funds Rate (but not to exceed the Highest Lawful Rate).
ARTICLE V
Yield Protection; Illegality; Etc.
Section 5.01 Additional Costs.
(a) The Company shall pay directly to each Lender from time to time on
demand such amounts as such Lender may reasonably determine to be necessary to
compensate it for any costs
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which such Lender determines are attributable to its making or maintaining any
Loans under this Agreement or its Note or the participation in Letters of
Credit, or its obligation to make any such Loans or participate in Letters of
Credit hereunder, or any reduction in any amount receivable by such Lender
hereunder in respect of any such Loans or Letters of Credit or such obligation
(such increases in costs and reductions in amounts receivable being herein
called "Additional Costs"), resulting from any Regulatory Change which: (i)
changes the basis of taxation of any amounts payable to such Lender under this
Agreement or its Note in respect of any Loans or Letters of Credit (other than
taxes imposed on the overall net income of such Lender or of its Applicable
Lending Office); or (ii) imposes or modifies any reserve, special deposit,
deposit insurance or assessment, minimum capital, capital ratio or similar
requirements relating to any extensions of credit or other assets of, or any
deposits with or other liabilities of, such Lender (including any Loans or any
deposits referred to in the definition of "Fixed Base Rate" in Section 1.01);
or (iii) imposes any other condition affecting this Agreement or its Note (or
any of such extensions of credit or liabilities). Each Lender will notify the
Company of any event occurring after the date of this Agreement which will
entitle such Lender to compensation pursuant to this Section 5.01(a) as
promptly as practicable after it obtains knowledge thereof, if it determines to
request such compensation, and will set forth in reasonable detail the basis
for and manner of determining such compensation. If any Lender requests
compensation from the Company under this Section 5.01(a), or under Section
5.01(c), the Company may, by notice to such Lender (with a copy to the Agent),
suspend the obligation of such Lender to make Loans of the type with respect to
which such compensation is requested.
(b) Without limiting the effect of the foregoing provisions of this
Section 5.01, in the event that, by reason of any Regulatory Change, any Lender
either (i) incurs Additional Costs based on or measured by the excess above a
specified level of the amount of a category of deposits or other liabilities of
such Lender which includes deposits by reference to which the interest rate on
Fixed Rate Loans is determined as provided in this Agreement or a category of
extensions of credit or other assets of such Lender which includes Fixed Rate
Loans or (ii) becomes subject to restrictions on the amount of such a category
of liabilities or assets which it may hold, then, if such Lender so elects by
notice to the Company (with a copy to the Agent), the obligation of such Lender
to make Loans of such type hereunder shall be suspended until the earlier to
occur of (y) the date such Lender is no longer within the restrictions of such
Regulatory Change or (z) the date such Regulatory Change ceases to be in effect
(in which case the provisions of Section 5.04 shall be applicable).
(c) Without limiting the effect of the foregoing provisions of this
Section 5.01 (but without duplication), the Company shall pay directly to each
Lender from time to time on request such amounts as such Lender may reasonably
determine to be necessary to compensate such Lender for any increased costs
which it determines are attributable to the maintenance by it or any of its
affiliates pursuant to any law or regulation of any jurisdiction or any
interpretation, directive or request (whether or not having the force of law
and whether in effect on the date of this Agreement or thereafter) of any court
or governmental or monetary authority of capital in respect of its Loans or
Letters of Credit hereunder or its obligation to make Loans or participate in
Letters of Credit
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hereunder (such compensation to include, without limitation, an amount equal to
any reduction in return on assets or equity of such Lender to a level below
that which it could have achieved but for such law, regulation, interpretation,
directive or request). Each Lender will notify the Company if it is entitled to
compensation pursuant to this Section 5.01(c) as promptly as practicable after
it obtains knowledge of the facts that entitled it to such compensation, if it
determines to request such compensation, and will set forth in reasonable
detail the basis for and manner of determining such compensation.
(d) Determinations and allocations by a Lender for purposes of this
Section 5.01 of the effect of any Regulatory Change pursuant to subsections (a)
or (b), or of the effect of capital maintained pursuant to subsection (c), on
its costs of making or maintaining Loans or its obligation to make Loans or
participate in Letters of Credit, or on amounts receivable by, or the rate of
return to, it in respect of Loans, Letters of Credit or such obligation, and of
the additional amounts required to compensate such Lender under this Section
5.01, shall be conclusive, provided that such determinations and allocations
are made on a reasonable basis.
Section 5.02 Limitation on Types of Loans. Anything herein to the
contrary notwithstanding, if:
(a) the Agent reasonably determines that quotations of interest rates
for the relevant deposits referred to in the definition of "Fixed Base Rate" in
Section 1.02 are not being provided in the relevant amounts or for the relevant
maturities for purposes of determining the rate of interest for Fixed Rate
Loans as provided in this Agreement; or
(b) the Majority Lenders determine (which determination shall be
conclusive) and notify the Agent that the relevant rates of interest referred
to in the definition of "Fixed Rate" in Section 1.02 upon the basis of which
the rate of interest for Fixed Rate Loans is to be determined do not adequately
cover the cost to the Lenders of making or maintaining such Loans;
then the Agent shall give the Company and each Lender prompt notice thereof,
and so long as such condition remains in effect, the Lenders shall be under no
obligation to make Fixed Rate Loans of such type; provided, however, such Loans
shall be made as Base Rate Loans. Notwithstanding the foregoing, the Lenders
shall maintain until the end of the Interest Period then in effect such Fixed
Rate Loans then outstanding.
Section 5.03 Illegality. Notwithstanding any other provision in this
Agreement, in the event that it becomes unlawful, as the result of
circumstances not reasonably within the control of any Lender, for such Lender
or its Applicable Lending Office to honor its obligation to make or maintain
Fixed Rate Loans hereunder, then such Lender shall promptly notify the Company
thereof (with a copy to the Agent) and such Lender's obligation to make or
maintain Fixed Rate Loans
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hereunder shall be suspended until such time as such Lender may again make and
maintain such affected Loans (in which case the provisions of Section 5.04
shall be applicable).
Section 5.04 Certain Base Rate Loans pursuant to Sections 5.01 and
5.03. If the obligations of any Lender to make Fixed Rate Loans ("Affected
Loans") shall be suspended pursuant to Section 5.01 or 5.03, all Affected Loans
which would otherwise be made by such Lender shall be made instead as Base Rate
Loans and, if an event referred to in Section 5.01(b) or 5.03 has occurred and
such Lender so requests by notice to the Company (with a copy to the Agent),
all Affected Loans of such Lender then outstanding shall be automatically
converted into Base Rate Loans on the date specified by such Lender in such
notice, and, to the extent that Affected Loans are so made as (or converted
into) Base Rate Loans, all payments of principal which would otherwise be
applied to such Lender's Affected Loans shall be applied instead to its Base
Rate Loans.
Section 5.05 Certain Compensation. The Company shall pay to the Agent
for the account of each Lender, upon the request of such Lender through the
Agent, such amount or amounts as shall be sufficient (in the reasonable opinion
of such Lender) to compensate it for any loss, cost or expense which such
Lender reasonably determines is attributable to:
(a) any payment of a Fixed Rate Loan made by the Company on a date
other than the last day of an Interest Period for such Loan (whether by reason
of acceleration or otherwise); or
(b) any failure by the Company to borrow a Fixed Rate Loan to be made
by such Lender on the date specified therefor in the relevant notice under
Section 2.02.
Without limiting the foregoing, such compensation shall include an
amount equal to the excess, if any, of: (i) the amount of interest which
otherwise would have accrued on the principal amount so paid or not borrowed
for the period from and including the date of such payment or failure to borrow
to but excluding the last day of the Interest Period for such Loan (or, in the
case of a failure to borrow, to but excluding the last day of the Interest
Period for such Loan which would have commenced on the date specified therefor
in the relevant notice) at the applicable rate of interest for such Loan
provided for herein; over (ii) the amount of interest (as reasonably determined
by such Lender) such Lender would have bid in the London interbank market for
Dollar deposits for amounts comparable to such principal amount and maturities
comparable to such period. A determination of any Lender as to the amounts
payable pursuant to this Section 5.05 shall be prima facie evidence of the
correctness of such determination.
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ARTICLE VI
Conditions Precedent
Section 6.01 Initial Loan.
The obligation of the Lenders to make the initial Loans hereunder is
subject to the receipt by the Agent of all fees payable pursuant to Section
2.04 or otherwise under this Agreement and the following documents and
satisfaction of the other conditions provided in this Article VI, each of which
shall be satisfactory to the Agent in form and substance:
(a) Certificates of the Secretary or Assistant Secretary of the
Company setting forth (i) resolutions of its board of directors in form and
substance satisfactory to the Agent with respect to the authorization of the
Notes, Letters of Credit and Letter of Credit Agreements, this Agreement and
the other Security Instruments provided herein, (ii) the officers of the
Company (y) who are authorized to sign this Agreement, the Notes, Letter of
Credit Agreement and the other Security Instruments and request Letters of
Credit hereunder, and (z) who will, until replaced by another officer or
officers duly authorized for that purpose, act as its representative for the
purposes of signing documents and giving notices and other communications in
connection with this Agreement and the transactions contemplated hereby, and
(iii) specimen signatures of the officers so authorized. The Agent and the
Lenders may conclusively rely on such certificate until the Agent receives
notice in writing from the Company to the contrary.
(b) A copy, certified as true by the Secretary or Assistant Secretary
of the Company of the articles or certificate of incorporation and the bylaws
of the Company.
(c) Certificates of the appropriate state agencies with respect to the
valid existence and good standing of the Company and the qualification of each
to do business as a foreign corporation in any jurisdiction in which the
ownership of Property or the nature of activities requires such qualification
except where the failure to so qualify would not have a Material Adverse
Effect.
(d) A compliance certificate which shall be true and correct in the
form of Exhibit C, duly and properly executed by an executive officer of the
Company, and dated as of the date of the funding of the first Loan provided for
in Section 2.01 of this Agreement.
(e) The Notes, duly completed and executed.
(f) A favorable opinion of Andrews & Kurth L.L.P., counsel to the
Company and THEC Holdings, substantially in the form of Exhibit D hereto.
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(g) A favorable opinion of Cullen & Dykman concerning the Public
Utility Holding Company Act.
(h) Engineering Reports evaluating the value of the Company's and each
Subsidiary's producing and non-producing Oil and Gas Properties as of September
30, 1998.
(i) Such other documents as the Agent or any Lender or special counsel
to the Agent may reasonably request.
(j) The Agent and the Lenders shall be satisfied with all
environmental issues (if any) relating to the Company's Properties.
(k) The Agent and the Lenders shall be satisfied with the Company's
title to its Properties.
Section 6.02 Initial and Subsequent Loans. The obligation of the
Lenders to make, convert or continue Loans (other than Base Rate Loans which
are made pursuant to the terms hereof solely to convert existing Loans in the
normal course on the last day of an Interest Period therefor) to the Company
upon the occasion of each borrowing hereunder (including the initial borrowing)
or of the Agent to issue, renew, extend or reissue Letters of Credit is subject
to the further conditions precedent that, as of the date of such Loans,
conversions or continuations or issuance, renewal, extension or reissuance of
such Letter of Credit and after giving effect thereto: (i) no Event of Default
shall have occurred and be continuing; (ii) no condition causing a Material
Adverse Effect shall have occurred and be continuing; and (iii) the
representations and warranties made by the Company in Article VII shall be true
in material respects on and as of the date of the making, conversion or
continuation of such Loans or the issuance, renewal, extension or reissuance of
such Letters of Credit with the same force and effect as if made on and as of
such date and following such new borrowing, conversion or continuation or
issuance, renewal, extension or reissuance except as such representations and
warranties are modified to give effect to transactions expressly permitted
hereby. Each request for a borrowing, conversion or continuation and selection
of an Interest Period (other than Base Rate Loans which are made pursuant to
the terms hereof solely to convert existing Loans in the normal course on the
last day of an Interest Period therefor) or request for the issuance, renewal,
extension or reissuance of a Letter of Credit by the Company hereunder shall
constitute a certification by the Company to the effect set forth in the
preceding sentence (both as of the date of such notice and, unless the Company
otherwise notifies the Agent prior to the date of and immediately following
such borrowing, conversion or continuation, or issuance, renewal, extension or
reissuance as of the date thereof).
Section 6.03 Conditions Relating to Letters of Credit. In addition to
the satisfaction of all other conditions precedent set forth in this Article
VI, the issuance, renewal, extension or reissuance of the Letters of Credit
referred to in Section 2.01(b) is subject to the following conditions
precedent:
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(a) At least four (4) Business Days prior to the date of the issuance,
renewal, extension or reissuance of each Letter of Credit, the Agent shall have
received a written request for a Letter of Credit as described in Section 2.02.
(b) The Company shall have duly and validly executed and delivered to
the Agent a Letter of Credit Agreement pertaining to the Letter of Credit.
Section 6.04 Subsequent Environmental Audits--New Acquisitions. Prior
to each acquisition of Oil and Gas Properties or other real property interests
by the Company or any Subsidiary after the Closing Date, the Company shall have
prepared (and shall timely deliver to the Agent) a Phase I Audit pertaining to
the Property being acquired. The Phase I Audit may be prepared by the Company,
unless the value of the Oil and Gas Properties or other real property interests
being acquired is greater than $1,000,000, in which case, the Lenders may
require the Company to engage an environmental consulting or engineering firm
to conduct the Phase I Audit. Such Phase I Audit shall be completed and
received by the Agent on or before 45 days following the date the Company
begins or engages said environmental consulting or engineering firm.
Section 6.05 Guarantors. In the event a Guarantor shall have executed
a Guaranty Agreement pursuant to Section 9.19, the Lenders' obligation to make
subsequent Loans shall be subject to the Agent's receipt of the following
documents:
(a) certificates of the Secretary or Assistant Secretary of such
Guarantor setting forth:
(i) resolutions of its board of directors in form and
substance reasonably satisfactory to the Agent with respect to the
authorization of the Guaranty Agreements;
(ii) the officers of the Company who are authorized to sign
such Guaranty Agreement and who will, until replaced by another
officer or officers duly authorized for the purpose, act as a
representative for the purposes of signing documents and giving
notices and other communications in connection with such Guaranty
Agreement and the transactions contemplated thereby; and
(iii) specimen signatures of the officers so authorized.
The Agent and the Lenders may conclusively rely on such certificate until the
Agent receives notice in writing from such Guarantor to the contrary;
(b) a copy, certified as true by the Secretary or Assistant Secretary
of such Guarantor;
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(c) certificates of the appropriate state agencies with respect to the
valid existence and good standing of such Guarantor and the qualification of
each to do business as a foreign corporation in any jurisdiction in which the
ownership of Property or the nature of activities requires such qualification,
except where the failure so to qualify would not have a Material Adverse
Effect;
(d) a Guaranty Agreement duly executed by such Guarantor; and
(e) an opinion of counsel to such Guarantor in form and substance
reasonably acceptable to the Agent.
