SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ____________
COMMISSION FILE NUMBER: 0-21663
OFFSHORE ENERGY DEVELOPMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
76-0509791
(I.R.S. Employer
Identification No.)
1400 WOODLOCH FOREST DRIVE, SUITE 200
THE WOODLANDS, TEXAS 77380
(Address of principal executive offices)
(Zip Code)
(713) 364-0033
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
As of December 13, 1996, there were 8,701,885 shares of the registrant's Common
Stock, par value $.01 per share, outstanding.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
OFFSHORE ENERGY DEVELOPMENT CORPORATION
Unaudited Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30, September 30,
1995 1996 1996
------------ ------------ ------------
(Predecessors) (Predecessors) (Company)
(Unaudited) (Pro Forma)
(Unaudited)
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents .............................. $ 710,306 $ 882,471 $ 882,501
Accounts receivable - trade, affiliate and other ...... 2,352,191 2,287,093 2,287,093
Prepaids and other assets .............................. 27,484 65,975 65,975
------------ ------------ ------------
Total current assets ............... 3,089,981 3,235,539 3,235,569
Oil and gas properties - at cost (successful efforts method) 26,153,845 28,535,411 28,535,411
Other property and equipment ................................ 329,923 344,249 344,249
Accumulated depreciation, depletion and amortization ....... (6,376,095) (10,261,408) (10,261,408)
------------ ------------ ------------
20,107,673 18,618,252 18,618,252
Investments in affiliates and others ........................ 245,783 507,729 507,729
Investments in certificates of deposits, restricted ......... 1,378,601 1,428,816 1,428,816
Deferred and other assets ................................... 348,347 727,949 727,949
------------ ------------ ------------
Total Assets ....................... $ 25,170,385 $ 24,518,285 $ 24,518,315
============ ============ ============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable - trade and affiliate ................. $ 3,137,347 $ 2,680,267 $ 2,680,267
Capital lease payable - current ........................ 168,168 149,017 149,017
Accrued liabilities .................................... 357,766 908,042 908,042
Current portion of long-term debt ...................... 12,260,962 133,606 133,606
------------ ------------ ------------
Total current liabilities .......... 15,924,243 3,870,932 3,870,932
Long-term debt .............................................. -- 2,500,000 2,500,000
Deferred tax liability ...................................... -- 4,778 1,572,778
Capital lease payable - noncurrent .......................... 831,692 740,512 740,512
Reserve for abandonment ..................................... 236,608 300,898 300,898
------------ ------------ ------------
Total liabilities .................. 16,992,543 7,417,120 8,985,120
Redeemable preference units ................................. 10,294,365 10,824,222 10,824,222
Stockholders' equity (deficit)
Predecessor capital .................................... (2,122,891) 6,078,874 --
Preferred stock, $.01 par value, authorized
1,000,000 shares; none issued or outstanding ..... -- -- --
Common stock, $.01 par value, authorized
10,000,000 shares; issued and outstanding
5,051,885 at September 30, 1996 (pro forma) ...... -- -- 50,519
Additional paid-in capital ............................. -- -- 4,460,385
Retained earnings ...................................... 6,368 198,069 198,069
------------ ------------ ------------
Total stockholders' equity (deficit) (2,116,523) 6,276,943 4,708,973
Commitments and contingencies
------------ ------------ ------------
Total Liabilities and Stockholders' Equity .................. $ 25,170,385 $ 24,518,285 $ 24,518,315
============ ============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
OFFSHORE ENERGY DEVELOPMENT CORPORATION
Unaudited Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1995 September 30, 1996
(Predecessors) (Predecessors)
(Unaudited) (Unaudited)
----------- ------------
<S> <C> <C>
Income:
Exploration and production ....................... $ 3,719,024 $ 7,214,461
Pipeline operating and marketing ................. 109,169 718,418
Equity in earnings of equity investments ......... 475,555 41,753
Gain on sales of oil and gas properties
or partnership investments, net ............ -- 10,661,433
----------- ------------
Total Income ................................ 4,303,748 18,636,065
----------- ------------
Expenses:
Operations and maintenance ....................... 1,389,582 1,520,932
Exploration charges .............................. 448,275 918,774
Depreciation, depletion and amortization ........ 2,973,830 3,876,782
Abandonment expense .............................. 15,717 216,215
General and administrative ....................... 1,743,363 1,622,591
----------- ------------
Total Expenses .............................. 6,570,767 8,155,294
----------- ------------
Earnings (losses) before interest and taxes ...... (2,267,019) 10,480,771
Interest Income (Expense) and Other
Interest expense ................................. (1,051,000) (709,190)
Interest income and other ........................ 297,779 (40,980)
----------- ------------
Total Interest Income (Expense) and Other ... (753,221) (750,170)
----------- ------------
Income (Loss) Before Income Taxes ..................... (3,020,240) 9,730,601
Income Tax Benefit (Expense) .......................... 27,020 (4,778)
----------- ------------
Net Income (Loss) ................................ $(2,993,220) $ 9,725,823
Preference unit payments and accretion of discount .... (687,746) (1,332,357)
----------- ------------
Income (loss) available to common unit holders and
stockholders ................................ $(3,680,966) $ 8,393,466
=========== ============
Pro forma net income (loss) data (unaudited)
Net income (loss) as reported .................... $ 9,725,823
Pro forma adjustment for federal income tax benefit
(expense) ........................................ (3,598,555)
------------
Pro forma net income (loss) ...................... 6,127,268
Preference unit payments and accretion of discount .... (1,332,357)
------------
Pro forma income (loss) available to common unit
holders and stockholders .................... $ 4,794,911
============
Pro forma income (loss) available to common unit
holders and stockholders per common share ........ $ 0.95
============
Pro forma weighted average of common shares
outstanding ...................................... 5,051,885
============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
OFFSHORE ENERGY DEVELOPMENT CORPORATION
Unaudited Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
September 30, 1995 September 30, 1996
(Predecessors) (Predecessors)
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Income:
Exploration and production ....................... $ 1,859,931 $ 1,665,632
Pipeline operating and marketing ................. 15,655 224,668
Equity in earnings of equity investments ......... 161,017 18,582
----------- -----------
Total Income ................................ 2,036,603 1,908,882
----------- -----------
Expenses:
Operations and maintenance ....................... 325,655 495,929
Exploration charges .............................. 141,922 497,406
Depreciation, depletion and amortization ........ 1,375,917 1,000,216
Abandonment expense .............................. 2,558 94
General and administrative ....................... 587,772 467,676
----------- -----------
Total Expenses .............................. 2,433,824 2,461,321
----------- -----------
Earnings (losses) before interest and taxes ...... (397,221) (552,439)
Interest Income (Expense) and Other
Interest expense ................................. (354,312) (87,058)
Interest income and other ........................ 68,167 23,843
----------- -----------
Total Interest Income (Expense) and Other ... (286,145) (63,215)
----------- -----------
Income (Loss) Before Income Taxes ..................... (683,366) (615,654)
Income Tax Benefit .................................... 16,975 8,352
----------- -----------
Net Loss ......................................... (666,391) (607,302)
Preference unit payments and accretion of discount .... (395,246) (439,119)
----------- -----------
Loss available to common unit holders and
stockholders .................................. $(1,061,637) $(1,046,421)
=========== ===========
Pro forma net income (loss) data (unaudited)
Net income (loss) as reported .................... $ (607,302)
Pro forma adjustment for federal income tax benefit ... 224,702
-----------
Pro forma net loss ............................... (382,600)
Preference unit payments and accretion of discount .... (439,119)
-----------
Pro forma loss available to common unit
holders and stockholders ..................... $ (821,719)
===========
Pro forma loss available to common unit
holders and stockholders per common share ........ $ (0.16)
===========
Pro forma weighted average of common shares
outstanding ...................................... 5,051,885
===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
OFFSHORE ENERGY DEVELOPMENT CORPORATION
Unaudited Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1995 September 30, 1996
(Predecessors) (Predecessors)
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Operating Activities
Net income (loss) ........................................... $ (2,993,220) $ 9,725,823
Adjustments to reconcile net income (loss)
to cash provided by (used in) operations
Depreciation, depletion and amortization .............. 3,051,706 3,984,982
Abandonment expense .................................... 13,159 68,644
Gain on sales, net .................................... -- (10,661,433)
Dry hole expense ....................................... -- 301,750
Equity in (earnings) loss of equity investments, net .. (475,555) (41,753)
Change in interest in oil and gas partnerships ......... 292,918 753,382
Deferred taxes ......................................... -- 4,778
Changes in assets and liabilities:
Accounts receivable ............................... (807,653) 755,218
Deferred and other assets ......................... (2,303) (1,910,033)
Accounts payable .................................. 1,437,654 213,359
Accrued liabilities ............................... (306,723) 550,276
------------ ------------
Total adjustments ............................ 3,203,203 (5,980,830)
------------ ------------
Net cash provided by operating activities ......... 209,983 3,744,993
Investing Activities
Investment in equity interests .............................. (263,536) (243,748)
Advances to equity investees ................................ (836,137) --
Repayments from equity investees ............................ 997,791 512,640
Proceeds from the sales of properties and other investments . -- 11,340,093
Restricted investments in certificates of deposit ........... (617,410) (50,215)
Acquisition of property and equipment ....................... (14,940,856) (4,492,440)
------------ ------------
Net cash provided by (used in) investing activities (15,660,148) 7,066,330
Financing Activities
Proceeds from issuance of redeemable preference units ....... 5,500,000 --
Preference unit payments .................................... (570,000) (802,500)
Proceeds from borrowings .................................... 6,291,493 2,633,606
Principal payments on borrowings ............................ (2,925,024) (12,260,962)
Fees paid to acquire financing .............................. (109,998) (98,971)
Principal payments on capital lease ......................... (82,773) (110,331)
------------ ------------
Net cash provided by (used in) financing activities 8,103,698 (10,639,158)
Increase (decrease) in cash and cash equivalents .. (7,346,467) 172,165
Cash and cash equivalents balance, beginning of period ..... 8,413,782 710,306
------------ ------------
Cash and cash equivalents balance, end of period ........... $ 1,067,315 $ 882,471
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ............... $ 1,160,594 $ 712,545
============ ============
Cash paid during the period for income taxes ........... $ -- $ --
============ ============
Supplemental disclosure of non-cash activity:
Capital lease acquisition .............................. $ 763,164 $ --
============ ============
Accretion of discount on redeemable preference units ... $ 117,746 $ 529,857
============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
OFFSHORE ENERGY DEVELOPMENT CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include, in the opinion of management, all adjustments necessary to present
fairly the consolidated financial position of OEDC, Inc. ("Inc.") and OEDC
Partners, L.P. ("Partners") (collectively the "Predecessors"), the Predecessors
of Offshore Energy Development Corporation (the "Company"), at September 30,
1996, their results of operations for the three and nine months ended September
30, 1995 and 1996 and their cash flows for the nine months ended September 30,
1995 and 1996. Also included is the Company's pro forma unaudited condensed
consolidated balance sheet at September 30, 1996 prepared on the basis described
below under the section "UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
INFORMATION." The unaudited condensed consolidated financial statements should
be read in conjunction with the Predecessors' historical consolidated financial
statements and notes thereto as of and for the period ended June 30, 1996 as
included in the Company's Registration Statement on Form S-1 (333-11269) filed
with the Securities and Exchange Commission.
During November 1996, the Company sold 3,650,000 shares of its common
stock in an initial public offering (the "Offering"). Contemporaneously with the
Offering, the stockholders of Inc. and the partners of Partners consummated a
combination (the "Combination") through the exchange of their interests for
5,051,882 shares of common stock of the Company. Following the Combination, the
Company serves as the parent company of Inc. and Partners.
The unaudited condensed consolidated financial statements include the
accounts of the Predecessors. The unaudited condensed consolidated financial
statements are presented due to Inc.'s sole general partner interest and control
over Partners. The stockholder's equity of Inc. and partners' equity of Partners
are presented due to the commonality of the stockholders and partners of Inc.
and Partners. As a result of the consolidated presentation, Inc.'s 1% general
partner interest in Partners has been eliminated. Partners' investments in
associated oil and gas partnerships are accounted for using the proportionate
consolidation method, whereby, Partners' proportionate share of each oil and gas
partnerships' assets, liabilities, revenues, and expenses is included in the
appropriate classifications in Partners' financial statements. Investments in
non-oil and gas partnerships where the Predecessors have ownership interests of
less than 50% are accounted for on the equity method, and all investments with
ownership interests less than 20% are accounted for on the cost method. All of
the Predecessors' material intercompany accounts and transactions have been
eliminated in the consolidation.
ORGANIZATION
OFFSHORE ENERGY DEVELOPMENT CORPORATION. The Company is a Delaware
corporation formed on July 24, 1996 for the purpose of acquiring the common
stock of Inc. and the partners' interests of Partners.
OEDC, INC. Inc. was formed on August 31, 1992 for the purpose of
investing in certain partnerships involved in drilling, producing, marketing,
gathering and storing oil and gas. Inc.'s only significant assets are its
general partnership interests.
Inc. accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary difference between the financial
reporting basis and tax basis of Inc.'s assets and liabilities. Deferred tax
assets are also recognized for the tax effect of operating loss carryforwards
and other tax credit carryforwards available to Inc. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Total deferred tax assets are reduced by a valuation
allowance to an amount that in management's judgment is more likely than not to
be realized as a future tax benefit.
OEDC PARTNERS, L.P. Partners was formed on August 31, 1992 for the
purpose of investing in certain partnerships involved in drilling, producing,
marketing, gathering and storing oil and gas. On the date of formation, Inc.,
the general partner, contributed approximately $90,000 and the limited partners,
Offshore Energy Development Corporation (an S Corporation) and Natural Gas
Partners, L.P. and affiliates ("NGP") contributed net assets of approximately
$1,496,000 and $6,380,000, including cash of approximately $6,375,000, in
exchange for 2,000 common units, 99,000 common units and 100,000 preference
units, respectively. These contributions were recorded by Partners at the
partners' historical cost.
Partners' partnership agreement was amended effective July 31, 1995. In
accordance with the amended partnership agreement, NGP contributed $5,500,000 in
exchange for an additional 20,000 preference units and 99,000 common units and
an increase in the redemption price of all 120,000 preference units to $100 from
$65 per unit, resulting in a total redemption value of $12 million. The NGP
contribution has been allocated $3,500,000 to preference units and $2,000,000 to
common units. The difference between the redemption value and recorded value of
the preference units, $2,000,000, was accreted over the redemption period for
the preference units. Subsequent to the amendment, the ownership interest of
Inc., Offshore Energy Development Corporation (an S Corporation) and NGP were
1%, 49.5% and 49.5%, respectively. The partnership agreement of Partners
required Partners to redeem 50% of the preference units outstanding on December
31, 1997 at a rate of $100 per unit and to redeem all remaining preference units
outstanding at a rate of $100 per unit on December 31, 1998. Under the
partnership agreement, Partners paid NGP a 9% coupon on the preference units
outstanding. Partners was scheduled to make the following preference payments in
equal quarterly installments: $1,080,000 in 1996; $1,080,000 in 1997; and
$540,000 in 1998. If the preference payments were not made according to
schedule, the coupon rate would increase from 9% per annum to 15% per annum and
any distributions by Partners would be first applied to preference payments in
arrears. If more than two preference payments were not made as scheduled, NGP
would become entitled to certain voting rights in Partners. On November 6, 1996,
Partners redeemed all outstanding preference units for $12,000,000 using
proceeds from the Offering.
Prior to consummation of the Combination, Partners was not subject to
federal income taxes. Income and losses earned by Partners were passed through
to its partners on the basis of the allocation provisions established in the
partnership agreement. Upon consummation of the Combination, Partners became
subject to federal income taxes through its ownership by the Company.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated balance sheet, based upon
the historical unaudited condensed consolidated balance sheet of the
Predecessors, has been prepared assuming the Combination was consummated as of
September 30, 1996. The unaudited pro forma condensed consolidated balance sheet
reflects a pro forma adjustment to record the estimated deferred tax liability
recognized by Partners and expensed to its operations as required in instances
when Partners, a partnership, becomes subject to federal income taxes through
inclusion in OEDC's federal tax returns. Additionally, the unaudited pro forma
condensed consolidated balance sheet reflects a pro forma adjustment to record
the issuance of 5,051,882 shares of the Company's common stock in the
Combination for the exchange of Inc.'s common stock and Partners' equity.
Pro forma net income (loss) at September 30, 1996 reflects federal
income taxes that would have been recorded had Partners been subject to such
taxes. Such amounts have been included in the statements of operations pursuant
to the rules and regulations of the Securities and Exchange Commission for
instances when a partnership becomes subject to federal income taxes. Pro forma
net income (loss) per common share is presented giving effect to the number of
shares that would be outstanding had the Combination been consummated as of
January 1, 1996.
The unaudited pro forma consolidated financial information is provided
for information purposes only. The unaudited pro forma financial information and
the unaudited pro forma adjustments have been prepared on the basis of generally
accepted accounting principles and are based on information and certain
assumptions and estimates that management of the Company believes are
reasonable. The unaudited pro forma consolidated financial information is not
necessarily indicative of what the Company's financial position would have been
had the Combination been consummated on the dates indicated. In addition, future
results may vary significantly from the results reflected in such unaudited pro
forma financial information due to production, price and cost changes,
agreements and other factors.
2. CREDIT FACILITY
The Company has entered into a two-year $10,000,000 line of credit with
Union Bank of California, N.A. At September 30, 1996, the borrowing base was
$5,937,500 and $2,633,606 was outstanding under this facility. The borrowing
base will be reduced by $312,500 per month for 12 months commencing September
30, 1997, by $250,000 per month for the succeeding six months and by $166,667
per month for the final six months of the agreement, unless changed by the bank
at the time of a borrowing base redetermination. The borrowing base is to be
redetermined every six months. Borrowings under this facility bear interest at
a rate equal to, at the Company's option, either the bank's reference rate plus
1% or LIBOR plus 2.5 %, with an effective rate of interest at September 30, 1996
of 7.94%.
3. SUBSEQUENT EVENTS
On November 6, 1996, the Company sold 3,500,000 shares of its common
stock in the Offering. Contemporaneously with the completion of Offering, the
Combination was consummated whereby the stockholders and partners of
Predecessors exchanged their interests for 5,051,882 shares of common stock of
the Company. With a portion of the proceeds of Offering, Partners redeemed for
$12 million all of the outstanding redeemable preference units held by NGP.
On November 12, 1996, pursuant to the underwriting agreement relating to
the Offering, the underwriters of the Offering exercised their over-allotment
option and purchased 150,000 shares of common stock from the Company, providing
the Company with net proceeds and additional equity of $1,674,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULT OF OPERATIONS
The following discussion should be read in conjunction with Offshore Energy
Development Corporation's (the "Company") unaudited condensed consolidated
financial statements and notes thereto included elsewhere herein.
OVERVIEW
The financial statements presented represent the consolidated financial
statements of OEDC, Inc., the Company's predecessors and OEDC Partners, L.P. The
Company was formed for the purpose of becoming the holding company for OEDC,
Inc. and OEDC Partners, L.P. pursuant to the terms of an Agreement and Plan of
Reorganization dated August 30, 1996 (the "Combination"). Under the terms of the
Combination, which was consummated on November 6, 1996, the Company (i) acquired
all of the outstanding capital stock of OEDC, Inc. which was previously owned by
certain members of Company's management (including their families) and by
Natural Gas Partners, L. P. ("NGP"), (ii) acquired by merger 50% of the common
limited partnership units of OEDC Partners, L.P. from the Texas corporation
having the same name as the Company, and (iii) acquired 50% of the common units
of OEDC Partners, L.P. held by NGP and certain of its employees. As a result of
the change in the form of the business resulting from the Combination, the
Company will incur a charge of approximately $1,568,000 during the fourth
quarter of 1996 to record a deferred tax liability reflecting the excess of the
pre-Combination tax deductions for intangible drilling costs over the amount of
their depreciation for financial statement purposes. Unless the context requires
otherwise, references herein to the Company are to the Company and its
predecessors on a consolidated basis. Contemporaneously with the consummation of
the Combination, the Company completed an initial public offering (the
"Offering") of 3,650,000 shares of its Common Stock, par value $0.01 per share.
The Company commenced operations in 1988 and drilled one well per year through
1992. From 1993 through 1995, the Company drilled four to six gross wells per
year, initiating and managing over $125 million in capital projects in gas
exploration, production and gathering and retaining net interests ranging from
25% to 80% in these projects. The Company subsequently sold most of such
interests as described below. Project funding came initially from private
placements and later from NGP, mezzanine financing sources and partnerships and
other arrangements with industry participants. The Company's growth was
constrained by its lack of financial resources, requiring the Company to develop
projects utilizing short-term vendor financing and other borrowings and to sell
its interests in the projects it initiated at a profit rather than retain them.
This resulted in the Company sustaining losses in years when it incurred the
project expenses and gains in the years when the interests in the projects were
sold. During 1995, the Company sustained losses resulting from the expenses
associated with development expenditures on the Company's Mobile 959/960
cluster, while net income was recorded in the first nine months of 1996 as the
result of gains on the sale of all but one percent of the Company's interest in
Dauphin Island Gathering Partners ("DIGP"), a partnership that owns the Dauphin
Island Gathering System (the "DIGS"), a non-jurisdictional pipeline system
offshore Alabama.
The Company's business may be affected by fluctuations in demand for and price
of natural gas and oil caused by seasonal and other factors. Accordingly, the
Company's results of operations may vary from quarter to quarter, and the
operating results for a particular quarter or other interim period may not be
indicative of results for any future period or for the entire fiscal year.
This report contains certain forward-looking statements regarding the Company's
future financial condition, liquidity, results of operations and prospects. The
words "expect," "estimate," "anticipate," "predict" and similar expressions are
intended to identify forward-looking statements. These statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those set forth in a forward-looking statement. Such risks and
uncertainties include, but are not limited to, those relating to: (i) the
speculative nature of the assumptions underlying forward-looking statements,
(ii) the volatility of natural gas and oil prices, (iii) the Company's ability
to replace its reserves, (iv) the costs and uncertainties relating to oil and
gas exploration and development, (v) the substantial capital requirements
associated with the Company's business strategy, and (vi) the other risks and
uncertainties described herein and under the caption "Risk Factors" in the
Company' Registration Statement on Form S-1 (No. 333-11269) filed with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995.
INCOME. Total income for the Company increased by $14,332,000 (333%) from
$4,304,000 in the nine months ended September 30, 1995 to $18,636,000 in the
nine months ended September 30, 1996. Exploration and production revenue
increased $3,495,000 (94%) from $3,719,000 in the nine months ended September
30, 1995 to $7,214,000 in the nine months ended September 30, 1996, primarily as
a result of a 59% increase in production volumes from 2.275 Bcf during the
nine-month 1995 period compared to 3.622 Bcf during the nine-month 1996 period.
The production increase was primarily attributable to full period production in
1996 from the Company's South Timbalier 162 B-7 well, which was completed in the
fourth quarter of 1995, which was partially offset by ordinary production
declines experienced at the Company's Mobile area 959 cluster. The increase in
exploration and production revenue was also attributable to higher natural gas
prices. Average natural gas prices received (inclusive of hedging) were $1.63
per Mcf compared to $1.99 per Mcf (a 22% increase) in the nine months ended
September 30, 1995 and 1996, respectively.
Pipeline operating and marketing income increased by $609,000 (558%) from
$109,000 for the nine-month period ended September 30, 1995 to $718,000 for the
nine-month period ended September 30, 1996, primarily due to increased monthly
management fees the Company earns for operating the DIGS. The monthly management
fee the Company receives for operating the DIGS was increased from $5,800 per
month to $44,700 per month in January, 1996 and was subsequently increased to
$55,000 per month in July, 1996. The Company also received $272,000 in gas
marketing revenue associated with the South Timbalier 162 B-7 well for the
nine-month period ended September 30, 1996.
The Company's equity in earnings of equity investments relating to the Company's
interest in DIGP decreased by $434,000 (91%) from $476,000 for the nine months
ended September 30, 1995 to $42,000 for the same period in 1996. The decrease is
the result of a reduction in the Company's ownership in DIGP from 25% to 1% in
early 1996. The Company's sale of all but a 1% general partnership interest in
DIGP resulted in a gain of $10,827,000 net to the Company. The gain on sale was
offset by a $166,000 loss on sale the Company realized on the disposition of
non-strategic and non-producing acreage.
