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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1996
COMMISSION FILE NUMBER 1-12204
----------------
TRANSTEXAS GAS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0401023
(I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1300 EAST NORTH BELT
SUITE 310
HOUSTON, TEXAS 77032
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(713) 987-8600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
The number of shares of common stock of the registrant outstanding on June
14, 1996 was 74,000,000.
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TRANSTEXAS GAS CORPORATION
TABLE OF CONTENTS
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PAGE
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PART I.
FINANCIAL INFORMATION
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Item 1. Financial Statements
Report of Independent Accountants.................................... 2
Condensed Consolidated Balance Sheet as of April 30, 1996 and January
31, 1996............................................................ 3
Condensed Consolidated Statement of Operations for the three months
ended April 30, 1996 and 1995....................................... 4
Condensed Consolidated Statement of Cash Flows for the three months
ended April 30, 1996 and 1995....................................... 5
Notes to Condensed Consolidated Financial Statements................. 6-17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 18-24
PART II.
OTHER INFORMATION
Item 1 and Item 5........................................................ 25
Item 6................................................................... 35
Signature................................................................ 36
Index to Exhibits........................................................ 37
</TABLE>
1
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of TransTexas Gas Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
TransTexas Gas Corporation as of April 30, 1996, and the related condensed
consolidated statements of operations and cash flows for the three months
ended April 30, 1996 and 1995. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of January 31, 1996, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the year then ended (not presented herein); and in our report dated
April 29, 1996, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of January 31, 1996, is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ Coopers & Lybrand L.L.P.
Houston, Texas
June 14, 1996
2
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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APRIL 30, JANUARY
1996 31, 1996
ASSETS ---------- ----------
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Current assets:
Cash and cash equivalents............................ $ 13,921 $ 11,248
Interest reserve account............................. 46,000 46,000
Accounts receivable.................................. 31,796 36,251
Receivable from affiliates........................... 3,292 3,697
Inventories.......................................... 11,782 11,421
Other current assets (Note 3)........................ 54,730 50,821
---------- ----------
Total current assets............................... 161,521 159,438
---------- ----------
Property and equipment................................. 2,099,935 2,008,068
Less accumulated depreciation, depletion and
amortization.......................................... 1,325,633 1,292,728
---------- ----------
Net property and equipment--based on the full cost
method of accounting for gas and oil properties of
which $141,944 and $136,360 was excluded from
amortization at April 30, 1996 and January 31, 1996,
respectively........................................ 774,302 715,340
---------- ----------
Due from affiliates.................................... 28,394 14,504
Other assets, net...................................... 38,311 37,203
---------- ----------
$1,002,528 $ 926,485
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
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Current liabilities:
Current maturities of long-term debt................. $ 4,311 $ 1,335
Accounts payable..................................... 58,977 39,745
Accrued liabilities.................................. 116,098 74,756
---------- ----------
Total current liabilities.......................... 179,386 115,836
---------- ----------
Due to affiliates...................................... 4,239 2,851
Long-term debt, less current maturities................ 8,842 2,541
Production payment..................................... 21,613 31,036
Senior secured notes................................... 800,000 800,000
Revolving credit agreement............................. 20,684 20,365
Deferred revenue....................................... 41,512 32,850
Deferred income taxes.................................. 41,882 40,256
Other liabilities...................................... 35,790 35,190
Commitments and contingencies (Note 2)................. -- --
Stockholders' deficit:
Common stock, $0.01 par value, authorized 100,000,000
shares, issued and outstanding 74,000,000 shares.... 740 740
Capital deficit...................................... (107,040) (107,040)
Accumulated deficit.................................. (45,120) (48,140)
---------- ----------
Total stockholders' deficit........................ (151,420) (154,440)
---------- ----------
$1,002,528 $ 926,485
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED APRIL 30,
----------------------
1996 1995
---------- ----------
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Revenues:
Gas, condensate and natural gas liquids.............. $ 79,802 $ 63,882
Transportation....................................... 8,195 8,890
Gains on sale of assets.............................. 7,762 --
Other................................................ 199 56
---------- ----------
Total revenues..................................... 95,958 72,828
---------- ----------
Costs and expenses:
Operating............................................ 27,438 19,459
Depreciation, depletion and amortization............. 30,099 30,872
General and administrative........................... 7,439 5,674
Taxes other than income taxes........................ 5,184 3,891
---------- ----------
Total costs and expenses........................... 70,160 59,896
---------- ----------
Operating income................................... 25,798 12,932
---------- ----------
Other income (expense):
Interest income...................................... 1,134 467
Interest expense..................................... (22,286) (15,324)
---------- ----------
Total other income (expense)....................... (21,152) (14,857)
---------- ----------
Income (loss) before income taxes.................. 4,646 (1,925)
Income taxes........................................... 1,626 1,919
---------- ----------
Net income (loss).................................. $ 3,020 $ (3,844)
========== ==========
Net income (loss) per common share..................... $ 0.04 $ (0.05)
========== ==========
Weighted average number of shares outstanding.......... 74,000,000 74,000,000
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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TRANSTEXAS GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
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THREE MONTHS
ENDED APRIL 30,
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1996 1995
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Operating activities:
Net income (loss)......................................... $ 3, 020 $ (3,844)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization................ 30,099 30,872
Amortization of debt issue costs........................ 1,018 921
Gains on sale of assets................................. (7,762) --
Deferred income taxes................................... 1,626 898
Proceeds from volumetric production payment............. 15,537 --
Amortization of deferred revenue........................ (6,875) --
Changes in assets and liabilities:
Accounts receivable.................................... 4,455 (2,070)
Receivable from affiliates............................. 405 451
Inventories............................................ (361) 294
Other current assets................................... (1,316) (622)
Accounts payable....................................... 6,453 (6,286)
Accrued liabilities.................................... 35,066 (21,181)
Due from affiliates.................................... (12,502) 11,045
Other assets........................................... (1,088) (324)
Other liabilities...................................... (726) --
-------- --------
Net cash provided by operating activities............ 67,049 10,154
-------- --------
Investing activities:
Capital expenditures.................................... (72,616) (60,075)
Proceeds from sales of assets........................... 7,779 --
Production payment from affiliate....................... -- 3,547
-------- --------
Net cash used by investing activities................ (64,837) (56,528)
-------- --------
Financing activities:
Issuance of dollar-denominated production payment....... -- 49,500
Repayments of dollar-denominated production payment..... (8,097) (2,992)
Issuance of long-term debt.............................. 10,000 --
Principal payments on long-term debt.................... (723) (455)
Debt issue costs........................................ (1,038) (2,247)
Revolving credit agreement, net......................... 319 2,521
-------- --------
Net cash provided by financing activities............ 461 46,327
-------- --------
Increase (decrease) in cash and cash equivalents..... 2,673 (47)
Beginning cash and cash equivalents........................ 11,248 819
-------- --------
Ending cash and cash equivalents........................... $ 13,921 $ 772
======== ========
Noncash operating and investing activities:
Accounts payable for property and equipment............. $ 12,779 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The condensed consolidated financial statements reflect all adjustments,
consisting of normal recurring accruals, which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods. Certain reclassifications have been made to the prior year period to
conform to the current period presentation. Unless the context indicates
otherwise, the term "Company" refers to TransTexas Gas Corporation and its
wholly-owned subsidiary, TransTexas Transmission Corporation ("TTC"). The
Company is indirectly a subsidiary of TransAmerican Natural Gas Corporation
("TransAmerican"). Interim results of operations are not necessarily
indicative of the results that may be expected for the year ending January 31,
1997. The financial information presented herein should be read in conjunction
with the consolidated financial statements and notes included in the Company's
Transition Report on Form 10-K for the Transition Period ended January 31,
1996.
A primary source of funds to meet the Company's debt service and capital
requirements is net cash flow provided by operating activities, which is
extremely sensitive to the prices the Company receives for its natural gas.
The Company has entered into hedge agreements to reduce its exposure to price
risk in the spot market for natural gas. However, a substantial portion of the
Company's production will remain subject to such price risk. Additionally,
significant capital expenditures are required for drilling and development,
lease acquisitions, pipeline and other equipment additions. Since July 31,
1995, the Company has utilized asset sales and various financings, in addition
to cash flow from operating activities, to meet its working capital
requirements. The Company anticipates that it will utilize additional
financing or sales of assets to fund planned levels of operations through
January 1997. No assurance, however, can be given that the Company's cash flow
from operating activities will be sufficient to meet planned capital
expenditures, contingent liabilities, and debt service in the future.
Pursuant to the Indenture governing the Company's Senior Secured Notes (the
"Indenture"), if the Company's Working Capital, as defined in the Indenture,
is less than $20 million at the end of any fiscal quarter, the Company's
Capital Expenditures, as defined, for the next succeeding fiscal quarter may
not exceed 90% of the Company's Consolidated EBITDA, as defined, for such
prior fiscal quarter minus the Company's Consolidated Fixed Charges, as
defined, for such prior fiscal quarter (the "Capital Expenditure Limit"). The
Company's Working Capital at April 30, 1996 was less than $20 million. As a
result, the Company's Capital Expenditures for the quarter ending July 31,
1996 may not exceed the Capital Expenditure Limit. The Company anticipates
that such restriction will not have a material effect on its development
drilling for the current fiscal quarter. In addition, the Indenture permits
the Company to fund the drilling of up to 30 wells in any fiscal year pursuant
to third-party drilling programs. Any costs associated with these wells would
not be included in Capital Expenditures.
In March 1995, the Financial Accounting Standards Board issued 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."
As of February 1, 1996, the Company adopted the requirements of SFAS No. 121.
Based on the Company's estimates as of April 30, 1996, there have been no
events or circumstances that require the recognition of an impairment loss.
Gas and oil properties accounted for under the full cost method will continue
to be subject to a ceiling test limitation.
2. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
As part of the transfer of the natural gas exploration, production and
transmission businesses of TransAmerican to the Company (the "Transfer"), the
Company has succeeded to the potential liability, if any, of TransAmerican and
certain subsidiaries in connection with the lawsuits described below. The
Company has assumed liability for the disputed claim described under
"Ginther/Warren" and liability for other litigation up
6
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
to $15 million plus the difference, if any, between $10 million and the costs
(if less than $10 million) incurred to resolve the disputed claims. Pursuant
to an agreement among the Company, TransAmerican and certain of its
subsidiaries, as amended (the "Transfer Agreement"), TransAmerican will
indemnify the Company against all losses incurred by the Company in excess of
$25 million in connection with (a) disputed claims in TransAmerican's
bankruptcy and (b) other litigation assumed by the Company and other
agreements related to TransAmerican's plan of reorganization (other than
settlements and judgments paid from escrowed cash established in connection
with TransAmerican's plan of reorganization). Effective with the settlement of
the Terry/Penrod litigation described in Note 8, TransAmerican will be
required to indemnify the Company for all future losses incurred in connection
with litigation or bankruptcy claims assumed in the Transfer. Any
indemnification payments received from TransAmerican for which the Company is
the primary obligor will be considered a contribution of capital. There can be
no assurance that TransAmerican will have the financial ability to meet all of
its indemnification obligations.
Finkelstein. On April 15, 1990, H.S. Finkelstein and Medallion Oil Company
filed suit against TransAmerican in the 49th Judicial District Court, Zapata
County, Texas, alleging that TransAmerican failed to pay royalties and
improperly marketed oil and gas produced from certain leases. On September 27,
1994, the plaintiffs added the Company as an additional defendant. On January
6, 1995, a judgment against TransAmerican and the Company was entered for
approximately $18 million in damages, interest and attorneys' fees. The
Company and TransAmerican have posted a supersedeas bond and appealed the
judgment to the Fourth Court of Appeals, San Antonio, Texas. The Fourth Court
of Appeals affirmed the judgment on April 3, 1996. The Company and
TransAmerican have filed a motion for rehearing. On April 22, 1991, the
plaintiffs filed another suit against TransAmerican and various affiliates in
the 49th Judicial District Court, Zapata County, Texas, alleging an improper
calculation of overriding royalties allegedly owed to the plaintiffs and
seeking damages in an unspecified amount. On November 18, 1993, the plaintiffs
added the Company as an additional defendant. The parties have agreed to
binding arbitration in this matter.
Ginther/Warren. Wilbur L. Ginther and Howard C. Warren conveyed a portion of
a lease to Henry J. N. Taub. Taub "farmed out" certain interests to
TransAmerican, and TransAmerican paid royalties to Taub. The Texas Supreme
Court upheld a judgment in favor of Messrs. Ginther and Warren against Taub's
interest in the lease. The lower court judgment had awarded a portion of the
lease to Messrs. Ginther and Warren because Taub's attorney had defrauded
Messrs. Ginther and Warren with respect to their interest in the lease. On
November 26, 1986, the estates of Messrs. Ginther and Warren filed an
adversary proceeding in the United States Bankruptcy Court for the Southern
District of Texas, Houston Division (the "Bankruptcy Court") against
TransAmerican, seeking damages and claiming that TransAmerican had
constructive notice of their disputes but continued to pay royalties and
proceeds of production to Taub. TransAmerican filed an interpleader action in
the Bankruptcy Court and deposited the disputed funds accruing from and after
November 1984 into the registry of the court. On September 30, 1993, the
Bankruptcy Court entered a judgment against TransAmerican in the amount of
$6.3 million plus post judgment interest. TransAmerican obtained a stay
pending its appeal of the judgment by posting a supersedeas bond. The Company
previously set aside, in escrow, the majority of the funds needed for the
bond. On September 15, 1995, the U.S. District Court for the Southern District
of Texas entered an order reversing the award of interest to Taub and
affirming the final judgment in all other respects. The Company has appealed
the judgment to the Fifth Circuit Court of Appeals.
Coastal. On October 28, 1991, Coastal filed an action against TransAmerican
that was consolidated in the 49th Judicial District Court, Webb County, Texas,
alleging breach of contract and tortious interference related to two gas sales
contracts and a transportation agreement, seeking unspecified actual and
punitive damages and injunctive relief. On April 22, 1994, the court entered a
judgment adverse to TransAmerican and the Company requiring them to pay $1.3
million plus $0.7 million in attorney's fees to Coastal. On May 29, 1996, the
Court
7
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
of Appeals affirmed the judgments. TransAmerican and the Company continue to
appeal this judgment. Coastal has abstracted the judgment in Webb and Zapata
Counties. While this matter is being judicially resolved, the Company is
continuing to furnish gas to Coastal.
Alameda. On May 22, 1993, Alameda Corporation ("Alameda") sued TransAmerican
and Mr. Stanley in the 215th Judicial District Court of Harris County, Texas,
claiming that TransAmerican failed to account to Alameda for a share of the
proceeds TransAmerican received in a settlement during 1990 of litigation with
El Paso Natural Gas Company ("El Paso") and that TransAmerican has been
unjustly enriched by its failure to share these proceeds with Alameda. The
court granted Mr. Stanley's motion for summary judgment. On September 20,
1995, the jury rendered a verdict in favor of TransAmerican. Alameda has
appealed to the Fourteenth Court of Appeals.
Aspen. TransAmerican brought suit, on September 29, 1993, against Aspen
Services, ("Aspen"), seeking an audit and accounting of drilling costs that
Aspen had charged while providing drilling services to TransAmerican. The
parties' drilling agreement provided, among other things, that Aspen would
receive payment for its drilling-related costs from the production and sale of
gas from the wells that were drilled, and that the revenues that TransAmerican
would otherwise receive from the wells would be reduced by the amounts
received by Aspen. Aspen, under provisions of the parties' drilling agreement,
requested that TransAmerican's audit be made subject to arbitration, and the
court agreed. While the audit was in progress, Aspen asserted additional costs
that it contended should be added to the production payment account. One
category of such costs, relating to overhead expenses, amounted to
approximately $2.6 million. The arbitrators are in the process of deciding the
validity of those expenses as well as of the audit exceptions taken by
TransAmerican, which amount to approximately $3.5 million. Aspen also filed,
in the court proceeding, on July 19, 1995, a counterclaim and third party
claim against TransAmerican, the Company, and affiliated entities, asserting,
among other things, that these entities failed to make certain payments and
market gas from these wells. Aspen is seeking damages in an unspecified
amount, as well as certain equitable claims. The Company and its affiliates
are vigorously contesting this claim. The parties' drilling contract was not
transferred to the Company in the Transfer. The properties relating to the
drilling contract, however, were transferred to the Company. TransAmerican is
entitled to any settlement or damages awarded to it in this matter.
Kathryn M. On June 8, 1995, Kathryn M., Inc., et al., filed suit against
TransAmerican in the 333rd Judicial District Court (subsequently transferred
to the 334th Judicial District Court), Harris County, Texas, alleging that the
plaintiffs, as nonparticipating royalty interest owners in the La Perla Ranch
leases, are entitled to receive a portion of the settlement proceeds received
by TransAmerican from El Paso. TransAmerican intends to vigorously defend this
action.
General. The Company is also a named defendant in other ordinary course,
routine litigation incidental to its business. Although the outcome of these
other lawsuits cannot be predicted with certainty, the Company does not expect
these matters to have a material adverse effect on its financial position. At
April 30, 1996, the possible range of estimated losses related to all of the
aforementioned claims in addition to the estimates accrued by the Company is
$0 to $62 million. The resolution in any reporting period of one or more of
these matters in a manner adverse to the Company could have a material impact
on the Company's results of operations and cash flows for that period.
Litigation expense, consisting primarily of legal fees, totaled approximately
$1 million for each of the quarters ended April 30, 1996 and 1995. The Company
has delivered letters of credit and placed into escrow cash, which letters of
credit and cash total approximately $29.3 million, to be applied to the
litigation claims described above.
8
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
Environmental Matters
The Company's operations and properties are subject to extensive federal,
state, and local laws and regulations relating to the generation, storage,
handling, emission, transportation, and discharge of materials into the
environment. Permits are required for various of the Company's operations, and
these permits are subject to revocation, modification, and renewal by issuing
authorities. The Company also is subject to federal, state, and local laws and
regulations that impose liability for the cleanup or remediation of property
that has been contaminated by the discharge or release of hazardous materials
or wastes into the environment. Governmental authorities have the power to
enforce compliance with their regulations, and violations are subject to fines
or injunctions, or both. It is not anticipated that the Company will be
required in the near future to expend amounts that are material to the
financial condition or operations of the Company by reason of environmental
laws and regulations but, because such laws and regulations are frequently
changed and as a result, may impose increasingly strict requirements, the
Company is unable to predict the ultimate cost of complying with such laws and
regulations.
Gas Sales Commitments
In February 1990, TransAmerican amended a long-term gas sales contract,
whereby TransAmerican potentially increased the price to be received for
future sales under the amended contract. In consideration, TransAmerican
agreed to pay the buyer approximately $0.4 million per month through June
1997. This commitment was assumed by the Company.
The Company and PanEnergy Trading and Market Service, Inc. entered into a
long-term firm gas purchase contract on August 31, 1994 under which the
Company will deliver 100,000 MMBtu of natural gas per day through August 1997.
The selling price for this gas is determined by certain industry averages as
defined in the contract.
The Company and MidCon Texas Pipeline Corp. entered into a long-term gas
purchase contract on January 10, 1996, under which the Company is required to
deliver a total of 100,000 MMBtu per day to four specified delivery points for
a period of five years. The purchase price is determined by an industry index
less $0.09 per MMBtu. Deliveries shall commence upon the earlier of completion
of pipeline construction or ninety days after the acquisition of all rights of
way, permits and construction drawings.
Production Payments
On February 28, 1995, the Company sold to TCW Portfolio No. 1555 Sub-Custody
Partnership, L.P. ("TCW"), a term royalty in the form of a dollar-denominated
production payment in certain of the Company's properties for proceeds of
$49.5 million, less closing costs of approximately $2 million. This production
payment was terminated in May 1996 with a portion of the proceeds of the
volumetric production payment described below.
In January 1996, the Company sold to an unaffiliated third party a term
royalty interest in the form of a volumetric production payment on certain of
its producing properties. For net proceeds of approximately $33 million, the
Company conveyed to the third party a royalty on approximately 29 Bcf of
natural gas, which amount can increase if certain minimum monthly volumes are
not delivered to the production payment interest. In February 1996, the
Company and the third party amended this purchase agreement to include an
additional 14 Bcf which were sold to the third party for a purchase price of
approximately $16 million.
In May 1996, the Company sold to an unaffiliated third party an additional
term royalty interest in the form of a volumetric production payment on
certain of the Company's producing properties. For net proceeds of
9
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TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
approximately $43 million, the Company conveyed to the third party a royalty
on approximately 37 Bcf of natural gas, which amount can increase if certain
minimum monthly volumes are not delivered to the production payment interest.
The Company used approximately $25 million of these net proceeds to terminate
the dollar-denominated production payment described above.
Possible Federal Tax Liability
Part of the refinancing of TransAmerican's debt in 1993 involved the
cancellation of approximately $65.9 million of accrued interest and of a
contingent liability for interest of $102 million owed by TransAmerican.
TransAmerican has taken the federal tax position that the entire amount of
this debt cancellation is excluded from its income under the cancellation of
indebtedness provisions of the Internal Revenue Code of 1986, as amended ("COD
Exclusion"). TransAmerican expects that its tax attributes (including its net
operating loss and credit carryforwards) will be substantially reduced as a
consequence of the COD Exclusion. Although the Company believes that there is
substantial legal authority to support the position that the COD Exclusion
applies to the cancellation of TransAmerican's indebtedness, due to factual
and legal uncertainties there can be no assurance that the IRS will not
challenge this position, or that the Company's position would be upheld. Under
the Tax Allocation Agreement, the Company has agreed to pay an amount equal to
any federal tax liability (which would be approximately $25.4 million)
attributable to the inapplicability of the COD Exclusion. Any such tax would
be offset in future years by alternative minimum tax credits and retained loss
and credit carryforwards to the extent recoverable from TransAmerican.
Potential Effects of a Change of Control
The Indenture provides that, upon the occurrence of a Change of Control (as
such term is defined in the Indenture), each holder of the Notes will have the
right to require the Company to repurchase such holder's Notes at 101% of the
principal amount thereof plus accrued and unpaid interest. A Change of Control
would be deemed to occur under the Indenture in the case of certain changes or
other events in respect of the ownership or control of the Company, including
any circumstance pursuant to which any person or group, other than John R.
Stanley and his wholly-owned subsidiaries or the trustee under the indenture
governing $440 million aggregate principal amount of mortgage notes (the "TARC
Notes") of TransAmerican Refining Corporation ("TARC"), is or becomes the
beneficial owner of more than 50% of the total voting power of the Company's
then outstanding voting stock, unless the Notes have an investment grade
rating for the period of 120 days thereafter. The term "person," as used in
the definition of Change of Control, means a natural person, company,
government or political subdivision, agency or instrumentality of a government
and also includes a "group," which is defined as two or more persons acting as
a partnership, limited partnership or other group. In addition, certain
changes or other events in respect of the ownership or control of the Company
that do not constitute a Change of Control under the Indenture may result in a
"change of control" of the Company under the terms of the Company's credit
facility (the "BNY Facility") and certain equipment financing. Such an
occurrence could create an obligation for the Company to repay such other
indebtedness. At April 30, 1996, the Company had approximately $30.2 million
of indebtedness (excluding the Notes) subject to such right of repayment or
repurchase. In the event of a Change of Control under the Indenture or a
"change of control" under the terms of other outstanding indebtedness, there
can be no assurance that the Company will have sufficient funds to satisfy any
such payment obligations.
TARC owns and operates a large petroleum refinery in the Gulf Coast region
along the Mississippi River, approximately 20 miles from New Orleans,
Louisiana. TARC's refinery was shut down in January 1983 and is currently
partially operational. TARC is engaged in a two-phase capital improvement
program designed to reactivate the refinery and increase its complexity. In
February 1995, TARC issued the TARC Notes that were
10
<PAGE>
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
initially collateralized by, among other things, 55 million shares of the
Company's common stock (the "Common Stock"). In March 1996, TARC sold 4.55
million shares of Common Stock to provide additional financing for the capital
improvement program. TARC's Transition Report on Form 10-K for the six months
ended January 31, 1996, indicates that TARC will require additional financing
of $350 million to $355 million over the course of the remaining construction
period to complete the capital improvement program. TARC has advised the
Company that if this financing is not available on a timely basis, or if
significant engineering problems, work stoppages, cost overruns or delays
occur, TARC likely will not be able to complete the first phase of the capital
improvement program by February 15, 1997. TARC has further advised the Company
that, even if required financing is obtained on a timely basis, completion by
February 15, 1997 will still prove very difficult if personnel shortages
prevent full staffing during peak construction periods. TARC has also advised
the Company that it has identified and is considering certain steps to address
these staffing concerns, but there can be no assurance that these steps will
prove successful. Under the indenture governing the TARC Notes, the failure of
TARC to complete the first phase of its capital improvement program by
February 15, 1997 (subject to extension to August 15, 1997 if certain
financial coverage ratios are met) would constitute an event of default at
such date. Any such event of default could result in the sale, following the
occurrence of such event of default, of some or all of the remaining 50.45
million shares of Common Stock pledged to collateralize the TARC Notes. A
foreclosure on such shares would constitute a "change of control" of the
Company under the BNY Facility and certain equipment financing, which may
create an obligation for the Company to repay amounts outstanding thereunder,
but would not constitute a Change of Control under the Indenture. A sale of
such shares following a foreclosure could result in a Change of Control under
the Indenture.
The Company has significant contingent liabilities, including liabilities
with respect to litigation matters, indemnification obligations relating to
certain tax benefit transfer sale-leaseback transactions and other obligations
assumed in the Transfer. In addition, a change of control or other event that
results in deconsolidation of the Company and TransAmerican for federal income
tax purposes could result in acceleration of a substantial amount of federal
income taxes. These matters, individually and in the aggregate, amount to
significant potential liability which, if adjudicated in a manner adverse to
the Company in one reporting period, could have a material adverse effect on
the Company's cash flow or operations for that period. Although the outcome of
these contingencies or the probability of the occurrence of these
contingencies cannot be predicted with certainty, the Company does not expect
these matters to have a material adverse effect on its financial position.
3. OTHER CURRENT ASSETS
The major components of other current assets are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
APRIL
30, JANUARY 31,
1996 1996
------- -----------
<S> <C> <C>
Prepayments:
Trade................... $ 3,770 $ 2,394
Drilling................ 1,464 2,070
Insurance............... 1,961 1,430
Properties held for sale.. 6,000 6,000
Restricted cash........... 7,368 7,368
Settlement values of
commodity price swap
agreements............... 33,910 31,317
Other..................... 257 242
------- -------
$54,730 $50,821
======= =======
</TABLE>
11
<PAGE>
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
4. ACCRUED LIABILITIES
The major components of accrued liabilities are as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1996 1996
--------- -----------
<S> <C> <C>
Royalties.......................................... $ 13,105 $ 9,793
Taxes other than income taxes...................... 6,984 2,733
Accrued interest................................... 34,756 11,756
Payroll............................................ 5,649 4,832
Litigation settlements............................. 4,053 7,053
Settlement values of commodity price swap
agreements........................................ 36,638 31,317
Insurance.......................................... 3,238 1,248
Deferred revenue................................... 10,367 4,000
Other.............................................. 1,308 2,024
--------- --------
$ 116,098 $ 74,756
========= ========
</TABLE>
5. SUMMARY FINANCIAL INFORMATION
The following summary financial information of TTC reflects its financial
position as of April 30, 1996 and January 31, 1996 and its results of
operations for the three months ended April 30, 1996 and 1995 (in thousands of
dollars):
<TABLE>
<CAPTION>
APRIL
30, JANUARY 31,
1996 1996
ASSETS ------- -----------
<S> <C> <C>
Total current assets.................................. $ 6,324 $ 811
Property and equipment, net........................... 76,776 70,273
Other assets.......................................... 3 3
------- -------
$83,103 $71,087
======= =======
<CAPTION>
LIABILITIES AND EQUITY
<S> <C> <C>
Total current liabilities............................. $ 5,565 $ 6,191
Total noncurrent liabilities.......................... 28,995 21,016
Total equity.......................................... 48,543 43,880
------- -------
$83,103 $71,087
======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED APRIL 30,
---------------
1996 1995
------- -------
<S> <C> <C>
Revenues................................................. $31,153 $22,710
Operating expenses....................................... 23,979 17,981
------- -------
Operating income....................................... 7,174 4,729
Other income (expense)................................... -- (47)
------- -------
Income before income taxes............................. 7,174 4,682
Income taxes............................................. 2,511 1,639
------- -------
Net income............................................. $ 4,663 $ 3,043
======= =======
</TABLE>
12
<PAGE>
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
Operating expenses for the three months ended April 30, 1996 increased by
approximately $6.0 million from the comparable prior year period primarily due
to increases in the spot market price of natural gas, which resulted in
increases in NGL and compressor fuel costs. Included in revenues for the three
months ended April 30, 1996 is a gain of approximately $7.5 million on the
sale of the Company's interest in the MidCon Texas pipeline and net gains on
the disposition of other equipment.
TTC conducts significant intercompany activities with TransTexas Gas
Corporation and TransAmerican. Included in the results of operations of TTC
are the following transactions with affiliates (in thousands of dollars).
<TABLE>
<CAPTION>
THREE MONTHS
ENDED APRIL 30,
---------------
1996 1995
------- -------
<S> <C> <C>
Revenues.................................................. $ 6,586 $ 8,530
Operating costs and expenses.............................. 18,149 13,697
</TABLE>
Affiliated operating costs and expenses for the three months ended April 30,
1996 and 1995 include the cost of natural gas purchased from TransTexas Gas
Corporation of approximately $12 million and $10 million, respectively.
Nonaffiliated revenues for the respective periods include the sales of natural
gas liquids and condensate extracted from this purchased gas of $14 million
and $13 million.
6. INCOME TAXES
Total income tax expense differs from amounts computed by applying the
statutory federal income tax rate to income before income taxes. The items
accounting for this difference are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED APRIL
30,
--------------
1996 1995
------- ------
<S> <C> <C>
Federal income tax at the statutory rate................. $ 1,626 $ (674)
Increase (decrease) in tax resulting from:
Accrual adjustment..................................... -- 2,593
------- ------
$ 1,626 $1,919
======= ======
</TABLE>
Income tax expense for the three months ended April 30, 1995 includes an
adjustment of $2.6 million to reconcile the Company's fiscal 1994 tax accrual
to the tax return.
Deconsolidation
TransAmerican Energy Corporation ("TEC") and TARC, both subsidiaries of
TransAmerican, currently own approximately 54% and 14%, respectively, of the
outstanding common stock of the Company. These shares are pledged as
collateral for TARC's outstanding debt securities. TransDakota Oil Corporation
("TDOC"), another subsidiary of TransAmerican, owns 5% of the outstanding
common stock of the Company, which is pledged as collateral for TDOC's debt
securities.
Under certain circumstances, TransAmerican, TDOC, TEC or TARC may sell or
otherwise dispose of shares of common stock of the Company. If, as a result of
any sale or other disposition of the Company's
13
<PAGE>
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
common stock, the direct and indirect ownership of the Company by
TransAmerican is less than 80% (measured by voting power and value), the
Company will no longer be a member of TransAmerican's consolidated group for
federal tax purposes (the "TransAmerican Consolidated Group") and, with
certain exceptions, will no longer be obligated under the terms and conditions
of the Tax Allocation Agreement (as defined below) ("Deconsolidation").
Further, if TEC or TARC sells or otherwise transfers any stock of TARC, or
issues any options, warrants or other similar rights relating to such stock,
outside of the TransAmerican Consolidated Group, then a Deconsolidation of
both TARC and the Company from the TransAmerican Consolidated Group would
occur. For the taxable year during which Deconsolidation of the Company
occurs, which would also be the final year that the Company is a member of the
TransAmerican Consolidated Group, TransAmerican would recognize a previously
deferred gain of approximately $266.3 million associated with the Transfer and
would be required to pay federal income tax on this gain (the tax is estimated
to be between $29 million and $56 million if Deconsolidation occurs in fiscal
1997 and between $24 million and $45 million if Deconsolidation occurs in
fiscal 1998). This analysis is based on the Company's position that the gain
from the Transfer, which occurred in 1993, was deferred under the consolidated
return regulations. The deferred gain generally is being included in
TransAmerican's taxable income in a manner that corresponds (as to timing and
amount) with the realization by the Company of (and, thus, will be offset by)
the tax benefits (i.e., additional depreciation, depletion and amortization
on, or reduced gain or increased loss from a sale of, the transferred assets)
arising from the additional basis. If, under the terms of the TARC Notes, it
was reasonably certain when the TARC Notes were issued that a sufficient
amount of the Company's stock would be disposed in the future to cause a
Deconsolidation of the Company from the TransAmerican Consolidated Group, it
is possible that the Deconsolidation of the Company would be treated as
occurring as of the date the TARC Notes were issued. However, TARC has advised
the Company that it believes that when the TARC Notes were issued it was not
reasonably certain that a Deconsolidation of the Company would occur in the
future. Under the Tax Allocation Agreement, the Company is required to pay
TransAmerican each year an amount equal to the lesser of (i) the reduction in
taxes paid by the Company for such year as a result of any increase in the tax
basis of assets acquired by the Company from TransAmerican that is
attributable to the Transfer and (ii) the increase in taxes paid by
TransAmerican for such year and all prior years attributable to gain
recognized by TransAmerican in connection with the contribution of assets by
TransAmerican to the Company (less certain amounts paid by the Company for all
prior years). The Company estimates that if Deconsolidation occurs in fiscal
1997 or 1998, the amount reimbursed to TransAmerican would be between $9
million and $16 million and between $7 million and $13 million, respectively.
The remaining amount of the tax relating to the gain would be paid to
TransAmerican over the lives of the assets transferred. In addition, the
Company could be liable for additional taxes pursuant to the Tax Allocation
Agreement and the several liability provisions of federal tax law.
Generally, under the Tax Allocation Agreement, if net operating losses of
the Company are used by other members of the TransAmerican Consolidated Group,
then the Company is entitled to the benefit (through reduced current tax
payable) of such losses in later years to the extent the Company has taxable
income, remains a member of the TransAmerican Consolidated Group, and the
other group members have the ability to pay such taxes. If TEC, TARC or TDOC
transfers shares of the Company (or transfers options or other rights to
acquire such shares) and, as a result of such transfer, Deconsolidation of the
Company occurs, the Company would not receive any benefit pursuant to the Tax
Allocation Agreement for net operating losses of the Company used by other
members of the TransAmerican Consolidated Group prior to the Deconsolidation
of the Company.
Each member of a consolidated group filing a consolidated federal income tax
return is severally liable to the Internal Revenue Service (the "IRS") for the
consolidated federal income tax liability of the consolidated group. There can
be no assurance that TransAmerican will have the ability to satisfy the above
tax obligation at the time due and, therefore, the Company, TARC or TEC may be
required to pay the tax.
14
<PAGE>
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
Under the Tax Allocation Agreement, the Company will be required to pay any
Texas franchise tax (which is estimated not to exceed $10.6 million) which may
be attributable to any gain recognized by TransAmerican on the Transfer and
will be entitled to any benefits of the additional basis resulting from the
recognition of such gain.
7. HEDGING AGREEMENTS
Beginning in April 1995, the Company entered into commodity price swap
agreements (the "Hedge Agreements") to reduce its exposure to price risk in
the spot market for natural gas. Pursuant to the Hedge Agreements, either the
Company or the counter party thereto is required to make a payment to the
other at the end of each month (the "Settlement Date"). The payments will
equal the product of a notional quantity ("Base Quantity") of natural gas and
the difference between a specified fixed price ("Fixed Price") and a market
price ("Floating Price") for natural gas. The Floating Price is determined by
reference to natural gas futures contracts traded on the New York Mercantile
Exchange ("NYMEX"). The Hedge Agreements provide for the Company to make
payments to the counter party to the extent that the Floating Price exceeds
the Fixed Price, up to a maximum ("Maximum Floating Price") and for the
counter party to make payments to the Company to the extent that the Floating
Price is less than the Fixed Price. For the three months ended April 30, 1996,
the Company incurred net settlement losses pursuant to the Hedge Agreements
totaling approximately $9.6 million. As of April 30, 1996, the Company has
Hedge Agreements with Settlement Dates ranging from May 1996 through April
1997 involving total Base Quantities for all monthly periods of approximately
73.0 TBtu of natural gas. Fixed Prices for these agreements range from $1.70
to $1.72 per MMBtu ($1.76 to $1.78 per Mcf) up to a Maximum Floating Price of
$2.20 per MMBtu ($2.28 per Mcf). At April 30, 1996, the estimated cost to
settle all of the Hedge Agreements would have been approximately $31.1
million. These agreements are accounted for as hedges and accordingly, any
gains or losses are deferred and recognized in the month the physical volumes
are delivered. At April 30, 1996, the Company maintained $13.9 million in
margin accounts related to the Hedge Agreements. The Company may be required
to post additional cash margin whenever the daily natural gas futures prices
as reported on the NYMEX, for each of the months in which the swap agreements
are in place, exceed the Fixed Price. The maximum margin call under each Hedge
Agreement will never exceed the product of the Base Quantity for the remaining
months under such Hedge Agreement multiplied by the difference between the
Maximum Floating Price and the Fixed Price.
In June 1996, the Company entered into a Master Swap Agreement (the "Master
Swap Agreement") with one of its swap counter parties, which replaced a
previously existing master agreement governing the swaps between the two
parties. The Company's obligations under the Master Swap Agreement are
collateralized by a mortgage on a substantial portion of the Company's
producing properties. In accordance with the Indenture, the lien created by
the mortgage collateralizes obligations up to a maximum of $80.8 million (10%
of the SEC PV10 of the Company's most recent reserve report). As contemplated
by the Indenture, the Trustee under the Indenture has subordinated the lien
collateralizing the Notes outstanding thereunder to the lien collateralizing
the Company's obligations under the Master Swap Agreement. The maximum amount
of obligations of the Company that could be collateralized by the mortgage,
based on the swaps in place under the Master Swap Agreement as of the date
hereof, is approximately $12 million. Subject to compliance with certain
collateral coverage tests, the Company is not required to provide additional
cash margin for any swaps now or hereafter subject to the Master Swap
Agreement.
8. LITIGATION SETTLEMENTS
Terry/Penrod. TransAmerican and a group of TransAmerican's former bank
lenders (the "Bank Group") were parties to a consolidated suit filed December
6, 1991, in the United States District Court for the Southern
15
<PAGE>
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
District of Texas, Houston Division, relating to the interpretation of two
third-party drilling agreements. Plaintiffs Ensco Offshore Company, f/k/a
Penrod Drilling Corporation, Terry Oilfield Supply Co., Inc. and Terry
Resources, Inc. ("Terry") sued TransAmerican for approximately $50 million in
actual damages and punitive damages of not less than five times actual
damages. On April 5, 1996, the court entered a final judgment against
TransAmerican, the Company and several of their affiliates, in the amount of
approximately $43 million, plus interest. On April 18, 1996, the court entered
a separate judgment against the same parties for Terry's attorneys' fees of $2
million. In May 1996, the Company paid Terry approximately $19 million and
caused escrowed funds held for the benefit of the Bank Group of approximately
$22 million to be paid to Terry. Upon payment of the settlement amount, Terry
released the judgments, released all liens and reassigned to the Company a
production payment in certain properties. Terry dismissed an unrelated
administrative proceeding upon payment of the settlement amount described
above.
9. CREDIT AGREEMENTS
The Company and BNY Financial Corporation entered into an Amended and
Restated Accounts Receivable Management and Security Agreement, as of October
31, 1995, for a $40 million line of credit. The line of credit is
collateralized by accounts receivable and inventory of the Company and is
guaranteed by John R. Stanley. The amounts which may be advanced to the
Company under this line of credit are based on a percentage of the Company's
natural gas receivables from unaffiliated third parties. The amount
outstanding under the line of credit as of April 30, 1996 was $20.7 million.
Based upon foreseeable accounts receivable levels, the Company estimates the
maximum amount available at any one time under this facility for fiscal 1997
will be approximately $26 million.
Under the terms of this agreement, the Company's net loss (including any
extraordinary losses) may not exceed $5 million for each fiscal quarter ending
after January 31, 1996 ($10 million for each six-month period). This line of
credit is also subject to certain other covenants which relate to, among other
things, the maintenance of certain financial ratios.
In May 1996, the Company entered into a Note Purchase Agreement pursuant to
which the Company issued notes in the aggregate principal amount of $15.75
million, for aggregate proceeds of $15 million. The notes bear interest at 13
1/3% per annum and mature in August 1996. The notes are guaranteed on a senior
secured basis by TransAmerican.
10. TRANSACTIONS WITH AFFILIATES
In February 1996, the Company purchased the building for its corporate
headquarters from TransAmerican for $4 million.
In December 1994, the Company entered into an interruptible gas sales
agreement with TransAmerican, revenues from which totaled approximately $10.4
million and $2.6 million, respectively, for the three months ended April 30,
1996 and 1995. The receivable from TransAmerican for natural gas sales totaled
approximately $10.5 million at April 30, 1996.
The Company sells natural gas to TARC under an interruptible long-term sales
contract. Revenues from TARC under this contract totaled approximately $0.3
million and $0.1 million for the three months ended April 30, 1996 and 1995,
respectively. The receivable from TARC for natural gas sales totaled
approximately $0.3 million at April 30, 1996. The receivable from TARC for
natural gas sales at January 31, 1996 was immaterial.
In January 1996, the Company and TransTexas Exploration Corporation, as a
wholly-owned subsidiary of the Company ("TTEX") entered into a Drilling
Program, as defined in the Indenture. Pursuant to the Drilling
16
<PAGE>
TRANSTEXAS GAS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
Program, TTEX will receive a portion of revenues from certain of the Company's
wells. TTEX has paid the Company approximately $5.4 million pursuant to this
Drilling Program as of April 30, 1996 and will pay the Company an additional
$18.3 million during fiscal 1997. This transaction does not affect the
consolidated cash flow of the Company.
Pursuant to the terms of the Transfer Agreement, TransAmerican has
indemnified the Company for substantially all of the Company's liability in
connection with the settlement of the Terry/Penrod litigation (See Note 8). In
order to facilitate the settlement, the Company advanced to TransAmerican
$16.4 million of the settlement in exchange for a note receivable. The note is
due in installments and partially collateralized by certain of TransAmerican's
oil and gas properties. In connection with the litigation settlement, the
Company received from Terry the reversionary interest in certain producing
properties. The Company and TransAmerican had intended that such interests
would revert to TransAmerican under the Transfer Agreement. The Company and
TransAmerican have agreed in principle that the Company will retain such
interests in partial satisfaction of TransAmerican's indemnity obligations.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto of the Company included
elsewhere in this report.
RESULTS OF OPERATIONS
General
The Company's results of operations are dependent upon natural gas
production volumes and unit prices from sales of natural gas, condensate, and
natural gas liquids ("NGLs"). The profitability of the Company also depends on
the volume of natural gas it gathers and transports, its ability to minimize
finding and lifting costs and maintaining its reserve base while maximizing
production.
The Company's operating data for the three months ended April 30, 1996 and
1995, is as follows:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED APRIL
30,
------------
1996 1995
----- -----
<S> <C> <C>
Sales volumes:
Gas (Bcf) (1)............................................. 36.2 35.8
NGLs (MMgal).............................................. 48.2 52.3
Condensate (MBbls)........................................ 164 176
Average prices:
Gas (dry) (per Mcf) (2)................................... $2.03 $1.34
NGLs (per gallon)......................................... .31 .26
Condensate (per Bbl)...................................... 20.03 17.67
Number of gross wells drilled............................. 45 18
Percentage of wells completed............................. 84% 83%
</TABLE>
- - --------
(1) Sales volumes for the three months ended April 30, 1996 include 5.9 Bcf
delivered pursuant to a volumetric production payment.
(2) Average price for the three months ended April 30, 1996 includes amounts
delivered under volumetric production payments. The average gas price for
the Company's undedicated production for this period was $2.18 per Mcf.
Gas prices do not include the effect of hedging agreements.
A summary of the Company's operating expenses is set forth below (in
millions of dollars):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED APRIL 30,
---------------
1996 1995
------- -------
<S> <C> <C>
Operating costs and expenses:
Lease.................................................. $ 6.7 $ 4.0
Pipeline............................................... 8.2 5.3
Natural gas liquids.................................... 12.5 10.2
------- -------
27.4 19.5
Taxes other than income taxes (1)........................ 5.2 3.9
------- -------
Total.................................................. $ 32.6 $ 23.4
======= =======
</TABLE>
- - --------
(1) Taxes other than income taxes include severance, property, and other
taxes.
The Company's average depletion rates have been as follows:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
APRIL 30,
---------
1996 1995
---- ----
<S> <C> <C>
Depletion rates (per Mcfe)..................................... $.90 $.78
</TABLE>
18
<PAGE>
The Company's Consolidated EBITDA, as defined in the Indenture, which
consists of the Company's earnings before consolidated fixed charges
(including $3.9 million and $1.0 million of capitalized interest and the
interest component of rent expense for the quarters ended April 30, 1996 and
1995, respectively), income taxes, depreciation, depletion, and amortization
are set forth below (in millions of dollars):
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED APRIL
30,
-----------
1996 1995
----- -----
<S> <C> <C>
Consolidated EBITDA........................................... $60.9 $45.3
</TABLE>
Three Months Ended April 30, 1996, Compared with the Three Months Ended April
30, 1995
Gas, condensate and NGLs revenues for the three months ended April 30, 1996
increased by $15.9 million from the comparable period of the prior year, due
primarily to increases in gas, condensate and NGL prices, offset in part by
decreases in condensate and NGL sales volumes. The average monthly prices
received per Mcf of gas, excluding amounts dedicated to volumetric production
payments, ranged from $2.04 to $2.45 in the three months ended April 30, 1996,
compared to a range of $1.29 to $1.43 in the same period in the prior year. As
of April 30, 1996, the Company had a total of 1,024 producing wells compared
to 936 at April 30, 1995. NGL sales volumes decreased primarily due to the
decrease in the volumes of natural gas processed. Transportation revenues
decreased by $0.7 million for the quarter ended April 30, 1996, due to
decreases in volumes transported through the Company's pipeline system. The
Company currently transports a portion of its production from the Bob West and
Bob West North development areas through a third-party pipeline.
Lease operating expenses for the quarter ended April 30, 1996 increased by
$2.7 million over the comparable prior year period primarily due to the
increase in producing wells and the initiation of a program to increase flow
rates on certain of the Company's wells through the installation of wellhead
compressors. The Company estimates that rental of these compressors will add
approximately $0.9 million to lease operating expenses in fiscal 1997.
Pipeline operating expenses increased by $2.9 million due primarily to
increases in compressor fuel costs and chemicals used in the operation of the
Company's amine plants. NGLs cost increased by $2.3 million from the first
quarter in the prior year due to the increase in the cost of natural gas
processed. Depreciation, depletion and amortization expense for the three
months ended April 30, 1996 decreased by $0.8 million due to a decrease in the
Company's undedicated natural gas production, offset by a $0.12 increase in
the depletion rate. General and administrative expenses increased by $1.8
million in the three months ended April 30, 1996, due primarily to increases
in wages and benefits and outside services.
Interest income for the three months ended April 30, 1996 increased by
approximately $0.7 million over the comparable prior year period due to
increased cash balances resulting from the issuance of the Notes in June 1995.
Interest expense increased by $7.0 million over the same period of the prior
year primarily as a result of interest accrued on the Notes, offset in part by
the capitalization of approximately $3.7 million of interest in connection
with the acquisition of certain of the Company's gas and oil properties.
Cash provided by operating activities for the three months ended April 30,
1996 increased by $56.9 million from the comparable prior year period due
primarily to the increase in prices received for the Company's gas, condensate
and NGLs and the sale of a volumetric production payment in the three months
ended April 30, 1996. Cash provided by operating activities for the three
months ended April 30, 1995 reflects an interest payment of $26.2 million on
the Company's $500 million Senior Secured Notes.
Liquidity and Capital Resources
A primary source of funds to meet the Company's capital and debt service
requirements is net cash flow provided by operating activities, which is
dependent on the prices the Company receives for the volumes of natural gas
the Company produces. The Company has entered into hedge agreements to reduce
a portion of its exposure to natural gas prices. See Note 7 of Notes to
Condensed Consolidated Financial Statements included elsewhere herein.
19
<PAGE>
The Company makes substantial capital expenditures for the exploration,
development and production of its natural gas reserves. The Company has
financed these expenditures primarily with cash from operations, public
offerings of debt and equity securities, the sale of production payments and
other financings. For the three months ended April 30, 1996, total capital
expenditures were $92 million, including $5 million for lease acquisitions,
$71 million for drilling and development and $16 million for the Company's gas
gathering and pipeline system and other equipment. Pursuant to the Indenture,
if the Company's Working Capital, as defined in the Indenture, is less than
$20 million at the end of any fiscal quarter, the Company's Capital
Expenditures, as defined, for the next succeeding fiscal quarter may not
exceed 90% of the Company's Consolidated EBITDA for such prior fiscal quarter
minus the Company's Consolidated Fixed Charges for such prior fiscal quarter
(the "Capital Expenditure Limit"). The Company's Working Capital at April 30,
1996 was less than $20 million. As a result, the Company's Capital
Expenditures for the quarter ending July 31, 1996 may not exceed the Capital
Expenditure Limit. The Company anticipates that such restriction will not have
a material effect on developmental drilling for the current fiscal quarter. In
addition, the Indenture permits the Company to fund the drilling of up to 30
wells in any fiscal year pursuant to third-party drilling programs. Any costs
associated with these wells would not be included in Capital Expenditures.
The Company anticipates total capital expenditures of approximately $210
million in each of fiscal 1997 and fiscal 1998, subject to Indenture
requirements and available cash flow, of which approximately $175 million will
be used for drilling and development, $15 million for lease acquisitions and
$20 million for the Company's gas gathering and pipeline system (including
pipeline expansion into the La Grulla development area) and other equipment.
If revenues decrease, certain contingent obligations of the Company become
fixed or the Company's level of capital expenditures remains limited by the
Indenture, the Company may not have sufficient funds for, or may be restricted
in maintaining the level of, capital expenditures necessary to replace its
reserves or to maintain production at current levels and, as a result,
production may decrease over time. Although cash from operating activities for
the three months ended April 30, 1996 has increased, net cash provided by
operating activities declined over the three and one-half years ended January
31, 1996. No assurance can be given that the Company's cash flow from
operating activities will be sufficient to meet planned capital expenditures,
contingent liabilities and debt service in the future. Since July 31, 1995,
the Company has utilized asset sales and various financings, in addition to
cash flow from operating activities, to meet its working capital requirements.
The Company anticipates that it will utilize additional financing or sales of
assets to fund planned levels of operations and to meet its obligations,
including its obligations under the Indenture, through January 1997.
In January 1996, the Company entered into a reimbursement agreement with an
unaffiliated third party pursuant to which the third party caused a $20
million letter of credit to be issued to collateralize a supersedeas bond on
behalf of the Company in a legal proceeding. Prior to this transaction, the
supersedeas bond had been collateralized by other letters of credit. These
letters of credit were collateralized by $20 million in cash, which has been
released to the Company. If there is a draw under the letter of credit, the
Company is required to reimburse the third party within 60 days.
In January and February 1996, the Company completed both a financing and a
sale-leaseback transaction, each in the amount of $3 million, related to its
operating equipment. Both the financing, which has an interest rate of 9% per
annum, and the sale-leaseback transaction, which has a monthly lease payment
of approximately $56,400, have a 36-month term. In February 1996, the Company
completed an additional financing collateralized by its operating equipment in
the amount of $10 million at an interest rate of 12% per annum and a 36-month
term.
In January 1996, the Company sold to an unaffiliated third party a term
overriding royalty interest in the form of a production payment carved out of
its interests in certain of its producing properties. For net proceeds of
approximately $33 million, the Company conveyed to the third party a term
overriding royalty equivalent to a base volume of approximately 29 Bcf of
natural gas, subject to certain increases in the base volume and in the
percentage interest dedicated if certain minimum performance and delivery
requirements are not met. In February 1996, in consideration for additional
net proceeds of approximately $15.5 million, the Company supplemented
20
<PAGE>
the production payment to subject a percentage of its interests in certain
additional producing properties to the production payment and to include
additional volumes of approximately 14 Bcf of natural gas within the base
volume subject to the production payment.
In March 1996, the Company sold its 41.67% interest in the 76-mile, 24-inch
MidCon Texas pipeline that runs from the Company's Thompsonville compressor
station to Agua Dulce for $7.5 million. The Company believes that its existing
transportation capacity in this area is adequate for the Company's production
and does not anticipate any material constraints on the transportation of its
natural gas as a result of this sale.
In May 1996, the Company sold to an unaffiliated third party an additional
term royalty interest in the form of a volumetric production payment on
certain of the Company's producing properties. For net proceeds of
approximately $43 million, the Company conveyed to the third party a royalty
on approximately 37 Bcf of natural gas, which amount can increase if certain
minimum monthly volumes are not delivered to the production payment interest.
The Company used approximately $25 million of these net proceeds to terminate
an existing dollar-denominated production payment.
In May 1996, the Company entered into a Note Purchase Agreement pursuant to
which the Company issued notes in the aggregate principal amount of $15.75
million for aggregate proceeds of $15 million. The notes bear interest at 13
1/3% per annum and mature in August 1996. The notes are guaranteed on a senior
secured basis by TransAmerican.
In May 1996, the Company entered into an agreement with one of its swap
counter parties as a result of which the Company, subject to compliance with
certain collateral coverage tests, will not be required to make cash margin
deposits with respect to the swaps covered by such agreement. See Note 7 to
the accompanying Condensed Consolidated Financial Statements.
The Company has engaged an investment banking firm to assist in the
potential sale or sale/leaseback of all or a portion of the Pipeline System,
without disrupting the pipeline capacity available to the Company. The Company
has also engaged an investment banking firm to assist in the sale of its
interest in the Lodgepole area and three separate packages of producing
properties in the Lobo Trend containing a total of approximately 200 Bcfe of
natural gas reserves.
The Company currently has a $40 million credit facility with BNY Financial
Corporation (the "BNY Facility") pursuant to which it may borrow funds based
on the amount of its accounts receivable. At April 30, 1996, the outstanding
balance under the BNY Facility was $20.7 million. The Company does not
anticipate that it will be able to borrow more than $26 million under the BNY
Facility during fiscal 1997, based on the expected amount of its accounts
receivable. The BNY Facility requires the Company to maintain certain
financial ratios and includes certain covenants. Under the terms of the BNY
Facility, the Company's net loss (including any extraordinary losses) may not
exceed $5 million for each fiscal quarter ending after January 31, 1996 ($10
million for each six-month period).
Pursuant to the Indenture, the Company maintains an account (the "Interest
Reserve Account") from which funds may only be disbursed in accordance with
the terms of a Cash Collateral and Disbursement Agreement (the "Disbursement
Agreement"). The Company has deposited into the Interest Reserve Account funds
sufficient to pay the aggregate amount of the next ensuing interest payment
due in respect of the Notes. Funds in the Interest Reserve Account may be
invested, at the direction of the Company (except as provided below), only in
cash and Cash Equivalents as defined in the Disbursement Agreement, and any
interest income thereon will be added to the balance of the Interest Reserve
Account. The Company must maintain a balance (the "Requisite Balance") in the
Interest Reserve Account at least equal to the amount necessary to satisfy the
Company's obligation to pay interest in respect of all then outstanding Notes
on the next Interest Payment Date; provided, however, that if, pursuant to the
Disbursement Agreement, any funds in the Interest Reserve Account are applied
to the payment of interest on the Notes, the Company shall not be obligated to
maintain the Requisite Balance during the period of 60 days immediately
following the Interest Payment Date in respect of which such payment was made.
21
<PAGE>
The Company may instruct the disbursement agent under the Disbursement
Agreement to deposit with the Indenture Trustee, on any Interest Payment Date,
any or all of the funds in the Interest Reserve Account. The Disbursement
Agreement provides that if the Company fails to pay an installment of interest
on the Notes on any Interest Payment Date, then all investments in the
Interest Reserve Account will be immediately liquidated and all funds in the
Interest Reserve Account will be deposited with the Indenture Trustee. If the
Company has not paid such installment of interest within five days after such
Interest Payment Date, or if the Company so instructs the Indenture Trustee,
the Indenture Trustee will apply such deposited funds to the payment of
interest on the Notes. The Disbursement Agreement provides that funds may be
disbursed from the Interest Reserve Account and released to the Company only
to the extent that the balance thereof exceeds the Requisite Balance.
Deconsolidation for Federal Income Tax Purposes
Under certain circumstances, TransAmerican, TDOC, TEC or TARC may sell or
otherwise dispose of shares of common stock of the Company. If, as a result of
any sale or other disposition of the Company's common stock, the direct and
indirect ownership of the Company by TransAmerican is less than 80% (measured
by voting power and value), the Company will no longer be a member of
TransAmerican's consolidated group for federal tax purposes (the
"TransAmerican Consolidated Group") and, with certain exceptions, will no
longer be obligated under the terms and conditions of the Tax Allocation
Agreement (as defined below) ("Deconsolidation"). Further, if TEC or TARC
sells or otherwise transfers any stock of TARC, or issues any options,
warrants or other similar rights relating to such stock, outside of the
TransAmerican Consolidated Group, then a Deconsolidation of both TARC and the
Company from the TransAmerican Consolidated Group would occur. For the taxable
year during which Deconsolidation of the Company occurs, which would also be
the final year that the Company is a member of the TransAmerican Consolidated
Group, TransAmerican would recognize a previously deferred gain of
approximately $266.3 million associated with the Transfer and would be
required to pay federal income tax on this gain (the tax is estimated to be
between $29 million and $56 million if Deconsolidation occurs in fiscal 1997
and between $24 million and $45 million if Deconsolidation occurs in fiscal
1998). This analysis is based on the Company's position that the gain from the
Transfer, which occurred in 1993, was deferred under the consolidated return
regulations. The deferred gain generally is being included in TransAmerican's
taxable income in a manner that corresponds (as to timing and amount) with the
realization by the Company of (and, thus, will be offset by) the tax benefits
(i.e., additional depreciation, depletion and amortization on, or reduced gain
or increased loss from a sale of, the transferred assets) arising from the
additional basis. If, under the terms of the TARC Notes, it was reasonably
certain when the TARC Notes were issued that a sufficient amount of the
Company's stock would be disposed in the future to cause a Deconsolidation of
the Company from the TransAmerican Consolidated Group, it is possible that the
Deconsolidation of the Company would be treated as occurring as of the date
the TARC Notes were issued. However, TARC has advised the Company that it
believes that when the TARC Notes were issued it was not reasonably certain
that a Deconsolidation of the Company would occur in the future. Under the Tax
Allocation Agreement, the Company is required to pay TransAmerican each year
an amount equal to the lesser of (i) the reduction in taxes paid by the
Company for such year as a result of any increase in the tax basis of assets
acquired by the Company from TransAmerican that is attributable to the
Transfer and (ii) the increase in taxes paid by TransAmerican for such year
and all prior years attributable to gain recognized by TransAmerican in
connection with the contribution of assets by TransAmerican to the Company
(less certain amounts paid by the Company for all prior years). The Company
estimates that if Deconsolidation occurs in fiscal 1997 or 1998, the amount
reimbursed to TransAmerican would be between $9 million and $16 million and
between $7 million and $13 million, respectively. The remaining amount of the
tax relating to the gain would be paid over the lives of the assets
transferred. In addition, the Company could be liable for additional taxes
pursuant to the Tax Allocation Agreement and the several liability provisions
of federal tax law.
Generally, under the Tax Allocation Agreement, if net operating losses of
the Company are used by other members of the TransAmerican Consolidated Group,
then the Company is entitled to the benefit (through reduced current tax
payable) of such losses in later years to the extent the Company has taxable
income, remains a member of the TransAmerican Consolidated Group, and the
other group members have the ability to pay such taxes. If TEC, TARC or TDOC
transfers shares of the Company (or transfers options or other rights to
acquire
22
<PAGE>
such shares) and, as a result of such transfer, the direct and indirect
ownership of the Company by TARC, TEC and TransAmerican is less than 80%
(measured by voting power and value), the Company would no longer be a member
of the TransAmerican Consolidated Group. The Company, therefore, would not
receive any benefit pursuant to the Tax Allocation Agreement for net operating
losses of the Company used by other members of the TransAmerican Consolidated
Group prior to the deconsolidation of the Company.
Each member of a consolidated group filing a consolidated federal income tax
return is severally liable to the Internal Revenue Service (the "IRS") for the
consolidated federal income tax liability of the consolidated group. There can
be no assurance that TransAmerican will have the ability to satisfy the above
tax obligation at the time due and, therefore, the Company, TARC or TEC may be
required to pay the tax.
Under the Tax Allocation Agreement, the Company will be required to pay any
Texas franchise tax (which is estimated not to exceed $10.6 million) which may
be attributable to any gain recognized by TransAmerican on the Transfer and
will be entitled to any benefits of the additional basis resulting from the
recognition of such gain.
Contingent Liabilities
The Company has significant contingent liabilities, including liabilities
with respect to litigation matters, indemnification obligations relating to
certain tax benefit transfer sale-leaseback transactions, and other
obligations assumed in the Transfer. These matters, individually and in the
aggregate, amount to significant potential liability which, if adjudicated in
a manner adverse to the Company in one reporting period, could have a material
adverse effect on the Company's cash flow or operations for that period.
Although the outcome of these lawsuits cannot be predicted with certainty, the
Company does not expect these matters to have a material adverse effect on its
financial position. The Company has delivered letters of credit and placed
into escrow cash, which letters of credit and cash total approximately $50
million, to be applied to certain potential litigation claims. In addition, a
change of control or other event that results in deconsolidation of the
Company and TransAmerican for federal income tax purposes could also result in
acceleration of a substantial amount of federal income taxes. See Note 6 to
the Condensed Consolidated Financial Statements included elsewhere herein.
Potential Effects of Change of Control
The Indenture provides that, upon the occurrence of a Change of Control (as
such term is defined in the Indenture), each holder of the Notes will have the
right to require the Company to repurchase such holder's Notes at 101% of the
principal amount thereof plus accrued and unpaid interest. A Change of Control
would be deemed to occur under the Indenture in the case of certain changes or
other events in respect of the ownership or control of the Company, including
any circumstance pursuant to which any person or group, other than John R.
Stanley and his wholly-owned subsidiaries or the trustee under the indenture
governing the TARC Notes, is or becomes the beneficial owner of more than 50%
of the total voting power of the Company's then outstanding voting stock,
unless the Notes have an investment grade rating for the period of 120 days
thereafter. The term "person," as used in the definition of Change of Control,
means a natural person, company, government or political subdivision, agency
or instrumentality of a government and also includes a "group," which is
defined as two or more persons acting as a partnership, limited partnership or
other group. In addition, certain changes or other events in respect of the
ownership or control of the Company that do not constitute a Change of Control
under the Indenture may result in a "change of control" of the Company under
the terms of the BNY Facility and certain equipment financing. Such an
occurrence could create an obligation for the Company to repay such other
indebtedness. At April 30, 1996, the Company had approximately $30.2 million
of indebtedness (excluding the Notes) subject to such right of repayment or
repurchase. In the event of a Change of Control under the Indenture or a
"change of control" under the terms of other outstanding indebtedness, there
can be no assurance that the Company will have sufficient funds to satisfy any
such payment obligations.
TARC owns and operates a large petroleum refinery in the Gulf Coast region
along the Mississippi River, approximately 20 miles from New Orleans,
Louisiana. TARC's refinery was shut down in January 1983 and is currently
partially operational. TARC is engaged in a two-phase capital improvement
program designed to
23
<PAGE>
reactivate the refinery and increase its complexity. In February 1995, TARC
issued the TARC Notes that were initially collateralized by, among other
things, 55 million shares of the Company's common stock (the "Common Stock").
In March 1996, TARC sold 4.55 million shares of Common Stock to provide
additional financing for the capital improvement program. TARC's Transition
Report on Form 10-K for the six months ended January 31, 1996, indicates that
TARC will require additional financing of approximately $350 to $355 million
over the course of the remaining construction period to complete the capital
improvement program. TARC has advised the Company that if this financing is not
available on a timely basis, or if significant engineering problems, cost
overruns or delays occur, TARC likely will not be able to complete the first
phase of the capital improvement program by February 15, 1997. TARC has further
advised the Company that, even if required financing is obtained on a timely
basis, completion by February 15, 1997 will still prove very difficult if
personnel shortages prevent full staffing during peak construction periods.
TARC has also advised the Company that it has identified and is considering
certain steps to address these staffing concerns, but there can be no assurance
that these steps will be successful. Under the indenture governing the TARC
Notes, the failure of TARC to complete the first phase of its capital
improvement program by February 15, 1997 (subject to extension to August 15,
1997 if certain financial coverage ratios are met) would constitute an event of
default at such date. Any such event of default could result in the sale,
following the occurrence of such event of default, of some or all of the
remaining 50.45 million shares of Common Stock pledged to collateralize the
TARC Notes. A foreclosure on such shares would constitute a "change of control"
of the Company under the BNY Facility and certain equipment financing, which
may create an obligation for the Company to repay amounts outstanding
thereunder, but would not constitute a Change of Control under the Indenture. A
sale of such shares following a foreclosure could result in a Change of Control
under the Indenture. See "Item 5--TARC Financial Information".
Forward-Looking Statements
Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. Words such as "anticipates," "expects,"
"believes" and "likely" indicate forward-looking statements. The Company's
management believes its current views and expectations are based on reasonable
assumptions; however, there are significant risks and uncertainties that could
significantly affect expected results. Factors that could cause actual results
to differ materially from those in the forward-looking statements include
fluctuations in the commodity prices for natural gas, crude oil, condensate and
natural gas liquids, the extent of the Company's success in discovering,
developing and producing reserves, conditions in the equity and capital
markets, the ultimate resolution of litigation, and competition.
24
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Notes 2 and 8 to the condensed consolidated financial statements for a
discussion of the Company's legal proceedings.
ITEM 5. OTHER INFORMATION
TARC FINANCIAL INFORMATION
The information relating to TARC which is set forth below is included because
a default by TARC on certain of its obligations could, under certain
circumstances, result in a change of control of the Company that could require
the Company to repay or repurchase the Notes.
TARC is subject to the informational requirements of the Exchange Act and, in
accordance therewith, files reports and other information with the Commission.
Such reports and other information can be inspected and copied at the public
reference facilities maintained by the Commission. TARC is a separate legal
entity that does not control, and is not controlled by, the Company. The
Company and TARC have separate operations and are separately managed, although
two of the Company's directors and its Chief Executive Officer also hold the
same positions with TARC. The Company has no control over the content or
presentation of TARC's financial or operating information.
The following information has been excerpted directly from TARC's filings
under the Exchange Act. The Company makes no representations as to, and
disclaims any responsibility for, the accuracy, adequacy or completeness of
such information, which should be read in conjunction with other publicly
available information filed by TARC with the Commission.
For purposes only of the information which follows under this caption "TARC
Financial Information," the term "Company" refers to TARC, cross-references are
to the relevant sections of the TARC filing from which the information is
excerpted, and other capitalized terms have the meanings attributed to such
terms in the TARC filing from which the information is excerpted.
25
<PAGE>
EXCERPTED FROM THE TRANSITION REPORT ON FORM 10-K OF TARC FOR THE SIX MONTHS
ENDED JANUARY 31, 1996 (AS USED HEREIN, THE TERM "COMPANY" REFERS TO TARC,
CROSS-REFERENCES ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM WHICH
THE INFORMATION IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE THE MEANINGS
ATTRIBUTED TO SUCH TERMS IN THE TARC FILING FROM WHICH THE INFORMATION IS
EXCERPTED.)
TRANSAMERICAN REFINING CORPORATION
BALANCE SHEET
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 31,
------------------- JANUARY 31,
1995 1994 1996
ASSETS --------- -------- -----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................... $ 6,105 $ 35 $ 2,779
Long-term debt proceeds held in collateral
account.................................... 7,760 -- 14,840
Accounts receivable......................... 3,792 9,183 121
Receivable from affiliates.................. 436 -- 118
Inventories................................. 39,974 4,498 37,231
Other....................................... 7,244 -- 5,479
--------- -------- ---------
Total current assets...................... 65,311 13,716 60,568
--------- -------- ---------
Property and equipment........................ 279,552 159,308 430,858
Less accumulated depreciation and
amortization................................. 7,388 2,139 10,244
--------- -------- ---------
Net property and equipment.................. 272,164 157,169 420,614
--------- -------- ---------
Long-term debt proceeds held in collateral
account...................................... 133,097 -- 9,565
Other assets, net............................. 29,307 5,442 27,576
--------- -------- ---------
$ 499,879 $176,327 $ 518,323
========= ======== =========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C> <C>
Current liabilities:
Accounts payable............................ $ 14,636 $ 15,971 $ 23,552
Payable to affiliate........................ 1,847 1,239 2,957
Accrued liabilities......................... 15,192 13,344 14,560
Product financing arrangements.............. 27,671 -- 37,206
--------- -------- ---------
Total current liabilities................. 59,346 30,554 78,275
--------- -------- ---------
Payable to affiliates......................... -- 45,021 3,799
Long-term debt................................ 294,963 -- 316,538
Investment in TransTexas...................... 56,621 -- 56,777
Other......................................... 1,112 352 1,168
Commitments and contingencies (Note 11) -- -- --
Stockholder's equity:
Common stock, $0.01 par value, authorized
100,000,000 shares, issued and outstanding,
30,000,000 shares.......................... 300 300 300
Additional paid-in capital.................. 238,322 186,548 238,322
Accumulated deficit......................... (150,785) (86,448) (176,856)
--------- -------- ---------
Total stockholder's equity................ 87,837 100,400 61,766
--------- -------- ---------
$ 499,879 $176,327 $ 518,323
========= ======== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
EXCERPTED FROM THE TRANSITION REPORT ON FORM 10-K OF TARC FOR THE SIX MONTHS
ENDED JANUARY 31, 1996 (AS USED HEREIN, THE TERM "COMPANY" REFERS TO TARC,
CROSS-REFERENCES ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM WHICH
THE INFORMATION IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE THE MEANINGS
ATTRIBUTED TO SUCH TERMS IN THE TARC FILING FROM WHICH THE INFORMATION IS
EXCERPTED.)
TRANSAMERICAN REFINING CORPORATION
STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31,
----------------------------- ---------------------
1995 1994 1993 1996 1995
--------- -------- -------- -------- -----------
(UNAUDITED)
-----------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales........... $140,027 $174,143 $ -- $107,237 $ 71,035
Tank rentals............ 552 3,035 5,178 -- 551
--------- -------- -------- -------- --------
Total revenues........ 140,579 177,178 5,178 107,237 71,586
--------- -------- -------- -------- --------
Costs and expenses:
Cost of products sold... 149,087 168,855 -- 110,052 73,862
Operations and
maintenance............ 12,299 12,103 9,617 7,910 7,727
Depreciation and
amortization........... 5,855 2,589 -- 3,159 2,706
General and
administrative......... 13,614 4,496 11,341 7,438 8,442
Taxes other than income
taxes.................. 4,170 3,661 3,621 649 2,088
--------- -------- -------- -------- --------
Total costs and
expenses............. 185,025 191,704 24,579 129,208 94,825
--------- -------- -------- -------- --------
Operating loss........ (44,446) (14,526) (19,401) (21,971) (23,239)
--------- -------- -------- -------- --------
Other income (expense):
Interest income......... 4,087 37 2 2,263 4
Interest expense........ (31,354) (13) (17) (32,180) (3,540)
Interest capitalized.... 18,850 -- -- 26,202 3,509
Equity in loss before
extraordinary item of
TransTexas............. (2,428) -- -- (156) --
Other income (expense).. 2,451 (2,851) 43 (229) 116
--------- -------- -------- -------- --------
Total other income
(expense)............ (8,394) (2,827) 28 (4,100) 89
--------- -------- -------- -------- --------
Net loss before
extraordinary item... (52,840) (17,353) (19,373) (26,071) (23,150)
Extraordinary item:
Equity in extraordinary
loss of TransTexas..... (11,497) -- -- -- --
--------- -------- -------- -------- --------
Net loss................ $ (64,337) $(17,353) $(19,373) $(26,071) $(23,150)
========= ======== ======== ======== ========
Net loss per share:
Net loss before
extraordinary item..... $ (1.76) $ (0.58) $ (0.65) $ (0.87) $ (0.77)
Extraordinary item...... (0.38) -- -- -- --
--------- -------- -------- -------- --------
$ (2.14) $ (0.58) $ (0.65) $ (0.87) $ (0.77)
========= ======== ======== ======== ========
Weighted average number
of shares outstanding
(in thousands)......... 30,000 30,000 30,000 30,000 30,000
========= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
EXCERPTED FROM THE TRANSITION REPORT ON FORM 10-K OF TARC FOR THE SIX MONTHS
ENDED JANUARY 31, 1996 (AS USED HEREIN, THE TERM "COMPANY" REFERS TO TARC,
CROSS-REFERENCES ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM WHICH
THE INFORMATION IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE THE MEANINGS
ATTRIBUTED TO SUCH TERMS IN THE TARC FILING FROM WHICH THE INFORMATION IS
EXCERPTED.)