ARTICLE VII
Representations and Warranties
The Company represents and warrants to the Lenders that (each
representation and warranty herein is given as of the date of this Agreement
and shall be deemed repeated and reaffirmed on the dates provided in Section
6.02):
Section 7.01 Corporate Existence. The Company and each Subsidiary: (a)
is a corporation duly organized, validly existing and in good standing under
the laws of the jurisdictions in which it is incorporated (b) has all requisite
corporate power, and has all material governmental licenses, authorizations,
consents and approvals necessary to own its assets and carry on its business as
now being or as proposed to be conducted; and (c) is qualified to do business
in all jurisdictions in which the nature of the business conducted by it makes
such qualification necessary and where failure so to qualify would have a
Material Adverse Effect.
Section 7.02 Financial Condition.
(a) The audited financial statements of the Company for the period
ended December 31, 1998, heretofore furnished to each of the Lenders, are
complete and correct and fairly present the financial condition of the Company
and the results of its operations as at said date and for the period stated
(subject only to normal year-end audit adjustments with respect to such
unaudited interim statements), all in accordance with GAAP applied on a
consistent basis.
(b) Neither the Company nor any Subsidiary have had, on the respective
dates set forth above, any material contingent liabilities, liabilities for
taxes, unusual forward or long-term commitments or unrealized or anticipated
losses from any unfavorable commitments, except as referred to or reflected or
provided for in such Financial Statements or otherwise provided to the Agent
and the Lenders in writing. Since the date of the most recent financial
statements of the Company delivered to the Agent, there has been no change or
event having a Material Adverse
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Effect, except as otherwise disclosed to the Agent and the Lenders in writing
on or before the Closing Date.
Section 7.03 Liabilities; Litigation. Except for liabilities incurred
in the normal course of business, neither the Company nor any Subsidiary has
any material (individually or in the aggregate) liabilities, direct or
contingent, except as disclosed or referred to in the most recent financial
statements of the Company delivered to the Agent or as disclosed to the Lenders
in Schedule 7.03 hereto. Except as disclosed in Schedule 7.03, to the best of
the Company's knowledge and belief, as of the Closing Date, there is no
litigation, legal, administrative or arbitral proceeding, investigation or
other action of any nature pending or, to the knowledge of the Company
threatened against or affecting the Company or any Subsidiary which involves
the possibility (other than customary deductibles) of any judgment or liability
not fully covered by insurance, and which would have a Material Adverse Effect.
Section 7.04 No Breach. Except for waivers or consents obtained in
writing by the Company prior to the Closing Date, neither the execution and
delivery by the Company of this Agreement, the Notes, or the other Security
Instruments, nor compliance with the terms and provisions hereof will conflict
with or result in a breach of, or require any consent under, the respective
charter or by-laws of the Company or any Subsidiary, or any applicable law or
regulation, or any order, writ, injunction or decree of any court or
governmental authority or agency, or any agreement or instrument to which the
Company or any Subsidiary is a party or by which the Company or any Subsidiary
is bound or to which the Company or any Subsidiary is subject, or constitute a
default under any such agreement or instrument, or result in the creation or
imposition of any Lien upon any of the revenues or assets of the Company or any
Subsidiary pursuant to the terms of any such agreement or instrument.
Section 7.05 Corporate Action. The Company is duly authorized and
empowered to create and issue the Notes; and the Company and each Subsidiary
are duly authorized and empowered to execute, deliver and perform the Security
Instruments, including this Agreement, to which they respectively are parties;
all corporate action on the Company's part requisite for the due creation and
issuance of the Notes and on the Company's and each Subsidiary's respective
part for the due execution, delivery and performance of the Security
Instruments, including this Agreement, to which the Company and each Subsidiary
respectively are parties has been duly and effectively taken; and this
Agreement does, and the Notes and other Security Instruments to which the
Company and each Subsidiary respectively are parties upon their creation,
issuance, execution and delivery will, constitute valid and binding obligations
of the Company and each Subsidiary, respectively, enforce able in accordance
with their terms.
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Section 7.06 Approvals. No authorizations, approvals or consents of,
and no filings or registrations with, any governmental or regulatory authority
or agency are necessary for the execution, delivery or performance by the
Company or any Subsidiary of this Agreement, the Notes, or the Security
Instruments to which they respectively are parties or for the validity or
enforceability thereof.
Section 7.07 Use of Loans. The proceeds of the Loans shall be used by
the Company (i) to pay in full the indebtedness of the Company under the
Existing Credit Agreement, (ii) to finance Acceptable Acquisitions, and (iii)
to provide working capital for exploration and production of Oil and Gas
Properties of the Company and its Subsidiaries. Neither the Company nor any
Subsidiary is engaged principally, or as one of its important activities, in
the business of extending credit for the purpose, whether immediate, incidental
or ultimate, of buying or carrying margin stock (within the meaning of
Regulation U or X of the Board of Governors of the Federal Reserve System) and
no part of the proceeds of any Loan hereunder will be used to buy or carry any
margin stock.
Section 7.08 ERISA. Except as set out in Schedule 7.08 hereof, each of
the Company and the ERISA Affiliates have fulfilled its obligations under the
minimum funding standards of ERISA and the Code with respect to each Plan and
are in compliance in all material respects with the presently applicable
provisions of ERISA and the Code, and have not incurred any liability to the
PBGC or any Plan or Multiemployer Plan.
Section 7.09 Taxes. To the best knowledge of the Company, BUG has
filed all United States Federal income tax returns (consolidated if required by
GAAP) and all other material tax returns which are required to be filed with
respect to the Company and its Subsidiaries and all taxes due pursuant to such
returns or pursuant to any assessment with respect to the Company and its
Subsidiaries received by BUG, THEC Holdings, the Company or any Subsidiary have
been paid, except for such assessments which are being contested in good faith
by appropriate proceedings. The charges, accruals and reserves on the books of
BUG, THEC Holdings, the Company and/or its Subsidiaries in respect of taxes and
other governmental charges with respect to the Company and its Subsidiaries
are, in the opinion of the Company, adequate.
Section 7.10 Titles, etc. The Company has and upon the Initial Funding
will have good and indefeasible title to its material (individually or in the
aggregate) Properties, free and clear of all Liens except Excepted Liens, Liens
permitted by Section 9.03, and Liens disclosed to the Lenders in Schedule 7.10.
After giving full effect to the Excepted Liens and Liens disclosed to the
Lenders in Schedule 7.10, upon the Initial Funding, the Company will acquire
and own the net interests in production attributable to the wells and units
reflected in the Initial Reserve Report and the owner ship of such Properties
shall not in any material respect obligate the Company to bear the costs and
expenses relating to the maintenance, development and operations of each such
Property in an amount in excess of the working interest of each Property set
forth in the Initial Reserve Report. Further, upon delivery of each reserve
report furnished to the Lenders pursuant to Sections 8.04(a)
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or (b) the statements made in the preceding sentence shall be true with respect
to such furnished reserve reports. All information contained in the Initial
Reserve Report is true and correct in all material respects as of the date
thereof and as of the date of the Initial Funding.
Section 7.11 No Material Misstatements. No material information,
statement, exhibit, certificate, document or report furnished to the Lenders by
the Company or any Subsidiary in connection with the negotiation of this
Agreement contained any material misstatement of fact or omitted to state a
material fact or any fact necessary to make the statement contained therein not
materially misleading.
Section 7.12 Investment Company Act. Neither the Company nor any
Subsidiary is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
Section 7.13 Public Utility Holding Company Act. Neither the Company
nor any Subsidiary is a "holding company," or a "subsidiary company" of a
"holding company," or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company," or a "public utility" within the meaning of
the Public Utility Holding Company Act of 1935, as amended.
Section 7.14 Subsidiaries and Partnerships. The Company has no
Subsidiaries and no interest in any partnerships (excluding tax partnerships)
except those shown on Schedule 7.14 hereto, which Exhibit is complete and
accurate. The Company owns 100% of the issued and outstanding shares of stock
of each such Subsidiary, unless otherwise disclosed on Schedule 7.14.
Section 7.15 Location of Business and Offices. The Company's principal
place of business and chief executive offices are located at the address stated
on the signature page of this Agreement.
Section 7.16 Gas Imbalances. Except as set forth on Schedule 7.16,
there are no gas imbalances, take or pay or other prepayments with respect to
any of the Company's or Subsidiaries' Oil and Gas Properties which would
require the Company or its Subsidiaries to deliver Hydrocar bons produced from
their respective Oil and Gas Properties at some future time without then or
promptly thereafter receiving full payment therefor which would exceed 500
m.m.c.f. in the aggregate.
Section 7.17 Rate Filings. To the best of the Company's knowledge,
neither the Company nor any Subsidiary has violated any provisions of The
Natural Gas Act or The Natural Gas Policy Act of 1978 or any other Federal or
State law or any of the regulations thereunder (including those of the
respective Conservation Commissions and Land Offices of the various
jurisdictions having authority over the Company's and the Subsidiaries' Oil and
Gas Properties) with respect to the Company's and the Subsidiaries' Oil and Gas
Properties which have a Material Adverse Effect which is continuing or which
might in the future result in a Material Adverse Effect, and the Company and
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each Subsidiary has or will have made all necessary rate filings, certificate
applications, well category filings, interim collection filings and notices,
and any other filings or certifications, and has or will have received all
necessary regulatory authorizations (including without limitation necessary
authorizations, if any, with respect to any processing arrangements conducted
by it or others respecting the Company's and the Subsidiaries' Oil and Gas
Properties or production therefrom) required under said laws and regulations
with respect to all of the Company's and the Subsidiaries' Oil and Gas
Properties or production therefrom so as not to have a Material Adverse Effect.
To the best of the Company's knowledge, said material rate filings, certificate
applications, well category filings, interim collection filings and notices,
and other filings and certifications contain no untrue statements of material
facts nor do they omit any statements of material facts necessary in said
filings.
Section 7.18 Environmental Matters. Except for those matters disclosed
in Schedule 7.18, or such other matters which would not have a Material Adverse
Effect (or with respect to (c), (d), and (e) below, where the failure to take
such actions would not have such a Material Adverse Effect):
(a) None of the Properties owned by the Company or its Subsidiaries or
the operations conducted thereon violate any Environmental Laws or the order of
any court or Governmental Authority with respect to Environmental Laws;
(b) Without limitation of clause (a) above, none of the Properties
owned by the Company or its Subsidiaries or the operations currently conducted
thereon or by any prior owner or operator of such Property or operation, are in
violation of or subject to any existing, pending or (to the knowledge of the
Company) threatened action, suit, investigation, inquiry or proceeding by or
before any court or Governmental Authority with respect to Environmental Laws
or to any remedial obliga tions under Environmental Laws;
(c) All notices, permits, licenses or similar authorizations, if any,
required to be obtained or filed in connection with the operation or use of any
and all Property of the Company and its Subsidiaries, including without
limitation past or present treatment, storage, disposal or release of a
hazardous substance or solid waste into the environment, have been duly
obtained or filed;
(d) All hazardous substances, if any, generated at any and all
Property of the Company and its Subsidiaries have in the past been transported,
treated and disposed of only by carriers maintaining valid permits under RCRA
and any other Environmental Law and only at treatment, storage and disposal
facilities maintaining valid permits under RCRA and any other Environmental
Law, which carriers and facilities have been and are operating in compliance
with such permits;
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(e) The Company and each Subsidiary have taken all reasonable steps
necessary to determine and is determining (on a continuing basis) that no
hazardous substances or hazardous waste have been disposed of or otherwise
released and there has been no threatened release of any hazardous substances
on or to any Property of the Company and its Subsidiaries except in compliance
with Environmental Laws; and
(f) Neither the Company nor any Subsidiary has material contingent
liability in connection with any release or threatened release of any hazardous
substance or solid waste into the environment.
Each of the representations and warranties in this Section 7.18 is absolute to
the extent that it relates to any Property during the period such Property has
been owned by the Company or its Subsidiaries, and is made to the best of the
Company's knowledge as to any prior periods with respect to such Property.
Section 7.19 Defaults. Neither the Company nor any Subsidiary is in
default nor has any event or circumstance occurred which, but for the
expiration of any applicable grace period or the giving of notice, or both,
would constitute a default (in any respect which would have a Material Adverse
Effect) under any material agreement or other instrument to which the Company
or any Subsidiary is a party or by which the Company or any Subsidiary is
bound. No Event of Default hereunder has occurred and is continuing.
Section 7.20 Compliance with the Law. Neither the Company nor any
Subsidiary has violated any Governmental Requirement or failed to obtain any
license, permit, franchise or other governmental authorization necessary for
the ownership of any of their respective Properties or the conduct of their
respective business; which violation or failure would have (in the event such
violation or failure were asserted by any Person through appropriate action) a
Material Adverse Effect.
Section 7.21 Insurance. The Company has, and has caused all its
Subsidiaries to have (a) all insurance policies sufficient for the compliance
by each of them with all Requirements of Law, and (b) insurance coverage in at
least such amounts and against such risks (including public liability) that are
usually insured against by companies engaged in the same or a similar business
under the same or similar circumstances for the assets and operations of the
Company and its Subsidiaries. Schedule 7.21 sets forth the material insurance
policies of the Company and its Subsidiaries which are in full force and effect
as of the Closing Date.
Section 7.22 Credit Agreements. Schedule 7.22 is a complete and
correct list, as of the Closing Date, of each credit agreement, loan agreement,
indenture, purchase agreement, guarantee or other arrangement providing for or
otherwise relating to any Debt of the Company, the principal or face amount of
which equals or exceeds (or may equal or exceed) $100,000, and the aggregate
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principal or face amount outstanding or which may become outstanding under each
such arrangement is correctly described in such Schedule 7.22.
Section 7.23 Solvency. The Company and its Subsidiaries, taken as a
whole, and the Company and each of its material Subsidiaries are Solvent, both
before and after the execution, delivery and performance of the Security
Instruments, including this Agreement.
Section 7.24 Year 2000 Representation. Any reprogramming required to
permit the proper functioning, in and following the year 2000, of (i) the
Company's computer systems and (ii) equipment containing embedded microchips
and the testing of all such systems and equipment, as so reprogrammed, will be
completed by March 31, 1999. The cost to the Company of such reprogramming and
testing and of the reasonably foreseeable consequences of year 2000 to the
Company will not result in a Default or a Material Adverse Effect. Except for
such of the reprogramming referred to in the preceding sentence as may be
necessary, the computer and management information systems of the Company and
its Subsidiaries are and, with ordinary course upgrading and maintenance, will
continue to be, sufficient to permit the Company to conduct its business
without Material Adverse Effect.
