EXHIBIT 10.3
AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT
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QUICKSILVER RESOURCES INC.
as Seller
and
MARINER GAS LLC
as Buyer
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Dated as of March 31, 2000
TABLE OF CONTENTS
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Page
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ARTICLE I DEFINITIONS................................................... 2
ARTICLE II PURCHASE AND SALE; PURCHASE PRICE............................. 14
2.01 Purchase and Sale; Purchase Price............................. 14
2.02 Effective Date; Allocation of Revenue, Expenses, Taxes, Rights
and Obligations............................................... 14
2.03 Purchase Price Allocation..................................... 15
ARTICLE III REPRESENTATIONS AND WARRANTIES................................ 15
3.01 Representations and Warranties of Seller...................... 15
3.02 Representations and Warranties of Buyer....................... 25
3.03 Disclaimers of Other Representations and Warranties........... 26
ARTICLE IV COVENANTS..................................................... 27
4.01 Covenants of Seller........................................... 27
ARTICLE V CLOSING....................................................... 29
5.01 Date of Closing............................................... 29
5.02 Place of Closing.............................................. 29
5.03 Closing Obligations........................................... 29
5.04 Additional Actions............................................ 31
ARTICLE VI TAX CREDIT MATTERS............................................ 31
6.01 Quarterly Statements.......................................... 31
6.02 Annual Recalculation.......................................... 31
6.03 Change in Law Recalculations.................................. 32
ARTICLE VII CALCULATION OF AGGREGATE TAX CREDITS.......................... 34
7.01 Credit Calculation Representation............................. 34
7.02 Credit Calculation Assumption; Buyer-Assumed Risks............ 34
7.03 Correction of Net Profits Calculation for Tax Loss............ 36
7.04 Buyer's Covenants............................................. 36
7.05 Requirement to Contest........................................ 37
7.06 Control....................................................... 37
7.07 Information................................................... 38
7.08 Settlements................................................... 38
7.09 Waiver........................................................ 38
7.10 Adjustments................................................... 39
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ARTICLE VIII OTHER OBLIGATIONS AFTER CLOSING............................... 39
8.01 Sales Taxes and Recording Fees................................ 39
8.02 Indemnification (Other Than For Lost Tax Credits)............. 39
8.03 Further Assurances............................................ 42
8.04 Survival...................................................... 42
8.05 Tax Reporting and Ruling...................................... 42
8.06 Allocation of Unit Production................................. 46
8.07 Preferential Rights; CMS Title Defects;
Corrective Assignments........................................ 46
8.08 Compression Arrangements...................................... 48
ARTICLE IX SELLER'S OPTION TO PURCHASE OIL AND GAS INTERESTS............. 49
9.01 Grant of Seller's Option...................................... 49
9.02 Term of the Seller's Option................................... 49
9.03 Exercise of the Seller's Option............................... 49
9.04 The Seller's Option Purchase Price............................ 50
9.05 Seller's Option Closing Date.................................. 52
9.06 Refund of Unused Abandonment Reserve.......................... 53
9.07 Extension of Option Period.................................... 53
ARTICLE X BUYER'S OPTION TO PURCHASE OIL AND GAS INTERESTS.............. 54
10.01 Grant of Buyer's Option....................................... 54
10.02 Term of the Buyer's Option.................................... 54
10.03 Exercise of the Buyer's Option................................ 55
10.04 The Buyer's Option Purchase Price............................. 55
10.05 Buyer's Option Closing Date................................... 56
10.06 Assignability................................................. 57
10.07 Extension of Option Period.................................... 58
ARTICLE XI ARBITRATION................................................... 58
11.01 Submission to Arbitration..................................... 58
11.02 Initiation of Arbitration and Selection of Arbitrators........ 58
11.03 Arbitration Procedures........................................ 58
11.04 Enforcement................................................... 59
11.05 Fees and Costs................................................ 59
ARTICLE XII MISCELLANEOUS................................................. 59
12.01 Exhibits and Schedules........................................ 59
12.02 Expenses...................................................... 59
12.03 Notices....................................................... 59
12.04 Amendment..................................................... 60
12.05 Assignment.................................................... 60
12.06 Announcements................................................. 61
12.07 Confidentiality............................................... 61
12.08 Headings...................................................... 62
12.09 Counterparts.................................................. 62
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12.10 References.................................................... 62
12.11 Governing Law................................................. 62
12.12 Entire Agreement.............................................. 62
12.13 Mutually Drafted.............................................. 62
12.14 Parties in Interest........................................... 63
12.15 Late Payments................................................. 63
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EXHIBITS AND SCHEDULES
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Exhibits
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Exhibit Description
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A Interests
B Amended and Restated Assignment of Enforcement Rights
C Non-Foreign Status Certificate
D Opinion of Buyer's Counsel
E-1 Opinion of Seller's Counsel
E-2 Opinion of Seller's Michigan Counsel
F Amended and Restated Fixed Payment Note
G Assignment
H-1 Conveyance of Production Payment
H-2 First Amendment to Conveyance of Production Payment
I CMS Estoppel Certificate
J Form of Cinnabar Gas Sales Contract
Schedules
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Schedule Description
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1.1 Scheduled Amounts
1.2 [Intentionally Omitted]
1.3 Qualified ▇▇▇▇▇
1.4 Rework Operations
3.01(h)(7) Contested Taxes
3.01(h)(8) Contested Mechanics Liens
3.01(k) Lease Defaults
3.01(l) Material Contracts Requiring Further Action
3.01(m) Unpaid Royalties, Rentals and Other Payments
3.01(n) Preferential Rights
3.01(q) Threatened or Pending Litigation
3.01(w) Marketing, Sales and Transportation Contracts
3.01(x)(i) API Well Numbers
3.01(x)(ii)(A) ▇▇▇▇▇ Affected by IRS Claim
3.01(aa) License Agreements
3.01(cc) Gas Gathering, Compression, Dehydration, Water Disposal,
CO\\2\\Removal, and Gas Marketing
3.01(gg) Persons Taking Gas
5.03(i)(1) Title Opinions
5.03(i)(2) Title Reports
5.03(k) Certificates of Existing Insurance
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8.05(f) Rulings to be Requested
8.08 Compression Contracts
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AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT
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THIS AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT (this "Agreement")
executed this ___ day of May, 2000, to be effective for all purposes as of March
31, 2000, is between QUICKSILVER RESOURCES INC., a Delaware corporation
("Seller"), and MARINER GAS LLC, a Massachusetts limited liability company
("Buyer"). Seller and Buyer are sometimes individually referred to herein as a
"party" or collectively as the "parties."
RECITALS
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A. The parties executed and delivered that Purchase and Sale Agreement
dated March 31, 2000 (the "Original Agreement") pursuant to which Seller sold
the Interests (as defined below) to Buyer.
B. The parties desire to correct and clarify certain provisions of the
Original Purchase Agreement and, accordingly, are amending and restating the
Original Purchase Agreement in its entirety as set forth below.
In consideration of the mutual promises contained herein, the benefits to
be derived by each party hereunder and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, Buyer and Seller
hereby amend and restate the Original Purchase Agreement as follows:
ARTICLE I
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DEFINITIONS
"AAA" means the American Arbitration Association.
"Adverse Consequences" means all actions, suits, arbitrations,
proceedings, hearings, investigations, charges, complaints, claims, demands,
injunctions, judgments, orders, decrees, rulings, damages, dues, penalties,
fines, costs, reasonable amounts paid in settlement, liabilities, obligations,
taxes, liens, losses, expenses, and fees, including court costs and attorneys',
consultants' and experts' fees and expenses.
"Adverse Tax ▇▇▇▇" means a ▇▇▇▇ which (i) if enacted would have the
effect of reducing or eliminating the availability to Buyer or any member of
Buyer of Aggregate Tax Credits and (ii) has a reasonable possibility of being
enacted into law, such determination to be made by Buyer using its reasonable
good faith judgment after consultation with Seller and consideration of who is
sponsoring the ▇▇▇▇, whether it is being considered by committee, the
disposition of similar bills in prior years and other relevant factors.
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"Affiliate" means, with respect to any Person, any other Person which
either directly or indirectly controls, is controlled by, or is under common
control with such Person. For purposes hereof "control" means the right or
power to direct the policies of another through management authority, stock
ownership, delegated authority, voting rights, contract or otherwise.
"Aggregate Discounted CIL Loss" is defined in Section 6.03.
"Aggregate Tax Credits" means, with respect to any Quarterly Period,
the product of (i) the amount of Qualified Production (expressed in MMBtus) and
(ii) the Tax Credit Rate, which amounts will be accurately reflected by Seller
in the Quarterly Statement delivered to Buyer with respect to such Quarterly
Period and which will reflect any Change in Law.
"Allocated Value" is defined in Section 8.02(c).
"Applicable Interest" means, with respect to any payment amount and
period specified in this Agreement, interest on such amount calculated at the
Applicable Rate during such period, expressed as an average daily rate and
compounded monthly.
"Applicable Rate" means, at any time, the lesser of (i) the highest
rate of interest payable on any outstanding loans from Senior Lenders under the
Senior Loan Document (determined as if no Event of Default (as defined in the
Senior Loan Document) has occurred), provided, if there are no loans outstanding
from the Senior Lenders, then the rate under this clause (i) shall be the Prime
Rate; and (ii) the maximum non-usurious rate of interest under applicable law.
"Assignment" means that certain Assignment dated as of the Effective
Date conveying the Interests from Seller to Buyer.
"Assignment of Enforcement Rights" means the Amended and Restated
Assignment of Enforcement Rights between Buyer and Seller substantially in the
form of Exhibit B hereto, which amends and restates in its entirety that
Assignment of Enforcement Rights (the "Original Assignment of Enforcement
Rights") executed and delivered by Buyer and Seller at the Closing.
"BOA" means Bank of America, N.A.
"Buyer-Assumed Risk Event" is defined in Section 7.02.
"Buyer's Exercise Termination Date" is defined in Section 10.04.
"Buyer's Option" is defined in Section 10.01.
"Buyer's Option Closing Date" is defined in Section 10.03.
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"Buyer's Option Exercise Date" is defined in Section 10.03.
"Buyer's Option Purchase Price" is defined in Section 10.02.
"Capital Contribution Termination Date" means December 31, 2002, or
such later date through which Qualified Production qualifies for tax credits
under section 29 of the Code as a result of an amendment to or affecting section
29(f) of the Code.
"Carried Claim" is defined in Section 7.05.
"Cash Portion of the Purchase Price" is defined in Section 2.01.
"CERCLA" is defined in Section 3.01(t).
"Change in Law" means any (i) amendment to or repeal of (or the
enactment of legislation affecting) section 29 of the Code (or any renumbered,
successor or replacement provision of the Code) enacted after the Closing Date,
(ii) issuance or amendment of temporary or final regulations, rulings or other
materials under section 29 of the Code by the IRS or the Treasury Department
after the Closing Date, or (iii) administrative or judicial decision after the
Closing Date interpreting a provision of section 29 of the Code, or another
section of the Code the interpretation of which affects the application of
section 29 of the Code, that reduces or eliminates the amount of section 29 tax
credits available to the Buyer or any member of Buyer. A Change in Law shall
not include any of the items described in the preceding sentence if a Final
Determination incorporating such items would be a Buyer-Assumed Risk Event under
Sections 7.02(a)(ii), (iii) or (iv). The adjustments to the Tax Credit Rate for
the Inflation Adjustment Factor, as published from time to time, pursuant to
section 29 of the Code as it exists on the Effective Date, shall not constitute
a Change in Law.
"CIL Effective Date" is defined in Section 6.03.
"CIL Loss" is defined in Section 6.03.
"CIL Rescheduled Amount" is defined in Section 6.03.
"Cinnabar" means Cinnabar Energy Services & Trading LLC, which is
owned 50% by Seller.
"Cinnabar Gas Sales Contract" means that Gas Purchase Agreement dated
effective as of March 31, 2000 between the Buyer, as seller, and Cinnabar, as
purchaser, providing for the purchase of gas produced from the Interests for a
period of five years, in the form of Exhibit J hereto.
"Claim Notice" is defined in Section 8.02(e).
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"Closing" is defined in Section 5.01.
"Closing Date" is defined in Section 5.01.
"CMS" means CMS Oil and Gas Company.
"CMS Agreement" means that Purchase and Sale Agreement dated as of
March 4, 2000, between CMS, as seller, and Seller, as buyer.
"CMS Estoppel Certificate" means the Agreement dated March 31, 2000
between CMS and Buyer.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" is defined in Section 12.07.
"Credit Calculation Assumption" is defined in Section 7.02.
"Credit Calculation Representation" is defined in Section 7.01.
"Disallowed Credits" is defined in Section 7.03.
"Effective Date" means 7:00 A.M. Central Standard Time on March 31,
2000.
"Engineering Firm" is defined in Section 9.04(b).
"Environmental Laws" is defined in Section 3.01(t).
"Excess Credit Capital Contribution" is defined in Section 3.2(a) of
the LLC Agreement.
"Excess Credit Contribution Cap" is defined in Section 3.3(a) of the
LLC Agreement.
"Excess Tax Credits" means, with respect to any Quarterly Period, the
amount, if any, by which the Aggregate Tax Credits exceed the Scheduled Amount
for such Quarterly Period.
"FERC" is defined in Section 3.01(x).
"Final Determination" means, with respect to a Tax Claim, (i) a
decision, judgment, decree or other order by any court of competent
jurisdiction, which decision, judgment, decree or other order has become final
after all allowable appeals by either party to the action have been exhausted or
after the time for filing such appeals has expired, or (ii)
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a settlement agreement binding upon Buyer that is entered into in connection
with an administrative or judicial proceeding following Buyer's receipt of
either (A) Seller's Waiver or (B) a Settlement Acceptance Notice.