TRANSAMERICAN REFINING CORPORATION
STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JULY 31, JANUARY 31,
---------------------------- ---------------------
1995 1994 1993 1996 1995
-------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss.................. $(64,337) $(17,353) $(19,373) $(26,071) (23,150)
Adjustments to reconcile
net loss to net cash used
by operating activities:
Depreciation and
amortization............ 5,855 2,694 -- 3,159 2,706
Litigation............... 4,500 -- 9,000 2,000 4,500
Amortization of discount
on long-term debt....... 7,673 -- -- 3,389 --
Amortization of debt
issue costs............. 552 -- -- 238 --
Equity in net loss of
TransTexas.............. 13,925 -- -- 156 --
Inventory write down..... 1,265 79 -- 4,406 --
Changes in assets and
liabilities:
Accounts receivable.... 4,570 (8,558) (326) 3,671 6,901
Inventories............ (8,249) (4,577) -- 7,242 3,063
Prepayments and other.. (7,244) -- -- 1,765 (221)
Accounts payable....... (2,690) 5,194 131 (1,675) (105)
Payable to affiliate,
net................... (1,214) 1,239 -- 1,979 (765)
Accrued liabilities.... (2,625) 11,391 687 (3,132) (4,871)
Other assets........... (2,126) (1,088) -- (130) 562
Other liabilities...... (259) (96) (41) -- (102)
-------- -------- -------- -------- -------
Net cash used by
operating activities.. (50,404) (11,075) (9,922) (3,003) (11,482)
-------- -------- -------- -------- -------
Investing activities:
Capital expenditures..... (107,374) (57,209) -- (119,565) (52,306)
-------- -------- -------- -------- -------
Financing activities:
Issuance of long-term
debt and warrants....... 300,750 -- -- -- --
Advances from
TransAmerican and
affiliates.............. 87,560 68,523 9,869 16,698 86,925
Repayment of advances
from TransAmerican and
affiliates.............. (60,000) -- -- (13,450) (20,000)
Long-term debt proceeds
held in collateral
account................. (173,000) -- -- -- --
Withdrawals from
collateral account...... 32,143 -- -- 116,452 --
Debt issue costs......... (23,605) (220) -- -- (3,126)
Principal payments on
capital lease
obligations............. -- -- -- (458) --
-------- -------- -------- -------- -------
Net cash provided by
financing activities.. 163,848 68,303 9,869 119,242 63,799
-------- -------- -------- -------- -------
Increase (decrease) in
cash and cash
equivalent............ 6,070 19 (53) (3,326) 11
Beginning cash and cash
equivalents............... 35 16 69 6,105 35
-------- -------- -------- -------- -------
Ending cash and cash
equivalents............... $ 6,105 $ 35 $ 16 $ 2,779 $ 46
======== ======== ======== ======== =======
Cash paid for:
Interest................. $ 1,282 $ -- $ -- $ 8,719 $ --
Noncash financing and
investing activities:
Forgiveness of advances
from TransAmerican
(including $25.0
million for property,
plant and equipment
transferred from
TransAmerican at net
book value in 1994)..... 71,170 100,000 -- -- --
Contribution of TransTexas
stock..................... 37,176 -- -- -- --
TransTexas assumption of
litigation liabilities.... -- 13,500 -- -- --
Accounts payable for
property and equipment.... 11,784 10,429 -- 10,591 8,293
Capital lease obligations
and other incurred for
property and equipment.... 967 1,336 -- 1,643 66
Product financing
arrangements.............. 27,671 -- -- 37,206 --
</TABLE>
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
EXCERPTED FROM THE TRANSITION REPORT ON FORM 10-K OF TARC FOR THE SIX MONTHS
ENDED JANUARY 31, 1996 (AS USED HEREIN, THE TERM "COMPANY" REFERS TO TARC,
CROSS-REFERENCES ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM WHICH
THE INFORMATION IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE THE MEANINGS
ATTRIBUTED TO SUCH TERMS IN THE TARC FILING FROM WHICH THE INFORMATION IS
EXCERPTED.)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and notes thereto.
RESULTS OF OPERATIONS
General
The Company's refinery was inoperative from January 1983 through February
1994. During this period, the Company's revenues related primarily to tank
rentals and its expenses were for maintenance and repairs, tank rentals,
general and administrative expenses and property taxes. The Company commenced
partial operations at the refinery in March 1994 and temporarily ceased
processing operations in December 1994 pending additional funding. Other
factors in the decision to suspend processing operations included relatively
low refining margins. The relatively low margins were attributable to the high
cost of feedstocks relative to intermediate product prices produced from the
limited portion of the refinery being operated. The Company recommenced
processing operations in May 1995 and temporarily ceased operations from
October 1995 to April 1996. From time to time, the Company will be required to
suspend operations in order to tie-in units as they are completed.
Additionally, the Company may suspend operations because of working capital
constraints or operating margins. The Company does not consider its historical
results to be indicative of future results.
The Company's results of operations are dependent on the operating status of
certain units within its refinery, which determines the types of feedstocks
processed and refined product yields. The results are also affected by the
unit costs of purchased feedstocks and the unit prices of refined products,
which can vary significantly. The Capital Improvement Program is designed to
significantly change the Company's throughput capacity, the feedstocks
processed, and refined product yields.
Six Months Ended January 31, 1996, Compared with the Six Months Ended January
31, 1995
Total revenues for the six months ended January 31, 1996 increased $35.6
million to $107.2 million from $71.6 million in the same period in 1995,
primarily due to an increase in the volume of products sold to 6.1 million
barrels in 1996 from 4.2 million barrels in 1995. In addition, $1.2 million of
the increase was due to an increase in the average product sales price of
$0.19 per barrel in 1996 over 1995.
Cost of products sold for the six months ended January 31, 1996 increased
$36.2 million to $110.1 million from $73.9 million for the same period in
1995, primarily due to an increase in the volume of products sold, partially
offset by a decrease in the average price of feedstocks purchased.
Operations and maintenance expenses for the six months ended January 31,
1996 increased $0.2 million to $7.9 million from $7.7 million for the same
period in 1995, primarily due to an increase in the number of days the vacuum
unit was operating.
Depreciation and amortization expenses for the six months ended January 31,
1996 increased $0.5 million to $3.2 million from $2.7 million for the same
period in 1995, primarily due to the transfer of certain terminal facilities
and tankage equipment from construction in progress to depreciable assets
during the recent period.
General and administrative expenses for the six months ended January 31,
1996, decreased $1.0 million to $7.4 million from $8.4 million for the same
period in 1995, primarily as a result of a reduction in litigation accruals,
$2.5 million, partially offset by an increase in payroll of $1.1 million
arising from operations support requirements.
29
<PAGE>
EXCERPTED FROM THE TRANSITION REPORT ON FORM 10-K OF TARC FOR THE SIX MONTHS
ENDED JANUARY 31, 1996 (AS USED HEREIN, THE TERM "COMPANY" REFERS TO TARC,
CROSS-REFERENCES ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM WHICH
THE INFORMATION IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE THE MEANINGS
ATTRIBUTED TO SUCH TERMS IN THE TARC FILING FROM WHICH THE INFORMATION IS
EXCERPTED.)
Taxes other than income taxes for the six months ended January 31, 1996
decreased $1.4 million to $0.7 million from $2.1 million for the same period
in 1995, primarily due to the capitalization of refinery property taxes in the
current period under the Capital Improvement Program.
Interest income for the six month period ended January 31, 1996, increased
$2.3 million compared to the same period in 1995 due primarily to interest
earned on long-term debt proceeds held in the Collateral Account. Interest
expense for the six month period ended January 31, 1996, increased $28.6
million due to interest accrued on long-term debt issued in February 1995,
amortization of debt issue costs and financing costs associated with product
purchases. During the six months ended January 31, 1996, the Company
capitalized $26.2 million of interest related to property and equipment
associated with the Capital Improvement Program.
Year Ended July 31, 1995, Compared with the Year Ended July 31, 1994
Total revenues for the year ended July 31, 1995, decreased $36.6 million to
$140.6 million from $177.2 million in the same period in 1994, primarily due
to a decrease in the volume of products sold which was partially offset by an
increase in the average price of products sold.
Cost of products sold for the year ended July 31, 1995, decreased $19.8
million to $149.1 million from $168.9 million for the same period in 1994,
primarily as a result of a decrease in volume of products sold, partially
offset by an increase in the average price of feedstocks purchased and a
contract cancellation loss of approximately $3.8 million.
Operations and maintenance expense for the year ended July 31, 1995,
increased $0.2 million to $12.3 million from $12.1 million for the same period
in 1994, primarily as a result of an increase in the number of days the vacuum
unit was operating.
Depreciation and amortization expense for the year ended July 31, 1995,
increased $3.3 million to $5.9 million from $2.6 million for the same period
in 1994, primarily as a result of increased depreciation expense being
recorded for refinery assets which were taken out of discontinued operations
during 1994.
General and administrative expenses for the year ended July 31, 1995,
increased $9.1 million to $13.6 million from $4.5 million in the same period
in 1994, primarily as a result of a litigation accrual of $4.5 million and
increases in legal and consulting fees and insurance costs as a result of
expanded refinery operations.
Taxes other than income taxes for the year ended July 31, 1995, increased
$0.5 million to $4.2 million from $3.7 million for the same period in 1994,
primarily as a result of an increase in property taxes assessed.
Interest income for the year ended July 31, 1995, increased $4.1 million
compared to the same period in 1994 due primarily to interest earned on long-
term debt proceeds held in the Collateral Account. Interest expense for the
year ended July 31, 1995, increased $31.3 million due to interest accrued on
long-term debt issued during 1995, amortization of debt issue costs and
financing costs associated with product purchases. During the year ended July
31, 1995, the Company capitalized $18.9 million of interest related to
property and equipment associated with the Company's Capital Improvement
Program.
Other income for the year ended July 31, 1995, was $2.5 million compared to
other expense of $2.9 million for the same period in 1994 primarily as a
result of trading gains on futures contracts.
During the fourth quarter of 1995, net loss before an extraordinary item
increased $35.5 million over the same period in 1994, primarily due to
interest associated with the Company's long-term debt and amortization of debt
issue costs.
30
<PAGE>
EXCERPTED FROM THE TRANSITION REPORT ON FORM 10-K OF TARC FOR THE SIX MONTHS
ENDED JANUARY 31, 1996 (AS USED HEREIN, THE TERM "COMPANY" REFERS TO TARC,
CROSS-REFERENCES ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM WHICH
THE INFORMATION IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE THE MEANINGS
ATTRIBUTED TO SUCH TERMS IN THE TARC FILING FROM WHICH THE INFORMATION IS
EXCERPTED.)
In February 1995, TransAmerican contributed 55 million shares of TransTexas
common stock to TEC, and TEC then contributed 15 million of these shares of
TransTexas common stock to the Company. The equity in loss of TransTexas for
the year ended July 31, 1995, reflects the Company's 20.3% equity interest in
TransTexas' loss before an extraordinary item from the date of acquisition.
The equity in extraordinary loss of TransTexas represents the Company's equity
in a charge recorded by TransTexas in the fourth quarter for the early
retirement of $500 million of its 10% Senior Secured Notes due 2000 from the
proceeds of the issuance by TransTexas in June 1995 of $800 million in 11%
Senior Secured Notes due 2002.
Year Ended July 31, 1994, Compared with the Year Ended July 31, 1993
Total revenues for the year ended July 31, 1994, increased $172.0 million to
$177.2 million from $5.2 million in the same period in 1993, primarily as a
result of the Company's operation of the vacuum unit at its refinery.
Approximately 32% of sales were to a single customer pursuant to a processing
agreement.
Cost of products sold for the year ended July 31, 1994, increased $168.9
million as compared to the same period in 1993, due to the operation of the
vacuum unit at the refinery.
Operations and maintenance expense for the year ended July 31, 1994,
increased $2.5 million to $12.1 million from $9.6 million for the same period
in 1993, primarily due to the operation of the vacuum unit at the refinery.
Depreciation and amortization expense for the year ended July 31, 1994,
increased $2.6 million as compared to the same period in 1993, due to the
depreciation of refinery assets that were taken out of discontinued operations
during 1994.
General and administrative expenses for the year ended July 31, 1994,
decreased $6.8 million to $4.5 million from $11.3 million in the same period
in 1993, primarily as a result of a litigation accrual of $9 million in 1993.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the issuance of the TARC Notes, $173 million of the
proceeds thereof were deposited into a cash collateral account, designated for
use in the Capital Improvement Program. The current budget for the Capital
Improvement Program calls for total expenditures of $434 million; however, the
Company estimates that expenditures of approximately $122 million to $127
million in addition to the current budget will be required to complete the
Capital Improvement Program. The foregoing estimates, as well as other
estimates and projections herein, are subject to substantial revision upon the
occurrence of future events, such as unavailability of, or delays in,
financing, engineering problems, work stoppages and cost overruns over which
the Company may not have any control.
As of January 31, 1996, expenditures on the Capital Improvement Program
funded by or approved for reimbursement from the cash collateral account
totaled approximately $155 million. Approximately $24 million remained in the
cash collateral account as of January 31, 1996. The Company sold 4.55 million
shares of TransTexas common stock in March 1996, and deposited approximately
$26.6 million of the proceeds of such sale into the cash collateral account in
accordance with the requirements of the Indenture. Giving effect to current
estimates and the sale of TransTexas stock in March 1996, additional funding
of $350 million to $355 million will be required to complete the Capital
Improvement Program. As of January 31, 1996, the Company had commitments for
refinery construction and maintenance of approximately $121 million.
Additional funds
31
<PAGE>
EXCERPTED FROM THE TRANSITION REPORT ON FORM 10-K OF TARC FOR THE SIX MONTHS
ENDED JANUARY 31, 1996 (AS USED HEREIN, THE TERM "COMPANY" REFERS TO TARC,
CROSS-REFERENCES ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM WHICH
THE INFORMATION IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE THE MEANINGS
ATTRIBUTED TO SUCH TERMS IN THE TARC FILING FROM WHICH THE INFORMATION IS
EXCERPTED.)
necessary to complete the Capital Improvement Program may be provided from (i)
the sale of additional shares of TransTexas common stock held by the Company,
(ii) the sale of common stock of the Company, (iii) equity investments in the
Company (including the sale of preferred stock of the Company to TEC, funded
by the sale of TransTexas common stock held by TEC), (iv) capital
contributions by TransAmerican, or (v) other sources of financing, the access
to which could require the consent of the holders of the TARC Notes. There is
no assurance that sufficient funds will be available from these sources or
upon terms acceptable to the Company and TransAmerican. The Company
anticipates completing this financing on a timely basis; however, if this
financing is not available or if significant engineering problems, work
stoppages or cost overruns occur, the Company likely will not be able to
complete and test Phase I of the Capital Improvement Program by February 15,
1997. Under the Indenture, the failure of the Company to complete and test
Phase I by February 15, 1997 (subject to extension to August 15, 1997 if
certain financial coverage ratios are met) would constitute an event of
default at such date.
The Company and the South Louisiana Port Commission ("Port Commission") have
reached an agreement in principle which would allow for the issuance of
approximately $75 million in Port Commission tax exempt bonds, the proceeds of
which may be used to construct tank storage facilities, docks and air and
waste water treatment facilities for the Company's FCC Unit. The air and waste
water treatment facility are included in the Capital Improvement Program;
however, the issuance of the tax exempt bonds could provide an alternate
source of financing for the construction of such facilities. The Port
Commission would own the facilities built with the proceeds of the bonds, and
the Company would operate the facilities pursuant to a long-term (30-year)
lease. There can be no assurance that the issuance of the tax-exempt bonds,
which may require the consent of the holders of the TARC Notes, will occur.
The Company has incurred losses and negative cash flow from operations as a
result of limited refining operations which did not cover the fixed costs of
maintaining the refinery, increased working capital requirements and losses on
refined product sales due to product financing costs and low margins. Based on
recent refining margins, projected levels of operations and debt service
requirements, such negative cash flows are likely to continue. In order to
operate the refinery and service its debt, the Company must raise debt or
equity capital in addition to the funds required to complete the Capital
Improvement Program. TransAmerican, TEC or the Company may sell securities to
raise funds for additional working capital. There is no assurance that
additional capital will be available.
Without additional funding to complete Phase I of the Capital Improvement
Program and to provide working capital for operations and debt service, there
is substantial doubt about the Company's continued existence. If the Company
(i) does not complete the Capital Improvement Program timely, (ii) incurs
significant cost overruns, (iii) does not ultimately achieve profitable
operations, or (iv) ceases to continue operations, the Company's investment in
the refinery may not be recovered. The financial statements do not include any
adjustments for such uncertainties.
A change of control or other event that results in deconsolidation of the
Company from TransAmerican's consolidated group for federal income tax
purposes could result in the acceleration of payment of a substantial amount
of federal income taxes by TransAmerican. Each member of a consolidated group
filing a consolidated federal income tax return is severally liable for the
consolidated federal income tax liability of the consolidated group. There can
be no assurance that TransAmerican will have the ability to satisfy the above
tax obligation at the time due and, therefore, the Company, or other members
may be required to pay the tax. A decision by TEC or the Company to sell
TransTexas shares could result in deconsolidation of TransTexas for tax
purposes. The tax liability to TransAmerican at January 31, 1996 which would
result from deconsolidation is estimated to be approximately $45 million.
32
<PAGE>
EXCERPTED FROM THE TRANSITION REPORT ON FORM 10-K OF TARC FOR THE SIX MONTHS
ENDED JANUARY 31, 1996 (AS USED HEREIN, THE TERM "COMPANY" REFERS TO TARC,
CROSS-REFERENCES ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM WHICH
THE INFORMATION IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE THE MEANINGS
ATTRIBUTED TO SUCH TERMS IN THE TARC FILING FROM WHICH THE INFORMATION IS
EXCERPTED.)
The Company enters into financing arrangements in order to maintain an
available supply of feedstocks. Typically, the Company enters into an
agreement with a third party to acquire a cargo of feedstock which is
scheduled to be delivered to the Company's refinery. The Company pays through
the third party all transportation costs, related taxes and duties and letter
of credit fees for the cargo, plus a negotiated commission. Prior to arrival
at the refinery, another third party purchases the cargo, and the Company
commits to purchase, at a later date, the cargo at an agreed price plus
commission and costs. The Company also places margin deposits with the third
party to permit the third party to hedge its price risk. The Company purchases
these cargos in quantities sufficient to maintain expected operations and is
obligated to purchase all of the cargos delivered pursuant to these
arrangements. In the event the refinery is not operating, these cargos may be
sold on the spot market. During the six months ended January 31, 1996,
approximately 0.5 million barrels of feedstocks with a cost of $8.8 million
were sold by a third party on the spot market prior to delivery to the Company
without a material gain or loss to the Company.
In March 1996, the Company entered into a processing agreement with a third
party for the processing of various feedstocks at the refinery. The Company is
required to pay all costs for feedstock acquisition, transportation,
processing and inspections plus a commission for each barrel processed. The
Company is entitled to a processing fee based on the margin after all costs,
if any, earned by the third party on the sale of refined products. This
agreement provides for the Company to process approximately 1.1 million
barrels of feedstock. In April 1996, the Company entered into a similar
processing agreement with another third party.
Environmental compliance and permitting issues are an integral part of the
capital expenditures in the Capital Improvement Program. During the next three
fiscal years the Company does not expect to incur significant expenses for
environmental compliance in addition to the amounts included in the Capital
Improvement Program. There is no assurance, however, that costs incurred to
comply with environmental laws will not have a material adverse effect on the
Company's future results of operations, cash flows or financial condition. The
Company also has contingent liabilities with respect to litigation matters as
more fully described in Note 11 of Notes to Financial Statements.
On December 13, 1995, litigation with Frito-Lay, Inc. was settled. The
Company intends to pay $2.5 million to Frito-Lay, Inc. during fiscal year 1997
in accordance with the Tax Allocation Agreement and other relevant documents.
INFLATION AND CHANGES IN PRICES
The Company's revenues and feedstock costs have been and will continue to be
affected by changes in the prices of petroleum and petroleum products. The
Company's ability to obtain additional capital is also substantially dependent
on refined product prices and refining margins, which are subject to
significant seasonal, cyclical and other fluctuations that are beyond the
Company's control.
From time to time, the Company enters into futures contracts, options on
futures, swap agreements and forward sale agreements for crude and refined
products intended to protect against a portion of the price risk associated
with price declines from holding inventory of feedstocks and refined products,
or for fixed price purchase commitments. The Company's policy is not to enter
into fixed price or other purchase commitments in excess of anticipated
processing requirements. The Company believes that these current and
anticipated futures transactions do not and will not constitute speculative
trading as specified under and prohibited by the Indenture.
33
<PAGE>
EXCERPTED FROM THE TRANSITION REPORT ON FORM 10-K OF TARC FOR THE SIX MONTHS
ENDED JANUARY 31, 1996 (AS USED HEREIN, THE TERM "COMPANY" REFERS TO TARC,
CROSS-REFERENCES ARE TO THE RELEVANT SECTIONS OF THE TARC FILING FROM WHICH
THE INFORMATION IS EXCERPTED, AND OTHER CAPITALIZED TERMS HAVE THE MEANINGS
ATTRIBUTED TO SUCH TERMS IN THE TARC FILING FROM WHICH THE INFORMATION IS
EXCERPTED.)
FORWARD-LOOKING STATEMENTS
Forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
are included throughout this report. Words such as "anticipates," "expects,"
"believes" and "likely" indicates forward-looking statements. The Company's
management believes that its current views and expectations are based on
reasonable assumptions; however, there are significant risks and uncertainties
that could significantly affect expected results. Factors that could cause
actual results to differ materially from those in the forward-looking
statements include the Company's success in raising additional capital to
complete the Capital Improvement Program as scheduled, engineering problems,
work stoppages, cost overruns, fluctuations in the commodity prices for
petroleum, petroleum products, casualty loss and refined products, conditions
in the equity and capital markets and competition.
RECENTLY ISSUED PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company plans to adopt the requirements of SFAS 121 during fiscal 1997 and
does not believe initial adoption will have a material impact on its financial
statements. See Note 2 to the Notes to Financial Statements included elsewhere
herein.
34
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<C> <S>
10.1 --Note Purchase Agreement, dated as of May 10, 1996, among TransTexas
Gas Corporation, TCW Shared Opportunity Fund II, L.P. and Jefferies &
Company, Inc.
10.2 --Master Swap Agreement, dated June 6, 1996, between TransTexas Gas
Corporation and AIG Trading Corporation.
10.3 --Purchase Agreement, dated January 30, 1996, between TransTexas Gas
Corporation and Sunflower Energy Finance Company.
10.4 --Production Payment Conveyance, executed on January 30, 1996, from
TransTexas Gas Corporation to Sunflower Energy Finance Company.
10.5 --First Supplement to Purchase Agreement, dated as of February 12, 1996,
among TransTexas Gas Corporation, Sunflower Energy Finance Company and
TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P.
10.6 --First Supplement to Production Payment Conveyance, executed February
12, 1996, among TransTexas Gas Corporation, Sunflower Energy Finance
Company and TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P.
10.7 --Purchase Agreement, dated May 14, 1996, among TransTexas Gas
Corporation, TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P.
and Sunflower Energy Finance Company.
10.8 --Production Payment Conveyance, executed May 14, 1996, from TransTexas
Gas Corporation to TCW Portfolio No. 1555 DR V Sub-Custody Partnership,
L.P. and Sunflower Energy Finance Company.
15.1 --Letter of Independent Accountants regarding awareness of incorporation
by reference.
27.1 --Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
April 30, 1996.
35
<PAGE>
SIGNATURE
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 duly authorized officer and principal financial and accounting
officer.
TRANSTEXAS GAS CORPORATION
(Registrant)
June 14, 1996 /s/ Edwin B. Donahue
By:__________________________________
Edwin B. Donahue, Vice President
and Chief Financial Officer
36
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
10.1 --Note Purchase Agreement, dated as of May 10, 1996, among TransTexas
Gas Corporation, TCW Shared Opportunity Fund II, L.P. and Jefferies &
Company, Inc.
10.2 --Master Swap Agreement, dated June 6, 1996, between TransTexas Gas
Corporation and AIG Trading Corporation.
10.3 --Purchase Agreement, dated January 30, 1996, between TransTexas Gas
Corporation and Sunflower Energy Finance Company.
10.4 --Production Payment Conveyance, executed on January 30, 1996, from
TransTexas Gas Corporation to Sunflower Energy Finance Company.
10.5 --First Supplement to Purchase Agreement, dated as of February 12,
1996, among TransTexas Gas Corporation, Sunflower Energy Finance
Company and TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P.
10.6 --First Supplement to Production Payment Conveyance, executed February
12, 1996, among TransTexas Gas Corporation, Sunflower Energy Finance
Company and TCW Portfolio No. 1555 DR V Sub-Custody Partnership, L.P.
10.7 --Purchase Agreement, dated May 14, 1996, among TransTexas Gas
Corporation, TCW Portfolio No. 1555 DR V Sub-Custody Partnership,
L.P. and Sunflower Energy Finance Company.
10.8 --Production Payment Conveyance, executed May 14, 1996, from
TransTexas Gas Corporation to TCW Portfolio No. 1555 DR V Sub-Custody
Partnership, L.P. and Sunflower Energy Finance Company.
15.1 --Letter of Independent Accountants regarding awareness of
incorporation by reference.
27 --Financial Data Schedule
</TABLE>
<PAGE>
NOTE PURCHASE AGREEMENT
between
TRANSTEXAS GAS CORPORATION
and
TCW SHARED OPPORTUNITY FUND II, L.P.
and
JEFFERIES & COMPANY, INC.,
dated as of
May 10, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<C> <S> <C>
SECTION 1. PURCHASE AND SALE OF NOTES.................................. 1
1.1 Issue of Notes.............................................. 1
1.2 Purchase and Sale of Notes.................................. 1
1.3 Registration of Notes....................................... 3
1.4 Delivery Expenses........................................... 4
1.5 Issue Taxes................................................. 4
1.6 Direct Payment.............................................. 4
1.7 Lost, Etc. Notes............................................ 5
1.8 Indemnification............................................. 5
1.9 Further Actions............................................. 7
SECTION 2. CLOSING CONDITIONS.......................................... 8
2.1 Delivery of Documents....................................... 8
2.2 Legal Investment; Purchase Permitted by Applicable Laws..... 10
2.3 Payment of Fees and Reimbursement of Expenses............... 10
2.4 Compliance with Agreements.................................. 10
2.5 Representations and Warranties.............................. 10
2.6 No Event of Default......................................... 10
2.7 Proceedings Satisfactory.................................... 11
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... 11
3.1 Authorization; Capitalization............................... 11
3.2 No Violation or Conflict; No Default........................ 11
3.3 Use of Proceeds............................................. 12
3.4 No Material Adverse Change; Financial Statements............ 12
3.5 Full Disclosure............................................. 13
3.6 Third Party Consents........................................ 13
3.7 Private Offering............................................ 13
3.8 Governmental Regulations.................................... 14
3.9 No Brokers.................................................. 14
3.10 Solvency.................................................... 14
3.11 Litigation.................................................. 14
3.12 Compliance with Laws, etc. ................................. 15
3.13 Taxes....................................................... 15
3.14 Environmental Matters....................................... 15
3.15 Employee Benefits........................................... 17
3.16 Transition Report........................................... 17
SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASERS. 17
4.1 Purchase for Own Account.................................... 17
</TABLE>
i
<PAGE>
<TABLE>
Page
<C> <S> <C>
4.2 Authorization............................................... 18
4.3 Notes Restricted............................................ 18
4.4 ERISA....................................................... 19
4.5 Agreement Binding on Future Holders......................... 19
4.6 Brokers..................................................... 20
SECTION 5. COVENANTS................................................... 20
5.1 Payment of Notes............................................ 20
5.2 Financial Statements and Reports............................ 20
5.3 Compliance Certificate...................................... 23
5.4 Limitation on Restricted Payments........................... 23
5.5 Limitation on Additional Debt and Issuance of Disqualified
Capital Stock.............................................. 24
5.6 Limitation on Transactions With Related Persons............. 25
5.7 Limitation on Liens......................................... 25
5.8 Limitation on Asset Sales................................... 26
5.9 Limitations on Restricting Subsidiary Dividends............. 26
5.10 Stay, Extension and Usury Laws.............................. 27
5.11 Corporate Existence; Merger; Successor Corporation.......... 27
5.12 Same Business............................................... 28
5.13 Payment of Taxes and Other Claims........................... 28
5.14 Limitation on Status as Investment Company or Public
Utility Company........................................... 29
5.15 Insurance................................................... 29
5.16 Restriction on Sale and Issuance of Subsidiary Stock........ 29
5.17 Employee Plans.............................................. 29
5.18 ERISA Notices............................................... 30
5.19 Inconsistent Agreements..................................... 31
5.20 Compliance with Laws; Maintenance of Licenses............... 31
5.21 Inspection of Properties and Records........................ 31
5.22 Separate Existence and Formalities.......................... 32
5.23 Maintenance of Office or Agency............................. 33
5.24 Information to the Purchasers............................... 33
5.25 Certificates of Designation................................. 33
5.26 Ownership of Subsidiaries................................... 33
5.27 Limitation on Capital Expenditures.......................... 34
5.28 Maintenance of Interest Reserve Account..................... 34
SECTION 6. REDEMPTION.................................................. 34
6.1 The Company's Right to Redeem............................... 34
6.2 Selection of Notes to Be Redeemed........................... 35
6.3 Notice of Redemption........................................ 35
</TABLE>
ii
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<TABLE>
Page
<C> <S> <C>
6.4 Effect of Notice of Redemption.............................. 36
6.5 Payment of Redemption Price................................. 36
SECTION 7. DEFAULTS AND REMEDIES....................................... 36
7.1 Events of Default........................................... 36
7.2 Acceleration of Notes; Remedies............................. 38
7.3 Premium on Acceleration..................................... 39
7.4 Other Remedies.............................................. 39
7.5 Waiver of Past Defaults..................................... 39
7.6 Rights of Holders to Receive Payment........................ 39
7.7 Undertaking for Costs....................................... 39
SECTION 8. AMENDMENTS AND WAIVERS...................................... 40
8.1 With Consent of Holders..................................... 40
8.2 Revocation and Effect of Consents........................... 41
8.3 Notation on or Exchange of Notes............................ 41
8.4 Payment of Expenses......................................... 42
SECTION 9. DEFINITIONS................................................. 42
9.1 Definitions................................................. 42
9.2 Rules of Construction....................................... 50
SECTION 10. MISCELLANEOUS.............................................. 51
10.1 Notices.................................................... 51
10.2 Successors and Assigns..................................... 52
10.3 Counterparts............................................... 52
10.4 Headings................................................... 52
10.5 Governing Law.............................................. 52
10.6 Entire Agreement........................................... 53
10.7 Severability............................................... 53
10.8 Further Assurances......................................... 53
10.9 Disclosure of Financial Information........................ 53
10.10 Maintenance of Confidentiality............................. 53
</TABLE>
Schedule 1.2 - Bank Accounts
Schedule 5.23 - Office or Agency of the Company
Annex A - Form of Note
Annex B - Opinion Matters (Counsel for the Company)
Annex C - Opinion Matters (New York Counsel for the Company)
Annex D - Opinion Matters (Counsel for the Purchasers)
Annex E - Properties that are the subject of the Koch I Production Payment
iii
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NOTE PURCHASE AGREEMENT
This Note Purchase Agreement dated as of May 10, 1996 (this
"Agreement"), is entered into by and between TransTexas Gas Corporation, a
---------
Delaware corporation (the "Company"), and TCW Shared Opportunity Fund II, L.P.,
-------
a Delaware limited partnership ("TCW"), and Jefferies & Company, Inc., a
---
Delaware corporation ("Jefferies"). TCW and Jefferies are referred to
---------
collectively herein as the "Purchasers."
----------
Certain capitalized terms used herein are defined in Section 9.1.
In consideration of the premises, mutual covenants and agreements
hereinafter contained and for other good and valuable consideration, the receipt
and adequacy of which are hereby acknowledged, the parties hereto hereby agree
as follows:
SECTION 1. PURCHASE AND SALE OF NOTES
--------------------------
1.1 Issue of Notes
--------------
(a) On or before the Closing, the Company will have authorized the
issue and sale to the Purchasers, of up to $15,750,000 aggregate principal
amount of its 13 1/3% Senior Notes due August 1, 1996 (the "Notes").
-----
(b) The Notes shall be substantially in the form attached hereto as
Annex A and shall include such notations, legends or endorsements set forth
therein or required by law. The Notes will be in the principal amount of
$100,000 (except in the case of redemptions where the aggregate principal amount
remaining after any such redemption is less than $100,000) or integral multiples
of $10,000 in excess thereof. Each Note shall be dated the date of its
issuance. Subject to Section 1.7, the aggregate principal amount of the Notes
outstanding at any one time may not exceed $15,750,000. The terms and
provisions contained in the Notes shall constitute, and are hereby expressly
made, a part of this Agreement and, to the extent applicable, the Company and
the Purchasers, by their execution and delivery of this Agreement, expressly
agree to such terms and provisions and to be bound thereby.
1.2 Purchase and Sale of Notes
--------------------------
(a) Purchase and Sale of Original Notes. Subject to the terms and
-----------------------------------
conditions set forth herein and in reliance on the representations and
warranties of each of the Purchasers contained or incorporated herein, at the
Closing, the Company shall sell and, subject to the terms and conditions set
forth herein and in reliance on the representations and warranties of the
Company contained or incorporated herein, TCW shall purchase, a Note or Notes
(in the denominations specified by TCW) in an aggregate principal amount of
$4,620,000, for an aggregate purchase price equal to $4,400,000, and Jefferies
shall purchase, a Note or Notes (in the denominations specified by Jefferies) in
an aggregate principal amount of $2,310,000, for an aggregate purchase price
equal to $2,200,000. The
1
<PAGE>
Notes that shall be purchased and sold pursuant to this Section 1.2(a) shall be
dated the Closing Date and are referred to collectively herein as the "Original
---------
Notes".
- - -------
(b) Closing. The purchase and sale of the Original Notes shall take
-------
place at a closing (the "Closing") at the offices of Skadden, Arps, Slate,
-------
Meagher & Flom, 1600 Smith Street, Suite 4460, Houston, Texas 77002, at 10:00
a.m. on May 10, 1996 or such other Business Day and time as may be agreed upon
by the Purchasers and the Company (the "Closing Date"). At the Closing, the
------------
Company shall deliver to each of the Purchasers the Original Notes to be
purchased by it (in such permitted denomination or denominations and registered
in the name of such Purchaser or the name of such nominee or nominees as such
Purchaser may request), dated the Closing Date, against payment of the purchase
price therefor by intra-bank or federal funds bank wire transfer of same day
funds to the Company's bank account identified on Schedule 1.2 hereto.
------------
(c) Additional Notes. Within one Business Day subsequent to the
----------------
satisfaction of all the conditions set forth below in this Section 1.2(c), TCW
shall purchase, a Note or Notes (in the denominations specified by TCW) in an
aggregate principal amount of $5,880,000, for an aggregate purchase price equal
to $5,600,000, and Jefferies shall purchase, a Note or Notes (in the
denominations specified by Jefferies) in an aggregate principal amount of
$2,940,000, for an aggregate purchase price equal to $2,800,000; provided,
however, that neither of the Purchasers shall have any obligation to purchase
any of such Notes, unless all of the following conditions have been met within
five days subsequent to the consummation of the Koch I Production Payment:
(1) The Net Proceeds to the Company from the Koch I Production
Payment (less the amount of such Net Proceeds that are used to terminate
the existing dollar-denominated production payment burdening the properties
that are the subject of the Koch I Production Payment) shall not be less
than $6,600,000.
(2) All obligations due pursuant to the Settlement and the
Judgement shall have been paid in full.
The Notes that may be purchased and sold pursuant to this Section 1.2(c) shall
be dated the Additional Notes Closing Date and are referred to collectively
herein as the "Additional Notes."
----------------
(d) Additional Notes Closing. The purchase and sale of the Additional
------------------------
Notes shall take place at a closing (the "Additional Notes Closing") at the
------------------------
offices of Skadden, Arps, Slate, Meagher & Flom, 1600 Smith Street, Suite 4460,
Houston, Texas 77002 on such Business Day (the "Additional Notes Closing Date")
-----------------------------
and at such time as shall be agreed upon by the Purchasers and the Company. At
the Additional Notes Closing, the Company shall deliver to each of the
Purchasers the Additional Notes to be purchased by it (in such permitted
denomination or denominations and registered in the name of such Purchaser or
the name of such nominee or nominees as such Purchaser may request), dated the
Closing Date, against payment of the purchase price therefor by intra-bank or
federal
2
<PAGE>
funds bank wire transfer of same day funds to the Company's bank account
identified on Schedule 1.2 hereto.
------------
(e) Payment and Reimbursement of Expenses. The Company shall pay all
-------------------------------------
expenses incurred by it, including without limitation, counsel's fees and
accountants' fees, incurred by it in connection with the transactions
contemplated by this Agreement. Regardless of whether any Notes are sold, at
the Closing and at such other time as each of the Purchasers shall request, the
Company shall reimburse such Purchaser, by intra-bank or federal funds bank wire
transfer of same day funds to such Purchaser's bank account identified on
Schedule 1.2 hereto, for all reasonable out-of-pocket expenses relating to this
- - ------------
Agreement, including without limitation:
(1) such Purchaser's reasonable out-of-pocket expenses incurred
in connection with the transactions contemplated by this Agreement,
including, without limitation, travel and lodging expenses;
(2) the reasonable fees and other out-of-pocket charges and
expenses of such Purchaser's counsel, in connection with this Agreement;
(3) such Purchaser's out-of-pocket expenses (including without
limitation, the reasonable fees and expenses of such Purchaser's counsel)
relating to any amendment to, or modification of, or any waiver or consent
or presentation of rights under, this Agreement; and
(4) all other expenses, including without limitation, counsel's
fees and accountants' fees incurred by such Purchaser in connection with
the transactions contemplated by this Agreement.
1.3 Registration of Notes
---------------------
The Company shall cause to be kept at its principal office a register
for the registration and transfer of the Notes (the "Note Register"). The names
-------------
and addresses of the Holders of Notes, the transfer of Notes, and the names and
addresses of the transferees of the Notes shall be registered in the Note
Register.
The Person in whose name any registered Note shall be registered shall
be deemed and treated as the owner and holder thereof for all purposes of this
Agreement, and the Company shall not be affected by any notice to the contrary,
until due presentment of such Note for registration of transfer so provided in
this Section 1.3. Payment of or on account of the Principal and interest on any
registered Notes shall be made to or upon the written order of such registered
holder.
When Notes are presented to the Company, duly endorsed or accompanied
with a written instrument of transfer in form reasonably satisfactory to the
Company duly executed by the registered Holder of such Note requesting the
Company to register the transfer of such Notes or to exchange such Notes for an
equal Principal amount of Notes of
3
<PAGE>
other authorized denominations, the Company shall register the transfer or make
the exchange as requested, if its reasonable requirements for such transaction
are met (including, without limitation, a restatement, on and as of the date of
transfer with respect to the transferee, of the covenants, representations and
warranties of Section 4).
1.4 Delivery Expenses
-----------------
If a Holder surrenders any Note to the Company for any reason, the
Company shall pay the cost of delivering to such Holder's home office or to the
office of such Holder's designee from the Company, insured to such Holder's
satisfaction, the surrendered Note and each Note issued in substitution,
replacement or exchange for, or upon conversion of, the surrendered Note.
1.5 Issue Taxes
-----------
The Company shall pay all taxes (other than taxes in the nature of
income, franchise or gift taxes) and governmental fees in connection with the
issuance, sale, delivery or transfer by the Company to each Holder of the Notes
and will save such Holder harmless without limitation as to time against any and
all liabilities with respect to all such taxes and fees. The obligations of the
Company under this Section 1.5 shall survive the payment or prepayment of the
Notes, at maturity, upon redemption or otherwise, and the termination of this
Agreement.
1.6 Direct Payment
--------------
(a) The Company will pay or cause to be paid all amounts payable with
respect to any Note (without any presentment of such Note and without any
notation of such payment being made thereon) by crediting (before 12:00 Noon,
New York time), by federal funds bank wire transfer in same day funds to each
Holder's account in any bank in the State of New York as may be designated and
specified in writing by such Holder at least two Business Days prior thereto.
The initial bank account of each of the Purchasers for this purpose is
identified on Schedule 1.2.
(b) Notwithstanding anything to the contrary contained in the Notes,
if any Principal amount payable with respect to a Note is payable, at maturity,
upon redemption or otherwise, on a Legal Holiday, then the Company shall pay
such amount on the next succeeding Business Day, and interest shall accrue on
such amount until the date on which such amount is paid and payment of such
accrued interest shall be made concurrently with the payment of such amount,
provided that the Company may elect to pay in full (but not in part) any such
amount on the last Business Day prior to the date such payment otherwise would
be due, and no such additional interest shall accrue on such amount.
4
<PAGE>
1.7 Lost, Etc. Notes
----------------
If a mutilated Note is surrendered to the Company or if the Holder of
a Note claims and submits an affidavit or other evidence, satisfactory to the
Company, to the effect that the Note has been lost, destroyed or wrongfully
taken, the Company shall issue a replacement Note if the Company's reasonable
and customary requirements relating to replacement Notes are reasonably
satisfied. If required by the Company, such Holder must provide an indemnity
bond, or other form of indemnity, sufficient in the judgment of the Company, to
protect the Company, from any loss which it may suffer if a Note is replaced.
The Company may charge such Holder for its reasonable, out-of-pocket expenses in
replacing a Note.
Every replacement Note is an obligation of the Company.
1.8 Indemnification
---------------
In addition to all other sums due hereunder or provided for in this
Agreement and any and all obligations of the Company to indemnify TCW and
Jefferies hereunder, the Company hereby agrees to indemnify TCW and Jefferies,
each Affiliate of TCW or Jefferies and each director, officer, employee,
counsel, agent or representative of TCW or Jefferies and their respective
Affiliates (collectively, the "Indemnified Parties") against, and hold it and
-------------------
them harmless from, to the fullest extent lawful, all losses, claims, damages,
liabilities, reasonable out-of-pocket costs (including, without limitation,
reasonable attorneys' fees and reasonable out-of-pocket disbursements) and
reasonable out-of-pocket expenses, including expenses of investigation
(collectively, "Losses"), incurred by it or them and arising out of or in
------
connection with this Agreement or the transactions contemplated hereby (or any
other document or instrument executed herewith or pursuant hereto), regardless
of whether the transactions contemplated by this Agreement are consummated and
regardless of whether any Indemnified Party is a formal party to any proceeding;
provided, however, that the Company shall not be liable to any Indemnified Party
for any Losses to the extent that it shall be finally determined by a court of
competent jurisdiction (which determination is not subject to appeal or review)
that such Losses arose from the gross negligence, willful misconduct, bad faith
or violation of law of such Indemnified Party, which was not taken by such
Indemnified Party in reliance upon any of the representations, warranties,
covenants or promises of the Company herein (including, without limitation,
those incorporated by reference herein), including (without limitation) the
certificates delivered by the Company pursuant hereto. The Company shall
reimburse any Indemnified Party promptly for all such Losses as they are
incurred by such Indemnified Party (regardless of whether it is or may be
ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder). Prior to reimbursing any Indemnified Party for any
Losses pursuant to this Section 1.8, the Company may require such Indemnified
Party to provide a written undertaking to reimburse the Company if it is finally
judicially determined by a court of competent jurisdiction (which determination
is not subject to appeal) that such Indemnified Party was not entitled to
indemnification pursuant to this Section 1.8 or otherwise. The obligations of
the Company to each Indemnified Party hereunder shall be separate obligations
and the Company's liability to any such Indemnified Party hereunder
5
<PAGE>
shall not be extinguished solely because any other Indemnified Party is not
entitled to indemnity hereunder. The obligations of the Company under this
Section 1.8 shall survive the payment or prepayment of the Notes, at maturity,
upon acceleration, redemption or otherwise, any transfer of the Notes by TCW or
Jefferies and the termination of this Agreement and the Notes for a period not
to exceed the statute of limitations period applicable to such Loss.
In addition, the Company shall without limitation as to time,
indemnify, reimburse, defend, and hold harmless the Indemnified Parties for,
from, and against all Losses asserted against, resulting to, imposed on, or
incurred by any of the Indemnified Parties, directly or indirectly, in
connection with any of the following: (i) any environmental matters identified
or described in the Transition Report; (ii) any pollution or threat to human
health or the environment that is related in any way to the Company's or its
Subsidiaries or any Person's for whom any of the foregoing are or may be
responsible by law or contract, management, use, control, ownership or operation
of the business or property in connection with the business of any of the
foregoing, including, without limitation, all on-site and off-site activities
involving Materials of Environmental Concern, and that occurred, existed, arises
out of conditions or circumstances that occurred or existed, or was caused, in
whole or in part, on or before the Closing Date, regardless of whether the
pollution or threat to human health or the environment, or any such
Environmental Liability, is described in the Transition Report; (iii) any
Environmental Liability against any Person whose liability for such
Environmental Liability the Company or its Subsidiaries has assumed or retained,
either contractually or by operation of law, including without limitation any
pollution or threat to human health or the environment, or any federal, state,
local or foreign approvals; or (iv) the breach of any environmental
representation or warranty set forth or incorporated by reference herein;
provided, however, that the Company shall not be liable to any Indemnified Party
for any Losses to the extent such Losses arose from the gross negligence, wilful
misconduct, bad faith or violation of law of such Indemnified Party.
In case any action, claim or proceeding shall be brought against any
Indemnified Party with respect to which indemnity may be sought against the
Company hereunder, such Indemnified Party shall promptly notify the Company in
writing and the Company shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to such Indemnified Party and
payment of all reasonable fees and out-of-pocket expenses incurred in connection
with the defense thereof. The failure to so notify the Company shall not affect
any obligation it may have to any Indemnified Party under this Agreement or
otherwise except to the extent that (as finally determined by a court of
competent jurisdiction (which determination is not subject to review or appeal))
such failure materially and adversely prejudiced the Company. Each Indemnified
Party shall have the right to employ separate counsel in such action, claim or
proceeding and participate in the defense thereof, but the fees and expenses of
such counsel shall be at the expense of each Indemnified Party unless: (i) the
Company has agreed to pay such expenses; or (ii) the Company has failed promptly
to assume the defense and employ counsel reasonably satisfactory to such
Indemnified Party; or (iii) the named parties to any such action, claim or
proceeding (including any impleaded parties) include any Indemnified Party and
the Company or an Affiliate of the Company, and such Indemnified Party shall
have been
6
<PAGE>
advised by counsel that either (x) there may be one or more legal defenses
available to it which are different from or in addition to those available to
the Company or such Affiliate or (y) a conflict of interest exists or could
reasonably be expected to exist if such counsel represents such Indemnified
Party and the Company or its Affiliate; provided that, if such Indemnified Party
notifies the Company in writing that it elects to employ separate counsel in the
circumstances described in clause (i), (ii) or (iii) above, the Company shall
not have the right to assume the defense thereof and such counsel shall be at
the expense of the Company; provided, however, that the Company shall not, in
connection with any one such action or proceeding or separate but substantially
similar or related actions or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be responsible hereunder for
the reasonable fees and out-of-pocket expenses of more than one such firm of
separate counsel (in addition to any reasonably requested local counsel), which
counsel shall be designated by the Company. The Company shall not be liable for
any settlement of any such action effected without its written consent (which
shall not be unreasonably withheld). The Company shall not, without the
Indemnified Party's prior written consent, consent to entry of any judgment or
settle or compromise any pending or threatened claim, action or proceeding in
respect of which indemnification or contribution may be sought hereunder, unless
the foregoing contains an unconditional release, in form and substance
reasonably satisfactory to the Indemnified Parties, of the Indemnified Parties
from all liability and obligation arising therefrom.
If the indemnification provided for in this Section 1.8 is unavailable
to, or insufficient to hold harmless, any Indemnified Party in respect of any
Losses referred to therein, then the Company shall have an obligation to
contribute to the amount paid or payable by such Persons as a result of such
Losses in such proportion as is appropriate to reflect the relative fault of the
Company, its subsidiaries and Affiliates, on the one hand, and such Indemnified
Party, on the other hand, in connection with the actions which resulted in such
Losses as well as any other relevant equitable considerations. The amount paid
or payable by any such Person as a result of the Losses referred to above shall
be deemed to include, subject to the limitations set forth in this Section 1.8,
any reasonable legal or other fees or out-of-pocket expenses reasonably incurred
by such Person in connection with any investigation, lawsuit or legal or
administrative action or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 1.8 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. No
Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) relating to any Losses shall be entitled to
contribution from any Person who is not guilty of such fraudulent
misrepresentation relating to any Losses.
1.9 Further Actions
---------------
During the period from the date hereof to the Closing Date, the
Company shall (i) take all actions necessary or appropriate to cause its
representations and warranties contained in Section 3 to be true and correct in
all material respects as of the Closing Date,
7
<PAGE>
after giving effect to the transactions contemplated by this Agreement, as if
made on and as of such date and (ii) take, or cause to be taken, all action, and
do, or cause to be done, all things necessary, proper or reasonably advisable
under applicable law and regulations to consummate and make effective the
transactions contemplated by this Agreement, including, without limitation,
obtaining all consents and approvals of all Persons and removing all injunctive
or other impediments or delays, legal or otherwise, which are necessary to the
consummation of the transactions contemplated by this Agreement.
SECTION 2. CLOSING CONDITIONS
------------------
The obligations of each of the Purchasers to purchase and pay for the
Original Notes to be delivered to such Purchaser at the Closing shall be subject
to the satisfaction of each of the following conditions on or before the Closing
Date, and the obligations of each of the Purchasers to purchase and pay for the
Additional Notes to be delivered to such Purchaser at the Additional Notes
Closing shall be subject to the satisfaction of each of the following conditions
on or before the Additional Notes Closing Date.
2.1 Delivery of Documents
---------------------
The Company shall have delivered to each of the Purchasers, in form
and substance satisfactory to such Purchaser the following:
(a) The Notes to be purchased by such Purchaser on the Closing Date or
the Additional Notes Closing Date, as the case may be, duly executed by the
Company.
(b) (1) An opinion, dated the Closing Date or the Additional Notes
Closing Date, as the case may be, and addressed to the Purchasers, from
Gardere & Wynne, L.L.P., counsel for the Company, as to the matters set
forth on Annex B.
(2) An opinion, dated the Closing Date or the Additional Notes
Closing Date, as the case may be, and addressed to the Purchasers, from
Lane & Mittendorf, L.L.P. counsel for the Company, as to the matters set
forth on Annex C.
(3) An opinion, dated the Closing Date or the Additional Notes
Closing Date, as the case may be, and addressed to the Purchasers, from
Skadden, Arps, Slate, Meagher & Flom, counsel for the Purchasers, as to the
matters set forth on Annex D.
(4) Such other opinions of counsel covering matters incidental
to the transactions contemplated by this Agreement as either of the
Purchasers may reasonably request.
8
<PAGE>
In rendering such opinions, each counsel may rely as to factual
matters upon certificates or other documents furnished by officers and directors
of the Company (copies of which shall be delivered to the Purchasers) and by
government officials, and upon such other documents as such counsel deem
appropriate as a basis for their opinion.
(c) Resolutions of the Board of Directors of the Company, certified by
the Secretary or Assistant Secretary of the Company, to be duly adopted and in
full force and effect on the Closing Date or the Additional Notes Closing Date,
as the case may be, authorizing (i) the execution, delivery and performance of
this Agreement and the Notes and the consummation of the transactions
contemplated hereby and (ii) the issuance of the Notes.
(d) A certificate of the Chief Financial Officer of the Company, dated
the Closing Date or the Additional Notes Closing Date, as the case may be,
certifying (i) that all of the conditions set forth in Sections 2.3, 2.4, 2.5
and 2.6 are satisfied on and as of such date, (ii) that all of the
representations and warranties of the Company contained or incorporated by
reference herein are true and correct on and as of such date as though made on
and as of such date (unless stated to relate to another date), both immediately
prior to and after giving effect to the transactions contemplated by this
Agreement, and no event has occurred and is continuing, or would result from the
issuance of the Notes, which constitutes or would constitute a Default or an
Event of Default and (iii) as to such other matters as either of the Purchasers
may reasonably request.
(e) A certificate of the Chief Financial Officer of the Company, in
form, scope and substance reasonably satisfactory to the Purchasers, dated the
Closing Date or the Additional Notes Closing Date, as the case may be, to the
effect that, both immediately prior to and after giving effect to the
transactions contemplated hereby, the Company is Solvent.
(f) Governmental certificates, dated the most recent practicable date
prior to the Closing Date or the Additional Notes Closing Date, as the case may
be, showing that the Company is organized and in good standing in the State of
Delaware and is qualified as a foreign corporation and in good standing in the
State of Texas.
(g) Copies of each consent, license and approval required in
connection with the execution, delivery and performance by the Company of this
Agreement and the Notes.
(h) Copies of the Charter Documents of the Company, certified as of a
recent date by the Secretary of State of the State of Delaware and certified by
the Secretary or Assistant Secretary of the Company, as true and correct as of
the Closing Date or the Additional Notes Closing Date, as the case may be.
(i) Certificates of the Secretary or an Assistant Secretary of the
Company as to the incumbency and signatures of the officers or representatives
of the Company executing this Agreement and the Notes and any other certificate
or other document to be delivered pursuant hereto or thereto, together with
evidence of the incumbency of such Secretary or Assistant Secretary.
9
<PAGE>
(j) Such additional information and materials as either of the
Purchasers may reasonably request, including, without limitation, copies of any
material debt agreements, security agreements and other contracts to which the
Company is a party.
2.2 Legal Investment; Purchase Permitted by Applicable Laws
-------------------------------------------------------
The acquisition of the Notes by the Purchasers (a) shall not be
prohibited by any applicable law or governmental regulation, release,
interpretation or opinion (including, without limitation, Regulations G, T, U
and X of the Board of Governors of the Federal Reserve System), (b) shall
constitute a legal investment as of the Closing Date or the Additional Notes
Closing Date, as the case may be, under the laws and regulations and orders of
each jurisdiction to which the Purchasers may be subject (without resort to any
"basket" or "leeway" provision), and (c) shall not subject either of the
Purchasers to any penalty or other onerous condition in or pursuant to any such
law, regulation or order; and the Purchasers shall have received such
certificates or other evidence as either of the Purchasers may request to
establish compliance with this condition.
2.3 Payment of Fees and Reimbursement of Expenses
---------------------------------------------
In accordance with the terms hereof, the Company shall have delivered
at the Closing, by intra-bank or federal funds bank wire transfer of same day
funds, payment for all the fees payable by the Company pursuant to the terms
hereof and payment for all expenses reimbursable by the Company pursuant to the
terms hereof.
2.4 Compliance with Agreements
--------------------------
The Company shall have performed and complied in all material respects
with all agreements, covenants and conditions contained herein and in any other
document contemplated hereby which are required to be performed or complied with
by the Company on or before the Closing Date or the Additional Notes Closing
Date, as the case may be.
2.5 Representations and Warranties
------------------------------
Unless stated to relate to another date, all of the representations
and warranties of the Company contained or incorporated by reference herein
shall be true and correct (in the case of Section 3.2(a)(2) and (3), Section 3.6
and Section 3.15, in all material respects) on and as of the Closing Date or the
Additional Notes Closing Date, as the case may be, both before and after giving
effect to the transactions contemplated hereby.
2.6 No Event of Default
-------------------
No event shall have occurred and be continuing, or would result from
the consummation of the transactions contemplated to be consummated on or prior
to the Closing Date or the Additional Notes Closing Date, as the case may be, by
this Agreement, which constitutes or would constitute a Default or an Event of
Default.
10
<PAGE>
2.7 Proceedings Satisfactory
------------------------
All proceedings taken in connection with the issuance and delivery of
the Notes, the transactions contemplated hereby, and all documents and papers
relating thereto, shall be reasonably satisfactory to the Purchasers. The
Purchasers and their counsel shall have received copies of such documents and
papers as they may reasonably request in connection therewith, or as a basis for
the Closing opinions, all in form and substance satisfactory to the Purchasers.
Any document annexed to this Agreement shall be satisfactory in form and
substance to the Purchasers.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
The Company represents and warrants on the date hereof and as of the
Closing as follows:
3.1 Authorization; Capitalization
-----------------------------
The Company has taken all actions necessary to authorize it (i) to
execute, deliver and perform its obligations under this Agreement, (ii) to issue
and perform its obligations under the Notes and (iii) to consummate the
transactions contemplated hereby. Each of this Agreement and the Notes is a
legally valid and binding obligation of the Company, enforceable against it in
accordance with its terms, except for (a) the effect thereon of bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating to or
affecting the rights of creditors generally and (b) limitations imposed by
federal or state law or equitable principles upon the specific enforceability of
any of the remedies, covenants or other provisions thereof and upon the
availability of injunctive relief or other equitable remedies. The Company has
authorized 100,000,000 shares of Common Stock, par value $.01 per share, of
which 74,000,000 shares are issued and outstanding. All of the shares of issued
and outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and nonassessable.
3.2 No Violation or Conflict; No Default
------------------------------------
(a) Neither the execution, delivery or performance of this Agreement
or the Notes, nor the compliance by the Company with the terms and provisions
thereof, nor the consummation of the transactions contemplated herein and
therein, nor the issuance, sale or delivery of the Notes will:
(1) violate any provision of the Charter Documents of the
Company,
(2) violate any applicable provision of any statute, law, rule
or regulation or any judgment, decree, order, regulation or rule of any
court
11
<PAGE>
or governmental authority or body to which the Company or any of its
properties may be subject,
(3) permit or cause the acceleration of the maturity of any debt
or material obligation of the Company, or
(4) violate, or be in conflict with, or constitute a default
under, or permit the termination of, or require the consent of any Person
under, or result in the creation or imposition of any Lien (other than
Permitted Liens) upon any property of the Company under, any mortgage,
indenture, loan agreement, note, debenture, agreement for borrowed money or
any other material agreement to which the Company is a party or by which
the Company (or its properties) may be bound, other than such violations,
conflicts, defaults, terminations and Liens, or such failures to obtain
consents, which could not reasonably be expected to result in a Material
Adverse Effect.
(b) The Company is not in material default (without giving effect to
any grace or cure period or notice requirement) under any material agreement for
borrowed money or under any material agreement pursuant to which any of its
securities were sold.
3.3 Use of Proceeds
---------------
The proceeds from the sale of the Notes hereunder will be utilized for
general corporate purposes. None of the transactions contemplated by this
Agreement (including, without limitation, the use of the proceeds from the sale
of the Notes) will violate or result in a violation of Section 7 of the Exchange
Act or any regulation issued pursuant thereto, including, without limitation,
Regulations G, T, U and X of the Board of Governors of the Federal Reserve
System.
3.4 No Material Adverse Change; Financial Statements
------------------------------------------------
(a) Since April 30, 1996, the Company has not suffered any material
adverse change in its properties, business, operations, assets, condition
(financial or otherwise) or prospects which could reasonably be expected to
result in a Material Adverse Effect, other than the Judgment.
(b) The financial statements included or incorporated by reference in
the Transition Report (collectively, the "Financial Statements") present fairly
the consolidated financial position, results of operations and cash flows of the
Company in all material respects, at the respective date or for the respective
periods to which they apply. Except as disclosed therein, the Financial
Statements and related notes have been prepared in accordance with GAAP
consistently applied throughout the periods involved. All financial statements
concerning the Company and its Subsidiaries that will hereafter be furnished by
the Company and its Subsidiaries to the Purchasers or any Holder pursuant to
this Agreement will be prepared in accordance with GAAP consistently applied and
will present
12
<PAGE>
fairly, in all material respects, the financial condition of the corporations
covered thereby as at the dates thereof and the results of their operations for
the period then ended.
3.5 Full Disclosure
---------------
Neither this Agreement (including without limitation the
representations and warranties incorporated herein by reference), the Transition
Report, nor any other document, certificate or written statement furnished by or
on behalf of the Company to the Purchasers in connection with the negotiation
and sale of the Notes, when taken as a whole, contains any untrue statement of a
material fact or omits to state any material fact necessary to make the
statements contained herein or therein not misleading in light of the
circumstances under which they were made. There is no material fact known to
the Company that has had or could reasonably be expected to have a Material
Adverse Effect and that has not been disclosed herein, in the Transition Report
or in such other documents, certificates and written statements furnished to the
Purchasers for use in connection with the transactions contemplated hereby.
3.6 Third Party Consents
--------------------
Neither the nature of the Company nor of any of its businesses or
properties, nor any relationship between the Company and any other Person, nor
any circumstance in connection with the offer, issuance, sale or delivery of the
Notes at the Closing nor the performance by the Company of its other obligations
hereunder or thereunder, or the consummation of the transactions contemplated
by, this Agreement, is such as to require a consent, approval or authorization
of, or notice to, or filing, registration or qualification with, any
governmental authority or other Person on the part of the Company as a condition
to the execution and delivery of this Agreement or the offer, issuance, sale or
delivery of the Notes at the Closing other than such consents, approvals,
authorizations, notices, filings, registrations or qualifications which shall
have been made or obtained on or prior to the Closing Date (and copies of which
will be delivered to the Purchasers) and such filings under federal and state
securities laws which are permitted to be made after the Closing Date and which
the Company hereby agrees to file within the time period prescribed by
applicable law.
3.7 Private Offering
----------------
Assuming the truth and correctness of the representations and
warranties set forth in Section 4, the sale of the Notes hereunder is exempt
from the registration and prospectus delivery requirements of the Securities
Act.
Except for the issuance and sale of Notes to the Purchasers hereunder,
no Notes have been issued and sold by the Company (or any of its predecessor
entities) within the six-month period immediately prior to and including the
date hereof; and the Company agrees that neither it nor anyone acting on its
behalf, will offer or sell the Notes, or any portion of them, if such offer or
sale would cause the issuance and sale of the Notes to the Purchasers hereunder
not to be exempt from the registration and prospectus delivery
13
<PAGE>
requirements under the provisions of Section 5 of the Securities Act, nor offer
any similar securities for issuance or sale to, or solicit any offer to acquire
any of the same from, or otherwise approach or negotiate with respect thereto
with, anyone if the sale of the Notes and any such securities would be
integrated as a single offering for the purposes of the Securities Act,
including without limitation Regulation D thereunder such as would cause the
issuance and sale of the Notes to the Purchasers hereunder not to be exempt from
the registration and prospectus delivery requirements under the provisions of
Section 5 of the Securities Act.
3.8 Governmental Regulations
------------------------
The Company is not subject to regulation under the Investment Company
Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as
amended, the Federal Power Act, the Interstate Commerce Act, the Commodity
Exchange Act or to any federal or state statute or regulation limiting its
ability to incur indebtedness for borrowed money as contemplated hereby.
3.9 No Brokers
----------
The Company has not dealt with any broker, finder, commission agent or
other such intermediary (other than Jefferies & Company, Inc. and its
Affiliates) in connection with the sale of the Notes and the transactions
contemplated by this Agreement, and the Company is not under any obligation to
pay any broker's or finder's fee or commission or similar payment in connection
with such transactions.
The Company shall indemnify and hold the Holders harmless, to the
fullest extent permitted by law, from and against any and all actions, suits,
claims, costs, expenses, losses, liabilities and/or obligations in connection
with or relating to any broker's or finder's fees or commission or similar
payment in connection with such transactions, except with respect to fees or
commissions incurred by either of the Purchasers for its account, so long as the
Company receives notice of any such action, suit, claim, etc., reasonably
promptly after the Holders become aware thereof; provided that the failure to
give such notice as provided in this sentence shall not relieve the Company of
its obligations under this sentence except to the extent, and only to the
extent, that the Company is materially prejudiced by such failure to give notice
(as determined by a court of competent jurisdiction in a final nonappealable
judgment).
3.10 Solvency
--------
Both immediately prior to and after giving effect to the transactions
contemplated by this Agreement, the Company is Solvent.
3.11 Litigation
----------
Except for the Settlement, there has been no change in the status of
the litigation disclosed in the Transition Report, and, except as set forth in
the Transition
14
<PAGE>
Report, there are as of the Closing no actions, judgments, suits, investigations
or proceedings pending or, to the Company's best knowledge, threatened against
the Company or any of its Subsidiaries, except for any such change in status or
additional litigation as would not have a Material Adverse Effect. There are as
of the Closing no actions, judgments, suits, investigations or proceedings
pending or threatened against the Company or any of its Subsidiaries that
challenge the validity of this Agreement or the Notes or the transactions
contemplated hereby or thereby.
3.12 Compliance with Laws, etc.
--------------------------
(a) Subject to Section 3.15, each of the Company and its Subsidiaries
is in compliance with all federal, state, local laws and regulations applicable
to it, including without limitation those relating to equal employment
opportunity and employee safety, except where noncompliance would not have a
Material Adverse Effect.
(b) There are not currently, and at the Closing there will be no,
collective bargaining or similar agreements applicable to the Company or any of
its Subsidiaries.
3.13 Taxes
-----
All tax returns required to be filed by the Company in any
jurisdiction (including foreign jurisdictions) have been timely filed and such
returns are true, complete and correct in all material respects; and (b) all
material taxes, assessments, fees and other charges (including, without
limitation, withholding taxes, penalties, and interest) payable by it that have
become due and payable have been paid, other than those (i) being contested in
good faith and for which an adequate reserve or accrual has been established or
(ii) those currently payable without penalty or interest and for which an
adequate reserve or accrual has been established or extensions duly filed. The
Company does not know of (A) any actual or proposed material additional tax
assessments or (B) any probable basis for the imposition of any material
additional tax assessments for any fiscal period against the Company.
3.14 Environmental Matters
---------------------
Except as set forth in the Transition Report, as set forth in the TARC
Reports, or as could not reasonably be expected to have a Material Adverse
Effect or otherwise require disclosure in the Transition Report:
(a) each of the Company and its Subsidiaries (collectively, for
purposes solely of this Section 3.14, the "Company") and, to the best knowledge
of the Company, any Person for whom any of the foregoing are or may be
responsible by law or contract, is in compliance with all Environmental Laws,
which compliance includes, but is not limited to, (1) compliance with all
standards, schedules and timetables therein, and (2) the possession of all
permits, licenses, approvals and other authorizations required under the
Environmental Laws or with respect to the operation of the Company's or such
Person's business, property
15
<PAGE>
and assets, and compliance with the terms and conditions thereof and (3) any
federal, state, local or foreign approvals required pursuant to any
Environmental Laws that pertain or relate to the transactions contemplated by
this Agreement;
(b) the Company has not received any notice or claim (written or
oral), whether from a governmental authority, citizens group, employee or
otherwise, that alleges that it is in violation of any Environmental Law; the
Company has no liability under any Environmental Law; and, to the best knowledge
of the Company, there are no past or present actions, activities, circumstances,
conditions, events or incidents that may be expected to prevent or interfere
with full compliance by the Company (or any Person for whom the Company is or
may be responsible by law or contract) with applicable Environmental Laws in the
future;
(c) there is no Environmental Liability pending or, to the best
knowledge of the Company, threatened against the Company;
(d) there are no past or present actions, activities, circumstances,
conditions, events or incidents, including, without limitation, the release,
emission, discharge, presence or disposal of any Material of Environmental
Concern, that could reasonably be expected to form the basis of any
Environmental Liability against the Company;
(e) no real property or facility owned, used, operated, leased,
managed or controlled by the Company, or, to the best knowledge of the Company,
any predecessor in interest for which the Company could be responsible, is
listed or proposed for listing on the National Priorities List or the
Comprehensive Environmental Response, Compensation, and Liability Information
System pursuant to the Comprehensive Environmental Response, Compensation, and
Liability Act, as amended, or on any other state or local list established
pursuant to any Environmental Law;
(f) there have been no releases (including, without limitation, any
past or present releasing, spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, disposing or dumping, on-
site or off-site) of Materials of Environmental Concern by the Company or, to
the best knowledge of the Company, any predecessor in interest, for which the
Company could incur liability under or pursuant to any Environmental Law, at,
on, under, from or into any facility or real property owned, operated, leased,
managed or controlled by the Company, and the Company has not incurred or
reasonably could be expected to incur any Environmental Liability for
contamination at, on, under, from or into any on-site or off-site locations
where the Company has stored, disposed or arranged for the disposal of Materials
of Environmental Concern;
(g) the condition of all underground storage tanks or other
underground storage receptacles, or related piping, that are located on a
facility or property owned, operated, leased, managed or controlled by the
Company is such that the Company is not, and cannot reasonably be expected to
become, subject to any Environmental Liability relating thereto or resulting
therefrom; and
16
<PAGE>
(h) there is no asbestos contained in or forming part of any building,
building component, structure or office space, and no polychlorinated biphenyls
(PCBs) or PCB-containing items are used or stored at any property, owned,
operated, leased or managed for which removal, abatement or cleanup is or may be
required or for which such matters the Company could be liable.
3.15 Employee Benefits
-----------------
The Company and its ERISA Affiliates are in compliance in all material
respects with all applicable provisions of ERISA and the Code and the
regulations and published interpretations thereunder with respect to all
employee benefit plans, including without limitation, the applicable minimum
funding standards of ERISA and the Code. Neither the Company nor its ERISA
Affiliates maintain or contribute to, or during the last five years maintained
or contributed to, any pension plan or multiemployer plan. Neither the Company
nor any Subsidiary has incurred any liability to the Pension Benefit Guaranty
Corporation (established pursuant to ERISA) or a pension plan under Title IV of
ERISA. Assuming that no portion of the proceeds from the sale of the Notes is
attributable, directly or indirectly, to the assets of any employee benefit
plan, the execution, performance and delivery of this Agreement and the Notes by
any party thereto will not involve any prohibited transaction within the meaning
of Section 406 of ERISA or Section 4975 of the Code for which an exemption
therefrom is not available. As used in this Section 3.15, the terms "employee
benefit plan," "pension plan" or "multiemployer plan" have the respective
meanings specified in Section 3 of ERISA.
3.16 Transition Report
-----------------
The Company has provided each of the Purchasers with a copy of the
Transition Report.
3.17 Survival of Representations and Warranties
------------------------------------------
All of the Company's representations and warranties hereunder shall
survive the execution and delivery of this Agreement and of the Notes and any
investigation by either of the Purchasers and the issuance of the Notes.
SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASERS
-----------------------------------------------------------
Each of the Purchasers represents and warrants to the Company as of
the date hereof and as of the Closing Date, that:
4.1 Purchase for Own Account
------------------------
Such Purchaser is purchasing the Notes solely for its own account and
not as nominee or agent for any other Person and not with a view to, or for
offer or sale in
17
<PAGE>
connection with, any distribution thereof (within the meaning of the Securities
Act) that would be in violation of the securities laws of the United States of
America or any state thereof, subject, nevertheless, to the disposition of its
property being at all times within its control. Such Purchaser has such
knowledge and experience in business and financial matters that it is capable of
evaluating the merits and risks to it of an investment in the Notes. Such
Purchaser has not acted as the Company's agent in connection with the sale of
the Notes. Such Purchaser was not formed for the specific purpose of purchasing
the Notes being issued pursuant to this Agreement, and such Purchaser is an
"accredited investor" within the meaning given to such term in Rule 501(a) under
the Securities Act.
4.2 Authorization
-------------
Such Purchaser has taken all actions necessary to authorize it (i) to
execute, deliver and perform all of its obligations under this Agreement, (ii)
to perform all of its obligations under the Notes and (iii) to consummate the
transactions contemplated hereby and thereby. This Agreement is a legally valid
and binding obligation of such Purchaser enforceable against it in accordance
with its terms, except for (a) the effect thereon of bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting the
rights of creditors generally and (b) limitations imposed by federal or state
law or equitable principles upon the specific enforceability of any of the
remedies, covenants or other provisions thereof and upon the availability of
injunctive relief or other equitable remedies.
4.3 Notes Restricted
----------------
Such Purchaser acknowledges that the Notes have not been registered
under the Securities Act or any state securities laws and understands that the
Notes must be held indefinitely unless they are subsequently registered under
the Securities Act and any applicable state securities laws or such sale is
permitted pursuant to an available exemption from such registration requirement.
No transfer or sale (including, without limitation, by pledge or
hypothecation) of Notes by any Holder which is otherwise permitted hereunder,
other than a transfer or sale to the Company, shall be effective unless such
transfer or sale is made (A) pursuant to an effective registration statement
under the Securities Act and a valid qualification under applicable state
securities or "blue sky" laws or (B) without such registration or qualification
as a result of the availability of an exemption therefrom, and, if reasonably
requested by the Company, counsel for such Holder shall have furnished the
Company with an Opinion of Counsel, reasonably satisfactory in form and
substance to the Company, to the effect that no such registration is required
because of the availability of an exemption from the registration requirements
of the Securities Act.
18
<PAGE>
4.4 ERISA
-----
Such Purchaser represents that either:
(a) it is not acquiring the Notes for or on behalf of any "employee
pension benefit plan" or "employee welfare benefit plan" (as defined
in Section 3 of ERISA) or any "plan" (as defined in Section 4975 of
the Code) (each hereafter a "Plan");
(b) the assets used to acquire the Notes are assets of an insurance
company general account and the purchase of the Notes would be exempt
under the provisions of the proposed Prohibited Transaction Class
Exemption published by the Department of Labor in the Federal Register
on August 22, 1994 (59 FR 43134), assuming that the relevant
provisions are adopted in a form substantially similar to that
proposed; or
(c) if it is acquiring the Notes on behalf of a Plan, either directly or
through an investment fund (such as a bank collective investment fund
or insurance company pooled separate account), then, assuming that the
plans described or incorporated by reference in the Transition Report
are the only Plans with respect to which the Company is a "party in
interest" or "disqualified Person" (as such terms are defined in
Section 3 of ERISA and Section 4975 of the Code, respectively), either
i) no part of the funds to be used to purchase the Notes constitutes
assets allocable to any trust that contains assets of the plans
described in the Transition Report; or
ii) an exemption from the prohibited transaction rules applies such
that the use of such funds does not constitute a non-exempt
prohibited transaction in violation of Section 406 of ERISA or
Section 4975 of the Code, which could be subject to a civil
penalty assessed pursuant to Section 502 of ERISA or a tax
imposed under Section 4975 of the Code.