ARTICLE VIII
Affirmative Covenants
So long as any of the Notes shall remain unpaid or any Lender shall
have any Commitment under this Agreement or any Letter of Credit shall remain
outstanding, the Company agrees that:
Section 8.01 Financial Statements and Other Reports. The Company shall
deliver, or shall cause to be delivered, to each of the Lenders:
(a) As soon as available and in any event within 90 days after the end
of each calendar year (except as otherwise provided in Section 6.05), the
audited statements of income, stockholders' equity and cash flows of the
Company and its Subsidiaries on a consolidated basis for such calendar year,
and the related balance sheet of the Company and its Subsidiaries on a
consolidated basis as at the end of such calendar year, and commencing with
respect to the calendar year ended December 31, 1998, setting forth in each
case in comparative form the corresponding figures for the preceding calendar
year, and accompanied by the related opinion of Arthur Andersen & Co. or such
other independent public accountants of recognized national standing acceptable
to the Agent which opinion shall state that said financial statements fairly
present the financial condition and results of operations of the Company and
its Subsidiaries as at the end of, and for, such calendar year, and a
certificate of such accountants stating that, in making the examination
necessary for their opinion, they obtained no knowledge, except as specifically
stated, of any Event of Default.
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(b) As soon as available and in any event within 60 days after the end
of each of the first three (3) quarterly periods of each calendar year,
unaudited statements of income, stockholders' equity and cash flows of the
Company and its Subsidiaries on a consolidated basis for such period and for
the period from the beginning of the respective calendar year to the end of
such period, and the related unaudited balance sheet of the Company and its
Subsidiaries on a consolidated basis as at the end of such period, and
commencing with respect to the quarter ending March 31, 1999, setting forth in
each case in comparative form the corresponding figures for the corresponding
period in the preceding calendar year, accompanied by the certificate of the
senior financial officer of the Company, which certificate shall state that
said financial statements fairly present the financial condition and results of
operations of the Company and its Subsidiaries in accordance with GAAP
consistently applied, as at the end of, and for, such period (subject to normal
year-end audit adjust ments).
(c) As soon as possible, and in any event within 10 days after the
Company knows that any of the events or conditions specified below with respect
to any Plan or Multiemployer Plan have occurred or exist, a statement signed by
a senior financial officer of the Company setting forth details respecting such
event or condition and the action, if any, which the Company or its ERISA
Affiliate proposes to take with respect thereto (and a copy of any report or
notice required to be filed with or given to PBGC by the Company or an ERISA
Affiliate with respect to such event or condition):
(i) any reportable event, as defined in Section 4043(b) of
ERISA and the regulations issued thereunder, with respect to a Plan,
as to which PBGC has not by regulation waived the requirement of
Section 4043(a) of ERISA that it be notified within 30 days of the
occurrence of such event (provided that a failure to meet the minimum
funding standard of Section 412 of the Code or Section 302 of ERISA
shall be a reportable event regardless of the issuance of any waivers
in accordance with Section 412(d) of the Code);
(ii) the filing under Section 4041 of ERISA of a notice of
intent to terminate any Plan or the termination of any Plan;
(iii) the institution by PBGC of proceedings under Section
4042 of ERISA for the termination of, or the appointment of a trustee
to administer, any Plan, or the receipt by the Company or any ERISA
Affiliate of a notice from a Multiemployer Plan that such action has
been taken by PBGC with respect to such Multiemployer Plan;
(iv) the complete or partial withdrawal by the Company or
any ERISA Affiliate under Section 4201 or 4204 of ERISA from a
Multiemployer Plan, or the receipt by the Company or any ERISA
Affiliate of notice from a Multiemployer Plan that is in reorgani
zation or insolvency pursuant to Section 4241 or 4245 of ERISA or that
it intends to terminate or has terminated under Section 4041A of
ERISA; and
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(v) the institution of a proceeding by a fiduciary of any
Multiemployer Plan against the Company, any Subsidiary or any ERISA
Affiliate to enforce Section 515 of ERISA, which proceeding is not
dismissed within 30 days.
(d) Promptly after the Company knows of any occurrence constituting an
Event of Default or having a Material Adverse Effect, a notice of such Event of
Default or Material Adverse Effect, describing the same in reasonable detail
and what action if any, the Company proposes to take in response thereto.
(e) Promptly upon their becoming available, one copy of each financial
statement, report, notice or proxy statement sent by the Company or any
Subsidiary to stockholders generally, and of each regular or periodic report
and any registration statement, prospectus or written communication (other than
transmittal letters) in respect thereof filed by the Company or any Subsidiary
with or received by the Company or any Subsidiary in connection therewith from,
any securities exchange or the Securities and Exchange Commission or any
successor agency; provided, however, the foregoing shall not require the
Company to provide the Lenders copies of routine business reports sent by the
Company to its parent company in the ordinary course of business.
(f) From time to time such other information regarding the business,
affairs or financial condition of the Company or any Subsidiary (including,
without limitation, any Plan or Multi employer Plan and any reports or other
information required to be filed under ERISA) as any Lender or the Agent may
reasonably request.
(g) Promptly after the furnishing thereof, copies of any statement or
report furnished to any Person pursuant to the terms of any indenture, loan or
credit or other similar agreement (other than documents executed in connection
with this Agreement), and not otherwise required to be furnished to the Lenders
pursuant to any other provision of this Section 8.01.
The Company will furnish to each Lender, at the time it furnishes each set of
financial statements pursuant to paragraph (a) or (b) above, a certificate of a
senior financial officer of the Company (i) to the effect that no Event of
Default has occurred and is continuing (or, if any Event of Default has
occurred and is continuing, describing the same in reasonable detail), (ii)
setting forth in reasonable detail the computations necessary to determine
whether the Company is in compliance with all of the terms, conditions,
agreements and covenants contained in this Agreement including, without
limitation, the covenants contained in Sections 9.12 and 9.13 as of the end of
the respective fiscal quarter or calendar year, (iii) including a statement
that the year 2000 remediation efforts of the Company and the Subsidiaries are
proceeding as scheduled, and (iv) indicating whether an auditor, regulator or
third party consultant has issued a management letter or other communication
regarding the year 2000 exposure, program or progress of the Company and/or the
Subsidiaries.
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Section 8.02 Litigation. The Company shall promptly give to each
Lender notice of all legal or arbitral proceedings, and of all proceedings
before any Governmental Authority, affecting the Company or any Subsidiary,
except proceedings which, if adversely determined, would not have a Material
Adverse Effect.
Section 8.03 Corporate Existence, Etc.
(a) The Company shall and shall cause each Subsidiary to (i) preserve
and maintain its corporate existence and all of its material rights, privileges
and franchises; (ii) keep books of record and account in which full, true and
correct entries will be made of all dealings or transactions in relation to its
business and activities; (iii) comply with the requirements of all applicable
laws, rules, regulations and orders of governmental or regulatory authorities
if failure to comply with such requirements would have a Material Adverse
Effect; (iv) pay and discharge all taxes, assessments and governmental charges
or levies imposed on it or on its income or profits or on any of its Property
prior to the date on which penalties attach thereto, except for any such tax,
assessment, charge or levy the payment of which is being contested in good
faith and by proper proceedings and against which adequate reserves are being
maintained; (v) permit representatives of any Lender or the Agent, during
normal business hours upon reasonable prior notice, to examine, copy and make
extracts from its books and records, to inspect its Properties, and to discuss
its business and affairs with its officers, all to the extent reasonably
requested by such Lender or the Agent (as the case may be); and (vi) keep
insured by financially sound and reputable insurers all property of a character
usually insured by corporations engaged in the same or similar business
similarly situated against loss or damage of the kinds and in the amounts
customarily insured against by such corporations and carry such other insurance
as is usually carried by such corporations.
(b) The Company will at its own expense do or cause to be done and
will cause each Subsidiary to do or cause to be done all things reasonably
necessary to preserve and keep in good repair, working order and efficiency all
Properties owned by the Company and each Subsidiary including, without
limitation, all equipment, machinery and facilities, and from time to time will
make all the reasonably necessary repairs, renewals and replacements so that at
all times the state and condition of the Properties owned by the Company and
each Subsidiary will be fully preserved and maintained. The Company will and
will cause each Subsidiary to operate their respective Properties or cause or
use best efforts to cause such Properties to be operated in accordance with the
practices of the industry and in compliance with all applicable contracts and
agreements and in compliance in all material respects with all Governmental
Requirements, except for any non-compliance that would not result in a Material
Adverse Effect.
Section 8.04 Engineering and Other Reports.
(a) As soon as available and in any event prior to August 1 of each
calendar year, commencing on or before August 1, 1999, the Company shall
furnish to the Lenders a report (the
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"Reserve Report") in form and substance satisfactory to the Lenders prepared by
an independent petroleum consultant(s) acceptable to the Lenders, which Reserve
Report shall evaluate as of the end of the current calendar year the Oil and
Gas Property of the Company, its Affiliates and its Subsidiaries and which
shall, together with any other information reasonably requested by the Majority
Lenders, set forth the proved oil and gas reserves attributable to such
Property together with a projection of the rate of production and future net
income with respect thereto as of such date, based upon the pricing assumptions
consistent with Securities and Exchange Commission reporting requirements at
the time.
(b) As soon as available and in any event prior to February 1 of each
calendar year, the Company shall furnish to the Lenders a production report
prepared by the Company detailing by field the oil and gas volumes produced,
product price received, and lease operating expenses by month for the interim
six month period from the preceding March through September.
(c) If requested by the Majority Lenders, the Company shall furnish to
the Lenders, within 45 days following such request, a report (the "Alternate
Reserve Report") in form and substance satisfactory to the Lenders which may be
prepared by or under the supervision of a petroleum engineer who shall be an
employee of the Company and certified by the chief engineer of the Company as
to its truth and accuracy and shall have been reviewed by the independent
petroleum consultant referred to in Section 8.04(a) above who shall certify
such report to have been prepared using customary engineering disciplines,
which shall further evaluate the Property evaluated in the immediately
preceding Reserve Report, and which shall, together with any other information
reasonably requested by the Majority Lenders, set forth the proved oil and gas
reserves attributable to such Property as of September 1 or March 1, as
applicable, of the current calendar year, together with a projection of the
rate of production and net future income with respect thereto as of such date,
based upon the pricing assumptions consistent with Securities and Exchange
Commission reporting requirements at the time.
(d) With the delivery of the reports required in Subsections (a), (b)
and (c) above, the Company shall provide to the Lenders a statement reflecting
any material changes in the net revenue interest of each well or lease as
reflected in the immediately preceding report after giving effect to all
encumbrances from the net revenue interests as reflected in such report, along
with an explanation as to any material discrepancies between the two net
revenue interest disclosures.
(e) Concurrently with the delivery of the reports required in
Subsections (a), (b) and (c) above, the Company shall provide to the Lenders a
report in form and substance satisfactory to the Lenders prepared and certified
by the chief financial officer of the Company, which report shall, together
with any other information requested by the Majority Lenders, fully set forth
and disclose the volume, estimated amount and nature of any and all gas
imbalances with respect to the Oil and Gas Properties of the Company, its
Affiliates and its Subsidiaries as of the previous quarterly date.
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Section 8.05 Further Assurances. The Company will cure and will cause
each Guarantor to cure promptly any defects in the creation and issuance of the
Notes and the execution and delivery of the Security Instruments, including
this Agreement. The Company at its expense will promptly execute and deliver to
the Agent upon request all such other and further documents, agreements and
instruments in compliance with or accomplishment of the covenants and
agreements of the Company in the Security Instruments, including this
Agreement, or to further evidence and more fully describe the collateral
intended as security for the Notes, or to correct any omissions in the Security
Instruments, or more fully state the security obligations set out herein or in
any of the Security Instruments, or to perfect, protect or preserve any Liens
created pursuant to any of the Security Instruments, or to make any recordings,
to file any notices, or obtain any consents, all as may be necessary or
appropriate in connection therewith.
Section 8.06 Performance of Obligations. The Company will pay the
Notes according to the reading, tenor and effect thereof; and the Company will
do and perform every act and discharge all of the obligations provided to be
performed and discharged by the Company under the Security Instruments,
including this Agreement, at the time or times and in the manner specified.
Section 8.07 MarketSpan Credit Facility. The Company shall maintain an
unused and available commitment under the MarketSpan Credit Facility equal to
or greater than $25,000,000 until such time as (i) the redetermination of the
Borrowing Base becomes effective on or about September 1, 1999, (ii) any and
all prepayments required under Section 2.08(b) have been made in full, and
(iii) no Default exists hereunder.
ARTICLE IX
Negative Covenants
So long as any of the Notes shall remain unpaid or any Lender shall
have any Commitment under this Agreement or any Letter of Credit shall remain
outstanding, the Company shall not:
Section 9.01 Debt. Create, incur, assume or suffer to exist, or permit
any of its Subsidiaries to create, incur, assume or suffer to exist any Debt,
except:
(a) Debt described in Schedule 9.01, including renewals, extensions or
refinancings thereof, provided that the principal amount thereof does not
increase;
(b) Other Debt of the Company subordinated on terms satisfactory to
the Lenders to the Company's obligations under this Agreement and the Notes,
the Letters of Credit and Letter of Credit Agreements and any other Security
Instrument in an aggregate principal amount not to exceed $10,000,000 at any
one time outstanding;
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(c) Debt of the Company to any Guarantor or any other Subsidiary which
becomes a Guarantor prior to the incurrence of such Debt, and Debt of any
Guarantor or any such Subsidiary to the Company or to any other Guarantor or
any such Subsidiary;
(d) Debt of the Company to any Subsidiary (other than a Guarantor or
any Subsidiary which becomes a Guarantor prior to the incurrence of such Debt)
or Debt of any Subsidiary (other than a Guarantor or any Subsidiary which
becomes a Guarantor prior to the incurrence of such Debt) to the Company in an
aggregate principal amount not exceeding $1,000,000 at any one time
outstanding;
(e) accounts payable (other than for borrowed money) to trade
creditors for goods or services incurred in the ordinary course of business and
which are not in excess of 30 days past the due date, or, if greater than 30
days past due, are being contested in good faith and by appropriate
proceedings;
(f) Debt of the Company and any Subsidiary (other than newly-formed
Subsidiaries created specifically for the purpose of investing in project
finance transactions) incurred to purchase or to finance the purchase of, fixed
assets in an aggregate principal amount not exceeding as to the Company and its
Subsidiaries $15,000,000 at any time outstanding;
(g) Debt of the Company incurred in the ordinary course of business in
connection with performance bonds required of operators by the Minerals
Management Service which the Company is required to post in connection with its
activities as operator on offshore Oil and Gas Properties up to the aggregate
amount of $3,300,000 at any one time outstanding; and
(h) the Company's pro rata portion of Debt in respect of the Judgment
Liens.