"Fixed Payment Note" means that Amended and Restated Fixed Payment
Note made by Buyer to Seller, substantially in the form of Exhibit F, which
amends and restates in its entirety that Fixed Payment Note (the "Original Fixed
Payment Note") executed and delivered by Buyer to Seller at the Closing.
"4/1/2000 Discounted CIL Loss" is defined in Section 6.03.
"Full Production Date" means 7:00 A.M. local time, of the day after
the day on which 183,949,431 Mcf of Gas attributable to the Interests have been
produced and sold after the Effective Date from the ▇▇▇▇▇.
"Gas" means Devonian shale hydrocarbon gas produced from the ▇▇▇▇▇
from the Antrim Formation.
"Hazardous Substances" is defined in Section 3.01(t).
"Hydrocarbons" is defined in paragraph (ii) of the definition of
Working Interests.
"Imputed Discount Rate" is defined in Section 6.03.
"Independent Tax Counsel" means (i) in the case of Seller, ▇▇▇▇▇▇ &
Hanger, L.L.P., or any other law firm selected by Seller and reasonably
acceptable to Buyer and (ii) in the case of Buyer, Holme ▇▇▇▇▇▇▇ & ▇▇▇▇ LLP or
any other law firm selected by Buyer and reasonably acceptable to Seller.
"Infill ▇▇▇▇▇" means any additional ▇▇▇▇▇ located on the Land or
recompletions of ▇▇▇▇▇ on the Land (other than recompletions of the Qualified
▇▇▇▇▇ in the Antrim Formation that produce Qualified Production).
"Inflation Adjustment Factor" means the inflation adjustment factor
published by the IRS pursuant to section 29 d)(2)(B) of the Code.
"Intercreditor Agreement" means the Intercreditor Agreement dated
March 31, 2000 by and among Buyer, BOA, as Agent for the Senior Lenders, and
TCW, as Agent for the Note Purchasers.
"Interests" means all of the following, subject to the Production
Payment:
(i) 99.5% of the Working Interests set forth in Exhibit A,
Part I of II attached hereto, insofar and only insofar as Working Interests
were acquired by
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Seller pursuant to that certain Assignment dated March 31, 2000 from CMS
Oil and Gas Company, a Michigan corporation, into Seller;
(ii) 100% of the Working Interests set forth on Exhibit A, Part
II of II attached hereto, insofar and only insofar as such Working
Interests were acquired by Seller pursuant to that certain Assignment dated
March 31, 2000 from Terra Energy Ltd., a Michigan corporation, into Seller;
(iii) the Interests shall not include, and Seller further
reserves and excepts unto itself, the right to receive all oil, gas and
other hydrocarbons that are produced, saved and sold from ▇▇▇▇▇ other than
the ▇▇▇▇▇ and Seller shall bear and pay all operating costs and other costs
and expenses attributable to such reserved production;
(iv) the Interests shall not include, and Seller also reserves
the right to use the lateral pipelines downstream of the central processing
facilities for the ▇▇▇▇▇ and Units to the extent there is capacity in
excess of that necessary to transport gas produced from the ▇▇▇▇▇; and
Seller also reserves any unused second-line or multiple-line rights under
the rights-of-way and easements for such lateral pipelines and any other
pipeline or gas transportation rights necessary to comply with applicable
law;
(v) the Interests shall not include, and Seller also reserves,
the compressors owned by Seller and used to compress gas produced from the
▇▇▇▇▇ and the lateral pipelines downstream from such compressors to the
point such lateral pipelines connect to a lateral pipeline or other
pipeline owned by a third party; and
(vi) the Buyer's Option.
"IRS" means the Internal Revenue Service.
"Knowledge" shall mean, with respect to any entity, the actual
knowledge of any officer, manager, or member of such entity.
"Land" shall mean all of the land described in Exhibit A or otherwise
included within the boundary of any Unit, limited to the Antrim Formation.
"Late Payment Interest Rate" means the lesser of (i) the Prime Rate
plus three percent and (ii) the maximum non-usurious rate of interest under
applicable law.
"Leases" is defined in paragraph (i) of the definition of Working
Interests.
"Legal Opinion" means a written opinion of Seller's Independent Tax
Counsel addressed to Buyer and meeting customary professional standards relating
to opinions of such type.
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"LLC Agreement" means the Mariner Gas LLC Operating Agreement dated
effective as of March 8, 2000, between State Street Bank and Trust Company and
Antrim Corporation, as the members.
"Loss" is defined in Section 8.02(e).
"Lost Scheduled Amount" with respect to any Qualified Well shall be an
amount equal to $20,000,000.00 multiplied by a fraction whose numerator is the
Allocated Value of such Qualified Well and whose denominator is the Allocated
Value of all the Qualified ▇▇▇▇▇.
"Management Agreement" means that certain Amended and Restated
Management Agreement dated as of the Effective Date between the Manager and
Buyer with respect to the Interests, which amends and restates in its entirety
that Management Agreement (the "Original Management Agreement") executed and
delivered by Buyer and Seller at the Closing.
"Manager" means Quicksilver Resources Inc., a Delaware corporation, or
any successor Manager under the Management Agreement.
"Mariner Mortgage" means that certain Mortgage dated as of the
Effective Date given by Buyer, as mortgagor, to Seller, as mortgagee, covering
the Interests, as amended by that First Amendment to Mortgage dated as of the
Effective Date.
"Mariner Lien Documents" means those lien affidavits, UCC-l's and
other documents requested by Buyer or by Seller to evidence of record the liens
and security interests granted by the Mariner Mortgage and the Quicksilver
Mortgage.
"Mcf" mean 1,000 cubic feet at a temperature of sixty degrees
Fahrenheit (60F) and at a pressure of fourteen and sixty-five one-hundredths
pounds per square inch absolute (14.65 psia).
"MMBtu" means million British thermal units.
"Negative Final Determination" means a Final Determination which
upholds the position of the IRS set forth in a Tax Claim.
"Net Profits" is defined in the PP Document.
"Net Profits Account" is defined in the PP Document.
"Net Revenue Interests" is defined in Section 3.01(i).
"NGPA" is defined in Section 3.01(x).
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"NGPA Regulations" is defined in Section 3.01(x).
"No Ruling Notice" is defined in Section 8.5(f).
"Non-Mariner Properties" is defined in Section 8.07(e).
"Non-Qualified ▇▇▇▇▇" means the ▇▇▇▇▇ other than the Qualified ▇▇▇▇▇.
"Permitted Encumbrances" is defined in Section 3.01(h).
"Person" means any natural person, association, trust, partnership,
limited liability company, corporation, governmental entity, or other legal
entity.
"Positive Final Determination" means a Final Determination which
rejects the position of the IRS set forth in a Tax Claim.
"PP Document" means that certain Conveyance of Production Payment
dated as of the Effective Date between Buyer, as assignor, and Seller, as
assignee, covering the Interests, as amended by that First Amendment to
Conveyance of Production Payment dated as of the Effective Date.
"PP Partial Release Payment" is defined in Section 10.04(b).
"Prime Rate" means the lesser of (i) the rate of interest charged by
Bank of America, N.A., or its successor, from time to time, as announced by such
bank as its prime or base rate of interest, and (ii) the maximum non-usurious
rate under applicable law.
"Production Payment" means the production payment conveyed by Buyer to
Seller in the PP Document.
"Projected Qualified Production" is defined in Section 6.03.
"Purchase Price" is defined in Section 2.01.
"Qualified Production" means Gas produced and sold from the Qualified
▇▇▇▇▇ after the Effective Date but if and only if, and only to the extent that,
such Gas constitutes "qualified fuel" under section 29(c)(1)(B)(i) of the Code
to which the credit provided for by section 29(a) of the Code applies. The
amount of Qualified Production with respect to any Quarterly Period shall be
estimated for purposes of delivery of a Quarterly Statement and shall be
subsequently adjusted as provided in Section 6.02.
"Qualified ▇▇▇▇▇" means the ▇▇▇▇▇ listed on Schedule 1.3 hereto.
"Quarterly Period" means a calendar quarter, provided that the first
Quarterly Period shall mean the period from the Effective Date up to and
including June 30,
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2000 and the last Quarterly Period shall mean that portion of the calendar
quarter in which the Capital Contribution Termination Date occurs from the
beginning of such calendar quarter up to and including the Capital Contribution
Termination Date.
"Quarterly Scheduled Amount Deficit" is defined in the PP Document.
"Quarterly Statement" is defined in Section 6.01.
"Quicksilver Abandonment Account-PP" is defined in the PP Document.
"Quicksilver Guaranty" means that certain Amended and Restated
Guaranty Agreement of even date from Seller to Buyer guarantying the payment and
performance of 50% of Cinnabar's obligations under the Cinnabar Gas Sales
Contract, which amends and restates in its entirety that Guaranty Agreement (the
"Original Guaranty") executed and delivered by Seller at the Closing.
"Quicksilver Mortgage" means that certain Mortgage dated as of the
Effective Date given by Seller, as mortgagor, to Buyer, as mortgagee, covering
the Production Payment, the Reversionary Interest and Seller's other interests
in the Land, ▇▇▇▇▇ and Units, as amended by that First Amendment to Mortgage
dated as of the Effective Date.
"RCRA" is defined in Section 3.01(t).
"Recalculation Statement" is defined in Section 6.02.
"Reserve Report" means the reserve report prepared by Schlumberger
Holditch-Reservoir Technologies Consulting Services dated March 8, 2000
effective as of April 1, 2000, covering the Interests.
"Reversionary Interest" means 75% of the Interests ((i) excluding
equipment and other tangible Interests disposed of in the ordinary course of
business, and Leases and Units that have expired, been terminated or defeased in
the ordinary course of business or by the Manager under the Management
Agreement, and (ii) including any additions to the equipment and other tangible
property owned by Buyer and located on the Land, appurtenant thereto or used or
obtained in connection therewith or with the production, gathering, treatment,
processing, sale or disposal of Hydrocarbons or water produced therefrom or
attributable thereto), which shall automatically revert to and vest in Seller on
the Full Production Date.
"Rework Operations" means the fracturing and other reworking
operations described on Schedule 1.4 to be undertaken by the Seller, in its
capacity as the Manager under the Management Agreement, after the Effective Date
for the purpose of increasing the volumes of Qualified Production produced from
the subject Qualified ▇▇▇▇▇.
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"Scheduled Amount" means, for each Quarterly Period ending on or
before December 31, 2002, the amount set forth in Schedule 1.1.
"Scheduled Amount Deficit Distributions" is defined in the Management
Agreement.
"Section 7.03 Amount" is defined in Section 7.03.
"Seller's Acknowledgment" is defined in Section 7.05.
"Seller's Exercise Termination Date" is defined in Section 9.02.
"Seller's Interests" is defined in Section 10.01.
"Seller's Option" is defined in Section 9.01.
"Seller's Option Closing Date" is defined in Section 9.02.
"Seller's Option Exercise Date" is defined in Section 9.02.
"Seller's Option Purchase Price" is defined in Section 9.02.
"Seller's Waiver" is defined in Section 7.05.
"Senior Lenders" is defined in Section 3.01(ee).
"Senior Loan Document" is defined in Section 3.01(ee).
"Settlement Acceptance Notice" is defined in Section 7.08.
"Settlement Notice" is defined in Section 7.08.
"Sub-Debt Lenders" is defined in Section 3.01(ff).
"Sub-Debt Note Purchase Agreement" is defined in Section 3.01(ff).
"Tax Claim Notice" is defined in Section 7.04(b).
"Tax Claim" means any claim by the IRS contained in a written
notification to Buyer, but only to the extent such claim (i) proposes to
disallow any portion of the Aggregate Tax Credits claimed by Buyer as set forth
in a Quarterly Statement for a Quarterly Period and (ii) could result in Seller
incurring an obligation to make payment of a Section 7.03 Amount to Buyer under
Section 7.03 hereof if such proposed disallowance were sustained.
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"Tax Credit Rate" means, for any Quarterly Period, the dollar value
per MMBtu of the credit provided for federal income tax purposes under section
29 of the Code for natural gas produced from Devonian shale, taking into account
any Change in Law. For purposes of delivery of a Quarterly Statement, it shall
be assumed that the Inflation Adjustment Factor for the calendar year which
includes such Quarterly Period is equal to 102% of the Inflation Adjustment
Factor applicable to the preceding calendar year. The Tax Credit Rate shall be
subsequently adjusted as provided in Section 6.02.
"Tax Indemnity" means the indemnity provisions of Article VII.
"Tax Loss" shall occur if there is a Final Determination that Buyer
was not entitled to all or any portion of the Aggregate Tax Credits claimed by
Buyer, to the extent such Aggregate Tax Credits were reflected on a Quarterly
Statement.
"Tax Loss Notice" is defined in Section 7.03.
"TCW" means TCW Asset Management Company.
"Terra" is defined in Section 3.01(j).
"Transaction" means the transactions contemplated by this Agreement.
"Transaction Documents" means this Agreement, the Fixed Payment Note,
the Assignment of Enforcement Rights, the Assignment, the PP Document, the
Quicksilver Mortgage, the Mariner Mortgage, Mariner Lien Documents, the
Management Agreement, the Cinnabar Gas Sales Contract, the Quicksilver Guaranty,
and each instrument and document delivered pursuant to this Agreement.
"Treasury Regulations" means the regulations promulgated by the United
States Treasury Department with respect to the Code.
" Trigger Date" is defined in Section 9.02(a).
"Undiscounted CIL Loss" is defined in Section 6.03.
"Units" means the units described in Exhibit A covering the Land,
limited to the Antrim Formation.
"Variables" is defined in Section 8.07(d).
"▇▇▇▇▇" means the oil and gas ▇▇▇▇▇ described in Exhibit A and all
other oil and gas ▇▇▇▇▇ included within any Unit, but excluding Infill ▇▇▇▇▇.