The representations contained in this Section 4.4 are made in express
reliance on the employee benefit plans described or incorporated by reference
in the Transition Report.
4.5 Agreement Binding on Future Holders.
-----------------------------------
Such Purchaser agrees that, in connection with any sale or other
transfer of the Notes, it will require any such purchaser or transferee of the
Notes to agree in writing to be bound by the provisions of this Agreement as if
it were a Purchaser hereunder.
19
<PAGE>
4.6 Brokers.
-------
Such Purchaser is not under any obligation to pay any broker's or
finder's fee or commission or similar payment in connection with the
transactions contemplated by this Agreement.
Such Purchaser shall indemnify and hold the Company harmless, to the
fullest extent permitted by law, from and against any and all actions, suits,
claims, costs, expenses, losses, liabilities and/or obligations in connection
with or relating to any broker's or finder's fees or commission or similar
payment incurred by such Purchaser in connection with such transactions, except
with respect to such fees or commissions incurred by such Company for its
account, so long as such Purchaser receives notice of any such action, suit,
claim, etc., reasonably promptly after the Company becomes aware thereof;
provided that the failure to give such notice as provided in this sentence shall
not relieve such Purchaser of its obligations under this sentence except to the
extent, and only to the extent, that such Purchaser is materially prejudiced by
such failure to give notice (as determined by a court of competent jurisdiction
in a final nonappealable judgment).
SECTION 5. COVENANTS
---------
So long as any of the Notes remain unpaid and outstanding, the Company
covenants to the Holders of outstanding Notes as follows:
5.1 Payment of Notes
----------------
The Company shall pay the Principal of and interest on the Notes on
the dates and in the manner provided in the Notes. To the extent lawful, the
Company shall pay interest (including interest accruing after the commencement
of any proceeding under any Bankruptcy Law) on all due and unpaid amounts
outstanding under the Notes (including overdue installments of Principal or
interest) at a rate equal to 18% per annum, compounded monthly.
5.2 Financial Statements and Reports
--------------------------------
(a) The Company shall maintain, and shall cause each of its
Subsidiaries to maintain, a system of accounting established and administered in
accordance with sound business practices to permit preparation of financial
statements in conformity with GAAP. The Company shall deliver to each Holder
the financial statements and other reports described below:
(i) Monthly Financials. As soon as available and in any event
------------------
within thirty (30) days after the end of each month ending after the
Closing Date, the Company will deliver: the consolidated balance sheet of
the Company and its Subsidiaries as at the end of such month and the
related consolidated statements of income and stockholders' equity and cash
flows for such month and in each case for
20
<PAGE>
the period from the beginning of the then current fiscal year to the end of
such month, setting forth in each case in comparative form the
corresponding figures for the corresponding periods of the previous fiscal
year, certified by the chief financial officer of the Company that they
fairly present the consolidated financial condition of the Company and its
Subsidiaries as at the dates indicated and the results of their operations
and their cash flows for the periods indicated, subject to changes
resulting from audit and normal year-end adjustments;
(ii) Quarterly Financials. As soon as available and in any
--------------------
event within sixty (60) days after the end of each fiscal quarter (other
than the last quarter of any fiscal year), the Company will deliver the
consolidated balance sheet of the Company and its Subsidiaries as at the
end of such fiscal quarter and the related consolidated statements of
income, stockholders' equity and cash flows for such fiscal quarter and for
the period from the beginning of the then current fiscal year to the end of
such fiscal quarter, setting forth, in each case, in comparative form the
corresponding figures for the corresponding periods of the previous fiscal
year, certified by the chief financial officer of the Company that they
fairly present the consolidated financial condition of the Company and its
Subsidiaries as at the dates indicated and the results of their operations
and their cash flows for the periods indicated, subject to changes
resulting from audit and normal year-end adjustments;
(iii) Year-End Financials. As soon as available and in any
-------------------
event within one hundred five (105) days after the end of each fiscal year,
the Company will deliver: (A) the consolidated balance sheet of the
Company and its Subsidiaries as at the end of such year and the related
consolidated statements of income, stockholders' equity and cash flows of
the Company and its Subsidiaries for such fiscal year, setting forth in
each case in comparative form the corresponding figures for the previous
fiscal year, certified by the chief financial officer of the Company that
they fairly present the financial condition of the Company and its
Subsidiaries as at the dates indicated and the results of their operations
and their cash flows for the periods indicated, (B) a schedule of the
outstanding Debt for borrowed money of the Company and its Subsidiaries
describing in reasonable detail each such debt issue or loan outstanding
and the principal amount of accrued and unpaid interest with respect to
each such debt issue or loan, and (C) in the case of such consolidated
financial statements, a report thereon of independent certified public
accountants of recognized national standing selected by the Company, which
report shall be unqualified, shall express no doubts about the ability of
the Company and its Subsidiaries to continue as a going concern, and shall
state that such consolidated financial statements fairly present the
consolidated financial position of the Company and its Subsidiaries as of
the dates indicated and the results of their operations and their cash
flows for the periods indicated in conformity with GAAP applied on a basis
consistent with prior years (except as otherwise disclosed in such
financial statements) and that the examination by such accountants in
connection with such consolidated financial statements has been made in
accordance with United States generally accepted auditing standards;
21
<PAGE>
(iv) The Company shall promptly provide copies of all reports,
letters and other correspondence from local, state, or federal regulatory
or other agencies relating to the business, licenses or operating contracts
of the Company or any of its Subsidiaries, which reports, letters or other
correspondence relate to matters that could reasonably be expected to have
a Material Adverse Effect;
(v) The Company shall promptly provide notice to each Holder of
(i) any violation of or noncompliance with any Environmental Laws that
could reasonably be expected to have a Material Adverse Effect, (ii) any
communication or claim of Environmental Liability (written or oral)
relating to a potential or present Environmental Liability, whether from a
governmental authority, citizens group, employee or otherwise, alleging
that the Company or any of its Subsidiaries is not in compliance with any
Environmental Law or asserting liability of the Company or any of its
Subsidiaries for contamination from or as a result (directly or indirectly)
of, any Materials of Environmental Concern, which noncompliance or
liability could reasonably be expected to have a Material Adverse Effect,
or (iii) any releases or threatened releases (including, without
limitation, any releasing, spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, disposing or dumping,
on-site or off-site) of any Materials of Environmental Concern for which
the Company or any of its Subsidiaries could be held liable, either in fact
or by law, which releases would reasonably be expected to have a Material
Adverse Effect;
(vi) The Company shall promptly provide to each Holder copies of
any report, financial statement, notice, letter, correspondence or other
document delivered to, or received from, any holders of Debt outstanding
under the Revolving Credit Agreement or any holders of other Debt
outstanding in an amount not less than $1,000,000, not otherwise delivered
to the Holders pursuant to this Section 5.2; provided; however, that the
Company shall not be required to so provide any such notice, letter,
correspondence or other document, that does not contain information that
could reasonably be considered to be of material interest to the Holders;
and
(vii) The Company shall promptly provide copies of such other
information and data with respect to the Company or any of its Subsidiaries
as from time to time may be reasonably requested in writing by any Holder.
(b) Each financial statement delivered pursuant to subsections (a)(i),
(ii) and (iii) of this Section 5.2 shall be substantially in the form
appropriate for financial statements included in a Quarterly Report on Form 10-Q
or Annual Report on Form 10-K, as the case may be, filed with the Securities and
Exchange Commission pursuant to the Exchange Act and, in the case of clauses
(ii) and (iii), shall be accompanied by a brief, narrative report appropriate
for inclusion in such Form in the section titled "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" set forth in Item
303 of Regulation S-K under the Act and the Exchange Act.
22
<PAGE>
5.3 Compliance Certificate
----------------------
(a) The Company shall deliver to the Holders, within 30 days after the
end of each calendar month and within 45 days after each fiscal year, an
Officers' Certificate stating that a review of the activities of the Company and
its Subsidiaries during the preceding calendar month or fiscal year, as the case
may be, has been made under the supervision of the signing Officers with a view
to determining whether the Company and its Subsidiaries have kept, observed,
performed and fulfilled their respective obligations under this Agreement, and
further stating, as to each such Officer signing such certificate, that to the
best of his knowledge (after due inquiry), the Company and each of its
Subsidiaries has kept, observed, performed and fulfilled each and every covenant
contained in this Agreement (or, if a Default or Event of Default shall have
occurred, describing all such Defaults or Events of Default of which he may have
knowledge) and that to the best of his knowledge (after due inquiry) no event
has occurred and remains in existence by reason of which payments on account of
the Principal of or interest, if any, on the Notes are prohibited or if such
event has occurred, a description of the event. The Officers' Certificate shall
set forth all financial calculations for such fiscal quarter or fiscal year
necessary to demonstrate compliance with the covenants contained in this
Section 5.
(b) So long as not contrary to the then current recommendations of the
American Institute of Certified Public Accountants, the financial statements
delivered pursuant to Sections 5.2(a)(iii) shall be accompanied by a written
statement of independent public accountants (which shall be a firm of
established national reputation) that in making the examination necessary for
certification of such financial statements nothing has come to their attention
which would lead them to believe that the Company or any of its Subsidiaries has
violated any provisions of this Agreement or, if any such violation has
occurred, specifying the nature and period of existence thereof, it being
understood that such accountants shall not be liable directly or indirectly to
any Person for any failure to obtain knowledge of any such violation.
(c) The Company will deliver to the Holders, forthwith upon becoming
aware of (i) any Default or Event of Default or (ii) any event of default under
any other loan agreement, mortgage, indenture or instrument referred to in
Section 7.1(e), an Officers' Certificate specifying in reasonable detail such
Default, Event of Default or event of default and the nature of any remedial or
corrective action the Company proposes to take with respect thereto.
5.4 Limitation on Restricted Payments
---------------------------------
The Company shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, make any Restricted Payment. Notwithstanding the
foregoing, the Company shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, (a) make any advance described in clause (vi) of the
definition of the term Permitted Investment in the Senior Secured Indenture, if
the amount of such advance plus the aggregate amount of all the then outstanding
advances of the type described in such clause would exceed
23
<PAGE>
$500,000, (b) make any Investment described in clause (viii), clause (ix) (other
than Investments in the Interest Reserve Account (as defined in Section 4.20 of
the Senior Secured Indenture)), clause (x) or clause (xi) (other than
Investments in connection with joint operating, joint venture or area of mutual
interest agreements or other similar or customary arrangements entered into in
the ordinary course of business, which agreements or arrangements were entered
into prior to the date hereof, and Investments in connection with farm-in
agreements) of the definition of the term Permitted Investment in the Senior
Secured Indenture, or (c) make any Investment in any Subsidiary of the Company,
except for any office lease between the Company and TransAmerican or any
Subsidiary of TransAmerican; provided, however, that the Company may make
Investments in TTC that are consistent with its past business practices in an
amount which together with all prior Investments in TTC since the date hereof,
that have not been repaid in cash to the Company or offset against obligations
of the Company to TTC, and all Incurrences (as defined in Section 5.5) of Debt
or issuances of Disqualified Capital Stock by TTC to the Company shall not
exceed $2,000,000 in the aggregate at any one time.
5.5 Limitation on Additional Debt and Issuance of Disqualified Capital Stock
------------------------------------------------------------------------
The Company shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, create, incur, assume, guarantee or otherwise become
liable for, contingently or otherwise (to "Incur" or, as appropriate, an
"Incurrence"), any Debt or issue any Disqualified Capital Stock (other than
Capital Stock of a Subsidiary of the Company issued to the Company), except as
permitted pursuant to Section 4.11 of the Senior Secured Indenture; provided,
however, that (i) neither the Company nor any of its Subsidiaries shall Incur
any Debt allowed pursuant to clause (d) of the first paragraph of such Section
4.11 other than (A) Debt under the Notes, (B) Debt existing on the date hereof,
(C) Debt under the Revolving Credit Agreement, as in effect on the date hereof,
(D) Debt described in clause (iv) of the definition of the term "Debt" in the
Senior Secured Indenture and (E) Debt not in excess of $5,000,000 in aggregate
principal amount at any time outstanding represented by trade payables that are
incurred on normal, customary terms in the ordinary course of business and are
overdue for a period of more than 60 days ("Overdue Trade Payables"); provided,
----------------------
however, that the aggregate amount of such Debt that may be incurred pursuant to
this clause (E) shall not exceed the aggregate amount of Debt represented by
Overdue Trade Payables that shall have been repaid after the date hereof, (ii)
neither the Company nor any of its Subsidiaries shall Incur any Debt allowed
pursuant to clause (f), clause (i), clause (j) or clause (m) of such Section
4.11, (iii) the Company shall not enter into any agreement for the Presale of
Gas pursuant to clause (m) of such Section 4.11, (iv) the Company shall not
Incur any Debt allowed pursuant to the second paragraph of such Section 4.11,
(v) each Wholly Owned Subsidiary of the Company shall not Incur any Debt or
issue any Disqualified Capital Stock to the Company, except for such Incurrences
and such issuances by TTC that are consistent with the past business practices
of the Company and TTC and which together with all such prior Incurrences of
Debt since the date hereof, that have not been repaid in cash or offset against
obligations of the Company to TTC, and the aggregate amount of Investments made
after the date hereof by the Company and its Subsidiaries in TTC, does not
exceed $2,000,000 in the aggregate at any one time and (vi) Debt representing
the balance deferred and unpaid of the purchase price of services
24
<PAGE>
purchased in the ordinary course of business and consistent with past business
practices shall be considered a trade payable.
5.6 Limitation on Transactions With Related Persons
-----------------------------------------------
The Company shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, regardless of whether by action or inaction, fail to
comply, or cause a failure to comply, with the provisions of Section 4.10 of the
Senior Secured Indenture, except for any office lease between the Company and
TransAmerican or any Subsidiary of TransAmerican; provided, however, that
without limiting the foregoing, the Company shall not, and shall not permit any
of its Subsidiaries to, directly or indirectly, enter into any Related Person
Transaction between the Company and any of its Wholly Owned Subsidiaries or
between any such Wholly Owned Subsidiary and another Wholly Owned Subsidiary of
the Company other than any such transaction or transactions as are consistent
with the Company's past business practices.
5.7 Limitation on Liens
-------------------
The Company shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, regardless of whether by action or inaction, fail to
comply, or cause a failure to comply, with the provisions of Section 4.13 of the
Senior Secured Indenture; provided, however, that without limiting the
foregoing, the Company shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, Incur or suffer to exist any Lien upon any of its
property or assets, whether now owned or hereafter acquired, for the purpose of
securing Debt Incurred pursuant to clause (d) of the first paragraph under
Section 4.11 of the Senior Secured Indenture, other than Liens existing on the
date hereof, Liens arising pursuant to the terms of the Revolving Credit
Agreement as in effect on the date hereof and Permitted Liens that are imposed
on assets of the Company without its consent. Notwithstanding the foregoing
provisions of this Section 5.7, the Company and its Subsidiaries may Incur or
suffer to exist Liens on property securing Permitted Refinancing Debt, if the
Debt being refinanced was secured by a Lien on such property existing as of the
date hereof and such Lien does not increase in amount or extend to any other
property. In addition, notwithstanding any other provision hereof, the Company
shall not, and shall not permit any of its Subsidiaries to, directly or
indirectly, Incur or suffer to exist any Lien (i) of the type described in
clause (d) of the definition of the term Permitted Liens in the Senior Secured
Indenture, other than pledges of assets to secure appeal, supersedeas or
performance bonds (or to secure reimbursement obligations or letters of credit
in support of such bonds) in an aggregate amount outstanding at any time not in
excess of $2,000,000 or (ii) of the type described in clause (k) of the
definition of Permitted Liens in the Senior Secured Indenture.
25
<PAGE>
5.8 Limitation on Asset Sales
-------------------------
The Company shall not, and shall not permit any of its Subsidiaries to
consummate an Asset Sale, except that:
(a) the Company and its Subsidiaries may engage in Asset Sales in
the ordinary course of business and on ordinary business terms;
(b) the Company and its Subsidiaries may sell, lease, transfer,
abandon or otherwise dispose of (i) damaged, worn out, or other obsolete
property in the ordinary course of business or (ii) other property no
longer necessary for the proper conduct of the business;
(c) the Company and its Subsidiaries may engage in Asset Sales
not otherwise permitted by the provisions of this Section 5.8, provided
that the aggregate proceeds from all such Asset Sales do not exceed
$500,000 after the date hereof;
(d) the Company may engage in an Asset Sale represented by the
Koch I Production Payment;
(e) the Company and its Subsidiaries may engage in Asset Sales
not otherwise permitted by the provisions of this Section 5.8, provided
that all of the Net Proceeds from any such Asset Sale are applied
immediately upon consummation of such Asset Sale to the redemption of Notes
in accordance with the provisions of Section 6;
provided, however, that in connection with any such Asset Sale allowed under
this Section 5.8 (other than under clause (e) above), all the Net Cash Proceeds
of such Asset Sale must be reinvested in the business of the seller (it being
understood that such reinvestment in the business of the seller shall include
applying such Net Cash Proceeds to general corporate purposes of the seller);
provided, further, that the consideration paid to the seller in connection with
any Asset Sale allowed under this Section 5.8 shall not be less than the fair
market value (as determined in good faith by the Company) of the assets sold in
such Asset Sale.
5.9 Limitations on Restricting Subsidiary Dividends.
-----------------------------------------------
The Company shall not, and shall not permit any of its Subsidiaries
to, directly or indirectly, create, assume or suffer to exist any consensual
encumbrance or restriction on the ability of any Subsidiary of the Company to
pay dividends or make other distributions on the Capital Stock of any Subsidiary
of the Company or pay any obligation to the Company or any of its Subsidiaries
or otherwise transfer assets or make or pay loans or advances to the Company or
any of its Subsidiaries, except encumbrances and restrictions existing under any
agreement of a Person acquired by the Company or a Subsidiary of the Company,
which restrictions existed at the time of acquisition, were not put in place in
26
<PAGE>
anticipation of such acquisition and are not applicable to any Person or
property, other than the Person or any property of the Person so acquired.
5.10 Stay, Extension and Usury Laws
------------------------------
The Company covenants and agrees (to the extent that it may lawfully
do so) that it will not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, and will use its best
efforts to resist any attempts to claim or take the benefit of any stay,
extension or usury law wherever enacted, now or at any time hereafter in force,
which may affect the covenants or the performance of its obligations under this
Agreement or the Notes; and the Company (to the extent it may lawfully do so)
hereby expressly waives all benefit or advantage of any such law, and covenants
that it will not, by resort to any such law, hinder, delay or impede the
execution of any power herein granted to the Holders, but will suffer and permit
the execution of every such power as though no such law has been enacted.
5.11 Corporate Existence; Merger; Successor Corporation
--------------------------------------------------
(a) The Company will do or cause to be done all things necessary to
preserve and keep in full force and effect its and its Subsidiaries' corporate
existence in accordance with its organizational documents and the corporate
rights (charter and statutory), licenses and franchises of the Company, and each
of its Subsidiaries; provided, however, that the Company shall not be required
to preserve any such right, license or franchise, or corporate existence, if the
Board of Directors of the Company shall determine in good faith that the
preservation thereof is no longer desirable in the conduct of the business of
the Company, and that the loss thereof is not adverse in any material respect to
any Holder.
(b) The Company shall not in a single transaction or through a series
of related transactions, (i) consolidate with or merge with or into any other
Person, or transfer (by lease, assignment, sale or otherwise) all or
substantially all of its properties and assets as an entirety or substantially
as an entirety to another Person or group of affiliated Persons or (ii) adopt a
Plan of Liquidation, unless, in either case:
(1) either the Company, shall be the continuing Person, or the
Person (if other than the Company) formed by such consolidation or into
which the Company, is merged or to which all or substantially all of the
properties and assets of the Company, as an entirety or substantially as an
entirety are transferred (or, in the case of a Plan of Liquidation, any
Person to which assets are transferred) (the Company or such other Person
being hereinafter referred to as the "Surviving Person") shall be a
----------------
corporation organized and validly existing under the laws of the United
States, any State thereof or the District of Columbia, and shall expressly
assume, by an amendment to this Agreement, all the Obligations of the
Company under the Notes and this Agreement;
27
<PAGE>
(2) immediately after and giving effect to such transaction and
the assumption contemplated by clause (1) above and the incurrence or
anticipated incurrence of any Debt to be incurred in connection therewith,
(i) the Surviving Person shall have a Consolidated Net Worth equal to or
greater than the Consolidated Net Worth of the Company, immediately
preceding the transaction and (ii) the Surviving Person shall be able to
incur at least $1.00 of Senior Debt pursuant to the second paragraph of
Section 4.11 of the Senior Secured Indenture;
(3) immediately before and immediately after and giving effect
to such transaction and the assumption of the Obligations as set forth in
clause (1) above and the incurrence or anticipated incurrence of any Debt
to be incurred in connection therewith, no Default or Event of Default
shall have occurred and be continuing; and
(4) the Company shall have delivered to each Holder an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, transfer or adoption and such amendment to this
Agreement comply with this Section 5.11, that the Surviving Person shall be
bound hereby, and that all conditions precedent herein provided relating to
such transaction have been satisfied.
(c) Upon any consolidation or merger, or any transfer of assets
(including pursuant to a Plan of Liquidation) in accordance with this Section
5.11, the successor Person formed by such consolidation or into which the
Company is merged or to which such transfer is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Agreement with the same effect as if such successor Person had been named
as the Company herein; provided, however, that the Company shall not be released
from the Obligations and covenants under this Agreement or under the Notes.
5.12 Same Business
-------------
For so long as any Notes are outstanding, the Company and its
Subsidiaries will engage only in a Related Business; provided, however, that
without limiting the foregoing, the Company shall not, and shall not permit any
of its Subsidiaries to, directly or indirectly, regardless of whether by action
or inaction, fail to comply, or cause a failure to comply, with the provisions
of Section 4.18 of the Senior Secured Indenture.
5.13 Payment of Taxes and Other Claims.
---------------------------------
The Company shall, and shall cause each of its Subsidiaries to, pay or
discharge or cause to be paid or discharged, before the same shall become
delinquent, (i) all taxes, assessments and governmental charges (including
withholding taxes and any penalties, interest and additions to taxes) levied or
imposed upon the Company or any of its Subsidiaries or any of their respective
properties and assets and (ii) all lawful claims,
28
<PAGE>
whether for labor, materials, supplies, services or anything else, which have
become due and payable and which by law have or may become a Lien upon the
property and assets of the Company or any of its Subsidiaries; provided,
however, that the Company shall not be required to pay or discharge or cause to
be paid or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and for which disputed amounts adequate reserves have been
established in accordance with GAAP.
5.14 Limitation on Status as Investment Company or Public Utility Company.
--------------------------------------------------------------------
The Company shall not, and shall not permit any of its Subsidiaries
to, become an "investment company" (as that term is defined in the Investment
Company Act of 1940, as amended), or a "holding company," or "public utility
company" (as such terms are defined in the Public Utility Holding Company Act of
1935, as amended) or otherwise become subject to regulation under the Investment
Company Act or the Public Utility Holding Company Act.
5.15 Insurance
---------
The Company and its Subsidiaries shall maintain liability, casualty
and other insurance with a reputable insurer or insurers in such amounts and
against such risks as is carried by responsible companies engaged in similar
businesses and owning similar assets.
5.16 Restriction on Sale and Issuance of Subsidiary Stock.
----------------------------------------------------
The Company shall not sell, and shall not permit any of its
Subsidiaries to issue or sell, any shares of Capital Stock of any Subsidiary to
any Person other than the Company or a Wholly Owned Subsidiary of the Company.
5.17 Employee Plans
--------------
The Company shall not, directly or indirectly, (i) terminate any
employee pension benefit plan subject to Title IV of ERISA if as a result of
such termination the Company and its Subsidiaries, collectively, would incur a
liability with respect to such plan in excess of $1,000,000 in the aggregate, or
(ii) make a complete or partial withdrawal (within the meaning of Section 4201
of ERISA) from any multiemployer plan if as a result of such withdrawal (within
the meaning of Section 4201 of ERISA), the Company and its Subsidiaries,
collectively, would incur a liability with respect to such plan in excess of
$1,000,000 in the aggregate.
As used in this Section 5.17, the terms "employee pension benefit
plan" and "multiemployer plan" shall have the meanings assigned to such terms in
Section 3 of ERISA.
29
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5.18 ERISA Notices
-------------
Promptly, but in any event within 15 days, the Company shall deliver
to each of the Purchasers (or, if either of the Purchasers does not continue to
be a Holder, such Person as the Holders of a majority in Principal amount of the
then outstanding Notes shall designate), if and when the Company or any of its
Subsidiaries (i) gives or is required to give notice to the Pension Benefit
Guaranty Corporation (the "PBGC") of any "reportable event" (as defined in
----
Section 4043 of ERISA) with respect to any employee pension benefit plan
maintained by the Company or, to the best knowledge of the officers or directors
of the Company, any entity which is a member of the same controlled group as the
Company which "reportable event" might reasonably constitute grounds for a
termination of such plan under Title IV of ERISA or the imposition of a tax
under Section 4971 of the Code, or knows that the plan administrator of any such
plan has given or is required to give notice of any such reportable event, a
copy of the notice of such reportable event given or required to be given to the
PBGC, (ii) receives notice of complete or partial withdrawal liability under
Title IV of ERISA or notice that any multiemployer plan to which the Company or,
to the best knowledge of the officers or directors of the Company, any entity
which is a member of the same controlled group as the Company contributes or is
obligated to contribute is in reorganization or has been terminated, a copy of
such notice, (iii) receives notice from the PBGC under Title IV of ERISA of an
intent to terminate or appoint a trustee to administer any employee pension
benefit plan maintained by the Company or, to the best knowledge of the officers
or directors of the Company, any entity which is a member of the same controlled
group as the Company, a copy of such notice, (iv) applies for a waiver of the
minimum funding standard under Section 412 of the Code, a copy of such
application, (v) gives notice of intent to terminate any employee pension
benefit plan maintained by the Company or, to the best knowledge of the officers
or directors of the Company, any entity which is a member of the same controlled
group as the Company under Title IV of ERISA, a copy of such notice and other
information filed with the PBGC, (vi) fails to make any payment or contribution
to any employee pension benefit plan (or multiemployer plan or in respect of any
benefit arrangement) or makes any amendment to any employee benefit plan or
benefit arrangement which could reasonably result in the imposition of a lien or
the posting of a bond or other security, a certificate of the Chief Executive
Officer of the Company setting forth details as to such occurrence and action,
if any, which the Company or any of its Subsidiaries is required or proposes to
take, (vii) adopts, establishes, maintains or enters into any obligation to make
contributions that are material with respect to the Company to any new employee
benefit plan or multiemployer plan, a certificate of the Chief Executive Officer
of the Company setting forth details as to such obligation, (viii) modifies
any existing employee benefit plan maintained by the Company or, to the best
knowledge of the officers or directors of the Company, any entity which is a
member of the same controlled group as the Company (other than any modification
to medical, dental or other employee welfare benefit plans in the ordinary
course of business) so as to increase its obligations thereunder materially, a
certificate of the Chief Executive Officer of the Company setting forth details
as to such modification, or (ix) materially increases a contribution obligation
to any multiemployer plan maintained by the Company or, to the best knowledge of
the officers or directors of the Company, any entity which is a member of the
30
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same controlled group as the Company, a certificate of the Chief Executive
Officer of the Company setting forth details as to such increase.
As used in this Section 5.18, the terms "employee pension benefit
plan," "multiemployer plan" and "employee benefit plan" shall have the meanings
assigned to such terms in Section 3 of ERISA and the term "controlled group"
shall have the meaning assigned to such term in Section 414 of the Code and in
ERISA, as applicable.
5.19 Inconsistent Agreements
-----------------------
The Company shall not, and shall not permit any of its Subsidiaries
to, (i) enter into any agreement or arrangement that would impair the ability
of the Company or any of its Subsidiaries to fulfill the obligations of the
Company or any of its Subsidiaries under this Agreement, or (ii) supplement,
amend or otherwise modify the terms of their respective Charter Documents if the
effect thereof would impair the ability of the Company or any of its
Subsidiaries to fulfill the obligations of the Company under this Agreement.
5.20 Compliance with Laws; Maintenance of Licenses
---------------------------------------------
The Company shall, and shall cause each of its Subsidiaries to, comply
with all applicable statutes, ordinances, governmental rules and regulations,
judgements, orders and decrees (including all Environmental Laws) to which any
of them is subject, and maintain, obtain and keep in effect all licenses,
permits, franchises and other governmental authorizations necessary to the
ownership or operation of their respective properties or the conduct of their
respective businesses, except to the extent that the failure to so comply or
maintain, obtain and keep in effect could not reasonably be expected to have a
Material Adverse Effect.
5.21 Inspection of Properties and Records
------------------------------------
The Company shall allow, and cause each of its Subsidiaries to allow,
the Holder of the largest aggregate Principal amount of the Notes (and so long
as a Default or an Event of Default has occurred and is continuing, the
Purchasers and each Holder) (or, in each case, such Persons as any of them may
designate) (individually and collectively, "Inspectors"), subject to appropriate
----------
agreements as to confidentiality, (i) to visit and inspect any of the properties
of the Company or any of its Subsidiaries, (ii) to examine all their books of
account and to make copies and extracts therefrom, (iii) to discuss their
respective affairs, finances and accounts with their respective officers, and
(iv) to discuss the financial condition of the Company and its Subsidiaries with
their independent accountants upon reasonable notice to the Company of its
intention to do so and so long as the Company shall be given the reasonable
opportunity to participate in such discussions (and by this provision the
Company authorizes said accountants to have such discussions with the
Inspectors). All such visits, examinations and discussions set forth in the
preceding sentence shall be at such reasonable times and as often as may be
reasonably requested. If a Default or an Event of Default shall have occurred
and be continuing, the Company shall pay or reimburse all
31
<PAGE>
Inspectors for reasonable out-of-pocket expenses which such Inspectors may
reasonably incur in connection with any such visitations or inspections.
5.22 Separate Existence and Formalities. The Company hereby covenants and
----------------------------------
agrees that:
(1) Company's and its Subsidiaries' funds and other assets will not
be commingled with those of TransAmerican, other than pursuant to the
Services Agreement;
(2) all material actions taken by the Company and its Subsidiaries
will be taken pursuant to authority granted by the Board of Directors of
the Company and its Subsidiaries, to the extent required by law or the
Company's and its Subsidiaries' Certificate of Incorporation or By-laws;
(3) the Company and its Subsidiaries will maintain records and books
of account separate from those of TransAmerican in accordance with
generally accepted accounting principles;
(4) the Company and its Subsidiaries will conduct their business at
an office or offices that are identifiably segregated from the offices of
TransAmerican;
(5) Company and its Subsidiaries will conduct their business solely
in their own name and will not knowingly or negligently mislead any other
Person as to the identity or authority of the Company and its Subsidiaries;
(6) oral and written communications of the Company and its
Subsidiaries, including, without limitation, letters, invoices, purchase
orders, contracts, statements and applications, will be made solely in the
name of the Company and its Subsidiaries;
(7) Company and its Subsidiaries will provide for all of its
operating expenses and liabilities from its own separate funds;
(8) Company and its Subsidiaries will maintain correct minutes of the
meetings and other corporate proceedings of the owners of its capital stock
and the Board of Directors and otherwise comply with requisite corporate
formalities required by law;
(9) except as set forth in the Tax Allocation Agreement and the
Transfer Agreement, the Company will not hold itself out or knowingly
permit itself to be held out as having agreed to pay or as being liable for
any indebtedness of TransAmerican; and
32
<PAGE>
(10) each of the Company and TTC will take full advantage of the
rights and privileges under the Transfer Agreement, and neither the Company
nor TTC will amend the Transfer Agreement in a manner adverse to the
Holders, the Company or TTC.
5.23 Maintenance of Office or Agency
-------------------------------
The Company shall maintain (i) an office or agency where the Notes may
be presented for payment; (ii) an office or agency where the Notes may be
presented for registration and transfer and for exchange as provided in this
Agreement; and (iii) an office or agency where notices and demands to or upon
the Company in respect of the Notes may be served. The location of such office
or agency initially shall be as set forth on Schedule 5.23. The Company shall
-------------
give to each Holder written notice of any change of location thereof.
5.24 Information to the Purchasers
-----------------------------
The Company shall, upon the written request of either of the
Purchasers or any subsequent Holder, deliver to such Purchaser or such Holder
and any prospective purchaser designated by such Purchaser or such Holder
promptly following the request of such Purchaser or such Holder or such
prospective purchaser such information which such Purchaser or such Holder or
such prospective purchaser may reasonably request in order to comply with the
information requirements of Rule 144A; provided, however, that such prospective
purchaser shall execute a confidentiality agreement pursuant to Section 10.10
prior to such deliveries.
5.25 Certificates of Designation
---------------------------
Any Certificate of Designation of the Company with respect to
Disqualified Capital Stock shall provide that no dividends shall be paid or
accrued unless such dividends are otherwise permitted to be paid or accrued
pursuant to this Agreement.
5.26 Ownership of Subsidiaries
-------------------------
(a) On or after the date hereof, the Company shall not create or cause
to exist any Subsidiary of the Company (which is not a Subsidiary of the Company
immediately prior to the date hereof).
(b) The Company shall maintain (along with one or more Subsidiaries in
the case of an indirect Subsidiary) good and valid title to those Equity
Interests of each of its Subsidiaries free and clear of any Lien other than
Liens permitted under Section 5.7.
33
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5.27 Limitation on Capital Expenditures
----------------------------------
(a) The Company shall not, and shall not permit any of its
Subsidiaries to, make or incur after the date hereof Capital Expenditures in an
aggregate amount for the Company and its Subsidiaries in excess of an amount
equal to (i) $32.5 million plus (ii) an amount equal to the lesser of $5,000,000
and the amount of proceeds received by the Company from the Koch I Production
Payment that is used by the Company to make or incur Capital Expenditures.
(b) Notwithstanding the foregoing, the Company shall not and shall not
permit any of its Subsidiaries to make or incur any Capital Expenditures as long
as any Event of Default has occurred and is continuing.
5.28 Maintenance of Interest Reserve Account
---------------------------------------
The Company shall not, and shall not permit any of its Subsidiaries
to, make any deposit to the Interest Reserve Account (as defined in Section 4.20
of the Senior Secured Indenture) prior to the last day on which such deposit is
required pursuant to the provisions of Section 4.20 of the Senior Secured
Indenture.
SECTION 6. REDEMPTION
----------
6.1 The Company's Right to Redeem
-----------------------------
(a) Optional Redemption. The Company may redeem all or a portion of
-------------------
the Notes in accordance with Section 4 of the Notes.
(b) Mandatory Redemption. In accordance with Section 4 of the Notes,
--------------------
(i) the Company shall redeem all of the outstanding Notes on the earlier to
occur of (1) a Change of Control, (2) the first date after the date hereof on
which the Company consummates any sale of debt or equity securities and (3)
Stated Maturity, (ii) immediately upon any Asset Sale permitted pursuant to
clause (e) of Section 5.8, the Company shall redeem Notes in an aggregate
principal amount equal to the Net Proceeds from such Asset Sale and (iii)
within two Business Days of the consummation of the Koch I Production Payment,
the Company shall redeem Notes in an aggregate principal amount equal to the
difference (the "Excess Koch Proceeds") between (1) the Net Proceeds from the
--------------------
Koch I Production Payment (less the amount of such Net Proceeds that are used to
terminate the existing dollar-denominated production payment burdening the
properties that are the subject of the Koch I Production Payment) and (2)
$20,000,000; provided, however, that the Company shall cause all Excess Koch
Proceeds to be retained in the Collateral Account (as defined in the Senior
Secured Indenture) at all times prior the redemption of Notes required in
connection with the Koch I Production Payment.
34
<PAGE>
6.2 Selection of Notes to Be Redeemed
---------------------------------
If fewer than all of the Notes are to be redeemed, the Company shall
redeem the Notes pro rata, in such manner as complies with applicable legal
requirements, if any. Notes in denominations of $1,000 may be redeemed only in
whole. The Company may select for redemption portions (equal to $1,000 or any
integral multiple thereof) of the Principal of Notes that have denominations
larger than $1,000. Provisions of this Agreement that apply to Notes called for
redemption also apply to portions of Notes called for redemption.
6.3 Notice of Redemption
--------------------
At least 7 days but not more than 30 days before a Redemption Date,
the Company shall deliver a notice of redemption ("Notice of Redemption") by
--------------------
confirmed facsimile transmission (or other same day confirmed method of
delivery) to each Holder whose Notes are to be redeemed at such Holder's
registered address; provided, however, that in the event of a redemption
required pursuant to clause (ii) or clause (iii) of Section 6.1 (b), the Company
shall not be required to deliver a Notice of Redemption prior to 2 days before
the related Redemption Date. Each Notice of Redemption shall identify the Notes
to be redeemed and shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) the name and address of the Company;
(d) that Notes called for redemption must be surrendered to the
Company to collect the Redemption Price;
(e) that, unless the Company defaults in paying the Redemption Price,
interest on Notes called for redemption ceases to accrue on and after the
Redemption Date, and the only remaining right of the Holders of such Notes is to
receive payment of the Redemption Price upon surrender to the Company of the
Notes redeemed;
(f) if any Note is being redeemed in part, the portion of the
Principal amount of such Note to be redeemed and that, after the Redemption
Date, and upon surrender of such Note, a new Note or Notes in aggregate
Principal amount equal to the unredeemed portion thereof will be issued;
(g) if fewer than all the Notes are to be redeemed, the identification
of the particular Notes (or portion(s) thereof) to be redeemed, as well as the
aggregate Principal amount of Notes to be redeemed and the aggregate Principal
amount of Note(s) to be outstanding after such partial redemption; and
35
<PAGE>
(h) the paragraph of the Notes pursuant to which the Notes are to be
redeemed.
6.4 Effect of Notice of Redemption
------------------------------
Once Notice of Redemption is mailed in accordance with Section 6.3
above, Notes called for redemption become due and payable on the Redemption Date
and at the Redemption Price. Upon surrender to the Company, such Notes called
for redemption shall be paid at the Redemption Price.
6.5 Payment of Redemption Price
---------------------------
On presentation and surrender of any Notes with respect to which a
notice of redemption has been given, at a place of payment specified in such
notice, such Notes or specified portions thereof shall be paid and redeemed by
the Company at the applicable Redemption Price.
If, on or prior to the Redemption Date, the Company deposits in a
segregated account or otherwise sets aside funds sufficient to pay the
Redemption Price of the Notes called for redemption, then, unless the Company
defaults in the payment of such Redemption Price, interest on the Notes to be
redeemed will cease to accrue on and after the applicable Redemption Date,
regardless of whether such Notes are presented for payment.
SECTION 7. DEFAULTS AND REMEDIES
---------------------
7.1 Events of Default
-----------------
An "Event of Default" occurs if:
----------------
(a) the Company defaults in the payment of the Principal of any Note
when the same becomes due and payable at maturity, upon redemption or otherwise;
(b) the Company defaults in the payment of interest on any Note or any
other amount payable hereunder when the same becomes due and payable and the
Default continues for a period of five days;
(c) the Company fails to comply with any of the agreements, covenants,
or provisions of this Agreement or the Notes and the Default continues for the
period and after the notice specified below;
(d) (i) if any of the representations or warranties of the Company
made in this Agreement (including those representations and warranties
incorporated by reference herein) are untrue in any respect, the result of which
could reasonably be expected to have a Material Adverse Effect or (ii) if any of
the representations or warranties of the Guarantor made in the Guaranty
Agreement (including those representations and warranties
36
<PAGE>
incorporated by reference therein) are untrue in any respect, the result of
which could reasonably be expected to have a Material Adverse Effect;
(e) (i) if an event of default occurs under any loan agreement, note,
mortgage, indenture or other instrument binding upon the Company or the
Guarantor or any of their respective Subsidiaries, which shall represent a
default in payment upon final maturity or otherwise, and the Principal amount of
such indebtedness, together with the Principal amount of any other such
indebtedness with respect to which such a default has occurred, aggregates
$8,000,000 or more, or (ii) if an event of default occurs under any loan
agreement, note, mortgage, indenture or other instrument binding upon the
Company or the Guarantor or any of their respective Subsidiaries which shall
represent a default in payment upon final maturity or otherwise result in the
acceleration of such indebtedness prior to its expressed maturity and the
Principal amount of such indebtedness, together with the Principal amount of any
other such indebtedness the maturity of which has been so accelerated and has
not been paid, aggregates $5,000,000 or more;
(f) a final judgment or final judgments for the payment of money are
entered by a court or courts of competent jurisdiction against the Company, the
Guarantor or any of their respective Subsidiaries (other than TransAmerican
Energy Corporation and TransAmerican Refining Corporation) and such remains
undischarged for a period (during which execution shall not be effectively
stayed) of 30 days, provided that the aggregate of all such judgments (net of
amounts covered by insurance) exceeds $5,000,000;
(g) the filing by the Company, the Guarantor or any of their
respective Subsidiaries (any such Person, a "Debtor") of a petition commencing
------
a voluntary case under section 301 of title 11 of the United States Code, or the
commencement by a Debtor of a case or proceeding under any other Bankruptcy Law
seeking the adjustment, restructuring, or discharge of the debts of such Debtor,
or the liquidation of such Debtor, including without limitation the making by a
Debtor of an assignment for the benefit of creditors; or the taking of any
corporate action by a Debtor in furtherance of or to facilitate, conditionally
or otherwise, any of the foregoing;
(h) the filing against a Debtor of a petition commencing an
involuntary case under section 303 of title 11 of the United States Code, with
respect to which case (i) such Debtor consents or fails to timely object to the
entry of, or fails to seek the stay and dismissal of, an order of relief, (ii)
an order for relief is entered and is pending and unstayed on the 60th day after
the filing of the petition commencing such case, or if stayed, such stay is
subsequently lifted so that such order for relief is given full force and
effect, or (iii) no order for relief is entered, but the court in which such
petition was filed has not entered an order dismissing such petition by the 60th
day after the filing thereof; or the commencement under any other Bankruptcy Law
of a case or proceeding against a Debtor seeking the adjustment, restructuring,
or discharge of the debts of such Debtor, or the liquidation of such Debtor,
which case or proceeding is pending without having been dismissed on the 60th
day after the commencement thereof;
37
<PAGE>
(i) the entry by a court of competent jurisdiction of a judgment,
decree or order appointing a receiver, liquidator, trustee, custodian or
assignee of a Debtor or of the property of a Debtor, or directing the winding up
or liquidation of the affairs or property of a Debtor, and (i) such Debtor
consents or fails to timely object to the entry of, or fails to seek the stay
and dismissal of, such judgment, decree, or order, or (ii) such judgment, decree
or order is in full force and effect and is not stayed on the 60th day after the
entry thereof, or, if stayed, such stay is thereafter lifted so that such
judgment, decree or order is given full force and effect; or
(j) if any of the Guaranty Agreement, the Guaranty (as defined in the
Guaranty Agreement) or either of the Pledge Agreements shall for any reason
cease to be in full force and effect or shall cease to give the Holders the
liens, rights, powers and privileges purported to be created thereby, including,
without limitation, a perfected security interest in the TEC Collateral (as
defined in each of the Pledge Agreements) in accordance with the terms thereof.
A Default under clause (c) of Section 7.1 (other than a Default under
Sections 5.3(c)(i), 5.11, 5.26, 5.27, 5.28 or 6.1(b) of this Agreement, which
Default shall be an Event of Default without the notice or passage of time
specified in this paragraph) or under clause (e) of Section 7.1 (other than a
Default resulting from the acceleration (which acceleration has not been
rescinded) of any indebtedness described therein, which Default shall be an
Event of Default without the notice or passage of time specified in this
paragraph) or under clause (f) of Section 7.1 is not an Event of Default (x)
until the Holders of at least a majority in aggregate Principal amount of the
then outstanding Notes notify the Company of the Default and the Company does
not cure the Default within 30 days after receipt of the notice or (y) in the
case of a Default under Sections 5.4, 5.5, 5.6, 5.7, 5.8, 5.9, 5.10, 5.13 or
5.17 unless the Company does not cure the Default within five Business Days
after the earlier of the delivery by the Company to the Holders of a notice of
the Default or the giving of notice of the Default to the Company by any Holder.
The notice given by a Holder or Holders must specify the Default, demand that it
be remedied and state that the notice is a "Notice of Default."
7.2 Acceleration of Notes; Remedies
-------------------------------
(a) Subject to the following paragraph, if an Event of Default (other
than an Event of Default specified in clause (g), (h) or (i) of Section 7.1)
occurs and is continuing, the Holders of at least a majority in aggregate
Principal amount of the then outstanding Notes, by notice to the Company, may
declare the unpaid Principal of and any accrued interest on all the Notes to be
due and payable, and immediately upon such declaration, the Principal and
interest shall be due and payable. If an Event of Default specified in clause
(g), (h) or (i) of Section 7.1 occurs, such an amount shall ipso facto become
and be immediately due and payable without any declaration or other act on the
part of any Holder.
The Holders of at least a majority in aggregate Principal amount of
the then outstanding Notes by notice to the Company may rescind an acceleration
and its
38
<PAGE>
consequences if the rescission would not conflict with any judgment or
decree binding on the Company and if all existing Events of Default have been
cured or waived except nonpayment of Principal or interest that has become due
solely because of the acceleration.
7.3 Premium on Acceleration
-----------------------
In the event of an acceleration of the Notes upon an Event of Default,
the Holders shall be entitled to receive, in addition to any other payments to
which they may be entitled, a premium equal to the premium that would be payable
upon redemption of the Notes in accordance with the terms thereof and hereof.
7.4 Other Remedies
--------------
If an Event of Default occurs and is continuing, Holders of the Notes
may pursue any available remedy to collect the payment of Principal or interest
on the Notes or to enforce the performance of any provision of the Notes or this
Agreement.
A delay or omission by any Holder of any Notes in exercising any right
or remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or acquiescence in the Event of Default. All remedies
are cumulative to the extent permitted by law.
7.5 Waiver of Past Defaults
-----------------------
The Holders of at least a majority in aggregate Principal amount of
the then outstanding Notes by notice to the Company may waive an existing
Default or Event of Default and its consequences except a continuing Default or
Event of Default in the payment of the Principal of or interest on any Notes.
7.6 Rights of Holders to Receive Payment
------------------------------------
Notwithstanding any other provision of this Agreement, the right of
any Holder of a Note to receive payment of Principal and interest on the Note,
on or after the respective due dates expressed in the Note, or to bring suit for
the enforcement of any such payment on or after such respective dates, shall not
be impaired or affected without the consent of the Holder.
7.7 Undertaking for Costs
---------------------
In any suit for the enforcement of any right or remedy under this
Agreement, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
39
<PAGE>
SECTION 8. AMENDMENTS AND WAIVERS
----------------------
8.1 With Consent of Holders
-----------------------
The Company, when authorized by a resolution of the Board of Directors
of the Company, with the written consent of the Holder or Holders of at least a
majority in aggregate Principal amount of the outstanding Notes, may amend this
Agreement or the Notes, provided that each Holder shall have received prior
notice of such proposed amendment. The Holder or Holders of at least a majority
in aggregate Principal amount of the outstanding Notes may waive compliance by
the Company with any provision of this Agreement or the Notes, provided that
each Holder shall have received prior notice of such proposed waiver. Without
the consent of each Holder affected, however, no amendment or waiver may (with
respect to any Notes held by a nonconsenting Holder of Notes):
(a) reduce the Principal amount of Notes whose Holders must consent to
an amendment or waiver of any provision of this Agreement or the Notes;
(b) reduce the Principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of Notes or reduce the
premium payable pursuant to Section 7.3;
(c) reduce the rate of or change the time for payment of interest on
any Note;
(d) waive a Default or Event of Default in the payment of Principal of
or interest on the Notes (except a rescission of acceleration of the Notes by
the Holders of at least a majority in aggregate Principal amount of the Notes
and a waiver of the payment default that resulted from such acceleration);
(e) make the Principal of or the interest on, any Note payable in any
manner other than that stated in this Agreement and the Notes;
(f) make any change in the provisions of this Agreement relating to
waivers of past Defaults or the rights of Holders of Notes to receive payments
of Principal of or interest on the Notes;
(g) waive a redemption payment with respect to any Note; or
(h) make any change in the foregoing amendment and waiver provisions.
It shall not be necessary for the consent of the Holders under this
Section 8 to approve the particular form of any proposed amendment or waiver,
but it shall be sufficient if such consent approves the substance thereof.
After an amendment or waiver under this Section 8 becomes effective,
the Company shall mail to the Holders affected thereby a notice briefly
describing the
40
<PAGE>
amendment or waiver. Any failure of the Company to mail such notice, or any
defect therein, shall not, however, in any way impair or affect the validity of
any such amendment or waiver.
In connection with any amendment under this Section 8, the Company may
offer, but shall not be obligated to offer, to any Holder who consents to such
amendment or waiver, consideration for such Holder's consent.
8.2 Revocation and Effect of Consents
---------------------------------
Until an amendment or waiver becomes effective, a consent to it by a
Holder is a continuing consent by the Holder and every subsequent Holder of a
Note or portion of a Note that evidences the same debt as the consenting
Holder's Note, even if notation of the consent is not made on any Note.
However, any such Holder or subsequent Holder may revoke the consent as to his
Note or portion of his Note by notice to the Company received before the date on
which the Holders of a majority in aggregate Principal amount of the Notes have
consented (and not theretofore revoked such consent) to the amendment or waiver.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to consent to any amendment or
waiver, which record date shall be at least 15 days prior to the first
solicitation of such consent. If a record date is fixed, then notwithstanding
the last sentence of the immediately preceding paragraph, those Persons who were
Holders at such record date (or their duly designated proxies), and only those
Persons, shall be entitled to revoke any consent previously given, regardless of
whether such Persons continue to be Holders after such record date. No such
consent shall be valid or effective for more than 90 days after such record
date.
After an amendment or waiver becomes effective, it shall bind every
Holder, unless it makes a change described in any of clauses (a) through (h) of
Section 8.1, in which case, the amendment or waiver shall bind only each Holder
of a Note who has consented to it and every subsequent Holder of a Note or
portion of a Note that evidences the same debt as the consenting Holder's Note;
provided that any such waiver shall not impair or affect the right of any Holder
to receive payment of Principal of and interest on a Note, on or after the
respective due dates expressed in such Note, or to bring suit for the
enforcement of any such payment on or after such respective dates without the
consent of such Holder.
In determining whether the Holders of the required Principal amount of
Notes have concurred in any direction, waiver, consent or amendment, Notes owned
by the Company or any Affiliate of the Company shall be considered as though not
outstanding.
8.3 Notation on or Exchange of Notes
--------------------------------
If an amendment or waiver changes the terms of a Note, the Company may
require the Holder of the Note to deliver it to the Company. The Company may
place an appropriate notation on the Note about the changed terms and return it
to the Holder.
41
<PAGE>
8.4 Payment of Expenses
-------------------
The Company agrees to pay or reimburse the Purchaser's reasonable out-
of-pocket expenses (including the reasonable fees and out-of-pocket expenses of
one counsel for all Holders) relating to any amendment, or modification of, or
any waiver, or consent under this Agreement and the Notes.
SECTION 9. DEFINITIONS
-----------
9.1 Definitions
-----------
As used in this Agreement, the following terms shall have the
following meanings:
"Additional Notes" has the meaning given to such term in Section
----------------
1.2(c).
"Additional Notes Closing" has the meaning given to such term in
------------------------
Section 1.2(d).
"Additional Notes Closing Date" has the meaning given to such term in
-----------------------------
Section 1.2(d).
"Affiliate" has the meaning given to such term in the Senior Secured
---------
Indenture.
"Agreement" means this Note Purchase Agreement dated as of May 10,
---------
1996 by and among the Company and the Purchaser.
"Asset Sale" means any direct or indirect conveyance, sale, transfer
----------
or other disposition (including through damage or destruction for which
insurance proceeds are paid or by condemnation), in one or a series of related
transactions, of any of the properties, businesses or assets of the Company or
any Subsidiary of the Company, whether owned on the date hereof or thereafter
acquired.
"Bankruptcy Law" means title 11, U.S. Code or any similar federal or
--------------
state law for the relief of debtors.
"Board of Directors" has the meaning given to such term in the Senior
------------------
Secured Indenture.
"Board Resolution" has the meaning given to such term in the Senior
----------------
Secured Indenture.
"Business Day" means any day which is not a Legal Holiday.
------------
42
<PAGE>
"Capital Expenditures" means, without duplication, for any period, the
--------------------
aggregate of all expenditures on a consolidated basis including deposits
(whether paid in cash or property or accrued as liabilities and including the
aggregate principal amount of all Capitalized Lease Obligations) made by the
Company and its Subsidiaries that, in conformity with GAAP, are required to be
included in the property, plant, equipment, or similar fixed asset account.
"Capital Stock" has the meaning given to such term in the Senior
-------------
Secured Indenture.
"Capitalized Lease Obligations" has the meaning given to such term in
-----------------------------
the Senior Secured Indenture.
"Change of Control" has the meaning given to such term in the Senior
-----------------
Secured Indenture.
"Charter Documents" means the Articles of Organization, Articles of
-----------------
Incorporation or Certificate of Incorporation and Bylaws, as amended or restated
(or both) to date, as applicable.
"Closing" shall have the meaning set forth in Section 1.2(b).
-------
"Closing Date" shall have the meaning set forth in Section 1.2(b).
------------
"Code" means the Internal Revenue Code of 1986, as amended from time
----
to time, and any successor statute or law thereto.
"Company" means TransTexas Gas Corporation, a Delaware corporation,
-------
and any successor corporation thereto.
"Consolidated" or "consolidated," when used with reference to any
------------ ------------
accounting term, means the amount described by such accounting term, determined
on a consolidated basis in accordance with GAAP, after elimination of
intercompany items.
"Consolidated Net Worth" means, with respect to any Person, as of any
----------------------
date of determination, the total amount of stockholders' equity of such Person
and its Subsidiaries, determined in accordance with GAAP, which would
appear on the consolidated balance sheet of such Person as of the date of
determination.
"Debt" has the meaning given to such term in the Senior Secured
----
Indenture.
"Default" means any event which is, or after notice or passage of time
-------
would be, an Event of Default.
"Disqualified Capital Stock" has the meaning given to such term in the
--------------------------
Senior Secured Indenture.
43
<PAGE>
"Environmental Laws" means all federal, state, local and foreign laws
------------------
and regulations relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata), including, without limitation, laws
and regulations relating to emissions, discharges, releases or threatened
releases of Materials of Environmental Concern, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environmental Concern.
"Environmental Liability" means any claim, action, cause of action,
-----------------------
investigation or notice (written or oral) by any Person alleging potential or
actual liability (including, without limitation, potential or actual liability
for investigating costs, clean up costs, governmental response costs, natural
resources damages, property damages, personal injuries or penalties) arising out
of, based upon, resulting from or relating to or under any Environmental Law,
including, without limitation, any such liability relating to the presence, or
release into the environment of any Material of Environmental Concern, or
circumstances forming the basis of any violation, or alleged violation, of any
Environmental Law.
"Equity Interest" means (i) with respect to a corporation, any and all
---------------
Capital Stock or warrants, options or other rights to acquire Capital Stock (but
excluding any debt security which is convertible into, or exchangeable or
exercisable for, Capital Stock) and (ii) with respect to a partnership, limited
liability company or similar Person, any and all units, interests, rights to
purchase, warrants, options or other equivalents of, or other ownership
interests in any such Person.
"ERISA" means The Employee Retirement Income Security Act of 1974, as
-----
amended from time to time, and any successor statute or law thereto.
"Event of Default" shall have the meaning set forth in Section 7.1.
----------------
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
from time to time, and any successor statute or law thereto.
"GAAP" means those generally accepted accounting principles and
----
practices which are recognized as such by the American Institute of Certified
Public Accountants acting through its Accounting Principles Board or by the
Financial Accounting Standards Board or through other appropriate boards or
committees thereof and which are consistently applied for all periods after the
date hereof so as to properly reflect the financial conditions, and the results
of operations and cash flows, of the Company and its consolidated subsidiaries,
except that any accounting principle or practice required to be changed by the
Accounting Principles Board or Financial Accounting Standards Board (or other
appropriate board or committee of such boards) in order to continue as a
generally accepted accounting principle or practice may so be changed. In the
event of a change in GAAP, this Agreement and the Notes, to the extent GAAP
applies, shall continue to be construed in accordance with GAAP as in existence
on the date hereof.
"Guarantor" has the meaning given to such term in the Guaranty
---------
Agreement.
44
<PAGE>
"Guaranty" has the meaning given to such term in the Guaranty
--------
Agreement.
"Guaranty Agreement" means the Guaranty Agreement dated as of May 10,
------------------
1996 between TransAmerican and the Purchasers.
"Holder" or "Holders" means a Purchaser or the Purchasers,
------ -------
respectively (so long as it or they hold any Notes), and any other holder of any
of the Notes.
"Incur" shall have the meaning specified in Section 5.5.
-----
"Inspectors" shall have the meaning set forth in Section 5.21.
----------
"Investment" has the meaning given to such term in the Senior Secured
----------
Indenture.
"Jefferies" means Jefferies & Company, Inc., a Delaware corporation.
---------
"Judgment" means the judgment entered by the United States District
--------
Court for the Southern District of Texas in Civil Action H-91-2926, styled Terry
Oilfield Supply Co., Inc., et al v. American Security Bank, N.A., et al ,
against the Company and certain of its affiliates in favor of the plaintiffs
Terry Petroleum Company and Ensco Offshore Company in the amount of
$42,951,582.80 plus interest at a rate of 10.25% per annum from February 1,
1996.
"Koch I Production Payment" means the production payment transaction
-------------------------
to be entered into among the Company, TCW Portfolio No. 1555 DRV Sub-Custody
Partnership, L.P. and Sunflower Energy Finance Company, relating to the
properties described in Annex E.
"Legal Holiday" means a Saturday, Sunday or day on which banks and
-------------
trust companies in the principal place of business of the Company or in New York
are not required to be open. If a payment date is a Legal Holiday, payment may
be made on the next succeeding day that is not a Legal Holiday, and interest
shall accrue for the intervening period.
"Lien" has the meaning given to such term in the Senior Secured
----
Indenture.
"Material Adverse Effect" means (a) a material adverse effect upon the
-----------------------
business, operations, properties, assets, condition (financial or otherwise) or
prospects of the Company and its Subsidiaries taken as a whole or (b) a material
adverse effect on the ability of the Company to perform its obligations under
this Agreement or of the Purchasers or any Holder to enforce or collect any of
the obligations hereunder. In determining whether any individual event would
result in a Material Adverse Effect, notwithstanding that such event does not of
itself have such effect, a Material Adverse Effect shall be deemed to have
occurred if the cumulative effect of such event and all other then existing
events that are the
45
<PAGE>
subject of the applicable representation or covenant would result in a Material
Adverse Effect.
"Materials of Environmental Concern" means pollutants, contaminants,
----------------------------------
chemicals, industrial, toxic or hazardous wastes, substances or constituents,
petroleum and petroleum products (or any by-product or constituent thereof),
asbestos or asbestos-containing materials, or polychlorinated biphenyls.
"Net Cash Proceeds" means the aggregate amount of cash received by the
-----------------
Company and its Subsidiaries in respect of an Asset Sale, less the sum of (a)
all reasonable out-of-pocket fees, commissions and other expenses incurred in
connection with such Asset Sale, including the amount (estimated in good faith
by the Company) of income, franchise, sales and other applicable taxes required
to be paid by the Company or any Subsidiary of the Company in connection with
such Asset Sale and (b) the aggregate amount of cash so received which is used
to retire any then existing Debt of the Company or its Subsidiaries (other than
the Notes), as the case may be, which is required by the terms of such Debt to
be repaid in connection with such Asset Sale.
"Net Proceeds" means the aggregate amount of consideration (regardless
------------
of whether in cash, obligations, property or otherwise) received by the Company
and its Subsidiaries in respect of an Asset Sale, less all reasonable out-of-
pocket fees, commissions and other expenses incurred in connection with such
Asset Sale; provided, however, that such expenses shall not include the amount
of income, franchise, sales and other applicable taxes required to be paid by
the Company or any Subsidiary of the Company in connection with such Asset Sale.
"Note Register" has the meaning set forth in Section 1.3.
-------------
"Notes" means the Original Notes and the Additional Notes.
-----
"Notice of Redemption" has the meaning given to such term in Section
--------------------
6.3.
"Obligations" means, with reference to any Debt, any Principal,
-----------
interest, penalties, fees and other liabilities payable from time to time and
obligations performable under the documentation governing such Debt.
"Officer" of a Person mean its Chairman of the Board, President,
-------
Treasurer, any Vice President, Secretary or any Assistant Secretary.
"Officers' Certificate" means a certificate signed by any two
---------------------
Officers, one of whom must be the Chairman of the Board, the President, the
Treasurer or a Vice President of the Company.
"Opinion of Counsel" means, except for purposes of Section 4.3, a
------------------
written opinion from legal counsel who is reasonably acceptable to each of the
Purchasers. Unless otherwise required by either of the Purchasers, the legal
counsel may be an employee of or
46
<PAGE>
counsel to the Company. For purposes of Section 4.3, "Opinion of Counsel" means
a written opinion from legal counsel who is reasonably acceptable to the Company
and who may be an employee of or counsel to either of the Purchasers or any
Holder.
"Original Notes" has the meaning given to such term in Section
--------------
1.2(a).
"Permitted Liens" has the meaning given to such term in the Senior
---------------
Secured Indenture.
"Permitted Refinancing Debt" means, with respect to any Person, any
--------------------------
Debt of such Person issued in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund other Debt of such
Person; provided that: (1) the principal amount of such Debt does not exceed
the principal amount of the Debt so extended, refinanced, renewed,
replaced, defeased or refunded or, in the case of Debt being refinanced that was
issued with an original issue discount, the accreted value thereof (as
determined in accordance with GAAP) at the time of such refinancing, renewal,
replacement, defeasance or refunding (plus the amount of reasonable fees and
expenses incurred in connection therewith); (2) such Debt has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of the Debt being extended, refinanced, renewed, replaced, defeased or refunded;
(3) such Debt is subordinated in right of payment to the Guaranty on terms at
least as favorable to the holders of the Guaranty as those, if any, contained in
the documentation governing the Debt being extended, refinanced, renewed,
replaced, defeased or refunded; (4) the annual interest rate with respect to
such Debt is the market rate at the time for similar Debts of similar borrowers
or the same rate as the Debt being refinanced, and is payable no more frequently
than, that of the Debt being extended, refinanced, renewed, replaced, defeased
or refunded; and (5) such Debt is incurred by such Person who is an obligor on
the Debt being extended, refinanced, renewed, replaced, defeased or refunded.
"Person" means any corporation, individual, joint stock company, joint
------
venture, partnership, unincorporated association, governmental regulatory
entity, country, state or political subdivision thereof, trust, municipality or
other entity.
"Plan of Liquidation" means, with respect to any Person, a plan that
-------------------
provides for, contemplates or the effectuation of which is preceded or
accompanied by (regardless of whether substantially contemporaneously, in phases
or otherwise) (i) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of such Person otherwise than as an entirety or
substantially as an entirety and (ii) the distribution of all or substantially
all of the proceeds of such sale, lease, conveyance or other disposition and all
or substantially all of the remaining assets of such Person to holders of
Capital Stock of such Person.
"Principal" of any Debt (including the Notes) means the principal of
---------
such Debt plus, without duplication, any applicable premium, if any, on such
Debt.
47
<PAGE>
"Property" or "property" means any assets or property of any kind or
-------- --------
nature whatsoever, real, Personal or mixed (including fixtures), whether
tangible or intangible; provided that the terms "Property" or "property," when
used with respect to any Person, shall not include Notes issued by such Person.
"Purchaser" means TCW or Jefferies, as the case may be, and
---------
"Purchasers" means TCW and Jefferies, collectively.
- - -----------
"Redemption Date" means, when used with respect to any Note to be
---------------
redeemed, the date fixed for such redemption pursuant to this Agreement and the
Notes.
"Redemption Price" means, when used with respect to any Note to be
----------------
redeemed, the price fixed for such redemption pursuant to this Agreement and the
Notes.
"Related Business" has the meaning given to such term in the Senior
----------------
Secured Indenture.
"Related Person" has the meaning given to such term in the Senior
--------------
Secured Indenture.
"Related Person Transaction" has the meaning given to such term in the
--------------------------
Senior Secured Indenture.
"Restricted Payment" has the meaning given to such term in the Senior
------------------
Secured Indenture.
"Revolving Credit Agreement" means the Amended and Restated Accounts
--------------------------
Receivable Management and Security Agreement dated as of October 31, 1995 by and
between BNY Financial Corporation, the Company and TTC.
"Rule 144" means Rule 144 as promulgated by the SEC under the
--------
Securities Act, as amended from time to time, and any successor rule or
regulation thereto.
"Rule 144A" means Rule 144A as promulgated by the SEC under the
---------
Securities Act, as amended from time to time, and any successor rule or
regulation thereto.
"SEC" means the Securities and Exchange Commission and any successor
---
thereto.
"Securities Act" means the Securities Act of 1933, as amended from
--------------
time to time, and any successor statute or law thereto.
"Senior Debt" has the meaning given to such term in the Senior Secured
-----------
Indenture.
48
<PAGE>
"Senior Secured Indenture" means the Indenture dated as of June 15,
------------------------
1995 between the Company, as issuer, TTC, as guarantor, and American Bank
National Association, as trustee, as amended and supplemented and as in effect
on the date hereof (regardless of whether such indenture actually is in full
force and effect on the date of consideration, and without regard to any
amendment or supplement to such indenture entered into subsequent to the date
hereof).
"Services Agreement" means the Services Agreement, dated August 24,
------------------
1993, between the Company and TransAmerican, as amended through the date hereof.
"Settlement" means the settlement in an amount not greater than the
----------
amount owed pursuant to the Judgment paid to settle all outstanding claims
against the Company relating to the civil action H-91-2926, styled Terry
Oilfield Supply Co., Inc., et al v. American Security Bank, N.A., et al, in the
United States District Court for the Southern District of Texas.
"Solvent" means, with respect to any Person on a particular date, that
-------
on such date, (a) the fair saleable value of the assets of such Person exceeds
its probable liability on its debts as they become absolute and mature; (b) such
Person is able to pay its debts or liabilities as such debts and liabilities
mature; and (c) such Person is not engaged in a business or transaction, and is
not about to engage in a business or transaction, for which such Person's assets
would constitute an unreasonably small capital.
"Stated Maturity," when used with respect to any Note, means August 1,
---------------
1996.
"Subsidiary" has the meaning given to such term in the Senior Secured
----------
Indenture; provided, however, that for purposes of Section 5, "Subsidiary" and
"Wholly Owned Subsidiary" shall not include TARC or TEC.
"Surviving Person" shall have the meaning set forth in Section
----------------
5.13(b)(1).
"TARC" means TransAmerican Refining Corporation, a Delaware
----
corporation.
"TARC Reports" means TARC's Annual Report on Form 10-K for the year
------------
ended July 31, 1995, and TARC's quarterly report on Form 10-Q for the period
ended October 31, 1995, in each case, as filed with the SEC.
"Tax Allocation Agreement" means the Tax Allocation Agreement, dated
------------------------
as of August 24, 1993, among TransAmerican, the Company, TransTexas Transmission
Corporation and TransAmerican's other subsidiaries, as amended through the date
hereof.
"TCW" means TCW Shared Opportunity Fund II, L.P.
---
49
<PAGE>
"TEC" means TransAmerican Energy Corporation, a Delaware corporation.
---
"TransAmerican" means TransAmerican Natural Gas Corporation, a Texas
-------------
corporation.
"Transfer Agreement" means the Transfer Agreement, dated August 24,
------------------
1993, between TransAmerican, the Company, TTC and Mr. John R. Stanley, as
amended through the date hereof.
"Transition Report" means the Transition Report on Form 10-K for the
-----------------
six-month period ending January 31, 1996 filed with the SEC on or about April
30, 1996.
"TTC" means TransTexas Transmission Corporation, a Delaware
---
corporation.
"U.S. Legal Tender" means such coin or currency of the United States
-----------------
of America as at the time of payment shall be legal tender for the payment of
public and private debts.
"Voting Stock" has the meaning given to such term in the Senior
------------
Secured Indenture.
"Weighted Average Life to Maturity" means, when applied to any Debt at
---------------------------------
any date, the number of years obtained by dividing (a) the sum of the products
obtained by multiplying (x) the amount of each then remaining installment,
sinking find, serial maturity or other required payments of principal, including
payment at final maturity, in respect thereof, by (y) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment, by (b) the then outstanding principal amount of such
Debt.
"Wholly Owned Subsidiary" means, with respect to any Person, at any
-----------------------
time, a Subsidiary of such Person, all of the Voting Stock of which (except any
director's qualifying shares) is at the time owned directly or indirectly by
such Person.
9.2 Rules of Construction
---------------------
Unless the context otherwise requires
(a) a term has the meaning assigned to it;
(b) "or" is not exclusive;
(c) words in the singular include the plural, and words in the plural
include the singular;
(d) provisions apply to successive events and transactions; and
50
<PAGE>
(e) "herein," "hereof," "hereunder" and other words of similar import
refer to this Agreement as a whole and not to any particular Section or other
subdivision.
(f) reference to a Section means reference to such Section in this
Agreement, unless stated otherwise.
SECTION 10. MISCELLANEOUS
-------------
10.1 Notices
-------
All notices and other communications provided for or permitted
hereunder shall be made by hand-delivery, first-class mail, telex, telecopier,
or overnight air courier guaranteeing next day delivery:
(a) if to TCW to TCW Shared Opportunity Fund II, L.P., c/o TCW Asset
Management Company, 11100 Santa Monica Boulevard, Suite 2000, Los Angeles,
California 90025, Telecopy No. (310) 575-9700, Attention: Nicholas Tell, with a
copy to Skadden, Arps, Slate, Meagher & Flom, 300 S. Grand Avenue, Suite 3400,
Los Angeles, California 90071, Telecopy No. (213) 687-5600, Attention: Rod A.
Guerra, Jr., Esq.; and
(b) if to Jefferies to Jefferies & Company, Inc., 650 Fifth Avenue,
Fourth Floor, New York, New York 10019, Telecopy No. (212) 903-2622, Attention.:
Jerry M. Gluck, with a copy to Skadden, Arps, Slate, Meagher & Flom, 300 S.
Grand Avenue, Suite 3400, Los Angeles, California 90071, Telecopy No. (213) 687-
5600, Attention: Rod A. Guerra, Jr., Esq.; and
(c) if to the Company, to TransTexas Gas Corporation, 1300 East North
Belt, Houston, Texas 77032, Telecopy No. (713) 986-8865, Attention: Ed
Donahue, with a copy to Gardere & Wynne, L.L.P., 3000 Thanksgiving Tower, 1601
Elm Street, Dallas, Texas 75201, Attention: C. Robert Butterfield, Esq.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when
answered back if telexed; when receipt acknowledged, if telecopied; and the next
Business Day after timely delivery to the courier, if sent by overnight air
courier guaranteeing next day delivery. The parties may change the addresses to
which notices are to be given by giving five days' prior notice of such change
in accordance herewith.
51
<PAGE>
10.2 Successors and Assigns
----------------------
This Agreement shall inure to the benefit of and be binding upon the
successors and assigns of each of the parties; provided, however, that the
Company may not assign its rights and obligations hereunder without the written
consent of each of the Purchasers.
10.3 Counterparts
------------
This Agreement may be executed in any number of counterparts and by
the parties hereto in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
10.4 Headings
--------
The headings in this Agreement are for convenience of reference only
and shall not limit or otherwise affect the meaning hereof.
10.5 Governing Law
-------------
THIS AGREEMENT, THE NOTES AND ALL ISSUES HEREUNDER AND THEREUNDER,
INCLUDING (WITHOUT LIMITATION) THE DETERMINATION OF THE MAXIMUM LAWFUL RATE OF
INTEREST THAT MAY BE CONTRACTED FOR, CHARGED OR RECEIVED WITH RESPECT TO THE
NOTES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK (WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW EXCEPT
SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW). TO THE FULLEST EXTENT
IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, THE COMPANY HEREBY IRREVOCABLY
SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH
OF MANHATTAN IN NEW YORK CITY OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF
MANHATTAN IN NEW YORK CITY IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING
OUT OF OR RELATING TO THIS AGREEMENT, AND IRREVOCABLY AGREES THAT ALL CLAIMS IN
RESPECT OF ANY SUCH SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN
ANY SUCH COURT. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY
EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY AND ANY OBJECTION WHICH IT
MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY HOLDER TO SERVE PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE
PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION.
52
<PAGE>
10.6 Entire Agreement
----------------
This Agreement, together with the Notes (and any agreement between
the Company and any Holder relating to transfers), is intended by the parties as
a final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein and therein. This Agreement,
together with the Notes, supersedes all prior agreements and understandings
between the parties with respect to such subject matter.
10.7 Severability
------------
In the event that any one or more of the provisions contained herein,
or the application thereof in any circumstances, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired or affected, it being
intended that the rights and privileges of each of the Purchasers shall be
enforceable to the fullest extent permitted by law.