EXPENSE. Total expenses increased by $1,584,000 (25%) from $6,571,000 for the
first nine months of 1995 to $8,155,000 for the first nine months of
1996.
Operations and maintenance expense increased by $131,000 (9%) from $1,390,000 to
$1,521,000 for the nine-month periods ended September 30, 1995 and 1996,
respectively. Operations and maintenance expense was relatively stable between
the two periods. In general, a significant portion of operations expense does
not fluctuate from period to period as changes occur in production volumes and
prices received for those volumes. Therefore, such expenses do not change
proportionately with changes in exploration and production income.
As a result of natural gas production volumes increasing by 59% for the nine
months ended September 30, 1996 compared to the same period in 1995, the
Company's depreciation, depletion, and amortization ("DD&A") increased by
$903,000 (30%) from $2,974,000 to $3,877,000 in the nine months ended September
30, 1995 and 1996, respectively. The Company's average DD&A rate per Mcf of
production was $1.31 per Mcf and $1.07 per Mcf for the nine-month periods ending
September 30, 1995 and 1996, respectively. The decline in DD&A rate per Mcf was
due to production from the Company's South Timbalier 162 B-7 well, which had a
lower finding cost per Mcf as compared to the Company's Mobile 959 cluster.
Exploration charges increased by $471,000 (105%) from $448,000 to $919,000 for
the nine months ended September 30, 1995 and 1996, respectively. The increase
was primarily attributable to an unsuccessful additional completion attempt made
by the Company in a productive South Timbalier well. The Company also incurred
increased seismic expenditures of $163,000 (78%) from $208,000 to $371,000 for
the periods ended September 30, 1995 and 1996 respectively, primarily associated
with data acquisition relating to the Company's activities in the South
Timbalier and Viosca Knoll areas. As a result of the Company's use of the
successful efforts method of accounting (see "Accounting Matters"), the Company
expenses unsuccessful exploration efforts as well as seismic acquisition costs.
Abandonment accruals for the Company increased by $56,000 (431%) from $13,000 to
$69,000 for the nine months ended September 30, 1995 and 1996, respectively. The
Company incurred an abandonment charge of $148,000 during the nine-month period
ended September 30, 1996, as a result of final resolution of a vendor dispute
relating to a prior period platform abandonment.
INTEREST EXPENSE. Interest expense decreased by $342,000 (33%) from $1,051,000
in the first nine months of 1995 to $709,000 in the first nine months of 1996.
During the nine-month period ended September 30, 1996, the Company paid interest
to an affiliate of Enron Corp. ("Enron") relating to a combination term and
revolving credit facility. The term portion of the credit facility bore interest
at 15% per annum and the revolving portion bore interest at a floating rate
equal to 2.5% above the applicable prime rate. During first quarter 1996, the
Company repaid all amounts outstanding under the term portion and one-half of
the amount outstanding under the revolving portion. The Company also paid
$116,000 of interest charges to Enron relating to a delayed swap settlement in
first quarter of 1996. Total interest paid to Enron decreased by $384,000 (39%)
from $973,000 in the nine month period ended September 30, 1995 to $589,000 in
the nine-month period ended September 30, 1996.
The Company replaced the Enron revolving credit facility in August 1996 with a
revolving credit facility from Union Bank of California N.A. ("Union Bank") with
an interest rate of LIBOR plus 2.5%. Approximately $21,000 in interest was paid
on the Union Bank credit facility through September 30, 1996. Other interest
paid of $99,000 through the nine-month period ended September 30, 1996 related
primarily to vendor financings.
NET INCOME (LOSS), NET INCOME (LOSS) AVAILABLE TO COMMON UNIT HOLDERS AND
STOCKHOLDERS AND PREFERENCE UNIT PAYMENTS. The Company incurred a net loss of
$2,993,000 for the first nine months of 1995, compared to net income of
$9,726,000 for the nine month period ended September 30, 1996. The net income
for the 1996 nine-month period was primarily attributable to the gain realized
on the previously noted sale of the Company's interest in DIGP.
Income (loss) available to common unit holders and stockholders, which gives
effect to preference unit payments and accretion of discount, was a loss of
$3,681,000 for the first nine months of 1995, compared to net income of
$8,393,000 for the first nine months of 1996.
During the nine months ended September 30, 1995 the Company made preference
payments to NGP totaling $570,000 compared to $803,000 (a 41% increase) for the
comparable period in 1996. The increase was attributable to additional
preference units purchased by NGP in August 1995. The Company began accreting
the discount on preference units following the purchase of these additional
preference units. The accretion of discount was $118,000 and $530,000 for the
nine months ended September 30, 1995 and 1996 respectively.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
INCOME. Total income for the three months ended September 30, 1996 decreased
$128,000 (6%) from $2,037,000 to $1,909,000 for the three-month periods in 1995
and 1996, respectively.
Exploration and production revenue declined by $194,000 (10%) from $1,860,000 to
$1,666,000 for the three-month periods ended September 30, 1995 and 1996,
respectively. Total volume of natural gas produced declined by 153,000 Mcf (12%)
from 1.254 Bcf for the three months ended September 30, 1995 compared to 1.101
Bcf for the three-month period ended September 30, 1996. The reduction in
volumes was the result of declines experienced at the Company's Mobile area 959
cluster, partially offset by new production from the company's South Timbalier
162 B-7 well. Natural gas prices received (inclusive of hedging) for the
three-month period ended September 30, 1995 and 1996 remained relatively
constant at $1.48/Mcf and $1.51/Mcf, respectively.
Pipeline operating and marketing revenue increased by $209,000 (1,306%) from
$16,000 to $225,000 for the three-month periods ended September 30, 1995 and
1996, respectively, primarily as a result of increased DIGS operator fees the
Company receives. The Company received $5,800 per month in 1995 compared to the
$55,000 per month the Company began receiving in July, 1996. Also contributing
to the 1996 increase was $60,000 earned marketing natural gas on behalf of
partners at the South Timbalier 162 complex. The Company did not earn any gas
marketing revenue in the three months ended September 30, 1995.
Equity in earnings of equity investments relating to the Company's interest in
DIGP decreased, as expected, since the Company sold all but 1% of its 25%
interest in DIGP in early 1996. Equity in earnings of equity investments
decreased $142,000 (88%) from $161,000 to $19,000 in the three-month periods
ending September 30, 1995 and 1996, respectively.
EXPENSES. Total expenses increased by $27,000 (1%) from $2,434,000 to $2,461,000
for the three-month periods ending September 30, 1995 and 1996, respectively.
Operations and maintenance expenses increased by $170,000 (52%) from $326,000
for the quarter ended September 30, 1995 to $496,000 for the quarter ended
September 30, 1996. The increase was attributable primarily to full quarter
production cost from the Company's South Timbalier 162 production platform
(which commenced production in fourth quarter 1995) and additional repair and
maintenance charges associated with the Company's platform located at Mobile
area block 959.
For the quarter ended September 30, 1996 natural gas volume produced decreased
by 12 % compared to the same period in 1995. The Company's DD&A expense
decreased by $376,000 (27%) from $1,376,000 to $1,000,000 for the three months
ended September 30, 1995 and 1996, respectively. The Company's average DD&A
rates per Mcf of production were $1.10 per Mcf and $.91 per Mcf for the
three-month periods ending September 30, 1995 and 1996 respectively. The decline
in DD&A rate per Mcf was due to production from the Company's South Timbalier
162 B-7 well, which had a lower finding cost per Mcf as compared to the
Company's Mobile 959 cluster.
Exploration charges increased by $355,000 (250%) from $142,000 to $497,000 in
the quarters ended September 30, 1995 and 1996, respectively. The increase was
primarily attributable to an unsuccessful additional completion attempted by the
Company in a productive South Timbalier well. As the Company accounts for its
operations under the successful efforts method (see "Accounting Matters"), the
Company must expense unsuccessful exploration activities as well as seismic data
acquisitions.
INTEREST EXPENSE. Total interest expense decreased by $267,000 (75%) from
$354,000 to $87,000 for the quarters ended September 30, 1995 and 1996,
respectively. The decrease was the result of repaying all amounts outstanding
under a term credit facility with an interest rate of 15% per annum and also
reducing amounts outstanding on a revolving credit facility by 50% in the first
quarter of 1996.
NET INCOME (LOSS), NET INCOME (LOSS) AVAILABLE TO COMMON UNIT HOLDERS AND
STOCKHOLDERS AND PREFERENCE UNIT PAYMENTS. The Company incurred a net loss of
$666,000 for the quarter ended September 30, 1995 , compared to a net loss of
$607,000 for the same quarter ended September 30, 1996.
The loss available to common unit holders and stockholders, which gives effect
to preference unit payments and accretion of discount, was a loss of $1,062,000
for the quarter ended September 30, 1995, compared to a loss of $1,046,000 for
the quarter ended September 30, 1996.
Preference payments remained relatively constant for the quarters ending
September 30, 1995 and 1996 at $278,000 and $263,000 respectively. The Company
began accreting the discount on preference units following the purchase of
additional preference units by NGP in August 1995. The accretion of discount for
the quarter ended September 30, 1995 was $118,000 (two months accretion)
compared to full quarter accretion of $177,000 for the quarter ended September
30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY
The Company's main source of liquidity historically has been short-term,
project-specific debt and equity and vendor financings. The large early debt
service demands of these financings have created periodic liquidity strains on
the Company. The Company reduced it cash position by $10,639,000 due to
financing activities during the first nine months of 1996, which consisted
primarily of repayment of the Enron term facility for the development of the
Mobile 959/960 cluster and the repayment of $2,500,000 of the Enron revolving
credit facility. During the first nine months of 1995, the Company realized net
proceeds of $8,104,000 from financing activities, which represented borrowings
under such term credit facility for the development of the Mobile 959/960
cluster. In the future the Company intends to finance its capital expenditures
out of funds generated from operations, the proceeds from the Offering and bank
borrowings.
The second largest source of liquidity has been the profitable sale of assets
which the Company has developed. The Company received net cash of $7,066,000
from investing activities in the first nine months of 1996 as compared to
utilizing $15,660,000 in investing activities during the first nine months of
1995. The 1996 cash inflow was the result of selling all but one percent of the
Company's general partnership interest in DIGP and selling a non strategic lease
block. This was partially offset by investments in properties and a contribution
to repay nonrecourse liabilities associated with the Company's gathering system
interest. The 1995 investment outflows consisted primarily of development
activities on the Mobile 959/960 cluster. The Company has no present plans to
sell any of its properties and does not anticipate that sales of properties will
be a significant source of liquidity in the future.
The Company received approximately $40.1 million in net proceeds from the
Offering. The Company used approximately $12 million of the proceeds to redeem
all outstanding preference units held by NGP and approximately $3.1 million to
repay all amounts outstanding under the Company's credit facility with Union
Bank. The Company intends to use up to $14 million of the net proceeds
of the Offering to repay amounts contributed by Enron to South Dauphin II
Limited Partnership. See "-- Financing Activities -- South Dauphin II Limited
Partnership."
In the event the cash flows from the Company's operating activities, credit
available under its credit facility with Union Bank and the proceeds from the
Offering are not sufficient to fund development costs, or results from drilling
are not as successful as anticipated, the Company will either curtail its
drilling or seek additional financing to assist in its drilling activities. No
assurance may be given that the Company will be able to obtain such additional
financing. If the Company is required to curtail its drilling activities, its
ability to develop and expand its prospect inventory, as well as its earnings
and cash flow from exploration and production activities, will be adversely
affected.
The Company intends to continue its efforts to acquire additional acreage if and
when these opportunities become available. Any such acquisition or related
drilling on such acquisition could require additional borrowings under the
credit facility with Union Bank, or additional debt or equity financing. No
assurance may be given that the Company will be able to obtain such additional
capital.
WORKING CAPITAL
The Company had a working capital deficit of $635,000 as of September
30, 1996. The Company periodically has experienced substantial working capital
deficits. The Company has incurred substantial expenditures for the acquisition
and development of capital assets either on vendor open accounts payable or
under short-term financings. The Company has been able to refinance the accounts
payable balances by including them in longer-term project financings. The
operation of the Company's properties, when combined with property-based credit
facilities, has usually generated sufficient cash within 12 months to repay the
investments therein. Thus, capital investments in properties have converted to
cash or generated borrowing capacity rapidly enough to finance the Company's
working capital deficits.
CASH FLOW FROM OPERATIONS
During the nine months ended September 30, 1996, the Company generated net cash
flow from operations of $3,745,000 as compared to net cash flow from operations
of $210,000 during the same period in 1995. The improvement in 1996 was due
primarily to new production from the South Timbalier 162 B-7 well. While
improved gas prices also contributed to the increase in net cash flow from
operations, the impact was diminished by a decrease in exploration and
production revenue attributable to hedging activities in 1996. This is
consistent with the Company's hedging program to moderate fluctuations in cash
flows and thereby enable the Company to cover its fixed obligations despite
fluctuations in commodity process.
Net cash flow from operations during the first nine months of 1996 was also
increased by the Company's receipt of management fees the Company earns as the
operator of the DIGS, which contributed approximately $446,000 of operating cash
flow in that period. Prior to January 1, 1996, the Company performed similar
functions for minimal remuneration as a 25% partner in DIGP. The terms of the
sale by the Company of all but a one percent general partnership interest in
DIGP provided for compensation to the Company for its services as operator.
FINANCING ACTIVITIES
The Company's estimated total capital expenditure budget for the period from
September 30, 1996 through December 31, 1997 is approximately $40 million. The
Company believes that the proceeds of the Offering, borrowings under the credit
facility described below and cash flows generated from operations will be
sufficient to fund these budgeted expenditures. However, no assurance may be
given as to the adequacy of these sources.
CREDIT FACILITY. The Company has a two-year line of credit with Union Bank.
Borrowing under the line of credit may not exceed at any time the lesser of $10
million or a borrowing base (computed with reference to the Company's oil and
gas reserves) as determined by the bank in its sole discretion. The borrowing
base will be determined at least semiannually. On September 30, 1996, the
borrowing base was $5,938,000 and $2,634,000 was outstanding under this
facility. The borrowing base will be reduced by $312,500 per month through
August 31, 1997, by $250,000 per month for the succeeding six months and by
$166,667 per month for the final six months of the agreement, unless changed by
the bank at the time of a borrowing base redetermination. Borrowings under this
facility bear interest at a rate equal to, at the Company's option, either the
bank's reference rate plus 1% or LIBOR plus 2.5%, with an effective rate of
interest on September 30, 1996 of 7.94%. The Company repaid all amounts
outstanding under the credit facility with the proceeds of the Offering.
The credit facility contains restrictive covenants imposing limitations of the
occurrence of indebtedness, the sale of properties, payment of dividends,
mergers or consolidations, capital expenditures, transactions with affiliates,
making loans, and investments outside the ordinary course of business. The
facility requires that the Company maintain at the subsidiary level certain
minimum financial ratios, including a current ratio of at least 1:1, subject to
certain intercompany transactions, and interest coverage ratio on 2.5:1. The
Company was in compliance with such ratios at September 30, 1996. In addition,
the weighted average maturity of indebtedness incurred on ordinary terms to
vendors, suppliers and others supplying goods and services to the Company in the
ordinary course of business may not exceed 60 days. The loan agreement, in
addition to customary default provisions, provides that it is an event of
default if either (i) a person or group (other than certain members of
management and their family members and NGP), owns beneficially more than 50% of
the Company's voting capital stock outstanding, or (ii) any two of certain
members of management cease to be actively involved in the management and
operation of the Company for any reason other than death or disability. The
credit facility requires the Company to maintain certain hedging positions.
Indebtedness under the credit facility is secured by a first lien upon
substantially all of the properties owned by OEDC Exploration & Production,
L.P., a wholly owned subsidiary of the Company, and by the pledge of the
Company's limited partnership interests in South Dauphin Partners, L.P. and
South Dauphin II Limited Partnership and its general partnership interest in
DIGP. All assets not subject to a lien in favor of the lender are subject to a
negative pledge, with certain exceptions.
SOUTH DAUPHIN II LIMITED PARTNERSHIP. The Company and Enron formed South Dauphin
II Limited Partnership ("SDPII") to fund a drilling and development program,
with the Company generally responsible for costs in excess of budgeted amounts.
The financing of SDPII in nonrecourse to the Company's other assets. Pursuant to
the terms of the partnership agreement, Enron will receive 85% of the net cash
flows from the subject wells (provided a minimum payment schedule is met) until
it has been repaid all of its original investment plus a 15% pre-tax rate of
return ("Payout"). Once Payout has occurred, Enron's interest will decrease to
25% and the Company's interest will increase to 75%. SDPII has the option to
prepay Enron's investment and accelerate the ownership change. If such
prepayment is from financing activities instead of cash flow from operations,
the Company is required to make an additional payment to Enron equal to 10% of
Enron's net investment (funds advanced less distributions received) and five
percent of the unfunded portion of the Enron's commitment. The Company intends
to use up to $14 million of the net proceeds of the Offering to repay such
obligations and, accordingly, will incur the additional charges. The amount to
be repaid to Enron will be determined by the amount of funds contributed by
Enron to SDPII. As of September 30, 1996, Enron had made contributions to SDPII
of $2.2 million. As of December 16, 1996 Enron had made contributions of $4.2
million. Assuming the prepayment of the $4.2 million, the Company would incur
additional charges of approximately $1.1 million. The Company intends to cause
SDPII to prepay the amounts due to Enron during the first quarter of 1997.
The SDPII partnership agreement also provides that the failure of any two of the
Company's three senior managers to be actively involved in the management and
operations of SDPII constitutes a change of control of such partnership. In such
event, the agreement gives the Enron the right to fix a price at which the
Company would be required to elect to either purchase Enron's interest in the
partnership or sell all of the Company's interest in the partnership to Enron.
HEDGING ACTIVITIES
The Company continues to utilize financial futures to hedge its natural gas
production. For the nine month period ended September 30, 1995 total natural gas
revenues were increased by $609,000 compared to a decrease of $1,076,000 for the
nine-month period ended September 30, 1996 as a result of the Company's hedging
program. For the quarter ended September 30, 1995 the Company's total revenues
were increased by $368,000 compared to a reduction of $254,000 for the quarter
ended September 30, 1996 as a result of the Company's hedging program. As of
September 30, 1996 the Company had 1.89 Bcf hedged from October, 1996 through
December, 1997 at an average price of $2.35 per Mcf.
As of December 16, 1996, the Company had approximately 3.35 Bcf of natural gas
hedged from January 1997 through December 1997 at an average price of $2.19 per
Mcf. The Company estimates that as of December 16, 1996, the cost to unwind its
hedged position is approximately $884,000. Although hedging reduces the
Company's susceptibility to declines in the sales prices of its natural gas
production, it also prevents the Company from receiving the full benefit of any
increases in the sales prices of such production. Further, significant
reductions in production at times when the Company's production is hedged could
require the Company to make payments under the hedge agreements in the absence
of offsetting income.
EFFECTS OF INFLATION AND CHANGING PRICES
The Company's results of operations and cash flow are affected by changing oil
and gas prices. Increases in oil and gas prices often result in increased
drilling activity, which in turn increases the demand for and cost of
exploration and development. Thus, increased prices may generate increased
revenue without necessarily increasing profitability. These industry market
conditions have been far more significant determinants of Company earnings than
have macroeconomic factors such as inflation, which has had only minimal impact
on Company activities in recent years. While it is impossible to predict the
precise effect of changing prices and inflation on future Company operations,
the short-lived nature of the Company's gas reserves makes it more possible to
match development costs with predictable revenue streams than would long-lived
reserves. No assurance can be given as to the Company's future success at
reducing the impact of price changes on the Company's operating results.
ACCOUNTING MATTERS
The Company uses the successful efforts method of accounting for its oil and gas
properties. This results in the capitalization of certain exploration charges
and expensing of dry hole costs. The Company uses the units of production method
to deplete its producing properties.
In January 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires the Company to review its oil and gas properties whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable, and recognize a loss if such recoverable amounts are less
than the carrying amount. There have been no impairment losses recognized as of
September 30, 1996, but any future losses would be included in depletion,
depreciation, amortization and impairment in future accounting periods.
On October 23, 1995, the Financial Account Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which establishes a fair value method
for accounting for stock-based compensation plans either through recognition or
disclosure. The Company adopted this standard in 1996 and will disclose the pro
forma net income (loss) and earnings (loss) per share amounts assuming the fair
value method was adopted on January 1, 1995 in its financial statements as of
and for the year ended December 31, 1996. The adoption of this standard will not
impact the Company's consolidated results of operations or financial position.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is a defendant in a suit styled H.E. (GENE) HOLDER, JR. AND
DAN H. MONTGOMERY V. OFFSHORE ENERGY DEVELOPMENT CORPORATION, which was
filed in 1995 alleging that the idea, design, and location of the DIGS
as an intrastate gas gatherer regulated by the Federal Energy Regulatory
Commission under Section 311 of the Natural Gas Policy Act of 1978 was a
confidential trade secret owned by the plaintiffs which had been
revealed to the Company during confidential discussions in furtherance
of a proposed joint venture. The plaintiffs further allege that the
Company made misrepresentations regarding its intention to form a joint
venture with the plaintiffs in order to obtain the confidential
information and to induce the plaintiffs into executing a
confidentiality agreement which thereafter prevented the plaintiffs from
further pursuing the project independently. The plaintiffs also allege
that the Company orally agreed to form a joint venture and that the
Company breached its fiduciary duties to the plaintiffs. As a
consequence, the plaintiffs allege "millions of dollars in profits" as
actual damages and also seek the award of unspecified punitive damages,
attorneys' fees, pre- and post-judgment interest and costs of suit.
The Company denies the plaintiffs' allegations and is vigorously
defending this matter. The Company has raised the affirmative defenses
of statute of frauds, statute of limitations. laches, waiver and
estoppel. Discovery is ongoing in the case and a trial date has not been
set. Although a decision adverse to the Company in this litigation could
have a material adverse effect on the Company's financial condition and
results of operation, the Company does not believe that the final
resolution of this case will result in a material liability to the
Company.
ITEM 2. CHANGES IN SECURITIES.
(a) Not applicable.
(b) Not applicable.
(c) On July 26, 1996, the Company issued one share of Common Stock to
each of David B. Strassner, Douglas H. Kiesewetter and R. Keith
Anderson in consideration of $10.00 per share. Such issuance was
exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) of such Act as a transaction by the
issuer not involving any public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 29, 1996, the stockholders of the Company executed a unanimous
written consent approving the Company's 1996 Stock Awards Plan. On
August 30, 1996, the stockholders of the Company executed a unanimous
written consent approving the Agreement and Plan of Reorganization dated
August 30, 1996 relating to the Combination.
ITEM 5. OTHER INFORMATION.
On November 6, 1996, the Company and subsidiaries of MCN Corporation
("MCN") and PanEnergy Corp ("PanEnergy") formed a partnership (the
"Processing Partnership") for the purpose of constructing, owning and
operating, or providing financing for one or more natural gas processing
facilities onshore in Mobile County, Alabama. Such a facility would
extract condensate and natural gas liquids from natural gas prior to
delivery of natural gas to the interstate pipeline system. Much of the
natural gas produced in the Mobile, Viosca Knoll and Main Pass areas of
the Gulf of Mexico has a high gas liquids content. Because no gas
processing facility is currently available in southern Alabama to
process the Mobile, Viosca Knoll and Main Pass gas, producers
effectively lose the potential additional value associated with the
liquifiable hydrocarbons in their natural gas production. Construction
of a plant in this area would enable producers to achieve a higher total
price for the sale of their gas and would make attachment to the DIGS
more desirable because the DIGS would be the only gathering system that
delivers gas in proximity to a processing plant in this area. PanEnergy
is the managing partner of the Processing Partnership and will manage
the construction and operation of the Processing Partnership's projects.
Currently, the Processing Partnership plans to construct in stages a
plant that will have an initial capacity of 600 MMcf/d and a capacity of
900 MMcf/d when completed. Preliminary estimates by the Company are that
this will be a $90 million construction project. The Company expects the
plant to be operational in the first quarter of 1998, and the Company
and its partners continue to evaluate design, construction and market
information for the plant. No assurance may be given, however, that the
plant will be constructed or that, if constructed, it will be completed
within the estimated cost or on the anticipated schedule.