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"Working Interests" means all of the following:
(i) All of Seller's rights, title and interest in and to the
entire estates created by all leases, and in and to all royalties,
overriding royalty interests, mineral fee interests and other interests,
licenses, permits and other agreements described in Exhibit A, insofar and
only insofar as they cover and relate to the Land (the "Leases"), and the
Units, together with all of Seller's rights, title and interest in and to
the Qualified ▇▇▇▇▇ and the Non-Qualified ▇▇▇▇▇, all of Seller's other
right, title and interest in and to the Leases, royalties, overriding
royalty interests, mineral fee interests and other interests, Land, Units
and ▇▇▇▇▇, the property and rights incident thereto, including all rights
in, to and under all agreements, product purchase and sale contracts,
leases, permits, rights-of-way, easements, licenses, farmouts, options and
orders in any way relating thereto, insofar as they relate thereto;
(ii) All of Seller's right, title and interest in and to all of
the personal property, fixtures and improvements, permits, licenses,
approvals, servitudes, rights-of-way, easements, surface leases and other
surface rights (including, but not limited to, any ▇▇▇▇▇, tanks, boilers,
buildings, injection and disposal ▇▇▇▇▇, injection facilities, saltwater
disposal facilities, central processing facilities, metering facilities,
compression facilities, gathering systems, laterals and other appurtenances
and facilities) now or as of the Effective Date on the Land, appurtenant
thereto or used or obtained in connection therewith or with the production,
gathering, treatment, processing, sale or disposal of oil, gas and other
hydrocarbons and non-hydrocarbon gas from the ▇▇▇▇▇ (including, without
limitation, carbon dioxide) (collectively, "Hydrocarbons") or water
produced therefrom or attributable thereto; and all other appurtenances
thereunto belonging insofar and only insofar as the same relate to the
▇▇▇▇▇ and Seller's Net Revenue Interest for each Unit arising from Seller's
interests in the ▇▇▇▇▇ within each such Unit, the operation thereof and the
production, gathering, treatment, processing, sale or disposal of
Hydrocarbons therefrom;
(iii) All of Seller's right, title and interest, to the extent
transferable, in and to all existing and effective unitization, pooling and
communitization agreements, declarations and orders, and the properties
covered thereby and the production of Hydrocarbons attributable to said
properties and interests after the Effective Date, insofar and only insofar
as the same arise from the interests of Seller described in paragraphs (i)
or (ii) above; and
(iv) All of Seller's right, title and interest, to the extent
transferable, in and to existing and effective oil, gas (including carbon
dioxide), liquids, condensate, casinghead gas and gas sales, purchase,
exchange, gathering, transportation and processing contracts, operating
agreements, balancing agreements, joint venture agreements, partnership
agreements, farmout agreements and other contracts, agreements and
instruments, insofar and only insofar as they
13
relate to any of the properties and interests of Seller described in
paragraphs (i), (ii), or (iii) above.
ARTICLE II
----------
PURCHASE AND SALE; PURCHASE PRICE
2.01 Purchase and Sale; Purchase Price. Seller agrees to sell and
convey and Buyer agrees to purchase and pay for the Interests, subject to the
terms and conditions of this Agreement. The purchase price for the Interests
(the "Purchase Price") shall be: (i) cash in the amount of $25,000,000.00 to the
Seller (the "Cash Portion of the Purchase Price"), which is being paid in
immediately available funds at the Closing to CMS on behalf of Seller, (ii) the
Production Payment burdening the Interests, which is being conveyed by Buyer to
Seller in the PP Document and (iii) amounts payable to Seller pursuant to the
Fixed Payment Note.
2.02 Effective Date; Allocation of Revenue, Expenses, Taxes, Rights
and Obligations. The effective date of the conveyance of the Interests for
purposes of allocating revenue, expenses and taxes in regard to the Interests,
shall be the Effective Date. Buyer shall be entitled to revenue from operations
and the sale of Hydrocarbons produced from or attributable to the Interests on
or after the Effective Date, and Buyer shall pay for expenses relating to such
production. Seller shall be entitled to revenue from operations and the sale of
Hydrocarbons produced from or attributable to the Interests before the Effective
Date, and shall pay expenses relating to such production. Taxes relating to the
Interests, including ad valorem, property, production, severance and other taxes
(other than income taxes) shall be allocated in the same manner as other
expenses, with taxes that are measured by or relate to production being treated
as expenses in connection with such production regardless of the period for
which such taxes are assessed.
14
2.03 Purchase Price Allocation. Seller and Buyer shall cooperate in
the preparation of Internal Revenue Service Form 8594, including all required
amendments thereto, in accordance with section 1060 of the Code and the Treasury
Regulations promulgated thereunder, to report the allocation of the Purchase
Price among the Interests.
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES
3.01 Representations and Warranties of Seller. Seller represents and
warrants to Buyer as follows:
(a) Seller is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware.
(b) Seller has all requisite corporate power and authority to
carry on its business as presently conducted, to enter into the Transaction
Documents, and to perform its obligations under the Transaction Documents.
The consummation of the transactions contemplated by the Transaction
Documents will not violate, nor be in conflict with, any provision of
Seller's articles or certificate of incorporation, bylaws or other
governing documents, or any agreement or instrument to which Seller is a
party or is bound, or any judgment, decree, order, statute, rule or
regulation applicable to Seller.
(c) The execution, delivery and performance of the Transaction
Documents and the transactions contemplated hereby and thereby have been
duly and validly authorized by all requisite corporate action on the part
of Seller.
(d) This Agreement has been duly executed and delivered on
behalf of Seller, and at the Closing all of the Transaction Documents and
all other documents and instruments required hereunder and thereunder to be
executed and delivered by Seller shall have been duly executed and
delivered. This Agreement does, and the other Transaction Documents and
such other documents and instruments shall, constitute legal, valid and
binding obligations of Seller enforceable in accordance with their terms,
subject, however, to the effects of bankruptcy, insolvency, reorganization,
moratorium and similar laws from time to time in effect, as well as to
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
(e) Seller has delivered to Buyer, its audited financial
statements dated as of December 31, 1998 and December 31, 1999 and the
related statements of operations for the fiscal periods then ended audited
by Deloitte & Touche LLP. Seller will deliver like financial statements for
each calendar year to Buyer within 90 days after the end of such calendar
year. Such financial statements do and will
15
fairly present in accordance with generally accepted accounting principles
applied on a consistent basis except as disclosed in the notes thereto, the
financial position of Seller at the date and for the period therein set
forth. Since December 31, 1999 there has been no material adverse change in
the financial condition of Seller, and there has been no occurrence or
other event or condition that might reasonably be expected to result in
such a material adverse effect after the date hereof, other than economic
trends affecting the oil and gas industry generally.
(f) Seller has incurred no liability, contingent or otherwise,
for brokers' or finders' fees relating to the transactions contemplated by
the Transaction Documents for which Buyer shall have any responsibility
whatsoever.
(g) Seller is not a foreign person (as that term is defined in
section 1445 of the Code and the rules and regulations promulgated
thereunder).
(h) Except as specifically set forth in Exhibit A and except for
Permitted Encumbrances (as defined below), Seller has good and defensible
title to the Interests, free and clear of all liens, encumbrances, burdens,
claims and defects of title of any kind.
"Permitted Encumbrances" as used herein shall mean the following:
(1) the burdens, encumbrances and obligations created by or
arising under the Leases and the agreements set forth in Exhibit A, and
overriding royalty interests, back-in rights and other burdens taken into
account in computing the "Net Revenue Interests" set forth in Exhibit A;
(2) the Production Payment, the Reversionary Interest, the
Seller's Option and the Buyer's Option;
(3) all rights to consent by, required notices to, filings
with, or other actions by governmental entities in connection with the sale
or conveyance of the Interests if the same are customarily obtained
subsequent to such sale or conveyance and there is no reason to believe
that such consents or actions will not be obtained or taken in due course;
(4) rights of reassignment upon surrender of the Leases
held by Seller's predecessors in interest;
(5) easements, rights-of-way, servitudes, permits, surface
leases and other rights in respect of surface use, so long as the existing
locations of the ▇▇▇▇▇ and other facilities and the continued use thereof
in the same manner as they have been historically used are not in conflict
with the foregoing;
16
(6) rights and regulatory powers reserved to or vested in
any municipality or governmental, statutory or public authority;
(7) liens for taxes, fees, claims, charges, assessments,
government charges or levies not yet due, or which are being contested in
good faith and by appropriate proceedings and for which adequate reserves
have been established in the event that such contests are unsuccessful
(which contested matters and reserves are described in Schedule
3.01(h)(7));
(8) mechanics', materialmen's, operators' or other like
liens arising in the ordinary course of business which are not yet due, or
which are being contested in good faith and by appropriate proceedings and
for which there is no material risk of forfeiture or loss of any of the
Interests (which contested matters are described in Schedule 3.01(h)(8));
(9) rights to require the removal of lands or leases from
unitization agreements or pooling provisions, or the units created thereby,
insofar as and to the extent that such rights or the exercise of such
rights do not cause the Working Interests (as defined below) to exceed or
the Net Revenue Interests (as defined below) to be less than the amount
represented and warranted by Seller in Section 3.01(i) as set forth on
Exhibit A as to any Unit;
(10) division orders and sales contracts terminable without
penalty upon no more than 30 days notice to the purchaser;
(11) liens created by law for royalty or for compliance with
the terms of the Leases; and
(12) terms and provisions of the operating agreements and
other agreements described on Exhibit A.
(i) The Interests, without regard to the Production Payment,
entitle Seller to receive not less than 99.5% of the undivided interests
set forth in Exhibit A as "Net Revenue Interests" of all Hydrocarbons
produced, saved and sold from or attributable to the Land and the ▇▇▇▇▇ or
Units through the plugging, abandonment and salvage of the ▇▇▇▇▇ within the
Units respectively. Seller's obligation with respect to the Interests, to
bear costs and expenses relating to the development of and operations on
the Leases, Land and ▇▇▇▇▇ thereon or attributable thereto is not, and,
through the plugging, abandonment and salvage of such ▇▇▇▇▇, shall not be,
greater than 99.5% of the "Working Interests" set forth in Exhibit A,
except for obligations under operating agreements to bear a proportionate
share of any operating costs payable by co-owners who fail to pay their
share of operating costs.
17
(j) Immediately prior to Seller's acquisition of the Interests
from CMS Oil and Gas Company ("CMS") and Terra Energy Ltd. ("Terra"), CMS
and Terra were, to Seller's Knowledge, receiving from all purchasers of
production from the Interests not less than the "Net Revenue Interests" set
forth in Exhibit A without any material portion being held in suspense or
any indemnity other than the normal division order warranty of title.
Immediately prior to Seller's acquisition of the Interests from CMS and
Terra, CMS and Terra were, to Seller's Knowledge, paying for the
development and operation of the Interests not more than the "Working
Interests" set forth in Exhibit A, and Seller is current for all costs and
expenses pertaining to the development and operation of the Interests.
(k) The Leases are in full force and effect, are valid and
subsisting, and except for the matters described in Schedule 3.01(k),
neither Terra, CMS, or Seller has been notified by any lessor under any
Lease or by any other party of a material default under any Lease that has
not been resolved or of any requirements or demands to drill additional
▇▇▇▇▇ on any of the Land. The Leases cover the Antrim Formation and entitle
the owner(s) thereof to all Gas produced from the ▇▇▇▇▇, subject to
existing royalties and overriding royalty interests and subject to the unit
agreements for the Units described in Exhibit A.
(l) Neither Seller, CMS nor Terra is in default in any material
respect under any contract or agreement pertaining to the Interests except
for those alleged defaults described in Schedule 3.01(k), and, except as
specifically indicated in Schedule 3.01(l), there are no contracts or other
agreements, other than existing operating agreements, pertaining to the
Interests which require any further capital expenditures on the part of
Seller or require Seller to perform any material obligations thereunder in
order to earn, maintain or retain the Interests.
(m) Except for the matters described in Schedule 3.01(m), all
royalties, rentals and other payments that have become due and payable
under the Leases have been properly and timely paid, and all conditions
necessary to keep the Leases in force have been performed.
(n) Schedule 3.01(n) sets forth the preferential rights to
purchase all or any portion of the Interests that have been identified by
Seller through the date of this Agreement that have not been waived with
respect to the transactions contemplated herein. All consents or waivers
identified by Seller through the date of this Agreement necessary to convey
the Interests pursuant to this Agreement have been obtained, except the
consent of the Director of the Michigan Department of Natural Resources as
to the Leases granted by the State of Michigan (and Seller has no reason to
believe that such consent will not be obtained). Seller has given the
holders of the preferential rights described in Schedule 3.01(n) notice of
the Transaction as required by such rights.
18
(o) There are no gas imbalances existing as of the Effective
Date. Neither Seller, CMS nor Terra is obligated, by virtue of a prepayment
arrangement, a "take or pay" arrangement, a production payment or any other
arrangement, to deliver Hydrocarbons produced from the Interests at some
future time without then or thereafter receiving full payment therefor. The
production from the ▇▇▇▇▇ has not been prorated by the Michigan Public
Service Commission.
(p) All ad valorem, property, production, severance, net
profits, excise and similar taxes and assessments based on or measured by
the ownership of property or the production of Hydrocarbons or the receipt
of proceeds therefrom on the Interests that have become due and payable
have been properly and timely paid.
(q) Except as set forth in Schedule 3.01(q), no suit, action or
other proceeding is pending or, to the Knowledge of Seller, threatened
before any court or governmental agency that, if resolved adversely to
Seller, would have a material adverse effect on the Interests.
(r) All laws, rules, regulations, ordinances and orders of all
local, state and federal governmental bodies, authorities and agencies
having jurisdiction over the Interests have been complied with in all
material respects.
