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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
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DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
JANUARY 25, 1999
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SHERIDAN ENERGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 1-10201 76-0507664
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(STATE OF (COMMISSION (IRS EMPLOYEE
INCORPORATION) FILE NUMBER) IDENTIFICATION NO.)
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1000 LOUISIANA
SUITE 800
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(713) 651-7899
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On January 25, 1999, Sheridan California Energy, Inc. ("SCEI"), an 80%-
owned subsidiary of Sheridan Energy, Inc. ("Sheridan" or the "Registrant"),
completed its acquisition from Amerada Hess Corporation ("AHC") of approximately
$58 million (before adjustments) of natural gas producing and non-producing
properties in the Sacramento Basin, California ("Properties," such acquisition
being herein called the "Acquisition"). SCEI is the assignee of Sheridan's
rights to acquire the AHC Properties. It is estimated that the Properties have
proven natural gas reserves, as of the Acquisition's November 1, 1998 effective
date, estimated at 82 billion cubic feet (Bcf), of which 78 Bcf are proven
developed reserves.
Financing for the Acquisition was obtained from Bank One, Texas, National
Association ("Bank One") and Calpine Corporation (NYSE:CPN; "Calpine"). Bank
One and SCEI entered into a revolving line of credit secured by the Properties.
Calpine contributed approximately $15 million in cash to SCEI, in exchange for
the issuance by SCEI to a wholly-owned Calpine subsidiary of (i) 20% of SCEI's
outstanding common stock for $2 million and (ii) $13 million in seven-year
redeemable non-voting SCEI preferred stock, with a dividend coupon of 12% per
annum. SCEI may, at its option, pay dividends for the first three years by
issuing additional shares of preferred stock in an amount equal to .07 (14% per
annum) shares for each share of preferred stock issued and outstanding at the
time of such payment.
The Bank One credit line and Calpine redeemable preferred stock recourse is
limited to the assets of SCEI. Sheridan contributed $3 million in cash and
other assets valued, for transaction purposes, at $4.6 million and received 80%
of the voting stock of SCEI. Sheridan has a call option on Calpine's 20% common
ownership after retirement of the preferred stock and other conditions.
SCEI also entered into a Gas Purchase and Sale Agreement ("GPA") with
another Calpine subsidiary for the sale to the Calpine subsidiary of
substantially all of the natural gas to be produced from the Properties. The
GPA has a primary term of ten (10) years, subject to year-to-year renewals
thereafter. Gas from the Properties will be sold at a first-of-the-month index
price, subject to certain deductions for transportation and marketing costs.
Certain obligations of the buyer under the GPA are guaranteed by Calpine.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The financial statements required by this item will be filed by
amendment not later than sixty days after the date of the filing of this
Form 8-K report.
(b) Exhibits.
4.1 Certificate of Designations of Series N-A Preferred Stock of
SCEI.
10.1 Agreement for Purchase and Sale dated effective as of
November 1, 1998 between AHC and Sheridan, as amended.
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10.2 Agreement Regarding Formation of Corporation by and among
Sheridan, SCEI, Calpine and CPN Production Company.
10.3 Credit Agreement dated as of January 21, 1999 among SCEI,
Bank One, as agent for itself as a lender and the other lenders
from time to time a party thereto.
10.4 Gas Purchase and Sales Agreement between SCEI and Calpine Fuels
Corporation.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
SHERIDAN ENERGY, INC.
(REGISTRANT)
By: /s/ Michael A. Gerlich
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Michael A. Gerlich,
Vice President and
Chief Financial Officer
DATED: February 9, 1999
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CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES N-A PREFERRED STOCK
Pursuant to Section 151(g) of the Delaware General Corporation Law
__________________
SHERIDAN CALIFORNIA ENERGY, INC., a corporation organized and existing
under the laws of the state of Delaware (the "Corporation"), HEREBY CERTIFIES
that the following resolutions were duly adopted by the Board of Directors of
the Corporation by unanimous written consent of the Board of Directors pursuant
to Section 228 of the Delaware General Corporation Law:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Corporation by Article Three of the Certificate of Incorporation, a
series of Preferred Stock be, and it hereby is, created out of the authorized
but unissued shares of Preferred Stock of the Corporation, such series to be
designated "Series N-A Preferred Stock" (the "Series N-A Preferred Stock") to
consist of 2,000,000 shares, par value $0.01 per share, of which the powers,
designations, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications, limitations
and restrictions thereof shall be as follows:
1. Amount. The number of shares constituting the Series N-A Preferred
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Stock shall be 2,000,000.
2. Payment of Dividends.
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(A) Holders of the Series N-A Preferred Stock are entitled to receive
when, as and if declared by the Board of Directors, out of the funds of the
Corporation legally available therefor, cumulative cash dividends in an amount
equal to $0.625 per share, payable semi-annually, on January 15 and July 15 in
each year commencing on July 15, 1999, except that if any such day is not a
business day in Houston, Texas, then such dividends shall be payable on the next
succeeding business day (each such date on which a dividend is payable is
referred to herein as a "Dividend Payment Date"). At the option of the
Corporation, and subject to the restriction hereinafter set forth in this
Section 2(A), upon declaration of the Board of Directors, dividends otherwise
payable in cash on the Dividend Payment Dates during the period up to and
including January 15, 2002 (the "Stock Dividend Period") may be paid, in whole
or in part, by issuing additional fully paid and non-assessable shares of the
Series N-A Preferred Stock having a capital determined by the Board of Directors
in accordance with Section 154 of the Delaware General Corporation Law of $10
per share (the "Preferred Dividend Stock") in an amount equal to .07 additional
shares of Series N-A Preferred Stock for each share of Series N-A Preferred
Stock then issued and outstanding. Dividends on the Series N-A Preferred Stock
are cumulative from the date of original issuance of shares of Series N-A
Preferred Stock (or in the case of shares issued as Preferred Dividend Stock,
from the Dividend Payment Date for the dividend being satisfied by issuance of
such Preferred Dividend Stock), and
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will be payable, when, as and if declared, to holders of record on the
applicable record date as shall be fixed by the Board of Directors. Dividends in
arrears may be declared and paid at any time, without reference to any regular
dividend payment date, to holders of record on such date not exceeding 60 days
preceding the payment date thereof, as may be fixed by the Board of Directors.
The amount of Preferred Dividend Stock issuable to a holder by way of a dividend
shall be computed on the basis of the aggregate number of shares of Series N-A
Preferred Stock registered in such holder's name on the record date fixed for
the payment of such dividend plus the amount of accrued but not declared
dividends of Preferred Dividend Stock. Dividends payable for any period less
than a full semi-annual period shall be computed on the basis of a 360-day year
consisting of twelve 30-day months. Dividends shall accrue whether or not there
are profits, surplus or other funds of the Corporation legally available for the
payment of dividends. Accrued but unpaid dividends will not bear interest.
Notwithstanding anything herein to the contrary, dividends on the Series N-A
Preferred Stock may not be paid in the form of Preferred Dividend Stock, and
shall be payable in cash, to the extent that (a) on the tenth day prior to the
applicable Dividend Payment Date, there is a Conveyed Property Value Shortfall
(hereinafter defined) and (b) such cash dividends are permitted to be paid under
Section 6.8 of the Credit Agreement dated as of January 21, 1999 between the
Corporation, Bank One, Texas, National Association, as agent and lender and the
lenders signatory thereto. A "Conveyed Property Value Shortfall" shall exist if
at any time of determination, the value, determined in accordance with Schedules
B and B-1 to the Agreement for Purchase and Sale dated as of November 9, 1998,
as amended, between Amerada Hess Corporation, a Delaware corporation as Seller
("AHC") and Sheridan Energy, Inc. ("SEI"), as Buyer (the "AHC Agreement") of the
properties not effectively conveyed to the Corporation pursuant to the AHC
Agreement (except for those properties not effectively conveyed for which
adjustments to the purchase price under the AHC Agreement have already been made
pursuant to the Closing Agreement dated January 25, 1999 by and between AHC, SEI
and the Corporation) is more than $2,000,000 and in such event shall equal the
excess, if any, of (a) 50% of the value (so determined) of the properties not so
conveyed over (b) the amount of dividends on the Series N-A Preferred Stock paid
in cash on Dividend Payment Dates prior to the date of determination that could
have been paid in Preferred Dividend Stock but for application of the limitation
contained in the preceding sentence.
(B) Unless full cumulative dividends on the Series N-A Preferred
Stock have been paid through the most recently completed semi-annual dividend
period for the Series N-A Preferred Stock, no dividends (other than in common
stock of the Corporation (the "Common Stock")) may be paid or declared and set
apart for payment or other distribution made upon the Common Stock or on any
other stock of the Corporation ranking junior to or on a parity with the Series
N-A Preferred Stock as to dividends, nor may any Common Stock or any other stock
of the Corporation ranking junior to or on a parity with the Series N-A
Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for
any consideration (or any payment be made to or available for a sinking fund for
the redemption of any shares of such stock) by the Corporation or any Subsidiary
of the Corporation.
3. Voting Rights. Except as set forth herein, the Series N-A Preferred
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Stock shall have no voting rights. The holders of shares of Series N-A
Preferred Stock shall have the following voting rights with respect thereto:
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(A) Each share of Series N-A Preferred Stock shall entitle the holder
thereof to the voting rights required by applicable law.
(B) The consent of the holders of at least 66-2/3% of the outstanding
shares of the Series N-A Preferred Stock, voting separately as a single class,
in person or by proxy, either in writing without a meeting or at an annual or a
special meeting of stockholders called for the purpose, shall be necessary to,
and the Corporation shall not without such consent, (i) increase or decrease the
aggregate number of authorized shares of the Series N-A Preferred Stock
(provided in any event that no such decrease shall ever be below the number of
then outstanding shares of Series N-A Preferred Stock), (ii) effect an exchange,
reclassification, or cancellation of all or part of the Series N-A Preferred
Stock, (iii) change, alter or delete the designations, powers, preferences,
relative and other special rights of the Series N-A Preferred Stock, or the
qualifications, limitations or restrictions thereof including any changes
occurring as a result of a merger or consolidation, (iv) issue (or deliver from
shares held by the Corporation) any shares of, or securities convertible into or
exercisable or exchangeable for, or reclassify any other shares of other classes
or series into, shares of Series N-A Preferred Stock, other than 1,300,000
shares of Series N-A Preferred Stock upon the original issuance of such series
and shares of Series N-A Preferred Stock issued as Preferred Dividend Stock
pursuant to Section 2 of this Certificate of Designation, (v) create, authorize
or issue, or increase the authorized amount of, any Preferred Stock or series
thereof (other than the Series N-A Preferred Stock permitted to be issued under
clause (iv) above) or any other stock or equity security ranking senior to or on
a parity with (with respect to voting or dividends or payments upon redemption
or upon liquidation, dissolution or winding up) the Series N-A Preferred Stock,
(vi) approve or permit the Corporation's entry into any line of business outside
the energy industry or any material change in the principal business of the
Corporation, (vii) merge with or into, or consolidate with, any other
corporation or entity, (viii) declare or pay a dividend or distribution of cash
or property in respect of, or redeem, repurchase or otherwise acquire or permit
any Subsidiary to purchase or otherwise acquire (or make any payment to or in
respect of any sinking fund applicable thereto), any Junior Security (as
hereinafter defined), provided, however, that no change in the dividend rate can
be effected without the consent of all holders of the Series N-A Preferred Stock
or (ix) reduce the capital represented by outstanding shares of Series N-A
Preferred Stock. In all cases where the holders of shares of the Series N-A
Preferred Stock have the right to vote separately as a class, all such holders
shall be entitled to one vote for each share held by them. The term "Junior
Securities" as used herein shall mean any of the Corporation's capital stock
other than the Series N-A Preferred Stock.
(C) If at any time (i) dividends on the Series N-A Preferred Stock
shall be in arrears (x) for more than thirty (30) days after the applicable
Dividend Payment Date during the Stock Dividend Period or (y) in an amount
equivalent to two (2) semi-annual dividends, whether or not consecutive, at any
time after the Stock Dividend Period or (ii) the Corporation shall be obligated
to and shall have failed to redeem any shares of the Series N-A Preferred Stock
pursuant to Section 6, and for so long thereafter as shares of the Series N-A
Preferred Stock remain outstanding, at the election of the holders of the Series
N-A Preferred Stock (exercisable by written notice to the Corporation from a
majority of the holders of the then outstanding shares of Series N-A Preferred
Stock having been given to the Corporation and the noticed matters not having
been cured within 15 days after receipt of such notice), the holders of the
Series N-A Preferred Stock shall have the
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voting power, voting separately as a single class, to elect such number of
directors as constitutes a majority of the Board of Directors of the
Corporation. Under such circumstances, (1) the number of directors constituting
the whole Board of Directors shall be automatically increased, effective upon
the election of directors by the holders of Series N-A Preferred Stock as herein
provided, by such number as shall permit the directors so elected to constitute
a majority of the whole Board of Directors, and (2) the holders of the Series N-
A Preferred Stock shall have the right to elect such directors. The right of the
holders of Series N-A Preferred Stock to elect directors may be exercised
initially by written consent of the holders of the Series N-A Preferred Stock or
at a special meeting called for that purpose, which shall be called upon the
request of any stockholder or stockholders owning in the aggregate not less than
66-2/3% of the total number of shares of Series N-A Preferred Stock outstanding.
For so long as the right of the holders of the Series N-A Preferred Stock to
elect a majority of the Board of Directors as provided herein shall continue,
after the holders of Series N-A Preferred Stock shall have exercised such right,
(x) the directors so elected by the holders of Series N-A Preferred Stock shall
continue in office until their successors shall have been elected or until the
arrearages giving rise to such right have been cured and all accrued dividends
on the Series N-A Preferred Stock have been paid in full, and (y) any vacancy on
the Board of Directors caused by the resignation, death or removal of a director
elected by the holders of the Series N-A Preferred Stock or otherwise entitled
to be filled by the holders of the Series N-A Preferred Stock may be filled by
vote of a majority of the remaining Directors theretofore elected by the holders
of the Series N-A Preferred Stock or by the vote of the holders of the Series N-
A Preferred Stock, voting as a separate class. References in this paragraph to
directors elected by the holders of the Series N-A Preferred Stock shall include
directors elected by such directors to fill vacancies as provided in clause (y)
of the foregoing sentence. The directors elected by the holders of the Series N-
A Preferred Stock may be removed from the Board of Directors only by a vote of
the holders of a majority of the then outstanding shares of the Series N-A
Preferred Stock. Holders of the Series N-A Preferred Stock shall not be entitled
to cumulate their shares for the election of directors. The holders of the
Series N-A Preferred Stock may assign their rights under this Section 3(C) to
appoint a majority of the Board of Directors of the Corporation. The rights of
the holders of the Series N-A Preferred Stock to elect such majority shall
terminate and any Directors so elected shall immediately resign, upon the curing
of the matters giving rise to the holders' rights.
4. Liquidation Preference. In the event of any liquidation, dissolution,
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or winding up of the affairs of the Corporation, whether voluntary or otherwise
("Liquidation"), after payment or provision for payment by the Corporation of
the debts and other liabilities of the Corporation, each holder of the Series N-
A Preferred Stock shall be entitled to receive an amount in cash for each share
of the then outstanding Series N-A Preferred Stock held by such holder equal to
$10.00 per share (such amount being referred to herein as the "Liquidation
Preference"), plus accrued and unpaid dividends on each such share (whether or
not declared), and shall not be entitled to any further payment, before any
distribution shall be made to the holders of any Junior Securities upon the
Liquidation of the Corporation. Written notice of any Liquidation of the
Corporation, stating a payment date and the place where the distributable
amounts shall be payable, shall be given by mail, postage prepaid, not less than
30 days prior to the payment date stated therein, to the holders of record of
the Series N-A Preferred Stock, if any, at their respective addresses as the
same shall appear on the books of the Corporation. For the purposes of this
Section 4, the merger or consolidation of the Corporation into or with any other
corporation, or the merger of any other
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corporation into it, or the sale, lease or conveyance of all or substantially
all the assets, property or business of the Corporation, shall not be deemed to
be a Liquidation of the Corporation, unless such merger, consolidation, sale,
lease or conveyance shall be in connection with a dissolution or winding up of
the business of the Corporation.
5. Redemption at the Option of the Corporation.
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(A) The Corporation, at its option, may redeem the shares of Series
N-A Preferred Stock, in whole or in part, out of funds legally available
therefor, at any time or from time to time, subject to the notice provisions,
provisions for partial redemption and provisions limiting the Corporation's
optional redemption rights described below, at the price of $10.00 per share
plus accrued and unpaid dividends on each such share (whether or not declared)
(the "Redemption Price").
(B) In the event the Corporation shall redeem shares of Series N-A
Preferred Stock under this Section 5, notice of such redemption shall be given
by first class mail, postage prepaid, mailed not less than 30 nor more than 60
days prior to the redemption date, to each holder of record of the shares to be
redeemed, at such holder's address as the same appears on the stock records of
the Corporation. Each such notice shall state: (i) the redemption date; (ii)
the number of shares of Series N-A Preferred Stock to be redeemed and, if less
than all the shares held by such holder are to be redeemed, the number of such
shares to be redeemed from such holder; (iii) the Redemption Price; (iv) the
place or places where certificates for such shares are to be surrendered for
payment of the Redemption Price; and (v) that dividends on the shares to be
redeemed shall cease to accrue on such redemption date.
(C) Upon surrender in accordance with said notice of the certificates
for any such shares so redeemed (properly endorsed or assigned for transfer, if
the Board of Directors shall so require and the notice shall so state), such
shares shall be redeemed by the Corporation at the Redemption Price. If fewer
than all the outstanding shares of Series N-A Preferred Stock are to be
redeemed, shares to be redeemed shall be selected by the Corporation from
outstanding shares of Series N-A Preferred Stock not previously called for
redemption by lot or pro rata (as near as may be) or by any other method
determined by the Board of Directors of the Corporation in its sole discretion
to be equitable. If fewer than all the shares represented by any certificate
are redeemed, a new certificate shall be issued representing the unredeemed
shares without cost to the holder thereof.
6. Redemption.
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(A) On January 15, 2006, the Corporation shall redeem, for cash, all
of the outstanding shares of the Series N-A Preferred Stock at the Mandatory
Redemption Price (as hereinafter defined).
(B) Upon the occurrence of a Change of Control (as hereinafter
defined) with respect to the Corporation, any holder of Series N-A Preferred
Stock may require, at the holder's option, for a period of 90 days after receipt
of a notice by the Corporation to the holders of the
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Series N-A Preferred Stock that a Change of Control has occurred, the
Corporation to redeem the shares of Series N-A Preferred Stock held by such
holder, in whole or in part, at the Mandatory Redemption Price. A "Change in
Control" shall be deemed to have occurred (i) upon a merger, consolidation or
reorganization or similar transaction that requires approval of holders of
Common Stock, or any person or "group" (as defined in Rule 13d-5 under the
Securities Exchange Act of 1934, as amended) (other than Calpine Corporation and
its Affiliates) becoming the beneficial owner (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) of 50% or more of the
outstanding voting securities of the Corporation, (ii) upon the sale of all or
substantially all of the Corporation's assets, or (iii) upon the execution of an
agreement by the Corporation to do any of the foregoing. The term "Affiliate"
shall mean any person, corporation or other entity controlling, controlled by or
under common control with the party in question and, as used in this definition,
the term "control," including the correlative terms "controlling," "controlled
by" and "under common control with" shall mean possession, directly or
indirectly, of the power to direct or cause the direction of management or
policies (whether through ownership of securities or any partnership or other
ownership interest, by contract or otherwise) of a person, corporation or other
entity.
(C) Upon the occurrence of a Default (as hereinafter defined) with
respect to the Corporation, any holder of Series N-A Preferred Stock may
require, at the holder's option, the Corporation to redeem the shares of Series
N-A Preferred Stock held by such holder, in whole or in part, at the Mandatory
Redemption Price. A "Default" shall be deemed to have occurred if at any time
(i) dividends payable on the shares of Series N-A Preferred Stock at the time
outstanding have not been fully paid on the Dividend Payment Date; provided,
however, if such dividends are paid on or before the 30th day following such
Dividend Payment Date, the Corporation shall not be considered in Default, (ii)
any action for which the consent of the holders of Series N-A Preferred Stock is
required pursuant to the terms of Section 3(B) is taken without such consent, or
(iii) the Corporation breaches any covenant made with respect to the Series N-A
Preferred Stock (including but not limited to provisions set forth in Sections 8
and 9).
(D) A holder of Series N-A Preferred Stock may exercise the
redemption rights pursuant to Sections 6(B) and 6(C) by delivering notice of
such exercise to the Corporation, together with the certificate or certificates
representing such shares. Upon receipt of such redemption notice, the
Corporation shall, within 30 days, calculate the Mandatory Redemption Price as
of the end of the month preceding the month in which the Corporation receives
such notice; provided that with respect to the exercise of the mandatory
redemption right set forth in Section 6(C), the Corporation shall calculate the
Mandatory Redemption Price within 5 days after the receipt of such redemption
notice. The Corporation shall pay to the holder exercising such redemption right
the Mandatory Redemption Price times the number of shares redeemed on or before
the 45th day from the receipt by the Corporation of the redemption notice;
provided that with respect to the exercise of the mandatory redemption right set
forth in Section 6(C), the Corporation shall pay to the holder exercising such
redemption right the Mandatory Redemption Right within 10 days after the receipt
of such redemption notice. The Corporation shall pay to the holders the
redemption price payable pursuant to Section 6(A) upon delivery of the
certificates representing shares to be redeemed on or after the redemption date
specified therein.
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(E) The term "Mandatory Redemption Price" shall mean $10.00 per share
of Series N-A Preferred Stock, plus all accrued and unpaid dividends (whether or
not declared).
7. Reacquired Shares. Any shares of the Series N-A Preferred Stock
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redeemed or purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Series N-A Preferred Stock to be created by resolution or resolutions
of the Board of Directors, subject to the conditions and restrictions on
issuance set forth herein.
8. Covenants.
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(A) For so long as any shares of the Series N-A Preferred Stock are
outstanding, neither the Corporation nor any Subsidiary of the Corporation shall
incur, create or assume, or otherwise become responsible for the payment of or
permit to be secured, directly or indirectly, by any lien or other encumbrance
upon property or assets of the Corporation or any Subsidiary, any Indebtedness
(as hereinafter defined), if, taking into account such Indebtedness, (i) the
Corporation's aggregate Indebtedness would exceed 80% during the First Period,
or 70% during the Second Period and Third Period, of the estimated value of
future gross revenues (estimated in accordance with the requirements of the
Securities and Exchange Commission) to be generated from the production of
proved reserves, net of estimated production and future development costs, using
prices and costs in effect as of the date indicated, without giving effect to
non-property related expenses such as general and administrative expenses and
future income tax expenses or to depreciation, depletion and amortization,
discounted using an annual discount rate of 10% as reported in the Corporation's
most recent estimate of proved reserves (as of the end of the calendar year
preceding such incurrence, provided that if such incurrence is within 90 days
following the end of a calendar year, such report may be as of the end of the
next preceding calendar year) prepared by Netherland, Sewell & Associates or
such other firm of nationally recognized petroleum engineers as may be approved
by the holders of at least 66-2/3% of the outstanding shares of Series N-A
Preferred Stock (adjusted for any material asset sales or acquisitions since the
date of the last determination); or (ii) the ratio of the Cash flow to Debt
Service (as those terms are defined in the Senior Loan Facility), calculated as
provided in Section 6.13 of the Senior Loan Facility except that the
Indebtedness proposed to be incurred shall be taken into account on a pro forma
basis as if incurred at the beginning of the tested period, would be less than
1.1 to 1 if such Indebtedness is to be incurred during the First Period or 1.2
to 1 if such Indebtedness is to be incurred during the Second Period or the
Third Period; or (iii) during the First Period and Second Period, the terms of
such Indebtedness (other than the Corporation's outstanding Senior Loan Facility
until its scheduled maturity) would prohibit or restrict dividends or other
distributions on or any required redemption of the Series N-A Preferred Stock.
During the Third Period neither the Corporation nor any Subsidiary of the
Corporation shall incur, create, assume or permit to exist, or otherwise become
or be responsible for the payment of, or permit to be secured, directly or
indirectly, by any lien or other encumbrance upon property or assets of the
Corporation or any Subsidiary, any Indebtedness (including Indebtedness under
the Senior Loan Facility) if the terms of such Indebtedness would prohibit or
restrict dividends or other distributions on or any required redemption of the
Series N-A Preferred Stock.
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(B) The following definitions shall apply to terms used in this
Section:
(i) "Indebtedness" means 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
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 of such person (other than obligations in respect of current
transactions incurred in the ordinary course of business that are due by their
terms within, and have not remained outstanding in excess of, sixty days after
such obligations are incurred, unless being contested in good faith), (d) all
obligations to pay contractual obligations which have been incurred setting
forth liquidated money penalties for drilling commitments which have not been
commenced by a date certain, but excluding such amounts once satisfied; (e) all
obligations under leases which shall have been, or should have been, in
accordance with GAAP, recorded as capital leases in respect of which such Person
is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in
respect of which obligations the Corporation otherwise assures a creditor
against loss; (f) all Indebtedness and other obligations secured by a lien on
any asset of such Person, whether or not such Indebtedness is assumed by the
Corporation; (g) all Indebtedness and other obligations of others guaranteed by
such Person; (h) all obligations or undertakings of such Person to maintain or
cause to be maintained the financial position or covenants of other Persons; (i)
obligations arising with respect to letters of credit or applications or
reimbursement agreements therefor; (j) mandatory redemption or mandatory
dividend rights on capital stock (including the Series N-A Preferred Stock); and
(k) all unfunded postretirement and postemployment benefits including, without
limitation, unfunded pension liabilities;
(ii) "GAAP" means generally accepted accounting principles
(including principles of consolidation), in effect from time to time,
consistently applied;
(iii) "Subsidiary" means, as to any Person, any corporation,
company, association, partnership, limited liability company or other business
entity of which such Person or one or more of its Subsidiaries or such Person
and one or more of its Subsidiaries owns sufficient equity or voting interests
to enable it or them (as a group) ordinarily, in the absence of contingencies,
to elect a majority of the directors (or Persons performing similar functions)
of such entity, and any partnership, limited liability company or joint venture
if more than a 50% interest in the profits or capital thereof is owned by such
Person or one or more of its Subsidiaries or such Person and one or more of its
Subsidiaries; and
(iv) "Person" means an individual or individuals, a
partnership, a corporation, a company, a limited liability company, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, any other form of legal entity, or a governmental authority.
(v) "Senior Loan Facility" means that certain Credit
Agreement by and between the Corporation, as the borrower, and Bank One, Texas
National Association, as Agent and as a lender, and the other lenders from time
to time parties thereto.
8
<PAGE>
(vi) "Cash Flow" shall have the meaning ascribed to it in
Section 1.2 of the Senior Loan Facility, which definition is incorporated herein
by reference for all purposes.
(vii) "First Period" means the period beginning on the date
hereof and ending December 31, 2002.
(viii) "Second Period" means the period beginning on January 1,
2003 and ending December 31, 2004.
(ix) "Third Period" means the period beginning on January 1,
2005 and ending on the date all shares of Series N-A Preferred Stock have been
redeemed.
9. For so long as any shares of the Series N-A Preferred Stock are
outstanding, neither the Corporation nor any Subsidiary of the Corporation shall
sell, transfer or otherwise dispose of (or enter into any contract or grant any
option relating to any such sale, transfer or other disposition of) oil or gas
properties or assets (other than sales of production in the ordinary course of
business) having a fair market value in excess of, or for consideration in
excess of, (i) $5,000,000 in any transaction or series of related transactions
or (ii) $10,000,000 in all transactions in the aggregate, unless such
transaction is a sale for cash consideration not less than the fair market value
of such properties or assets, as determined in good faith by the Board of
Directors of the Corporation, and (a) the proceeds of such sale are applied,
contemporaneously with the consummation of such sale, to the repayment of
Indebtedness of the Corporation within the meaning of clause (a) of the
definition of Indebtedness set forth herein and/or to the redemption of Series
N-A Preferred Stock, or (b) at the time of such sale the Corporation, by action
of its Board of Directors, undertakes and commits to reinvest such proceeds
within six months following the consummation of such sale, in oil and gas
properties having proved reserves, as determined in good faith by the Board of
Directors of the Corporation on the basis of reports of reputable independent
petroleum engineers, having a present value (calculated on the same basis as the
valuation of reserves made in accordance with Section 9(b) of the Stockholders
Agreement) at the time of acquisition not less than the present value
(calculated on the same basis at the time of disposition) of the proved reserves
attributable to the properties or assets disposed of, and the Corporation does
in fact reinvest such proceeds in compliance with such undertaking and
commitment.
10. The Corporation shall observe and comply with the covenants set forth
in the following Sections of the Senior Loan Facility: Sections 5.1 through
5.4; 5.6; 5.8 through 5.13; 5.16 through 5.19; 6.2 through 6.3; 6.5 through
6.6; 6.10; 6.12 through 6.13; and 6.15, which provisions and all of the
definitions used therein that are set forth in the Senior Loan Facility, each as
in effect from time to time, including any successor provisions thereto, are
hereby expressly incorporated in this Section 10 by reference, and the benefits
of such terms and covenants shall run in favor or the holders of the Series N-A
Preferred Stock; provided, however, that any provision in such Senior Loan
Facility terms, covenants and definitions for notice to or delivery of any
report, certificate or other document to the lenders thereunder or any agent
therefor shall be deemed to include a requirement for like notice or delivery to
the holders of the Series N-A Preferred Stock, and provided further, that the
holders of the Series N-A Preferred Stock, however, shall be restricted from
exercising any remedy with respect to a failure to observe and comply with such
covenants including
9
<PAGE>
requiring redemption pursuant to Section 6) until such time as the Senior Loan
Facility is paid in full, whereupon such terms, covenants and definitions shall
for purposes of this Certificate remain in effect in the form in effect at such
time and such restrictions on the exercise of any remedy shall no longer apply.
SHERIDAN CALIFORNIA ENERGY, INC.
/s/ Michael Gerlich
-----------------------------------
Michael Gerlich, Vice President and Secretary
10
<PAGE>
AGREEMENT FOR PURCHASE AND SALE
DATED EFFECTIVE AS OF NOVEMBER 1, 1998
BY AND BETWEEN
AMERADA HESS CORPORATION
AS SELLER
AND
SHERIDAN ENERGY, INC.
AS BUYER
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE PAGE
- ------- ----
<S> <C>
ARTICLE I........................................................... 1
DEFINITIONS
ARTICLE II.......................................................... 8
SALE AND PURCHASE
ARTICLE III......................................................... 8
PURCHASE PRICE AND PAYMENT
ARTICLE IV.......................................................... 11
SELLER'S REPRESENTATIONS
ARTICLE IV.......................................................... 14
SELLER'S REPRESENTATIONS
ARTICLE VI.......................................................... 15
ACCESS TO INFORMATION AND INSPECTION
ARTICLE VII......................................................... 16
TITLE
ARTICLE VIII........................................................ 18
PREFERENTIAL PURCHASE RIGHTS AND CONSENTS
ARTICLE IX.......................................................... 19
COVENANTS OF SELLER
ARTICLE X........................................................... 21
CLOSING CONDITIONS
ARTICLE XI.......................................................... 23
CLOSING
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
ARTICLE XII......................................................... 24
EFFECT OF CLOSING
ARTICLE XIII........................................................ 26
SETTLEMENT OF PRORATIONS
ARTICLE XIV......................................................... 27
ENVIRONMENTAL
ARTICLE XV.......................................................... 28
CASUALTY LOSS AND CONDEMNATION
ARTICLE XVI......................................................... 29
DEFAULT AND REMEDIES
ARTICLE XVII........................................................ 30
ARBITRATION
ARTICLE XVIII....................................................... 31
MISCELLANEOUS
</TABLE>
-ii-
<PAGE>
EXHIBITS
- --------
A - Subject Interests
B - Purchase Price Allocation
C - Preferential Rights and Consents
D - Production Payments and Certain Agreements
E - Litigation and Other Liabilities
F - Assignment, Bill of Sale and Conveyance
G - Advance Payments and Prepayments
H - Overproduction and Underproduction
I - Excluded Assets
J - Oil and Gas Purchase and Processing Agreement
K - Other Material Agreements
L - Tax Liens
M - Environmental Testing and Confidentiality Agreement
-iii-
<PAGE>
AGREEMENT FOR PURCHASE AND SALE
THIS AGREEMENT dated effective as of the 1/st/ day of November, 1998,
between Amerada Hess Corporation, a Delaware corporation (hereinafter referred
to as "Seller"), and Sheridan Energy, Inc., a Delaware corporation (herein
referred to as "Buyer").
WITNESSETH:
WHEREAS, Seller owns certain oil and gas leasehold interests and related
equipment situated in the State of California; and
WHEREAS, Seller desires to sell and Buyer desires to acquire these
interests and related assets on the terms and conditions hereinafter provided;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereby agree as follows:
ARTICLE I.
DEFINITIONS
-----------
The following terms, as used herein, shall have the following meanings:
1.1 "Agreement" shall mean this Agreement for Purchase and Sale between
Seller and Buyer.
1.2 "Assets" shall mean the following described assets and properties
(except to the extent constituting Excluded Assets):
(a) the Subject Interests;
(b) the Lands;
(c) the Incidental Rights;
(d) the Claims;
(e) the Royalty Accounts; and
(f) all Hydrocarbons produced from or attributable to the Subject
Interests with respect to all periods subsequent to the Effective Time, together
with all proceeds from or of such Hydrocarbons.
1.3 "Assumed Obligations" shall mean (i) all liabilities and obligations
of Seller with respect to the Claims and all liabilities and obligations arising
after Closing from disbursement of
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<PAGE>
the Royalty Accounts, (ii) all liabilities and obligations of Seller arising or
accruing under or with respect to the Assets to the extent attributable to time
periods from and after the Effective Time, including, without limitation, those
arising under any applicable Environmental Law, (iii) all liabilities and
obligations of Seller, whether accrued or not, with respect to plugging and
abandoning any wells, removing equipment and facilities and restoring the
surface (but not including operations required under any Environmental Law
attributable to time periods before the Effective Time) relating to operations
pertaining to the Assets, (iv) all liabilities and obligations of Seller with
respect to the matters disclosed in Exhibits "D", "F", "G", "J" and "K" attached
hereto to the extent attributable to time periods from and after the Effective
Time, (v) pro-rata share of Property Taxes (based on the Effective Time) with
respect to the Assets for the Tax Period in which Closing occurs and all
Transfer Taxes, (vi) all liabilities and obligations of Seller arising or
accruing under or with respect to the Oil and Gas Purchase and Processing
Agreements attributable to time periods from and after the Effective Time, (vii)
all liabilities and obligations under the Basic Documents attributable to time
periods from and after the Effective Time except to the extent that a particular
obligation is otherwise expressly retained by Seller hereunder, and (viii) all
other liabilities and obligations otherwise expressly assumed by Buyer under
this Agreement.
1.4 "Basic Documents" shall mean all contracts, agreements, and other
legally binding rights and obligations to which the Assets may be subject, or
that may relate to the Assets including, without limitation, leases, assignments
in the chain of title, overriding royalty assignments, farmout and farmin
agreements, option agreements, pooling and unitization agreements, operating
agreements, production sales and marketing agreements, processing agreements,
transportation agreements, production purchasing agreements, permits, licenses
and orders.
1.5 "Buyer's Credits" shall be as defined in Section 3.2.
1.6 "Claims" shall mean (i) all claims of Seller against gas purchasers
for "take or pay" obligations with respect to the Assets to the extent such
claims accrue at or after the Effective Time (but not for obligations accruing
prior thereto) and (ii) all obligations and benefits with respect to gas
production, pipeline, transportation or processing imbalances which are to be
assumed or received by Buyer pursuant to this Agreement.
1.7 "Closing" shall be as defined in Section 11.1.
1.8 "Closing Date" shall be as defined in Section 11.1.
1.9 "Defensible Title" shall mean such title to a Subject Interest that,
subject to and except for Permitted Encumbrances, (a) entitles Seller and Buyer,
at Closing and for the production life of the respective unit or well, to own
and receive not less than the net revenue interest of Seller for the well or
unit as set forth in Exhibit "A" of all Hydrocarbons produced, saved and
marketed from or attributable to such well or unit and (b) obligates Seller and
Buyer, at Closing and for the productive life of the respective unit or well, to
bear the costs and expenses relating to the maintenance, development and
operation of such well or unit in an amount not
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<PAGE>
greater than the working interest of Seller for such well or unit as set forth
in Exhibit "A", unless Seller's net revenue interest therein is proportionately
increased, it being understood that the existence of Permitted Encumbrances
affecting any property shall not form the basis for a claim that Seller does not
have Defensible Title to such property.
1.10 "Deposit" shall be as defined in Section 3.1.
1.11 "Environmental Defect" means any event or condition with respect to
air, land, soil, surface, subsurface strata, surface water, ground water, or
sediment which causes a property to become subject to required remediation
under, or not be in compliance with, any Environmental Law.
1.12 "Environmental Laws" shall mean any and all federal, state and local
laws including statutes, regulations, orders, ordinances, judgments, rulings and
common law, relating to hazardous substances, pollution, naturally occurring
radioactive materials or protection of the environment, including laws relating
to actual or threatened emissions, discharges, or releases of pollutants,
contaminants or hazardous substances, or other toxic materials or wastes into
ambient air, surface water, ground water, or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants of hazardous substances, or
other toxic materials or wastes and specifically including, without limitation,
The Comprehensive Environmental Response, Compensation And Liability Act Of
1980, as amended (42 U.S.C. (S)(S)9601 et. seq.), The Resource Conservation And
Recovery Act Of 1976 (42 U.S.C. (S)6901 et. seq.), The Clean Water Act (33
U.S.C. (S)(S)466 et. seq.), The Safe Drinking Water Act (14 U.S.C. (S)(S)1401-
1450), The Hazardous Materials Transportation Act (49 U.S.C. (S)(S)1801 et.
seq.), The Toxic Substance Control Act (15 U.S.C. (S)(S)2601-2629), The Clean
Air Act (42 U.S.C. (S)7401 et. seq.) as amended, The Clean Air Act Amendments of
1990 and all state and local laws, and any replacement or successor legislation
or regulation thereto.
1.13 "Effective Time" shall mean 7:00 a.m., Pacific Standard Time on
November 1, 1998.
1.14 "Excluded Assets" shall mean the following:
(a) all rights, interests, assets and properties of Seller which are
expressly excluded from this sale under other provisions of this Agreement or
which are set forth in Exhibit "I";
(b) (i) except as provided in Article XV and except to the extent
constituting or attributable to Claims, all trade credits, accounts receivable,
notes receivable and other receivables attributable to Seller's interest in the
Assets with respect to any period of time prior to the Effective Time, and (ii)
except to the extent constituting the Royalty Accounts, all deposits, cash,
checks in process of collection, cash equivalents and funds attributable to
Seller's interest in the Assets with respect to any period of time prior to the
Effective Time;
-3-
<PAGE>
(c) all corporate, financial, tax and legal (other than title)
records of Seller; however, Buyer shall be entitled to receive copies of any
financial, tax (subject to Section 12.2(d) of this Agreement) or legal records
which directly relate to the Subject Interests; provided, however, that Buyer's
said entitlement shall not extend to any records whose disclosure would
constitute a breach of privilege or confidentiality under any agreement or
create a claim against Seller under federal or state laws;
(d) except to the extent constituting Claims and except as otherwise
provided in this Agreement, all claims and causes of action of Seller (i)
arising from acts, omissions or events, or damage to or destruction of property,
occurring prior to the Effective Time, or (ii) with respect to any of the
Excluded Assets;
(e) except as otherwise provided in clause (vi) of the definition of
Incidental Rights or in Article XV hereof, all rights, titles, claims and
interests of Seller (i) under any policy or agreement of insurance or indemnity,
(ii) under any bond or (iii) to any insurance or condemnation proceeds or
awards;
(f) all (i) Hydrocarbons produced from or attributable to the Assets
with respect to all periods prior to the Effective Time, together with all
proceeds from or of such Hydrocarbons, and (ii) Hydrocarbons which, at the
Effective Time, are owned by Seller or to which Seller has title and which are
in storage, within processing plants, or in pipelines;
(g) Seller's share of any and all claims, as well as Seller's claims,
for refund of or loss carry forwards with respect to (i) federal, state and
local, sales and use, ad valorem, property, excise, production, severance, gross
receipts, payroll, withholding or other taxes attributable to any period prior
to the Effective Time; (ii) federal, state and local income or franchise taxes;
or (iii) any taxes attributable to the Excluded Assets;
(h) all amounts due or payable to Seller as adjustments or refunds
under any audit pertaining to periods prior to the Effective Time;
(i) all amounts due or payable to Seller as adjustments or refunds
under any contracts or agreements respecting periods prior to the Effective
Time, other than Claims;
(j) all amounts due or payable to Seller as adjustments to insurance
premiums related to the Assets with respect to any period prior to the Effective
Time;
(k) except to the extent included in the Claims, all proceeds,
benefits, income or revenues accruing (and any security or other deposits made)
with respect to (i) the Assets prior to the Effective Time or (ii) any Excluded
Assets;
(l) any logo, service mark, copyright, trade name or trademark
associated with Seller or any business of Seller;
-4-
<PAGE>
(m) all files, information and data expressly excluded from the
definition of Incidental Rights; and
(n) the rights to use the surface and subsurface of any of the Lands
for access to those leases and contractual rights or portions of leases and
contractual rights which are expressly excluded from Exhibit "A" or to other
properties of Seller, including, without limitation, the right to construct,
maintain, repair, replace, remove, use and operate drilling rigs and facilities,
production platforms and production facilities, roads, pipe lines, tank
batteries and other facilities for exploration, drilling, operating, producing,
treating, transporting and removing oil and gas, and the rights to drill through
depths and formations included within the Assets and to install, maintain,
repair, replace, remove, use and operate therein production facilities in
connection with drilling and exploration operations, reworking operations, and
production operations (including, without limitation, recycling, water flooding
or other pressure maintenance operations) relating to oil and gas in those
depths; provided, that the exercise of such rights will not materially interfere
with Buyer's operation of or the ownership, use or value of the Assets. To the
extent Seller uses such surface, Seller agrees that it will equitably share the
expenses directly related to such use.
1.15 "GAAP" shall mean generally accepted accounting principles,
consistently applied.
1.16 "Hart-Scott-Rodino Act" shall be as defined in Section 18.2.
1.17 "Hydrocarbons" shall mean crude oil, natural gas, casinghead gas,
condensate, sulphur, natural gas liquids and other liquid or gaseous
hydrocarbons (including CO2), and shall also refer to all other minerals of
every kind and character which may be covered by or included in the Subject
Interests.
1.18 "Incidental Rights" shall mean all right, title and interest of
Seller in and to or derived from the following insofar as the same directly
relate to the Subject Interests: (i) all unitization, communitization and
pooling designations, declarations, agreements and orders covering Hydrocarbons
in or under the Lands or any portion thereof and the units and pooled or
communitized areas created thereby; (ii) all easements, rights-of-way, surface
leases, permits, licenses, servitudes or other interests; (iii) all wells
(including abandoned wells), equipment and other personal property, fixtures and
improvements situated upon the Lands or used or held for use in connection with
the exploration, development or operation of the Subject Interests or Lands or
the production, treatment, storage, compression, processing or transportation of
Hydrocarbons from or in the Subject Interests or Lands; (iv) all Hydrocarbon
sales, purchase, exchange and processing contracts and agreements, farmout or
farmin agreements, joint operating agreements and all other contracts and
agreements insofar as the same affect or relate to the Subject Interests or
Lands or any part thereof; (v) all lease files, land files, well files, gas and
oil sales contract files, gas processing files, division order files, abstracts,
title opinions, and all other books, files and records, information and data
(including copies of engineering, geological and geophysical data to the extent
same may be transferred, but subject in all events to any and all consents
concerning ownership and transfer), and all rights thereto, of Seller insofar
-5-
<PAGE>
as the same are directly related to and useful for the realization of value by
Buyer of any of the Subject Interests or Lands and to the extent the transfer
thereof is not prohibited by existing contractual obligations with third
parties; and (vi) to the extent transferable and subject to Article XV hereof,
all interest of Seller in and to all claims and causes of action which Seller
may have against insurance companies and others by reason of injury or damage to
or destruction or loss of all or any part of the Assets by reason of events
occurring subsequent to the Effective Time.
1.19 "Lands" shall mean, except to the extent constituting Excluded
Assets, each and every kind and character of right, title, claim or interest
which Seller has in and to the lands covered by the Subject Interests.
1.20 "Oil and Gas Purchase and Processing Agreements" shall mean all
existing contracts and agreements set forth on Exhibit "J".
1.21 "Permitted Encumbrances" shall mean any of the following matters:
(a) the terms, conditions, restrictions, exceptions, reservations,
limitations and other matters contained in the agreements, instruments and
documents which create or reserve to Seller its interests in any of the Assets
provided they do not operate to reduce the net revenue interest, nor increase
the working interest, unless Seller's net revenue interest therein is
proportionately increased, of Seller in the Subject Interests as reflected in
Exhibit "A" hereto;
(b) any (i) undetermined or inchoate liens or charges constituting
or securing the payment of expenses which were incurred incidental to
maintenance, development, production, or operation of the Assets or for the
purpose of developing, producing or processing Hydrocarbons therefrom or therein
and (ii) materialman's, mechanics', repairman's, employees', contractors',
operators' or other similar liens or charges for liquidated amounts arising in
the ordinary course of business (x) which are not yet due and payable, (y) for
which Seller is responsible for paying or releasing at Closing or (z) for which
Buyer has agreed to assume or pay pursuant to the terms hereof;
(c) any liens for taxes, tax assessments not yet delinquent, or tax
assessments that are being contested in good faith and disclosed on Exhibit "L",
and other assessments not yet delinquent, or if delinquent, that are being
contested in good faith and disclosed on Exhibit "L";
(d) any liens or security interests created by law or reserved in
oil and gas leases for royalty, bonus or rental or for compliance with the terms
of the Subject Interests;
(e) any obligations or duties affecting the Assets to any
municipality or public authority with respect to any franchise, grant, license
or permit, and all applicable laws, rules and orders of governmental authority;
(f) any (i) easements, rights-of-way, servitudes, permits, surface
leases and other rights in respect of surface operations, pipelines, grazing,
hunting, fishing, logging, canals, ditches, reservoirs, or the like, or (ii)
easements for streets, alleys, highways, pipelines, telephone
-6-
<PAGE>
lines, power lines, railways and other similar rights-of-way, on, over, or in
respect of property owned or leased by Seller or over which Seller owns rights-
of-way, easements, permits, or licenses, to the extent such matters,
individually or in the aggregate, do not interfere materially with oil and gas
operations currently conducted on the Subject Interests or the ownership, use or
value thereof;
(g) all lessors' royalties, overriding royalties, net profits
interests, carried interests, reversionary interests and other burdens to the
extent that the net cumulative effect of such burdens does not operate to reduce
the net revenue interest of Seller in any of the Subject Interests to below the
applicable net revenue interest set forth in Exhibit "A" hereto or require the
payment of expenses in an amount greater than the working interest shown on
Exhibit "A" (unless Seller's net revenue interest is increased proportionately);
(h) preferential rights to purchase and required third party
consents to assignments and similar agreements with respect to which waivers or
consents are obtained prior to Closing from the appropriate parties with respect
to the sale contemplated hereunder or the appropriate time period for asserting
such rights has expired prior to Closing without an exercise of such rights with
respect to such sale;
(i) all rights to consent by, required notices to, filings with, or
other actions by governmental entities in connection with the sale or conveyance
of oil and gas leases or interests therein if the same are customarily obtained
contemporaneously with or subsequent to such sale or conveyance;
(j) any encumbrance, title defect or matter (whether or not
constituting a Title Defect) waived or deemed waived by Buyer pursuant to
Article VII hereof;
(k) the Oil and Gas Purchase and Processing Agreements.
1.22 "Property Taxes" shall be as defined in Section 12.2.
1.23 "Purchase Price" shall be as defined in Section 3.1.
1.24 "Retained Obligations" shall mean (i) all liabilities and obligations
arising prior to Closing from disbursement of the Royalty Accounts, (ii) all
liabilities and obligations of Seller arising or accruing under or with respect
to the Assets to the extent attributable to time periods prior to the Effective
Time, including, without limitation, those arising under any applicable
Environmental Law, (iii) all liabilities and obligations of Seller arising or
accruing with respect to the ownership, use or operation of the Assets for
periods prior to the Effective Time, (iv) all liabilities and obligations of
Seller with respect to the matters disclosed in Exhibits "D", "E", "G", "J" and
"K" attached hereto to the extent attributable to time periods prior to the
Effective Time, (v) pro-rata share of Property Taxes (based on the Effective
Time) with respect to the Assets for the Tax Period in which Closing occurs,
(vi) all liabilities and obligations of Seller arising or accruing under or with
respect to the Oil and Gas Purchase and Processing Agreements attributable to
time periods prior to the Effective Time, (vii) all liabilities and obligations
under
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<PAGE>
the Basic Documents attributable to time periods prior to the Effective Time,
and (viii) all other liabilities and obligations otherwise expressly assumed by
Buyer under this Agreement.
1.25 "Royalty Accounts" shall mean those separately identifiable accounts
of Seller or any third party operator in which Seller or any third party
operator is holding as of the Effective Time monies which (i) are owing to third
party owners of royalty, overriding royalty, working or other interests in
respect of past production of Hydrocarbons attributable to the Assets or (ii)
may be subject to refund by royalty owners or other third parties to purchasers
of past production of Hydrocarbons attributable to the Assets.
1.26 "Seller's Credits" shall be as defined in Section 3.2.
1.27 "Subject Interests" shall mean, except to the extent constituting
Excluded Assets, any and all interests owned by Seller in the State of
California, or which Seller is entitled to receive, in, to or under any and all
oil, gas and/or mineral leases, permits, licenses, concessions, leasehold
estates, fee, royalty, overriding royalty interests and wells to the extent the
beforementioned cover interests located at any place within the State of
California, including, without limitation, those interests described in Exhibit
"A" attached hereto.
1.28 "Tax Period" shall be as defined in Section 12.2.
1.29 "Title Defect" shall be as defined in Section 7.3.
1.30 "Transfer Taxes" shall be as defined in Section 12.2.
ARTICLE II.
SALE AND PURCHASE
-----------------
Subject to the terms and conditions of this Agreement and the Permitted
Encumbrances, Seller agrees to sell and convey to Buyer and Buyer agrees to
purchase and pay for the Assets.
ARTICLE III.
PURCHASE PRICE AND PAYMENT
--------------------------
3.1 Purchase Price. The total consideration for the sale and conveyance
--------------
of the Assets to Buyer is Buyer's payment of Fifty-Eight Million Dollars ($U.S.
58,000,000.00) (the "Purchase Price"). The Purchase Price, subject to such
adjustments, if any, as are expressly provided for elsewhere in this Agreement,
shall be paid by Buyer to Seller at Closing by means of a completed Federal
Funds transfer to the account of Chase Manhattan Bank, New York, New York, ABA
No. 021-000-021, Amerada Hess Corporation Account Number 323-019-609. Buyer
shall pay to Seller a deposit in the total amount of $5,800,000 (the "Deposit").
The Deposit shall be paid by Buyer one half on or before the execution hereof,
pursuant to that certain letter agreement dated November 9, 1998 between Buyer
and Seller, and the remaining one half on December 9, 1998.
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<PAGE>
The Deposit will be held by Seller and, upon Closing, the amount thereof
(without interest) shall be credited toward the Purchase Price. In the event
this Agreement is terminated or the transaction contemplated hereby otherwise
fails to close due solely to the breach of this Agreement by Buyer, occurring in
the absence of any breach hereof by Seller, then, as Seller's sole and exclusive
remedy for such breach or termination: (i) Seller shall retain only the first
half of the Deposit if such breach or termination occurs before payment of the
second half of the Deposit; and (ii) Seller shall retain the entire Deposit if
such breach or termination occurs after payment of the second half of the
Deposit. In the event this Agreement is terminated or the transaction
contemplated hereby fails to close for any other reason, the Deposit shall be
returned to Buyer.
3.2 Purchase Price Credits.
----------------------
(a) With respect to the period commencing at the Effective Time and
ending at 7:00 a.m. (local time for each Asset) on the Closing Date, the parties
shall calculate the revenues from production and other operating sources
(excluding interest income), from or attributable to the Assets for such period
actually received by Seller as of the Closing Date ("Buyer's Credits") and shall
calculate all exploration, production, development, operating, overhead, general
and administrative and other costs paid by Seller with respect to the Assets for
such period charged under applicable operating agreements, or if no operating
agreement is applicable, the amount actually being paid by Seller for such costs
and expenses, but not to exceed the amount due under the most recent COPAS
Accounting Procedure Joint Operations ("Seller's Credits"), excluding interest
expense not paid in connection with matters identified in Exhibit "D" and all
non-cash charges attributable to depletion, depreciation, bad debt losses, lease
abandonment, etc.; provided that with respect to any properties operated by
Seller, the Seller's Credits with respect to the Subject Interests in such
properties shall also include (i) the overhead charges payable to Seller on
account of such Subject Interests under existing operating agreements or (ii) if
no overhead charge is applicable to a Subject Interest under an existing
operating agreement, an overhead charge to such Subject Interest equal to the
Average Producing Well Rates in the area as indicated in the most recent Survey
of Combined Fixed Rate Overhead Charges for Oil and Gas Producers conducted by
Ernst & Young or the prevailing rate in the area if the foregoing survey is not
available. Only items of revenue, cost and expense attributable to the Assets
shall be included in the foregoing calculations. Amounts constituting the
Buyer's Credits shall be retained by Seller. If Seller's Credits exceed Buyer's
Credits, the difference shall be due Seller by Buyer. If Buyer's Credits exceed
Seller's Credits, the difference shall be due Buyer by Seller.
(b) In addition, at Closing, Seller shall, based upon data available
at that time, determine (A) the total amount of overproduction of gas
attributable to Seller's interest (e.g. volumes of gas taken from the wells
comprising a portion of the Subject Interests (the "Wells"), by Seller in excess
of those volumes which Seller's interest would entitle it to receive) and (B)
the total amount of underproduction of gas attributable to Seller's interest
(e.g. volumes of gas not taken from Wells, or on lands unitized therewith, by
Seller despite Seller's interest in and right to receive such volumes). If the
total amount of overproduction (as so determined) exceeds the total amount of
underproduction (as so determined) Buyer shall receive a Buyer's Credit
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equal to $2.00 per MMBtu times such excess. If the total amount of
underproduction (as so determined) exceeds the total amount of overproduction
(as so determined), Seller shall receive a Seller's Credit equal to $2.00 per
MMBtu times such excess. Regardless of any other provision set forth in this
Agreement, the overproduction set forth on Exhibit "H" with respect to PG&E
shall remain an obligation of Seller's (and thus a Retained Obligation), and no
adjustment shall be made under this Agreement for said overproduction.
(c) Seller and Buyer or representatives of each shall determine the
amount of the Hydrocarbons existing in storage tanks, gathering lines,
pipelines, gasoline plants, and other facilities as of the Effective Date using
the point or points of delivery to Seller's purchasers as a zero reference point
(the "Existing Hydrocarbons"). Seller shall receive a Seller's Credit equal to
the amount of proceeds actually received by Buyer attributable to such Existing
Hydrocarbons.