The Processing Partnership is now owned 49.5% by each of MCN and
PanEnergy and 1% by the Company. The Company has acquired for $200,000
an option to buy an additional 32 1/3% interest in the Processing
Partnership, exercisable until the third anniversary of the
commencement of commercial operations at the Processing Partnership's
initial processing facility. The exercise price for the Company's option
is calculated by multiplying (a) the product of (i) the "Processing
Facilities Value" and (ii) 32 2/3% of the interests of MCN and PanEnergy
(and in certain cases their assignees) in the Processing Partnership by
(b) the "Payment Factor," and then subtracting $200,000 from such total
amount. "Processing Facilities Value" means (1) with respect to any
processing facility completed as of the closing of the exercise of the
option, the depreciated book value as of such date, as determined in
accordance with generally accepted accounting principles and using
25-year straight line depreciation, of such facility and (2) with
respect to any facility not completed as of such date, the allowance for
funds used during construction for such facility as of such date, as
determined in accordance with generally accepted accounting principles.
The "Payment Factor" is initially 100% and increases by 3% upon the
commencement of commercial operations at the Processing Partnership's
initial processing facility and thereafter by 3% after each three-month
period during the term of the option. The interest in the Processing
Partnership that the Company's option entitles it to buy would be
diluted if the Processing Partnership admitted an additional partner
that was either an assignee of a proportionate interest from all of the
partners or whose admittance otherwise resulted in a proportionate
decrease in each partner's interest.
The Company will be required to obtain financing in order to exercise
the option to increase its interest, and, although the Company
anticipates that such financing will be available, no assurance may be
given in this regard. If the Company does not exercise the option to
acquire the additional partnership interest, the Company will be
required to assign to each of MCN and PanEnergy 1/14 of the increased
interest in DIGP that the Company may earn pursuant to the DIGP
partnership agreement.
The partnership agreement for the Processing Partnership provides that
any partner who desires to participate in the construction, ownership,
operation or financing of a gas processing plant in Mobile County must
offer the other partners a right of first refusal to participate in the
project. In addition, the Company, MCN and PanEnergy have entered into
an Area of Mutual Interest Agreement pursuant to which any party that
desires to construct, own and operate or provide financing for (a) any
gas processing plant in Jackson or Harrison Counties, Mississippi,
Baldwin County, Alabama or Escambia County, Florida or (b) a power plant
located in Mobile County, Alabama for the generation of power to the
initial processing plant constructed by the Processing Partnership must
offer the other parties a right of first refusal to participate in the
project. The Company's right to participate would be 20% in any such
power plant and 33 1/3% in any such processing plant, except that the
Company's right to participate in a processing plant at any time after
the exercise or termination of the Company's option described above will
be equal to the Company's interest in the Processing Partnership.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed with this report:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.1 Agreement and Plan of Reorganization dated August 30, 1996 by and
among the Company, Offshore Energy Development Corporation, a Texas
corporation, OEDC, Inc., Natural Gas Partners, L.P., NGP-OEDC Holdings,
L.P., David B. Strassner, Douglas H. Kiesewetter, R. Keith Anderson,
Matthew T. Bradshaw, Taft and Nancy Bradshaw, R. Gamble Baldwin, David
R. Albin, Donald Shore, Trustee of the Albin Income Trust, John S.
Foster, Kenneth A. Hersh, Bruce B. Selkirk, III, John C. Goff, and
Agnes Denise Darraugh (incorporated herein by reference to Exhibit 2 to
the Company's Registration Statement on Form S-1 (No. 333-11269) (the
"Registration Statement")).
10.2 Fourth Amended and Restated General Partnership Agreement of Dauphin
Island Gathering Partners dated as of July 1, 1996 among MCNIC Mobile
Bay Gathering Company, PanEnergy Dauphin Island Company and Dauphin
Island Gathering Company, L.P. (incorporated herein by reference to
Exhibit 10.8 to the Registration Statement).
10.3 Agreement of Limited Partnership of South Dauphin II Limited
Partnership dated July 25, 1996 by and between OEDC Exploration and
Production, L.P. and Joint Energy Development Investments Limited
Partnership (incorporated herein by reference to Exhibit 10.11 to the
Registration Statement).
10.4 Credit Agreement dated August 28, 1996 between OEDC Exploration and
Production, L.P., OEDC, Inc., OEDC Partners, L.P., the Company, Dauphin
Island Gathering Company, L.P. and Union Bank of California, N.A.
(incorporated herein by reference to Exhibit 10.14 to the Registration
Statement).
10.5 Guaranty dated August 28, 1996 by Dauphin Island Gathering Company L.P.
in favor of Union Bank of California, N.A. (incorporated herein by
reference to Exhibit 10.15 to the Registration Statement).
10.6 Guaranty dated August 28, 1996 by OEDC, Inc. in favor of Union Bank of
California, N.A. (incorporated herein by reference to Exhibit 10.16 to
the Registration Statement).
10.7 Guaranty dated August 28, 1996 by Offshore Energy Development
Corporation in favor of Union Bank of California, N.A. (incorporated
herein by reference to Exhibit 10.17 to the Registration Statement).
10.8 Guaranty dated August 28, 1996 by OEDC Partners, L.P. in favor of Union
Bank of California, N.A. (incorporated herein by reference to Exhibit
10.18 to the Registration Statement).
10.9 Offshore Energy Development Corporation 1996 Stock Awards Plan
(incorporated herein by reference to Exhibit 10.22 to the Registration
Statement).
10.10 Form of Incentive Stock Option Agreement (incorporated herein by
reference to Exhibit 10.23 to the Registration Statement).
10.11 Form of Nonqualified Stock Option Agreement (new option) (incorporated
herein by reference to Exhibit 10.24 to the Registration Statement).
10.12 Form of Nonqualified Stock Option Agreement (replacement option)
(incorporated herein by reference to Exhibit 10.25 to the Registration
Statement).
10.13 Registration Rights Agreement dated August 30, 1996 by and among the
Company, Natural Gas Partners, L.P., David B. Strassner, Douglas H.
Kiesewetter and R. Keith Anderson (incorporated herein by reference to
Exhibit 10.26 to the Registration Statement).
10.14 Stockholders Agreement dated August 30, 1996 by and among the Company,
Natural Gas Partners, L.P., David B. Strassner, Douglas H. Kiesewetter
and R. Keith Anderson (incorporated herein by reference to Exhibit
10.27 to the Registration Statement).
10.15 Form of Affiliates Agreement by and between the Company, OEDC Partners,
L.P., OEDC, Inc., Natural Gas Partners, L.P., David B. Strassner,
Douglas H. Kiesewetter, R. Keith Anderson and Gaylen J. Byker
(incorporated herein by reference to Exhibit 10.28 to the Registration
Statement).
10.16 Form of Amendment to Affiliates Agreement by and between the Company,
OEDC Partners, L.P., OEDC, Inc., Natural Gas Partners, L.P., David B.
Strassner, Douglas H. Kiesewetter and Gaylen J. Byker (incorporated
herein by reference to Exhibit 10.29 to the Registration Statement).
10.17 Form of Indemnity Agreement by and between the Company and each of its
directors and executive officers (incorporated herein by reference to
Exhibit 10.30 to the Registration Statement).
10.18 Financial Advisory Services Agreement dated as of April 1, 1996 between
OEDC Partners, L.P. and Natural Gas Partners, L.P. (incorporated herein
by reference to Exhibit 10.31 to the Registration Statement).
10.19 Amendment dated August 30, 1996 to Financial Advisory Services
Agreement between OEDC Partners, L.P. and Natural Gas Partners, L.P.
(incorporated herein by reference to Exhibit 10.32 to the Registration
Statement).
10.20 Agreement of Management Stockholders dated August 30, 1996 by and among
the Company and David B. Strassner, Douglas H. Kiesewetter and R. Keith
Anderson (incorporated herein by reference to Exhibit 10.33 to the
Registration Statement).
10.21 Joint Exploration and Participation Agreement dated as of October 3,
1996 by and between OEDC Exploration and Production, L.P. and Amoco
Production Company (incorporated herein by reference to Exhibit 10.34
to the Registration Statement).
10.22 Underwriting Agreement dated October 31, 1996 by and among the Company,
the Selling Stockholders named therein and the Underwriters named
therein (incorporated herein by reference to the form thereof filed as
Exhibit 1 to the Registration Statement).
10.23 Registration Agreement dated October 30, 1996 by and among the Company
and the Selling Stockholders named therein (incorporated herein by
reference to the form thereof filed as Exhibit 10.36 to the
Registration Statement).
10.24 Letter of Intent dated September 13, 1996 by and among Dauphin Island
Gathering Partners and Centana Gathering Company, Coastal Field
Services Company and CNG Main Pass Gathering Company (incorporated
herein by reference to Exhibit 10.35 to the Registration Statement).
10.25 General Partnership Agreement for Mobile Bay Processing Partners dated
as of November 6, 1996 by and among MCNIC Mobile Bay Processing
Company, OEDC Processing, L.P. and PanEnergy Mobile Bay Processing
Company.
10.26 Option Agreement dated November 6, 1996 among Dauphin Island Gathering
Company, L.P., OEDC Processing, L.P., MCNIC Mobile Bay Processing, L.P.
and PanEnergy Mobile Bay Processing Company.
10.27 Area of Mutual Interest Agreement dated as of November 6, 1996 between
Pipeline & Processing Group, Inc., OEDC Partners, L.P. and PanEnergy
Field Services, Inc.
27 Financial Data Schedule.
(b) The Company filed no reports on Form 8-K during the quarter
for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OFFSHORE ENERGY DEVELOPMENT
CORPORATION
Date: December 16, 1996 By: /s/ DOUGLAS H. KIESEWETTER
Douglas H. Kiesewetter
Executive Vice President and Chief
Operating Officer
(for the registrant and as its principal
financial officer)
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.1 Agreement and Plan of Reorganization dated August 30, 1996 by and
among the Company, Offshore Energy Development Corporation, a Texas
corporation, OEDC, Inc., Natural Gas Partners, L.P., NGP-OEDC Holdings,
L.P., David B. Strassner, Douglas H. Kiesewetter, R. Keith Anderson,
Matthew T. Bradshaw, Taft and Nancy Bradshaw, R. Gamble Baldwin, David
R. Albin, Donald Shore, Trustee of the Albin Income Trust, John S.
Foster, Kenneth A. Hersh, Bruce B. Selkirk, III, John C. Goff, and
Agnes Denise Darraugh (incorporated herein by reference to Exhibit 2 to
the Company's Registration Statement on Form S-1 (No. 333-11269) (the
"Registration Statement")).
10.2 Fourth Amended and Restated General Partnership Agreement of Dauphin
Island Gathering Partners dated as of July 1, 1996 among MCNIC Mobile
Bay Gathering Company, PanEnergy Dauphin Island Company and Dauphin
Island Gathering Company, L.P. (incorporated herein by reference to
Exhibit 10.8 to the Registration Statement).
10.3 Agreement of Limited Partnership of South Dauphin II Limited
Partnership dated July 25, 1996 by and between OEDC Exploration and
Production, L.P. and Joint Energy Development Investments Limited
Partnership (incorporated herein by reference to Exhibit 10.11 to the
Registration Statement).
10.4 Credit Agreement dated August 28, 1996 between OEDC Exploration and
Production, L.P., OEDC, Inc., OEDC Partners, L.P., the Company, Dauphin
Island Gathering Company, L.P. and Union Bank of California, N.A.
(incorporated herein by reference to Exhibit 10.14 to the Registration
Statement).
10.5 Guaranty dated August 28, 1996 by Dauphin Island Gathering Company L.P.
in favor of Union Bank of California, N.A. (incorporated herein by
reference to Exhibit 10.15 to the Registration Statement).
10.6 Guaranty dated August 28, 1996 by OEDC, Inc. in favor of Union Bank of
California, N.A. (incorporated herein by reference to Exhibit 10.16 to
the Registration Statement).
10.7 Guaranty dated August 28, 1996 by Offshore Energy Development
Corporation in favor of Union Bank of California, N.A. (incorporated
herein by reference to Exhibit 10.17 to the Registration Statement).
10.8 Guaranty dated August 28, 1996 by OEDC Partners, L.P. in favor of Union
Bank of California, N.A. (incorporated herein by reference to Exhibit
10.18 to the Registration Statement).
10.9 Offshore Energy Development Corporation 1996 Stock Awards Plan
(incorporated herein by reference to Exhibit 10.22 to the Registration
Statement).
10.10 Form of Incentive Stock Option Agreement (incorporated herein by
reference to Exhibit 10.23 to the Registration Statement).
10.11 Form of Nonqualified Stock Option Agreement (new option) (incorporated
herein by reference to Exhibit 10.24 to the Registration Statement).
10.12 Form of Nonqualified Stock Option Agreement (replacement option)
(incorporated herein by reference to Exhibit 10.25 to the Registration
Statement).
10.13 Registration Rights Agreement dated August 30, 1996 by and among the
Company, Natural Gas Partners, L.P., David B. Strassner, Douglas H.
Kiesewetter and R. Keith Anderson (incorporated herein by reference to
Exhibit 10.26 to the Registration Statement).
10.14 Stockholders Agreement dated August 30, 1996 by and among the Company,
Natural Gas Partners, L.P., David B. Strassner, Douglas H. Kiesewetter
and R. Keith Anderson (incorporated herein by reference to Exhibit
10.27 to the Registration Statement).
10.15 Form of Affiliates Agreement by and between the Company, OEDC Partners,
L.P., OEDC, Inc., Natural Gas Partners, L.P., David B. Strassner,
Douglas H. Kiesewetter, R. Keith Anderson and Gaylen J. Byker
(incorporated herein by reference to Exhibit 10.28 to the Registration
Statement).
10.16 Form of Amendment to Affiliates Agreement by and between the Company,
OEDC Partners, L.P., OEDC, Inc., Natural Gas Partners, L.P., David B.
Strassner, Douglas H. Kiesewetter and Gaylen J. Byker (incorporated
herein by reference to Exhibit 10.29 to the Registration Statement).
10.17 Form of Indemnity Agreement by and between the Company and each of its
directors and executive officers (incorporated herein by reference to
Exhibit 10.30 to the Registration Statement).
10.18 Financial Advisory Services Agreement dated as of April 1, 1996 between
OEDC Partners, L.P. and Natural Gas Partners, L.P. (incorporated herein
by reference to Exhibit 10.31 to the Registration Statement).
10.19 Amendment dated August 30, 1996 to Financial Advisory Services
Agreement between OEDC Partners, L.P. and Natural Gas Partners, L.P.
(incorporated herein by reference to Exhibit 10.32 to the Registration
Statement).
10.20 Agreement of Management Stockholders dated August 30, 1996 by and among
the Company and David B. Strassner, Douglas H. Kiesewetter and R. Keith
Anderson (incorporated herein by reference to Exhibit 10.33 to the
Registration Statement).
10.21 Joint Exploration and Participation Agreement dated as of October 3,
1996 by and between OEDC Exploration and Production, L.P. and Amoco
Production Company (incorporated herein by reference to Exhibit 10.34
to the Registration Statement).
10.22 Underwriting Agreement dated October 31, 1996 by and among the Company,
the Selling Stockholders named therein and the Underwriters named
therein (incorporated herein by reference to the form thereof filed as
Exhibit 1 to the Registration Statement).
10.23 Registration Agreement dated October 30, 1996 by and among the Company
and the Selling Stockholders named therein (incorporated herein by
reference to the form thereof filed as Exhibit 10.36 to the
Registration Statement).
10.24 Letter of Intent dated September 13, 1996 by and among Dauphin Island
Gathering Partners and Centana Gathering Company, Coastal Field
Services Company and CNG Main Pass Gathering Company (incorporated
herein by reference to Exhibit 10.35 to the Registration Statement).
10.25 General Partnership Agreement for Mobile Bay Processing Partners dated
as of November 6, 1996 by and among MCNIC Mobile Bay Processing
Company, OEDC Processing, L.P. and PanEnergy Mobile Bay Processing
Company.
10.26 Option Agreement dated November 6, 1996 among Dauphin Island Gathering
Company, L.P., OEDC Processing, L.P., MCNIC Mobile Bay Processing, L.P.
and PanEnergy Mobile Bay Processing Company.
10.27 Area of Mutual Interest Agreement dated as of November 6, 1996 between
Pipeline & Processing Group, Inc., OEDC Partners, L.P. and PanEnergy
Field Services, Inc.
27 Financial Data Schedule.
GENERAL PARTNERSHIP AGREEMENT
FOR
MOBILE BAY PROCESSING PARTNERS
BETWEEN
MCNIC MOBILE BAY PROCESSING COMPANY,
OEDC PROCESSING, L.P.
AND
PANENERGY MOBILE BAY PROCESSING COMPANY
DATED AS OF NOVEMBER 6, 1996
<PAGE>
GENERAL PARTNERSHIP AGREEMENT
OF
MOBILE BAY PROCESSING PARTNERS
THIS GENERAL PARTNERSHIP AGREEMENT ("AGREEMENT") is made and entered
into as of the 6th day of November, 1996 (the "EFFECTIVE DATE"), by and among
MCNIC MOBILE BAY PROCESSING COMPANY, a Michigan corporation ("MMBPC"), OEDC
PROCESSING, L.P., a Texas limited partnership, the general partner of which is
OEDC, INC., ("OEDCP") and PANENERGY MOBILE BAY PROCESSING COMPANY, a Delaware
corporation ("PMBPC") all of such parties for convenience being sometimes
hereinafter referred to collectively as the "PARTNERS" or individually as a
"PARTNER".
W I T N E S S E T H:
WHEREAS, Pipeline & Processing Group Inc., a Michigan corporation,
PanEnergy Field Services, Inc., a Colorado corporation, and Dauphin Island
Gathering Company, L.P., a Texas limited partnership, the general partner of
which is OEDC, Inc., a Texas corporation have entered into a Binding Term Sheet
to Form General Partnership Related to NGL Processing Facility dated June 30,
1996 (the "TERM SHEET");
WHEREAS, the Term Sheet provides that the parties thereto, or wholly
owned direct or indirect affiliates of their ultimate parent companies, shall
form a partnership; and
WHEREAS, each of the parties hereto is the entity contemplated by
the parties to the Term Sheet as the proposed partner of the partnership.
NOW, THEREFORE, in consideration of the terms and mutual covenants
set forth herein, the parties agree as follows:
ARTICLE 1.
FORMATION OF A PARTNERSHIP
1.1 FORMATION OF PARTNERSHIP. The Partners hereby agree to and do herewith
form a general partnership (the "PARTNERSHIP") under the Delaware [Revised
Partnership Act] (the "PARTNERSHIP ACT") for the limited purposes and scope set
forth herein. Each Partner's interest in the Partnership shall be deemed
personal property for all purposes herein. All real and other property owned by
the Partnership shall be deemed owned by the Partnership as an entity, and no
Partner shall individually have any direct ownership in such property.
<PAGE>
1.2 OWNERSHIP INTERESTS. Subject to the terms hereof, the interest of the
Partners in the Partnership ("OWNERSHIP INTERESTS") shall be as follows:
At the Effective Date:
MMBPC 49.5%
PMBPC 49.5%
OEDCP 1.0%
1.3 PURPOSE OF PARTNERSHIP. The Partnership is formed for the limited
purposes of constructing, owning and operating, or providing financing for one
or more natural gas processing facilities (including, without limitations, a
slug catcher) ("PROCESSING FACILITY") onshore in Mobile County, Alabama, for the
removal of condensate and natural gas liquids (collectively "LIQUIDS") from
natural gas, including but not limited to, activities such as (a) natural gas
compression, treating, and dehydration at a Processing Facility, (b) separation,
fractionation, storage, transportation and marketing of Liquids extracted at a
Processing Facility and (c) purchase and transportation of natural gas as
necessary for the efficient operation of a Processing Facility, with all of the
preceding collectively referred to as "PARTNERSHIP OPERATIONS").
1.4 NAME OF PARTNERSHIP. The name of the Partnership shall be Mobile Bay
Processing Partners. The Managing Partner shall file the required assumed name
certificates. The business and affairs of the Partnership shall be conducted
solely under the name of Mobile Bay Processing Partners, and such name shall be
used at all times in connection with the business and affairs of the
Partnership.
1.5 PRINCIPAL PLACE OF BUSINESS. The city in which the principal place of
business of the Managing Partner is located is Denver, Colorado, which shall be
the principal place of business of the Partnership.
ARTICLE 2.
RESPONSIBILITIES OF THE PARTIES
2.1 RESPONSIBILITIES OF THE PARTIES. Each Partner is responsible for
procuring any and all authorizations which it might individually require for its
participation in the Partnership. The authority of the Partners to conduct
business on behalf of the Partnership is limited to the authority expressly
granted under this Agreement. The Partners represent and warrant that each has
the legal authority to and is not prohibited from entering into the Partnership
and pursuing the business thereof. Except as otherwise provided herein, each
Partner may own and operate and invest in any natural gas processing system not
owned or operated by the Partnership wherever located, compete with the other
Partners and the Partnership, and engage in and possess business interests in
ventures of any kind for such Partners' exclusive benefit, and the other
Partners shall have no interest therein by virtue of this Agreement.
ARTICLE 3.
MANAGEMENT AND OPERATION OF THE PARTNERSHIP
3.1 MANAGEMENT COMMITTEE.
(a) The management of the Partnership shall be by a committee of the
representatives of the Partners (the "MANAGEMENT COMMITTEE") which shall
have general discretion to manage the affairs, determine and approve the
overall objectives, policies, procedure, methods and actions of the
Partnership, including, but not limited to, the authority to perform those
acts specifically enumerated herein, and the exclusive right to make all
major policy and business development decisions. No Partner shall have
authority to act for, or to assume any obligation or responsibility on
behalf of the Partnership without the prior written approval of the
Management Committee unless otherwise specifically provided herein.
(b) It is hereby understood and agreed by the Partners that the
day-to-day business of Partnership Operations will be delegated to the
Managing Partner under the subsequent provisions of this ARTICLE 0.
3.2 ORGANIZATION AND DUTIES OF MANAGEMENT COMMITTEE.
(a) The members of the Management Committee shall consist of one
representative of each Partner. Each Partner shall from time to time
designate, by written notice to the other Partners, its representative to
serve on the Management Committee, and the representative so designated
shall be authorized to vote the Ownership Interest of the appointing
Partner. By like notice, each Partner may designate two alternate
representatives, either of whom shall have authority to act in the absence
of its representative. Any Partner may at any time, by written notice to
the other Partners, remove its representative or alternate
representative(s) on the Management Committee and designate a new
representative or alternate(s). The Management Committee representative of
each Partner shall be authorized by such Partner to take any and all
actions with respect to the Partnership and to act on such Partner's
behalf with respect to the Partnership. The resignation or removal of a
member of the Management Committee shall not invalidate any act of such
member taken prior to the giving of written notice of his or her
resignation or removal.
<PAGE>
(b) The representative of the Managing Partner on the Management
Committee shall be the Chairman of the Management Committee.
(c) Meetings of the Management Committee shall be held at the
principal offices of the Partnership, or such other places as may be
agreed to by its members. The Chairman shall preside at all meetings of
the Management Committee and shall schedule such meetings of the
Management Committee as are necessary to resolve current items of business
with at least two (2) business days advance written notice, which notice
shall include the agenda for the meeting. Any Partner may, with at least
one business day's advance written notice add items to the agenda for the
meeting. If, however, the item of business is construction proposed by the
Managing Partner or a Partner, then the meeting to discuss such business
shall be scheduled with at least ten (10) days' advance written notice.
Unless agreed to otherwise by all of the members of the Management
Committee, only matters on the agenda provided with the notice of the
meeting (or timely noticed by a Partner) shall be considered at the
meeting. Meetings may be held by conference telephone or similar
communications equipment by means of which all persons participating in
the meeting can clearly hear each other simultaneously. Any Partner may
call a meeting of the Management Committee by notifying the Chairman of
such request and including with such notice any agenda items to be acted
upon at such meeting. The Chairman shall be responsible for maintaining
written minutes of all meetings.
(d) Members of the Management Committee, or their designated
alternates, may attend meetings and vote either in person, by telephone or
other similar communications (confirmed in writing) or through duly
authorized powers of attorney. With respect to each item of business, a
quorum of the Management Committee shall consist of representatives of two
or more Partners that are not Affiliates with more than fifty percent
(50%) of the Ownership Interests (excluding any Partners whose voting
rights have been suspended at such time or are excluded from voting
pursuant to the express provisions hereof). As used in this Agreement, the
term "AFFILIATE" shall mean any person that directly or indirectly,
through one or more intermediaries, controls, or is controlled by or is
under common control with any Partner. The term "PERSON" shall include,
without limitation, an individual, a corporation, a partnership, an
association, a joint stock company and a trust. The term "CONTROL"
(including the terms "CONTROLS", "CONTROLLED BY" and "UNDER COMMON CONTROL
WITH") means, (1) with respect to a corporation, the ownership or other
control of securities to which are attached more than fifty percent (50%)
of the voting interest of all equity securities issued by the corporation,
(2) with respect to a partnership, the ownership of more than
<PAGE>
fifty percent (50%) interest in the partnership, and (3) with respect to
any other person, the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such
person, by contract or otherwise and (4) a "Wholly Owned Affiliate"
(hereinafter defined).