(s) All necessary and material plans for development,
applications, inspection reports, certificates and other instruments
pertaining to operational and environmental matters have been filed with
the appropriate local, state and federal governmental bodies, authorities
and agencies and all permits necessary for the legal operation of the
Interests in material compliance with all laws, rules, regulations,
ordinances and orders, including without limitation Environmental Laws (as
hereinafter defined, and as such laws are in effect and consistently
enforced as of the Closing Date), have been obtained, and the Interests are
in material compliance with all such laws, rules, regulations, ordinances
and orders. Seller is qualified to hold interests in those Leases issued by
the State of Michigan.
(t) (i) To Seller's Knowledge, at all times during CMS's or
Terra's ownership or operation of the Interests, the Interests have been
operated in material compliance with all applicable Environmental Laws (as
such laws are in effect and consistently enforced as of the Closing Date),
and no conditions exist that would subject Seller, CMS, Terra or Buyer to
any material damages (including, without limitation, actual, consequential,
exemplary or punitive damages), penalties, injunctive relief or cleanup
costs under any Environmental Laws (as such laws are in effect and
consistently enforced as of the Closing Date), or that require or are
likely to require material cleanup, removal, remedial action or other
response by Seller, CMS, Terra or Buyer pursuant to Environmental Laws (as
such laws are in effect and consistently enforced as of the Closing Date).
19
(ii) With respect to the Interests, neither Seller, CMS
nor Terra is a party to any litigation or administrative proceeding, nor,
to Seller's Knowledge, is any litigation or administrative proceeding
threatened against Seller, CMS, Terra or the Interests, which asserts or
alleges that Seller, CMS, Terra or any of their predecessors violated or is
violating Environmental Laws (as such laws are in effect and consistently
enforced as of the Closing Date) or that Seller, CMS or Terra is required
to undertake any material clean up, removal or remedial or other responsive
action due to the use, storage, treatment, disposal, discharge, leaking or
release of any Hazardous Substances (as hereinafter defined). Neither
Seller, CMS, Terra, nor to Seller's Knowledge, any of their predecessors,
or any part of the Interests is subject to any judgment, decree, order or
citation related to or arising out of Environmental Laws (as such laws are
in effect and consistently enforced as of the Closing Date relating to or
affecting the Interests), and, to Seller's Knowledge, neither Seller, CMS,
nor Terra has been named or listed as a "potentially responsible party"
under CERCLA (as defined below) with respect to the Interests. To Seller's
Knowledge, there are no underground storage tanks located on or in the
Interests.
(iii) As used herein, the term "Environmental Laws" shall
mean any and all present and future laws (whether common or statutory),
compacts, treaties, conventions, rules, regulations, orders, decrees,
judgments, injunctions, promulgated or entered under such laws by any
federal, state or local governmental entity relating to public or employee
health and safety, pollution or protection of the environment, including
without limitation, common law claims and theories of liability in
negligence, trespass, nuisance, or any other common law theory, the
Comprehensive Environmental Response, Compensation, and Liability Act, as
amended by the Superfund Amendment and Reauthorization Act and otherwise
("CERCLA"), the Resource Conservation and Recovery Act ("RCRA"), the
Federal Safe Drinking Water Act, the Federal Water Pollution Control Act,
the Emergency Planning and Community Right-to-Know Act, the Clean Air Act,
the Oil Pollution Act, and any and all other federal, state, and local
laws, rules, regulations and orders relating to reclamation of land,
wetlands and waterways or relating to use, storage, emissions, discharges,
cleanup, releases or threatened releases of pollutants, contaminants,
chemicals or industrial, toxic or Hazardous Substances (as hereinafter
defined) on or into the workplace or the environment (including without
limitation, ambient air, oceans, waterways, wetlands, surface water, ground
water (tributary and non-tributary), land surface or subsurface strata) or
otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transportation or handling of pollutants,
contaminants, chemicals, or industrial, toxic, hazardous or similar
substances, as all of the foregoing may be amended, supplemented and
reauthorized from time to time.
(iv) As used herein, the term "Hazardous Substances"
shall mean any and all (1) "hazardous substances," as defined by CERCLA;
(2) "solid wastes" and "hazardous wastes," as defined by RCRA; (3) any
pollutant, contaminant or hazardous, dangerous or toxic chemicals,
materials or substances within the meaning
20
of any Environmental Law; (4) any radioactive material, including any
source, special nuclear or by-product material as defined at 42 U.S.C. (S)
2011 et seq., as amended, or any naturally occurring radioactive materials;
(5) asbestos in any form or condition; and (6) petroleum and petroleum
products.
(v) As used herein, the term "release" shall have the
meaning specified in CERCLA, and the term "disposal" or "disposed" shall
have the meaning specified in RCRA.
In the event CERCLA, RCRA or any other applicable Environmental
Law is amended so as to broaden the meaning of any terms defined thereby,
such broader meaning shall apply subsequent to the effective date of such
amendment; and to the extent that applicable state or local laws establish
a meaning for "hazardous substance," "release," "solid waste," "hazardous
wastes," or "disposal" that is broader than that specified in either CERCLA
or RCRA, such broader meaning shall apply.
(u) [Intentionally Omitted.]
(v) No portion of the Interests (1) has been contributed to and
is currently owned by a tax partnership; (2) is subject to any form of
agreement (whether formal or informal, written or oral) deemed by any
federal tax statute, rule or regulation to be or to have created a tax
partnership; or (3) otherwise constitutes "partnership property" (as that
term is used throughout Subchapter K of Chapter 1 of Subtitle A of the
Code) of a tax partnership. For purposes of this Section 3.01(v) a "tax
partnership" is any entity, organization or group deemed to be a
partnership within the meaning of section 761 of the Code or any similar
federal statute, rule or regulation, and that is not excluded from the
application of the partnership provisions of Subchapter K of Chapter 1 of
Subtitle A of the Code by reasons of elections made, pursuant to section
761(a) of the Code and all such similar federal statutes, rules and
regulations, to be excluded from the application of all such partnership
provisions.
(w) Other than the Cinnabar Gas Sales Contract, arrangements for
sales of gas to third parties for providing compression services on or near
the Units, and the gathering, transporting, processing contracts set forth
in Schedule 3.01(w), no Hydrocarbons produced from the Interests are
subject to a sales contract or other agreement relating to the production,
gathering, transporting, processing, treating or marketing of Hydrocarbons,
and no Person has any call upon or option to purchase the Interests or the
production therefrom.
(x) (i) Schedule 3.01(x)(i) sets forth the correct API
identification number for each Well. The Reserve Report accurately
reflects the total number of producing ▇▇▇▇▇ in each Unit. All applications
for well determinations for each Qualified Well have been filed with the
applicable state and federal agencies under
21
the Natural Gas Policy Act of 1978, as amended (the "NGPA") and the rules
and regulations of the Federal Energy Regulatory Commission (the "FERC")
under such act (the "NGPA Regulations") requesting a determination that all
of the gas produced from each Qualified Well is produced from "Devonian
shale." Each such application has been approved by the applicable state
agency and by the FERC and has been finally approved under and in
accordance with Section 503 of the NGPA (as evidenced by appropriate FERC
certification). Such applications comply with the requirements of the NGPA
and the NGPA Regulations. True and correct copies of such certifications
have been furnished to Buyer. No further applications are required under
the NGPA and the NGPA Regulations to allow the legal sale of all Gas
produced from the Interests at a price equal to the price for such Gas
currently being received. No production from the Interests qualifies for
incentive prices under section 107 or the deregulation provisions of the
NGPA or Subtitle 13 of title I of the NGPA.
(ii) (A) Each Qualified Well was drilled (within the
meaning of section 29(f) of the Code) after
December 31, 1979 and prior to January 1, 1993,
and was completed as a well capable of
producing from the formation described in
Section 3.01(x)(iii); (provided that the
parties recognize that the IRS has claimed that
the ▇▇▇▇▇ described in Schedule 3.01(x)(ii)(A)
were not drilled within such time period and
the parties agree that no Aggregate Tax Credits
attributable to production from such ▇▇▇▇▇
shall be included in Aggregate Tax Credits, or
reflected as such on any Quarterly Statement or
Recalculation Statement, until such time as
such IRS claim has been resolved and is finally
determined not to be correct).
(B) All gas (except carbon dioxide) produced from
each Qualified Well is a "qualified fuel" under
section 29(c) of the Code.
(iii) The Qualified ▇▇▇▇▇ are perforated only in the
Antrim Formation and the gas produced from each Qualified Well is not
commingled with any gas from that well that is not produced from such
formation.
(iv) Prior to January 1, 1980, there was no production of
coal seam, Devonian shale, geopressured brine or tight formation gas in
marketable quantities from the "property" (as used in section 29 of the
Code) on which any Qualified Well is located.
22
(v) No oil or gas produced from the Qualified ▇▇▇▇▇
qualifies or has qualified for the enhanced oil recovery credit or any
other credit under section 43 of the Code and none has been claimed or
taken on such oil or gas.
(vi) No credits referred to in section 29(b)(4) of the
Code have been claimed with respect to property used in connection with the
Interests.
(vii) No grants have been provided by the United States, a
State or a political subdivision of a State "for use in connection with any
project" (within the meaning of section 29(b)(3)(A)(i)(I) of the Code) that
includes any of the Interests.
(viii) No proceeds of any issue of State or local
government obligations has been "used to provide financing for any project"
(within the meaning of section 29(b)(3)(A)(i)(II) of the Code) that
includes any of the Interests.
(ix) No "subsidized energy financing" (within the meaning
of section 48(a)(4)(c) of the Code) has been "provided in connection with
any project" (within the meaning of section 29(b)(3)(A)(i)(III) of the
Code) that includes any of the Interests.
(x) All Gas produced from the Qualified ▇▇▇▇▇ during any
Quarterly Period will constitute Qualified Production.
(y) All of the factual information furnished by Seller to Buyer
in writing in connection with the Transaction, and all factual information
furnished in writing to Schlumberger Holditch - Reservoir Technologies
Consulting Services in connection with its preparation of the Reserve
Report, do not (1) contain any untrue statement of material fact or (2)
omit any statement of material fact necessary to make the statements
therein not misleading.
(z) Seller has had the opportunity to consult with its own
attorneys, accountants, and other consultants regarding the business, tax,
and legal merits of executing this Agreement and consummating the
transactions contemplated herein.
(aa) Except for the rights of the licensors under the license
agreements described in Schedule 3.01(aa), no third party intellectual
property rights exist, including without limitation patents, patent
applications and trade secrets, which would be infringed, interfered with
or otherwise violated by consummation of the transactions contemplated in
this Agreement or by Buyer's ownership and continued operation of the
Interests, in each case where such infringement, interference or violation
would have a material adverse impact on any portion of the Interests.
(bb) None of the operations set forth on Schedule 1.4 will cause
any gas produced and sold from the reworked Qualified Well not to be
Qualified Production. The capital expenditures set forth in Schedule 1.4
are sufficient to conduct the
23
Rework Operations and Seller reasonably believes that the Rework Operations
will be adequate to achieve the increased production anticipated in the
preparation of the Reserve Report. Seller has ongoing business
relationships with reputable service companies which have available
adequate crews and equipment to perform the Rework Operations on or before
the schedule set forth in Schedule 1.4.
(cc) Schedule 3.01(cc) accurately summarizes the gas gathering,
processing, treatment, CO\\2\\ removal, water disposal, marketing, and
points of sale relating to Gas produced from the Interests.
(dd) The representations and warranties made by Seller to CMS in
the CMS Agreement were true and correct when made and would be true and
correct if restated and made as of the Effective Date, all conditions
precedent to the CMS Agreement have been satisfied, the closing under the
CMS Agreement has occurred and Seller has the right to record the
assignment from CMS to Seller of that portion of the Interests owned by
CMS.
(ee) The representations and warranties made by Seller to the
Senior Lenders (as defined below) in that certain Third Amended and
Restated Credit Agreement (the "Senior Loan Document") dated as of March
31, 2000 among Quicksilver Resources Inc., as borrower, and Bank of
America, N.A., as Administrative Agent, and the financial institutions
listed on Schedule 1 thereto, as Banks (the "Senior Lenders") were true and
correct when made and would be true and correct if restated and made as of
the Effective Date, and all conditions precedent under the Senior Loan
Document to the advances necessary to fund the purchase price payable to
CMS under the CMS Agreement have been satisfied.
(ff) The representations and warranties made by Seller to the
Sub-Debt Lenders (as defined below) in that certain Note Purchase Agreement
(the "Sub-Debt Note Purchase Agreement") dated March 31, 2000 among
Quicksilver Resources Inc. and TCW, as Agent for the Note Purchasers, and
Life Insurance Company of Georgia, et al., as Note Purchasers (the "Sub-
Debt Lenders"), were true and correct when made and would be true and
correct if restated and made as of the Effective Date, and all conditions
precedent under the Sub-Debt Note Purchase Agreement to the advances
necessary to fund the purchase price payable to CMS under the CMS Agreement
have been satisfied.
(gg) Except as set forth on Schedule 3.01(gg), no landowners,
lessors, or royalty owners have taken, or currently take gas produced from
any of the ▇▇▇▇▇ in kind, and any such Person listed on Schedule 3.01(gg)
is covered by Seller's insurance policies represented by the Certificates
of Insurance listed in Schedule 5.03(k).
24
3.02 Representations and Warranties of Buyer. Buyer represents and
warrants to Seller as follows:
(a) Buyer is a limited liability company duly organized, validly
existing and in good standing under the laws of the Commonwealth of
Massachusetts.
(b) Buyer has all requisite limited liability company power and
authority to carry on its business as presently conducted, to enter into
the Transaction Documents, to purchase the Interests on the terms described
in this Agreement and to perform its other obligations under the
Transaction Documents. The consummation of the transactions contemplated by
the Transaction Documents will not violate, nor be in conflict with, any
provision of Buyer's limited liability company operating agreement, other
governing documents, or any agreement or instrument to which Buyer is a
party or is bound, or any judgment, decree, order, statute, rule or
regulation applicable to Buyer.