10.8 Further Assurances
------------------
The Company shall cause each of its Subsidiaries to, at its cost and
expense, upon request of either of the Purchasers or any Holder, duly execute
and deliver, or cause to be duly executed and delivered, to the Purchasers or
such Holder such further instruments and do or cause to be done such further
acts as may be necessary or proper in the reasonable opinion of each of the
Purchasers or such Holder to carry out more effectually the provisions and
purposes of this Agreement.
10.9 Disclosure of Financial Information
-----------------------------------
Subject to the terms of Section 10.10 hereof, each Holder is hereby
authorized to deliver a copy of any financial statement or any other information
relating to the business, operations or financial condition of the Company and
each of its subsidiaries which may be furnished to it hereunder or otherwise, to
any other Holder, any court, Governmental Body having jurisdiction over such
Holder, to any Person which shall, or shall have any right or obligation to,
succeed to all or any part of such Holder's interest in any of the Notes and
this Agreement or to any actual or prospective purchaser or assignee thereof.
10.10 Maintenance of Confidentiality
------------------------------
Each Holder shall hold all non-public, proprietary or confidential
information obtained pursuant to or in connection with the transactions
contemplated hereby (the "Confidential Information") in confidence and shall not
------------------------
use or disclose any such Confidential Information except for purposes of the
transactions contemplated by and in accordance with this Agreement; provided,
however, that the Holders may disclose any such Confidential Information (i) to
their respective directors, officers, employees, examiners, outside auditors,
53
<PAGE>
counsel, consultants, appraisers and other professional advisors in connection
with the transactions contemplated by this Agreement, (ii) as required by any
law or Governmental Body including, without limitation, any Federal or state
Freedom of Information Act, or (iii) to any proposed purchaser or assignee of
Notes in connection with the contemplated transfer thereof, provided, that any
such Person set forth in clause (iii) shall execute a confidentiality agreement
containing provisions substantially identical to this Section 10.10 in advance
of receipt of such information. Notwithstanding the foregoing, the provisions
of this Section 10.10 shall not apply to such portions of the Confidential
Information that (i) are or become available to the public through no fault or
action of a Holder or its representatives, or (ii) become available to a Holder
or its representatives on a non-confidential basis from a source, other than the
Company or its representatives, not known by such Holder to be in violation of
any agreement with or other duty to the Company.
54
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties set forth below as of the date first written above.
TRANSTEXAS GAS CORPORATION
By: /s/ Ed Donahue
Name: Ed Donahue
Title: Vice President, CFO and Secretary
TCW SHARED OPPORTUNITY FUND II, L.P.
By: TCW Investment Management Company,
its Investment Manager
By: /s/ Mark L. Altanosio
Name: Mark L. Altanosio
Title: Group Managing Director
By: /s/ Nicholas W. Teu Jr.
Name: Nicholas W. Teu Jr.
Title: Vice President and Counsel
JEFFERIES & COMPANY, INC.
By: /s/ Joseph E. Haly
Name: Joseph E. Haly
Title: Vice President
<PAGE>
Schedule 1.2
------------
Company's Account Information:
Fleet Bank of Massachusetts
Boston, Massachusetts
For Credit to TransTexas Gas Corporation
ABA: 011000138
Account#: 93635-00603
Ref:
Attn:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------
TCW's Account:
- - ---------------
<S> <C>
Citibank/NYC/Bear Stearns
ABA: 021000089
A/C: Bear Stearns/0925-3186
FBO: TCW Shared Opportunity Fund II, L.P.
Account: 102-02730
</TABLE>
Jefferies' Account:
- - ------------------
Bank of New York
New York, New York
ABA: 021-000018
Account No.: 890-007-001
Account Name: Jefferies & Company, Inc.
1
<PAGE>
Schedule 5.23
Office or Agency for Notices and Demands
----------------------------------------
TransTexas Gas Corporation
1300 East North Belt
Houston, Texas 77032
1
<PAGE>
ANNEX A
-------
[FORM OF NOTE]
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT OR AN EXEMPTION THEREFROM UNDER THE ACT, THE RULES AND
REGULATIONS THEREUNDER AND APPLICABLE STATE LAWS. THE TRANSFER OF THIS NOTE IS
SUBJECT TO THE CONDITIONS SPECIFIED IN THE NOTE PURCHASE AGREEMENT DATED AS OF
MAY 10, 1996 BY AND BETWEEN TRANSTEXAS GAS CORPORATION AND THE PURCHASERS PARTY
THERETO.
13 1/3% Senior Note due August 1, 1996
No. _______ $[FACE AMOUNT]
TRANSTEXAS GAS CORPORATION
promises to pay to [NAME OF PURCHASER] or registered assigns, the Principal sum
of [FACE AMOUNT] Dollars ($________) on August 1, 1996 plus accrued and unpaid
interest as provided below.
Interest Payment Dates: 15th day of each calendar month; provided that the first
Interest Payment Date shall be June 15, 1996.
Record Dates: 1st day of each calendar month next preceding each Interest
Payment Date.
Capitalized terms used herein shall have the meanings ascribed to them
in the Agreement (as defined below) unless otherwise indicated.
1. INTEREST. TransTexas Gas Corporation, a Delaware corporation (the
"Company"), promises to pay interest on the principal amount of this Note at
-------
13 1/3% per annum from May 10, 1996 until maturity. The Company will pay
interest monthly on the 15th day of each calendar month, or if any such day is
not a Business Day, on the next succeeding Business Day (each an "Interest
Payment Date"). Interest on the Notes will accrue from the most recent date on
which interest has been paid or, if no interest has been paid, from the date of
issuance; provided, that the first Interest Payment Date shall be June 15, 1996.
The Company shall pay interest (including post-petition interest in any
proceeding under Bankruptcy Law) on all due and unpaid amounts outstanding under
the Notes (including overdue installments of Principal or interest), from time
to time on demand at a
A-1
<PAGE>
rate equal to 18% per annum, compounded monthly, to the extent lawful. Interest
will be computed on the basis of a 360-day year of twelve 30-day months.
2. METHOD OF PAYMENT. The Company will pay interest on the Notes to
the Persons who are registered Holders of Notes at the close of business on the
first day of the calendar month next preceding the Interest Payment Date, even
if such Notes are cancelled after such record date and on or before such
Interest Payment Date. The Notes will be payable both as to Principal and
interest by federal funds wire transfer of U.S. Legal Tender to each Holder's
account in any bank in the State of New York as may be designated and specified
in writing by such Holder at least five Business Days prior thereto.
3. NOTE PURCHASE AGREEMENT. The Company issued the Notes under the
Note Purchase Agreement dated as of May 10, 1996 (the "Agreement") by and
---------
between the Company and the purchasers party thereto (the "Purchasers"). The
----------
Notes are subject to, and qualified by, all such terms, certain of which are
summarized herein, and Holders of Notes are referred to the Agreement for a
statement of such terms. The Notes are general unsecured obligations of the
Company. The Notes are limited to $15,750,000 in aggregate principal amount.
4. REDEMPTION.
(a) The Company may redeem all or any of the Notes, in whole or in
part, at any time, on or after the date hereof.
(b) The Company shall redeem all of the outstanding Notes on the
earlier to occur of (i) a Change of Control, (ii) the first date after the date
hereof on which the Company consummates any sale of debt or equity securities
and (iii) Stated Maturity. Immediately upon any Asset Sale permitted pursuant
to clause (e) of Section 5.8, the Company shall redeem Notes in an aggregate
principal amount equal to the Net Proceeds from such Asset Sale, and within two
Business Days of the consummation of the Koch I Production Payment, the Company
shall redeem Notes in an aggregate principal amount equal to the difference (the
"Excess Koch Proceeds") between (i) the Net Proceeds from the Koch I Production
--------------------
Payment (less the amount of such Net Proceeds that are used to terminate the
existing dollar-denominated production payment burdening the properties that are
the subject of the Koch I Production Payment) and (ii) $20,000,000; provided,
however, that the Company shall cause all Excess Koch Proceeds to be retained in
the Collateral Account (as defined in the Senior Secured Indenture) at all times
prior the redemption of Notes required in connection with the Koch I Production
Payment.
(c) The redemption price that shall be paid in any redemption of Notes
shall be equal to 100% of the principal amount thereof, plus all accrued and
unpaid interest through such date.
5. NOTICE OF REDEMPTION. Notice of redemption pursuant to Section
4(a) hereof shall be delivered at least 7 days but not more than 30 days before
a Redemption Date by confirmed facsimile transmission (or other same day
confirmed method of delivery) to
A-2
<PAGE>
each Holder whose Notes are to be redeemed at such Holder's registered address;
provided, however, that in the event of a redemption required pursuant to clause
(ii) of the first sentence of Section 4(b) hereof or pursuant to the second
sentence of such Section 4(b), the Company shall not be required to deliver a
Notice of Redemption prior to 2 days before the related Redemption Date. Notes
in denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000, unless all of the Notes held by a Holder are to be
redeemed. If, on or prior to the Redemption Date, the Company deposits in a
segregated account or otherwise sets aside funds sufficient to pay the
Redemption Price of the Notes called for redemption, then, on and after the
Redemption Date, interest ceases to accrue on Notes or portions thereof called
for redemption and the only right of the Holders of such Notes will be to
receive payment of the Redemption Price, unless the Company defaults in paying
the redemption price.
6. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered
form, without coupons, in the principal amount of $100,000 or integral multiples
of $50,000 in excess thereof. The transfer of Notes may be registered and Notes
may be exchanged as provided in the Agreement. The Company may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and the Company may require a Holder to pay any taxes and fees
required by law or permitted by the Agreement. The Company need not exchange or
register the transfer of any Note or portion of a Note selected for redemption,
except for the unredeemed portion of any Note being redeemed in part. Also, the
Company need not exchange or register the transfer of any Notes for a period of
15 days before a selection of Notes to be redeemed or during the period between
a record date and the corresponding Interest Payment Date.
7. PERSONS DEEMED OWNERS. The registered Holder of a Note may be
treated as its owner for all purposes.
8. AMENDMENTS AND WAIVERS. Subject to certain exceptions, the
Agreement and the Notes may be amended or supplemented and any existing Default
under, or compliance with any provision of, the Agreement may be waived with the
written consent of the Holders of at least a majority in aggregate Principal
amount of the outstanding Notes.
The right of any Holder to participate in any consent required or
sought pursuant to any provision of the Agreement (and the obligation of the
Company to obtain any such consent otherwise required from such Holder) may be
subject to the requirement that such Holder shall have been the Holder of record
of any Notes with respect to which such consent is required or sought as of a
date identified by the Company in a notice furnished to Holders in accordance
with the terms of the Agreement.
9. DEFAULTS AND REMEDIES. An Event of Default is, in general:
default in the payment of the Principal of any Note; default in the payment of
interest on any Note for a period of 5 days; failure by the Company for 30 days
after notice to it to comply with provisions of the Agreement or the Notes or,
in the case of the failure to comply with certain specified covenants, for
either five Business Days after such notice or without such notice; if any of
the representations or warranties of the Company made in or in connection
A-3
<PAGE>
with the Agreement (including those representations and warranties incorporated
by reference therein) are untrue in any respect, the result of which could
reasonably be expected to have a Material Adverse Effect; if any of the
representations or warranties of the Guarantor made in or in connection with the
Guaranty Agreement (including those representations and warranties incorporated
by reference therein) are untrue in any respect, the result of which could
reasonably be expected to have a Material Adverse Effect; certain defaults under
and/or acceleration prior to maturity of certain other indebtedness of the
Company or the Guarantor; certain final judgments which remain undischarged
after notice; certain events of bankruptcy or insolvency; failure by the Company
to comply with any of the agreements, covenants, or provisions of any other
agreement between the Company and the Purchaser or an event of default occurs
under any agreement between the Guarantor and the Purchaser; if any of the
Guaranty Agreement, the Guaranty (as defined in the Guaranty Agreement) or
either of the Pledge Agreements shall for any reason cease to be in full force
and effect or shall cease to give the Holders the liens, rights, powers and
privileges purported to be created thereby, including, without limitation, a
perfected security interest in the TEC Collateral (as defined in each of the
Pledge Agreements) in accordance with the terms thereof. If an Event of Default
occurs and is continuing, the Holders of at least a majority in aggregate
Principal amount of the then outstanding Notes may declare all the Notes to be
due and payable immediately. In the event of an acceleration of the Notes upon
an Event of Default, the Holders shall be entitled to receive, in addition to
any other payments to which they may be entitled, a premium equal to the premium
that would be payable upon redemption of the Notes in accordance with the terms
thereof and hereof. The Company is obligated to furnish a monthly compliance
certificate to the Holders.
10. NO RECOURSE AGAINST OTHERS. A director, officer, employee or
stockholder of the Company, as such, shall not have any liability for any
obligations of the Company under the Notes or the Agreement or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder by accepting a Note waives and releases all such liability. The
waiver and release are part of the consideration for the issuance of the Notes.
11. ABBREVIATIONS. Customary abbreviations may be used in the name
of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
The Company will furnish to any Holder upon written request and
without charge a copy of the Agreement. Requests may be made to TransTexas Gas
Corporation, 1300 East North Belt, Suite 310, Houston, Texas 77032, Attention:
Ed Donahue.
A-4
<PAGE>
TRANSTEXAS GAS CORPORATION
Date: May 10, 1996 By:
-------------------------------------------
Authorized Signatory
A-5
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and
transfer this Note to ________________________________________________________
______________________________________________________________________________
(Insert assignee's Soc. Sec. or tax I.D. no.)
______________________________________________________________________________
(Print or type assignee's name, address and zip code)
______________________________________________________________________________
and irrevocably appoint ______________________________________________________
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
______________________________________________________________________________
Date: _______________________________
Your Signature:_______________________________________
(Sign exactly as your name appears
on the face of this Note)
Signature Guarantee
A-6
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ANNEX B
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1
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ANNEX C
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1
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ANNEX D
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EXHIBIT 10.2
June 6, 1996
TransTexas Gas Corporation
1300 East North Belt
Houston, Texas 77032-2949
Attention: Ed Donahue
Vice President, C.F.O.
Gentlemen:
This letter agreement (together with the Exhibits, this "Master Agreement")
sets forth the terms and conditions pursuant to which AIG Trading Corporation
("AIG") and TransTexas Gas Corporation ("Counterpart") may, from time to time,
enter into Swap Transactions (as defined below) involving the price of natural
gas ("Commodities"). Unless defined elsewhere in this Master Agreement, terms
used in this Master Agreement shall have the respective meanings set forth in
Exhibit A.
1. Terms of & Responsibility for Swap Transactions
-----------------------------------------------
1.1 The letter agreement, dated April 6, 1995, setting forth certain terms
and conditions governing Swap Transactions between the parties is hereby
terminated, effective immediately. Nothing in this Master Agreement shall
require either party to enter into any Swap Transactions, but each Swap
Transaction between the parties (whether originally subject to such April 6
agreement or entered into before, on or after the date of this Master Agreement)
shall be governed by this Master Agreement.
1.2 This Master Agreement and all Swap Transactions (collectively, this
"Agreement"), together with the Specified Agreements, constitutes one integrated
contract. The parties acknowledge that this Master Agreement, each Swap
Transaction and each Specified Agreement is each being entered into in reliance
on the fact that this Agreement and the other Specified Agreements constitute a
single agreement between the parties (and, to the extent applicable, TTC) and
the parties agree that they would not otherwise have entered into this Master
Agreement, any Swap Transactions or any Specified Agreements.
1.3 For each Swap Transaction entered into, the parties shall agree on the
following terms: (a) the relevant Commodity
<PAGE>
or Commodities; (b) the Base Quantity of each Commodity; (c) the Pricing Period
or Periods; (d) the Fixed Price, if applicable; (e) the Floating Price; (f) the
Fixed Price Payor and Floating Price Payor; (g) the transaction fee, if any, and
the party to which it is to be paid; and (h) any other specific terms as they
determine (which, at the parties' election, may include, without limitation, a
Fallback Price). A Swap Transaction is entered into upon agreement of the
parties, by telephone, telecopier or otherwise, notwithstanding the failure of
the parties to send or agree upon the Confirmation (as defined below) for that
Swap Transaction as provided in paragraph 1.4.
1.4 AIG shall confirm each Swap Transaction entered into by issuing a
telecopier confirmation in substantially the form of the Annex to Exhibit A (a
"Confirmation"). AIG agrees to use all reasonable efforts to send a
Confirmation for each Swap Transaction within three business days after it is
entered into. However, if AIG fails to send a Confirmation for any Swap
Transaction within such three business day period, Counterpart may send a
Confirmation for that Swap Transaction to AIG. Unless objected to within two
business days after receipt, each Confirmation is final and binding upon the
parties, absent manifest error.
2. Swap Transaction Payments
-------------------------
2.1 AIG shall determine the Average Floating Price and Floating Price
Amount for each Pricing Period and advise Counterpart thereof by no later than
the third business day after the end of such Pricing Period. The Net Payment
for each Pricing Period shall be paid as follows:
(a) if there is a Fixed Price, by the Floating Price Payor if the Floating
Price Amount exceeds the Fixed Price Amount and by the Fixed Price Payor if
the Fixed Price Amount exceeds the Floating Price Amount. No Net Payment
shall be made if the Fixed Price Amount equals the Floating Price Amount;
(b) if there is a Cap Price or a Floor Price, by the appropriate party paying
the Net Payment if the Floating Price is greater than the Cap Price or less
than the Floor Price. No Net Payment shall be made if the Floating Price
is greater than or equal to the Floor Price or less than or equal to the
Cap Price; and
(c) if there are two Floating Prices, by the party owing the larger Floating
Price Amount. No Net Payment shall be made if the two Floating Price Amounts
are equal.
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2.2 The party obligated to make the Net Payment, if any, shall pay such
amount to the other party on the fifth business day following the end of each
Pricing Period unless the parties agree to a different date (a "Payment Date").
Each Net Payment shall be made without offset, deduction, discount or
counterclaim (subject to Section 3 and except as otherwise expressly provided in
this Master Agreement or any Specified Agreement). No deliveries are required
or permitted under any Swap Transaction.
3. Non-Performance
---------------
3.1 Notwithstanding any other provision of this Agreement or any other
agreement between or involving the parties, a default (each an "Event of
Default") shall occur (after giving effect to any applicable notice or grace
period provided for below) in the event either party (the "Defaulting Party")
shall:
(a) become bankrupt or insolvent, however evidenced, or be unable to pay its
debts as they fall due,
(b) file a petition or otherwise commence a proceeding under any bankruptcy,
insolvency, reorganization or similar law or have any such petition filed or
proceeding commenced against it,
(c) have a liquidator, administrator, receiver or trustee appointed with
respect to it or any substantial portion of its property or assets,
(d) fail to pay any obligation, or provide or return any Margin, to the
other party (the "Performing Party") when due under this Agreement, if such
failure is not cured within twenty-four hours (but at least one business day)
after notice from the Performing Party,
(e) fail to perform any obligation to the Performing Party when due or
otherwise Breach any other covenant or agreement (other than an obligation,
covenant or agreement referred to in paragraph 3.1(d) or, in the case of
Counterpart, 3.1(g)) under this Agreement (including, without limitation,
covenants which are incorporated in this Agreement by reference), if such
failure is not cured within one business day after notice from the Performing
Party, provided that if such failure or Breach does not affect the Defaulting
Party's ability to perform any material obligation to the Performing Party, then
such failure or Breach shall not be an Event of Default under this Agreement
unless the Defaulting Party has failed to cure the same within five business
days after notice from the Performing Party, or
(f) fail to provide adequate assurance of its ability to perform all of its
outstanding obligations to the Performing Party under this Agreement or any
Specified Agreement, within 48
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hours (but at least one business day) of a demand therefor when the Performing
Party has reasonable grounds for insecurity.
In addition, an Event of Default shall also occur (in which case Counterpart is
the Defaulting Party and AIG is the Performing Party) if Counterpart shall:
(g) fail to perform any obligation set forth in or otherwise Breach
paragraphs 5.2(a), 5.2(d)-(j), 7.4 or 9.8,
(h) Breach any Specified Agreement, each as currently in effect or as
amended, supplemented or replaced after the date of this Master Agreement, if
such Breach is not cured within one business day after notice from the
Performing Party, provided that if such Breach does not affect the Defaulting
Party's ability to perform any material obligation to the Performing Party, then
such Breach shall not be an Event of Default under this Agreement unless the
Defaulting Party has failed to cure the same within five business days after
notice from the Performing Party,
(i) Breach the Indenture or any Indenture Related Agreement, each as
currently in effect or as amended, supplemented or replaced after the date of
this Master Agreement, and as a result of which (i) any obligation becomes due
and payable or is required to be performed before it would otherwise have been
due, or (ii) a party exercises remedies, provided that a written waiver of any
such Breach by all parties to the relevant agreements required to grant such
waiver shall constitute a waiver for purposes of this Agreement for the same
period,
(j) have an event occur under one or more agreements or instruments relating
to Debt which has resulted in an amount of at least $5 million becoming due and
payable under such agreements or instruments before it would otherwise have been
due or payable, or have an event occur under any Trading Transaction as a result
of which there occurs a liquidation, acceleration or early termination of such
Trading Transactions (other than by mutual agreement) in respect of which
Counterpart owes a settlement payment of at least $5 million,
(k) have an event (other than a Permitted Encumbrance or an event described
in paragraph 3.1(o)) occur as a result of which any Person having an interest in
any Margin (whether or not subordinate to the interest of AIG) could, as a
result, foreclose on or otherwise enforce any Lien on or other right or interest
of any kind in or to any part of such Margin,
(l) make any representation or warranty under paragraph 4.2(c) which is
untrue in any respect as of when made or deemed made,
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(m) make any representation or warranty in this Agreement (other than a
representation or warranty referred to in paragraph 3.1(l)) or any Specified
Agreement which is untrue in any material respect as of when made or deemed made
(except that if a statement in any such representation or warranty expressly
includes a standard of materiality, an Event of Default shall occur if such
statement is untrue in any respect as of when made or deemed made giving effect
to such standard), provided that an Event of Default shall not occur under this
paragraph 3.1(m) with respect to paragraph 4.2(b) solely as a result of an event
referred to in paragraph 3.1(o) (but such event can constitute an Event of
Default under paragraph 3.1(o) if it is the type of event defined as such under
paragraph 3.1(o)),
(n) consolidate with or merge with or into any other Person, or, directly or
indirectly, sell, lease, assign, transfer or convey all or substantially all of
its assets (computed on a consolidated basis), to another Person or group of
Affiliated Persons, whether in a single transaction or through a series of
related transactions, if either (i) at the time or within 120 days after such
transaction, the rating of Counterpart's senior long-term debt (secured or
unsecured) is downgraded by Standard & Poor's Corporation, Inc. or Moody's
Investors Service, Inc. (or any successor rating agencies to either such entity)
to a rating below that which existed immediately prior to the time such
transaction is publicly announced, or (ii) such transaction does not comply with
Article V of the Indenture, or
(o) have entered against it a final judgment or judgments not covered by
insurance for the payment of money, or the issuance of any warrant or order of
attachment against any portion of the property or assets of Counterpart, which,
in the aggregate, equal or exceed $10 million at any one time by a court or
courts of competent jurisdiction which are not stayed, bonded or discharged
within thirty days of the entering, issuance or attachment thereof or, in the
case of any such final judgment which provides for payment over time, which
shall so remain unstayed, unbonded or undischarged beyond any applicable payment
date provided therein.
In addition, an Event of Default shall also occur (in which case Counterpart is
the Defaulting Party and AIG is the Performing Party) if:
(p) the Trustee shall give (or purport to give) a notice to AIG under
Section 3(a) of the Subordination Agreement.
The specific enumeration of certain events in paragraph 3.1(g)-(p) or the
occurrence of any such event does not limit either party's rights under
paragraph 3.1(f). Notwithstanding the provisions of paragraphs 3.1(g)-(i), (k)
or (m), an Event of Default shall not occur under any of such paragraphs if (x)
such
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event is Counterpart's failure to perform a covenant or other agreement under
this Agreement or a Specified Agreement which relates specifically to Other
Collateral or such event is Counterpart's having made a representation or
warranty under this Agreement or a Specified Agreement which relates
specifically to Other Collateral and which is untrue in any respect, and (y)
such event, together with all other such events in respect of such paragraphs
which have occurred and are continuing, reduce Property Value by no more than
$10 million; provided that, if an event referred to in this sentence does not
relate only to Other Collateral, then such event, to the extent it does not
relate to Other Collateral, can constitute an Event of Default if it is the type
of event which is defined as such.
3.2 If an Event of Default occurs, then the Performing Party shall have the
right immediately, without any prior notice to the Defaulting Party (other than
as expressly provided in paragraph 3.1), and at any time or times thereafter, to
terminate and liquidate any or all Swap Transactions then outstanding by:
(a) closing out and terminating each Swap Transaction being liquidated, so
that such Swap Transaction is canceled, and calculating a Settlement Payment for
such Swap Transaction payable to one party from the other, as appropriate, and
any Breakage Costs incurred by the Performing Party, and
(b) setting off (A) all such Settlement Payments owing to the Defaulting
Party, plus any Funds held as Margin by the Performing Party in connection with
this Agreement, plus (at the Performing Party's election) any or all other
amounts due to the Defaulting Party under this Agreement, against (B) all such
Settlement Payments owing to the Performing Party, plus any Funds held as Margin
by the Defaulting Party in connection with this Agreement, plus any or all
Breakage Costs, plus (at the Performing Party's election) any or all other
amounts due to the Performing Party under this Agreement, so that all such
amounts shall be netted to a single liquidated amount payable by one party to
the other.
Such net amount shall be paid by the close of business in New York on the next
business day.
3.3 The Performing Party's rights under this Section 3 shall be in addition
to, and not in limitation or exclusion of, any other rights which the Performing
Party may have (whether by agreement, operation of law, in equity or otherwise
and including, without limitation, foreclosure of Liens on Other Collateral in
favor of the Performing Party under any Specified Agreement). After an Event of
Default occurs, (a) the Performing Party may from time to time exercise its
right to
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terminate and liquidate Swap Transactions, (b) the Performing Party may suspend
its payments under Section 2 pending a liquidation or setoff under this Section
3, and (c) the Defaulting Party is responsible for all reasonable costs and
expenses incurred by the Performing Party as a result of an Event of Default
(including, without limitation, reasonable attorneys' fees and disbursements).
3.4 If an Event of Default occurs, the Performing Party (at its election)
may set off any or all amounts which the Defaulting Party owes to it (whether
under this Agreement or otherwise and whether or not then due) against any or
all amounts which it owes to the Defaulting Party (whether under this Agreement
or otherwise and whether or not then due); provided that any amount not then due
which is included in such setoff shall be discounted to present value as at the
time of setoff (to take account of the period between the time of setoff and the
date on which such amount would otherwise have been due) at the applicable rate
for that period determined by the Performing Party in any commercially
reasonable manner.
3.5 Prior to or within a reasonable time after commencing a liquidation
under paragraph 3.2, the Performing Party shall use reasonable efforts to notify
the Defaulting Party that such liquidation has commenced. However, the
Performing Party's failure to give such notice shall not be an Event of Default
under this Agreement and shall not in any manner affect the validity or
effectiveness of any such liquidation.
3.6 After an Event of Default has occurred in respect of which Counterpart
is the Defaulting Party, Counterpart will not make any payment on the Notes.
4. Representations & Warranties
----------------------------
4.1 Each party represents and warrants to the other party, on the date of
this Master Agreement, at the time it enters into each Swap Transaction and (in
the case of paragraphs 4.1(a) and (b) only) at all times until this Agreement
has been terminated and (in the case of Counterpart) until it has indefeasibly
satisfied in full all of its obligations to AIG under this Agreement and each
Specified Agreement, that (a) it possesses all corporate power and authority
and, to the extent applicable, all corporate, regulatory and other approvals
necessary to enter into and perform this Agreement and each Specified Agreement,
(b) each of this Agreement and each Specified Agreement constitutes its valid
and binding agreement enforceable against it in accordance with its terms, (c)
each Swap Transaction entered into is undertaken in conjunction with a line of
business of such party, and (d) it is an "eligible swap participant" as defined
in Section 35.1(b) of the Regulations of the Commodity Futures Trading
Commission.
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4.2 Without limiting paragraph 4.1, Counterpart represents and warrants to
AIG, on the date of this Master Agreement and at all times until this Agreement
has been terminated and Counterpart has indefeasibly satisfied in full all of
its obligations to AIG under this Agreement and each Specified Agreement, that:
(a) except as provided in Schedule 4.2(a), the execution, delivery and
performance (including, without limitation, the entry into Swap Transactions and
each provision of Margin) by Counterpart of and under this Agreement and each
Specified Agreement does not and will not cause Counterpart to be in Breach of
any other agreement (including, without limitation, the Indenture or any
Indenture Related Agreement, each as currently in effect or as amended,
supplemented or replaced after the date of this Master Agreement) or any law,
regulation, order or court process or decision, to which it is a party or by
which it or a material portion of its properties are bound or affected,
(b) except as provided in Schedule 4.2(b), subject to Permitted Encumbrances
and notwithstanding any title opinion to the contrary, (i) AIG's interest in the
Other Collateral is a first priority, perfected Lien on all Other Collateral,
(ii) no event has occurred as a result of which any Person could cause
Counterpart's interest in the Other Collateral to terminate or be forfeited or
released, other than as the result of any cessation of production that was not
caused or permitted to occur by Counterpart's failure to act as a prudent
operator or to perform any of its obligations under this Agreement or any
Specified Agreement (in each case referred to in this paragraph 4.2(b),
regardless of any stay, injunction or similar proceeding which may delay or
prevent the taking of such action), (iii) Counterpart has not granted or
permitted or suffered to exist any Lien in or on any Other Collateral, and (iv)
Counterpart owns good title to the Other Collateral,
(c) with respect to Margin other than the Other Collateral, (i) AIG's
interest in such Margin is and will be a first priority, perfected Lien on all
such Margin, (ii) no event has occurred as a result of which any Person could
cause Counterpart's interest in such Margin to terminate or be forfeited or
released (in each case referred to in this paragraph 4.2(c), regardless of any
stay, injunction or similar proceeding which may delay or prevent the taking of
such action), and (iii) except for the Lien granted to AIG under this Agreement
and except for the Lien, if any, of the Trustee in Counterpart's interest, if
any, in such Margin, Counterpart has not granted or permitted or suffered to
exist any Lien in or on any such Margin,
(d) with respect to each of the Indenture, the Indenture Related Agreements
and any Credit Agreement in effect on the
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date of this Master Agreement, the copy thereof provided to AIG is true and
correct and reflects any amendments or supplements thereto on or before the date
of this Master Agreement,
(e) the Subordination Agreement and the Specified Agreements are sufficient
to and will at all times cause the interest of the Trustee held for the benefit
of the holders of the Notes in the Other Collateral to be subordinate to AIG's
Lien under this Agreement and the Specified Agreements on (i) the Other
Collateral and (ii) Counterpart's interest, if any, in any other Margin, and
(f) each Reserve Report, each production report and each certificate
delivered to AIG under or with respect to this Agreement or any Specified
Agreement is true, accurate and complete in all respects as of the date
delivered (or, if different, as of the relevant date as of which a statement is
made or information provided in such Reserve Report or certificate).
5. Covenants
---------
5.1 Reference is made to the covenants in Sections 4.13 and 4.22 of the
Indenture. AIG shall have the benefit thereof to the same extent as if such
covenants had been given and entered into directly with AIG and set forth in
this Agreement (except that, for purposes of incorporating Section 4.22 and (to
the extent used therein) the definition of Third Party Consent Agreement into
this Master Agreement, references to Collateral, the Trustee and the Security
Documents are deemed to refer to Margin, AIG and the Specified Agreements,
respectively).
5.2 Counterpart covenants and agrees with AIG as follows, at all times
until this Agreement has been terminated and Counterpart has indefeasibly
satisfied in full all of its obligations to AIG under this Agreement and each
Specified Agreement:
(a) After the date of this Master Agreement, no amendment or supplement of
the Indenture or any Indenture Related Agreement, and no Credit Agreement which
is entered into or amendment or supplement thereto, will adversely affect AIG's
ability to exercise its rights under this Agreement or any Specified Agreement,
without AIG's prior written consent to such amendment or supplement or Credit
Agreement, which consent will not be unreasonably withheld,
(b) Counterpart will have a Reserve Report prepared semi-annually, once as
of the end of Counterpart's fiscal year and once as of the end of its second
fiscal quarter, and will provide each such Reserve Report to AIG as soon as it
is available but in any event within ninety days after the date as of which it
is prepared. Each Reserve Report will be prepared
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by Netherland & Sewell or another nationally recognized engineering firm
reasonably acceptable to AIG. Together with each Reserve Report, Counterpart
will provide to AIG (i) a Reserve Report Certificate, and (ii) title opinions
sufficient to demonstrate the status of Counterpart's title to each completed
well listed in such Reserve Report that (1) either was not listed in the
previous Reserve Report or as to which a title opinion was otherwise not
previously provided by Counterpart to AIG, (2) has an SEC PV 10 of at least $2
million, and (3) is included in the calculation of Property Value. Counterpart
will deliver a copy of each title opinion which it receives with respect to any
interest included in the Other Collateral, promptly after it is received by
Counterpart and whether or not it is an Acceptable Title Opinion,
(c) Counterpart will provide to AIG copies of (i) any certificates or
notices provided to the Trustee under Sections 4.7(a)-(c) or 4.8 of the
Indenture or received by Counterpart under Section 6.2 of the Indenture, at the
same time as it gives, or as soon as practicable after it receives, each such
certificate or notice, (ii) any other certificates or notices under the
Indenture and the Indenture Related Agreements (each as currently in effect or
as amended, supplemented or replaced after the date of this Master Agreement),
if such certificate or notice relates to a Breach, a waiver or any matter which
does or could reasonably be expected to affect AIG's rights in or to any Margin,
at the same time as Counterpart gives, or as soon as practicable after
Counterpart receives, each such certificate or notice, (iii) any amendment or
supplement to the Indenture, any Indenture Related Agreement or any Credit
Agreement, as soon as the same is executed, (iv) Counterpart's annual
consolidated financial statements for its fiscal year certified by independent
auditors and prepared in accordance with generally accepted accounting
principles, consistently applied, within 105 days after the end of each such
fiscal year, and (v) Counterpart's quarterly consolidated financial statements
for each such fiscal quarter and for its fiscal year through such quarter,
certified by its Chief Financial Officer and prepared in accordance with
generally accepted accounting principles, consistently applied, within 60 days
after the end of each such fiscal quarter (but, in the case of clauses (iv) and
(v), without duplication of items provided to AIG under paragraph 5.2(c)(i)),
(d) Counterpart will not enter into any Trading Transaction unless it is a
Permitted Hedging Transaction,
(e) Counterpart will not consummate any transfer, sale or other disposition
of any kind of or grant any Lien or interest of any kind in or on any Other
Collateral, or incur any other obligation or enter into any other transaction
which could reduce the Collateral Value or the Property Value at that time,
unless at least two business days in advance thereof (i)
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Counterpart has provided AIG with (x) a Roll-Up Certificate (if either the
Property Value of the Other Collateral subject to such transaction is at least
$25 million or a Roll-Up Certificate has been prepared) or (y) an Update
Certificate (if such Property Value is less than $25 million and a Roll-Up
Certificate has not yet been prepared) which reflects such transaction, (ii) if
any Margin would be due to AIG after giving effect to such transaction,
Counterpart shall have provided such Margin to AIG before or concurrently with
such transaction or (in the case of a transaction contemplated by Section 7)
before or concurrently with AIG's execution of the relevant instruments
releasing AIG's Lien, and (iii) Counterpart's outstanding Trading Transactions,
after giving effect to such transaction, would still be Permitted Hedging
Transactions, provided that (A) AIG is not required to release its Lien on any
Margin except with respect to the Other Collateral as expressly provided in
Section 7, and (B) Counterpart shall not be deemed to have failed to comply with
this paragraph 5.2(e) solely by reason of an action permitted by Section
4.6(iii) of the Specified Mortgage,
(f) Counterpart will provide AIG with a Compliance Certificate (i) within
twenty days after the end of each calendar month, (ii) within five business days
after AIG's request (in which case, if AIG limits its request to certain items,
such Certificate may be limited to such items), and (iii) as soon as it becomes
aware of (x) any Breach of its representation and warranty in paragraph 4.2(b),
or (y) one or more transactions or events referred to in the form of Compliance
Certificate which, singly or in the aggregate, would reduce Property Value by at
least $15 million. Counterpart is deemed to be "aware" of any transaction or
event which is known, or which with reasonable diligence should have been known,
to one or more Senior Officers,
(g) Counterpart will maintain its principal place of business and chief
executive office in Harris County, Texas, unless notice is given to AIG,
together with such documents and instruments as AIG shall reasonably request, at
least five business days in advance of such change of location,
(h) Counterpart will cause TTC to maintain in full force and effect an
agreement under which TTC will continue to provide transportation for all
natural gas produced from property included in the Other Collateral (whether or
not owned by Counterpart) for the productive term of the Other Collateral on
terms substantially the same as in effect on the date of this Master Agreement
(but subject to the tariff rates for transportation then in effect),
(i) Counterpart will provide to AIG each monthly production report filed or
required to be filed with the Texas Railroad Commission ("TRC") or any successor
agency having
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jurisdiction, on the production from the wells included in the Other Collateral,
as soon as practicable after the same is prepared but not later than five
Business Days after the date such report is filed with the TRC, and
(j) Counterpart will not repay the Notes with the proceeds of any new
indebtedness unless its obligations under such new indebtedness are
subordinated, on terms at least comparable to those set forth in the
Subordination Agreement, to its obligations to AIG under this Agreement.
6. Survival; Opinion
-----------------
6.1 Each representation and warranty set forth above (or incorporated by
reference) in Section 4 and the provisions of Section 11 shall survive any
payment under and termination of this Agreement and any Swap Transaction,
provided that, for the sake of clarity, the parties agree that representations
and warranties made as of a certain date need only be true and correct as of
that date.
6.2 Concurrently with the execution of this Master Agreement, Counterpart
shall provide to AIG an opinion of Gardere & Wynne, L.L.P., counsel to
Counterpart, and Lane & Mittendorf LLP, special New York counsel to Counterpart,
collectively to the effect of paragraphs 4.1(a)-(b) and 4.1(d) (but in the case
of paragraph 4.1(b), subject to applicable bankruptcy and insolvency laws of
general application) and 4.2(a)-(c) and 4.2(e) and, without limiting the
foregoing, to the effect that AIG's Lien on the Margin is fully enforceable
subject only to applicable bankruptcy and insolvency laws of general application
and, in the case of Other Collateral only, to the limit on the amount which AIG
may receive from Other Collateral (but not from Margin other than the Other
Collateral) as a result of the AIG Payments Cap (as defined in the Subordination
Agreement).
6.3 Within thirty days after the date of this Master Agreement, Counterpart
will provide to AIG an opinion of Gardere & Wynne, L.L.P., counsel to
Counterpart, which may be based, in pertinent part, on Acceptable Title Opinions
covering the Mortgaged Properties (as such term is defined in the Specified
Mortgage) in Webb, Zapata and Starr counties, to the effect that the Specified
Mortgage and the Specified Security Agreement have been filed in the appropriate
records necessary to perfect the Liens created by such Mortgage and Security
Agreement and restating the opinions in paragraphs 8-10 of the Gardere & Wynne,
L.L.P. opinion delivered under paragraph 6.2 through the date that the Specified
Mortgage and the Specified Security Agreement were so filed. To the extent that
any opinion expressed in the opinion delivered under this paragraph 6.3 is
subject to any other Lien(s), each such other Lien and the Mortgaged Property to
which it relates shall be listed in the
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opinion delivered under this paragraph 6.3 or in the Acceptable Title Opinion on
which such opinion is based.
7. Certain Releases
----------------
7.1 AIG will execute and deliver, within five business days after a request
from Counterpart accompanied by all documents required under this Section 7 (or,
if AIG in good faith requests additional documents or information, then within
two business days after AIG receives such documents or information), any
instruments reasonably necessary or appropriate to release AIG's Lien on
specified Other Collateral, if the provisions of this Section 7 have been
complied with. Counterpart will reimburse AIG for its expenses (including,
without limitation, reasonable attorneys' fees and disbursements) incurred in
connection with any such request, within five business days after receipt of
AIG's invoice.
7.2 AIG shall not be required to agree to any such release or to execute
any related instruments unless:
(a) Counterpart's request is accompanied by (i) specific instruments which
are reasonably necessary or appropriate, in AIG's judgment, to effect the
requested release and which do not in any way affect or limit AIG's rights with
respect to any other Margin, and, if applicable, (ii) a copy of Counterpart's
related Subordination Request or Release Request to the Trustee together with a
copy of the instruments of subordination or release executed by the Trustee and
(if applicable) other Persons, provided that, for purposes of this paragraph
7.2(a)(ii), if at the time such documents are provided to AIG executed copies
are not available, Counterpart may (x) provide unexecuted copies or then current
drafts to AIG, in which case (y) Counterpart shall advise AIG of all material
changes to such drafts and provide copies of the final documents to AIG when
available,
(b) either (i) no Event of Default or Potential Event of Default and no
Breach of any Specified Agreement, the Indenture or any Indenture Related
Agreement has occurred or would occur as a result of or after giving effect to
the requested release, or (ii) in respect of such an occurrence relating to the
Indenture or any Indenture Related Agreement, such Breach has been cured or
waived in writing by all parties to the relevant agreement required to grant
such waiver,
(c) Counterpart shall have provided any Margin due and any certificate to
be delivered to AIG in accordance with paragraph 5.2(e), and
(d) Counterpart provides a certificate to AIG, executed by its Chief
Executive Officer, President, Executive Vice President or Chief Financial
Officer, confirming that the requested
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release complies in all respects with this Section 7 as of the time the
instruments releasing AIG's Lien are to be executed.
7.3 AIG's execution of any release in accordance with this Section 7 or
otherwise shall not relieve Counterpart of any of its obligations under this
Agreement (including, without limitation, under paragraph 5.2(e) and Exhibit B).
No such release will contain any provisions that would affect in any manner
AIG's rights other than with respect to the specific Other Collateral covered by
such release.
7.4 If a Roll-Up Certificate has not been provided to AIG under paragraph
5.2(e)(i) prior to execution of any release under this Section 7 (other than
under paragraph 7.5), it shall be provided to AIG as soon as Counterpart
receives it and, in any event, no later than fourteen days after AIG executes
the relevant release.
7.5 If Counterpart requests a release of AIG's Lien on all Other
Collateral, AIG will execute and deliver, within five business days after a
request from Counterpart accompanied by all documentation required under this
Section 7 (or, if AIG in good faith requests additional documents or
information, then within two business days after AIG receives such documents or
information), any instruments reasonably necessary or appropriate to release
AIG's Lien on such Other Collateral, if:
(a) Counterpart shall (i) provide Variation Margin in such amount as is
required under paragraph 3 of Exhibit B, and (ii) comply with the requirements
of paragraphs 5.2(e)(ii)-(iii), 7.1, 7.2(a), 7.2(c)-(d) and 7.3 (except, in the
case of paragraphs 7.2(c) and 7.3, to the extent they incorporate paragraph
5.2(e)(i)), and
(b) Either (i) no Event of Default or Potential Event of Default, no Breach
of any Specified Agreement and no Breach (other than an immaterial Breach) of
the Indenture or any Indenture Related Agreement has occurred or would occur as
a result of or after giving effect to the requested release, or (ii) in respect
of such an occurrence relating to the Indenture or any Indenture Related
Agreement, such Breach has been cured or waived in writing by all parties to the
relevant agreement required to grant such waiver.
Effective as of and after the time all Other Collateral is released in
accordance with this Section 7, Section 5 (other than paragraphs 5.2(c)(iv) and
(v) and 5.2(d)) shall no longer apply to this Agreement.
7.6 If AIG releases its Lien on specific properties included in the Other
Collateral in accordance with this Section 7 (such properties, once such Lien is
released, being referred to as "Released Other Collateral"), such Released Other
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Collateral (as of and after the time of such release) is no longer Other
Collateral.
8. Payments; Notices
-----------------
8.1 All payments under this Agreement shall be made in Funds to the bank
account in a major U.S. financial center designated by the party to which
payment is due. Each party shall promptly advise the other of the appropriate
bank account whenever it is to receive payment, but each party may designate
standing payment instructions from time to time. If any amount is not paid when
due under this Agreement (including, without limitation, after an Event of
Default), such amount shall bear interest until paid at the publicly announced
prime rate of Citibank, N.A., as from time to time in effect, plus 2% per annum
(but not to exceed the maximum rate permitted by applicable law) (the "Default
Rate").
8.2 If on any date payments (other than Margin) are due from AIG and
Counterpart to each other under this Agreement, then (subject to Section 3) the
amounts owing shall be offset against each other so that only the net amount
owing on that day shall be paid by the party owing the larger amount to the
other party.
8.3 All notices, requests and other communications under this Agreement
shall be delivered or given by registered mail, return receipt requested, or by
telecopier and shall be deemed to have been given when received or on the date
stated in the return mail receipt if sent to the respective party's address set
forth below and in any case to the attention of the Person or department
indicated:
If to AIG: AIG Trading Corporation
One Greenwich Plaza
Greenwich, Connecticut 06830
Attention--Energy Department
Telecopier No.--(203) 861-3827
If to Counterpart: TransTexas Gas Corporation
1300 East North Belt
Houston, Texas 77032-2949
Attention--Ed Donahue
Telecopier No.--(713) 986-8865
provided that (a) each party's designated address or telecopier number may be
changed by notice to the other party which shall only be effective upon receipt,
and (b) any notice received outside of normal business hours in the city where
the recipient is located or on a day which is not a business day shall be deemed
given at the next opening of business on a business day. Each party may rely on
any communication relating to this
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Agreement which it reasonably believes to have come from the other party.
9. Miscellaneous
-------------
9.1 This Agreement is for the benefit of the parties and their respective
successors and permitted assigns. No other Person (including, without
limitation, any customer of either party) shall have any rights under this
Agreement. This Agreement may not be assigned by either party in whole or in
part without the prior written consent of the other party. Time is of the
essence in all aspects of each party's performance under this Agreement and each
party irrevocably waives any defense of force majeure or act of state which it
might have in connection with this Agreement.
9.2 In the event of a conflict or inconsistency between a Confirmation and
this Master Agreement, the Confirmation shall govern as to the specific terms of
that Swap Transaction and otherwise this Master Agreement shall govern, unless
the Confirmation expressly states that it intends to amend or supplement one or
more provisions of this Master Agreement.
9.3 This Agreement (a) constitutes the entire agreement between the parties
with respect to the subject matter of this Agreement, (b) may not be amended,
modified or supplemented, except by a writing signed by both parties or by
signed telecopies sent by each party to the other evidencing mutual agreement,
and (c) supersedes all standard terms and conditions of trading of either party
(except for the terms in the Exhibits), regardless of how denominated and
whether or not the same are printed on one or more confirmations or purchase or
sales orders relating thereto. No delay on the part of either party in
exercising any right under this Agreement shall operate as a waiver thereof, nor
shall any waiver on the part of either party, nor any single or partial exercise
of any right under this Agreement preclude any other or further exercise thereof
or any other right under this Agreement. No waiver or amendment of this
Agreement shall be implied from any course of dealing between the parties, nor
shall any waiver by a party of, or any failure by a party to assert, its rights
under this Agreement on any specific occasion be considered a waiver in respect
of any other occasion or series of occasions. Each party's rights and remedies
under this Agreement are cumulative and are not exclusive of any rights and
remedies provided for by law, in equity or otherwise.
9.4 The headings in this Master Agreement are for convenience of reference
only and shall not affect the construction or interpretation of any provision
(or portion of a provision) of this Master Agreement. In the event that any
provision (or portion of a provision) of this Agreement is declared to be
illegal, invalid or otherwise unenforceable by a
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court of competent jurisdiction, the remainder of this Agreement (and of such
provision) shall not be affected except to the extent necessary to delete such
illegal, invalid or unenforceable provision (or portion thereof), unless the
deletion of such provision (or portion thereof) shall substantially impair the
benefits of the remaining portions of this Agreement.
9.5 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF THE STATE OF NEW YORK, U.S.A., WITHOUT GIVING EFFECT TO
PRINCIPLES OF CONFLICT OF LAWS (EXCEPT THAT THE GRANT AND PERFECTION OF AIG'S
RIGHTS IN AND FORECLOSURE ON THE OTHER COLLATERAL, TO THE EXTENT IT IS LOCATED
OUTSIDE OF NEW YORK STATE, WILL BE GOVERNED BY THE LAW OF THE STATE PROVIDED FOR
IN THE RELEVANT SPECIFIED AGREEMENT). THE PARTIES AGREE THAT THE UNITED NATIONS
CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS SHALL NOT IN ANY WAY
APPLY TO, OR GOVERN, THIS AGREEMENT. THE PARTIES AGREE TO SUBMIT TO THE
EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN NEW YORK CITY,
BOROUGH OF MANHATTAN, IN CONNECTION WITH ANY ACTION OR OTHER PROCEEDING RELATING
TO THIS AGREEMENT, ANY SPECIFIED AGREEMENT OR ANY MATTER CONTEMPLATED BY OR
RELATING TO ANY SUCH AGREEMENT (EXCEPT AS EXPRESSLY PROVIDED OTHERWISE IN A
SPECIFIED AGREEMENT). EACH PARTY IRREVOCABLY WAIVES AND AGREES NOT TO MAKE, TO
THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE JURISDICTION OF ANY SUCH COURT OR TO THE LAYING OF VENUE OF ANY SUCH
ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH
ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM. FINAL JUDGMENT IN ANY SUCH ACTION SHALL BE BINDING UPON THE
PARTIES AND MAY BE ENFORCED IN SUCH COURTS OR IN THE COURTS OF ANY COUNTRY OR
STATE TO THE JURISDICTION OF WHICH THE PARTY AGAINST WHOM SUCH JUDGMENT IS
RENDERED OR ANY OF ITS ASSETS IS SUBJECT. EACH PARTY AGREES THAT SERVICE OF
PROCESS IN CONNECTION WITH SUCH ACTION OR PROCEEDING MAY BE SERVED ON IT IN ANY
MANNER (OTHER THAN BY TELECOPIER) SET FORTH IN PARAGRAPH 8.3.
9.6 This Agreement may be terminated upon three business days' notice from
either party to the other party, but such termination shall not affect any Swap
Transaction outstanding at the time such termination is effective, which shall
remain subject to the terms and conditions of this Agreement and each Specified
Agreement until all outstanding obligations under this Agreement and each
Specified Agreement are indefeasibly performed or liquidated.
9.7 Each party may record all telephone conversations between them and any
tape recordings may be submitted in evidence to any court in any legal
proceeding for the purpose of establishing any matter relating to this Agreement
or any Specified Agreement.
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<PAGE>
9.8 Counterpart hereby irrevocably designates and appoints CT Corporation
as its authorized agent to receive service of process on its behalf in
connection with any legal matters or proceedings pertaining to this Agreement or
any Specified Agreement, and agrees that service of process to such agent in
connection with such matters or proceedings may be served in any manner (other
than by telecopier) set forth in paragraph 8.3 and such shall be deemed full and
complete service on Counterpart. If any such agent resigns, Counterpart agrees
to appoint a substitute agent (which accepts such appointment on the same terms
as such initial agent) before such resignation is effective and failure to do so
is an Event of Default by Counterpart if not cured within ten days after such
resignation is effective.
9.9 Each party agrees, upon a reasonable request from the other party, to
do such acts and to execute, deliver and record such further documents and
instruments as may be necessary (a) in the case of a request by AIG, to more
fully vest in AIG rights in the Margin as contemplated by Exhibit B, and (b) in
the case of a request by Counterpart, to more effectively release AIG's Lien on
Released Other Collateral, provided that AIG shall not be required to take any
action or execute, deliver or record any document or instrument which in any way
affects AIG's rights under this Agreement (including, without limitation, in and
to any Margin) other than with respect to such Released Other Collateral.
10. Credit Enhancement
------------------
Credit enhancement shall be provided in accordance with the terms of Exhibit
B.
11. Indemnification
---------------
Counterpart agrees to indemnify and hold harmless each Indemnified Party
from and against any actual or threatened claims, actions, proceedings, losses,
liabilities, costs and expenses (including, without limitation, reasonable
attorneys' fees and disbursements) incurred or arising out of or in connection
with this Agreement (other than under Swap Transactions) or any Specified
Agreement (including, without limitation, any claim by any person that any right
or interest granted to AIG under this Agreement or any Specified Agreement is in
conflict with the rights of such person), except to the extent that the same are
found by a court of competent jurisdiction from which no appeal can be or is
taken to have resulted from the willful misconduct, bad faith or gross
negligence of such Indemnified Party. Notwithstanding the above provisions of
this Section 11, such indemnity does not cover any claims, actions, proceedings,
losses, liabilities, costs and expenses (including, without limitation,
reasonable attorneys' fees and disbursements) incurred or arising out of or in
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connection with any transaction which an Indemnified Party enters into to hedge
a risk under a Swap Transaction. Each Indemnified Party (or AIG on its or their
behalf) will notify Counterpart promptly of any claim asserted for which
indemnity may be sought under this Section 11. Counterpart shall defend the
claim and each Indemnified Party shall provide reasonable cooperation at
Counterpart's expense in such defense. Each Indemnified Party shall have
separate counsel and Counterpart shall pay the reasonable attorneys' fees and
disbursements of such counsel; provided that Counterpart will not be required to
pay such fees and expenses if it assumes such Indemnified Party's defense and if
there is no conflict of interest between Counterpart and such Indemnified Party.
Counterpart need not pay for any settlement made without its consent, which
shall not be unreasonably withheld.
If the above conforms to your understanding of our agreement, please so
indicate by signing where indicated below. Upon signature by both parties, this
shall become a binding agreement between us.
Very truly yours,
AIG TRADING CORPORATION
By:_____________________________
William Rippe
Managing Director
ACCEPTED AND AGREED:
TRANSTEXAS GAS CORPORATION
By:__________________________
Ed Donahue
Vice President & Chief
Financial Officer
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Exhibit A - Definitions
-----------------------
Unless expressly provided otherwise, "Indenture" and "Indenture Related
Agreement" refers to each such agreement as in effect on the date of this Master
Agreement. The terms "Affiliate", "Debt", "Notes", "Permitted Lien", "Person",
"Release Request"' "Reserve Report", "SEC PV 10", "Security Documents",
"Subordination Request", "Subsidiary" and "Trustee" when used in this Master
Agreement have the respective meanings ascribed to them in the Indenture.
"Acceptable Title Opinion" means a title opinion (a) prepared by counsel
reasonably acceptable to AIG (it being agreed by AIG that, unless it notifies
Counterpart to the contrary, counsel engaged by Counterpart prior to the date of
this Master Agreement are acceptable to AIG), (b) confirming Counterpart's title
to the Other Collateral covered thereby (including, without limitation, the
wells listed in the Reserve Report as located thereon) subject only to such
Liens and other interests of any kind as are stated in such opinion, (c) setting
forth (A) Counterpart's working interest and net revenue interest and share of
the expenses of developing and operating wells located on the Other Collateral
covered thereby through the plugging, abandonment and salvage of such wells and
(B) all applicable landowners' royalties, overriding royalties, production
payments or other non-operating interests or other burdens on production, (d)
which is either addressed to AIG or states that AIG may rely thereon, and (e)
which is otherwise in form and substance substantially equivalent to title
opinions delivered to Counterpart in the ordinary course of business and
consistent with past practices, as evidenced by the title opinions delivered by
Counterpart to AIG prior to the execution of this Master Agreement.
"Average Floating Price" for a Pricing Period means the arithmetic mean of
all Floating Prices occurring during that Pricing Period.
"Base Quantity" means the quantity of the designated Commodity as to which
pricing is to occur during each Pricing Period.
"Breach" means any (a) failure to pay an amount or perform an obligation
when due, or (b) other event defined as a breach, default, or similar event or
occurrence; which in each case would be, or which with notice, lapse of time or
both, would be, an event or occurrence that would give rise to the right or
ability to exercise remedies.
"Breakage Costs" means all costs and losses which the Performing Party may
incur as a result of its terminating and liquidating a Swap Transaction under
Section 3, including, without limitation, costs and losses incurred in
maintaining, terminating and/or re-establishing any hedge or related trading
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positions, except for amounts covered by the Settlement Payment for such Swap
Transaction.
A "business day" means any day on which banks in New York City are open for
business and, in relation to the calculation of a Floating Price based on the
price on a particular exchange or market, on which such exchange or market is
open for business.
"Cap Price" for a Swap Transaction means the cap price per unit of the
relevant Commodity set by the parties.
"Cap Price Amount" means, with respect to each Pricing Period, an amount
equal to the Cap Price multiplied by the Base Quantity.
"Close of business" means the close of banking business in New York City.
"Compliance Certificate" means any Certificate provided under paragraph
5.2(f) in substantially the form appended as Exhibit C.
"Collateral Value" means the Designated Percentage multiplied by the lowest
of (a) the Property Value, (b) $808 million, (c) 166% of the Property Value of
the Other Collateral which is proved developed producing, and (d) 200% of the
Property Value of the Other Collateral with respect to which AIG has received
Acceptable Title Opinions from outside counsel; provided that for purposes of
clauses (c) and (d) of this definition only, the Property Value of the Other
Collateral shall not be reduced by reason of clauses (i) through (k) of the
definition of Property Value. Collateral Value refers to such amount with
respect to all Other Collateral, unless indicated otherwise. When determining
Collateral Value with respect to part of the Other Collateral at a time when the
Collateral Value is less than the Property Value, the Collateral Value of such
Other Collateral is equal to its Property Value multiplied by a fraction, the
numerator of which is the Collateral Value of all Other Collateral and the
denominator of which is the Property Value of all Other Collateral multiplied by
the Designated Percentage. When determining Collateral Value for purposes of
paragraph 5.2(e), such determination shall also take into account the relevant
transaction and any other transactions or events which are (or are reasonably
expected) to occur before the relevant transaction or before the relevant
instruments are executed. The Collateral Value is zero once AIG has delivered
instruments of release requested by Counterpart under paragraph 7.5.
"Credit Agreement" means any agreement under which Counterpart or its
Subsidiary either (a) may incur a Debt in a principal amount of at least $5
million which is secured by
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collateral of the type referred to in clause (j) of the definition of Permitted
Liens, or (b) may grant any Lien or other right or interest of any kind which
reasonably could be expected to affect AIG's Lien on any Margin.
"Designated Percentage" at any time means 1 minus the Default Rate
(expressed as a decimal) compounded daily for four years. (See paragraph 8.1
for the definition of Default Rate.)
"Fallback Price" for a Swap Transaction means the price per unit of the
relevant Commodity as announced, published or determined, for each business day,
by a source designated by the parties (such as a commodity exchange, an over-
the-counter market, trade publication or quotations from a specified dealer or
dealers), to be used in place of the Floating Price when so provided in this
Master Agreement.
"Fixed Price" for a Swap Transaction means the fixed price per unit of the
relevant Commodity set by the parties.
"Fixed Price Amount" means, with respect to each Pricing Period, an amount
equal to the Fixed Price multiplied by the Base Quantity.
"Floating Price" for a Swap Transaction means the price per unit of the
relevant Commodity as announced, published or determined, for each business day,
by a source designated by the parties (such as a commodity exchange, an over-
the-counter market, trade publication or quotations from a specified dealer or
dealers), or if such price is not available on any day on which, in the ordinary
course of business, it would be available, or if such price, in AIG's
commercially reasonable judgment, is subject to a "limit" move or otherwise does
not reflect free-market prices, then for such day in lieu of such price the
Floating Price shall be (a) the Fallback Price or (b) if no Fallback Price is
specified or available, the price per unit of the relevant Commodity as
determined by AIG in any commercially reasonable manner.
"Floating Price Amount" means, with respect to each Pricing Period, an
amount equal to the Average Floating Price multiplied by the Base Quantity.
"Floor Price" for a Swap Transaction means the floor price per unit of the
relevant Commodity set by the parties.
"Floor Price Amount" for a Swap Transaction means, with respect to each
Pricing Period, an amount equal to the Floor Price multiplied by the Base
Quantity.
"Funds" mean U.S. dollars paid by wire transfer of immediately available
funds to the bank account in New York City designated by the party receiving
payment.
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"Indemnified Party" means each of AIG and its Affiliates and its and their
respective directors, officers, shareholders, employees and agents.
"Indenture" means that certain Indenture, dated as of June 15, 1995, among
Counterpart, TTC and the Trustee.
"Indenture Related Agreement" means each of the Security Documents and any
other agreement, to which the Counterpart or one of its Affiliates is a party,
which is entered into in connection with the Indenture or any Security Document.
"Lien" means any Lien (as such term is defined in the Indenture), any right
of setoff and any other right, obligation, claim, liability or interest having
similar effect.
"Margin" has the meaning given such term in Exhibit B.
"Net Payment" for a Pricing Period means an amount equal to the difference
between (as applicable) (a) the Floating Price Amount and the Fixed Price
Amount, (b) the Floating Price Amount and the Cap Price Amount or the Floor
Price Amount, or (c) the two Floating Price Amounts.
"Other Collateral" has the meaning given such term in Exhibit B.
"Permitted Encumbrance" means (a) the security interest granted to the
Trustee under the Indenture, (b) Permitted Liens in effect on the date of this
Master Agreement, (c) any other Permitted Lien which is non-consensual if
Counterpart uses all reasonable efforts to remove such Lien as soon as
practicable (but this clause (c) shall not require Counterpart to pay any amount
which is not yet due or which Counterpart is disputing in good faith), (d) any
Lien on Released Other Collateral which is granted or comes into existence only
at the time such property becomes, or after such property has become, Released
Other Collateral, and (e) Liens under Texas Uniform Commercial Code Section 9-
319 if all interest owners entitled to claim a Lien thereunder are and have been
paid in full when due.
"Permitted Hedging Transactions" has the meaning ascribed to it in the
Indenture except that, for purposes of physical sales of natural gas, the second
proviso to that definition does not apply.
"Potential Event of Default" means an event which with notice, lapse of
time, or both, would constitute an Event of Default.
"Previous Month's Sales Price" means, as of any date, the weighted average
price (to be paid or received within twenty five days after the end of the
previous calendar month) at which
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Counterpart has sold natural gas delivered during the previous calendar month to
be calculated by the twentieth day of the current calendar month, taking into
account settlement payments paid or received (or to be paid or received within
twenty five days) by Counterpart under Trading Transactions which hedged price
movements with respect to natural gas so delivered during such previous calendar
month, provided that if Counterpart does not provide to AIG, promptly after
AIG's request, information reasonably satisfactory to AIG which substantiates
any Previous Month's Sales Price, then such Price shall be as determined by AIG
in any commercially reasonable manner.
"Pricing Period" means a fixed period consisting of a number of days, weeks
or months agreed to by the parties. The Pricing Periods of a Swap Transaction
may be of the same length or varying lengths and do not have to run
consecutively.
"Property Value" at any time means the SEC PV 10 of all oil and gas reserves
included in the Other Collateral based on the most recent Reserve Report (and
with no value being attributed to other assets included in the Other Collateral)
reduced by:
(a) the principal amount of all obligations (including, without limitation,
production payments to the extent not covered by clause (d) of this definition)
secured by Liens or other interests of any kind in or on the Other Collateral
which rank senior to or pari passu with AIG,
---- -----
(b) all interest, premium, fees and other charges on such obligations which
accrue or are due within the next twelve months,
(c) any reduction in the Previous Month's Sales Price from the price or
prices reflected in the most recent Reserve Report, except that (i) this clause
(c) shall not apply unless such Previous Month's Sales Price is at least ten
percent below the price or prices reflected in such Reserve Report, and (ii)
once Property Value with respect to a Reserve Report has been reduced under this
clause (c), it can be increased (to no more than the price or prices reflected
in the most recent Reserve Report) based on a Roll-Up Certificate concerning a
subsequent Previous Month's Sales Price,
(d) any value attributable to any interest in any property included in the
most recent Reserve Report which interest has been sold, transferred or
otherwise disposed of, or with respect to which interest AIG has released (or
has been requested by Counterpart to release) its Lien in accordance with
Section 7,
(e) the reduction in value of any Other Collateral resulting from a material
change relating to such Other Collateral or any law, regulation or other
restriction affecting any Other Collateral not reflected in the most recent
Reserve Report,
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including, without limitation, conservation laws, prorationing laws or other
laws purporting to limit the production of hydrocarbons to market demand, tax
and environmental laws and regulations, gathering and transportation fees and
tariffs, and active contests concerning title to such Other Collateral,
(f) any value attributable to any property if AIG's ability to sell,
transfer or otherwise dispose of such property if Counterpart were a Defaulting
Party is limited in any manner by an agreement with or restriction in favor of a
third party (but, if the reduction in value on sale, transfer or other
disposition or realization resulting from such agreement or restriction can be
reasonably estimated, limited to such reduction in value),
(g) any value attributable to any property (i) if the status of AIG's Lien,
or if the title reports or opinions or other relevant material agreements,
relating to such property are not reasonably satisfactory to AIG, or (ii) to the
extent that Counterpart's ownership interest in such property is less than the
interest attributed to Counterpart in its most recent Reserve Report (but
without duplication for amounts by which Property Value is then being reduced in
accordance with clauses (a), (d) or (f) of this definition),
(h) an amount which reflects, with respect to any property covered by such
Reserve Report, (i) the depletion of reserves, (ii) the cessation of production,
(iii) any catastrophic loss, or (iv) any material change in the rate of
production from the rate assumed in such Reserve Report,
(i) the amount, if any, by which 60% of the SEC PV 10 of all oil and gas
reserves included in the Other Collateral exceeds the SEC PV 10 of those oil and
gas reserves included in the Other Collateral which are proved developed
producing reserves,
(j) the amount, if any, by which 50% of the SEC PV 10 of all oil and gas
reserves included in the Other Collateral exceeds the SEC PV 10 of those oil and
gas reserves included in the Other Collateral with respect to which AIG has
received Acceptable Title Opinions from outside counsel,
(k) without duplication for amounts deducted under clause (j), the amount,
if any, by which 75% of the SEC PV 10 of all oil and gas reserves included in
the Other Collateral exceeds the SEC PV 10 of those oil and gas reserves
included in the Other Collateral with respect to which AIG has received
Acceptable Title Opinions, and
(l) without duplication for amounts deducted under clauses (a)-(k), any
amount by which Property Value is reduced by events contemplated by the last
sentence of paragraph 3.1,
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in each case as determined by AIG in good faith and in a commercially reasonable
manner. In making this determination, AIG will take into account any Reserve
Report Certificate, Roll-Up Certificate, Compliance Certificate and Update
Certificate which AIG has received which relate to the most recent Reserve
Report. When determining Property Value for purposes of paragraph 5.2(e), such
reductions shall also take into account the relevant transaction and any other
transactions or events which are (or are reasonably expected) to occur before
the relevant transaction or before the relevant instruments are executed.
Property Value is reduced by all events and occurrences specified in this
definition, notwithstanding the fact that some may, singly or with other events
or occurrences, be Permitted Encumbrances. Property Value refers to such amount
with respect to all Other Collateral, unless indicated otherwise. When
determining Property Value with respect to part of the Other Collateral, clauses
(a)-(l) shall apply only to the extent they relate to the relevant part of the
Other Collateral.
"Reserve Report Certificate" means a Certificate provided under paragraph
5.2(b) in substantially the form of Exhibit D.
"Roll-Up Certificate" means a report prepared by independent petroleum
engineers with respect to oil and gas reserves which updates information set
forth in the most recent Reserve Report with respect to price, depletion,
cessation of production and other material events but without adding new
reserves, provided that if such independent petroleum engineers did not prepare
such Reserve Report they must be reasonably acceptable to AIG. Each such
Certificate shall be in accordance with SEC guidelines, if any, in relation to
the aspect of such Reserve Report covered by such Certificate.
"Senior Officer" means, with respect to Counterpart, Chief Executive
Officer, President and Chief Financial Officer.
"Settlement Payment" means, with respect to an outstanding Swap Transaction,
an amount representing the outstanding Swap Transaction's net present value (in
U.S. dollars) to the party entitled to receive compensation for the early
termination thereof, determined as of the date such Transaction is liquidated by
the Performing Party in any commercially reasonable manner.
"Specified Agreement" means each of (a) that certain Mortgage, Deed of
Trust, Assignment of Production, Security Agreement and Financing Statement,
dated of even date with this Master Agreement, between Counterpart and Michael
A. Goldstein, as Trustee for the benefit of AIG (the "Specified Mortgage"), (b)
that certain Security Agreement, Pledge and Financing Statement, dated of even
date with this Master Agreement, between Counterpart and AIG (the "Specified
Security Agreement"), and (c) any other agreement which is entered into
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<PAGE>
in connection with either such agreement and to which Counterpart or one of its
Affiliates is a party, in each case as amended or supplemented from time to
time.
"Specified Mortgage" has the meaning ascribed to it in the definition of
Specified Agreement.
"Specified Security Agreement" has the meaning ascribed to it in the
definition of Specified Agreement.
"Subordination Agreement" means that certain Subordination Agreement, dated
of even date with this Master Agreement, between Counterpart, TTC, the Trustee
and AIG, as amended or supplemented from time to time.
"Swap Transaction" means a transaction in which the parties agree, for each
Pricing Period, to make Net Payments in accordance with Section 2. A Swap
Transaction shall be deemed to be outstanding until all its Pricing Periods have
been completed and all Net Payments thereunder have been made or until
completion of its liquidation under Section 3.
"Trading Transaction" means any Swap Transaction and any other futures,
forward, swap or option contract entered into with any Person (including,
without limitation, both physical and financially settled transactions) and any
master agreement therefor.
"TTC" means TransTexas Transmission Corporation.
"Update Certificate" means a certificate provided under paragraph 5.2(e) in
substantially the form appended as Exhibit E.
ACCEPTED AND AGREED:
TRANSTEXAS GAS CORPORATION AIG TRADING CORPORATION
By:______________________ By:________________________
Ed Donahue William Rippe
Vice President & Chief Managing Director
Financial Officer
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<PAGE>
Annex to Exhibit A - Form of Confirmation
-----------------------------------------
Date: ________
To: [Counterpart]
Attn: ________
This is confirmation of the following Swap Transaction done with you on
________, 199__.
Commodity:
Base Quantity:
[Pricing Term:]
Pricing Periods:
Fixed Price:
Floating Price: $_____ per _______ [, except that the Floating
Price cannot exceed $_____ per _______].
[Floor Price]
[Cap Price]
[Fallback Price:]
Fixed Price Payor:
Floating Price Payor:
[Transaction Fee:
Amount: $_______________
Payable to: ________________]
Other Terms (if any):
This Swap Transaction is subject to the terms and conditions set forth in our
letter agreement, dated June 6, 1996, relating to Swap Transactions between us.
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<PAGE>
Please advise if your records indicate any discrepancies.
AIG TRADING CORPORATION
By:________________________
Name: __________________
Position: ______________
ACCEPTED AND AGREED:
TRANSTEXAS GAS CORPORATION
By:______________________
Name:_________________
Position:_____________
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<PAGE>
Exhibit B - Marking-to-Market
-----------------------------
Counterpart's obligations under outstanding Swap Transactions shall be
margined and marked-to-market as provided below:
1. Concurrently with the execution of this Master Agreement, Counterpart
shall provide the following original margin ("Original Margin") to AIG:
1.1 Funds in the amount of U.S. $1 million, and
1.2 Certain natural gas properties and other assets (the "Other
Collateral"), as provided and described in the Specified Agreements.
Original Margin held by AIG shall be returned to Counterpart if this Agreement
shall have been terminated and all obligations of Counterpart to AIG under this
Agreement and each Specified Agreement have been indefeasibly satisfied in full.
Otherwise, AIG shall not be required to release Original Margin except as
required in respect of Other Collateral under Section 7.
2. As of the close of business on each business day, AIG shall calculate
the Exposure for each Swap Transaction then outstanding and the total of the
Exposures of each party. AIG's "Net Exposure" means an amount equal to the sum
of:
(a) with respect to Capped Swap Transactions, the Potential Exposure in
respect of all outstanding Capped Swap Transactions at that time, plus
(b) with respect to Uncapped Swap Transactions, the sum
of --
(i) the Potential Exposure in respect of all outstanding Uncapped Swap
Transactions at that time, plus
(ii) the amount, if any, by which at that time (x) the sum of AIG's
Exposures exceeds (y) the sum of Counterpart's Exposures plus the Potential
Exposure in respect of such Uncapped Swap Transactions.
3. If, at the close of business on any business day, AIG's Net Exposure
exceeds the Margin Value of the Original Margin, then (in addition to any
Original Margin required under paragraph 1 of this Exhibit B) variation margin
("Variation Margin") shall be provided by Counterpart and returned by AIG so
that AIG holds Variation Margin with a Margin Value equal to such excess. If,
at the close of business on any business day, AIG's Net Exposure is less than
the Margin Value of the Original Margin, all Variation Margin then held by AIG
shall be returned
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<PAGE>
by AIG. All payments or returns of Variation Margin shall be rounded to the
nearest integral multiple of $500,000 (and rounded up if exactly between two
integral multiples of $500,000). All Variation Margin shall be delivered in the
form of (i) Funds, or (ii) a letter of credit (each an "L/C") meeting the
requirements specified below.