(d) No later than three (3) days prior to Closing, Seller shall
furnish Buyer with an estimated accounting showing the estimated amount of
Seller's Credits and the estimated amount of Buyer's Credits, subject to being
finally adjusted within one hundred twenty (120) days after the Closing as
hereinafter provided. An estimated credit due Seller shall increase the
Purchase Price paid at Closing by that amount and an estimated credit due Buyer
shall reduce the Purchase Price paid at Closing by that amount. The amount of
the final credit, as adjusted, shall be paid in cash on final adjustment by the
party owing it. If within one hundred twenty (120) days following Closing the
parties are unable to agree as to whether an item of income or expense belongs
in the period before or after the Effective Time, or is properly included in
Seller's Credits or Buyer's Credits, or a dispute exists as to any other matters
related to the existence, propriety or amount of any of such alleged credits,
then such item or matter may be submitted for arbitration pursuant to the
provisions of Article XVII hereof. Final settlement shall be made within
fifteen (15) days following agreement by the Buyer and Seller or final
determination by the arbitrator (which final determination shall be binding upon
Buyer and Seller).
3.3 Purchase Price Allocations.
--------------------------
Seller and Buyer mutually agree to allocate the Purchase Price among
the Assets as set forth in Exhibit "B" attached hereto. Seller and Buyer agree
that said allocation as set forth in Exhibit "B" is the proper allocation of the
Purchase Price in accordance with the fair market value of the Assets, and that
said allocation of the Purchase Price of the Assets as set forth in Exhibit "B"
shall apply for purposes of Sections 755 and 1060 of the Internal Revenue Code
of 1986 (as amended and together with any regulations promulgated thereunder,
the "Code"). Seller and Buyer agree (and each agrees to cause its affiliates)
to report the federal, state and local income and other tax consequences of the
transactions contemplated herein, and in particular to report the information
required under Section 1060(b) of the Code (and any regulations promulgated
thereunder), in a manner consistent with such allocation. Seller and Buyer
further agree (and each agrees to cause its affiliates) to not take any tax
position inconsistent with such allocation in connection with the examination of
any of their tax returns, refund claims or litigation, investigations or other
proceedings involving any of their tax returns. Seller and Buyer each further
agree that they will not take any position inconsistent with this allocation in
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preparing financial statements, tax returns, reports to shareholders or
government authorities or otherwise.
Buyer and Seller each agree to furnish the other a copy of IRS Form
8594 (Asset Acquisition Statement under Section 1060 of the Code) as filed with
the Internal Revenue Service by such party or any affiliate thereof, pursuant to
Sections 755 and 1060 of the Code, as a result of the consummation of the
transactions contemplated hereby, within thirty (30) days of the filing of such
form with the Internal Revenue Service.
ARTICLE IV.
SELLER'S REPRESENTATIONS
------------------------
4.1 Seller's Representations. Seller represents and warrants to Buyer as
------------------------
of the date hereof that:
(a) Seller is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and Seller is duly
qualified pursuant to any and all applicable laws, statutes and regulations to
own and operate the Assets;
(b) Seller has all requisite power and authority to carry on its
business as presently conducted, to enter into this Agreement and the other
documents and agreements contemplated hereby, and to perform its obligations
under this Agreement and the other documents and agreements contemplated hereby.
Subject to Sections 8.1, 8.2, 18.1 and 18.2, the consummation of the
transactions contemplated by this Agreement will not violate, nor be in conflict
with, any provision of Seller's charter, by-laws or governing documents or any
material agreement or instrument to which it is a party or by which it is bound,
or any judgment, decree, order, statute, rule or regulation applicable to
Seller;
(c) The execution, delivery and performance of this Agreement and the
transactions contemplated hereunder have been duly and validly authorized by all
requisite corporate action on the part of Seller;
(d) This Agreement constitutes, and all documents and instruments
required hereunder to be executed and delivered by Seller at Closing will
constitute, legal, valid and binding obligations of Seller in accordance with
their respective terms, subject to applicable bankruptcy and other similar laws
of general application with respect to creditors;
(e) There are no bankruptcy, reorganization or arrangement
proceedings pending, being contemplated by, or to the actual knowledge of the
officers of Seller, threatened against Seller;
(f) No broker or finder has acted for or on behalf of Seller in
connection with this Agreement or the transactions contemplated by this
Agreement, and no broker or finder is
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entitled to any brokerage or finder's fee or commission in respect thereof based
in any way on agreements, arrangements or understandings made by or on behalf of
Seller;
(g) Except as shown on Exhibit "E" hereto, there is no demand or
suit, action or other proceeding pending in which Seller has been served with
process, or to Seller's knowledge threatened, before any court or governmental
agency which if adversely decided could reasonably be expected to have an
adverse impact on the ability to close the transaction contemplated by this
Agreement or to result in a material impairment or loss of title to any material
part of the Assets taken as a whole or the value thereof taken as a whole or
which might materially hinder or impede the operation of the Assets taken as a
whole;
(h) Except as shown on Exhibit "E" and as may be referred to in
Article XIV, Seller, to its knowledge, has not violated, and to Seller's
knowledge there are no alleged violations by Seller of, any applicable rules,
regulations or orders of any governmental agency having jurisdiction over the
Assets which would affect in any material respect the ownership, operation, use
or value of the Assets individually or collectively;
(i) Seller is a United States person within the meaning of Section
7701(a)(30) of the Internal Revenue Code of 1986, as amended;
(j) To the best of Seller's knowledge, Seller is not in and has
received no notice of any default under, and no condition exists that with
notice or lapse of time or both would constitute a default under, any statute,
writ, injunction, order, judgment or decree of any Governmental Authority or any
agreement, contract, lease, license or other instrument, which default or
potential default might reasonably be expected to have a material adverse effect
on the Assets, their ownership, operation or value;
(k) To the best of Seller's knowledge, all wells located on the
Assets have been drilled and operated, and all products sold in conformity with
applicable Federal, State and local laws or regulatory provisions and Seller has
not been notified of and is not aware of any possible violations thereof which
might reasonably be expected to have a material adverse effect on the Assets. To
the best of its knowledge, Seller has complied in all material respects with all
applicable laws and with all rules, regulations and orders of governmental
agencies while operating the Assets and has obtained all material permits and
governmental licenses and other material authorizations legally required to own
and operate the Assets;
(l) To the best of Seller's knowledge, all ad valorem, property,
production, severance, income, franchise, sales, use or any other type of
assessment or levy ("Taxes") relating to the Assets which are payable by and
billed to Seller through the Effective Time and the Closing have been properly
paid, and there are no tax liens upon, pending against, or, to the knowledge of
Seller, threatened against any Asset sold or to be sold pursuant to this
Agreement, except for those set forth in Exhibit "L";
(m) There has been no material adverse change in: (i) the business or
financial condition of Seller or (ii) the Assets, taken as a whole, and, to
Seller's knowledge, no event has
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occurred or circumstances arisen which is reasonably expected to give rise to
such a change. There is no fact known to Seller that has specific application to
Seller or the Assets (other than general economic or industry conditions) which
could have a material adverse effect on the Assets, their ownership, value or
operation after the Effective Time that has not been set forth in this
Agreement;
(n) Except for those obligations set forth in Exhibit "G", there are
no obligations or liabilities under outstanding authorities for expenditure or
similar authorization to pay costs or expenses for drilling, completing,
equipping, deepening, side tracking, reworking, plugging and abandonment or
other material costs or expenses with respect to the ownership of the Assets,
nor are there any obligations or commitments presently existing under which
Seller's interest in the Assets will be altered due to the passage of time, the
collection of a specified sum of money (including, for example, non-consent
operations or back-in obligations) or other reason, except for those interests
in the Assets specifically identified on Exhibit "A" as being "BPO" and "APO"
and those obligations under AHC Agreement Nos. 5884, 6671, 6696, 6710, 6741 and
6742 as identified on Exhibit "K";
(o) To the best of Seller's knowledge, the condition, use and
operation of the Assets complies with all Environmental Laws in all material
respects and, to the best of Seller's knowledge, after due inquiry, there
presently exists no condition which may subject the owner of the Assets to
potential liability, whether arising from such condition now or in the future,
under any Environmental Law currently in effect;
(p) Except as shown on Exhibit "H": (i) none of the Assets are
subject to any contract or agreement providing for recoupment of sums paid in
respect of take or pay gas purchase contracts or other similar provision such
that the owner of the Assets will not receive the full amount of revenue from
the sale of production attributable to the ownership interest therein and (ii)
there exists no imbalance regarding production taken or marketed from the Assets
or any portion thereof which could result in (1) a portion of Seller's interest
in production therefrom to be taken or delivered after the Closing without Buyer
receiving payment therefor and at the price it would have received absent such
imbalance; (2) Buyer, after Closing, being obligated to make payment to any
person or entity as a result of such imbalance; or (3) production being shut-in
or curtailed after Closing due to non-compliance with allowables, production
quotas, proration rules or similar orders or regulations of any governmental
authorities;
(q) There are no material contracts, agreements or instruments
affecting the Assets, the transfer of which is restricted by third party
agreement or applicable law. There are no material permits and other
appurtenances affecting the Assets, the transfer of which is restricted by third
party agreements or applicable law;
(r) To Seller's knowledge, except as reflected on Exhibit "C", the
Assets are not subject to any agreements containing preferential purchase rights
or consent to assignment provisions that must be complied with prior to the
assignments of the Assets to Buyer;
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<PAGE>
(s) To Seller's knowledge (i) Seller is not in material default under
any of the terms and provisions of the oil, gas and mineral leases that comprise
the Assets or under any agreement to which the same are subject; and (ii) all
royalties, rentals, and other payments due thereunder by Seller have been timely
and properly paid in full on or before the due dates thereof;
(t) No amount of Seller's Hydrocarbons produced from the properties
and marketed by others is subject to a sales, transportation or processing
contract (except for those contracts identified in Exhibit "J" and except for
contracts terminable without penalty by Seller on not more than 30 days notice),
no person has any call upon, option to purchase or similar rights under any
agreements with respect to the Assets or the production therefrom. Seller has
not in any respect collected, nor will Seller in any respect collect, any
proceeds from the sale of Hydrocarbons produced from the Assets that are subject
to refund by Buyer;
(u) To Seller's knowledge, the only unrecorded agreements materially
affecting the Assets are identified on Exhibit "K" hereto ("Contracts"), and
Seller is not in material breach or default with respect to any of its
obligations under any Contract; and
(v) Except as to the Assets covered by AHC Agreement No. 6710 as
specified on Exhibit "K", none of the Assets are subject to any tax partnership.
ARTICLE V.
BUYER'S REPRESENTATIONS
-----------------------
5.1 Buyer's Representations. Buyer represents and warrants to Seller as
-----------------------
of the date hereof that:
(a) It is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and Buyer is or prior to
Closing will be duly qualified pursuant to any and all applicable laws, statutes
and regulations to own and operate the Assets;
(b) It has all requisite power and authority to carry on its
business as presently conducted, to enter into this Agreement and the other
documents and agreements contemplated hereby, to purchase the Assets on the
terms described in this Agreement, and to perform its other obligations under
this Agreement and the other documents and agreements contemplated hereby.
Subject to Sections 18.1, and 18.2, the consummation of the transactions
contemplated by this Agreement will not violate, nor be in conflict with, any
provision of Buyer's charter, by-laws or governing documents, or any material
agreement or instrument to which Buyer is a party or by which it is bound, or
any judgment, decree, order, statute, rule or regulation applicable to Buyer;
(c) The execution, delivery and performance of this Agreement and
the transactions contemplated hereunder have been duly and validly authorized by
all requisite corporate action on the part of Buyer;
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(d) This Agreement constitutes, and all documents and instruments
required hereunder to be executed and delivered by Buyer at Closing will
constitute, legal, valid and binding obligations of Buyer in accordance with
their respective terms, subject to bankruptcy and other similar laws of general
application with respect to creditors;
(e) There are no bankruptcy, reorganization or arrangement
proceedings pending, being contemplated by, or to the actual knowledge of the
officers of Buyer, threatened against Buyer;
(f) No broker or finder has acted for or on behalf of Buyer in
connection with this Agreement or the transactions contemplated by this
Agreement, and no broker or finder is entitled to any brokerage or finder's fee
or commission in respect thereof based in any way on agreements, arrangements or
understandings made by or on behalf of Buyer;
(g) Buyer is now or prior to Closing will be, and after Closing
shall continue to be, qualified to own Federal and State oil, gas and mineral
leases in all jurisdictions where any such Subject Interests are located, and
the consummation of the transactions contemplated hereby will not cause Buyer to
be disqualified as such an owner or to exceed any acreage limitation imposed by
any law, statute, rule or regulation;
(h) Buyer is directly engaged in the business of exploration and
production of oil, gas or other valuable minerals and derives at least
$5,000,000 of annual gross income from such business. Prior to entering into
this Agreement, Buyer was advised by and has relied solely on its own legal, tax
and other professional counsel concerning this Agreement, the Assets and the
value thereof. Buyer is acquiring the Assets for its own account and not for
distribution or resale in any manner that would violate any state or federal
securities law, rule, regulation or order. Buyer understands and acknowledges
that, if any of the Assets were held to be securities, they would be restricted
securities which must be held indefinitely; and
(i) Buyer has arranged to have available by the Closing Date
sufficient funds to enable the Buyer to pay in full the Purchase Price, together
with all costs and expenses relative thereto, and otherwise to perform its
obligations under this Agreement.
ARTICLE VI.
ACCESS TO INFORMATION AND INSPECTION
------------------------------------
6.1 Title Files. Promptly after the execution of this Agreement and until
-----------
the Closing Date, Seller shall permit Buyer and its representatives at
reasonable times during normal business hours to examine, in Seller's offices,
all abstracts of title, title opinions, title files, ownership maps, lease
files, assignments, division orders, check vouchers, payout statements and
agreements pertaining to the Assets insofar as the same may now be in existence
and in the possession of Seller.
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6.2 Other Files. Prior to Closing, Seller shall make available to Buyer
-----------
for inspection by Buyer at reasonable times during normal business hours at
their actual location, all accounting, revenue, marketing, transportation,
processing, environmental, geological, geophysical, production and engineering
books, records and data in possession of Seller, except such records or data
which Seller is prevented by contractual obligations with third parties from
disclosing; provided that in the event Seller is prohibited from making files or
records available because of provisions of third party agreements, then Seller
shall inform Buyer of the existence of such records, the parties thereto and the
subject matter of such records.
6.3 Confidentiality Agreement. All such information made available to
--------------------------
Buyer shall be maintained confidential by Buyer as provided in that certain
Confidentiality Agreement dated September 16, 1998, between Seller and Buyer,
the terms of which are incorporated herein by reference and made a part of this
Agreement. Buyer shall further take whatever reasonable steps may be necessary
to ensure that Buyer's employees, consultants and agents comply with the
provisions of this Article VI and the provisions of said Confidentiality
Agreement.
6.4 Inspections. Promptly after the execution of this Agreement, Seller,
-----------
subject to third party operator approval which Seller will seek to obtain, shall
permit Buyer and its representatives at reasonable times and at their sole risk,
cost and expense, to conduct reasonable inspections of the Assets; provided,
however, Buyer shall repair any damage to the Assets resulting from such
inspections and Buyer does hereby indemnify and hold harmless Seller from and
against any and all losses, costs, damages, obligations, claims, liabilities,
expenses or causes of action arising from Buyer's inspection of the Assets,
including, without limitation, claims for personal injuries, property damage and
reasonable attorney's fees and further including claims arising in whole or part
from Seller's negligence.
ARTICLE VII.
TITLE
-----
7.1 No Warranty or Representation. Seller shall convey Seller's interests
-----------------------------
in and to the Assets to Buyer subject to the Permitted Encumbrances and without
any warranty of title, express or implied, except for special warranty against
claims arising by, through or under Seller, as provided in the form of
Assignment, Bill of Sale and Conveyance attached as Exhibit "F" hereto. Seller
makes no warranty or representation, express or implied, with respect to the
accuracy or completeness of the information, records and data now, heretofore or
hereafter made available to Buyer in connection with this Agreement (including,
without limitation, any description of the Assets, pricing assumptions,
potential for production of Hydrocarbons from the Subject Interests or any other
matters contained in any other material furnished to Buyer by Seller or by
Seller's agents or representatives).
7.2 Buyer's Title Review.
--------------------
(a) Immediately upon execution by both parties hereto of this
Agreement Buyer may at Buyer's sole cost and expense commence and diligently
pursue such examination
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of title to the Subject Interests as Buyer desires. Seller shall fully cooperate
with Buyer and shall make available to Buyer at Seller's offices in Houston,
Texas, all documents, records and material in Seller's possession (except to the
extent disclosure of same is prohibited pursuant to agreements with third
parties; provided that in the event Seller is prohibited from making files or
records available because of provisions of third party agreements, then Seller
shall inform Buyer of the existence of such records, the parties thereto and the
subject matter of such records) and all assistance reasonably necessary to
assist Buyer in determining the validity of Seller's title in and to the Subject
Interests. In no event, however, does Seller warrant or represent the
sufficiency, completeness or accuracy of such documents, records and materials,
and Buyer's reliance thereon shall be at Buyer's sole risk and expense. No later
than five (5) days prior to Closing, Buyer shall notify Seller of any Title
Defects associated with such property in accordance with Section 7.3 below. To
be effective, Buyer's written notice of a Title Defect must include (i) a brief
description of the matter constituting the asserted Title Defect and (ii)
supporting documents reasonably necessary for Seller (or a title attorney or
examiner hired by Seller) to verify the existence of such asserted Title Defect.
Any matters not described in a written notice of Title Defect which is delivered
within the time frame set forth above shall conclusively be deemed to have been
waived and accepted by Buyer, and shall be deemed Permitted Encumbrances
hereunder.
(b) Upon receipt of the notice set forth under Section 7.2(a) Seller
shall have the right, but not the obligation, until the Closing Date to cure all
or any portion of asserted Title Defects, such curative costs to be borne solely
by Seller. If Buyer elects to waive or is deemed to have waived any asserted or
unasserted Title Defects, such waived or unasserted Title Defects shall be
deemed Permitted Encumbrances hereunder. If any Title Defect is not cured prior
to Closing then the portion of the Assets affected by such Title Defect shall be
deleted from the sale contemplated herein, and retained by Seller and the
Purchase Price shall be reduced by the Allocated Value of the portion of the
Assets affected by such Title Defect. Seller shall have 90 days following
Closing within which to cure such Title Defect. If a Title Defect is cured by
Seller during such 90 day period, Seller shall convey the portion of the Assets
affected by such Title Defect to Buyer in consideration of the payment by Buyer
to Seller of the Allocated Value thereof. In the event that any Title Defect is
not cured within the 90 day period, then Seller shall retain the portion of the
Assets affected by the Defect and the parties shall have no other obligation or
liability hereunder with respect thereto. In the event Buyer and Seller are
unable to agree upon the existence of an alleged Title Defect or amount of the
downward adjustment of the Purchase Price attributable to a Title Defect for the
purposes of the foregoing, then the same may be submitted to arbitration
pursuant to the provisions of Article XVII.
7.3 Title Defects. For the purposes of this Agreement, a portion of the
-------------
Subject Interests shall be deemed to have a "Title Defect" if any one or more of
the following statements is untrue with respect to such portion of the Subject
Interests as of the Effective Time or the Closing Date:
(i) Seller has Defensible Title thereto.
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(ii) All royalties, rentals, Pugh clause payments, shut-in gas
payments and other payments due with respect to such portion of the Subject
Interests have been properly and timely paid, except for payments held in
suspense for title or other reasons which are reasonable and customary in the
industry and which will not result in grounds for cancellation of Seller's
rights in such portion of the Subject Interests.
(iii) Except as set forth in any of the Exhibits hereto, Seller is
not in default under the material terms of any of the Basic Documents respecting
such portion of the Subject Interests which could (1) materially interfere with
the ownership, operation, value or use thereof, (2) materially prevent Seller
from receiving its proportionate share of the proceeds of production
attributable to Seller's interest therein, or (3) result in cancellation of
Seller's interest therein.
(iv) There is no lien, charge, encumbrance, defect or objection
(other than a Permitted Encumbrance) against, in or to Seller's title thereto or
right or interest therein. There is no existing fact or circumstance relative to
Seller's title which is of such significance that a reasonable and prudent
person engaged in the business of the ownership, development and operation of
oil and gas properties with knowledge of all the facts and appreciation of their
legal significance would be unwilling to accept and pay for the Subject Interest
or portion thereof which is affected thereby.
7.4 Title Indemnification. Notwithstanding any other provisions of this
---------------------
Article VII, to the extent that all Title Defects have a cumulative value of
less than 10% of the Purchase Price, then for any uncured Title Defect Seller
shall have the option to execute and deliver to Buyer a title indemnity and, in
such event, the relevant uncured Title Defect shall be deemed to be cured and
removed for the purposes of this Agreement. In the event Seller elects to give
such an indemnity, Seller shall hold harmless and keep Buyer indemnified from
and against any and all liability, loss, costs (including legal fees and costs),
suits, judgments, causes of action, claims or damages suffered by Buyer or
arising or incurred in connection with or resulting from any uncured Title
Defects with the intent that Buyer shall be placed in the same economic and
financial condition as Buyer would have been in had Seller actually cured the
Title Defect. No claim for indemnification of Buyer shall be made or be
enforceable, whether by legal proceedings or otherwise, unless written notice of
the claim, setting out reasonable details thereof is given by Buyer to Seller on
or before January 1, 2004. Any indemnity given pursuant to this section shall
not affect in any way the special warranty of title given by Seller in the
Assignment or the obligations of Seller pursuant thereto.
ARTICLE VIII.
PREFERENTIAL PURCHASE RIGHTS AND CONSENTS
-----------------------------------------
8.1 Purchase Rights. Promptly after the execution hereof, Seller shall
---------------
send such notices and other documents as may be required in order to satisfy the
provisions of any agreement giving preferential purchase (or similar) rights to
any third party on account of the execution of this Agreement or the transaction
contemplated hereby. If a third party who has been offered an interest in a
Subject Interest pursuant to a preferential right to purchase, elects
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prior to Closing to purchase all or part of such Subject Interest pursuant to
the aforesaid offer, the interest or part thereof so affected will be eliminated
from the Assets and the Purchase Price reduced by the portion of the Purchase
Price allocated to such interest or part thereof under Section 3.3 hereof. If
any preferential right is not exercised or waived or the time to exercise has
not expired prior to Closing, then, at Buyer's election, (i) the Subject
Interest affected thereby shall be removed from the Assets and the Purchase
Price reduced by the Allocated Value thereof or (ii) Buyer shall purchase the
Subject Interest without reduction to the Purchase Price. If Buyer chooses
option (i), Seller shall have 90 days following Closing within which to obtain
the required waiver. If the waiver is obtained by Seller during such 90 day
period, Seller shall convey the portion of the Assets affected by such
preferential right to Buyer in consideration of the payment by Buyer to Seller
of the Allocated Value thereof. In the event that any waiver is not obtained
within the 90 day period, then Seller shall retain the portion of the Assets
affected by the preferential right and the parties shall have no other
obligation or liability hereunder with respect thereto. If Buyer chooses option
(ii), and thereafter a third party elects to purchase all or a part of an
interest in a Subject Interest subject to a preferential right to purchase and
Closing has already occurred (and payment of the Purchase Price made to Seller)
with respect to such interest, Buyer shall be obligated to convey said interest
to such third party and shall be entitled to the consideration for the sale of
such interest or part thereof.
8.2 Consents. Seller shall use reasonable efforts, but without any
--------
obligation to incur any cost or expense in connection therewith, to obtain prior
to Closing all consents to assignment applicable to any of the Assets. If a
lessor or other third party who has the right to consent to the assignment of a
portion of the Assets refuses such consent prior to Closing, or if a request for
a consent to assign is outstanding as of Closing, then at the option of Buyer
(i) the interest or part thereof so affected will be eliminated from the Assets
and the Purchase Price reduced by the portion of the Purchase Price allocated to
such interest or part thereof under Section 3.3 hereof or (ii) Buyer shall
accept the assignment thereof. If Buyer chooses option (i), Seller shall have 90
days following Closing within which to obtain the required consent. If the
consent is obtained by Seller during such 90 day period, Seller shall convey the
portion of the Assets affected by such consent requirement to Buyer in
consideration of the payment by Buyer to Seller of the Allocated Value thereof.
In the event that any consent is not obtained within the 90 day period, then
Seller shall retain the portion of the Assets affected by the consent
requirement and the parties shall have no other obligation or liability
hereunder with respect thereto.
ARTICLE IX.
COVENANTS OF SELLER
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9.1 Covenants of Seller Pending Closing. From and after the Effective
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Time of this Agreement and until the Closing, except as otherwise provided in
this Agreement or as consented to by Buyer in writing and subject to Section 9.2
below and the terms of applicable operating and other agreements, Seller shall:
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(a) Subject to Seller's right to obtain Seller's Credits pursuant to
Section 3.2, continue to operate the Assets in a good and workmanlike manner
consistent with industry standards and past practices;
(b) Maintain in full force and effect all policies of insurance
covering the Assets now maintained by Seller;
(c) Use reasonable efforts to preserve in full force and effect all
material leases, operating agreements, easements, rights-of-way, permits,
licenses, contracts and other material agreements included in the Incidental
Rights which relate to the Assets and perform all material obligations of Seller
in or under any such agreement relating to such Assets;
(d) Use Seller's reasonable efforts to maintain its relationships
with suppliers, customers and others having material business relations with
Seller with respect to the Assets so that they will be preserved for Buyer on
and after the Closing Date;
(e) Not enter into any agreement or arrangement granting any
preferential right to purchase any of the Assets or requiring the consent of any
person to the transfer and assignment of any of the Assets hereunder, except in
connection with the performance by Seller of an obligation or agreement existing
on the date hereof or pursuant to this Agreement, not enter into any material
modification or amendment to any Basic Document and not agree to participate in
any operation for drilling, reworking, deepening, plugging and abandonment or
other capital expenditure the cost of which exceeds $50,000 to the Seller's
interest;
(f) Not dedicate, sell, farm out, encumber or dispose (or enter into
discussions with any third party with respect to any of the foregoing) of any
Assets without Buyer's written consent except sales of oil and gas production
in the ordinary course of business; and
(g) Maintain all material equipment included in the Assets in
accordance with customary industry operating practices and procedures.
Notwithstanding the other provisions of this Article IX, (i) Seller may
take any action with respect to the Assets if reasonably necessary under
emergency circumstances and provided Buyer is notified as soon thereafter as
reasonably practical, (ii) Seller shall have no liability to Buyer for the
incorrect payment of delay rentals, royalties, shut-in royalties or similar
payments or for any failure to pay any such payments through mistake or
oversight (including Seller's negligence but not including Seller's gross
negligence or willful misconduct). Any consent requested of Buyer with respect
to the matters covered by this Article IX shall not be unreasonably withheld or
action with respect thereto unduly delayed.
9.2 Limitations on Seller's Covenants Pending Closing.
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(a) To the extent Seller is not the operator of any of the Assets,
the obligations of Seller in Section 9.1 above, which have reference to
operations or activities which normally or pursuant to existing contracts are
carried out or performed by the operator, shall be construed to
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require only that Seller use reasonable efforts (without being obligated to
incur any expense or institute any cause of action) to cause the operator of
such Assets to take such actions or render such performance within the
constraints of the applicable operating agreements and other applicable
agreements.
(b) Notwithstanding anything to the contrary in this Article IX,
should Seller not wish to pay any lease rental or other payment or participate
in any reworking, deepening, drilling, completion, equipping or other operation
on or with respect to any well or other Asset which may otherwise be required by
Section 9.1 above, Seller shall give Buyer written notice thereof as soon as
reasonably practicable after Seller receives notice thereof from the operator of
such property (or if Seller is the operator, after Seller gives written notice
thereof to the non-operators of such property); and Seller shall not be
obligated to make any such payment or to elect to participate in any such
operation which Seller does not wish to make or participate in unless Seller
receives from Buyer, within a reasonable time prior to the date when such
payment or election is required to be made by Seller, (i) the written election
and agreement of Buyer to require Seller to take such action and to indemnify
Seller therefrom and (ii) all funds necessary for such action. Notwithstanding
the foregoing, Seller shall not be obligated to pay any lease rental or other
payment or to elect to participate in any operation if the third party operator
of the property involved recommends that such action not be taken. If Buyer
advances any funds pursuant to this Section 9.2(b) and the Assets to which such
payments relate are not conveyed to Buyer at Closing, and Seller does not
reimburse Buyer for all advances made by Buyer with respect to such Assets
pursuant to this Section 9.2(b) within thirty (30) days after this Agreement
terminates with respect to such Assets, then (i) Buyer shall own and be entitled
to any right of Seller that would have lapsed but for such payment, and (ii) in
the case of operations, Buyer shall be entitled to receive the penalty which
Seller, as nonconsenting party, would have suffered under the applicable
operating agreement with respect to such operations as if Buyer were a
consenting party thereunder.
ARTICLE X.
CLOSING CONDITIONS
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10.1 Seller's Closing Conditions. The obligations of Seller under this
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Agreement are subject, at the option of Seller, to the satisfaction at or prior
to the Closing of the following conditions:
(a) All representations and warranties of Buyer contained in this
Agreement shall be true in all material respects at and as of the Closing as if
such representations and warranties were made at and as of the Closing, and
Buyer shall have performed and satisfied all covenants, obligations and
agreements required by this Agreement to be performed and satisfied by Buyer at
or prior to the Closing;
(b) Seller shall have received a certificate dated as of the
Closing, executed by a duly authorized officer of Buyer, to the effect that to
such officer's knowledge the statements made under Article V above are true at
and as of the Closing;
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(c) Except for approvals covered by Section 18.1 hereof, all
necessary consents of and filings with the Federal Trade Commission and any
other state or federal governmental authority or agency relating to the
consummation of the transactions contemplated by this Agreement shall have been
obtained, accomplished or waived, and the applicable waiting periods prescribed
in connection with the Hart-Scott-Rodino Act shall have elapsed or terminated
(by early termination or otherwise) since the dates of the filings by the
parties with respect thereto; and
(d) As of the Closing Date, no suit, action or other proceeding
(excluding any such matter initiated by Seller) shall be pending or threatened
before any court or governmental agency seeking to restrain Seller or prohibit
the Closing or seeking damages against Seller as a result of the consummation of
this Agreement.
10.2 Buyer's Closing Conditions. The obligations of Buyer under this
--------------------------
Agreement are subject, at the option of Buyer, to the satisfaction at or prior
to the Closing of the following conditions:
(a) All representations and warranties of Seller contained in this
Agreement shall be true in all material respects at and as of the Closing as if
such representations and warranties were made at and as of the Closing, and
Seller shall have performed and satisfied all covenants, obligations and
agreements required by this Agreement to be performed and satisfied by Seller at
or prior to the Closing;
(b) Buyer shall have received a certificate dated as of the
Closing, executed by a duly authorized officer of Seller, to the effect that to
such officer's knowledge the statements made under Article IV above by Seller
are true at and as of the Closing;
(c) Except for approvals covered by Section 18.1 hereof, all
necessary consents and filings with the Federal Trade Commission and any other
state or federal governmental authority or agency relating to the consummation
of the transactions contemplated by this Agreement shall have been obtained,
accomplished or waived, and the applicable waiting periods prescribed in
connection with the Hart-Scott-Rodino Act shall have elapsed or terminated (by
early termination or otherwise) since the dates of the filings by the parties
with respect thereto; and
(d) As of the Closing Date, no suit, action or other proceeding
(excluding any such matter initiated by Buyer) shall be pending or threatened
before any court or governmental agency seeking to restrain Buyer or prohibit
the Closing or seeking damages against Buyer as a result of the consummation of
this Agreement.
10.3 Purchase Price Threshold. Either party shall be entitled, at its
------------------------
option, to terminate this Agreement in the event Purchase Price adjustments
arising from Title Defects, preferential purchase rights, consents to assign,
Environmental Defects, casualty losses or condemnations are greater than twenty
percent (20%) of the Purchase Price.
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ARTICLE XI.
CLOSING
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11.1 Closing. The closing of this transaction (the "Closing") shall be
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held at 10:00 a.m., Central Standard Time, at the offices of Seller at One Allen
Center, 500 Dallas Street, Houston, Texas, on January 15, 1999, or at such other
date or place as the parties may agree in writing (herein called "Closing
Date"). Regardless of when the Closing shall occur, Closing shall be effective
with respect to each Asset as of the Effective Time.
11.2 Seller's Closing Obligations. At Closing (except Seller shall have a
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period of twenty-one (21) days after the Closing for items e, f and g), Seller
shall deliver to Buyer the following:
(a) The Assignments, Bills of Sale and Conveyances substantially in
the form attached hereto as Exhibit "F" and such other documents as may be
reasonably necessary to convey all Seller's interest in the Assets to Buyer in
accordance with the provisions hereof;
(b) The certificate of Seller referred to in Section 10.2(b)
hereof;
(c) Evidence of Seller's compliance with the Hart-Scott-Rodino Act
(if necessary);
(d) Transfer or division orders, or letters-in-lieu thereof, to be
effective at the Effective Time in the form required by the purchasers of the
Hydrocarbons from the producing properties;
(e) All title opinions, abstracts of title, lease records, data
sheets, status and other reports pertaining to the Subject Interests heretofore
received by Seller or to which Seller has access;
(f) All of the Basic Documents, and the files pertaining thereto,
and all other contracts, documents and files affecting title to the Subject
Interests to which Seller has access; and
(g) All lease files, land files, well files, gas and oil sales
contract files, gas processing files, division order files, abstracts, title
opinions, and all other books, files and records information and data, except
insofar as Seller is prevented from transferring same by contractual obligations
to third parties or applicable law.
11.3 Buyer's Closing Obligations. At Closing, Buyer shall deliver to
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Seller the following:
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(a) The Purchase Price subject to such adjustments, if any, as are
expressly provided for in this Agreement) in immediately available funds to
Seller as provided in Section 3.1 hereof (or to such other account within the
continental United States of America designated by Seller to Buyer at least five
(5) days prior to the Closing Date);
(b) The certificate of Buyer referred to in Section 10.1(b) hereof;
and
(c) Evidence of Buyer's compliance with the Hart-Scott-Rodino Act
(if necessary).
ARTICLE XII.
EFFECT OF CLOSING
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12.1 Revenues. To the extent not included in the reimbursements under
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Section 3.2 hereof, all proceeds, accounts receivable, notes receivable,
revenues, monies and other items included in or attributable to the Excluded
Assets and all other Excluded Assets shall belong to and be paid over to Seller
and all other proceeds, accounts receivable, notes receivable, revenues, monies
and other items relating to the period of time after the Effective Time and
included in or attributable to the Assets shall belong to and be paid over to
Buyer.
12.2 Taxes.
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(a) Apportionment of Ad Valorem and Property Taxes. All ad valorem,
real property taxes and personal property taxes, including interest and
penalties attributable thereto (hereinafter "Property Taxes"), attributable to
the Assets with respect to the tax assessment period ("Tax Period") during which
the Effective Time occurs shall be apportioned as of the Effective Time between
Seller and Buyer, with Seller paying a fraction thereof based upon the number of
days in the Tax Period prior to the Effective Time and Buyer paying a fraction
thereof based upon the number of days in the Tax Period after the Effective
Time. The owner of record on the assessment date shall file or cause to be filed
all required reports and returns incident to the Property Taxes and shall pay or
cause to be paid to the taxing authorities all Property Taxes relating to the
Tax Period during which the Effective Time occurs. If Seller is the owner of
record on the assessment date, then Buyer shall pay to Seller Buyer's pro rata
portion of Property Taxes within thirty (30) days after receipt of Seller's
invoice therefor, except to the extent taken into account as an adjustment to
the Purchase Price pursuant to Section 3.2. If Buyer is the owner of record as
of the assessment date then Seller shall pay to Buyer Seller's pro rata portion
of Property Taxes within thirty (30) days after receipt of Buyer's invoice
therefor, except to the extent taken into account as an adjustment to the
Purchase Price pursuant to Section 3.2.
(b) Sales Taxes. The Purchase Price provided for hereunder
excludes, and Buyer shall be liable for, any Transfer Taxes (as defined below)
required to be paid in connection with the sale of the Assets pursuant to this
Agreement. To the extent required by applicable law, Seller shall collect and
remit any Transfer Taxes that are required to be paid as a result of the
transfer of the Assets by Seller to the Buyer. If the transfer of the Assets
pursuant to this
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Agreement is exempt from any Transfer Taxes, Buyer shall, at Closing, provide
Seller with properly executed exemption certificates or other documentation
acceptable under applicable law. As used here, the term "Transfer Taxes" shall
mean any sales, use, excise, stock, stamp, document, filing, recording,
registration, authorization and similar taxes, fees and charges.
(c) Other Taxes. With the exception of income and franchise taxes,
all other federal, state and local taxes (including interest and penalties
attributable thereto) on the ownership or operations of the Assets which are
imposed with respect to periods or portions of periods prior to the Effective
Time shall be paid by Seller and all such taxes imposed with respect to periods
or portions of periods beginning on or after the Effective Time shall be paid by
Buyer.
(d) Cooperation. After the Closing, each party to this Agreement
shall provide the other party with reasonable access to all relevant documents,
data and other information (other than that which is subject to any attorney-
client privilege) which may be required by the other party for the purpose of
preparing tax returns, filing refund claims and responding to any audit by any
taxing jurisdiction. Each party to this Agreement shall cooperate with all
reasonable requests of the other party made in connection with contesting the
imposition of taxes. Notwithstanding anything to the contrary in this
Agreement, neither party to this Agreement shall be required at any time to
disclose to the other party any Tax Return or other confidential tax
information. Except where disclosure is required by applicable law or judicial
order, any information obtained by a party pursuant to this Section 12.2(d)
shall be kept confidential by such party, except to the extent disclosure is
required in connection with the filing of any Tax Returns or claims for refund
or in connection with the conduct of an audit, or other proceedings in response
to an audit, by a taxing jurisdiction.
12.3 Expenses. To the extent not included in the reimbursements under
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Section 3.2 hereof or in the Assumed Obligations, all accounts payable and other
costs and expenses (other than taxes described in Section 12.2) with respect to
the Seller's interest in the Assets which are attributable under the cash basis
of accounting to the period prior to the Effective Time shall be the obligation
of and be paid by Seller, and those which are attributable under the cash basis
of accounting to the period commencing with the Effective Time, as well as all
Assumed Obligations, shall be the obligation of and be paid by Buyer.
12.4 Shared Obligations. If monies are received by any party hereto which,
------------------
under the terms of this Article XII, belong to another party, the same shall
immediately be paid over to the proper party. If an invoice or other evidence
of an obligation is received which under the terms of this Article XII is
partially the obligation of Seller and partially the obligation of Buyer, then
the parties shall consult each other and each shall promptly pay its portion of
such obligation to the obligee, provided that if either party hereto shall fail
promptly to pay its portion of such obligation to the obligee, the other party
hereto shall have the right (but not the obligation) to pay such portion of such
obligation, whereupon the defaulting party shall promptly reimburse such other
party for the defaulting party's portion so paid, plus interest on said amounts
until reimbursed, at a rate equal to the prime rate plus 3%.
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12.5 Seller Operated Assets. It is expressly understood and agreed that
----------------------
Seller shall not be obligated to continue operating any of the Assets following
the Closing and Buyer hereby assumes full responsibility for operating (or
causing the operation of) all Assets following the Closing. Seller will assist
Buyer in obtaining the approval of the working interest owners in each
applicable well or unit to the substitution of Buyer as Operator in place of
Seller. Buyer acknowledges and agrees that Seller cannot and does not covenant
or warrant that Buyer shall become successor Operator to Seller since such wells
or units may be subject to operating or other agreements that control the
appointment of a successor operator. Without implying any obligation on
Seller's part to continue operating any Assets after the Closing, if Seller
continues to operate any Assets following the Closing at the request of Buyer or
due to constraints of applicable operating agreements, failure of a successor
operator to take over operations or other reasonable cause, such continued
operation by Seller shall be for the account of Buyer, at the sole risk, cost
and expense of Buyer, and Seller, as part of the Assumed Obligations, is hereby
released and indemnified by Buyer from all claims, losses, damages, costs,
expenses, causes of action and judgments of any kind or character (INCLUDING
SELLER'S NEGLIGENCE BUT NOT INCLUDING GROSS NEGLIGENCE OR WILLFUL MISCONDUCT)
with respect to such continued operations by Seller. In connection with any
such continued operation of the Assets by Seller, Seller shall be reimbursed by
Buyer for all costs and expenses incurred by Seller with respect thereto,
including a charge for overhead in the same manner as provided in the
calculation of Seller's Credits for the period prior to the Closing. In the
event that Seller continues operating any Assets after Closing pursuant to this
Section 12.5, Buyer and Seller shall enter into a mutually agreed upon nominee
agreement which will contain the release, indemnification and reimbursement
provisions set forth in this Section 12.5 and will further provide that, with
respect to any Assets affected thereby, Seller shall act as Buyer's nominee but
shall be authorized to act only upon and in accordance with Buyer's specific
written instructions and Seller shall have no authority, responsibility or
discretion to perform any tasks or functions with respect to such Assets other
than those which are purely administrative or ministerial in nature, unless
otherwise specifically requested and authorized by Buyer in writing.
12.6 Royalty Accounts. Seller shall fund and pay over to Buyer at Closing
----------------
the Royalty Accounts existing with respect to Seller-operated Subject Interests
or any other Subject Interests as to which Seller is responsible for the
disbursement of the sales proceeds of Hydrocarbon production to the persons
entitled thereto. At Closing, Buyer assumes the obligation to correctly,
properly and timely disburse to the persons entitled thereto all monies
comprising the Royalty Accounts.
ARTICLE XIII.
SETTLEMENT OF PRORATIONS
------------------------
13.1 Accounting. No later than three (3) days prior to Closing, Seller
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shall furnish Buyer with an estimated accounting showing in reasonable detail
the prorating of any amounts described in and subject to Article XII of this
Agreement. If pursuant to such estimated accounting either Seller or Buyer
shall owe any obligation to the other which is not included in the
reimbursements under Section 3.2, then the Purchase Price paid at Closing shall
be further
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adjusted to reflect such charges and credits which are necessary to accomplish
such adjustment. Promptly after the Closing Date (but not later than one hundred
twenty (120) days thereafter), Seller shall furnish Buyer with a final
accounting showing in reasonable detail the prorating of any amounts described
in and subject to Article XII hereof.
13.2 Settlement of Disputes. If within thirty (30) days after Seller
----------------------
furnishes such final accounting to Buyer, Buyer and Seller are unable to agree
on such final accounting or the adjustments provided for in Section 3.2 hereof,
then either Seller or Buyer may submit such proration or allocation dispute to
arbitration pursuant to Article XVII hereof. Final settlement shall be made
within ten (10) business days following agreement by the Buyer and Seller or
final determination by the arbitrator. All determinations and adjustments with
respect to allocating items to the periods before or after the Effective Time
shall be in accordance with GAAP.
ARTICLE XIV.
ENVIRONMENTAL
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14.1 Availability of Data to Buyer; Access to Buyer. Immediately following
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the execution hereof, Seller shall make available to Buyer all of Seller's files
regarding the Assets and their environmental condition or compliance with
Environmental Laws, to the extent available and to the extent Seller is
authorized to disclose same (excepting documents subject to confidentiality
restrictions or legal privilege, and also excepting any proprietary
interpretative data). Buyer shall have the right following the execution of this
Agreement by both parties to conduct an environmental assessment of the Assets,
at its own risk and expense.
In connection therewith, Seller will provide Buyer (and its
representatives) with reasonable access to the Assets operated by Seller to
conduct the environmental assessment; provided that Seller may require Buyer and
its representatives to comply with Seller's safety procedures and execute an
Environmental Testing and Confidentiality Agreement in a form attached as
Exhibit "M" prior to performing any such assessment. Buyer shall provide Seller
two (2) days written notice of a desired date(s) for such assessment, the
proposed locations, and the anticipated scope of any testing or other
activities. Seller shall have the right to be present during any assessment
and, if any testing is conducted, Seller may require splitting of all samples.
Buyer shall provide Seller copies of all reports, results, data and analyses in
connection therewith, within three days of Buyer's receipt of same.
14.2 Notice of Environmental Defect. Buyer shall, as soon as possible, but
------------------------------
in no event later than five (5) days prior to Closing (the "Notice Date"), give
written notice to Seller specifying all Environmental Defects, which notice
shall describe the alleged Environmental Defect with particularity and include
all information in the possession of or used by Buyer to determine the existence
of or otherwise related to such alleged Environmental Defect, and shall also
state the alleged Environmental Defect Amount. For purposes hereof "
Environmental Defect Amount" shall mean an estimate of the costs to cure such
Environmental Defect. Failure by Buyer to timely assert an Environmental Defect
shall be deemed an election by Buyer to waive such Environmental
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Defect and to accept and pay for the Assets notwithstanding the effect of the
uncured Environmental Defect.
14.3 Environmental Defect; Remedy. Seller shall have the right to elect
----------------------------
within its sole discretion whether or not to attempt to cure any asserted
Environmental Defect. If any Environmental Defect is not cured prior to Closing
then Buyer shall have the option, exercisable in its discretion, to: (i) refuse
to accept an assignment of the portion of the Assets affected by such
Environmental Defect or (ii) accept an assignment of the portion of the Assets
affected by such Environmental Defect with a reduction in the Allocated Value
thereof to be paid to Seller by an amount equal to the cost of remediation of
the Environmental Defect, not to exceed, however, the Allocated Value of the
affected portion of the Assets. In the event Buyer refuses to accept an
assignment of the portion of the Assets affected by such Environmental Defect
the portion of the Assets affected by such Environmental Defect shall be deleted
from the sale contemplated herein and retained by Seller and the Purchase Price
reduced by the Allocated Value thereof. Seller shall have 90 days following
Closing within which to cure such Environmental Defect. If an Environmental
Defect is cured by Seller during such 90 day period, Seller shall convey the
portion of the Assets affected by such Environmental Defect to Buyer in
consideration of the payment by Buyer to Seller of the Allocated Value thereof.
In the event that any Environmental Defect is not cured within the 90 day
period, then Seller shall retain the portion of the Assets affected by the
Environmental Defect and the parties shall have no other obligation or liability
hereunder with respect thereto. If any dispute exists as to the validity of any
alleged Environmental Defect or the correctness of any Environmental Defect
Amount or any other related matter, then such disputed item or matter may be
submitted to arbitration pursuant to Article XVII hereof.
ARTICLE XV.
CASUALTY LOSS AND CONDEMNATION
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15.1 If after the date of execution hereof and prior to the Closing any
part of the Assets shall be destroyed by fire or other casualty or if any part
of the Assets shall be taken in condemnation or under the right of eminent
domain or if proceedings for such purposes shall be pending or threatened, this
Agreement shall remain in full force and effect notwithstanding any such
destruction, taking or proceeding or the threat thereof.
15.2 Proceeds and Awards. In the event of any loss described in Section
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15.1, at the election of Buyer Seller shall either (i) at the Closing pay to
Buyer all sums paid to Seller by reason of such destruction less any
unreimbursed costs and expenses incurred by Seller in collecting same, or (ii)
commit, use, or apply such sums (less any unreimbursed costs and expenses
incurred by Seller in collecting same) to repair, restore or replace such
damaged or taken Assets. To the extent the insurance proceeds, condemnation
awards or other payments are not committed, used or applied by Seller prior to
the Closing Date to repair, restore or replace such damaged or taken Assets,
Seller shall at the Closing pay to Buyer all sums paid to Seller by reason of
such destruction or taking, less any unreimbursed costs and expenses incurred by
Seller in collecting same. In addition and to the extent such proceeds, awards
or payments have not been committed, used or applied by Seller in repair,
restoration or replacement as aforesaid,
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Seller shall assign, transfer and set over unto Buyer, without recourse against
Seller, all of the right, title and interest of Seller in and to any claims
against third parties with respect to the event or circumstance causing such
loss and any unpaid insurance proceeds, condemnation awards or other payments
arising out of such destruction or taking, less any unreimbursed costs and
expenses incurred by Seller in collecting same. Any such funds which have been
committed by Seller for repair, restoration or replacement as aforesaid shall be
paid by Seller for such purposes or, at Seller's option, delivered to Buyer upon
Seller's receipt from Buyer of adequate assurance and indemnity from Buyer that
Seller shall incur no liability or expense as a result of such commitment.
Notwithstanding anything to the contrary in this Section 15.2, Seller shall not
be obligated to carry or maintain, and shall have no obligation or liability to
Buyer for its failure to carry or maintain, any insurance coverage with respect
to any of the Assets, except as required by Section 9.1(b). Notwithstanding the
foregoing, in the event the proceeds collected under insurance policies or from
third parties is insufficient to reimburse the owner of the damaged portion of
the Assets for the value thereof or to permit repair, replacement or restoration
thereof and the shortfall for all incidents arising under this provision exceeds
$100,000, then Seller shall have the option, to be exercised prior to Closing
within its sole discretion, to pay to Buyer or pay for repair, replacement or
restoration the amount of the shortfall. If Seller elects not to pay such
shortfall, then Buyer shall have the option, to be exercised within its sole
discretion, to refuse to purchase that portion of the Assets adversely impacted
by such casualty event and, in such case, such portion shall be removed from
this transaction and the Purchase Price reduced by the Allocated Value thereof.
ARTICLE XVI.
DEFAULT AND REMEDIES
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16.1 Seller's Remedies. Upon failure of Buyer to comply herewith by the
-----------------
Closing Date, as it may be extended in accordance herewith, Seller, at its sole
option, may terminate this Agreement and, subject to the provisions of Section
3.1, retain the portion of the Deposit provided for in Section 3.1, together
with any interest earned on such portion, as liquidated damages, all other
remedies (except as expressly retained in Section 16.3) being expressly waived
and released by Seller. SELLER AND BUYER ACKNOWLEDGE THAT THE EXTENT OF DAMAGES
TO SELLER OCCASIONED BY ANY BREACH OR DEFAULT BY BUYER WOULD BE IMPOSSIBLE OR
EXTREMELY DIFFICULT TO ASCERTAIN AND THAT THE AMOUNT OF THE DEPOSIT IS A FAIR
AND REASONABLE ESTIMATE OF SUCH DAMAGES UNDER THE CIRCUMSTANCES.
16.2 Buyer's Remedies. Upon failure of Seller to comply herewith by the
----------------
Closing Date, as it may be extended in accordance herewith, Buyer, at its sole
option, may (i) enforce specific performance; (ii) pursue any claim for damages
(not including, however, any exemplary, punitive, special, indirect,
consequential, remote or speculative damages)); or (iii) terminate this
Agreement and receive back the Deposit together with any interest earned
thereon, all other remedies (except as expressly retained in Section 16.3) being
expressly waived and released by Buyer.
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16.3 Other Remedies. Notwithstanding the foregoing, termination of this
--------------
Agreement shall not prejudice or impair Buyer's obligations under Sections 6.3
(and the Confidentiality Agreement referenced therein), 6.4 and 9.2(b) and such
other portions of this Agreement as are necessary to the enforcement and
construction of Sections 6.3, 6.4 and 9.2(b). The prevailing party in any
proceeding brought under or to enforce this Agreement shall be additionally
entitled to recover costs and reasonable attorney's fees from the non-prevailing
party as determined in the discretion of the arbitrator.
ARTICLE XVII.
ARBITRATION
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17.1 Binding Arbitration. On the request of any Party whether made before
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or after the institution of any legal proceeding, any action, dispute, claim or
controversy of any kind now existing or hereafter arising between any of the
Parties in any way arising out of, pertaining to or in connection with this
Agreement (a "Dispute") shall be resolved by binding arbitration in accordance
with the terms hereof. Any Party may, by summary proceedings, bring an action in
court to compel arbitration of any Dispute.
17.2 Governing Rules. Any arbitration shall be administered by the American
---------------
Arbitration Association (the "AAA") in accordance with the terms of this Article
XVII, the Commercial Arbitration Rules of the AAA, and, to the maximum extent
applicable, the Federal Arbitration Act. Judgment on any award rendered by an
arbitrator may be entered in any court having jurisdiction.
17.3 Arbitrators. Any arbitration shall be conducted before one
-----------
arbitrator. The arbitrator shall be a person who is knowledgeable in the subject
matter of the Dispute selected by agreement between the Parties. If the Parties
cannot agree on an arbitrator within thirty (30) days after the request for an
arbitration, then either Party may request the AAA to select an arbitrator. The
arbitrator may engage engineers, accountants or other consultants that the
arbitrator deems necessary to render a conclusion in the arbitration proceeding.
17.4 Conduct of Arbitration. To the maximum extent practicable, an
----------------------
arbitration proceeding hereunder shall be concluded within one hundred eighty
(180) days of the filing of the Dispute with the AAA. Arbitration proceedings
shall be conducted in Houston, Texas. Arbitrators shall be empowered to impose
sanctions and to take such other actions as the arbitrators deem necessary to
the same extent a judge could impose sanctions or take such other actions
pursuant to the Federal Rules of Civil Procedure and applicable law. At the
conclusion of any arbitration proceeding, the arbitrator shall make specific
written findings of fact and conclusions of law. The arbitrator shall have the
power to award recovery of all costs and fees to the prevailing Party. Each
Party agrees to keep all Disputes and arbitration proceedings strictly
confidential except for disclosure of information required by applicable law.
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17.5 Costs of Arbitration. All fees of the arbitrator and any engineer,
--------------------
accountant or other consultant engaged by the arbitrator, shall be paid by Buyer
and Seller equally unless otherwise awarded by the arbitrator.
ARTICLE XVIII.
MISCELLANEOUS
-------------
18.1 Certain Governmental Consents. At the Closing, Seller shall execute
-----------------------------
and deliver to Buyer such assignments of Federal and State leases as require
consent to assignment, on the forms required by the governmental agency having
jurisdiction thereof. Seller and Buyer will use reasonable efforts after
Closing to obtain approval of such assignments.
18.2 Antitrust Laws. This Agreement is subject in all respects to and
--------------
conditioned upon compliance by the parties with Title II of the Hart-Scott-
Rodino Antitrust Improvements Act of 1976 (the "Hart-Scott-Rodino Act"), and
rules and regulations promulgated pursuant thereto, to the extent that said act,
rules and regulations are applicable to the transaction or transactions
contemplated by this Agreement. Buyer and Seller agree to make such filings
with and provide such information to the Federal Trade Commission and the
Department of Justice with respect to the transactions contemplated by this
Agreement as are required in connection with the Hart-Scott-Rodino Act
sufficiently in advance of the Closing Date to permit the lapse of the normal
waiting periods prescribed in connection with the Hart-Scott-Rodino Act prior to
the Closing Date.
18.3 Public Announcements. The parties hereto agree that prior to making
--------------------
any public announcement or statement with respect to the transaction
contemplated by this Agreement, the party desiring to make such public
announcement or statement shall consult with the other party hereto and exercise
reasonable efforts to (i) agree upon the text of a joint public announcement or
statement to be made by both of such parties or (ii) obtain approval of the
other party hereto to the text of a public announcement or statement to be made
solely by Seller or Buyer, as the case may be. Nothing contained in this
paragraph shall be construed to require either party to obtain approval of the
other party hereto to disclose information with respect to the transaction
contemplated by this Agreement to any state or federal governmental authority or
agency to the extent required by applicable law or by any applicable rules,
regulations or orders of any governmental authority or agency having
jurisdiction or necessary to comply with disclosure requirements of the New York
Stock Exchange and applicable securities laws.
18.4 Filing and Recording of Assignments, etc. Buyer shall be solely
----------------------------------------
responsible for all filings and recording of assignments and other documents
related to the Assets and for all fees connected therewith, and upon request
Buyer shall advise Seller of the pertinent recording data. Seller shall not be
responsible for any loss to Buyer because of Buyer's failure to file or record
documents correctly or promptly. Buyer shall promptly file all appropriate
forms, declarations or bonds with Federal, State and Indian agencies relative to
its assumption of operations and Seller shall cooperate with Buyer in connection
with such filings.