Section 9.02 Guaranties, Etc. Assume, guarantee, endorse or otherwise
be or become directly or contingently responsible or liable, or permit any of
its Subsidiaries to assume, guarantee, endorse or otherwise be or become
directly or indirectly responsible or liable (including, but not limited to, an
agreement to purchase any obligation, stock, assets, goods or services or to
supply or advance any funds, asset, goods or services, or an agreement to
maintain or cause such Person to maintain a minimum working capital or net
worth or otherwise to assure the creditors of any Person against loss) for the
obligations of any Person (except for Debt of the Company to the Agent and/or
the Lenders), except for guaranties by endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of
business.
Section 9.03 Liens. Create, incur, assume or suffer to exist, or
permit any of its Subsidiaries to create, incur, assume or suffer to exist, any
Lien, upon or with respect to any of its properties, now owned or hereafter
acquired, except:
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(a) Liens in favor of the Agent on behalf of the Lenders securing the
Indebtedness hereunder;
(b) Excepted Liens;
(c) Liens, deposits or pledges to secure the performance of bids,
tenders, contracts (other than contracts for the payment of money), leases
(permitted under the terms of this Agreement), public or statutory obligations,
surety, stay, appeal, indemnity, performance or other similar bonds, or other
similar obligations arising in the ordinary course of business;
(d) Judgment and other similar Liens arising in connection with court
proceedings; provided that the execution or other enforcement of such Liens is
effectively stayed and the claims secured thereby are being actively contested
in good faith and by appropriate proceedings;
(e) Liens covering real or personal property in existence at the time
of acquisition thereof by the Company or any Subsidiary after the Closing Date,
provided, that no such Lien covers, or is extended to cover, any other property
owned by the Company or any such Subsidiary after the Closing Date;
(f) Landowner's royalties, overriding royalties and other royalty
interests incurred in the ordinary course of business which, in the aggregate,
do not materially detract from the value of the Property burdened thereby or
interfere with the ordinary course of the business of the Company; and
(g) Liens in existence on the Closing Date which are listed on
Schedule 7.10, provided, that no such Lien permitted by this clause (g) is
spread to cover any additional Property after the Closing Date and that the
amount of Debt secured thereby is not increased;
provided, however, that the Company may create, assume or suffer to exist any
Lien on the proved reserves or the probable reserves included in the Borrowing
Base of the type specified in clauses (b) through (e) and clause (g) above,
provided, that the Debt secured by such Liens shall not exceed $1,000,000 in
the aggregate at any one time outstanding.
(h) purchase money Liens on any Property hereafter acquired or the
assumption of or taking subject to any Lien on Property existing at the time of
such acquisition, or a Lien incurred in connection with any conditional sale or
other title retention agreement or a Capital Lease; provided that:
(i) any Property subject to any of the foregoing is
acquired by the Company or any such Subsidiary in the ordinary course
of its business and the Lien on any such Property is created or
assumed, or such Property is taken subject to the Lien,
contemporaneously with such acquisition;
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(ii) the obligation secured by any such Lien shall not
exceed 66-2/3% of the lesser of cost or fair market value as of the
time of acquisition of the Property covered thereby to the Company or
such Subsidiary acquiring the same;
(iii) each such Lien shall attach to no Property of the
Company or any Subsidiary other than the Property so acquired and
fixed improvements thereon;
(iv) the principal amount of Debt secured by all such Liens
shall not exceed $15,000,000 at any time outstanding in the aggregate;
and
(v) the obligations secured by such Lien are permitted by
the provisions of Section 9.01(f).
Section 9.04 Leases. Create, incur, assume or suffer to exist, or
permit any of its Subsidiaries to create, incur, assume or suffer to exist, any
obligation as lessee for the rental or hire of any real or personal property,
except: (a) leases existing on the date of this Agreement and any extensions or
renewals thereof; (b) Capital Leases; (c) leases (other than Capital Leases)
which do not in the aggregate require the Company and its Subsidiaries on a
consolidated basis to make payments (including taxes, insurance, maintenance
and similar expense which the Company or any Subsidiary is required to pay
under the terms of any lease) in any calendar year in excess of $500,000; (d)
leases between the Company and any Subsidiary or between any Subsidiaries and
(e) oil and gas leases entered into in the ordinary course of business.
Section 9.05 Investments. Make, or permit any of its Subsidiaries to
make, any loan or advance to any Person or purchase or otherwise acquire, or
permit any such Subsidiary to purchase or otherwise acquire, any capital stock,
assets, obligations or other securities of, make any capital contribution to,
or otherwise invest in, or acquire any interest in, any Person, except: (a)
direct obligations of the United States of America or any agency thereof with
maturities of one year or less from the date of acquisition; (b) commercial
paper of a domestic issuer rated at least "A-1" by Standard & Poor's
Corporation or "P-1" by Moody's Investors Service, Inc.; (c) certificates of
deposit with maturities of one year or less from the date of acquisition issued
by any Lender or any commercial bank operating within the United States of
America having capital and surplus in excess of $50,000,000; (d) for stock,
obligations or securities received in settlement of debts (created in the
ordinary course of business) owing to the Company or any such Subsidiary; (e)
any Acceptable Acquisition permitted by Section 9.11; (f) loans and advances to
any Subsidiary; (g) loans and advances to employees in the ordinary course of
business not to exceed $50,000 in the aggregate at any one time outstanding;
and (h) financing for interests in Properties assigned or conveyed by the
Company to executives of the Company pursuant to employment agreements existing
on the date hereof between such executives and the Company.
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Section 9.06 Dividends. Declare or pay any dividends, purchase,
redeem, retire or otherwise acquire for value any of its capital stock now or
hereafter outstanding, or make any distribution of assets to its stockholders
as such whether in cash, assets or in obligations of the Company, or allocate
or otherwise set apart any sum for the payment of any dividend or distribution
on, or for the purchase, redemption or retirement of any shares of its capital
stock, or make any other distribution by reduction of capital or otherwise in
respect of any shares of its capital stock or permit any of its Subsidiaries to
purchase or otherwise acquire for value any stock of the Company or another
such Subsidiary, except that the Company may declare and pay cash dividends
equal to 100% of net income over previous four quarters, if, after giving
effect to such dividend (a) no Event of Default has occurred and is continuing,
(b) no Event of Default will be caused by such action, (c) the post-dividend
Threshold Amount Utilization is less than 80%, and (d) the Company has a ratio
of Consolidated Total Debt to Consolidated Total Capitalization of less than
55%.
Section 9.07 Sale of Assets. Without the prior written consent of all
of the Lenders, sell, lease, assign, transfer or otherwise dispose of, or
permit any of its Subsidiaries to sell, lease, assign, transfer or otherwise
dispose of, any of its now owned or hereafter acquired assets (including,
without limitation, shares of stock and indebtedness of such Subsidiaries,
receivables and leasehold interests); except: (a) for Oil and Gas Properties
pursuant to Section 9.15, (b) for inventory disposed of in the ordinary course
of business; (c) the sale or other disposition of assets no longer used or
useful in the conduct of its business; (d) that any such Subsidiary may sell,
lease, assign, or otherwise transfer its assets to the Company or any other
Subsidiary; and (e) any sale, lease, assignment, transfer or other disposition
of Properties pursuant to employment agreements existing on the date hereof
with executives of the Company.
Section 9.08 Stock of Subsidiaries, Etc. Sell or otherwise dispose of
any shares of capital stock of any of its Subsidiaries, except in connection
with a transaction permitted under Section 9.10, or permit any such Subsidiary
to issue any additional shares of its capital stock, except (a) directors'
qualifying shares, and (b) shares of its capital stock issued to the Company or
another Subsidiary, provided, however, any such shares shall be pledged by the
Company or such Subsidiary, as applicable, promptly upon the issuance thereof,
as security for the Indebtedness.
Section 9.09 Transactions with Affiliates. Enter into any transaction,
including, without limitation, the purchase, sale or exchange of Property or
the rendering of any service, with any Affiliate or permit any of its
Subsidiaries to enter into any transaction, including, without limitation, the
purchase, sale or exchange of property or the rendering of any service, with
any Affiliate, except (a) in the ordinary course of and pursuant to the
reasonable requirements of the Company's or such Subsidiary's business and upon
fair and reasonable terms no less favorable to the Company or such Subsidiary
than would obtain in a comparable arm's length transaction with a Person not an
Affiliate, and (b) for the sale, lease, assignment, transfer or other
disposition of Properties pursuant to employment agreements existing on the
date hereof with executives of the Company.
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Section 9.10 Mergers, Etc. Merge or consolidate with, or sell, assign,
lease or otherwise dispose of (whether in one transaction or in a series of
transactions) all or substantially all of its assets (whether now owned or
hereafter acquired) to, any Person, or acquire all or substantially all of the
assets or the business of any Person (or enter into any agreement to do any of
the foregoing), or permit any of its Subsidiaries to do so except that: (a) any
such Subsidiary may merge into or transfer assets to the Company; (b) any
Subsidiary may merge into or consolidate with or transfer assets to any other
Subsidiary; and (c) the Company may effect any Acceptable Acquisition permitted
by Section 9.11.
Section 9.11 Acquisitions. Make any Acquisition other than an
Acceptable Acquisition; provided, however (a) the market value of any single
such Acceptable Acquisition shall not exceed $10,000,000 and (b) the market
value of all such Acceptable Acquisitions shall not exceed the aggregate amount
of $35,000,000 in any calendar year.
Section 9.12 Interest Coverage Ratio. The Company will not permit its
Interest Coverage Ratio (calculated as of the last day of each fiscal quarter
for the then most recent four fiscal quarters of the Company) to be less than
2.50 to 1.00. For the purposes of this Section 9.12, "Interest Coverage Ratio"
shall mean the ratio of (i) EBITDA for the four fiscal quarters ending on the
last day of the most recent fiscal quarter of the Company to (ii) cash interest
payments made during such four fiscal quarters of the Company and its
Subsidiaries.
Section 9.13 Debt to Total Capitalization Ratio. At any time permit
the ratio of Consolidated Total Debt to Consolidated Total Capitalization to be
greater than 60%.
Section 9.14 Negative Pledge Agreements. The Company will not create,
incur, assume or suffer to exist, or permit any Subsidiary to create, incur,
assume or suffer to exist, any contract, agreement or understanding (other than
this Agreement, the Security Instruments and any contract or agreement
evidencing an Excepted Lien, but only with respect to the Property covered by
such Excepted Lien) which in any way prohibits or restricts the granting,
conveying, creation or imposition of any Lien on any Property of the Company or
any Subsidiary, or which requires the consent of or notice to other Persons in
connection therewith, except customary consents to assignment provisions
contained in any instrument constituting Oil and Gas Properties, and in any
conveyance thereof in the Company's or any Subsidiaries' chain of title.
Section 9.15 Sale of Oil and Gas Properties. The Company will not, nor
permit any Subsidiary or Affiliate to sell, assign, transfer or convey any
interest in any Oil and Gas Properties except as follows:
(a) Hydrocarbons sold in the ordinary course of business as and when
produced;
(b) Routine farm-outs of non-proven acreage;
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(c) Sales of Properties provided the sales of all such Properties
permitted under this clause since the date of the last redetermination of the
Borrowing Base do not have a market value in excess of $5,000,000 in the
aggregate; and
(d) In addition to sales permitted above, sales of Properties included
in the Borrowing Base, provided simultaneously with any such sale the Borrowing
Base is reduced by amounts agreed to at the time by the Majority Lenders and,
if required by the Majority Lenders, the net proceeds received in any such sale
are applied to prepay the Notes as determined by the Lenders.
Section 9.16 Environmental Matters. Except as disclosed in Schedule
7.18, neither the Company nor any Subsidiary will cause or permit any of its
Property to be in violation of, or do anything or permit anything to be done
which will subject any such Property to any remedial obligations under any
Environmental Laws, assuming disclosure to the applicable Governmental
Authority of all relevant facts, conditions and circumstances, if any,
pertaining to such Property, and the Company will promptly notify the Agent in
writing of any existing, pending or threatened (of which the Company has
knowledge) action or investigation by any Governmental Authority in connection
with any Environmental Laws, except for any such violations or remedial
obligations (individually or in the aggregate) which would not have a Material
Adverse Effect. The Company will establish and implement such procedures as may
be necessary to continuously determine and assure that (i) no solid wastes are
disposed of on any Property owned by the Company or any Subsidiary in
quantities or locations that would require remedial action under any
Environmental Laws, (ii) no hazardous substance will be released on or to any
such Property in a quantity equal to or exceeding that quantity which requires
reporting pursuant to Section 103 of CERCLA, (iii) no hazardous substance is
released on or to any such Property so as to pose an imminent and substantial
endangerment to public health or welfare or the environment; (iv) all hazardous
substances and solid wastes generated by the Company or any Subsidiary or on
any Property of the Company or any Subsidiary will be transported only by
carriers maintaining valid permits under RCRA and treated, stored, and disposed
of only by facilities operating in compliance with RCRA, and (v) the Company,
each Subsidiary and their respective Property and operations will be maintained
and operated in compliance with all permits, licenses, and similar
authorizations required pursuant to any Environmental Laws, except for any
non-compliance with clauses (i) through (v) of this Section that would not have
a Material Adverse Effect. The Company covenants and agrees to keep or cause
all of its and its Subsidiaries' Property to be kept free of any hazardous
waste or contaminants to the extent required by applicable Environmental Laws,
and either to remove the same (or if removal is prohibited by law, to take
whatever action is required by law) promptly upon discovery at its sole expense
or to take other appropriate response to the extent required by applicable
Environmental Laws.
Section 9.17 ERISA Compliance. The Company will not at any time permit
any Plan maintained by it or any ERISA Affiliate to:
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(a) engage in any "prohibited transaction" as such term is defined in
Section 4975 of the Code;
(b) except as provided in Schedule 9.17, incur any "accumulated
funding deficiency" as such term is defined in Section 302 of ERISA; or
(c) terminate any such Plan in a manner which could result in the
imposition of a Lien on the Property of the Company or any Subsidiary pursuant
to Section 4068 of ERISA.
Section 9.18 Hedging Agreements. Except for those Hedging Agreements
described in Schedule 9.18, the Company will not enter into or become obligated
under, or permit any of its Subsidiaries to enter into or become obligated
under any Hedging Agreement except for such agreements which in the aggregate
do not cover at any time a volume of oil and gas (on a barrel of oil equivalent
basis) equal to more than 70% for any 12 month period of the projected
production for such period of oil and gas (on a barrel of oil equivalent basis)
from the Oil and Gas Properties included in the Borrowing Base and such
contracts are for delivery or settlement on or before the end of the second
calendar year after the calendar year of the date of such contract.
Section 9.19 Subsidiaries and Partnerships. The Company shall not
create any additional Subsidiaries or partnerships or permit any Subsidiary to
do so without prior written notice to the Agent and the Lenders. In every such
case, each new Significant Subsidiary shall forthwith execute and deliver a
Guaranty Agreement in favor of the Agent.