4. All Variation Margin shall be provided (or returned) by the close of
business on the next business day following the day as of which the calculation
determining that such Variation Margin is due or is to be returned occurs (or
earlier if so required by paragraph 5.2(e)). Each L/C delivered under this
Exhibit B shall (a) be an irrevocable standby letter of credit in AIG's favor
substantially in the form attached as the Annex to this Exhibit B, (b) be issued
or confirmed by a bank which is and continues to be acceptable to AIG, (c) have
such terms and conditions as AIG shall reasonably specify, and (d) be fully
enforceable and not the subject of any action restraining or attempting to
restrain payment thereunder. For purposes of paragraph 4(b) of this Exhibit B,
each of Bank of New York and Fleet Bank are acceptable on the date of this
Master Agreement and will continue to be acceptable unless its long-term
deposits are not rated at least "A" by Standard & Poor's Corporation or at least
"A2" by Moody's Investors Service, Inc., provided that AIG shall not be required
to accept L/C's issued by either such bank (and the Margin Value of any such L/C
shall be zero) to the extent the aggregate available amount of all L/C's issued
or confirmed by that bank and provided to AIG under this Exhibit B exceeds U.S.
$25 million. All costs relating to each L/C delivered under this Exhibit B
shall be for the account of Counterpart.
5. AIG shall not be required to provide Original Margin or Variation Margin
(collectively, "Margin"), but only to return Margin when and if so provided in
this Master Agreement. In addition, AIG shall not be required to return any
Margin if (a) an Event of Default, a Potential Event of Default or a Breach of
this Agreement has occurred and Counterpart is the Defaulting Party or the party
in respect of which such Potential Event of Default or Breach has occurred, (b)
a Breach of any Specified Agreement has occurred and Counterpart is the party in
respect of which such Breach has occurred, or (c) a Breach of the Indenture or
any Indenture Related Agreement has occurred, unless (in respect of a Breach
referred to in this paragraph 5(c)) such Breach has been cured or has been
waived in writing by all parties to the relevant agreement required to grant
such waiver. Paragraphs 5(b)-(c) of this Exhibit B will no longer apply as of
and after the time all Other Collateral is released in accordance with paragraph
7.5.
6. Without limiting the provisions of the Specified Agreements, Counterpart
grants to AIG a security interest in all Margin from time to time provided to
AIG in order to secure all
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<PAGE>
present and future obligations of Counterpart to AIG under this Agreement and
the Specified Agreements outstanding from time to time. Margin in the form of
Funds shall bear interest calculated on a daily basis at overnight LIBOR as from
time to time in effect (as reported on Telerate), with the net amount of
interest accrued monthly being payable on the third business day of the
following month. AIG shall have the free and unrestricted right to use and
dispose of all Margin in the form of Funds which it holds, subject only to its
obligations to return such Margin if and when so required under this Master
Agreement. Nothing in this Agreement limits AIG's rights with respect to any
Margin under the terms of any L/C or any Specified Agreement. AIG, at its
election, may include the proceeds of any Other Collateral in any setoff under
paragraphs 3.2(b) and/or 3.4.
7. For purposes of this Exhibit B:
7.1 "Exposure" for each Swap Transaction means:
(a) For a Swap Transaction as to which a Net Payment has been determined
but not yet paid, the party due the Net Payment shall have an Exposure in that
amount.
(b) For other Swap Transactions, if it is a Capped Swap Transaction the
Exposure is zero and if it is an Uncapped Swap Transaction --
(i) if the Commodity and delivery location covered by the Swap Transaction
is traded on the New York Mercantile Exchange, Inc. or the International
Petroleum Exchange of London Limited (an "Exchange") and the last Pricing Period
ends during or before the last delivery month for that Commodity on that
Exchange, the difference between the then current Market Price and the Fixed
Price Amount, with the Floating Price Payor having an Exposure if the Fixed
Price Amount exceeds such Market Price and with the Fixed Price Payor having an
Exposure if the opposite is the case, and
(ii) if the Swap Transaction is not covered by clause (b)(i), the Current
Value of that Swap Transaction, with the party that has an unrealized profit
having an Exposure in that amount. The party which would have to pay the
Current Value to induce a third party to enter into a comparable Swap
Transaction at that time is the party having an unrealized profit.
(c) To the extent (i) a Swap Transaction is covered in part by clause (a),
(b)(i) or (b)(ii), or (ii) a Pricing Period is covered in part by clause (a) and
in part by clause (b), that Swap Transaction shall be treated as separate Swap
Transactions for purposes of this calculation, to the extent covered by each
such clause.
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<PAGE>
7.2 The "Market Price" of a Swap Transaction equals the Floating Price
Amount which would be due under that Swap Transaction if the Floating Price for
each Pricing Period were calculated based on the most recent settlement price
for that Commodity on the applicable Exchange for the month in which the Pricing
Period occurs (or, if the Floating Price is determined based on the price for a
forward date or period during the Pricing Period, for the month in which such
forward date or period falls) (interpolated between months, if necessary);
provided that if such price for the applicable month is locked at its daily
limit as established by the Exchange or normal trading is not occurring on the
Exchange, then the Market Price for that Commodity and month shall be calculated
using prices determined in a manner comparable to that in which Current Value is
determined under paragraph 7.3 of this Exhibit B.
7.3 The "Current Value" of a Swap Transaction at any time means the amount
which a party would pay to or receive from a third party in an arm's-length
transaction, as consideration for entering into a new Swap Transaction at that
time in which such party holds the same position as in the outstanding Swap
Transaction, assuming that the Pricing Term of such Swap Transaction encompasses
only uncompleted Pricing Periods and that such Swap Transaction is in all other
respects identical to the outstanding Swap Transaction, as determined by AIG in
any commercially reasonable manner.
7.4 "Margin Value" at any time means the total value of Original Margin
(other than Funds held under paragraph 1.1 of this Exhibit B) or Variation
Margin, as applicable, then held by AIG, with each type of Margin being valued
as follows:
(a) for funds, the amount held by AIG,
(b) for each L/C held by AIG, the total amount available to be drawn
thereunder, provided that an L/C shall be valued at zero unless it expires more
than thirty days after the date of valuation, and
(c) for Other Collateral, an amount equal to ten percent of the Collateral
Value.
7.5 "Potential Exposure" at any time is equal to the sum of:
(a) With respect to each Capped Swap Transaction, the aggregate maximum
amount of Net Payments which Counterpart could have to make to AIG under such
Capped Swap Transaction, and
(b) With respect to each Uncapped Swap Transaction, the aggregate notional
quantity of natural gas covered thereby (expressed in MMBtu's) multiplied by 75
cents.
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<PAGE>
7.6 (a) "Capped Swap Transaction" means a Swap Transaction with respect to
which Counterpart has purchased a call option (or an equivalent swaption) from
AIG at the same time as it enters into such Swap Transaction, if such option (i)
remains outstanding, (ii) provides for cash settlement and has the same notional
quantity and payment dates as such Swap Transaction, and (iii) limits the
maximum amount which Counterpart could be required to pay under such Swap
Transaction.
(b) "Uncapped Swap Transaction" means a Swap Transaction other than a
Capped Swap Transaction.
ACCEPTED AND AGREED:
TRANSTEXAS GAS CORPORATION AIG TRADING CORPORATION
By:______________________ By:________________________
Ed Donahue William Rippe
Vice President & Chief Managing Director
Financial Officer
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<PAGE>
- - --------------------------------------------------------------------------------
PURCHASE AGREEMENT
TRANSTEXAS GAS CORPORATION
and
SUNFLOWER ENERGY FINANCE COMPANY
January 30, 1996
- - --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - Definitions and References 1
Section 1.1. Defined Terms and References 1
Section 1.2. Rules of Construction 4
ARTICLE II - Purchase and Sale 4
Section 2.1. Agreement of Purchase and Sale 4
Section 2.2. Payment of Purchase Price 4
Section 2.3. Expenses 4
Section 2.4. Payments 4
ARTICLE III - Closing Date and Closing 5
Section 3.1. Time and Place of Closing 5
Section 3.2. Conditions to Closing -- Documents 5
Section 3.3. Other Conditions to Closing 6
Section 3.4. Floor Contracts 6
ARTICLE IV - Representations and Covenants 7
Section 4.1. Representations and Warranties of Grantor 7
Section 4.2. Representations and Warranties of Original Grantee 13
Section 4.3. Covenants of Grantor 13
Section 4.4. Reporting Covenants of Grantor 15
Section 4.5. Additional Remedies Upon Designated Event 17
ARTICLE V - Adjustment of Dedication Percentage 18
Section 5.1. Reserve Reports 18
Section 5.2. Adjustment to Dedication Percentage 20
ARTICLE VI - Miscellaneous 20
Section 6.1. Waivers and Amendments 20
Section 6.2. Survival of Agreements; Cumulative Nature 20
Section 6.3. Notices 21
Section 6.4. Parties in Interest 21
Section 6.5. Governing Law 21
Section 6.6. Limitation on Interest 21
Section 6.7. Termination; Limited Survival 22
Section 6.8. Severability 22
Section 6.9. Arbitration 22
Section 6.10. Greenlee Overriding Royalties 24
Section 6.11. Counterparts 25
</TABLE>
i
<PAGE>
SCHEDULE 1 - Litigation Summary
SCHEDULE 2 - Severance Tax Exempt Wells
SCHEDULE 3 - Monthly Reporting Form
SCHEDULE 4 - Abstracts of Judgment
EXHIBIT A - Legal Opinion
EXHIBIT B - Partial Release and Subordination
EXHIBIT C - Ratification Agreement
EXHIBIT D - Guaranty
EXHIBIT E - Transportation Agreement
EXHIBIT F - Conveyance
ii
<PAGE>
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT dated as of the 30th day of January, 1996 (herein,
as from time to time amended or supplemented, called this "Agreement") is made
by TransTexas Gas Corporation, a Delaware corporation (herein called "Grantor"),
and Sunflower Energy Finance Company, a Delaware corporation (herein called
"Original Grantee").
RECITALS
--------
1. Grantor is the owner of interests in certain oil and gas leases
located in Webb and Zapata Counties, Texas, and desires to sell and assign to
Original Grantee, upon the terms and conditions herein set forth, a production
payment under a Production Payment Conveyance to be made by Grantor to Original
Grantee in the form attached hereto as Exhibit F.
2. Original Grantee desires to purchase such production payment upon the
terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, Grantor and Original Grantee hereby agree as
follows:
ARTICLE I - Definitions and References
Section 1.1. Defined Terms and References. As used herein, the terms
"Agreement", "Original Grantee" and "Grantor" have the meanings given them
above. Reference is also made to the "Conveyance", as defined below, for the
meaning of various terms defined therein, all of which shall when used herein
(unless otherwise expressly defined herein) have the meanings given them in the
Conveyance. For purposes of this Agreement, unless the context otherwise
requires, the following additional terms shall have the following meanings:
"Assignment and Release" means that certain Assignment and Release
Agreement of even date herewith which Grantor, Grantee and Permitted Assignee
shall execute and deliver immediately after the execution and delivery of this
Agreement and the Conveyance.
"Associated Subject Interests" has the meaning given such term in Section
4.1(n).
"Closing" and "Closing Date" have the meanings given them in Section 3.1.
"Conveyance" means the Production Payment Conveyance made by Grantor to
Original Grantee, in the form of Exhibit F to this Agreement (appropriately
completed), as from time to time amended and supplemented.
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<PAGE>
"Current Ad Valorem Taxes" means all ad valorem taxes which have been
assessed against any of the Subject Interests for 1995 or any prior year by any
taxing authority.
"Designated Event" has the meaning given such term in the Conveyance.
"Evaluation Date" means (a) each February 1, beginning with February 1,
1996, (b) each August 1, beginning with August 1, 1996, and (c) each other day
which Grantee designates as an Evaluation Date, provided that Grantee may not
make more than one such designation during the interval between any February 1
and the next succeeding August 1 or during the interval between any August 1 and
the next succeeding February 1. Each Evaluation Date on a February 1 or August
1 is herein called a "Regular Evaluation Date"; each other Evaluation Date is
herein called an "Optional Evaluation Date".
"Floor Contract" has the meaning given such term in Section 3.4.
"Futures Price" has the meaning given such term in Section 5.1.
"Grantee" refers collectively to Original Grantee and all of its successors
and assigns as owners of the Production Payment.
"Guaranty" means that certain Guaranty, dated of even date herewith,
executed by John R. Stanley in the form of Exhibit D hereto.
"Hazardous Substance" means any "hazardous waste", "hazardous substance",
"extremely hazardous substance", "toxic chemical", "hazardous chemical", "toxic
pollutants", contaminants", "chemical", "chemical substance", or "asbestos", as
such terms are defined in any Environmental Law, or related substances, in such
quantities or concentrations as are prohibited by (or require remediation under)
any Environmental Law or other applicable law, or which may be declared to
constitute a material threat to human health or to the environment.
"Koch Gas Services" means Koch Gas Services Company, an Oklahoma
corporation.
"Partial Release" means that certain Partial Release and Subordination,
dated of even date herewith, executed by the Trustee and Grantor in the form of
Exhibit B hereto.
"Permitted Assignee" means TCW Portfolio No. 1555 DR V Sub-Custody
Partnership, L.P., a California limited partnership.
"Permitted Encumbrances" has the meaning given such term in Section 4.1(h).
"PP Gas Sales Agreement" means that certain Natural Gas Purchase Agreement
of even date herewith made by Koch Gas Services, as buyer, and Original Grantee,
as seller, providing for the purchase and sale of the PP Hydrocarbons.
2
<PAGE>
"PPNPV" has the meaning given such term in Section 5.1.
"Preferential Right" has the meaning given such term in Section 4.1(p).
"Production Payment Documents" means this Agreement, the Conveyance, the
Ratification Agreement, the Partial Release, the Transportation Agreement, the
Standby Gas Sales Agreement, the Guaranty, and each certificate, agreement,
document, or instrument now or hereafter delivered in connection with any
thereof by or on behalf of Grantor or TTC to Grantee.
"Purchase Price" means $32,975,000.
"Ratification Agreement" means that certain Ratification Agreement, dated
of even date herewith, executed by TTC and Grantor in the form of Exhibit C
hereto.
"Required Ratio" means 125% from the date hereof until and including July
31, 1997, and thereafter 150%.
"Reserve Report" has the meaning given such term in Section 5.1.
"Senior Notes" means the 11-1/2% Senior Secured Notes due 2002 which have
been issued by Grantor pursuant to the Trust Indenture.
"SINPV" has the meaning given such term in Section 5.1.
"Standby Gas Sales Agreement" means that certain Standby Natural Gas
Purchase Agreement of even date herewith made by Koch Gas Services, as buyer,
and Grantor, as seller, providing for the purchase and sale of the EMC Volumes
accruing to Grantor.
"TransAmerican" means TransAmerican Natural Gas Corporation, a Texas
corporation.
"TransAmerican Company" means TransAmerican, Grantor, TTC, TransAmerican
Refining Corporation, TransAmerican Energy Corporation, and each other
subsidiary of TransAmerican.
"Transportation Agreement" means that certain Interruptable Gas
Transportation Agreement of even date herewith, made by Koch Gas Services and
TTC in the form of Exhibit E hereto.
"Trust Indenture" means that certain Indenture dated as of June 15, 1995,
made by Grantor (as Issuer), TTC (as Guarantor), and American Bank National
Association, as Trustee, in connection with Grantor's Senior Notes.
3
<PAGE>
"Trustee" means, at the time in question, the Person serving as Trustee
under the Trust Indenture.
"TTC" means TransTexas Transmission Corporation, a Delaware corporation.
Section 1.2. Rules of Construction. All references in this Agreement to
articles, sections, subsections and other subdivisions refer to corresponding
articles, sections, subsections and other subdivisions of this Agreement unless
expressly provided otherwise. Titles appearing at the beginning of any of such
subdivisions are for convenience only and shall not constitute part of such
subdivisions and shall be disregarded in construing the language contained in
such subdivisions. The words "this Agreement", "this instrument", "herein",
"hereof", "hereby", "hereunder" and words of similar import refer to this
Agreement as a whole and not to any particular subdivision unless expressly so
limited. Unless the context otherwise requires: "including" (and its grammatical
variations) means "including without limitation"; "or" is not exclusive; words
in the singular form shall be construed to include the plural and vice versa;
words in any gender include all other genders; references herein to any
instrument or agreement refer to such instrument or agreement as it may be from
time to time supplemented or amended; and references herein to any Person
include such Person's successors and assigns. All references in this Agreement
to exhibits and schedules refer to the exhibits and schedules to this Agreement
unless expressly provided otherwise, and all such exhibits and schedules are
hereby incorporated herein by reference and made a part hereof for all purposes.
ARTICLE II - Purchase and Sale
Section 2.1. Agreement of Purchase and Sale. Upon the terms and
conditions of this Agreement, Grantor agrees to sell the Production Payment to
Original Grantee and Original Grantee agrees to purchase the Production Payment
from Grantor.
Section 2.2. Payment of Purchase Price. Original Grantee will pay the
Purchase Price to Grantor by wire transfer of immediately available funds to
such banks and bank accounts as Grantor shall specify in the certificate
referred to in Section 3.2(d) below.
Section 2.3. Expenses. Grantor will pay to Grantee (or directly to
Grantee's attorneys and other consultants) all Reimbursable Expenses as they are
billed. Grantor has heretofore or concurrently herewith advanced $50,000 to
Original Grantee and $75,000 to TCW Asset Management Company to be applied to
Reimbursable Expenses, and these funds will be applied toward the Reimbursable
Expenses before asking Grantor to make any additional payments of Reimbursable
Expenses. To the extent that any such funds have not been so applied within
three months after the Closing Date, Original Grantee and TCW Asset Management
Company will return the remainder to Grantor, but Grantor will thereafter remain
liable to pay all Reimbursable Expenses as billed. To the extent that such
funds are insufficient to pay all Reimbursable Expenses and are exhausted,
Grantor will thereafter promptly pay all Reimbursable Expenses as they are
billed.
4
<PAGE>
Section 2.4. Payments. Each of Grantor and Grantee will pay each amount
owing to the other under the Production Payment Documents by wire transfer of
immediately available funds to the banks and bank accounts which each shall
specify to the other concurrently herewith, or to such other accounts as each
shall from time to time specify in writing at least five Business Days prior to
the effective date for any such change of accounts.
ARTICLE III - Closing Date and Closing
Section 3.1. Time and Place of Closing. The closing for the consummation
of the sale and purchase of the Production Payment (herein called the "Closing")
shall take place at such place (or places) and on such date in January, 1996 as
may be agreed to by Grantor and Original Grantee (herein called the "Closing
Date").
Section 3.2. Conditions to Closing -- Documents. The obligation of
Original Grantee to pay the Purchase Price is subject to Original Grantee's
receipt of each of the following, in form, substance, and date satisfactory to
Original Grantee and in such number of counterparts as Original Grantee shall
have requested:
(a) An "Omnibus Certificate" of the Secretary or Assistant Secretary of
Grantor, which shall contain the names and signatures of the officers of Grantor
authorized to execute the Production Payment Documents and which shall certify
to the truth, correctness and completeness of the following exhibits attached
thereto: (i) a copy of resolutions duly adopted by the Board of Directors of
Grantor and in full force and effect at the time this Agreement is entered into,
authorizing the execution of the Production Payment Documents and the
consummation of the transactions contemplated therein, (ii) a copy of the
charter documents of Grantor and all amendments thereto, certified by the
appropriate official of Grantor's state of incorporation, and (iii) a copy of
the bylaws of Grantor.
(b) An Omnibus Certificate for TTC, similar to that required for Grantor
under the preceding subsection (a).
(c) A long-form certificate (or certificates) of the due formation, valid
existence and good standing of each of Grantor and TTC in its state of
incorporation, issued by the appropriate authorities of such state, and
certificates of Grantor's and TTC's good standing and due qualification to do
business in Texas.
(d) A Compliance Certificate of the President and the Chief Financial
Officer of Grantor, dated as of the Closing Date, in which such officers shall
certify to the satisfaction of the conditions set out in Section 3.3 and shall
give the wiring instructions referred to in Section 2.2 above.
(e) Any assurances of title requested by Original Grantee concerning the
Production Payment, including the recording and filing of the Conveyance and the
updating of any specified title opinions through such recording (it being
understood that Original Grantee may
5
<PAGE>
require these assurances to be given after, as well as at, Closing, and that no
title deficiencies learned of by Grantee at any time shall in any way be deemed
to qualify any of Grantor's warranties of title or indemnities with respect to
title in any of the Production Payment Documents).
(f) Certificates from Grantor's insurance brokers or advisors confirming
that Grantor is in compliance with the requirements of Section 3.4 of the
Conveyance.
(g) Evidence that all Current Ad Valorem Taxes for 1995 have been paid.
(h) A legal opinion of Gardere & Wynne, L.L.P., as counsel to Grantor,
dated the Closing Date and in the form of Exhibit A hereto.
(i) The Conveyance.
(j) The Partial Release.
(k) The Ratification Agreement.
(l) The Guaranty.
(m) The Assignment and Release.
(n) The PP Gas Sales Agreement.
(o) A copy of the Standby Gas Sales Agreement, executed and delivered by
Koch Gas Services and Grantor.
(p) A copy of the Transportation Agreement, executed and delivered by Koch
Gas Services and TTC.
Section 3.3. Other Conditions to Closing. In addition to the receipt of
the foregoing documents and instruments, the obligation of Original Grantee to
pay the Purchase Price is subject to the satisfaction (or waiver by Original
Grantee) on the Closing Date of the following conditions precedent:
(a) All representations and warranties made by Grantor or TTC in any
Production Payment Document then or previously delivered shall be true and
correct as of the Closing Date.
(b) Grantor and TTC shall have performed all agreements, covenants, and
conditions which each is required by any Production Payment Document to perform
on or prior to the Closing Date.
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(c) The consummation of the Closing shall not (i) be prohibited by any law
or any regulation or order of any court or governmental agency or authority
applicable to Grantor, TTC, Original Grantee or Permitted Assignee, or (ii)
subject any of them to any penalty or other onerous condition under or pursuant
to any such law, regulation or order.
Section 3.4. Floor Contracts. Grantee expects that, on the Closing Date,
it will purchase one or more gas price floor contracts or other hedging
contracts. Any such contracts shall be in form and substance satisfactory to
Grantee in its discretion; Grantor shall have no interest therein and all
payments made therefor or received thereunder shall be for the account of
Grantee.
ARTICLE IV - Representations and Covenants
Section 4.1. Representations and Warranties of Grantor. To induce
Original Grantee to enter into this Agreement and to pay the Purchase Price,
Grantor hereby represents, warrants and covenants to Grantee that:
(a) Each of Grantor and TTC is, and shall remain, a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and duly qualified to do business and in good standing as a foreign
corporation in the State of Texas. Each has all requisite power and authority,
corporate or otherwise, to own and operate its assets in Texas and to execute
and deliver, and perform all of its obligations under, the Production Payment
Documents. Grantor is not a "foreign person" within the meaning of Sections
1445 and 7701 of the Internal Revenue Code of 1986, as amended (i.e., Grantor is
not a non-resident alien, foreign corporation, foreign partnership, foreign
trust or foreign estate as those terms are defined in the Code and any
regulations promulgated thereunder). TransAmerican owns (directly or indirectly)
approximately 87% of all of the issued and outstanding stock of Grantor, and
Grantor owns all of the issued and outstanding stock of TTC.
(b) The execution, delivery and performance by each of Grantor and TTC of
the Production Payment Documents to which each is a party and the consummation
of the transactions contemplated herein and therein have been duly authorized by
all necessary corporate action and do not and will not (i) violate any material
provision of any law, rule, regulation, order, writ, judgment, decree,
determination or award presently in effect having applicability to any
TransAmerican Company or of the Certificate of Incorporation or By-laws of
TransAmerican, Grantor, or TTC, or (ii) result in a breach of, or constitute a
default under, any contract, indenture, instrument, or agreement to which any
TransAmerican Company is a party or by which it or its property may be presently
bound or affected (including the leases under which Grantor holds the Subject
Interests), or result in or require the creation or imposition of any lien or
encumbrance under any such contract, indenture, instrument, or agreement.
Grantor and TTC have obtained, and shall continue to obtain, all consents,
authorizations and waivers necessary under any such contract, indenture,
instrument or agreement or under any such material provision of law, rule,
regulation, order, writ,
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judgment, decree, determination or award in order to permit the valid execution,
delivery and performance by Grantor and TTC of the Production Payment Documents.
(c) The Production Payment Documents have been duly executed and delivered
by Grantor and TTC (to the extent each is a party thereto) and constitute the
legal, valid and binding acts and obligations of Grantor and TTC, enforceable
against Grantor and TTC in accordance with their respective terms except as such
enforcement may be limited by bankruptcy, insolvency, moratorium and other
similar laws applicable to creditors' rights generally or by general principles
of equity.
(d) No event or state of affairs which would, upon delivery of the
Conveyance, be a Designated Event has occurred and is continuing. No material
"Default" and no "Event of Default" exists under the Trust Indenture. No
material "Default" and no "Event of Default" exists under that certain
Indenture, dated as of February 15, 1995, among TransAmerican Refining
Corporation, TransAmerican Energy Corporation (as Guarantor), and First Fidelity
Bank, National Association (as trustee). No TransAmerican Company is in default
in the payment of any item of indebtedness of $5,000,000 or more owed by it. No
bankruptcy or insolvency proceeding is presently pending or contemplated (or, to
Grantor's best knowledge, threatened) by or against any TransAmerican Company
under any applicable bankruptcy, insolvency or other similar law of any
jurisdiction, and no such Person has made a general assignment for the benefit
of creditors.
(e) The Partial Release constitutes the legal, valid and binding act and
obligation of the Trustee, enforceable against Trustee and the holders of the
Senior Notes in accordance with the terms thereof, except as such enforcement
may be limited by general principles of equity.
(f) The data, information, exhibits, memoranda and reports furnished by or
on behalf of TransAmerican, Grantor or TTC to Original Grantee or TCW Asset
Management Company in connection with the negotiation of the Production Payment
Documents (taken as a whole, and taking into account all corrections and
supplements to such information heretofore delivered) do not contain any
material misstatement of fact or omit to state a material fact or any fact
necessary to make the statements contained therein not misleading. There is no
fact known to TransAmerican, Grantor, or TTC that has not been disclosed to
Original Grantee or to TCW Asset Management Company which could materially and
adversely affect the value of the Production Payment. (The data and information
referred to in the above representations and warranties include any factual
information furnished by Grantor for incorporation or use in any reserve or
production reports or estimates furnished by Grantor or its independent
engineers to Original Grantee or TCW Asset Management Company, but Grantor is
not representing and warranting that any reserve or production estimates made by
Grantor or such engineers will ultimately prove to have been accurate.) No
material adverse change in the financial condition of Grantor or TTC or in the
condition or aggregate value of the Subject Wells or Subject Interests has
occurred since October 31, 1995 other than normal depletion.
(g) Except as described on Part A of Schedule 1 hereto or on Schedule 4
hereto, there is no litigation or administrative proceeding pending against any
TransAmerican Company
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which involves (i) a dispute or claim concerning title to any of the Subject
Interests, (ii) any actual or purported lien, security interest, charge or
burden upon any of the Subject Interests or any lease making up any part of the
Subject Interests, or (iii) any other claim which would affect a transferee of
any such lease or any of the Subject Interests. Except as described on Part B
of Schedule 1 there is no other litigation or proceeding pending or, to the best
knowledge of Grantor, threatened against any TransAmerican Company which would,
if determined adversely to such TransAmerican Company, have a material adverse
effect on the financial condition of Grantor or TTC, the value of the Production
Payment, the ability of Grantor to convey the Production Payment pursuant to the
Production Payment Documents, or the ability of Grantor or TTC to perform their
respective obligations under the Production Payment Documents.
(h) Grantor has good and defensible title to the Subject Interests, and
Grantor covenants to maintain good and defensible title to the Retained
Interests, in each case free and clear of all liens, security interests, and
encumbrances except for (i) the contracts, agreements, burdens, encumbrances and
other matters set forth in the descriptions of certain of the Subject Interests
on Exhibit A to the Conveyance, (ii) statutory liens for taxes which are not yet
delinquent or which (in the case of taxes hereafter coming due) are being
contested in good faith by appropriate proceedings and for the payment of which
Grantor has reserved adequate funds, (iii) liens under operating agreements,
pooling orders and unitization agreements, and mechanics' and materialmen's
liens, with respect to obligations incurred in the ordinary course of business
which are not yet due or which (in the case of obligations hereafter coming due)
are being contested in good faith by appropriate proceedings for the payment of
which Grantor has reserved adequate funds, (iv) easements, rights-of-way,
zoning, similar restrictions and other similar encumbrances incurred in the
ordinary course of business which do not in any case materially detract from the
value or use of the property subject thereto, (v) judgment liens and lis pendens
(which, except for the judgment liens and lis pendens listed in Schedule 4, do
not burden the Production Payment), but only for so long as enforcement thereof
is stayed or otherwise prevented and (vi) liens in favor of the Trustee
burdening the Retained Interests but not the Production Payment (the matters
described in the foregoing clauses (i), (ii), (iii), (iv), (v) and (vi) are
herein called the "Permitted Encumbrances"). The listing of Permitted
Encumbrances is made for the purpose of limiting the warranties of Grantor made
herein, and is not intended to restrict the description of the Subject
Interests, nor is it intended that the listing herein of any Permitted
Encumbrances shall subordinate the Production Payment to such Permitted
Encumbrance or otherwise cause the Conveyance or the rights of Grantee
thereunder to be made subject to, or encumbered by, such Permitted Encumbrance.
As provided above, no judgment lien or lis pendens referred to in clause (v)
above shall be considered to be a Permitted Encumbrance (for the purposes of
Section 4.1 of the Conveyance or for any other purpose) after enforcement
thereof ceases to be stayed or otherwise prevented.
(i) The oil, gas or mineral leases, contracts, servitudes and other
agreements forming a part of the Subject Interests, to the extent the same cover
or otherwise relate to the Subject Interests, are in full force and effect, and
Grantor agrees to so maintain them in full force and effect. All rents,
royalties and other payments due and payable under such leases, contracts,
servitudes and other agreements, or under the Permitted Encumbrances, or
otherwise attendant
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to the ownership or operation of the Subject Interests, have been, and will
continue to be, properly and timely paid. Grantor is not in default with
respect to Grantor's obligations (and Grantor is not aware of any default by any
third party with respect to such third party's obligations) under such leases,
contracts, servitudes and other agreements, or under the Permitted Encumbrances,
or otherwise attendant to the ownership or operation of any part of the Subject
Interests, where such default could materially and adversely affect the
ownership or operation of any of the Subject Interests; Grantor will fulfill all
such obligations coming due in the future.
(j) Schedule 2 lists those Subject Wells the production from which is not
presently subject to severance tax pursuant to (S) 201.057 of the Texas Tax
Code.
(k) No Subject Interest is dedicated or otherwise subject to any
contractual or other arrangement (other than the Standby Gas Sales Agreement,
the PP Gas Sales Agreement and the rights of Chevron U.S.A. Production Company
("Chevron") under the Assignment dated February 17, 1975, but effective as of
December 28, 1974 from Gulf Oil Corporation to Good Hope Refineries, Inc. and
the Assignment dated February 12, 1975 but effective as of December 26, 1974
from Gulf Oil Corporation to Good Hope Refineries, Inc. (the "Chevron Farmouts")
to purchase production from Grantor's Herbst and J.C. Martin leases) for the
sale, processing or transportation of Hydrocarbons produced therefrom (or
otherwise related to the marketing of such Hydrocarbons) which would bind
Grantee as owner of the PP Hydrocarbons, or would otherwise restrict the rights
of Grantee under the Conveyance to take possession of and market PP
Hydrocarbons. To the extent that Chevron ever exercises its rights under the
Chevron Farmouts to purchase PP Hydrocarbons and the price paid therefor by
Chevron is less than the price which would have been payable therefor under the
PP Gas Sales Agreement, then within five days after notice thereof Grantor shall
pay such difference to Grantee. Neither Grantor, nor any of its predecessors in
title, has received prepayments (including payments for gas not taken pursuant
to "take or pay" or other similar arrangements) for any Hydrocarbons produced or
to be produced from the Subject Interests after the Closing Date. There is no
Subject Interest with respect to which Grantor, or its predecessors in title,
has, prior to the date hereof, taken more ("overproduction"), or less
("underproduction"), Hydrocarbons than its (or its predecessor's in title's)
ownership interest in such Subject Interest would entitle it to take, which
overproduction or underproduction has not been recouped as of the date hereof
(other than a royalty owner which was underproduced by no more than 4000 MMBTUs
as of 12/31/95). No Subject Interest is subject to any production balancing
arrangement under which one or more third Persons (other than such royalty
owner) may take a portion of the production attributable to such Subject
Interest without payment (or without full payment) therefor as a result of
production having been taken from, or as a result of other actions or inactions
with respect to, other properties. No Subject Interest is subject on the date
hereof to any regulatory refund obligation and, to the best of Grantor's
knowledge, no facts exist which might cause the same to be imposed.
(l) The Subject Interests (and properties unitized therewith) are being
(and, to the extent the same could materially and adversely affect the ownership
or operation of the Subject Interests after the date hereof, have in the past
been) maintained, operated and developed in a
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good and workmanlike manner, in accordance with prudent industry standards and
in conformity in all material respects with all applicable laws and all rules,
regulations and orders of all duly constituted authorities having jurisdiction
and in conformity with all oil, gas or other mineral leases and other contracts
and agreements forming a part of the Subject Interests and in conformity with
the Permitted Encumbrances. All equipment and facilities necessary for such
operation of the Subject Wells are in place and in good and usable condition,
subject to ordinary maintenance and repair requirements. No Subject Interest is
subject to having allowable production after the date hereof reduced below the
full and regular allowable (including the maximum permissible tolerance) because
of any overproduction (whether or not the same was permissible at the time)
prior to the date hereof, and none of the wells located on the Subject Interests
(or properties unitized therewith) are or will be deviated from the vertical
more than the maximum permitted by applicable laws, regulations, rules and
orders, and such wells are, and will remain, bottomed under and producing from
(with the well bores wholly within) the Subject Interests (or, in the case of
wells located on properties unitized therewith, such unitized properties).
Grantor has all governmental licenses and permits necessary or appropriate to
own and operate the Subject Interests, and Grantor has not received notice of
any material violations in respect of any such licenses or permits.
(m) All valid expenses and liabilities (including all bills for labor,
materials and supplies used or furnished for use in connection with the Subject
Interests and all Direct Taxes and Current Ad Valorem Taxes relating to the
ownership or operation of the Subject Interests) have been, or are being, paid
(timely, and before the same become delinquent) by Grantor (and, as to
properties operated by third parties, by such third parties, to the best of
Grantor's knowledge).
(n) The Subject Interests, and Grantor's operations thereon, are in
compliance in all material respects with all applicable federal, state or local
laws, including all Environmental Laws. Grantor has taken all steps necessary
to determine and has determined that no Hazardous Substance has been disposed of
or otherwise released on or to the Subject Interests (except for dispositions
and releases done in compliance with all applicable laws and for which Grantor
otherwise has no material remedial obligations), and the use which Grantor makes
and intends to make of the Subject Interests will not result in any such
disposal or release. None of such operations of Grantor, and none of the
Subject Interests, is the subject of any federal, state or local investigation
evaluating whether any remedial action is needed to respond to a release of any
Hazardous Substance into the environment or to the improper storage or disposal
(including storage or disposal at offsite locations) of any Hazardous Substance.
Neither Grantor nor, to the best knowledge of Grantor, any other Person has
filed any notice under any Environmental Law indicating that Grantor or any of
its Affiliates is responsible for the release into the environment, or the
improper storage or disposal, of any Hazardous Substance that is now located on,
was removed from, or is in any way related to any Subject Interest, or that any
Hazardous Substance has been released (other than atmospheric emissions from
compressor stations, which emissions are now in compliance and permitted under
applicable Environmental Laws), or is improperly stored or disposed of, upon any
Subject Interest or upon any property of any TransAmerican Company located near
to any Subject Interest. No TransAmerican Company otherwise has any material
contingent liability in
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connection with its operations or properties in or near any Subject Interests
for the release into the environment, or the improper storage or disposal, of
any such pollutant, waste, substance or constituent. The Associated Subject
Interests are in compliance in all material respects with all Environmental Laws
for which Grantor (or, to the best of its knowledge, its predecessors in title
to the Subject Interests) would be responsible; as used herein the term
"Associated Subject Interests" means any and all interests in and to (and or
carved out of) the lands which are described or referred to in Exhibit A to the
Conveyance, or which are otherwise described in any of the oil, gas or mineral
leases or other instruments described in or referred to in such Exhibit A,
whether or not such property interests are owned by Grantor.
(o) No Subject Interest is subject to any tax or common law partnership or
to any joint venture (other than any Permitted Encumbrances).
(p) No Subject Interest is subject to a preferential right to purchase (a
"Preferential Right") other than [DESCRIPTION OF CHEVRON CALL], or subject to
the requirement that a consent to assignment (other than the Partial Release) be
obtained from a third party.
(q) Grantor has incurred no obligation or liability, contingent or
otherwise, for broker's or finder's fees in respect of any of the matters
provided for in this Agreement.
(r) Schedule 4 contains a complete and accurate list of all abstracts of
judgment and notices of lis pendens on file on the Closing Date against any of
the Subject Interests. Grantor has posted supersedeas bonds in the amounts
sufficient in all respects to stay execution of (and pay, if necessary) any such
judgment.
(s) All Subject Wells are equipped for production and connected to a
gathering system of sufficient capacity and pressure to permit the continuing
delivery of PP Hydrocarbons in volumes equal to the volumes historically
delivered. TTC's pipeline system from the Delivery Points to Agua Dulce, Texas
has a present daily delivery capacity (in this subsection, the "Capacity") of
approximately 800 million cubic feet per day ("MMcf/d"). Approximately 570
MMcf/d of Capacity is presently being used by all Persons transporting gas
through such pipeline system, and approximately 350 MMcf/d of Capacity, in the
aggregate, is contractually committed by TTC to the following third parties or
their Affiliates (or to Grantor for the benefit of such Persons) who may have
priority rights to such Capacity which are superior to the rights of Koch Gas
Services under the Transportation Agreement with respect to the following
amounts of Capacity (but no more):
The Coastal Corporation 140 MMcf/d
Associated Gas Services, Inc. 100 MMcf/d
TCW Portfolio No. 1555 DR V
Sub-Custody Partnership, L.P. 60 MMcf/d
Mideon Texas Pipeline Corp. 50 MMcf/d
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No other Person has any contractual or other rights owed to it by TTC or any
other TransAmerican Company which would restrict TTC from honoring its
obligations to Koch Gas Services under the Transportation Agreement.
(t) The facilities and arrangements by which Grantor disposes of water
produced from the Subject Wells are sufficient to dispose of the volumes of
water currently produced and Grantor has no knowledge of any reason to believe
that the facilities and arrangements will not be adequate in the future to
dispose of the volumes of water that may be reasonably expected to be produced
in conjunction with the Subject Wells.
(u) Except as provided in the Production Payment Documents, Grantor has
made no oral or written commitments to make capital expenditures in connection
with the Subject Wells after the Closing Date and no proposals have been made
(i) to drill additional wells or recomplete any zones in wells directly
offsetting any Subject Well that would produce from the subject reservoir for
such well (other than the Carr 112 or the Vergara 11, 12, 13 and 14), (ii) to
deepen, plug back or rework any Subject Wells (other than in the ordinary course
of business), (iii) to conduct any operations other than normal operations of
the Subject Wells, or (iv) to abandon any Subject Wells.
Section 4.2. Representations and Warranties of Original Grantee.
Original Grantee hereby represents and warrants to Grantor that: (a) Original
Grantee has incurred no obligation or liability, contingent or otherwise, for
broker's or finder's fees in respect of any of the matters provided for in this
Agreement; (b) this Agreement constitutes the legal, valid and binding act and
obligation of Original Grantee, enforceable against Original Grantee in
accordance with its terms except as such enforcement may be limited by
bankruptcy, insolvency, moratorium and other similar laws applicable to
creditors' rights generally or by general principles of equity; (c) no
bankruptcy or insolvency proceeding is presently pending or contemplated (or, to
Original Grantee's best knowledge, threatened) by or against Original Grantee
under any applicable bankruptcy, insolvency or other similar law of any
jurisdiction; and (d) Original Grantee has not made a general assignment for the
benefit of creditors.
Section 4.3. Covenants of Grantor. To induce Original Grantee to enter
into this Agreement and to pay the Purchase Price, Grantor warrants, covenants
and agrees with Grantee that until the Termination Time, unless Grantee has
previously agreed otherwise:
(a) Grantor will perform all of its covenants and duties under the
Production Payment Documents, all as fully as if they were set out in full
herein. Grantor will cause TTC to perform all of its covenants and duties under
the Production Payment Documents.
(b) In addition to any reports and information specifically required by
the terms of this Agreement or the Conveyance, Grantor agrees to furnish to
Grantee full information, at all reasonable times, which Grantee may request
concerning any covenant, provision or condition of the Production Payment
Documents or any matter or records in connection with such documents or with the
operation of, reserve engineering for, production from, or accounting for the
Subject Interests. Subject to any restrictions on Grantor's right to do so
under
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applicable operating agreements or similar contracts, Grantor will permit
representatives designated by Grantee, including independent accountants,
agents, attorneys, and other Persons, to visit and inspect the Subject Interests
and Grantor's books and records pertaining to the Subject Interests (and to make
copies and photocopies from such records and to write down and record such
information as such representatives may request, provided that no copies may be
made of geological or seismic data), and Grantor shall permit Grantee and its
designated representatives reasonably to investigate and verify the accuracy of
information furnished to Grantee hereunder or in connection herewith and to
discuss all such matters with its officers, employees and representatives.
(c) If any Person ever challenges or attacks (i) the validity or priority
of any Production Payment Document or of any rights, titles, or interests
created or evidenced thereby or (ii) the title of Grantor to any Subject
Interest or of Grantee to any part of the Production Payment, then upon learning
thereof Grantor will give prompt written notice thereof to Grantee and at
Grantor's own cost and expense will diligently endeavor to defeat such challenge
or attack and to cure any defect that may be developed or claimed, and Grantor
will take all necessary and proper steps for the defense of any legal
proceedings with respect thereto, including the employment of counsel to
represent Grantor, the prosecution or defense of litigation, and the release or
discharge of all adverse claims. Grantee (whether or not named as a party to
legal proceedings with respect thereto) is hereby authorized and empowered to
take such additional steps as in its judgment and discretion may be necessary or
proper for the defense of any such legal proceedings or the protection of the
validity or priority of the Production Payment Documents and the rights, titles,
and interests created or evidenced thereby, including the employment of
independent counsel (at reasonable fees) to represent Grantee, the prosecution
or defense of litigation, the compromise or discharge of any adverse claims made
with respect to the Production Payment, the purchase of any tax title and the
removal of prior liens or security interests, and all expenditures so made of
every kind and character shall be a Reimbursable Expense (which obligation
Grantor hereby expressly promises to pay on demand) owing by Grantor to Grantee
and shall bear interest from the date demanded until paid at the Agreed Rate.
(d) Grantor will, on request of Grantee, (i) promptly correct any defect,
error or omission which may be discovered in the contents, execution or
acknowledgment of any Production Payment Document, (ii) execute, acknowledge,
deliver and record or file such further instruments and do such further acts as
may be necessary, desirable or proper to carry out more effectively the purposes
of the Production Payment Documents and to more fully identify and make subject
to the Conveyance any property intended to be covered thereby, including any
renewals, additions, substitutions, replacements, or appurtenances to the
Subject Interests; and (iii) execute, acknowledge, deliver, and file or record
any document or instrument reasonably requested by Grantee to protect its
rights, title and interests under the Production Payment Documents against the
rights or interests of third Persons. Grantor shall pay all reasonable costs
connected with any of the foregoing.
(e) Without limitation of Grantee's remedies for breach of the
representations or warranties contained in Section 4.1(p), if a third party
properly exercises a Preferential Right
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after the Closing, Grantee will, in its sole and absolute discretion, either (i)
join in any required conveyance of the affected Subject Interest to such third
party, or (ii) make a conveyance of the affected Subject Interest to Grantor in
order that Grantor may make the necessary conveyance to such third party. Upon
making a conveyance in accordance with (i) or (ii), above, Grantee shall
(without limitation of its remedies for breach of the representations or
warranties contained in Section 4.1(p) hereof) be entitled to receive -- either
from the exercising third party, assuming that Grantee exercised option (i), or
from Grantor, assuming that Grantee exercised option (ii) -- the entire amount
of consideration attributable to Grantee's interest in the particular Subject
Interest covered by such Preferential Right. Grantee shall not incur any
liabilities with respect to any such reconveyance of properties that may be
required in accordance with this subsection or otherwise with respect to any
exercise of a Preferential Right, and Grantor shall indemnify and hold harmless
Grantee from any liabilities (including reasonable attorneys' fees) with respect
thereto.
(f) Grantor will not cause or permit the Subject Interests, the Associated
Subject Interests or Grantor to be in material violation of, or do anything or
permit anything to be done which will subject the Subject Interests or the
Associated Subject Interests to, any material remedial obligations under any
Environmental Laws, assuming disclosure to the applicable governmental
authorities of all relevant facts, conditions and circumstances, if any,
pertaining to the Subject Interests or the Associated Subject Interests and
Grantor will promptly notify Grantee in writing of any existing, pending or, to
the best knowledge of Grantor, threatened investigation or inquiry by any
private party or governmental authority in connection with any Environmental
Laws. Grantor will take all steps necessary to determine that no Hazardous
Substances are disposed of or otherwise released or being released on or to the
Subject Interests or the Associated Subject Interests in violation of any
Environmental Laws. Grantor will not cause or permit the disposal or other
release of any Hazardous Substance on or to the Subject Interests or the
Associated Subject Interests in violation of any Environmental Law and covenants
and agrees to remove or remediate any Hazardous Substance on the Subject
Interests or the Associated Subject Interests.
(g) Grantor will timely deposit with the Trustee any portion of the
Purchase Price which is required to be deposited pursuant to the Trust
Indenture. Grantor will otherwise ensure that no Event of Default occurs under
the Trust Indenture. Grantor will use all of the Purchase Price in accordance
with the terms of the Trust Indenture.
(h) Grantor will provide to Grantee any assurances of title which Grantee
may from time to time reasonably request concerning the Production Payment,
including the recording and filing of the Conveyance and the updating of any
specified title opinions through such recording (it being understood that no
title deficiencies learned of by Grantor shall in any way be deemed to qualify
any of Grantor's warranties of title or indemnities with respect to title in any
of the Production Payment Documents).
(i) Grantor will fully bond (or pay) any judgment entered in any lawsuit
listed in Schedule 1 or Schedule 4 so that such judgment can be fully paid by
proceeding against such
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bond without enforcement of any judgment lien or rights relating to any lis
pendens and without otherwise affecting the Production Payment.
(j) On or before February 29, 1996, Grantor will pay substantially all
capital expenditures (to the extent such capital expenditures will involve cash
payments) it has incurred prior to such date in connection with the drilling and
completion of its Carr 111 Wells, in order to avoid such capital expenditures
being considered "Cap Ex", as defined in the definition of "Marginal Costs" in
the Conveyance, for any period after such date.
Section 4.4. Reporting Covenants of Grantor. To induce Original Grantee
to enter into this Agreement and to pay the Purchase Price, Grantor warrants,
covenants and agrees with Grantee that until the Termination Time (and for two
months thereafter, with respect to subsection (a) below), unless Grantee has
previously agreed otherwise, Grantor will furnish the following statements and
reports to Grantee at Grantor's expense:
(a) Monthly, within 25 days after the end of the month to which each
report applies, Grantor shall furnish a report in the form of Schedule 3
showing:
(i) the name of each Subject Well,
(ii) the portion of gross production of Gas from each Subject Well
(measured in Mcfs) which is attributable to Subject Interests as metered at the
Delivery Points,
(iii) the quantity of PP Hydrocarbons (measured in Mcfs) produced from each
Subject Well and delivered to Grantee,
(iv) the number of MMBTUs in each Mcf of PP Hydrocarbons produced, as
measured at the Delivery Points,
(v) the PP Severance Taxes for such month with respect to PP Hydrocarbons,
if paid by Grantor,
(vi) any PP Ad Valorem Taxes actually paid during such month by Grantor,
(vii) the calculation of any reduction, if any, in PP Hydrocarbons due to
adjustments for Excess Marginal Costs for such month as provided in Section 2.2
of the Conveyance, and
(viii) any additions to the Base Volume as described in Section 2.4 of the
Conveyance.
Such report shall be supplemented, if and when requested by Grantee, to show:
(ix) the gross production of Hydrocarbons from each Subject Well, (x) the
quantities thereof, if
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any, used in lease operations, (xi) the most recent status of any Gas
imbalances, if any, affecting the Subject Interests, (xii) the number of wells
operated, wells drilled and wells abandoned on the Subject Interests, and (xiii)
the costs to Grantor of operating the Subject Interests. To the extent that any
of such information is not available to Grantor (despite all reasonable efforts
to obtain same) at the time any monthly report is furnished, it shall be
supplied to Grantee promptly after receipt.
(b) Within 45 days after each Regular Evaluation Date, and within 60 days
after the later of any Optional Evaluation Date or the date on which any
Optional Evaluation Date is designated, Grantor shall furnish a Reserve Report
covering the Subject Interests which has been prepared as of such Evaluation
Date in accordance with the terms of Section 5.1 hereof.
(c) Quarterly, within 60 days after the end of the first three fiscal
quarters in each fiscal year of Grantor, and annually, within 105 days after the
end of each fiscal year of Grantor, Grantor's consolidated financial statements
as of the end of and for such period, including a balance sheet and statements
of income, cash flows, and stockholder's equity, prepared in accordance with
generally accepted accounting principles and, with respect to the annual
financial statements, accompanied by a report of the Grantor's independent
certified public accountants stating that their examination was made in
accordance with generally accepted auditing standards and that in their opinion
such financial statements fairly present the matters reported on in accordance
with generally accepted accounting principles consistently applied. For so long
as Grantor files Forms 10-Q and 10-K with the Securities and Exchange
Commission, Grantor may satisfy the reporting requirements in this subsection
(c) by sending to Grantee a copy of each such form 10-Q and 10-K within fifteen
days after filing the same with the Securities and Exchange Commission, and
whenever Grantor or any Affiliate of Grantor files any Form 10-Q or 10-K with
the Securities and Exchange Commission or Grantor files any Form 8-K, Grantor
shall obtain and send a copy of such form to Grantee within fifteen days after
such form is so filed.
(d) Upon request of Grantee, but not more often than quarterly, Grantor
shall furnish reports, in detail reasonably acceptable to Grantee, concerning
any change in methods of operation of all or any Subject Wells, any new drilling
or development, any method of secondary recovery by repressuring or otherwise,
or any other action with respect to the Subject Interests, the decision as to
which may increase or reduce the quantity of Hydrocarbons ultimately recoverable
from the Subject Interests, or the rate of production therefrom, or which may
shorten or prolong the period of time required for liquidation of the Production
Payment.
(e) Upon request of Grantee, copies of surface maps showing property lines
and well locations, flow and pressure tests, natural gas analysis and casing
programs and other similar information related to the Subject Interests, the
Subject Wells and the production therefrom.
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(f) Upon request of Grantee, at any time and from time to time (but not
more frequently than once in any period of twelve consecutive months, unless
there has occurred a Designated Event that is not cured within the applicable
grace period) Grantor will provide at Grantor's sole expense an inspection or
audit of the Subject Interests and the Subject Lands from an engineering or
consulting firm approved by Grantee, indicating compliance or non-compliance
with Environmental Laws. Except for reports requested during the continuance of
a Designated Event, Grantor shall be responsible to pay for the costs of only
one such report during the term hereof (which Grantee shall specify), and
Grantee shall be responsible for the costs of all others.
(g) Promptly (and in any event within five days) after learning of the
occurrence of any Designated Event or of the making of any claim by any Person
which allegedly affects the rights of Grantor or Grantee in and to the Subject
Interests, Grantor will give Grantee written notice thereof.
Section 4.5. Additional Remedies Upon Designated Event. Upon the
occurrence of a Designated Event (and, with respect to the remedies described in
subsections (b) and (c) below, provided the breach giving rise to such
Designated Event has not been cured within 30 days after Grantee gives notice of
such breach to Grantor), Grantee shall, in addition to its other rights and
remedies, have the right, but not the obligation, to:
(a) instruct Koch Gas Services to pay directly to Grantee any amounts owing
under the Standby Gas Sales Agreement and Grantee shall apply such amounts to
any amounts then owing by Grantor to Grantee which are described in Section 2.2
or 5.1(a) of the Conveyance;
(b) remove Grantor as the operator of any or all of the Subject Interests
in which 100% of the working interest is owned by Grantor (a "100% Property"),
or
(c) instruct Grantor to resign as the operator of any Subject Interest (a
"Third Party Property") that is subject to a joint operating agreement between
Grantor and any third party working interest owner other than Grantor (a "Third
Party JOA").
In the event Grantor is removed by Grantee as the operator of any particular
100% Property, Grantee may appoint an Affiliate of the Original Grantee or
another reputable third party (which may be an Affiliate of any one or more
parties from time to time constituting Grantee but which may not otherwise be
any of the Persons described in clauses (ii) or (iii) of Section 6.2 of the
Conveyance, or any Affiliate of any such Person) who is experienced in operating
Gas properties, as the operator of any particular 100% Property, and Grantee may
negotiate with such third party a substitute operating agreement containing such
terms and conditions as are commercially reasonable in a transaction involving a
contract operator with no ownership interest in the contract area covered by an
operating agreement. All costs, expenses and fees billed or invoiced under any
such substitute operating agreement shall be borne and timely paid by Grantor.
In the event Grantee requests in accordance herewith that Grantor resign as the
operator of any Third Party Property (or in the event Grantor is otherwise
removed as operator
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under the terms of an applicable Third Party JOA, in which case Grantor shall
immediately so notify Grantee), Grantor shall consult with Grantee prior to
casting any vote it may have to name a substitute operator and shall cast such
vote as directed by Grantee.
ARTICLE V - Adjustment of Dedication Percentage
Section 5.1. Reserve Reports. Within 45 days after each Regular
Evaluation Date, and within 60 days after the date of any Optional Evaluation
Date or the date on which any Optional Evaluation Date is designated, Grantor
shall furnish to Grantee a reserve engineering report prepared as of such
Evaluation Date by Netherland, Sewell & Associates (or other independent
petroleum engineers selected by Grantor and acceptable to Grantee in the
reasonable exercise of its discretion) with respect to the Subject Interests.
Each such report is herein called a "Reserve Report". Each such Reserve Report
shall be prepared and furnished at the cost of Grantor, provided that any such
Reserve Report prepared as of an Optional Evaluation Date which reflects a ratio
of SINPV to PPNPV of the Required Ratio or more shall be at the cost of Grantee.
Each Reserve Report shall be prepared in accordance with the standards of the
Society of Petroleum Engineers and such engineers' customary professional
practices, provided that each Reserve Report shall:
(a) separately address proved developed producing reserves from other
reserves.
(b) separately address the anticipated production of proved developed
producing reserves accruing to (i) the Production Payment and (ii) the total
Subject Interests. (In preparing the first such Reserve Report as of February 1,
1996, such engineers shall assume that the Dedication Percentage is eighty-five
percent (85%).)
(c) separately calculate the future net revenues allocable to the
Production Payment and the future net revenues allocable to the total Subject
Interests from anticipated sales of production from proved developed producing
reserves and, using a discount factor of ten percent (10%) per annum, the
present value of each on the date as of which such report is prepared.
In preparing each Reserve Report and making such calculations, such engineers
shall: use the Dedication Percentages (both present and future) which are in
effect on such Evaluation Date or are then scheduled to take effect thereafter,
use the Futures Price as calculated for such Evaluation Date, and take into
account any limitations on production accruing to the Production Payment which
would be caused by projected Excess Marginal Costs and any projected increases
(pursuant to the terms of the Conveyance) in the Base Volume. As used herein:
(i) "PPNPV" means such discounted present value of the future net revenues
accruing to the Production Payment from anticipated sales of production from
proved producing reserves.
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(ii) "SINPV" means such discounted present value of the future net
revenues accruing to the total Subject Interests from anticipated sales of
production from proved producing reserves.
(iii) "Futures Price" means, for any Evaluation Date, the greater of
(i) $1.30 per MMBTU or
(ii) the least of: (1) the average of the prices payable under the PP Gas
Sales Agreement for the twelve months preceding the date as of which such report
is prepared, (2) the average of the prices payable under the PP Gas Sales
Agreement for the six months preceding the date as of which such report is
prepared, and (3) the remainder of (A) the average of the prices on the New York
Mercantile Exchange (or any successor organization), as reported in the Wall
Street Journal on such Evaluation Date (or, if such date is not a Business Day,
for the first Business Day thereafter) for the next twelve months' forward
contracts for natural gas delivered at the Henry Hub, minus (B) the sum of $.17
plus (or minus) any reasonable basis differential between the Henry Hub gas
price and the Agua Dulce gas price which Grantee then specifies for use in
preparing such Reserve Report.
Section 5.2. Adjustment to Dedication Percentage. Using the Reserve
Report prepared as of each Evaluation Date, and the PPNPV and SINPV as
calculated therein, Grantee shall calculate the ratio of such SINPV to such
PPNPV. If this ratio is less than the Required Ratio, then the Dedication
Percentage shall be automatically increased to ninety percent (90%) as provided
in Section 2.3 of the Conveyance.
ARTICLE VI - Miscellaneous
Section 6.1. Waivers and Amendments. No failure or delay (whether by
course of conduct or otherwise) by Grantee in exercising any right, power or
remedy which Grantee may have under any of the Production Payment Documents
shall operate as a waiver thereof or of any other right, power or remedy, nor
shall any single or partial exercise by Grantee of any such right, power or
remedy preclude any other or further exercise thereof or of any other right,
power or remedy. No waiver of any provision of any Production Payment Document
and no consent to any departure therefrom shall ever be effective unless it is
in writing and signed by Grantee, and then such waiver or consent shall be
effective only in the specific instances and for the purposes for which given
and to the extent specified in such writing. No notice to or demand on Grantor
shall in any case of itself entitle Grantor to any other or further notice or
demand in similar or other circumstances. This Agreement and the other
Production Payment Documents set forth the entire understanding and agreement of
the parties hereto and thereto with respect to the transactions contemplated
herein and therein and supersede all prior discussions and understandings with
respect to the subject matter hereof and thereof, and no modification or
amendment of or supplement to this Agreement or the other
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Production Payment Documents shall be valid or effective unless the same is in
writing and signed by the party against whom it is sought to be enforced.
THIS WRITTEN AGREEMENT AND THE OTHER PRODUCTION PAYMENT DOCUMENTS REPRESENT
THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Section 6.2. Survival of Agreements; Cumulative Nature. All of the
various representations, warranties, indemnities, covenants and agreements in
the Production Payment Documents shall survive the execution and delivery of
this Agreement and the other Production Payment Documents and the performance
hereof and thereof, including the granting of the Production Payment and the
delivery of the Conveyance. The representations, warranties, indemnities, and
covenants made by the parties in the Production Payment Documents, and the
rights, powers, and privileges granted to the parties in the Production Payment
Documents, are cumulative, and, except for expressly specified waivers and
consents, no Production Payment Document shall be construed in the context of
another to diminish, nullify, or otherwise reduce the benefit to either party of
any such representation, warranty, indemnity, covenant, right, power or
privilege. In particular and without limitation, no exception set out in this
Agreement to any representation, warranty, indemnity, or covenant herein
contained shall apply to any similar representation, warranty, indemnity, or
covenant contained in any other Production Payment Document, and each such
similar representation, warranty, indemnity, or covenant shall be subject only
to those exceptions which are expressly made applicable to it by the terms of
the various Production Payment Documents.
Section 6.3. Notices. All notices, requests, consents, demands and other
communications (in this section, collectively called "notices") which are
required or permitted under any Production Payment Document shall be in writing,
unless otherwise specifically provided in such Production Payment Document, and
shall be deemed sufficiently given or furnished if delivered by personal
delivery, by telecopy, by delivery service with proof of delivery, or by
registered or certified United States mail, postage prepaid, to Grantor at its
address specified on the signature pages hereto and to Grantee at its address
specified on the signature pages hereto. Any such notice shall be deemed to
have been given (a) in the case of personal delivery or delivery service, as of
the date of first attempted delivery at the address and in the manner provided
herein, (b) in the case of telecopy, upon receipt, or (c) in the case of
registered or certified United States mail, three days after deposit in the
mail. Each of Grantor and Grantee may change their respective addresses from
time to time by sending a notice of the new address, in the manner provided for
in this section, to the other.
Section 6.4. Parties in Interest. All grants, covenants and agreements
contained in the Production Payment Documents shall bind and inure to the
benefit of the parties thereto and
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their respective successors and assigns; providing that any assignment of any
party's rights and duties hereunder must be made in accordance with Article VI
of the Conveyance.
Section 6.5. Governing Law. Except to the extent that the law of another
jurisdiction is expressly elected in a Production Payment Document, the
Production Payment Documents shall be deemed contracts and instruments made
under the laws of the State of Texas and shall be construed and enforced in
accordance with and governed by the laws of the State of Texas and the laws of
the United States of America, without regard to principles of conflicts of law.
Section 6.6. Limitation on Interest. Although the Production Payment
Documents provide for the sale and purchase of a real property interest and not
a loan (except under federal income tax law), there are certain provisions (such
as Section 5.1(a) of the Conveyance) of the Production Payment Documents which
provide for the charging and payment of interest. Grantee and Grantor intend to
contract in strict compliance with applicable usury law from time to time in
effect. In furtherance thereof they hereby stipulate and agree that none of the
terms and provisions contained in the Production Payment Documents shall ever be
construed to create a contract to pay, for the use, forbearance or detention of
money, interest in excess of the maximum amount of interest permitted to be
charged by applicable law from time to time in effect. No party to any
Production Payment Document shall ever be liable for unearned interest or shall
ever be required to pay interest in excess of the maximum amount that may be
lawfully charged under applicable law from time to time in effect, and the
provisions of this section shall control over all other provisions of the
Production Payment Documents which may be in conflict or apparent conflict
herewith. In determining whether or not the interest paid or payable, under any
specific circumstance, exceeds the maximum amount permitted under applicable
law, the parties to the Production Payment Documents shall to the greatest
extent permitted under applicable law: (a) characterize any non-principal
payment as an expense, fee or premium rather than as interest, (b) exclude
voluntary prepayments and the effects thereof, and (c) amortize, prorate,
allocate, and spread the total amount of interest throughout the entire
contemplated term of the interest bearing obligation in accordance with the
amounts thereof outstanding from time to time and the maximum legal rate of
interest from time to time in effect under applicable law in order to lawfully
charge the maximum amount of interest permitted under applicable law. In the
event applicable law provides for an interest ceiling under Texas Revised Civil
Statutes Annotated article 5069-1.04, that ceiling shall be the indicated rate
ceiling. As used in this section the term "applicable law" means the laws of
the State of Texas or the laws of the United States of America, whichever laws
allow the greater interest, as such laws now exist or may be changed or amended
or come into effect in the future.
Section 6.7. Termination; Limited Survival. As provided in the
Conveyance, the Production Payment will terminate at the Termination Time
referred to therein. Notwithstanding the foregoing or anything to the contrary
in any Production Payment Document, all waivers or admissions made by Grantor in
any Production Payment Document and all obligations which any Person may have to
indemnify or compensate Grantee shall survive any termination of this Agreement
or any other Production Payment Document. At the request and expense of
Grantor, Grantee shall prepare, execute and deliver all necessary
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instruments (in proper recordable form, if applicable) to reflect and effect
such termination of the Production Payment and limited survival of the
Production Payment Documents.
Section 6.8. Severability. If any term or provision of any Production
Payment Document shall be determined to be illegal or unenforceable, all other
terms and provisions of the Production Payment Documents shall nevertheless
remain effective and shall be enforced to the fullest extent permitted by
applicable law.
Section 6.9. Arbitration.
(a) As used in this section:
(i) "AAA" means the American Arbitration Association (or any successor
thereto),
(ii) "Claims" means all claims by either party hereto against the other
with respect to the Production Payment or any of the Production Payment
Documents (including among others any claims with respect to the interpretation
or validity of any Production Payment Document, the existence or scope of any
duties owed thereunder, whether or not any such duties have been performed or
breached in any circumstances, or the extent or enforcement of any property
rights created thereunder or subject thereto), and
(iii) "Disputed Matters" means all Claims, all defenses against any
Claims, and all controversies relating thereto.
(b) If either Grantor or Grantee ever desires to assert a Claim against
the other, the party asserting such Claim will give written notice thereof to
the other party. During the thirty day period following receipt of such notice
by the other party, both parties will discuss such Claim and the validity
thereof. If the parties hereto cannot come to agreement about such Claim by the
end of such thirty day period (as such period may be extended by mutual
agreement), then within fifteen days after the end of such period either party
may by written notice to the other invoke the arbitration provisions of this
Agreement, whereupon Grantee and Grantor shall submit such Claim and all
Disputed Matters in any way related thereto to arbitration under the procedures
in the next following subsection (c).
(c) All Disputed Matters shall be resolved by arbitration conducted by
three arbitrators in accordance with this Section 6.9 and, to the extent not in
conflict herewith, the Commercial Arbitration Rules of the AAA then in effect.
Each such arbitrator must be independent and impartial and an attorney or
engineer with at least ten years' experience in the financing of oil and gas
properties. Within ten days after the sending and receipt of a notice invoking
arbitration as provided in subsection (b) above, each of Grantor and Grantee
shall specify (by notice to the other) the name and address of an arbitrator
appointed by it. At the end of such ten days, if one party has made a
specification of its appointed arbitrator but has not received notice of a
similar specification by the other party, then the party which has made a
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specification shall give notice to the other party that it has not received a
specification from the other party. If the other party does not act to specify
its arbitrator within an additional seven days after the giving of such notice,
the party who has made its specification may appoint the second arbitrator in
place of the party who has failed to do so. Within fifteen days after the first
two arbitrators have been appointed, they shall select the third arbitrator. If
a third arbitrator has not been selected within such period, either party hereto
may petition the Administrative Judge presiding over the State District Courts
of Dallas County, Texas to appoint such third arbitrator, whereupon such judge
(or any person designated by such judge to make such appointment) may make such
appointment unless the first two arbitrators have come to agreement on the third
arbitrator. Consistent with the expedited nature of arbitration, each party
will, upon the written request of the other party, provide the other with copies
of documents relevant to the issues raised by the Disputed Matter. Other
discovery may be ordered by the arbitrators to the extent they deem relevant and
appropriate, and any dispute regarding discovery, including disputes as to the
need thereof or the relevance or scope thereof, shall be determined by the
arbitrators, whose determination shall be conclusive. Unless Grantee and Grantor
agree otherwise, all arbitrations hereunder shall be held in Los Angeles,
California at the offices of Trust Company of the West. Grantee and Grantor
shall proceed expeditiously with any such arbitration and shall conclude all
proceedings thereunder, including any hearing, in order to allow a decision
based on applicable law to be rendered within ninety days after the appointment
of the third arbitrator. The decision of any two such arbitrators on the issues
before them shall be final, and any award or order so decided may be enforced in
any court having personal jurisdiction over the party against whom enforcement
is sought. Grantor shall bear its own expenses, including attorneys' fees and
expenses of arbitration, in connection with any such arbitration, but all
expenses of Grantee shall be considered Reimbursable Expenses to be paid or
reimbursed by Grantor. Although the foregoing arbitrations shall be conducted
under the rules of the AAA, the AAA itself shall not conduct such arbitrations,
nor shall such arbitrations be considered under the auspices of the AAA, nor
shall any fee be due the AAA. The arbitrators shall honor Grantor's and
Grantee's election of the laws of the State of Texas as set out in the various
Production Payment Documents, provided that each arbitration proceeding shall
also be subject to the United States Arbitration Act, 9 U.S.C., Chapter 1,
(S)(S) 1 et seq, to the extent applicable. The arbitrators are not empowered to
award punitive or exemplary damages on any Claim (but are empowered to award
Reimbursable Expenses to Grantee and pre-award interest to either party), and
EACH OF GRANTOR AND GRANTEE HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO
RECOVER PUNITIVE OR EXEMPLARY DAMAGES ON ANY CLAIM.
(d) All applicable statutes of limitations and defenses based on the
passage of time shall be tolled during the period in which arbitration has been
invoked as set forth in this section (but not during any period prior to such
invocation of arbitration). Each of Grantor and Grantee is required to continue
to perform its obligations under the Production Payment Documents pending final
resolution of any Disputed Matter.
Section 6.10. Greenlee Overriding Royalties. Notwithstanding the
restrictions on assignments by Grantor which are set out in Section 6.1 of the
Conveyance and
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notwithstanding the covenants of Grantor set out in Section 7.1 of the
Conveyance and 4.1(h) hereof, Grantor may assign to Michael Greenlee an
overriding royalty interest carved out of Grantor's Retained Interests in any
Subject Wells located on the portions of the Subject Lands held under the
following leases:
Rancho Nuevo
L & P
Briones
O.P. Carillo
J. Villareal
M. Cuellar
provided, however, that (a) no such overriding royalty burden on any such
Subject Lands shall exceed one percent times the Certain Percentage applicable
to such Subject Lands, and (b) each such overriding royalty interest, when
granted, shall burden the Retained Interests only and shall in no way burden the
Production Payment.
Section 6.11. Counterparts. This Agreement may be separately executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to constitute one
and the same Agreement.
IN WITNESS WHEREOF, this Agreement is executed as of the date first written
above.
Grantor: TRANSTEXAS GAS CORPORATION
By: ____________________________________
Name: Ed Donahue
Title: Vice President
Grantor's address: 1300 East North Belt, Suite 310
Houston, Texas 77032-2949
Attention: Ed Donahue, Vice President
Telephone: 713/987-8600
Telecopy: 713/986-8865
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Original Grantee: SUNFLOWER ENERGY FINANCE COMPANY
By: ________________________________
Name: Rex T. Clevenger
Title: Vice President
Original Grantee's
address: 4111 E. 37th St. North
Wichita, Kansas 67220
Attention: President
Telephone: 316/828-6994
Telecopy: 316/828-4081
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PRODUCTION PAYMENT CONVEYANCE
THIS CONVEYANCE (this "Conveyance") is made from and by TransTexas Gas
Corporation, a Delaware corporation (herein called "Grantor"), to Sunflower
Energy Finance Company, a Delaware corporation (herein called "Grantee").
ARTICLE I
Section 1.1. Defined Terms. When used in this Conveyance or in any exhibit
or schedule hereto (unless otherwise defined in any such exhibit or schedule),
the following terms have the respective meanings assigned to them in this
section or in the sections, subsections, exhibits and schedules referred to
below:
"Affiliate" means, with respect to any Person: (a) any other Person directly
or indirectly owning, controlling or holding with power to vote 10% or more of
the outstanding voting securities of such Person, (b) any other Person 10% or
more of whose outstanding voting securities are directly or indirectly owned,
controlled or held with power to vote by such Person, and (c) any other Person
directly or indirectly controlling, controlled by or under common control with
such Person; provided that, whenever Grantee is in whole or in part made up of
one or more funds, partnerships, or other entities and investment vehicles,
Grantee's "Affiliates" shall also include any trustee, partner or other
fiduciary of or for any such fund, partnership, or other entity or investment
vehicle and any Affiliates of any such trustee, partner or fiduciary.
"Agreed Rate" means a rate of interest of one percent (1%) per month,
calculated on the basis of a 30 day month and a year of twelve such months.
"Barrel" means 42 United States standard gallons of 231 cubic inches per
gallon at 60 degrees Fahrenheit.
"Base Volume" means 31,175,000 MMBTU's, as the same may be increased from
time to time under Section 2.4 hereof.
"British Thermal Unit" or "BTU" means the amount of energy required to raise
the temperature of one pound of pure water one degree Fahrenheit from 58.5
degrees Fahrenheit to 59.5 degrees Fahrenheit, as defined in the American Gas
Association Gas Measurement Manual and any subsequent revisions. The BTU
content of any particular quantity of Gas shall be determined as set forth in
the PP Gas Sales Agreement (in the definition of "BTU" as found therein).
<PAGE>
"Business Day" means a day which is not a Saturday, a Sunday, a legal
holiday in Houston, Texas, or a legal holiday in Los Angeles, California.
"Certain Percentage" means, with respect to each portion of Subject Lands
described on Exhibit A, the percentage shown on Exhibit A as the "Net Revenue
Interest" for such portion of Subject Lands.
"Commercial Well" has the meaning given such term in Section 3.2(c).
"Dedication Percentage" means from the Initial Time to, but not including,
7:00 a.m. April 1, 1996, 75% and thereafter, 85%; provided that the Dedication
Percentage shall increase to ninety percent (90%) from time to time as and when
provided in Sections 2.3, 3.5 and 5.1.
"Delivery Points" means, with respect to any particular Subject Well, the
point (immediately downstream of the lease separator) at which the volumes
(measured in Mcf's) and BTU content of Gas included in PP Hydrocarbons produced
from such Subject Well are initially measured.
"Delivery Services" has the meaning given such term in Section 2.5(a)(iv).
"Designated Event" has the meaning given such term in Section 5.1.
"Direct Taxes" means all ad valorem, property, gathering, transportation,
pipeline regulating, gross receipts, severance, production, excise, heating
content, carbon, value, value added, environmental, occupation, franchise,
sales, use, fuel, and other taxes and governmental charges and assessments
imposed on or as a result of all or any part of the Subject Interests, the
Hydrocarbons produced from Subject Interests or the proceeds thereof, the
Production Payment, or the PP Hydrocarbons or the proceeds thereof, regardless
of the point at which or the manner in which such taxes, charges or assessments
are charged, collected, levied or otherwise imposed. The only taxes which are
not Direct Taxes are federal income taxes, state income taxes, and franchise
taxes levied against Grantee and any other taxes levied against the overall net
income of Grantee.