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18.5 Retention and Assumption of Liabilities; Indemnity. Buyer agrees to
--------------------------------------------------
assume and pay, perform, fulfill and discharge all Assumed Obligations, and
agrees to release, indemnify, defend and hold Seller its officers, directors,
employees, agents, representatives, affiliates, subsidiaries and successors
harmless from and against any and all claims, losses, damages, costs, expenses,
causes of action or judgments of any kind or character with respect to all
liabilities and obligations or alleged or threatened liabilities and
obligations, including, without limitation, any interest, penalty, reasonable
attorney's fees and other costs and expenses incurred in connection therewith or
the defense thereof, attributable to or arising out of (i) the Assumed
Obligations, or the breach by Buyer of any of its representations and warranties
or covenants or obligations set forth herein. Seller agrees to retain and pay,
perform, fulfill and discharge all Retained Obligations, and agrees to release,
indemnify, defend and hold Buyer its officers, directors, employees, agents,
representatives, affiliates, subsidiaries and successors harmless from and
against any and all claims, losses, damages, costs, expenses, causes of action
or judgments of any kind or character with respect to all liabilities and
obligations or alleged or threatened liabilities and obligations, including,
without limitation, any interest, penalty, reasonable attorney's fees and other
costs and expenses incurred in connection therewith or the defense thereof,
attributable to or arising out of (i) the Retained Obligations, or the breach by
Seller of any of its representations and warranties or covenants or obligations
set forth herein. Each party expressly waives all rights and benefits which it
may have under Civil Code Section 1542 of the State of California as to the
foregoing mutual releases. With respect to operations committed to by Seller
and commenced prior to the Effective Time, but not completed until after the
Effective Time, the costs accruing with respect thereto prior to the Effective
Time shall be the obligation of Seller and the costs accruing with respect
thereto after the Effective Time shall be the obligation of Buyer. Without
limiting the parties' respective representations in Sections 4.1(f) and 5.1(f)
hereof, each party hereby agrees to indemnify and hold the other harmless from
and against any claim for a brokerage or finder's fee or commission in
connection with this Agreement or the transactions contemplated by this
Agreement to the extent such claim arises from or is attributable to the actions
of such indemnifying party, including, without limitation, any and all losses,
damages, attorney's fees, costs and expenses of any kind or character arising
out of or incurred in connection with any such claim or defending against the
same.
18.6 Indemnification Procedures.
--------------------------
(a) Within sixty (60) days (or fifteen (15) days if a Claim involves
a lawsuit) after any Party (the "Indemnified Party") becomes aware of facts
giving rise to a Claim by it for indemnification pursuant to this Article XVIII,
and prior to the expenditure or approval of the expenditure of any funds, such
Indemnified Party will provide notice thereof in writing (a "Claim Notice") to
the Party owing such indemnification (the "Indemnifying Party") specifying the
nature and specific basis for such Claim and a copy of all papers served with
respect to such Claim (if any). For purposes of this Section, receipt by the
Indemnified Party of written notice of any demand, assertion, claim, action or
proceeding (judicial, administrative or otherwise) by or from any person or
entity other than a party to this Agreement or any affiliate thereof which gives
rise to a Claim on behalf of such party shall constitute the discovery of facts
giving rise to a Claim by it and shall require prompt notice of the receipt of
such matter as provided in the first sentence of this Section. Each Claim
Notice shall set forth a reasonable description of the Claim as Seller shall
then
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have and shall contain a statement to the effect that Seller is making a Claim
pursuant to and formal demand for indemnification under, this Section 18.6. The
Claim Notice must set forth the particular provision in the Agreement pursuant
to which such indemnification Claim is made.
(b) The indemnifications provided by this Agreement are expressly
subject to the following:
(i) In case any legal proceeding or claim, including any
investigatory proceeding, is brought or made against the Indemnified Party in a
manner for which indemnification may be provided, the Indemnified Party shall
promptly notify the Indemnifying Party with the delivery of the Claim Notice.
The Indemnifying Party shall have the right to control and assume the defense of
any such legal proceeding or claim, including the employment of counsel
satisfactory to the Indemnifying Party. If the Indemnifying Party controls and
assumes the defense of any proceeding or claim, the Indemnified Party shall have
the right to employ separate counsel, but the fees and expenses of such counsel
shall be at the expense of the Indemnified Party unless the representation of
both parties by the same counsel would be inappropriate due to any actual or
potential conflicts of interest. The Indemnifying Party shall not be liable for
the fees and expenses of more than one separate firm of attorneys at any one
time for the Indemnified Party in connection with any one legal proceeding or
claim or substantially similar related proceedings and claims.
(ii) Notwithstanding anything of the contrary in Section (i)
above, the Indemnified Party shall be entitled to reasonable compensation of
costs of defense, including reasonable attorneys fees, in the event that (x) the
employment of separate counsel has been authorized by the Indemnifying Party,
(y) the Indemnifying Party has failed to defend diligently any Claims, or (z)
the parties to such action (including any impleaded parties) include the
Indemnified Party and the Indemnifying Party, and the Indemnified Party has been
advised by legal counsel that there may be legal defenses available to it which
are different from, in addition to or inconsistent with, the legal defenses
available to the Indemnifying Party, or that the Indemnified Party's interest
may be adverse in whole or in part to the interest of the Indemnifying Party.
The Indemnifying Party shall not, in the defense of any such Claims, except with
the prior written consent of the Indemnified Party, consent to the entry of any
judgment or enter into any settlement which does not include as an unconditional
term, the release by the claimant or the plaintiff of the Indemnified Party from
all further liability in respect to any such Claims.
(iii) If the Claim is of a sort which requires action on the
part of the owners of the Assets, such as restoration of surface locations, for
example, the party having knowledge or receiving notice of such Claim shall
provide the Indemnifying Party with the appropriate Claim Notice. The
Indemnifying Party shall have the option to respond in such manner as it deems
prudent to such Claim and shall make all decisions and take all action in
response to the Claim. Only if the Indemnifying Party fails to timely and
reasonably respond to such Claim may the Indemnified party take such actions as
are necessary to respond to the Claim.
(c) The indemnification obligations under this Agreement shall not
apply to any settlements effected without the consent of the Indemnifying Party.
The indemnification obligations
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under this Agreement shall not be deemed to create any rights of subrogation or
other rights in any insurer or third party.
18.7 Further Assurances and Records.
------------------------------
(a) After the Closing, each of the parties will execute, acknowledge
and deliver to the other such further instruments, and take such other action,
as may be reasonably requested in order to more effectively assure to said party
all of the respective properties, rights, titles, interests, estates, and
privileges intended to be assigned, delivered or inuring to the benefit of such
party in consummation of the transactions contemplated hereby.
(b) Buyer agrees to maintain the files and records of Seller that are
acquired pursuant to this Agreement until the seventh (7th) anniversary of the
Closing Date (or for such longer period of time as Seller shall advise Buyer is
necessary in order to have records available with respect to open years for tax
audit purposes), or, if any of such records pertain to any claim or dispute
pending on the seventh (7th) anniversary of the Closing Date, Buyer shall
maintain any of such records designated by Seller until such claim or dispute is
finally resolved and the time for all appeals has been exhausted. Buyer shall
provide Seller and its representatives reasonable access to and the right to
copy such files and records for the purposes of (i) preparing and delivering any
accounting provided for under this Agreement and adjusting, prorating and
settling the charges and credits provided for in this Agreement, (ii) complying
with any law, rule or regulation affecting Seller's interest in the Assets prior
to the Closing Date, (iii) preparing any audit of the books and records of any
third party relating to Seller's interest in the Assets prior to the Closing
Date, or responding to any audit prepared by such third parties, (iv) preparing
tax returns, (v) responding to or disputing any tax audit or (vi) asserting,
defending or otherwise dealing with any claim or dispute under this Agreement.
At any time after two (2) years following Closing, Buyer may give notice to
Seller of Buyer's intent to destroy all or any part of such files and records,
specifying in reasonable detail which files and records will be destroyed.
Seller shall have thirty (30) days from receipt of such notice within which to
respond that Buyer should deliver such files and records to Seller or that Buyer
may destroy such records. If Seller fails to timely respond, Seller shall be
deemed to have consented to the destruction of the files and records described
in such notice. If Seller elects to receive such files and records, Buyer shall
deliver the files and records to Seller within fifteen (15) days of receipt of
Seller's notice of such election.
(c) Buyer agrees that, as soon as practicable after the Closing, it
will remove or cause to be removed the names and marks used by Seller and all
variations and derivatives thereof and logos relating thereto from the Assets
and will not thereafter make any use whatsoever of such names, marks and logos.
(d) To the extent not obtained or satisfied as of Closing, Seller
agrees to continue to use reasonable efforts, but without any obligation to
incur any cost or expense in connection therewith, and to cooperate with Buyer's
efforts to obtain for Buyer (i) access to files, records and data relating to
the Assets in the possession of third parties; (ii) access to wells constituting
a part of the Assets operated by third parties for purposes of inspecting same;
and
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(iii) the waiver of confidentiality or other restrictions on the review by
and/or transfer to Buyer of seismic, geophysical, engineering or other data
pertaining to the Subject Interests.
18.8 Limitations. The express representations and warranties of Seller
-----------
contained in this Agreement are exclusive and are in lieu of all other
representations and warranties, express, implied or statutory, including without
limitation any representation or warranty with respect to title to the Assets or
the quality, quantity or volume of the reserves of oil, gas or other
Hydrocarbons in or under the Subject Interests. The items of personal property,
equipment, fixtures and appurtenances conveyed as part of the Assets are sold
hereunder "AS IS, WHERE IS" and no warranties or representations of any kind or
character, express or implied, including any warranty of quality,
merchantability, fitness for a particular purpose or condition, are given by or
on behalf of Seller. THE WARRANTIES OF SELLER CONTAINED IN THIS AGREEMENT ARE
EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, AND BUYER
HEREBY WAIVES ALL WARRANTIES OTHER THAN THOSE CONTAINED IN THIS AGREEMENT OR IN
ANY DOCUMENT EXECUTED PURSUANT TO THE TERMS HEREOF, EXPRESS OR IMPLIED,
INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS
FOR A PARTICULAR PURPOSE OR CONDITION. BUYER ACKNOWLEDGES THAT EXCEPT AS
SPECIFICALLY SET FORTH IN THIS AGREEMENT SELLER HAS NOT MADE, AND SELLER HEREBY
EXPRESSLY DISCLAIMS AND NEGATES, AND BUYER HEREBY EXPRESSLY WAIVES, ANY
REPRESENTATION OR WARRANTY, EXPRESS, IMPLIED, AT COMMON LAW, BY STATUTE OR
OTHERWISE RELATING TO (a) PRODUCTION RATES, RECOMPLETION OPPORTUNITIES, DECLINE
RATES, OR THE QUALITY, QUANTITY OR VOLUME OF THE RESERVES OF HYDROCARBONS, IF
ANY, ATTRIBUTABLE TO THE ASSETS, AND (b) THE ACCURACY, COMPLETENESS OR
MATERIALITY OF ANY INFORMATION, DATA OR OTHER MATERIALS (WRITTEN OR ORAL) NOW,
HERETOFORE OR HEREAFTER FURNISHED TO BUYER BY OR ON BEHALF OF SELLER.
NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, SELLER EXPRESSLY
DISCLAIMS AND NEGATES, AND BUYER HEREBY WAIVES, AS TO PERSONAL, MOVABLE
PROPERTY, EQUIPMENT AND FIXTURES CONSTITUTING A PART OF THE ASSETS (i) ANY
IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, (ii) ANY IMPLIED OR EXPRESS
WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, (iii) ANY IMPLIED OR EXPRESS
WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, (iv) ANY RIGHTS OF
PURCHASERS UNDER APPROPRIATE STATUTES TO CLAIM DIMINUTION OF CONSIDERATION OR
RETURN OF THE PURCHASE PRICE, (v) ANY IMPLIED OR EXPRESS WARRANTY OF FREEDOM
FROM VICES OR DEFECTS, WHETHER KNOWN OR UNKNOWN, AND (vi) ANY AND ALL IMPLIED
WARRANTIES EXISTING UNDER APPLICABLE LAW, IT BEING THE EXPRESS INTENTION OF
BUYER AND SELLER THAT (EXCEPT TO THE EXTENT EXPRESSLY PROVIDED IN ARTICLE IV)
THE MOVABLE PROPERTY, EQUIPMENT, INVENTORY, MACHINERY, FIXTURES AND PERSONAL
PROPERTY SHALL BE CONVEYED TO BUYER AS IS AND IN THEIR PRESENT CONDITION AND
STATE OF REPAIR, AND BUYER REPRESENTS TO SELLER THAT BUYER HAS MADE OR CAUSED TO
BE MADE SUCH INSPECTIONS
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WITH RESPECT TO THE MOVABLE PROPERTY, EQUIPMENT, INVENTORY, MACHINERY, FIXTURES
AND PERSONAL PROPERTY AS BUYER DEEMS APPROPRIATE AND BUYER WILL ACCEPT THE
MOVABLE PROPERTY, EQUIPMENT, INVENTORY, MACHINERY, FIXTURES AND PERSONAL
PROPERTY AS IS, IN THEIR PRESENT CONDITION AND STATE OF REPAIR, IT BEING THE
EXPRESS INTENTION OF BOTH BUYER AND SELLER THAT THE PERSONAL PROPERTY, EQUIPMENT
AND FIXTURES INCLUDED WITHIN THE ASSETS ARE HEREBY CONVEYED TO BUYER IN THEIR
PRESENT CONDITION AND STATE OF REPAIR, "AS IS" AND "WHERE IS" WITH ALL FAULTS,
AND THAT BUYER HAS MADE OR CAUSED TO BE MADE SUCH INSPECTIONS AS BUYER DEEMS
APPROPRIATE. SELLER AND BUYER AGREE THAT, TO THE EXTENT REQUIRED BY APPLICABLE
LAW TO BE EFFECTIVE, THE DISCLAIMERS OF CERTAIN WARRANTIES CONTAINED IN THIS
SECTION ARE "CONSPICUOUS" DISCLAIMERS FOR THE PURPOSES OF ANY APPLICABLE LAW,
RULE OR ORDER. To the maximum extent permitted by law, Buyer waives all
provisions of the Texas Deceptive Trade Practices Act, Chapter 17, Texas
Business and Commerce Code (other than Section 17.555 thereof), insofar as the
provisions of such act may be applicable to this Agreement or the transactions
contemplated hereby. To evidence its ability to grant such waiver, Buyer hereby
represents and warrants to Seller that the Buyer (i) is seeking or acquiring, by
purchase or lease, goods or services for commercial or business use, (ii) has
assets of $5 million or more according to its most recent financial statement
prepared in accordance with GAAP, (iii) has knowledge and experience in
financial and business matters that enable it to evaluate the merits and risks
of the transaction contemplated hereby and (iv) is not in a significantly
disparate bargaining position.
18.9 Survival. Except as otherwise specifically provided for in this
--------
Agreement or as hereinafter stated in this Section 18.9, no representation,
warranty, covenant or agreement made herein shall survive Closing. It is
expressly agreed that the terms and provisions of Articles I, III, V, VII, VIII,
XII, XIII, XIV, XV, XVI, XVII and XVIII and Sections 4.1(a) through 4.1(f),
inclusive, 6.3, 6.4 and 11.2 shall survive indefinitely, and that the terms and
conditions of Sections 4.1(g) through 4.1(v), inclusive shall survive Closing
for a period of twelve (12) months. It is understood and agreed that the failure
of any provision to survive the Closing or the survivability of which is
terminated after Closing pursuant to the provisions hereof shall not serve to
release any party from any obligation or liability arising prior to the time at
which such provision is deemed no longer to survive, provided that notice of
such matter has been given to the other party prior to the end of the time
period proscribed above.
18.10 Gas Imbalance: Buyer acknowledges and agrees to the following
-------------
regarding gas imbalances as of the Effective Time on any of the Assets to be
transferred pursuant to this Agreement:
(a) Gas Underproduction: In the event Seller is underproduced as to
any wells located on the Lands or if any amounts are owed Seller with respect to
any pipeline, transportation or processing imbalances, Buyer agrees (except as
provided in Section 3.2(b)) not to hold Seller liable for such underproduction
or such amounts. Seller, however, agrees to assign
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to Buyer all of its contractual rights to make up such underproduction, and to
recover all amounts owed.
(b) Gas Overproduction: In the event Seller is overproduced as to
any wells located on the Lands or if any amounts are due from Seller with
respect to any pipeline, transportation or processing imbalances, Buyer
acknowledges and agrees that its share of gas from any such overproduced wells
may at some point be curtailed by underproduced working interest owners and it
may be required to satisfy, in kind or in value, such third party transporters
and processors for such imbalances. Except as provided in Section 3.2(b) and
except for the overproduction set forth on Exhibit "H" with respect to PG&E
which shall remain an obligation of Seller's (and thus a Retained Obligation),
Seller shall not be liable to Buyer in the event such curtailment occurs or
satisfaction is required.
(c) Future Liability: From and after the Effective Time, any and
all benefits, obligations and liabilities associated with such imbalance
accounts shall accrue to and be the responsibility of Buyer. Buyer shall assume
Seller's overproduced or underproduced position in the Assets as of the
Effective Time, including but not limited to Buyer's responsibility for payment
of royalties on the volume of such gas which Seller took in excess of its
entitlement and any obligation to balance whether in cash or in kind.
18.11 Notices. All notices authorized or required by any of the
-------
provisions of this Agreement, unless otherwise specifically provided, shall be
in writing and shall be deemed given when actually received and may be delivered
in person or by United States mail, courier service, telegram, telex,
telecopier, or any other form of facsimile, postage or charges prepaid, and
addressed to the parties at the addresses set forth below:
If to Seller: Amerada Hess Corporation
One Allen Center, 500 Dallas
Houston, Texas 77002
Attention: D. G. Stevenson
Fax Number: (713) 609-4463
If to Buyer: Sheridan Energy, Inc.
1000 Louisiana, Suite 800
Houston, Texas 77002
Attention: Charles F. Chambers
and
Attention: Jon Wright
with a copy to: Ernest L. Nix, Jr.
509 Market Street, Suite 800
Shreveport, Louisiana 71101
Any party may, by written notice so delivered to the other, change the address
to which delivery shall thereafter be made.
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18.12 Incidental Expenses. Buyer shall bear and pay (i) any and all
-------------------
Federal, State or local Transfer Taxes as defined in Section 12.2(b) hereof
incident to the transfer, assignment or other conveyance of the Assets to Buyer,
and (ii) all costs or fees required to obtain consent to assign any Federal,
State or Indian leases included in the Assets. Each party shall bear its own
respective expenses incurred in connection with the Closing of this transaction,
including its own consultants' fees, attorneys' fees, accountants' fees, and
other similar costs and expenses.
18.13 Entire Agreement. Except for the Confidentiality Agreement
----------------
referenced in Section 6.3, this Agreement embodies the entire agreement between
the parties (superseding all prior agreements, arrangements and understandings
related to the subject matter hereof), and may be supplemented, altered,
amended, modified or revoked by writing only, signed by all of the parties
hereto. No supplement, amendment, modification, waiver or termination of this
Agreement shall be binding unless in writing and executed by both parties
hereto. The headings herein are for convenience only and shall have no
significance in the interpretation hereof.
18.14 Governing Law. THIS AGREEMENT AND OTHER DOCUMENTS DELIVERED
-------------
PURSUANT TO THIS AGREEMENT AND THE LEGAL RELATIONS BETWEEN THE PARTIES SHALL BE
GOVERNED AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICT OF LAWS.
18.15 Exhibits. All Exhibits and Schedules hereto which are referred to
--------
herein are hereby made a part hereof and incorporated herein by reference. For
the purposes of this Agreement references to Exhibit "A" shall be deemed to
refer to Exhibits "A", "A-1", "A-2" and "A-3", inclusive, and references to
Exhibit "B" shall be deemed to refer to Exhibits "B", "B-1" and "B-2",
inclusive.
18.16 Prime Rate. References to "prime rate" shall mean a rate per annum
----------
equal to the lesser of (a) a varying rate per annum that is equal to the
interest rate publicly quoted by CitiBank, N.A. from time to time as its prime
commercial or similar reference interest rate, with adjustments in that varying
rate to be made on the same date as any change in that rate, and (b) the maximum
rate permitted by applicable law.
18.17 Certain Terms. As used in this Agreement, the term "knowledge"
-------------
means actual knowledge of any fact, circumstance or condition by the officers or
management employees of the party involved at a supervisory or higher level, but
does not include (i) knowledge imputed to the party involved by reason of
knowledge of or notice to any person, firm or corporation other than its
officers or employees at a supervisory or higher level or (ii) knowledge deemed
to have been constructively given by reason of any filing, registration or
recording of any document or instrument in any public record or with any
governmental entity. As used in this Agreement, the term "day" means any
calendar day, and the term "business day" means any day exclusive of Saturdays,
Sundays and national holidays.
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18.18 Counterparts. This Agreement may be executed in any number of
------------
counterparts, and each and every counterpart shall be deemed for all purposes
one (1) agreement.
18.19 Waiver. Any of the terms, provisions, covenants, representations,
------
warranties or conditions hereof may be waived, only by a written instrument
executed by the party waiving compliance. Except as otherwise expressly
provided in this Agreement, the failure of any party at any time or times to
require performance of any provision hereof shall in no manner affect such
party's right to enforce the same. No waiver by any party of any condition, or
of the breach of any term, provision, covenant, representation or warranty
contained in this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be or construed as a further or continuing waiver
of any such condition or breach or a waiver of any other condition or of the
breach of any other term, provision, covenant, representation or warranty.
18.20 Binding Effect; Assignment. All the terms, provisions, covenants,
--------------------------
representations, warranties and conditions of this Agreement shall be binding
upon and inure to the benefit of and be enforceable by the parties hereto and
their respective successors; but this Agreement and the rights and obligations
hereunder shall not be assignable or delegable by any party without the express
written consent of the non-assigning or non-delegating parties. Any assignment
or delegation without such consent will be void.
18.21 No Recordation. Without limiting any party's right to file suit to
--------------
enforce its rights under this Agreement and except as to those portions of this
Agreement set forth in the Assignment, Bill of Sale and Conveyance, Exhibit "F",
Buyer and Seller expressly covenant and agree not to record or place of record
this Agreement or any copy or memorandum hereof.
18.22 Independent Investigation. Buyer represents and acknowledges that
-------------------------
it is knowledgeable of the oil and gas business and of the usual and customary
practices of producers such as Seller and that it has had access to the Assets,
the offices and employees of Seller, and the books, records and files of Seller
relating to the Assets and in making the decision to enter into this Agreement
and consummate the transactions contemplated hereby, Buyer has relied solely on
the basis of its own independent due diligence investigation of the Assets and
upon the representations and warranties made herein.
18.23 PG&E Contracts.
--------------
(a) Seller is a party to those agreements identified on Exhibit "J"
as AHC Contracts G2149, G2147, G2148 and G2146 (collectively the "PG&E
Contracts"), which provide generally for the purchase, gathering, compression
and handling of Seller's gas produced from the fields identified in Exhibit "J".
Seller and PG&E have been conducting negotiations for the termination of the
PG&E Contracts and settlement of various issues related thereto. As a part of
the negotiation to terminate the PG&E Contracts, Seller and PG&E have discussed
entering into an agreement to provide continuing gathering, compression and
related services for a term ("Compression Agreement"), an agreement for the
installation, operation and maintenance of certain facilities to connect
Seller's wells to PG&E's pipeline ("Interconnect Agreement"), and
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have also discussed the purchase by Seller from PG&E of an option to purchase
the gathering system and related assets currently owned by PG&E and used to
fulfill its obligations under the PG&E Contracts ("Option Agreement"). Seller
has provided drafts of the proposed Compression Agreement and Interconnect
Agreement to Buyer for its review and shall provide a draft of the proposed
Option Agreement to Buyer when same is available.
(b) Except with respect to the Option Agreement, Seller shall have
full and complete discretion concerning the final execution of any agreements
with PG&E, although Seller agrees to keep Buyer informed of the progress of
these negotiations. Notwithstanding any other provision of this Agreement
(including, but not limited to, those set forth in Article IX), Seller shall
have the right to terminate the PG&E Contracts and settle various issues related
thereto (with Seller retaining all the financial consideration resulting
therefrom and any and all liabilities existing or arising under any such
settlement agreement and the PG&E agreements which are terminated as a result of
the settlement) and enter into the Compression Agreement and the Interconnect
Agreement.
(c) In the event Seller has negotiated terms for the Compression
Agreement and the Interconnect Agreement with PG&E which Seller is ready and
willing to accept, then Seller shall so notify Buyer in writing and shall submit
copies of the proposed agreements (except for the agreement to terminate the
PG&E Contracts and settle outstanding disputes) with such notice. In the event
the Compression Agreement and the Interconnect Agreement contain any material
modification, addition or deletion from the drafts of the agreements furnished
to Buyer for its review on or before November 9, which would have a material
adverse effect upon Buyer, then, notwithstanding any provision of this Agreement
to the contrary, Buyer shall have three (3) full business days after receipt of
the notice and the proposed agreements within which to make its election of
whether or not to terminate this Agreement. In the event Buyer elects to
terminate this Agreement, it shall provide written notice thereof to Seller and
Seller shall return the Deposit to Buyer and the parties shall have no further
obligation or liability hereunder.
(d) By 12:00 noon on November 16, 1998, Seller shall advise Buyer
of its progress in negotiating the Option Agreement and give Buyer copies of the
proposed drafts of such agreement which Seller has in its possession. If Buyer,
in its sole discretion, is not satisfied with the terms of the then proposed
Option Agreement, it may elect to terminate this Agreement by giving Seller
notice of such election on or before 12:00 noon on November 18, 1998. In the
event Buyer elects to terminate this Agreement, Seller shall return the Deposit
to Buyer, and the parties shall have no further obligation or liability
hereunder. In the event Buyer fails to give such termination notice, all rights
of Buyer to terminate this Agreement under this subparagraph (d) shall be
relinquished. Seller agrees not to execute the Option Agreement unless Buyer
consents to such execution and further agrees that it will execute such Option
Agreement upon the instruction of Buyer; provided that since the Option
Agreement is being negotiated for the benefit of Buyer, if such Option Agreement
is approved by Buyer and is executed, all benefits and obligations pertaining to
said agreement shall be Buyer's, and Buyer shall reimburse Seller for any
payments it makes under the Option Agreement (it being understood that the
payments Seller will probably make will be through a deduction of the amounts
owed Seller by PG&E),
-40-
<PAGE>
and the obligations assigned by Seller under the Option Agreement shall be
considered Assumed Obligations.
18.24 Access to Seller's Records Post Closing. After Closing Seller shall
---------------------------------------
provide to Buyer access to Seller's financial, accounting and other files and
records, during Seller's normal business hours, as may be reasonably necessary
or useful to Buyer in connection with filings required pursuant to the rules of
the Securities and Exchange Commission or other governmental authority in
connection with this transaction.
18.25 Like-Kind Exchange: Taxes. Seller desires to exchange for other
--------------------------
property of like-kind and qualifying use within the meaning of Section 1031 of
the Internal Revenue Code of 1986, as amended and the Regulations promulgated
thereunder, the Assets, which are the subject of this Agreement. To effect such
an exchange, Seller reserves the right to assign its rights, but not its
obligations, hereunder to a Qualified Intermediary as provided in Treasury
Regulations Section 1.1031(k)-1(g)(4) on or before Closing, and Buyer hereby
agrees to recognize any such assignment. Buyer agrees to cooperate with Seller
and with the Qualified Intermediary to ensure that the formalities of a like-
kind exchange are accomplished. Buyer shall not be obligated to pay any
additional costs or incur any additional obligations in their acquisition of the
Assets, which are the subject of this Agreement, and Seller shall indemnify
Buyer against all claims, expenses, losses and liabilities, if any, resulting
from Buyer's participation in such an exchange.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the date first above written.
AMERADA HESS CORPORATION
By: ______________________________
Name: ______________________________
Title: ______________________________
"SELLER"
SHERIDAN ENERGY, INC.
By: ______________________________
Name: ______________________________
Title: ______________________________
"BUYER"
-41-
<PAGE>
AMENDMENT OF AGREEMENT FOR PURCHASE AND SALE
--------------------------------------------
Reference for all purposes is herein made to that certain Agreement for
Purchase and Sale effective November 1, 1998, as amended, between Amerada Hess
Corporation, a Delaware corporation (hereinafter referred to as "Seller"), and
Sheridan California Energy, Inc., a Delaware corporation (hereinafter referred
to as "Buyer") covering Seller's oil and gas leasehold interests in California
("Agreement").
WHEREAS, under Section 8.2 of the Agreement, Seller has been obtaining
consents from third parties with respect to the assignment of certain Assets;
and
WHEREAS, all of such consents were not obtained by Closing; and
WHEREAS, Seller may not be able to obtain certain consents within 90 days
following Closing as provided in Section 8.2; and
WHEREAS, Seller and Buyer are willing to enter into an agreement under
which Seller will retain record title in the Assets with respect to which
consents have not been obtained within the beforementioned 90 day period, and
Buyer will conduct operations with respect to those Assets.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Buyer and Seller agree to the
following Amendment of the Agreement:
1. Attached hereto as Exhibit "N" is a list of each oil and gas lease
with respect to which Seller has not, as of this date, obtained all of the
consents of all of the lessors as to such leases. Seller agrees to continue to
attempt to obtain said consents in accordance with Section 8.2 of the Agreement.
If all of the consents of the lessors with respect to a particular lease are
obtained prior to the expiration of the 90 day period referenced in Section 8.2,
Seller shall convey such lease to Buyer in consideration of the payment of the
Allocated Value for such lease as set forth in Exhibit "N". In addition, if at
the expiration of such 90 day period, Seller has obtained the consent of some,
but not all, of the lessors of a particular lease, Seller shall convey that
portion of the lease to Buyer for which consents have been obtained in
consideration of the payment of that portion of the Allocated Value for such
lease as set forth in Exhibit "N" attributable to the ownership of the
consenting lessors. Any such assignment shall be made effective November 1,
1998, with appropriate adjustments as required under the Agreement to reflect
such effective date.
2. With respect to any lease identified in Exhibit "N", or any portion
thereof, as to which consents have not been obtained by the end of the
beforementioned 90 day period, Seller and Buyer shall enter into that agreement
attached hereto as Exhibit "O" which shall permit Seller to retain title to such
leases, or portions thereof, and permit Buyer to operate such leases, or
portions thereof, at its sole risk, cost and expense. Upon execution of the
attached agreement,
1
<PAGE>
Buyer shall pay Seller that portion of the Allocated Value for such leases, or
portions thereof, based upon the Allocated Value set forth in Exhibit "N".
Except as hereinabove amended, all of the terms and conditions of the
Agreement shall remain in effect.
AMERADA HESS CORPORATION
By: /s/ D.G. Stevenson
---------------------------------
Name: D.G. Stevenson
-------------------------------
Title: Vice President
-------------------------------
"SELLER"
SHERIDAN CALIFORNIA ENERGY, INC.
By: /s/ B.A. Berilgen
---------------------------------
Name: B.A. Berilgen
-------------------------------
Title: President
-------------------------------
"BUYER"
2
<PAGE>
AMENDMENT OF AGREEMENT FOR PURCHASE AND SALE
Reference for all purposes is herein made to that certain Agreement for
Purchase and Sale ("Agreement") effective November 1, 1998, between Amerada Hess
Corporation ("Seller") and Sheridan Energy, Inc. ("Buyer").
For good and valuable consideration, the adequacy and sufficiency of
which are hereby acknowledged, Seller and Buyer agree to amend the Agreement as
follows:
1. In Section 3.1, the date of "December 7, 1998" is hereby deleted and
the date of "December 9, 1998" is substituted therefor.
2. In Section 11.1, the date of "January 15, 1999" is hereby deleted and
the date of "January 25, 1999" is substituted therefor.
3. Exhibit "A-2" attached hereto is hereby substituted for Exhibit "A-2"
of the Agreement.
4. Exhibit "C" attached hereto is hereby substituted for Exhibit "C" of
the Agreement.
5. Exhibit "K" attached hereto is hereby substituted for Exhibit "K" of
the Agreement.
Except as hereinabove amended, all of the other terms and conditions of
the Agreement shall remain in effect.
Dated this 8th day of January, 1999.
AMERADA HESS CORPORATION
By: /s/ D.G. Stevenson
-------------------------------
Name: D.G. Stevenson
Title: Vice President
"SELLER"
SHERIDAN ENERGY, INC.
By: /s/ B.A. Berilgen
--------------------------------
Name: B. A. Berilgen
Title: President
"BUYER"
<PAGE>
================================================================================
AGREEMENT REGARDING FORMATION OF CORPORATION
by and among
SHERIDAN ENERGY, INC.
SHERIDAN CALIFORNIA ENERGY, INC.
CALPINE CORPORATION
and
CPN PRODUCTION COMPANY
dated as of
January 25, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1
DEFINITIONS................................................................... 1
Section 1.1 Certain Defined Terms.......................................... 1
ARTICLE 2
DFORMATION OF SCEI............................................................ 4
Section 2.1 Incorporation of SCEI.......................................... 4
Section 2.2 Capital Structure.............................................. 4
Section 2.3 Initial Board of Directors and Officers........................ 5
Section 2.4 Organizational Documents....................................... 5
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SHERIDAN.................................... 6
Section 3.1 Corporate Existence............................................ 6
Section 3.2 Corporate Power and Authorization.............................. 6
Section 3.3 Binding Obligations............................................ 6
Section 3.4 No Violation................................................... 6
Section 3.5 Consents....................................................... 7
Section 3.6 Liens.......................................................... 7
Section 3.7 No Material Misstatements or Omissions......................... 7
Section 3.8 AHC Transactions............................................... 7
Section 3.9 Purchase for Investment........................................ 7
Section 3.10 Fees and Commissions........................................... 8
Section 3.11 Completeness of Schedules...................................... 8
Section 3.12 Representations and Warranties Regarding SCEI.................. 8
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF CPN......................................... 9
Section 4.1 Corporate Existence............................................ 9
Section 4.2 Corporate Power and Authorization.............................. 9
Section 4.3 Binding Obligations............................................ 9
Section 4.4 No Violation................................................... 9
Section 4.5 Purchase for Investment........................................ 10
Section 4.6 Fees and Commissions........................................... 10
</TABLE>
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 5
COVENANTS..................................................................... 10
Section 5.1 General........................................................ 10
Section 5.2 Full Access to Information..................................... 10
Section 5.3 Notice of Developments......................................... 10
Section 5.4 Special Covenants of Sheridan and SCEI......................... 11
ARTICLE 6
CLOSING CONDITIONS............................................................ 11
Section 6.1 Conditions to Obligation of Calpine............................ 11
Section 6.2 Conditions to Obligation of Sheridan........................... 13
ARTICLE 7
TERMINATION OF AGREEMENT...................................................... 14
Section 7.1 Termination.................................................... 14
Section 7.2 Effect of Termination.......................................... 15
ARTICLE 8
CLOSING MATTERS............................................................... 15
Section 8.1 Closing........................................................ 15
ARTICLE 9
MISCELLANEOUS................................................................. 15
Section 9.1 Mediation...................................................... 15
Section 9.2 Notices........................................................ 16
Section 9.3 Governing Law.................................................. 17
Section 9.4 Binding upon Successors and Assigns; No Assignment............. 17
Section 9.5 Severability................................................... 17
Section 9.6 Entire Agreement............................................... 17
Section 9.7 Amendment...................................................... 18
Section 9.8 No Waiver...................................................... 18
Section 9.9 Construction of Agreement...................................... 18
Section 9.10 Press Releases and Announcements; Transaction Costs............ 18
Section 9.11 Counterparts................................................... 18
</TABLE>
<PAGE>
AGREEMENT REGARDING FORMATION OF CORPORATION
THIS AGREEMENT REGARDING FORMATION OF CORPORATION (the "Agreement") is
entered into as of the 25th day of January, 1999, by and among SHERIDAN ENERGY,
INC., a Delaware corporation ("Sheridan"), SHERIDAN CALIFORNIA ENERGY, INC., a
Delaware corporation ("SCEI"), CALPINE CORPORATION, a Delaware corporation
(sometimes referred to herein as "Calpine Corporation") and CPN PRODUCTION
COMPANY, a Delaware corporation (sometimes referred to herein as "CPN"). Calpine
Corporation is a party to the Agreement solely for the purposes set forth in
Section 2.2(d).
W I T N E S S E T H:
- - - - - - - - - -
Sheridan and Amerada Hess Corporation ("AHC") entered into a letter
agreement dated November 9, 1998 (the "AHC Letter Agreement") that contemplated
either (i) the formation of a limited liability company to own and operate
certain oil and gas properties currently owned by AHC or (ii) the execution and
delivery of an Agreement for Purchase and Sale in the form attached as Exhibit
1.1(a) (the "AHC Purchase Agreement"), in accordance with which Sheridan would
acquire certain oil, gas and mineral leases, together with associated real and
personal property and fixtures (collectively, the "AHC Properties") currently
owned by AHC and located in the Sacramento Basin in California. Sheridan and AHC
subsequently executed and delivered the AHC Purchase Agreement in substantially
the form attached to AHC Letter Agreement. Sheridan has formed SCEI in which it
is contemplated that Sheridan and CPN would own equity interests, and which has
been formed for the purposes of acquiring Sheridan's rights under the AHC
Purchase Agreement and owning and operating the Properties (hereinafter
defined).
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.1 CERTAIN DEFINED TERMS. The following terms used in this
Agreement have the meanings set forth below. Other terms are defined elsewhere
in this Agreement.
"Administrative Services Agreement" shall mean the Administrative Services
---------------------------------
Agreement by and among Sheridan, SCEI and CPN, a form of which is attached
hereto as Exhibit I.
"Affiliate" shall mean any Person who controls, is controlled by or is
---------
under common control with another Person. "Control," with respect to any
Person, shall mean the power to direct the management and policies of such
Person.
<PAGE>
"AHC Contracts" shall mean the contracts and agreements included in the AHC
-------------
Properties, or which SCEI will assume or otherwise become a party to or bound by
as a result of the AHC Transactions or to which the AHC Properties are (or will
be upon the closing of the AHC Transactions) subject, including but not limited
to the Permitted Encumbrances (as defined in the AHC Purchase Agreement).
"AHC Properties" shall have the meaning set forth in the preamble to this
--------------
Agreement, and are more particularly described as the "Assets" in the AHC
Purchase Agreement attached as Schedule 1.1(a).
"AHC Transactions" shall mean purchase by and sale to SCEI of the AHC
----------------
Properties pursuant to the AHC Purchase Agreement.
"Board of Directors" shall mean the Board of Directors of SCEI.
------------------
"Calpine Guarantee" shall mean the Calpine Guarantee by and between Calpine
-----------------
Corporation and SCEI, a form of which is attached hereto as Exhibit J.
"Certificate of Designations" means the Certificate of Designations,
---------------------------
Preferences and Rights of Series N-A Preferred Stock relating to the CPN
Preferred, a form of which is attached hereto as Exhibit A.
"Charter" means, for any Person, such Person's certificate of
-------
incorporation, articles of incorporation or other organizational documents, as
the same may be amended.
"Closing" shall have the meaning set forth in Section 8.1.
-------
"Closing Date" shall have the meaning set forth in Section 8.1.
------------
"Common Stock" means the common stock, par value $.01 per share, of SCEI .
------------
"CPN Preferred" shall mean the Series N-A Preferred Stock, par value $0.01
-------------
per share of SCEI, having the rights, preferences, privileges and limitations
set forth in the Certificate of Designations.
"Environmental Laws" shall mean any and all federal, state and local laws
------------------
including statutes, regulations, orders, ordinances, judgments, rulings and
common law, relating to hazardous substances, pollution, naturally occurring
radioactive materials or protection of the environment, including laws relating
to actual or threatened emissions, discharges, or releases of pollutants,
contaminants or hazardous substances, or other toxic materials or wastes into
ambient air, surface water, groundwater or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or hazardous substances or
other toxic materials or wastes and specifically including without limitation,
The Comprehensive Environmental Response, Compensation And Liability Act Of
1980, as amended
2
<PAGE>
(42 U.S.C. (S)(S)9601 et. seq.), The Resource Conservation And Recovery Act of
1976 (42 U.S.C. (S)6901 et. seq.), The Clean Water Act (33 U.S.C. (S)(S)466 et.
seq.), The Safe Drinking Water Act (14 U.S.C. (S)(S)1401-1450), The Hazardous
Materials Transportation Act (49 U.S.C. (S)(S)1801 et. seq.), The Toxic
Substance Control Act (15 U.S.C. (S)(S)2601-2629), The Clean Air Act (42 U.S.C.
(S)7401 et. seq.) as amended, The Clean Air Act Amendments of 1990 and all state
and local laws, and any replacement or successor legislation or regulation
thereto.
"Gas Purchase Agreement" shall mean the Gas Purchase Agreement by and
----------------------
between Calpine Fuels Corporation and SCEI, a form of which is attached hereto
as Exhibit G.
"Governmental Authority" means any foreign or domestic federal, state,
----------------------
county, municipal, or other governmental or regulatory authority, agency, board,
body, commission, instrumentality, court, or any political subdivision thereof.
"Governmental Requirement" means any law, statute, code, ordinance, order,
------------------------
rule, regulation, judgment, decree, injunction, franchise, permit, certificate,
license, authorization or other direction or requirement (including but not
limited to any of the foregoing which relate to Environmental Laws, energy
regulations and occupational, safety and health standards or controls) of any
Governmental Authority.
"Knowledge" of a Person means the actual knowledge of such Person or
---------
information which such Person should have known following such reasonable
investigations and inquiries as are appropriate to confirm the truth and
accuracy in all material respects of the matters as to which a representation or
warranty relates, and shall include in the case of a corporate entity the
Knowledge (as aforesaid) of its President or any Vice President or any other
officer.
"Lien" shall have the meaning given such term in the Senior Loan Facility.
----
"LOI" shall mean the letter of intent dated December 20, 1998 by and
---
between Sheridan and Calpine Corporation regarding the subject matter of this
Agreement.
"Permit" shall mean any license, permit, exception, franchise,
------
accreditation, privilege, right, variance, waiver, approval or other
authorization of, by or from Governmental Authorities necessary for the
consummation of the transactions contemplated hereby or conduct of the business
of SCEI as contemplated herein.
"Permitted Lien" shall have the meaning given such term in the Senior Loan
--------------
Facility.
"Person" means and includes any natural person, corporation, limited
------
partnership, general partnership, joint venture, association, company, trust,
bank, trust company and other organization, whether or not a legal entity, any
government and any agency and political subdivision thereof.
"Peterson Ranch Contracts" has the meaning ascribed to that term in Section
------------------------
3.11.
3
<PAGE>
"Properties" shall mean the AHC Properties, the Sheridan Properties and
----------
such other interests in oil, gas and mineral fees and leaseholds as SCEI may
deem appropriate to acquire from time to time.
"Senior Loan Facility" means that certain Credit Agreement by and among
--------------------
SCEI, as the borrower, and Bank One, Texas National Association ("Bank One"), as
lender, and the other lenders from time to time parties thereto, in connection
with the funding of the acquisition of the AHC Properties, with terms
substantially the same as those set forth on the draft Credit Agreement between
SCEI and Bank One attached hereto as Schedule 1.1(b).
"Sheridan Properties" shall mean Sheridan's interests in oil, gas and
-------------------
mineral leases and associated real and personal property and fixtures located in
the Sacramento Basin generally known as the Peterson Ranch properties, which are
more particularly described in Exhibit B.
"Stock" shall mean and include all of the issued and outstanding Common
-----
Stock or CPN Preferred.
"Stockholder" shall mean and include Sheridan, CPN and any other Person who
-----------
now or hereafter owns Stock.
"Stockholders Agreement" shall mean the Stockholders Agreement by and among
----------------------
Sheridan, SCEI and CPN, a form of which is attached hereto as Exhibit F.
"Tax Sharing Agreement" shall mean the Tax Sharing Agreement by and between
---------------------
Sheridan and SCEI, a form of which is attached hereto as Exhibit H.
"Transaction Agreements" shall mean this Agreement, the Certificate of
----------------------
Designations, the Stockholders Agreement, the Administrative Services Agreement,
the Gas Purchase Agreement, the Tax Sharing Agreement and the Calpine Guarantee.
ARTICLE 2
FORMATION OF SCEI
SECTION 2.1 INCORPORATION OF SCEI. Sheridan has incorporated SCEI for
the principal purpose of exploring for, developing and producing oil, gas and
other hydrocarbons from the Properties.
SECTION 2.2 CAPITAL STRUCTURE. (a) Generally. The authorized shares
---------
of SCEI are 5,000,000 shares of Common Stock and 5,000,000 shares of preferred
stock. On or before the Closing Date, the Board of Directors of SCEI will
designate 2,000,000 shares of preferred stock, as "Series N-A Preferred Stock"
having such designations, preferences and relative, participating, optional or
other special rights, and qualifications, limitations or restrictions thereof,
as shall be set forth in the Certificate of Designations and shall file the
Certificate of Designations with the
4
<PAGE>
Secretary of State of Delaware. On or before the Closing Date, 2,000,000 shares
of Common Stock and 1,300,000 shares of Calpine Preferred shall be issued as
follows: 1,600,000 shares of Common Stock to Sheridan (the "Sheridan Common
Stock") and 400,000 shares of Common Stock (the "CPN Common Stock") to CPN, and
1,300,000 shares of the CPN Preferred to CPN, in consideration of the parties'
contributions to the capital of SCEI pursuant to Sections 2.2(b) and 2.2(c)
hereof.
(b) Common Stock Contributions. In consideration for the issuance
--------------------------
of the Sheridan Common Stock, Sheridan shall contribute a total of $7.6
million ("Sheridan's Equity Contribution"). Sheridan's Equity Contribution,
which shall be made on or before the Closing Date, shall consist of (i)
$3.0 million in cash, and (ii) the following assets, which the parties
agree have an aggregate value of $4.6 million: (A) the Sheridan Properties,
(B) Sheridan's rights under that certain Agreement to License the Use of
CGG Seismic Data dated May 4, 1998 by and between Georex, Inc. and SEI (the
"Seismic Data Agreement") and (C) Sheridan's rights under the AHC Letter
Agreement and the AHC Purchase Agreement. The assets described in Section
2.2(b)(ii) shall be conveyed to SCEI by an Assignment, Conveyance and Bill
of Sale in substantially the form of Exhibit C. Sheridan has made an
initial deposit of $5.8 million pursuant to the AHC Letter Agreement, $3.0
million of which shall be credited dollar-for-dollar to Sheridan's Equity
Contribution hereunder with the remainder of such deposit to be returned to
Sheridan by SCEI on the Closing Date. In consideration for the issuance to
it of the CPN Common Stock, CPN shall, at the Closing and subject to the
terms and conditions of this Agreement, contribute $1.9 million in cash
("CPN's Equity Contribution").
(c) CPN Preferred Contribution. In addition to CPN's Equity
--------------------------
Contribution pursuant to Section 2.2(b), CPN shall, at the Closing and
subject to the terms and conditions of this Agreement, contribute $13.0
million in cash to SCEI at the Closing, in exchange for the CPN Preferred
that shall have the terms set forth in the Certificate of Designations.
SCEI shall take all necessary corporate action prior to the issuance of the
CPN Preferred to cause the capital (determined in accordance with Section
154 of the Delaware General Corporation Law) to be represented by the CPN
Preferred to be $10 per share.
(d) Joinder of Calpine Corporation. Calpine Corporation shall, at
------------------------------
the Closing and subject to the terms and conditions of this Agreement,
cause CPN to make CPN's Equity Contribution, pay the consideration for the
CPN Preferred as provided in Sections 2.2(b) and 2.2(c), and Calpine
Corporation shall, subject as aforesaid, execute and deliver the Calpine
Guarantee pursuant to Section 6.1(k).
SECTION 2.3 INITIAL BOARD OF DIRECTORS AND OFFICERS. The initial Board
of Directors of SCEI shall consist of two (2) members. The remaining directors,
and SCEI's officers, shall be designated on or before the Closing.
SECTION 2.4 ORGANIZATIONAL DOCUMENTS. A copy of SCEI's Certificate of
Incorporation is attached hereto as Exhibit D, and a copy of its Bylaws is
attached hereto as Exhibit E.
5
<PAGE>
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SHERIDAN
Sheridan represents and warrants to CPN, and SCEI represents and warrants
to CPN as to those matters concerning itself, as follows:
SECTION 3.1 CORPORATE EXISTENCE. Each of Sheridan and SCEI is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware.
SECTION 3.2 CORPORATE POWER AND AUTHORIZATION. Each of Sheridan and
SCEI is duly authorized to execute, deliver, and perform this Agreement and the
other Transaction Agreements to which it will be a party and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the other Transaction Agreements to which they will be parties and the
consummation of the transactions to be performed by each of Sheridan and SCEI
has been duly and validly authorized by all necessary action on the part of
Sheridan's or SCEI's Board of Directors, as applicable, and no other corporate
proceedings are necessary to authorize the execution and delivery of this
Agreement and the other Transaction Agreements to which they will be parties by
Sheridan or SCEI or to consummate the transactions contemplated to be performed
by Sheridan and SCEI hereunder or thereunder.
SECTION 3.3 BINDING OBLIGATIONS. This Agreement has been duly and
validly executed and delivered by each of Sheridan and SCEI. This Agreement
constitutes, and the other Transaction Agreements to which each of Sheridan and
SCEI will be a party when executed and delivered will constitute, the legal,
valid and binding obligations of each of Sheridan and SCEI enforceable in
accordance with their terms, except insofar as the enforceability thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement of creditors' rights generally and
by general principles of equity.
SECTION 3.4 NO VIOLATION. The execution and delivery of this Agreement
and the other Transaction Agreements to which Sheridan and SCEI will be parties,
the consummation of the transactions provided for herein and therein and
contemplated hereby and thereby, the fulfillment by Sheridan and SCEI of the
terms hereof and thereof and the performance of their respective obligations
hereunder and thereunder do not and will not (a) conflict with or result in a
breach of any provision of the Charter, bylaws or other organizational document
of SCEI, or of Sheridan, (b) result in any default under or imposition of any
Lien pursuant to or in any material modification of the terms of any material
contract, agreement, obligation, or commitment applicable to Sheridan or SCEI,
or the creation of any Lien upon any of the properties or assets owned by
Sheridan or SCEI (other than the Liens pursuant to the Senior Loan Facility in
favor of the Lenders thereunder), (c) require any consent or approval (which has
not been obtained or waived) under any Permit or any note, bond, mortgage,
indenture, loan, distribution agreement, license, agreement, lease or material
instrument or material obligation to which Sheridan or SCEI is a party or by
which Sheridan or SCEI may be bound (other than, with respect to Sheridan, (i)
preferential rights affecting the Peterson Ranch Properties, (ii) the consent of
AHC to the assignment of Sheridan's rights under the AHC
6
<PAGE>
Purchase Agreement to SCEI, it being agreed that Sheridan shall use commercially
reasonable efforts to obtain such consent prior to Closing or (iii) consents
permitted under Section 3.5), or (d) violate any Governmental Requirement or
Permit applicable to Sheridan or SCEI.
SECTION 3.5 CONSENTS. All consents, approvals, qualifications, orders
or authorizations of, or filings with, any Governmental Authority, and all
consents under any contracts, agreements, or instruments to which Sheridan or
SCEI is a party or is otherwise bound and required in connection with Sheridan's
or SCEI's valid execution, delivery, or performance of this Agreement and the
other Transaction Agreements and the consummation of the transactions
contemplated hereby have been obtained or made other than, insofar as
performance after the Closing may require the same, consents that are routine in
nature and obtained post-Closing, or consents to assignments of interests in oil
and gas leases described in Section 18.1 of the AHC Purchase Agreement, if
waived by Sheridan (with CPN's consent).
SECTION 3.6 LIENS. Sheridan owns the rights of "Buyer" under the AHC
Purchase Agreement (as such term is defined therein) free and clear of all Liens
other than those evidenced pursuant to the Sheridan Bank Facility, and, subject
to obtaining the consent of AHC to such assignment pursuant to Section 3.4(c),
such rights shall be assigned to SCEI at or prior to Closing, and shall upon
Closing be subject to no Liens.
SECTION 3.7 NO MATERIAL MISSTATEMENTS OR OMISSIONS. Neither this
Agreement nor any certificates or documents made or delivered in connection
herewith contain or will contain when made any untrue statement of a material
fact or omits, or will omit when made, to state a material fact necessary to
make the statements herein or therein not misleading, in view of the
circumstances in which they were made. To the Knowledge of Sheridan and SCEI,
there is no fact or information relating to the AHC Transactions that has not
been disclosed to CPN by Sheridan and SCEI and which would result in a material
adverse effect on the assets or properties of SCEI taken as a whole (including,
without limitation, the AHC Properties and the Sheridan Properties) or SCEI's
ability to carry on the business contemplated hereby.
SECTION 3.8 AHC TRANSACTIONS. Except as otherwise disclosed in writing
to CPN prior to the date of this Agreement, neither Sheridan nor SCEI has any
Knowledge of any fact, event, condition or circumstance that would cause (i) the
representations made by AHC under the AHC Purchase Agreement to be untrue or
inaccurate in any material respect, or (ii) the representations made by Sheridan
or SCEI in this Article 3 to be untrue or inaccurate in any material respect
upon the consummation of the transactions contemplated by the AHC Purchase
Agreement.
SECTION 3.9 PURCHASE FOR INVESTMENT. Sheridan is acquiring the Sheridan
Common Stock for its own account and not with a view to the public resale of all
or any part thereof in any transaction which would constitute a "distribution"
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"). Sheridan acknowledges that the Sheridan Common Stock has not been
registered under the Securities Act and may be resold only if registered
pursuant to the provisions of the Securities Act or if an exemption from
registration is available.
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SECTION 3.10 FEES AND COMMISSIONS. Neither Sheridan nor SCEI has paid
or will become obligated to pay any fee or commission to any broker, finder or
intermediary for or on account of the transactions provided for in this
Agreement for which Calpine Corporation, CPN or SCEI would have any liability.
SECTION 3.11 COMPLETENESS OF SCHEDULES. To the Knowledge of Sheridan and
SCEI, the exhibits to the AHC Purchase Agreement list all AHC Contracts, except
as disclosed in writing to CPN prior to the execution and delivery of this
Agreement. Schedule 3.11 describes all contracts Known to Sheridan and SCEI (the
"Peterson Ranch Contracts") to which SCEI will become a party or by which it
will be bound by virtue of acquiring the Sheridan Properties or to which the
Sheridan Properties are (or upon the Closing will be) subject, and describes all
other Liens (other than Permitted Liens, as to which further CPN consent will
not be required) to which the Sheridan Properties are (or upon the Closing will
be) subject or bound. Upon consummation of the AHC Purchase Agreement and this
Agreement, to the Knowledge of Sheridan and SCEI, SCEI shall not be a party to,
nor have any obligations under, any agreements other than the AHC Purchase
Agreement (including but not limited to the Assignment (as defined therein), the
Closing Agreement by and among AHC, Sheridan and SCEI and the Assignment and
Assumption Agreement of even date herewith by and among SEI, SCEI and AHC and
the other agreements specified therein as required to be executed by SCEI
pursuant thereto), the AHC Contracts, the Peterson Ranch Contracts, the Senior
Loan Facility and this Agreement, the other Transaction Agreements to which it
is (or will be) a party and other agreements executed and delivered by Sheridan
and SCEI in connection with the foregoing that have been executed and delivered
by Calpine Corporation or CPN, or that have been approved in writing by Calpine
Corporation or CPN, such approval not to be unreasonably withheld.
Notwithstanding the foregoing provisions, or any other provisions in this
Agreement to the contrary, nothing in this Section 3.11 shall be construed as
extending the scope of the representations, warranties and covenants made by or
to Sheridan and/or SCEI in the AHC Purchase Agreement.
SECTION 3.12 REPRESENTATIONS AND WARRANTIES REGARDING SCEI.