Section 9.20 Changes to the MarketSpan Credit Facility . The Company
shall not, without the prior written consent of the Lenders make, or permit to
be made, any change to the MarketSpan Credit Facility that could reasonably be
expected to result in a violation of Section 8.07 or that would result in loans
made or to be made pursuant to the MarketSpan Credit Facility to be on terms
more adverse to the Company than the terms of such credit facility as of the
Closing Date.
ARTICLE X
Events of Default
Section 10.01 Events of Default. If one or more of the following
events ("Events of Default") shall occur and be continuing:
(a) (i) The Company shall default in the payment when due of any
principal of any Loan or of any reimbursement obligation for disbursement made
under any Letter of Credit or other amount payable by it hereunder, or (ii) the
Company shall default in the payment of any accrued interest on any Loan or on
any reimbursement obligation for disbursement made under any Letter
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of Credit or other amount payable by it hereunder, or any fees due and payable
hereunder, and such default shall continue unremedied for three (3) Business
Days after such occurrence; or
(b) The Company or any Subsidiary shall default in the payment when
due of any principal of or interest on any of its other Debt in an amount
aggregating $500,000, unless, in the case of trade creditors, such default is
being contested in good faith; or any non-monetary default specified in any
note, agreement, indenture or other document evidencing or relating to any
other Debt in an amount aggregating $1,000,000 of the Company or any Subsidiary
shall occur if the effect of such event is to cause, or to permit the holder or
holders of such Debt (or a trustee or agent on behalf of such holder or
holders) to cause, such Debt to become due prior to its stated maturity; or
(c) Any representation, warranty or certification made or deemed made
herein or in any other Security Instrument by the Company or any Subsidiary, or
any certificate furnished to any Lender or the Agent pursuant to the provisions
hereof or any other Security Instrument, shall prove to have been false or
misleading as of the time made or furnished in any material respect; or
(d) The Company shall default in the performance of any of its other
material obligations in this Agreement or under any Security Instrument, and
such default shall continue unremedied for a period of 30 days after notice
thereof to the Company by the Agent or any Lender (through the Agent);
provided, however, that the grace period referred to in this Section 10.01(d)
shall not apply to the obligations of the Company to promptly pay principal,
interest and fees or to any of its obligations under Article IX, except for its
obligations under Sections 9.12 and 9.13 of Article IX as to which Sections
9.12 and 9.13 such 30-day grace period shall apply; or
(e) The Company shall admit in writing its inability to, or be
generally unable to, pay its Debts as such Debts become due; or
(f) The Company shall (i) apply for or consent to the appointment of,
or the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its Property, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary case
under the Federal Bankruptcy Code (as now or hereafter in effect), (iv) file a
petition seeking to take advantage of any other law relating to bankruptcy,
insolvency, reorganization, winding-up, or composition or readjustment of
debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce
in writing to, any petition filed against it in an involuntary case under the
Federal Bankruptcy Code, or (vi) take any corporate action for the purpose of
effecting any of the foregoing; or
(g) A proceeding or case shall be commenced, without the application
or consent of the Company, in any court of competent jurisdiction, seeking (i)
its liquidation, reorganization, dissolution or winding-up, or the composition
or readjustment of its Debt, (ii) the appointment of
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a trustee, receiver, custodian, liquidator or the like of the Company or of all
or substantially all of its assets, or (iii) similar relief in respect of the
Company under any law relating to bankruptcy, insolvency, reorganization,
winding-up, or composition or adjustment of Debt, and such proceeding or case
shall continue undismissed, or an order, judgment or decree approving or
ordering any of the foregoing shall be entered and continue unstayed and in
effect, for a period of 90 days; or an order for relief against the Company
shall be entered in an involuntary case under the Federal Bankruptcy Code; or
(h) A final judgment or judgments for the payment of money in excess
of $2,500,000 in the aggregate shall be rendered by a court or courts against
the Company or any Subsidiary (which is not otherwise covered by insurance) and
the same shall not be discharged (or provision shall not be made for such
discharge), or a stay of execution thereof shall not be procured, within 30
days from the date of entry thereof and the Company or any Subsidiary shall
not, within said period of 30 days, or such longer period during which
execution of the same shall have been stayed, appeal therefrom and cause the
execution thereof to be stayed during such appeal; or
(i) An event or condition specified in Section 8.01(c) shall occur or
exist with respect to any Plan or Multiemployer Plan and, as a result of such
event or condition, together with all other such events or conditions, the
Company or any ERISA Affiliate shall incur or in the opinion of the Majority
Lenders shall be reasonably likely to incur a liability to a Plan, a
Multiemployer Plan or PBGC (or any combination of the foregoing) which is, in
the determination of the Majority Lenders would result in a Material Advance
Effect;
(j) Any Subsidiary takes, suffers or permits to exist as to such
Subsidiary any of the events or conditions referred to in Sections 10.01 (e),
(f), (g) or (h) hereof; or
(k) The occurrence of a Material Change without the written consent of
the Lenders; or
(l) The occurrence of any event having a Material Adverse Effect,
which remains unremedied for a period of 30 days after such occurrence; or
(m) The failure of the Company to satisfy any post Initial Loan
condition specified in Section 6.04 hereof on or before the deadline specified
therein, which remains unremedied for a period of 30 days after such
occurrence; or
(n) Any Guaranty Agreement shall at any time after its execution and
delivery and for any reason cease to be in full force and effect or shall be
declared null and void and the Guarantor thereunder fails to execute an
enforceable and effective Guaranty Agreement in replacement thereof, or the
validity or enforceability thereof shall be contested by the Guarantor or the
Guarantor shall deny it has any further liability or obligation thereunder or
shall fail to perform its obligations thereunder; or
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(o) The MarketSpan Credit Facility shall at any time and for any
reason prior to payment in full of the Company's obligations pursuant to
Section 2.08(b) occurring as a result of the redetermination of the Borrowing
Base scheduled to occur September 1, 1999, ceases to be in full force and
effect or shall be declared null and void, or the validity or enforceability
thereof shall be contested by the Company or MarketSpan Corporation, or either
such Person shall deny it has any further liability or obligation under the
MarketSpan Credit Facility or the Company or MarketSpan Corporation shall fail
to perform any of their respective obligations thereunder.
THEREUPON: (i) in the case of an Event of Default other than one referred to in
clause (e), (f) or (g), or clause (j) to the extent it refers to clauses (e),
(f) or (g) of this Section 10.01, the Agent may and, upon request of the
Majority Lenders, shall, by notice to the Company, cancel the Commitments
and/or declare the principal amount then outstanding of and the accrued
interest on the Loans and all other amounts payable by the Company hereunder
and under the Notes to be forthwith due and payable, whereupon such amounts
shall be immediately due and payable without presentment, demand, protest,
notice of intent to accelerate, notice of acceleration or other formalities of
any kind, all of which are hereby expressly waived by the Company; provided,
however, notwithstanding the foregoing waivers, the Agent will give the Company
one (1) Business Day's prior notice of the acceleration of Notes under this
clause (i); and (ii) in the case of the occurrence of an Event of Default
referred to in clause (e), (f) or (g), or clause (j) to the extent it refers to
clauses (e), (f) or (g), of this Section 10.01 the Commitments shall be
automatically canceled and the principal amount then outstanding of, and the
accrued interest on, the Loans and all other amounts payable by the Company
hereunder and under the Notes shall become automatically immediately due and
payable without presentment, demand, protest, notice of intent to accelerate,
notice of acceleration or other formalities of any kind, all of which are
hereby expressly waived by the Company.
Section 10.02 Cash Collateral for Letters of Credit. Without
limitation of any right or remedy specified in Section 10.01, if any of the
Indebtedness (other than the LC Exposure) shall have become due and payable
pursuant to the immediately foregoing paragraph of Section 10.01, the Agent,
upon the request of the Majority Lenders, shall, proceed to enforce remedies
under the Security Instruments. Upon realization of any of the collateral
covered by the Security Instruments, all such cash and cash proceeds shall be
applied first, to the payment of all unreimbursed fees and expenses outstanding
hereunder or under any of the other Security Instruments, then, to the amount
of outstanding balance of the Indebtedness, and then, held by the Agent as cash
collateral to secure the Company's obligation to reimburse the Agent and the
Lenders for drawings for the LC Exposure.
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ARTICLE XI
The Agent
Section 11.01 Appointment, Powers and Immunities. Each Lender hereby
irrevocably appoints and authorizes the Agent to act as its agent hereunder
with such powers as are specifically delegated to the Agent by the terms of
this Agreement, together with such other powers as are reasonably incidental
thereto. The Agent (which term as used in this sentence and in Section 11.05
and the first sentence of Section 11.06 shall include reference to its
affiliates and its own and its affiliates' officers, directors, employees and
agents): (a) shall have no duties or responsibilities except those expressly
set forth in this Agreement, and shall not by reason of this Agreement be a
trustee for any Lender; (b) shall not be responsible to the Lenders for any
recitals, statements, representations or warranties contained in this
Agreement, or in any certificate or other document referred to or provided for
in, or received by any of them under, this Agreement, or for the value,
validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement, any Note or any other document referred to or provided for herein or
for any failure by the Company or any other Person to perform any of its
obligations hereunder or thereunder; (c) shall not be required to initiate or
conduct any litigation or collection proceedings hereunder; and (d) shall not
be responsible for any action taken or omitted to be taken by it hereunder or
under any other document or instrument referred to or provided for herein or in
connection herewith, even if such actions or omissions are foreseeably caused
by the ordinary negligence of the Agent, except for its own gross negligence or
willful misconduct. The Agent may employ agents and attorneys-in-fact and shall
not be responsible for the negligence or misconduct of any such agents or
attorneys-in-fact selected by it in good faith. The Agent may deem and treat
the payee of any Note as the holder thereof for all purposes hereof unless and
until a written notice of the assignment or transfer thereof shall have been
filed with the Agent, together with the written consent of the Company to such
assignment or transfer.
Section 11.02 Reliance by Agent. The Agent shall be entitled to rely
upon any certification, notice or other communication (including any thereof by
telephone, telex, telegram or cable) believed by it to be genuine and correct
and to have been signed or sent by or on behalf of the proper Person or
Persons, and upon advice and statements of legal counsel, independent
accountants and other experts selected by the Agent. As to any matters not
expressly provided for by this Agreement, the Agent shall in all cases be fully
protected in acting, or in refraining from acting, hereunder in accordance with
instructions signed by the Majority Lenders, and such instructions of the
Majority Lenders and any action taken or failure to act pursuant thereto shall
be binding on all of the Lenders.
Section 11.03 Defaults. The Agent shall not be deemed to have
knowledge of the occurrence of an Event of Default (other than the non-payment
of principal of or interest on Loans or of fees) unless the Agent has received
notice from a Lender or the Company specifying such Event of Default and
stating that such notice is a "Notice of Default." In the event that the Agent
receives such a notice of the occurrence of an Event of Default, the Agent
shall give prompt notice
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thereof to the Lenders (and shall give each Lender and the Company prompt
notice of each such non-payment). The Agent shall (subject to Section 11.07)
take such action with respect to such Event of Default as shall be directed by
the Majority Lenders, provided that, unless and until the Agent shall have
received such directions, the Agent may (but shall not be obligated to) take
such action, or refrain from taking such action, with respect to such Event of
Default as it shall deem advisable in the best interest of the Lenders.
Section 11.04 Rights as a Lender. With respect to its Commitments, the
Loans made by it and the Letters of Credit, Chase (and any successor acting as
Agent) in its capacity as a Lender hereunder shall have the same rights and
powers hereunder as any other Lender and may exercise the same as though it
were not acting as the Agent, and the term "Lender" or "Lenders" shall, unless
the context otherwise indicates, include the Agent in its individual capacity.
Chase (and any successor acting as Agent) and its affiliates may (without
having to account therefor to any Lender) accept deposits from, lend money to
and generally engage in any kind of banking, trust or other business with the
Company (any and of its affiliates) as if it were not acting as the Agent, and
Chase and its affiliates may accept fees and other consideration from the
Company for services in connection with this Agreement or otherwise without
having to account for the same to the Lenders.
Section 11.05 Indemnification. THE LENDERS AGREE TO INDEMNITY THE
AGENT (TO THE EXTENT NOT REIMBURSED UNDER SECTION 12.03, BUT WITHOUT LIMITING
THE OBLIGATIONS OF THE COMPANY UNDER SAID SECTION 12.03), RATABLY IN ACCORDANCE
WITH THE AGGREGATE PRINCIPAL AMOUNT OF THE LOANS MADE BY THE LENDERS (OR, IF NO
LOANS ARE AT THE TIME OUTSTANDING, RATABLY IN ACCORDANCE WITH THEIR RESPECTIVE
COMMITMENTS), FOR ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES,
PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY
KIND AND NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED
AGAINST THE AGENT IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR
ANY OTHER DOCUMENTS CONTEMPLATED BY OR REFERRED TO HEREIN OR THE TRANSACTIONS
CONTEMPLATED HEREBY (INCLUDING, WITHOUT LIMITATION, THE COSTS AND EXPENSES
WHICH THE COMPANY IS OBLIGATED TO PAY UNDER SECTION 12.03 BUT EXCLUDING, UNLESS
AN EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING, NORMAL ADMINISTRATIVE COSTS
AND EXPENSES INCIDENT TO THE PERFORMANCE OF ITS AGENCY DUTIES HEREUNDER OR THE
ENFORCEMENT OF ANY OF THE TERMS HEREOF OR OF ANY SUCH OTHER DOCUMENTS, PROVIDED
THAT NO LENDER SHALL BE LIABLE FOR ANY OF THE FOREGOING TO THE EXTENT THEY
ARISE FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PARTY TO BE
INDEMNIFIED.
Section 11.06 Non-Reliance on Agent and other Lenders. Each Lender
agrees that it has, independently and without reliance on the Agent or any
other Lender, and based on such documents and information as it has deemed
appropriate, made its own credit analysis of the Company and decision to enter
into this Agreement and that it will, independently and without reliance upon
the Agent or any other Lender, and based on such documents and information as
it shall deem
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appropriate at the time, continue to make its own analysis and decisions in
taking or not taking action under this Agreement. The Agent shall not be
required to keep itself informed as to the performance or observance by the
Company of this Agreement or any other document referred to or provided for
herein or to inspect the Properties or books of the Company. Except for
notices, reports and other documents and information expressly required to be
furnished to the Lenders by the Agent hereunder, the Agent shall not have any
duty or responsibility to provide any Lender with any credit or other
information concerning the affairs, financial condition or business of the
Company (or any of its affiliates) which may come into the possession of the
Agent or any of its affiliates.
Section 11.07 Failure to Act. Except for action expressly required of
the Agent hereunder, the Agent shall in all cases be fully justified in failing
or refusing to act hereunder unless it shall be indemnified to its satisfaction
by the Lenders against any and all liability and expenses which may be incurred
by it by reason of taking or continuing to take any such action.