"economically feasible" has the meaning given such term in Section 3.2(c).
"EMC Volume" has the meaning given such term in Section 2.2(c).
"Environmental Laws" means all applicable local, state or federal laws,
rules, regulations, or orders regulating or otherwise pertaining to (a) the use,
generation, migration, storage, removal, treatment, remedy, discharge, release,
transportation, disposal or cleanup of pollutants, contamination, hazardous
wastes, hazardous substances, hazardous materials, toxic substances or toxic
pollutants, (b) the soil, surface waters, groundwaters, land, stream sediments,
surface or subsurface strata, ambient air and any other environmental medium on
or off any Subject Interest, or (c) the environment or health and safety-related
matters; including
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the following as from time to time amended and all others whether similar or
dissimilar and whether now existing or hereinafter enacted: the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986, the Resource
Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act
of 1980, the Solid Waste Disposal Act Amendments of 1980, and the Hazardous and
Solid Waste Amendments of 1984, the Hazardous Materials Transportation Act, as
amended, the Toxic Substance Control Act, as amended, the Clean Air Act, as
amended, the Clean Water Act, as amended, and all regulations promulgated
pursuant thereto.
"Excess Marginal Costs" shall mean, for any particular month, the excess of
Marginal Costs for such month over the Retained Interest Revenues for such
month.
"Gas" means natural gas and all other hydrocarbons that are gaseous in their
natural or as-produced state, including casinghead gas, whether or not such
natural gas and other gaseous hydrocarbons are Processed.
"Grantee" means the Person named in the preamble to this Conveyance as the
Grantee, and, unless the context in which used shall otherwise require, such
term shall also include any successor-owner at the time in question of any or
all of the Production Payment.
"Grantor" means the Person named in the preamble of this Conveyance as
Grantor, and, unless the context in which used shall otherwise require, such
term shall also include any successor-owner at the time in question of any or
all of the Subject Interests.
"Guaranty" shall have the meaning given such term in the Purchase Agreement.
"Hydrocarbons" means Gas.
"Imbalance Charges" shall have the meaning given such term in Section
2.5(b).
"Initial Time" means 7:00 a.m., Houston, Texas time, on February 1, 1996.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor statute or statutes.
Marginal Costs" means, for each month, the sum of (a) one thousand eight
hundred dollars ($1,800), proportionally reduced for each Subject Well in which
Grantor owns less than 100% of the working interest, times the number of Subject
Wells in operation for at least fifteen days during such month, plus (b) the
expenses actually paid by Grantor during such month for ad valorem and severance
taxes with respect to the Retained Interests and the production therefrom, plus
(c) the amount of any actual and reasonable capital expenditures ("Cap Ex") of
Grantor actually paid during such month (proportionately reduced for each
Subject Well in which Grantor owns less than 100% of the working interest and
net of any insurance proceeds for the loss of or damage to capital assets being
replaced or repaired), to
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the extent such Cap Ex was incurred in connection with the maintenance,
restoration or increase of Hydrocarbon production from the Subject Wells,
including the costs of reworking a Subject Well in an effort to restore or
increase production and the costs of constructing disposal or workover tanks or
pits associated with any Subject Well; provided that Cap Ex in any particular
month shall not exceed $50,000 without the prior written consent of Grantee,
except to the extent expenditures of Cap Ex in excess of $50,000 are required to
comply with the terms of any oil and gas lease included in the Subject Interests
or under the terms of the Trust Indenture (as defined in the Purchase
Agreement).
"Market Point" has the meaning given such term in Section 2.5(a)(iv).
"Mcf" means one thousand cubic feet.
"MMBTU" means one million BTUs.
"month" means, unless the context otherwise requires, the period beginning
at 7:00 a.m. local time in Houston, Texas on the first day of a calendar month
and ending at 7:00 a.m. local time in Houston on the first day of the
immediately following calendar month.
"Non-Affiliate" means, with respect to any Person, any Person who is not an
Affiliate of such Person.
"Oil" means crude oil, condensate, and other liquid hydrocarbons separated
at the surface using prudent operations and conventional separators, but does
not include the products of Processing.
"Permitted Encumbrances" has the meaning given such term in the Purchase
Agreement.
"Person" means an individual, corporation, partnership, limited liability
company, association, joint stock company, pension fund, trust or trustee
thereof, estate or executor thereof, unincorporated organization or joint
venture, court or governmental unit or any agency or subdivision thereof, or any
other legally recognizable entity.
"PP Ad Valorem Taxes" means a percentage (as established below) of all ad
valorem taxes (excluding penalties and interest) on the Subject Interests, which
percentage shall be (1) zero to the extent such taxes are allocable to any
period prior to the Initial Time, and (2) a percentage equal to the quotient of
PP Hydrocarbons attributable to the subject assessment period divided by
Hydrocarbons attributable to the Subject Interests for the same assessment
period to the extent such taxes are allocable to periods during the Production
Payment Period.
"PP Gas Sales Agreement" has the meaning given it in the Purchase Agreement.
"PP Hydrocarbons" means the Dedication Percentage of the Certain Percentage
of all Hydrocarbons in and under and that may be produced from (or, to the
extent pooled or
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unitized, allocated to) any Subject Lands less and except any Hydrocarbons
deemed allocable to the Retained Interests under the first sentence of Section
2.2(c) hereof.
"PPNPV" shall have the meaning given such term in the Purchase Agreement.
"PP Severance Taxes" shall mean all severance taxes (excluding penalties and
interest) actually attributable to the PP Hydrocarbons, taking into account any
applicable credits, rebates and other factors.
"Processing" or "Processed" means to manufacture, fractionate or refine
Subject Hydrocarbons or otherwise to engage in any process designed to remove
elements (hydrocarbons or non-hydrocarbon) from Gas, but such terms do not mean
or include the prudent operation of conventional separators at the well.
References to Hydrocarbons which are "Processed" (including the reference
thereto contained in the definition of Gas) refer both to the natural gas
liquids and other products of Processing and to the residue gas and other
hydrocarbons remaining after such operations.
"Production Payment" means the term overriding royalty which is granted
herein to Grantee, and all other rights, titles, interests, estates, remedies,
powers and privileges appurtenant or incident to such term overriding royalty,
whether hereunder, under the Purchase Agreement, by operation of law, or
otherwise.
"Production Payment Period" means the period from and after the Initial Time
until the Termination Time.
"Purchase Agreement" means the Purchase Agreement of even date herewith
between Grantor and Grantee, as from time to time amended or supplemented.
"Ratification Agreement" shall have the meaning given such term in the
Purchase Agreement.
"Reimbursable Expenses" means all costs and expenses paid or incurred by or
on behalf of Grantee or its Affiliates which are in any way related to: (a) the
negotiation, acquisition, ownership (other than federal or state income taxes
and internal audit and overhead expenses), enforcement, or termination of the
Production Payment, this Conveyance, the Purchase Agreement, or any waivers or
amendments hereto or thereto, or (b) any litigation, contest, release or
discharge of any adverse claim or demand made or proceeding instituted by any
Person affecting in any manner whatsoever the Production Payment, any PP
Hydrocarbons or the proceeds thereof, this Conveyance or the Purchase Agreement,
or the enforcement or defense hereof or thereof, or the defense of Grantee's
exercise of its rights hereunder or thereunder. Included among the Reimbursable
Expenses are (i) all recording and filing fees, (ii) all reasonable fees and
expenses of internal and external counsel, engineers, accountants and other
consultants, experts and advisors for Grantee (excluding fees and expenses of
engineers prior to the occurrence of a Designated Event) and (iii) all
reasonable travel and other out of pocket expenses of Grantee and its
consultants, experts and advisors.
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Notwithstanding the foregoing, Reimbursable Expenses shall not include expenses
that (A) are associated with third party claims relating to title to the
Production Payment, to the extent such claims arise solely due to the actions or
inactions of Grantee, or (B) arise out of the failure by Grantee to perform its
obligations under, or that are otherwise based upon, any contractual arrangement
entered into directly by Grantee and relating to the handling, transportation,
sale or other disposition of PP Hydrocarbons beyond the Delivery Points, except
to the extent any of such expenses arise due to the action or inaction of
Grantor, TTC or any Affiliate of Grantor or TTC.
"Required Ratio" has the meaning given such term in the Purchase Agreement.
"Reserve Reports" means the reserve reports to be delivered by Grantor to
Grantee pursuant to Section 5.1 of the Purchase Agreement.
"Retained Interests" means the interests retained by Grantor in the Subject
Interests after conveyance of the Production Payment hereunder.
"Retained Interest Revenues" means, for each month, all revenues actually
received during such month by Grantor from the sale or other disposition of Oil
and Gas produced from or attributable to the Subject Interests, excluding the PP
Hydrocarbons.
"Separation Point" shall mean the point at which lease level separation of
Oil takes place.
"SINPV" shall have the meaning given it in the Purchase Agreement.
"Specified Percentage" means from the Initial Time, to but not including
7:00 a.m. on April 1, 1996, 75% and thereafter, 85%.
"Standby Gas Sales Agreement" has the meaning given such term in the
Purchase Agreement.
"Subject Hydrocarbons" means that portion of the Hydrocarbons in and under
and that may be produced from (or, to the extent pooled or unitized, allocated
to) Subject Lands which is attributable (after deducting all royalties,
overriding royalties, production payments and similar burdens, excluding only
the Production Payment, which both burden the Subject Interests at the Initial
Time and are reflected in the Net Revenue Interest figures set out on Exhibit A)
to the Subject Interests.
"Subject Interests" means:
(a) All of the properties described in Exhibit A attached hereto; and
(b) Without limitation of the foregoing, all other right, title and interest
(of whatever kind or character, whether legal or equitable and whether vested or
contingent)
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of Grantor in and to the oil, gas and other minerals in and under or that may be
produced from Subject Lands (including interests in oil, gas or mineral leases
to the extent the same cover such lands, overriding royalties, production
payments and net profits interests in such lands or such leases, and fee mineral
interests, fee royalty interests and other interests in such oil, gas and other
minerals) even though Grantor's interest in such oil, gas and other minerals may
be incorrectly described in, or omitted from, Exhibit A; and
(c) All rights, titles and interests of Grantor in and to, or otherwise
derived from, all presently existing and valid oil, gas or mineral unitization,
pooling, or communitization agreements, declarations or orders and in and to the
properties covered and the units created thereby (including all units formed
under orders, rules, regulations, or other official acts of any federal, state,
or other authority having jurisdiction, voluntary unitization agreements,
designations or declarations, and so-called "working interest units" created
under operating agreements or otherwise) relating to the properties described in
subsections (a) or (b) above in this definition.
"Subject Lands" means the lands and depths described in Exhibit A (where no
depth limit is specified, Subject Lands shall include all depths).
"Subject Wells" means all wells now located on the Subject Lands or
hereafter drilled on the Subject Lands, and any other wells now or hereafter
located on lands or leases pooled, communitized or unitized with the Subject
Interests, to the extent any such well is utilized for the production of PP
Hydrocarbons.
"Termination Time" has the meaning assigned to it in Section 2.8.
"Transportation Agreement" has the meaning given it in the Purchase
Agreement.
"TTC" means TransTexas Transmission Corporation.
Section 1.2. Rules of Construction. All references in this Conveyance to
articles, sections, subsections and other subdivisions refer to corresponding
articles, sections, subsections and other subdivisions of this Conveyance unless
expressly provided otherwise. Titles appearing at the beginning of any of such
subdivisions are for convenience only and shall not constitute part of such
subdivisions and shall be disregarded in construing the language contained in
such subdivisions. The words "this Conveyance", "this instrument", "herein",
"hereof", "hereunder" and words of similar import refer to this Conveyance as a
whole and not to any particular subdivision unless expressly so limited. Unless
the context otherwise requires: "including" and its grammatical variations mean
"including without limitation"; "or" is not exclusive; words in the singular
form shall be construed to include the plural and vice versa; words in any
gender include all other genders; references herein to any instrument or
agreement refer to such the same as it may be from time to time amended or
supplemented; and references herein to any Person include such Person's
successors and assigns. All references in this Conveyance to exhibits and
schedules refer to exhibits and
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schedules to this Conveyance unless expressly provided otherwise, and all such
exhibits and schedules are hereby incorporated herein by reference and made a
part hereof for all purposes.
ARTICLE II
Section 2.1. Conveyance. Grantor does hereby GRANT, BARGAIN, SELL, CONVEY,
ASSIGN, TRANSFER, SET OVER AND DELIVER unto Grantee, as a production payment, a
term overriding royalty interest carved out of and burdening the Subject
Interests equal to and measured by all PP Hydrocarbons in and under and that may
be produced from (or, to the extent pooled or unitized, allocated to) the
Subject Lands, with such production payment to terminate as of the Termination
Time.
TO HAVE AND TO HOLD the Production Payment unto Grantee, its successors and
assigns, until the Termination Time.
Section 2.2. Non-Cost-Bearing Interest.
(a) General. The Production Payment shall be free and clear of (i) all
Direct Taxes, other than PP Severance Taxes and PP Ad Valorem Taxes and (ii) all
costs and expenses (in this section called the "Gross Costs") associated with
acquiring, exploring, developing, maintaining, producing and operating the
Subject Interests or of delivering Hydrocarbons produced therefrom to the
Delivery Points. Without limitation of the generality of the foregoing, Grantee
shall under no circumstances be responsible (whether personally or otherwise)
for any Gross Costs (it being understood, however, that volumes are subject to
reclassification under Section 2.2(c)). All Direct Taxes (other than PP
Severance Taxes that are not reimbursed or rebated to Grantor, in the form of a
credit or otherwise, and PP Ad Valorem Taxes) shall be borne by the Retained
Interests and paid by Grantor promptly, on or before the date same become due
and owing.
(b) PP Taxes. Grantor undertakes to calculate and pay all PP Ad Valorem
Taxes on or before the date they become due and owing. Grantor shall, upon
request by Grantee, provide to Grantee or Grantee's purchaser or other designee
all information in the possession of Grantor which will facilitate the payment
by Grantee or its purchaser or other designee of PP Severance Taxes. All PP Ad
Valorem Taxes shall be reimbursed by Grantee to Grantor upon billing therefor
and receipt of evidence that all ad valorem taxes burdening the Subject
Interests have been paid in full.
(c) Excess Marginal Costs. To the extent that, for any particular month,
Marginal Costs exceed Retained Interest Revenues, thus resulting in Excess
Marginal Costs for such month, it shall be deemed that, during such month, a
volume, expressed in MMBTU's, of what would otherwise be properly classified as
PP Hydrocarbons was actually allocable to the Retained Interests and sold by
Grantor under the Standby Gas Sales Agreement. Such volume (herein
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called the "EMC Volume") for any particular month shall be calculated by
utilizing the formula
V = EMC/P
where V is the EMC Volume for such month, EMC is the Excess Marginal Cost for
such month and P is the average price (per MMBTU) that would have been payable
for Gas over such month under the Standby Gas Sales Agreement. No EMC Volume
shall reduce the Base Volume unless and until it is recovered by Grantee in
accordance with Section 2.3(a) below. To the extent that the EMC Volume for a
particular month exceeds the PP Hydrocarbons for such month, the amount of the
excess shall be carried over and added to the EMC Volume attributable to the
next succeeding month, and shall likewise be carried over to succeeding months
until such time as it is extinguished. Grantor further agrees to secure a
representative market price (determined as of the time in question and taking
into account the relevant marketing locations and payable in cash or other
readily available funds), for any Oil or Gas attributable to the Retained
Interests provided that the price per MMBTU to which Grantor would have been
entitled under the Standby Gas Sales Agreement if volumes were sold thereunder,
shall be deemed to satisfy the foregoing requirement.
(d) Reimbursable Expenses. Grantor will promptly (and in any event within
30 days after receiving any notice or statement for the same) pay all
Reimbursable Expenses which have been incurred and are unpaid and reimburse
Grantee for any Reimbursable Expenses which have been paid by Grantee.
(e) Interest. Each amount which is to be paid by Grantor pursuant to this
Section 2.2 which is instead paid by Grantee shall bear interest at the Agreed
Rate on each day from and including the date of such payment until but not
including the date repaid by Grantor, and such interest shall be payable on the
first day of each calendar month and shall itself bear interest at the same rate
if not timely paid.
Section 2.3. Increases in Dedication Percentage.
(a) EMC Volumes. The Dedication Percentage shall be increased to ninety
percent (90%), effective as of 7:00 a.m. Houston, Texas time on such first day
of the month following any month for which an EMC Volume was calculated, and the
Dedication Percentage shall remain at 90% for the entire period until 7:00 a.m.
Houston, Texas time on the first day of the month (in this section called the
"Adjustment Date") next succeeding the month when all EMC Volumes have been
delivered to Grantee at the Delivery Points. Such delivery of EMC Volumes shall
be deemed to be accomplished solely out of those PP Hydrocarbons delivered to
Grantee during any month (after taking into account any further deduction of EMC
Volumes for such month) which exceed the Specified Percentage of the Certain
Percentage of all Hydrocarbons produced from or allocated to the Subject Lands.
All EMC Volumes which are not so recovered by Grantee during any particular
month shall be carried over to the next and succeeding months until so recovered
in full. As of the Adjustment Date (provided the Dedication Percentage has not
otherwise been increased to 90% pursuant to Sections 2.3(b),
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3.5 or 5.1), the Dedication Percentage shall automatically reduce from 90% to
the Specified Percentage, effective as of 7:00 a.m. Houston, Texas time on the
first day of the next succeeding month. Thereafter the Dedication Percentage
may be again increased as provided in this Section 2.3 or in Sections 3.5 and
5.1.
(b) Reserve Reports. On or before the 60th day following any "Evaluation
Date", as defined in the Purchase Agreement, but effective as of 7:00 a.m.,
Houston, Texas time on such Evaluation Date, the Dedication Percentage shall be
increased to ninety percent if the Reserve Report prepared as of such Evaluation
Date reflects that the ratio of SINPV to PPNPV, as calculated in accordance with
the provisions of Section 5.2 of the Purchase Agreement, is less than the
Required Ratio, all as more particularly described in Section 5.2 of the
Purchase Agreement. At such time, if any, as a subsequent Reserve Report
reflects that such ratio has become equal to or greater than the Required Ratio,
then (provided the Dedication Percentage has not otherwise been increased to 90%
pursuant to Sections 2.3(a), 3.5 or 5.1) the Dedication Percentage shall
automatically reduce from 90% to the Specified Percentage. Thereafter the
Dedication Percentage may be again increased as provided in this Section 2.3 or
in Sections 3.5 and 5.1.
Section 2.4. Increases in Base Volume.
(a) Volume Shortfalls. If, in any particular month, the MMBTU's of PP
Hydrocarbons actually delivered to Grantee at the Delivery Points during such
month do not equal or exceed the MMBTU's scheduled for such month in Schedule 2
hereto (whether due to reduction by EMC Volumes or for any other reason), then
the Base Volume shall be increased by the product of the following formula:
I = (.25)(SV-DV)
where I is the amount of such increase to the Base Volume, SV is the MMBTU's
scheduled for such month in Schedule 2 hereto, and DV is the MMBTU's of PP
Hydrocarbons actually delivered to Grantee at the Delivery Points during such
month.
(b) Unpaid Reimbursable Expenses. If any Reimbursable Expenses are not
timely paid by Grantor as required under Section 2.2(d), then the Base Volume
shall, provided Grantee gives notice of such increase to Grantor, be increased
by the product of the following formula:
I = RE/P
where I is the amount of such increase to the Base Volume, RE is the amount of
such unreimbursed Reimbursable Expenses, and P is the average price (per MMBTU)
that would have been payable for Gas under the Standby Gas Sales Agreement over
the month in which such notice is given. Such increase shall be deemed not to
have occurred, however, if Grantor thereafter pays such Reimbursable Expenses to
Grantee together with all interest which has accrued thereon under Section
2.2(e). The provisions of this Section 2.4 shall not be deemed to reduce
Grantor's obligations under Section 2.2(d).
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(c) Redelivery Shortfalls. As to each MMBTU for which Grantee does not
timely receive payment as a result of the operation of Section 5(b) of the PP
Gas Sales Agreement, the Base Volume, to the extent previously reduced when such
MMBTU was delivered to the applicable Delivery Point, shall again be increased
by such MMBTU until such time as Grantee receives full payment therefor, at
which time the Base Volume shall again be reduced by such MMBTU.
Section 2.5. Marketing of PP Hydrocarbons by Grantee to Third Parties.
(a) Cooperation and Assistance. Grantee and Grantor will each be taking
quantities of Hydrocarbons from the Subject Interests at the Delivery Points,
each will be reselling such Hydrocarbons at or downstream of the Delivery
Points, and Grantor and Grantee accordingly recognize that coordination between
Grantee and Grantor will be required with respect thereto. Grantor agrees to
cooperate with, and assist Grantee in connection with Grantee's receipt and
subsequent sale of PP Hydrocarbons. Without limitation of the foregoing:
(i) Not less than 7 Business Days prior to the first day of each month,
Grantor will notify Grantee or its authorized representatives, in writing, of
the total amounts and average daily amounts of Gas which Grantor expects to be
produced from the Subject Interests during such month and the portion thereof
which Grantor projects will be PP Hydrocarbons.
(ii) To the extent reasonably practicable, Grantor shall thereafter
immediately notify Grantee in writing of any change in the rate of delivery of
PP Hydrocarbons from the Subject Interests that has come to the attention of
Grantor.
(iii) To the extent that Grantee is selling the PP Hydrocarbons to a
purchaser who takes possession thereof at the Delivery Points, Grantor shall on
Grantee's behalf deliver such PP Hydrocarbons to such purchaser at the Delivery
Points in a condition satisfactory to meet or exceed all pipeline and gathering
system specifications and qualifications at such Delivery Point and otherwise to
meet or exceed all specifications from time to time in effect under the PP Gas
Sales Agreement and the Transportation Agreement. Such delivery, whether
performed by Grantor or by any other Person, shall be performed or caused to be
performed by Grantor at no cost to Grantee.
(iv) To the extent that Grantee is not selling the PP Hydrocarbons to a
purchaser who takes possession thereof at the Delivery Points, Grantor shall
deliver, or cause to be delivered, such PP Hydrocarbons to the Market Points
designated by Grantee in a condition satisfactory to meet or exceed all pipeline
specifications and qualifications at such Market Points. All such deliveries to
the Market Points (herein called the "Delivery Services"), whether performed by
Grantor or by any other Person, shall be performed or caused to be performed by
Grantor at the cost to Grantee of $.17 per mcf so delivered. Subject to the
prior rights of certain parties as specified in Section 4.1(s) of the Purchase
Agreement, the Delivery Services shall be provided to Grantee on a first
priority basis, to the maximum extent permitted by law, meaning, for example,
that (A)
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pipeline, separator, and compressor capacity, if owned or controlled by Grantor
or any Affiliate of Grantor, shall be afforded to PP Hydrocarbons prior to
affording any such capacity to Grantor, any Affiliates of Grantor or any other
Person, to the maximum extent permitted by law, and (B) pipeline, separator, and
compressor capacity owned or controlled by any Person other than Grantor or any
Affiliate of Grantor shall be afforded to PP Hydrocarbons prior to affording any
such capacity to Grantor or any Affiliate of Grantor, and Grantor hereby
expressly subordinates any capacity rights it may now or hereafter have to the
PP Hydrocarbons. Subject to the prior rights of certain parties as specified in
Section 4.1(s) of the Purchase Agreement, Grantor shall, to the maximum extent
permitted by law, take whatever action is appropriate to cause any Affiliate or
any other Person to afford PP Hydrocarbons the priority capacity described in
this subsection (iv), including assigning to Grantee, upon Grantee's request,
any capacity rights Grantor may have under contracts or other arrangements with
an Affiliate or any other Person as may be necessary or useful to facilitate
delivery of PP Hydrocarbons to each Market Point in a condition satisfactory to
meet or exceed pipeline specifications or qualifications at such Market Point.
As used in this subsection (iv), "Market Points" means (a) the Agua Dulce hub at
Agua Dulce, Texas, which is presently maintained by Natural Gas Pipeline Company
of America and (b) any point which is not substantially further than such hub
from the Subject Well in question and which can be reached through gathering
systems or pipelines which are, at the time in question, owned or operated by
Grantor or any of its Affiliates.
(v) Grantor will take all action legally available to it to cause TTC to
perform all of its obligations under the Transportation Agreement, and Grantor
will make available to Grantee or Grantee's purchaser of PP Hydrocarbons
(whether under the PP Gas Sales Agreement or otherwise) any of Grantor's
capacity in TTC's system that Grantor is legally and contractually authorized to
make available, in order that TTC will have capacity in its system to transport
PP Hydrocarbons under the Transportation Agreement.
(vi) Grantor and Grantee will cooperate to ensure that nominations to
transporters, processors, and purchasers are timely made and that such
nominations reflect expected deliveries from the various Subject Interests, and
Grantee and its authorized representatives shall be entitled to rely upon
Grantor's projections for the purpose of scheduling deliveries with
transporters, processors, and purchasers.
Should Grantee so request, Grantor will furnish the information provided for
above and will make nominations and schedule deliveries in conjunction with
Grantee (and make any revisions to such nominations and reschedule deliveries in
conjunction with Grantee) for PP Hydrocarbons (in the form and at the times
required by such Persons), directly to the Persons purchasing or transporting PP
Hydrocarbons for Grantee to the Delivery Point or the Market Point, as the case
may be.
(b) Responsibility. If any charges, costs, penalties or expenses are
incurred or payable to any Person solely as a result of Grantee's failure to
adjust nominations or scheduled
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deliveries in accordance with (i) a notification from Grantor of any increase or
decrease in quantities to be delivered from any Subject Well, or (ii) a
notification from Grantee's direct purchaser of any increase or decrease in
quantities to be delivered at Delivery Points, where it was reasonably possible
for Grantee to make such adjustment without penalty, then, as between the
parties hereto, Grantee shall be liable for and shall hold Grantor harmless from
any such charges, costs, penalties or expenses. If any such charges, costs,
penalties or expenses (the "Imbalance Charges") are incurred or payable to any
Person other than in the circumstances provided for in the preceding sentence
(including charges, costs, penalties or expenses caused by failure to deliver
projected quantities or failure to provide notice of changes in deliveries, or
charges, costs, penalties or expenses incurred when Grantor is making
nominations, or revisions to nominations, on behalf of Grantee), then, as
between the parties hereto, Grantor shall be liable for and shall indemnify and
hold Grantee harmless for such Imbalance Charges. Each of Grantor and Grantee
shall promptly notify the other of any notice received by it from any third
party which indicates that an imbalance in deliveries exists or is occurring
that may give rise to any such Imbalance Charges.
Section 2.6. Measurement; Hydrocarbons Lost or Used. As used in this
Conveyance, the term Hydrocarbons shall not include Gas produced from any
particular Subject Well and unavoidably lost in the production thereof or in the
compression or transportation thereof prior to the Delivery Point for such
Subject Well, or which are used by Grantor or the operator of any Subject Well
for the production of Subject Hydrocarbons or for the compression or
transportation of Subject Hydrocarbons prior to the Delivery Point for such
Subject Well, in each case only to the extent the same are lost or used in the
course of operations which are being conducted prudently and in a good and
workmanlike manner. Grantor hereby represents, warrants and covenants to
Grantee as follows: (a) the Delivery Point applicable to each Subject Well is
and will continue to be located at a point prior to any point where Gas from
such Subject Well is commingled with Gas or any other Hydrocarbons from any
other well or wells, (b) Grantor currently meters, and will continue to meter,
Gas from each Subject Well separately (i.e., on a well-by-well basis), (c) the
volumes (measured in Mcf's) of PP Hydrocarbons constituting Gas produced from or
out of any particular Subject Well are measured and determined, and will
continue to be measured and determined at the Delivery Point applicable to such
Subject Well, and (d) the Separation Point for each Subject Well is and will
continue to be upstream of the Delivery Point for such Subject Well. Grantor
covenants and agrees to determine the number of MMBTU's in each Mcf of Gas
included in PP Hydrocarbons at the Delivery Points.
Section 2.7. No Proportionate Reduction. It is understood and agreed that,
though the Production Payment is conveyed by Grantor to Grantee out of the
Subject Interests, the Production Payment shall be equal to the full Dedication
Percentage in effect from time to time of the Certain Percentage of the
Hydrocarbons produced from (or, to the extent pooled or unitized, allocated to)
the various Subject Lands and shall not be reduced for any reason. Among other
things, the Production Payment and the PP Hydrocarbons shall not be reduced due
to (a) the undivided interest owned by Grantor in a lease constituting any
Subject Interests being less than the entire interest in such lease, or (b) the
interest in Oil, Gas or other minerals underlying any portion of the Subject
Lands which is covered by a particular lease (or group of
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leases) being less than the entire interest in the oil, gas and other minerals
underlying such portion of the Subject Lands, or (c) the share of production
from (or, to the extent pooled or unitized, allocated to) any portion of Subject
Lands which is attributable to the Subject Interests being less than the Certain
Percentage set forth on Exhibit A for such portion of the Subject Lands, or (d)
Grantor's failure to own, or otherwise have good title to, all or any part of
the Subject Interests as described on Exhibit A.
Section 2.8. Termination. The Production Payment shall remain in full
force and effect until 6:59 a.m. local time in Houston, Texas, on the day
following the day on which the aggregate volume of all PP Hydrocarbons, measured
in MMBTU's, delivered to Grantee hereunder at the Delivery Points equals the
Base Volume (the "Termination Time"). At the Termination Time, all rights,
titles and interests herein conveyed in and to any Hydrocarbons thereafter
produced shall automatically terminate and vest in Grantor, and, upon request by
Grantor, Grantee shall execute and deliver such instrument or instruments (in
proper recordable form, if applicable) as may be necessary to evidence such
termination of the Production Payment; provided that, notwithstanding the
foregoing or anything herein to the contrary, any and all obligations which any
Person may have to indemnify or reimburse Grantee for any reason, or to make
payments to Grantee on account of PP Hydrocarbons produced before the
Termination Time, shall survive any termination of the Production Payment. No
pipeline company or other Person purchasing, taking, or Processing PP
Hydrocarbons shall ever be required to take notice of, or keep informed
concerning, the termination of the Production Payment, until actual receipt of
written notice from Grantee confirming that such termination has occurred, which
Grantee agrees to deliver with reasonable promptness upon request of Grantor.
ARTICLE III
Section 3.1. Operations. Subject to the provisions of Section 4.5 of the
Purchase Agreement, as between Grantee and Grantor, Grantor shall have exclusive
charge, management and control of all operations to be conducted on the Subject
Interests. Grantor shall take or cause to be taken any and all actions which a
prudent operator would deem necessary or advisable in the operation, maintenance
and management thereof and in the production, handling, treating and
transportation of Hydrocarbons produced therefrom, and in so acting Grantor
shall not take into account the diminution in Grantor's share of production from
the Subject Interests caused by the granting of the Production Payment and
Grantor shall make its economic decisions as if Grantor owned the full interest
in the Subject Interests undiminished by the Production Payment. Nothing
contained in this Conveyance shall be construed to impose upon Grantor any
express or implied obligation to conduct exploratory activities or to conduct
development drilling of new wells or deepening of existing wells on the Subject
Interests. Without limitation of the foregoing, Grantor shall:
(a) operate and maintain the Subject Interests in conformity with all
applicable laws and all rules, regulations and orders of all duly constituted
authorities having jurisdiction
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(including all Environmental Laws) and in conformity with all leases and other
contracts and agreements forming a part of or relating to the Subject Interests;
(b) promptly pay all costs and expenses (including all Direct Taxes, other
than PP Severance Taxes, and all costs, expenses and liabilities for labor,
materials and equipment incurred in connection with the Subject Interests and
all obligations to the holders of royalty interests and other interests
affecting the Subject Interests) incurred in exploring, developing, operating
and maintaining the Subject Interests (or in producing, handling, treating and
transporting Hydrocarbons produced therefrom) other than transporting PP
Hydrocarbons in conjunction with the provision of Delivery Services under
Section 2.5;
(c) maintain in full force and effect, free of any right of cancellation,
forfeiture or termination, the Subject Interests, as well as all permits,
licenses, easements, servitudes and other rights necessary or useful in
connection with the operation or management of the Subject Interests or
providing the Delivery Services; and
(d) maintain in good working order and, to the extent necessary, repair and
replace, the separation, metering, compression, delivery and related facilities
that are now or hereafter located on each Separation Point or Delivery Point.
Further without limiting the foregoing, Grantor shall not:
(a) propose or otherwise undertake any action or inaction that is reasonably
calculated to result in any significant Marginal Costs, where such action or
inaction is reasonably calculated to secure or enhance production of Oil as
opposed to Gas, or is otherwise not reasonably calculated to benefit Grantee
along with Grantor; or
(b) move any one or more Delivery Points further from the wellhead of any
Subject Well than is reasonably necessary.
As to any of the Subject Interests of which Grantor is now, or hereafter
becomes, the operator, Grantor will not resign, or otherwise voluntarily
relinquish, its position as operator, except in connection with a transaction
authorized under subsection 6.1 or except as provided otherwise in Section 4.5
of the Purchase Agreement. As to any matters which Grantor does not control
because Grantor is not at that time the operator of a part of the Subject
Interests, Grantor shall exercise its full legal rights to cause the operator of
such part of the Subject Interests to take any and all actions as are required
above except where the operator is designated by Grantee pursuant to Section 4.5
of the Purchase Agreement.
Section 3.2. Shut-in or Abandonment of Subject Wells; Abandonment of
Subject Interests.
(a) Prohibitions. Until the termination of the Production Payment, Grantor
shall not:
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(i) abandon (or propose or consent to the abandonment of) any Subject
Well, or surrender, abandon or release (or propose or consent to the surrender,
abandonment or release of) any Subject Interest; provided, however, that without
the consent of Grantee, Grantor shall have the right to abandon a Subject Well
if and when such Subject Well ceases to be a Commercial Well and it would not be
economically feasible (without regard to the burden of the Production Payment)
to restore the productivity of Hydrocarbons from such well by reworking,
reconditioning, plugging back, or otherwise conducting operations with respect
to such well (not to include redrilling or deepening of the well).
(ii) voluntarily shut-in or restrict the flow from a Subject Well (or
propose or consent to such a shut-in or restriction); provided that (1) a shut-
in of, or restriction of flow from, a well shall not be deemed to be voluntarily
made if it is caused by or results from governmental requirements, operation and
maintenance requirements, or sound reservoir management requirements, or from an
act or event of force majeure which act or event is not reasonably within the
control of and not caused by the fault or negligence of Grantor and which by the
exercise of due diligence Grantor is unable to prevent or overcome (provided
that changes in market conditions, losses of markets, and changes in tax laws
shall not be considered events of force majeure for purposes of this
subsection), and (2) a Subject Well which has ceased to be a Commercial Well and
can be abandoned under subsection (i) above may be shut-in pending such
abandonment; provided that, prior to abandoning any Subject Well, Grantor shall
first -- to the extent then permissible pursuant to the terms of the Trust
Indenture (as defined in the Purchase Agreement) and any applicable lease --
offer to Grantee the right, exercisable in the sole and absolute discretion of
Grantee, to take assignment from Grantor (upon payment by Grantee to Grantor of
the reasonable salvage value attributable to Grantor's interest in such Subject
Well less the estimated cost to plug and abandon such Subject Well) of all of
Grantor's right, title and interest in and to said Subject Well, together with
all of Grantor's right, title and interest in and to (1) all Oil or Gas to be
produced from the wellbore of such Subject Well, and (2) the Retained Interests
related to the Subject Well.
(b) Reworking. If, prior to the termination of the Production Payment, a
Subject Well ceases to be a Commercial Well and it would be economically
feasible (without regard to the burden of the Production Payment) to restore the
productivity of Hydrocarbons from such well by reworking, reconditioning,
plugging back, or otherwise conducting operations relative to such well (not to
include redrilling or deepening of the well), Grantor shall take such action to
restore the productivity of Hydrocarbons from such well.
(c) Definitions of "Commercial Well" and "economically feasible". For all
purposes of this Conveyance:
(i) A well shall be deemed to be a "Commercial Well" unless and until there
arises a condition, which reasonably appears to be permanent, such that the
aggregate value of the Hydrocarbons which are being produced or which it
reasonably appears will be produced from such well -- net of Direct Taxes and of
royalties, overriding royalties and
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similar burdens reflected in the Net Revenue Interest figures set out on Exhibit
A, but without regard to the burden of the Production Payment -- no longer
exceeds the costs and expenses directly related to the operation and maintenance
of such well.
(ii) The restoration of the productivity of a well shall be deemed to be
"economically feasible" whenever the aggregate value of the Hydrocarbons which
it reasonably appears will be produced from such well -- net of Direct Taxes and
of royalties, overriding royalties and similar burdens reflected in the Net
Revenue Interest figures set out on Exhibit A, but without regard to the burden
of the Production Payment -- exceeds the costs and expenses directly related to
such restoration and the operation and maintenance of such well.
The direct costs and expenses referred to in subsections (i) and (ii) above
shall in no event include items which are included in overhead charges under the
applicable operating agreement (or if there is no such operating agreement,
under the 1984 COPAS Accounting Procedure with the election "shall" selected in
Article III).
Section 3.3. Adverse Claims. Grantor will, immediately after discovery of
such claim or demand, cause written notice to be given to Grantee of every
adverse claim or demand made by any Person affecting the Subject Interests or
the Hydrocarbons produced therefrom in any material manner whatsoever. Grantor
will, immediately after discovery of such proceeding, cause written notice to be
given to Grantee of any proceedings instituted or threatened with respect to the
Subject Interests or the Hydrocarbons produced therefrom. Grantor will cause all
necessary and proper steps to be diligently taken to protect and defend the
Subject Interests and such Hydrocarbons against any such proceedings, or adverse
claim or demand, regardless of materiality.
Section 3.4. Insurance and Replacement. Grantor shall maintain or cause to
be maintained, at its sole cost and expense and with financially sound and
reputable insurers reasonably satisfactory to Grantee, insurance covering the
Subject Interests and all wells, equipment and facilities located thereon,
against such liabilities, casualties, risks and contingencies and in such types,
as is customary in the case of companies engaged in similar operations and
having similar property. Such insurance shall in any event include the types,
conditions and coverages described in Schedule 1, with limits of coverage no
less than those set out in such Schedule. All liability insurance shall name
Grantee as an additional insured. Grantor shall furnish annual certificates of
such insurance to Grantee not less than 30 days prior to the expiration or
termination of such policy of insurance. In the event of any damage to or loss
of any well, equipment or facility on the Subject Interests, Grantor (at no cost
to Grantee, and without regard to whether insurance proceeds are available to
Grantor) shall promptly redrill, rebuild, reconstruct, repair, restore or
replace such damaged or lost property.
Section 3.5. Government Regulation. The obligations of Grantor hereunder
shall be subject to all applicable federal, state and local laws, rules,
regulations and orders (including those of any applicable agency, board,
official or commission having jurisdiction). Grantor shall timely make all
filings with all applicable agencies, boards, officials and commissions
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having jurisdiction with respect to the Subject Interests or the operation
thereof prior to or at the time any such filing becomes due. Should any
statute, or any rules or regulations of any governmental body, or any provisions
in private contracts (including those limiting the size of overriding royalties
and similar interests but excluding any contracts directly entered into by
Grantee) become applicable to the Subject Interests so as to limit the portion
of the Hydrocarbons produced from the lands covered by a particular Subject
Interest which may be attributable to the Production Payment, the Production
Payment shall, as to such Subject Interest and for the period of time during
which such statute, rule, regulation or contractual provision is applicable, be
limited to the maximum amount of production from such lands which can be
attributed to the Production Payment under such statute, rule, regulation or
contractual provision; provided, however, should such limitation come into
effect as to one or more Subject Interests, then (without prejudice to other
rights Grantee may have) the Dedication Percentage applicable to that portion of
production from (or, to the extent pooled or unitized, allocated to) Subject
Lands covered by other Subject Interests which would be attributable to the
Production Payment in the absence of the provisions of this subsection shall be
increased, up to a maximum of 90%, so as to cause, to the maximum extent
possible, Grantee to receive, by virtue of ownership of the Production Payment,
the same amount of Hydrocarbons which Grantee would have received had the
aforementioned statute, rule, regulation or contractual provision not reduced
the share of production from the aforementioned Subject Interest with respect to
which the Production Payment could be paid.
Section 3.6. Pooling and Unitization. Certain of the Subject Interests may
have been pooled or unitized for the production of Hydrocarbons prior to the
date hereof, and may, after the date hereof, be pooled or unitized (a) pursuant
to any law, rule, regulation or order of any governmental body or official, or
(b) voluntarily by Grantor with the joinder of Grantee. To the extent certain
Subject Interests are so pooled or unitized, such Subject Interests are and
shall be subject to the terms and provisions of such pooling and unitization
agreements or orders, and, as to production of substances covered by such
agreements or orders, the production from Subject Lands (or any portion thereof)
shall be the production from such units which is allocated to Subject Lands (or
such portion thereof) under and by virtue of the applicable pooling and
unitization agreements or orders.
Section 3.7. Non-consent Operations. Grantor shall not elect to be a non-
participating party with respect to any plugging back, reworking, sidetracking,
completion, or other operation on any Subject Interest (or lands pooled
therewith), or (except in instances where abandonment of such well would
expressly be permitted hereunder) elect to be an abandoning party with respect
to a well located on any Subject Interest (or lands pooled therewith), if the
consequence of such election is that Grantor's interest in such Subject Interest
or any part thereof is temporarily (e.g., during a recoupment period) or
permanently forfeited to the parties participating in such operations or
electing not to abandon such well. Upon any such election by Grantor which is
approved by Grantee, such election shall also be binding on the Production
Payment as to the interest so temporarily or permanently forfeited. Any
additional interests acquired by Grantor by virtue of electing to pay for or
acquire the interest of a non-consenting or abandoning party in a situation of
the type described in the preceding sentence shall not become a part of Subject
Interests and subject to the Production Payment.
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Section 3.8. Future Gas Imbalances.
(a) Wellhead Imbalances.
(i) No Undertakes. Grantor will not take (for itself and for Grantee)
a lesser share of Gas produced from a Subject Well than the share of Gas which
Grantor and Grantee are collectively entitled to take by virtue of ownership of
the Subject Interests (without regard to any rights to take a lesser share under
any production balancing agreement or other arrangement or any rights under
common law with respect to production balancing), except as a result of Grantor
and Grantee, or any predecessor in title to such Subject Interest, having
previously taken from such Subject Well or other wells located on Subject
Interests more Gas than such parties would be entitled to receive by virtue of
their ownership ("previous overproduction"), but only to the extent that the
amount of such previous overproduction occurred after the Initial Time or
occurred prior to the Initial Time and is disclosed in the Purchase Agreement.
Notwithstanding the foregoing, Grantor may take for itself (but not for Grantee)
a lesser share (such lesser share, averaged over any particular month, not to
exceed five percent of its net revenue interest, after giving effect to the
Production Payment and any other burdens, in any particular Subject Well) of Gas
than the share of Gas Grantor is otherwise entitled to take by virtue of its
ownership in the Retained Interests, to the extent necessary to allow any
royalty owners under any oil and gas lease included in the Subject Interests --
which royalty owners have taken or may hereafter take all or any part of their
royalty share of Gas in kind -- to recoup any underproduced position that may
now exist or hereafter arise as between Grantor and any such royalty owners.
Any such recoupment of an underproduced position of any such royalty owners
shall be satisfied solely out of Grantor's share of Gas, and shall in no way
affect Grantee's share of Gas included in PP Hydrocarbons.
(ii) No Overtakes. Grantor will not take (for itself or for Grantee) a
greater share of the Gas produced from a Subject Well than the share of Gas
which Grantor and Grantee are collectively entitled to take by virtue of
ownership of the Subject Interests (without regard to any rights to take a
greater share under any production balancing agreement or other arrangement or
any rights under common law with respect to production balancing), except (i) as
a result of Grantor and Grantee, or any predecessor in title to such Subject
Interest having previously taken from such Subject Well or other wells located
on Subject Interests less Gas than such parties would be entitled to receive by
virtue of their ownership ("previous underproduction"), but only to the extent
that the amount of such previous underproduction occurred after the Initial Time
or occurred prior to the Initial Time and is disclosed in the Purchase
Agreement, or (ii) as a result of other parties contemporaneously taking a
lesser share from such Subject Well than they would be entitled (by virtue of
their ownership of their interests in such well) to take in circumstances where
Grantor cannot elect to take only the share attributable to Grantor and Grantee
notwithstanding such other parties taking a lesser share. Notwithstanding the
foregoing, Grantor may take for itself (but not for Grantee) a greater share
(such greater share, averaged over any particular month, not to exceed five
percent of its net revenue interest, after giving effect to the Production
Payment and any other burdens, in any particular Subject Well) of Gas than the
share of Gas Grantor is otherwise entitled to take by virtue of its ownership in
the Retained Interests to the extent necessary to
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allow Grantor to recoup any underproduced position that may now exist or
hereafter arise between Grantor and any royalty owners under any oil and gas
lease included in the Subject Interest, which royalty owners have taken or may
hereafter take all or any part of their royalty share of Gas in kind. Any such
recoupment of an underproduced position by Grantor shall be satisfied solely out
of the overproduced royalty owners' share of Gas, and shall in no way affect
Grantee's share of Gas included in PP Hydrocarbons.
(iii) Effects of Balancing. If Grantor improperly takes more or less
Hydrocarbons from a Subject Well than Grantor and Grantee collectively are
otherwise entitled to by virtue of the ownership of Subject Interests, such
action will not be binding on Grantee unless Grantee ratifies such action in
writing.
Section 3.9. Renewals and Extensions and New Leases. This Conveyance and
the Production Payment shall apply to all renewals, extensions and other similar
arrangements of the leases (or other determinable interests) which are included
in the Subject Interests, whether such renewals, extensions or arrangements have
heretofore been obtained by Grantor or are hereafter obtained by or for Grantor
or any Affiliate thereof and whether or not the same are described in Exhibit A.
For the purposes of the preceding sentence, a new lease which covers the same
interest (or any part thereof) which was covered by a prior lease, and which is
acquired within one year after the expiration, termination, or release of such
prior lease, shall be treated as a renewal or extension of such prior lease.
ARTICLE IV
SECTION 4.1. NO LIABILITY OF GRANTEE; INDEMNITY. EXCEPT AS OTHERWISE
SPECIFICALLY PROVIDED IN THIS CONVEYANCE WITH RESPECT TO PP SEVERANCE TAXES AND
PP AD VALOREM TAXES, GRANTEE SHALL NEVER BE RESPONSIBLE FOR ANY PART OF THE
COSTS, EXPENSES OR LIABILITIES INCURRED IN CONNECTION WITH THE EXPLORING,
DEVELOPING, OPERATING, OWNING OR MAINTAINING OF THE SUBJECT INTERESTS OR SUBJECT
LANDS, THE PHYSICAL CONDITION OF THE SUBJECT INTERESTS OR THE SUBJECT LANDS, OR
THE HANDLING, TREATING OR TRANSPORTING PRIOR TO THE DELIVERY POINTS OF
HYDROCARBONS PRODUCED FROM THE SUBJECT LANDS (INCLUDING ANY COSTS, EXPENSES,
LOSSES OR LIABILITIES RELATED TO VIOLATION OF AN ENVIRONMENTAL LAW OR OTHERWISE
RELATED TO DAMAGE TO OR REMEDIATION OF THE ENVIRONMENT, WHETHER THE SAME ARISE
OUT OF GRANTEE'S OWNERSHIP OF AN INTEREST IN PROPERTY OR OUT OF THE ACTIONS OF
GRANTOR OR GRANTEE OR OF THIRD PARTIES OR ARISE OTHERWISE), OR THE FAILURE BY
GRANTOR TO HAVE GOOD AND DEFENSIBLE TITLE TO THE SUBJECT INTERESTS FREE AND
CLEAR OF ALL BURDENS, ENCUMBRANCES, LIENS AND TITLE DEFECTS OTHER THAN PERMITTED
ENCUMBRANCES (INCLUDING ANY COSTS, EXPENSES, LOSSES OR LIABILITIES SUFFERED BY
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GRANTEE AS A RESULT OF ANY CLAIM THAT GRANTEE MUST PAY OVER TO ANY PERSON ANY
PART OF THE PROCEEDS OF PP HYDROCARBONS AT ANY TIME PREVIOUSLY RECEIVED OR
THEREAFTER TO BE RECEIVED BY GRANTEE), AND GRANTOR AGREES TO INDEMNIFY AND HOLD
GRANTEE HARMLESS FROM AND AGAINST ALL COSTS, EXPENSES, LOSSES AND LIABILITIES
INCURRED BY GRANTEE IN CONNECTION WITH ANY OF THE FOREGOING OR IN CONNECTION
WITH THE PRODUCTION PAYMENT, THE PURCHASE AGREEMENT, THIS CONVEYANCE, OR THE
TRANSACTIONS AND EVENTS (INCLUDING THE ENFORCEMENT OR DEFENSE THEREOF OR HEREOF)
AT ANY TIME ASSOCIATED WITH OR CONTEMPLATED IN ANY OF THE FOREGOING. SUCH
INDEMNITY SHALL ALSO COVER ALL COSTS AND EXPENSES OF GRANTEE, INCLUDING
REASONABLE LEGAL FEES AND EXPENSES, WHICH ARE INCURRED INCIDENT TO THE MATTERS
INDEMNIFIED AGAINST. THE FOREGOING INDEMNIFICATION SHALL EXTEND TO GRANTEE AND
ITS SUCCESSORS AND ASSIGNS, ALL THEIR RESPECTIVE AFFILIATES, AND ALL THE
RESPECTIVE OFFICERS, DIRECTORS, AGENTS, BENEFICIARIES, TRUSTEES, ATTORNEYS AND
EMPLOYEES OF THEMSELVES AND THEIR AFFILIATES. THE FOREGOING INDEMNITY SHALL
APPLY WHETHER OR NOT ARISING OUT OF THE SOLE, JOINT OR CONCURRENT NEGLIGENCE,
FAULT OR STRICT LIABILITY OF GRANTEE OR ANY OTHER PERSON OR ENTITY INDEMNIFIED
HEREUNDER AND SHALL APPLY, WITHOUT LIMITATION, TO ANY LIABILITY IMPOSED UPON ANY
PERSON INDEMNIFIED HEREUNDER AS A RESULT OF ANY STATUTE, RULE, REGULATION,
THEORY OF STRICT LIABILITY OR OTHERWISE. THE FOREGOING INDEMNITY SHALL NOT,
HOWEVER, APPLY TO ANY COSTS, EXPENSES, LOSSES OR LIABILITIES WHICH ARE
PROXIMATELY CAUSED SOLELY BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF
GRANTEE. IN ADDITION, THE INDEMNIFICATION AND HOLD HARMLESS PROVISIONS
CONTAINED IN THIS SECTION 4.1 AND ELSEWHERE IN THIS CONVEYANCE SHALL NOT APPLY
TO ANY COSTS, EXPENSES, LOSSES OR LIABILITIES THAT ARISE OUT OF THE FAILURE BY
GRANTEE (OR ANY PERSON OTHER THAN GRANTOR OR ANY AFFILIATE OF GRANTOR) TO
PERFORM ITS OBLIGATIONS UNDER, OR THAT ARE OTHERWISE BASED UPON, ANY CONTRACTUAL
ARRANGEMENT ENTERED INTO DIRECTLY BY GRANTEE AND RELATING TO THE HANDLING,
TRANSPORTATION, SALE OR OTHER DISPOSITION OF PP HYDROCARBONS AT OR BEYOND THE
DELIVERY POINTS, EXCEPT TO THE EXTENT CAUSED, BY THE ACTION OR INACTION OF
GRANTOR, TTC OR ANY AFFILIATE OF GRANTOR OR TTC. THE FOREGOING INDEMNITY SHALL
SURVIVE THE TERMINATION OF THE PRODUCTION PAYMENT AND OF THIS CONVEYANCE.
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ARTICLE V
Section 5.1. Remedies. As used herein, "Designated Event" means any breach
of this Conveyance or of the Purchase Agreement by Grantor (whether of a
covenant, a representation or warranty, or otherwise) which, in the case of an
obligation to pay money or to perform (or cause to be performed) the Delivery
Services, is not fully cured within 5 days after such breach occurs or which, in
the case of any other breach, is not fully cured and remedied within 30 days
after such breach occurs; provided that the intentional refusal of Grantor to
perform any material Delivery Service shall be a Designated Event with no
opportunity to cure. If a Designated Event occurs then Grantee may, either on
its own behalf or through any agent or representative and in addition to all
other rights and remedies available to it at law and in equity (including the
right to sue for damages, which right of Grantee is specifically acknowledged),
exercise any one or more of the following remedies during the continuance of a
Designated Event (it being agreed that the exercising of any one remedy shall
not preclude the exercising of any other remedy):
(a) If Grantor has failed to perform any act or to take any action which
Grantor is required hereunder to perform or take or to pay any money which
Grantor is required hereunder to pay, then, upon written notice to Grantor,
Grantee may, but shall not be obligated to, perform or cause to be performed
such act or take such action or pay such money, all in Grantor's name or in
Grantee's own name. Any expenses so incurred by Grantee and any money so paid
by Grantee shall be a demand obligation owing by Grantor to Grantee (which
obligation Grantor hereby expressly promises to pay) and Grantee, upon making
such payment, shall be subrogated to all of the rights of the Person receiving
such payment. Each amount due and owing by Grantor to Grantee pursuant to this
subsection shall bear interest each day, from the date of such expenditure or
payment until paid, at the Agreed Rate, which interest shall be payable on the
first day of each calendar month and shall itself bear interest at the same rate
if not timely paid.
(b) Grantee shall be entitled to apply to a court of competent jurisdiction
for the specific performance or observance of any covenant or agreement or in
aid of the execution of any power herein granted and for the appointment of a
receiver for the Subject Interests but no such appointment shall prejudice or
affect the rights of Grantee to receive all PP Hydrocarbons and any amounts due
hereunder.
(c) Grantee shall be entitled to increase the Dedication Percentage to 90%
by giving notice of such increase to Grantor, and upon the giving of any such
notice the Dedication Percentage shall be increased to 90% effective as of the
beginning of the immediately following month.
(d) Grantee shall be entitled to exercise any of the remedies provided to
it in any other Production Payment Document.
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Section 5.2. Termination of Remedies. The specific remedies to which
Grantee may become entitled under Sections 5.1(a) and (b) shall cease to be
exercisable when all Designated Events have ceased to exist for a continuous
period of thirty days or more (provided that the effecting of performance or
observation of any unperformed covenant or agreement, or other resolution of a
Designated Event, by Grantee or Grantee's agent or representative shall not be
deemed to cure such Designated Event), without prejudice, however, to the
exercise of any such remedies upon any subsequent occurrence of a Designated
Event. Nothing in this section shall impose limitations or otherwise inhibit
the exercise of any other rights or remedies which Grantee may have.
ARTICLE VI
Section 6.1. Assignments by Grantor. Without the prior written consent of
Grantee (which consent may be granted or withheld in the sole and absolute
discretion of Grantee), Grantor shall not assign, sell, transfer, convey,
exchange, mortgage or pledge all or any part of the Subject Interests or create
any lien thereon or security interest therein, except that, without the prior
written consent of Grantee, Grantor may permit Permitted Encumbrances to exist
against all or any part of the Subject Interests.
Section 6.2. Assignments by Grantee. Grantee shall have the right to
assign its interest in the Production Payment, in whole or in part, at any time;
provided, however, that if the interest of Grantee under this Conveyance shall
ever be owned by more than two Persons, such Persons shall designate one Person
as their agent to deliver and receive all communications (including consents)
and exercise the discretion of Grantee hereunder on their behalf and provided
further, that, except for assignments or transfers to Affiliates of Grantee,
Grantee shall not assign or transfer any rights under or any interest in the
Production Payment Documents (as defined in the Purchase Agreement) or the
Production Payment to (i) any Person which is at such time conducting
exploration, production or transportation operations in Railroad Commission
Districts 4 or 5, (ii) Enron Oil & Gas Company, Coastal Oil & Gas Corporation,
Tennessee Gas Pipeline, Terry Oilfield Supply Co., (iii) any party adverse to
Grantor in any proceeding set forth on Schedule 1 to the Purchase Agreement or
in any litigation or proceeding subsequently filed, or any successor to the
rights or interests of any of the foregoing in such proceedings or litigation,
or (iv) any Affiliate of any of the foregoing. No change of ownership or right
to receive payment of the Production Payment or of any part thereof, however
accomplished, shall be binding upon Grantor until notice thereof shall have been
furnished by the transferor and by the transferee, and then only with respect to
payments thereafter made. In the event the Production Payment is ever owned by
more than one Person, the rights, remedies, liabilities and obligations of such
Persons shall be several and not joint, unless it is agreed otherwise by such
Persons.
Section 6.3. Binding Effect. All the covenants and agreements of the
respective parties herein contained shall be deemed to be covenants running with
the Subject Interests and the
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lands covered thereby or included therein. All of the provisions hereof shall
be binding upon and shall inure to the benefit of the parties hereto, and their
respective successors and assigns.
ARTICLE VII
Section 7.1. Warranty. Grantor hereby binds itself to warrant and forever
defend all and singular title to the Production Payment unto Grantee, its
successors and assigns, against every person lawfully claiming or to claim the
same or any part thereof, subject, however, to the Permitted Encumbrances.
Without limitation of the generality of the foregoing, Grantor represents and
warrants to Grantee that Grantor's ownership of the Subject Interests does and
will, with respect to each tract of land identified in Exhibit A hereto, subject
only to the Permitted Encumbrances:
(a) entitle Grantor to receive (subject to and before giving effect to the
Production Payment), free and clear of liens and encumbrances (except the
Permitted Encumbrances), a decimal net revenue interest share of the
Hydrocarbons produced from, or allocated to, such well or unit equal to not less
than the decimal interest set forth in Exhibit A in connection with such tract
of land in the column headed "Net Revenue Interest", and
(b) cause Grantor to be obligated to bear a decimal share of the costs
associated with wells or operation on such tract of land not greater than the
decimal share set forth in Exhibit A in connection with such tract of land in
the column headed "Working Interest", without a corresponding increase in net
revenue interest.
Grantor further represents and warrants to Grantee that such shares of
production which Grantor is entitled to receive, and shares of expenses which
Grantor is obligated to bear, are not and will not be subject to change except,
and only to the extent that, such changes are reflected on Exhibit A. This
Conveyance is made with full substitution and subrogation of Grantee in and to
all covenants, representations and warranties by others heretofore given or made
with respect to the Subject Interests.
ARTICLE VIII
SECTION 8.1. CHOICE OF LAW. THIS CONVEYANCE SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS
(WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES THEREOF THAT WOULD CAUSE ANOTHER
STATE'S LAW TO APPLY) AND THE LAWS OF THE UNITED STATES OF AMERICA.
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Section 8.2. Intentions of the Parties. Nothing herein contained shall be
construed to constitute either party hereto (under state law or for tax
purposes) in partnership with the other party. In addition, the parties hereto
intend that the Production Payment shall at all times be treated (and all
provisions of this Conveyance shall be construed and treated accordingly) as a
production payment (i.e., a term overriding royalty) and an interest in real
property under the laws of each state in which Subject Interests are located.
Section 8.3. Ownership of Equipment. The Production Payment does not
include any right, title or interest in and to any of the personal property,
fixtures, structures or equipment now or hereafter placed on, or used in
connection with, the Subject Interests, and the interest herein conveyed to
Grantee is exclusively a production payment (i.e., a term overriding royalty).
Section 8.4. Further Assurances. Grantor agrees to execute and deliver to
Grantee all such other and additional instruments, notices, division orders,
transfer orders and other documents and to do all such other and further acts
and things as may be necessary to more fully and effectively grant, convey and
assign to Grantee the rights, titles, interest and estates conveyed to Grantee
hereby or intended to be so conveyed.
Section 8.5. Partition. Grantor and Grantee acknowledge that neither has
any right or interest that would permit it to partition any portion of the
Subject Interests as against the other, and each waives any such right.
Section 8.6. Notices and Addresses. All notices and other communications
required or permitted under this Conveyance shall be in writing and, unless
otherwise specifically provided, shall be delivered personally or by telecopier
or by registered or certified mail, postage prepaid, or by delivery service with
proof of delivery, at the respective addresses shown below, and shall be deemed
delivered on the date of receipt. Either party may specify as its proper
address any other street address within the continental limits of the United
States by giving notice to the other party, in the manner provided in this
Section, at least fifteen (15) days prior to the effective date of such change
of address.
Grantor's address:
1300 East North Belt
Suite 310
Houston, Texas 77032-2949
Attention: Ed Donahue
Telephone: 713/987-8600
Telecopy: 713/986-8865
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<PAGE>
Grantee's address:
4111 E. 37th St. North
Wichita, Kansas 67220
Attention: President
Telephone: 316/828-6994
Telecopy: 316/828-4081
Section 8.7. Counterparts. This Conveyance is being executed in multiple
counterparts, all of which are identical, except that, (i) to facilitate
recordation, in certain counterparts hereof only those portions of Exhibit A
which contain descriptions of properties located in the recording jurisdiction
in which the particular counterpart is to be recorded are included, and (ii)
Schedule 1 or Schedule 2 may be omitted from counterparts hereof which are being
recorded. All of such counterparts shall constitute one and the same
instrument. Complete copies of this Conveyance containing the entirety of
Exhibit A, and all schedules hereto, have been retained by Grantor and Grantee.
This Conveyance is executed this 30th day of January, 1996, but made
effective as to deliveries of Gas as of the Initial Time.
TRANSTEXAS GAS CORPORATION
By: _________________________________
Ed Donahue
Vice President
STATE OF TEXAS (S)
(S)
COUNTY OF HARRIS (S)
The foregoing instrument was acknowledged before me on this 31st day of
January, 1996, by Ed Donahue as Vice President of TransTexas Gas Corporation, a
Delaware corporation, on behalf of such corporation.
___________________________________
Notary Public, State of Texas
-26-
<PAGE>
FIRST SUPPLEMENT TO PURCHASE AGREEMENT
THIS FIRST SUPPLEMENT TO PURCHASE AGREEMENT (herein called this
"Supplement") is made as of February 12, 1996, by TransTexas Gas Corporation, a
Delaware corporation (herein called "Grantor"), Sunflower Energy Finance
Company, a Delaware corporation doing business as "Kansas Sunflower Energy
Finance Company" (herein called "Original Grantee"), and TCW Portfolio No. 1555
DR V Sub-Custody Partnership, L.P., a California limited partnership (herein
called "Assignee").
RECITALS
--------
1. Grantor and Original Grantee have heretofore entered into that certain
Purchase Agreement dated as of January 30, 1996 (herein called the "Original
Purchase Agreement") and, as contemplated therein, Grantor has, by means of a
Production Payment Conveyance of the same date (herein called the "Original
Conveyance"), conveyed to Original Grantee the "Production Payment" as therein
defined (herein called the "Original Production Payment"), burdening interests
of Grantor in certain oil and gas leases located in Webb and Zapata Counties,
Texas.
2. By means of an Assignment and Release Agreement dated as of January 30,
1996 among Grantor, Original Grantee and Assignee, Original Grantee has assigned
to Assignee an undivided five-sixths interest in the Original Production
Payment.
3. Grantor is the owner of interests in certain other oil and gas leases
located in Webb and Zapata Counties, Texas, and Grantor desires to amend and
supplement the Original Conveyance to make such additional interests subject
thereto.
4. Original Grantee and Assignee are willing to participate in such
amendment and supplement on the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, Grantor, Original Grantee and Assignee hereby
agree as follows:
ARTICLE I - Definitions and References
Section 1.1. Defined Terms and References. As used herein, the terms
"Supplement", "Assignee", "Grantor", "Original Conveyance", "Original Grantee",
"Original Production Payment", and "Original Purchase Agreement" have the
meanings given them above. Reference is also made to the "Purchase Agreement"
and to the "Conveyance", as defined below, for the meaning of various terms
defined therein, all of which shall when used herein (unless otherwise expressly
defined herein) have the same meanings. For purposes of this
1
<PAGE>
Supplement, unless the context otherwise requires, the following terms shall
have the following meanings:
"Additional Subject Interests" has the meaning assigned to it in the
Conveyance Supplement.
"Conveyance Supplement" means that certain First Supplement to Production
Payment Conveyance, dated of even date herewith, executed by Grantor, Original
Grantee and Assignee in the form of Exhibit F hereto.
"Grantee" refers collectively to Original Grantee and Assignee and all of
their respective successors and assigns as owners of the Production Payment.
"PP Gas Sales Supplement" means that certain First Supplement to Natural
Gas Purchase Agreement, dated of even date herewith, executed by Koch Gas
Services, Original Grantee and Assignee in the form of Exhibit C hereto.
"Production Payment" means the Original Production Payment as amended and
supplemented by the Conveyance Supplement.
"Release Supplement" means that certain First Supplement to Partial Release
and Subordination, dated of even date herewith, executed by the Trustee and
Grantor in the form of Exhibit B hereto.
"Second Closing" and "Second Closing Date" have the meanings given them in
Section 2.2.
"Standby Gas Sales Supplement" means that certain First Supplement to
Standby Natural Gas Purchase Agreement, dated of even date herewith, executed by
Koch Gas Services and Grantor in the form of Exhibit D hereto.
"Supplemental Purchase Price" means $15,700,000.
"Transportation Supplement" means that certain First Supplement to
Interruptible Gas Transportation Agreement, dated of even date herewith,
executed by Koch Gas Services and TTC in the form of Exhibit E hereto.
Section 1.2. References Include Supplements. As provided in Section 1.2
of the Original Purchase Agreement, references therein to any instrument or
agreement refer to such instrument or agreement as it may be from time to time
supplemented or amended. The parties hereto (without limiting the application
of the foregoing with respect to further amendments or supplements) confirm
that, effective from and after the date hereof, for the purposes of the Purchase
Agreement, this Supplement, and any other Production Payment Documents referring
to the Purchase Agreement:
2
<PAGE>
(a) the term "Conveyance", as defined in the Purchase Agreement, means the
Original Conveyance as supplemented and amended by the Conveyance Supplement and
as otherwise from time to time supplemented or amended.
(b) the term "Partial Release", as defined in the Purchase Agreement,
means the Partial Release referred to in the Original Purchase Agreement, as
supplemented and amended by the Release Supplement and as otherwise from time to
time supplemented or amended.
(c) the term "PP Gas Sales Agreement", as defined in the Purchase
Agreement, means the PP Gas Sales Agreement referred to in the Original Purchase
Agreement, as supplemented and amended by the PP Gas Sales Supplement and as
otherwise from time to time supplemented or amended.
(d) the term "Purchase Agreement", as defined in the Purchase Agreement,
means the Original Purchase Agreement as supplemented and amended hereby and as
otherwise from time to time supplemented or amended.
(e) the term "Standby Gas Sales Agreement", as defined in the Purchase
Agreement, means the Standby Gas Sales Agreement referred to in the Original
Purchase Agreement, as supplemented and amended by the Standby Gas Sales
Supplement and as otherwise from time to time supplemented or amended.
(f) the term "Transportation Agreement", as defined in the Purchase
Agreement, means the Transportation Agreement referred to in the Original
Purchase Agreement, as supplemented and amended by the Transportation Supplement
and as otherwise from time to time supplemented or amended.
(g) the term "Production Payment Documents", as defined in the Purchase
Agreement, includes among others the Conveyance Supplement, the PP Gas Sales
Supplement, the Release Supplement, the Standby Gas Sales Supplement, the
Transportation Supplement, and this Supplement.
Section 1.3. Rules of Construction. All references in this Supplement to
articles, sections, subsections and other subdivisions refer to corresponding
articles, sections, subsections and other subdivisions of this Supplement unless
expressly provided otherwise. Titles appearing at the beginning of any of such
subdivisions are for convenience only and shall not constitute part of such
subdivisions and shall be disregarded in construing the language contained in
such subdivisions. The words "this Supplement, "this instrument", "herein",
"hereof", "hereby", "hereunder" and words of similar import refer to this
Supplement as a whole and not to any particular subdivision unless expressly so
limited. Unless the context otherwise requires: "including" (and its
grammatical variations) means "including without limitation"; "or" is not
exclusive; words in the singular form shall be construed to include the plural
and vice versa; words in any gender include all other genders; references herein
to any instrument or agreement refer to such instrument or agreement as it may
be from time to time supplemented or amended; and references herein to any
Person
3
<PAGE>
include such Person's successors and assigns. All references in this Supplement
to exhibits and schedules refer to the exhibits and schedules to this Supplement
unless expressly provided otherwise, and all such exhibits and schedules are
hereby incorporated herein by reference and made a part hereof for all purposes.
ARTICLE II - Purchase and Sale
Section 2.1. Agreement of Purchase and Sale. Upon the terms and
conditions hereof, Grantor, Original Grantee and Assignee agree to amend and
supplement the Original Conveyance by executing and delivering the Conveyance
Supplement, and Original Grantee and Assignee agree to severally acquire the
interests therein conveyed by Grantor in the same undivided interests (one-sixth
and five-sixths, respectively) which they now hold in the Original Production
Payment.
Section 2.2. Time and Place of Second Closing. The closing for the
consummation of the sale and purchase of the interests to be granted under the
Conveyance Supplement (herein called the "Second Closing") shall take place at
such place (or places) and on such date in February, 1996 as may be agreed to by
Grantor, Original Grantee and Assignee (herein called the "Second Closing
Date").
Section 2.3. Payment of Supplemental Purchase Price. At the Second
Closing, Original Grantee will pay one-sixth of the Supplemental Purchase Price
to Grantor, and Assignee will pay at the Second Closing five-sixths of the
Supplemental Purchase Price to Grantor, by wire transfer of immediately
available funds to such banks and bank accounts as Grantor shall specify in the
certificate referred to in Section 2.4(c) below.
Section 2.4. Conditions to Closing -- Documents. The obligations of
Original Grantee and Assignee to pay their respective portions of the
Supplemental Purchase Price is subject to their receipt of each of the
following, in form, substance, and date satisfactory to each of them and in such
number of counterparts as each of them shall have requested:
(a) A certificate of the Secretary or Assistant Secretary of Grantor,
which shall confirm that the "Omnibus Certificate" furnished by Grantor under
the Original Purchase Agreement remains true and correct in all respects as of
the Second Closing Date.
(b) An certificate of the Secretary or Assistant Secretary of TTC, which
shall confirm that the "Omnibus Certificate" furnished by TTC under the Original
Purchase Agreement remains true and correct in all respects as of the Second
Closing Date.
(c) A Compliance Certificate of the President and the Chief Financial
Officer of Grantor, dated as of the Second Closing Date, in which such officers
shall certify to the satisfaction of the conditions set out in Section 2.5 below
and shall give the wiring instructions referred to in Section 2.3 above.
4
<PAGE>
(d) Any assurances of title requested by Original Grantee or Assignee
concerning the Production Payment, including the recording and filing of the
Conveyance Supplement and the updating of any specified title opinions through
such recording (it being understood that Original Grantee or Assignee may
require these assurances to be given after, as well as at, the Second Closing,
and that no title deficiencies learned of by Grantee at any time shall in any
way be deemed to qualify any of Grantor's warranties of title or indemnities
with respect to title in any of the Production Payment Documents).
(e) A legal opinion of Gardere & Wynne, L.L.P., as counsel to Grantor,
dated the Second Closing Date and in the form of Exhibit A hereto.
(f) The Conveyance Supplement.
(g) The Release Supplement.
(h) The PP Gas Sales Supplement.
(i) The Standby Gas Sales Supplement.
(j) The Transportation Supplement.
Grantee hereby consents to the Conveyance Supplement, the Release Supplement,
the PP Gas Sales Supplement, the Standby Gas Sales Supplement, and the
Transportation Supplement.
Section 2.5. Other Conditions to Second Closing. In addition to the
receipt of the foregoing documents and instruments, the obligations of Original
Grantee and of Assignee to pay their respective portions of the Supplemental
Purchase Price is subject to the satisfaction (or waiver by each of them) on the
Second Closing Date of the following conditions precedent:
(a) All representations and warranties made by Grantor, John R. Stanley or
TTC in any Production Payment Document then or previously delivered shall be
true and correct as of the Second Closing Date, and without limitation of the
foregoing shall be true and correct as they relate to the Additional Subject
Interests as of the Second Closing Date.
(b) Grantor, John R. Stanley and TTC shall have performed all agreements,
covenants, and conditions which each is required by any Production Payment
Document to perform on or prior to the Second Closing Date.
(c) The consummation of the Second Closing shall not (i) be prohibited by
any law or any regulation or order of any court or governmental agency or
authority applicable to Grantor, TTC, Original Grantee or Assignee, or (ii)
subject any of them to any penalty or other onerous condition under or pursuant
to any such law, regulation or order.
(d) Grantor shall have paid to Grantee a closing fee of $162,000 with one-
sixth of such fee paid to Original Grantee and five-sixths of such fee paid to
Assignee.
5
<PAGE>
ARTICLE III
Amendments to Original Purchase Agreement
Section 3.1. Additional Wells Free of Severance Tax. Schedule 2 of the
Original Purchase Agreement is hereby supplemented by adding thereto the Subject
Wells listed on Schedule 2A to this Supplement.