(a) Sheridan is the sole legal and beneficial owner of Shares of Common
Stock of SCEI, free and clear of all Liens other than those evidenced pursuant
to the Sheridan Bank Facility. The authorized capital stock of SCEI consists of
5,000,000 shares of Common Stock, of which 1,600,000 shares are issued and
outstanding, and 5,000,000 shares of preferred stock, par value $0.01 per
share, none of which is issued or outstanding. Except for the stock to be
issued pursuant to Section 2.2, SCEI has not issued, and has not entered into
any agreement or other commitment to issue, any stock of any class or series or
any warrants, options, or other rights to purchase, or to issue any security
convertible into, any stock of any class or series.
(b) SCEI has no subsidiaries, no employees and no employee benefit plan of
any kind whatsoever, including any "employee benefit plan" within the meaning of
the Employee Retirement Income Security Act of 1974, as amended.
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(c) SCEI has and shall, prior to the Closing, have no assets other than
those already contributed, or to be contributed by Sheridan pursuant to Section
2.2(b).
(d) As of the execution and delivery of this Agreement SCEI has no
liabilities for taxes, for indebtedness of any kind or nature, for liabilities
under ERISA or any other liabilities or obligations, fixed, contingent or
otherwise, other than its obligations pursuant to this Agreement. As of the
Closing, SCEI will have no liabilities or obligations, fixed, contingent or
otherwise, other than pursuant to the AHC Purchase Agreement, the AHC Contracts,
the Senior Loan Facility and the Transaction Agreements to which SCEI is a
party.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF
CPN
CPN represents and warrants to Sheridan and SCEI as follows:
SECTION 4.1 CORPORATE EXISTENCE. It is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
SECTION 4.2 CORPORATE POWER AND AUTHORIZATION. It is duly authorized to
execute, deliver, and perform this Agreement and the Transaction Agreements to
which it is a party and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions to be performed by it have been duly and validly authorized by all
necessary action on the part of its Board of Directors, and no other corporate
proceedings are necessary to authorize the execution and delivery by it of this
Agreement or the Transaction Agreements to which it is a party, or to consummate
the transactions contemplated to be performed by it hereunder or thereunder.
SECTION 4.3 BINDING OBLIGATIONS. This Agreement and the Transaction
Agreements to which it is a party, when executed and delivered, shall constitute
its legal, valid and binding obligations, enforceable in accordance with their
terms, except insofar as the enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity.
SECTION 4.4 NO VIOLATION. The execution and delivery of this Agreement
and the Transaction Agreements to which CPN is a party, the consummation of the
transactions provided for herein and therein and contemplated hereby and
thereby, and the fulfillment by CPN of the terms hereof and thereof, will not
(a) conflict with or result in a breach of any provision of its certificate of
incorporation, bylaws or other organizational documents, (b) result in any
default or in any material modification of the terms of any material contract,
agreement, obligation or commitment applicable to it, (c) require any consent or
approval (which has not been obtained or waived) under any material instrument
or material obligation to which it is a party or by which it may be bound, or
(d) violate any Governmental Requirement applicable to it.
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SECTION 4.5 PURCHASE FOR INVESTMENT. CPN is acquiring the CPN Common
Stock and the CPN Preferred for its own account and not with a view to the
public resale of all or any part thereof in any transaction which would
constitute a "distribution" within the meaning of the Securities Act. CPN
acknowledges that neither the CPN Common Stock nor the CPN Preferred has been
registered under the Securities Act and may be resold only if registered
pursuant to the provisions of the Securities Act or if an exemption from
registration is available.
SECTION 4.6 FEES AND COMMISSIONS. Neither Calpine Corporation nor CPN
has paid or will become obligated to pay any fee or commission to any broker,
finder or intermediary for or on account of the transactions provided for in
this Agreement for which Sheridan or SCEI would have any liability.
ARTICLE 5
COVENANTS
The parties agree as follows with respect to the period between the
execution of this Agreement and the Closing:
SECTION 5.1 GENERAL. Each of Sheridan, SCEI and CPN will use
commercially reasonable efforts to satisfy or cause to be satisfied all the
conditions precedent set forth in Article 6 and otherwise cause the transactions
contemplated by this Agreement to be consummated (including the giving of
notices to, or obtaining consents from, other Persons, but not including the
waiver of any such condition precedent).
SECTION 5.2 FULL ACCESS TO INFORMATION. To the extent that Sheridan or
SCEI has the right to do so under the AHC Purchase Agreement, each will permit
representatives of CPN (i) to have full access at reasonable times during normal
business hours, in a manner that will not interfere with the normal business
operations of Sheridan, SCEI, or AHC, to all premises, properties, personnel,
books, records (including tax records), contracts and documents of or pertaining
to the AHC Properties (including drafts of such documents) or the Sheridan
Properties and (ii) to participate in conferences and negotiations with AHC.
SECTION 5.3 NOTICE OF DEVELOPMENTS. Each party will give prompt written
notice to the other of any material adverse development causing or reasonably
likely to cause breach of any of its representations and warranties under this
Agreement, inability or failure to perform any of its covenants or the failure
of any condition set forth in Article 6 within its control to be satisfied.
Sheridan and SCEI shall keep CPN's designated representative informed of all
material developments of which Sheridan or SCEI has Knowledge regarding the AHC
Agreement or the AHC Properties, and shall give CPN notice of any material
breach of which Sheridan or SCEI has Knowledge by AHC of AHC's representations,
warranties or covenants under the AHC Purchase Agreement.
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SECTION 5.4 SPECIAL COVENANTS OF SHERIDAN AND SCEI. From the date
hereof until the Closing Date, Sheridan and SCEI agree that:
(a) SCEI shall issue no common stock or preferred stock except to CPN and
Sheridan, as contemplated by Section 2.2 hereof, or grant any option or warrant
or other right to purchase, or issue any security convertible, into, or
otherwise make any commitment to issue or sell, any stock of any class or
series.
(b) All proceeds received by SCEI from CPN pursuant to Section 2.2 shall
be used solely to acquire the AHC Properties and to reimburse CPN and Sheridan
for the transaction costs described in Section 9.10.(b)
ARTICLE 6
CLOSING CONDITIONS
SECTION 6.1 CONDITIONS TO OBLIGATION OF CALPINE. The obligation of
Calpine Corporation (for the limited purposes set forth in Section 2.2(d) and of
CPN to consummate the transactions contemplated by this Agreement is subject to
satisfaction or waiver of the following conditions on or before the Closing Date
(and SCEI and AHC shall, concurrently with the Closing of this Agreement,
consummate and close the AHC Purchase Agreement):
(a) Sheridan's and SCEI's representations and warranties contained in
Article 3 shall be accurate as of the Closing Date as though such
representations and warranties had been made at and as of that time;
(b) Sheridan (and to the extent applicable, SCEI) shall have performed and
complied with all of its covenants and agreements set forth in this Agreement
through the Closing, including but not limited to Sheridan's obligations to make
the contributions to SCEI's capital required under Section 2.2(b), which in the
case of the Sheridan Properties and the Seismic Data Agreement, shall be
effected by execution and delivery of an Assignment, Conveyance and Bill of Sale
in the form of Exhibit C;
(c) no action, suit, or proceeding shall be pending before any
Governmental Authority wherein an injunction, judgment, order, decree, ruling,
or charge would prevent consummation of any of the transactions contemplated by
this Agreement or the AHC Purchase Agreement, and no such injunction, judgment,
order, decree, ruling, or charge shall be in effect;
(d) AHC shall have consented to the assignment of the rights of Sheridan
under the AHC Purchase Agreement to SCEI, and the acquisition of the AHC
Properties thereunder shall have been consummated;
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(e) the Certificate of Designations shall have been filed with the
Secretary of State of Delaware and the Certificate of Incorporation (as amended
thereby) and Bylaws of SCEI shall be in the forms referred to Section 2.4;
(f) CPN's designee to the Board of Directors as required by the
Stockholders Agreement shall have been duly appointed to the Board of Directors
and evidence to such effect reasonably satisfactory to CPN provided to it;
(g) SCEI shall have entered into the Senior Loan Facility and the funding
of such Senior Loan Facility shall have been consummated;
(h) Sheridan shall have delivered a certificate of its Chief Financial
Officer in the form of Schedule 6.1(h) as to the AHC Properties and the Sheridan
Properties to be conveyed and assigned to SCEI at the Closing, and if such
Properties or the Liens or other encumbrances to which they are subject differ
in any respect from those identified in the Schedules to the AHC Purchase
Agreement or Schedule 3.11, as applicable, CPN shall have consented in writing
to such difference;
(i) Sheridan shall have delivered a certificate of its Chief Financial
Officer in the form of Schedule 6.1(h) as to the AHC Contracts and the Peterson
Ranch Contracts, and if the description of such Contracts differs in any respect
from that set forth in the Schedules to this Agreement, or if Sheridan has
Knowledge that any such Contract has been amended or modified or any provision
thereof waived (or any other consent to any departure from the due and punctual
performance thereof by any party has been given or made) since the date as of
which representations are made with respect thereto in the AHC Purchase
Agreement or this Agreement, Calpine shall have consented in writing to such
difference, amendment, modification, waiver or consent;
(j) all consents and approvals required by Governmental Authorities, and
all other consents required pursuant to Section 3.5, shall have been obtained
and evidence satisfactory to CPN to such effect shall have been provided;
(k) the parties (except for Calpine Corporation, which shall cause its
Affiliate Calpine Fuels Corporation to enter into the Gas Purchase Agreement,
and which shall execute and deliver a Contingent Payment Guarantee in the form
of Exhibit J) shall have entered into a Stockholders Agreement in substantially
the form of Exhibit F, the Gas Purchase Agreement in substantially the form of
Exhibit G, a Tax Sharing Agreement in the form of Exhibit H, and an
Administrative Services Agreement in the form of Exhibit I (it being understood
that only Sheridan and SCEI shall be the parties to, respectively, the
Administrative Services Agreement and the Tax Sharing Agreement);
(l) Sheridan shall have obtained and delivered to CPN waivers or consents
in form and substance reasonably satisfactory to it of the matters referred to
in Section 3.4;
(m) Sheridan shall have delivered to CPN a certificate from the Chief
Executive Officer and the Chief Financial Officer of Sheridan to the effect that
the representations and warranties of
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Sheridan are true and accurate on and as of the Closing Date with the same
effect as if made on and as of such Date, Sheridan has performed and complied
with all its covenants and agreements set forth in this Agreement required to be
performed and complied with prior to the Closing and the conditions set forth in
Sections 6.1(a) through 6.1(l) have otherwise been satisfied; and
(n) CPN shall have received an opinion of Winstead Sechrest & Minick P.C.,
dated as of the Closing Date, in the form set forth in Schedule 6.1(n), an
opinion of Messrs. Morris, Nichols, Arsht & Tunnell in the form set forth in
Schedule 6.1(o), and an opinion of Graham & James in the form set forth in
Schedule 6.1(p).
(o) All corporate and other proceedings in connection with the
transactions contemplated by this Agreement, and all documents and instruments
incident to those transactions, shall be in form and substance reasonably
satisfactory to CPN and its counsel.
SECTION 6.2 CONDITIONS TO OBLIGATION OF SHERIDAN. The obligations of
Sheridan to consummate the transactions contemplated by this Agreement are
subject to satisfaction or waiver of the following conditions on or before the
Closing Date (and SCEI and AHC shall, concurrently with the Closing of this
Agreement, consummate and close the AHC Purchase Agreement):
(a) CPN's representations and warranties contained in Article 4, shall be
accurate as of the Closing Date as though such representations and warranties
had been made at and as of that time;
(b) CPN (and, to the extent applicable, Calpine Corporation) shall have
performed and complied with all of its covenants and agreements set forth in
this Agreement through the Closing, including but not limited to CPN's
obligations to make the contributions to SCEI's capital required under Sections
2.2(b) and 2.2(c) and Calpine Corporation's obligations under Section 2.2(d) to
cause CPN to make such contributions;
(c) no action, suit, or proceeding shall be pending before any
Governmental Authority wherein an injunction, judgment, order, decree, ruling,
or charge would prevent consummation of any of the transactions contemplated by
this Agreement or the AHC Purchase Agreement, and no such injunction, judgment,
order, decree, ruling, or charge shall be in effect;
(d) AHC shall have consented to the assignment of the rights of Sheridan
under the AHC Purchase Agreement to SCEI, and the acquisition of the AHC
Properties shall have been consummated;
(e) the Certificate of Designations shall have been filed with the
Secretary of State of Delaware;
(f) SCEI shall have entered into the Senior Loan Facility, and the funding
of such Senior Loan Facility shall have been consummated;
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(g) all governmental consents and other consents described in Section 3.5
shall have been obtained, subject to the exceptions set forth therein;
(h) Calpine Corporation shall have caused its Affiliate Calpine Fuels
Corporation to enter into the Gas Purchase Agreement in the form of Exhibit G,
and CPN shall have entered into a Stockholders Agreement in the form of Exhibit
F and the Administrative Services Agreement in the form of Exhibit I;
(i) Calpine Corporation shall have executed and delivered the Contingent
Payment Guarantee in the form of Exhibit J;
(j) CPN shall have delivered to Sheridan a certificate from the Chief
Financial Officer of CPN to the effect that the representations and warranties
of CPN are true and accurate on and as of the Closing Date with the same effect
as if made on and as of such date, CPN has performed and complied with all its
covenants and agreements set forth in this Agreement required to be performed
and complied with prior to Closing; and
(k) Sheridan shall have received an opinion of Lisa Bodensteiner, Esq.,
Calpine Corporation's Assistant General Counsel, dated as of the Closing Date,
in the form attached as Schedule 6.2(k) as to the matters set forth in Sections
4.1, 4.2 and 4.3.
ARTICLE 7
TERMINATION OF AGREEMENT
SECTION 7.1 TERMINATION. This Agreement may be terminated at any time
prior to the Closing Date:
(a) by the mutual written consent of the parties;
(b) by either Sheridan or SCEI (the "Sheridan Parties," and each a
"Sheridan Party") or either Calpine Corporation or CPN (the "CPN Parties" and
each a "CPN Party") if there has been a breach by either of the CPN Parties (if
the termination is by a Sheridan Party) or either of the Sheridan Parties (if
the Termination is by a CPN Party) of any representation, warranty or covenant
contained in this Agreement, which cannot be, or has not been, cured within 20
days after written notice of such breach is given to the breaching Party,
provided that the right to effect such cure shall not extend beyond the date set
forth in subparagraph (c) below;
(c) by either the Sheridan Parties or the CPN Parties if the
conditions to Closing applicable to such Parties as required under Article 6
have not been met or waived by February 15, 1999; provided, however, that
neither the Sheridan Parties nor the CPN Parties shall be entitled to terminate
this Agreement pursuant to this subparagraph (c) if either Sheridan Party (in
the case of a termination by the Sheridan Parties) or either CPN Party (in the
case of a termination by the CPN Parties) breached any of its representations,
warranties or covenants in this Agreement; and
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(d) by either the Sheridan Parties or the CPN Parties upon
written notice to the other parties, if any Governmental Authority shall have
issued an order, decree or ruling or taken any such action permanently
enjoining, restraining or otherwise prohibiting the transactions contemplated by
this Agreement.
SECTION 7.2 EFFECT OF TERMINATION. Upon termination of this Agreement
pursuant to this Article 7, this Agreement shall be void and of no further
effect and shall result in no obligation of or liability to any of the parties
or their respective directors, officers, employees, agents or Stockholders,
unless such termination was the result of the breach of any representation,
warranty or covenant in this Agreement, in which case the parties who breached
the representation, warranty or covenant shall be liable to the other parties
for damages or such other legal or equitable remedies to which the non-breaching
parties may be entitled, but in no case shall any such party be liable for
consequential or punitive damages.
ARTICLE 8
CLOSING MATTERS
SECTION 8.1 CLOSING. Subject to the terms and conditions hereof, the
consummation of the transactions contemplated hereby (the "Closing") shall take
place on January 25, 1999, at the offices of Winstead Sechrest & Minick P.C., in
Houston, Texas, at 9:00 a.m., Houston time, or at such other place or time upon
which the parties hereto may mutually agree in writing, it being understood and
agreed that the Closing shall occur simultaneously with the closing under the
AHC Purchase Agreement (subject to Section 7.1) (the "Closing Date"). All
representations and warranties, covenants and other agreements set forth herein
shall survive the Closing, in the case of Sections 3.1 through 3.6 and Section
3.12 to the maximum period prescribed by applicable law, in the case of Section
3.9, until the tenth anniversary of the Closing Date and in the case of all
other representations and warranties, until the second anniversary of the
Closing Date, and in the case of covenants and agreements, for so long as
performance thereunder may be required by their terms. If written notice of a
claim for breach of this Agreement is given by the party asserting such claim to
the other party before such second anniversary, then, notwithstanding the
expiration of such time period, the representation, warranty, covenant or
agreement applicable to such claim shall survive until, but only for the
purposes of, the resolution of such claim.
ARTICLE 9
MISCELLANEOUS
SECTION 9.1 MEDIATION.
Any controversy, dispute or claim arising out of or relating to this
Agreement or the transactions contemplated hereby, other than controversies,
disputes and claims arising out of or relating to the Calpine Corporation
Guaranty (a "Dispute") shall initially be submitted to nonbinding mediation in
Sacramento, California upon the request of Sheridan or Calpine on the following
terms:
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upon the request of either party, a neutral mediator acceptable to both parties
(the "Mediator") shall be appointed within fifteen (15) days. The Mediator shall
attempt, through negotiations in any manner deemed reasonably appropriate by the
Mediator, in which the parties shall participate, to resolve the Dispute. The
Mediator shall be compensated at a rate agreeable to Sheridan, CPN and the
Mediator, and each of Sheridan and CPN shall pay an equal share of such
compensation and other expenses of the mediation.
SECTION 9.2 NOTICES. Whenever any party hereto desires or is required
to give any notice, demand, or request with respect to this Agreement, each such
communication shall be in writing and shall be effective only if it is delivered
by personal service or mailed, United States registered or certified mail,
postage prepaid, or sent by prepaid overnight courier or confirmed telecopier,
addressed as follows:
Sheridan:
Sheridan Energy, Inc.
1000 Louisiana, Suite 800
Houston, Texas 77002
Attn: Mr. B. A. Berilgen
Facsimile: (713) 651-7852
With copy (which shall not constitute notice) to:
Winstead Sechrest & Minick P.C.
910 Travis, Suite 2400
Houston, Texas 77002
Attention: Arthur S. Berner, Esq.
Facsimile: (713) 650-2400
SCEI:
Sheridan Energy, Inc.
1000 Louisiana, Suite 800
Houston, Texas 77002
Attn: Mr. B. A. Berilgen
Facsimile: (713) 651-7852
With copy (which shall not constitute notice) to:
Winstead Sechrest & Minick P.C.
910 Travis, Suite 2400
Houston, Texas 77002
Attention: Arthur S. Berner, Esq.
Facsimile: (713) 650-2400
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Calpine Corporation:
Calpine Corporation
50 West San Fernando Street
San Jose, California 95113
Attention: Mr. Brad Barnds
Facsimile: (408) 995-0505
CPN Production Company
50 West San Fernando Street
San Jose, California 95113
Attention: Mr. Brad Barnds
Facsimile: (408) 995-0505
With copy (which shall not constitute notice) to:
Baker & Botts, L.L.P.
910 Louisiana, 30th Floor
Houston, Texas 77002
Attention: Michael Watson, Esq.
Facsimile: (713) 229-1522
Such communications shall be effective when they are received by the
addressee thereof. Any party may change its address for such communications
by giving notice thereof to other parties in conformity with this Section.
SECTION 9.3 GOVERNING LAW. The internal laws of the State of Delaware
(irrespective of its choice of law principles) will govern the validity of this
Agreement, the construction of its terms, and the interpretation and enforcement
of the rights and duties of the parties hereto.
SECTION 9.4 BINDING UPON SUCCESSORS AND ASSIGNS; NO ASSIGNMENT. This
Agreement and the provisions hereof shall be binding upon each of the parties,
their permitted successors and assigns provided that this Agreement may not be
assigned by either party without the prior written consent of the other.
SECTION 9.5 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason or to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall continue in full force and effect and in
no way be affected, impaired or invalidated.
SECTION 9.6 ENTIRE AGREEMENT. This Agreement, together with other
agreements and instruments referenced herein constitute the entire understanding
and agreement of the parties with respect to the subject matter hereof and
supersede all prior and contemporaneous agreements or understandings,
inducements or conditions, express or implied, written or oral, between parties
with respect hereto, including, but not limited to, the understandings set forth
in the LOI.
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SECTION 9.7 AMENDMENT. This Agreement may only be amended by the
written consent of all of the parties to this Agreement at the time of such
amendment.
SECTION 9.8 NO WAIVER. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
SECTION 9.9 CONSTRUCTION OF AGREEMENT. A reference to an Article,
Section or an Exhibit shall mean an Article of, a Section in, or Exhibit to,
this Agreement unless otherwise explicitly set forth. The titles and headings
herein are for reference purposes only and shall not in any manner limit the
construction of this Agreement which shall be considered as a whole. The words
"include," "includes" and "including" when used herein shall be deemed in each
case to be followed by the words "without limitation." Whenever used in this
Agreement, the singular number will include the plural, and the plural number
will include the singular; pronouns in the masculine, feminine or neuter gender
will include each other gender.
SECTION 9.10 PRESS RELEASES AND ANNOUNCEMENTS; TRANSACTION COSTS.
(a) Press Releases and Announcements. No party shall issue any press
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release or announcement relating to the subject matter of this Agreement without
the prior written approval of the other parties, but any party may make any
public disclosure it believes in good faith is required by law or regulation (in
which case the disclosing party shall advise the other party and provide it with
a copy of the proposed disclosure prior to making the disclosure).
(b) Transaction Costs. At the Closing (or within 30 days thereafter upon
-----------------
presentation of invoices), SCEI will reimburse Sheridan and Calpine for all
reasonable out-of-pocket costs which they have incurred in connection with the
financing and formation of SCEI and the acquisition of the AHC Properties,
including, without limitation (i) accounting, legal, land, engineering, banking
fees, (ii) any third-Person fees required to be paid in connection with the
financing of the transactions contemplated by this Agreement, the AHC Letter
Agreement or the AHC Purchase Agreement and (iii) any other third Person fees
incurred in connection with the financing and formation of SCEI and the
acquisition of the AHC Properties.
SECTION 9.11 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be an original as against any party whose
signature appears thereon and all of which together shall constitute one and the
same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all the parties reflected hereon as signatories.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
SHERIDAN ENERGY, INC.
By: /s/ B.A. Berilgen
---------------------------------
Name: B.A. Berilgen
---------------------------------
Title: President and Chief Executive Officer
---------------------------------
SHERIDAN CALIFORNIA ENERGY, INC.
By: /s/ B.A. Berilgen
---------------------------------
Name: B.A. Berilgen
---------------------------------
Title: President and Chief Executive Officer
---------------------------------
CALPINE CORPORATION
By: /s/ Ann B. Curtis
---------------------------------
Name: Ann B. Curtis
---------------------------------
Title: Executive Vice President
---------------------------------
CPN PRODUCTION COMPANY
By: /s/ John T. King
---------------------------------
Name: John T. King
---------------------------------
Title: Agent
---------------------------------
19
<PAGE>
- --------------------------------------------------------------------------------
CREDIT AGREEMENT
BETWEEN
SHERIDAN CALIFORNIA ENERGY, INC.
AND
BANK ONE, TEXAS, NATIONAL ASSOCIATION, AS
AGENT AND LENDER
AND
THE LENDERS SIGNATORY HERETO
JANUARY 21, 1999
----------------------------
REVOLVING LINE OF CREDIT OF UP TO $100,000,000
----------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
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ARTICLE I DEFINITIONS AND INTERPRETATION................................................ 1
1.1 Terms Defined Above..................................................... 1
1.2 Additional Defined Terms................................................ 1
1.3 Undefined Financial Accounting Terms.................................... 14
1.4 References.............................................................. 14
1.5 Articles and Sections................................................... 15
1.6 Number and Gender....................................................... 15
1.7 Incorporation of Exhibits............................................... 15
ARTICLE II TERMS OF FACILITY............................................................. 15
2.1 Revolving Line of Credit................................................ 15
2.2 Letter of Credit Facility............................................... 16
2.3 Use of Loan Proceeds and Letters of Credit.............................. 18
2.4 Interest................................................................ 18
2.5 Repayment of Loans and Interest......................................... 18
2.6 Outstanding............................................................. 19
2.7 Time, Place, and Method of Payments..................................... 19
2.8 Pro Rata Treatment; Adjustments......................................... 19
2.9 Borrowing Base Determinations........................................... 20
2.10 Mandatory Prepayments................................................... 21
2.11 Voluntary Prepayments and Conversions of Loans.......................... 21
2.12 Commitment Fee.......................................................... 21
2.13 Facility Fee............................................................ 22
2.14 Letter of Credit Fee.................................................... 22
2.15 Loans to Satisfy Obligations of Borrower................................ 22
2.16 Security Interest in Accounts; Right of Offset.......................... 22
2.17 General Provisions Relating to Interest................................. 23
2.18 Yield Protection........................................................ 23
2.19 Limitation on Types of Loans............................................ 26
2.20 Illegality.............................................................. 26
2.21 Regulatory Change....................................................... 26
2.22 Limitations on Interest Periods......................................... 27
2.23 Letters in Lieu of Transfer Orders...................................... 27
2.24 Power of Attorney....................................................... 27
ARTICLE III CONDITIONS.................................................................... 28
3.1 Receipt of Loan Documents and Other Items............................... 28
3.2 Each Loan and Letter of Credit.......................................... 30
ARTICLE IV REPRESENTATIONS AND WARRANTIES................................................ 31
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4.1 Due Authorization....................................................... 31
4.2 Existence............................................................... 32
4.3 Valid and Binding Obligations........................................... 32
4.4 Security Instruments.................................................... 32
4.5 Title to Assets......................................................... 32
4.6 No Material Misstatements............................................... 32
4.7 Liabilities, Litigation, and Restrictions............................... 32
4.8 Authorizations; Consents................................................ 33
4.9 Compliance with Laws.................................................... 33
4.10 ERISA................................................................... 33
4.11 Environmental Laws...................................................... 33
4.12 Compliance with Federal Reserve Regulations............................. 34
4.13 Investment Company Act Compliance....................................... 34
4.14 Public Utility Holding Company Act Compliance........................... 34
4.15 Proper Filing of Tax Returns; Payment of Taxes Due...................... 34
4.16 Refunds................................................................. 34
4.17 Gas Contracts........................................................... 34
4.18 Intellectual Property................................................... 34
4.19 Casualties or Taking of Property........................................ 35
4.20 Locations of Borrower................................................... 35
4.21 Subsidiaries............................................................ 35
ARTICLE V AFFIRMATIVE COVENANTS......................................................... 35
5.1 Maintenance and Access to Records....................................... 35
5.2 Quarterly Financial Statements; Compliance Certificates.................. 35
5.3 Annual Financial Statements............................................. 36
5.4 Oil and Gas Reserve Reports............................................. 36
5.5 Title Opinions; Title Defects........................................... 36
5.6 Notices of Certain Events............................................... 36
5.7 Letters in Lieu of Transfer Orders; Division Orders..................... 37
5.8 Additional Information.................................................. 38
5.9 Compliance with Laws.................................................... 38
5.10 Payment of Assessments and Charges...................................... 38
5.11 Maintenance of Existence and Good Standing.............................. 38
5.12 Payment of Notes; Performance of Obligations............................ 38
5.13 Further Assurances...................................................... 38
5.14 Initial Fees and Expenses of Counsel to Lender.......................... 38
5.15 Subsequent Fees and Expenses of Lender.................................. 39
5.16 Operation of Oil and Gas Properties..................................... 39
5.17 Maintenance and Inspection of Properties................................ 39
5.18 Maintenance of Insurance................................................ 39
5.19 INDEMNIFICATION......................................................... 40
5.20 Borrower's Year 2000 Compliance......................................... 41
5.21 Interest Rate Hedge..................................................... 42
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5.22 Commodity Price Hedge.................................................... 42
ARTICLE VI NEGATIVE COVENANTS............................................................ 42
6.1 Indebtedness............................................................. 42
6.2 Contingent Obligations................................................... 42
6.3 Liens.................................................................... 43
6.4 Sales of Assets.......................................................... 43
6.5 Leasebacks............................................................... 43
6.6 Loans or Advances........................................................ 43
6.7 Investments.............................................................. 43
6.8 Dividends and Distributions.............................................. 43
6.9 Changes in Structure..................................................... 44
6.10 Transactions with Affiliates............................................. 44
6.11 Lines of Business........................................................ 44
6.12 General and Administrative Expenses...................................... 44
6.13 Debt Coverage Ratio...................................................... 44
6.14 Minimum Initial Capitalization........................................... 44
6.15 Capital Expenditures..................................................... 44
ARTICLE VII EVENTS OF DEFAULT............................................................. 45
7.1 Enumeration of Events of Default......................................... 45
7.2 Remedies................................................................. 46
ARTICLE VIII THE AGENT..................................................................... 47
8.1 Appointment.............................................................. 47
8.2 Waivers, Amendments...................................................... 48
8.3 Delegation of Duties..................................................... 48
8.4 Exculpatory Provisions................................................... 48
8.5 Reliance by Agent........................................................ 48
8.6 Notice of Default........................................................ 49
8.7 Non-Reliance on Agent and Other Lenders.................................. 49
8.8 Indemnification.......................................................... 50
8.9 Restitution.............................................................. 50
8.10 Agent in Its Individual Capacity......................................... 51
8.11 Successor Agent.......................................................... 51
8.12 Applicable Parties....................................................... 51
ARTICLE IX MISCELLANEOUS................................................................. 51
9.1 Assignments; Participations.............................................. 51
9.2 Survival of Representations, Warranties, and Covenants................... 53
9.3 Notices and Other Communications......................................... 53
9.4 Parties in Interest...................................................... 54
9.5 Rights of Third Parties.................................................. 54
9.6 Renewals; Extensions..................................................... 54
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9.7 No Waiver; Rights Cumulative............................................. 54
9.8 Survival Upon Unenforceability........................................... 55
9.9 Amendments; Waivers...................................................... 55
9.10 Controlling Agreement.................................................... 55
9.11 Disposition of Collateral................................................ 55
9.12 GOVERNING LAW............................................................ 55
9.13 JURISDICTION AND VENUE................................................... 55
9.14 WAIVER OF RIGHTS TO JURY TRIAL........................................... 56
9.15 ENTIRE AGREEMENT......................................................... 56
9.16 Counterparts............................................................. 56
9.17 Confidentiality.......................................................... 56
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<PAGE>
LIST OF EXHIBITS
Exhibit I - Form of Notes
Exhibit II - Form of Borrowing Request
Exhibit III - Form of Compliance Certificate
Exhibit IV - Facility Amounts
Exhibit V - Form of Opinion of Counsel
Exhibit VI - Form of Opinion of Local Counsel
Exhibit VII - Form of Assignment Agreement
<PAGE>
CREDIT AGREEMENT
----------------
This CREDIT AGREEMENT is made and entered into this 21st day of
January, 1999, by and among SHERIDAN CALIFORNIA ENERGY, INC., a Delaware
corporation (the "Borrower"), each lender that is a signatory hereto or becomes
--------
a signatory hereto as provided in Section 9.1 (individually, together with its
successors and assigns, a "Lender" and collectively together with their
------
respective successors and assigns, the "Lenders"), and BANK ONE, TEXAS, NATIONAL
-------
ASSOCIATION, a national banking association, as agent for the Lenders (in such
capacity, together with its successors in such capacity pursuant to the terms
hereof, the "Agent").
-----
W I T N E S S E T H:
- - - - - - - - - -
In consideration of the mutual covenants and agreements herein
contained, the Borrower and the Lender hereby agree as follows:
ARTICLE I
----------
DEFINITIONS AND INTERPRETATION
------------------------------
1.1 Terms Defined Above. As used in this Credit Agreement, the terms
-------------------
"Agent," "Borrower," "Lender" and "Lenders" shall have the meaning assigned to
----- -------- ------ -------
them hereinabove.
1.2 Additional Defined Terms. As used in this Credit Agreement, each
------------------------
of the following terms shall have the meaning assigned thereto in this Section,
unless the context otherwise requires:
"Additional Costs" shall mean costs which the Lenders determine are
----------------
attributable to its obligation to make or its making or maintaining any
LIBO Rate Loan, or any reduction in any amount receivable by the Lenders in
respect of any such obligation or any LIBO Rate Loan, resulting from any
Regulatory Change which (a) changes the basis of taxation of any amounts
payable to the Lenders under this Agreement or the Note in respect of any
LIBO Rate Loan (other than taxes imposed on the overall net income of the
Lenders), (b) imposes or modifies any reserve, special deposit, minimum
capital, capital rates, or similar requirements relating to any extensions
of credit or other assets of, or any deposits with or other liabilities of,
the Lender (including LIBO Rate Loans and Dollar deposits in the London
interbank market in connection with LIBO Rate Loans), or any commitments of
the Lenders hereunder, (c) increases the Assessment Rate, or (d) imposes
any other condition affecting this Agreement or any of such extensions of
credit, liabilities, or commitments.
<PAGE>
"Adjusted LIBO Rate" shall mean, for any LIBO Rate Loan, an interest
------------------
rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%)
determined by the Lenders to be equal to the sum of the LIBO Rate for such
Loan plus the Applicable Margin, but in no event exceeding the Highest
Lawful Rate.
"Affiliate" shall mean any Person directly or indirectly controlling,
---------
or under common control with, the Borrower and includes any Subsidiary of
the Borrower and any "affiliate" of the Borrower within the meaning of Reg.
(S)240.12b-2 of the Securities Exchange Act of 1934, as amended, with
"control," as used in this definition, meaning possession, directly or
indirectly, of the power to direct or cause the direction of management,
policies or action through ownership of voting securities, contract, voting
trust, or membership in management or in the group appointing or electing
management or otherwise through formal or informal arrangements or business
relationships.
"Agreement" shall mean this Credit Agreement, as it may be amended,
---------
supplemented, or restated from time to time.
"Applicable Lending Office" shall mean, for each type of Loan, the
-------------------------
lending office of the Lender (or an affiliate of the Lender) designated for
such type of Loan on the signature pages hereof or such other office of the
Lender (or an affiliate of the Lender) as the Lender may from time to time
specify to the Borrower as the office by which Loans of such type are to be
made and maintained.
"Applicable Margin" shall mean as to each LIBO Rate Loan, two and one-
-----------------
half percent (2.50%).
"Assessment Rate" shall mean, for any Interest Period, the average
---------------
rate (rounded upwards if necessary to the nearest 1/100 of 1%) charged by
the Federal Deposit Insurance Corporation (or any successor thereto) to the
Lender for deposit insurance for Dollar time deposits with the Lender at
the Principal Office during such Interest Period, as determined by the
Lender.
"Assignment Agreement" shall mean an Assignment Agreement,
--------------------
substantially in the form of Exhibit VII, with appropriate insertions.
-----------
"Available Commitment" shall mean, at any time, an amount equal to the
--------------------
remainder, if any, of (a) the Borrowing Base in effect at such time minus
-----
(b) the sum of the Loan Balance at such time plus the L/C Exposure at such
time.
"Base Rate" shall mean the interest rate announced or published by the
---------
Lender from time to time as its general reference rate of interest, which
Base Rate shall change upon any change in such announced or published
general reference interest rate and which Base Rate may not be the lowest
interest rate charged by the Lender.
<PAGE>
"Benefitted Lender" shall have the meaning assigned to such term in
-----------------
Section 2.9(c).
--------------
"Borrowing Base" shall mean, at any time, the amount determined by the
--------------
Lender in accordance with Section 2.9 and then in effect.
"Borrowing Request" shall mean each written request, in substantially
-----------------
the form attached hereto as Exhibit II, by the Borrower to the Agent for a
borrowing, conversion, or prepayment pursuant to Sections 2.1 or 2.11, each
of which shall:
(a) be signed by a Responsible Officer of the Borrower;
(b) when requesting a borrowing, be accompanied by a Compliance
Certificate;
(c) specify the amount and type of Loan requested, and, as
applicable, the Loan to be converted or prepaid and the date of the
borrowing, conversion, or prepayment (which shall be a Business Day);
(d) when requesting a Floating Rate Loan, be delivered to the
Agent no later than 1:00 p.m., Central Standard or Daylight Savings
Time, as the case may be, on the Business Day of the requested
borrowing, conversion, or prepayment;
(e) when requesting a LIBO Rate Loan, be delivered to the Agent
no later than 1:00 p.m., Central Standard or Daylight Savings Time, as
the case may be, two Business Days preceding the requested borrowing,
conversion, or prepayment and designate the Interest Period requested
with respect to such Loan.
"Business Day" shall mean (a) for all purposes other than as covered
------------
by clause (b) of this definition, a day other than a Saturday, Sunday,
legal holiday for commercial banks under the laws of the State of Texas, or
any other day when banking is suspended in the State of Texas, and (b) with
respect to all requests, notices, and determinations in connection with,
and payments of principal and interest on, LIBO Rate Loans, a day which is
a Business Day described in clause (a) of this definition and which is a
day for trading by and between banks for Dollar deposits in the London
interbank market.
"Cash Flow" shall mean net income plus depreciation, amortization,
---------
depletion and other non-cash expenses less preferred dividends paid in
cash, non-cash revenues, less mandatory capital expenditures of $300,000
per annum, which are included in the Lender's Borrowing Base determination.
In fiscal 1999,
<PAGE>
acquisition costs up to $2,000,000 which have been expensed in such period
shall be added back to net income for purposes of this calculation.
"Closing Date" shall mean the effective date of this Agreement.
------------
"Collateral" shall mean the Mortgaged Properties and any other
----------
Property now or at any time used or intended as security for the payment or
performance of all or any portion of the Obligations.
"Commitment Amount" shall mean, subject to the applicable provisions
-----------------
of this Agreement, at any time, the lesser of (a) the sum of the Facility
Amounts of the Lenders, or (b) the Borrowing Base in effect at such time.
"Commitment" shall mean the obligation of the Lenders, subject to
----------
applicable provisions of this Agreement, to make Loans to or for the
benefit of the Borrower pursuant to Section 2.1 and to issue Letters of
Credit pursuant to Section 2.2.
"Commitment Fee" shall mean each fee payable to the Lender by the
--------------
Borrower pursuant to Section 2.12.
"Commitment Period" shall mean the period from and including the
-----------------
Closing Date to but not including the Commitment Termination Date.
"Commitment Termination Date" shall mean December 31, 2001.
---------------------------
"Commonly Controlled Entity" shall mean any Person which is under
--------------------------
common control with the Borrower within the meaning of Section 4001 of
ERISA.
"Compliance Certificate" shall mean each certificate, substantially in
----------------------
the form attached hereto as Exhibit III, executed by a Responsible Officer
of the Borrower and furnished to the Agent from time to time in accordance
with Sections 5.2 and 5.3.
"Contingent Obligation" shall mean, as to any Person, without
---------------------
duplication, any obligation of such Person guaranteeing or in effect
guaranteeing any Indebtedness, leases, dividends, or other obligations of
any other Person (for purposes of this definition, a "primary obligation")
------------------
in any manner, whether directly or indirectly, including, without
limitation, any obligation of such Person, regardless of whether such
obligation is contingent, (a) to purchase any primary obligation or any
Property constituting direct or indirect security therefor, (b) to advance
or supply funds (i) for the purchase or payment of any primary obligation,
or (ii) to maintain working or equity capital of any other Person in
respect of any primary obligation, or otherwise to maintain the net worth
or solvency of any other Person, (c) to purchase Property, securities or
services primarily for the purpose of assuring the
<PAGE>
owner of any primary obligation of the ability of the Person primarily
liable for such primary obligation to make payment thereof, or (d)
otherwise to assure or hold harmless the owner of any such primary
obligation against loss in respect thereof, with the amount of any
Contingent Obligation being deemed to be equal to the stated or
determinable amount of the primary obligation in respect of which such
Contingent Obligation is made or, if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof as determined
by such Person in good faith.
"Debt Service" shall mean the principal amount outstanding under the
------------
Note at the end of any fiscal quarter divided by 6, provided that for (i)
the quarter ended March 31, 1999, the divisor shall be 24, (ii) the quarter
ended June 30, 1999, the divisor shall be 18, and (iii) the quarter ended
September 30, 1999, the divisor shall be 12.
"Default" shall mean any event or occurrence which with the lapse of
-------
time or the giving of notice or both would become an Event of Default.
"Default Rate" shall mean a per annum interest rate equal to the Base
------------
Rate plus five percent (5%), but in no event exceeding the Highest Lawful
Rate.
"Dollars" and "$" shall mean dollars in lawful currency of the United
------- -
States of America.
"Environmental Complaint" shall mean any written or oral complaint,
-----------------------
order, directive, claim, citation, notice of environmental report or
investigation, or other notice by any Governmental Authority or any other
Person with respect to (a) air emissions, (b) spills, releases, or
discharges to soils, any improvements located thereon, surface water,
groundwater, or the sewer, septic, waste treatment, storage, or disposal
systems servicing any Property of the Borrower, (c) solid or liquid waste
disposal, (d) the use, generation, storage, transportation, or disposal of
any Hazardous Substance, or (e) other environmental, health, or safety
matters affecting any Property of the Borrower or the business conducted
thereon.
"Environmental Laws" shall mean (a) the following federal laws as they
------------------
may be cited, referenced, and amended from time to time: the Clean Air
Act, the Clean Water Act, the Safe Drinking Water Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Endangered
Species Act, the Resource Conservation and Recovery Act, the Hazardous
Materials Transportation Act, the Superfund Amendments and Reauthorization
Act, and the Toxic Substances Control Act; (b) any and all equivalent
environmental statutes of any state in which Property of the Borrower is
situated, as they may be cited, referenced and amended from time to time;
(c) any rules or regulations promulgated under or adopted pursuant to the
above federal and state laws; and (d) any other equivalent federal, state,
or local statute or any requirement, rule, regulation, code, ordinance, or
order adopted
<PAGE>
pursuant thereto, including, without limitation, those relating to the
generation, transportation, treatment, storage, recycling, disposal,
handling, or release of Hazardous Substances.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended from time to time, and the regulations thereunder and
interpretations thereof.
"Event of Default" shall mean any of the events specified in Section
----------------
7.1.
"Facility Amount" shall mean, for each Lender, the amount set forth
---------------
opposite the name of such Lender on Exhibit IV under the caption "Facility
----------
Amounts," as modified from time to time to reflect assignments permitted by
Section 9.1 or otherwise pursuant to the terms hereof and to give effect to
-----------
any written request of the Borrower (any such request being irrevocable,
absent written agreement of the Agent and the Required Lenders, which
written agreement may be expressly conditioned on the payment of a fee
(other than with respect to a reduction) by the Borrower to the Agent, for
the account of the Lenders) to a reduction in the sum of the then existing
Facility Amounts of the Lenders.
"Facility Fee" shall mean the fee payable to the Lender by the
------------
Borrower pursuant to Section 2.13.
"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 brokers on
such day, as published by the Federal Reserve Bank of Dallas, Texas, on the
Business Day next succeeding such day, provided that (a) if the day 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
preceding Business Day as so published on the next succeeding Business Day,
and (b) if such rate is not so published for any day, the Federal Funds
Rate for such day shall be the average rate charged to Lender on such day
on such transactions as determined by the Lender.
"Final Maturity" shall mean December 31, 2001.
--------------
"Financial Statements" shall mean statements of the financial
--------------------
condition of the Borrower as at the point in time and for the period
indicated and consisting of at least a balance sheet and related statements
of operations, common stock and other stockholders' equity, and cash flows
for the Borrower and, when required by applicable provisions of this
Agreement to be audited, accompanied by the unqualified certification of a
nationally-recognized firm of independent certified public accountants or
other independent certified public accountants acceptable to the Lender and
footnotes to any of the foregoing, all of which shall be prepared in
<PAGE>
accordance with GAAP consistently applied and in comparative form with
respect to the corresponding period of the preceding fiscal period.
"Floating Rate" shall mean an interest rate per annum equal to the
-------------
Base Rate from time to time in effect, but in no event exceeding the
Highest Lawful Rate.
"Floating Rate Loan" shall mean any Loan and any portion of the Loan
------------------
Balance which the Borrower has requested, in the initial Borrowing Request
for such Loan or a subsequent Borrowing Request for such portion of the
Loan Balance, bearing interest at the Floating Rate, or which pursuant to
the terms hereof is otherwise required to bear interest at the Floating
Rate.
"GAAP" shall mean generally accepted accounting principles established
----
by the Financial Accounting Standards Board or the American Institute of
Certified Public Accountants and in effect in the United States from time
to time.
"Governmental Authority" shall mean any nation, country, commonwealth,
----------------------
territory, government, state, county, parish, municipality, or other
political subdivision and any entity exercising executive, legislative,
judicial, regulatory, or administrative functions of or pertaining to
government.
"Hazardous Substances" shall mean flammables, explosives, radioactive
--------------------
materials, hazardous wastes, asbestos, or any material containing asbestos,
polychlorinated biphenyls (PCBs), toxic substances or related materials,
petroleum, petroleum products, associated oil or natural gas exploration,
production, and development wastes, or any substances defined as "hazardous
substances," "hazardous materials," "hazardous wastes," or "toxic
substances" under the Comprehensive Environmental Response, Compensation
and Liability Act, as amended, the Superfund Amendments and Reauthorization
Act, as amended, the Hazardous Materials Transportation Act, as amended,
the Resource Conservation and Recovery Act, as amended, the Toxic
Substances Control Act, as amended, or any other law or regulation now or
hereafter enacted or promulgated by any Governmental Authority.
"Highest Lawful Rate" shall mean the maximum non-usurious interest
-------------------
rate, if any (or, if the context so requires, an amount calculated at such
rate), that at any time or from time to time may be contracted for, taken,
reserved, charged, or received under applicable laws of the State of Texas
or the United States of America, whichever authorizes the greater rate, as
such laws are presently in effect or, to the extent allowed by applicable
law, as such laws may hereafter be in effect and which allow a higher
maximum non-usurious interest rate than such laws now allow.
"Indebtedness" shall mean, as to any Person, without duplication, (a)
------------
all liabilities (excluding reserves for deferred income taxes, deferred
compensation liabilities, and other deferred liabilities and credits) which
in accordance with GAAP
<PAGE>
would be included in determining total liabilities as shown on the
liability side of a balance sheet, (b) all obligations of such Person
evidenced by bonds, debentures, promissory notes, or similar evidences of
indebtedness, (c) all other indebtedness of such Person for borrowed money,
and (d) all obligations of others, to the extent any such obligation is
secured by a Lien on the assets of such Person (whether or not such Person
has assumed or become liable for the obligation secured by such Lien).
(Provided, however, Indebtedness shall not include preferred stock).
"Insolvency Proceeding" shall mean application (whether voluntary or
---------------------
instituted by another Person) for or the consent to the appointment of a
receiver, trustee, conservator, custodian, or liquidator of any Person or
of all or a substantial part of the Property of such Person, or the filing
of a petition (whether voluntary or instituted by another Person)
commencing a case under Title 11 of the United States Code, seeking
liquidation, reorganization, or rearrangement or taking advantage of any
bankruptcy, insolvency, debtor's relief, or other similar law of the United
States, the State of Texas, or any other jurisdiction.
"Intellectual Property" shall mean patents, patent applications,
---------------------
trademarks, tradenames, copyrights, technology, know-how, and processes.
"Interest Period" shall mean, subject to the limitations set forth in
---------------
Section 222, with respect to any LIBO Rate Loan, a period commencing on the
date such Loan is made or converted from a Loan of another type pursuant to
this Agreement or the last day of the next preceding Interest Period with
respect to such Loan and ending on the numerically corresponding day in the
calendar month that is one, two, three, or, subject to availability, six
months thereafter, as the Borrower may request in the Borrowing Request for
such Loan.
"Investment" in any Person shall mean any stock, bond, note, or other
----------
evidence of Indebtedness, or any other security (other than current trade
and customer accounts) of, investment or partnership interest in or loan
to, such Person.
"L/C Exposure" shall mean, at any time, the aggregate maximum amount
------------
available to be drawn under outstanding Letters of Credit at such time.
"Letter of Credit" shall mean any standby letter of credit issued by
----------------
the Lender for the account of the Borrower pursuant to Section 2.2.
"Letter of Credit Application" shall mean the standard letter of
----------------------------
credit application employed by the Lender from time to time in connection
with letters of credit, provided that in the event of a conflict between
the terms of each Letter of Credit Application and this Agreement, this
Agreement shall control.
<PAGE>
"Letter of Credit Fee" shall mean each fee payable to the Lender by
--------------------
the Borrower pursuant to Section 2.14 upon or in connection with the
issuance of a Letter of Credit.
"LIBO Rate" shall mean, with respect to any Interest Period for any
---------
LIBO Rate Loan, the lesser of (a) the rate per annum (rounded upwards, if
necessary, to the nearest 1/16 of 1%) equal to the average of the offered
quotations appearing on Telerate Page 3750 (or if such Telerate Page shall
not be available, any successor or similar service selected by the Lender
and the Borrower) as of approximately 11:00 a.m., Central Standard or
Daylight Savings Time, as the case may be, on the day two Business Days
prior to the first day of such Interest Period for Dollar deposits in an
amount comparable to the principal amount of such LIBO Rate Loan and having
a term comparable to the Interest Period for such LIBO Rate Loan, or (b)
the Highest Lawful Rate. If neither such Telerate Page 3750 nor any
successor or similar service is available, the term "LIBO Rate" shall mean,
with respect to any Interest Period for any LIBO Rate Loan, the lesser of
(a) the rate per annum (rounded upwards if necessary, to the nearest 1/16
of 1%) quoted by the Lender 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 LIBO Rate Loan for the offering by the Lender
to leading banks in the London interbank market of Dollar deposits in an
amount comparable to the principal amount of such LIBO Rate Loan and having
a term comparable to the Interest Period for such LIBO Rate Loan, or (b)
the Highest Lawful Rate.
"LIBO Rate Loan" shall mean any Loan and any portion of the Loan
--------------
Balance which the Borrower has requested, in the initial Borrowing Request
for such Loan or a subsequent Borrowing Request for such portion of the
Loan Balance, bearing interest at the Adjusted LIBO Rate and which is
permitted by the terms hereof to bear interest at the Adjusted LIBO Rate.
"Lien" shall mean any interest in Property securing an obligation owed
----
to, or a claim by, a Person other than the owner of such Property, whether
such interest is based on common law, statute, or contract, and including,
but not limited to, the lien or security interest arising from a mortgage,
ship mortgage, encumbrance, pledge, security agreement, conditional sale or
trust receipt, or a lease, consignment, or bailment for security purposes
(other than true leases or true consignments), liens of mechanics,
materialmen, and artisans, maritime liens and reservations, exceptions,
encroachments, easements, rights of way, covenants, conditions,
restrictions, leases, and other title exceptions and encumbrances affecting
Property which secure an obligation owed to, or a claim by, a Person other
than the owner of such Property (for the purpose of this Agreement, the
Borrower shall be deemed to be the owner of any Property which it has
acquired or holds subject to a conditional sale agreement, financing lease,
or other arrangement pursuant to which title to the Property has been
retained by or vested in some other Person for security purposes), and the
filing or recording of any financing statement or other security instrument
in any public office.
<PAGE>
"Limitation Period" shall mean, with respect to any Lender, any period
-----------------
while any amount remains owing on the Note payable to such Lender and
interest on such amount, calculated at the applicable interest rate, plus
any fees or other sums payable to such Lender under any Loan Document and
deemed to be interest under applicable law, would exceed the amount of
interest which would accrue at the Highest Lawful Rate.
"Loan" shall mean any loan made by any Lender to or for the benefit of
----
the Borrower pursuant to this Agreement and any payment made by the Lender
under a Letter of Credit.
"Loan Balance" shall mean, at any time, the outstanding principal
------------
balance of the Notes at such time.
"Loan Documents" shall mean this Agreement, the Note, the Letter of
--------------
Credit Applications, the Letters of Credit, the Security Instruments, and
all other documents and instruments now or hereafter delivered pursuant to
the terms of or in connection with this Agreement, the Note, the Letter of
Credit Applications, the Letters of Credit, or the Security Instruments,
and all renewals and extensions of, amendments and supplements to, and
restatements of, any or all of the foregoing from time to time in effect.
"Material Adverse Effect" shall mean (a) any material adverse effect
-----------------------
on the business, operations, properties, or condition (financial or
otherwise), of the Borrower and its Subsidiaries, taken as a whole, (b) any
adverse effect upon the business operations, properties, or condition
(financial or otherwise), of the Borrower and its Subsidiaries, taken as a
whole, which materially increases the risk that any of the Obligations will
not be repaid as and when due, or (c) any material adverse effect upon the
Collateral.
"Mortgaged Properties" shall mean all Oil and Gas Properties of the
--------------------
Borrower subject to a perfected first-priority Lien in favor of the Agent
for the benefit of the Lenders, subject only to Permitted Liens, as
security for the Obligations.
"Notes" shall mean, collectively, each of the promissory notes of the
-----
Borrower payable to a Lender in the amount of the Facility Amount of such
Lender in the form attached hereto as Exhibit I with all blanks in such
---------
form completed appropriately, together with all renewals, extensions for
any period, increases, and rearrangements thereof.
"Obligations" shall mean, without duplication, (a) all Indebtedness
-----------
evidenced by the Note, (b) the Reimbursement Obligations, (c) the undrawn,
unexpired amount of all outstanding Letters of Credit, (d) the obligation
of the Borrower for the payment of Commitment Fees, Facility Fees, and
Letter of Credit Fees, (e)
<PAGE>
Commodity Hedge Agreements, (f) interest rate hedges, and (g) all other
obligations and liabilities of the Borrower to the Lenders, now existing or
hereafter incurred, under, arising out of or in connection with any Loan
Document, and to the extent that any of the foregoing includes or refers to
the payment of amounts deemed or constituting interest, only so much
thereof as shall have accrued, been earned and which remains unpaid at each
relevant time of determination.
"Oil and Gas Properties" shall mean fee, leasehold, or other interests
----------------------
in or under mineral estates or oil, gas, and other liquid or gaseous
hydrocarbon leases with respect to Properties situated in the United States
or offshore from any State of the United States, including, without
limitation, overriding royalty and royalty interests, leasehold estate
interests, net profits interests, production payment interests, and mineral
fee interests, together with contracts executed in connection therewith and
all tenements, hereditaments, appurtenances and Properties appertaining,
belonging, affixed, or incidental thereto.
"Percentage Share" shall mean, as to each Lender, the percentage such
----------------
Lender's Facility Amount constitutes of the sum of the Facility Amounts of
all Lenders.