(c) The execution, delivery and performance of the Transaction
Documents and the transactions contemplated hereby and thereby have been
duly and validly authorized by all requisite limited liability company
action on the part of Buyer.
(d) This Agreement has been duly executed and delivered on
behalf of Buyer, and at the Closing the Transaction Documents and all other
documents and instruments required hereunder and thereunder to be executed
and delivered by Buyer shall have been duly executed and delivered. This
Agreement and the other Transaction Documents do, and such documents and
instruments shall, constitute legal, valid and binding obligations of Buyer
enforceable in accordance with their terms, subject, however, to the
effects of bankruptcy, insolvency, reorganization, moratorium and similar
laws from time to time in effect, as well as to general principles of
equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
(e) Buyer has incurred no liability, contingent or otherwise,
for brokers' or finders' fees relating to the transactions contemplated by
the Transaction Documents for which Seller shall have any responsibility
whatsoever.
(f) Buyer is qualified to hold interests in those Leases issued
by the State of Michigan.
(g) Buyer is acquiring the Interests for its own account and not
with a view to, or for resale in connection with, any distribution or
public offering. Buyer is an "accredited investor," as defined in Rule 501
of Regulation D under the Securities Act of 1933, as amended. Buyer has
such knowledge and experience in financial and business matters (including
oil and gas investments) that it is capable of evaluating the merits and
risks of acquiring the Interests and of making an informed
25
investment decision and is able to bear the economic risk of such
investment. Buyer is familiar with the Interests and has been provided
with, or had access to, such information that it deems necessary to, or
useful in, its evaluation of the merits and risks of an investment in the
Interests and the making of an informed investment decision. Buyer has been
afforded the opportunity to ask questions of Seller concerning the
Interests, and all such questions have been answered to the satisfaction of
Buyer. In addition, Buyer has had the opportunity to consult with its own
attorneys, accountants, and other consultants regarding the business, tax,
and legal merits of acquiring the Interests.
3.03 Disclaimers of Other Representations and Warranties.
(a) The representations and warranties in this Agreement
constitute the only representations and warranties that are being made by
Seller and Buyer in connection with the transactions contemplated hereby,
and all other representations and warranties are expressly disclaimed and
negated. Each party acknowledges that, in making its decision to enter into
this Agreement and consummate such transactions, it has relied solely on
the basis of its own independent investigation and upon the express
representations and warranties of the other party set forth in this Article
III.
(b) Without limiting the generality of Section 3.03(a), SELLER
HEREBY EXPRESSLY DISCLAIMS AND NEGATES, ANY REPRESENTATION OR WARRANTY,
EXPRESSED (ORALLY OR IN WRITING), IMPLIED, AT THE COMMON LAW, BY STATUTE,
OR OTHERWISE, RELATING TO (i) THE CONDITION OF THE INTERESTS (INCLUDING ANY
IMPLIED OR EXPRESSED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, OR OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS) OR (ii) ANY
INFORMATION, DATA OR OTHER MATERIALS (WRITTEN OR ORAL) FURNISHED TO BUYER
BY OR ON BEHALF OF SELLER (INCLUDING WITH RESPECT TO GEOLOGICAL,
GEOPHYSICAL AND SEISMIC DATA, THE EXISTENCE OR EXTENT OF HYDROCARBON
RESERVES, THE RECOVERABILITY OF (OR THE COST OF RECOVERING) ANY SUCH
RESERVES, THE VALUE OF SUCH RESERVES, ANY PRODUCT PRICING ASSUMPTIONS, OR
THE ABILITY TO SELL HYDROCARBON PRODUCTION AFTER CLOSING; IT BEING AGREED
BY BUYER THAT IT IS ACQUIRING THE INTERESTS "AS-IS," "WHERE-IS," WITH ALL
FAULTS; provided, however, that the foregoing disclaimer and negation of
representations and warranties shall not affect or impair the express
representations, warranties, and indemnities of Seller set forth in Section
3.01, Article VII and Section 8.02.
26
ARTICLE IV
----------
COVENANTS
4.01 Covenants of Seller. Seller covenants and agrees with Buyer as
follows:
(a) So long as Buyer, its successors or assigns, own an interest
in the Interests, Seller shall, subject to execution of a mutually
agreeable confidentiality agreement, provide Buyer access to geophysical,
geological, title, production, contract, marketing, unit, operational,
environmental, permitting and other data and information, other than
Seller's proprietary information and data, owned by Seller pertaining to
the Interests, together with all balancing and disbursement statements
reported and relating to the Interests and such other information,
statements and documents reasonably requested by Buyer or its
representatives, as is available in Seller's files. Seller's files
pertaining to the Interests will be made available to Buyer for examination
at Seller's offices during normal working hours. Seller shall provide Buyer
and its agents and representatives (and the state and federal regulatory
authorities with jurisdiction over Buyer or the members of Buyer), during
the period in which Buyer has an interest in the Interests, the right to
inspect, review and copy any such data or information (or studies, maps,
evaluations, interpretations or reports derived therefrom) which relates to
the Interests, and to consult with Seller's independent certified public
accountants and independent petroleum engineers and Seller's technical
personnel, if any, with respect to the Interests and production therefrom.
The costs of such copying and any fees charged by any third-party
accountants or consultants for consulting with Buyer shall be paid by Buyer
directly to such third parties.
Notwithstanding the foregoing, Buyer shall not have the right to
copy or receive copies of any such data or information if Seller is subject
to a valid and effective agreement prohibiting Seller from copying or
distributing such data or information unless the agreement pursuant to
which it was acquired permits copies to be made and then only if Buyer
requesting such information or any of its agents or representatives agrees
to be bound by the terms of such agreement prior to copying or receiving
copies of such data or information, in which case Buyer or such agent or
representative shall have the right to copy or receive copies of such data
or information promptly after it agrees to be so bound. To the extent it
may legally do so, Seller shall disclose to Buyer that such data or
information exists and the restrictions on copying or distributing the
same.
(b) With regard to the Interests, Seller shall provide to Buyer,
promptly upon receipt, copies of any notice, pleading, citation,
indictment, complaint, order, decree, or other document received or
obtained from any person or other source asserting or alleging a violation
of any law, rule, regulation or order, including without limitation any
Environmental Laws, or a circumstance or condition which requires or could
require a financial contribution by Seller or Buyer or a cleanup,
27
removal, remedial action or other response by or on the part of Seller or
Buyer under Environmental Laws, or which seeks damages or civil, criminal
or punitive penalties from Seller or Buyer for an alleged violation of
Environmental Laws, or which names or lists Seller or Buyer as a
potentially responsible party under any Environmental Laws.
(c) Except as provided in this Section 4.01(c), neither Seller
nor its Affiliates shall have the power or authority to, and they shall
not, participate in the drilling of any Infill Well and shall object to and
vote against the drilling of any Infill Well. Seller may propose or
participate in the drilling of an Infill Well if such Infill Well will be
located on a spacing unit of not less than 80 acres and will be metered
individually. If Seller or any of its Affiliates elect to participate in
the drilling of a permitted Infill Well, it shall first notify the Buyer of
such election. Buyer shall assign to Seller or one of Seller's Affiliates
designated by Seller Buyer's interests in such proposed Infill Well (and
associated facilities) only insofar as such interests entitle the owner
thereof to participate in such Infill Well and reserving all rights to the
▇▇▇▇▇ and production therefrom; provided, however, that (i) the Buyer shall
have no obligation to pay any costs associated with such Infill Well, (ii)
Seller or its Affiliate shall bear all of the costs of drilling, completing
and operating such Infill Well and shall keep the Interests free of all
liens that may arise from drilling and operating the Infill Well, and (iii)
the Production Payment shall not burden such Infill Well.
(d) If Seller, in its capacity as an owner of working interests
in the same Leases or Units as the Interests, participates in any
additional drilling, recompletion, rework or other operation on any Unit,
Seller shall bear all of the costs thereof. If such activities could result
in the imposition of any lien on the Interests under the applicable
operating agreement or otherwise, prior to electing to participate in such
activity Seller shall demonstrate to Buyer's reasonable satisfaction that
it has the funds to pay its share of the costs of such activity and Seller
shall keep the Interests free of all such liens.
(e) Within 3 days after Seller' receipt thereof, Seller shall
provide to Buyer, at Seller's expense, copies of all title opinions and all
title reports obtained by Seller during Seller's Extended Due Diligence
Period, as defined in Section 13.1 of the CMS Agreement.
(f) Within 30 days after the Closing Seller shall furnish Buyer
with copies, certified as true and complete, of all of the documents
executed and delivered in connection with closing the transactions under
the CMS Agreement, the Senior Loan Document and the Sub-Debt Note Purchase
Agreement, and Seller shall furnish Buyer with copies of all amendments
thereto, certified as true and complete, within 15 days after the execution
thereof. Seller shall furnish Buyer with copies of all certificates,
engineering reports and other reports hereafter furnished to the Senior
Lenders or the Sub-Debt Lenders and all notices of default received from
28
the Senior Lenders or the Sub-Debt Lenders, and Seller will notify Buyer of
the occurrence of any event that constitutes, or with the passage of time
will constitute, an Event of Default under and as defined in the Senior
Loan Document or the Sub-Debt Note Purchase Agreement. Within 15 days after
Closing Seller shall furnish Buyer with a copy of the most recent ▇▇▇▇▇
▇▇▇▇▇ report covering the Interests in Seller's possession.
(g) Within 30 days after the Closing, Seller shall use its best
efforts to identify all preferential rights to purchase all or any portion of
the Interests in addition to those set forth in Schedule 3.01(n) and shall give
the required notices to the holders thereof.
ARTICLE V
---------
CLOSING
5.01 Date of Closing. The consummation of the transactions
contemplated by this Agreement occurred on March 31, 2000 (the "Closing Date")
simultaneously with the execution of the Original Agreement (the "Closing").
5.02 Place of Closing. The Closing was held at the offices of ▇▇▇▇▇▇
& ▇▇▇▇▇▇ LLP in Dallas, Texas.
5.03 Closing Obligations. At or prior to the Closing the following
events occurred, each being a condition precedent to the others and each being
deemed to have occurred simultaneously with the others:
(a) Seller and Buyer executed, acknowledged and delivered the
Assignment (in sufficient counterparts to facilitate recording) to Buyer or
Buyer's designee in form and substance as set forth in Exhibit G hereto.
Seller shall also execute, acknowledge and deliver separate assignments of
the Interests on officially approved forms in sufficient counterparts to
satisfy applicable statutory and regulatory requirements. Such forms shall
be deemed to contain the same terms, provisions and limitations as the
Assignment.
(b) Seller and Buyer executed, acknowledged and delivered to
each other, as appropriate, the Mariner Lien Documents.
(c) Buyer delivered to Seller, by wire transfer, the Cash
Portion of the Purchase Price.
(d) Buyer executed and delivered to Seller the Original Fixed
Payment Note.
(e) [Intentionally Omitted]
29
(f) [Intentionally Omitted]
(g) Buyer executed and delivered and caused its members to
execute and deliver to Seller the Original Assignment of Enforcement
Rights.
(h) Seller executed, acknowledged and delivered to Buyer a Non-
Foreign Status Certificate dated as of the Closing Date in the form and
substance as set forth in Exhibit C hereto.
(i) Seller delivered to Buyer title opinions acceptable to Buyer
covering the interests of CMS, Terra and Seller in the Units described in
Schedule 5.03(i)(1) and title reports prepared by an independent ▇▇▇▇▇▇▇
based, among other things, on a review of the applicable real property
records through a recent date covering the interests of CMS, Terra and
Seller in those Units described in Schedule 5.03(i)(2). The costs
associated with the preparation of such title opinions and title reports
shall be paid by Seller. In addition, Seller shall pay to Buyer 50% of the
costs incurred by Buyer for work by landmen in connection with Buyer's
review of CMS's and Seller's title to the Interests, provided, and only to
the extent that, Seller receives copies of the reports from such landmen
covering such work, such work covers portions of the Interests other than
that portion of the Interests covered by the title opinions and reports
described in Schedules 5.03(i)(1) and 5.03(i)(2), and Buyer substantiates
the cost of such work.
(j) Buyer and Seller executed, acknowledged and delivered the
Original Management Agreement.
(k) Seller delivered to Buyer certificates of insurance
reflecting that Buyer has been named as a co-insured on all insurance
coverage carried by Seller pertaining to the Interests, copies of which
certificates are attached hereto as Schedule 5.03(k).
(l) Buyer executed and deliver the PP Document in form and
substance as set forth in Exhibit H-1 hereto.
(m) Buyer executed and delivered the Mariner Mortgage.
(n) Seller executed and delivered the Quicksilver Mortgage.
(o) CMS executed and delivered the CMS Estoppel Certificate, in
form and substance as set forth in Exhibit I hereto.
(p) Cinnabar and Buyer executed and delivered the Cinnabar Gas
Sales Contract, which shall be terminable by Buyer upon termination of the
Management Agreement and Seller executed and delivered the Original
Quicksilver Guaranty.
30
5.04 Additional Actions.
(a) Buyer shall cause counsel for Buyer to deliver to Seller a
legal opinion contemporaneously with the execution of this Agreement, in
the form and substance as set forth in Exhibit D hereto regarding certain
matters relating to the Buyer and Buyer's members and the transactions
contemplated hereby.
(b) Seller shall cause counsel for Seller to deliver to Buyer
legal opinions, contemporaneously with the execution of this Agreement, in
the form and substance as set forth in Exhibits E-1 and E-2 hereto
regarding certain matters relating to Seller and the transactions
contemplated hereby.