Section 11.08 Resignation or Removal of Agent. Subject to the
appointment and acceptance of a successor Agent as provided below, the Agent
may resign at any time by giving notice thereof to the Lenders and the Company
and the Agent may be removed at any time with or without cause by the Majority
Lenders. Upon any such resignation or removal, the Majority Lenders, after
consultation with the Company, shall have the right to appoint a successor
Agent. If no successor Agent shall have been so appointed by the Majority
Lenders and shall have accepted such appointment within 30 days after the
retiring Agent's giving of notice of resignation or the Majority Lenders'
removal of the retiring Agent, then the retiring Agent may, on behalf of the
Lenders, after consultation with the Company, appoint a successor Agent. Upon
the acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations hereunder. After any
retiring Agent's resignation or removal hereunder as Agent, the provisions of
this Section 11 shall continue in effect for its benefit in respect of any
actions taken or omitted to be taken by it while it was acting as the Agent.
ARTICLE XII
Miscellaneous
Section 12.01 Waiver. No failure on the part of the Agent or any
Lender to exercise and no delay in exercising, and no course of dealing with
respect to, any right, power or privilege under this Agreement or any Note
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, power or privilege under this Agreement or any Note preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. The remedies provided herein are cumulative and not exclusive of any
remedies provided by law.
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Section 12.02 Notices. All notices and other communications provided
for herein and in the other Security Instruments (including, without
limitation, any modifications of, or waivers or consents under, this Agreement
or the other Security Instruments) shall be given or made by telex, telecopy,
telegraph, cable or in writing and telexed, telecopied, telegraphed, cabled,
mailed or delivered to the intended recipient at the "Address for Notices"
specified below its name on the signature pages hereof or in the other Security
Instruments; or, as to any party, at such other address as shall be designated
by such party in a notice to each other party. Except as otherwise provided in
this Agreement or in the other Security Instruments, all such communications
shall be deemed to have been duly given when transmitted by telex or
telecopier, delivered to the telegraph or cable office or personally delivered
or, in the case of a mailed notice, upon receipt, in each case given or
addressed as aforesaid.
Section 12.03 Payment of Expenses, Indemnities, etc. The Company
agrees to:
(a) whether or not the transactions hereby contemplated are
consummated, pay all reasonable expenses of the Agent in the
administration (both before and after the execution hereof and
including advice of counsel as to the rights and duties of the Agent
and the Lenders with respect thereto) of, and in connection with the
negotiation, investigation, preparation, execution and delivery of,
recording or filing of, preservation of rights under, enforcement of,
and refinancing, renegotiation or restructuring of, this Agreement,
the Notes and the other Security Instruments and any amendment, waiver
or consent relating thereto (including, without limitation, the
reasonable fees and disbursements of counsel for the Agent and in the
case of enforcement for any of the Lenders); and promptly reimburse
the Agent for all reasonable amounts expended, advanced or incurred by
the Agent or the Lenders to satisfy any obligation of the Company
under this Agreement or any Security Instrument;
(b) pay and hold each of the Lenders harmless from and
against any and all present and future stamp and other similar taxes
with respect to the foregoing matters and save each Lender harmless
from and against any and all liabilities with respect to or resulting
from any delay or omission to pay such taxes; and
(c) INDEMNIFY THE AGENT AND EACH LENDER, ITS OFFICERS,
DIRECTORS, EMPLOYEES, REPRESENTATIVES, AGENTS AND AFFILIATES FROM,
HOLD EACH OF THEM HARMLESS AGAINST, PROMPTLY UPON DEMAND PAY OR
REIMBURSE EACH OF THEM FOR, AND REFRAIN FROM CREATING OR ASSERTING
AGAINST ANY OF THEM, ANY AND ALL ACTIONS, SUITS, PROCEEDINGS
(INCLUDING ANY INVESTIGATIONS, LITIGATION OR INQUIRIES), CLAIMS,
DEMANDS, CAUSES OF ACTION, LOSSES, LIABILITIES, DAMAGES AND REASONABLY
INCURRED COSTS OR EXPENSES OF ANY KIND OR NATURE WHATSOEVER REGARDLESS
OF WHETHER FORESEEABLY CAUSED BY THE ORDINARY NEGLIGENCE OF THE AGENT
AND/OR THE LENDERS (COLLECTIVELY THE "INDEMNITY MATTERS") WHICH MAY
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BE INCURRED BY OR ASSERTED AGAINST OR INVOLVE ANY OF THEM (WHETHER OR
NOT ANY OF THEM IS DESIGNATED A PARTY THERETO) AS A RESULT OF, ARISING
OUT OF OR RELATED TO (I) ANY ACTUAL OR PROPOSED USE BY THE COMPANY OF
THE PROCEEDS OF ANY OF THE LOANS OR (II) ANY OTHER ASPECT OF THIS
AGREEMENT, THE NOTES, AND THE OTHER SECURITY INSTRUMENTS, INCLUDING,
WITHOUT LIMITATION, THE REASONABLE FEES AND DISBURSEMENTS OF COUNSEL
AND ALL OTHER REASONABLE EXPENSES INCURRED IN CONNECTION WITH
INVESTIGATING, DEFENDING OR PREPARING TO DEFEND ANY SUCH ACTION, SUIT,
PROCEEDING (INCLUDING ANY INVESTIGATIONS, LITIGATION OR INQUIRIES) OR
CLAIM, BUT EXCLUDING HEREFROM ALL INDEMNITY MATTERS ARISING SOLELY BY
REASON OF CLAIMS BETWEEN THE LENDERS OR ANY LENDER AND THE AGENT OR A
SHAREHOLDER OF A LENDER AGAINST SUCH LENDER OR SOLELY BY REASON OF
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT ON THE PART OF THE PARTY
SEEKING INDEMNITY; AND
(d) INDEMNIFY AND HOLD THE AGENT AND EACH LENDER, ITS
OFFICERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES, AGENTS AND AFFILIATES
HARMLESS AGAINST, PROMPTLY TO PAY ON DEMAND OR REIMBURSE EACH OF THEM
WITH RESPECT TO, ANY AND ALL CLAIMS, DEMANDS, CAUSES OF ACTION, LOSS,
DAMAGE, LIABILITIES, AND REASONABLY INCURRED COSTS AND EXPENSES
REGARDLESS OF WHETHER FORESEEABLY CAUSED BY THE ORDINARY NEGLIGENCE OF
THE AGENT AND/OR THE LENDERS OF ANY AND EVERY KIND OR NATURE
WHATSOEVER ASSERTED AGAINST OR INCURRED BY ANY OF THEM BY REASON OF OR
ARISING OUT OF OR IN ANY WAY RELATED TO (I) THE BREACH OF ANY
REPRESENTATION OR WARRANTY AS SET FORTH HEREIN REGARDING ENVIRONMENTAL
LAWS, OR (II) THE FAILURE OF THE COMPANY TO PERFORM ANY OBLIGATION
HEREIN REQUIRED TO BE PERFORMED PURSUANT TO ENVIRONMENTAL LAWS. THE
FOREGOING INDEMNITY SHALL NOT APPLY WITH RESPECT TO MATTERS CAUSED BY
OR ARISING OUT OF THE SOLE NEGLIGENCE, SOLE GROSS NEGLIGENCE OR SOLE
WILLFUL MISCONDUCT OF THE PARTY SEEKING INDEMNITY. THE AGENT OR
LENDER, AS APPROPRIATE SHALL GIVE NOTICE TO THE COMPANY OF ANY SUCH
CLAIM OR DEMAND BEING MADE AGAINST THE AGENT OR SUCH LENDER AND THE
COMPANY SHALL HAVE THE NON-EXCLUSIVE RIGHT TO JOIN IN THE DEFENSE
AGAINST ANY SUCH CLAIM OR DEMAND. THE PROVISIONS OF THIS PARAGRAPH
SHALL SURVIVE THE FINAL PAYMENT OF ALL INDEBTEDNESS AND THE
TERMINATION OF THIS AGREEMENT AND SHALL CONTINUE THEREAFTER IN FULL
FORCE AND EFFECT.
The Company's obligations under this Section 12.03 shall survive any
termination of this Agreement and the payment of the Notes.
Section 12.04 Amendments, Etc. Any provision of this Agreement or any
other Security Instruments may be amended, modified or waived with the Majority
Lenders' written consent; provided that no amendment, modification or waiver
which (i) extends the maturity of the Loans
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shall be effective without the written consent of each Lender directly affected
thereby, (ii) releases all or substantially all of the collateral or the
obligations of the Company or any Guarantor shall be effective without the
written consent of all Lenders, (iii) modifies or waives the payment of any
principal, interest, fees or other amount due hereunder or under the Notes or
any Letter of Credit or Letter of Credit Agreement to any Lender shall be
effective without the written consent of such Lender, (iv) modifies or reduces
the total Commitments of all of the Lenders shall be effective without the
written consent of all Lenders, (v) modifies or reduces the Commitment of any
Lender shall be effective without the written consent of such Lender, (vi)
decreases the interest rate applicable to the Loans shall be effective without
the written consent of each Lender directly affected thereby, (vii) decreases
the amount of any fees due to any Lender (or the Agent for the benefit of the
Lenders) hereunder shall be effective without the written consent of each
Lender directly affected thereby, or (viii) modifies any provision of this
Agreement requiring the vote of 100% of the Lenders shall be effective without
the written consent of all Lenders; provided further that no such agreement
shall amend, modify or otherwise affect the rights or duties of the Agent
hereunder without the prior written consent of the Agent. The Company's written
agreement is needed for any amendment or modification of this Agreement or any
other Security Instrument.
Section 12.05 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
Section 12.06 Assignments and Participations.
(a) The Company may not assign its rights or obligations
hereunder or under the Notes or under any Letter of Credit Agreement
without the prior consent of all of the Lenders and the Agent.
(b) Each Lender may, upon the written consent of the Agent
and the Company, which consent shall not be unreasonably withheld,
assign to one or more assignees all or a portion of its rights and
obligations under this Agreement pursuant to an Assignment and
Acceptance Agreement substantially in the form of Exhibit F (an
"Assignment and Acceptance") provided, however, that (i) any such
assignment shall be in the aggregate amount of at least $10,000,000,
and (ii) the assignee shall pay to the Agent a processing and
recordation fee of $2,500. Any such assignment will become effective
upon the issuance by the Agent of a letter of acknowledgment
reflecting such assignment and the resultant effects thereof on the
Commitments of the assignor and assignee, and the principal amount
outstanding of the Loans owed to the assignor and assignee, the Agent
hereby agreeing to effect such issuance no later than five (5)
Business Days after its receipt of an Assignment and Acceptance
executed by all parties thereto. Promptly after receipt of an
Assignment and Acceptance executed by all parties thereto, the Agent
shall send to the Company a copy of such executed Assignment and
Acceptance. Upon receipt of such executed Assignment and Acceptance,
the Company, will, at its own expense, execute and deliver new Notes
to the
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assignor and/or assignee, as appropriate, in accordance with their
respective interests as they appear on the Agent's letter of
acknowledgment. Upon the effectiveness of any assignment pursuant to
this Section, the assignee will become a "Lender," if not already a
"Lender," for all purposes of this Agreement and the other Security
Instruments. The assignor shall be relieved of its obligations
hereunder to the extent of such assignment (and if the assigning
Lender no longer holds any rights or obligations under this Agreement,
such assigning Lender shall cease to be a "Lender" hereunder). The
Agent will prepare on the last Business Day of each month during which
an assignment has become effective pursuant to this Section a new
schedule giving effect to all such assignments effected during such
month, and will promptly provide the same to the Company and each of
the Lenders.
(c) Each Lender may, following written notice to the Company,
transfer, grant or assign participations in all or any part of such
Lender's interests hereunder pursuant to this subsection to any
Person, provided that: (i) such Lender shall remain a "Lender" for all
purposes of this Agreement and the transferee of such participation
shall not constitute a "Lender" hereunder; and (ii) no participant
under any such participation shall have rights to approve any
amendment to or waiver of this Agreement, the Notes or any Security
Instrument except to the extent such amendment or waiver would (x)
extend the Drawdown Termination Date, (y) reduce the interest rate
(other than as a result of waiving the applicability of any
post-default increases in interest rates) or fees applicable to any of
the Commitments or Loans in which such participant is participating,
or postpone the payment of any thereof, or (z) release all or
substantially all of the collateral (except as expressly provided in
the Security Instruments) supporting any of the Commitments or Loans
in which such participant is participating. In the case of any such
participation, the participant shall not have any rights under this
Agreement or any of the Security Instruments (the participant's rights
against the granting Lender in respect of such participation to be
those set forth in the agreement with such Lender creating such
participation), and all amounts payable by the Company hereunder shall
be determined as if such Lender had not sold such participation,
provided that such participant shall be entitled to receive additional
amounts under Article V on the same basis as if it were a Lender.
(d) Notwithstanding any other provisions of this Section
12.06, no transfer or assignment of the interests or obligations of
any Lender hereunder or any grant of participations therein shall be
permitted if such transfer, assignment or grant would require the
Company to file a registration statement with the SEC or to qualify
the Loans under the "Blue Sky" laws of any state.
(e) The Lenders may furnish any information concerning the
Company in the possession of the Lenders from time to time (i) to
assignees and participants and (ii) following the prior consent of the
Company (which will not be unreasonably withheld) to prospective
assignees and participants; provided, however, neither the Agent nor
any of the
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Lenders shall have any liability with respect to any inadvertent
disclosure of information to prospective assignees and participants.
(f) Notwithstanding anything in this Section 12.06 to the
contrary, any Lender may assign and pledge all or any of its Notes to
any Federal Reserve Bank or the United States Treasury as collateral
security pursuant to Regulation A of the Board of Governors of the
Federal Reserve System and any operating circular issued by such
Federal Reserve System and/or such Federal Reserve Bank. No such
assignment and/or pledge shall release the assigning and/or pledging
Lender from its obligations hereunder.
Section 12.07 Invalidity. In the event that any one or more of the
provisions contained in the Notes, this Agreement or in any other Security
Instrument shall, for any reason, be held invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of the Notes, this Agreement or any other Security
Instrument.
Section 12.08 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and
the same instrument and any of the parties hereto may execute this Agreement by
signing any such counterpart.
Section 12.09 References. The words "herein," "hereof," "hereunder"
and other words of similar import when used in this Agreement refer to this
Agreement as a whole, and not to any particular article, section or subsection.
Any reference herein to a Section or Subsection shall be deemed to refer to the
applicable Section or Subsection of this Agreement unless otherwise stated
herein. Any reference herein to an exhibit or schedule shall be deemed to refer
to the applicable exhibit or schedule attached hereto unless otherwise stated
herein.
Section 12.10 Termination of Agreement; Survival of Obligations.