"Permitted Liens" shall mean (a) Liens for taxes, fees, assessments,
---------------
or other governmental charges or levies not delinquent or remain payable
without penalty or which (if foreclosure, distraint, sale, or other similar
proceedings shall not have been initiated) are being contested in good
faith by appropriate proceedings, and such reserve as may be required by
GAAP shall have been made therefor, (b) Liens in connection with workers'
compensation, unemployment insurance or other social security (other than
Liens created by Section 4068 of ERISA), old-age pension, or public
liability obligations which are not delinquent or remain payable without
penalty or which are being contested in good faith by appropriate
proceedings, if such reserve as may be required by GAAP shall have been
made therefor, (c) Liens in favor of vendors, carriers, warehousemen,
repairmen, mechanics, workmen, materialmen, construction, landlords or
similar Liens arising by operation of law in the ordinary course of
business in respect of obligations which are not overdue by more than 45
days or which are being contested in good faith by appropriate proceedings,
if such reserve as may be required by GAAP shall have been made therefor,
(d) Liens in favor of operators and non-operators under joint operating
agreements or similar contractual arrangements arising in the ordinary
course of the business of the Borrower or a Subsidiary to secure amounts
owing, which amounts are not yet overdue by more than 45 days or are being
contested in good faith by appropriate proceedings, if such reserve as may
be required by GAAP shall have been made therefor, (e) Liens under
production sales agreements, division orders, operating agreements, and
other agreements customary in the oil and gas business for processing,
producing, and selling hydrocarbons securing obligations not constituting
Indebtedness and provided that such Liens do not secure obligations to
deliver
<PAGE>
hydrocarbons at some future date without receiving full payment therefor
within 90 days of delivery, (f) easements, rights of way, restrictions, and
other similar encumbrances, and minor defects in the chain of title which
are customarily accepted in the oil and gas financing industry, none of
which interfere with the ordinary conduct of the business of the Borrower
or a Subsidiary or materially detract from the value or use of the Property
to which they apply, (g) any Lien existing on property of the Borrower on
the Closing Date and set forth on Exhibit VI securing Indebtedness
outstanding on such date and all renewals, replacements and continuations
thereof, provided that any such renewal, replacement or continuation
thereof does not extend to any property not previously encumbered by such
Lien (other than after acquired title to or on such property and the
proceeds of the existing collateral in accordance with the instrument
creating the Lien) and the amount of the Indebtedness secured thereby is
not increased, (h) Liens consisting of judgment or judicial attachment
Liens, provided that the enforcement of such Liens is effectively stayed
and all such Liens in the aggregate at any time outstanding for the
Borrower and its Subsidiaries do not exceed $250,000, (i) purchase money
security interests (other than capital leases) on any property acquired or
held by the Borrower or its Subsidiaries in the ordinary course of
business, securing Indebtedness incurred or assumed for the purpose of
financing all or any part of the cost of acquiring such property provided
--------
that (1) any such Lien attaches to such property concurrently with the
----
acquisition thereof, (2) such Lien attaches solely to such property so
acquired, (3) the principal amount of the Indebtedness secured thereby does
not exceed 100% of the cost of such property, and (4) the principal amount
of the Indebtedness, excluding any amounts owed for installment payments
for property and liability insurance, secured by any and all such purchase
money security interests shall not at any time exceed, in the aggregate
$500,000, (j) Liens securing obligations in respect of capital leases on
assets subject to such leases, provided that such capital leases are
-------- ----
otherwise permitted hereunder, (k) Liens arising solely by virtue of any
statutory or common law provision relating to banker's liens, rights of
set-off or similar rights and remedies as to deposit accounts or other
funds maintained with a creditor depository institution provided that (1)
-------------
such deposit account is not a dedicated cash collateral account and it not
subject to restrictions against access by the Borrower or its Subsidiaries,
as applicable, in excess of those set forth by regulation promulgated by
the Federal Reserve Board, and (2) such deposit account is not intended by
the Borrower or any Subsidiary to provide collateral to the depository
institution, (l) Liens arising from precautionary Uniform Commercial Code
financing statement filings in respect of operating leases or consignment
arrangements otherwise permitted hereunder to be entered into by the
Borrower or any of its Subsidiaries in the ordinary course of business, (m)
licenses, leases and subleases permitted under this Agreement and granted
to others that do not interfere in any material respect with the business
or operations of the Borrower or any of its Subsidiaries, and (n) Liens in
favor of the Agent and the Lenders and other Liens expressly permitted
under the Security Instruments.
<PAGE>
"Person" shall mean an individual, corporation, partnership, trust,
------
unincorporated organization, limited liability company, government, any
agency or political subdivision of any government, or any other form of
entity.
"Plan" shall mean, at any time, any employee benefit plan (as defined
----
in Section 3(3) of ERISA, which is covered by ERISA and in respect of which
the Borrower or any Commonly Controlled Entity is (or, if such plan were
terminated at such time, would under Section 4069 of ERISA be deemed to be)
an "employer" as defined in Section 3(5) of ERISA.
"Principal Office" shall mean the principal office of the Agent in
----------------
Houston, Texas, presently located at 910 Travis Street, Houston, Texas
77002-5860.
"Property" shall mean any interest in any kind of property or asset,
--------
whether real, personal or mixed, tangible or intangible.
"Regulation D" shall mean Regulation D of the Board of Governors of
------------
the Federal Reserve System, as the same may be amended or supplemented from
time to time.
"Regulatory Change" shall mean the passage, adoption, institution, or
-----------------
amendment of any federal, state, local, or foreign Requirement of Law
(including, without limitation, Regulation D), or any interpretation,
directive, or request (whether or not having the force of law) of any
Governmental Authority or monetary authority charged with the enforcement,
interpretation, or administration thereof, occurring after the Closing Date
and applying to a class of banks including the Lender or Lenders or their
Applicable Lending Offices.
"Reimbursement Obligation" shall mean the obligation of the Borrower
------------------------
to provide to the Lenders or reimburse the Lenders for any amounts payable,
paid, or incurred by the Lenders with respect to Letters of Credit.
"Release of Hazardous Substances" shall mean any material emission,
-------------------------------
spill, release, disposal, or discharge, except in accordance with a valid
permit, license, certificate, or approval of the relevant Governmental
Authority, of any Hazardous Substance into or upon (a) the air, (b) soils
or any improvements located thereon, (c) surface water or groundwater, or
(d) the sewer or septic system, or the waste treatment, storage, or
disposal system servicing any Property of the Borrower.
"Required Lenders" shall mean, Lenders (including the Agent) holding
----------------
at more than 66 2/3% of the then Loan Balance, or, if there is no Loan
Balance, Lenders (including the Agent) having more than 66 2/3% of the
aggregate amount of the Commitments.
<PAGE>
"Requirement of Law" shall mean, as to any Person, the certificate or
------------------
articles of incorporation and by-laws or other organizational or governing
documents of such Person, and any applicable law, treaty, ordinance, order,
judgment, rule, decree, regulation, or determination of an arbitrator,
court, or other Governmental Authority, including, without limitation,
rules, regulations, orders, and requirements for permits, licenses,
registrations, approvals, or authorizations, in each case as such now exist
or may be hereafter amended and are applicable to or binding upon such
Person or any of its Property or to which such Person or any of its
Property is subject.
"Reserve Report" shall mean each report delivered to the Agent and
--------------
each Lender pursuant to Section 54, provided that Borrower shall not be
required to deliver more than three reports.
"Responsible Officer" shall mean, as to any Person, its President,
-------------------
Chief Executive Officer or any Vice President.
"Security Instruments" shall mean the security instruments executed
--------------------
and delivered in satisfaction of the condition set forth in Section 3.1(f),
and all other documents and instruments at any time executed as security
for all or any portion of the Obligations, as such instruments may be
amended, restated, or supplemented from time to time.
"Subsidiary" shall mean, as to any Person, a corporation of which
----------
shares of stock having ordinary voting power (other than stock having such
power only by reason of the happening of a contingency) to elect a majority
of the board of directors or other managers of such corporation are at the
time owned, or the management of which is otherwise controlled, directly or
indirectly through one or more intermediaries, or both, by such Person.
"Superfund Site" shall mean those sites listed on the Environmental
--------------
Protection Agency National Priority List and eligible for remedial action
or any comparable state registries or list in any state of the United
States.
"Transferee" shall mean any Person to which any Lender has sold,
----------
assigned, transferred, or granted a participation in any of the
Obligations, as authorized pursuant to Section 91, and any Person
acquiring, by purchase, assignment, transfer, or participation, from any
such purchaser, assignee, transferee, or participant, any part of such
Obligations.
"UCC" shall mean the Uniform Commercial Code as from time to time in
---
effect in the State of Texas.
"Year 2000 Compliance" shall mean, with regard to any entity, that all
--------------------
software, embedded microchips, and other processing capabilities utilized
by, and material to the business operations or financial condition of, such
entity are able to
<PAGE>
interpret and manipulate data on and involving all calendar dates correctly
and without causing any abnormal ending scenario, including in relation to
dates in and after the year 2000.
1.3 Undefined Financial Accounting Terms. Undefined financial
------------------------------------
accounting terms used in this Agreement shall be defined according to GAAP at
the time in effect.
1.4 References. References in this Agreement to Exhibit, Article, or
----------
Section numbers shall be to Exhibits, Articles, or Sections of this Agreement,
unless expressly stated to the contrary. References in this Agreement to
"hereby," "herein," "hereinafter," "hereinabove," "hereinbelow," "hereof,"
"hereunder" and words of similar import shall be to this Agreement in its
entirety and not only to the particular Exhibit, Article, or Section in which
such reference appears.
1.5 Articles and Sections. This Agreement, for convenience only, has
---------------------
been divided into Articles and Sections; and it is understood that the rights
and other legal relations of the parties hereto shall be determined from this
instrument as an entirety and without regard to the aforesaid division into
Articles and Sections and without regard to headings prefixed to such Articles
or Sections.
1.6 Number and Gender. Whenever the context requires, reference
-----------------
herein made to the single number shall be understood to include the plural; and
likewise, the plural shall be understood to include the singular. Definitions
of terms defined in the singular or plural shall be equally applicable to the
plural or singular, as the case may be, unless otherwise indicated. Words
denoting sex shall be construed to include the masculine, feminine and neuter,
when such construction is appropriate; and specific enumeration shall not
exclude the general but shall be construed as cumulative.
1.7 Incorporation of Exhibits. The Exhibits attached to this
-------------------------
Agreement are incorporated herein and shall be considered a part of this
Agreement for all purposes.
ARTICLE II
----------
TERMS OF FACILITY
-----------------
2.1 Revolving Line of Credit. (a) Upon the terms and conditions
------------------------
(including, without limitation, the right of the Lenders to decline to make any
Loan so long as any Default or Event of Default exists) and relying on the
representations and warranties contained in this Agreement, each Lender
severally agrees, during the Commitment Period, to make Loans, in immediately
available funds at the Applicable Lending Office or the Principal Office, to or
for the benefit of the Borrower in an aggregate principal amount not to exceed
at any time outstanding the lessor of the Facility Amount of such Lender or the
Percentage Share of such Lender of the Borrowing Base then in effect. Loans
shall be made from time to time on any Business Day designated by the Borrower
following receipt by the Agent of a Borrowing Request.
<PAGE>
(b) Subject to the terms of this Agreement, during the Commitment
Period, the Borrower may borrow, repay, and reborrow and convert Loans of one
type or with one Interest Period into Loans of another type or with a different
Interest Period. Except for prepayments made pursuant to Section 2.10, each
borrowing, conversion, and prepayment of principal of Loans shall be in an
amount at least equal to $50,000. Each borrowing, prepayment, or conversion of
or into a Loan of a different type or, in the case of a LIBO Rate Loan, having a
different Interest Period, shall be deemed a separate borrowing, conversion, and
prepayment for purposes of the foregoing, one for each type of Loan or Interest
Period. Anything in this Agreement to the contrary notwithstanding, the
aggregate principal amount of LIBO Rate Loans having the same Interest Period
shall be at least equal to $100,000; and if any LIBO Rate Loan would otherwise
be in a lesser principal amount for any period, such Loan shall be a Floating
Rate Loan during such period.
(c) The Loans shall be made and maintained at the Applicable Lending
Office or the Principal Office and shall be evidenced by the Notes.
(d) Not later than 2:00 p.m., Central Standard or Daylight Savings
Time, as the case may be, on the date specified for each borrowing, each Lender
shall make available an amount equal to its Percentage Share of the borrowing to
be made on such date to the Agent, at an account designated by the Agent, in
immediately available funds, for the account of the Borrower. The amount so
received by the Agent shall, subject to the terms and conditions hereof, be made
available to the Borrower in immediately available funds at the Principal Office
by the end of that Business Day. All Loans by each Lender shall be maintained
at the Applicable Lending Office of such Lender and shall be evidenced by the
Note of such Lender.
(e) The failure of any Lender to make any Loan required to be made by
it hereunder shall not relieve any other Lender of its obligation to make any
Loan required to be made by it, and no Lender shall be responsible for the
failure of any other Lender to make any Loan.
(f) The face amounts of the Notes have been established as an
administrative convenience and do not commit any Lender to advance funds
hereunder in excess of the then current Borrowing Base.
2.2 Letter of Credit Facility. (a) Upon the terms and conditions and
-------------------------
relying on the representations and warranties contained in this Agreement, the
Agent, as issuing bank for the Lenders, agrees from the date of this Agreement
until the date which is thirty days prior to the Commitment Termination Date, to
issue on behalf of the Lenders in their respective Percentage Shares Letters of
Credit for the account of the Borrower and/or the benefit of any Subsidiary of
the Borrower and to renew and extend such Letters of Credit. Letters of Credit
shall be issued, renewed, or extended from time to time on any Business Day
designated by the Borrower following the receipt in accordance with the terms
hereof by the Agent of the written (or oral, confirmed promptly in writing)
request by a Responsible Officer of the Borrower and a Letter of Credit
Application. Letters of Credit shall be issued in such amounts as the Borrower
may request; provided, however, that (i) no Letter of Credit shall have an
expiration date which is more than 365 days after the issuance thereof or
subsequent to Final Maturity, (ii) each automatically renewable Letter of Credit
shall provide that it may be terminated by the Agent at its then current expiry
date by not less than 30 days' written notice by the Agent to the beneficiary of
such Letter of Credit, and (iii) the Agent shall not be obligated to issue any
Letter of Credit if (A) the face amount thereof would exceed the Available
Commitment, or (B) after giving effect to the issuance thereof, (B) the L/C
Exposure, when added to the Loan Balance then outstanding, would exceed
<PAGE>
the Commitment Amount, or (C) the L/C Exposure would exceed $3,000,000, other
than with respect to required commodity and interest rate hedges.
(b) Prior to any payment in respect of any Letter of Credit, each
Lender shall be deemed to be a participant through the Agent with respect to the
relevant Letter of Credit in the obligation of the Agent, as the issuer of such
Letter of Credit, in an amount equal to the Percentage Share of such Lender of
the maximum amount which is or at any time may become available to be drawn
thereunder. Upon delivery by such Lender of funds requested pursuant to Section
2.2(c), such Lender shall be treated as having purchased a participating
interest in an amount equal to such funds delivered by such Lender to the Agent
in the obligation of the Borrower to reimburse the Agent, as the issuer of such
Letter of Credit, for any amounts payable, paid, or incurred by the Agent, as
the issuer of such Letter of Credit, with respect to such Letter of Credit.
(c) Each Lender shall be unconditionally and irrevocably liable,
without regard to the occurrence of any Default or Event of Default, to the
extent of the Percentage Share of such Lender at the time of issuance of each
Letter of Credit, to reimburse, on demand, the Agent, as the issuer of such
Letter of Credit, for the amount of each Letter of Credit Payment under such
Letter of Credit. Each payment in respect of any Letter of Credit shall be
deemed to be a Floating Rate Loan by each Lender to the extent of funds
delivered by such Lender to the Agent with respect to such payment and shall to
such extent be deemed a Floating Rate Loan under and shall be evidenced by the
Note of such Lender.
(D) EACH LENDER AGREES TO SEVERALLY INDEMNIFY THE AGENT, AS THE
ISSUER OF EACH LETTER OF CREDIT, AND THE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS,
ATTORNEYS-IN-FACT AND AFFILIATES OF THE AGENT (TO THE EXTENT NOT REIMBURSED BY
THE BORROWER AND WITHOUT LIMITING THE OBLIGATION OF THE BORROWER TO DO SO),
RATABLY ACCORDING TO THE PERCENTAGE SHARE OF SUCH LENDER AT THE TIME OF ISSUANCE
OF SUCH LETTER OF CREDIT, FROM AND AGAINST ANY AND ALL LIABILITIES, CLAIMS,
OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS,
EXPENSES AND DISBURSEMENTS OF ANY KIND WHATSOEVER WHICH MAY AT ANY TIME
(INCLUDING, WITHOUT LIMITATION, ANY TIME FOLLOWING THE PAYMENT AND PERFORMANCE
OF ALL OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT) BE IMPOSED ON,
INCURRED BY OR ASSERTED AGAINST THE AGENT AS THE ISSUER OF SUCH LETTER OF CREDIT
OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR
AFFILIATES IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR SUCH
LETTER OF CREDIT OR ANY ACTION TAKEN OR OMITTED BY THE AGENT AS THE ISSUER OF
SUCH LETTER OF CREDIT OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS,
ATTORNEYS-IN-FACT OR AFFILIATES UNDER OR IN CONNECTION WITH ANY OF THE
FOREGOING, INCLUDING, WITHOUT LIMITATION, ANY LIABILITIES, CLAIMS, OBLIGATIONS,
LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES AND
DISBURSEMENTS IMPOSED, INCURRED OR ASSERTED AS A RESULT OF THE NEGLIGENCE,
WHETHER SOLE OR CONCURRENT, OF THE AGENT AS THE ISSUER OF SUCH LETTER OF CREDIT
OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR
AFFILIATES; PROVIDED THAT NO LENDER (OTHER THAN THE AGENT AS THE ISSUER OF A
LETTER OF CREDIT) SHALL BE LIABLE FOR THE PAYMENT OF ANY PORTION OF SUCH
LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS,
COSTS, EXPENSES OR DISBURSEMENTS RESULTING FROM THE GROSS NEGLIGENCE WHETHER
SOLE OR CONCURRENT OR WILLFUL MISCONDUCT OF THE AGENT AS THE ISSUER OF A LETTER
OF CREDIT. THE AGREEMENTS IN THIS SECTION 2.2(D) SHALL SURVIVE THE PAYMENT AND
PERFORMANCE OF ALL OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT.
2.3 Use of Loan Proceeds and Letters of Credit. (a) Proceeds of all
------------------------------------------
Loans shall be used solely for the acquisition and development of oil and gas
properties, including the acquisition
<PAGE>
of properties in the Sacramento Basin from Amerada Hess, and for general
purposes, including, without limitation, working capital.
(b) Letters of Credit shall be used solely for other general corporate
purposes and to support commodity price and interest rate hedges.
2.4 Interest. Subject to the terms of this Agreement (including,
--------
without limitation, Section 2.17), interest on the Loans shall accrue and be
payable at a rate per annum equal to the Floating Rate for each Floating Rate
Loan and the Adjusted LIBO Rate for each LIBO Rate Loan. Interest on all
Floating Rate Loans shall be computed on the basis of a year of 365 or 366 days,
as applicable, for the actual days elapsed (including the first day but
excluding the last day) during the period for which payable. Interest on all
LIBO Rate Loans shall be computed on the basis of a year of 360 days for the
actual days elapsed (including the first day but excluding the last day) during
the period for which payable. Notwithstanding the foregoing, interest on past-
due principal and, to the extent permitted by applicable law, past-due interest,
shall accrue at the Default Rate, computed on the basis of a year of 365 or 366
days, as the case may be, for the actual days elapsed (including the first day
but excluding the last day) during the period for which payable, and shall be
payable upon demand by the Lender at any time as to all or any portion of such
interest. In the event that the Borrower fails to select the duration of any
Interest Period for any LIBO Rate Loan within the time period and otherwise as
provided herein, such Loan (if outstanding as a LIBO Rate Loan) will be
automatically converted into a Floating Rate Loan on the last day of the then
current Interest Period for such Loan or (if outstanding as a Floating Rate
Loan) will remain as, or (if not then outstanding) will be made as, a Floating
Rate Loan. Interest provided for herein shall be calculated on unpaid sums
actually advanced and outstanding pursuant to the terms of this Agreement and
only for the period from the date or dates of such advances until repayment.
2.5 Repayment of Loans and Interest. Accrued and unpaid interest on
-------------------------------
each outstanding Floating Rate Loan shall be due and payable monthly commencing
on the first day of February, 1999, and continuing on the first day of each
calendar month thereafter while any Floating Rate Loan remains outstanding, the
payment in each instance to be the amount of interest which has accrued and
remains unpaid in respect of the relevant Loan. Accrued and unpaid interest on
each outstanding LIBO Rate Loan shall be due and payable on the last day of the
Interest Period for such LIBO Rate Loan and, in the case of any Interest Period
in excess of three months, on the day of the third calendar month following the
commencement of such Interest Period corresponding to the day of the calendar
month on which such Interest Period commenced, the payment in each instance to
be the amount of interest which has accrued and remains unpaid in respect of the
relevant Loan. The Loan Balance, together with all accrued and unpaid interest
thereon, shall be due and payable at Final Maturity. At the time of making each
payment hereunder or under the Note, the Borrower shall specify to the Lender
the Loans or other amounts payable by the Borrower hereunder to which such
payment is to be applied. In the event the Borrower fails to so specify, or if
an Event of Default has occurred and is continuing, the Lender may apply such
payment as it may elect in its sole discretion.
2.6 Outstanding The outstanding principal balance of the Notes
-----------
reflected by the notations by the Lenders on its records shall be deemed
rebuttably presumptive evidence of the principal amount owing on the Notes. The
liability for payment of principal and interest evidenced
<PAGE>
by the Notes shall be limited to principal amounts actually advanced and
outstanding pursuant to this Agreement and interest on such amounts calculated
in accordance with this Agreement.
2.7 Time, Place, and Method of Payments. All payments required
-----------------------------------
pursuant to this Agreement or the Notes shall be made in lawful money of the
United States of America and in immediately available funds, shall be deemed
received by the Agent on the Business Day received, or on the next Business Day
following receipt if such receipt is after 2:00 p.m., Central Standard or
Daylight Savings Time, as the case may be, on any Business Day, and shall be
made at the Principal Office. Except as provided to the contrary herein, if the
due date of any payment hereunder or under the Notes would otherwise fall on a
day which is not a Business Day, such 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.
2.8 Pro Rata Treatment; Adjustments. (a) Except to the extent
-------------------------------
otherwise expressly provided herein, (i) each borrowing pursuant to this
Agreement shall be made from the Lenders pro rata in accordance with their
respective Percentage Shares, (ii) each reduction of the sum of the Facility
Amounts of the Lenders at the request of the Borrower, as well as any subsequent
increase in the sum of the Facility Amounts of the Lenders at the request of the
Borrower and with written agreement of the Agent and the Required Lenders shall
serve to adjust the Facility Amounts of the Lenders pro rata in accordance with
the Facility Amounts of the Lenders in effect immediately prior to any such
adjustment, (iii) each payment by the Borrower of fees shall be made for the
account of the Lenders pro rata in accordance with their respective Percentage
Shares, (iv) each payment of principal of Loans shall be made for the account of
the Lenders pro rata in accordance with their respective shares of the Loan
Balance, and (v) each payment of interest on Loans shall be made for the account
of the Lenders pro rata in accordance with their respective shares of the
aggregate amount of interest due and payable to the Lenders.
(b) The Agent shall distribute all payments with respect to the
Obligations to the Lenders promptly upon receipt in like funds as received. In
the event that any payments made hereunder by the Borrower at any particular
time are insufficient to satisfy in full the Obligations due and payable at such
time, such payments shall be applied (i) first, to fees and expenses due
pursuant to the terms of this Agreement or any other Loan Document, (ii) second,
to accrued interest, (iii) third, to the Loan Balance, and (iv) last, to any
other Obligations.
(c) If any Lender (for purposes of this Section, a "Benefitted
----------
Lender") shall at any time receive any payment of all or part of its portion of
- ------
the Obligations, or receive any Collateral in respect thereof (whether
voluntarily or involuntarily, by set-off, pursuant to events or proceedings of
the nature referred to in Section 7.1(f) or Section 7.1(g), or otherwise) in an
-------------- --------------
amount greater than such Lender was entitled to receive pursuant to the terms
hereof, such Benefitted Lender shall purchase for cash from the other Lenders
such portion of the Obligations of such other Lenders, or shall provide such
other Lenders with the benefits of any such Collateral or the proceeds thereof,
as shall be necessary to cause such Benefitted Lender to share the excess
payment or benefits of such Collateral or proceeds with each of the Lenders
according to the terms hereof. If all or any portion of such excess payment or
benefits is thereafter recovered from such Benefitted Lender, such purchase
shall be rescinded and the purchase price and benefits returned by such Lender,
to the
<PAGE>
extent of such recovery, but without interest. The Borrower agrees that each
such Lender so purchasing a portion of the Obligations of another Lender may
exercise all rights of payment (including rights of set-off) with respect to
such portion as fully as if such Lender were the direct holder of such portion.
If any Lender ever receives, by voluntary payment, exercise of rights of set-off
or banker's lien, counterclaim, cross-action or otherwise, any funds of the
Borrower to be applied to the Obligations, or receives any proceeds by
realization on or with respect to any Collateral, all such funds and proceeds
shall be forwarded immediately to the Agent for distribution in accordance with
the terms of this Agreement.
2.9 Borrowing Base Determinations. (a) The Borrowing Base as of
-----------------------------
November 1, 1998 is acknowledged by the Borrower and the Lenders to be
$43,000,000. Commencing as of February 1, 1999 and continuing thereafter on the
first day of each calendar month through the next Borrowing Base Determination
which is scheduled for May 1, 1999, the amount of the Borrowing Base shall be
reduced by $450,000.
(b) The Borrowing Base shall be redetermined semi-annually on the
basis of information supplied by the Borrower in compliance with the provisions
of this Agreement, including, without limitation, Reserve Reports, and all other
relevant information available to the Lenders. In addition, the Lenders shall,
in the normal course of business following a request of the Borrower,
redetermine the Borrowing Base; provided, however, the Lenders shall not be
obligated to respond to more than four such requests during any calendar year,
and in no event shall the Lenders be required to redetermine the Borrowing Base
more than once in any two-month period, including, without limitation, each
scheduled semi-annual redetermination provided for above. Notwithstanding the
foregoing, the Lenders may at their discretion redetermine the Borrowing Base
and the amount by which the Borrowing Base shall be reduced each calendar month
as set forth in Section 2.9 (a) at any time and from time to time.
(c) Upon each determination of the Borrowing Base by the Lenders, the
Agent shall notify the Borrower orally (confirming such notice promptly in
writing) of such determination, and the Borrowing Base and the monthly amount by
which the Borrowing Base shall be reduced so communicated to the Borrower shall
become effective upon such written notification and shall remain in effect until
the next subsequent determination of the Borrowing Base and the monthly amount
by which the Borrowing Base shall be reduced.
(d) The Borrowing Base shall represent the determination by the
Lenders, in accordance with the applicable definitions and provisions herein
contained and their customary lending practices for loans of this nature, of the
value, for loan purposes, of the Mortgaged Properties, subject, in the case of
any increase in the Borrowing Base, to the credit approval process of the
Lenders. Furthermore, the Borrower acknowledges that the determination of the
Borrowing Base contains an equity cushion (market value in excess of loan
value), which is acknowledged by the Borrower to be essential for the adequate
protection of the Lenders.
2.10 Mandatory Prepayments. If at any time the sum of the Loan
---------------------
Balance and the L/C Exposure exceeds the Borrowing Base then in effect, the
Borrower shall, within 30 days of notice from the Lender of such occurrence, (a)
prepay, or make arrangements acceptable to the
<PAGE>
Lenders for the prepayment of, the amount of such excess for application on the
Loan Balance, (b) provide additional collateral, of character and value
satisfactory to the Lenders in their reasonable discretion, to secure the
Obligations by the execution and delivery to the Lenders of security instruments
in form and substance satisfactory to the Lenders in the exercise of their
reasonable discretion, or (c) effect any combination of the alternatives
described in clauses (a) and (b) of this Section and acceptable to the Lenders
in their reasonable discretion. In the event that a mandatory prepayment is
required under this Section and the Loan Balance is less than the amount
required to be prepaid, the Borrower shall repay the entire Loan Balance and, in
accordance with the provisions of the relevant Letter of Credit Applications
executed by the Borrower or otherwise to the reasonable satisfaction of the
Lenders, deposit with the Lenders, as additional collateral securing the
Obligations, an amount of cash, in immediately available funds, equal to the L/C
Exposure minus the Borrowing Base. The cash deposited with the Lenders in
satisfaction of the requirement provided in this Section may be invested, at the
reasonable discretion of the Lenders and then only at the express direction of
the Borrower as to investment vehicle and maturity (which shall be no later than
the latest expiry date of any then outstanding Letter of Credit), for the
account of the Borrower in cash or cash equivalent investments offered by or
through the Lenders.
2.11 Voluntary Prepayments and Conversions of Loans. Subject to
----------------------------------------------
applicable provisions of this Agreement, the Borrower shall have the right at
any time or from time to time to prepay Loans and to convert Loans of one type
or with one Interest Period into Loans of another type or with a different
Interest Period; provided, however, that (a) the Borrower shall give the Agent
notice of each such prepayment or conversion of all or any portion of a LIBO
Rate Loan no less than two Business Days prior to prepayment or conversion, (b)
any LIBO Rate Loan may be prepaid or converted only on the last day of an
Interest Period for such Loan, (c) the Borrower shall pay all accrued and unpaid
interest on the amounts prepaid or converted, and (d) no such prepayment or
conversion shall serve to postpone the repayment when due of any Obligation.
2.12 Commitment Fee. In addition to interest on the Note as provided
--------------
herein and all other fees payable hereunder and to compensate the Lender for
maintaining funds available, the Borrower shall pay to the Agent for the account
of the Lenders, in immediately available funds, on the first day of April, 1999,
and on the first day of each third calendar month thereafter during the
Commitment Period, a fee in the amount of 0.375% per annum, calculated on the
basis of a year of 365 or 366 days, as the case may be, for the actual days
elapsed (including the first day but excluding the last day), on the average
daily amount of the Available Commitment during the preceding quarterly period.
2.13 Facility Fee. In addition to interest on the Note as provided
------------
herein and all other fees payable hereunder and to compensate the Lenders for
the costs of the extension of credit hereunder, the Borrower shall pay to the
Agent for the account of the Lenders on the Closing Date, in immediately
available funds, a facility fee in the amount of $430,000. One-third of this
fee has been paid with the balance due on the Closing Date.
2.14 Letter of Credit Fee. In addition to interest on the Note as
--------------------
provided herein and all other fees payable hereunder, the Borrower agrees to pay
to the Lender, on the date of issuance of each Letter of Credit, a fee equal to
one percent (1%) per annum, calculated on the basis
<PAGE>
of a year of 365 or 366 days, as the case may be, for the actual days elapsed
(including the first day but excluding the last day), on the face amount of such
Letter of Credit during the period for which such Letter of Credit is issued;
provided, however, in the event such Letter of Credit is canceled prior to its
original expiry date or a payment is made by the Lender with respect to such
Letter of Credit, the Lender shall, within 30 days after such cancellation or
the making of such payment, rebate to the Borrower the unearned portion of such
fee. The Borrower also agrees to pay to the Lender on demand its customary
letter of credit transactional fees, including, without limitation, amendment
fees, payable with respect to each Letter of Credit.
2.15 Loans to Satisfy Obligations of Borrower. The Lenders may, but
----------------------------------------
shall not be obligated to, but only if an Event of Default exists, make Loans
for the benefit of the Borrower and apply proceeds thereof to the satisfaction
of any condition, warranty, representation, or covenant of the Borrower
contained in this Agreement or any other Loan Document. Any such Loan shall be
evidenced by the Note and shall be made as a Floating Rate Loan.
2.16 Security Interest in Accounts; Right of Offset. As security for
----------------------------------------------
the payment and performance of the Obligations, the Borrower hereby transfers,
assigns, and pledges to the Agent for the benefit of the Lenders and grants to
the Agent for the benefit of the Lenders a security interest in all funds of the
Borrower now or hereafter or from time to time on deposit with the Agent and
such Lender, with such interest of the Lender to be retransferred, reassigned,
and/or released by the Agent and each Lender, as the case may be, at the expense
of the Borrower upon payment in full and complete performance by the Borrower of
all Obligations. All remedies as secured party or assignee of such funds shall
be exercisable by the Lender during the existence of the occurrence of any Event
of Default, regardless of whether the exercise of any such remedy would result
in any penalty or loss of interest or profit with respect to any withdrawal of
funds deposited in a time deposit account prior to the maturity thereof.
Furthermore, the Borrower hereby grants to the Agent and each Lender the right,
exercisable during the existence of an Event of Default, of offset or banker's
lien against all funds of the Borrower now or hereafter or from time to time on
deposit with the Agent and each Lender, regardless of whether the exercise of
any such remedy would result in any penalty or loss of interest or profit with
respect to any withdrawal of funds deposited in a time deposit account prior to
the maturity thereof, provided that such Obligation shall have matured, whether
by acceleration of maturity or otherwise.
2.17 General Provisions Relating to Interest. (a) It is the intention
---------------------------------------
of the parties hereto to comply strictly with the usury laws of the State of
Texas and the United States of America. In this connection, there shall never be
collected, charged, or received on the sums advanced hereunder interest in
excess of that which would accrue at the Highest Lawful Rate. For purposes of
Chapter 10 of Subtitle 1 of Title 79, Texas Revised Civil Statutes, the Borrower
agrees that the Highest Lawful Rate shall be the "weekly ceiling" as defined in
such Section, provided that the Lenders may also rely, to the extent permitted
by applicable laws of the State of Texas or the United States of America, on
alternative maximum rates of interest under other laws of the State of Texas or
the United States of America applicable to the Lenders, if greater.
(b) Notwithstanding anything herein or in the Notes to the contrary,
during any Limitation Period, the interest rate to be charged on amounts
evidenced by the Notes shall be the
<PAGE>
Highest Lawful Rate, and the obligation, if any, of the Borrower for the payment
of fees or other charges deemed to be interest under applicable law shall be
suspended. During any period or periods of time following a Limitation Period,
to the extent permitted by applicable laws of the State of Texas or the United
States of America, the interest rate to be charged hereunder shall remain at the
Highest Lawful Rate until such time as there has been paid to the Lenders (i)
the amount of interest in excess of that accruing at the Highest Lawful Rate
that the Lenders would have received during the Limitation Period had the
interest rate remained at the otherwise applicable rate, and (ii) all interest
and fees otherwise payable to the Lenders but for the effect of such Limitation
Period.
(c) If, under any circumstances, the aggregate amounts paid on the
Note or under this Agreement or any other Loan Document include amounts which by
law are deemed interest and which would exceed the amount permitted if the
Highest Lawful Rate were in effect, the Borrower stipulates that such payment
and collection will have been and will be deemed to have been, to the extent
permitted by applicable laws of the State of Texas or the United States of
America, the result of mathematical error on the part of the Borrower and the
Lenders; and the Lenders shall promptly refund the amount of such excess (to the
extent only of such interest payments in excess of that which would have accrued
and been payable on the basis of the Highest Lawful Rate) upon discovery of such
error by the Lenders or notice thereof from the Borrower. In the event that the
maturity of any Obligation is accelerated, by reason of an election by the
Lenders or otherwise, or in the event of any required or permitted prepayment,
then the consideration constituting interest under applicable laws may never
exceed the Highest Lawful Rate; and excess amounts paid which by law are deemed
interest, if any, shall be credited by the Lenders on the principal amount of
the Obligations, or if the principal amount of the Obligations shall have been
paid in full, refunded to the Borrower.
(d) All sums paid, or agreed to be paid, to the Lenders for the use,
forbearance and detention of the proceeds of any advance hereunder shall, to the
extent permitted by applicable law, be amortized, prorated, allocated, and
spread throughout the full term hereof until paid in full so that the actual
rate of interest is uniform but does not exceed the Highest Lawful Rate
throughout the full term hereof.
2.18 Yield Protection. (a) Without limiting the effect of the other
----------------
provisions of this Section (but without duplication), the Borrower shall pay to
the Lenders from time to time such amounts as the Lenders may determine are
necessary to compensate it for any Additional Costs incurred by the Lenders.
(b) Without limiting the effect of the other provisions of this
Section (but without duplication), the Borrower shall pay to the Lenders from
time to time on request such amounts as the Lenders may determine are necessary
to compensate the Lenders for any costs attributable to the maintenance by the
Lenders (or any Applicable Lending Office), pursuant to any Regulatory Change,
of capital in respect of the Commitment, such compensation to include, without
limitation, an amount equal to any reduction of the rate of return on assets or
equity of the Lenders (or any Applicable Lending Office) to a level below that
which the Lenders (or any Applicable Lending Office) could have achieved but for
such Regulatory Change.
<PAGE>
(c) Without limiting the effect of the other provisions of this
Section (but without duplication), in the event that any Requirement of Law or
Regulatory Change or the compliance by the Lenders therewith shall (i) impose,
modify, or hold applicable any reserve, special deposit, or similar requirement
against any Letter of Credit or obligation to issue Letters of Credit, or (ii)
impose upon the Lenders any other condition regarding any Letter of Credit or
obligation to issue Letters of Credit, and the result of any such event shall be
to increase the cost to the Lenders of issuing or maintaining any Letter of
Credit or obligation to issue Letters of Credit or any liability with respect to
payments by the Lender under Letters of Credit, or to reduce any amount
receivable in connection therewith, then within 15 days of demand by the
Lenders, the Borrower shall pay to the Lenders, from time to time as specified
by the Lender, additional amounts which shall be sufficient to compensate the
Lenders for such increased cost or reduced amount receivable.
(d) Without limiting the effect of the other provisions of this
Section (but without duplication), the Borrower shall pay to the Lenders such
amounts as shall be sufficient in the reasonable opinion of the Lenders to
compensate them for any loss, cost, or expense incurred by and as a result of:
(i) any payment, prepayment, or conversion by the
Borrower of a LIBO Rate Loan on a date other than the
last day of an Interest Period for such Loan; or
(ii) any failure by the Borrower to borrow a LIBO
Rate Loan from the Lender on the date for such
borrowing specified in the relevant Borrowing Request;
such compensation to include, without limitation, with respect to any LIBO Rate
Loan, an amount equal to the excess, if any, of (A) the amount of interest which
would have accrued on the principal amount so paid, prepaid, converted, or not
borrowed for the period from the date of such payment, prepayment, conversion,
or failure to borrow to the last day of the then current Interest Period for
such Loan (or, in the case of a failure to borrow, the Interest Period for such
Loan which would have commenced on the date of such failure to borrow) at the
applicable rate of interest for such Loan provided for herein over (B) the
interest component (as reasonably determined by the Lenders) of the amount (as
reasonably determined by the Lenders) the Lenders would have bid in the London
interbank market for Dollar deposits of amounts comparable to such principal
amount and maturities comparable to such period; provided, however, that the
Lenders shall be limited to recover their actual losses and not anticipated
profits.
(e) Determinations by the Lenders for purposes of this Section of the
effect of any Regulatory Change on capital maintained, their costs or rate of
return, maintaining Loans, issuing Letters of Credit, its obligation to make
Loans and issue Letters of Credit, or on amounts receivable by it in respect of
Loans, Letters of Credit, or such obligations, and the additional amounts
required to compensate the Lenders under this Section shall be rebuttable
presumptions of the additional amounts due, provided that such determinations
are made on a reasonable basis. The Lenders shall furnish the Borrower with a
certificate setting forth in reasonable detail the basis and amount of increased
costs incurred or reduced amounts receivable as a result of any such event, and
the
<PAGE>
statements set forth therein shall be rebuttable presumptions of the additional
amounts due. The Lenders shall (i) notify the Borrower, as promptly as
practicable after the Lender obtains knowledge of any Additional Costs or other
sums payable pursuant to this Section and determines to request compensation
therefor, of any event occurring after the Closing Date which will entitle the
Lenders to compensation pursuant to this Section; provided that the Borrower
shall not be obligated for the payment of any Additional Costs or other sums
payable pursuant to this Section after the earlier of (A) the Final Maturity
(provided that the Obligations have been paid in full) and (B) the expiration of
the Commitment (provided that the Obligations have been paid in full) to the
extent such Additional Costs or other sums accrued more than 90 days prior to
the date upon which the Borrower was given such notice; and (ii) designate a
different Applicable Lending Office for the Loans of the Lenders affected by
such event if such designation will avoid the need for or reduce the amount of
such compensation and will not, in the sole opinion of the Lenders, be
materially disadvantageous to the Lenders. If the Lenders request compensation
from the Borrower under this Section, the Borrower may, by notice to the
Lenders, require that the Loans by the Lenders of the type with respect to which
such compensation is requested be converted into Floating Rate Loans in
accordance with Section 2.11. Any compensation requested by the Lenders pursuant
to this Section shall be due and payable to the Lender within fifteen days of
delivery of any such notice by the Lenders to the Borrower.
(f) The Lenders agree that they shall not request, and the Borrower
shall not be obligated to pay, any Additional Costs or other sums payable
pursuant to this Section unless similar additional costs and other sums payable
are also generally assessed by the Lenders against other customers of the
Lenders similarly situated where such customers are subject to documents
providing for such assessment.
(g) Upon the receipt by the Borrower from any Lender (an "Affected
Bank") of a claim for compensation under this Section 2.18, the Borrower may (i)
request the Affected Bank to use its best efforts to obtain a replacement bank
or financial institution satisfactory to the Borrower to acquire and assume all
or a ratable part of all of such Affected Bank's Loans and Commitment (a
"Replacement Bank"); (ii) request one or more of the other Lenders to acquire
and assume all or part of such Affected Bank's Loans and Commitment; or (iii)
designate a Replacement Bank under clause (i) or (iii) shall be subject to the
prior written consent of the Agent (which consent will not be unreasonably
withheld).
2.19 Limitation on Types of Loans. Anything herein to the contrary
----------------------------
notwithstanding, no more than 11 separate Loans shall be outstanding at any one
time, with, for purposes of this Section, all Floating Rate Loans constituting
one Loan and all LIBO Rate Loans for the same Interest Period constituting one
Loan. Anything herein to the contrary notwithstanding, if, on or prior to the
determination of any interest rate for any LIBO Rate Loan for any Interest
Period therefor:
(a) the Lenders determine (which determination shall be
conclusive) that quotations of interest rates for the
deposits referred to in the definition of "LIBO Rate" in
Section 1.2 are not being provided in the relevant amounts or
for the
<PAGE>
relevant maturities for purposes of determining the rate of interest
for such Loan as provided in this Agreement; or
(b) the Lenders determine (which determination shall be
conclusive) that the rates of interest referred to in the definition
of "LIBO Rate" in Section 1.2 upon the basis of which the rate of
interest for such Loan for such Interest Period is to be determined do
not accurately reflect the cost to the Lenders of making or
maintaining such Loan for such Interest Period,
then the Lenders shall give the Borrower prompt notice thereof; and so long as
such condition remains in effect, the Lenders shall be under no obligation to
make LIBO Rate Loans or to convert Loans of any other type into LIBO Rate Loans,
and the Borrower shall, on the last day of the then current Interest Period for
each outstanding LIBO Rate Loan, either prepay such LIBO Rate Loan or convert
such Loan into another type of Loan in accordance with Section 2.11. Before
giving such notice pursuant to this Section, the Lenders will designate a
different available Applicable Lending Office for LIBO Rate Loans or take such
other action as the Borrower may request if such designation or action will
avoid the need to suspend the obligation of the Lender to make LIBO Rate Loans
hereunder and will not, in the opinion of the Lenders, be materially
disadvantageous to the Lenders.
2.20 Illegality. Notwithstanding any other provision of this
----------
Agreement, in the event that it becomes unlawful for the Lenders or their
Applicable Lending Office to (a) honor its obligation to make any type of LIBO
Rate Loans hereunder, or (b) maintain any type of LIBO Rate Loans hereunder,
then the Lenders shall promptly notify the Borrower thereof; and the obligation
of the Lenders hereunder to make such type of LIBO Rate Loans and to convert
other types of Loans into LIBO Rate Loans of such type shall be suspended until
such time as the Lenders may again make and maintain LIBO Rate Loans of such
type, and the outstanding LIBO Rate Loans of such type shall be converted into
Floating Rate Loans in accordance with Section 2.11. Before giving such notice
pursuant to this Section, the Lenders will designate a different available
Applicable Lending Office for LIBO Rate Loans or take such other action as the
Borrower may request if such designation or action will avoid the need to
suspend the obligation of the Lenders to make LIBO Rate Loans and will not, in
the opinion of the Lenders, be disadvantageous to the Lenders.
2.21 Regulatory Change. In the event that by reason of any Regulatory
-----------------
Change, the Lenders (a) incur 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 the Lenders which includes deposits by reference to which the
interest rate on any LIBO Rate Loan is determined as provided in this Agreement
or a category of extensions of credit or other assets of such Lenders which
includes any LIBO Rate Loan, or (b) becomes subject to restrictions on the
amount of such a category of liabilities or assets which it may hold, then, at
the election of the Lenders with notice to the Borrower, the obligation of the
Lenders to make such LIBO Rate Loans and to convert Floating Rate Loans into
such LIBO Rate Loans shall be suspended until such time as such Regulatory
Change ceases to be in effect, and all such outstanding LIBO Rate Loans shall be
converted into Floating Rate Loans in accordance with Section 2.11.
<PAGE>
2.22 Limitations on Interest Periods. Each Interest Period selected
-------------------------------
by the Borrower (a) which commences on the last Business Day of a calendar month
(or, with respect to any LIBO Rate Loan, 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 subsequent calendar month,
(b) which would otherwise end on a day which is not a Business Day shall end on
the next succeeding Business Day (or, with respect to any LIBO Rate Loan, if
such next succeeding Business Day falls in the next succeeding calendar month,
on the next preceding Business Day), (c) which would otherwise commence before
and end after Final Maturity shall end on Final Maturity, and (d) shall have a
duration of not less than one month, as to any LIBO Rate Loan, and, if any
Interest Period would otherwise be a shorter period, the relevant Loan shall be
a Floating Rate Loan during such period.
2.23 Letters in Lieu of Transfer Orders. The Agent agrees that none
----------------------------------
of the letters in lieu of transfer or division orders provided by the Borrower
pursuant to Section 3.1(f)(iii) or Section 5.7 will be sent to the addressees
thereof prior to the occurrence of an Event of Default, at which time the Agent
may, at its option and in addition to the exercise of any of its other rights
and remedies, send any or all of such letters but only to the extent such Event
of Default still exists.
2.24 Power of Attorney. The Borrower hereby designates the Agent as
-----------------
its agent and attorney-in-fact, to act in its name, place, and stead for the
purpose of completing and, upon the occurrence of an Event of Default,
delivering any and all of the letters in lieu of transfer orders delivered by
the Borrower to the Agent pursuant to Section 3.1(f)(iii) or Section 5.7,
including, without limitation, completing any blanks contained in such letters
and attaching exhibits thereto describing the relevant Collateral. The Borrower
hereby ratifies and confirms all that the Agent shall reasonably and lawfully do
or cause to be done by virtue of this power of attorney and the rights granted
with respect to such power of attorney. This power of attorney is coupled with
the interests of the Agent in the Collateral, shall commence and be in full
force and effect as of the Closing Date and shall remain in full force and
effect and shall be irrevocable so long as any Obligation remains outstanding or
unpaid or any Commitment exists. The powers conferred on the Agent by this
appointment are solely to protect the interests of the Lender under the Loan
Documents and shall not impose any duty upon the Agent to exercise any such
powers. The Agent shall be accountable only for amounts that it actually
receives as a result of the exercise of such powers and shall not be responsible
to the Borrower or any other Person for any act or failure to act with respect
to such powers, except for negligence or willful misconduct or omission.
ARTICLE III
-----------
CONDITIONS
----------
The obligations of the Lenders to enter into this Agreement and to
make Loans and issue Letters of Credit are subject to the satisfaction of the
following conditions precedent:
3.1 Receipt of Loan Documents and Other Items. The Lenders shall
-----------------------------------------
have no obligation under this Agreement unless and until all matters incident to
the consummation of the
<PAGE>
transactions contemplated herein, including, without limitation, the review by
the Agent or its counsel of the title of the Borrower to its Oil and Gas
Properties, shall be satisfactory to the Agent, and the Agent shall have
received, reviewed, and approved the following documents and other items,
appropriately executed when necessary and, where applicable, acknowledged by one
or more authorized officers of the Borrower, all in form and substance
satisfactory to the Agent and dated, where applicable, of even date herewith or
a date prior thereto and acceptable to the Agent:
(a) multiple counterparts of this Agreement, as requested by the
Lender;
(b) the Notes;
(c) copies of the Articles of Incorporation of the Borrower and all
amendments thereto, accompanied by a certificate dated the Closing Date
issued by the secretary or an assistant secretary or another authorized
representative of the Borrower to the effect that each such copy is correct
and complete;
(d) a certificate of incumbency dated the Closing Date, including
specimen signatures of all officers or other representatives of the
Borrower who are authorized to execute Loan Documents on behalf of the
Borrower, such certificate being executed by the manager or another
authorized representative of the Borrower;
(e) copies of resolutions, to the extent required under the Operating
Agreement of the Borrower, adopted by the board of directors of the
Borrower approving the Loan Documents to which the Borrower is a party and
authorizing the transactions contemplated herein and therein, accompanied
by a certificate dated the Closing Date issued by the manager or another
authorized representative of the Borrower to the effect that such copies
are true and correct copies of resolutions duly adopted and that such
resolutions constitute all the resolutions adopted with respect to such
transactions, have not been amended, modified, or rescinded in any respect,
and are in full force and effect as of the date of such certificate;
(f) multiple counterparts, as requested by the Lender, of the
following Security Instruments creating, evidencing, perfecting, and
otherwise establishing Liens in favor of the Lender in and to the
Collateral:
(i) Mortgage, Deed of Trust, Indenture, Security
Agreement, Assignment of Production, and Financing Statement from the
Borrower covering all Oil and Gas Properties of the Borrower and all
improvements, personal property, and fixtures related thereto;
(ii) Financing Statements from the Borrower, as debtor,
constituent to the instrument described in clause (i) above;
(iii) undated letters, in form and substance satisfactory
to the Agent, from the Borrower to each purchaser of production and
<PAGE>
disburser of the proceeds of production from or attributable to the
Mortgaged Properties, together with additional letters with the
addressees left blank, authorizing and directing the addressees to
make future payments attributable to production from the Mortgaged
Properties directly to the Agent;
(g) certificates dated as of a recent date from the Secretary of
State or other appropriate Governmental Authority evidencing the existence
or qualification and good standing of the Borrower in its jurisdictions of
formation and in any other jurisdictions where it does business;
(h) results of searches of the UCC Records of the Secretary of State
of the State of California from a source acceptable to the Agent and
reflecting no Liens against any of the Collateral as to which perfection of
a Lien is accomplished by the filing of a financing statement other than in
favor of the Agent for the benefit of the Lenders;
(i) confirmation, acceptable to the Agent, of the title of the
Borrower to the Mortgaged Properties, free and clear of Liens other than
Permitted Liens;
(j) all operating, lease, sublease, royalty, sales, exchange,
processing, farmout, bidding, pooling, unitization, communitization, and
other material agreements relating to the Mortgaged Properties reasonably
requested by the Lender;
(k) engineering reports covering the Mortgaged Properties;
(l) the opinion of Winstead, Sechrest & Minick, P.C., counsel to the
Borrower, in the form attached hereto as Exhibit IV, with such changes
thereto as may be approved by the Agent;
(m) the opinion of special counsel to the Borrower in each of the
state of California, in the form attached hereto as Exhibit , with such
changes thereto as may be approved by the Agent;
(n) certificates evidencing the insurance coverage required pursuant
to Section 51.8; and
(o) such other agreements, documents, instruments, opinions,
certificates, waivers, consents, and evidence as the Lender may reasonably
request.
3.2 Each Loan and Letter of Credit. In addition to the conditions
------------------------------
precedent stated elsewhere herein, the Lender shall not be obligated to make any
Loan or issue any Letter of Credit unless:
<PAGE>
(a) the Borrower shall have delivered to the Agent a Borrowing
Request at least the requisite time prior to the requested date for the
relevant Loan, or a Letter of Credit Application at least three Business
Days prior to the requested issuance date for the relevant Letter of
Credit; and each statement or certification made in such Borrowing Request
or Letter of Credit Application, as the case may be, shall be true and
correct in all material respects on the requested date for such Loan or the
issuance of such Letter of Credit;
(b) no Event of Default or Default shall exist or will occur as a
result of the making of the requested Loan or the issuance of the requested
Letter of Credit;
(c) if requested by the Agent, the Borrower shall have delivered
evidence satisfactory to the Agent substantiating any of the material
matters contained in this Agreement which are necessary to enable the
Borrower to qualify for such Loan or the issuance of such Letter of Credit;
(d) no event shall have occurred which, in the reasonable opinion of
the Agent or any of the Lenders, would have a Material Adverse Effect;
(e) each of the representations and warranties contained in this
Agreement shall be true and correct and shall be deemed to be repeated by
the Borrower as if made on the requested date for such Loan or the issuance
of such Letter of Credit (except to the extent such representations and
warranties expressly refer to an earlier date, in which case, they shall be
true and correct as of such earlier date) provided, however, for purposes
of this Section 3.2, in each representation and warranty in Article IV that
makes reference to an Exhibit, the representation under this Section 3.2
that such representation and warranty in Article IV is true on and as of
the date of the making of such Loan or the issuance of such Letter of
Credit shall take into account (i) any subsequent amendments to any Exhibit
referred to therein, (ii) any exception contained in a written notice
received by the Agent which makes specific reference to the applicable
Exhibit, or (iii) any written disclosure made by the Borrower or any of its
Subsidiaries prior to the date as of which such representation or warranty
is made, provided that such amendment, exception or disclosure has been
consented to by the Required Banks if such amendment, exception or
disclosure amends or waives provisions of this Agreement or is otherwise
required under the terms of this Agreement.
(f) all of the Security Instruments shall be in full force and effect
and provide to the Lenders the security intended thereby;
(g) neither the consummation of the transactions contemplated hereby
nor the making of such Loan or the issuance of such Letter of Credit shall
contravene, violate, or conflict with any Requirement of Law;
<PAGE>
(h) except as shown in Exhibit VI, the Borrower shall hold full legal
title to the Collateral and be the sole beneficial owner thereof;
(i) the Agent and the Lenders shall have received the payment of all
fees payable to the Agent and the Lenders hereunder and reimbursement from
the Borrower, or special legal counsel for the Agent shall have received
payment from the Borrower, for (i) all reasonable fees and expenses of
counsel to the Agent for which the Borrower is responsible pursuant to
applicable provisions of this Agreement and for which invoices have been
presented at least 15 days prior to the date of the relevant Loan or Letter
of Credit Application (otherwise the initial Borrowing which must be
presented at least five days prior to the Closing Date), and (ii) estimated
fees charged by filing officers and other public officials incurred or to
be incurred in connection with the filing and recordation of any Security
Instruments, for which invoices have been presented as of or prior to the
date of the requested Loan or Letter of Credit Application (otherwise the
initial Borrowing which must be presented at least five days prior to the
Closing Date); and
(j) all matters incident to the consummation of the transactions
hereby contemplated shall be satisfactory to the Agent and each Lender in
the exercise of their reasonable discretion.
ARTICLE IV
----------
REPRESENTATIONS AND WARRANTIES
------------------------------
To induce the Agent and the Lenders to enter into this Agreement and
to make the Loans and issue Letters of Credit, the Borrower represents and
warrants to the Agent and each Lender (which representations and warranties
shall survive the delivery of the Notes) that:
4.1 Due Authorization. The execution and delivery by the Borrower
-----------------
of this Agreement and the borrowings hereunder, the execution and delivery by
the Borrower of the Notes, the repayment of the Notes and interest and fees
provided for in the Notes and this Agreement, the execution and delivery of the
Security Instruments by the Borrower and the performance of all obligations of
the Borrower under the Loan Documents are within the power of the Borrower, have
been duly authorized by all necessary corporate action by the Borrower, and do
not and will not (a) require the consent of any Governmental Authority, (b)
contravene or conflict with any Requirement of Law, (c) except as shown on
Exhibit VI, contravene or conflict with any indenture, instrument, or other
agreement to which the Borrower is a party or by which any Property of the
Borrower may be presently bound or encumbered, except where such contravention
or conflict would not individually or in the aggregate result in a Material
Adverse Effect, or (d) result in or require the creation or imposition of any
Lien in, upon or of any Property of the Borrower under any such indenture,
instrument, or other agreement, other than the Loan Documents.
<PAGE>
4.2 Existence. The Borrower is a corporation duly organized, legally
---------
existing, and in good standing under the laws of its state of organization and
is duly qualified as a foreign corporation and is in good standing in all
jurisdictions wherein the ownership of Property or the operation of its business
necessitates same, other than those jurisdictions wherein the failure to so
qualify will not have a Material Adverse Effect.