(c) Contemporaneously with the execution and delivery of this
Agreement, the parties are executing and delivering a First Amendment to
Conveyance of Production Payment, an Amended and Restated Management
Agreement, an Amended and Restated Fixed Payment Note, an Amended and
Restated Assignment of Enforcement Rights, a First Amendment to Mortgage
(Mariner Gas LLC to Quicksilver), and a First Amendment to Mortgage
(Quicksilver to Mariner Gas LLC), to correct and clarify certain provisions
of the respective agreements being so amended.
ARTICLE VI
-----------
TAX CREDIT MATTERS
6.01 Quarterly Statements. Within 60 days after the end of each
Quarterly Period, Seller shall deliver to Buyer a statement (a "Quarterly
Statement") showing the calculation of the Aggregate Tax Credits with respect to
such Quarterly Period. Each Quarterly Statement shall also set forth the
interest rate described in clause (i) of the definition of Applicable Rate.
6.02 Annual Recalculation. With respect to any calendar year as to
which Seller has delivered a Quarterly Statement Seller shall, within 30 days
following the issuance by the IRS of the Inflation Adjustment Factor for such
calendar year, deliver to Buyer a statement (the "Recalculation Statement")
showing a recomputation of the Aggregate Tax Credits with respect to each
Quarterly Period included within such calendar year. The Recalculation
Statement shall show any changes to the amount of Qualified Production, Tax
Credit Rate, or the Aggregate Tax Credits shown on a prior Quarterly Statement.
If the sum of the recalculated Aggregate Tax Credits shown on the Recalculation
Statement exceeds the sum of the Aggregate Tax Credits shown on the prior
corresponding Quarterly Statements, then, Buyer shall treat such excess as an
addition to the Aggregate Tax Credits for purposes of determining Net Profits
pursuant to Sections 3.1, 3.2 and 3.3 of the PP Document. If the sum of the
Aggregate Tax Credits shown on the prior corresponding Quarterly Statements
exceeds the sum of the recalculated Aggregate Tax Credits shown on
31
the Recalculation Statement, then, Buyer and Seller shall redetermine the
payments to which Seller would have been entitled pursuant to the Production
Payment if the Aggregate Tax Credits allowed in the calculation of Net Profits
pursuant to Sections 3.1, 3.2 and 3.3 of the Production Payment for each
Quarterly Period beginning with the first Quarterly Period affected by the
Recalculation Statement had been the tax credits allowed after taking the
Recalculation Statement into account. Any resulting overpayment, together with
Applicable Interest as provided in Section 3.7 of the PP Document, shall be
debited to the Net Profits Account for the then current month pursuant to
Section 3.3(p) of the PP Document but only if the Production Payment is still in
effect and only up to the amount that would otherwise be payable to Seller for
such month as the holder of the Production Payment but for such debit. The
balance of the overpayment, together with Applicable Interest, shall be repaid
by Seller to Buyer as provided in Section 3.7 of the PP Document.
6.03 Change in Law Recalculations. Within 30 days after the enactment
of a Change in Law the following amounts shall be determined and the following
adjustments, amendments and recalculations shall be made and performed with
respect to each Quarterly Period from and after the Quarterly Period during
which the Change in Law becomes effective (whether such effective date is prior
to, on or after the enactment date, the "CIL Effective Date") through the
Quarterly Period ending December 31, 2002, and the PP Document and the other
Transaction Documents shall be deemed amended as necessary to give effect
thereto:
(a) The "Projected Qualified Production" shall be that quantity
of Qualified Production that would be necessary to generate Aggregate Tax
Credits equal to the Scheduled Amount for such Quarterly Period if such
Change in Law had not occurred, using a tax credit rate of $1.0969 for
2000, $1.1188 for 2001 and $1.1412 for 2002.
(b) The "CIL Rescheduled Amount" shall be an amount equal to
the Aggregate Tax Credits, after giving effect to the Change in Law, that
would be generated in such Quarterly Period if (x) the Devonian shale
hydrocarbon gas production from the Qualified ▇▇▇▇▇ for such Quarterly
Period (to the extent such production would have constituted Qualified
Production without giving effect to the Change in Law) equals (y) the
Projected Qualified Production for such Quarterly Period, after giving
effect to the Change in Law.
(c) The "Undiscounted CIL Loss" for such Quarterly Period shall
be the amount, if any, by which the Scheduled Amount for such Quarterly
Period (prior to giving effect to the amendment to the Scheduled Amount
described in Section 6.03(g)) exceeds the CIL Rescheduled Amount for such
Quarterly Period.
(d) The "4/1/2000 Discounted CIL Loss" for such Quarterly
Period shall be an amount equal to the net present value, as of April 1,
2000, of the Undiscounted CIL Loss for such Quarterly Period discounted
using the Imputed Discount Rate, compounded quarterly, from the last day of
such Quarterly Period to
32
April 1, 2000. The "Imputed Discount Rate" shall be that percentage
discount rate which causes the sum described in clause (ii) to equal
$20,000,000 after performing the following calculations: (i) discount the
Scheduled Amount (prior to giving effect to the amendment to the Scheduled
Amount described in Section 6.03(g)) for each Quarterly Period from the
last day of such Quarterly Period to April 1, 2000 using the Imputed
Discount Rate, compounded quarterly, and then (ii) sum the discounted
amounts described in clause (i).
(e) The "CIL Loss" for such Quarterly Period shall be an amount
equal to the 4/1/2000 Discounted Loss plus Applicable Interest thereon,
compounded quarterly, from April 1, 2000 to the last day of the Quarterly
Period in which the CIL Effective Date occurs.
(f) The "Aggregate CIL Loss" shall mean an amount equal to the
sum of the CIL Loss for all such Quarterly Periods.
(g) The Scheduled Amount for such Quarterly Period shall be
deemed amended to equal the CIL Rescheduled Amount for such Quarterly
Period.
(h) The Quarterly Scheduled Amount Deficit for the Quarterly
Period in which the CIL Effective Date occurs shall be an amount equal to
(x) the Quarterly Scheduled Amount Deficit for such Quarterly Period, after
giving effect to the amendment to the Scheduled Amount described in Section
6.03(g), plus (y) the Aggregate CIL Loss.
(i) If the CIL Effective Date occurs in a Quarterly Period for
which a Quarterly Statement has not yet been delivered, the Change in Law
and the calculations and amendments described in Sections 6.03(a) through
(h) shall be given effect in the Quarterly Statement for such Quarterly
Period and subsequent Quarterly Statements.
(j) If the CIL Effective Date occurs during a Quarterly Period
for which a Quarterly Statement has been delivered pursuant to Section
6.01, then Buyer and Seller shall redetermine the payments to which Seller
would have been entitled pursuant to the Production Payment, giving effect
to the Change in Law and the calculations and amendments described in
Sections 6.03(a) through (h). The Aggregate CIL Loss, together with
Applicable Interest from the last day of the Quarterly Period in which the
CIL Effective Date occurs until paid as provided in Section 3.7 of the PP
Document, shall be debited to the Net Profits Account for the then current
month and each succeeding month pursuant to Section 3.3(p) of the PP
Document but only if the Production Payment is still in effect and only up
to the amount that would otherwise be payable to Seller for such month as
the holder of the Production Payment but for such debit. The balance of the
Aggregate CIL Loss, together with Applicable Interest, shall be repaid by
Seller to Buyer upon the earlier of the Seller's Option Closing Date (which
payment shall be a condition to Buyer's
33
obligations under Article IX) and the Production Payment Termination Date
(as such term is defined in the PP Document).
(k) The determinations, adjustments, amendments, calculations,
debits, and payments described in this Section 6.03 shall be Buyer's only
recourse and Seller's only liability in respect of a Change in Law.
ARTICLE VII
------------
CALCULATION
OF AGGREGATE TAX CREDITS
7.01 Credit Calculation Representation. Seller represents and
warrants to Buyer that Seller's calculation of the Aggregate Tax Credits for
each Quarterly Period, as reflected in the Quarterly Statement delivered to
Buyer with respect to each Quarterly Period, shall be correct and shall be
determined in a manner consistent with section 29 of the Code, judicial
interpretations thereof and regulations published thereunder, whether final or
temporary in form, and shall give effect to any Change in Law (the "Credit
Calculation Representation").
7.02 Credit Calculation Assumption; Buyer-Assumed Risks.
(a) The inclusion of Aggregate Tax Credits in the calculation
of Quarterly Scheduled Amount Deficits and as a component of Excess Tax
Credits which are a credit to the Net Profits Account pursuant to Section
3.2 of the PP Document and the obligation of the members of Buyer to make
Excess Credit Capital Contributions to Buyer pursuant to Section 3.2 of the
LLC Agreement, will not be reduced, excused, relieved or otherwise affected
by the occurrence of any of the following events (each a "Buyer-Assumed
Risk Event"):
(i) Other than a Change in Law, any (1) amendment to the
Code enacted after the Closing Date, (2) issuance or amendment of
any temporary or final regulations, rulings or other materials
under the Code by the IRS or the Treasury Department after the
Closing Date, (3) administrative or judicial decision after the
Closing Date interpreting a provision of the Code, or (4) other
federal, state or local tax law change enacted after the Closing
Date;
(ii) any Tax Claim, Final Determination or any other
determination that Buyer is not the owner of the Interests or that
the Interests do not constitute "economic interests" for federal
income tax purposes as held by Buyer, but only if (1) the Seller
is treated as the owner of the Interests for federal income tax
purposes immediately prior to the
34
Closing and would have continued to be treated as the owner of the
Interests for federal income tax purposes had the Transaction not
occurred and Seller had continued to hold the Interests, (2) the
Interests constitute "economic interests" for federal income tax
purposes as held by Seller immediately prior to the Closing and
would have continued to constitute "economic interests" for
federal income tax purposes in the hands of Seller had the
Transaction not occurred and Seller had continued to hold the
Interests; and (3) the failure to get any necessary lessor or
other consent to or approval for the transfer of the Interests to
Buyer does not cause Buyer not to be the owner of the economic
interest in the Interests after the Effective Date; provided,
however, that notwithstanding any provision of this Agreement to
the contrary, Aggregate Tax Credits shall not be included in (x)
the calculation of the Production Payment in accordance with
Section 3.2 of the PP Document with respect to tax credits under
section 29 of the Code, or (y) the calculation of Excess Credit
Capital Contributions under Section 3.2 of the LLC Agreement, to
the extent such credits are not available to Buyer because the
assumptions set forth in "(1)," "(2)" or "(3)" are not correct;
(iii) any Tax Claim, Final Determination or any other
determination that the transfer of the Interests to Buyer will not
be treated as a sale for federal income tax purposes, except to
the extent provided in (ii);
(iv) the failure of any of the assumptions or treatments
described in Section 8.05(a), (b), (c) and the first sentence of
Section 8.05(d);
(v) any application of Sections 465, 469 or 29(b)(6) of
the Code or the "alternative minimum tax" (as defined in the
Code);
(vi) any application of rules relating to short taxable
years;
(vii) any failure of any member of Buyer to timely or
properly claim any credits under section 29 of the Code; or
(viii) any failure of any member of Buyer to have
sufficient income or tax liability to benefit fully from credits
under section 29 of the Code (after giving effect to carryovers
and carrybacks).
(b) In addition, the occurrence of a Buyer-Assumed Risk Event
will not constitute a Tax Loss or a breach of the Credit Calculation
Representation or otherwise result in the application of Section 7.03.
Nothing in this Section 7.02, however, will relieve Seller of its
obligations under Section 8.05.
7.03 Correction of Net Profits Calculation for Tax Loss. If Buyer
incurs a Tax Loss as a result of a breach of the Credit Calculation
Representation then, upon notice
35
delivered by Buyer to Seller of such Tax Loss (a "Tax Loss Notice"), the
following provisions of this Section 7.03 shall apply, subject to the provisions
of Section 7.04 through 7.10. (For clarity, the parties acknowledge that the
remedy for a Tax Loss resulting from a Change in Law shall be as provided in
Section 6.03.) Upon delivery of the Tax Loss Notice, Buyer and Seller shall
redetermine the payments to which Seller would have been entitled pursuant to
the Production Payment if the Aggregate Tax Credits allowed in the calculation
of Net Profits pursuant to Sections 3.1, 3.2 and 3.3 of the PP Document for each
Quarterly Period beginning with the first Quarterly Period affected by the Tax
Loss had been the tax credits allowed after taking the Tax Loss into account.
Subject to the limitation set forth in the last sentence of this Section 7.03,
any resulting overpayment, together with Applicable Interest as provided in
Section 3.7 of the PP Document, (the "Section 7.03 Amount") shall be debited to
the Net Profits Account for the then current month and the two succeeding months
pursuant to Section 3.3(p) of the PP Document but only if the Production Payment
is still in effect and only up to the amount that would otherwise be payable to
Seller as the holder of the Production Payment for such months. Subject to the
limitation set forth in the last sentence of this Section 7.03, the balance of
the overpayment, together with Applicable Interest, shall be repaid by Seller to
Buyer as provided in Section 3.7 of the PP Document. The remedy provided by this
Section 7.03 shall be Buyer's only recourse and Seller's only liability, in
respect of a Tax Loss. The aggregate of all Section 7.03 Amounts shall be
limited to an amount equal to (i) $20,000,000 plus Applicable Interest thereon
from April 1, 2000, plus (ii) Excess Credit Capital Contributions (as defined in
the LLC Agreement), if any, made by the members of Buyer to the Designated
Account (as defined in the Management Agreement) plus Applicable Interest
thereon from the date such contributions were made to the Designated Account,
plus (iii) Section 7.03 Amounts attributable to overstatements on Quarterly
Statements of the MMBtus of Gas produced from the Qualified ▇▇▇▇▇, in the case
of clauses (i), (ii) and (iii) above, determined as of the date such limitation
is being applied. If such aggregate limitation on Section 7.03 Amounts is ever
achieved so as to limit the aggregate Section 7.03 Amounts, Applicable Interest
under clause (i) shall not accrue on the amount set forth in clause (i) after
such time to cause an increase in such aggregate limitation.