"WHOLLY OWNED AFFILIATE" shall mean with respect to a person (a) a
person that owns directly or indirectly all of the outstanding Equity
Interests of such person, or (b) a person all of the outstanding Equity
Interests of which (other than directors' qualifying shares) are owned
directly or indirectly, by either (i) a Partner or (ii) a person that owns
directly or indirectly all of the outstanding Equity Interests of a
Partner.
"EQUITY INTERESTS" shall mean capital stock of a corporation or
partnership interests or warrants, options or other rights to acquire
capital stock or partnership interests (but excluding (a) any debt
security that is convertible into, or exchangeable for, capital stock or
partnership interests, and (b) any other indebtedness.
(e) Actions taken by representatives of the required sum of the
percentage Ownership Interests of the Partners, as specified for
particular actions herein, at a Management Committee meeting at which a
quorum is present, and for which notice either is given or is waived
before or after such meeting by such representatives, shall authorize
action by the Partnership. Each representative shall have a vote equal to
the Ownership Interest percentage of the Partner he or she represents.
3.3 ACTION REQUIRING MAJORITY APPROVAL. The approval of two or more
members of the Management Committee that are not Affiliates representing
sixty-six and two-thirds percent (66b%) or more of the Ownership Interests which
are not excluded or suspended from voting under a specific provision of this
Agreement ("MAJORITY APPROVAL") shall be necessary before any of the following
actions can be taken on behalf of the Partnership:
(a) Approving any Project Plan proposed by the Managing Partner for
the construction or acquisition of a Processing Facility under ARTICLE 0
and any other proposals for expansions of a Processing Facility.
(b) Approving budgets and any revisions thereto submitted by the
Managing Partner pursuant to ARTICLE 0 and SECTION 0.
(c) Selling, transferring, or leasing any of the material assets of
the
<PAGE>
Partnership.
(d) Approving any interim and permanent financing agreements that
are non-recourse to the Partners and the Partnership and any amendments or
restructuring thereof, and mortgaging or pledging any of the material
assets of the Partnership in connection therewith.
(e) Exercising any of the other powers granted to the Management
Committee under SECTION 0 or other provisions hereof which (1) are not
specifically enumerated elsewhere herein as requiring less or more than a
Majority Approval, or (2) not delegated to the Managing Partner under
SECTION 0.
(f) Selecting a nationally recognized firm of independent certified
public accountants to audit the books of account of the Partnership as
provided by SECTION 0 and selecting outside attorneys to represent the
Partnership (except as provided in SECTION 0).
(g) Selecting from time to time the bank or banks in which the funds
of the Partnership shall be deposited by the Managing Partner, and
approving the investment of available funds.
(h) Approving contracts with vendors for goods or services involving
more than $100,000 during the life of the contract or more than $20,000
during any one month.
(i) Approving the initiation of litigation or settlement of disputes
involving claims (1) of the Partnership against a third party which are in
excess of $25,000 (including attorneys fees of the Partnership) or (2) of
the Partnership against a Partner (provided that in the event of a
proposed action against a Partner the proposed defendant Partner shall not
be entitled to vote) and approving the employment of all attorneys
representing the Partnership in such matters.
(j) Determining the frequency, form and nature of reports required
from contractors and the Managing Partner.
(k) Approving any applications for or the acceptance of any
necessary regulatory approvals.
(l) Subject to SECTION 0, removing the Managing Partner and
selecting
<PAGE>
a new Managing Partner.
(m) Approving, consistent with ARTICLE 0, all tax policy matters
regarding the Partnership, including, but not limited to, elections
relating to state and federal income taxes, preparation and filing of
Partnership returns and, subject to EXHIBIT E, the handling of and
participation in tax audits conducted by any governmental entity.
(n) Approving (1) the general commercial provisions applicable to
agreements for use by the Managing Partner in connection with Partnership
Operations, all of which shall be set without regard to a Partner or a
Partner's Affiliates' marketing, gas purchase or product sales activities;
and (2) any proposals by the Managing Partner for deviations from such
agreements.
(o) Consenting to certain Dispositions as provided in SECTION 0.
(p) Approving any contract or agreement with any Affiliate of a
Partner; provided, however, the vote of the Partner whose Affiliate is the
counterparty shall be excluded in determining the requisite approval.
(q) Approving agreements for the sale of Liquids that are not
terminable at will with thirty-one (31) days notice or less.
(r) Approving any contract or agreement that delegates certain or
all of the duties of the Managing Partner to any person.
3.4 ACTION REQUIRING SUPER MAJORITY APPROVAL. The approval of two or more
members of the Management Committee that are not Affiliates representing ninety
percent (90%) or more of the Ownership Interests which are not excluded or
suspended from voting under a specific provision of this Agreement ("SUPER
MAJORITY APPROVAL") shall be necessary before any of the following actions can
be taken on behalf of the Partnership:
(a) Approving any interim and permanent financing agreements that
are recourse to the Partners and/or the Partnership and any amendments or
restructuring thereof, and mortgaging or pledging any of the material
assets of the Partnership in connection therewith.
(b) Admitting new partner(s), other than as a result of a
Disposition.
(c) A merger or consolidation of the Partnership with another
entity.
<PAGE>
(d) A sale of all of the assets of the Partnership or a sale of a
portion of the assets of the Partnership representing substantially all
the market value of the assets of the Partnership.
3.5 INDEMNIFICATION OF MANAGEMENT COMMITTEE MEMBERS. THE PARTNERSHIP SHALL
DEFEND, INDEMNIFY, HOLD HARMLESS, RELEASE AND DISCHARGE THE MEMBERS OF THE
MANAGEMENT COMMITTEE, INCLUDING THE ALTERNATES, AND MEMBERS OF ANY COMMITTEE
ESTABLISHED BY THE MANAGEMENT COMMITTEE, AGAINST ALL ACTIONS, CLAIMS, DEMANDS,
COSTS AND LIABILITIES ARISING OUT OF THE ACTS (OR FAILURE TO ACT) OF ANY SUCH
PERSONS IN GOOD FAITH WITHIN THE SCOPE OF THEIR AUTHORITY IN THE COURSE OF THE
PARTNERSHIP'S BUSINESS (INCLUDING THE NEGLIGENCE OF SUCH MEMBERS AND
ALTERNATES), AND SUCH PERSONS SHALL NOT BE LIABLE FOR ANY OBLIGATIONS,
LIABILITIES OR COMMITMENTS INCURRED BY OR ON BEHALF OF THE PARTNERSHIP AS A
RESULT OF ANY SUCH ACTS OR FAILURE TO ACT FOR WHICH THEY ARE INDEMNIFIED.
3.6 MANAGING PARTNER. The day-to-day management of the Partnership and
Partnership Operations shall be administered by a managing partner, which shall
be a Partner (the "MANAGING PARTNER"). The Managing Partner may delegate its
duties or any part thereof, as Managing Partner, to one or more persons,
pursuant to agreements approved by the requisite vote of the Management
Committee; provided, however, notwithstanding such delegation the Managing
Partner shall be liable jointly and severally with such persons for the
performance of its obligations hereunder. PMBPC is designated as the initial
Managing Partner.
3.7 REMOVAL OR RESIGNATION OF THE MANAGING PARTNER. The Managing Partner
may be discharged of its powers, duties and responsibilities as the Managing
Partner and terminated as follows:
(a) The Management Committee (without the participation of the
member representing the Managing Partner or its Affiliates) may remove the
Managing Partner if the Managing Partner has (1) performed or failed to
perform its duties under this Agreement in a manner that is grossly
negligent or in a manner that constitutes willful misconduct, as follows:
(i) If the Managing Partner agrees to its removal under this
SECTION 0, then such removal shall be accomplished by written notice
from the Management Committee (without the participation of the
member representing the Managing Partner or its Affiliates) to the
Managing Partner which shall state the name of the successor
Managing Partner and the date on which the successor Managing
Partner will assume the
<PAGE>
responsibilities of the Managing Partner under this Agreement. The
removal shall become effective on the date that the successor
Managing Partner assumes the duties of the Managing Partner.
(ii) If the Managing Partner does not agree to removal under
this SECTION 0, then the Managing Partner's removal under this
Section shall be accomplished by written notice from the Management
Committee (without the participation of the member representing the
removed Managing Partner or its Affiliates) to the Managing Partner,
after a determination, pursuant to SECTION 0 of this Agreement or
otherwise as the Partners may agree, that the Managing Partner has
acted with gross negligence or in a manner that constitutes willful
misconduct. Such notice shall state the name of the successor
Managing Partner and the date on which the successor Managing
Partner will assume the responsibilities of the Managing Partner
under this Agreement. The removal shall become effective on the date
that the successor Managing Partner assumes the duties of the
Managing Partner.
(b) The Managing Partner shall be deemed to have resigned if (1) the
Ownership Interest of the Managing Partner and its Affiliates is reduced
to less than fifteen percent (15%) (in a single transaction or in a series
of transactions), during the time period it is acting as Managing Partner;
(2) a reduction of the Managing Partner's Ownership Interest pursuant to
SECTION 0 occurs, (3) a Change of Control occurs with respect to the
Managing Partner, (4) any of the events described in SECTIONS 0, 0, 0 OR 0
occur with respect to the Managing Partner or (5) the Managing Partner
withdraws from the Partnership. A "CHANGE OF CONTROL" shall mean a change
of more than fifty percent (50%) (in a single transaction or series of
transactions) in (1) the direct ownership of such entity (other than a
transfer to a Wholly Owned Affiliate) or (2) the ownership of an entity
that directly or indirectly owns such entity as its principal asset (other
than a transfer to a Wholly Owned Affiliate). Promptly after the
occurrence of any of such events, the Management Committee (without the
participation of the member representing the removed Managing Partner or
its Affiliates) shall provide to the Managing Partner a written notice
which shall state the name of the successor Managing Partner and the date
on which the successor Managing Partner will assume the responsibilities
of the Managing Partner under this Agreement. Such resignation shall
become effective on the date that the successor Managing Partner assumes
the duties of the Managing Partner.
(c) The Managing Partner, substantially contemporaneously with the
<PAGE>
submission to the Management Committee of any Operating Budget, may resign
its duties as the Managing Partner by written notice to the Management
Committee. The resignation shall not become effective until the successor
Managing Partner assumes the duties and obligations of the Managing
Partner, which the Partners shall cause to occur not later than one
hundred twenty (120) days after the submission by the Managing Partner of
its resignation.
(d) In the event the Managing Partner is removed or resigns pursuant
to this SECTION 0, the Managing Partner shall submit to the Management
Committee a final accounting of its operations under this Agreement. At
the request of the Management Committee, the departing Managing Partner
shall take an inventory of all materials relating to the Processing
Facility. The departing Managing Partner shall deliver to the successor
Managing Partner all records, reports and data that are in its possession
as the Managing Partner. Upon the delivery of such records, reports and
data, the departing Managing Partner shall be released and discharged
from, and the successor Managing Partner shall assume, all duties and
obligations of the Managing Partner under this Agreement; provided that
any liability of the departing Managing Partner that accrued prior to the
effective date of the change of the Managing Partner shall,
notwithstanding the release or discharge of the departing Managing
Partner, continue to remain a liability of the departing Managing Partner.
The former Managing Partner may retain copies of all such records, reports
and data as the former Managing Partner may require, which copies will be
prepared at the expense of the former Managing Partner.
(e) If the Managing Partner is removed or resigns pursuant to this
SECTION 0, the Management Committee shall select a successor Managing
Partner by Majority Approval. The vote of the member of the Management
Committee representing the Partner that was removed as the Managing
Partner shall be excluded if such member does not vote or such member only
votes for such removed Managing Partner to succeed itself.
3.8 DUTIES OF THE MANAGING PARTNER. All of the Managing Partner's duties
shall be performed pursuant to an approved budget as provided in ARTICLE 0. The
Managing Partner will actively manage and conduct the day-to-day business of the
Partnership, devoting appropriate time and talents to such management so as to
conduct the business of the Partnership in a good and businesslike manner and in
accordance with good and prudent practice within the industry. In connection
therewith, the Managing Partner shall provide supervisory, administrative and
technical services to the Partnership and shall perform such services with the
same degree of diligence and care that it would exercise if the Partnership were
owned solely by the Managing
<PAGE>
Partner. Absent express contrary direction from the Management Committee in the
case of SECTIONS 0, 0, 0, 0 AND 0, or unless otherwise specified in this
Agreement, the Managing Partner shall have the responsibility and authority,
without the prior or subsequent approval of the Management Committee, to take or
cause to be taken the following actions for and on behalf of the Partnership:
(a) Perform the day-to-day operations of the Partnership, including
overseeing the operation and maintenance of the Processing Facility and
overseeing all construction activities.
(b) Negotiate and execute gas processing, gas purchase Liquid
fractionation, and Liquid sales agreements under terms of service and
rates as substantially approved by the Management Committee under SECTION
0 AND 0 under which the Partnership will process gas, purchase gas,
fractionate Liquids or sell Liquids.
(c) Obtain all permits, certificates and licenses necessary for the
operation and maintenance of the Processing Facility, and perform the
administrative functions of the Partnership, including, without
limitation, providing legal, accounting (in accordance with ARTICLE 0),
engineering, planning, budgeting, reporting and other technical services,
and maintain the records of the Partnership.
(d) Perform or cause to be performed all necessary meter reading and
chart calculations.
(e) Protect and preserve the title and interests of the Partnership
with respect to a Processing Facility and other assets owned by the
Partnership.
(f) Enter into Processing Facility design and construction contracts
and purchase materials, equipment, rights-of-way and easements in
connection with any Project Plans approved by the Management Committee.
(g) Negotiate, enter into and supervise the performance of contracts
other than those contemplated in SECTIONS 3.8(B) AND (F) and amendments
thereto with third parties as may be necessary, appropriate or advisable
in furtherance of the purposes of the Partnership business.
(h) Prepare and timely make such filings with any governmental
authority as may be required to construct and operate a Processing
Facility.
<PAGE>
(i) Maintain the assets of the Partnership in good order and repair.
(j) Prepare and furnish to governmental regulatory bodies all
reports, statements and information that they may reasonably request or to
which they are legally entitled concerning a Processing Facility or the
Partnership.
(k) Execute documents requiring execution by the Partnership (both
those requiring approval of the Management Committee and those not
requiring approval).
(l) Initiate, defend, negotiate and otherwise handle claims against
the Partnership or a Partner, the Managing Partner, or other person or
entity to be indemnified by the Partnership or claims of the Partnership
against third parties, where such claims (including attorneys' fees to be
incurred by the Partnership) are less than $25,000 in value (including
approving employment of all attorneys representing the Partnership in such
matters).
(m) Collect revenues for the Partnership (in accordance with budgets
approved by the Management Committee) and make cash calls on and
distributions to the Partners.
(n) In the event of, or reasonable anticipation of, any occurrence
or condition which might (1) threaten life, property or the environment,
(2) render a Processing Facility incapable of normal operation, (3)
jeopardize the investment of the Partnership in a Processing Facility or
(4) if required in order to comply with law or an order of a governmental
authority with jurisdiction over a Processing Facility, the Managing
Partner shall take such steps and incur such expenses and costs as in its
reasonable opinion are required to deal with such emergency or requirement
without being subject to the monetary spending limits imposed on the
Managing Partner herein. The Managing Partner shall report such an
emergency or requirement to the Management Committee as promptly as
possible.
(o) Not later than July 15th following the end of each of the
Partnership's fiscal years, furnish information necessary to prepare and
file all Partnership tax returns.
(p) Prepare Construction Budgets and Operating Budgets pursuant to
SECTIONS 0 AND 0.
(q) Provide and maintain adequate insurance coverage for the account
<PAGE>
of the Partnership with a reliable insurance company(s) authorized to do
business in the area of the Processing Facility in accordance with the
requirements of ARTICLE 0, if reasonably available, and to charge the
Partnership for the actual cost of such insurance.
(r) Maintain the bank accounts of the Partnership, make
distributions thereunder, and pay invoices for expenses accrued by the
Partnership.
(s) Perform the functions described in the Accounting Procedures.
(t) Perform such other acts reasonably necessary, appropriate or
advisable to carry out the Managing Partner's duties under this Agreement
to the extent that such acts are not matters to be voted on by the
Management Committee as described in SECTIONS 0 OR 0 or other provisions
hereof.
3.9 AUTHORIZATION. Subject to the express restrictions and limitations set
forth in this Agreement, the Partnership authorizes the Managing Partner to
perform any and every act and duty and to exercise any and every power of the
Managing Partner as authorized by this Agreement, as follows:
(a) To act in the name of and on behalf of the Partnership.
(b) In the Partnership's name and on its behalf, to make, execute,
acknowledge and deliver all contracts, assignments, and other agreements,
instruments or documents as are contemplated in this Agreement.
(c) Generally, to take and perform any and all actions necessary,
appropriate or convenient to fulfill the obligations and duties of the
Managing Partner as authorized by this Agreement.
3.10 INDEMNIFICATION OF THE MANAGING PARTNER. THE PARTNERSHIP SHALL
DEFEND, INDEMNIFY, HOLD HARMLESS, RELEASE AND DISCHARGE THE MANAGING PARTNER AND
ITS AFFILIATES TO WHICH CERTAIN DUTIES UNDER THIS AGREEMENT HAVE BEEN DELEGATED
AND THEIR OFFICERS, DIRECTORS, AGENTS AND EMPLOYEES HARMLESS, WHEN ACTING AS OR
FOR THE MANAGING PARTNER, AGAINST ANY AND ALL CLAIMS, LOSSES, LIABILITIES,
DAMAGES AND CAUSES OF ACTION, WHETHER BASED ON TORT, BREACH OF CONTRACT OR ANY
OTHER LEGAL THEORY (TO THE EXTENT THAT SUCH CLAIMS, LOSSES, LIABILITIES, DAMAGES
AND CAUSES OF ACTION ARE NOT PAID BY INSURANCE CARRIED PURSUANT TO THIS
AGREEMENT), ON ACCOUNT OF TAXES, LIENS, DEBTS, PERSONAL INJURIES, DEATH OR
DAMAGE TO
<PAGE>
PROPERTY AND ALL OTHER CLAIMS OR DEMANDS OF EVERY CHARACTER ARISING OUT OF, IN
CONNECTION WITH, OR AS AN INCIDENT TO, ANY ACT OR OMISSION IN CONNECTION WITH
THE MANAGING PARTNER'S OR SUCH AFFILIATES' PERFORMANCE OF ITS DUTIES AND
RESPONSIBILITIES UNDER THIS AGREEMENT AS OR FOR THE MANAGING PARTNER, INCLUDING
NEGLIGENCE (BUT NOT GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, EXCEPT WHEN SUCH
CLAIMS, LOSSES, LIABILITIES, DAMAGES AND CAUSES OF ACTION ARISE AS A RESULT OF
THE MANAGING PARTNER'S OR SUCH AFFILIATES' PERFORMANCE OR OMISSION IN ACCORDANCE
WITH THE INSTRUCTIONS OF THE MANAGEMENT COMMITTEE GIVEN SPECIFICALLY WITH
RESPECT TO THE PRECISE MANNER IN WHICH THE MANAGING PARTNER OR SUCH AFFILIATES
IS TO PERFORM THE SPECIFIED TASK) OF THE MANAGING PARTNER, SUCH AFFILIATES, OR
THEIR OFFICERS, DIRECTORS, AGENTS OR EMPLOYEES.
3.11 THE MANAGING PARTNER'S LIABILITY. THE MANAGING PARTNER, ITS
AFFILIATES AND THEIR OFFICERS, DIRECTORS, AGENTS AND EMPLOYEES SHALL NOT BE
LIABLE TO THE PARTNERSHIP OR ANY PARTNER FOR ANY LOSS OR DAMAGE SUFFERED BY THE
PARTNERSHIP OR A PARTNER RESULTING FROM THE PERFORMANCE OF THE MANAGING
PARTNER'S DUTIES AND RESPONSIBILITIES UNDER THIS AGREEMENT, EXCEPT WHEN AND TO
THE EXTENT THAT SUCH LOSS OR DAMAGE RESULTS FROM THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF THE MANAGING PARTNER OR ITS AFFILIATES OR THEIR RESPECTIVE
OFFICERS, DIRECTORS, AGENTS OR EMPLOYEES; PROVIDED THAT, WHERE SUCH LOSS OR
DAMAGE ARISES AS A RESULT OF THE MANAGING PARTNER'S PERFORMANCE OR OMISSION IN
ACCORDANCE WITH THE INSTRUCTIONS OF THE MANAGEMENT COMMITTEE GIVEN SPECIFICALLY
WITH RESPECT TO THE PRECISE MANNER IN WHICH THE MANAGING PARTNER IS TO PERFORM
THE SPECIFIED TASK, IT SHALL BE DEEMED THAT SUCH LOSS OR DAMAGE WAS NOT THE
RESULT OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE MANAGING PARTNER OR ITS
AFFILIATES OR THEIR RESPECTIVE OFFICERS, DIRECTORS, AGENTS OR EMPLOYEES.
3.12 EXCLUSION OF SUSPENSION OF VOTE. If a Partner is excluded or
suspended from voting under this Agreement, the percentage of Ownership
Interests required for the applicable approval shall exclude the Ownership
Interest of such Partner.
<PAGE>
ARTICLE 4.
CONSTRUCTION/ACQUISITIONS
4.1 FACILITIES TO BE CONSTRUCTED OR ACQUIRED. From time to time hereafter,
the Partnership may agree to construct a proposed Processing Facility or acquire
an existing Processing Facility, as may be approved by the Management Committee
pursuant to SECTION 0.
4.2 ENGINEERING PLAN AND PROJECT PLANS.
(a) Prior to submission for the approval required by SECTION 0, the
Managing Partner shall complete an engineering study for feasibility of
the Processing Facility to be constructed or acquired. In connection with
the initial Processing Facility under consideration by the Partners, until
approval of a Construction Budget for the initial Processing Facility, the
Managing Partner shall be authorized to incur costs on behalf of the
Partnership as set forth in that certain Funding Agreement dated August 6,
1996 (the "FUNDING AGREEMENT"), and such costs are hereby approved by the
Management Committee.
(b) The Managing Partner shall prepare for approval by the
Management Committee, a written description of the location of the
proposed Processing Facility to be constructed or acquired, and (i) for a
construction project: the specifications for the design, engineering,
materials and equipment to be used in the construction of such Processing
Facility to be constructed by the Partnership, as well as the estimated
costs, estimated economic projections, estimated construction schedule and
date of completion of such Processing Facility, or (ii) for an acquisition
project the proposed purchase price, projected acquisition costs,
financial projections, closing schedule and material terms of the
acquisition. Upon request, the Managing Partner shall furnish to the
Management Committee all documents relating to such acquisition available
to the Managing Partner ("PROJECT PLAN").
(c) From time to time, the Managing Partner shall prepare and submit
within agreed reasonable time periods, Project Plans for projects as
requested by the Management Committee.
4.3 CONSTRUCTION/ACQUISITION BUDGETS AND APPROVALS. With respect to the
construction or acquisition of a Processing Facility, the following procedures
shall apply:
(a) If any Project Plans are approved by the Management Committee,
the Managing Partner shall submit to the Management Committee for its
approval
<PAGE>
of a budget ("CONSTRUCTION BUDGET" or, in the case of an acquisition,
"ACQUISITION BUDGET") stating the estimated costs that the Managing
Partner expects to incur in connection with the acquisition or
construction of the proposed Processing Facility. A Construction Budget
shall be submitted at least sixty (60) days prior to commencement of
construction of the approved Processing Facility. An Acquisition Budget
shall be submitted sixty (60) days prior to the date an offer for such
acquisition is to be made (or such shorter period of time available to the
Partnership, if an offer is required in less than sixty (60) days).