Section 3.2. Chevron Call. The phrase, "[DESCRIPTION OF CHEVRON CALL],"
which appears in Section 4.1(p) of the Purchase Agreement, is hereby replaced
with the following phrase: "the rights of Chevron referred to in Section
4.1(k),".
ARTICLE IV - Representations and Covenants
Section 4.1. Representations of Grantor. To induce Original Grantee and
Assignee to enter into this Supplement and to pay the Supplemental Purchase
Price, Grantor hereby represents and warrants to Grantee that:
(a) Each representation and warranty of Grantor contained in the Original
Purchase Agreement is true and correct at and as of the Second Closing Date as
if made on such date rather than on and as of the Closing Date, and, without
limitation of the foregoing, each is specifically true and correct as it relates
to the Additional Subject Interests.
(b) The production from the Subject Wells listed on Schedule 2A to this
Supplement is not presently subject to each severance tax pursuant to (S)
201.057 of the Texas Tax Code.
Section 4.2. Covenants of Grantor. To induce Original Grantee and
Assignee to enter into this Supplement and to pay the Supplemental Purchase
Price, Grantor hereby covenants and agrees with Grantee that:
(a) Grantor will perform all of its covenants and duties under the
Conveyance, the Purchase Agreement, and the other Production Payment Documents,
all as fully as if they were set out in full herein. Grantor will cause TTC to
perform all of its covenants and duties under the Production Payment Documents.
(b) Grantor will timely deposit with the Trustee any portion of the
Supplemental Purchase Price which is required to be deposited pursuant to the
Trust Indenture. Grantor will otherwise ensure that no Event of Default occurs
under the Trust Indenture. Grantor will use all of the Supplemental Purchase
Price in accordance with the terms of the Trust Indenture.
6
<PAGE>
ARTICLE V - Miscellaneous
Section 5.1. Survival of Agreements; Cumulative Nature. All of the
various representations, warranties, indemnities, covenants and agreements in
the Production Payment Documents shall survive the execution and delivery of
this Supplement and the other Production Payment Documents and the performance
hereof and thereof.
Section 5.2. Ratification of Purchase Agreement. The Original
Purchase Agreement as hereby supplemented and amended is hereby ratified and
confirmed in all respects. All provisions in the Purchase Agreement pertaining
to Production Payment Documents apply hereto, including in particular (but
without limitation) Section 6.9 of the Purchase Agreement providing for
arbitration.
Section 5.3. Governing Law. This Supplement shall be deemed a
contract and instrument made under the laws of the State of Texas and shall be
construed and enforced in accordance with and governed by the laws of the State
of Texas and the laws of the United States of America, without regard to
principles of conflicts of law.
Section 5.4. Counterparts. This Supplement may be separately
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to
constitute one and the same Supplement.
IN WITNESS WHEREOF, this Supplement is executed as of the date first
above written.
Grantor: TRANSTEXAS GAS CORPORATION
By: _________________________________
Ed Donahue, Vice President
Original Grantee: SUNFLOWER ENERGY FINANCE COMPANY
(d/b/a Kansas Sunflower Energy Finance Company)
By: _________________________________
Rex Clevenger, Vice President
7
<PAGE>
Assignee: TCW PORTFOLIO NO. 1555 DR V SUB-CUSTODY
PARTNERSHIP, L.P.
By: TCW Royalty Company V
General Partner
By: _________________________________
William K. White
Senior Vice President
By: _________________________________
George R. Hutchinson
Senior Vice President
8
<PAGE>
CONSENT AND AGREEMENT
---------------------
Each of John R. Stanley and TransTexas Transmission Corporation hereby
consents to the provisions of the foregoing Supplement and the transactions
contemplated herein, including without limitation the making of the Conveyance
Supplement, the Release Supplement, the PP Gas Sales Supplement, the Standby Gas
Sales Supplement, and the Transportation Supplement. John R. Stanley hereby
ratifies and confirms his Guaranty dated as of January 30, 1996, for the benefit
of Original Grantee and Assignee; TransTexas Transmission Corporation hereby
ratifies and confirms its Ratification Agreement dated as of January 30, 1996,
for the benefit of Original Grantee and Assignee; and each agrees and
acknowledges that there are no defenses, setoffs, deductions or counterclaims
with respect thereto and that his or its obligations and covenants thereunder
are unimpaired and remain in full force and effect.
_________________________________
John R. Stanley
TRANSTEXAS TRANSMISSION CORPORATION
By: ____________________________
Ed Donahue, Vice President
9
<PAGE>
FIRST SUPPLEMENT TO PRODUCTION
PAYMENT CONVEYANCE
RECITALS:
A. On January 30, 1996, effective as of February 1, 1996, TransTexas Gas
Corporation, a Delaware corporation ("TransTexas"), executed in favor of
Sunflower Energy Finance Company, a Delaware corporation, d/b/a Kansas
Sunflower Energy Finance Company ("Sunflower"), that certain Production
Payment Conveyance (the "Original PP Conveyance"), recorded as set forth in
Part One of Schedule 1 hereto.
B. On January 30, 1996, effective February 1, 1996, immediately after the
effective time of the Original PP Conveyance, Sunflower executed that certain
Assignment and Agreement (the "TCW Assignment") whereunder it assigned to TCW
Portfolio No. 1555 DR V Sub-Custody Partnership, L.P., a California limited
partnership ("TCW"), an undivided eighty-three and one-third percent
(83-1/3%) interest in and to (a) the "Production Payment" created under the
Original PP Conveyance, and (b) any other rights, titles, interests or
properties created in favor of Sunflower under the Original PP Conveyance;
the TCW Assignment is recorded as set forth in Part Two of Schedule 1 hereto.
C. TCW, Sunflower and TransTexas desire to supplement and amend the Original PP
Conveyance in order to include additional properties more particularly
described below, and to otherwise clarify certain provisions of the Original
PP Conveyance.
SUPPLEMENT AND AGREEMENT:
FOR A GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are
hereby acknowledged, TransTexas, Sunflower and TCW do hereby agree, act and
covenant as follows:
1. The definition of Base Volume as set forth in the Original PP Conveyance is
hereby amended to read as follows:
"Base Volume" means 46,225,000 MMBTU's, as the same may be
increased from time to time under Section 2.4 hereof."
2. Exhibit A to the Original PP Conveyance is hereby amended and supplemented,
effective as of 7:00 a.m. Houston, Texas time on March 1, 1996, to include at
the end thereof Exhibit A hereto (herein called "Additional Exhibit A").
-1-
<PAGE>
3. The terms "Certain Percentage," "PP Hydrocarbons," "Subject Hydrocarbons,"
"Subject Interests," "Subject Lands," and "Subject Wells," as such terms are
defined and used in the Original PP Conveyance are hereby amended, effective
as of 7:00 a.m. Houston, Texas time on March 1, 1996, in order to take into
account and recognize the addition of Additional Exhibit A hereto to the end
of Exhibit A as attached to the Original PP Conveyance, and all other direct
or indirect references in the Original PP Conveyance shall likewise be
considered amended in order to take into account and recognize the addition
of Additional Exhibit A hereto to the end of Exhibit A as attached to the
Original PP Conveyance.
4. Effective as of March 1, 1996, at 7:00 a.m., Houston, Texas time, Schedule 2
to the Original PP Conveyance shall be replaced in its entirety by Schedule 2
attached hereto, and the Original PP Conveyance is hereby amended in order to
effectuate the foregoing.
5. All of the terms and provisions of the Original PP Conveyance not amended or
supplemented hereby are ratified, adopted, affirmed and renewed, and remain
in full force and effect for the proportionate benefit of Sunflower and TCW,
and their respective successors and assigns. For the above-recited
consideration, TransTexas does hereby, in order to more fully effectuate the
amendments and other provisions herein contained, GRANT, BARGAIN, SELL,
CONVEY, ASSIGN, TRANSFER, SET OVER and DELIVER unto TCW and Sunflower, in the
relative undivided percentages of eighty-three and one-third percent
(83-1/3%) to TCW and the remaining sixteen and two-thirds percent (16-2/3%)
to Sunflower, as a production payment, a term overriding royalty interest
carved out of and burdening the "Additional Subject Interests," as defined
below, equal to and measured by all "Additional PP Hydrocarbons," as defined
below, in, under and that may be produced from (or, to the extent pooled or
unitized, allocated to) the "Additional Subject Lands," as defined below,
with such production payment to be effective as to deliveries of Additional
PP Hydrocarbons as of 7:00 a.m. Houston, Texas time on March 1, 1996 and to
terminate as of the Termination Time. To have and to hold the above-described
production payment, upon and subject to the terms of the Original PP
Conveyance, as amended hereby, unto Sunflower and TCW, in the respective
percentage shares set forth above, and their respective successors and
assigns, until the Termination Time. As used herein, the following terms
shall have the following meanings:
(a) "Additional PP Hydrocarbons" shall mean the Dedication Percentage, as
defined in the Original PP Conveyance, of the Certain Percentage (as the
definition of such term is amended herein) of all Hydrocarbons in, under
or that may be produced from (or, to the extent pooled or unitized,
allocated to) any Additional Subject Lands.
(b) "Additional Subject Interests" shall mean:
(i) All of the properties described in Additional Exhibit A; and
(ii) Without limitation of the foregoing, all other right, title and
interest (of whatever kind or character, whether legal or equitable
and whether vested or contingent)
-2-
<PAGE>
of TransTexas in and to the oil, gas and other minerals in and under
or that may be produced from the Additional Subject Lands (including
interests in oil, gas or mineral leases to the extent the same cover
such lands, overriding royalties, production payments and net profits
interests in such lands or such leases, and fee mineral interests,
fee royalty interests and other interests in such oil, gas and other
minerals) even though TransTexas' interest in such oil, gas and other
minerals may be incorrectly described in, or omitted from, Additional
Exhibit A; and
(iii) All rights, titles and interests of TransTexas in and to, or
otherwise derived from, all presently existing and valid oil, gas or
mineral unitization, pooling, or communitization agreements,
declarations or orders and in and to the properties covered and the
units created thereby (including all units formed under orders,
rules, regulations, or other official acts of any federal, state, or
other authority having jurisdiction, voluntary unitization
agreements, designations or declarations, and so-called "working
interest units" created under operating agreements or otherwise)
relating to the properties described in subsections (i) or (ii) above
in this definition.
(c) "Additional Subject Lands" means the lands and depths described in
Additional Exhibit A hereto (where no depth limit is specified,
Additional Subject Lands shall include all depths).
Without limitation of the generality of the provisions of Sections 3 and 4,
above, or of the foregoing provisions of this Section 5, effective as to
deliveries of Additional PP Hydrocarbons as of 7:00 a.m. Houston, Texas time,
on March 1, 1996, the definition of PP Hydrocarbons as found in the Original
PP Conveyance shall be amended to include all Additional PP Hydrocarbons, as
defined herein, the definition of Subject Lands as found in the Original PP
Conveyance shall be amended to include all Additional Subject Lands, as
defined herein, and the definition of Subject Interests as found in the
Original PP Conveyance shall be amended to include all Additional Subject
Interests, as defined herein.
6. The decimal interests set forth in Exhibit A to the Original PP Conveyance
shall be converted to percentages where the context of any particular
provision of the Original PP Conveyance, including without limitation the
definition of "Certain Percentage", so requires; the Original PP Conveyance
is hereby amended in order to effectuate the foregoing.
7. This First Supplement may be executed in multiple counterparts, all of which
are identical, except that Schedule 2 may be attached only to those
counterparts retained by the parties. All of such counterparts together
shall constitute one and the same instrument.
8. This First Supplement shall be binding upon and shall enure to the benefit of
the parties hereto (with respect to Sunflower and TCW, in the relative
proportionate shares set forth above), and their respective successors and
assigns, and all of the covenants and agreements
-3-
<PAGE>
contained in the Original PP Conveyance, as amended hereby, shall be deemed
to be covenants and agreements running with the lands affected thereby.
9. This First Supplement shall be governed by and construed in accordance with
the laws of the State of Texas, without regard to principles of conflicts of
laws.
EXECUTED by the parties hereto on the dates set out below in their respective
acknowledgments, but effective as to deliveries of Additional PP Hydrocarbons as
of 7:00 a.m. Houston, Texas time on March 1, 1996.
TRANSTEXAS GAS CORPORATION
By: __________________________________
Name: Ed Donahue
Title: Vice President
SUNFLOWER ADDRESS: SUNFLOWER ENERGY FINANCE
COMPANY, d/b/a Kansas Sunflower
4111 E. 37th St. North Energy Finance Company
Wichita, Kansas 67220
Attention: President
By: __________________________________
Name: Rex Clevenger
Title: Vice President
TCW ADDRESS: TCW PORTFOLIO NO. 1555 DR V
SUB-CUSTODY PARTNERSHIP, L.P.
c/o Trust Company of the West
865 South Figueroa By: TCW Royalty Company V,
Los Angeles, California 90017 General Partner
Attention: Arthur R. Carlson
By: __________________________________
Name: William K. White
This document prepared by: Title: Senior Vice President
Karen E. Lynch
Thompson & Knight, P.C. By: __________________________________
1700 Pacific Avenue, Suite 3300 Name: George R. Hutchinson
Dallas, Texas 75201 Title: Senior Vice President
-4-
<PAGE>
- - --------------------------------------------------------------------------------
PURCHASE AGREEMENT
TRANSTEXAS GAS CORPORATION
and
TCW PORTFOLIO NO. 1555 DR V SUB-CUSTODY PARTNERSHIP, L.P.,
and
SUNFLOWER ENERGY FINANCE COMPANY
---------------------
May 14, 1996
- - --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE I - Definitions and References......................... 1
Section 1.1. Defined Terms and References................ 1
Section 1.2. Rules of Construction....................... 4
ARTICLE II - Purchase and Sale................................. 4
Section 2.1. Agreement of Purchase and Sale.............. 4
Section 2.2. Payment of Purchase Price................... 4
Section 2.3. Expenses.................................... 4
Section 2.4. Payments.................................... 4
ARTICLE III - Closing Date and Closing......................... 5
Section 3.1. Time and Place of Closing................... 5
Section 3.2. Conditions to Closing -- Documents.......... 5
Section 3.3. Other Conditions to Closing................. 6
Section 3.4. Floor Contracts............................. 7
ARTICLE IV - Representations and Covenants..................... 7
Section 4.1. Representations and Warranties of Grantor... 7
Section 4.2. Representations and Warranties of Grantees.. 13
Section 4.3. Covenants of Grantor........................ 13
Section 4.4. Reporting Covenants of Grantor.............. 15
Section 4.5. Additional Remedies Upon Designated Event... 17
ARTICLE V - Adjustment of Dedication Percentage................ 18
Section 5.1. Reserve Reports............................. 18
Section 5.2. Adjustment to Dedication Percentage......... 20
ARTICLE VI - Miscellaneous..................................... 20
Section 6.1. Waivers and Amendments...................... 20
Section 6.2. Survival of Agreements; Cumulative Nature... 20
Section 6.3. Notices..................................... 21
Section 6.4. Parties in Interest......................... 21
Section 6.5. Governing Law............................... 21
Section 6.6. Limitation on Interest...................... 21
Section 6.7. Termination; Limited Survival............... 22
Section 6.8. Severability................................ 22
Section 6.9. Arbitration................................. 22
Section 6.10. Counterparts................................ 24
</TABLE>
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SCHEDULE 1 - Litigation Summary
SCHEDULE 2 - Severance Tax Exempt Wells
SCHEDULE 3 - Monthly Reporting Form
SCHEDULE 4 - Abstracts of Judgment
EXHIBIT A - Legal Opinion
EXHIBIT B - Partial Release and Subordination
EXHIBIT C - Ratification Agreement
EXHIBIT D - Guaranty
EXHIBIT E - Transportation Agreements
EXHIBIT F - Conveyance
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PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT dated as of May 14, 1996 (herein, as from time to
time amended or supplemented, called this "Agreement") is made by TransTexas Gas
Corporation, a Delaware corporation (herein called "Grantor"), and TCW Funds V
and Sunflower (as separately identified below, who are herein collectively
called "Grantees").
RECITALS
1. Grantor is the owner of interests in certain oil and gas leases
located in Webb and Zapata Counties, Texas, and desires to sell and assign to
Grantees, upon the terms and conditions herein set forth, a production payment
under a Production Payment Conveyance to be made by Grantor to Grantees in the
form attached hereto as Exhibit F.
2. Grantees desire to purchase such production payment upon the terms and
conditions herein set forth.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, Grantor and Grantees hereby agree as follows:
ARTICLE I - Definitions and References
Section 1.1. Defined Terms and References. As used herein, the terms
"Agreement", "Grantees" and "Grantor" have the meanings given them above.
Reference is also made to the "Conveyance", as defined below, for the meaning of
various terms defined therein, all of which shall when used herein (unless
otherwise expressly defined herein) have the meanings given them in the
Conveyance. For purposes of this Agreement, unless the context otherwise
requires, the following additional terms shall have the following meanings:
"Associated Subject Interests" has the meaning given such term in Section
4.1(n).
"Closing" and "Closing Date" have the meanings given them in Section 3.1.
"Conveyance" means the Production Payment Conveyance made by Grantor to
Grantees, in the form of Exhibit F to this Agreement (appropriately completed),
as from time to time amended and supplemented.
"Current Ad Valorem Taxes" means all ad valorem taxes which have been
assessed against any of the Subject Interests for 1995 or any prior year by any
taxing authority.
"Designated Event" has the meaning given such term in the Conveyance.
"Evaluation Date" means (a) each February 1, beginning with February 1,
1997, (b) each August 1, beginning with August 1, 1996, and (c) each other day
which Majority
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Grantees designate as an Evaluation Date, provided that Majority Grantees may
not make more than one such designation during the interval between any February
1 and the next succeeding August 1 or during the interval between any August 1
and the next succeeding February 1. Each Evaluation Date on a February 1 or
August 1 is herein called a "Regular Evaluation Date"; each other Evaluation
Date is herein called an "Optional Evaluation Date".
"Floor Contract" has the meaning given such term in Section 3.4.
"Futures Price" has the meaning given such term in Section 5.1.
"Guaranty" means that certain Guaranty, dated of even date herewith,
executed by John R. Stanley in the form of Exhibit D hereto.
"Hazardous Substance" means any "hazardous waste", "hazardous substance",
"extremely hazardous substance", "toxic chemical", "hazardous chemical", "toxic
pollutants", contaminants", "chemical", "chemical substance", or "asbestos", as
such terms are defined in any Environmental Law, or related substances, in such
quantities or concentrations as are prohibited by (or require remediation under)
any Environmental Law or other applicable law, or which may be declared to
constitute a material threat to human health or to the environment.
"Koch Gas Services" means Koch Gas Services Company, an Oklahoma
corporation.
"Majority Grantees" means any one or more Grantees whose aggregate
Percentage Shares exceed 75%.
"Partial Release" means that certain Partial Release and Subordination,
dated of even date herewith, executed by the Trustee and Grantor in the form of
Exhibit B hereto.
"Percentage Share" means, with respect to each Grantee, the fractional
interest which it owns in the Production Payment at the time in question. At
the initial grant of the Production Payment, the Percentage Share of TCW Funds V
is seven-ninths (7/9), and the Percentage Share of Sunflower is two-ninths
(2/9).
"Permitted Encumbrances" has the meaning given such term in Section 4.1(h).
"PP Gas Sales Agreement" means that certain Natural Gas Purchase Agreement
of even date herewith made by Koch Gas Services, as buyer, and Grantees, as
seller, providing for the purchase and sale of the PP Hydrocarbons.
"PPNPV" has the meaning given such term in Section 5.1.
"Preferential Right" has the meaning given such term in Section 4.1(p).
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"Production Payment Documents" means this Agreement, the Conveyance, the
Ratification Agreement, the Partial Release, the Transportation Agreement, the
Standby Gas Sales Agreement, the Guaranty, and each certificate, agreement,
document, or instrument now or hereafter delivered in connection with any
thereof by or on behalf of Grantor or TTC to any Grantee.
"Purchase Price" means $43,200,000.
"Ratification Agreement" means that certain Ratification Agreement, dated
of even date herewith, executed by TTC and Grantor in the form of Exhibit C
hereto.
"Required Ratio" means 150%.
"Reserve Report" has the meaning given such term in Section 5.1.
"Senior Notes" means the 11-1/2% Senior Secured Notes due 2002 which have
been issued by Grantor pursuant to the Trust Indenture.
"Settlement Agreement" has the meaning given such term in Section 3.2(o).
"SINPV" has the meaning given such term in Section 5.1.
"Standby Gas Sales Agreement" means that certain Standby Natural Gas
Purchase Agreement of even date herewith made by Koch Gas Services, as buyer,
and Grantor, as seller, providing for the purchase and sale of the EMC Volumes
accruing to Grantor.
"Sunflower" means Sunflower Energy Finance Company, a Delaware corporation
doing business in Texas as "Kansas Sunflower Energy Finance Company."
"TCW Funds V" means TCW Portfolio No. 1555 DR V Sub-Custody Partnership,
L.P., a California limited partnership.
"TransAmerican" means TransAmerican Natural Gas Corporation, a Texas
corporation.
"TransAmerican Company" means TransAmerican, Grantor, TTC, TransAmerican
Refining Corporation, TransAmerican Energy Corporation, and each other
subsidiary of TransAmerican.
"Transportation Agreement" refers collectively to those two certain
Interruptible Gas Transportation Agreements of even date herewith, made by Koch
Gas Services and TTC in the forms attached as Exhibit E hereto.
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"Trust Indenture" means that certain Indenture dated as of June 15, 1995,
made by Grantor (as Issuer), TTC (as Guarantor), and American Bank National
Association, as Trustee, in connection with Grantor's Senior Notes.
"Trustee" means, at the time in question, the Person serving as Trustee
under the Trust Indenture.
"TTC" means TransTexas Transmission Corporation, a Delaware corporation.
Section 1.2. Rules of Construction. All references in this Agreement to
articles, sections, subsections and other subdivisions refer to corresponding
articles, sections, subsections and other subdivisions of this Agreement unless
expressly provided otherwise. Titles appearing at the beginning of any of such
subdivisions are for convenience only and shall not constitute part of such
subdivisions and shall be disregarded in construing the language contained in
such subdivisions. The words "this Agreement, "this instrument", "herein",
"hereof", "hereby", "hereunder" and words of similar import refer to this
Agreement as a whole and not to any particular subdivision unless expressly so
limited. Unless the context otherwise requires: "including" (and its
grammatical variations) means "including without limitation"; "or" is not
exclusive; words in the singular form shall be construed to include the plural
and vice versa; words in any gender include all other genders; references herein
to any instrument or agreement refer to such instrument or agreement as it may
be from time to time supplemented or amended; and references herein to any
Person include such Person's successors and assigns. All references in this
Agreement to exhibits and schedules refer to the exhibits and schedules to this
Agreement unless expressly provided otherwise, and all such exhibits and
schedules are hereby incorporated herein by reference and made a part hereof for
all purposes.
ARTICLE II - Purchase and Sale
Section 2.1. Agreement of Purchase and Sale. Upon the terms and
conditions of this Agreement, Grantor agrees to sell the Production Payment to
Grantees and each Grantee severally agrees to purchase its respective Percentage
Share of the Production Payment from Grantor.
Section 2.2. Payment of Purchase Price. Each Grantee will pay its
Percentage Share of the Purchase Price to Grantor by wire transfer of
immediately available funds to the account of the Trustee which Grantor shall
specify in the certificate referred to in Section 3.2(d) below.
Section 2.3. Expenses. Grantor will pay to each Grantee (or directly to
such Grantee's attorneys and other consultants) all Reimbursable Expenses as
they are billed. Grantor has heretofore or concurrently herewith advanced
$25,000 to Mayer, Brown & Platt (counsel for Sunflower) and $60,000 to Thompson
& Knight, P.C. (counsel for TCW Funds V, who have already received $18,000 of
such $60,000) to be applied to Reimbursable Expenses, and these
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funds will be applied toward the Reimbursable Expenses before asking Grantor to
make any additional payments of Reimbursable Expenses. To the extent that any
such funds have not been so applied within three months after the Closing Date,
Grantees will direct their counsel to return the remainder to Grantor, but
Grantor will thereafter remain liable to pay all Reimbursable Expenses as
billed. To the extent that such funds are insufficient to pay all Reimbursable
Expenses and are exhausted, Grantor will thereafter promptly pay all
Reimbursable Expenses as they are billed.
Section 2.4. Payments. Each of Grantor and Grantees will pay each amount
owing to any of the others under the Production Payment Documents by wire
transfer of immediately available funds to the banks and bank accounts which
each shall specify to the other concurrently herewith, or to such other accounts
as each shall from time to time specify in writing at least five Business Days
prior to the effective date for any such change of accounts.
ARTICLE III - Closing Date and Closing
Section 3.1. Time and Place of Closing. The closing for the consummation
of the sale and purchase of the Production Payment (herein called the "Closing")
shall take place at such place (or places) and on such date in May, 1996 as may
be agreed to by Grantor and Grantees (herein called the "Closing Date").
Section 3.2. Conditions to Closing -- Documents. The obligation of each
Grantee to pay its Percentage Share of the Purchase Price is subject to
Grantees' receipt of each of the following, in form, substance, and date
satisfactory to each Grantee and in such number of counterparts as each Grantee
shall have requested:
(a) An "Omnibus Certificate" of the Secretary or Assistant Secretary of
Grantor, which shall contain the names and signatures of the officers of Grantor
authorized to execute the Production Payment Documents and which shall certify
to the truth, correctness and completeness of the following exhibits attached
thereto: (i) a copy of resolutions duly adopted by the Board of Directors of
Grantor and in full force and effect at the time this Agreement is entered into,
authorizing the execution of the Production Payment Documents and the
consummation of the transactions contemplated therein, (ii) a copy of the
charter documents of Grantor and all amendments thereto, certified by the
appropriate official of Grantor's state of incorporation, and (iii) a copy of
the bylaws of Grantor.
(b) An Omnibus Certificate for TTC, similar to that required for Grantor
under the preceding subsection (a).
(c) A long-form certificate (or certificates) of the due formation, valid
existence and good standing of each of Grantor and TTC in its state of
incorporation, issued by the appropriate authorities of such state, and
certificates of Grantor's and TTC's good standing and due qualification to do
business in Texas.
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(d) A Compliance Certificate of the President and the Chief Financial
Officer of Grantor, dated as of the Closing Date, in which such officers shall
certify to the satisfaction of the conditions set out in Section 3.3 and shall
give the wiring instructions referred to in Section 2.2 above.
(e) Any assurances of title requested by any Grantee concerning the
Production Payment, including the recording and filing of the Conveyance and the
updating of any specified title opinions through such recording (it being
understood that Grantees may require these assurances to be given after, as well
as at, Closing, and that no title deficiencies learned of by any Grantee at any
time shall in any way be deemed to qualify any of Grantor's warranties of title
or indemnities with respect to title in any of the Production Payment
Documents).
(f) Certificates from Grantor's insurance brokers or advisors confirming
that Grantor is in compliance with the requirements of Section 3.4 of the
Conveyance.
(g) A legal opinion of Gardere & Wynne, L.L.P., as counsel to Grantor,
dated the Closing Date and in the form of Exhibit A hereto.
(h) The Conveyance.
(i) The Ratification Agreement.
(j) The Guaranty.
(k) The PP Gas Sales Agreement.
(l) A copy of the Standby Gas Sales Agreement, executed and delivered by
Koch Gas Services and Grantor.
(m) A copy of the Transportation Agreement, executed and delivered by Koch
Gas Services and TTC.
(n) The Partial Release.
(o) The releases and other documents referred to in Section 6 of the
Settlement Agreement dated effective as of April 18, 1996 (herein called the
"Settlement Agreement"), among the parties to the Terry Oilfield Supply Co.
lawsuit listed on Schedule 1 hereto, and the other settlement documents required
to be delivered under such Settlement Agreement upon payment of the "Settlement
Amounts" referred to therein, together with such payment instructions by
Grantor, the Trustee, and the plaintiffs in such litigation which Grantees
reasonably require in order to coordinate the payment of the Purchase Price with
the obtaining of such releases.
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Section 3.3. Other Conditions to Closing. In addition to the receipt of
the foregoing documents and instruments, the obligation of each Grantee to pay
its Percentage Share of the Purchase Price is subject to the satisfaction (or
waiver by each Grantee) on the Closing Date of the following conditions
precedent:
(a) All representations and warranties made by Grantor or TTC in any
Production Payment Document then or previously delivered shall be true and
correct as of the Closing Date.
(b) Grantor and TTC shall have performed all agreements, covenants, and
conditions which each is required by any Production Payment Document to perform
on or prior to the Closing Date.
(c) The consummation of the Closing shall not (i) be prohibited by any law
or any regulation or order of any court or governmental agency or authority
applicable to Grantor, TTC, or any Grantee, or (ii) subject any of them to any
penalty or other onerous condition under or pursuant to any such law, regulation
or order.
Section 3.4. Floor Contracts. Grantees expect that, on the Closing Date,
they will purchase one or more gas price floor contracts or other hedging
contracts. Any such contracts shall be in form and substance satisfactory to
each Grantee in its discretion; Grantor shall have no interest therein and all
payments made therefor or received thereunder shall be for the account of
Grantees.
ARTICLE IV - Representations and Covenants
Section 4.1. Representations and Warranties of Grantor. To induce
Grantees to enter into this Agreement and to pay the Purchase Price, Grantor
hereby represents, warrants and covenants to each Grantee that:
(a) Each of Grantor and TTC is, and shall remain, a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and duly qualified to do business and in good standing as a foreign
corporation in the State of Texas. Each has all requisite power and authority,
corporate or otherwise, to own and operate its assets in Texas and to execute
and deliver, and perform all of its obligations under, the Production Payment
Documents. Grantor is not a "foreign person" within the meaning of Sections
1445 and 7701 of the Internal Revenue Code of 1986, as amended (i.e., Grantor is
not a non-resident alien, foreign corporation, foreign partnership, foreign
trust or foreign estate as those terms are defined in the Code and any
regulations promulgated thereunder). TransAmerican owns (directly or
indirectly) approximately 80% of all of the issued and outstanding stock of
Grantor, and Grantor owns all of the issued and outstanding stock of TTC.
(b) The execution, delivery and performance by each of Grantor and TTC of
the Production Payment Documents to which each is a party and the consummation
of the
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transactions contemplated herein and therein have been duly authorized by all
necessary corporate action and do not and will not (i) violate any material
provision of any law, rule, regulation, order, writ, judgment, decree,
determination or award presently in effect having applicability to any
TransAmerican Company or of the Certificate of Incorporation or By-laws of
TransAmerican, Grantor, or TTC, or (ii) result in a breach of, or constitute a
default under, any contract, indenture, instrument, or agreement to which any
TransAmerican Company is a party or by which it or its property may be presently
bound or affected (including the leases under which Grantor holds the Subject
Interests), or result in or require the creation or imposition of any lien or
encumbrance under any such contract, indenture, instrument, or agreement.
Grantor and TTC have obtained, and shall continue to obtain, all consents,
authorizations and waivers necessary under any such contract, indenture,
instrument or agreement or under any such material provision of law, rule,
regulation, order, writ, judgment, decree, determination or award in order to
permit the valid execution, delivery and performance by Grantor and TTC of the
Production Payment Documents.
(c) The Production Payment Documents have been duly executed and delivered
by Grantor and TTC (to the extent each is a party thereto) and constitute the
legal, valid and binding acts and obligations of Grantor and TTC, enforceable
against Grantor and TTC in accordance with their respective terms except as such
enforcement may be limited by bankruptcy, insolvency, moratorium and other
similar laws applicable to creditors' rights generally or by general principles
of equity.
(d) No event or state of affairs which would, upon delivery of the
Conveyance, be a Designated Event has occurred and is continuing. No material
"Default" and no "Event of Default" exists under the Trust Indenture. No
material "Default" and no "Event of Default" exists under that certain
Indenture, dated as of February 15, 1995, among TransAmerican Refining
Corporation, TransAmerican Energy Corporation (as Guarantor), and First Fidelity
Bank, National Association (as trustee). No TransAmerican Company is in default
in the payment of any item of indebtedness of $5,000,000 or more owed by it. No
bankruptcy or insolvency proceeding is presently pending or contemplated (or, to
Grantor's best knowledge, threatened) by or against any TransAmerican Company
under any applicable bankruptcy, insolvency or other similar law of any
jurisdiction, and no such Person has made a general assignment for the benefit
of creditors.
(e) The Partial Release constitutes the legal, valid and binding act and
obligation of the Trustee, enforceable against Trustee and the holders of the
Senior Notes in accordance with the terms thereof, except as such enforcement
may be limited by general principles of equity.
(f) The data, information, exhibits, memoranda and reports furnished by or
on behalf of TransAmerican, Grantor or TTC to Sunflower or TCW Asset Management
Company in connection with the negotiation of the Production Payment Documents
(taken as a whole, and taking into account all corrections and supplements to
such information heretofore delivered) do not contain any material misstatement
of fact or omit to state a material fact or any fact necessary to make the
statements contained therein not misleading. There is no fact known to
TransAmerican, Grantor, or TTC that has not been disclosed to Sunflower or TCW
Asset
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Management Company which could materially and adversely affect the value of the
Production Payment. (The data and information referred to in the above
representations and warranties include any factual information furnished by
Grantor for incorporation or use in any reserve or production reports or
estimates furnished by Grantor or its independent engineers to Sunflower or TCW
Asset Management Company, but Grantor is not representing and warranting that
any reserve or production estimates made by Grantor or such engineers will
ultimately prove to have been accurate.) No material adverse change in the
financial condition of Grantor or TTC or in the condition or aggregate value of
the Subject Wells or Subject Interests has occurred since January 31, 1996 other
than normal depletion and the judgments entered during April 1996 in the Terry
Oilfield Supply Co. lawsuit listed on Schedule 1 hereto.
(g) Except as described on Part A of Schedule 1 hereto or on Schedule 4
hereto, there is no litigation or administrative proceeding pending against any
TransAmerican Company which involves (i) a dispute or claim concerning title to
any of the Subject Interests, (ii) any actual or purported lien, security
interest, charge or burden upon any of the Subject Interests or any lease making
up any part of the Subject Interests, or (iii) any other claim which would
affect a transferee of any such lease or any of the Subject Interests. Except as
described on Part B of Schedule 1 there is no other litigation or proceeding
pending or, to the best knowledge of Grantor, threatened against any
TransAmerican Company which would, if determined adversely to such TransAmerican
Company, have a material adverse effect on the financial condition of Grantor or
TTC, the value of the Production Payment, the ability of Grantor to convey the
Production Payment pursuant to the Production Payment Documents, or the ability
of Grantor or TTC to perform their respective obligations under the Production
Payment Documents.
(h) Grantor has good and defensible title to the Subject Interests, and
Grantor covenants to maintain good and defensible title to the Retained
Interests, in each case free and clear of all liens, security interests, and
encumbrances except for (i) the contracts, agreements, burdens, encumbrances and
other matters set forth in the descriptions of certain of the Subject Interests
on Exhibit A to the Conveyance, (ii) statutory liens for taxes which are not yet
delinquent or which (in the case of taxes hereafter coming due) are being
contested in good faith by appropriate proceedings and for the payment of which
Grantor has reserved adequate funds, (iii) liens under operating agreements,
pooling orders and unitization agreements, and mechanics' and materialmen's
liens, with respect to obligations incurred in the ordinary course of business
which are not yet due or which (in the case of obligations hereafter coming due)
are being contested in good faith by appropriate proceedings for the payment of
which Grantor has reserved adequate funds, (iv) easements, rights-of-way,
zoning, similar restrictions and other similar encumbrances incurred in the
ordinary course of business which do not in any case materially detract from the
value or use of the property subject thereto, (v) judgment liens and lis pendens
(which, except for the judgment liens and lis pendens listed in Schedule 4, do
not burden the Production Payment), but only for so long as enforcement thereof
is stayed or otherwise prevented and (vi) liens in favor of the Trustee
burdening the Retained Interests but not the Production Payment (the matters
described in the foregoing clauses (i), (ii), (iii), (iv), (v) and (vi) are
herein called the "Permitted Encumbrances"). The listing of Permitted
Encumbrances is made for the purpose of limiting the warranties of Grantor made
herein, and
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is not intended to restrict the description of the Subject Interests, nor is it
intended that the listing herein of any Permitted Encumbrances shall subordinate
the Production Payment to such Permitted Encumbrance or otherwise cause the
Conveyance or the rights of Grantees thereunder to be made subject to, or
encumbered by, such Permitted Encumbrance. As provided above, no judgment lien
or lis pendens referred to in clause (v) above shall be considered to be a
Permitted Encumbrance (for the purposes of Section 4.1 of the Conveyance or for
any other purpose) after enforcement thereof ceases to be stayed or otherwise
prevented.
(i) The oil, gas or mineral leases, contracts, servitudes and other
agreements forming a part of the Subject Interests, to the extent the same cover
or otherwise relate to the Subject Interests, are in full force and effect, and
Grantor agrees to so maintain them in full force and effect. All rents,
royalties and other payments due and payable under such leases, contracts,
servitudes and other agreements, or under the Permitted Encumbrances, or
otherwise attendant to the ownership or operation of the Subject Interests, have
been, and will continue to be, properly and timely paid. Grantor is not in
default with respect to Grantor's obligations (and Grantor is not aware of any
default by any third party with respect to such third party's obligations) under
such leases, contracts, servitudes and other agreements, or under the Permitted
Encumbrances, or otherwise attendant to the ownership or operation of any part
of the Subject Interests, where such default could materially and adversely
affect the ownership or operation of any of the Subject Interests; Grantor will
fulfill all such obligations coming due in the future.
(j) Schedule 2 lists those Subject Wells the production from which is not
presently subject to severance tax pursuant to (S) 201.057 of the Texas Tax
Code.
(k) No Subject Interest is dedicated or otherwise subject to any
contractual or other arrangement (other than the Standby Gas Sales Agreement and
the PP Gas Sales Agreement) for the sale, processing or transportation of
Hydrocarbons produced therefrom (or otherwise related to the marketing of such
Hydrocarbons) which would bind Grantees as owner of the PP Hydrocarbons, or
would otherwise restrict the rights of Grantees under the Conveyance to take
possession of and market PP Hydrocarbons. Neither Grantor, nor any of its
predecessors in title, has received prepayments (including payments for gas not
taken pursuant to "take or pay" or other similar arrangements) for any
Hydrocarbons produced or to be produced from the Subject Interests after the
Closing Date. There is no Subject Interest with respect to which Grantor, or
its predecessors in title, has, prior to the date hereof, taken more
("overproduction"), or less ("underproduction"), Hydrocarbons than its (or its
predecessor's in title's) ownership interest in such Subject Interest would
entitle it to take, which overproduction or underproduction has not been
recouped as of the date hereof (other than a royalty owner which was
overproduced by no more than 22,000 MMBTUs as of 3/31/96). No Subject Interest
is subject to any production balancing arrangement under which one or more third
Persons (other than such royalty owner) may take a portion of the production
attributable to such Subject Interest without payment (or without full payment)
therefor as a result of production having been taken from, or as a result of
other actions or inactions with respect to, other properties. No Subject
Interest is subject on the date hereof to any regulatory refund
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obligation and, to the best of Grantor's knowledge, no facts exist which might
cause the same to be imposed.
(l) The Subject Interests (and properties unitized therewith) are being
(and, to the extent the same could materially and adversely affect the ownership
or operation of the Subject Interests after the date hereof, have in the past
been) maintained, operated and developed in a good and workmanlike manner, in
accordance with prudent industry standards and in conformity in all material
respects with all applicable laws and all rules, regulations and orders of all
duly constituted authorities having jurisdiction and in conformity with all oil,
gas or other mineral leases and other contracts and agreements forming a part of
the Subject Interests and in conformity with the Permitted Encumbrances. All
equipment and facilities necessary for such operation of the Subject Wells are
in place and in good and usable condition, subject to ordinary maintenance and
repair requirements. No Subject Interest is subject to having allowable
production after the date hereof reduced below the full and regular allowable
(including the maximum permissible tolerance) because of any overproduction
(whether or not the same was permissible at the time) prior to the date hereof,
and none of the wells located on the Subject Interests (or properties unitized
therewith) are or will be deviated from the vertical more than the maximum
permitted by applicable laws, regulations, rules and orders, and such wells are,
and will remain, bottomed under and producing from (with the well bores wholly
within) the Subject Interests (or, in the case of wells located on properties
unitized therewith, such unitized properties). Grantor has all governmental
licenses and permits necessary or appropriate to own and operate the Subject
Interests, and Grantor has not received notice of any material violations in
respect of any such licenses or permits.
(m) All valid expenses and liabilities (including all bills for labor,
materials and supplies used or furnished for use in connection with the Subject
Interests and all Direct Taxes and Current Ad Valorem Taxes relating to the
ownership or operation of the Subject Interests) have been, or are being, paid
(timely, and before the same become delinquent) by Grantor (and, as to
properties operated by third parties, by such third parties, to the best of
Grantor's knowledge).
(n) The Subject Interests, and Grantor's operations thereon, are in
compliance in all material respects with all applicable federal, state or local
laws, including all Environmental Laws. Grantor has taken all steps necessary
to determine and has determined that no Hazardous Substance has been disposed of
or otherwise released on or to the Subject Interests (except for dispositions
and releases done in compliance with all applicable laws and for which Grantor
otherwise has no material remedial obligations), and the use which Grantor makes
and intends to make of the Subject Interests will not result in any such
disposal or release. None of such operations of Grantor, and none of the
Subject Interests, is the subject of any federal, state or local investigation
evaluating whether any remedial action is needed to respond to a release of any
Hazardous Substance into the environment or to the improper storage or disposal
(including storage or disposal at offsite locations) of any Hazardous Substance.
Neither Grantor nor, to the best knowledge of Grantor, any other Person has
filed any notice under any Environmental Law indicating that Grantor or any of
its Affiliates is responsible for the release into the environment, or the
improper storage or disposal, of any Hazardous Substance that is now located on,
was removed from, or is in any way related to any Subject
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Interest, or that any Hazardous Substance has been released (other than
atmospheric emissions from compressor stations, which emissions are now in
compliance and permitted under applicable Environmental Laws), or is improperly
stored or disposed of, upon any Subject Interest or upon any property of any
TransAmerican Company located near to any Subject Interest. No TransAmerican
Company otherwise has any material contingent liability in connection with its
operations or properties in or near any Subject Interests for the release into
the environment, or the improper storage or disposal, of any such pollutant,
waste, substance or constituent. The Associated Subject Interests are in
compliance in all material respects with all Environmental Laws for which
Grantor (or, to the best of its knowledge, its predecessors in title to the
Subject Interests) would be responsible; as used herein the term "Associated
Subject Interests" means any and all interests in and to (and or carved out of)
the lands which are described or referred to in Exhibit A to the Conveyance, or
which are otherwise described in any of the oil, gas or mineral leases or other
instruments described in or referred to in such Exhibit A, whether or not such
property interests are owned by Grantor.
(o) No Subject Interest is subject to any tax or common law partnership or
to any joint venture (other than any Permitted Encumbrances).
(p) No Subject Interest is subject to a preferential right to purchase (a
"Preferential Right") or subject to the requirement that a consent to assignment
(other than the Partial Release) be obtained from a third party.
(q) Grantor has incurred no obligation or liability, contingent or
otherwise, for broker's or finder's fees in respect of any of the matters
provided for in this Agreement.
(r) Grantor has paid $3,000,000 under the Settlement Agreement and on the
date hereof Grantor is in compliance with its obligations thereunder. Schedule
4 contains a complete and accurate list of all abstracts of judgment and notices
of lis pendens on file on the Closing Date against any of the Subject Interests.
Grantor has posted supersedeas bonds in the amounts sufficient in all respects
to stay execution of (and pay, if necessary) any such judgment, other than the
judgments which are to be disposed of pursuant to the Settlement Agreement.
(s) All Subject Wells are equipped for production and connected to a
gathering system of sufficient capacity and pressure to permit the continuing
delivery of PP Hydrocarbons in volumes equal to the volumes historically
delivered. TTC's pipeline system from the Delivery Points to Agua Dulce, Texas
has a present daily delivery capacity (in this subsection, the "Capacity") of
approximately 800 million cubic feet per day ("MMcf/d"). Approximately 500
MMcf/d of Capacity is presently being used by all Persons transporting gas
through such pipeline system, and approximately 470 MMcf/d of Capacity, in the
aggregate, is contractually committed by TTC to the following third parties or
their Affiliates (or to Grantor for the benefit of such Persons) who may have
priority rights to such Capacity which are superior to the rights of Koch Gas
Services under the Transportation Agreement with respect to the following
amounts of Capacity (but no more):
The Coastal Corporation 140 MMcf/d
Associated Gas Services, Inc. 100 MMcf/d
Associated Gas Services, Inc. (June, 1996 only) 75 MMcf/d
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TCW Funds V and Sunflower 75 MMcf/d
Midcon Texas Pipeline Corp. (June, 1996 only) 80 MMcf/d
No other Person has any contractual or other rights owed to it by TTC or any
other TransAmerican Company which would restrict TTC from honoring its
obligations to Koch Gas Services under the Transportation Agreement. Grantor
agrees to subordinate to Koch Gas Services any rights which Grantor may now or
hereafter have to make use of Capacity, including any such rights arising under
any arrangement with TTC for firm transportation of gas, and Grantor agrees that
it will not sell any of Grantor's gas to any third party which might make use of
Capacity unless such third party similarly agrees to subordinate to Koch Gas
Services any rights which such third party may now or hereafter have to make use
of Capacity, including any such rights arising under any arrangement with TTC
for firm transportation of gas.
(t) The facilities and arrangements by which Grantor disposes of water
produced from the Subject Wells are sufficient to dispose of the volumes of
water currently produced and Grantor has no knowledge of any reason to believe
that the facilities and arrangements will not be adequate in the future to
dispose of the volumes of water that may be reasonably expected to be produced
in conjunction with the Subject Wells.
(u) Except as provided in the Production Payment Documents, Grantor has
made no oral or written commitments to make capital expenditures in connection
with the Subject Wells after the Closing Date and no proposals have been made
(i) to drill additional wells or recomplete any zones in wells directly
offsetting any Subject Well that would produce from the subject reservoir for
such well, (ii) to deepen, plug back or rework any Subject Wells (other than in
the ordinary course of business), (iii) to conduct any operations other than
normal operations of the Subject Wells, or (iv) to abandon any Subject Wells.
Section 4.2. Representations and Warranties of Grantees. Each Grantee
hereby severally represents and warrants to Grantor that: (a) such Grantee has
incurred no obligation or liability, contingent or otherwise, for broker's or
finder's fees in respect of any of the matters provided for in this Agreement;
(b) this Agreement constitutes the legal, valid and binding act and obligation
of such Grantee, enforceable against such Grantee in accordance with its terms
except as such enforcement may be limited by bankruptcy, insolvency, moratorium
and other similar laws applicable to creditors' rights generally or by general
principles of equity; (c) no bankruptcy or insolvency proceeding is presently
pending or contemplated (or, to such Grantee's best knowledge, threatened) by or
against such Grantee under any applicable bankruptcy, insolvency or other
similar law of any jurisdiction; and (d) such Grantee has not made a general
assignment for the benefit of creditors.
Section 4.3. Covenants of Grantor. To induce Grantees to enter into this
Agreement and to pay the Purchase Price, Grantor warrants, covenants and agrees
with each Grantee that until the Termination Time, unless each Grantee has
previously agreed otherwise:
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(a) Grantor will perform all of its covenants and duties under the
Production Payment Documents, all as fully as if they were set out in full
herein. Grantor will cause TTC to perform all of its covenants and duties under
the Production Payment Documents.
(b) In addition to any reports and information specifically required by
the terms of this Agreement or the Conveyance, Grantor agrees to furnish to
Grantees full information, at all reasonable times, which any Grantee may
request concerning any covenant, provision or condition of the Production
Payment Documents or any matter or records in connection with such documents or
with the operation of, reserve engineering for, production from, or accounting
for the Subject Interests. Subject to any restrictions on Grantor's right to do
so under applicable operating agreements or similar contracts, Grantor will
permit representatives designated by any Grantee, including independent
accountants, agents, attorneys, and other Persons, to visit and inspect the
Subject Interests and Grantor's books and records pertaining to the Subject
Interests (and to make copies and photocopies from such records and to write
down and record such information as such representatives may request, provided
that no copies may be made of geological or seismic data), and Grantor shall
permit such Grantee and its designated representatives reasonably to investigate
and verify the accuracy of information furnished to Grantees hereunder or in
connection herewith and to discuss all such matters with its officers, employees
and representatives.
(c) If any Person ever challenges or attacks (i) the validity or priority
of any Production Payment Document or of any rights, titles, or interests
created or evidenced thereby or (ii) the title of Grantor to any Subject
Interest or of any Grantee to any part of the Production Payment, then upon
learning thereof Grantor will give prompt written notice thereof to each Grantee
and at Grantor's own cost and expense will diligently endeavor to defeat such
challenge or attack and to cure any defect that may be developed or claimed, and
Grantor will take all necessary and proper steps for the defense of any legal
proceedings with respect thereto, including the employment of counsel to
represent Grantor, the prosecution or defense of litigation, and the release or
discharge of all adverse claims. Majority Grantees (whether or not any Grantee
is named as a party to legal proceedings with respect thereto) are hereby
authorized and empowered to take such additional steps as in their judgment and
discretion may be necessary or proper for the defense of any such legal
proceedings or the protection of the validity or priority of the Production
Payment Documents and the rights, titles, and interests created or evidenced
thereby, including the employment of independent counsel (at reasonable fees) to
represent one or more Grantees, the prosecution or defense of litigation, the
compromise or discharge of any adverse claims made with respect to the
Production Payment, the purchase of any tax title and the removal of prior liens
or security interests, and all expenditures so made by any Grantee of every kind
and character shall be a Reimbursable Expense (which obligation Grantor hereby
expressly promises to pay on demand) owing by Grantor to such Grantee and shall
bear interest from the date demanded until paid at the Agreed Rate.
(d) Grantor will, on request of Majority Grantees, (i) promptly correct
any defect, error or omission which may be discovered in the contents, execution
or acknowledgment of any Production Payment Document, (ii) execute, acknowledge,
deliver and record or file such
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further instruments and do such further acts as may be necessary, desirable or
proper to carry out more effectively the purposes of the Production Payment
Documents and to more fully identify and make subject to the Conveyance any
property intended to be covered thereby, including any renewals, additions,
substitutions, replacements, or appurtenances to the Subject Interests; and
(iii) execute, acknowledge, deliver, and file or record any document or
instrument reasonably requested by Majority Grantees to protect the rights,
title and interests of Grantees under the Production Payment Documents against
the rights or interests of third Persons. Grantor shall pay all reasonable costs
connected with any of the foregoing.
(e) Without limitation of Grantees' remedies for breach of the
representations or warranties contained in Section 4.1(p), if a third party
properly exercises a Preferential Right after the Closing, each Grantee will, in
its sole and absolute discretion, either (i) join in any required conveyance of
the affected Subject Interest to such third party, or (ii) make a conveyance of
the affected Subject Interest to Grantor in order that Grantor may make the
necessary conveyance to such third party. Upon making a conveyance in
accordance with (i) or (ii), above, such Grantee shall (without limitation of
its remedies for breach of the representations or warranties contained in
Section 4.1(p) hereof) be entitled to receive --either from the exercising third
party, assuming that such Grantee exercised option (i), or from Grantor,
assuming that such Grantee exercised option (ii) -- the entire amount of
consideration attributable to such Grantee's interest in the particular Subject
Interest covered by such Preferential Right. No Grantee shall incur any
liabilities with respect to any such reconveyance of properties that may be
required in accordance with this subsection or otherwise with respect to any
exercise of a Preferential Right, and Grantor shall indemnify and hold harmless
each Grantee from any liabilities (including reasonable attorneys' fees) with
respect thereto.
(f) Grantor will not cause or permit the Subject Interests, the Associated
Subject Interests or Grantor to be in material violation of, or do anything or
permit anything to be done which will subject the Subject Interests or the
Associated Subject Interests to, any material remedial obligations under any
Environmental Laws, assuming disclosure to the applicable governmental
authorities of all relevant facts, conditions and circumstances, if any,
pertaining to the Subject Interests or the Associated Subject Interests and
Grantor will promptly notify each Grantee in writing of any existing, pending
or, to the best knowledge of Grantor, threatened investigation or inquiry by any
private party or governmental authority in connection with any Environmental
Laws. Grantor will take all steps necessary to determine that no Hazardous
Substances are disposed of or otherwise released or being released on or to the
Subject Interests or the Associated Subject Interests in violation of any
Environmental Laws. Grantor will not cause or permit the disposal or other
release of any Hazardous Substance on or to the Subject Interests or the
Associated Subject Interests in violation of any Environmental Law and covenants
and agrees to remove or remediate any Hazardous Substance on the Subject
Interests or the Associated Subject Interests.
(g) Grantor will timely deposit with the Trustee any portion of the
Purchase Price which is required to be deposited pursuant to the Trust
Indenture. Grantor will otherwise
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ensure that no Event of Default occurs under the Trust Indenture. Grantor will
use all of the Purchase Price in accordance with the terms of the Trust
Indenture.
(h) Grantor will provide to Grantees any assurances of title which
Majority Grantees may from time to time reasonably request concerning the
Production Payment, including the recording and filing of the Conveyance and the
updating of any specified title opinions through such recording (it being
understood that no title deficiencies learned of by any Grantee shall in any way
be deemed to qualify any of Grantor's warranties of title or indemnities with
respect to title in any of the Production Payment Documents).
(i) Grantor will fully bond (or pay) any judgment entered in any lawsuit
listed in Schedule 1 or Schedule 4 so that such judgment can be fully paid by
proceeding against such bond without enforcement of any judgment lien or rights
relating to any lis pendens and without otherwise affecting the Production
Payment.
(j) On or before May 31, 1996, Grantor will pay substantially all capital
expenditures (to the extent such capital expenditures will involve cash
payments) it has incurred prior to such date in connection with the drilling and
completion of wells on the Subject Interests which have been spudded on or
before the date hereof, in order to avoid such capital expenditures being
considered "Cap Ex", as defined in the definition of "Marginal Costs" in the
Conveyance, for any period after such date.
Section 4.4. Reporting Covenants of Grantor. To induce Grantees to enter
into this Agreement and to pay the Purchase Price, Grantor warrants, covenants
and agrees with each Grantee that until the Termination Time (and for two months
thereafter, with respect to subsection (a) below), unless each Grantee has
previously agreed otherwise, Grantor will furnish the following statements and
reports to each Grantee at Grantor's expense:
(a) Monthly, within 25 days after the end of the month to which each
report applies, Grantor shall furnish a report in the form of Schedule 3
showing:
(i) the name of each Subject Well,
(ii) the portion of gross production of Gas from each Subject
Well (measured in Mcfs) which is attributable to Subject Interests as
metered at the Delivery Points,
(iii) the quantity of PP Hydrocarbons (measured in Mcfs) produced
from each Subject Well and delivered to Grantees,
(iv) the number of MMBTUs in each Mcf of PP Hydrocarbons
produced, as measured at the Delivery Points,
(v) the PP Severance Taxes for such month with respect to PP
Hydrocarbons, if paid by Grantor,
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(vi) any PP Ad Valorem Taxes actually paid during such month by
Grantor,
(vii) the calculation of any reduction, if any, in PP
Hydrocarbons due to adjustments for Excess Marginal Costs for such
month as provided in Section 2.2 of the Conveyance, and
(viii) any additions to the Base Volume as described in Section
2.4 of the Conveyance.
Such report shall be supplemented, if and when requested by any Grantee, to
show: (ix) the gross production of Hydrocarbons from each Subject Well, (x)
the quantities thereof, if any, used in lease operations, (xi) the most
recent status of any Gas imbalances, if any, affecting the Subject
Interests, (xii) the number of wells operated, wells drilled and wells
abandoned on the Subject Interests, and (xiii) the costs to Grantor of
operating the Subject Interests. To the extent that any of such
information is not available to Grantor (despite all reasonable efforts to
obtain same) at the time any monthly report is furnished, it shall be
supplied to Grantees promptly after receipt.
(b) Within 60 days after each Regular Evaluation Date, and within 60
days after the later of any Optional Evaluation Date or the date on which
any Optional Evaluation Date is designated, Grantor shall furnish a Reserve
Report covering the Subject Interests which has been prepared as of such
Evaluation Date in accordance with the terms of Section 5.1 hereof.
(c) Quarterly, within 60 days after the end of the first three fiscal
quarters in each fiscal year of Grantor, and annually, within 105 days
after the end of each fiscal year of Grantor, Grantor's consolidated
financial statements as of the end of and for such period, including a
balance sheet and statements of income, cash flows, and stockholder's
equity, prepared in accordance with generally accepted accounting
principles and, with respect to the annual financial statements,
accompanied by a report of the Grantor's independent certified public
accountants stating that their examination was made in accordance with
generally accepted auditing standards and that in their opinion such
financial statements fairly present the matters reported on in accordance
with generally accepted accounting principles consistently applied. For so
long as Grantor files Forms 10-Q and 10-K with the Securities and Exchange
Commission, Grantor may satisfy the reporting requirements in this
subsection (c) by sending to each Grantee a copy of each such form 10-Q and
10-K within fifteen days after filing the same with the Securities and
Exchange Commission, and whenever Grantor or any Affiliate of Grantor files
any Form 10-Q or 10-K with the Securities and Exchange Commission or
Grantor files any Form 8-K, Grantor shall obtain and send a copy of such
form to each Grantee within fifteen days after such form is so filed.
(d) Upon request of any Grantee, but not more often than quarterly,
Grantor shall furnish reports, in detail reasonably acceptable to Grantees,
concerning any
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change in methods of operation of all or any Subject Wells, any new
drilling or development, any method of secondary recovery by repressuring
or otherwise, or any other action with respect to the Subject Interests,
the decision as to which may increase or reduce the quantity of
Hydrocarbons ultimately recoverable from the Subject Interests, or the rate
of production therefrom, or which may shorten or prolong the period of time
required for liquidation of the Production Payment.
(e) Upon request of any Grantee, copies of surface maps showing
property lines and well locations, flow and pressure tests, natural gas
analysis and casing programs and other similar information related to the
Subject Interests, the Subject Wells and the production therefrom.
(f) Upon request of Majority Grantees, at any time and from time to
time (but not more frequently than once in any period of twelve consecutive
months, unless there has occurred a Designated Event that is not cured
within the applicable grace period) Grantor will provide at Grantor's sole
expense an inspection or audit of the Subject Interests and the Subject
Lands from an engineering or consulting firm approved by Majority Grantees,
indicating compliance or non-compliance with Environmental Laws. Except
for reports requested during the continuance of a Designated Event, Grantor
shall be responsible to pay for the costs of only one such report during
the term hereof (which Majority Grantees shall specify), and Grantees shall
be responsible for the costs of all others in accordance with their
respective Percentage Shares.
(g) Promptly (and in any event within five days) after learning of
the occurrence of any Designated Event or of the making of any claim by any
Person which allegedly affects the rights of Grantor or any Grantee in and
to the Subject Interests, Grantor will give each Grantee written notice
thereof.
Section 4.5. Additional Remedies Upon Designated Event. Upon the
-----------------------------------------
occurrence of a Designated Event (and, with respect to the remedies described in
subsections (b) and (c) below, provided the breach giving rise to such
Designated Event has not been cured within 30 days after Majority Grantees give
notice of such breach to Grantor), Majority Grantees shall, in addition to their
other rights and remedies, have the right, but not the obligation, to:
(a) instruct Koch Gas Services to pay directly to Grantees (in
accordance with their respective Percentage Shares, or as otherwise
directed by all Grantees) any amounts owing under the Standby Gas Sales
Agreement, and Grantees shall apply such amounts to any amounts then owing
by Grantor to any Grantee which are described in Section 2.2 or 5.1(a) of
the Conveyance;
(b) remove Grantor as the operator of any or all of the Subject
Interests in which 100% of the working interest is owned by Grantor (a
"100% Property"), or
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(c) instruct Grantor to resign as the operator of any Subject Interest
(a "Third Party Property") that is subject to a joint operating agreement
between Grantor and any third party working interest owner other than
Grantor (a "Third Party JOA").
In the event Grantor is removed by Majority Grantees as the operator of any
particular 100% Property, Majority Grantees may appoint an Affiliate of
Sunflower or another reputable third party (which may be an Affiliate of any one
or more Grantees but which may not otherwise be any of the Persons described in
clauses (ii) or (iii) of Section 6.2 of the Conveyance, or any Affiliate of any
such Person) who is experienced in operating Gas properties, as the operator of
any particular 100% Property, and Majority Grantees may negotiate with such
third party a substitute operating agreement containing such terms and
conditions as are commercially reasonable in a transaction involving a contract
operator with no ownership interest in the contract area covered by an operating
agreement. All costs, expenses and fees billed or invoiced under any such
substitute operating agreement shall be borne and timely paid by Grantor. In the
event Majority Grantees request in accordance herewith that Grantor resign as
the operator of any Third Party Property (or in the event Grantor is otherwise
removed as operator under the terms of an applicable Third Party JOA, in which
case Grantor shall immediately so notify each Grantee), Grantor shall consult
with Grantees prior to casting any vote it may have to name a substitute
operator and shall cast such vote as directed by Majority Grantees.
ARTICLE V - Adjustment of Dedication Percentage
Section 5.1. Reserve Reports. Within 60 days after each Regular
Evaluation Date, and within 60 days after the date of any Optional Evaluation
Date or the date on which any Optional Evaluation Date is designated, Grantor
shall furnish to each Grantee a reserve engineering report prepared as of such
Evaluation Date by Netherland, Sewell & Associates (or other independent
petroleum engineers selected by Grantor and acceptable to Majority Grantees in
the reasonable exercise of their discretion) with respect to the Subject
Interests. Each such report is herein called a "Reserve Report". Each such
Reserve Report shall be prepared and furnished at the cost of Grantor, provided
that any such Reserve Report prepared as of an Optional Evaluation Date which
reflects a ratio of SINPV to PPNPV of the Required Ratio or more shall be at the
cost of Grantees in accordance with their respective Percentage Shares. Each
Reserve Report shall be prepared in accordance with the standards of the Society
of Petroleum Engineers and such engineers' customary professional practices,
provided that each Reserve Report shall:
(a) separately address proved developed producing reserves from other
reserves.
(b) separately address the anticipated production of proved developed
producing reserves accruing to (i) the Production Payment and (ii) the
total Subject Interests.
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(c) separately calculate the future net revenues allocable to the
Production Payment and the future net revenues allocable to the total
Subject Interests from anticipated sales of production from proved
developed producing reserves and, using a discount factor of ten percent
(10%) per annum, the present value of each on the date as of which such
report is prepared.
In preparing each Reserve Report and making such calculations, such engineers
shall: use the Dedication Percentages (both present and future) which are in
effect on such Evaluation Date or are then scheduled to take effect thereafter,
use the Futures Price as calculated for such Evaluation Date, and take into
account any limitations on production accruing to the Production Payment which
would be caused by projected Excess Marginal Costs and any projected increases
(pursuant to the terms of the Conveyance) in the Base Volume. As used herein:
(i) "PPNPV" means such discounted present value of the future net
revenues accruing to the Production Payment from anticipated sales of
production from proved producing reserves.
(ii) "SINPV" means such discounted present value of the future net
revenues accruing to the total Subject Interests from anticipated sales of
production from proved producing reserves.
(iii) "Futures Price" means, for any Evaluation Date, the greater of
(i) $1.30 per MMBTU or
(ii) the least of: (1) the average of the prices payable under
the PP Gas Sales Agreement for the twelve months preceding the date as
of which such report is prepared, (2) the average of the prices
payable under the PP Gas Sales Agreement for the six months preceding
the date as of which such report is prepared, and (3) the remainder of
(A) the average of the prices on the New York Mercantile Exchange (or
any successor organization), as reported in the Wall Street Journal on
such Evaluation Date (or, if such date is not a Business Day, for the
first Business Day thereafter) for the next twelve months' forward
contracts for natural gas delivered at the Henry Hub, minus (B) the
sum of $.17 plus (or minus) any reasonable basis differential between
the Henry Hub gas price and the Agua Dulce gas price which Majority
Grantees then specify for use in preparing such Reserve Report.
Section 5.2. Adjustment to Dedication Percentage. Using the Reserve
Report prepared as of each Evaluation Date, and the PPNPV and SINPV as
calculated therein, Majority Grantees shall calculate the ratio of such SINPV to
such PPNPV. If this ratio is less than the Required Ratio, then the Dedication
Percentage shall be automatically increased to ninety percent (90%) as provided
in Section 2.3 of the Conveyance.
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ARTICLE VI - Miscellaneous
Section 6.1. Waivers and Amendments. No failure or delay (whether by
course of conduct or otherwise) by any Grantee in exercising any right, power or
remedy which any Grantee may have under any of the Production Payment Documents
shall operate as a waiver thereof or of any other right, power or remedy, nor
shall any single or partial exercise by any Grantee of any such right, power or
remedy preclude any other or further exercise thereof or of any other right,
power or remedy. No waiver of any provision of any Production Payment Document
and no consent to any departure therefrom shall ever be effective unless it is
in writing and signed by each Grantee, and then such waiver or consent shall be
effective only in the specific instances and for the purposes for which given
and to the extent specified in such writing. No notice to or demand on Grantor
shall in any case of itself entitle Grantor to any other or further notice or
demand in similar or other circumstances. This Agreement and the other
Production Payment Documents set forth the entire understanding and agreement of
the parties hereto and thereto with respect to the transactions contemplated
herein and therein and supersede all prior discussions and understandings with
respect to the subject matter hereof and thereof, and no modification or
amendment of or supplement to this Agreement or the other Production Payment
Documents shall be valid or effective unless the same is in writing and signed
by the party against whom it is sought to be enforced.
THIS WRITTEN AGREEMENT AND THE OTHER PRODUCTION PAYMENT DOCUMENTS REPRESENT
THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Section 6.2. Survival of Agreements; Cumulative Nature. All of the
various representations, warranties, indemnities, covenants and agreements in
the Production Payment Documents shall survive the execution and delivery of
this Agreement and the other Production Payment Documents and the performance
hereof and thereof, including the granting of the Production Payment and the
delivery of the Conveyance. The representations, warranties, indemnities, and
covenants made by the parties in the Production Payment Documents, and the
rights, powers, and privileges granted to the parties in the Production Payment
Documents, are cumulative, and, except for expressly specified waivers and
consents, no Production Payment Document shall be construed in the context of
another to diminish, nullify, or otherwise reduce the benefit to either party of
any such representation, warranty, indemnity, covenant, right, power or
privilege. In particular and without limitation, no exception set out in this
Agreement to any representation, warranty, indemnity, or covenant herein
contained shall apply to any similar representation, warranty, indemnity, or
covenant contained in any other Production Payment Document, and each such
similar representation, warranty, indemnity, or covenant shall be subject only
to those exceptions which are expressly made applicable to it by the terms of
the various Production Payment Documents.
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Section 6.3. Notices. All notices, requests, consents, demands and other
communications (in this section, collectively called "notices") which are
required or permitted under any Production Payment Document shall be in writing,
unless otherwise specifically provided in such Production Payment Document, and
shall be deemed sufficiently given or furnished if delivered by personal
delivery, by telecopy, by delivery service with proof of delivery, or by
registered or certified United States mail, postage prepaid, to Grantor at its
address specified on the signature pages hereto and to each Grantee at its
address specified on the signature pages hereto. Any such notice shall be
deemed to have been given (a) in the case of personal delivery or delivery
service, as of the date of first attempted delivery at the address and in the
manner provided herein, (b) in the case of telecopy, upon receipt, or (c) in the
case of registered or certified United States mail, three days after deposit in
the mail. Each of Grantor and Grantees may change their respective addresses
from time to time by sending a notice of the new address, in the manner provided
for in this section, to the others.
Section 6.4. Parties in Interest. All grants, covenants and agreements
contained in the Production Payment Documents shall bind and inure to the
benefit of the parties thereto and their respective successors and assigns;
providing that any assignment of any party's rights and duties hereunder must be
made in accordance with Article VI of the Conveyance.
Section 6.5. Governing Law. Except to the extent that the law of another
jurisdiction is expressly elected in a Production Payment Document, the
Production Payment Documents shall be deemed contracts and instruments made
under the laws of the State of Texas and shall be construed and enforced in
accordance with and governed by the laws of the State of Texas and the laws of
the United States of America, without regard to principles of conflicts of law.
Section 6.6. Limitation on Interest. Although the Production Payment
Documents provide for the sale and purchase of a real property interest and not
a loan (except under federal income tax law), there are certain provisions (such
as Section 5.1(a) of the Conveyance) of the Production Payment Documents which
provide for the charging and payment of interest. Grantees and Grantor intend
to contract in strict compliance with applicable usury law from time to time in
effect. In furtherance thereof they hereby stipulate and agree that none of the
terms and provisions contained in the Production Payment Documents shall ever be
construed to create a contract to pay, for the use, forbearance or detention of
money, interest in excess of the maximum amount of interest permitted to be
charged by applicable law from time to time in effect. No party to any
Production Payment Document shall ever be liable for unearned interest or shall
ever be required to pay interest in excess of the maximum amount that may be
lawfully charged under applicable law from time to time in effect, and the
provisions of this section shall control over all other provisions of the
Production Payment Documents which may be in conflict or apparent conflict
herewith. In determining whether or not the interest paid or payable, under any
specific circumstance, exceeds the maximum amount permitted under applicable
law, the parties to the Production Payment Documents shall to the greatest
extent permitted under applicable law: (a) characterize any non-principal
payment as an expense, fee or premium rather than as interest, (b) exclude
voluntary prepayments and the effects thereof, and (c) amortize, prorate,
allocate, and spread the total amount of interest throughout the entire
contemplated term of the interest
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bearing obligation in accordance with the amounts thereof outstanding from time
to time and the maximum legal rate of interest from time to time in effect under
applicable law in order to lawfully charge the maximum amount of interest
permitted under applicable law. In the event applicable law provides for an
interest ceiling under Texas Revised Civil Statutes Annotated article 5069-1.04,
that ceiling shall be the indicated rate ceiling. As used in this section the
term "applicable law" means the laws of the State of Texas or the laws of the
United States of America, whichever laws allow the greater interest, as such
laws now exist or may be changed or amended or come into effect in the future.
Section 6.7. Termination; Limited Survival. As provided in the
Conveyance, the Production Payment will terminate at the Termination Time
referred to therein. Notwithstanding the foregoing or anything to the contrary
in any Production Payment Document, all waivers or admissions made by Grantor in
any Production Payment Document and all obligations which any Person may have to
indemnify or compensate any Grantee shall survive any termination of this
Agreement or any other Production Payment Document. At the request and expense
of Grantor, Grantees shall prepare, execute and deliver all necessary
instruments (in proper recordable form, if applicable) to reflect and effect
such termination of the Production Payment and limited survival of the
Production Payment Documents.
Section 6.8. Severability. If any term or provision of any Production
Payment Document shall be determined to be illegal or unenforceable, all other
terms and provisions of the Production Payment Documents shall nevertheless
remain effective and shall be enforced to the fullest extent permitted by
applicable law.
Section 6.9. Arbitration.
(a) As used in this section:
(i) "AAA" means the American Arbitration Association (or any
successor thereto),
(ii) "Claims" means all claims by Grantor against any Grantee, or by
any Grantee against Grantor, with respect to the Production Payment or any
of the Production Payment Documents (including among others any claims with
respect to the interpretation or validity of any Production Payment
Document, the existence or scope of any duties owed thereunder, whether or
not any such duties have been performed or breached in any circumstances,
or the extent or enforcement of any property rights created thereunder or
subject thereto), and
(iii) "Disputed Matters" means all Claims, all defenses against any
Claims, and all controversies relating thereto.
(b) If either Grantor or any Grantee ever desires to assert a Claim, the
party asserting such Claim will give written notice thereof to the other parties
hereto. During the thirty day period following receipt of such notice by the
other party, all parties hereto will discuss such
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Claim and the validity thereof. If the parties hereto cannot come to agreement
about such Claim by the end of such thirty day period (as such period may be
extended by mutual agreement), then within fifteen days after the end of such
period either Grantor or Majority Grantees may by written notice to the other
parties hereto invoke the arbitration provisions of this Agreement, whereupon
Grantees and Grantor shall submit such Claim and all Disputed Matters in any way
related thereto to arbitration under the procedures in the next following
subsection (c).
(c) All Disputed Matters shall be resolved by arbitration conducted by
three arbitrators in accordance with this Section 6.9 and, to the extent not in
conflict herewith, the Commercial Arbitration Rules of the AAA then in effect.
Each such arbitrator must be independent and impartial and an attorney or
engineer with at least ten years' experience in the financing of oil and gas
properties. Within ten days after the sending and receipt of a notice invoking
arbitration as provided in subsection (b) above, each of Grantor and Majority
Grantees shall specify (by notice to the other parties hereto) the name and
address of an arbitrator appointed by it. At the end of such ten days, if
Majority Grantees have made a specification of their appointed arbitrator but
have not received notice of a similar specification by Grantor (or vice-versa),
then the party which has made a specification shall give notice to the other
party that it has not received a specification from the other party. If the
other party does not act to specify its arbitrator within an additional seven
days after the giving of such notice, the party who has made its specification
may appoint the second arbitrator in place of the party who has failed to do so.