7.04 Buyer's Covenants. To the extent that any Section 7.03 Amount is
increased because Buyer does not substantially comply with its covenants in this
Section 7.04, Seller shall not be liable to Buyer for the amount of the increase
in the Section 7.03 Amount resulting from Buyer's noncompliance.
(a) Buyer shall provide Seller with copies of any written
communications received from the IRS (including any memoranda, statements,
reports or other correspondence) within 30 days after receipt thereof to
the extent such written communication relates in a material way to the
Credit Calculation Representation. In addition, if the IRS discusses or
otherwise raises inquiries with Buyer that relate in a material way to the
Credit Calculation Representation, Buyer shall keep Seller reasonably
informed of such oral discussions and of the course and conduct of all
material matters that could be the subject of a Section 7.03 Amount. Buyer
shall reasonably allow Seller to review and comment on any written
communication
36
prepared by Buyer in response to any oral or written communication or
inquiry from the IRS, prior to delivery of such response to the IRS, to the
extent such written communication relates in a material way to matters that
are the subject of a potential Section 7.03 Amount.
(b) If the IRS makes a Tax Claim against Buyer, Buyer shall
promptly (but in any event no more than 30 days following the receipt of
such Tax Claim) notify Seller in writing of such Tax Claim (a "Tax Claim
Notice").
7.05 Requirement to Contest. Buyer shall use its reasonable
commercial efforts to contest any Tax Claim in accordance with the terms of this
Section 7.05; provided, however, Buyer shall not be required to contest a Tax
Claim unless it has received on a timely basis a notice ("Seller's
Acknowledgment") from Seller in which Seller acknowledges that such Tax Claim,
if sustained in a Final Determination, is subject to Section 7.03. Failure of
Seller to deliver a Seller's Acknowledgment to Buyer within 30 days after
Seller's receipt of a Tax Claim Notice shall result in Seller's waiver of any
obligation of Buyer to contest a Tax Claim (a "Seller's Waiver"). In contesting
any Tax Claim pursuant to this Section 7.05, Buyer shall conduct such contest
with Buyer's Independent Tax Counsel and the reasonable contest costs (including
accountant's fees, investigatory fees, and fees and disbursements of counsel)
incurred by Buyer in good faith in contesting the Tax Claim shall be borne by
Seller; provided, however, Seller shall only bear Buyer's contest costs with
respect to a Tax Claim to the extent that the basis for such position, if
successfully asserted by the IRS, would result in a Section 7.03 Amount (a
"Carried Claim"). To the extent a contest involves more claims by the IRS that
do not relate to the loss of Aggregate Tax Credits in addition to a Carried
Claim, Buyer shall reasonably allocate its contest costs to determine that
portion of such costs directly related to the Carried Claim and Seller shall
bear such allocated costs.
7.06 Control. Except or unless otherwise specifically provided
herein, Buyer shall control the nature of all action to be taken to contest a
Tax Claim. Buyer shall be required to proceed beyond the administrative level
to either the Tax Court, the appropriate federal district court or the U.S.
Claims Court only if Seller delivers to Buyer a Legal Opinion (the cost of which
shall be borne by Seller), which opinion states that there is a realistic
possibility (as that term is interpreted under Section 6694 of the Code) that
Buyer will prevail on the merits of its case. Buyer shall be required to appeal
an adverse decision of such court only if Seller delivers a Legal Opinion (the
cost of which shall be borne by Seller) which opinion states that, after taking
into account conclusions of fact and law contained in the lower court's
decision, it is more likely than not that Buyer will prevail on appeal. In no
event shall Buyer be required to appeal an adverse determination of any court
beyond the first appeal.
7.07 Information. Buyer shall keep Seller reasonably informed as to
the status and progress of all matters materially related to the contest of the
Tax Claim. Buyer shall provide Seller, within 15 days of the receipt thereof,
with copies of all written communications received from the IRS relating to the
Tax Claim. Buyer shall discuss with
37
Seller the course and conduct of all matters that are the subject of a potential
Section 7.03 Amount and shall permit representatives of Seller to participate in
meetings and discussions with the IRS regarding any Tax Claim to the extent
practicable under then applicable IRS procedures and without providing Seller
information relating to matters that are not the subject of a potential Section
7.03 Amount; provided, however, Seller's role at any meetings and discussions
with the IRS regarding a Tax Claim will be as an expert consultant acting at the
direction of Buyer in providing factual and legal support for the
representations and covenants indemnified hereunder.
7.08 Settlements. In the case of any Tax Claim subject to the contest
provisions hereof, Buyer may at any time settle such Tax Claim it is otherwise
required to contest pursuant to the terms hereof. Any such settlement, without
the consent of Seller, which consent will not be unreasonably withheld, shall be
deemed an unconditional waiver by Buyer of its rights to a Section 7.03 Amount
with respect to any Tax Loss to which the Tax Claim relates and with respect to
any other Tax Loss which arises in any subsequent year the contest of which is
precluded or materially prejudiced by such failure to contest. If, in the
course of contesting any Tax Claim, Buyer receives an offer from the IRS that
would permit Buyer to settle such Tax Claim (a "Settlement Notice"), Buyer shall
promptly notify Seller of such proposed settlement within 30 days of receipt
thereof. If such offer would not affect the contest of any items unrelated to
the Tax Claim (either in the current or any other taxable year) and Seller
determines that such offer is favorable, then, within 15 days after receiving
notice of the Settlement Notice from Buyer, Seller may request in writing (a
"Settlement Acceptance Notice") that Buyer agree to such settlement (which
request shall include an acknowledgment by Seller that the Section 7.03 Amount
applicable to such Tax Claim will include an amount calculated in accordance
with Section 7.03 with respect to all years affected by such settlement and an
acknowledgment that, to the extent such settlement does not control the outcome
of prior or subsequent taxable years, that Section 7.03 will continue to apply
to such prior or subsequent years). Upon receipt of a Settlement Acceptance
Notice, Buyer shall either agree to accept such settlement or to treat an amount
equal to the Section 7.03 Amount that would result from such settlement as the
Section 7.03 Amount with respect to the claimed Tax Loss to which the settlement
related. Notwithstanding the preceding provisions of this Section 7.08, if
Seller provided Buyer with a Settlement Acceptance Notice, but the settlement
contemplated by such notice is not accepted by the IRS, Section 7.03 shall
continue to apply.
7.09 Waiver. Notwithstanding any of the foregoing provisions to the
contrary, Buyer, by written notice to Seller, may refrain from contesting any
Tax Claim. Any failure by Buyer to contest, unless such failure is excused
pursuant to the second sentence of Section 7.05, shall be deemed to be a waiver
of rights to a Section 7.03 Amount for the year or years to which such Tax Claim
relates and to all prior or subsequent years in which both (i) additional Tax
Claims are made based upon the same legal or factual theory as such Tax Claim,
and (ii) the contest of which Tax Claim is precluded or materially prejudiced by
Buyer's failure to contest.
38
7.10 Adjustments. If Seller delivers a Recalculation Statement under
Section 6.02 before a Tax Claim is delivered to Buyer, this Tax Indemnity shall
apply only with respect to the adjusted figures for Qualified Production, Tax
Credit Rate and Aggregate Tax Credits shown on the latter of any such
statements, and any prior figures shall be ignored for the purposes of this Tax
Indemnity.
ARTICLE VIII
------------
OTHER OBLIGATIONS AFTER CLOSING
8.01 Sales Taxes and Recording Fees. Seller shall pay all sales or
use taxes occasioned by the purchase and sale of the Interests and all
documentary, filing and recording fees required in connection with the filing
and recording of the assignments described in Section 5.03(a) above.
8.02 Indemnification (Other Than For Lost Tax Credits). After the
Closing, Buyer and Seller shall indemnify each other as set forth below.
Notwithstanding anything to the contrary contained in this Section 8.02, the
indemnity obligations of Seller set forth in this Section 8.02 shall not extend
to or cover any loss of Aggregate Tax Credits by Buyer other than partial
refunds of the Cash Portion of the Purchase Price pursuant to Section 8.07.
Buyer's sole remedy for any claimed loss of Aggregate Tax Credits shall be as
provided in Article VII, except for claims for partial refunds of the Cash
Portion of the Purchase Price pursuant to Section 8.07.
(a) Indemnity by Seller for Pre-Effective Date Matters. Seller
shall defend, indemnify and save and hold harmless Buyer for, from and
against and shall promptly reimburse Buyer with respect to any and all
Adverse Consequences with respect to the Interests which accrue or relate
to times prior to the Effective Date (but not to the extent such Adverse
Consequences result from or are attributable to any representation of Buyer
contained in this Agreement being untrue or a breach of any warranty or
covenant of Buyer contained in this Agreement). Seller's aggregate
liability under the indemnity obligations under this Section 8.02(a) shall
not be limited in amount except as otherwise provided in Section
8.02(c)(ii).
(b) Indemnity by Seller for Environmental Matters. Seller shall
defend, indemnify and save and hold Buyer harmless for, from and against
and shall promptly reimburse Buyer with respect to, any and all Adverse
Consequences of any and every kind or character, known or unknown, fixed or
contingent, asserted by any federal, state, local or other governmental
entity or other party against Buyer or incurred by Buyer to comply with
applicable law, by reason of or arising out of (i) any violation or breach
of any Environmental Laws by Seller, any of its predecessors or its
employees or agents before Closing; (ii) any act, omission, event or
circumstance existing or occurring on the Interests before Closing
(including, without limitation, the use; transportation; handling; storage;
treatment; removal;
39
actual, proposed or threatened release or emission; generation; or presence
of Hazardous Substances on or under the Interests or other property,
wetlands or waterways) that constitutes or results in a violation or breach
of or liability under any Environmental Laws; or (iii) any matter that
would constitute a breach of Seller's representations in Section 3.01(t)
applied without regard to whether such matters are within Seller's
Knowledge. Seller's aggregate liability under the indemnity obligations
under this Section 8.02(b) shall not be limited in amount except as
otherwise provided in Section 8.02(c)(ii).
(c) Indemnity by Seller for Breach.
(i) Seller shall defend, indemnify and save and hold
harmless Buyer for, from and against and shall promptly reimburse Buyer
with respect to any and all Adverse Consequences that result from or are
attributable to any representation or warranty of Seller contained in this
Agreement being untrue, or any warranty, agreement or covenant of Seller
contained in this Agreement being breached, subject to the limitations
hereinafter set forth. Except with respect to claims for loss of Aggregate
Tax Credits (Buyer's sole remedy for which shall be as provided in Article
VI, Article VII and Section 8.07), the indemnification provided in this
Section 8.02(c) and the implementation thereof as provided in the other
provisions of this Article VIII shall be the sole and exclusive remedy of
Buyer for breach of any of Seller's representations, warranties, agreements
or covenants of Seller contained in this Agreement. Seller's aggregate
liability under the indemnity obligations under this Section 8.02(c) shall
not be limited in amount, except as otherwise provided in Section
8.02(c)(ii).
(ii) Notwithstanding any other provisions of this
Agreement, Seller's aggregate liability under Sections 8.02(a), 8.02(b) and
8.02(c)(i) for claims by Buyer (A) for loss of title to any Well or Unit,
(B) based on Seller's failure to receive the Net Revenue Interests in any
Well or Unit as set forth in Exhibit A, (C) otherwise based on a loss in
value of the Interests (including any equipment included therein) or (D)
any other claim asserted by Buyer under Section 8.02(a) that is not
attributable to a third-party claim against Buyer, shall be limited
(provided that this limitation shall not limit Seller's obligations with
respect to any claims asserted against Buyer by third Persons who are not
successors in interest to Buyer with respect to the Interests) to an amount
equal to (1) the Allocated Value of the affected ▇▇▇▇▇, plus (2) interest,
compounded monthly, at the Applicable Rate on the amount described in "(1)"
from the Effective Date through the date Seller pays the applicable
indemnity claim by Buyer; and provided further that the dollar amount of
any such lost value shall be determined using the same methodology as used
in preparing the Reserve Report. "Allocated Value" means as to any Unit, an
amount equal to $5,000,000.00 multiplied by a fraction whose numerator is
an amount equal to 99.5% of the "PV10 value" of such Unit as reflected on
the Reserve Report and whose denominator is $83,872,000. The Allocated
Value of any Well shall be the
40
Allocated Value of the Unit in which such Well is located divided by the
number of ▇▇▇▇▇ in the Unit.
(d) Buyer's Indemnification of Seller. Buyer shall defend,
indemnify and save and hold harmless Seller for, from and against and shall
promptly reimburse Seller with respect to any and all Adverse Consequences
that result from or are attributable to any representation or warranty of
Buyer contained in this Agreement being untrue or any warranty, agreement
or covenant of Buyer contained in this Agreement being breached. The
indemnification provided in this Section 8.02(d) and the implementation
thereof as provided in the other provisions of this Article VIII shall be
the sole and exclusive remedy of Seller for breach of any of Buyer's
representations, warranties, agreements or covenants of Buyer set forth in
Section 3.02.
(e) Procedures. The indemnification contained in this Section
8.02 shall be implemented as follows:
(1) Such indemnity shall extend to any actual loss, cost,
expense, liability, obligation or damage ("Loss") incurred or suffered by
the indemnified party, its officers, directors, shareholders, partners,
members and managers, including reasonable fees and expenses of attorneys,
technical experts and expert witnesses reasonably incident to the Adverse
Consequences indemnified against.
(2) The amount of each payment claimed by an indemnified
party to be owing and the basis for such claim, together with a list
identifying to the extent reasonably possible each separate item of Loss
for which payment is so claimed, shall be set forth by such party in a
statement delivered to the indemnifying party ("Claim Notice"). The amount
claimed shall be paid by such indemnifying party as and to, and only to the
extent required herein within 30 days after receipt of such statement or
after the amount of such payment has been finally established, whichever
last occurs.