(b) A Construction Budget shall set forth the estimated costs and
expenditures by quarterly periods, shall itemize the costs estimated in
the budgets by such individual line items, and shall include such
supporting documentation and data as reasonably requested by the
Management Committee. An Acquisition Budget shall set forth the
acquisition costs and related transaction costs, and shall include such
supporting documentation and data as reasonably requested by the
Management Committee.
(c) Unless otherwise authorized by the Management Committee,
construction costs or acquisition costs shall not be incurred for the
construction or acquisition of any Processing Facility until a
Construction Budget or Acquisition Budget, as applicable, has been
approved by the Management Committee.
(d) During the progress of any construction or acquisition, the
Managing Partner shall notify the Management Committee promptly of
unsatisfactory progress or of any occurrence that may cause a
substantially higher cost than was estimated and approved in the
applicable budget. If it appears that any aggregate of items not
contemplated by the applicable budget have estimated costs in excess of
five percent (5%) of the approved budget, then any such excess budgeted
cost or unbudgeted cost shall not be incurred without the prior approval
of the Management Committee. This approval may be oral in order to
expedite action, but shall be followed immediately by written approval.
4.4 COSTS AND PAYMENT. The Managing Partner shall keep a full and accurate
account of all costs and expenses incurred in connection with the planning,
design, construction, testing and placing in service or acquisition of
Partnership facilities in accordance with the Accounting Procedures. The
Partnership shall provide funds for all such costs and expenses in accordance
with this Agreement.
4.5 CONSTRUCTION. The Managing Partner shall direct all activities
necessary to design, construct, test and place in service any facilities
authorized by the Management Committee, all
<PAGE>
of which shall meet any applicable minimum federal safety standards. All
equipment and materials and third-party contractors, as required, shall be
obtained based on competitive bids. Unless otherwise specifically authorized in
writing by the Management Committee, the Managing Partner shall require (a) a
performance bond payable to the Partnership from the contractor who actually
constructs Partnership facilities and (b) a payment bond, each in an amount
equal to the contractor's bid for performance of the construction.
4.6 PERMITS AND PROPERTY. The Managing Partner shall acquire, or cause to
be acquired, in the name of the Partnership, or for or on its behalf, all
permits, certificates, rights-of-way, leases and fee properties, and state,
county and/or federal approvals and authorizations as may be necessary for the
Partnership to construct, own and operate any approved facilities constructed by
the Partnership. Any permits, certificates, rights of-way, leases, fee
properties, approvals and authorizations acquired by the Managing Partner in its
own name pursuant to this section shall be immediately assigned to the
Partnership.
4.7 INSPECTION AND TESTING. During construction of any Partnership
facilities each Partner shall have the right of access to the construction
site(s) and the right to inspect all phases of the construction work and all
records pertaining thereto at all such times and locations as do not interfere
with such construction. The Managing Partner shall advise each Partner in
writing when installation of all or any portion of the Partnership facilities
has been completed and the date, time and place of any testing of such
Partnership facilities or any portion thereof. Each Partner shall have the
option to be present and witness any and all such testing. Upon completion of
the installation and testing of the Partnership facilities, the Managing Partner
shall provide the Partners with "as built" drawings and data relating to
engineering calculations, specifications, materials and equipment installation
and testing of the Partnership facilities, and an itemized inventory and
documentation of the Partnership facilities.
<PAGE>
4.8 PARTICIPATION IN PROJECTS IN AMI.
(a) None of the Partners, whether directly or indirectly, through
any ownership or other interest, whether through Affiliates or otherwise,
shall participate in any AMI Project (hereinafter defined) without
complying with the provisions of this SECTION 4.8. An "AMI PROJECT" shall
mean any project included in the definition of Partnership Operations. In
the event any Partner participates in an AMI Project, whether directly or
indirectly, through any ownership or other interest, whether through
Affiliates or otherwise ("ACQUIRING PARTNER") such Acquiring Partner shall
offer, or cause to be offered, to each of the other Partners (each a
"NON-ACQUIRING PARTNER") the opportunity to participate in such AMI
Project on the same terms and conditions applicable to such Acquiring
Partner on a pro rata basis, in the proportion that the Ownership Interest
of such Partner who desires to participate in the AMI Project bears to the
Ownership Interest of all Partners (including the Acquiring Partner) who
desire to participate in the AMI Project.
(b) An Acquiring Partner who participates in an AMI Project shall
provide, subject to confidentiality or contractual restrictions, to the
Non-Acquiring Partners written notice of such participation, together with
all relevant information pertaining to the AMI Project in the possession
of the Acquiring Partner (or the person through which it is participating
in such AMI Project). If the Acquiring Partner has a right to make
available such information to the Non-Acquiring Partners, each
Non-Acquiring Partner prior to its receipt of such information shall
execute a confidentiality agreement containing the same terms as the
confidentiality agreement to which the Acquiring Partner is bound, unless
such Non-Acquiring Partner elects not to receive such information. If the
Acquiring Partner does not have the right to provide the relevant
information with respect to the AMI Project to the Non-Acquiring Partners
prior to the time the Acquiring Partner completes the transaction pursuant
to which it would participate in the AMI Project, then the obligations of
the Acquiring Partner under SECTION 4.8 to provide the Non-Acquiring
Partners the opportunity to participate in such AMI Project shall be
deferred until such time as the Acquiring Partner closes such transaction,
at which time the Acquiring Partner shall comply with the provisions of
this SECTION 4.8. Each of the Non-Acquiring Partners shall have sixty (60)
days in the case of an acquisition, and one hundred twenty (120) in the
case of construction, to notify the Acquiring Partner in writing of its
election to participate in the AMI Project. Each such notice shall
stipulate whether the Non-Acquiring Partner desires to limit its
participation to its Ownership Interest in the Partnership or would be
willing to acquire on a pro rata basis, in the ratio that its Ownership
Interest
<PAGE>
bears to the Ownership Interests of all Partners who participate in the
AMI Project. If the terms of an acquisition require a lesser period of
time for the submission of an offer, the sixty (60) day response period
shall be reduced to a period ending three (3) days before the submission
deadline as provided by the terms as such acquisition. Failure of a
Non-Acquiring Partner to respond timely shall constitute an election by
such Non-Acquiring Partner not to participate in the AMI Project and
failure to specify in a timely response whether a Non-Acquiring Partner
elects to acquire a pro rata share of the AMI Project shall be an election
to limit participation to such Non-Acquiring Partners' Ownership Interest
in the Partnership.
If all Partners agree to participate in an AMI Project, such AMI
Project shall be pursued by the Partnership unless all of the Partners
elect otherwise. However, if an AMI Project includes persons other than
the Acquiring Partner, then such AMI Project shall be pursued pursuant to
the agreements to which the Acquiring Party is obligated or, in absence of
such agreements, agreements to form a limited liability company in form
and substance substantially similar to this Partnership Agreement unless
all the Partners otherwise agree. If less than all Partners elect to
participate in an AMI Project, such AMI Project shall be pursued pursuant
to such agreements as may be agreed by all of such Partners who
participate in such AMI Project or, in absence of such agreement,
agreements to form a limited liability company, in form and substance
substantially similar to this Partnership Agreement.
ARTICLE 5.
CAPITAL CONTRIBUTIONS/FINANCING
5.1 INITIAL CAPITAL CONTRIBUTIONS. Each Partner shall be deemed to have
contributed to the Partnership the amounts it has funded or subsequently funds
pursuant to the Funding Agreement.
5.2 OTHER CONTRIBUTIONS. In order to meet the cash requirements of the
Partnership in excess of the contributions made pursuant to SECTIONS 0, that
have been approved in a Construction Budget, Acquisition Budget or Operating
Budget, the Managing Partner may make cash calls monthly or at less frequent
intervals on the Partners for required capital contributions by each of the
Partners proportionate to its Ownership Interest. In addition, the Managing
Partner may make cash calls for costs and expenses of the Partnership approved
by the Management Committee that are not contained within an approved
Construction Budget, Acquisition Budget or Operating Budget. Each cash call made
pursuant to this SECTION 0 shall be in writing and shall contain the following
information:
<PAGE>
(a) The total amount of contributions requested from all Partners.
(b) The amount of contribution required from each Partner, including
the amount required from the Partner to whom the request is addressed.
(c) The purpose for which the funds are to be applied in reasonable
detail.
(d) The date on which payments of the contributions shall be made by
each Partner, which shall be not less than ten (10) days and not more than
thirty (30) days, unless otherwise approved by the Management Committee,
after the date on which the cash call is received by each Partner.
5.3 FAILURE TO MAKE CONTRIBUTIONS.
(a) If a Partner shall default in any of its obligations under
SECTION 0 to make contributions to the Partnership in accordance with the
terms of any call for such contributions, the Managing Partner shall
immediately notify each of the Partners (a "DEFAULT NOTICE"). If the
contribution has not been made by the defaulting Partner within two (2)
business days after the receipt of the Default Notice, the Managing
Partner shall again notify each of the Partners. Within five (5) business
days after the receipt of the Default Notice, if the default has not been
cured by the payment of the contribution and interest thereon (calculated
as hereinafter provided) (the "DEFAULT AMOUNT"), each of the
non-defaulting Partners may, in its sole discretion, pay to the Managing
Partner its portion (based on the ratio that each non-defaulting Partner's
Ownership Interest bears to the aggregate Ownership Interests of all
non-defaulting Partners participating in such contribution (the
non-defaulting Partners that so elect are herein referenced to as the
"PARTICIPATING PARTNERS") of the Default Amount.
(b) During the continuance of any payment default by any Partner,
the Partner shall not be entitled to receive any cash distributions and
the Participating Partners will share in all cash distributions that
otherwise would have been made to the defaulting Partner on a
proportionate basis based on the ratio that each Participating Partner's
Ownership Interest bears to the aggregate Ownership Interests of all
Participating Partners. The defaulting Partner shall not be permitted to
be represented on the Management Committee or other committees, and will
have its voting rights suspended, but the defaulting Partner shall
continue to be liable for its obligations as a Partner under this
Agreement. If a defaulting Partner cures its default within the thirty
(30) day period described in SECTION 0, by paying
<PAGE>
to the Partnership the amount of the default and the interest thereon
calculated under SECTION 0 less the amount that was distributed to the
Participating Partners from the amounts that were otherwise distributable
to the defaulting Partner, the amount paid shall be distributed to the
Participating Partners pro rata in accordance with their Ownership
Interests.
(c) Interest shall accrue on unpaid contributions from the date that
the contribution became payable until the contribution is paid at a rate
equal to the lesser of fifteen percent (15%) per annum or the maximum
lawful rate.
(d) In the event that a defaulting Partner fails to pay to the
Partnership any portion of the Default Amount as provided herein on or
prior to the thirtieth (30th) day after the due date for the contribution
or the Participating Partners have not received from the amounts that were
otherwise distributable to the defaulting Partner the Default Amount plus
interest thereon as provided herein prior to the thirtieth (30th) day
after the due date for the contribution, the Participating Partners may
elect to (x) continue receiving the benefits of SECTIONS 0 and 0 or (y)
require the Partnership to reduce the Ownership Interest of the defaulting
Partner, effective on the thirty-first (31st) day after the due date for
the contribution (the "ADJUSTMENT DATE"), to a percentage determined by
multiplying the Ownership Interest of the defaulting Partner (as
determined on the Adjustment Date) by a number equal to one minus a
fraction, the numerator of which is one hundred fifty percent (150%) of
the Default Amount less the amounts that have been distributed to the
Participating Partners prior to the adjustment Date that were otherwise
distributable to the defaulting Partner, and the denominator of which is
the product of (1) the Ownership Interest of the defaulting Partner (as
determined on the Adjustment Date) multiplied by (2) the aggregate amount
of the Capital Accounts of all Partners on the Adjustment Date. The
adjustment shall apply separately for each default on a cash call. The
Ownership Interests of the Participating Partners shall be adjusted upward
by the proportion of the amount of the downward adjustment made to the
Ownership Interest of the defaulting Partner.
(e) If the Participating Partners have elected the remedy provided
in SECTION 0(Y), the default to which such election is related will be
deemed to have been cured and the defaulting Partner will no longer be
deemed a non-defaulting Partner for this SECTION 0, except for purposes of
SECTION 0.
(f) If at anytime or over a course of time, the Ownership Interest
of a Partner is reduced by seventy-five percent (75%) or more as a result
of the provisions of this SECTION 0, the defaulting Partner shall not be
permitted to be
<PAGE>
represented on the Management Committee or other committees and will have
its voting rights suspended, but the defaulting Partner shall continue to
be liable for its obligations as a Partner under this Agreement and shall
continue to have all other rights hereunder.
(g) Notwithstanding the foregoing, the remedies provided in SECTION
0 are cumulative and are not exclusive, and in the event of a default by a
Partner, the Partnership and the Partners shall be entitled to all
available legal or equitable remedies.
ARTICLE 6.
OPERATING COSTS AND COMPENSATION OF
THE MANAGING PARTNER AND OTHER PARTNERS
6.1 BUDGETS, APPROVALS AND AUTHORIZATIONS.
(a) Beginning within the 1997 Calendar year, each year, the
Management Committee shall approve a budget estimating costs and expenses
which will be incurred in connection with the operation and maintenance of
each Processing Facility ("OPERATING BUDGET"). On or before February 1,
1997, the Managing Partner shall prepare and submit for approval of the
Management Committee an Operating Budget for the balance of the 1997
fiscal year of the Partnership. On or before October 1 of each year
beginning with the 1997 Calendar Year, the Managing Partner shall prepare
and submit for approval of the Management Committee an Operating Budget
estimating the revenues, costs and expenses which will be received or
incurred in connection with Partnership Operations during the next
succeeding fiscal year. The Operating Budgets shall set forth the
estimated costs and expenditures by quarterly periods and shall itemize
the costs estimated in the budgets by such individual line items as
reasonably requested by the Management Committee. All Operating Budgets
shall be updated by the Managing Partner, and the Managing Partner shall
furnish a copy of the updated Operating Budget to each Partner, on or
before the tenth (10th) day of the first (1st) month of each Calendar
Quarter.
(b) The Management Committee shall notify the Managing Partner of
its approval or disapproval of the Operating Budget within fifteen (15)
days after receipt of such budget. If the Management Committee notifies or
is deemed to have notified the Managing Partner of its disapproval of all
or any portion of an Operating Budget, then, until the Management
Committee has approved a revised budget, the Managing Partner is
authorized to incur (1) costs set forth in any line
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item approved by the Management Committee and (2) any additional costs in
connection with line items that were not approved by the Management
Committee up to an aggregate amount of not more than the lesser of (x)
fifty percent (50%) of the budget that was submitted by the Managing
Partner but not approved by the Management Committee, less the amounts set
forth in (1) above, and (y) the amount of the prior year's budget for such
line item. If the Management Committee fails to notify the Managing
Partner in writing of its approval or disapproval of any budget within
fifteen (15) days after receipt of such budget or revised budget, then the
Management Committee shall be deemed to have rejected such budget.
(c) If, during the period covered by an approved Operating Budget,
the Managing Partner determines that an adjustment to the estimated costs
set forth in the approved budget is necessary or appropriate, then the
Managing Partner shall submit to the Management Committee for approval an
adjusted budget setting forth such adjusted or additional line items as
are necessary or required. The same procedures set forth in SECTIONS 0 AND
0 with regard to the approval of annual Operating Budgets shall apply to
the approval of any adjusted costs budget, except that the Managing
Partner may provide for a period less than fifteen (15) days, but not less
than five (5) days, in which the Management Committee shall approve or
disapprove an adjusted budget, and the Management Committee's approval of
an adjusted budget may be oral in order to expedite action, but such
approval shall be followed immediately with written approval.
(d) The Managing Partner is authorized to incur costs in excess of
the amount budgeted in an approved budget or adjusted budget, and the
Managing Partner is authorized to incur costs in connection with an
unbudgeted item; provided that the Managing Partner may not incur such
excess or unbudgeted costs in a total amount greater than fifteen (15)
percent of the total amount set forth in the approved budget or adjusted
budget, without the approval of the Management Committee. In addition, if
any line item variance from the budgeted amount exceeds an amount equal to
the greater of fifteen percent (15%) of the budgeted cost for that item or
$50,000, or if the cost of an unbudgeted item exceeds the lesser of
fifteen percent (15%) of the total applicable budget or $50,000, then the
Managing Partner shall advise the Management Committee in the next
quarterly budget of any such variance from the approved budget, and the
Managing Partner also shall provide the Management Committee with an
explanation of the reason for such variance.
6.2 BUSINESS PLAN. Contemporaneously with the submission by the Managing
Partner
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of the Operating Budget, the Managing Partner shall submit a business plan for
the next fiscal year and subsequent two (2) years that includes anticipated new
processing and fractionation activity for such years, anticipated revenues for
such years, anticipated capital expenditures for such years, anticipated cash
calls during such years, and anticipated cash distributions during such years.
6.3 COSTS AND PAYMENT. The Managing Partner shall keep a full and complete
account of all costs and expenses incurred by it in connection with the
operation and maintenance of each Processing Facility in accordance with the
Accounting Procedures included in the Construction and Operation Agreement
(hereafter defined) (the "ACCOUNTING PROCEDURES"). The Partners shall provide
funds for all costs incurred in connection with the operation and maintenance of
the Processing Facility in accordance with ARTICLE 0 of this Agreement.
6.4 PARTNERS' COOPERATION. Each Partner shall provide such documentation
as is required to perform the accounting set forth in the Accounting Procedures.
6.5 COMPENSATION OF THE MANAGING PARTNER. The Partnership shall compensate
the Managing Partner as provided in the Construction and Operation Agreement to
be executed by the Partnership, the Partners and an Affiliate of PMBPC (the
"CONSTRUCTION AND OPERATION AGREEMENT").
ARTICLE 7.
ALLOCATIONS AND DISTRIBUTIONS
7.1 REVENUE DISTRIBUTION.
(a) The Managing Partner shall deposit, or cause to be deposited,
all monies due to the Partnership and payable by third parties in a bank
account of the Partnership. Except as otherwise specifically provided in
this Agreement or in related agreements associated with the financing of
the Partnership, the Managing Partner shall pay, from those monies
received, all expenses accrued by the Partnership on a current basis. At
least monthly, by the last day of each month (commencing the first month
after the receipt by the Partnership of its first revenues), all cash
funds of the Partnership, other than funds provided by capital
contributions which shall not be distributed, that the Management
Committee reasonably determines are not needed for the payment of current
Partnership obligations or significant Partnership expenditures known by
the Managing Partner to be payable within the next ninety (90) day period
shall be distributed to the Partners in proportion to their respective
Ownership Interests.
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(b) The distributions provided in this Section are subject to the
rights of the Participating Partners under SECTION 0 to receive the
distributions otherwise payable to a defaulting Partner.
(c) Notwithstanding the foregoing or any other provision contained
in this Agreement, (1) the Partnership may retain such insurance proceeds
and other amounts as the Management Committee shall reasonably determine
are necessary to pay Partnership liabilities and expenses and to restore,
preserve and protect Partnership property upon the occurrence of an
accident, catastrophe or similar event or to comply with all applicable
environmental laws, ordinances, rules and regulations, and (2) the
Partnership may retain amounts, as determined by the Management Committee,
for the purpose of creating a reserve from which to pay the remainder of
(i) the Partnership's share of the estimated cost of abandoning any
facilities owned by the Partnership minus (ii) the Partnership's share of
the estimated fair market value of any salvageable materials, supplies,
equipment and other personal property or fixtures located on or used in
connection with the Partnership's facilities in excess of the
Partnership's share of the estimated cost of salvage of such items.
(d) All Partnership distributions shall be charged to each Partner's
Capital Account.
7.2 INCOME TAX ALLOCATIONS. Subject to any special allocations required by
Treasury Regulations Sections 1.704-2(b), 1.704-2(i), and 1.704-2(j)(2)(ii),
relating to deductions and gains attributable to Nonrecourse Deductions and
Partner Nonrecourse Deductions (as those terms are defined in such Regulations),
the Partnership's items of income, gain, loss, deduction, and credit shall be
allocated among the Partners in each taxable year (or portion thereof) in the
same ratio in which Profits or Losses are allocated as provided below:
(a) Profits for any taxable year (or portion thereof) shall be
allocated in the same ratio as the Partners are entitled to distributions
from the Partnership under SECTION 0 hereof.
(b) Losses for any taxable year (or portion thereof) shall be
allocated among the Partners in proportion to their respective Ownership
Interests for such taxable year (or portion thereof).
(c) As used herein, "PROFITS" and "LOSSES" mean, for each taxable
year or other period, an amount equal to the Partnership's taxable income
or loss for such year or period, determined in accordance with Code
Section 703(a) (for this
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purpose, all items of income, gain, loss, or deduction required to be
stated separately pursuant to Code Section 703(a)(1) shall be included in
taxable income or loss), with the following adjustments:
(1) Any income of the Partnership that is exempt from federal
income tax and not otherwise taken into account in computing Profits
and Losses pursuant to this definition of Profits and Losses shall
be added to such income or loss for the purpose of determining
Partner Capital Accounts;
(2) Any expenditures of the Partnership described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B)
expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i),
and not otherwise taken into account in computing Profits and Losses
pursuant to this definition of Profits and Losses, shall be
subtracted from such income or loss for the purpose of determining
Partner Capital Accounts;
(3) In the event the Gross Asset Value of any Partnership
asset is adjusted as required by the terms of the definition of
Gross Asset Value hereof, the amount of such adjusted Gross Asset
Value shall be taken into account in accordance with Regulation
Section 1.704-1(b) for the purpose of determining Partner Capital
Accounts;
(4) Gain or loss resulting from any disposition of Partnership
assets with respect to which gain or loss is recognized for federal
income tax purposes shall be computed by reference to the Gross
Asset Value of the property disposed of in accordance with
Regulation Section 1.704-1(b) for the purpose of determining Partner
Capital Accounts, notwithstanding that the adjusted tax basis of
such property differs from its Gross Asset Value;
(5) In lieu of the depreciation, amortization, and other cost
recovery deductions taken into account in computing such taxable
income or loss, for the purpose of determining Partner Capital
Accounts there shall be taken into account Depreciation for such
Fiscal Year or other period, computed in accordance with the
definition of Depreciation herein; and
(6) Notwithstanding any other provision of this definition of
Profits and Losses, any items which are specially allocated pursuant
to this SECTION 0 shall not be taken into account in computing
Profits or Losses
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but shall be taken into account in computing Partner Capital
Accounts.
(d) As used herein, "GROSS ASSET VALUE" means, with respect to any
asset, the asset's adjusted basis for federal income tax purposes, except
as follows:
(1) The initial Gross Asset Value of any asset contributed by
a Partner to the Partnership shall be the gross fair market value of
such asset, as determined by the contributing Partner and the other
Partners;
(2) The Gross Asset Values of all Partnership assets shall be
adjusted to equal their respective gross fair market values, as
determined by the Partners, as of the following times: (i) the
acquisition of any additional interest in the Partnership by any new
or existing Partner in exchange for more than a DE MINIMIS Capital
Contribution; (ii) the distribution by the Partnership to a Partner
of more than a DE MINIMIS amount of Partnership assets as
consideration for an interest in the Partnership; and (iii) the
liquidation of the Partnership within the meaning of Regulations
Section 1.704-1(b)(2)(ii)(g); PROVIDED, however, that adjustments
pursuant to CLAUSES (I) AND (II) hereof shall be made only with the
consent of all the Partners;
(3) The Gross Asset Value of any Partnership asset distributed
to any Partner shall be the gross fair market value of such asset on
the date of distribution, as determined by the Partnership; and
(4) The Gross Asset Value of Partnership assets shall be
increased (or decreased) to reflect any adjustments to the adjusted
basis of such assets pursuant to Code Section 734(b) or Code Section
743(b), but only to the extent that such adjustments are taken into
account in determining Capital Accounts pursuant to Regulations
Section 1.704-1(b)(2)(iv)(m) and SECTION 0 hereof.
If the Gross Asset Value of an asset has been determined or adjusted pursuant to
the provisions of this SECTION 0, such Gross Asset Value shall thereafter be
adjusted by the Depreciation taken into account with respect to such asset for
purposes of computing Profits and Losses.
(e) As used herein, "DEPRECIATION" means, for each taxable year, or
other period, an amount equal to the depreciation, amortization, or other
cost recovery deduction allowable with respect to any asset for such year
or other
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period, except that if the Gross Asset Value of an asset differs from its
adjusted basis for federal income tax purposes at the beginning of such
year or other period, Depreciation shall be an amount which bears the same
ratio to such beginning Gross Asset Value as the federal income tax
depreciation, amortization, or other cost recovery deduction for such year
or other period bears to such beginning adjusted tax basis; provided,
however, that if the federal income tax depreciation, amortization, or
other cost recovery deduction for such year is zero, Depreciation shall be
determined with reference to such beginning Gross Asset Value using any
reasonable method selected by the Partnership.