(a) This Agreement and the Security Instruments shall
terminate and cease to be of legal force and effect upon the payment
in full of the Indebtedness and the termination of the Commitments. To
the extent that any payments on the Indebtedness or proceeds of the
collateral are subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to a trustee, debtor
in possession, receiver or other Person under any bankruptcy law,
common law or equitable cause, then to such extent the Indebtedness so
satisfied shall be revived and continue as if such payment or proceeds
had not been received by the Agent or the Lenders, and the security
interests, rights, powers and remedies of the Agent and the Lenders
under this Agreement and the Security Instruments shall continue in
full force and effect. In such event, this Agreement shall be
automatically reinstated pursuant to the terms of Subsection 12.10(b)
if it shall theretofore have been terminated.
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(b) The grant of a security interest under the Security
Instruments and all of the Agent's and the Lenders' rights, powers and
remedies under this Agreement and under the Security Instruments shall
remain in full force and effect until the Agent has retransferred and
delivered all collateral described therein in its possession to the
Company, including without limitation all shares of stock, and
executed a written release or termination statement and reassigned to
the Company without recourse or warranty any remaining collateral,
including without limitation all shares of stock, and all rights
conveyed hereby. Upon the complete payment of the Indebtedness and the
compliance by the Company with all covenants and agreements hereof, at
the written request and expense of the Company, will deliver to the
Company the Notes marked "paid" or with such other notation as is
appropriate and will release, reassign and transfer the collateral,
including without limitation all shares of stock, to the Company or
such other Person as is appropriate and declare this Agreement and the
Security Instruments to be of no further force or effect.
Notwithstanding the foregoing, the obligations of the Company under
Sections 5.01, 5.05 and 12.03 shall survive the repayment of the Loans
and the termination of the Commitments.
Section 12.11 Captions. Captions and section headings appearing herein
are included solely for convenience of reference and are not intended to affect
the interpretation of any provision of this Agreement.
Section 12.12 Governing Law; Submission to Jurisdiction.
(a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS; EXCEPT
THAT CHAPTER 346 OF THE TEXAS FINANCE CODE (WHICH REGULATES CERTAIN
REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRI-PARTY ACCOUNTS) SHALL
NOT APPLY TO THIS AGREEMENT OR THE NOTES.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
AGREEMENT, THE NOTES OR THE OTHER SECURITY INSTRUMENTS MAY BE BROUGHT
IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF AMERICA
FOR THE SOUTHERN DISTRICT OF TEXAS, AND, BY EXECUTION AND DELIVERY OF
THIS AGREEMENT, THE COMPANY HEREBY ACCEPTS FOR ITSELF AND (TO THE
EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE COMPANY
HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE
GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO
THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE
JURISDICTIONS. THIS SUBMISSION TO JURISDICTION IS NONEXCLUSIVE AND
DOES NOT PRECLUDE THE AGENT OR ANY LENDER FROM OBTAINING JURISDICTION
OVER THE COMPANY IN ANY COURT OTHERWISE HAVING JURISDICTION.
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Section 12.13 Interest. It is the intention of the parties hereto that
each Lender shall conform strictly to usury laws applicable to it. Accordingly,
if the transactions contemplated hereby would be usurious as to any Lender
under laws applicable to it (including the laws of the United States of America
and the State of Texas or any other jurisdiction whose laws may be mandatorily
applicable to such Lender notwithstanding the other provisions of this
Agreement), then, in that event, notwithstanding anything to the contrary in
the Notes, this Agreement or in any other Security Instrument or agreement
entered into in connection with or as security for the Notes, it is agreed as
follows: (i) the aggregate of all consideration which constitutes interest
under law applicable to any Lender that is contracted for, taken, reserved,
charged or received by such Lender under the Notes, this Agreement or under any
of the other aforesaid Security Instruments or agreements or otherwise in
connection with the Notes shall under no circumstances exceed the maximum
amount allowed by such applicable law, and any excess shall be cancelled
automatically and if theretofore paid shall be credited by such Lender on the
principal amount of the Indebtedness (or, to the extent that the principal
amount of the Indebtedness shall have been or would thereby be paid in full,
refunded by such Lender to the Company); and (ii) in the event that the
maturity of the Notes is accelerated by reason of an election of the holder
thereof resulting from any Event of Default under this Agreement or otherwise,
or in the event of any required or permitted prepayment, then such
consideration that constitutes interest under law applicable to any Lender may
never include more than the maximum amount allowed by such applicable law, and
excess interest, if any, provided for in this Agreement or otherwise shall be
cancelled automatically by such Lender as of the date of such acceleration or
prepayment and, if theretofore paid, shall be credited by such Lender on the
principal amount of the Indebtedness (or, to the extent that the principal
amount of the Indebtedness shall have been or would thereby be paid in full,
refunded by such Lender to the Company). All sums paid or agreed to be paid to
any Lender for the use, forbearance or detention of sums due hereunder shall,
to the extent permitted by law applicable to such Lender, be amortized,
prorated, allocated and spread in equal parts throughout the full term of the
Loans evidenced by the Notes until payment in full so that the rate or amount
of interest on account of any Loans hereunder does not exceed the maximum
amount allowed by such applicable law. If at any time and from time to time (i)
the amount of interest payable to any Lender on any date shall be computed at
the Highest Lawful Rate applicable to such Lender pursuant to this Section
12.13 and (ii) in respect of any subsequent interest computation period the
amount of interest otherwise payable to such Lender would be less than the
amount of interest payable to such Lender computed at the Highest Lawful Rate
applicable to such Lender, then the amount of interest payable to such Lender
in respect of such subsequent interest computation period shall continue to be
computed at the Highest Lawful Rate applicable to such Lender until the total
amount of interest payable to such Lender shall equal the total amount of
interest which would have been payable to such Lender if the total amount of
interest had been computed without giving effect to this Section.
To the extent that Section 303.001 of the Texas Finance Code is
relevant to any Lender for the purpose of determining the Highest Lawful Rate,
each such Lender hereby elects to determine the applicable rate ceiling under
such Section by the weekly rate ceiling from time to time in effect.
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<PAGE> 77
Section 12.14 Waiver of Jury Trial. EACH OF THE PARTIES HERETO WAIVES,
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO A TRIAL BY JURY
IN ANY ACTION OR PROCEEDING TO ENFORCE OR TO DEFEND ANY RIGHTS UNDER THIS
AGREEMENT, THE NOTES OR ANY OTHER SECURITY INSTRUMENT OR UNDER ANY AMENDMENT,
INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE
DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY RELATIONSHIP
EXISTING IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OTHER SECURITY
INSTRUMENT AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE
A COURT AND NOT BEFORE A JURY.
Section 12.15 Exculpation Provisions. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE OTHER
SECURITY INSTRUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF
THE TERMS OF THIS AGREEMENT AND THE OTHER SECURITY INSTRUMENTS; THAT IT HAS IN
FACT READ THIS AGREEMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND
KNOWLEDGE OF THE TERMS, CONDITIONS AND EFFECTS OF THIS AGREEMENT; THAT IT HAS
BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE
NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS AGREEMENT AND THE OTHER SECURITY
INSTRUMENTS; AND HAS RECEIVED THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS
AGREEMENT AND THE OTHER SECURITY INSTRUMENTS; AND THAT IT RECOGNIZES THAT
CERTAIN OF THE TERMS OF THIS AGREEMENT AND THE OTHER SECURITY INSTRUMENTS
RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT IN SOME ASPECTS OF THE
TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS RESPONSIBILITY FOR SUCH
LIABILITY. EACH PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE
VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS AGREEMENT AND
THE OTHER SECURITY INSTRUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE OR
KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT "CONSPICUOUS."
Section 12.16 No Oral Agreements. THIS WRITTEN AGREEMENT, THE NOTES,
AND THE OTHER SECURITY INSTRUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES.
The parties hereto have caused this Agreement to be duly executed as
of the day and year first above written.
-70-
<PAGE> 78
COMPANY:
THE HOUSTON EXPLORATION
COMPANY
By: /s/ Thomas W. Powers
----------------------------
Name: Thomas W. Powers
Title: Senior Vice President
Business Development
Finance and Treasurer
Address: 1100 Louisiana
Suite 2000
Houston, Texas 77002
Telecopier No.: 713/830-6885
Telephone No.: 713/652-2847
[Amended and Restated Credit Agreement
Signature Page 1]
<PAGE> 79
LENDERS AND AGENTS:
Commitment CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION, Individually as a Lender
and as Administrative Agent
$50,000,000.00 By: /s/ Russell A. Johnson
-------------------------------------
Name: Russell Johnson
Title: Vice President
Applicable Lending Office for Base
Rate Loans:
Address: 712 Main Street
Houston, Texas 77002
Applicable Lending Office for Fixed
Rate Loans:
Address: 712 Main Street
Houston, Texas 77002
Telecopier: 713/216-4117
Telephone: 713/216-5617
Address for Notices:
Loan and Agency Services
The Chase Manhattan Bank
1 Chase Manhattan Plaza, 8th Floor
New York, New York 10081
Telecopier No.: 212/552-7490
Telephone No.: 212/552-7943
Attention: Muniram Appanna
with a copy to:
Address: 1111 Fannin
Houston, Texas 77002
Telecopier No.:
------------------
Telephone No.:
------------------
Attention:
-----------------------
[Amended and Restated Credit Agreement
Signature Page 2]
<PAGE> 80
Commitment THE BANK OF NOVA SCOTIA,
Individually as a Lender and as
Syndication Agent
$40,000,000.00 By: /s/ F.C.H. Ashby
---------------------------------
Name: F.C.H. Ashby
Title: Senior Manager Loan Operations
Applicable Lending Office for Base
Rate Loans:
Address: 600 Peachtree Street N.E.
Suite 2700
Atlanta, Georgia 30308
Telecopier No.:
---------------------
Telephone No.:
---------------------
Applicable Lending Office for Fixed
Rate Loans:
Address: 600 Peachtree Street N.E.
Suite 2700
Atlanta, Georgia 30308
Telecopier:
-------------------------
Telephone:
-------------------------
Address for Notices:
1100 Louisiana, Suite 3000
Houston, Texas 77002
Telecopier No.: 713/752-2425
Telephone No.: 713/759-3441
Attention: Mark Ammerman
with a copy to:
Address: 600 Peachtree Street N.E.
Suite 2700
Atlanta, Georgia 30308
Telecopier No.: 404/888-8998
Telephone No.: 404/877-1552
Attention: Phyllis Walker
[Amended and Restated Credit Agreement
Signature Page 3]
<PAGE> 81
Commitment FIRST UNION NATIONAL BANK,
Individually as a Lender and as
Documentation Agent
$35,000,000.00 By: /s/ David Humphreys
---------------------------------
Name: David Humphreys
Title: Vice President
Applicable Lending Office for Base
Rate Loans:
Address: 301 South College Street
Charlotte, North Carolina
28288
Telecopier No.:
---------------------
Telephone No.:
---------------------
Applicable Lending Office for Fixed
Rate Loans:
Address: 301 South College Street
Charlotte, North Carolina
28288
Telecopier:
-------------------------
Telephone:
-------------------------
Address for Notices:
1001 Fannin Street
Houston, Texas 77002
Telecopier No.: 713/650-6354
Telephone No.: 713/346-2704
Attention: Jay Chernosky
with a copy to:
Address: 1001 Fannin Street
Houston, Texas 77002
Telecopier No.: 713/650-6354
Telephone No.: 713/346-2727
Attention: Debbie Blank
[Amended and Restated Credit Agreement
Signature Page 4]
<PAGE> 82
Commitment PNC BANK NATIONAL ASSOCIATION,
Individually as a Lender and as
Managing Agent
$35,000,000.00 By: /s/ Julie Quaid
---------------------------------
Name: Julie Quaid
Title: Associate Vice President
Applicable Lending Office for Base
Rate Loans:
Address: 249 Fifth Avenue, 3rd Floor
Mail Stop P1-POPP-03-1
Pittsburgh, Pennsylvania
15222
Telecopier No.: 412-768-4586
Telephone No.: 412-768-4262
Applicable Lending Office for Fixed
Rate Loans:
Address: 249 Fifth Avenue, 3rd Floor
Mail Stop P1-POPP-03-1
Pittsburgh, Pennsylvania
15222
Telecopier: 412-768-4586
Telephone: 412-768-4262
Address for Notices:
249 Fifth Avenue, 3rd Floor
Mail Stop P1-POPP-03-1
Pittsburgh, Pennsylvania 15222
Telecopier No.: 412/762-2571
Telephone No.: 412/762-3025
Attention: Tom Grundman
[Amended and Restated Credit Agreement
Signature Page 5]
<PAGE> 83
with a copy to:
Address: 620 Liberty Avenue
Mail Stop P2-PTPP-03-1
Pittsburgh, Pennsylvania
15222
Telecopier No.: 412/768-4586
Telephone No.: 412/768-4262
Attention: Stephanie Angelini
[Amended and Restated Credit Agreement
Signature Page 6]
<PAGE> 84
Commitment Comerica Bank - Texas
$25,000,000.00 By: /s/ Martin W. Wilson
---------------------------------
Name: Martin W. Wilson
Title: Vice President
Applicable Lending Office for Base
Rate Loans:
Address: 1601 Elm Street, 2nd Floor
Dallas, Texas 75201
Telecopier No.: 214-969-6561
Telephone No.: 214-969-6563
Applicable Lending Office for Fixed
Rate Loans:
Address: 1601 Elm Street, 2nd Floor
Dallas, Texas 75201
Telecopier: same as above
Telephone: same as above
Address for Notices:
1601 Elm Street, 2nd Floor
Dallas, Texas 75201
Telecopier No.: 214/969-6561
Telephone No.: 214/969-6563
Attention: Martin W. Wilson
with a copy to:
Address: Livonia Operations Center
39200 Six Mile Road,
4th Floor
Livonia, Michigan 48152
Telecopier No.: 734/632-7050
Telephone No.: 734/632-3063
Attention: Nancy Lee
[Amended and Restated Credit Agreement
Signature Page 7]
<PAGE> 85
EXHIBIT B
FORM OF
REVOLVING CREDIT NOTE
$_________________ Houston, Texas March ____, 1999
THE HOUSTON EXPLORATION COMPANY (hereinafter called the "Company"), a
Delaware corporation, with offices at 1100 Louisiana, Suite 2000, Houston,
Texas 77002, for value received, promises and agrees to pay on or before March
1, 2003, to the order of ____________________________________ (hereinafter
called the "Lender") at the banking quarters of CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION, as Agent, located at 712 Main Street, Houston, Texas 77002, in
coin or currency of the United States of America which at the time of payment
is legal tender for the payment of public and private debts, the principal sum
of _____________________________________ DOLLARS ($___________________), or so
much thereof as may be advanced pursuant to the Credit Agreement hereinafter
mentioned, as shown on the schedules attached hereto and any continuation of
such schedules.