4.3 Valid and Binding Obligations. All Loan Documents, when duly
-----------------------------
executed and delivered by the Borrower, will be the legal, valid, and binding
obligations of the Borrower, enforceable against the Borrower in accordance with
their respective terms except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of creditors'
rights generally or by equitable principles relative to enforceability.
4.4 Security Instruments. The provisions of each Security Instrument
--------------------
are effective to create in favor of the Lender, a legal, valid, and enforceable
Lien in all right, title, and interest of the Borrower in the Collateral
described therein, except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of creditors'
rights generally or by equitable principles relative to enforceability, which
Liens, assuming the accomplishment of recording and filing in accordance with
applicable laws prior to the intervention of rights of other Persons, shall
constitute fully perfected first-priority Liens on all right, title, and
interest of the Borrower in the Collateral described therein subject to
Permitted Liens.
4.5 Title to Assets. The Borrower has good and indefeasible title to
---------------
all of its interests in its Properties then owned by it, free and clear of all
Liens except Permitted Liens.
4.6 No Material Misstatements. As of the Closing Date, no
-------------------------
information, exhibit, statement, or report furnished to the Lender by or at the
direction of the Borrower in connection with this Agreement contains any
material misstatement of fact or omits to state a material fact or any fact
necessary to make the statements contained therein not misleading as of the date
made or deemed made.
4.7 Liabilities, Litigation, and Restrictions. As of the Closing
-----------------------------------------
Date, other than as listed under the heading "Liabilities" on Exhibit VI
attached hereto, the Borrower has no liabilities, direct, or contingent, which
would result in a Material Adverse Effect, except as set forth under the heading
"Litigation" on Exhibit VI hereto, no litigation or other action of any nature
affecting the Borrower is pending before any Governmental Authority or, to the
best knowledge of the Borrower, threatened against or affecting the Borrower
which might reasonably be expected to result in any material impairment of its
ownership of any Collateral or have a Material Adverse Effect. To the best
knowledge of the Borrower, after due inquiry, no unusual or unduly burdensome
restriction, restraint or hazard exists by contract, Requirement of Law, or
otherwise relative to the business or operations of the Borrower or the
ownership and operation of the Collateral would result in a Material Adverse
Effect, other than such as relate generally to Persons engaged in business
activities similar to those conducted by the Borrower.
4.8 Authorizations; Consents. Except as expressly contemplated by
------------------------
this Agreement, no authorization, consent, approval, exemption, franchise,
permit, or license of, or filing with, any Governmental Authority or any other
Person is required to authorize or is otherwise
<PAGE>
required in connection with the valid execution and delivery by the Borrower of
the Loan Documents or any instrument contemplated hereby, the repayment by the
Borrower of the Note and interest and fees provided in the Note and this
Agreement, or the performance by the Borrower of the Obligations.
4.9 Compliance with Laws. The Borrower and its Property, including,
--------------------
without limitation, the Mortgaged Property, are in compliance with all material
applicable Requirements of Law, including, without limitation, Environmental
Laws, the Natural Gas Policy Act of 1978, as amended, and ERISA, except to the
extent non-compliance with any such Requirements of Law could not reasonably be
expected to have a Material Adverse Effect.
4.10 ERISA. As of the Closing Date, the Borrower does not maintain,
-----
nor has it maintained, any Plan. As of the Closing Date, the Borrower does not
currently contribute to or have any obligation to contribute to or otherwise
have any liability with respect to any Plan.
4.11 Environmental Laws. To the best knowledge and belief of the
------------------
Borrower, except as would not have a Material Adverse Effect, or as described on
Exhibit VI under the heading "Environmental Matters:"
(a) no Property of the Borrower is currently on or has ever been on,
or is adjacent to any Property which is on or has ever been on, any federal
or state list of Superfund Sites;
(b) no Hazardous Substances have been generated, transported, and/or
disposed of by the Borrower at a site which was, at the time of such
generation, transportation, and/or disposal, or has since become, a
Superfund Site;
(c) except in accordance with applicable Requirements of Law or the
terms of a valid permit, license, certificate, or approval of the relevant
Governmental Authority, no Release of Hazardous Substances by the Borrower
or from, affecting, or related to any Property of the Borrower or adjacent
to any Property of the Borrower has occurred; and
(d) no Environmental Complaint has been received by the Borrower.
4.12 Compliance with Federal Reserve Regulations. No transaction
-------------------------------------------
contemplated by the Loan Documents is in violation of any regulations
promulgated by the Board of Governors of the Federal Reserve System, including,
without limitation, Regulations G, T, U, or X.
4.13 Investment Company Act Compliance. The Borrower is not, nor is
---------------------------------
the Borrower directly or indirectly controlled by or acting on behalf of any
Person which is, an "investment company" or an "affiliated person" of an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
<PAGE>
4.14 Public Utility Holding Company Act Compliance. The Borrower is
---------------------------------------------
not a "holding company," or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company," within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
4.15 Proper Filing of Tax Returns; Payment of Taxes Due. The Borrower
--------------------------------------------------
has duly and properly filed its United States income tax return and all other
tax returns which are required to be filed and has paid all taxes due except (i)
such as are being contested in good faith and as to which adequate provisions
and disclosures have been made, and (ii) taxes, assessments, levies or other
charges imposed by any Governmental Authority, other than income taxes imposed
by the United States of America, which respect of which the failure to make
payment could not, by reason of the amount thereof or of remedies attributable
to such Governmental Authorities, reasonably be expected to have a Material
Adverse Effect. The respective charges and reserves on the books of the
Borrower with respect to taxes and other governmental charges are adequate.
4.16 Refunds. Except as described on Exhibit VI under the heading
-------
"Refunds," no orders of, proceedings pending before, or other requirements of,
the Federal Energy Regulatory Commission, the Texas Railroad Commission, or any
Governmental Authority exist which could result in the Borrower being required
to refund any material portion of the proceeds received or to be received from
the sale of hydrocarbons constituting part of the Mortgaged Property.
4.17 Gas Contracts. Except as described on Exhibit VI under the
-------------
heading "Gas Contracts," the Borrower (a) is not obligated in any material
respect by virtue of any prepayment made under any contract containing a "take-
or-pay" or "prepayment" provision or under any similar agreement to deliver
hydrocarbons produced from or allocated to any of the Mortgaged Property at some
future date without receiving full payment therefor within 90 days of delivery,
and (b) has not produced gas, in any material amount, subject to, and neither
the Borrower nor any of the Mortgaged Properties is subject to, balancing rights
of third parties or subject to balancing duties under governmental requirements,
except as to such matters for which the Borrower has established monetary
reserves adequate in amount to satisfy such obligations and has segregated such
reserves from other accounts.
4.18 Intellectual Property. The Borrower owns or is licensed to use
---------------------
all Intellectual Property necessary to conduct all business material to its
condition (financial or otherwise), business, or operations as such business is
currently conducted. No claim has been asserted or is pending by any Person
with the respect to the use of any such Intellectual Property or challenging or
questioning the validity or effectiveness of any such Intellectual Property; and
the Borrower knows of no valid basis for any such claim. The use of such
Intellectual Property by the Borrower does not infringe on the rights of any
Person, except for such claims and infringements as do not, in the aggregate,
give rise to any material liability on the part of the Borrower.
4.19 Casualties or Taking of Property. Except as disclosed on Exhibit
--------------------------------
VI under the heading "Casualties," except as would not result in a Material
Adverse Effect, neither the business nor any Property of the Borrower has been
materially adversely affected as a result of any fire, explosion, earthquake,
flood, drought, windstorm, accident, strike or other labor disturbance,
<PAGE>
embargo, requisition or taking of Property, or cancellation of contracts,
permits, or concessions by any Governmental Authority, riot, activities of armed
forces, or acts of God.
4.20 Locations of Borrower. The principal place of business and chief
---------------------
executive office of the Borrower is located at the address of the Borrower set
forth in Section 9.3 or at such other location as the Borrower may have, by
proper written notice hereunder, advised the Lender, provided that such other
location is within a state in which appropriate financing statements from the
Borrower in favor of the Lender have been filed.
4.21 Subsidiaries. As of the Closing Date, the Borrower has no
------------
Subsidiaries.
ARTICLE V
---------
AFFIRMATIVE COVENANTS
---------------------
So long as any Obligation remains outstanding or unpaid or any
Commitment exists, the Borrower shall:
5.1 Maintenance and Access to Records. Keep adequate records, in
---------------------------------
accordance with GAAP, of all its transactions so that at any time, and from time
to time, its true and complete financial condition may be readily determined,
and within ten days following the reasonable request of the Agent, make such
records available for inspection by the Agent and, at the expense of the
Borrower, allow the Agent to make and take away copies thereof.
5.2 Quarterly Financial Statements; Compliance Certificates. Deliver
-------------------------------------------------------
to the Agent, (a) on or before the 45th day after the close of each of the first
three quarterly periods of each fiscal year of the Borrower, a copy of the
unaudited Financial Statements of the Borrower as at the close of such
quarterly period and from the beginning of such fiscal year to the end of such
period, such Financial Statements to be certified by a Responsible Officer of
the Borrower as having been prepared in accordance with GAAP consistently
applied and as a fair presentation of the condition of the Borrower, subject to
changes resulting from normal year-end audit adjustments, and (b) on or before
the 45th day after the close of each fiscal quarter, with the exception of the
last fiscal quarter, a Compliance Certificate.
5.3 Annual Financial Statements. Deliver to the Agent, on or before
---------------------------
the 90th day after the close of each fiscal year of the Borrower, a copy of the
annual audited Financial Statements of the Borrower and a Compliance
Certificate.
5.4 Oil and Gas Reserve Reports. (a) Deliver to the Agent and each
---------------------------
Lender no later than April 1 of each year during the term of this Agreement,
engineering reports in form and substance satisfactory to the Agent, certified
by any nationally- or regionally-recognized independent consulting petroleum
engineers acceptable to the Agent as fairly and accurately setting forth (i) the
proven and producing, shut-in, behind-pipe, and undeveloped oil and gas reserves
(separately classified as such) attributable to the Mortgaged Properties as of
January 1 of the year for which such reserve reports are furnished, (ii) the
aggregate present value of the future net income with respect
<PAGE>
to such Mortgaged Properties, discounted at a stated per annum discount rate of
proven and producing reserves, (iii) projections of the annual rate of
production, gross income, and net income with respect to such proven and
producing reserves, and (iv) information with respect to the "take-or-pay,"
"prepayment," and gas-balancing liabilities of the Borrower.
(b) Deliver to the Agent and each Lender no later than October 1 of
each year during the term of this Agreement, engineering reports in form and
substance satisfactory to the Agent prepared by or under the supervision of the
chief petroleum engineer of the Borrower evaluating the Mortgaged Properties as
of July 1, of the year for which such reserve reports are furnished and updating
the information provided in the reports pursuant to Section 5.4(a).
(c) Each of the reports provided pursuant to this Section shall be
submitted to the Agent and each Lender together with additional data concerning
pricing, quantities of production from the Mortgaged Properties, volumes of
production sold, purchasers of production, gross revenues, expenses, and such
other information and engineering and geological data with respect thereto as
the Lenders may reasonably request.
5.5 Title Opinions; Title Defects. Promptly upon the reasonable
-----------------------------
request of the Agent, furnish to the Agent title opinions, in form and substance
and by counsel reasonably satisfactory to the Agent, or other confirmation of
title acceptable to the Agent, covering Oil and Gas Properties constituting not
less than 85% of the value, determined by the Agent in its reasonable
discretion, of the Mortgaged Properties; and within 60 days after notice by the
Agent of any defect, material in the opinion of the Lenders in value, in the
title of the Borrower to any of its Oil and Gas Properties, clear such title
defects, and, in the event any such title defects are not cured in a timely
manner, pay all related reasonable costs and fees incurred by the Agent to do
so.
5.6 Notices of Certain Events. Deliver to the Agent, within five
-------------------------
days of having knowledge of the occurrence of any of the following events or
circumstances, a written statement with respect thereto, signed by a Responsible
Officer of the Borrower and setting forth the relevant event or circumstance and
the steps being taken by the Borrower with respect to such event or
circumstance:
(a) any Default or Event of Default;
(b) any default or event of default under any contractual obligation
of the Borrower, or any litigation, investigation, or proceeding between
the Borrower and any Governmental Authority which, in either case, if not
cured or if adversely determined, as the case may be, could reasonably be
expected to have a Material Adverse Effect;
(c) any litigation or proceeding involving the Borrower as a
defendant or in which any Property of the Borrower is subject to a claim
and in which the amount involved is $500,000 or more and which is not
covered by insurance or which is material and in which injunctive or
similar relief is sought;
<PAGE>
(d) the receipt by the Borrower of any Environmental Complaint which,
if not cured or if adversely determined could reasonably be expected to
have a Material Adverse Effect;
(e) any actual, proposed, or threatened testing or other
investigation by any Governmental Authority or other Person concerning the
environmental condition of, or relating to, any Property of the Borrower or
adjacent to any Property of the Borrower following any allegation of a
violation of any Requirement of Law which could reasonably be expected to
result in a Material Adverse Effect;
(f) any Release of Hazardous Substances by the Borrower or from,
affecting, or related to any Property of the Borrower or adjacent to any
Property of the Borrower except in accordance with applicable Requirements
of Law or the terms of a valid permit, license, certificate, or approval of
the relevant Governmental Authority, or the violation of any Environmental
Law, or the revocation, suspension, or forfeiture of or failure to renew,
any permit, license, registration, approval, or authorization which in each
case could reasonably be expected to have a Material Adverse Effect;
(g) the change in identity or address of any Person remitting to the
Borrower proceeds from the sale of hydrocarbon production from or
attributable to any Mortgaged Property;
(h) any change in the senior management of the Borrower; and
(i) any other event or condition which could reasonably be expected
to have a Material Adverse Effect.
5.7 Letters in Lieu of Transfer Orders; Division Orders. Promptly
---------------------------------------------------
upon reasonable request by the Agent at any time and from time to time, execute
such letters in lieu of transfer orders, in addition to the letters signed by
the Borrower and delivered to the Agent in satisfaction of the condition set
forth in Section 3.1(f)(iii) and/or division and/or transfer orders as are
necessary or appropriate to transfer and deliver to the Agent proceeds from or
attributable to any Mortgaged Property.
5.8 Additional Information. Furnish to the Agent, promptly upon the
----------------------
reasonable request of the Agent, such additional financial or other information
concerning the assets, liabilities, operations, and transactions of the Borrower
as the Agent may from time to time request; and notify the Agent not less than
ten Business Days prior to the occurrence of any condition or event that may
change the proper location for the filing of any financing statement or other
public notice or recording for the purpose of perfecting a Lien in any
Collateral, including, without limitation, any change in its name or the
location of its principal place of business or chief executive office; and upon
the request of the Agent, execute such additional Security Instruments as may be
necessary or appropriate in connection therewith.
<PAGE>
5.9 Compliance with Laws. Except to the extent the failure to comply
--------------------
or cause compliance would not have a Material Adverse Effect, comply with all
applicable Requirements of Law, including, without limitation, (a) the Natural
Gas Policy Act of 1978, as amended, (b) ERISA, (c) Environmental Laws, and (d)
all permits, licenses, registrations, approvals, and authorizations (i) related
to any natural or environmental resource or media located on, above, within, in
the vicinity of, related to or affected by any Property of the Borrower, (ii)
required for the performance of the operations of the Borrower, or (iii)
applicable to the use, generation, handling, storage, treatment, transport, or
disposal of any Hazardous Substances; and cause all employees, crew members,
agents, contractors, subcontractors, and future lessees (pursuant to appropriate
lease provisions) of the Borrower, while such Persons are acting within the
scope of their relationship with the Borrower, to comply with all such
Requirements of Law as may be necessary or appropriate to enable the Borrower to
so comply.
5.10 Payment of Assessments and Charges. Pay all taxes, assessments,
----------------------------------
governmental charges, rent, and other Indebtedness which, if unpaid, might
become a Lien against the Property of the Borrower, except for Permitted Liens
and any of the foregoing being contested in good faith and as to which adequate
reserve in accordance with GAAP has been established or unless failure to pay
would not have a Material Adverse Effect.
5.11 Maintenance of Existence and Good Standing. Maintain its
------------------------------------------
existence or qualification and good standing in its jurisdictions of
organization and in all jurisdictions wherein the Property now owned or
hereafter acquired or business now or hereafter conducted necessitates same,
unless the failure to do so would not have a Material Adverse Effect.
5.12 Payment of Notes; Performance of Obligations. Pay the Notes
--------------------------------------------
according to the reading, tenor, and effect thereof, as modified hereby, and do
and perform every act and discharge all of its other Obligations.
5.13 Further Assurances. Promptly cure any defects in the execution
------------------
and delivery of any of the Loan Documents and all agreements contemplated
thereby, and execute, acknowledge, and deliver such other assurances and
instruments as shall, in the reasonable opinion of the Agent or any Lender, be
necessary to fulfill the terms of the Loan Documents.
5.14 Initial Fees and Expenses of Counsel to Lender. On the Closing
----------------------------------------------
Date, promptly reimburse the Agent for all reasonable fees and expenses of
Jackson Walker L.L.P., special counsel to the Agent, in connection with the
preparation of this Agreement and all documentation contemplated hereby, the
satisfaction of the conditions precedent set forth herein, the filing and
recordation of Security Instruments, and the consummation of the transactions
contemplated in this Agreement. Jackson Walker L.L.P. will furnish a detailed
statement of services rendered and a statement for estimated recording fees one
day prior to the Closing Date.
5.15 Subsequent Fees and Expenses of Lender. Upon request by the
--------------------------------------
Agent, promptly reimburse the Agent (to the fullest extent permitted by law) for
all amounts reasonably expended, advanced, or incurred by or on behalf of the
Agent to satisfy any obligation of the Borrower under any of the Loan Documents
after the occurrence and during the continuance of an Event of Default; to
collect the Obligations; to ratify, amend, restate, or prepare additional Loan
<PAGE>
Documents, as the case may be; for the filing and recordation of Security
Instruments; to enforce the rights of the Agent under any of the Loan Documents;
and to protect the Properties or business of the Borrower, including, without
limitation, the Collateral, which amounts shall be deemed compensatory in nature
and liquidated as to amount upon notice to the Borrower by the Agent and which
amounts shall include, but not be limited to (a) all court costs, (b) reasonable
attorneys' fees, (c) reasonable fees and expenses of auditors and accountants
incurred to protect the interests of the Agent, (d) fees and expenses incurred
in connection with the participation by the Agent as a member of the creditors'
committee in a case commenced under any Insolvency Proceeding, (e) fees and
expenses incurred in connection with lifting the automatic stay prescribed in
(S)362 Title 11 of the United States Code, and (f) fees and expenses incurred in
connection with any action pursuant to (S)1129 Title 11 of the United States
Code all reasonably incurred by the Agent in connection with the collection of
any sums due under the Loan Documents, together with interest at the per annum
interest rate equal to the Floating Rate, calculated on a basis of a calendar
year of 365 or 366 days, as the case may be, counting the actual number of days
elapsed, on each such amount from the date of notification that the same was
expended, advanced, or incurred by the Agent until the date it is repaid to the
Agent, with the obligations under this Section surviving the non-assumption of
this Agreement in a case commenced under any Insolvency Proceeding and being
binding upon the Borrower and/or a trustee, receiver, custodian, or liquidator
of the Borrower appointed in any such case.
5.16 Operation of Oil and Gas Properties. Develop, maintain, and
-----------------------------------
operate its Oil and Gas Properties in a prudent and workmanlike manner in
accordance with industry standards.
5.17 Maintenance and Inspection of Properties. Maintain all of its
----------------------------------------
tangible Properties in good repair and condition, ordinary wear and tear
excepted; make all necessary replacements thereof and operate such Properties in
a good and workmanlike manner; and permit any authorized representative of the
Lender to visit and inspect, at the expense of the Borrower, any tangible
Property of the Borrower at reasonable times and upon reasonable advance notice.
5.18 Maintenance of Insurance. Maintain insurance with respect to its
------------------------
Properties and businesses against such liabilities, casualties, risks, and
contingencies as is customary in the relevant industry and sufficient to prevent
a Material Adverse Effect, all such insurance to be in amounts and from insurers
reasonably acceptable to the Agent and, within 30 days of the Closing Date for
property damage insurance covering Collateral and business interruption
insurance, if any, maintained by Borrower, naming the Agent as loss payee, and,
upon any renewal of any such insurance and at other times upon request by the
Lender, furnish to the Lender evidence, satisfactory to the Lender, of the
maintenance of such insurance. From and during the existence of an Event of
Default or if the Borrowing Base is reduced because of such event, the Lender
shall have the right to collect, and the Borrower hereby assigns to the Agent,
any and all monies that may become payable under any policies of insurance
relating to business interruption or by reason of damage, loss, or destruction
of any of the Collateral. From and during the existence of an Event of Default
or if the Borrowing Base is reduced because of such event, the Agent may, at its
option, apply all such sums or any part thereof received by it toward the
payment of the Obligations, whether matured or unmatured, application to be made
first to interest and then to principal, and shall deliver to the Borrower the
balance, if any, after such application has been made. Provided that no Default
or
<PAGE>
Event of Default has occurred and is continuing, the Agent shall deliver any
such proceeds received by it to the Borrower. In the event the Agent receives
insurance proceeds not attributable to Collateral or business interruption or
while no Event of Default exists, the Agent shall deliver any such proceeds to
the Borrower.
5.19 INDEMNIFICATION. INDEMNIFY AND HOLD THE LENDER AND ITS
---------------
SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT, AND
AFFILIATES AND EACH TRUSTEE FOR THE BENEFIT OF THE AGENT AND EACH LENDER UNDER
ANY SECURITY INSTRUMENT HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, LOSSES,
DAMAGES, LIABILITIES, FINES, PENALTIES, CHARGES, ADMINISTRATIVE AND JUDICIAL
PROCEEDINGS AND ORDERS, JUDGMENTS, REMEDIAL ACTIONS, REQUIREMENTS AND
ENFORCEMENT ACTIONS OF ANY KIND, AND ALL COSTS AND EXPENSES INCURRED IN
CONNECTION THEREWITH (INCLUDING, WITHOUT LIMITATION, ATTORNEYS' FEES AND
EXPENSES), ARISING DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, FROM (A) THE
PRESENCE OF ANY HAZARDOUS SUBSTANCES ON, UNDER, OR FROM ANY PROPERTY OF THE
BORROWER, WHETHER PRIOR TO OR DURING THE TERM HEREOF, (B) ANY ACTIVITY CARRIED
ON OR UNDERTAKEN ON OR OFF ANY PROPERTY OF THE BORROWER, WHETHER PRIOR TO OR
DURING THE TERM HEREOF, AND WHETHER BY THE BORROWER OR ANY PREDECESSOR IN TITLE,
EMPLOYEE, AGENT, CONTRACTOR, OR SUBCONTRACTOR OF THE BORROWER OR ANY OTHER
PERSON AT ANY TIME OCCUPYING OR PRESENT ON SUCH PROPERTY, IN CONNECTION WITH THE
HANDLING, TREATMENT, REMOVAL, STORAGE, DECONTAMINATION, CLEANUP, TRANSPORTATION,
OR DISPOSAL OF ANY HAZARDOUS SUBSTANCES AT ANY TIME LOCATED OR PRESENT ON OR
UNDER SUCH PROPERTY, (C) ANY RESIDUAL CONTAMINATION ON OR UNDER ANY PROPERTY OF
THE BORROWER, (D) ANY CONTAMINATION OF ANY PROPERTY OR NATURAL RESOURCES ARISING
IN CONNECTION WITH THE GENERATION, USE, HANDLING, STORAGE, TRANSPORTATION OR
DISPOSAL OF ANY HAZARDOUS SUBSTANCES BY THE BORROWER OR ANY EMPLOYEE, AGENT,
CONTRACTOR, OR SUBCONTRACTOR OF THE BORROWER WHILE SUCH PERSONS ARE ACTING
WITHIN THE SCOPE OF THEIR RELATIONSHIP WITH THE BORROWER, IRRESPECTIVE OF
WHETHER ANY OF SUCH ACTIVITIES WERE OR WILL BE UNDERTAKEN IN ACCORDANCE WITH
APPLICABLE REQUIREMENTS OF LAW, OR (E) THE PERFORMANCE AND ENFORCEMENT OF ANY
LOAN DOCUMENT, ANY ALLEGATION BY ANY BENEFICIARY OF A LETTER OF CREDIT OF A
WRONGFUL DISHONOR BY THE LENDER OF A CLAIM OR DRAFT PRESENTED THEREUNDER, OR ANY
OTHER ACT OR OMISSION IN CONNECTION WITH OR RELATED TO ANY LOAN DOCUMENT OR THE
TRANSACTIONS CONTEMPLATED THEREBY, EXCLUDING ANY OF THE FOREGOING IN THIS
SECTION ARISING FROM NEGLIGENCE OR WILFUL MISCONDUCT, WHETHER SOLE OR
CONCURRENT, ON THE PART OF THE LENDER OR ANY OF ITS SHAREHOLDERS, OFFICERS,
DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT, OR AFFILIATES OR ANY TRUSTEE
FOR THE BENEFIT OF THE LENDER UNDER ANY SECURITY INSTRUMENT; WITH THE FOREGOING
INDEMNITY SURVIVING SATISFACTION OF ALL OBLIGATIONS AND THE TERMINATION OF THIS
AGREEMENT, UNLESS ALL SUCH OBLIGATIONS HAVE BEEN
<PAGE>
SATISFIED WHOLLY IN CASH FROM THE BORROWER AND NOT BY WAY OF REALIZATION AGAINST
ANY COLLATERAL OR THE CONVEYANCE OF ANY PROPERTY IN LIEU THEREOF, PROVIDED THAT
--------
SUCH INDEMNITY SHALL NOT EXTEND TO ANY ACT OR OMISSION BY THE LENDER WITH
RESPECT TO ANY PROPERTY SUBSEQUENT TO THE AGENT OR THE LENDERS BECOMING THE
OWNER OF SUCH PROPERTY AND WITH RESPECT TO WHICH PROPERTY SUCH CLAIM, LOSS,
DAMAGE, LIABILITY, FINE, PENALTY, CHARGE, PROCEEDING, ORDER, JUDGMENT, ACTION,
OR REQUIREMENT ARISES SUBSEQUENT TO THE ACQUISITION OF TITLE THERETO BY THE
AGENT OR THE LENDERS.
5.20 Borrower's Year 2000 Compliance.
-------------------------------
(A) Furnish such additional information, statements and other
reports with respect to Borrower's activities, course of action and progress
towards becoming Year 2000 Compliant as Agent may request from time to time.
(B) In the event of any change in circumstances that causes or will
likely cause any of Borrower's representations and warranties with respect to
its being or becoming Year 2000 Compliant to no longer be true (hereinafter,
referred to as a "Change in Circumstances") then Borrower shall promptly, and in
any event within ten (10) days of receipt of information regarding a Change in
Circumstances, provide Agent with written notice (the "Notice") that describes
in reasonable detail the Change in Circumstances and how such Change in
Circumstances caused or will likely cause Borrower's representations and
warranties with respect to being or becoming Year 2000 Compliant to no longer be
true. Borrower shall, within ten (10) days of a request, also provide Agent
with any additional information Agent requests of Borrower in connection with
the Notice and/or a Change in Circumstances.
(C) Give any representative of Lenders access during all business
hours to, and permit such representative to examine, copy or make excerpts from,
any and all books, records and documents in the possession of Borrower and
relating to its affairs, and to inspect any of the properties and Systems of
Borrower, and to project test the Systems to determine if they are Year 2000
Compliant in an integrated environment, all at the sole cost and expense of
Lenders.
5.21 Interest Rate Hedge. Enter into an interest rate hedge with a
-------------------
minimum of $20,000,000 for a period of not less than two (2) years. Such hedge
will be executed with the Lender or a third party reasonably acceptable to the
Lender.
5.22 Commodity Price Hedge. Enter into a Commodity Hedge Agreement
---------------------
(as hereinafter defined) with a minimum of 70% of the projected gas production
levels for a minimum of 36 months. All Commodity Hedge Agreements will be
executed with the Lender or a third party reasonably acceptable to the Lender.
The Lender will provide Letter of Credit support behind third party hedges at an
agreeable support level.
ARTICLE VI
----------
<PAGE>
NEGATIVE COVENANTS
------------------
So long as any Obligation remains outstanding or unpaid or any
Commitment exists, the Borrower will not:
6.1 Indebtedness. Create, incur, assume, or suffer to exist any
------------
Indebtedness, whether by way of loan or otherwise; provided, however, the
foregoing restriction shall not apply to (a) the Obligations, (b) unsecured
accounts payable incurred in the ordinary course of business, which are not
unpaid in excess of 90 days beyond invoice date or are either (i) being
contested in good faith and as to which such reserve as is required by GAAP has
been made or (ii) less than $250,000 in the aggregate, (c) crude oil, natural
gas, or other hydrocarbon floor, collar, cap, price protection, or swap
agreements ("Commodity Hedge Agreements"), in form and substance and with a
Person reasonably acceptable to the Agent and each Lender, provided that (i)
each commitment issued under such agreement must also be approved by the Agent
and each Lender, which approvals are not unreasonably withheld or delayed, (ii)
such agreements shall not be entered into with respect to Mortgaged Properties
constituting more than 80% of monthly production of proven producing reserves as
forecast in Agent and each Lender's most recent engineering evaluation, (iii)
that the strike prices in such agreements are not less than the prices used by
the Agent and each Lender in the most recent Borrowing Base determination, and
(iv) the Agent for the benefit of each Lender shall receive a security interest
in the Commodity Hedge Agreements, (d) interest rate swap or other financial
hedging agreements, in form and substance and with a Person reasonably
acceptable to the Agent and each Lender, (e) Indebtedness in respect of
Permitted Liens, or (f) Indebtedness in respect of amounts owed for installment
payments for property and liability insurance.
6.2 Contingent Obligations. Create, incur, assume, or suffer to
----------------------
exist any Contingent Obligation; provided, however, the foregoing restriction
shall not apply to (a) indemnities, performance guarantees and performance
surety or other bonds provided in the ordinary course of business, (b) trade
credit incurred or operating leases entered into in the ordinary course of
business, (c) Contingent Obligations permitted pursuant to Section 6.1, or (c)
endorsements for collection or deposit in the ordinary course of business.
6.3 Liens. Create, incur, assume, or suffer to exist any Lien on any
-----
of its Oil and Gas Properties or any other Property, whether now owned or
hereafter acquired; provided, however, the foregoing restrictions shall not
apply to Permitted Liens.
6.4 Sales of Assets. Without the prior written consent of the Agent
---------------
and each Lender, sell, transfer, or otherwise dispose of, in one or any series
of transactions, assets, whether now owned or hereafter acquired except for (a)
dispositions of excess, obsolete or worn out machinery, equipment or fixtures,
(b) other assets not to exceed in fair market value $500,000 in a calendar year,
(c) transfers resulting from casualty or condemnation of property or assets, (d)
intercompany sales or transfers of assets in the ordinary course of business, or
(e) sale of equipment to the extent such equipment is exchanged for credit
against the purchase price of similar equipment or the proceeds thereof are so
applied.
<PAGE>
6.5 Leasebacks. Enter into any agreement to sell or transfer any
----------
Property and thereafter rent or lease as lessee such Property or other Property
intended for the same use or purpose as the Property sold or transferred.
6.6 Loans or Advances. Make or agree to make or allow to remain
-----------------
outstanding any loans or advances to any Person; provided, however, the
foregoing restrictions shall not apply to (a) advances or extensions of credit
in the form of accounts receivable incurred in the ordinary course of business
and upon terms common in the industry for such accounts receivable, or (b)
advances to employees of the Borrower for the payment of expenses in the
ordinary course of business.
6.7 Investments. Acquire Investments in, or purchase or otherwise
-----------
acquire all or substantially all of the assets of, any Person; provided,
however, the foregoing restriction shall not apply to the purchase or
acquisition of (a) Oil and Gas Properties, (b) Investments in the form of (i)
debt securities issued or directly and fully guaranteed or insured by the United
States Government or any agency or instrumentality thereof, with maturities of
no more than one year, (ii) commercial paper of a domestic issuer rated at the
date of acquisition at least P-2 by Moody's Investor Service, Inc. or A-2 by
Standard & Poor's Corporation and with maturities of no more than one year from
the date of acquisition, or (iii) repurchase agreements covering debt securities
or commercial paper of the type permitted in this Section, certificates of
deposit, demand deposits, eurodollar time deposits, overnight bank deposits and
bankers' acceptances, with maturities of no more than one year from the date of
acquisition, issued by or acquired from or through the Lender or any bank or
trust company organized under the laws of the United States or any state thereof
and having capital surplus and undivided profits aggregating at least
$100,000,000, (c) other short-term Investments similar in nature and degree of
risk to those described in clause (b) of this Section, (d) money-market funds,
or (e) Investments in or acquisitions of any Person whose assets consist
primarily of Oil and Gas Properties.
6.8 Dividends and Distributions. Declare, pay, or make, whether in
---------------------------
cash or Property of the Borrower, any dividend or distribution on, or purchase,
redeem, or otherwise acquire for value, any ownership interest of any class of
equity at any time that a Default or Event of Default exists; provided, however,
the foregoing restriction shall not apply to distributions paid in the form of
capital stock of the Borrower. Notwithstanding the foregoing, cash dividends on
any preferred stock will be allowed if Borrower maintains a minimum rate of Cash
Flow to Debt Service as determined pursuant to Section 6.1 of at least 1.20 to
1.00 and no Default or Event of Default exists and the payment of such dividends
would not result in an Event of Default.
6.9 Changes in Structure. Enter into any transaction of
--------------------
consolidation, merger, or amalgamation; liquidate, wind up, or dissolve (or
suffer any liquidation or dissolution), except (a) any Subsidiary may merge with
the Borrower, provided that the Borrower is the continuing or surviving
corporation, or with any one or more Subsidiaries provided then in any
transaction between a Subsidiary and a wholly-owned Subsidiary, the wholly-owned
Subsidiary shall be the continuing or surviving corporation, (b) any Subsidiary
may sell all or substantially all of its assets (upon voluntary liquidation or
otherwise), to the Borrower or another wholly-owned Subsidiary, or (c) the
<PAGE>
Borrower or any Subsidiary may merge with any entity acquired in accordance with
the provisions of Section 6.7, so long as the Borrower or such Subsidiary is the
surviving corporation.
6.10 Transactions with Affiliates. Directly or indirectly, enter
----------------------------
into any transaction (including the sale, lease, or exchange of Property or the
rendering of service) with any of its Affiliates, other than upon fair and
reasonable terms no less favorable than could be obtained in an arm's length
transaction with a Person which was not an Affiliate.
6.11 Lines of Business. Expand, on its own or through any
-----------------
Subsidiary, into any line of business other than those in which the Borrower is
engaged as of the Closing Date.
6.12 General and Administrative Expenses. Borrower shall not permit
-----------------------------------
general and administrative expenses paid in cash to be more than $2,000,000 as
determined on a rolling four quarter basis.
6.13 Debt Coverage Ratio. Permit at the close of any fiscal quarter,
-------------------
the ratio of Cash Flow to Debt Service to be less than 1.10 to 1.00, to be
tested on a rolling four quarters basis; provided that for (i) the quarter ended
March 31, 1999, the test shall be for such quarter only, (ii) the quarter ended
June 30, 1999, the test shall be for the first two quarters of 1999, and (iii)
for the quarter ended September 30, 1999, the test shall be for the first three
quarters of 1999.
6.14 Minimum Initial Capitalization. Borrower shall not have less
------------------------------
than a minimum initial capitalization of $17,000,000 (and will furnish the Agent
and each Lender with satisfactory proof of such fact).
6.15 Capital Expenditures. Make expenditures for capital or fixed
--------------------
assets in any fiscal year other than for domestic oil and gas properties and
related assets required in the ordinary course of business and not to exceed the
aggregate amount of $500,000.00.
ARTICLE VII
-----------
EVENTS OF DEFAULT
-----------------
7.1 Enumeration of Events of Default. Any of the following events
--------------------------------
shall constitute an Event of Default:
(a) default shall be made in the payment when due of any installment
of principal or interest under this Agreement or the Note or in the payment
when due of any fee or other sum payable under any Loan Document and such
default as to interest or fees only shall have continued for five days;
(b) default shall be made by the Borrower in the due observance or
performance of any of its obligations under the Loan Documents, and such
default
<PAGE>
shall continue for 30 days after the earlier of notice thereof to the
Borrower by the Lender or knowledge thereof by the Borrower;
(c) any representation or warranty made by the Borrower in any of the
Loan Documents proves to have been untrue in any material respect or any
representation, statement (including Financial Statements), certificate, or
data furnished or made to the Lender in connection herewith proves to have
been untrue in any material respect as of the date the facts therein set
forth were stated or certified;
(d) default shall be made by the Borrower (as principal or guarantor
or other surety) in the payment or performance of any bond, debenture,
note, or other Indebtedness or under any credit agreement, loan agreement,
indenture, promissory note, or similar agreement or instrument executed in
connection with any of the foregoing regarding the payment of Indebtedness
in excess of $250,000, and such default shall remain unremedied for in
excess of 30 days;
(e) the Borrower shall be unable to satisfy any condition or cure any
circumstance specified in Article III, the satisfaction or curing of which
is precedent to the right of the Borrower to obtain a Loan or the issuance
of a Letter of Credit, and such inability shall continue for a period in
excess of 30 days;
(f) the Borrower shall (i) apply for or consent to the appointment of
a receiver, trustee, or liquidator of it or all or a substantial part of
its assets, (ii) file a voluntary petition commencing an Insolvency
Proceeding, (iii) make a general assignment for the benefit of creditors,
(iv) be unable, or admit in writing its inability, to pay its debts
generally as they become due, or (v) file an answer admitting the material
allegations of a petition filed against it in any Insolvency Proceeding;
(g) an order, judgment, or decree shall be entered against the
Borrower by any court of competent jurisdiction or by any other duly
authorized authority, on the petition of a creditor or otherwise, granting
relief in any Insolvency Proceeding or approving a petition seeking
reorganization or an arrangement of its debts or appointing a receiver,
trustee, conservator, custodian, or liquidator of it or all or any
substantial part of its assets, and such order, judgment, or decree shall
not be dismissed or stayed within 90 days;
(h) the levy against any significant portion of the Property of the
Borrower, or any execution, garnishment, attachment, sequestration, or
other writ or similar proceeding which is not permanently dismissed or
discharged within 90 days after the levy;
(i) a final and non-appealable order, judgment, or decree shall be
entered against the Borrower for money damages and/or Indebtedness due in
an amount in excess of $500,000, and such order, judgment, or decree shall
not be dismissed or stayed within 90 days;
<PAGE>
(j) any charges are filed or any other action or proceeding is
instituted by any Governmental Authority against the Borrower under the
Racketeering Influence and Corrupt Organizations Statute (18 U.S.C. (S)1961
et seq.), the result of which could be the forfeiture or transfer of any
-- ---
material Property of the Borrower subject to a Lien in favor of the Lender
without (i) satisfaction or provision for satisfaction of such Lien, or
(ii) such forfeiture or transfer of such Property being expressly made
subject to such Lien;
(k) the Borrower shall have (i) concealed, removed, or diverted, or
permitted to be concealed, removed, or diverted, any part of its Property,
with intent to hinder, delay, or defraud its creditors or any of them, (ii)
made or suffered a transfer of any of its Property which may be fraudulent
under any bankruptcy, fraudulent conveyance, or similar law, (iii) made any
transfer of its Property to or for the benefit of a creditor at a time when
other creditors similarly situated have not been paid (except pursuant to
the direction of the Lenders), or (iv) shall have suffered or permitted,
while insolvent, any creditor, other than the Lenders or the Agent, to
obtain a Lien upon any of its Property through legal proceedings or
distraint which is not vacated within 90 days from the date thereof;
(l) any Security Instrument shall for any reason not, or cease to,
create valid and perfected first-priority Liens against the Collateral
purportedly covered thereby, subject to Permitted Liens and dispositions
otherwise permitted by this Agreement;
(m) the occurrence of a Material Adverse Effect and the same shall
remain unremedied for in excess of 30 days after notice given by the
Lender.
7.2 Remedies. (a) Upon the occurrence of an Event of Default
--------
specified in Sections 7.1(f) or 7.1(g), immediately and without notice, (i) all
Obligations shall automatically become immediately due and payable, without
presentment, demand, protest, notice of protest, default, or dishonor, notice of
intent to accelerate maturity, notice of acceleration of maturity, or other
notice of any kind, except as may be provided to the contrary elsewhere herein,
all of which are hereby expressly waived by the Borrower; (ii) the Commitment
shall immediately cease and terminate unless and until reinstated by the Lenders
in writing; and (iii) the Lenders are hereby authorized at any time and from
time to time, without notice to the Borrower (any such notice being expressly
waived by the Borrower), to set-off and apply any and all deposits (general or
special, time or demand, provisional or final) held by the Lenders and any and
all other indebtedness at any time owing by the Lender to or for the credit or
account of the Borrower against any and all of the Obligations although such
Obligations may be unmatured.
(b) Upon the occurrence of any Event of Default other than those
specified in Sections 7.1(f) or 7.1(g), (i) the Required Lenders may, by notice
to the Borrower, declare all Obligations immediately due and payable, without
presentment, demand, protest, notice of protest, default, or dishonor, notice of
intent to accelerate maturity, notice of acceleration of maturity, or other
notice of any kind, except as may be provided to the contrary elsewhere herein,
all of which
<PAGE>
are hereby expressly waived by the Borrower; (ii) the Commitment shall
immediately cease and terminate unless and until reinstated by the Lenders in
writing; and (iii) the Lenders are hereby authorized at any time and from time
to time, without notice to the Borrower (any such notice being expressly waived
by the Borrower), to set-off and apply any and all deposits (general or special,
time or demand, provisional or final) held by the Lenders and any and all other
indebtedness at any time owing by the Lenders to or for the credit or account of
the Borrower against any and all of the Obligations although such Obligations
may be unmatured.
(c) Upon the occurrence of any Event of Default, the Lenders and the
Agent may, in addition to the foregoing in this Section, exercise any or all of
its rights and remedies provided by law or pursuant to the Loan Documents.
ARTICLE VII
-----------
THE AGENT
---------
8.1 Appointment. Each Lender hereby designates and appoints the
-----------
Agent as the agent of such Lender under this Agreement and the other Loan
Documents. Each Lender authorizes the Agent, as the agent for such Lender, to
take such action on behalf of such Lender under the provisions of this Agreement
and the other Loan Documents and to exercise such powers and perform such duties
as are expressly delegated to the Agent by the terms of this Agreement and the
other Loan Documents, together with such other powers as are reasonably
incidental thereto. Notwithstanding any provision to the contrary elsewhere in
this Agreement or in any other Loan Document, the Agent shall not have any
duties or responsibilities except those expressly set forth herein or in any
other Loan Document or any fiduciary relationship with any Lender; and no
implied covenants, functions, responsibilities, duties, obligations, or
liabilities on the part of the Agent shall be read into this Agreement or any
other Loan Document or otherwise exist against the Agent.
8.2 Waivers, Amendments. The provisions of this Agreement and of
-------------------
each other Loan Document may from time to time be amended, modified or waived,
if such amendment, modification, or waiver is in writing and consented to by the
Borrower and the Required Lenders; provided, however, that no such amendment,
modification or waiver would: (a) modify any requirement hereunder that any
particular action be taken by all of the Lenders or by the Required Lenders
unless consented to by each Lender; (b) modify this Section 8.2, change the
definition of "Required Lenders", or change the Commitment Amount or Percentage
Share of any Lender, reduce the fees described in Article II, extend the
Commitment Termination Date or Final Maturity, release any Security Instrument
or Lien, or initiate any foreclosure, enforcement or collection procedure
without the consent of each Lender; (c) extend the due date for, (or reduce the
amount of any scheduled repayment or prepayment of principal of or interest on
any Loan) without the consent of the holder of that Note evidencing such Loan;
(d) affect, adversely the interests, rights, or obligations of the Agent without
the consent of the Agent; or (e) to modify the Borrowing Base or modify the
monthly amount by which the Borrowing Base shall be reduced.
<PAGE>
8.3 Delegation of Duties. The Agent may execute any of its duties
--------------------
under this Agreement and the other Loan Documents by or through agents or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible to any
Lender for the negligence or misconduct of any agents or attorneys-in-fact
selected by it with reasonable care.
8.4 Exculpatory Provisions. Neither the Agent nor any of its
----------------------
officers, directors, employees, agents, attorneys-in-fact or affiliates shall be
(a) required to initiate or conduct any litigation or collection proceedings
hereunder, except with the concurrence of the Required Lenders and contribution
by each Lender of its Percentage Share of costs reasonably expected by the Agent
to be incurred in connection therewith, (b) liable for any action lawfully taken
or omitted to be taken by it or such Person under or in connection with this
Agreement or any other Loan Document (except for gross negligence or willful
misconduct of the Agent or such Person), or (c) responsible in any manner to any
Lender for any recitals, statements, representations or warranties made by the
Borrower or any officer thereof contained in this Agreement or any other Loan
Document or in any certificate, report, statement or other document referred to
or provided for in, or received by the Agent under or in connection with, this
Agreement or any other Loan Document, or for the value, validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement or any other Loan
Document or for any failure of the Borrower to perform its obligations hereunder
or thereunder. The Agent shall not be under any obligation to any Lender to
ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement or any other Loan
Document, or to inspect the properties, books or records of the Borrower.
8.5 Reliance by Agent. The Agent shall be entitled to rely, and
-----------------
shall be fully protected in relying, upon any Note, writing, resolution, notice,
consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or
teletype message, statement, order or other document or conversation believed by
it to be genuine and correct and to have been signed, sent or made by the proper
Person or Persons and upon advice and statements of legal counsel (including
counsel to the Borrower), independent accountants and other experts selected by
the Agent. The Agent may deem and treat the payee of any Note as the owner
thereof for all purposes unless and until a written notice of assignment,
negotiation, or transfer thereof shall have been received by the Agent. The
Agent shall be fully justified in failing or refusing to take any action under
this Agreement or any other Loan Document unless it shall first receive such
advice or concurrence of the Required Lenders as it deems appropriate and
contribution by each Lender of its Percentage Share of costs reasonably expected
by the Agent to be incurred in connection therewith. The Agent shall in all
cases be fully protected in acting, or in refraining from acting, under this
Agreement and the other Loan Documents in accordance with a request of the
Required Lenders. Such request and any action taken or failure to act pursuant
thereto shall be binding upon the Lenders and all future holders of the Notes.
In no event shall the Agent be required to take any action that exposes the
Agent to personal liability or that is contrary to any Loan Document or
applicable Requirement of Law.
8.6 Notice of Default. The Agent shall not be deemed to have
-----------------
knowledge or notice of the occurrence of any Default or Event of Default unless
the Agent has received notice from a Lender or the Borrower referring to this
Agreement, describing such Default or Event of Default and stating that such
notice is a "notice of default." In the event that the Agent receives such
<PAGE>
a notice, the Agent shall promptly give notice thereof to the Lenders. The Agent
shall take such action with respect to such Default or Event of Default as shall
be reasonably directed by the Required Lenders; provided that unless and until
--------
the Agent shall have received such directions, subject to the provisions of
Section 7.2, the Agent may (but shall not be obligated to) take such action, or
- -----------
refrain from taking such action, with respect to such Default or Event of
Default as it shall deem advisable in the best interests of the Lenders. In the
event that the officer of the Agent primarily responsible for the lending
relationship with the Borrower or the officer of any Lender primarily
responsible for the lending relationship with the Borrower becomes aware that a
Default or Event of Default has occurred and is continuing, the Agent or such
Lender, as the case may be, shall use its good faith efforts to inform the other
Lenders and/or the Agent, as the case may be, promptly of such occurrence.
Notwithstanding the preceding sentence, failure to comply with the preceding
sentence shall not result in any liability to the Agent or any Lender.
8.7 Non-Reliance on Agent and Other Lenders. Each Lender expressly
---------------------------------------
acknowledges that neither the Agent nor any other Lender nor any of their
respective officers, directors, employees, agents, attorneys-in-fact or
affiliates has made any representation or warranty to such Lender and that no
act by the Agent or any other Lender hereafter taken, including any review of
the affairs of the Borrower, shall be deemed to constitute any representation or
warranty by the Agent or any Lender to any other Lender. Each Lender represents
to the Agent that it has, independently and without reliance upon the Agent or
any other Lender, and based on such documents and information as it has deemed
appropriate, made its own appraisal of and investigation into the business,
operations, property, condition (financial and otherwise) and creditworthiness
of the Borrower and the value of the Collateral and other Properties of the
Borrower and has made its own decision to enter into this Agreement. Each
Lender also represents 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 appropriate at the time, continue to make its own credit analysis,
appraisals and decisions in taking or not taking action under this Agreement and
the other Loan Documents, and to make such investigation as it deems necessary
to inform itself as to the business, operations, property, condition (financial
and otherwise) and creditworthiness of the Borrower and the value of the
Collateral and other Properties of the Borrower. Except for notices, reports
and other documents 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 business,
operations, property, condition (financial and otherwise), or creditworthiness
of the Borrower or the value of the Collateral or other Properties of the
Borrower which may come into the possession of the Agent or any of its officers,
directors, employees, agents, attorneys-in-fact or affiliates.
8.8 Indemnification. EACH LENDER AGREES TO INDEMNIFY THE AGENT AND
---------------
ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT AND AFFILIATES (TO
THE EXTENT NOT REIMBURSED BY THE BORROWER AND WITHOUT LIMITING THE OBLIGATION OF
THE BORROWER TO DO SO), RATABLY ACCORDING TO THE PERCENTAGE SHARE OF SUCH
LENDER, FROM AND AGAINST ANY AND ALL LIABILITIES, CLAIMS, OBLIGATIONS, LOSSES,
DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES AND DISBURSEMENTS
OF ANY KIND WHATSOEVER WHICH MAY AT ANY TIME (INCLUDING ANY TIME FOLLOWING THE
PAYMENT AND PERFORMANCE OF ALL OBLIGATIONS AND THE TERMINATION OF THIS
AGREEMENT) BE IMPOSED
<PAGE>
ON, INCURRED BY OR ASSERTED AGAINST THE AGENT OR ANY OF ITS OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES IN ANY WAY RELATING TO OR
ARISING OUT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY OTHER DOCUMENT
CONTEMPLATED OR REFERRED TO HEREIN OR THE TRANSACTIONS CONTEMPLATED HEREBY OR
ANY ACTION TAKEN OR OMITTED BY THE AGENT OR ANY OF ITS OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES UNDER OR IN CONNECTION WITH
ANY OF THE FOREGOING, INCLUDING ANY LIABILITIES, CLAIMS, OBLIGATIONS, LOSSES,
DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES AND DISBURSEMENTS
IMPOSED, INCURRED OR ASSERTED AS A RESULT OF THE NEGLIGENCE, WHETHER SOLE OR
CONCURRENT, OF THE AGENT OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS,
ATTORNEYS-IN-FACT OR AFFILIATES; PROVIDED THAT NO LENDER SHALL BE LIABLE FOR THE
--------
PAYMENT OF ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES,
PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS RESULTING
SOLELY FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE AGENT OR ANY OF
ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS-IN-FACT OR AFFILIATES. THE
AGREEMENTS IN THIS SECTION SHALL SURVIVE THE PAYMENT AND PERFORMANCE OF ALL
OBLIGATIONS AND THE TERMINATION OF THIS AGREEMENT.
8.9 Restitution. Should the right of the Agent or any Lender to
-----------
realize funds with respect to the Obligations be challenged and any application
of such funds to the Obligations be reversed, whether by Governmental Authority
or otherwise, or should the Borrower otherwise be entitled to a refund or return
of funds distributed to the Lenders in connection with the Obligations, the
Agent or such Lender, as the case may be, shall promptly notify the Lenders of
such fact. Not later than Noon, Central Standard or Central Daylight Savings
Time, as the case may be, of the Business Day following such notice, each Lender
shall pay to the Agent an amount equal to the ratable share of such Lender of
the funds required to be returned to the Borrower. The ratable share of each
Lender shall be determined on the basis of the percentage of the payment all or
a portion of which is required to be refunded originally distributed to such
Lender, if such percentage can be determined, or, if such percentage cannot be
determined, on the basis of the Percentage Share of such Lender. The Agent
shall forward such funds to the Borrower or to the Lender required to return
such funds. If any such amount due to the Agent is made available by any Lender
after Noon, Central Standard or Central Daylight Savings Time, as the case may
be, of the Business Day following such notice, such Lender shall pay to the
Agent (or the Lender required to return funds to the Borrower, as the case may
be) for its own account interest on such amount at a rate equal to the Federal
Funds Rate for the period from and including the date on which restitution to
the Borrower is made by the Agent (or the Lender required to return funds to the
Borrower, as the case may be) to but not including the date on which such Lender
failing to timely forward its share of funds required to be returned to the
Borrower shall have made its ratable share of such funds available.
8.10 Agent in Its Individual Capacity. The Agent and its affiliates
--------------------------------
may make loans to, accept deposits from and generally engage in any kind of
business with the Borrower as though the Agent were not the agent hereunder.
With respect to any Note issued to the Lender serving as the Agent, the Agent
shall have the same rights and powers under this Agreement as a Lender and may
exercise such rights and powers as though it were not the Agent. The terms
"Lender" and "Lenders" shall include the Agent in its individual capacity.
<PAGE>
8.11 Successor Agent. The Agent may resign as Agent upon ten days'
---------------
notice to the Lenders and the Borrower. If the Agent shall resign as Agent
under this Agreement and the other Loan Documents, Lenders for which the
Percentage Shares aggregate at least fifty-one percent (51%) shall appoint from
among the Lenders a successor agent for the Lenders, subject to the reasonable
consent of the Borrowers, whereupon such successor agent shall succeed to the
rights, powers and duties of the Agent. The term "Agent" shall mean such
successor agent effective upon its appointment. The rights, powers, and duties
of the former Agent as Agent shall be terminated, without any other or further
act or deed on the part of such former Agent or any of the parties to this
Agreement or any holders of the Notes. After the removal or resignation of any
Agent hereunder as Agent, the provisions of this Article VIII and those of any
------------
Section hereof relating to the Agent, including Section 5.14, Section 5.15 and
------------ ------------
Section 5.19 shall inure to its benefit as to any actions taken or omitted to be
- ------------
taken by it while it was Agent under this Agreement and the other Loan
Documents.
8.12 Applicable Parties. The provisions of this Article are solely
------------------
for the benefit of the Agent and the Lenders, and the Borrower shall not have
any rights as a third party beneficiary or otherwise under any of the provisions
of this Article. In performing functions and duties hereunder and under the
other Loan Documents, the Agent shall act solely as the agent of the Lenders and
does not assume, nor shall it be deemed to have assumed, any obligation or
relationship of trust or agency with or for the Borrower or any legal
representative, successor, and assign of the Borrower.
ARTICLE IX
----------
MISCELLANEOUS
-------------
9.1 Assignments; Participations. Each Lender may assign or sell
---------------------------
participations in its Loans and Commitments to one or more other Persons in
accordance with this Section 9.1.
(a) Assignments. Any Lender,
-----------
(i) with the written consent of the Borrower (in its sole discretion)
and the Agent (which consent shall not be unreasonably delayed or
withheld), may at any time, assign and delegate to one or more
commercial banks or other financial institutions, and
(ii) with notice to the Borrower and the Agent, but without the
consent of the Borrower or the Agent, may assign and delegate to any
of its Affiliates or to any other Lender
(each Person described in (i) or (ii) above as being the Person to
whom such assignment and delegation is to be made, being hereinafter referred to
as an "Assignee Lender"), all or any fraction of such Lender's total Loans and
---------------
Commitments (which assignment and delegation shall be of a constant, and not a
varying percentage, of all the assigning Lender's Loans and Commitments), in a
minimum aggregate amount of $1,000,000 of such Lender's Percentage Share
<PAGE>
of the Maximum Commitment Amount, if less; provided, however, that such Assignee
Lender will comply with all the provisions of this Agreement, and further,
provided, however, that the Borrower and Agent shall be entitled to continue to
deal solely and directly with such assigning Lender in connection with the
interests so assigned and delegated to an Assignee Lender until:
(iii) written notice of such assignment and delegation together with
payment instructions, addresses and related information with respect
to such Assignee Lender, shall have been given to the Borrower and the
Agent by such Lender and such Assignee Lender,
(iv) such Assignee Lender shall have executed and delivered to the
Borrower and the Agent a Lender Assignment Agreement, accepted by the
Borrower and the Agent and attached hereto as Exhibit VII, and
(v) the processing fees described below shall have been paid.