Within fifteen days after the first two arbitrators have been appointed, they
shall select the third arbitrator. If a third arbitrator has not been selected
within such period, either party hereto may petition the Administrative Judge
presiding over the State District Courts of Dallas County, Texas to appoint such
third arbitrator, whereupon such judge (or any person designated by such judge
to make such appointment) may make such appointment unless the first two
arbitrators have come to agreement on the third arbitrator. Consistent with the
expedited nature of arbitration, each party will, upon the written request of
the other party, provide the other with copies of documents relevant to the
issues raised by the Disputed Matter. Other discovery may be ordered by the
arbitrators to the extent they deem relevant and appropriate, and any dispute
regarding discovery, including disputes as to the need thereof or the relevance
or scope thereof, shall be determined by the arbitrators, whose determination
shall be conclusive. Unless Grantees and Grantor agree otherwise, all
arbitrations hereunder shall be held in Los Angeles, California at the offices
of Trust Company of the West. Grantees and Grantor shall proceed expeditiously
with any such arbitration and shall conclude all proceedings thereunder,
including any hearing, in order to allow a decision based on applicable law to
be rendered within ninety days after the appointment of the third arbitrator.
The decision of any two such arbitrators on the issues before them shall be
final, and any award or order so decided may be enforced in any court having
personal jurisdiction over the party against whom enforcement is sought. Grantor
shall bear its own expenses, including attorneys' fees and expenses of
arbitration, in connection with any such arbitration, but all expenses of
Grantees shall be considered Reimbursable Expenses to be paid or reimbursed by
Grantor. Although the foregoing arbitrations shall be conducted under the rules
of the AAA, the AAA itself shall not conduct such arbitrations, nor shall such
arbitrations be considered under the auspices of the AAA, nor shall any fee be
due the AAA. The arbitrators shall honor
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Grantor's and Grantees' election of the laws of the State of Texas as set out in
the various Production Payment Documents, provided that each arbitration
proceeding shall also be subject to the United States Arbitration Act, 9 U.S.C.,
Chapter 1, (S)(S) 1 et seq, to the extent applicable. The arbitrators are not
empowered to award punitive or exemplary damages on any Claim (but are empowered
to award Reimbursable Expenses to Grantees and pre-award interest to either
party), and EACH OF GRANTOR AND GRANTEES HEREBY IRREVOCABLY WAIVES ANY RIGHT IT
MAY HAVE TO RECOVER PUNITIVE OR EXEMPLARY DAMAGES ON ANY CLAIM.
(d) All applicable statutes of limitations and defenses based on the
passage of time shall be tolled during the period in which arbitration has been
invoked as set forth in this section (but not during any period prior to such
invocation of arbitration). Each of Grantor and Grantees is required to
continue to perform its obligations under the Production Payment Documents
pending final resolution of any Disputed Matter.
Section 6.10. Counterparts. This Agreement may be separately executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to constitute one
and the same Agreement.
IN WITNESS WHEREOF, this Agreement is executed as of the date first written
above.
Grantor: TRANSTEXAS GAS CORPORATION
By: ____________________________________
Name: Ed Donahue
Title: Vice President
Grantor's address: 1300 East North Belt, Suite 310
Houston, Texas 77032-2949
Attention: Ed Donahue, Vice President
Telephone: 713/987-8600
Telecopy: 713/986-8865
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Sunflower: SUNFLOWER ENERGY FINANCE COMPANY
By: ______________________________________
Rex T. Clevenger
Vice President
Sunflower's address: 4111 E. 37th St. North
Wichita, Kansas 67220
Attention: President
Telephone: 316/828-6994
Telecopy: 316/828-4081
TCW PORTFOLIO NO. 1555 DR V SUB-CUSTODY
PARTNERSHIP, L.P.
By: TCW Royalty Company V, General Partner
By: ______________________________________
George R. Hutchinson
Vice President
By: ______________________________________
William K. White
Vice President
TCW Funds V's address: c/o Trust Company of the West
865 South Figueroa
Los Angeles, California 90017
Attention: Arthur R. Carlson
Telephone: 213/244-0053
Telecopy: 213/244-0604
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PRODUCTION PAYMENT CONVEYANCE
THIS CONVEYANCE (this "Conveyance") is made from and by TransTexas Gas
Corporation, a Delaware corporation (herein called "Grantor") to TCW Funds V and
Sunflower (as separately identified below, who are herein collectively called
"Grantees").
ARTICLE I
Section 1.1. Defined Terms. When used in this Conveyance or in any exhibit
or schedule hereto (unless otherwise defined in any such exhibit or schedule),
the following terms have the respective meanings assigned to them in this
section or in the sections, subsections, exhibits and schedules referred to
below:
"Affiliate" means, with respect to any Person: (a) any other Person directly
or indirectly owning, controlling or holding with power to vote 10% or more of
the outstanding voting securities of such Person, (b) any other Person 10% or
more of whose outstanding voting securities are directly or indirectly owned,
controlled or held with power to vote by such Person, and (c) any other Person
directly or indirectly controlling, controlled by or under common control with
such Person; provided that, whenever any Grantee is in whole or in part made up
of one or more funds, partnerships, or other entities and investment vehicles,
such Grantee's "Affiliates" shall also include any trustee, partner or other
fiduciary of or for any such fund, partnership, or other entity or investment
vehicle and any Affiliates of any such trustee, partner or fiduciary.
"Agreed Rate" means a rate of interest of one percent (1%) per month,
calculated on the basis of a 30 day month and a year of twelve such months.
"Barrel" means 42 United States standard gallons of 231 cubic inches per
gallon at 60 degrees Fahrenheit.
"Base Volume" means 38,329,000 MMBTU's, as the same may be increased from
time to time under Section 2.4 hereof.
"British Thermal Unit" or "BTU" means the amount of energy required to raise
the temperature of one pound of pure water one degree Fahrenheit from 58.5
degrees Fahrenheit to 59.5 degrees Fahrenheit, as defined in the American Gas
Association Gas Measurement Manual and any subsequent revisions. The BTU
content of any particular quantity of Gas shall be determined as set forth in
the PP Gas Sales Agreement (in the definition of "BTU" as found therein).
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"Business Day" means a day which is not a Saturday, a Sunday, a legal
holiday in Houston, Texas, or a legal holiday in Los Angeles, California.
"Certain Percentage" means, with respect to each portion of Subject Lands
described on Exhibit A, the percentage shown on Exhibit A as the "Net Revenue
Interest" for such portion of Subject Lands.
"Commercial Well" has the meaning given such term in Section 3.2(c).
"Dedication Percentage" means from the Initial Time to, but not including,
7:00 a.m. August 1, 1996, 65% and thereafter, 78%; provided that the Dedication
Percentage shall increase to ninety percent (90%) from time to time as and when
provided in Sections 2.3, 3.5 and 5.1.
"Delivery Points" means, with respect to any particular Subject Well, the
point (immediately downstream of the lease separator) at which the volumes
(measured in Mcf's) and BTU content of Gas included in PP Hydrocarbons produced
from such Subject Well are initially measured.
"Delivery Services" has the meaning given such term in Section 2.5(a)(iv).
"Designated Event" has the meaning given such term in Section 5.1.
"Direct Taxes" means all ad valorem, property, gathering, transportation,
pipeline regulating, gross receipts, severance, production, excise, heating
content, carbon, value, value added, environmental, occupation, franchise,
sales, use, fuel, and other taxes and governmental charges and assessments
imposed on or as a result of all or any part of the Subject Interests, the
Hydrocarbons produced from Subject Interests or the proceeds thereof, the
Production Payment, or the PP Hydrocarbons or the proceeds thereof, regardless
of the point at which or the manner in which such taxes, charges or assessments
are charged, collected, levied or otherwise imposed. The only taxes which are
not Direct Taxes are federal income taxes, state income taxes, and franchise
taxes levied against any Grantee and any other taxes levied against the overall
net income of any Grantee.
"economically feasible" has the meaning given such term in Section 3.2(c).
"EMC Volume" has the meaning given such term in Section 2.2(c).
"Environmental Laws" means all applicable local, state or federal laws,
rules, regulations, or orders regulating or otherwise pertaining to (a) the use,
generation, migration, storage, removal, treatment, remedy, discharge, release,
transportation, disposal or cleanup of pollutants, contamination, hazardous
wastes, hazardous substances, hazardous materials, toxic substances or toxic
pollutants, (b) the soil, surface waters, groundwaters, land, stream sediments,
surface or subsurface strata, ambient air and any other environmental medium on
or off any Subject Interest, or (c) the environment or health and safety-related
matters; including
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the following as from time to time amended and all others whether similar or
dissimilar and whether now existing or hereinafter enacted: the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986, the Resource
Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act
of 1980, the Solid Waste Disposal Act Amendments of 1980, and the Hazardous and
Solid Waste Amendments of 1984, the Hazardous Materials Transportation Act, as
amended, the Toxic Substance Control Act, as amended, the Clean Air Act, as
amended, the Clean Water Act, as amended, and all regulations promulgated
pursuant thereto.
"Excess Marginal Costs" shall mean, for any particular month, the excess of
Marginal Costs for such month over the Retained Interest Revenues for such
month.
"Gas" means natural gas and all other hydrocarbons that are gaseous in their
natural or as-produced state, including casinghead gas, whether or not such
natural gas and other gaseous hydrocarbons are Processed.
"Grantee" means any of TCW Funds V and Sunflower, and, unless the context in
which used shall otherwise require, such term shall also include any successor-
owner at the time in question of any or all of the Production Payment.
"Grantor" means the Person named in the preamble of this Conveyance as
Grantor, and, unless the context in which used shall otherwise require, such
term shall also include any successor-owner at the time in question of any or
all of the Subject Interests.
"Guaranty" shall have the meaning given such term in the Purchase Agreement.
"Hydrocarbons" means Gas.
"Imbalance Charges" shall have the meaning given such term in Section
2.5(b).
"Initial Time" means 7:00 a.m., Houston, Texas time, on June 1, 1996.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor statute or statutes.
"Majority Grantees" means any one or more Grantees whose aggregate
Percentage Shares exceed 75%.
"Marginal Costs" means, for each month, the sum of (a) one thousand eight
hundred dollars ($1,800), proportionally reduced for each Subject Well in which
Grantor owns less than 100% of the working interest, times the number of Subject
Wells in operation for at least fifteen days during such month, plus (b) the
expenses actually paid by Grantor during such month for ad valorem and severance
taxes with respect to the Retained Interests and the production therefrom, plus
(c) the amount of any actual and reasonable capital expenditures
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("Cap Ex") of Grantor actually paid during such month (proportionately reduced
for each Subject Well in which Grantor owns less than 100% of the working
interest and net of any insurance proceeds for the loss of or damage to capital
assets being replaced or repaired), to the extent such Cap Ex was incurred in
connection with the maintenance, restoration or increase of Hydrocarbon
production from the Subject Wells, including the costs of reworking a Subject
Well in an effort to restore or increase production and the costs of
constructing disposal or workover tanks or pits associated with any Subject
Well; provided that Cap Ex in any particular month shall not exceed $50,000
without the prior written consent of each Grantee, except to the extent
expenditures of Cap Ex in excess of $50,000 are required to comply with the
terms of any oil and gas lease included in the Subject Interests or under the
terms of the Trust Indenture (as defined in the Purchase Agreement).
"Market Point" has the meaning given such term in Section 2.5(a)(iv).
"Mcf" means one thousand cubic feet.
"MMBTU" means one million BTUs.
"month" means, unless the context otherwise requires, the period beginning
at 7:00 a.m. local time in Houston, Texas on the first day of a calendar month
and ending at 7:00 a.m. local time in Houston on the first day of the
immediately following calendar month.
"Non-Affiliate" means, with respect to any Person, any Person who is not an
Affiliate of such Person.
"Oil" means crude oil, condensate, and other liquid hydrocarbons separated
at the surface using prudent operations and conventional separators, but does
not include the products of Processing.
"Percentage Share" means, with respect to each Grantee, the fractional
interest which it owns in the Production Payment at the time in question. At
the initial grant of the Production Payment, the Percentage Share of TCW Funds V
is seven-ninths (7/9), and the Percentage Share of Sunflower is two-ninths
(2/9).
"Permitted Encumbrances" has the meaning given such term in the Purchase
Agreement.
"Person" means an individual, corporation, partnership, limited liability
company, association, joint stock company, pension fund, trust or trustee
thereof, estate or executor thereof, unincorporated organization or joint
venture, court or governmental unit or any agency or subdivision thereof, or any
other legally recognizable entity.
"PP Ad Valorem Taxes" means a percentage (as established below) of all ad
valorem taxes (excluding penalties and interest) on the Subject Interests, which
percentage shall be (1) zero to the extent such taxes are allocable to any
period prior to the Initial Time, and (2) a percentage equal to the quotient of
PP Hydrocarbons attributable to the subject assessment
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period divided by Hydrocarbons attributable to the Subject Interests for the
same assessment period to the extent such taxes are allocable to periods during
the Production Payment Period.
"PP Gas Sales Agreement" has the meaning given it in the Purchase Agreement.
"PP Hydrocarbons" means the Dedication Percentage of the Certain Percentage
of all Hydrocarbons in and under and that may be produced from (or, to the
extent pooled or unitized, allocated to) any Subject Lands less and except any
Hydrocarbons deemed allocable to the Retained Interests under the first sentence
of Section 2.2(c) hereof.
"PPNPV" shall have the meaning given such term in the Purchase Agreement.
"PP Severance Taxes" shall mean all severance taxes (excluding penalties and
interest) actually attributable to the PP Hydrocarbons, taking into account any
applicable credits, rebates and other factors.
"Processing" or "Processed" means to manufacture, fractionate or refine
Subject Hydrocarbons or otherwise to engage in any process designed to remove
elements (hydrocarbons or non-hydrocarbon) from Gas, but such terms do not mean
or include the prudent operation of conventional separators at the well.
References to Hydrocarbons which are "Processed" (including the reference
thereto contained in the definition of Gas) refer both to the natural gas
liquids and other products of Processing and to the residue gas and other
hydrocarbons remaining after such operations.
"Production Payment" means the term overriding royalty which is granted
herein to Grantees, and all other rights, titles, interests, estates, remedies,
powers and privileges appurtenant or incident to such term overriding royalty,
whether hereunder, under the Purchase Agreement, by operation of law, or
otherwise.
"Production Payment Period" means the period from and after the Initial Time
until the Termination Time.
"Purchase Agreement" means the Purchase Agreement of even date herewith
between Grantor and Grantees, as from time to time amended or supplemented.
"Ratification Agreement" shall have the meaning given such term in the
Purchase Agreement.
"Reimbursable Expenses" means all costs and expenses paid or incurred by or
on behalf of each Grantee or its Affiliates which are in any way related to: (a)
the negotiation, acquisition, ownership (other than federal or state income
taxes and internal audit and overhead expenses), enforcement, or termination of
the Production Payment, this Conveyance, the Purchase Agreement, or any waivers
or amendments hereto or thereto, or (b) any litigation, contest, release or
discharge of any adverse claim or demand made or proceeding instituted by any
Person affecting in any manner whatsoever the Production Payment, any PP
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Hydrocarbons or the proceeds thereof, this Conveyance or the Purchase Agreement,
or the enforcement or defense hereof or thereof, or the defense of any Grantee's
exercise of its rights hereunder or thereunder. Included among the Reimbursable
Expenses are (i) all recording and filing fees, (ii) all reasonable fees and
expenses of internal and external counsel, engineers, accountants and other
consultants, experts and advisors for each Grantee (excluding fees and expenses
of engineers prior to the occurrence of a Designated Event) and (iii) all
reasonable travel and other out of pocket expenses of each Grantee and its
consultants, experts and advisors. Notwithstanding the foregoing, Reimbursable
Expenses of any Grantee shall not include expenses that (A) are associated with
third party claims relating to title to the Production Payment, to the extent
such claims arise solely due to the actions or inactions of such Grantee, or (B)
arise out of the failure by such Grantee to perform its obligations under, or
that are otherwise based upon, any contractual arrangement entered into directly
by such Grantee and relating to the handling, transportation, sale or other
disposition of PP Hydrocarbons beyond the Delivery Points, except to the extent
any of such expenses arise due to the action or inaction of Grantor, TTC or any
Affiliate of Grantor or TTC.
"Required Ratio" has the meaning given such term in the Purchase Agreement.
"Reserve Reports" means the reserve reports to be delivered by Grantor to
Grantees pursuant to Section 5.1 of the Purchase Agreement.
"Retained Interests" means the interests retained by Grantor in the Subject
Interests after conveyance of the Production Payment hereunder.
"Retained Interest Revenues" means, for each month, all revenues actually
received during such month by Grantor from the sale or other disposition of Oil
and Gas produced from or attributable to the Subject Interests, excluding the PP
Hydrocarbons.
"Separation Point" shall mean the point at which lease level separation of
Oil takes place.
"SINPV" shall have the meaning given it in the Purchase Agreement.
"Specified Percentage" means from the Initial Time, to but not including
7:00 a.m. on August 1, 1996, 65% and thereafter, 78%.
"Standby Gas Sales Agreement" has the meaning given such term in the
Purchase Agreement.
"Subject Hydrocarbons" means that portion of the Hydrocarbons in and under
and that may be produced from (or, to the extent pooled or unitized, allocated
to) Subject Lands which is attributable (after deducting all royalties,
overriding royalties, production payments and similar burdens, excluding only
the Production Payment, which both burden the Subject Interests at the Initial
Time and are reflected in the Net Revenue Interest figures set out on Exhibit A)
to the Subject Interests.
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"Subject Interests" means:
(a) All of the properties described in Exhibit A attached hereto; and
(b) Without limitation of the foregoing, all other right, title and
interest (of whatever kind or character, whether legal or equitable and
whether vested or contingent) of Grantor in and to the oil, gas and other
minerals in and under or that may be produced from Subject Lands (including
interests in oil, gas or mineral leases to the extent the same cover such
lands, overriding royalties, production payments and net profits interests
in such lands or such leases, and fee mineral interests, fee royalty
interests and other interests in such oil, gas and other minerals) even
though Grantor's interest in such oil, gas and other minerals may be
incorrectly described in, or omitted from, Exhibit A; and
(c) All rights, titles and interests of Grantor in and to, or otherwise
derived from, all presently existing and valid oil, gas or mineral
unitization, pooling, or communitization agreements, declarations or orders
and in and to the properties covered and the units created thereby
(including all units formed under orders, rules, regulations, or other
official acts of any federal, state, or other authority having jurisdiction,
voluntary unitization agreements, designations or declarations, and so-
called "working interest units" created under operating agreements or
otherwise) relating to the properties described in subsections (a) or (b)
above in this definition.
"Subject Lands" means the lands and depths described in Exhibit A (where no
depth limit is specified, Subject Lands shall include all depths).
"Subject Wells" means all wells now located on the Subject Lands or
hereafter drilled on the Subject Lands, and any other wells now or hereafter
located on lands or leases pooled, communitized or unitized with the Subject
Interests, to the extent any such well is utilized for the production of PP
Hydrocarbons.
"Sunflower" means Sunflower Energy Finance Company, a Delaware corporation
doing business in Texas as "Kansas Sunflower Energy Finance Company."
"TCW Funds V" means TCW Portfolio No. 1555 DR V Sub-Custody Partnership,
L.P., a California limited partnership.
"Termination Time" has the meaning assigned to it in Section 2.8.
"Transportation Agreement" has the meaning given it in the Purchase
Agreement.
"TTC" means TransTexas Transmission Corporation.
Section 1.2. Rules of Construction. All references in this Conveyance to
articles, sections, subsections and other subdivisions refer to corresponding
articles, sections,
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subsections and other subdivisions of this Conveyance unless expressly provided
otherwise. Titles appearing at the beginning of any of such subdivisions are for
convenience only and shall not constitute part of such subdivisions and shall be
disregarded in construing the language contained in such subdivisions. The words
"this Conveyance", "this instrument", "herein", "hereof", "hereunder" and words
of similar import refer to this Conveyance as a whole and not to any particular
subdivision unless expressly so limited. Unless the context otherwise requires:
"including" and its grammatical variations mean "including without limitation";
"or" is not exclusive; words in the singular form shall be construed to include
the plural and vice versa; words in any gender include all other genders;
references herein to any instrument or agreement refer to such the same as it
may be from time to time amended or supplemented; and references herein to any
Person include such Person's successors and assigns. All references in this
Conveyance to exhibits and schedules refer to exhibits and schedules to this
Conveyance unless expressly provided otherwise, and all such exhibits and
schedules are hereby incorporated herein by reference and made a part hereof for
all purposes.
ARTICLE II
Section 2.1. Conveyance. Grantor does hereby GRANT, BARGAIN, SELL, CONVEY,
ASSIGN, TRANSFER, SET OVER AND DELIVER unto Grantees as a production payment,
severally in accordance with their Percentage Shares, a term overriding royalty
interest carved out of and burdening the Subject Interests equal to and measured
by all PP Hydrocarbons in and under and that may be produced from (or, to the
extent pooled or unitized, allocated to) the Subject Lands, with such production
payment to terminate as of the Termination Time.
TO HAVE AND TO HOLD the Production Payment unto Grantees, in accordance with
their Percentage Shares, and their respective successors and assigns, until the
Termination Time.
Section 2.2. Non-Cost-Bearing Interest.
(a) General. The Production Payment shall be free and clear of (i) all
Direct Taxes, other than PP Severance Taxes and PP Ad Valorem Taxes and (ii) all
costs and expenses (in this section called the "Gross Costs") associated with
acquiring, exploring, developing, maintaining, producing and operating the
Subject Interests or of delivering Hydrocarbons produced therefrom to the
Delivery Points. Without limitation of the generality of the foregoing, no
Grantee shall under any circumstances be responsible (whether personally or
otherwise) for any Gross Costs (it being understood, however, that volumes are
subject to reclassification under Section 2.2(c)). All Direct Taxes (other than
PP Severance Taxes that are not reimbursed or rebated to Grantor, in the form of
a credit or otherwise, and PP Ad Valorem Taxes) shall be borne by the Retained
Interests and paid by Grantor promptly, on or before the date same become due
and owing.
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(b) PP Taxes. Grantor undertakes to calculate and pay all PP Ad Valorem
Taxes on or before the date they become due and owing. Grantor shall, upon
request by any Grantee, provide to Grantee or Grantee's purchaser or other
designee all information in the possession of Grantor which will facilitate the
payment by such Grantee or its purchaser or other designee of PP Severance
Taxes. All PP Ad Valorem Taxes paid by Grantor for the account of each Grantee
shall be reimbursed by such Grantee to Grantor upon billing therefor and receipt
of evidence that all ad valorem taxes burdening the Subject Interests have been
paid in full.
(c) Excess Marginal Costs. To the extent that, for any particular month,
Marginal Costs exceed Retained Interest Revenues, thus resulting in Excess
Marginal Costs for such month, it shall be deemed that, during such month, a
volume, expressed in MMBTU's, of what would otherwise be properly classified as
PP Hydrocarbons was actually allocable to the Retained Interests and sold by
Grantor under the Standby Gas Sales Agreement. Such volume (herein called the
"EMC Volume") for any particular month shall be calculated by utilizing the
formula
V = EMC/P
where V is the EMC Volume for such month, EMC is the Excess Marginal Cost for
such month and P is the average price (per MMBTU) that would have been payable
for Gas over such month under the Standby Gas Sales Agreement. No EMC Volume
shall reduce the Base Volume unless and until it is recovered by Grantees in
accordance with Section 2.3(a) below. To the extent that the EMC Volume for a
particular month exceeds the PP Hydrocarbons for such month, the amount of the
excess shall be carried over and added to the EMC Volume attributable to the
next succeeding month, and shall likewise be carried over to succeeding months
until such time as it is extinguished. Grantor further agrees to secure a
representative market price (determined as of the time in question and taking
into account the relevant marketing locations and payable in cash or other
readily available funds), for any Oil or Gas attributable to the Retained
Interests provided that the price per MMBTU to which Grantor would have been
entitled under the Standby Gas Sales Agreement, if volumes were sold thereunder,
shall be deemed to satisfy the foregoing requirement.
(d) Reimbursable Expenses. Grantor will promptly (and in any event within
30 days after receiving any notice or statement for the same) pay all
Reimbursable Expenses which have been incurred and are unpaid and reimburse each
Grantee for any Reimbursable Expenses which have been paid by such Grantee.
(e) Interest. Each amount which is to be paid by Grantor pursuant to this
Section 2.2 which is instead paid by any Grantee shall bear interest at the
Agreed Rate on each day from and including the date of such payment until but
not including the date repaid by Grantor to such Grantee, and such interest
shall be payable on the first day of each calendar month and shall itself bear
interest at the same rate if not timely paid.
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Section 2.3. Increases in Dedication Percentage.
(a) EMC Volumes. The Dedication Percentage shall be increased to ninety
percent (90%), effective as of 7:00 a.m. Houston, Texas time on such first day
of the month following any month for which an EMC Volume was calculated, and the
Dedication Percentage shall remain at 90% for the entire period until 7:00 a.m.
Houston, Texas time on the first day of the month (in this section called the
"Adjustment Date") next succeeding the month when all EMC Volumes have been
delivered to Grantees at the Delivery Points. Such delivery of EMC Volumes
shall be deemed to be accomplished solely out of those PP Hydrocarbons delivered
to Grantees during any month (after taking into account any further deduction of
EMC Volumes for such month) which exceed the Specified Percentage of the Certain
Percentage of all Hydrocarbons produced from or allocated to the Subject Lands.
All EMC Volumes which are not so recovered by Grantees during any particular
month shall be carried over to the next and succeeding months until so recovered
in full. As of the Adjustment Date (provided the Dedication Percentage has not
otherwise been increased to 90% pursuant to Sections 2.3(b), 3.5 or 5.1), the
Dedication Percentage shall automatically reduce from 90% to the Specified
Percentage, effective as of 7:00 a.m. Houston, Texas time on the first day of
the next succeeding month. Thereafter the Dedication Percentage may be again
increased as provided in this Section 2.3 or in Sections 3.5 and 5.1.
(b) Reserve Reports. On or before the 60th day following any "Evaluation
Date", as defined in the Purchase Agreement, but effective as of 7:00 a.m.,
Houston, Texas time on such Evaluation Date, the Dedication Percentage shall be
increased to ninety percent if the Reserve Report prepared as of such Evaluation
Date reflects that the ratio of SINPV to PPNPV, as calculated in accordance with
the provisions of Section 5.2 of the Purchase Agreement, is less than the
Required Ratio, all as more particularly described in Section 5.2 of the
Purchase Agreement. At such time, if any, as a subsequent Reserve Report
reflects that such ratio has become equal to or greater than the Required Ratio,
then (provided the Dedication Percentage has not otherwise been increased to 90%
pursuant to Sections 2.3(a), 3.5 or 5.1) the Dedication Percentage shall
automatically reduce from 90% to the Specified Percentage. Thereafter the
Dedication Percentage may be again increased as provided in this Section 2.3 or
in Sections 3.5 and 5.1.
Section 2.4. Increases in Base Volume.
(a) Volume Shortfalls. If, in any particular month, the MMBTU's of PP
Hydrocarbons actually delivered to Grantees at the Delivery Points during such
month do not equal or exceed the MMBTU's scheduled for such month in Schedule 2
hereto (whether due to reduction by EMC Volumes or for any other reason), then
the Base Volume shall be increased by the product of the following formula:
I = (.25)(SV-DV)
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where I is the amount of such increase to the Base Volume, SV is the MMBTU's
scheduled for such month in Schedule 2 hereto, and DV is the MMBTU's of PP
Hydrocarbons actually delivered to Grantees at the Delivery Points during such
month.
(b) Unpaid Reimbursable Expenses. If any Reimbursable Expenses are not
timely paid by Grantor as required under Section 2.2(d), then the Base Volume
shall, provided Majority Grantees give notice of such increase to Grantor, be
increased by the product of the following formula:
I = RE/P
where I is the amount of such increase to the Base Volume, RE is the amount of
such unreimbursed Reimbursable Expenses, and P is the average price (per MMBTU)
that would have been payable for Gas under the Standby Gas Sales Agreement over
the month in which such notice is given. Such increase shall be deemed not to
have occurred, however, if Grantor thereafter pays such Reimbursable Expenses to
Grantees together with all interest which has accrued thereon under Section
2.2(e). The provisions of this Section 2.4 shall not be deemed to reduce
Grantor's obligations under Section 2.2(d).
(c) Redelivery Shortfalls. As to each MMBTU for which Grantees do not
timely receive payment as a result of the operation of Section 5(b) of the PP
Gas Sales Agreement, the Base Volume, to the extent previously reduced when such
MMBTU was delivered to the applicable Delivery Point, shall again be increased
by such MMBTU until such time as Grantees receive full payment therefor, at
which time the Base Volume shall again be reduced by such MMBTU.
Section 2.5. Marketing of PP Hydrocarbons by Grantee to Third Parties.
(a) Cooperation and Assistance. Grantees and Grantor will each be taking
quantities of Hydrocarbons from the Subject Interests at the Delivery Points,
each will be reselling such Hydrocarbons at or downstream of the Delivery
Points, and Grantor and Grantees accordingly recognize that coordination between
Grantees and Grantor will be required with respect thereto. Grantor agrees to
cooperate with, and assist each Grantee in connection with such Grantee's
receipt and subsequent sale of PP Hydrocarbons. Without limitation of the
foregoing:
(i) Not less than 7 Business Days prior to the first day of each month,
Grantor will notify each Grantee or its authorized representatives, in
writing, of the total amounts and average daily amounts of Gas which Grantor
expects to be produced from the Subject Interests during such month and the
portion thereof which Grantor projects will be PP Hydrocarbons.
(ii) To the extent reasonably practicable, Grantor shall thereafter
immediately notify each Grantee in writing of any change in the rate of
delivery of PP Hydrocarbons from the Subject Interests that has come to the
attention of Grantor.
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(iii) To the extent that any Grantee is selling the PP Hydrocarbons to
a purchaser who takes possession thereof at the Delivery Points, Grantor
shall on such Grantee's behalf deliver such PP Hydrocarbons to such
purchaser at the Delivery Points in a condition satisfactory to meet or
exceed all pipeline and gathering system specifications and qualifications
at such Delivery Point and otherwise to meet or exceed all specifications
from time to time in effect under the PP Gas Sales Agreement and the
Transportation Agreement. Such delivery, whether performed by Grantor or by
any other Person, shall be performed or caused to be performed by Grantor at
no cost to such Grantee.
(iv) To the extent that any Grantee is not selling the PP Hydrocarbons
to a purchaser who takes possession thereof at the Delivery Points, Grantor
shall deliver, or cause to be delivered, such PP Hydrocarbons to the Market
Points designated by such Grantee in a condition satisfactory to meet or
exceed all pipeline specifications and qualifications at such Market Points.
All such deliveries to the Market Points (herein called the "Delivery
Services"), whether performed by Grantor or by any other Person, shall be
performed or caused to be performed by Grantor at the cost to such Grantee
of $.17 per mcf so delivered. Subject to the prior rights of certain parties
as specified in Section 4.1(s) of the Purchase Agreement, the Delivery
Services shall be provided to such Grantee on a first priority basis, to the
maximum extent permitted by law, meaning, for example, that (A) pipeline,
separator, and compressor capacity, if owned or controlled by Grantor or any
Affiliate of Grantor, shall be afforded to PP Hydrocarbons prior to
affording any such capacity to Grantor, any Affiliates of Grantor or any
other Person, to the maximum extent permitted by law, and (B) pipeline,
separator, and compressor capacity owned or controlled by any Person other
than Grantor or any Affiliate of Grantor shall be afforded to PP
Hydrocarbons prior to affording any such capacity to Grantor or any
Affiliate of Grantor, and Grantor hereby expressly subordinates any capacity
rights it may now or hereafter have to the PP Hydrocarbons. Subject to the
prior rights of certain parties as specified in Section 4.1(s) of the
Purchase Agreement, Grantor shall, to the maximum extent permitted by law,
take whatever action is appropriate to cause any Affiliate or any other
Person to afford PP Hydrocarbons the priority capacity described in this
subsection (iv), including assigning to Grantees, upon Majority Grantees'
request, any capacity rights Grantor may have under contracts or other
arrangements with an Affiliate or any other Person as may be necessary or
useful to facilitate delivery of PP Hydrocarbons to each Market Point in a
condition satisfactory to meet or exceed pipeline specifications or
qualifications at such Market Point. As used in this subsection (iv),
"Market Points" means (a) the Agua Dulce hub at Agua Dulce, Texas, which is
presently maintained by Natural Gas Pipeline Company of America and (b) any
point which is not substantially further than such hub from the Subject Well
in question and which can be reached through gathering systems or pipelines
which are, at the time in question, owned or operated by Grantor or any of
its Affiliates.
(v) Grantor will take all action legally available to it to cause TTC
to perform all of its obligations under the Transportation Agreement, and
Grantor will make available
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to each Grantee or each Grantee's purchaser of PP Hydrocarbons (whether
under the PP Gas Sales Agreement or otherwise) any of Grantor's capacity in
TTC's system that Grantor is legally and contractually authorized to make
available, in order that TTC will have capacity in its system to transport
PP Hydrocarbons under the Transportation Agreement.
(vi) Grantor and Grantees will cooperate to ensure that nominations to
transporters, processors, and purchasers are timely made and that such
nominations reflect expected deliveries from the various Subject Interests,
and each Grantee and its authorized representatives shall be entitled to
rely upon Grantor's projections for the purpose of scheduling deliveries
with transporters, processors, and purchasers.
Should any Grantee so request, Grantor will furnish the information provided for
above and will make nominations and schedule deliveries in conjunction with such
Grantee (and make any revisions to such nominations and reschedule deliveries in
conjunction with such Grantee) for PP Hydrocarbons (in the form and at the times
required by such Persons), directly to the Persons purchasing or transporting PP
Hydrocarbons for such Grantee to the Delivery Point or the Market Point, as the
case may be.
(b) Responsibility. If any charges, costs, penalties or expenses are
incurred or payable to any Person solely as a result of any Grantee's failure to
adjust nominations or scheduled deliveries in accordance with (i) a notification
from Grantor of any increase or decrease in quantities to be delivered from any
Subject Well, or (ii) a notification from such Grantee's direct purchaser of any
increase or decrease in quantities to be delivered at Delivery Points, where it
was reasonably possible for such Grantee to make such adjustment without
penalty, then, as between the parties hereto, such Grantee shall be liable for
and shall hold Grantor harmless from any such charges, costs, penalties or
expenses. If any such charges, costs, penalties or expenses (the "Imbalance
Charges") are incurred or payable to any Person other than in the circumstances
provided for in the preceding sentence (including charges, costs, penalties or
expenses caused by failure to deliver projected quantities or failure to provide
notice of changes in deliveries, or charges, costs, penalties or expenses
incurred when Grantor is making nominations, or revisions to nominations, on
behalf of any Grantee), then, as between the parties hereto, Grantor shall be
liable for and shall indemnify and hold each Grantee harmless for such Imbalance
Charges. Each of Grantor and Grantees shall promptly notify the other of any
notice received by it from any third party which indicates that an imbalance in
deliveries exists or is occurring that may give rise to any such Imbalance
Charges.
Section 2.6. Measurement; Hydrocarbons Lost or Used. As used in this
Conveyance, the term Hydrocarbons shall not include Gas produced from any
particular Subject Well and unavoidably lost in the production thereof or in the
compression or transportation thereof prior to the Delivery Point for such
Subject Well, or which are used by Grantor or the operator of any Subject Well
for the production of Subject Hydrocarbons or for the compression or
transportation of Subject Hydrocarbons prior to the Delivery Point for such
Subject Well, in each case only to the extent the same are lost or used in the
course of operations which are
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being conducted prudently and in a good and workmanlike manner. Grantor hereby
represents, warrants and covenants to Grantees as follows: (a) the Delivery
Point applicable to each Subject Well is and will continue to be located at a
point prior to any point where Gas from such Subject Well is commingled with Gas
or any other Hydrocarbons from any other well or wells, (b) Grantor currently
meters, and will continue to meter, Gas from each Subject Well separately (i.e.,
on a well-by-well basis), (c) the volumes (measured in Mcf's) of PP Hydrocarbons
constituting Gas produced from or out of any particular Subject Well are
measured and determined, and will continue to be measured and determined at the
Delivery Point applicable to such Subject Well, and (d) the Separation Point for
each Subject Well is and will continue to be upstream of the Delivery Point for
such Subject Well. Grantor covenants and agrees to determine the number of
MMBTU's in each Mcf of Gas included in PP Hydrocarbons at the Delivery Points.
Section 2.7. No Proportionate Reduction. It is understood and agreed that,
though the Production Payment is conveyed by Grantor to Grantees out of the
Subject Interests, the Production Payment shall be equal to the full Dedication
Percentage in effect from time to time of the Certain Percentage of the
Hydrocarbons produced from (or, to the extent pooled or unitized, allocated to)
the various Subject Lands and shall not be reduced for any reason. Among other
things, the Production Payment and the PP Hydrocarbons shall not be reduced due
to (a) the undivided interest owned by Grantor in a lease constituting any
Subject Interests being less than the entire interest in such lease, or (b) the
interest in Oil, Gas or other minerals underlying any portion of the Subject
Lands which is covered by a particular lease (or group of leases) being less
than the entire interest in the oil, gas and other minerals underlying such
portion of the Subject Lands, or (c) the share of production from (or, to the
extent pooled or unitized, allocated to) any portion of Subject Lands which is
attributable to the Subject Interests being less than the Certain Percentage set
forth on Exhibit A for such portion of the Subject Lands, or (d) Grantor's
failure to own, or otherwise have good title to, all or any part of the Subject
Interests as described on Exhibit A.
Section 2.8. Termination. The Production Payment shall remain in full
force and effect until 6:59 a.m. local time in Houston, Texas, on the day
following the day on which the aggregate volume of all PP Hydrocarbons, measured
in MMBTU's, delivered to Grantees in compliance herewith at the Delivery Points
equals the Base Volume (the "Termination Time"). At the Termination Time, all
rights, titles and interests herein conveyed in and to any Hydrocarbons
thereafter produced shall automatically terminate and vest in Grantor, and, upon
request by Grantor, Grantees shall execute and deliver such instrument or
instruments (in proper recordable form, if applicable) as may be necessary to
evidence such termination of the Production Payment; provided that,
notwithstanding the foregoing or anything herein to the contrary, any and all
obligations which any Person may have to indemnify or reimburse any Grantee for
any reason, or to make payments to any Grantee on account of PP Hydrocarbons
produced before the Termination Time, shall survive any termination of the
Production Payment. No pipeline company or other Person purchasing, taking, or
Processing PP Hydrocarbons shall ever be required to take notice of, or keep
informed concerning, the termination of the Production Payment, until actual
receipt of written notice from each Grantee
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confirming that such termination has occurred, which each Grantee agrees to
deliver with reasonable promptness upon request of Grantor.
ARTICLE III
Section 3.1. Operations. Subject to the provisions of Section 4.5 of the
Purchase Agreement, as between Grantees and Grantor, Grantor shall have
exclusive charge, management and control of all operations to be conducted on
the Subject Interests. Grantor shall take or cause to be taken any and all
actions which a prudent operator would deem necessary or advisable in the
operation, maintenance and management thereof and in the production, handling,
treating and transportation of Hydrocarbons produced therefrom, and in so acting
Grantor shall not take into account the diminution in Grantor's share of
production from the Subject Interests caused by the granting of the Production
Payment and Grantor shall make its economic decisions as if Grantor owned the
full interest in the Subject Interests undiminished by the Production Payment.
Nothing contained in this Conveyance shall be construed to impose upon Grantor
any express or implied obligation to conduct exploratory activities or to
conduct development drilling of new wells or deepening of existing wells on the
Subject Interests. Without limitation of the foregoing, Grantor shall:
(a) operate and maintain the Subject Interests in conformity with all
applicable laws and all rules, regulations and orders of all duly
constituted authorities having jurisdiction (including all Environmental
Laws) and in conformity with all leases and other contracts and agreements
forming a part of or relating to the Subject Interests;
(b) promptly pay all costs and expenses (including all Direct Taxes,
other than PP Severance Taxes, and all costs, expenses and liabilities for
labor, materials and equipment incurred in connection with the Subject
Interests and all obligations to the holders of royalty interests and other
interests affecting the Subject Interests) incurred in exploring,
developing, operating and maintaining the Subject Interests (or in
producing, handling, treating and transporting Hydrocarbons produced
therefrom) other than transporting PP Hydrocarbons in conjunction with the
provision of Delivery Services under Section 2.5;
(c) maintain in full force and effect, free of any right of
cancellation, forfeiture or termination, the Subject Interests, as well as
all permits, licenses, easements, servitudes and other rights necessary or
useful in connection with the operation or management of the Subject
Interests or providing the Delivery Services; and
(d) maintain in good working order and, to the extent necessary, repair
and replace, the separation, metering, compression, delivery and related
facilities that are now or hereafter located on each Separation Point or
Delivery Point.
Further, but without limiting the foregoing, Grantor shall not:
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(e) propose or otherwise undertake any action or inaction that is
reasonably calculated to result in any significant Marginal Costs, where
such action or inaction is reasonably calculated to secure or enhance
production of Oil as opposed to Gas, or is otherwise not reasonably
calculated to benefit Grantees along with Grantor; or
(f) move any one or more Delivery Points further from the wellhead of
any Subject Well than is reasonably necessary.
As to any of the Subject Interests of which Grantor is now, or hereafter
becomes, the operator, Grantor will not resign, or otherwise voluntarily
relinquish, its position as operator, except in connection with a transaction
authorized under subsection 6.1 or except as provided otherwise in Section 4.5
of the Purchase Agreement. As to any matters which Grantor does not control
because Grantor is not at that time the operator of a part of the Subject
Interests, Grantor shall exercise its full legal rights to cause the operator of
such part of the Subject Interests to take any and all actions as are required
above except where the operator is designated by Majority Grantees pursuant to
Section 4.5 of the Purchase Agreement.
Section 3.2. Shut-in or Abandonment of Subject Wells; Abandonment of
Subject Interests.
(a) Prohibitions. Until the termination of the Production Payment, Grantor
shall not (unless each Grantee otherwise consents):
(i) abandon (or propose or consent to the abandonment of) any Subject
Well, or surrender, abandon or release (or propose or consent to the
surrender, abandonment or release of) any Subject Interest; provided,
however, that without the consent of any Grantee, Grantor shall have the
right to abandon a Subject Well if and when such Subject Well ceases to be a
Commercial Well and it would not be economically feasible (without regard to
the burden of the Production Payment) to restore the productivity of
Hydrocarbons from such well by reworking, reconditioning, plugging back, or
otherwise conducting operations with respect to such well (not to include
redrilling or deepening of the well).
(ii) voluntarily shut-in or restrict the flow from a Subject Well (or
propose or consent to such a shut-in or restriction); provided that (1) a
shut-in of, or restriction of flow from, a well shall not be deemed to be
voluntarily made if it is caused by or results from governmental
requirements, operation and maintenance requirements, or sound reservoir
management requirements, or from an act or event of force majeure which act
or event is not reasonably within the control of and not caused by the fault
or negligence of Grantor and which by the exercise of due diligence Grantor
is unable to prevent or overcome (provided that changes in market
conditions, losses of markets, and changes in tax laws shall not be
considered events of force majeure for purposes of this subsection), and (2)
a Subject Well which has ceased to be a Commercial Well and can be abandoned
under subsection (i) above may be shut-in pending such abandonment; provided
that, prior to abandoning any Subject Well, Grantor shall first -- to the
extent then permissible
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pursuant to the terms of the Trust Indenture (as defined in the Purchase
Agreement) and any applicable lease -- offer to Grantees the right (the
"Take-over Right") to take assignment from Grantor of all of Grantor's
right, title and interest in and to (1) said Subject Well, (2) all Oil or
Gas to be produced from the wellbore of such Subject Well, and (3) the
Retained Interests related to the Subject Well (herein collectively called
the "Take-over Interests") upon the following terms and conditions:
(A) In the event all Grantees elect, in their sole and absolute
discretion, to exercise the Take-over Right relative to any particular
Subject Well, each Grantee, upon payment of its Percentage Share of the
reasonable salvage value attributable to Grantor's interest in the
Subject Well less the estimated cost to plug and abandon such well,
shall be entitled to assignment of its Percentage Share of the
applicable Take-over Interests; and
(B) In the event at least one but less than all Grantees elect, in
their sole and absolute discretion, to exercise the Take-over Right
relative to particular Subject Well, the Grantees electing to so
exercise such Take-over Rights shall do so in the relative percentage
shares that such participating Grantees then bear to one another in the
Production Payment (the "Relative Participating Percentage Shares"), to
the effect that upon payment by each participating Grantee of its
Relative Participating Percentage Share of the reasonable salvage value
attributable to Grantor's entire interest in such Subject Well less the
estimated cost to plug and abandon such Subject Well, each such
participating Grantee shall be entitled to assignment of its Relative
Participating Percentage Share of the applicable Take-over Interests.
(b) Reworking. If, prior to the termination of the Production Payment, a
Subject Well ceases to be a Commercial Well and it would be economically
feasible (without regard to the burden of the Production Payment) to restore the
productivity of Hydrocarbons from such well by reworking, reconditioning,
plugging back, or otherwise conducting operations relative to such well (not to
include redrilling or deepening of the well), Grantor shall take such action to
restore the productivity of Hydrocarbons from such well.
(c) Definitions of "Commercial Well" and "economically feasible". For all
purposes of this Conveyance:
(i) A well shall be deemed to be a "Commercial Well" unless and until
there arises a condition, which reasonably appears to be permanent, such
that the aggregate value of the Hydrocarbons which are being produced or
which it reasonably appears will be produced from such well -- net of Direct
Taxes and of royalties, overriding royalties and similar burdens reflected
in the Net Revenue Interest figures set out on Exhibit A, but without regard
to the burden of the Production Payment -- no longer exceeds the costs and
expenses directly related to the operation and maintenance of such well.
(ii) The restoration of the productivity of a well shall be deemed to
be "economically feasible" whenever the aggregate value of the Hydrocarbons
which it
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reasonably appears will be produced from such well -- net of Direct Taxes
and of royalties, overriding royalties and similar burdens reflected in the
Net Revenue Interest figures set out on Exhibit A, but without regard to the
burden of the Production Payment -- exceeds the costs and expenses directly
related to such restoration and the operation and maintenance of such well.
The direct costs and expenses referred to in subsections (i) and (ii) above
shall in no event include items which are included in overhead charges under the
applicable operating agreement (or if there is no such operating agreement,
under the 1984 COPAS Accounting Procedure with the election "shall" selected in
Article III).
Section 3.3. Adverse Claims. Grantor will, immediately after discovery of
such claim or demand, cause written notice to be given to each Grantee of every
adverse claim or demand made by any Person affecting the Subject Interests or
the Hydrocarbons produced therefrom in any material manner whatsoever. Grantor
will, immediately after discovery of such proceeding, cause written notice to be
given to each Grantee of any proceedings instituted or threatened with respect
to the Subject Interests or the Hydrocarbons produced therefrom. Grantor will
cause all necessary and proper steps to be diligently taken to protect and
defend the Subject Interests and such Hydrocarbons against any such proceedings,
or adverse claim or demand, regardless of materiality.
Section 3.4. Insurance and Replacement. Grantor shall maintain or cause to
be maintained, at its sole cost and expense and with financially sound and
reputable insurers reasonably satisfactory to Majority Grantees, insurance
covering the Subject Interests and all wells, equipment and facilities located
thereon, against such liabilities, casualties, risks and contingencies and in
such types, as is customary in the case of companies engaged in similar
operations and having similar property. Such insurance shall in any event
include the types, conditions and coverages described in Schedule 1, with limits
of coverage no less than those set out in such Schedule. All liability
insurance shall name each Grantee as an additional insured. Grantor shall
furnish annual certificates of such insurance to Grantees not less than 30 days
prior to the expiration or termination of such policy of insurance. In the
event of any damage to or loss of any well, equipment or facility on the Subject
Interests, Grantor (at no cost to Grantees, and without regard to whether
insurance proceeds are available to Grantor) shall promptly redrill, rebuild,
reconstruct, repair, restore or replace such damaged or lost property.
Section 3.5. Government Regulation. The obligations of Grantor hereunder
shall be subject to all applicable federal, state and local laws, rules,
regulations and orders (including those of any applicable agency, board,
official or commission having jurisdiction). Grantor shall timely make all
filings with all applicable agencies, boards, officials and commissions having
jurisdiction with respect to the Subject Interests or the operation thereof
prior to or at the time any such filing becomes due. Should any statute, or any
rules or regulations of any governmental body, or any provisions in private
contracts (including those limiting the size of overriding royalties and similar
interests but excluding any contracts directly entered into by any Grantee)
become applicable to the Subject Interests so as to limit the portion of the
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Hydrocarbons produced from the lands covered by a particular Subject Interest
which may be attributable to the Production Payment, the Production Payment
shall, as to such Subject Interest and for the period of time during which such
statute, rule, regulation or contractual provision is applicable, be limited to
the maximum amount of production from such lands which can be attributed to the
Production Payment under such statute, rule, regulation or contractual
provision; provided, however, should such limitation come into effect as to one
or more Subject Interests, then (without prejudice to other rights Grantees may
have) the Dedication Percentage applicable to that portion of production from
(or, to the extent pooled or unitized, allocated to) Subject Lands covered by
other Subject Interests which would be attributable to the Production Payment in
the absence of the provisions of this subsection shall be increased, up to a
maximum of 90%, so as to cause, to the maximum extent possible, Grantees to
receive, by virtue of ownership of the Production Payment, the same amount of
Hydrocarbons which Grantees would have received had the aforementioned statute,
rule, regulation or contractual provision not reduced the share of production
from the aforementioned Subject Interest with respect to which the Production
Payment could be paid.
Section 3.6. Pooling and Unitization. Certain of the Subject Interests may
have been pooled or unitized for the production of Hydrocarbons prior to the
date hereof, and may, after the date hereof, be pooled or unitized (a) pursuant
to any law, rule, regulation or order of any governmental body or official, or
(b) voluntarily by Grantor with the joinder of Grantees. To the extent certain
Subject Interests are so pooled or unitized, such Subject Interests are and
shall be subject to the terms and provisions of such pooling and unitization
agreements or orders, and, as to production of substances covered by such
agreements or orders, the production from Subject Lands (or any portion thereof)
shall be the production from such units which is allocated to Subject Lands (or
such portion thereof) under and by virtue of the applicable pooling and
unitization agreements or orders.
Section 3.7. Non-consent Operations. Grantor shall not elect to be a non-
participating party with respect to any plugging back, reworking, sidetracking,
completion, or other operation on any Subject Interest (or lands pooled
therewith), or (except in instances where abandonment of such well would
expressly be permitted hereunder) elect to be an abandoning party with respect
to a well located on any Subject Interest (or lands pooled therewith), if the
consequence of such election is that Grantor's interest in such Subject Interest
or any part thereof is temporarily (e.g., during a recoupment period) or
permanently forfeited to the parties participating in such operations or
electing not to abandon such well. Upon any such election by Grantor which is
approved by each Grantee, such election shall also be binding on the Production
Payment as to the interest so temporarily or permanently forfeited. Any
additional interests acquired by Grantor by virtue of electing to pay for or
acquire the interest of a non-consenting or abandoning party in a situation of
the type described in the preceding sentence shall not become a part of Subject
Interests and subject to the Production Payment.
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Section 3.8. Future Gas Imbalances.
(a) Wellhead Imbalances.
(i) No Undertakes. Grantor will not take (for itself and for Grantees)
a lesser share of Gas produced from a Subject Well than the share of Gas which
Grantor and Grantees are collectively entitled to take by virtue of ownership of
the Subject Interests (without regard to any rights to take a lesser share under
any production balancing agreement or other arrangement or any rights under
common law with respect to production balancing), except as a result of Grantor
and Grantees, or any predecessor in title to such Subject Interest, having
previously taken from such Subject Well or other wells located on Subject
Interests more Gas than such parties would be entitled to receive by virtue of
their ownership ("previous overproduction"), but only to the extent that the
amount of such previous overproduction occurred after the Initial Time or
occurred prior to the Initial Time and is disclosed in the Purchase Agreement.
Notwithstanding the foregoing, Grantor may take for itself (but not for
Grantees) a lesser share (such lesser share, averaged over any particular month,
not to exceed five percent of its net revenue interest, after giving effect to
the Production Payment and any other burdens, in any particular Subject Well) of
Gas than the share of Gas Grantor is otherwise entitled to take by virtue of its
ownership in the Retained Interests, to the extent necessary to allow any
royalty owners under any oil and gas lease included in the Subject Interests --
which royalty owners have taken or may hereafter take all or any part of their
royalty share of Gas in kind -- to recoup any underproduced position that may
now exist or hereafter arise as between Grantor and any such royalty owners. Any
such recoupment of an underproduced position of any such royalty owners shall be
satisfied solely out of Grantor's share of Gas, and shall in no way affect
Grantees' share of Gas included in PP Hydrocarbons.
(ii) No Overtakes. Grantor will not take (for itself or for Grantees)
a greater share of the Gas produced from a Subject Well than the share of Gas
which Grantor and Grantees are collectively entitled to take by virtue of
ownership of the Subject Interests (without regard to any rights to take a
greater share under any production balancing agreement or other arrangement or
any rights under common law with respect to production balancing), except (i) as
a result of Grantor and Grantees, or any predecessor in title to such Subject
Interest having previously taken from such Subject Well or other wells located
on Subject Interests less Gas than such parties would be entitled to receive by
virtue of their ownership ("previous underproduction"), but only to the extent
that the amount of such previous underproduction occurred after the Initial Time
or occurred prior to the Initial Time and is disclosed in the Purchase
Agreement, or (ii) as a result of other parties contemporaneously taking a
lesser share from such Subject Well than they would be entitled (by virtue of
their ownership of their interests in such well) to take in circumstances where
Grantor cannot elect to take only the share attributable to Grantor and Grantees
notwithstanding such other parties taking a lesser share. Notwithstanding the
foregoing, Grantor may take for itself (but not for Grantees) a greater share
(such greater share, averaged over any particular month, not to exceed five
percent of its net revenue interest, after giving effect to the Production
Payment and any other burdens, in any particular Subject Well) of Gas than the
share of Gas Grantor is otherwise entitled to take by virtue of its ownership in
the Retained Interests to the extent
20
<PAGE>
necessary to allow Grantor to recoup any underproduced position that may now
exist or hereafter arise between Grantor and any royalty owners under any oil
and gas lease included in the Subject Interest, which royalty owners have taken
or may hereafter take all or any part of their royalty share of Gas in kind. Any
such recoupment of an underproduced position by Grantor shall be satisfied
solely out of the overproduced royalty owners' share of Gas, and shall in no way
affect Grantees' share of Gas included in PP Hydrocarbons.
(iii) Effects of Balancing. If Grantor improperly takes more or less
Hydrocarbons from a Subject Well than Grantor and Grantees collectively are
otherwise entitled to by virtue of the ownership of Subject Interests, such
action will not be binding on any Grantee unless such Grantee ratifies such
action in writing.
Section 3.9. Renewals and Extensions and New Leases. This Conveyance and
the Production Payment shall apply to all renewals, extensions and other similar
arrangements of the leases (or other determinable interests) which are included
in the Subject Interests, whether such renewals, extensions or arrangements have
heretofore been obtained by Grantor or are hereafter obtained by or for Grantor
or any Affiliate thereof and whether or not the same are described in Exhibit A.
For the purposes of the preceding sentence, a new lease which covers the same
interest (or any part thereof) which was covered by a prior lease, and which is
acquired within one year after the expiration, termination, or release of such
prior lease, shall be treated as a renewal or extension of such prior lease.
ARTICLE IV
SECTION 4.1. NO LIABILITY OF GRANTEES; INDEMNITY. EXCEPT AS OTHERWISE
SPECIFICALLY PROVIDED IN THIS CONVEYANCE WITH RESPECT TO PP SEVERANCE TAXES AND
PP AD VALOREM TAXES, NO GRANTEE SHALL EVER BE RESPONSIBLE FOR ANY PART OF THE
COSTS, EXPENSES OR LIABILITIES INCURRED IN CONNECTION WITH THE EXPLORING,
DEVELOPING, OPERATING, OWNING OR MAINTAINING OF THE SUBJECT INTERESTS OR SUBJECT
LANDS, THE PHYSICAL CONDITION OF THE SUBJECT INTERESTS OR THE SUBJECT LANDS, OR
THE HANDLING, TREATING OR TRANSPORTING PRIOR TO THE DELIVERY POINTS OF
HYDROCARBONS PRODUCED FROM THE SUBJECT LANDS (INCLUDING ANY COSTS, EXPENSES,
LOSSES OR LIABILITIES RELATED TO VIOLATION OF AN ENVIRONMENTAL LAW OR OTHERWISE
RELATED TO DAMAGE TO OR REMEDIATION OF THE ENVIRONMENT, WHETHER THE SAME ARISE
OUT OF ANY GRANTEE'S OWNERSHIP OF AN INTEREST IN PROPERTY OR OUT OF THE ACTIONS
OF GRANTOR OR ANY GRANTEE OR OF THIRD PARTIES OR ARISE OTHERWISE), OR THE
FAILURE BY GRANTOR TO HAVE GOOD AND DEFENSIBLE TITLE TO THE SUBJECT INTERESTS
FREE AND CLEAR OF ALL BURDENS, ENCUMBRANCES, LIENS AND TITLE DEFECTS OTHER THAN
PERMITTED ENCUMBRANCES (INCLUDING ANY COSTS, EXPENSES, LOSSES OR
21
<PAGE>
LIABILITIES SUFFERED BY ANY GRANTEE AS A RESULT OF ANY CLAIM THAT SUCH GRANTEE
MUST PAY OVER TO ANY PERSON ANY PART OF THE PROCEEDS OF PP HYDROCARBONS AT ANY
TIME PREVIOUSLY RECEIVED OR THEREAFTER TO BE RECEIVED BY SUCH GRANTEE), AND
GRANTOR AGREES TO INDEMNIFY AND HOLD EACH GRANTEE HARMLESS FROM AND AGAINST ALL
COSTS, EXPENSES, LOSSES AND LIABILITIES INCURRED BY SUCH GRANTEE IN CONNECTION
WITH ANY OF THE FOREGOING OR IN CONNECTION WITH THE PRODUCTION PAYMENT, THE
PURCHASE AGREEMENT, THIS CONVEYANCE, OR THE TRANSACTIONS AND EVENTS (INCLUDING
THE ENFORCEMENT OR DEFENSE THEREOF OR HEREOF) AT ANY TIME ASSOCIATED WITH OR
CONTEMPLATED IN ANY OF THE FOREGOING. SUCH INDEMNITY SHALL ALSO COVER ALL COSTS
AND EXPENSES OF EACH GRANTEE, INCLUDING REASONABLE LEGAL FEES AND EXPENSES,
WHICH ARE INCURRED INCIDENT TO THE MATTERS INDEMNIFIED AGAINST. THE FOREGOING
INDEMNIFICATION SHALL EXTEND TO EACH GRANTEE AND ITS SUCCESSORS AND ASSIGNS, ALL
THEIR RESPECTIVE AFFILIATES, AND ALL THE RESPECTIVE OFFICERS, DIRECTORS, AGENTS,
BENEFICIARIES, TRUSTEES, ATTORNEYS AND EMPLOYEES OF THEMSELVES AND THEIR
AFFILIATES. THE FOREGOING INDEMNITY SHALL APPLY WHETHER OR NOT ARISING OUT OF
THE SOLE, JOINT OR CONCURRENT NEGLIGENCE, FAULT OR STRICT LIABILITY OF ANY
GRANTEE OR ANY OTHER PERSON OR ENTITY INDEMNIFIED HEREUNDER AND SHALL APPLY,
WITHOUT LIMITATION, TO ANY LIABILITY IMPOSED UPON ANY PERSON INDEMNIFIED
HEREUNDER AS A RESULT OF ANY STATUTE, RULE, REGULATION, THEORY OF STRICT
LIABILITY OR OTHERWISE. THE FOREGOING INDEMNITY SHALL NOT, HOWEVER, APPLY TO ANY
COSTS, EXPENSES, LOSSES OR LIABILITIES OF ANY GRANTEE WHICH ARE PROXIMATELY
CAUSED SOLELY BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH GRANTEE. IN
ADDITION, THE INDEMNIFICATION AND HOLD HARMLESS PROVISIONS CONTAINED IN THIS
SECTION 4.1 AND ELSEWHERE IN THIS CONVEYANCE SHALL NOT APPLY TO ANY COSTS,
EXPENSES, LOSSES OR LIABILITIES OF ANY GRANTEE THAT ARISE OUT OF THE FAILURE BY
SUCH GRANTEE (OR ANY PERSON OTHER THAN GRANTOR OR ANY AFFILIATE OF GRANTOR) TO
PERFORM ITS OBLIGATIONS UNDER, OR THAT ARE OTHERWISE BASED UPON, ANY CONTRACTUAL
ARRANGEMENT ENTERED INTO DIRECTLY BY SUCH GRANTEE AND RELATING TO THE HANDLING,
TRANSPORTATION, SALE OR OTHER DISPOSITION OF PP HYDROCARBONS AT OR BEYOND THE
DELIVERY POINTS, EXCEPT TO THE EXTENT CAUSED, BY THE ACTION OR INACTION OF
GRANTOR, TTC OR ANY AFFILIATE OF GRANTOR OR TTC. THE FOREGOING INDEMNITY SHALL
SURVIVE THE TERMINATION OF THE PRODUCTION PAYMENT AND OF THIS CONVEYANCE.
22
<PAGE>
ARTICLE V
Section 5.1. Remedies. As used herein, "Designated Event" means any breach
of this Conveyance or of the Purchase Agreement by Grantor (whether of a
covenant, a representation or warranty, or otherwise) which, in the case of an
obligation to pay money or to perform (or cause to be performed) the Delivery
Services, is not fully cured within 5 days after such breach occurs or which, in
the case of any other breach, is not fully cured and remedied within 30 days
after such breach occurs; provided that the intentional refusal of Grantor to
perform any material Delivery Service shall be a Designated Event with no
opportunity to cure. If a Designated Event occurs then Majority Grantees may,
either on their own behalf or through any agent or representative and in
addition to all other rights and remedies available to any Grantee at law and in
equity (including the right to sue for damages, which right of each Grantee is
specifically acknowledged), exercise any one or more of the following remedies
during the continuance of a Designated Event (it being agreed that the
exercising of any one remedy shall not preclude the exercising of any other
remedy):
(a) If Grantor has failed to perform any act or to take any action
which Grantor is required hereunder to perform or take or to pay any money
which Grantor is required hereunder to pay, then, upon written notice to
Grantor, Majority Grantees may, but shall not be obligated to, perform or
cause to be performed such act or take such action or pay such money, all in
Grantor's name or in their own names. Any expenses so incurred by any
Grantee and any money so paid by any Grantee shall be a demand obligation
owing by Grantor to such Grantee (which obligation Grantor hereby expressly
promises to pay) and such Grantee, upon making such payment, shall be
subrogated to all of the rights of the Person receiving such payment. Each
amount due and owing by Grantor to any Grantee pursuant to this subsection
shall bear interest each day, from the date of such expenditure or payment
until paid, at the Agreed Rate, which interest shall be payable on the first
day of each calendar month and shall itself bear interest at the same rate
if not timely paid.
(b) Majority Grantees shall be entitled to apply to a court of
competent jurisdiction for the specific performance or observance of any
covenant or agreement or in aid of the execution of any power herein granted
and for the appointment of a receiver for the Subject Interests but no such
appointment shall prejudice or affect the rights of each Grantee to receive
all PP Hydrocarbons and any amounts due hereunder.
(c) Majority Grantees shall be entitled to increase the Dedication
Percentage to 90% by giving notice of such increase to Grantor, and upon the
giving of any such notice the Dedication Percentage shall be increased to
90% effective as of the beginning of the immediately following month.
(d) Majority Grantees shall be entitled to exercise any of the remedies
provided to Grantees in any other Production Payment Document.
23
<PAGE>
Section 5.2. Termination of Remedies. The specific remedies to which
Majority Grantees may become entitled under Sections 5.1(a) and (b) shall cease
to be exercisable when all Designated Events have ceased to exist for a
continuous period of thirty days or more (provided that the effecting of
performance or observation of any unperformed covenant or agreement, or other
resolution of a Designated Event, by any Grantee or any Grantee's agent or
representative shall not be deemed to cure such Designated Event), without
prejudice, however, to the exercise of any such remedies upon any subsequent
occurrence of a Designated Event. Nothing in this section shall impose
limitations or otherwise inhibit the exercise of any other rights or remedies
which any Grantee may have.
ARTICLE VI
Section 6.1. Assignments by Grantor. Without the prior written consent of
each Grantee (which consent may be granted or withheld in the sole and absolute
discretion of each Grantee), Grantor shall not assign, sell, transfer, convey,
exchange, mortgage or pledge all or any part of the Subject Interests or create
any lien thereon or security interest therein, except that, without the prior
written consent of Grantees, Grantor may permit Permitted Encumbrances to exist
against all or any part of the Subject Interests.
Section 6.2. Assignments by Grantees. Each Grantee shall have the right to
assign its interest in the Production Payment, in whole or in part, at any time;
provided, however, that if the interest of Grantees under this Conveyance shall
ever be owned by more than three Persons, such Persons shall designate one
Person as their agent to deliver and receive all communications (including
consents) and exercise the discretion of Grantees hereunder on their behalf and
provided further, that, except for assignments or transfers to Affiliates of any
Grantee, no Grantee shall assign or transfer any rights under or any interest in
the Production Payment Documents (as defined in the Purchase Agreement) or the
Production Payment to (i) any Person which is at such time conducting
exploration, production or transportation operations in Railroad Commission
Districts 4 or 5, (ii) Enron Oil & Gas Company, Coastal Oil & Gas Corporation,
Tennessee Gas Pipeline, or Terry Oilfield Supply Co., (iii) any party adverse to
Grantor in any proceeding set forth on Schedule 1 to the Purchase Agreement or
in any litigation or proceeding subsequently filed, or any successor to the
rights or interests of any of the foregoing in such proceedings or litigation,
any party named as a defendant in the case styled "TransAmerican Natural Gas
Corporation v. El Paso Natural Gas Company, et al.", No. 94-63464, 206th
Judicial District Court, Hidalgo County, Texas or (v) any Affiliate of any of
the foregoing that is not an Affiliate of a Grantee. No change of ownership or
right to receive payment of the Production Payment or of any part thereof,
however accomplished, shall be binding upon Grantor until notice thereof shall
have been furnished by the transferor and by the transferee, and then only with
respect to payments thereafter made. For as long as the Production Payment is
owned by more than one Person, the rights, remedies, liabilities and obligations
of such Persons shall be several and not joint, unless it is agreed otherwise by
such Persons.
24
<PAGE>
Section 6.3. Binding Effect. All the covenants and agreements of the
respective parties herein contained shall be deemed to be covenants running with
the Subject Interests and the lands covered thereby or included therein. All of
the provisions hereof shall be binding upon and shall inure to the benefit of
the parties hereto, and their respective successors and assigns.
ARTICLE VII
Section 7.1. Warranty. Grantor hereby binds itself to warrant and forever
defend all and singular title to the Production Payment unto Grantees, their
successors and assigns, against every person lawfully claiming or to claim the
same or any part thereof, subject, however, to the Permitted Encumbrances.
Without limitation of the generality of the foregoing, Grantor represents and
warrants to each Grantee that Grantor's ownership of the Subject Interests does
and will, with respect to each tract of land identified in Exhibit A hereto,
subject only to the Permitted Encumbrances:
(a) entitle Grantor to receive (subject to and before giving effect to
the Production Payment), free and clear of liens and encumbrances (except
the Permitted Encumbrances), a decimal net revenue interest share of the
Hydrocarbons produced from, or allocated to, such well or unit equal to not
less than the decimal interest set forth in Exhibit A in connection with
such tract of land in the column headed "Net Revenue Interest", and
(b) cause Grantor to be obligated to bear a decimal share of the costs
associated with wells or operation on such tract of land not greater than
the decimal share set forth in Exhibit A in connection with such tract of
land in the column headed "Working Interest", without a corresponding
increase in net revenue interest.
Grantor further represents and warrants to each Grantee that such shares of
production which Grantor is entitled to receive, and shares of expenses which
Grantor is obligated to bear, are not and will not be subject to change except,
and only to the extent that, such changes are reflected on Exhibit A. This
Conveyance is made with full substitution and subrogation of Grantees in and to
all covenants, representations and warranties by others heretofore given or made
with respect to the Subject Interests.
ARTICLE VIII
SECTION 8.1. CHOICE OF LAW. THIS CONVEYANCE SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS
(WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES THEREOF THAT WOULD CAUSE ANOTHER
STATE'S LAW TO APPLY) AND THE LAWS OF THE UNITED STATES OF AMERICA.
25
<PAGE>
Section 8.2. Intentions of the Parties. Nothing herein contained shall be
construed to constitute either party hereto (under state law or for tax
purposes) in partnership with the other party. In addition, the parties hereto
intend that the Production Payment shall at all times be treated (and all
provisions of this Conveyance shall be construed and treated accordingly) as a
production payment (i.e., a term overriding royalty) and an interest in real
property under the laws of each state in which Subject Interests are located.
Section 8.3. Ownership of Equipment. The Production Payment does not
include any right, title or interest in and to any of the personal property,
fixtures, structures or equipment now or hereafter placed on, or used in
connection with, the Subject Interests, and the interest herein conveyed to
Grantees is exclusively a production payment (i.e., a term overriding royalty).
Section 8.4. Further Assurances. Grantor agrees to execute and deliver to
Grantees all such other and additional instruments, notices, division orders,
transfer orders and other documents and to do all such other and further acts
and things as may be necessary to more fully and effectively grant, convey and
assign to Grantees the rights, titles, interest and estates conveyed to Grantees
hereby or intended to be so conveyed.
Section 8.5. Partition. Grantor and Grantees acknowledge that none of them
has any right or interest that would permit it to partition any portion of the
Subject Interests as against the other, and each waives any such right.
Section 8.6. Notices and Addresses. All notices and other communications
required or permitted under this Conveyance shall be in writing and, unless
otherwise specifically provided, shall be delivered personally or by telecopier
or by registered or certified mail, postage prepaid, or by delivery service with
proof of delivery, at the respective addresses shown below, and shall be deemed
delivered on the date of receipt. Either party may specify as its proper
address any other street address within the continental limits of the United
States by giving notice to the other party, in the manner provided in this
Section, at least fifteen (15) days prior to the effective date of such change
of address.
Grantor's address:
1300 East North Belt
Suite 310
Houston, Texas 77032-2949
Attention: Ed Donahue
Telephone: 713/987-8600
Telecopy: 713/986-8865
26
<PAGE>
Sunflower's address:
4111 E. 37th St. North
Wichita, Kansas 67220
Attention: President
Telephone: 316/828-6994
Telecopy: 316/828-4081
TCW Funds IV and TCW Fund V addresses:
c/o Trust Company of the West
865 South Figueroa
Los Angeles, California 90017
Attention: Arthur R. Carlson
Telephone: 213/244-0053
Telecopy: 213/244-0604
Section 8.7. Counterparts. This Conveyance is being executed in multiple
counterparts, all of which are identical, except that, (i) to facilitate
recordation, in certain counterparts hereof only those portions of Exhibit A
which contain descriptions of properties located in the recording jurisdiction
in which the particular counterpart is to be recorded are included, and (ii)
Schedule 1 or Schedule 2 may be omitted from counterparts hereof which are being
recorded. All of such counterparts shall constitute one and the same
instrument. Complete copies of this Conveyance containing the entirety of
Exhibit A, and all schedules hereto, have been retained by Grantor and Grantees.
This Conveyance is executed this 14th day of May, 1996, but made effective
as to deliveries of Gas as of the Initial Time.
TRANSTEXAS GAS CORPORATION
By: _________________________________
Ed Donahue
Vice President
27
<PAGE>
EXHIBIT 15.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: TransTexas Gas Corporation Registration on Form S-3
We are aware that our report dated June 14, 1996 on our review of interim
condensed consolidated financial information of TransTexas Gas Corporation for
the three month period ended April 30, 1996 and 1995 included in this Form 10-
Q for the quarter then ended is incorporated by reference in the Company's
registration statements on Form S-3 (Registration No. 33-91494, filed with the
Securities and Exchange Commission on March 12, 1996. Pursuant to Rule 436(c)
under the Securities Act of 1933, this report should not be a part of the
registration statement prepared or certified by us within the meaning of
Sections 7 and 11 of that Act.
Coopers & Lybrand L.L.P.
Houston, Texas
June 14, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited condensed balance sheet at April 30, 1996 and the unaudited condensed
statement of operations for the three months ended April 30, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
<CASH> 59,921
<SECURITIES> 0
<RECEIVABLES> 31,796
<ALLOWANCES> 0
<INVENTORY> 11,782
<CURRENT-ASSETS> 161,521
<PP&E> 2,099,935
<DEPRECIATION> 1,325,633
<TOTAL-ASSETS> 1,002,528
<CURRENT-LIABILITIES> 179,386
<BONDS> 833,837
0
0
<COMMON> 740
<OTHER-SE> (152,160)
<TOTAL-LIABILITY-AND-EQUITY> 1,002,528
<SALES> 79,802
<TOTAL-REVENUES> 95,958
<CGS> 0
<TOTAL-COSTS> 70,160
<OTHER-EXPENSES> (1,134)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,286
<INCOME-PRETAX> 4,646
<INCOME-TAX> 1,626
<INCOME-CONTINUING> 3,020
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,020
<EPS-PRIMARY> .04
<EPS-DILUTED> 0
</TABLE>