All capitalized terms which are used but not defined in this Note
shall have the same meanings as in the Credit Agreement dated as of March __,
1999, between the Company, Chase Bank of Texas, National Association, as
Administrative Agent, The Bank of Nova Scotia, as Syndication Agent, First
Union National Bank, as Documentation Agent, PNC Bank National Association, as
Managing Agent, the Lender and each other financial institution now or
hereafter signatory thereto (such Credit Agreement, together with all
amendments or supplements thereto, being the "Credit Agreement").
In addition to the principal sum referred to in the first paragraph of
this Note, the Company also agrees to pay interest on all amounts hereof so
advanced and remaining from time to time unpaid hereon from the date hereof
until maturity at the rates and on the dates provided for in the Credit
Agreement. Past due principal and interest shall bear interest at the
Post-Default Rate.
The Lender is hereby authorized to record all loans and all payments
and prepayments hereunder on account of principal and interest on the schedules
attached hereto and made a part hereof for all purposes and to provide
continuations to such schedules as may be necessary. The date, type, interest
rate and maturity of each Loan made by the Lender to the Company, and each
payment made on account of the principal thereof, shall be recorded by the
Lender on its books and, prior to any transfer of this Note, endorsed by the
Lender on the schedules attached hereto or any continuation thereof.
B-1
<PAGE> 86
This Note is a "Revolving Credit Note" under the Credit Agreement, is
issued pursuant to and is entitled to the benefits of the Credit Agreement.
Reference is made to the Credit Agreement for provisions for the acceleration
of the maturity hereof on the occurrence of certain events specified therein,
for interest rate computations in the event that the otherwise agreed rate is
at any time limited by the Highest Lawful Rate, for the reimbursement of
attorneys' fees or other costs of collection or enforcement, and for all other
pertinent purposes. It is contemplated that by reason of prepayment hereon
there may be times when no Indebtedness is owing hereunder; but notwithstanding
such occurrences, this Note shall remain valid and shall be in full force and
effect as to loans made pursuant to the Credit Agreement subsequent to each
occurrence.
This Note has been made and issued and is payable in the State of
Texas and shall be governed by the laws of such State.
THE HOUSTON EXPLORATION COMPANY
By:
-----------------------------
Name: Thomas W. Powers
Title: Senior Vice President
Business Development
Finance and Treasurer
B-2
<PAGE> 87
EXHIBIT C
FORM OF
COMPLIANCE CERTIFICATE
The undersigned hereby certifies that he is the ______________________
of The Houston Exploration Company, a Delaware corporation (the "Company"), and
that as such he is authorized to execute this certificate on behalf of the
Company. With reference to the Amended and Restated Credit Agreement dated as
of March __, 1999 (together with all amendments or supplements thereto being
the "Agreement"), among the Company; Chase Bank of Texas, National Association,
as Administrative Agent ("the Agent") for itself and the other financial
institutions now or hereafter signatory thereto (the "Lenders"); The Bank of
Nova Scotia, as Syndication Agent; First Union National Bank, as Documentation
Agent; and the Lenders, PNC Bank National Association, as Managing Agent; and
the Lenders, and the undersigned further certifies, represents and warrants as
follows (each capitalized term used herein having the same meaning given to it
in the Agreement unless otherwise specified):
(a) The representations and warranties of the Company
contained in the Agreement and otherwise made in writing by or on
behalf of the Company pursuant to the Agreement were true and correct
when made, and are repeated at and as of the time of delivery hereof
and are true and correct at and as of the time of delivery hereof in
all material respects, or has notified the Agent of any failure
thereof.
(b) The Company has performed and complied with all
agreements and conditions contained in the Agreement required to be
performed or complied with by it prior to or at the time of delivery
hereof.
(c) Neither the Company nor any Subsidiary has incurred any
material liabilities, direct or contingent, since September 30, 1998,
except those (i) set forth in Schedule 7.03 to the Agreement, (ii)
disclosed on the most recent financial statements of the Company and
the Subsidiaries delivered to the Agent and (iii) consented to by the
Agent and the Lenders in writing.
(d) Since September 30, 1998, no change has occurred, either
in any case or in the aggregate, in the condition, financial or
otherwise, of the Company or any Subsidiary which would have a
Material Adverse Effect, except as disclosed to the Agent in writing.
(e) There exists, and, after giving effect to the loan or
loans or extensions of credit with respect to which this certificate
is being delivered, will exist, no Event of Default under the
Agreement or any event or circumstance which constitutes, or
C-1
<PAGE> 88
with notice or lapse of time (or both) would constitute, an event of
default under any loan or credit agreement, indenture, deed of trust,
security agreement or other agreement or instrument evidencing or
pertaining to any Debt of the Company or any Subsidiary, or under any
material agreement or instrument to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary is
bound.
(f) Based upon the detailed computations set forth on
Schedule 8.01 attached hereto, the Company is in compliance with the
provisions of Sections 9.12 and 9.13 of the Agreement as of
__________________, 19______.
EXECUTED AND DELIVERED this ____ day of ___________, 19__.
THE HOUSTON EXPLORATION COMPANY
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
C-2
<PAGE> 89
EXHIBIT E
FORM OF
BORROWING, CONTINUATION AND CONVERSION REQUEST
____________, 19__
The Houston Exploration Company, a Delaware corporation (the
"Company"), pursuant to the Credit Agreement dated as of March __, 1999 (as the
same may be amended or supplemented, the "Agreement"), among the Company, Chase
Bank of Texas, National Association, as Administrative Agent, The Bank of Nova
Scotia, as Syndication Agent, First Union National Bank, as Documentation
Agent, PNC Bank National Association, as Managing Agent, and the financial
institutions now or hereafter signatory thereto hereby makes the requests
indicated below (unless otherwise defined herein, capitalized terms are defined
in the Agreement):
[ ] 1. Revolving Credit Loans:
(a) Aggregate amount of new Revolving Credit Loans to be $________;
(b) Requested funding date is _________________, 199__;
(c) $_____________________ of such borrowings are to be Fixed Rate
Loans;
$_____________________ of such borrowings are to be Base Rate
Loans; and
(d) Length of Interest Period for Fixed Rate Loans is __________.
[ ] 2. Fixed Rate Loan Continuation for Fixed Rate Loans maturing on
______________:
(a) Aggregate amount to be continued as Fixed Rate Loans is $______;
(b) Aggregate amount to be converted to Base Rate Loans is $______;
and
(c) Length of Interest Period for continued Fixed Rate Loans is ___-
___________.
E-1
<PAGE> 90
[ ] 3. Conversion of Outstanding Base Rate Loans to Fixed Rate Loans:
Convert $__________________ of the outstanding Base Rate
Loans to Fixed Rate Loans on ____________________ with an
Interest Period of __________________.
4. Letter of Credit
(a) Account Party: , 19
------------------------ -----
(b) Issuance Date: , 19
------------------------ -----
(c) Beneficiary: , 19
------------------------ -----
(d) Expiration Date: , 19
------------------------ -----
(e) Delivery
Instructions: , 19
------------------------ -----
The undersigned certifies that he is the __________________ of the
Company, and that as such he is authorized to execute this certificate on
behalf of the Company. The undersigned further certifies, represents and
warrants on behalf of the Company that the Company is entitled to receive the
requested loan or loans or extension of credit under the terms and conditions
of the Agreement.
THE HOUSTON EXPLORATION COMPANY
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
E-2
<PAGE> 91
EXHIBIT F
FORM OF
ASSIGNMENT AND ACCEPTANCE
Dated: _______________, 199__
Reference is made to that certain Credit Agreement dated as of March
__, 1999, among The Houston Exploration Company, a Delaware corporation (the
"Company"), Chase Bank of Texas, National Association, as Administrative Agent,
The Bank of Nova Scotia, as Syndication Agent, First Union National Bank, as
Documentation Agent, PNC Bank National Association, as Managing Agent, and the
financial institutions now or hereafter signatory thereto (such Credit
Agreement together with all amendments and supplements thereto being the
"Credit Agreement"). Capitalized terms used herein and not otherwise defined
shall have the meanings assigned to such terms in the Credit Agreement. This
Assignment and Acceptance, between the Assignor (as defined and set forth on
Schedule I hereto and made a part hereof) and the Assignee (as defined and set
forth on Schedule I hereto and made a part hereof) is dated as of the Effective
Date (as set forth on Schedule I hereto and made a part hereof).
1. The Assignor hereby irrevocably sells and assigns to the Assignee
without recourse to the Assignor, and the Assignee hereby irrevocably purchases
and assumes from the Assignor without recourse to the Assignor, as of the
Effective Date, an undivided interest (the "Assigned Interest") in and to all
the Assignor's rights and obligations under the Credit Agreement respecting
those, and only those, Commitments and Loans contained in the Credit Agreement
as are set forth on Schedule I, in a principal amount as set forth on Schedule
I.
2. The Assignor (i) represents and warrants that it owns the Assigned
Interest free and clear from any lien or adverse claim; (ii) other than the
representation and warranty set forth in clause (i) above, makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with the
Credit Agreement or any other instrument, document or agreement delivered in
connection therewith, or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of the Credit Agreement, or any other
instrument or document furnished pursuant thereto, other than that it is the
legal and beneficial owner of the interest being assigned by it hereunder and
that such interest is free and clear of any adverse claim; (iii) makes no
representation or warranty and assumes no responsibility with respect to the
financial condition of the Company or the performance or observance by either
the Guarantors, the Company or its Subsidiaries or of any of their respective
obligations under the Credit Agreement, or any other instrument or document
furnished pursuant thereto; and (iv) attaches the Note held by it evidencing
the Assigned Interest and requests that the Company exchange such Note for a
new Note payable to the Assignor (if the Assignor has retained any interest in
the Assigned Interest) and a new Note payable to the Assignee in the respective
amounts which reflect the assignment being made hereby (and after giving effect
to any other assignments which have become effective on the Effective Date).
F-1
<PAGE> 92
3. The Assignee (i) represents and warrants that it is legally
authorized to enter into this Assignment and Acceptance; (ii) confirms that it
has received a copy of the Credit Agreement, together with copies of the
financial statements referred to in Section 7.02, or if later, the most recent
financial statements delivered pursuant to Section 8.01 thereof, and such other
documents and information as it has deemed appropriate to make its own credit
analysis; (iii) agrees that it will, independently and without reliance upon
either the Agent, any other Lender or the Assignor and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under the Credit Agreement;
(iv) agrees that it will be bound by the provisions of the Credit Agreement and
will perform in accordance with its terms all the obligations which by the
terms of the Credit Agreement are required to be performed by it; and (v) if
the Assignee is organized under the laws of a jurisdiction outside the United
States, attaches the forms prescribed by the Internal Revenue Service of the
United States certifying as to the Assignee's exemption from United States
withholding taxes with respect to all payments to be made to the Assignee under
the Credit Agreement or such other documents as are necessary to indicate that
all such payments are subject to such tax at a rate reduced by an applicable
tax treaty.
4. Following the execution of this Assignment and Acceptance, it will
be delivered to the Company effective as of the Effective Date (which Effective
Date shall, unless otherwise agreed, be at least five (5) Business Days after
the execution of this Assignment and Acceptance).
5. Upon delivery to the Company, all payments under the Credit
Agreement in respect of the Assigned Interest (including without limitation,
all payments of principal, interest and fees with respect thereto) for the
period up to, but not including, the Effective Date, shall be made to the Agent
for the benefit of the Assignor, and for the period from and after the
Effective Date shall be made to the Agent for the benefit of the Assignee.
Assignor and Assignee hereby agree that if Assignor receives any of the
payments referred to in the preceding sentence which should have been made to
Assignee, or if Assignee receives any of the payments referred to in the
previous sentence which should have been made to Assignor, such payments shall
promptly be paid by Assignor to Assignee, or by Assignee to Assignor, as the
case may be, in full.
6. From and after the Effective Date, (i) the Assignee shall be a
party to the Credit Agreement and, to the extent provided in this Assignment
and Acceptance and Section 12.06 of the Credit Agreement, shall have the rights
and obligations thereunder, and (ii) the Assignor shall, to the extent provided
in this Assignment and Acceptance and Section 12.06 of the Credit Agreement,
relinquish its rights and be released from its obligations under the Credit
Agreement.
7. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.
F-2
<PAGE> 93
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and
Acceptance to be executed by their respective duly authorized officers on
Schedule I hereto.
------------------------------------
as Assignor
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
------------------------------------
as Assignee
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
F-3
<PAGE> 94
APPROVED:
THE HOUSTON EXPLORATION COMPANY
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
CHASE BANK OF TEXAS,
NATIONAL ASSOCIATION, as Agent
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
F-4
<PAGE> 95
SCHEDULE I
TO
ASSIGNMENT AND ACCEPTANCE
Assignor:
---------------------
Total Commitment of Assignor Prior to Effective Date: $
------------
Total Commitment of Assignor After Effective Date: $
------------
Assignee:
---------------------
Total Commitment of Assignee Prior to Effective Date: $
------------
Total Commitment of Assignee After Effective Date: $
------------
Effective Date of Assignment: , 199
------------ --
Amount of Total Commitment Assigned: $
-------------
<TABLE>
<CAPTION>
Principal Amount Percentage Assigned
Facilities (or amount of) (Shown as a percentage
Assigned Commitment) Assigned of aggregate Commitments)
- ---------- -------------------- -------------------------
<S> <C> <C>
Revolving Credit $ %
------------ -----------
</TABLE>
Assignee's Base Rate Address for Notice:
Lending Office:
- ------------------------------ -------------------------------
- ------------------------------ -------------------------------
- ------------------------------ -------------------------------
Attn:
--------------------------
Telex No:
----------------------
Assignee's Eurodollar Telecopy No:
-------------------
Lending Office: Telephone No:
------------------
- ------------------------------
- ------------------------------
- ------------------------------
F-5
<PAGE> 96
SCHEDULE 1.02(b)
EXISTING LETTERS OF CREDIT
Chase Bank of Texas, National Association
<TABLE>
<CAPTION>
Amount Maturity L/C #
------ -------- -----
<S> <C> <C>
$50,000.00 January 31, 2000 I466939
$300,000.00 June 6, 1999 I445680
</TABLE>
Schedule 1.02(b)-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE HOUSTON EXPLORATION COMPANY SET FORTH IN THE
COMPANY'S FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,948
<SECURITIES> 0
<RECEIVABLES> 28,312
<ALLOWANCES> 0
<INVENTORY> 925
<CURRENT-ASSETS> 32,137
<PP&E> 1,011,337
<DEPRECIATION> 463,445
<TOTAL-ASSETS> 583,760
<CURRENT-LIABILITIES> 119,027
<BONDS> 240,000
0
0
<COMMON> 239
<OTHER-SE> 193,039
<TOTAL-LIABILITY-AND-EQUITY> 583,760
<SALES> 26,520
<TOTAL-REVENUES> 26,865
<CGS> 0
<TOTAL-COSTS> 23,048
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,021
<INCOME-PRETAX> 796
<INCOME-TAX> 50
<INCOME-CONTINUING> 746
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 746
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