From and after the date that the Borrower and the Agent accept such
Lender Assignment Agreement, (a) the Assignee Lender thereunder shall be deemed
automatically to have become a party hereto and to the extent that rights and
obligations hereunder have been assigned and delegated to such Assignee Lender
in connection with such Lender Assignment Agreement, shall have the rights and
obligations of a Lender hereunder and under the other Loan Documents, and (b)
the Assignor Lender, to the extent that rights and obligations hereunder have
been assigned and delegated by it in connection with such Lender Assignment
Agreement, shall be released from its obligations hereunder and under the other
Loan Documents. Within five Business Days after its receipt of notice that the
Agent has received an executed Lender Assignment Agreement, the Borrower shall
execute and deliver to the Agent (for delivery to the relevant Assignee Lender)
new Notes evidencing such Assignee Lender's assigned Loans and Commitments and,
if the assignor Lender has retained Loans and Commitments hereunder, replacement
Notes in the principal amount of the Loans and Commitments retained by the
assignor Lender hereunder (such Notes to be in exchange for, but not in payment
of, those Notes then held by such assignor Lender). Each such Note shall be
dated the date of the predecessor Notes. The assignor Lender shall mark the
predecessor Notes "exchanged" and deliver them to the Borrower. Accrued
interest on that part of the predecessor Notes evidenced by the new Notes, and
accrued fees, shall be paid as provided in the Lender Assignment Agreement.
Accrued interest on that part of the predecessor Notes evidenced by the
replacement Notes shall be paid to the assignor Lender. Accrued interest and
accrued fees shall be paid at the same time or times provided in the predecessor
Notes and in this Agreement. Such assignor Lender or such assignee Lender must
also pay a processing fee to the Agent upon delivery of any Lender Assignment
Agreement in the amount of $3,000. Any attempted assignment and delegation not
made in accordance with this Section 9.1 shall be null and void.
(b) Participations. Any Lender, with the prior written consent of the
--------------
Borrower in its sole discretion, may at any time sell to one or more commercial
banks (each of such commercial banks being herein called a "Participant")
-----------
participating interests in any of the Loans, Commitments, or other interests of
such Lender hereunder; provided, however, that (a) no participation
<PAGE>
contemplated in this Section 9.1 shall relieve such Lender from its Commitments
or its other obligations hereunder or under any other Loan Document, (b) such
Lender shall remain solely responsible for the performance of its Commitments
and such other obligations, (c) the Borrower and the Agent shall continue to
deal solely and directly with such Lender in connection with such Lender's
rights and obligations under this Agreement and each of the other Loan
Documents, (d) no Participant shall be entitled to require such Lender to take
or refrain from taking any action hereunder or under any other Loan Document.
9.2 Survival of Representations, Warranties, and Covenants. All
------------------------------------------------------
representations and warranties of the Borrower and all covenants and agreements
herein made shall survive the execution and delivery of the Notes and the
Security Instruments and shall remain in force and effect so long as any
Obligation is outstanding or any Commitment exists.
9.3 Notices and Other Communications. Except as to oral notices
--------------------------------
expressly authorized herein, which oral notices shall be confirmed in writing,
all notices, requests, and communications hereunder shall be in writing
(including by telecopy). Unless otherwise expressly provided herein, any such
notice, request, demand, or other communication shall be deemed to have been
duly given or made when delivered by hand, or, in the case of delivery by mail,
when deposited in the mail, certified mail, return receipt requested, postage
prepaid, or, in the case of telecopy notice, when receipt thereof is
acknowledged orally or by written confirmation report, addressed as follows:
(a) if to the Agent and Lender, to:
Bank One, Texas, National Association
910 Travis, 6th Floor
Houston, Texas 77002-5860
Attention: Energy Group, 6th Floor
(or for notice by mail, to:
P.O. Box 2629
Houston, Texas 77252-2629
Attention: Energy Group, 6th Floor
Telecopy: (713) 751-7894
(b) if to the Borrower, to:
Sheridan California Energy, Inc.
1000 Louisiana, Suite 800
Houston, Texas 77002
Attention: Chief Financial Officer
Telecopy: (713) 651-3056
Any party may, by proper written notice hereunder to the others,
change the individuals or addresses to which such notices to it shall thereafter
be sent.
<PAGE>
9.4 Parties in Interest. Subject to applicable restrictions
-------------------
contained herein, all covenants and agreements herein contained by or on behalf
of the Borrower, the Agent or the Lenders shall be binding upon and inure to the
benefit of the Borrower, the Agent or the Lenders, as the case may be, and their
respective legal representatives, successors, and assigns.
9.5 Rights of Third Parties. All provisions herein are imposed
-----------------------
solely and exclusively for the benefit of the Agent, Lenders and the Borrower.
No other Person shall have any right, benefit, priority, or interest hereunder
or as a result hereof or have standing to require satisfaction of provisions
hereof in accordance with their terms.
9.6 Renewals; Extensions. All provisions of this Agreement relating
--------------------
to the Notes shall apply with equal force and effect to each promissory note
hereafter executed which in whole or in part represents a renewal or extension
of any part of the Indebtedness of the Borrower under this Agreement, the Notes,
or any other Loan Document.
9.7 No Waiver; Rights Cumulative. No course of dealing on the part
----------------------------
of the Agent or the Lender, its officers or employees, nor any failure or delay
by the Agent or the Lender with respect to exercising any of its rights under
any Loan Document shall operate as a waiver thereof. The rights of the Agent or
the Lender under the Loan Documents shall be cumulative and the exercise or
partial exercise of any such right shall not preclude the exercise of any other
right. Neither the making of any Loan nor the issuance of a Letter of Credit
shall constitute a waiver of any of the covenants, warranties, or conditions of
the Borrower contained herein. In the event the Borrower is unable to satisfy
any such covenant, warranty, or condition, neither the making of any Loan nor
the issuance of a Letter of Credit shall have the effect of precluding the
Lender from thereafter declaring such inability to be an Event of Default as
hereinabove provided.
9.8 Survival Upon Unenforceability. In the event any one or more of
------------------------------
the provisions contained in any of the Loan Documents or in any other instrument
referred to herein or executed in connection with the Obligations shall, for any
reason, be held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality, or unenforceability shall not affect any other provision
of any Loan Document or of any other instrument referred to herein or executed
in connection with such Obligations.
9.9 Amendments; Waivers. Neither this Agreement nor any provision
-------------------
hereof may be amended, waived, discharged, or terminated orally, but only by an
instrument in writing signed by the party against whom enforcement of the
amendment, waiver, discharge, or termination is sought.
9.10 Controlling Agreement. In the event of a conflict between the
---------------------
provisions of this Agreement and those of any other Loan Document, the
provisions of this Agreement shall control.
9.11 Disposition of Collateral. Notwithstanding any term or
-------------------------
provision, express or implied, in any of the Security Instruments, the
realization, liquidation, foreclosure, or any other disposition on or of any or
all of the Collateral shall be in the order and manner and determined in
<PAGE>
the sole discretion of the Lender; provided, however, that in no event shall the
Lender violate applicable law or exercise rights and remedies other than those
provided in such Security Instruments or otherwise existing at law or in equity.
9.12 GOVERNING LAW. THIS AGREEMENT AND THE NOTES SHALL BE DEEMED TO
-------------
BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED
BY THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF
RELATING TO CONFLICTS OF LAW; PROVIDED, HOWEVER, THAT CHAPTER 345 OF THE TEXAS
FINANCE CODE (WHICH REGULATES CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND
REVOLVING TRIPARTY ACCOUNTS) SHALL NOT APPLY.
9.13 JURISDICTION AND VENUE. ALL ACTIONS OR PROCEEDINGS WITH RESPECT
----------------------
TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR
FROM THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE LITIGATED, AT THE SOLE
DISCRETION AND ELECTION OF THE LENDER, IN COURTS HAVING SITUS IN HOUSTON, HARRIS
COUNTY, TEXAS. THE BORROWER HEREBY SUBMITS TO THE JURISDICTION OF ANY LOCAL,
STATE, OR FEDERAL COURT LOCATED IN HOUSTON, HARRIS COUNTY, TEXAS, AND HEREBY
WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR CHANGE THE JURISDICTION OR VENUE OF
ANY LITIGATION BROUGHT AGAINST IT BY THE LENDER IN ACCORDANCE WITH THIS SECTION.
9.14 WAIVER OF RIGHTS TO JURY TRIAL. THE BORROWER, AGENT AND THE
------------------------------
LENDERS HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, IRREVOCABLY, AND
UNCONDITIONALLY WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT,
PROCEEDING, COUNTERCLAIM, OR OTHER LITIGATION THAT RELATES TO OR ARISES OUT OF
ANY OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE ACTS OR OMISSIONS OF THE
LENDER IN THE ENFORCEMENT OF ANY OF THE TERMS OR PROVISIONS OF THIS AGREEMENT OR
ANY OTHER LOAN DOCUMENT OR OTHERWISE WITH RESPECT THERETO. THE PROVISIONS OF
THIS SECTION ARE A MATERIAL INDUCEMENT FOR THE LENDER ENTERING INTO THIS
AGREEMENT.
9.15 ENTIRE AGREEMENT. THIS AGREEMENT CONSTITUTES THE ENTIRE
----------------
AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND
SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER WRITTEN
OR ORAL, RELATING TO THE SUBJECT HEREOF. FURTHERMORE, IN THIS REGARD, THIS
AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT, COLLECTIVELY, THE
FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF SUCH
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH PARTIES.
<PAGE>
9.16 Counterparts. For the convenience of the parties, this Agreement
------------
may be executed in multiple counterparts, each of which for all purposes shall
be deemed to be an original, and all such counterparts shall together constitute
but one and the same Agreement.
9.17 Confidentiality. In the event that the Borrower provides to the
---------------
Agent or any Lender written confidential information belonging to Borrower, the
Agent and the Lenders shall thereafter maintain such information in confidence
in accordance with the standards of care and diligence that each utilizes in
maintaining its own confidential information. This obligation of confidence
shall not apply to such portions of the information which (i) are in the public
domain, (ii) hereafter become part of the public domain without the Agent or the
Lenders breaching their obligations of confidence to Borrower, (iii) are
previously known by the Agent or the Lenders from some source other than
Borrower, (iv) are hereafter developed by the Agent or the Lenders without using
the Borrower's information, (v) are hereafter obtained by or made available to
the Agent or the Lenders from a third party who the Agent and the Lenders are
not aware owes an obligation of confidence to Borrower with respect to such
information or through any other means other than through disclosure by
Borrower, (vi) are disclosed with such Borrower's consent, (vii) must be
disclosed either pursuant to any governmental requirement or to Persons
regulating the activities of the Agent and the Lenders, or (viii) as may be
required by law or regulation or order of any Governmental Authority in any
judicial, arbitration or governmental proceeding. Further, the Agent and the
Lenders may disclose any such information to any independent certified public
accountants, and/or any legal counsel employed by the Agent or any Lender in
connection with this Agreement or any other Loan Document, including without
limitation, the enforcement or exercise of all rights and remedies thereunder,
or any assignee or participant (including prospective assignees and
participants) in the Loan; provided, however, that the Agent and the Lenders
shall receive a confidentiality agreement from the Person to whom such
information is disclosed such that said Person shall have the same obligation to
maintain the confidentiality of such information as is imposed upon the Agent
and the Lenders hereunder. Notwithstanding anything to the contrary provided
herein, this obligation of confidence shall case three years from the date the
information was furnished, unless Borrower requests in writing at least 30 days
prior to the expiration of such three year period, to maintain the
confidentiality of such information for an additional three year period.
IN WITNESS WHEREOF, this Agreement is deemed executed effective as of
the date first above written.
BORROWER:
SHERIDAN CALIFORNIA ENERGY, INC.
By: /s/ Michael A. Gerlich
-----------------------------------------
Michael A. Gerlich
Vice President and Chief Financial Officer
<PAGE>
AGENT AND LENDER:
BANK ONE, TEXAS, NATIONAL
ASSOCIATION
By: /s/ Richard Sylvan
--------------------------------
Richard Sylvan
Senior Vice President
<PAGE>
EXHIBIT I
---------
FORM OF NOTE
PROMISSORY NOTE
---------------
$100,000,000 Houston, Texas January 21, 1999
FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned ("Maker")
-----
promises to pay to the order of BANK ONE, TEXAS, NATIONAL ASSOCIATION ("Payee"),
-----
at its banking quarters in Houston, Harris County, Texas, the sum of ONE
HUNDRED MILLION DOLLARS ($100,000,000), or so much thereof as may be advanced
against this Note pursuant to the Credit Agreement dated of even date herewith
by and between Maker and Payee (as amended, restated, or supplemented from time
to time, the "Credit Agreement"), together with interest at the rates and
----------------
calculated as provided in the Credit Agreement.
Reference is hereby made to the Credit Agreement for matters governed
thereby, including, without limitation, certain events which will entitle the
holder hereof to accelerate the maturity of all amounts due hereunder.
Capitalized terms used but not defined in this Note shall have the meanings
assigned to such terms in the Credit Agreement.
This Note is issued pursuant to, is the "Note" under, and is payable
as provided in the Credit Agreement. Subject to compliance with applicable
provisions of the Credit Agreement, Maker may at any time pay the full amount or
any part of this Note without the payment of any premium or fee, but such
payment shall not, until this Note is fully paid and satisfied, excuse the
payment as it becomes due of any payment on this Note provided for in the Credit
Agreement.
Without being limited thereto or thereby, this Note is secured by the
Security Instruments.
THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE STATE OF
TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW;
PROVIDED, HOWEVER, THAT CHAPTER 345 OF THE TEXAS FINANCE CODE (WHICH REGULATES
CERTAIN REVOLVING CREDIT LOAN ACCOUNTS AND REVOLVING TRIPARTY ACCOUNTS) SHALL
NOT APPLY TO THIS NOTE.
SHERIDAN CALIFORNIA ENERGY, INC.
By:___________________________________________
Michael A. Gerlich
I-i
<PAGE>
Vice President and Chief Financial Officer
I-ii
<PAGE>
EXHIBIT II
----------
FORM OF BORROWING REQUEST
Bank One, Texas, National Association
910 Travis
Houston, Texas 77002-5860
Attention: Energy Group, 6th Floor
Re: Credit Agreement dated as of January 21, 1999, by and between BANK
ONE, TEXAS, NATIONAL ASSOCIATION, as Agent, and the lenders signatory
thereto from time to time and SHERIDAN CALIFORNIA ENERGY, INC. (as
amended, restated, or supplemented from time to time, the "Credit
------
Agreement")
---------
Ladies and Gentlemen:
Pursuant to the Credit Agreement, the Borrower hereby makes the
requests indicated below:
[_] 1. Loans
(a) Amount of new Loan: $________________
(b) Requested funding date: ___________, 19___
(c) $________________ of such Loan is to be a Floating Rate Loan;
$________________ of such Loan is to be a LIBO Rate Loan.
[_] (d) Requested Interest Period for LIBO Rate Loan: ____ months.
2. Continuation or conversion of LIBO Rate Loan maturing on __________:
(a) Amount to be continued as a LIBO Rate Loan is $______________________,
with an Interest Period of ____ months;
(b) Amount to be converted to a Floating Rate Loan is $______________; and
[_] 3. Conversion of Floating Rate Loan:
II-i
<PAGE>
(a) Requested conversion date: __________, 19____.
(b) Amount to be converted to a LIBO Rate Loan is $________, with an
Interest Period of _____ months.
The undersigned certifies that she/he is the __________ of the
Borrower, has obtained all consents necessary, and as such she/he is authorized
to execute this request on behalf of the Borrower. The undersigned further
certifies, represents, and warrants on behalf of the Borrower that the Borrower
is entitled to receive the requested borrowing, continuation, or conversion
under the terms and conditions of the Credit Agreement.
Each capitalized term used but not defined herein shall have the
meaning assigned to such term in the Credit Agreement.
Very truly yours,
SHERIDAN CALIFORNIA ENERGY, INC.
By:__________________________________________
Michael A. Gerlich
Vice President and Chief Financial Officer
II-ii
<PAGE>
EXHIBIT III
-----------
FORM OF COMPLIANCE CERTIFICATE
______________, 19__
Bank One, Texas, National Association
910 Travis
Houston, Texas 77002-5860
Attention: Energy Group, 6th Floor
Re: Credit Agreement dated as of January 21, 1999, by and between BANK
ONE, TEXAS, NATIONAL ASSOCIATION, as Agent, and the lenders signatory
thereto from time to time and SHERIDAN CALIFORNIA ENERGY, INC. (as
amended, restated, or supplemented from time to time, the "Credit
------
Agreement")
---------
Ladies and Gentlemen:
Pursuant to applicable requirements of the Credit Agreement, the
undersigned, as a Responsible Officer of the Borrower, hereby certifies to you
the following information as true and correct as of the date hereof or for the
period indicated, as the case may be:
1. To the best of the knowledge of the undersigned, no Default or Event
of Default exists as of the date hereof or has occurred since the date of
our previous certification to you, if any.
1. To the best of the knowledge of the undersigned, the following
Defaults or Events of Default exist as of the date hereof or have occurred
since the date of our previous certification to you, if any, and the
actions set forth below are being taken to remedy such circumstances:
2. The compliance of the Borrower with the financial covenants of the
Credit Agreement, as of the close of business on ____________________, is
evidenced by the following:
(a) Section 6.12: General and Administrative Expenses. Borrower shall not
-----------------------------------
permit general and administrative expenses to be more than $2,000,000 as
determined on a rolling four quarter basis.
III-i
<PAGE>
(b) Section 6.13: Debt Coverage Ratio. Permit at the close of any fiscal
-------------------
quarter, the ratio of Cash Flow to Debt Service to be less than 1.10 to
1.00, to be tested on a rolling four quarters basis; provided that for (i)
the quarter ended March 31, 1999, the test shall be for such quarter only,
(ii) the quarter ended June 30, 1999, the test shall be for the first two
quarters of 1999, and (iii) for the quarter ended September 30, 1999, the
test shall be for the first three quarters of 1999.
Required Actual
-------- ------
Not less than 1.10 to 1.00 ______ to 1.0
(c) Section 6.15: Capital Expenditures. Make expenditures for capital or
--------------------
fixed assets in any fiscal year other than for domestic oil and gas
properties and related assets required in the ordinary course of business
and not to exceed the aggregate amount of $500,000.00.
Required Actual
-------- ------
3. No Material Adverse Effect has occurred since the date of the
Financial Statements dated as of ______________________.
Each capitalized term used but not defined herein shall have the
meaning assigned to such term in the Credit Agreement.
Very truly yours,
SHERIDAN CALIFORNIA ENERGY, INC.
By: -------------------------------------------
Michael A. Gerlich
Vice President and Chief Financial Officer
III-ii
<PAGE>
EXHIBIT IV
----------
FORM OF OPINION OF COUNSEL
Closing Date
Bank One, Texas, National Association
910 Travis
Houston, Texas 77002-5860
Attention: Energy Group, 6th Floor
Re: Credit Agreement dated as of January 21, 1999, by and between BANK
ONE, TEXAS, NATIONAL ASSOCIATION, as Agent, and the lenders signatory
thereto from time to time and SHERIDAN CALIFORNIA ENERGY, INC. (as
amended, restated, or supplemented from time to time, the "Credit
------
Agreement")
---------
Ladies and Gentlemen:
We have acted as counsel to SHERIDAN CALIFORNIA ENERGY, INC. (the
"Borrower") in connection with the transactions contemplated in the Credit
- ---------
Agreement. This Opinion is delivered pursuant to Section 3.1(m) of the Credit
Agreement, and the Lender is hereby authorized to rely upon this Opinion in
connection with the transactions contemplated in the Credit Agreement. Each
capitalized term used but not defined herein shall have the meaning assigned to
such term in the Credit Agreement.
In our representation of the Borrower, we have examined an executed
counterpart of each of the following (the "Loan Documents"):
--------------
(a) the Credit Agreement;
(b) the Note;
(c) Mortgage, Deed of Trust, Indenture, Security Agreement,
Assignment of Production, and Financing Statement dated of even date
herewith from the Borrower in favor of the Lender (the "Mortgage"); and
--------
(d) Financing Statements from the Borrower, as debtor, constituent to
the Mortgage (the "Financing Statement").
-------------------
IV-i
<PAGE>
We have also examined the originals, or copies certified to our
satisfaction, of such other records of the Borrower, certificates of public
officials and officers of the Borrower, agreements, instruments, and documents
as we have deemed necessary as a basis for the opinions hereinafter expressed.
In making such examinations, we have, with your permission, assumed:
(a) the genuineness of all signatures to the Loan Documents other
than those of the Borrower;
(b) the authenticity of all documents submitted to us as originals
and the conformity with the originals of all documents submitted to us as
copies;
(c) the Lender is authorized and has the power to enter into and
perform its obligations under the Credit Agreement;
(d) the due authorization, execution, and delivery of all Loan
Documents by each party thereto other than the Borrower; and
(e) the Borrower has title to all Property covered or affected by the
Mortgage.
Based upon the foregoing and subject to the qualifications set forth
herein, we are of the opinion that:
1. The Borrower is a limited liability company duly organized,
legally existing, and in good standing under the laws of its state of
organization and is duly qualified as a foreign limited liability company
and is in good standing in all jurisdictions wherein the ownership of its
Property or the operation of its business necessitates same.
2. The execution and delivery by the Borrower of the Credit
Agreement and the borrowings thereunder, the execution and delivery by the
Borrower of the other Loan Documents to which the Borrower is a party, and
the payment and performance of all Obligations of the Borrower thereunder
are within the power of the Borrower, have been duly authorized by all
necessary corporate action, and do not (a) require the consent of any
Governmental Authority, (b) contravene or conflict with any Requirement of
Law, (c) to our knowledge after due inquiry, contravene or conflict with
any indenture, instrument, or other agreement to which the Borrower is a
party or by which any Property of the Borrower may be presently bound or
encumbered, or (d) result in or require the creation or imposition of any
Lien upon any Property of the Borrower other than as contemplated by the
Loan Documents.
IV-ii
<PAGE>
3. The Loan Documents to which the Borrower is a party constitute
legal, valid, and binding obligations of the Borrower, enforceable against
the Borrower in accordance with their respective terms.
4. The forms of the Mortgage and the Financing Statement and the
description of the Mortgaged Property (as such term is defined in the
Mortgage and so used herein) situated in the State of Texas (the "State")
-----
satisfy all applicable Requirements of Law of the State and are legally
sufficient under the laws of the State to enable the Lender to realize the
practical benefits purported to be afforded by the Mortgage.
5. The Mortgage creates a valid lien upon and security interest in
all Mortgaged Property situated in the State to secure the Indebtedness (as
such term is defined in the Mortgage and so used herein).
6. The Mortgage and the Financing Statement are in satisfactory form
for filing and recording in the offices described below.
7. The filing and/or recording, as the case may be, of (a) the
Mortgage in the office of the county clerk of each county in the State in
which any portion of the Mortgaged Property is located, and as a financing
statement and utility security instrument in the office of the Secretary of
State of the State, and (b) the Financing Statement in the Uniform
Commercial Code records in each county in the State in which any portion of
the Mortgaged Property is located are the only recordings or filings in the
State necessary to perfect the liens and security interests in the
Mortgaged Property created by the Mortgage or to permit the Lender to
enforce in the State its rights under the Mortgage. No subsequent filing,
re-filing, recording, or re-recording will be required in the State in
order to continue the perfection of the liens and security interests
created by the Mortgage except that (a) a continuation statement must be
filed with respect to the Mortgage filed as a financing statement in the
office of the Secretary of State of the State and with respect to the
Financing Statement in the Uniform Commercial Code records in each county
in the State in which any portion of the Mortgaged Property is located,
each within six months prior to the expiration of five years from the date
of the relevant initial financing statement filing, (b) a subsequent
continuation statement must be filed within six months prior to the
expiration of each subsequent five-year period from the date of each
initial financing statement filing, and (c) amendments or supplements to
the Mortgage filed as a financing statement and the Financing Statement
and/or additional financing statements may be required to be filed in the
event of a change in the name, identity, or structure of the Borrower or in
the event the financing statement filing otherwise becomes inaccurate or
incomplete.
IV-iii
<PAGE>
8. To our knowledge after due inquiry, except as disclosed in
Exhibit VI to the Credit Agreement, no litigation or other action of any
nature affecting the Borrower is pending before any Governmental Authority
or threatened against the Borrower. To our knowledge after due inquiry, no
unusual or unduly burdensome restriction, restraint, or hazard exists by
contract, Requirement of Law, or otherwise relative to the business or
operations of the Borrower or the ownership and operation of any Properties
of the Borrower other than such as relate generally to Persons engaged in
business activities similar to those conducted by the Borrower.
9. No authorization, consent, approval, exemption, franchise, permit
or license of, or filing (other than filing of Security Instruments in
appropriate filing offices) with, any Governmental Authority or any other
Person is required to authorize or is otherwise required in connection with
the valid execution and delivery by the Borrower of the Loan Documents or
any instrument contemplated thereby, or the payment performance by the
Borrower of the Obligations.
10. No transaction contemplated by the Loan Documents is in violation
of any regulations promulgated by the Board of Governors of the Federal
Reserve System, including, without limitation, Regulations G, T, U, or X.
11. The Borrower is not, nor is the Borrower directly or indirectly
controlled by or acting on behalf of any Person which is, an "investment
company" or an "affiliated person" of an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
12. The Borrower is not a "holding company," or an "affiliate" of a
"holding company" or of a "subsidiary company" of a "holding company,"
within the meaning of the Public Utility Holding Company Act of 1935, as
amended.
The opinions expressed herein are subject to the following qualifications and
limitations:
A. We are licensed to practice law only in the State and other
jurisdictions whose laws are not applicable to the opinions expressed
herein; accordingly, the foregoing opinions are limited solely to the laws
of the State, applicable United States federal law, and the corporation
laws of the State of _______________.
B. The validity, binding effect, and enforceability of the Loan
Documents may be limited or affected by bankruptcy, insolvency, moratorium,
reorganization, or other similar laws affecting rights of creditors
generally, including, without limitation, statutes or rules of law which
limit the effect of waivers of rights by a debtor or grantor; provided,
however, that the limitations and other effects of such statutes or rules
of law upon the validity and binding effect of the Loan Docu-
IV-iv
<PAGE>
ments should not differ materially from the limitations and other effects
of such statutes or rules of law upon the validity and binding effect of
credit agreements, promissory notes, and security instruments generally.
C. The enforceability of the respective obligations of the Borrower
under the Loan Documents is subject to general principles of equity
(whether such enforceability is considered in a suit in equity or at law).
This Opinion is furnished by us solely for the benefit of the Lender
in connection with the transactions contemplated by the Loan Documents and is
not to be quoted in whole or in part or otherwise referred to or disclosed in
any other transaction.
Very truly yours,
IV-v
<PAGE>
EXHIBIT V
---------
FORM OF OPINION OF LOCAL COUNSEL
--------------------------------
Closing Date
Bank One, Texas, National Association
910 Travis
Houston, Texas 77002-5860
Attention: Energy Group, 6th Floor
Re: Credit Agreement dated as of January 21, 1999, by and between BANK
ONE, TEXAS, NATIONAL ASSOCIATION, as Agent, and the lenders signatory
thereto from time to time and SHERIDAN CALIFORNIA ENERGY, INC. (as
amended, restated, or supplemented from time to time, the "Credit
------
Agreement")
---------
Ladies and Gentlemen:
We have acted as special counsel in the State of California (the
"State") to SHERIDAN CALIFORNIA ENERGY, INC. (the "Borrower") in connection with
- ------ --------
the transactions contemplated in the Loan Documents described below which were
executed pursuant to the Credit Agreement. In such capacity, we furnish this
Opinion with the intention and understanding that it is to be relied upon by
________________ (the "Lender") in the closing of the transactions contemplated
------
in the Credit Agreement.
In our representation of the Borrower, we have examined an executed
counterpart of each of the following (the "Loan Documents"):
--------------
(a) Mortgage, Deed of Trust, Indenture, Security Agreement,
Assignment of Production and Financing Statement dated of even date
herewith from the Borrower in favor of the Lender (the "Mortgage"); and
--------
(b) Non-Standard Financing Statement constituent to the Mortgage (the
"Financing Statement").
-------------------
In making such examination, we have, with your permission, assumed:
(a) the genuineness of all signatures to the Loan Documents;
V-i
<PAGE>
(b) the authenticity of all documents submitted to us as originals
and the conformity with the originals of all documents submitted to us as
copies;
(c) each party to any Loan Document is authorized and has the power
to enter into and perform its obligations under such Loan Document;
(d) the due authorization, execution, and delivery of all Loan
Documents by each party thereto;
(e) the Borrower is a duly organized and validly existing limited
liability company under the laws of the State of ___________; and
(f) the Borrower has title to all Mortgaged Property (as such term is
defined in the Mortgage and so used herein) situated in the State.
Based upon the foregoing and subject to the qualifications set forth
herein, we are of the opinion that:
1. No consent, approval, or other authorization of, or filing or
registration (other than as described in paragraph A.7 hereof) with, any
court, governmental agency, commission, or other authority of the State or
any subdivision thereof is required for the due execution and delivery of
the Loan Documents or for the enforceability, performance, or observance of
the terms thereof.
2. The execution and delivery by the Borrower of each Loan Document
to which it is a party, compliance with the provisions thereof, and the
consummation of the transactions contemplated thereby will not conflict
with or result in a violation of any law or governmental rule or regulation
of the State or any subdivision thereof.
3. The Loan Documents to which the Borrower is a party constitute
legal, valid, and binding obligations of the Borrower, enforceable against
the Borrower in accordance with their respective terms.
4. The forms of the Mortgage and the Financing Statement and the
description of the Mortgaged Property situated in the State satisfy all
applicable laws of the State and are legally sufficient under the laws of
the State to enable the Lender to realize the practical benefits purported
to be afforded by the Mortgage.
5. The Mortgage (a) creates a lien upon and a security interest in
all Mortgaged Property situated in the State to secure the Indebtedness (as
such term is defined in the Mortgage and so used herein), and (b) provides
for nonjudicial foreclosure remedies customarily used in the State.
V-ii
<PAGE>
6. The Mortgage and the Financing Statement are in satisfactory form
for filing and recording in the offices described below.
7. The filing and/or recording, as the case may be, of (a) the
Mortgage in the office of the county clerk of each county in the State in
which any portion of the Mortgaged Property is located and as a financing
statement in the office of the Secretary of State of the State, and (b) the
Financing Statement in the Uniform Commercial Code records in each county
in the State in which any portion of the Mortgaged Property is located are
the only recordings or filings in the State necessary to perfect the liens
and security interests in the Mortgaged Property created by the Mortgage or
to permit the Lender to enforce in the State its rights under the Mortgage.
No subsequent filing, re-filing, recording, or re-recording will be
required in the State in order to continue the perfection of the liens and
security interests created by the Mortgage except that (a) a continuation
statement must be filed with respect to the Mortgage filed as a financing
statement in the office of the Secretary of State of the State and with
respect to the Financing Statement in the Uniform Commercial Code records
in each county in the State in which any portion of the Mortgaged Property
is located, each within six months prior to the expiration of five years
from the date of the relevant initial financing statement filing, (b) a
subsequent continuation statement must be filed within six months prior to
the expiration of each subsequent five-year period from the date of each
initial financing statement filing, and (c) amendments or supplements to
the Mortgage filed as a financing statement and the Financing Statement
and/or additional financing statements may be required to be filed in the
event of a change in the name, identity, or structure of the Borrower or in
the event the financing statement filing otherwise becomes inaccurate or
incomplete.
8. No state or local mortgage recording tax, stamp tax, or other
similar fee, tax, or governmental charge (other than statutory filing and
recording fees to be paid upon filing) is required to be paid to the State
or any subdivision thereof in connection with the execution, delivery,
filing, or recording of any of the Loan Documents or the consummation of
the transactions contemplated therein.
9. It is not necessary for the Lender to qualify to do business in
the State or file in the State any designation for service of process or
reports solely by reason of the interests conveyed or assigned to it or for
its benefit under the Mortgage, nor will such conveyances or assignments
alone result in the imposition upon the Lender of any taxes by the State or
by any subdivision thereof, including, without limitation, franchise,
license, tax on interest received or income taxes, other than recording and
filing fees in connection with the filings referred to in paragraph A.7
above and taxes which the Lender may owe in the event it becomes the actual
and record owner of any Mortgaged Property situated in the State.
V-iii
<PAGE>
10. The foreclosure of, or exercise of the power of sale under, the
Mortgage will not in any manner restrict, affect or impair the liability of
the Borrower with respect to the indebtedness or the rights and remedies of
the Lender with respect to the foreclosure or enforcement of any other
security interests or liens securing the Indebtedness to the extent any
deficiency remains unpaid after application to the Indebtedness of the
proceeds of such foreclosure or the exercise of such power of sale.
11. The priority of the liens and security interests created by the
Mortgage with respect to Indebtedness incurred by the Borrower on or before
the date on which the Mortgage is filed in the appropriate recording
offices referred to hereinabove will be determined by the date of such
filings. The priority of the lien created by the Mortgage with respect to
Indebtedness incurred by the Borrower after the date the Mortgage is
recorded will be determined by the dates the Mortgage is filed.
12. The priority of the lien created by the Mortgage will not be
affected by any prepayment of a portion, but less than all, of the
Indebtedness, or any reduction or increase of the outstanding amount of the
Indebtedness from time to time.
13. The limitations period for enforcement of the Mortgage in the
State is ______________.
The opinions expressed herein are subject to the following qualifications
and limitations:
A. We are licensed to practice law only in the State and other
jurisdictions whose laws are not applicable to the opinions expressed
herein; accordingly, the foregoing opinions are limited solely to the laws
of the State and applicable United States federal law.
B. The validity, binding effect, and enforceability of the Loan
Documents may be limited or affected by bankruptcy, insolvency, moratorium,
reorganization, or other similar laws affecting rights of creditors
generally, including, without limitation, statutes or rules of law which
limit the effect of waivers of rights by a debtor or grantor; provided,
---------
however, that the limitations and other effects of such statutes or rules
-------
of law upon the validity and binding effect of the Loan Documents should
not differ materially from the limitations and other effects of such
statutes or rules of law upon the validity and binding effect of
assignments and security instruments generally.
C. The enforceability of the respective obligations of the Borrower
under the Loan Documents to which it is a party is subject to general
principles of equity (whether such enforceability is considered in a suit
in equity or at law).
V-iv
<PAGE>
This Opinion is furnished by us solely for the benefit of the Lender
in connection with the transactions contemplated by the Loan Documents and is
not to be quoted in whole or in part or otherwise referred to or disclosed in
any other transaction.
Very truly yours,
V-v
<PAGE>
EXHIBIT VI
----------
DISCLOSURES
<TABLE>
<S> <C> <C>
Section 1.2 Existing Liens None
Section 3.2 Title Encumbrances None
Section 4.1 Conflicts Certain of the provisions of the Certificate of Designations,
Preferences and Rights of Services N-A Preferred Stock require
mandatory redemption at times when such redemption may be prohibited by
Section 6.8
Section 4.7 Liabilities None
---------------------
Section 4.7 Litigation None
---------------------
Section 4.11 Environmental Matters None
---------------------
Section 4.16 Refunds None
---------------------
Section 4.17 Gas Contracts None
---------------------
Section 4.19 Casualties None
---------------------
</TABLE>
VI-i
<PAGE>
EXHIBIT VII
-----------
[FORM OF ASSIGNMENT AGREEMENT]
ASSIGNMENT AGREEMENT
--------------------
This ASSIGNMENT AGREEMENT (as amended, supplemented, restated or otherwise
modified from time to time, this "Agreement") is dated as of __________________,
---------
__________, by and between ______________________________ (the "Assignor") and
--------
________________________________ (the "Assignee").
--------
RECITALS
--------
WHEREAS, the Assignor is a party to the Credit Agreement dated as of
January 21, 1999, (as amended, supplemented or restated from time to time, the
"Credit Agreement") by and among Sheridan California Energy, Inc., a Texas
----------------
limited liability company (the "Borrower"), each of the lenders that is or
--------
becomes a party thereto as provided in Section 9.1(b) of the Credit Agreement
(individually, together with its successors and assigns, a "Lender", and
------
collectively, together with their successors and assigns, the "Lenders"), and
-------
Bank One, Texas, National Association, a national banking association, as a
Lender (in such capacity, "Bank One") and as agent for the Lenders (in such
capacity, together with its successors in such capacity, the "Agent"); and
-----
WHEREAS, the Assignor proposes to sell, assign and transfer to the
Assignee, and the Assignee proposes to purchase and assume from the Assignor,
[ALL][A PORTION] of the Assignor's Facility Amount and its outstanding Loans,
all on the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS AND INTERPRETATION
------------------------------
1.1 Definitions from Credit Agreement. All capitalized terms used but not
---------------------------------
defined herein have the respective meanings given to such terms in the Credit
Agreement.
1.2 Additional Defined Terms. As used herein, the following terms have
------------------------
the following respective meanings:
"Assigned Interest" shall mean all of Assignor's (in its capacity as a
-----------------
"Lender") rights and obligations (i) under the Credit Agreement and the
other Loan Documents in respect of [ALL OF] [THE PORTION OF THE] Facility
Amount of the Assignor in the principal amount equal
VII-i
<PAGE>
to $_____________ and (ii) to make Loans under its Commitment up to such
amount referenced above and any right to receive payments for the Loans
currently outstanding under its Commitment in the principal amount of
$_____________ (the "Loan Balance"), plus the interest and fees which will
------------
accrue with respect thereto from and after the Assignment Date.
"Assignment Date" shall mean ________________, __________.
---------------
1.3 References. References in this Agreement to Schedule, Exhibit,
----------
Article, or Section numbers shall be to Schedules, Exhibits, Articles, or
Sections of this Agreement, unless expressly stated to the contrary. References
in this Agreement to "hereby," "herein," "hereinafter," "hereinabove,"
"hereinbelow," "hereof," "hereunder" and words of similar import shall be to
this Agreement in its entirety and not only to the particular Schedule, Exhibit,
Article, or Section in which such reference appears. Except as otherwise
indicated, references in this Agreement to statutes, sections, or regulations
are to be construed as including all statutory or regulatory provisions
consolidating, amending, replacing, succeeding, or supplementing the statute,
section, or regulation referred to. References in this Agreement to "writing"
include printing, typing, lithography, facsimile reproduction, and other means
of reproducing words in a tangible visible form. References in this Agreement
to agreements and other contractual instruments shall be deemed to include all
exhibits and appendices attached thereto and all subsequent amendments and other
modifications to such instruments, but only to the extent such amendments and
other modifications are not prohibited by the terms of this Agreement.
References in this Agreement to Persons include their respective successors and
permitted assigns.
1.4 Articles and Sections. This Agreement, for convenience only, has
---------------------
been divided into Articles and Sections; and it is understood that the rights
and other legal relations of the parties hereto shall be determined from this
instrument as an entirety and without regard to the aforesaid division into
Articles and Sections and without regard to headings prefixed to such Articles
or Sections.
1.5 Number and Gender. Whenever the context requires, reference
-----------------
herein made to the single number shall be understood to include the plural; and
likewise, the plural shall be understood to include the singular. Definitions
of terms defined in the singular or plural shall be equally applicable to the
plural or singular, as the case may be, unless otherwise indicated. Words
denoting sex shall be construed to include the masculine, feminine and neuter,
when such construction is appropriate; and specific enumeration shall not
exclude the general but shall be construed as cumulative.
1.6 Negotiated Transaction. Each party to this Agreement affirms to
----------------------
the other that it has had the opportunity to consult, and discuss the provisions
of this Agreement with, independent counsel and fully understands the legal
effect of each provision.
VII-ii
<PAGE>
ARTICLE II
SALE AND ASSIGNMENT
-------------------
2.1 Sale and Assignment. On the terms and conditions set forth herein,
-------------------
effective on and as of the Assignment Date, the Assignor hereby sells, assigns
and transfers to the Assignee, and the Assignee hereby purchases and assumes
from the Assignor, all of the right, title and interest of the Assignor in and
to, and all of the obligations of the Assignor in respect of, the Assigned
Interest. Such sale, assignment and transfer is without recourse and, except as
expressly provided in this Agreement, without representation or warranty.
2.2 Assumption of Obligations. The Assignee agrees with the Assignor (for
-------------------------
the express benefit of the Assignor and the Borrower) that the Assignee will,
from and after the Assignment Date, assume and perform all of the obligations of
the Assignor in respect of the Assigned Interest. From and after the Assignment
Date: (a) the Assignor shall be released from the Assignor's obligations in
respect of the Assigned Interest, and (b) the Assignee shall be entitled to all
of the Assignor's rights, powers and privileges under the Credit Agreement and
the other Loan Documents in respect of the Assigned Interest.
2.3 Consent by Agent. By executing this Agreement as provided below, in
----------------
accordance with Section 9.1(b) of the Credit Agreement, the Agent hereby
acknowledges notice of the transactions contemplated by this Agreement and
consents to such transactions.
ARTICLE III
PAYMENTS
--------
3.1 Payments. As consideration for the sale, assignment and transfer
--------
contemplated by Section 2.1, the Assignee shall, on the Assignment Date, assume
-----------
Assignor's obligations in respect of the Assigned Interest and pay to the
Assignor an amount equal to the Loan Balance, if any, all accrued and unpaid
interest and fees with respect to the Assigned Interest as of the Assignment
Date. Except as otherwise provided in this Agreement, all payments hereunder
shall be made in Dollars and in immediately available funds, without setoff,
deduction or counterclaim.
3.2 Allocation of Payments. The Assignor and the Assignee agree that (i)
----------------------
the Assignor shall be entitled to any payments of principal with respect to the
Assigned Interest made prior to the Assignment Date, together with any interest
and fees with respect to the Assigned Interest accrued prior to the Assignment
Date, (ii) the Assignee shall be entitled to any payments of principal with
respect to the Assigned Interest made from and after the Assignment Date,
together with any and all interest and fees with respect to the Assigned
Interest accruing from and after the Assignment Date, and (iii) the Agent is
authorized and instructed to allocate payments received by it for the account of
the Assignor and the Assignee as provided in the foregoing clauses. Each party
hereto agrees that
VII-iii
<PAGE>
it will hold any interest, fees or other amounts that it may receive to which
the other party hereto shall be entitled pursuant to the preceding sentence for
account of such other party and pay, in like money and funds, any such amounts
that it may receive to such other party promptly upon receipt.
3.3 Delivery of Notes. Promptly following the receipt by the Assignor of
-----------------
the consideration required to be paid under Section 3.1 hereof, the Assignor
-----------
shall, in the manner contemplated by Section 9.1(b) of the Credit Agreement, (i)
deliver to the Agent (or its counsel) the Note held by the Assignor and (ii)
notify the Agent to request that the Borrower execute and deliver new Notes to
the Assignor, if Assignor continues to be a Lender, and the Assignee, dated the
Assignment Date in respective principal amounts equal to the respective Facility
Amounts of the Assignor (if appropriate) and the Assignee after giving effect to
the sale, assignment and transfer contemplated hereby.
3.4 Further Assurances. The Assignor and the Assignee hereby agree to
------------------
execute and deliver such other instruments, and take such other actions, as
either party may reasonably request in connection with the transactions
contemplated by this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT
--------------------
The effectiveness of the sale, assignment and transfer contemplated hereby
is subject to the satisfaction of each of the following conditions precedent:
(a) the execution and delivery of this Agreement by the Assignor and
the Assignee;
(b) the receipt by the Assignor of the payments required to be made
under Section 3.1; and
-----------
(c) the acknowledgment and consent by the Agent contemplated by
Section 2.3.
------------
ARTICLE V
REPRESENTATIONS AND WARRANTIES
------------------------------
5.1 Representations and Warranties of Assignor. The Assignor represents
------------------------------------------
and warrants to the Assignee as follows:
VII-iv
<PAGE>
(a) it has all requisite power and authority, and has taken all action
necessary to execute and deliver this Agreement and to fulfill its
obligations under, and consummate the transactions contemplated by, this
Agreement;
(b) the execution, delivery and compliance with the terms hereof by
the Assignor and the delivery of all instruments required to be delivered
by it hereunder do not and will not violate any Requirement of Law
applicable to it;
(c) this Agreement has been duly executed and delivered by it and
constitutes the legal, valid and binding obligation of the Assignor,
enforceable against it in accordance with its terms;
(d) all approvals and authorizations of, all filings with and all
actions by any Governmental Authority necessary for the validity or
enforceability of its obligations under this Agreement have been obtained;
(e) the Assignor has good title to, and is the sole legal and
beneficial owner of, the Assigned Interest, free and clear of all Liens,
claims, participations or other charges of any nature whatsoever; and
(f) the transactions contemplated by this Agreement are commercial
banking transactions entered into in the ordinary course of the banking
business of the Assignor.
5.2 Disclaimer. Except as expressly provided in Section 5.1 hereof, the
---------- -----------
Assignor does not make any representation or warranty, nor shall it have any
responsibility to the Assignee, with respect to the accuracy of any recitals,
statements, representations or warranties contained in the Credit Agreement or
in any other Loan Document or for the value, validity, effectiveness,
genuineness, execution, legality, enforceability or sufficiency of the Credit
Agreement, the Notes or any other Loan Document or for any failure by the
Borrower or any other Person (other than Assignor) to perform any of its
obligations thereunder or for the existence, value, perfection or priority of
any collateral security or the financial or other condition of the Borrower or
any other Person, or any other matter relating to the Credit Agreement or any
other Loan Document or any extension of credit thereunder.
5.3 Representations and Warranties of Assignee. The Assignee represents
------------------------------------------
and warrants to the Assignor as follows:
(a) it has all requisite power and authority, and has taken all action
necessary to execute and deliver this Agreement and to fulfill its
obligations under, and consummate the transactions contemplated by, this
Agreement;
VII-v
<PAGE>
(b) the execution, delivery and compliance with the terms hereof by
the Assignee and the delivery of all instruments required to be delivered
by it hereunder do not and will not violate any Requirement of Law
applicable to it;
(c) this Agreement has been duly executed and delivered by it and
constitutes the legal, valid and binding obligation of the Assignee,
enforceable against it in accordance with its terms;
(d) all approvals and authorizations of, all filings with and all
actions by any Governmental Authority necessary for the validity or
enforceability of its obligations under this Agreement have been obtained;
(e) the Assignee has received copies of the Credit Agreement and the
other Loan Documents, as well as copies of all Financial Statements
previously provided by the Borrower in satisfaction of obligations under
the Credit Agreement.
(f) the Assignee has fully reviewed the terms of the Credit Agreement
and the other Loan Documents and has independently and without reliance
upon the Assignor, and based on such information as the Assignee has deemed
appropriate, made its own credit analysis and decision to enter into this
Agreement;
(g) if the Assignee is not incorporated under the laws of the United
States of America or a state thereof, the Assignee has contemporaneously
herewith delivered to the Agent and the Borrower such documents as are
required by Section 2.25(b) of the Credit Agreement; and
(h) the transactions contemplated by this Agreement are commercial
banking transactions entered into in the ordinary course of the banking
business of the Assignee.
ARTICLE VI
MISCELLANEOUS
-------------
6.1 Notices. All notices and other communications provided for herein
-------
(including any modifications of, or waivers, requests or consents under, this
Agreement) shall be given or made in writing (including by telecopy) to the
intended recipient at its "Address for Notices" specified below its name on the
signature pages hereof or, as to either party, at such other address as shall be
designated by such party in a notice to the other party.
6.2 Amendment, Modification or Waiver. No provision of this Agreement may
---------------------------------
be amended, modified or waived except by an instrument in writing signed by the
Assignor and the Assignee, and consented to by the Agent.
VII-vi
<PAGE>
6.3 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. The representations and warranties made herein by the
Assignee are also made for the benefit of the Agent, and the Assignee agrees
that the Agent is entitled to rely upon such representations and warranties.
6.4 Assignments. Neither party hereto may assign any of its rights or
-----------
obligations hereunder except in accordance with the terms of the Credit
Agreement.
6.5 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be identical and all of which, taken together,
shall constitute one and the same instrument, and each of the parties hereto may
execute this Agreement by signing any such counterpart.
6.6 Governing Law. THIS AGREEMENT (INCLUDING THE VALIDITY AND
-------------
ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF TEXAS, OTHER THAN THE CONFLICT OF LAWS RULES THEREOF.
6.7 Expenses. To the extent not paid by the Borrower pursuant to the
--------
terms of the Credit Agreement, each party hereto shall bear its own expenses in
connection with the execution, delivery and performance of this Agreement.
6.8 Waiver of Jury Trial. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY
--------------------
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY
JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment
Agreement to be executed and delivered as of the date first above written.
ASSIGNOR
--------
_____________________________________
By:_____________________________________
Name:___________________________________
Title:__________________________________
Address for Notices:
_____________________________________
VII-vii
<PAGE>
_____________________________________
_____________________________________
Telecopier No.:_______________________________
Telephone No.:________________________________
Attention:____________________________________
ASSIGNEE
--------
_____________________________________
By:_______________________________________
Name:_____________________________________
Title:____________________________________
Address for Notices:
_____________________________________
_____________________________________
_____________________________________
Telecopier No.:________________________________
Telephone No.:_________________________________
Attention:_____________________________________
ACKNOWLEDGED AND CONSENTED TO:
BANK ONE, TEXAS, NATIONAL ASSOCIATION
as Agent
By:__________________________________
Name:________________________________
Title:_______________________________
VII-viii
<PAGE>
GAS PURCHASE AND SALES AGREEMENT
THIS GAS PURCHASE AND SALES AGREEMENT (the "Agreement") is made, and
entered into as of January 25, 1999, but effective as of February 1, 1999 (the
"Effective Date"), by and among CALPINE FUELS CORPORATION, a California
corporation (hereinafter referred to as "Buyer"), and SHERIDAN CALIFORNIA
ENERGY, INC., a Delaware corporation (hereinafter referred to as "Seller").
W I T N E S S E T H:
WHEREAS, affiliates of Buyer own and operate proprietary systems of gas
gathering and transmission pipelines ("Calpine Pipeline"), some of which are now
or may hereafter be in reasonable proximity to wells producing Seller's Gas, and
Seller wishes to sell Seller's Gas (hereinafter defined) to Buyer on the terms
and conditions set forth below.
NOW THEREFORE, in consideration of the premises, and of the mutual
covenants and agreements set forth herein, the receipt and sufficiency of which
are hereby acknowledged, the parties have agreed as follows:
1. DEFINITIONS
1.1 Unless expressly stated otherwise, the following terms when used
in this Agreement shall mean:
1.1.1 The term "Seller's Gas" shall mean any Gas which is not Excluded
Gas and which Seller now has or hereafter acquires the right to sell, either as
an operator or as a non-working interest owner electing to take its working
interest share of gas produced in kind, from any well now or hereafter drilled
within the area in California described on Exhibit "A" attached hereto.
1.1.2 The term "Btu" shall mean a British thermal unit, which means the
amount of heat required to raise the temperature of one pound of distilled water
from 59 degrees Fahrenheit to 60 degrees Fahrenheit at a constant pressure of
14.73 pounds per square inch absolute.
1.1.3 The term "Governmental Authority" as used herein, shall mean the
California Public Utility Commission, or any other state or local governmental
agency with jurisdiction over all or any part of the subject matter of this
Agreement.
1.1.4 The term "Contract Month" shall mean each successive period of
one calendar month beginning on the Effective Date; provided, however, that if
such Effective Date is other than the first day of a calendar month, then the
period beginning with such Effective Date to the first day of the following
month shall, for all purposes under this Agreement, be treated as a full
Contract Month; and, provided, further, that if the period of time between the
final such anniversary date during the
<PAGE>
term of this Agreement and the termination date of this Agreement is less than a
month, such period shall nevertheless be deemed a full Contract Month.
1.1.5 The term "cubic foot" shall mean the quantity of gas which
occupies one cubic foot when such gas is at a temperature of sixty (60) degrees
Fahrenheit and at a pressure of 14.73 pounds per square inch absolute.
1.1.6 A "day" shall begin at 7:00 a.m. Pacific Time on each calendar
day and end at 7:00 a.m. Pacific Time on the following calendar day.
1.1.7 The term "Delivery Capacity" shall mean: (a) Seller's Gas
production, expressed in terms of MMBtu per day, meeting the quality standards
set forth in Section 11 below which is capable of being produced as established
during a test period mutually agreeable to the parties of not more than five
consecutive (5) days against the delivery pressure prescribed by Section 7.
Notwithstanding anything in this Agreement to the contrary, in no event shall
the Delivery Capacity exceed what Seller, in its judgment as a reasonably
prudent operator, deems appropriate for the sound physical operation of its
wells and leases.
1.1.8 The term "Gas" shall mean natural gas produced from a Well,
casinghead gas and the residue resulting from processing both natural gas from a
Well and casinghead gas, meeting the minimum quality standards specified in
Section 11.
1.1.9 The term "Heating Value" shall mean the gross number of Btu which
would be contained in the quantity of one (1) cubic foot of Gas at a temperature
of 60 degrees Fahrenheit, under a pressure of fourteen and seventy-three
hundredths (14.73) pounds per square inch absolute, and adjusted to reflect the
actual water vapor content of the Gas delivered.
1.1.10 The term "Hydrocarbon Liquids" shall mean condensate and/or
distillate which may be recovered by either mechanical or low temperature means
from the Seller's Gas delivered or to be delivered hereunder.
1.1.11 The term "Calpine Pipeline" shall mean the proprietary pipeline
facilities owned and operated by an affiliate of Buyer, as such pipeline
facilities may exist from time to time, as referenced in the second recital in
this Agreement.
1.1.12 The term "Liquefiable Hydrocarbons" shall mean the hydrocarbons
other than crude oil and methane that exist in the gas phase under initial or
original reservoir conditions and are produced with the Seller's Gas committed
hereunder.
1.1.13 The term "Mcf" shall mean one thousand cubic feet.
1.1.14 The term "MMBtu" shall mean one million Btu.
2
<PAGE>
1.1.15 The term "Excluded Gas" shall mean (a) Gas produced attributable
to lands outside the area depicted on Exhibit "A" attached hereto, (b) Gas that
is dedicated to pre-effective date commitments for Gas required to fulfill
Seller's obligations under (i) the take-in-kind royalty provisions of its oil,
Gas and mineral leases (provided that Seller shall not actively encourage any
lessor to take its royalty share of Gas in-kind and shall not agree to remarket
any Gas taken in-kind by a lessor), (ii) agreements to which Seller is a Party
including obligations pursuant to calls on production, rights of first refusal,
reversionary rights to convert retained overriding royalties into working
interests and similar rights in favor of third Persons for those times and to
the extent third parties have exercised their rights to enforce such
obligations, (c) Gas subject to the operational reservations set forth in
Section 3.6.1; (d) Gas sold to a third party in accordance with Section 14.5
hereof but only during the continuance of the event of Force Majeure; and (e)
such other Gas as Seller proposes to exclude and Buyer agrees in writing, in
Buyer's sole discretion, may be excluded.
1.1.16 The term "Sellers Nomination" shall mean, as to any Contract
Month, the quantity of Seller's Gas nominated by Seller pursuant to Section 3.3
not to exceed the Delivery Capacity.
1.1.17 The term "Monthly Contract Quantity" shall mean, as to any
Contract Month, the total monthly quantity, expressed in MMBtu identified in
Seller's Nomination.