7.3 CURATIVE AMENDMENT. Notwithstanding any other provision of this
Agreement, the allocations shall affect an allocation for federal income tax
purposes in a manner consistent with Section 704(b) and the regulations
promulgated thereunder. If for any reason the allocations conflict with the
regulations under Section 704(b), the Partner designated as the Tax Matters
Partner may amend these provisions to the extent necessary to reflect
allocations consistent with the regulations.
7.4 SECTION 704(C). In accordance with Internal Revenue Code ' 704(c) and
the Treasury Regulations thereunder, income, gain, loss and deduction with
respect to any property contributed to the capital of the Partnership, shall,
solely for tax purposes, be allocated between the Partners so as to take account
of any variation between the adjusted basis to the Partnership for federal
income tax purposes and its fair market value. The Partners agree to use the
traditional method with curative allocations under Regulation Section 1.704-3(c)
for this purpose.
7.5 TRANSFERS. The allocation of items of income, gain, loss, deduction
and credit attributable to a partnership interest that is assigned during the
year will be done in accordance with Section 706(d). If more than one method is
permitted, the Tax Matters Partner can determine the method of allocation,
taking into account both the desire to match income and deductions and ease of
administration.
ARTICLE 8.
ACCOUNTING
8.1 FISCAL YEAR. The fiscal year of the Partnership shall be the calendar
year.
8.2 BOOKS OF ACCOUNT. The books of account of the Partnership shall be
kept and maintained, so far as is practicable, at the principal place of
business of the Managing Partner, or, if requested by the Managing Partner, at
such other place or places as may be approved by the Management Committee from
time to time. The books of account shall be maintained in accordance with
generally accepted accounting principles, consistently applied, and shall show
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all items of investment, income and expense. Each of the Partners shall have
reasonable access to the books, records, data and information of the Partnership
(including information maintained by the Managing Partner) at any time during
normal business hours. Monthly statements of income and expense shall be
prepared by the Managing Partner and shall be furnished to the Partners along
with a statement of cash distributions made in accordance with ARTICLE 0. As
soon as practicable, but not later than July 15th following the end of each of
the Partnership's fiscal years, the Managing Partner shall cause to be delivered
to each Partner such federal, state and local income tax returns and such other
tax accounting information and schedules as shall be necessary for the
preparation by each Partner of its income tax returns for such fiscal year. As
soon as practicable, but not later than one hundred twenty (120) days following
the end of each of the Partnership's fiscal years, the Managing Partner shall
cause to be delivered to each Partner a profit and loss statement, a statement
of cash flows for such fiscal year, a balance sheet and a statement of each
Partner's capital account as of the end of such fiscal year together with an
audit report thereon by a nationally recognized firm of independent certified
public accountants selected by the Management Committee.
8.3 CAPITAL ACCOUNTS. A capital account ("CAPITAL ACCOUNT") shall be
established and maintained for each Partner. Each Partner's Capital Account
shall be maintained in the following manner:
(a) To each Partner's Capital Account there shall be credited the
amount of cash and Gross Asset Value of any asset contributed to the
Partnership by such Partner, such Partner's distributive share of Profits,
any items in the nature of income or gain which are specially allocated
pursuant to SECTION 0 hereof, and the amount of any Partnership
liabilities assumed by such Partner or which are secured by any asset of
the Partnership distributed to such Partner.
(b) To each Partner's Capital Account there shall be debited the
amount of cash and the Gross Asset Value of any Partnership asset
distributed to such Partner pursuant to any provision of this Agreement,
such Partner's distributive share of Losses, any items in the nature of
expenses or losses which are specially allocated pursuant to SECTION 0,
and the amount of any liabilities of such Partner assumed by the
Partnership or which are secured by any property contributed by such
Partner to the Partnership.
(c) In the event all or a portion of an interest in the Partnership
is transferred in accordance with the terms of this Agreement, the
transferee shall succeed to the Capital Account of the transferor to the
extent it relates to the transferred interest in the Partnership.
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(d) In determining the amount of any liability for purposes of this
definition of Capital Accounts, there shall be taken into account Code
Section 752(c) and any other applicable provisions of the Code and
Regulations.
The foregoing provisions and the other provisions of this Agreement relating to
the maintenance of Capital Accounts and allocations are intended to comply with
Regulations Sections 1.704-1(b) and 1.704-2, and shall be interpreted and
applied in a manner consistent with such Regulations.
8.4 SURVIVAL OF TAX PROVISIONS. The provisions of this Agreement relating
to tax matters shall survive the termination of this Agreement and the
termination of any Partner's interest in this Partnership and shall remain
binding on the Partner for the period of time necessary to resolve with any
federal, state and local tax authorities any tax matter regarding the
Partnership.
8.5 AUDIT. Each Partner shall have the right at any time during and up to
twenty-four (24) months after the close of any fiscal year, but not more than
once in any twelve (12) month period, to audit, examine and make copies of or
extracts from the books of account or any other records of a Partner, the
Managing Partner, or the Partnership relating to the Partnership pertaining to
that fiscal year. Such right may be exercised during normal business hours
through any agent or employee of a Partner or the Managing Partner designated by
the Partner or the Managing Partner or by an independent certified public
accountant designated by the Partner or the Managing Partner. Such Partner or
the Managing Partner, as applicable, shall bear all expenses incurred in any
such examination or audit.
ARTICLE 9.
TERM AND TERMINATION
9.1 TERM. The Partnership shall continue in existence for a primary term
of thirty (30) years from the Effective Date and thereafter for successive
periods of one year; provided, that any Partner may elect to dissolve the
Partnership and this Agreement as of the end of such thirty (30) year period or
as of December 31 of each year after such 30-year period by giving the other
Partners written notice of such election not less than one year prior to the
date such termination is to take effect.
9.2 VOTE TO DISSOLVE. By Super Majority Approval, the Partners may elect
to dissolve the Partnership and terminate this Agreement at any time during the
term hereof.
9.3 OTHER REASONS FOR DISSOLUTION. The Partnership shall automatically and
without notice be dissolved upon the happening of any of the following events
(unless the applicable event is listed in SECTIONS 9.3 (A), (B), (C), (D) OR (G)
and, on or before ninety (90) days after the
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occurrence of such event, all of the unaffected Partners waive such event in
writing and elect not to dissolve the Partnership).
(a) Proceedings shall be commenced by or against any of the Partners
(or general partner of a Partner) for any relief under any bankruptcy or
insolvency law, or any law relating to the relief of debtors, readjustment
of indebtedness, reorganization, arrangement, composition or extension;
and, if such proceedings have been commenced by a person other than a
Partner against any Partner (or general partner of a Partner), such
proceeding shall not have been dismissed, nullified, stayed or otherwise
rendered ineffective (but then only so long as such stay shall continue in
force or such ineffectiveness shall continue) within ninety (90) days
after such proceedings shall have been commenced.
(b) A decree or order of a court having jurisdiction in the premises
for the appointment of a receiver or liquidator or trustee or assignee in
bankruptcy or insolvency of a Partner (or general partner of a Partner) or
of a substantial part of a Partner's property, or for the winding up or
liquidation of its affairs, shall have been entered, and such decree or
order shall have remained in force undischarged and unstayed for a period
of ninety (90) days, or any substantial part of the property of a Partner
(or general partner of a Partner) shall be sequestered or attached and
shall not be returned to the possession of such Partner (or general
partner of a Partner) or released from such attachment within ninety (90)
days thereafter.
(c) A Partner (or general partner of a Partner) shall make a general
assignment for the benefit of creditors or shall admit in writing its
inability to pay its debts generally as they become due.
(d) The filing of a certificate of dissolution by a Partner (or
general partner of a Partner) under the laws of the State of its
incorporation or partnership, or the entering of a final order dissolving
any Partner by any court of competent jurisdiction.
(e) The sale or abandonment of all or substantially all of the
Partnership's business and assets.
(f) Any event which shall make it unlawful for the business of the
Partnership to be carried on or for the Partners to carry on such business
in partnership.
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(g) A Partner withdraws from the Partnership.
9.4 WINDING UP.
(a) Upon a dissolution of the Partnership, the Partners shall
undertake the sale or abandonment of all of the Partnership's business and
assets, and each Partner shall bear its proportionate share (based on each
Partner's Ownership Interest) of all costs and expenses incurred in
connection with winding up the Partnership business and with abandonment
or sale of the Processing Facility. In the event of dissolution, the
Managing Partner, or if the Managing Partner caused the dissolution, then
whichever Partner chosen by the Management Committee, shall be the
liquidator of the Partnership. The Management Committee shall determine,
among other things, arrangements with creditors, the extent to which
assets should be sold or distributed in kind and the amount of any reserve
for contingent liability. After the Partnership shall be dissolved
pursuant to the provisions of this ARTICLE 0, the Managing Partner shall
continue to exercise the powers vested in it by this Agreement and
continue Partnership Operations in the normal course to the extent
appropriate for the purpose of winding up the business of the Partnership
and liquidating the assets thereof in an orderly manner, but the Managing
Partner shall engage in no new business on behalf of the Partnership
during the period of such winding up.
(b) After the payment of debts or otherwise providing for the
liabilities of the Partnership, the liquidator will distribute any
remaining assets of the Partnership as follows:
(1) Cash or cash equivalents shall be distributed (i) first,
to the Partners in proportion to their respective positive Capital
Account balances, if any, and (ii) second, to each Partner in
proportion to its Ownership Interest.
(2) Interests in the Processing Facility and other tangible
assets shall be sold by the liquidator on such terms as are approved
by the Management Committee, or if the Management Committee elects
not to sell any such assets, or if such sale is not consummated
within a period deemed reasonable by the Management Committee, such
assets shall be distributed to each Partner in proportion to its
Ownership Interest, and each Partner shall execute an operating
agreement governing operation of such assets containing operating
and economic terms substantially similar to these contained in this
Agreement.
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(c) On liquidation of the Partnership or a Partnership interest
within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(g),
each Partner having a deficit balance in its Capital Account (after giving
effect to all contributions, distributions, and allocations for all fiscal
years, including the fiscal year of the liquidation) shall contribute to
the Partnership the amount necessary to restore the deficit balance in
such Capital Account to zero in compliance with Regulation Section
1.704-1(b)(2)(ii)(b)(3). Such contribution shall be made no later than the
end of the taxable year in which the liquidation occurred (or, if later,
within ninety (90) days after the date of liquidation). The contribution
shall not be used to pay nonrecourse liabilities but shall be used to pay
any other Partnership liabilities and then shall be distributed to the
other Partners in accordance with the positive balance in such Partners'
Capital Accounts.
(d) No dissolution of the Partnership shall relieve any Partner from
any obligation accruing or accrued prior to the date of such dissolution
or as a result of such dissolution or deprive any Partner not in default
hereunder of any remedy otherwise available to it.
The term "DISSOLUTION" as used in this Agreement shall mean "an
event requiring a winding up" as such terms are used in the Partnership
Act.
9.5 WITHDRAWAL.
(a) A Partner (herein called a "WITHDRAWING PARTNER") shall have the
right to withdraw from the Partnership at any time by giving written
notice (herein called "WITHDRAWAL NOTICE") to the other Partners and to
the Partnership. In the event of such withdrawal, the Partnership shall
retain all contributions theretofore made by the Withdrawing Partner. In
addition, such Withdrawing Partner, regardless of the time of the delivery
of the Withdrawal Notice shall pay to the Partnership its share of all
cost, expense, obligation and liability that (1) were accrued or otherwise
attributable to the period prior to the time of the giving of the
Withdrawal Notice, (2) were incurred prior to the time of the giving of
the Withdrawal Notice regardless of the periods of time to which such
cost, expense, obligation and liability relates, including any obligations
attributable to the work performed or actions taken or authorized by the
Management Committee or the Managing Partner prior to the time of the
giving of the Withdrawal Notice, and (3) are to be incurred by the
Partnership as a result of actions taken or authorized by the Management
Committee or the Managing Partner prior to the time of the giving of the
Withdrawal Notice (the "WITHDRAWING PARTNER OBLIGATIONS"). The Withdrawing
Partner shall post a deposit in an amount set by the Management
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Committee (without the Withdrawing Partner voting thereon) to cover the
Withdrawing Partner's share of the estimated future demobilization costs
(including environmental clean-up costs) and Partnership liquidation
costs. The deposit will be applied to the Withdrawing Partner's actual
share of such costs when they are ultimately incurred with the Withdrawing
Partner remaining liable for its share of the ultimate costs if they are
greater than the deposit. If the deposit is greater than the Withdrawing
Partner's actual share, the difference will be refunded. Withdrawal shall
(1) be effective as of the date of giving of the Withdrawal Notice (I.E.,
latest date received by all Partners and the Partnership), (2) terminate
the Withdrawing Partner's status as a Partner, (3) forfeit all voting
rights of the Withdrawing Partner in Partnership affairs, (4) terminate
all representation of the Withdrawing Partner on the Management Committee
and other Partnership committees, and (5) result in a pro rata increase of
the remaining Partners' Ownership Interests based on the ratio of their
then present Ownership Interests. The non-Withdrawing Partners shall
indemnify and hold harmless the Withdrawing Partner, against any costs,
expenses, obligations and liabilities of the Partnership that are
attributable to periods after the effective date of the withdrawal other
than Withdrawing Partner Obligations and demobilization costs and
liquidation costs.
(b) If the Management Committee approves a Project Plan or
Construction Budget for the initial Processing Facility (other than a slug
catcher) to be constructed pursuant to this Agreement by requisite
approval, a Partner who does not vote to approve such Project Plan or
Construction Budget shall be deemed to have withdrawn from the Partnership
effective on the date of such vote and the provisions of this SECTION 0
shall be applicable to such Partner; provided, however, notwithstanding
any provision of SECTION 0 of this Agreement to the contrary, such
Withdrawing Partner shall not be entitled to reimbursement of any funds
previously contributed to the Partnership, such Partner shall not be
liable for any demobilization costs and liquidations of the Partnership,
and the Partners who approve such Project Plan or Construction Budget
shall be deemed to have elected to reconstitute the Partnership.
9.6 DEEMED DISTRIBUTION AND RECONTRIBUTION. Notwithstanding any other
provision of this ARTICLE 0, in the event the Partnership is liquidated within
the meaning of Regulation Section 1.704-1(b)(2)(ii)(g) but no actual liquidation
has occurred, the property shall not be liquidated, the Partnership's
liabilities shall not be paid or discharged, and the Partnership's affairs shall
not be wound up. Instead, the Partnership shall be deemed to have distributed
the property in kind to the Partners, who shall be deemed to have assumed and
taken subject to all Partnership liabilities, all in accordance with their
respective Capital Accounts, and if any Partner's Capital Account has a deficit
balance (after giving effect to all contributions, distributions, and
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allocations for all fiscal years, including the fiscal year during which such
liquidation occurs), such Partners shall contribute to the capital of the
Partnership the amount necessary to restore such deficit balance to zero in
compliance with Regulation Section 1.704-1(b)(2)(ii)(b)(3). Immediately
thereafter, the Partners shall be deemed to have recontributed the property in
kind to the Partnership, which shall be deemed to have assumed and taken subject
to all such liabilities.
ARTICLE 10.
OPTION AND PRIOR RIGHT TO PURCHASE.
10.1 DISPOSITIONS.
(a) Each Partner agrees that it shall not sell, transfer, assign or
in any way alienate all or any portion of its Ownership Interest in the
Partnership or any right or interest therein, whether voluntarily or by
operation of law, or by gift, merger, consolidation, a Change of Control
or otherwise, (hereinafter referred to as "DISPOSE" or a "DISPOSITION"),
except for a Disposition which complies with the requirements of this
SECTION 0.
(b) Subject to the express provisions of SECTION 0 below excepting
certain Dispositions, should any Partner decide to Dispose of any portion
of its Ownership Interest in the Partnership directly or indirectly, such
Partner (the "SELLING PARTNER") shall first give written notice to the
other Partners (the "NON-SELLING PARTNERS") of its intent to Dispose of
its interest and of the quantum interest be Disposed. Each of the
Non-Selling Partners shall have the right to make an offer in writing to
purchase the Ownership Interest offered to be Disposed. Each Non-Selling
Partner shall have the right to make an offer for a portion of the
Ownership Interest offered to be Disposed in proportion that its Ownership
Interest bears to the Ownership Interest of all of the Non-Selling
Partners who elect to make such offer. Such offer must be made on or
before fifteen (15) days after the date of receipt of notification of
intent to transfer by the Selling Partner. The Selling Partner may, in its
sole discretion, elect to either accept or reject any such offer by
notifying the Non-Selling Partner of its election writing on or before
fifteen (15) days of its receipt of the written offer. If the Selling
Partner accepts the offer of one or more Non-Selling Partners, the
Non-Selling Partners whose offer have been accepted shall have forty-five
(45) days from receipt of notification of acceptance to complete their
respective purchases. Should the Selling Partner reject an offer of a
Non-Selling Partner or not receive timely an offer from a Non-Selling
Partner, the Selling Partner shall have the right for a period of one
hundred eighty (180) days following the expiration of the fifteen (15) day
period referred to above, to Dispose to a third party that portion of its
<PAGE>
Ownership Interest covered by such offer subject, however, in the case in
which an offer had been made by a Non-selling Partner, to a minimum price
requirement equivalent to the highest rejected offer of the Non-Selling
Partners.
(c) The other provisions of this SECTION 0 shall not apply to (1) a
sale or transfer of all of Partner's Ownership Interest to a Wholly Owned
Affiliate, in which case, the Selling Partner shall be jointly and
severally liable with such Wholly Owned Affiliate for all of its
obligations under this Agreement; (2) a sale or transfer to a publicly
traded entity formed for the purpose of acquiring (directly or indirectly)
the Ownership Interest of the Selling Partner, nor (3) the acquisition of
additional Ownership Interests by OEDCP pursuant to that certain Option
Agreement executed contemporaneously with this Agreement.
(d) In cases where all or a portion of the consideration to be
received in connection with a Disposition is other than cash, (including
property, note, defined cash payment or other non-cash assets), the cash
value of that consideration shall be determined: (1) by mutual agreement
of the Selling and Non-Selling Partners involved in the transaction or (2)
failing such mutual agreement, within three (3) business days following
receipt by either the Non-Selling Partner or Selling Partner of a notice
to the other that it desires such determination to be made by independent
appraisal (to be obtained at the sole cost of the Selling Partner), by a
qualified independent appraiser selected by mutual agreement of the
Selling and Non-Selling Partners, or (3) failing mutual agreement for the
selection of an independent appraiser within three (3) business days after
the receipt of the notice referenced in (2), by independent appraisal
(obtained at the sole cost of the Selling Partner) by a qualified
appraiser selected by the Chief Judge of the United States District Court
for the Southern District of Texas, or in the event such judge
disqualifies himself or herself, the most senior judge of such court who
does not disqualify himself or herself.
(e) Any Disposition other than (1) a Disposition to a Non-Selling
Partner whose offer has been accepted as provided in SECTION 10.1(B), or
(2) those referenced in SECTION 0 shall require Majority Approval,
excluding the vote of the Selling Partner. Such Majority Approval shall
not be unreasonably withheld. A Selling Partner shall request the
Non-Selling Partners in writing to approve such Disposition. Within five
(5) business days after receipt of such notice by each Non-Selling
Partner, such Non-Selling Partner shall notify the Selling Partner in
writing whether or not it approves such Disposition. Failure by a
Non-Selling Partner to timely notify the Selling Partner shall be deemed
approval of the Disposition. If any Partner elects to not approve such
Disposition, it shall specify
<PAGE>
the reasonable grounds upon which it is objecting to such Disposition.
Failure to specify such grounds shall be deemed an election by such
Partner to approve the Disposition.
ARTICLE 11.
TAXES
11.1 TAXES.
(a) The Managing Partner shall cause to be paid all valid applicable
taxes and fees, other than local, state and federal income taxes, levied
upon the Partnership or in connection with its operations, including but
not limited to sales, use, excise and property taxes. To the extent not
paid from Partnership funds, the Managing Partner may make cash calls on
each Partner for its proportionate share of all such payments. The
Managing Partner shall render for ad valorem taxation all property subject
to this Agreement which by law should be rendered for such taxes and pay
all such taxes assessed thereon before they become delinquent. If any tax
assessment is considered unreasonable by the Managing Partner, it may at
its discretion protest such valuation or make payment under protest within
the time and manner prescribed by law, and it may at its discretion
prosecute, or not prosecute, the protest to a final determination. When
any such protested valuation or payment shall have been finally
determined, the Managing Partner shall pay from Partnership funds the
assessment on the Partnership, if any such remains unpaid, together with
costs of protest or prosecution and any interest and penalty accrued.
(b) The Partners intend that the Partnership shall be treated as a
"partnership" for income tax purposes, and the Partners agree to take all
actions, including the amendment of this Agreement and the execution of
such other documents as may be required to qualify for and receive such
tax treatment. The Managing Partner shall be the Tax Matters Partner of
the Partnership as described in '6231(a)(7) of the Internal Revenue Code
of 1986 (the "CODE") ("TAX MATTERS PARTNER"). The Tax Matters Partner
shall prepare and file all federal, state and municipal income tax returns
to be filed on behalf of the Partnership on an accrual basis. The Tax
Matters Partner shall inform all Partners of all matters which may come to
its attention in its capacity as Tax Matters Partner by giving them notice
thereof within fifteen (15) days after becoming so informed. All
Partnership elections for federal, state and municipal tax purposes shall
be determined by the Tax Matters Partner. All Partners shall be entitled
to participate in any IRS proceedings at their expense. The Tax Matters
Partner on behalf of the
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Partnership shall make the election under Section 754 of the Code. The
affairs of the Partners and the Partnership with regard to Federal income
taxes shall be subject to the terms and conditions of EXHIBIT D attached
hereto.
ARTICLE 12.
INSURANCE AND LOSSES
12.1 INSURANCE. Unless otherwise directed by the Management Committee, the
Managing Partner shall obtain and maintain for the protection and benefit of the
Partnership and itself the following minimum insurance coverage:
(a) Worker's Compensation Insurance to cover the Managing Partner's
or its Affiliates' employees performing services for the Partnership in
accordance with the requirements of the laws of the State where such
employees are performing services or other applicable state and Employer's
Liability Insurance with limits of not less than $1,000,000 aggregate for
each accident and $1,000,000 aggregate for each disease. The Managing
Partner or its parent, subsidiary or other affiliated companies shall
diligently proceed to acquire Worker's Compensation Insurance and
Employer's Liability Insurance that permit endorsement of such policies to
include alternate employer/borrowed servant coverage and shall provide
such endorsement to the Partners.
(b) Commercial General Liability Insurance with limits of not less
than $5,000,000 combined single limit for personal injury and property
damage, endorsed to provide contractual liability, completed operations,
explosion, collapse and underground damage hazards.
(c) Automobile Public Liability Insurance with limits of $1,000,000
combined single limit for personal injury and property damage.
(d) Property insurance for equipment with limits of not less than
replacement cost the insured equipment.
Each policy of insurance obtained pursuant to the provisions of SECTIONS
0, 0 AND 0 of this Section shall provide by endorsement or otherwise that the
provisions of the policy are extended to cover the interests of the parties
hereto. Each policy of insurance pursuant to the provisions of SECTIONS 0, 0 AND
0 shall contain an endorsement providing that insurance carriers shall have no
right of subrogation against the Partners, their respective parents,
subsidiaries, and affiliated companies and shall name the Managing Partner and
the Partners and their respective parents, subsidiaries and affiliated companies
as additional insureds. In the event that the Managing
<PAGE>
Partner contracts with a third party for the provision of any service or
services for the Partnership, that third party shall be required to carry
insurance with subrogation waivers equal to or in excess of the requirements
herein and, except for the operator under the Construction and Operation
Agreement whose liability shall be governed by the provisions of the
Construction and Operation Agreement, shall be required unless waived by the
Management Committee to contractually indemnify and hold harmless the
Partnership from tort liability arising from its performance and the negligence
of the Partners, Partnership and their respective parents, subsidiaries and
affiliated companies and on all policies name the Managing Partner and the
Partners and their respective parents, subsidiaries and affiliated companies as
additional insureds. The Managing Partner shall furnish to the Partners a
certificate covering each policy of insurance required to be obtained pursuant
to this Section. The Managing Partner may settle or defend any insured or
uninsured claims on behalf of the Partnership subject to the monetary limits in
ARTICLE 0 or, if applicable, subject to approval of the Management Committee.
12.2 COST OF INSURANCE. The Managing Partner shall submit a statement to
the Partnership of insurance premium costs and expenses associated with the
insurance policies provided hereunder. The Partnership shall promptly reimburse
the Managing Partner for such costs and expenses.
12.3 INDEMNIFICATION OF PARTNERS. Except as provided in SECTION 0, (1) all
liability, loss, damage, claim or expense for which the Partnership is
responsible and not covered by insurance or in excess of insurance actually
carried shall be borne by the Partners proportionately based on their Ownership
Interests, and (2) the Partnership shall indemnify and hold harmless each
Partner against any claim made against any of them by a third party alleging
liability while acting on behalf of the Partnership in accordance with this
agreement or based on the Partner's status as a Partner, together with the costs
reasonably incurred for the defense of such claim, except with respect to such
claims that arise from gross negligence or willful misconduct. The indemnified
party shall be indemnified and reimbursed first from the assets of the
Partnership. In the event that the amount of such indemnity or reimbursement
exceeds the amount available from the assets of the Partnership, each Partner
shall severally contribute its proportionate share of the excess based on its
Ownership Interest.
12.4 LOSS OF OR DAMAGE TO PARTNERSHIP PROPERTY. The Partners shall be
responsible in proportion to their respective Ownership Interests for any
casualty loss of or damage to Partnership property for which the Partnership is
not covered by insurance, unless such loss or damage is caused by the gross
negligence or willful misconduct of a Partner, and in such case, such Partner
shall be liable therefor.
<PAGE>
ARTICLE 13.
INVOLUNTARY DISSOLUTION AND CONTINUANCE
13.1 CONTINUANCE OF RELATIONSHIP. It is understood and agreed by each of
the Partners that the relationship among them shall be a Partnership until such
relationship is either specifically terminated by the written consent of all of
the Partners or by one of the provisions hereof. If, notwithstanding such
understanding and agreement, the Partnership may be deemed terminated or
dissolved by operation of law, each of the Partners hereby covenants and agrees
that:
(a) The business and affairs of the Partnership shall continue
without interruption and be carried out by a new partnership upon the
approval of a majority of the Partners (the "SUCCESSOR PARTNERSHIP").
(b) The Partners of the Successor Partnership shall be the Parties
who were Partners hereunder at the time of such termination or
dissolution, and the Successor Partnership and the Partners thereof shall
be governed by the terms of this Agreement as if the Successor Partnership
were the Partnership.
(c) Each of the Partners shall execute such further agreements
including notes, notations and accommodations as may be necessary to
continue the business of the Partnership and to protect and perfect any
lien or security interest granted by the Partnership.
(d) Notwithstanding the foregoing, if for any reason the business
and affairs of the Partnership cannot be carried out as a Successor
Partnership and any Partner determines to proceed with the business of the
Partnership, then the other Partners at the time of dissolution shall be
entitled to join with such Partner in such other entity or entities as may
be used to own and operate the business of the Partnership, to the same
extent and on a similar basis as provided in this Agreement, taking full
account of the respective capital contributions theretofore made by such
Partners to the Partnership.
<PAGE>
ARTICLE 14.
MISCELLANEOUS
14.1 LAWS AND REGULATIONS. This Agreement and all operations hereunder
shall be subject to all valid and applicable federal and state laws and to the
valid and applicable orders, laws, rules and regulations of any state or federal
authority having jurisdiction, but nothing contained herein shall be construed
as a waiver of any right to question or contest any such order, law, rule or
regulation in any forum having jurisdiction in the premises.
14.2 CONTROLLING LAW. THIS AGREEMENT SHALL BE GOVERNED, INTERPRETED
AND CONSTRUED UNDER THE STATUTORY AND COMMON LAW OF THE STATE OF
DELAWARE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
14.3 FORCE MAJEURE. Performance, other than to make payments due, under
this Agreement by any party shall be excused in the event such performance is
prevented by war, blockades, insurrection, strikes or differences with workers,
riots, disorders, epidemics, landslides, lightning, earthquakes, fires, storms,
floods, washouts, civil disturbances, blowouts, explosions, breakage or accident
to machinery or lines of pipe, acts of God or of the public enemy, acts of
governmental authorities, state and federal regulations, inability or delay in
obtaining rights-of-way, permits, easements or material and, without limitation
by enumeration, any other cause or happening whether of the kind enumerated
herein or otherwise not reasonably within the control of such party; provided,
however, that performance shall be resumed within a reasonable time after such
cause has been removed; and provided further, that no party shall be required
against its will to adjust any labor dispute.
14.4 NOTICES. Unless herein provided to the contrary, any notice called
for in this Agreement shall be in writing and shall be given by personal
delivery, or by mail, overnight courier or facsimile with all postage and
charges prepaid to the Managing Partner or Partner affected by such notice at
the place designated. Notices shall be considered as duly delivered upon actual
receipt by the addressee. Normal operating instructions can be made by
telephone. Unless changed by notice in writing to the Managing Partner and all
Partners, the addresses of the parties are as follows:
MMBPC: MCNIC Mobile Bay Processing Company
c/o Pipeline & Processing Group, Inc.
150 W. Jefferson, Suite 1700
Detroit, Michigan 48226
Attention: Vice President
OEDCP: OEDC Processing, L.P.
<PAGE>
1400 Woodloch Forest Drive, Suite 200
The Woodlands, Texas 77380
Attention: Vice President of OEDC, Inc.
PMBPC: PanEnergy Mobile Bay Processing Company
5718 Westheimer, Suite 2000
Houston, Texas 77057
Attention: Vice President, Offshore
Partnership: Mobile Bay Processing Partners
c/o PanEnergy Mobile Bay Processing Company
370 17th Street, Suite 900
Denver, Colorado 80202
Attention: Senior Vice President, Gulf Coast
Any notice given hereunder shall be provided to all Partners.
14.5 CONFIDENTIALITY. The Partners (including Withdrawing Partners) shall
ensure that any information regarding the business, assets, customers, processes
and methods of the Partnership or the other Partners that it may learn in the
course of negotiations for or performance under this Agreement (a) is treated by
it in strict confidence, (b) is not disclosed in any manner to any Person other
than an Affiliate of a Partner, a lender to or an accountant, attorney or
representative of such Partner or Affiliate who needs to know such information,
or as may be required by law or for tax purposes and (c) is not used by such
Partner or any of its Affiliates for any purpose other than for the exclusive
benefit of the Partnership or to comply with law, tax purposes or legal process.
In addition, such information may be disclosed by a Partner to a person only if
and to the extent that such information (a) is known to such person prior to
learning of it from the Partner, (b) is obtained, whether directly or
indirectly, by such person from a source other than such Partner (or any of its
Affiliates) that (1) did not require such person to hold such secrets or
information in confidence and (2) did not limit or restrict such person's use
thereof, (c) is disclosed for legal, regulatory or tax purposes or (d) becomes
public knowledge otherwise than through the Partner (or any of its Affiliates)
seeking to use or disclose such information. Notwithstanding the foregoing, no
Partner shall disclose any information if such disclosure would cause a breach
of, or violate the terms of, any agreement to which the Partnership is subject.
A disclosure by a Partner to its employee who is also an employee of an
Affiliate of such Partner or who performs services for an Affiliate of such
Partner shall not violate the provisions of this SECTION 14.5, provided the
information so disclosed is not used for any
<PAGE>
purpose other than the exclusive benefit of the Partnership, or to comply with
law, tax purposes or legal process.
14.6 INURING CLAUSE. This Agreement shall inure to the benefit of and be
binding upon the parties and their respective successors and assigns.
14.7 DEFAULT. No waiver of any default shall be construed as a waiver of
any future default, whether of a like or of a different nature.
14.8 PARTITION OF PARTNERSHIP. Each Partner hereby expressly waives any
right to bring any action for an involuntary partition of the Partnership or its
assets.
14.9 TIME OF THE ESSENCE. Time is of the essence in the performance of
this Agreement.
14.10 LIMITATION ON AUTHORITY. Neither the Managing Partner nor any of the
Partners shall have authority to take any action inconsistent with the terms of
this Agreement. Except as authorized by this Agreement, no Partner shall act as
the agent of the Partnership without express written authorization to act as the
agent with respect to the particular matter involved. Such authorization shall
be obtained from the Management Committee or, to the extent authorized by this
Agreement, from the Managing Partner.
14.11 ARBITRATION.
(a) On the request of any Partner, whether made before or after the
institution of any legal proceeding but no later than forty-five (45) days
after service of legal proceedings on the Partner seeking arbitration, any
action, dispute, claim or controversy of any kind now existing or
hereafter arising between any of the parties hereto and pertaining to the
interpretation of or breach of this Agreement (a "DISPUTE") shall be
resolved by binding arbitration in accordance with the terms hereof. Any
Partner may, by summary proceedings, bring an action in court to compel
arbitration of any Dispute.
(b) Any arbitration shall be administered by the American
Arbitration Association (the "AAA") in accordance with the terms of this
SECTION 0, 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.
(c) Any arbitration shall be conducted before one arbitrator. The
<PAGE>
arbitrator shall be an individual who is knowledgeable in the subject
matter of the Dispute selected by agreement between the Partners. If the
Partners cannot agree on an arbitrator within thirty (30) days after the
request for an arbitration, then any Partner 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.
(d) 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 Partners. Each Partner agrees to keep all Disputes and
arbitration proceedings strictly confidential except for disclosure of
information required by applicable law.
(e) All fees of the arbitrator and any engineer, accountant or other
consultant engaged by the arbitrator, shall be paid by the Partners
according to their Ownership Interests unless otherwise awarded by the
arbitrator.
14.12 REPRESENTATION OF PARTNERS. Each Partner represents and warrants to
each other Partner and to the Partnership that:
(a) In cases of a corporation, it is a corporation duly organized,
validly existing and in good standing under the laws of its State of
incorporation or in a case of a partnership, it is a partnership duly
organized and validly existing under the laws of the State of its
organization.
(b) The execution and delivery of this Agreement have been, and the
performance of this Agreement shall be, at the time required to be
performed hereunder, duly and validly authorized by all requisite
corporate or partnership action on its part.
(c) It has full power and authority to carry on its business as
presently conducted, to enter into this Agreement and to perform its
obligations under this Agreement.
<PAGE>
(d) This agreement has been duly executed and delivered on behalf of
it and constitutes the legal, valid and binding obligation of such Partner
enforceable in accordance with its terms except as enforceability may be
limited by applicable bankruptcy, reorganization or moratorium statutes,
or the similar laws affecting the rights of creditors, generally, or
equitable principles.
(e) The execution and delivery of this Agreement by such Partner
does not, and its performance of this Agreement, and ownership of its
Ownership Interest shall not, (1) violate or be in conflict with, or
require the consent of any person or entity under, any provision of such
Partner's governing documents, (2) conflict with, result in a breach of,
or constitute a default (or an event of that with a lapse of time or
notice, or both, would constitute a default) under any agreement or
instrument to which such Partner is a party or is bound or otherwise
subject to or (3) violate any provision of or require any consent,
authorization or approval under any judgment, decree, judicial or
administrative order, award, writ, injunction, statute, rule or regulation
applicable to such Partner.
(f) That such Partner has not and shall not at any time disclose to
the Partnership or the other Partners any information that such Partner is
prohibited or restricted from disclosing.
Each Partner shall be responsible for, shall pay on a current basis, shall
indemnify, save, hold harmless, discharge and release the Partnership and the
other Partners, their respective Affiliates and its and their respective
successors and permitted assigns, and all of their respective stockholders,
directors, officers, employees, agents and representatives (the "INDEMNIFIED
PARTIES") from and against any and all claims, demands, suits, actions,
proceedings, payments, charges, judgments, assessments, liabilities, damages,
penalties, fines or costs and expenses suffered, paid or incurred by the party
seeking indemnification, including any legal or other expenses reasonably
incurred in connection therewith, arising from, based upon, related to or
associated with any breach of a representation and/or warranty made by such
Partner in SECTIONS 2.1 AND 0.
14.13 SEVERABILITY. If and to the extent that any court or governmental
agency of competent jurisdiction holds any part or provision of this Agreement
to be invalid or unenforceable, the Partners shall agree upon an equitable
adjustment of the provisions of this Agreement with a view toward effecting its
purpose. Such holding shall in no way affect the validity or effectiveness of
the other provisions of this Agreement, which shall remain in full force and
effect.
14.14 REMEDIES. Each right and remedy under this Agreement is cumulative
and in
<PAGE>
addition to other rights or remedies under this Agreement or any applicable law.
14.15 EXHIBITS. Each exhibit referred to in this Agreement is incorporated
in this Agreement by reference. All obligations of any Partner under any such
exhibit shall be considered to be obligations under this Agreement.
14.16 SPECIAL AND CONSEQUENTIAL DAMAGES. Neither the Partners, the
Managing Partner, the Partnership, nor the members of the Management Committee
or any subcommittee thereof shall be liable to the other for any exemplary or
punitive damages or for loss of profits or consequential losses arising in
connection with the Partnership Operations or this Agreement.
14.17 AMENDMENTS. This Agreement may only be amended, supplemented or
modified by written agreement duly executed by all Partners.
14.18 COUNTERPARTS. This Agreement, the Funding Agreement, may be executed
in counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
14.19 ENTIRE AGREEMENT. This Agreement and the other documents
contemplated hereunder constitute the full and complete agreement of the parties
hereto with respect to the subject matter hereof.
[SIGNATURES ON NEXT PAGE]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first written above.
MCNIC MOBILE BAY PROCESSING COMPANY
By: /s/ JOSEPH L. ROBERTS
Name: Joseph L. Roberts
Title: Vice President
OEDC PROCESSING, L.P.
By: /s/ R. KEITH ANDERSON
Name: R. Keith Anderson
Title: Vice President
PANENERGY MOBILE BAY PROCESSING COMPANY
By: /s/ B. D. REESE
Name: B. D. Reese
Title: Vice President
<PAGE>
OPTION AGREEMENT
This Option Agreement ("AGREEMENT") is made and entered into as of the 6th
day of November, 1996 by and among Dauphin Island Gathering Company, L.P., a
Texas limited partnership ("DIGC"), OEDC Processing, L.P., a Texas limited
partnership ("OEDCP"), MCNIC Mobile Bay Processing Company, a Michigan
corporation ("MMBPC"), and PanEnergy Mobile Bay Processing Company, a Delaware
corporation ("PMBPC"). All capitalized terms that are defined in the General
Partnership Agreement for Mobile Bay Processing Partners dated as of November 6,
1996 between OEDCP, MMBPC and PMBPC (the "PARTNERSHIP AGREEMENT") and not
otherwise defined herein shall have the meanings ascribed to such terms in the
Partnership Agreement.
1. INTRODUCTION. OEDCP has a 1% general partnership interest in Mobile Bay
Processing Partners (the "PARTNERSHIP"). PMBPC and MMBPC hold the remaining
general partnership interests in equal shares. PMBPC and MMBPC desire to grant
to OEDCP, and OEDCP desires to acquire from MMBPC and PMBPC, an option to
purchase an additional 321/3% interest in the Partnership, subject to reduction
as hereinafter provided (the additional interest in the Partnership, as it may
be reduced pursuant to this Agreement, is referred to herein as the "ADDITIONAL
PARTNERSHIP INTEREST"). The purpose of this Agreement is to set forth the terms
and conditions of the option.
2. GRANT OF OPTION. Each of PMBPC and MMBPC hereby grants to OEDCP an
option (the "Option") to purchase one-half of the Additional Partnership
Interest under the terms and conditions of this Agreement. The Option shall
terminate on (i) the giving of a Withdrawal Notice by OEDCP, (ii) the failure of
OEDCP to exercise the Option in accordance with the terms of this Agreement or
(iii) as provided in Section 8.3.
3. CONSIDERATION.
3.1 In consideration of PMBPC and MMBPC granting to OEDCP the
Option, OEDCP is paying $100,000 to each of PMBPC and MMBPC contemporaneously
with the execution of this Agreement. If the Option is exercised, the $100,000
paid to each of MMBPC and PMBPC shall be applied to the purchase price to be
paid to each of MMBPC and PMBPC by OEDCP for the Additional Partnership
Interest.
3.2 If the Option is not exercised, PMBPC and MMBPC shall each
retain the $100,000 paid to it and OEDCP shall cause its affiliate, DIGC, and
DIGC hereby agrees, as additional consideration for the granting of the Option,
to assign to (i) PanEnergy Dauphin Island Company, an affiliate of PMBPC
("PDI"), a one percent interest in Dauphin Island Gathering Partners ("DIGP"),
to be conveyed out of the interest in DIGP to be received by DIGC on the
occurrence of "PDI Payout" (as such term is defined in the Fourth Amended and
Restated General Partnership Agreement for Dauphin Island Gathering Partners
(the "DIGP PARTNERSHIP AGREEMENT")) and (ii) MCNIC Mobile Bay Gathering Company,
an affiliate of MMBPC ("MMBGC"), a one
1
<PAGE>
percent interest in DIGP, to be conveyed out of the interest in DIGP to be
received by DIGC on the occurrence of "MMBGC Payout" (as such term is defined in
the DIGP Partnership Agreement). OEDCP shall not be required to cause DIGC to
assign to PDI or MMBGC an interest in DIGP as a result of the termination of the
Option on the giving of a Withdrawal Notice by OEDCP.
3.3 Contemporaneously with the execution of this Agreement, DIGC,
PDI and MMBGC, are negotiating for an amendment of the DIGP Partnership
Agreement. The drafts of the amendment to the DIGP Partnership Agreement that
have been circulated to the relevant parties contemplate the admission of
additional partners and a reduction of the interest of DIGC in DIGP both before
and after "payout." If additional partners are admitted to DIGP, whether
pursuant to an amendment to the DIGP Partnership Agreement substantially similar
to the current drafts of such amendment or otherwise, any interest in DIGP that
may be assigned to each of PDI and MMBGC pursuant to Section 3.2 of this
Agreement (i) with respect to PDI, shall be assigned only (A) out of the
increased interest in DIGP that DIGC receives after "payout" with respect to PDI
and (B) after "payout" has occurred with respect to all DIGP partners other than
MMBGC; (ii) with respect to MMBGC, shall be assigned only (X) out of the
increased interest in DIGP that DIGC receives after "payout" with respect to
MMBGC and (Y) after "payout" has occurred with respect to all DIGP partners
other than PDI; and (iii) shall be reduced in the same proportion that the 14%
interest in DIGP that DIGC will receive after "payout" has occurred with respect
to all DIGP partners is reduced.
4. DILUTION OF INTEREST.
4.1 From time to time during the term of this Agreement, additional
Partners may be admitted to the Partnership. For the purposes of this Agreement,
such Partners shall be known as either Individual Assignees or Joint Assignees.
4.2 An "INDIVIDUAL ASSIGNEE" shall be a new Partner in the
Partnership that is either (i) an assignee of an interest from one or more, but
not all, of the Partners in the Partnership at the time such assignment occurs
or (ii) is admitted to the Partnership and each of the Partner's interest in the
Partnership is reduced disproportionately.
4.3 A "JOINT ASSIGNEE" shall be a new Partner in the Partnership
that is either (i) an assignee of a proportionate interest from all of the
Partners in the Partnership at the time such assignment occurs or (ii) admitted
to the Partnership and each of the Partner's interest in the Partnership is
reduced proportionately.
4.4 If an Individual Assignee is admitted to the Partnership then
the Individual Assignee shall be required to assume a proportionate share of the
obligations under this Agreement,
-2-
<PAGE>
and the Additional Partnership Interest shall not be reduced due to any such
sale. If one or more Joint Assignees are admitted to the Partnership, then (i)
such Joint Assignee shall not be required to assume any obligations under this
Agreement, (ii) such Joint Assignee's interest in the Partnership shall not be
subject to the terms of this Agreement and (iii) the Additional Partnership
Interest shall be reduced proportionately by the interest assigned to such Joint
Assignee.
5. INDIVIDUAL ASSIGNEES. OEDCP shall not have any obligations to any
Individual Assignees and PMBPC and MMBPC, as applicable, shall be responsible
for (i) delivering copies of the Exercise Notice and any other notices received
from OEDCP pursuant to this Agreement to any of their respective Individual
Assignees, and (ii) causing the Individual Assignees to deliver the bills of
sale required to be delivered by them to OEDCP.
6. EXERCISE. OEDCP may exercise the Option at any time until the third
anniversary of the Commercial Operations Date for the Processing Facility (the
"OPTION PERIOD"). The "Commercial Operations Date" shall be deemed to be the
first day of the month immediately following the date on which the Management
Committee determines is the date that the initial Processing Facility shall have
been placed in commercial operation. The Option shall expire unless exercised on
or prior to the end of the Option Period. To exercise the Option, PMBPC and
MMBPC must receive from OEDCP, on or before the end of the Option Period, a
written notice of OEDCP's intent to exercise the Option ("EXERCISE NOTICE"). The
Exercise Notice shall be deemed to have been received by PMBPC and MMBPC on the
date that the last of PMBPC and MMBPC shall have actually received the Exercise
Notice.
7. PRICE. The price to be paid by OEDCP for the Additional Partnership
Interest (the "PURCHASE PRICE") shall be calculated by multiplying (a) the
product of (i) Processing Facilities Value and (ii) 322/3% of the aggregate
interest of PMBPC, MMBPC and any Individual Assignees on the date of the
Exercise Notice by (b) the payment factor attributable to the three calendar
month period during which the Exercise Notice is deemed to have been received by
PMBPC and MMBPC, and then subtracting $200,000 from the resultant amount. As
used in this Agreement, "Processing Facilities Value" shall mean (1) with
respect to any Processing Facility completed as of the closing date of the
Option exercise, the depreciated book value as of such date, as determined in
accordance with generally accepted accounting principles (utilizing 25-year
straight line depreciation), of such Processing Facility and (2) with respect to
any Processing Facility not completed as of such date, the allowance for funds
used during construction for such Processing Facility as of the effective date
of the closing of the Option, as determined in accordance with generally
accepted accounting practices.
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<PAGE>
PAYMENT FACTORS
The payment factors set forth below are divided into three calendar month
periods beginning on the Commercial Operations Date.
3 CALENDAR MONTH
YEAR PERIOD PAYMENT FACTOR
---- ---------------- --------------
1 1st 103%
1 2nd 106%
1 3rd 109%
1 4th 112%
2 1st 115%
2 2nd 118%
2 3rd 121%
2 4th 124%
3 1st 127%
3 2nd 130%
3 3rd 133%
3 4th 136%
8. THE CLOSING.
8.1 The closing and transfer of the Additional Partnership Interest
shall occur on the first business day following the fourteenth calendar day
after both MMBPC and PMBPC shall have received the Exercise Notice.
8.2 OEDCP may elect to extend the closing until the first business
day following the twenty-ninth calendar day after MMBPC and PMBPC shall have
received the Exercise Notice by providing written notice to PMBPC and MMBPC on
or before the date that would have been the closing date had OEDCP not elected
to extend the closing. If OEDCP shall have elected to extend the closing and the
extended closing date falls in the three calendar month period following the
three calendar month period during which OEDCP shall have delivered the Exercise
Notice (as shown above), OEDCP shall pay interest on the Purchase Price to
MMBPC, PMBPC and the Individual Assignees at a rate equal to 12% per annum from
the original closing date to the actual closing date.
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<PAGE>
8.3 At the closing, OEDCP shall pay to each of MMBPC, PMBPC and the
Individual Assignees its proportionate share of the Purchase Price, and PMBPC,
MMBPC and the Individual Assignees shall each deliver to OEDCP a bill of sale in
the form of Exhibit A hereto. The Effective Date of the closing and transfer of
the Additional Partnership Interest shall be the first day of the first calendar
month following the closing. If OEDCP fails to close within the time periods
allotted after providing the Exercise Notice, then OEDCP shall be deemed not to
have exercised the Option and the Option shall terminate.
9. CAPITAL ACCOUNTS. The capital account of OEDCP in the Partnership after
the acquisition of the Additional Partnership Interest shall be OEDCP's capital
account in the Partnership prior to the acquisition of the Additional
Partnership Interest plus 322/3% of the capital account of each of PMBPC, MMBPC
and the Individual Assignees prior to the acquisition of the Additional
Partnership Interest.