1.1.18 The term "Point(s) of Delivery" shall mean a point of
interconnection between the Seller's Facilities and, at Buyer's election, either
(a) Pacific Gas and Electric Company's gas gathering or transmission system
("PG&E's System"), (b) another utility's or co-op's gas gathering or
transmission system ("Third Party's System"), or (c) the Calpine Pipeline. The
Points of Delivery as of the Effective Date are listed on Exhibit "C."
1.1.19 The term "Facilities" shall mean any and all facilities required
to be constructed and installed in order to enable Seller to deliver Seller's
Gas to Buyer at the Point of Delivery herein in the quantities and at the
pressure requirements and quality specifications provided herein. Facilities
shall be maintained by Seller at its sole cost and expense. The costs of
constructing Facilities shall be determined as provided in Section 2.2 hereof.
1.1.20 The term "Transporter" shall mean any pipeline system that
transports Gas, including Calpine's Pipeline, PG&E's System or a Third Party's
System.
1.1.21 The term "Well" shall mean an oil and gas well subject to this
Agreement.
2. FILINGS WITH REGULATORY
AUTHORITIES AND CONSTRUCTION OF FACILITIES
2.1 Each of the parties hereto agrees to file promptly, at its own
expense, any applications for governmental permits, licenses and authorizations
which, in its sole discretion, it deems necessary in order to perform its
obligations from time to time under this Agreement. Such applications, if any,
will be prosecuted diligently and in good faith, provided that neither party
shall be obligated to accept any authorizations which would materially and
adversely affect such party.
3
<PAGE>
2.2 Seller will provide Buyer with notice of the Facilities required to be
constructed in order to deliver Seller's Gas to a designated Point of Delivery.
If the designated Point of Delivery is other than that location on the PG&E
System to which the costs of construction of Facilities would be the least
expensive (the "Preferred Location"), Seller's notice to Buyer shall include the
estimated cost of constructing Facilities necessary to connect to the Preferred
Location on the PG&E System and an estimate of the cost of connecting to the
designated Point of Delivery. Seller shall bear the cost of constructing
Facilities necessary to deliver Seller's Gas to the designated Point of Delivery
up to the amount of the estimate of the cost of connecting to the Preferred
Location on the PG&E System. Seller and Buyer will enter into good faith
negotiations to reach a definitive written agreement on which party shall bear
any costs of connecting to the designated Point of Delivery which exceed the
estimated cost of connecting to the Preferred Location on the PG&E System.
Should the parties be unable to agree within a period of ten (10) days from
receipt of Buyer's notice to Seller on the sharing of such excess costs, the
designated Point of Delivery shall become, by default, the Preferred Location on
the PG&E System, and Seller shall proceed with installing Facilities necessary
to connect to the Preferred Location on the PG&E System. Notwithstanding any
provision hereof to the contrary, Seller shall be under no obligation whatsoever
to construct Facilities, even to connect to a Preferred Location, to the extent
Seller reasonably determines that to do so is uneconomic to Seller. The phrase
"uneconomic to Seller" as used herein shall mean that the reasonably estimated
cost of constructing the Facilities in question could not reasonably be expected
to be recovered (together with any of Seller's unrecovered costs of drilling and
completing the well or wells in question) from Seller's net revenue interest in
the well or wells in question.
2.3 Upon execution of this Agreement and from time to time throughout the
term hereof, each of the parties shall timely file with the Governmental
Authority and other applicable regulatory bodies having jurisdiction all
notices, acceptances or other filings required by such regulatory bodies in
connection with the sale of Seller's Gas hereunder and shall promptly provide
copies of such to the other party.
3. QUANTITY
3.1 Subject to the other terms and provisions hereof, Buyer hereby agrees
to purchase and take from Seller during each Contract Month, and Seller hereby
agrees to sell and deliver to Buyer during each Contract Month, the Monthly
Contract Quantity. Seller will exercise all commercially reasonable efforts (a)
to cancel or terminate any and all gas purchase agreements in force and effect
on the Effective Date with any third party purchaser of Seller's Gas except any
such Gas Purchase Agreement which Buyer and Seller agree in writing to keep in
force (a "Continued Existing Agreement"), and (b) provide notice to take in kind
any and all Seller's Gas for any working interest in any gas unit or field.
Seller shall pay to Buyer or credit to Buyer's account the amount of 5c per
MMBtu for all Seller's Gas sold after the Effective Date under any Continued
Existing Agreement, in accordance with Section 4.4.1 hereof. Seller will not
extend, amend or otherwise increase any of Seller's obligations under any gas
sales agreements in force and effect on the Effective Date without first
obtaining Buyer's written consent.
4
<PAGE>
3.2 Any Hydrocarbon Liquids or Liquefiable Hydrocarbons which Seller
has failed to recover prior to delivery to a Point of Delivery on the Calpine
Pipeline and which Buyer or Buyer's affiliate extracts to provide for efficient
operations shall become the sole property of Buyer upon such extraction.
3.2.1 On or before the earlier of (i) the NYMEX closing for gas futures
contracts or (ii) the 25/th/ day of each Contract Month, Seller shall advise
Buyer of the quantity of Seller's Gas estimated to be delivered each day during
the next Contract Month.
3.2.2 The parties shall confer at either party's initiative during each
Month to reforecast the daily quantities of Seller's Gas scheduled to be
delivered or purchased pursuant to Seller's Nomination. Without limiting the
generality of the foregoing, Seller shall promptly notify Buyer of any changes
in the quantities of Seller's Gas scheduled to be delivered or taken pursuant to
Seller's Nomination, as well as any condition that is reasonably likely to
change such quantities estimated to be delivered in Seller's Nomination. Such
changes shall be deemed timely delivered for purposes of determining liability
for imbalance charges pursuant to this Agreement if delivered to Buyer by not
later than 9:00 a.m. on the day before revised nominations are due to be
delivered by Buyer to downstream Transporters pursuant to such Transporter's
respective Tariffs.
3.2.3 Without limiting the generality of Section 3.2.1, the parties
recognize that additional quantities of Seller's Gas not included in Seller's
Nominations may become available for delivery to Buyer at various times after
the first day of an applicable Contract Month. At least two (2) business days
before the day that Seller wishes to begin deliveries of such additional
quantities of Seller's Gas, Seller shall provide Buyer with a written notice
setting forth (i) the Points of Delivery at which Seller wishes to make such
deliveries, (ii) the additional monthly quantities that Seller estimates will be
delivered to such Points of Delivery during the Month, and (iii) the index(es)
applicable to such Point(s) of Delivery. The contract price for the additional
monthly quantities shall be determined in accordance with Section 4, and Buyer
shall purchase such additional monthly quantities in accordance with Section
3.1.
3.2.4 For any of Seller's Gas delivered to a Point of Delivery on
PG&E's System or on a Third Party's System, Buyer shall make all daily or other
nominations to PG&E or the Third Party as may be required by them, consistent
with Seller's Nominations hereunder, and shall provide copies of all such
nominations to PG&E or the Third Party, at the same time, to Seller. Seller
shall confirm such nominations to PG&E or the Third Party, as required.
3.3 A "Buyer Take Default" shall occur if, during any Contract Month,
Buyer fails for any reason (other than Force Majeure) to take the Monthly
Contract Quantity (less any Seller's Gas released pursuant to any provision of
this Agreement), in which event Seller may sell any such Gas not so taken by
Buyer to other buyers provided that such Gas shall not be committed under
agreements with such buyers for a term of greater than 30 days without Buyer's
prior written consent, and as the sole and exclusive remedy for such Buyer Take
Default, Buyer shall pay Seller in accordance with the provisions of Section 12,
an amount equal to the difference, if any, between the
5
<PAGE>
price received by Seller from such third party or parties, if lower than the
following index price, and the first-of-the-month index price for Gas delivered
to the PG&E City Gate as reported in Natural Gas Intelligence, less PG&E's then
current firm transportation rate (including fuel) for "Silverado" backbone
transportation capacity, plus $0.05 per MMBtu. Nothing herein shall relieve
Buyer from any imbalance charges for which it is liable hereunder.
3.3.1 A "Material Buyer Take Default" shall occur if during any two
consecutive years Buyer fails to take at least 90% of the sum of the Monthly
Contract Quantities for each contract year. Seller may, in its discretion,
terminate this Agreement if a Material Buyer Take Default occurs and Seller
gives Buyer written notice of Seller's intention to terminate this Agreement
within sixty (60) days after the last day of the contract year in which a
Material Buyer Take Default occurs, such termination to be effective on the last
day of the month following the month in which such termination notice is
delivered to Buyer. Seller's right to terminate this Agreement for a Material
Buyer Take Default shall be waived if Seller fails to deliver to Buyer the
notice described in the proceeding grammatical sentence of this Section within
the 60-day period set forth therein. After the occurrence of a Material Buyer
Take Default, Seller's sole and exclusive remedies shall be (i) the recovery of
any accrued and unpaid amounts due from Buyer through the date of such Material
Buyer Take Default, plus interest accrued thereon in accordance with Section 12
and (ii) termination of this Agreement pursuant to this Section.
3.3.2 A "Seller Delivery Default" shall occur if, during any Contract
Month, Seller fails for any reason (other than Force Majeure) to deliver the
Monthly Contract Quantity (less any Seller's Gas released pursuant to any
provision of this Agreement), in which event Buyer may purchase replacement Gas
from a third party or parties and, as the sole and exclusive remedy for such
Seller Delivery Default, Seller shall pay Buyer in accordance with the
provisions of Section 12 an amount equal to the difference, if any, between the
price paid by Buyer to such third party or parties, if higher than the following
index price, and the first-of-the-month index price for Gas delivered to the
PG&E City Gate as reported in Natural Gas Intelligence, less PG&E's then current
firm transportation rate (including fuel) for "Silverado" backbone
transportation capacity, plus $0.05 per MMBtu. Nothing herein shall relieve
Seller from any imbalance charges for which it is liable hereunder.
3.3.3 A "Material Seller Take Default" shall occur if, during any two
consecutive years, Seller fails to deliver at least 90% of the sum of the
Monthly Contract Quantities during each contract year. Buyer may, in its
discretion, terminate this Agreement if a Material Seller Delivery Default
occurs and Buyer gives Seller written notice of Buyer's intention to terminate
this Agreement within sixty (60) days after the last day of the contract year in
which a Material Seller Delivery Default occurs, such termination to be
effective on the last day of the month following the month in which such
termination notice is delivered to Seller. Buyer's right to terminate this
Agreement for a Material Seller Take Default shall be waived if Buyer fails to
deliver to Seller the notice described in the preceding grammatical sentence of
this Section within the 60-day period set forth therein. After the occurrence
of a Material Seller Take Default, Buyer's sole and exclusive remedies shall be
(i) the recovery of any accrued and unpaid amounts due from Seller through the
date of such Material Seller Take Default, plus interest accrued thereon in
accordance with Section 12, and (ii) termination of this Agreement pursuant to
this Section.
6
<PAGE>
3.4 The parties acknowledge that deliveries of Seller's Gas hereunder may
increase or decrease significantly from Contract Month to Contract Month as a
consequence of the routine conduct of the parties' operations and a variety of
factors affecting the market for Gas generally. Accordingly, the parties agree
that (a) the obligations of Seller (i) to sell and deliver the Monthly Contract
Quantity and (ii) of Buyer to purchase and receive the Monthly Contract Quantity
and (b) the methods used by the parties to estimate the quantities of Seller's
Gas to be sold by Seller and purchased by Buyer from Contract Month to Contract
Month hereunder, are all commercially reasonable means, arrived at by both
parties, acting in good faith, to minimize the severity of such increases and
decreases in deliveries, consistent with the commercial realities of producing
and marketing the Seller's Gas and the realities of Gas markets generally. The
parties agree that Section 2.306 of the Uniform Commercial Code, or any
provision of any law with similar provisions (collectively, "Output Contract
Laws"), is inapplicable to this Agreement and the transactions hereby
contemplated. To the extent that any Output Contract Laws are held to apply to
this Agreement and the transactions hereby contemplated, the parties hereby
WAIVE AND RELINQUISH any defenses to the enforcement of this Agreement arising
from such Output Contract Laws, and any claims that may be asserted by either
party arising from such Output Contract Laws.
3.5 Buyer shall manage balancing of Gas volumes on all Transporters'
Systems (including PG&E's System and Third Party's Systems), and Buyer and
Seller shall cooperate in avoiding and correcting imbalances as follows:
a. Seller shall provide Buyer once every week by facsimile a
statement of the current meter reading at the Facility;
b. Seller shall adjust Seller's Nomination upward or downward on a
temporary basis if the currently effective Seller's Nomination
does not reasonably correspond to Seller's production, as
provided in Section 3.2.2.
3.5.1 Buyer shall assume responsibility for trading of imbalances under
PG&E's tariff schedules G-BAL and Producer Balancing Agreements, and Seller will
designate Buyer as Seller's agent pursuant to such balancing agreements, or if
another Transporter is involved, pursuant to the tariff of that Transporter (or
any successor tariff, or agreement in the case of an unregulated entity). If
imbalance penalties or costs associated with such imbalances should occur,
including costs associated with Operational Flow Orders or Emergency Flow Orders
levied by PG&E, the cause of such imbalance shall be determined by the parties.
If it is determined that the imbalances arose as a result of Seller's failure to
deliver Seller's estimates of deliveries, or amendments thereto, pursuant to
Sections 3.2.1, 3.2.2 or 3.2.3 hereof, then Seller shall reimburse Buyer for
such imbalance charges or costs associated with such imbalances. Under all other
circumstances, Buyer shall pay such imbalance charges or costs associated with
such imbalances.
3.5.2 If PG&E adopts more strict gas balancing procedures than exist on
the Effective Date hereof, Seller agrees to meet with Buyer immediately
following receipt of a written request therefor from Buyer to renegotiate the
gas balancing provisions and quantity provisions of this Agreement
7
<PAGE>
so as to enable Buyer to comply with such stricter procedures without penalty or
incremental cost to Buyer.
3.6 Seller reserves to itself, its successors, assigns and
affiliates, the following rights (together with quantities of Gas sufficient to
satisfy such rights):
3.6.1 To operate Seller's leaseholds, lands and/or interests therein,
free from any control by Buyer, in such manner as Seller deems advisable for the
development and operation of Seller's leases (or on any unit, including, without
limitation, field-wide units), including the right (but never the obligation) to
drill new wells, enhance production, to repair and rework Seller's wells, to
renew and extend (in whole or in part) any lease, to abandon any well or
surrender any lease (in whole or in part) for any reason, to abandon, modify,
extend or dispose of any production facilities owned or installed (in whole or
in part) by Seller, to treat Gas, to use Gas as compressor fuel, for ethane
injection and recovery operations, to generate power in connection with
leasehold operations, to lift oil by repressuring, recycling or pressure
maintenance operations and to otherwise operate such leases and fields free from
any control by Buyer;
3.6.2 To remove from the Seller's Gas all liquids, liquid hydrocarbons,
oil and/or condensate and any other non-methane constituents, both by lease
separation and/or by processing plant, prior to delivery of the Gas to the
Point(s) of Delivery;
3.6.3 To produce Gas without waste and in accordance with prudent oil
and gas field practices, it being understood and agreed that Seller shall not be
required to produce any well at a rate in excess of the rate fixed by law or
regulation or in excess of the rate of flow which Seller determines, in its
discretion, exercised in good faith as a prudent operator, should be produced
from such well;
3.6.4 To pool or unitize Seller's leases with other leases of Seller or
others located in the field in which Seller's wells are located (it being
understood that the Gas attributable or allocated to Seller's interest in the
pool or unit so created will remain Seller's Gas unless otherwise provided in
this Agreement);
3.6.5 To deliver Gas required to be delivered to Third Persons under
the common law governing relationships between co-tenants, or under Gas
balancing agreements existing as of the Effective Date or similar arrangements
affecting any of Seller's wells or oil, gas and mineral leases.
3.6.6 Notwithstanding anything stated herein to the contrary, Seller
shall in no way be prohibited or precluded from assigning or granting a security
interest, lien or other encumbrance (collectively, referred to as "Liens") to
secure the repayment of obligations that Seller owes to commercial banks,
insurance companies or other financial or trade creditors (collectively,
"Lenders") on any of the properties owned by Seller from which Seller's Gas is
produced; that any person succeeding to the rights of Seller to the properties
subject hereto shall take such properties subject in all respect to the terms
and conditions hereof.
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4. PRICE
4.1 The price Buyer shall pay for the Seller's Gas delivered to a
Point of Delivery at the Calpine Pipeline in compliance with this Agreement
shall be equal to the first-of-the-month index price for gas delivered to the
PG&E City Gate as reported in Natural Gas Intelligence, less PG&E's then current
------------------------
firm transportation rate (including fuel) for "Silverado" backbone
transportation capacity, plus $0.05 per MMBtu.
4.2 The price Buyer shall pay for the Seller's Gas delivered to a
Point of Delivery at either PG&E's System or a Third Party's System in
compliance with this Agreement shall be equal to the first-of-the-month index
price for gas delivered to the PG&E City Gate as reported in Natural Gas
-----------
Intelligence, less PG&E's then current firm transportation rate (including fuel)
- ------------
for "Silverado" backbone transmission capacity.
4.3 In addition, during the term hereunder and notwithstanding the
Point of Delivery or any price redetermination hereunder, the price for Seller's
Gas shall be reduced by $0.05 per MMBtu to compensate Buyer for its obligation
to take all of Seller's Gas. This reduction shall not be subject to or affected
by any redetermination otherwise provided herein or be taken into account in the
calculation of any such other adjustment.
4.4 Either party may provide the other party with written notice to
redetermine the price of Seller's Gas to the extent any of the following occur:
(i) The reference index price is no longer published; or (ii) regulatory events
change or alter the cost or value of firm backbone transmission capacity, local
transmission and/or distribution on the PG&E System. In such event the parties
hereto shall meet reasonably promptly and attempt in good faith to negotiate a
new price leaving the parties in the same relative economic position they were
in prior to the event requiring redetermination. The redetermined price shall
be applied retroactively to the date of the notice requesting redetermination.
4.4.1 For any Seller's Gas sold by Seller to a third party, Seller
shall pay to Buyer or credit to Buyer against future Gas purchases by Buyer a
sum equal to the amount of 5c per MMBtu per month of Gas so sold to a third
party.
4.5 If the parties are unable to agree upon a new price within a
period of thirty (30) days, a new price shall be determined by arbitration in
accordance with the terms hereof. This agreement to arbitrate shall be
specifically enforceable. Either party may request arbitration by submitting a
written notice to the other. The notice shall name the noticing Party's
arbitrator and shall contain a statement of the issue(s) presented for
arbitration. Within fifteen (15) days of receipt of a notice of arbitration, the
other party shall name its arbitrator by written notice and may designate any
additional issue(s) for arbitration. The two named arbitrators shall select the
third
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arbitrator within fifteen (15) days after the date on which the second
arbitrator was named. Should the two arbitrators fail to agree on the selection
of the third arbitrator, either party shall be entitled to request the Senior
Judge of the United States District Court of the Northern District of California
to select the third arbitrator. If the Senior Judge fails or refuses to appoint
a third arbitrator within fifteen (15) days of a request to do so, then either
party may request any California Chapter of the American Arbitration Association
to select the third arbitrator. All arbitrators shall be qualified by education
or experience within the natural gas industry to decide the issues presented for
arbitration. No arbitrator shall be a current or former director, officer or
employee of either party, or its affiliates; an attorney (or member of a law
firm) that has rendered legal services to either party or its affiliates within
the past three years; or a consultant (or member of a consulting firm) that has
rendered services to either party over the past three years.
4.5.1 Each party shall deliver to the other party and to the
arbitrators, within ten (10) business days of the appointment, a written
proposal stating such party's proposed outcome, together with supporting
materials and documentation. Each party shall submit its response to the other
party's proposal within ten (10) business days after the arbitrators' and other
party's receipt of such proposal. The arbitrators, in their discretion, may
request the submission of additional information, and may conduct a hearing on
the subject matter of the dispute. Within forty-five (45) days after the
selection and appointment of the arbitrators, a majority of the arbitrators
shall select and adopt either Seller's proposal or Buyer's proposal, without
modification or compromise. The arbitrators shall make their decision as
follows: (i) in any price dispute over an index, the arbitrators shall decide
which of the proposed indexes presented to the arbitrators best represents the
market price for Gas of like quantities and quality at the applicable Point(s)
of Delivery and (ii) in all other price disputes, the arbitrator shall consider
the terms and conditions of this Agreement and the redetermined price shall be
reflective of and based upon the fair market value of natural gas of similar
quantity and quality, sold between a similarly situated buyer and seller,
purchased under a similar Gas Purchase Contract within the same geographic area,
which leaves the parties in the same relative economic position they were in
prior to the redetermination. The applicable contract price during the
arbitration shall be the contract price being paid on the day before the date
arbitration was begun hereunder (the "Arbitration Commencement Date"). Upon the
conclusion of the arbitration, such Contract Price, if it has changed as a
result of the arbitrators' decision, shall be adjusted retroactive to the
Arbitration Commencement Date.
4.5.2 The arbitration shall be concluded within 180 days of the
Arbitration Commencement Date. The arbitration shall be subject to the rules of
the American Arbitration Association, except to the extent such rules conflict
with the provisions of Article 4.5 and under no circumstances shall the American
Arbitration Association be appointed as the administrator of such arbitration
proceeding. Any decision by the arbitrators shall be final and binding upon the
parties and shall be enforceable in any court having jurisdiction over the
parties and/or the subject matter of this Agreement. The arbitrators shall have
the power to award recovery of all costs and fees to the prevailing party.
Until the date of such award, each party shall bear the expense and cost of its
own arbitrator, and one-half of the cost of the third arbitrator.
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5. POINT OF DELIVERY
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5.1 Seller shall make deliveries of Seller's Gas hereunder through
Facilities to Buyer at the Point(s) of Delivery. The parties may agree to add
or to delete Point(s) of Delivery after the Effective Date subject to the other
terms of this Agreement.
6. TITLE, POSSESSION AND CONTROL
6.1 Title to the Seller's Gas sold hereunder shall pass from Seller to
Buyer at the Point of Delivery. As between the parties hereto, Seller shall be
deemed to be in exclusive control, and possession of the Seller's Gas,
deliverable hereunder and responsible for any injuries, claims, liabilities or
damages caused thereby prior to delivery at the Points of Delivery; upon receipt
of the Seller's Gas at the Points of Delivery, Buyer shall be deemed to be in
exclusive control and possession thereof and responsible for any injuries,
claims, liabilities or damages caused by Buyer's possession and control. The
party in control and possession of such Seller's Gas shall indemnify and hold
harmless the other party with respect to any injuries, claims, liabilities, or
damages occurring while the Seller's Gas is in the indemnifying party's control
and possession.
7. DELIVERY PRESSURE
7.1 All of Seller's Gas purchased hereunder shall be delivered by Seller
at pressure sufficient to effect delivery into the designated Point of Delivery
pipeline against the pressure prevailing therein from time to time at each Point
of Delivery. For deliveries of Seller's Gas to Calpine Pipeline Seller shall
not be required to exceed a maximum of 900 psig. As to any Seller's Gas which
fails to meet the pressure specifications required herein, Buyer shall have the
right to refuse to accept delivery thereof. During the periods of such refusal
by Buyer, Seller may deliver the Gas to other buyers; provided that such Gas
shall not be committed under agreements with such buyers for a term of greater
than 30 days without Buyer's prior written consent until Buyer is willing to
accept Seller's Gas, or permanently release said Gas to Seller. Notwithstanding
any provision hereof to the contrary, it is understood and agreed that Seller
shall not be required to acquire or install facilities or equipment for
compression, processing, treating or other operations conducted with respect to
Seller's Gas pursuant to this Agreement to the extent Seller reasonably
determines that to do so is uneconomic to Seller. The phrase "uneconomic to
Seller" as used herein shall mean that the reasonably estimated cost to acquire
or install the facilities or equipment in question could not reasonably be
expected to be recovered (together with any of Seller's unrecovered costs of
drilling and completing the well or wells and gathering Facilities in question)
from Seller's net revenue interest in the well or wells in question.
8. TAXES
8.1 Seller shall pay all federal, state and local production, gathering,
severance or similar taxes now or hereafter levied with respect to Seller's Gas
delivered hereunder prior to the Point of Delivery and Buyer shall be
responsible for any taxes imposed upon the Seller's Gas or the transportation
thereof at and after the Point of Delivery. It is further agreed that should
any taxing agency require that any taxes for which either party is responsible
hereunder be paid by the other
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party directly to the taxing agency, said payment will be made and deducted from
the gross payment to the other party owing the tax after written notice thereof
to Seller. In addition, if either party is required by law to collect any such
taxes from the other party and such other party claims an exemption from such
taxes, the party alleged to owe the tax shall, upon the other party's request,
furnish such other party with the applicable exemption certificate, or other
reasonably satisfactory evidence of such exemption.
8.2 With respect to all other taxes, assessments or fees which may be
imposed with respect to possession, ownership, processing or other activity
related to the Seller's Gas, each party hereto shall bear such taxes,
assessments or fees arising on account of its possession, ownership, processing
or other activities. Further, nothing herein shall be construed to obligate
either party to reimburse the other for any federal, state or local ad valorem,
capital stock, income, windfall or excess profits taxes, general franchise taxes
imposed on corporations on account of their corporate existence or on their
right to do business within the state as a foreign corporation, or similar
taxes.
9. TERM OF AGREEMENT; DEFAULTS AND REMEDIES
9.1 This Agreement shall be in force and effect from the Effective Date of
this Agreement until the first to occur of: (i) 7:00 a.m. Pacific Time on the
tenth (10/th/) anniversary of such Effective Date (it being understood that,
subject to the terms and conditions of this Agreement, this Agreement shall be
automatically extended from year to year after such tenth anniversary, unless
terminated by either party upon written notice delivered to the other party at
least thirty (30) days prior to the last day of the then-effective term); (ii)
termination of this Agreement by Seller for a Material Take Default; (iii)
termination of this Agreement by either party for Defaults enumerated in Section
9.3.
9.2 No termination of this Agreement shall release or be construed as
releasing either party from any liability or obligation to indemnify or pay
damages to the other party arising prior to termination out of, in connection
with, or otherwise relating to, directly or indirectly, the provisions of this
Agreement, or the defaulting party's material breach, material default or
material failure in the performance of any of the defaulting party's covenants,
agreements, duties or obligations arising hereunder, or any misrepresentations
or breach of a warranty contained herein. Any imbalances in receipts or
deliveries shall be corrected to zero within ninety (90) days after such date.
9.3 Each of the following shall be deemed a "Buyer Default": (i) Buyer's
failure to pay or cause to be paid any amount owing under this Agreement when
due (including, without limitation, payments due from Buyer in respect of a
Buyer Default or Material Buyer Take Default and any interest accrued on any
amounts payable hereunder in accordance with Section 12) for a period of ten
(10) business days after the due date, subject in all respects to Buyer's rights
under Section 12 (a "Buyer Payment Default"); (ii) a Material Buyer Take
Default; (iii) the occurrence of one or more of the following Defaults with
respect to Buyer: (A) the entry of a decree or order for relief against Buyer by
a court of competent jurisdiction in any involuntary case brought against Buyer
under any bankruptcy insolvency or other similar law (collectively, "Debtor
Relief Laws") generally affecting
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the rights of creditors and relief of debtors now or hereafter in effect, (B)
the appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or other similar agent under applicable Debtor Relief Laws for
Buyer or for any substantial part of its assets or property, (C) the ordering of
the winding up or liquidation of the Buyer's affairs, (D) the filing of a
petition in any such involuntary bankruptcy case, which petition remains
undismissed for a period of 180 days or which is not dismissed or suspended
pursuant to Section 305 of the Federal Bankruptcy Code (or any corresponding
provision of any future United States bankruptcy law), (E) the commencement by
Buyer of a voluntary case under any applicable Debtor Relief Law now or
hereafter in effect, (F) the consent by Buyer to the entry of an order for
relief in any involuntary case under any law or to the appointment of or the
taking of possession by a receiver, liquidator, assignee, trustee, custodian,
sequestrator or other similar agent under any applicable Debtor Relief Laws for
Buyer or for any substantial part of its assets or property, of (G) the making
by Buyer of any general assignment for the benefit of its creditors (the
Defaults referred to in clauses (A) through(G) being collectively referred to as
a "Buyer Bankruptcy Default"); or (iv) Buyer's failure to perform any covenant
or other obligation in this Agreement (other than those specified in clauses (i)
through (iii) of this Section 9.3), and if such failure is susceptible of cure
before Seller suffers any costs or losses as a result thereof, such failure is
not remedied within thirty (30) days of Buyer's receipt of a written notice
describing the particulars of such failure in reasonable detail (such failure
being herein called a "Buyer Covenant Default").
9.3.1 Each of the following shall be deemed a "Seller Default": (i)
Seller's failure to pay or cause to be paid any amount owing under this
Agreement when due for a period of ten (10) days after the due date (a "Seller
Payment Default"); (ii) the occurrence of one or more of the following Defaults
with respect to Seller: (A) the entry of a decree or order for relief against
Seller by a court of competent jurisdiction in any involuntary case brought
against Seller under any Debtor Relief Laws generally affecting the rights of
creditors and relief of debtors now or hereafter in effect, (B) the appointment
of a receiver, liquidator, assignee, custodian, trustee, sequestrator or other
similar agent under applicable Debtor Relief Laws for Seller or for any
substantial part of its assets or property, (C) the ordering of the winding up
or liquidation of Seller's affair, (D) the filing of a petition in any such
involuntary bankruptcy case, which petition remains undismissed for a period of
180 days or which is not dismissed or suspended pursuant to Section 305 of the
Federal Bankruptcy Code (or any corresponding provision of any future United
States bankruptcy law), (E) the commencement by Seller under any such law or to
the appointment of or the taking of possession by a receiver, liquidator,
assignee, trustee, custodian, sequestrator or other similar agent under any
applicable Debtor Relief Laws for Seller or for any substantial part of its
assets or property, or (G) the making by Seller of any general assignment for
the benefit of its creditors (the Defaults referred to in clauses (A) through
(G) being collectively referred to as a "Seller Bankruptcy Default"); or
Seller's failure to perform any covenant or other obligation in this Agreement
(other than those specified in clauses (i) and (ii) of this Section 9.3.1), and
if such failure is susceptible of cure before Buyer suffers any costs or losses
as a result thereof, such failure is not remedied within thirty (30) days of
Seller's receipt of a written notice describing the particulars of such failure
in reasonable detail (such failure being herein called a "Seller Covenant
Default").
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9.3.2 Except as explicitly provided elsewhere in this Agreement, and
subject in all respects to the other terms and conditions hereof, the party not
in Default (herein referred to as an "Unaffected Party") may take such actions
as it may be permitted to take under applicable law in consequence of a Default,
including, without limitation in the case of Seller, the right to sell all or
any part of the Seller's Gas to third Persons; provided, however, that the right
to terminate this Agreement shall only be applicable (A) upon occurrence of a
Buyer Bankruptcy Default or a Seller Bankruptcy Default (whereupon this
Agreement shall terminate automatically and immediately, (B) upon occurrence of
a Buyer Payment Default or a Seller Payment Default (whereupon this Agreement
shall immediately terminate, at the Unaffected Party's election if the
Unaffected Party had previously given at least ten (10) days' prior written
notice to the Defaulting Party of the Unaffected Party's intent to terminate
this Agreement), (C) upon occurrence of a Material Buyer Take Default, as
provided in Section 3.3 or (D) upon occurrence of a Buyer Credit Default under
Section 9.3, upon ten (10) days' prior written notice to Buyer.
9.3.3 An Unaffected Party shall use commercially reasonable efforts to
mitigate costs or losses as a result of a Default, including, without
limitation, exercising commercially reasonable efforts to find alternative
markets for Seller's Gas or alternative supplies of Gas, as applicable.
Similarly, a Defaulting Party shall exercise commercially reasonable efforts to
minimize the harm suffered by an Unaffected Party in consequence of such
Default, including providing the Unaffected Party with prompt notice of such
Default so as to facilitate cover for Gas not delivered or the resale of Gas not
taken hereunder.
9.3.4 Unless explicitly indicated to the contrary in this Agreement, the
remedies provided for in this Section 9.3 (including, without limitation,
termination of this Agreement) are cumulative of, and may be exercised without
prejudice to, any other remedies, whether at law or in equity to which an
Unaffected Party may be entitled under this Agreement for any Default.
9.3.5 All payments will be made without setoff or counterclaim; provided,
however, that upon a Defaulting Party's failure to make payment of undisputed
amounts on the due date, the Unaffected Party may, at its option and in its
discretion, setoff against any amounts owed to the Defaulting Party under this
Agreement or otherwise. The obligations of the Unaffected Party to the
Defaulting Party shall be deemed satisfied and discharged to the extent of any
such setoff.
10. MEASUREMENT
10.1 The measurement of gas quality and volume shall be determined as
follows:
(a) The temperature of the Seller's Gas delivered will be
determined by a continuous method or by an arithmetic average of frequent, not
less than once per hour, temperature readings obtained during each chart period
from a recorder installed separately from the flow recorder.
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(b) The specific gravity of the Seller's Gas delivered shall be
determined by the use of a recording gravitometer, or by the use of periodic
sampling and laboratory measurement.
(c) The Heating Value of the Seller's Gas delivered shall be
determined by one of the following methods as elected by Buyer, or any other
method mutually agreed upon:
(1) A gas sampler, which samples proportional to flow,
analyzing the sample collected by gas chromatography and calculating the Heating
Value; or
(2) by the use of a recording calorimeter.
10.2 Tests to determine the quality of the Seller's Gas shall be made
using standard methods approved in the natural gas industry. Tests shall be
performed at least quarterly, unless otherwise mutually agreed, provided that in
no event will more than twelve (12) consecutive months elapse between tests for
any Point of Delivery. The party making the quality test shall notify the other
party at least seven (7) days prior to making the quality test and shall allow
the other party an opportunity to witness all tests.
10.3 The quantity of Seller's Gas delivered by Seller shall be measured
in cubic feet in accordance with the provisions of American National Standard
Institute/American Petroleum Institute Report 2530 (ANSI/API 2530) or any
subsequent revisions thereof acceptable to the parties hereto.
10.4 Buyer shall install and maintain, at its sole expense, one suitable
orifice meter and necessary related gauges (as generally adopted and used in the
natural gas industry) at the Point of Delivery for the purpose of measuring the
Seller's Gas delivered hereunder. Buyer, at its sole expense, shall calibrate
the meter at least once every 90 days. Buyer shall afford Seller an opportunity,
through prior notice, to witness all meter tests.
10.5 Seller shall have access to said meter or meters at any reasonable
time, and shall be allowed to inspect and check or test same, and also all
gauges, charts and records of measurement, at such time as it may desire.
Seller shall give Buyer reasonable notice to provide Buyer an opportunity to
have a representative present when any check or test is made. If an inaccuracy
is discovered, then the amount of Seller's Gas which shall have been delivered
shall be recalculated and corrected where the magnitude of the inaccuracy can be
determined for any period definitely known or agreed upon. In the event such
periods are unknown and cannot be agreed upon, the period of inaccuracy will be
deemed for a period equal to the lesser of (i) one half the time since the last
test or (ii) 30 days.
10.6 Seller shall obtain for Buyer, at Buyer's cost, any necessary
easements or rights of way on the land covered by the Seller's leases for
Buyer's metering facilities, as described herein.
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11. QUALITY
11.1 Seller's Gas shall meet all PG&E gas quality standards as
identified in CPUC tariffs as they exist from time to time for all deliveries
into the PG&E system. For deliveries to other pipeline(s) other than PG&E, and
not affiliated with Buyer, Seller's Gas shall meet the quality specifications
required by such other pipelines as they exist from time to time. For deliveries
directly to Calpine Pipeline, Seller's Gas shall meet all PG&E gas quality
standards as identified in CPUC tariffs as they exist from time to time, except
that the gas may have a gross heating value of not less than seven hundred and
fifty (750) Btu per cubic foot. If at any time Seller's Gas has a gross heating
value of less than 900 Btu per cubic foot and is directly connected to Calpine
Pipeline, and acceptance of such gas which when considered with all other gas
flowing on the Calpine Pipeline, reduces the Btu quality to levels unacceptable
for the operation of any plant or facility owned or operated by Buyer or any
affiliate of Buyer; then Buyer shall have the right to refuse to accept delivery
thereof. Buyer may resume acceptance of such lower Btu quality Gas at any time.
Seller may deliver the Gas to other buyers; provided that such gas shall not be
committed under agreements with such buyers for a term greater than 30 days
without Buyer's prior written consent, until Buyer is willing to accept Seller's
Gas, or permanently release said Gas to Seller.
11.2 If necessary to meet the quality specifications in this Section 11,
but subject in all respects to the provisions of Section 2.2, Seller shall
install and maintain a suitable separator and any necessary dehydration
equipment through which the Seller's Gas shall pass before delivery to Buyer
which shall be sufficiently adequate to separate and remove free liquids and
other impurities from the gas stream.
11.3 As to any Seller's Gas which fails to meet the quality
specifications required herein, Buyer shall have the right to refuse to accept
delivery thereof, and upon such refusal Seller shall be entitled to sell such
Gas to a third party, subject to the obligation to pay 5c MMBtu to Buyer under
Section 4.4.1 hereof.
12. BILLINGS AND PAYMENTS
12.1 On or before the last business day of each Contract Month after
deliveries of Seller's Gas are commenced, Buyer shall render to Seller a
statement along with payment by wire transfer for the amount due for Seller's
Gas delivered during the preceding Contract Month. Payment and statements may
be based on estimated quantities and prices if actual quantities and prices are
not available in time to prepare the statement and make payment. In such event,
Buyer shall make an adjustment in succeeding statements and payments to account
for any difference between actual quantities and prices and estimated quantities
and prices. All payments by Buyer hereunder shall be to the order of Seller and
Seller shall be responsible for properly distributing the payment among the
individuals and entities entitled to a portion of such payment.
12.2 If Buyer fails to pay any amount when due or Buyer pays an amount
disputed in good faith and it is ultimately determined that such amount was not
due, interest shall be paid to the other
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party on any amount finally determined to be due which interest shall accrue
until paid at the rate equal to the lesser of (a) the prime rate available from
time to time at Bank of America, Los Angeles, California plus two (2) percentage
points, or (b) the maximum non-usurious rate permitted by applicable law. The
rate of interest described in the preceding sentence shall be referred to as the
"Reference Rate."
12.3 Each party shall keep and maintain true and correct books, records,
files and accounts of all information available to such party and reasonably
related to the transactions contemplated by this Agreement, including, as
applicable, all measurement records, all information used to determine prices
and all Transporter invoices, imbalance statements and payment records. Each
party shall have the right to audit and examine at all reasonable times the
records and charts of the other party pertaining to the performance of this
Agreement during the term hereof and for a period of twenty-four (24) months
after the termination hereof, to the extent necessary to determine compliance
hereof. If any overcharge or undercharge in any amount whatsoever shall at any
time be found and the bill therefor has been paid, Seller shall refund the
amount of the overcharge or Buyer shall pay the amount of the undercharge, plus
interest at the Reference Rate, within thirty (30) days after the final
determination thereof; provided, however, that no retroactive adjustment will be
made for any overcharge or undercharge beyond a period of twenty-four (24)
months from the date the discrepancy was first discovered. Notwithstanding the
foregoing, if a party provides written notice to the other party of an
overcharge or undercharge within the 24-month period set forth in the preceding
sentence, such claim shall survive such 24-month period for the maximum time
prescribed by applicable law.
12.4 If in any two consecutive Contract Months the cumulative total
amount payable by Buyer to Seller for Gas sold by Seller to Buyer hereunder
exceeds the sum of $5,400,000.00, Seller may, by written notice to Buyer,
require that Buyer cause Calpine Corporation to reissue its guarantee of Buyer's
payment obligations to Seller hereunder with an aggregate Calpine Corporation
liability in an amount equal to such two consecutive Contract Months' cumulative
total until such time as a succeeding such two consecutive Contract Months'
cumulative total is equal to or less than $5,400,000.00, whereupon Calpine
Corporation may reissue such guarantee with an aggregate Calpine Corporation
liability of $5,400,000.00. Whenever Calpine Corporation reissues its guarantee
hereunder, the guarantee being replaced by the reissued guarantee shall be
returned to Calpine Corporation.
13. WARRANTY OF TITLE TO SELLER'S GAS
13.1 Seller warrants title to, or the right to sell, all Gas delivered
to Buyer under this Agreement. Seller also warrants that all such Gas shall be
free from all liens, encumbrances and adverse claims of every kind, including
but not limited to liens to secure payment of production, severance and other
taxes. Seller shall pay, or cause to be paid, all royalties, taxes and other
sums due on production, gathering, severance or handling of the Seller's Gas
delivered by Seller to Buyer, and Seller shall timely make or cause to be made
payments to all other parties, if any, having interest in the Seller's Gas sold
or to be sold hereunder. Seller agrees to hereby indemnify Buyer, and its
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successors, assigns, and holds them harmless against all suits, actions, claims,
debts, accounts, prices, loss damage and expense of every kind and character on
account of title claims of any and all entities arising out of or in connection
with the Seller's Gas delivered by it, including without limitation, all
royalties, taxes, payments or other charges thereon applicable before or upon
delivery to Buyer. If Seller's title is questioned or involved in any action or
if Seller fails to satisfy timely and promptly its obligations hereunder, Buyer
may thereafter refuse without penalty to accept further deliveries from Seller
and/or Buyer may withhold payment of sums due hereunder (without interest
thereon) up to the amount of the claim or obligations accrued until title is
free from such question, or such action is finally determined, or such
obligations are satisfied, or until such time as Seller furnishes a bond, in
form and substance acceptable to Buyer, conditioned to save Buyer harmless with
sureties satisfactory to Buyer, or, with respect to title claims, unless Seller
gives an opinion of independent legal counsel that the title claim is without
merit.
13.2 Seller warrants that, to its knowledge, all Seller's Gas delivered
hereunder will have been produced and delivered in accordance with all valid and
applicable laws and all regulations, rules and orders of any regulatory body
having jurisdiction and control over the production of natural gas or the
operation of natural gas properties in California.
14. FORCE MAJEURE
14.1 If either party is rendered unable by Force Majeure to carry out,
wholly or in part, any of its obligations under this Agreement, except for the
payment of money owed for prior periods, then upon that party's giving written
notice (or oral notice followed promptly by written notice) and full particulars
of the Force Majeure, the obligations of both parties under this Agreement shall
be suspended without liability to the extent and for the period of such event of
Force Majeure which, so far as possible, shall be remedied with all reasonable
dispatch. If the party claiming Force Majeure notwithstanding such Force
Majeure may partially carry out such obligations, then only such obligations as
are affected by the event of Force Majeure shall be suspended as aforesaid.
14.2 Subject to the other provisions of this Section 14, the term "Force
Majeure" or "Force Majeure Event" as used herein shall mean an event that (i)
was not within the control of the party claiming its occurrence and (ii) could
not have been prevented or avoided by such party through the exercise of due
diligence. Events of Force Majeure shall include, by way of example rather than
of enumeration, acts of God; strikes, lockouts or other industrial disturbances;
inability to obtain pipe or other material, equipment, or labor, wars; riots;
insurrections; epidemics; landslides; lightning; earthquakes; fires; storms;
floods; washouts; arrests and restraint of rulers and people; interruptions by
government or court orders; present or future orders of any regulatory body
having proper jurisdiction over all or any part of the arrangements made under
this Agreement; civil disturbances; explosions; breakage or accident to
machinery or lines of pipe; freezing of wells or pipelines; and any other cause
beyond the reasonable control of the parties, whether of the kind herein
enumerated or otherwise. Nothing contained herein, however, shall be construed
to require either party to settle a labor dispute against its will.
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14.3 For such portion of Seller's Gas for which the only Point of
Delivery is or only Points of Delivery are the Calpine Pipeline, the parties
agree that the term "Force Majeure" or "Force Majeure Event" shall also include
(i) events that render the Plants unable, wholly or in part, to operate at a
profit, as determined in the reasonable judgment, exercised in good faith, of
the owners of the Plants acting as a reasonable and prudent owner, (ii) any
reduction, curtailment, or interruption of the taking of electric energy from
the Plants under the power sales agreements under which power is sold therefrom
or of the transmission of electric energy from the Plants under transmission
service agreements related thereto, and (iii) scheduled and unscheduled
maintenance and repairs. Such term likewise includes (i) in those instances
where either party hereto is required to obtain easements, rights-of-way grants,
permits, exceptions or licenses to enable such party to fulfill its obligation
hereunder, the inability of such party to acquire, or the delays on the part of
such party in acquiring at reasonable cost and after the exercise of reasonable
diligence, such easements, rights-of-way grants, permits, exceptions or
licenses, and (ii) in those instances where either party hereto is required to
furnish materials and supplies for the purpose of constructing or maintaining
facilities or is required to secure permits or permission from any governmental
agency (federal, state or municipal, civil or military) to enable such party to
fulfill its obligations hereunder, the inability of such party to acquire or the
delays on the part of such party in acquiring, at reasonable cost and after the
exercise of reasonable diligence, such material and supplies, permits and
permissions. Lack of financial resources, loss of markets for Gas or changes in
market prices for Gas shall not be a cause of Force Majeure nor constitute a
Force Majeure Event.
14.4 An event that would otherwise constitute a Force Majeure Event
shall not relieve the party claiming Force Majeure from any of its obligations
hereunder in the event such party fails to use reasonable diligence to remedy
the situation of Force Majeure in an adequate manner and with all reasonable
dispatch.
14.5 If Buyer is unable to take Seller's Gas from any Point(s) of
Delivery due to the occurrence of Force Majeure, Seller, acting in a
commercially reasonable manner, may market and sell such Seller's Gas from the
affected Point(s) of Delivery to any third parties otherwise free from this
Agreement and without any obligation otherwise to Buyer during the continuance
of the Force Majeure. As soon as the Force Majeure that rendered Buyer unable
to take Seller's Gas is remedied or terminated, Seller's obligation to
thereafter commence selling the Seller's Gas to Buyer shall commence following
the expiration of any agreement between Seller and third person for the purchase
of Seller's Gas that Buyer was unable to take and that Seller subsequently
marketed and sold to such parties as permitted by this Section 14.5. It is
specifically understood and agreed that any such agreement between Seller and
third persons shall be terminable without penalty to Seller on not more than
thirty (30) days' notice, and Seller shall use commercially reasonable efforts
to terminate any such agreement within a shorter period once the event of Force
Majeure has been remedied or terminated.
14.6 If any condition of Force Majeure affecting Buyer or Seller shall
continue for a period in excess of six (6) months duration, each party shall
each have the right, effective immediately upon
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delivering written notice to the other party, to terminate this Agreement; but,
in the event of such termination the parties shall settle their accounts as
provided in Section 9.2.
15. REGULATORY BODIES
15.1 This Agreement shall be subject to all valid and applicable State
and Federal laws and orders, directives, rules and the regulations of any
governmental body or official having jurisdiction, and this Agreement is
conditioned upon the parties hereto obtaining all requisite certificates and
authorizations acceptable to the parties directly affected thereby from any
governmental agency, organization or body having jurisdiction.
15.2 It is mutually understood that neither Buyer nor Seller considers
itself a public utility. Neither party intends, by this Agreement or by its
performance of its obligations hereunder, to dedicate to public or quasi-public
use or purpose any of the pipelines or other facilities which it or any of its
affiliates operates, and the parties agree that the execution of this Agreement
shall not, nor shall any performance or partial performance hereunder, be or
ever be deemed or urged by either party to be a dedication to public or quasi-
public use of any pipelines or facilities of the other party or any of its
affiliates, or as subjecting either party or any of its affiliates to
regulations of any character, description or degree. If, at any time, the CPUC,
the Federal Energy Regulatory Commission or any other public body or third party
should initiate any action claiming or asserting jurisdiction over either party
or any of its affiliates as a public utility, a natural gas company or a
pipeline company under the laws of the State of California, or as a natural gas
company or utility under Federal law, as the case may be, or shall take
jurisdiction in any proceeding whereby any third person should assert or claim
that either party or any of its affiliates is a public utility, a natural gas
company or a pipeline company because of the purchase and/or sale of the
Seller's Gas which is the subject of this Agreement, or the production,
gathering, processing or transporting of such Seller's Gas, either party shall
have the right to terminate this Agreement at any time thereafter by giving
thirty (30) days' written notice to the other party of its intention to do so
and such termination shall relieve both parties of all further obligations and
liabilities under this Agreement, except as provided in Section 9.2.
16. CONFIDENTIALITY
16.1 The parties incorporate by reference the confidentiality provisions
of the Stockholders' Agreement, with all necessary changes being made.
17. INDEMNITY
17.1 Seller and Buyer, respectively, as indemnitor, will each indemnify
the other as indemnitee and save it harmless from any and all loss, damage,
expense and liability resulting from injuries to or death of persons, including
but not limited to employees of either party hereto, and damage to or
destruction of property, including but not limited to the property of either
party hereto,
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arising out of, or in anyway connected with, the indemnitor's own performance of
this Agreement, or any operations hereunder by indemnitor, its agents or
employees.
18. MISCELLANEOUS
18.1. No waiver by Buyer or Seller of any default of the other under this
Agreement shall operate as a waiver of any future default, whether of a like or
different character.
18.2 Every notice, request, statement or bill provided for in this
Agreement shall be in writing or sent by confirmable electronic means and
directed to the party to whom given, made or delivered at such party's address
as follows:
BUYER:
Calpine Fuels Corporation
50 West San Fernando Street
San Jose, CA 95113
Attention:__________
Fax No.:____________
SELLER:
Sheridan California Energy, Inc.
1100 Louisiana, Suite 800
Houston, TX 77002
Attention: Mr. Michael A. Gerlich
Fax No.: (713) 651-7852
With a copy (which shall not constitute notice) to:
Winstead Sechrest & Minick P.C.
910 Travis, Suite 2400
Houston, TX 77002
Attention: Arthur S. Berner, Esq.
Fax No: (713) 650-2400
or at such other post office address as such party shall from time to time
designate as the address for such purpose.
18.3 Buyer and Seller agree that this Agreement shall be construed
according to the laws of the State of California.
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18.4 Except as specifically provided elsewhere in this Agreement, this
Agreement shall not be assigned without the express written consent of the other
party, except to wholly owned subsidiaries and affiliates of the assigning
party, in which case the assigning party shall not be relieved of responsibility
for any of its obligations under this Agreement. Notwithstanding the foregoing,
Seller shall have the right to convey its interest in oil and gas leases from
which Seller's Gas is produced (a "Subject Interest") to a Person who is not an
affiliate pursuant to this Section 18.4. At Seller's option, the affected
Subject Interest shall either remain subject to this Agreement, and Gas produced
from that Subject Interest shall be deemed Seller's Gas for all purposes under
this Agreement, or shall remain Seller's Gas pursuant to a separate agreement
executed by Buyer and Seller's successor in interest and containing terms and
conditions substantially identical to this Agreement. If Seller elects to convey
the Subject Interest subject to this Agreement, the documents evidencing the
conveyance of the Subject Interest shall specifically identify this Agreement
and obligation to Seller's successor in interest to ratify and adopt this
Agreement insofar as it applies to the Subject Interest acquired by Seller's
successor in interest. If Seller elects to require its successor in interest to
execute an agreement substantially identical to this Agreement, such agreement
shall be executed contemporaneously with the documents evidencing the conveyance
of the Subject Interest. Notwithstanding the foregoing, Seller shall have the
right to convey a Subject Interest to a Person who is not an affiliate free and
clear of this Agreement if the Subject Interest, when combined with any other
Subject Interest contemporaneously conveyed to such Person, produced in total an
average of 200 MMBtu per day, or less, over the six month period ending ninety
(90) days prior to the effective date of the conveyance.
18.5 Notwithstanding the provisions of Section 18.4, Buyer, in connection
with certain transactions, may grant a lender or other third party ("Lender") a
security interest in Buyer's interest in this Agreement and the quantity of
Seller's Gas delivered to Buyer hereunder. Buyer will give Seller prompt written
notice of the granting of a security interest and Seller hereby consents to the
creation of the liens described above.
18.6 IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY
PUNITIVE, SPECIAL, CONSEQUENTIAL, OR INDIRECT DAMAGES, INCLUDING, WITHOUT
LIMITATION, DAMAGES FOR LOST PROFITS.
18.7 Seller shall, to the extent it is assignable without breach of
contract and without subjecting Seller to regulatory requirements that would not
otherwise be applicable, assign to Buyer or any affiliate of Buyer designated by
Buyer, without warranty, any rights which Seller may have or acquire in any
option to purchase PG&E's gas gathering system in the Rio Vista Unit area. If
any such option is not so assignable, Seller shall at Buyer's written request
and at Buyer's expense exercise such option or cause it to be exercised and
thereafter assign such gas gathering system to Buyer or an affiliate of Buyer
designated by Buyer, without warranty, subject, however, to applicable
regulatory requirements.
All payments to Seller shall be made in accordance with the Wire Transfer
Instructions attached hereto as Exhibit "D."
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IN WITNESS WHEREOF, the parties hereto have executed, or caused this
Agreement to be executed by their duly authorized officers, as of the Effective
Date.
SELLER:
SHERIDAN CALIFORNIA ENERGY, INC.
By: /s/ B.A. Berilgen
-----------------------------------------
Printed Name: B.A. Berilgen
-------------------------------
Title: President and Chief Executive Officer
--------------------------------------
BUYER:
CALPINE FUELS CORPORATION
By: /s/ John T. King
----------------------------------------
Printed Name: John T. King
------------------------------
Title: Agent
-------------------------------------
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EXHIBIT "A"
TO GAS PURCHASE AND SALES AGREEMENT BY AND BETWEEN
CALPINE FUELS CORPORATION, AS BUYER, AND SHERIDAN CALIFORNIA
ENERGY, INC., AS SELLER, DATED EFFECTIVE JANUARY 25, 1999
1. Those certain lands which comprise the "AHC Properties" and the
"Sheridan Properties" as defined and described in that certain Agreement
Regarding Formation of Corporation by and between Sheridan Energy, Inc.,
Sheridan California Energy, Inc., Calpine Corporation, and CPN Production
Company, dated effective January 25, 1999; and
2. Those lands depicted on the map attached hereto as Exhibit "A-1"
designated as the seismic area.
<PAGE>
EXHIBIT "B"
SELLER'S NOMINATION
Selling Party:__________________ Receipt Point:___________________
Month of Gas Flow:______________ _________________________________
SCHEDULE OF GAS FLOW
--------------------
DAY QUANTITY (MMBTU/DAY) DAY QUANTITY (MMBTU/DAY)
--- ---------------------- --- --------------------
01 16
02 17
03 18
04 19
05 20
06 21
07 22
08 23
09 24
10 25
11 26
12 27
13 28
14 29
15 30
31
Total Month_____________________ Average Btu_____________________
<PAGE>
EXHIBIT "C"
BUYER'S NOMINATION AND MONTHLY CONTRACT QUANTITY
Selling Party:_______________ Receipt Point:____________________
Month of Gas Flow____________ __________________________________
SCHEDULE OF GAS FLOW
--------------------
DAY QUANTITY (MMBTU/DAY) DAY QUANTITY (MMBTU/DAY)
--- -------------------- --- -------------------
01 16
02 17
03 18
04 19
05 20
06 21
07 22
08 23
09 24
10 25
11 26
12 27
13 28
14 29
15 30
31
Total Month (Monthly Contract Quantity)_______ Average Btu_________________
<PAGE>
EXHIBIT "D"
WIRE TRANSFER INSTRUCTIONS
--------------------------
Bank One Texas, N.A.
Houston, TX
ABA # 111000614
Bank Contact: Lenna Lenders
Bank No.: 713-751-7865
Bank Fax: 713-751-3544
Account Name: Sheridan California Energy, Inc.
Account Number: 156-6568-117
Tax ID Number: 94-3318017