10. ASSIGNMENT. This Agreement may not be assigned or transferred by OEDCP
without the prior written consent of the other parties hereto; provided,
however, that (i) this Agreement may be assigned to Affiliates of OEDCP to which
OEDCP also assigns its one percent interest in the Partnership without such
prior written approval, and (ii) this limitation shall not limit the ability of
OEDCP to mortgage, pledge or grant a security interest in its interest under
this Agreement.
11. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Texas without giving effect to any
principles of conflicts of laws.
12. EXPENSES AND FEES. Whether or not the transactions contemplated by
this Agreement are consummated, each of the parties hereto shall pay the fees
and expenses of their respective counsel, accountants and other experts incident
to the negotiation and preparation of this Agreement and consummation of the
transactions contemplated hereby.
13. NOTICES. The notice provisions in the Partnership Agreement shall also
apply to this Agreement. Notice to DIGC shall be given in the same manner that
notices are given to OEDCP.
14. INTEGRATION. This Agreement sets forth the entire agreement and
understanding of the parties in respect of the transactions contemplated hereby
and supersedes the applicable portion(s) of all prior agreements, prior
arrangements and prior understandings relating to the subject matter hereof.
This Agreement may not be amended, supplemented or waived unless such amendment,
supplement or waiver is in writing and signed by all the parties hereto or their
assignees.
15. MULTIPLE COUNTERPARTS. This Agreement may be executed in a number of
identical counterparts, each of which for all purposes is to be deemed an
original, and all of which constitute,
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<PAGE>
collectively, one agreement; but in making proof of this Agreement, it shall not
be necessary to produce or account for more than one such counterpart.
16. SEVERAL LIABILITY. The liability of MMBPC and PMBPC under or in
connection with this Agreement shall be several and not joint or collective.
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<PAGE>
EXECUTED as of the date first set forth above.
OEDC PROCESSING, L.P.
By: OEDC, Inc., its general partner
By: /s/ R. KEITH ANDESRON
Name: R. Keith Anderson
Title: Vice President
DAUPHIN ISLAND GATHERING COMPANY, L.P.
By: OEDC, Inc., its general partner
By: /s/ R. KEITH ANDERSON
Name: R. Keith Anderson
Title: Vice President
MCNIC MOBILE BAY PROCESSING COMPANY
By: /s/ JOSEPH L. ROBERTS
Name: Joseph L. Roberts
Title: Vice President
PANENERGY MOBILE BAY PROCESSING
COMPANY
By: /s/ B. D. REESE
Name: B. D. Reese
Title: Vice President
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<PAGE>
EXHIBIT A
BILL OF SALE
This Bill of Sale ("BILL OF SALE") is executed and delivered by _______________
("ASSIGNOR"), to OEDC Processing, L.P., a Texas limited partnership
("ASSIGNEE").
Assignor, for valuable considerations, the receipt and sufficiency of which are
hereby acknowledged, does by these presents GRANT, BARGAIN, SELL, CONVEY,
ASSIGN, TRANSFER, SET OVER and DELIVER unto Assignee, effective as of
_______________1 (the "Effective Date"), the following (collectively, the
"ASSIGNED INTEREST"):
(i) a ___%2 interest in Mobile Bay Processing Partners (the "PARTNERSHIP")
formed pursuant to the General Partnership Agreement for Mobile Bay
Processing Partners dated November 6, 1996, among Assignee, MCNIC Mobile
Bay Processing Company, a Michigan corporation, and PanEnergy Mobile Bay
Processing Company, a Delaware corporation (the "PARTNERSHIP AGREEMENT");
and
(ii) all rights of Assignor as a general partner in the Partnership,
whether arising under the Partnership Agreement, by operation of law or
otherwise, with respect to the interest in the Partnership described in
clause (i) above.
TO HAVE AND TO HOLD all and singular the Assigned Interest, together with all
rights, titles, interests, estates, remedies, powers and privileges thereunto
appertaining unto Assignee and their respective successors, legal
representatives and assigns forever. Assignor hereby binds itself, its
successors, legal representatives and assigns, to warrant and forever defend the
Assigned Interest unto Assignee, their respective successors, legal
representatives and assigns, against every person whomsoever lawfully claiming
or to claim the same or any part thereof, by, through or under Assignor, but not
otherwise.
Assignor hereby represents as follows:
- -------------
(1) Insert here the first day of the month following Closing.
(2) Insert here 32 2/3% of the Assignor's interest.
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<PAGE>
1. ORGANIZATION. Assignor is a corporation duly organized, validly
existing and in good standing under the laws of its state of incorporation.
Assignor is qualified to do business in and in good standing under the laws of
each state where such qualification is required of Assignor.
2. AUTHORIZATION AND AUTHORITY. The execution and delivery of this Bill of
Sale have been and the performance of this Bill of Sale and the transactions
contemplated hereby shall be at the time required to be performed hereunder,
duly and validly authorized by all requisite corporate action on the part of
Assignor. Assignor has full corporate power and authority to carry on its
business as presently conducted and to enter into this Bill of Sale.
3. ENFORCEABILITY. This Bill of Sale has been duly executed and delivered
on behalf of Assignor, and constitutes a legal, valid and binding obligation of
Assignor enforceable in accordance with its terms, except as enforceability may
be limited by applicable bankruptcy, reorganization or moratorium statutes, or
other similar laws affecting the rights of creditors generally or equitable
principles (collectively, "EQUITABLE LIMITATIONS"). All documents required
hereunder to be executed and delivered by Assignor shall be duly executed and
delivered and shall constitute legal, valid and binding obligations of Assignor
enforceable in accordance with their terms, except as enforceability may be
limited by Equitable Limitations.
4. CONFLICTS. The execution and delivery of this Bill of Sale by Assignor
does not, and the consummation of the transactions contemplated by this Bill of
Sale shall not, (a) violate or be in conflict with, or require the consent of
any person or entity under, any provision of Assignor's Certificate of
Incorporation, bylaws or other governing documents, (b) conflict with, result in
a breach of, constitute a default (or an event that with the lapse of time or
notice, or both, would constitute a default) under any agreement or instrument
to which Assignor is a party or is bound, or (c) violate any provision of or
require any consent, authorization or approval under any judgment, decree,
judicial or administrative order, award, writ, injunction, statute, rule or
regulation applicable to Assignor.
Assignee hereby represents as follows:
1. ORGANIZATION. Assignee is a limited partnership duly organized and in
good standing under the laws of the State of Texas. Assignee is qualified to do
business in and is in good standing under the laws of each state where such
qualification is required of Assignee. The sole general partner of Assignee is
OEDC, Inc. ("OEDC"). OEDC is a corporation duly organized, validly existing and
in good standing under the laws of the State of Texas. OEDC is qualified to do
business in and is in good standing under the laws of each state where such
qualification is required of OEDC.
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<PAGE>
2. AUTHORIZATION AND AUTHORITY. The execution and delivery of this Bill of
Sale have been and the performance of this Bill of Sale and the transactions
contemplated hereby shall be at the time required to be performed hereunder,
duly and validly authorized by all requisite partnership action on the part of
Assignee and by all requisite corporate action on the part of OEDC. Assignee has
full partnership power and authority to carry on its business as presently
conducted and to enter into this Bill of Sale.
3. ENFORCEABILITY. This Bill of Sale has been duly executed and delivered
on behalf of Assignee, and constitutes a legal, valid and binding obligation of
Assignee enforceable in accordance with its terms, except as enforceability may
be limited by Equitable Limitations. All documents required hereunder to be
executed and delivered by Assignee shall be duly executed and delivered and
shall constitute legal, valid and binding obligations of Assignee enforceable in
accordance with their terms, except as enforceability may be limited by
Equitable Limitations.
4. CONFLICTS. The execution and delivery of this Bill of Sale by Assignee
does not, and the consummation of the transactions contemplated by this Bill of
Sale shall not, (a) violate or be in conflict with, or require the consent of
any person or entity under the governing documents of Assignee or OEDC, (b)
conflict with, result in a breach of, constitute a default (or an event that
with the lapse of time or notice, or both, would constitute a default) under any
agreement or instrument to which Assignee is a party or is bound, or (c) violate
any provision of or require any consent, authorization or approval under any
judgment, decree, judicial or administrative order, award, writ, injunction,
statute, rule or regulation applicable to Assignee.
All capitalized terms used in this Bill of Sale but not defined herein shall
have the meanings ascribed to such terms in the Partnership Agreement.
If there is any conflict between the terms of this Bill of Sale and the terms of
the Partnership Agreement, the terms of the Partnership Agreement shall govern
and control.
This Bill of Sale may be executed in any number of counterparts and each of such
counterparts shall for all purposes be deemed to be an original, and all such
counterparts shall together constitute but one and the same Bill of Sale.
EXCEPT FOR THE EXPRESS REPRESENTATIONS AND WARRANTIES OF ASSIGNOR CONTAINED IN
THIS BILL OF SALE OR THE PARTNERSHIP AGREEMENT, ASSIGNOR EXPRESSLY DISCLAIMS AND
NEGATES, AND ASSIGNEE HEREBY WAIVES, (I) ANY WARRANTY OR REPRESENTATION, EXPRESS
OR IMPLIED, AS TO THE QUALITY, MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, CONFORMITY TO
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<PAGE>
SAMPLES, OR CONDITION OF THE ASSIGNED INTEREST OR ANY OF
THE ASSETS OF MOBILE BAY PROCESSING PARTNERS OR ANY PART THEREOF; AND (II) ALL
REPRESENTATIONS AND WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, OTHER THAN THE
EXPRESS REPRESENTATIONS CONTAINED IN THIS BILL OF SALE OR THE PARTNERSHIP
AGREEMENT.
EXCEPT FOR THE EXPRESS REPRESENTATIONS OF ASSIGNOR CONTAINED IN THIS BILL OF
SALE AND THE PARTNERSHIP AGREEMENT, THE ASSIGNED INTEREST IS SOLD, AND ASSIGNEE
ACCEPTS THE ASSIGNED INTEREST "AS IS, WITH ALL FAULTS."
Assignor shall be responsible for, shall pay on a current basis, and shall
indemnify, save, hold harmless, discharge and release Assignee, all of its
affiliates to which certain duties under the Partnership Agreement have been
delegated, successors and permitted assignees, and all of their respective
stockholders, directors, officers, employees, agents and representatives
(collectively, "ASSIGNEE INDEMNIFIED PARTIES") from and against any and all
damage, loss, cost, expense, obligation, claim or liability, including
reasonable counsel fees and reasonable expenses of investigating, defending and
prosecuting litigation, suffered by any of the Assignee Indemnified Parties or
the Partnership and arising from, based upon, related to or associated with any
act, omission, event, condition or circumstance occurring or existing before the
Effective Date relating to the Assigned Interest; provided that the liability of
Assignor under this indemnity shall not exceed 322/3% of the sum of any cash
distributions prior to the Effective Date from the Partnership to Assignor and
tax benefits allocated or allocable with respect to periods prior to the
Effective Date by the Partnership to Assignor.
Subject to the above indemnity by Assignor, Assignee shall assume and be
responsible for, shall pay on a current basis, and shall indemnify, save, hold
harmless, discharge and release Assignor, all of its affiliates, successors and
permitted assignees, and all of their respective stockholders, directors,
officers, employees, agents and representatives from and against any and all
obligations under the Partnership Agreement attributable to the Assigned
Interest from the inception of the Partnership.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Bill of Sale to be duly
executed on this the ____ day of _____________, 1996.
ASSIGNOR:
By:
Name:
Title:
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EXHIBIT 10.27
AREA OF MUTUAL INTEREST AGREEMENT
BETWEEN
PIPELINE & PROCESSING GROUP, INC.,
OEDC PARTNERS, L.P.
AND
PANENERGY FIELD SERVICES, INC.
DATED AS OF NOVEMBER 6, 1996
<PAGE>
AREA OF MUTUAL INTEREST AGREEMENT
THIS AREA OF MUTUAL INTEREST AGREEMENT (hereinafter "AGREEMENT") is
made and entered this 6th day of November, 1996, by and between PIPELINE &
PROCESSING GROUP, INC., a Michigan corporation (hereinafter "P&PG"), OEDC
PARTNERS, L.P., a Texas limited partnership, the general partner of which is
OEDC, Inc. (hereinafter "OEDC"), and PANENERGY FIELD SERVICES, INC., a Colorado
corporation, (hereinafter "PFS"). All of such parties are hereinafter referred
to collectively as the "PARTIES" or individually as a "PARTY".
W I T N E S S E T H:
WHEREAS, the Parties desire to create an area of cooperation with
respect to certain projects located within certain counties in Mississippi,
Alabama and Florida, as hereinafter provided.
NOW, THEREFORE, in consideration of the mutual promises set forth
herein, the receipt and sufficiency of which is hereby acknowledged by the
Parties, the Parties agree as follows:
ARTICLE I
TERM
1.1 TERM. This Agreement shall remain in force and effect until the tenth
(10th) anniversary date hereof, unless terminated at an earlier time by mutual
agreement of all the Parties.
ARTICLE II
AMI OPERATIONS
2.1 AMI OPERATIONS. An AMI Operation shall mean constructing, owning,
acquiring or operating, or providing financing for, (a) any processing plants
("PROCESSING FACILITY") to be located in Jackson or Harrison Counties,
Mississippi, Baldwin County, Alabama, or Escambia County, Florida, for the
removal of natural gas liquids, and to the extent applicable, condensate
(collectively "LIQUIDS"), from natural gas, including, but not limited to,
activities such as natural gas compression, treating and dehydration at a
Processing Facility, separation, fractionation, storage, transportation and
marketing of Liquids extracted at a Processing Facility, and purchase and
transportation of natural gas as necessary for the efficient operation of a
Processing Facility, or (b) a power generation facility (a "POWER PLANT") to be
located in Mobile County, Alabama, for the generation of power to the initial
processing plant constructed pursuant to that certain General Partnership
Agreement made and entered into on November 6, 1996, by and among MCNIC
<PAGE>
MOBILE BAY PROCESSING COMPANY, a Michigan corporation, OEDC PROCESSING, L.P., a
Texas limited partnership, the general partner of which is OEDC, INC., and
PANENERGY MOBILE BAY PROCESSING COMPANY, a Delaware corporation (the
"PARTNERSHIP AGREEMENT"), with all of the preceding described in (a) and (b)
collectively referred to as "AMI OPERATIONS").
2.2 PARTICIPATION IN AMI OPERATIONS.
(a) None of the Parties, whether directly or indirectly,
through any ownership or other interest, whether through Affiliates or
otherwise, shall participate in any AMI Operations without complying with
the provisions of this SECTION 2.2. In the event any Party participates in
an AMI Operation, whether directly or indirectly, through any ownership or
other interest, whether through Affiliates or otherwise ("ACQUIRING
PARTY") such Acquiring Party shall offer, or cause to be offered, to each
of the other Parties (each a "NON-ACQUIRING PARTY") the opportunity to
participate in such AMI Operation on the same terms and conditions
applicable to such Acquiring Party and for a portion of the Acquiring
Party's interest equal to the Ownership Interest allocated to such
Non-Acquiring Party in ARTICLE III, or such lesser interest as elected by
such Non-Acquiring Party.
(b) An Acquiring Party who participates in an AMI Operation
shall provide, subject to confidentiality or contractual restrictions, to
the Non-Acquiring Parties written notice of such participation together
with all relevant information pertaining to the AMI Operation in the
possession of the Acquiring Party (or the person through which it is
participating in such AMI Operation). If the Acquiring Party has a right
to make available such information to the Non-Acquiring Parties, each
Non-Acquiring Party prior to its receipt of such information shall execute
a confidentiality agreement containing the same terms as the
confidentiality agreement to which the Acquiring Party is bound, unless
such Non-Acquiring Party elects not to receive such information. If the
Acquiring Party does not have the right to provide the relevant
information with respect to the AMI Operation to the Non-Acquiring Parties
prior to the time the Acquiring Party completes the transaction pursuant
to which it would participate in the AMI Operation, then the obligations
of the Acquiring Party under SECTION 2.2 to provide the Non-Acquiring
Parties the opportunity to participate in such AMI Operation shall be
deferred until such time as the Acquiring Party closes such transaction,
at which time the Acquiring Party shall comply with the provisions of this
SECTION 2.2. Each of the Non-Acquiring Parties shall have sixty (60) days
in
3
<PAGE>
the case of an acquisition, and one hundred twenty (120) in the case of
construction, to notify the Acquiring Party in writing of its election to
participate in the AMI Operation. Each such notice shall stipulate whether
the Non-Acquiring Party desires to limit its participation to the
Ownership Interest allocated to it in SECTION 3.1 or a lesser interest,
and state the portion it would accept of the Ownership Interest of any
Parties who elect not to participate (for their full allocated share or
part thereof) in such AMI Operation to which it is entitled pursuant to
SECTION 3.1. If the terms of an acquisition require a lesser period of
time for the submission of an offer, the sixty (60) day response period
shall be reduced to a period ending three (3) days before the submission
deadline as provided by the terms as such acquisition. Failure of a
Non-Acquiring Party to respond timely shall constitute an election by such
Non-Acquiring Party not to participate in the AMI Operation. Failure to
specify in a timely response the share of the Ownership Interest of a
Party who elects not to participate (for their full allocated share or
part hereof) the Non-Acquiring Party elects to acquire shall be an
election to limit participation to such Non-Acquiring Parties' Ownership
Interest or such lesser interest for which it elected to participate.
AMI Operations shall be pursued pursuant to the agreements to
which the Acquiring Party is obligated or, in absence of such agreements,
agreements to form a limited liability company in form and substance
substantially similar to the Partnership Agreement unless all the Parties
otherwise agree. As used in this Agreement, the term "AFFILIATE" shall
mean any person that directly or indirectly, through one or more
intermediaries, controls or is controlled by or is under common control
with any Party. The term "PERSON" shall include, without limitation, an
individual, a corporation, a partnership, an association, a joint stock
company and a trust. The term "CONTROL" (including the terms "CONTROLS",
"CONTROLLED BY" and "UNDER COMMON CONTROL WITH") means (a) with respect to
a corporation, the ownership or other control of securities to which are
attached more than fifty percent (50%) of the voting interest of all
equity securities issued by the corporation, (b) with respect to a
partnership, the ownership of more than fifty percent (50%) interest in
the partnership, and (c) with respect to any other person, the possession,
direct or indirect, of the power to direct or cause the direction of the
management and policies of such person, by contract or otherwise.
4
<PAGE>
ARTICLE III
OWNERSHIP INTEREST
3.1 OWNERSHIP INTERESTS. Each Party shall have the right to participate
and acquire an interest in AMI Operations (hereinafter an "OWNERSHIP INTEREST")
as follows:
(a) POWER PLANT. If the AMI Operation is the Power Plant, then the
Parties shall have the right to participate in such AMI Operation in the
following proportions:
PFS 42%
P&PG 38%
OEDC 20%
; provided, however, if any Party elects not to participate (for its full
allocated share, or part thereof), then the portion of such Party's
Ownership Interest for which it elects to not participate shall be
allocated among the other Parties as follows: (1) first, to the Party with
the lesser interest up to a maximum amount that would yield such Party and
the other Party who participates in the AMI Operations the same Ownership
Interest in the AMI Operation, and (2) the remainder, if any, to such
Parties equally.
(b) PROCESSING FACILITY. If the AMI Operation concerns a Processing
Facility, each Party shall have the right to participate in such AMI
Operation for a one-third (a) interest. If any Party elects not to
participate (for its full allocate share, or part thereof), the portion of
such Party's Ownership Interest for which it elects to not participate
shall be allocated among the other Parties equally.
Notwithstanding the foregoing, the Ownership Interest allocated to
OEDC with respect to any AMI Operations relating to a Processing Facility
proposed after the earlier of (1) the termination of the "OPTION PERIOD"
as defined in that certain Option Agreement of even date herewith among
Dauphin Island Gathering Company, L.P., OEDC Processing, L.P., MCNIC
Mobile Bay Processing Company and PanEnergy Mobile Bay Processing Company
(the "OPTION AGREEMENT"), (2) the termination of the "OPTION" (as defined
in the Option Agreement) in accordance with the terms of the Option
Agreement, or (3) the date of the "EXERCISE NOTICE" (as defined in the
Option
5
<PAGE>
Agreement), shall be the same percentage interest that OEDC Processing,
L.P. owns under the terms of the Partnership Agreement.
ARTICLE IV
MISCELLANEOUS
4.1 CONTROLLING LAW. THIS AGREEMENT SHALL BE GOVERNED, INTERPRETED
AND CONSTRUED UNDER THE STATUTORY AND COMMON LAW OF THE STATE OF
TEXAS, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
4.2 NOTICES. Unless herein provided to the contrary, any notice called for
in this Agreement shall be in writing and shall be given by personal delivery,
or by mail, overnight courier or facsimile with all postage and charges prepaid
to the other Parties affected by such notice at the place designated. Notices
shall be considered as duly delivered upon actual receipt by the addressee.
Unless changed by notice in writing to all other Parties, the addresses of the
Parties are as follows:
P&PG: Pipeline & Processing Group, Inc.
150 W. Jefferson, Suite 1700
Detroit, Michigan 48226
Attention: Vice President
OEDC: OEDC Partners, L.P.
1400 Woodloch Forest Drive, Suite 200
The Woodlands, Texas 77380
Attention: Vice President of OEDC, Inc.
PFS: PanEnergy Field Services, Inc.
5718 Westheimer, Suite 2000
Houston, Texas 77057
Attention: Vice President, Offshore
4.3 ASSIGNABILITY. The rights and obligations of the Parties, in and under
this Agreement shall not be assigned, sold, transferred, conveyed, made subject
to a lien or security interest or otherwise encumbered (collectively, a
"TRANSFER") without the prior written consent of all the other Parties. Any
Transfer in violation of this provision shall be null and void.
4.4 DEFAULT. No waiver of any default shall be construed as a waiver of
any future default, whether of a like or a different nature.
6
<PAGE>
4.5 SEVERABILITY. If and to the extent that any court or governmental
agency of competent jurisdiction holds any part or provision of this Agreement
to be invalid or unenforceable, the Parties shall agree upon an equitable
adjustment of the provisions of this Agreement with a view toward effecting its
purpose. Such holding shall in no way affect the validity or effectiveness of
the other provisions of this Agreement, which shall remain in full force and
effect.
4.6 REMEDIES. Each right and remedy in this Agreement is cumulative and
in addition to other rights or remedies under this Agreement or any applicable
law.
4.7 SPECIAL AND CONSEQUENTIAL DAMAGES. None of the Parties, shall be
liable to the other for any exemplary or punitive damages, or for loss of
profits, or consequential losses, arising in connection with this Agreement.
4.8 AMENDMENTS. This Agreement may only be amended, supplemented or
modified by written agreement duly executed by all Parties.
4.9 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
but one and the same instrument.
4.10 ENTIRE AGREEMENT/CONFLICTS. This Agreement and the other documents
contemplated hereunder constitute the full and complete agreement of the Parties
hereto with respect to the subject matter hereof.
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7
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement
as of the day and year first written.
PIPELINE & PROCESSING GROUP, INC.
By: /s/ JOSEPH L. ROBERTS
Name: Joseph L. Roberts
Title: Vice President
OEDC PARTNERS, L.P.
By: /s/ R. KEITH ANDERSON
Name: R. Keith Anderson
Title: Vice President
PANENERGY FIELD SERVICES, INC.
By: /s/ B. D. REESE
Name: B. D. Reese
Title: Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE REGISTRANT'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMPER 30,
1996, WHICH INCLUDES THE UNAUDITED CONDENSED CONSOLIDATED FINANICAL STATEMENTS
OF THE REGISTRANT, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 882,471
<SECURITIES> 0
<RECEIVABLES> 2,287,093
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,235,539
<PP&E> 28,879,660
<DEPRECIATION> 10,261,408
<TOTAL-ASSETS> 24,518,285
<CURRENT-LIABILITIES> 3,870,932
<BONDS> 0
0
0
<COMMON> 120
<OTHER-SE> 6,276,823
<TOTAL-LIABILITY-AND-EQUITY> 24,518,285
<SALES> 7,932,879
<TOTAL-REVENUES> 18,636,065
<CGS> 1,520,932
<TOTAL-COSTS> 8,155,294
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 709,190
<INCOME-PRETAX> 9,730,601
<INCOME-TAX> 4,778
<INCOME-CONTINUING> 9,725,823
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,393,466
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