(3) Promptly after notification to an indemnified party
with respect to any claim or legal action or other matter that may result
in a Loss for which indemnification may be sought under this Section 8.02,
but in any event in time sufficient for the indemnifying party to contest
any action, claim proceeding or other matter that has become the subject of
proceedings before any court or tribunal, such indemnified party shall give
written notice of such claim, legal action or other matter to the
indemnifying party and, at the request of such indemnifying party, shall
furnish the indemnifying party or its counsel with copies of all pleadings
and other information with respect to such claim, legal action or other
matter and shall, at the election of the indemnifying party made within 60
days after receipt of such notice, permit the indemnifying party to assume
control of such claim, legal action or other matter (to the extent only
that such claim, legal action or other matter relates to a Loss for which
the indemnifying party is liable), including the determination of all
41
appropriate actions, the negotiation of settlements on behalf of the
indemnified party, and the conduct of litigation, through attorneys of the
indemnifying party's choice; provided, however, that no such settlement can
result in any liability or cost to the indemnified party without its
consent. In the event of such an election by the indemnifying party to
assume control, (A) any expense incurred by the indemnified party
thereafter for investigation or defense of the matter shall be borne by the
indemnified party, and (B) the indemnified party shall give all reasonable
information and assistance, other than pecuniary, that the indemnifying
party shall deem necessary to the proper defense of such claim, legal
action, or other matter. In the absence of such an election, the
indemnified party will use its best efforts to defend, at the indemnifying
party's expense, any claim, legal action or other matter to which such
other party's indemnification under this Section 8.02 applies until the
indemnifying party assumes such defense, and, if the indemnifying party
fails to assume such defense within the time period provided above, settle
the same in the indemnified party's reasonable discretion at the
indemnifying party's expense.
(f) Any party entitled to indemnification hereunder shall use
commercially reasonable efforts to minimize any Adverse Consequences for
which indemnification is sought hereunder.
8.03 Further Assurances. Seller and Buyer shall execute, acknowledge
and deliver or cause to be executed, acknowledged and delivered such instruments
and take such other action as may be reasonably necessary or advisable to carry
out their obligations under this Agreement and under any Exhibit, Schedule,
document, certificate or other instrument delivered pursuant hereto.
8.04 Survival. The representations, warranties, covenants, agreements
and indemnities included or provided in this Agreement, or in any Exhibit,
Schedule, document, certificate or other instrument delivered pursuant hereto,
shall survive the Closing.
8.05 Tax Reporting and Ruling.
(a) Inclusion in Tax Basis and Amount Realized. Buyer and
Seller shall treat the Production Payment as a contingent payment debt
instrument governed by the provisions of Treasury Regulation
Section 1.1275-4(c). The "issue price" of such debt instrument shall be
determined under Treasury Regulation Section 1.1274-2(g). Buyer shall
include the issue price of such debt instrument in its tax basis for the
Interests as of the Closing Date pursuant to Treasury Regulation Section
1.1012-1(g). Seller shall determine the amount realized upon the
disposition of the Interests attributable to such debt instrument pursuant
to Treasury Regulation Section 1.1001-1(g).
(b) Principal and Interest Computations. The portion of each
payment made pursuant to the Production Payment that will be treated as
principal and the
42
portion of each such payment that will be treated as
interest shall be determined pursuant to the principles set forth in
Treasury Regulation Section 1.1275-4(c)(4).
(c) Treatment of Fixed Payment Note Both Buyer and Seller
agree to treat the Fixed Payment Note as a fixed yield obligation under
Treasury Regulation Section 1.1272-1(d) and will recognize interest expense
to Buyer and income to Seller, respectively, as such.
(d) Interests Owned By Buyer. Prior to the Full Production
Date, the parties shall treat the entire interest in the Interests as owned
by Buyer for all purposes, including, but not limited to, for federal
income tax purposes. To that end, Buyer, its successors and assigns, shall
at all times treat production income attributable to the entire interest in
the Interests prior to the Full Production Date as its income for federal
income tax purposes, and Seller, its successors and assigns, shall treat
such production income as the income of Buyer for federal income tax
purposes. Seller and Buyer shall treat the transfer of the Interests as a
sale for federal income tax purposes.
(e) Michigan Single Business Tax. Buyer agrees to take the
position that because it will pay severance taxes on sales of Hydrocarbon
production from the Interests it will be exempt from any single business
tax under the Michigan Single Business Tax Act, as currently enacted and
enforced, attributable to its ownership of the Interests and the sale of
production therefrom under the rationale of ▇▇▇▇▇ v. Department of
Treasury, 204 Mich. App. 428 (1994). The parties will cooperate reasonably
to sustain this position, provided neither party will have any obligation
to contest the imposition of such tax or any claim for payment of such tax
by the State of Michigan. If this filing position is challenged by the
State of Michigan or the single business tax is amended such that Buyer is
required to pay any single business tax, the parties acknowledge that
during the term of the Production Payment reserved to Seller in the PP
Document 100% of such tax shall be debited to the Net Profits Account under
such Production Payment as provided in Section 3.3(c) thereof.
(f) Private Letter Ruling. Buyer may request a private letter
ruling from the Internal Revenue Service seeking rulings to substantially
the effect described in Schedule 8.05(f). Seller shall cooperate as Buyer
reasonably requests in seeking such rulings including agreeing to
modifications to the Transaction Documents requested by Buyer to the extent
necessary to obtain such rulings; provided that Seller shall not be
required to agree to any modification that would adversely affect Seller
from an economic, tax, legal, operational or security standpoint. If Buyer
files the request for ruling on or before May 19, 2000 but does not receive
a favorable private letter ruling regarding such matters by December 24,
2000, Buyer may elect to give a "No Ruling Notice" by delivering such a
notice to Seller on or before December 31, 2000, which notice shall have
the effect described in Section 8.05(g).
43
(g) No Ruling Notice. If Buyer timely gives a No Ruling Notice
pursuant to Section 8.05(f), then, as of December 31, 2000, the Transaction
Documents shall be deemed amended as follows and the parties shall execute
and deliver such amendments and other documents necessary to give effect to
such amendments:
(i) The cumulative Quarterly Scheduled Amount Deficit (as
defined in the PP Document) shall be deemed to be an amount equal to (1)
the Cash Portion of the Purchase Price plus Applicable Interest thereon
from March 31, 2000, through December 31, 2000, plus (2) Excess Credit
Capital Contributions (as defined in the LLC Agreement), if any, made by
the members of Buyer to the Designated Account (as defined in the
Management Agreement) prior to December 31, 2000 plus Applicable Interest
thereon from the date such contributions were made to the Designated
Account through December 31, 2000, less (3) any Scheduled Amount Deficit
Distributions made to the members of Buyer prior to December 31, 2000 plus
interest thereon at the Applicable Rate from the date such distributions
were made through December 31, 2000.
(ii) The Qualified Production, the Aggregate Tax Credits,
the Scheduled Amount, the CIL Rescheduled Amount, the Excess Tax Credits,
the Quicksilver Monthly Abandonment Reserve (as defined in the PP
Document), and the Management Fee (as defined in the Management Agreement)
for each Quarterly Period commencing on or after April 1, 2000 shall be
deemed amended to be zero. No further payments shall be due on the Fixed
Payment Note. No amounts shall be reserved in the Quicksilver Monthly
Abandonment Reserve, the Working Capital Reserves, the Tax Claim Reserves,
or the Payment Reserves (as such terms are defined in the Management
Agreement). Neither Seller, any Senior Lender or any Sub-Debt Lender will
seek to restrain or prevent the distribution of any Scheduled Amount
Deficit Distribution to the members of Buyer, or seek to require the
members of Buyer to recontribute the same to Buyer or pay such amounts to
any other Person.
(iii) At such time as Buyer has received Scheduled Amount
Deficit Distributions sufficient to reduce the Unrecouped Scheduled Amount
& Interest Deficit (as defined in the PP Document) to zero (provided that
Seller shall have the right to pay to the members of Buyer (99% to State
Street Bank and Trust Company and 1% to Antrim Corporation) amounts in
addition to the Scheduled Amount Deficit Distributions which payments by
Seller shall be deemed to constitute Scheduled Amount Deficit Distributions
for purposes of this Section 8.05(g)(iii)):
(1) the Fixed Payment Note shall be deemed canceled;
(2) the Production Payment shall be deemed
terminated;
44
(3) within 30 days thereafter Buyer shall execute,
acknowledge, and deliver to Seller sufficient numbers of
assignments of the Interests to Seller ((A) excluding equipment
and other tangible Interests disposed of in the ordinary course of
business, and Leases and Units that have expired, been terminated
or defeased in the ordinary course of business, and (B) including
any additions to the equipment and other tangible property owned
by Buyer and located on the Land, appurtenant thereto or used or
obtained in connection therewith or with the production,
gathering, treatment, processing, sale or disposal of Hydrocarbons
or water produced therefrom or attributable thereto) to permit
Seller to record said assignments of record, such assignments to
be in a form reasonably satisfactory to Buyer and Seller; such
assignments will contain legally sufficient property descriptions
of such Interests, comply with all recordation and governmental
requirements, will be made effective as of the date on which Buyer
received Scheduled Amount Deficit Distributions sufficient to
reduce the Unrecouped Scheduled Amount & Interest Deficit to zero,
and will contain a special warranty of title, subject to the
Reversionary Interest;
(4) Seller shall assume and release and indemnify,
defend and save and hold harmless Buyer from all liabilities and
obligations relating to the Interests, including but not limited
to those arising under the Production Payment and all liabilities
and other Adverse Consequences, including, without limitation,
those arising under Environmental Laws that are attributable to
the Interests (whether arising before, during or after Buyer's
period of ownership and whether or not attributable to the actions
of Buyer); provided, however, that notwithstanding any other
provision of this Agreement or the other Transaction Documents,
Seller shall have no obligation in regard to liabilities and other
Adverse Consequences to the extent the same are attributable to
the gross negligence or willful misconduct of Buyer or to the
breach by Buyer of the Transaction Documents; provided, however,
that acts of Seller (its successors and assigns) as Buyer's
manager under the Management Agreement shall not be deemed to be
acts of Buyer.
(iv) If Buyer, its successors or assigns, claims on its federal
income tax return any tax credits under section 29 of the Code on
production from the Interests, then, for purposes of Section 8.05(g)(iii),
the members of Buyer shall be deemed to have received an additional
Scheduled Amount Deficit Distribution equal to the amount of such credits
as of last day of the Quarterly Period during which the Gas giving rise to
such credits was produced. The decision regarding whether or not to claim
any such tax credits shall be within the sole and absolute discretion of
the Buyer.
(v) Neither Seller, nor any successor or assign of Seller,
shall claim any tax credits under section 29 of the Code on any gas
produced from the Interests until the earlier of (x) the closing of
Seller's exercise of the Seller's Option
45
and (y) the effective time of the reconveyance of the Interests by Buyer to
Seller under Section 8.05(g)(iii).
8.06 Allocation of Unit Production. The parties recognize that the
Units include the ▇▇▇▇▇ and the Non-Qualified ▇▇▇▇▇, and that additional ▇▇▇▇▇
may be drilled on lands included in the Units. The parties further recognize
that because of the relatively low volumes of gas produced from each well it may
be economically impractical to meter separately production from each well in the
Unit and that production from the Qualified ▇▇▇▇▇ is or may be commingled with
production from the Non-Qualified ▇▇▇▇▇ and other ▇▇▇▇▇ included in the Units
prior to metering and that the commingled production will be centrally metered.
In such instances, subject to the last sentence of this Section 8.06, the
parties agree, and agree to use their commercially reasonable efforts to cause
third parties, to deem that each producing well in a Unit produces the same
volume of Hydrocarbons (for example, if 10,000 Mcfs are produced from a Unit in
a month by 10 producing ▇▇▇▇▇ then each well shall be deemed to have produced
1,000 Mcfs during the month). Within 30 days after Closing the parties shall
cause the Engineering Firm to review the production allocation methodology
described in this Section 8.06 to determine whether such allocation is
reasonable for the Interests in light of their particular production
characteristics, giving due consideration to local oil and gas industry
practices, and can be adequately demonstrated for the purposes of the Code; if
the Engineering Firm does not conclude that such allocation can be so
substantiated, the parties shall agree upon an allocation methodology that can
be so substantiated for purposes of the Code.
8.07 Preferential Rights; CMS Title Defects; Corrective Assignments.
(a) Seller shall promptly notify Buyer if any preferential
purchase rights with respect to the Interests are exercised or if the requisite
notice period has elapsed without said rights having been exercised.
(b) Seller shall promptly provide Buyer with copies of all
Claims of Title Defects (as defined in the CMS Agreement) relating to the
Interests that are given to CMS pursuant to the post-closing title procedure set
forth in Article XIII of the CMS Agreement. Seller shall keep Buyer informed on
a current basis of the status and CMS response to all such claims by providing,
from time to time as appropriate, a status report describing which claims have
been cured, indemnified or bonded over and which claims, if any, resulted in a
purchase price adjustment and the amount of the adjustment for each such claim.
Seller shall promptly pay to Buyer all purchase price adjustment amounts
received by it from CMS for portions of the Interests that are not required to
be reconveyed to CMS pursuant to Section 8.07(c) below up to an amount equal to
the Allocated Value plus the Lost Scheduled Amount attributable to the affected
Interests. If purchase price adjustments would otherwise be due to Seller for
any portion of the Interests under such post-closing title procedure but are not
paid to Seller by CMS because of the limits on title adjustments set forth in
Section 13.5 of the CMS Agreement, then Seller shall, within ten days after
written notice from Buyer, deliver to Buyer in immediately available funds an
amount equal to the unpaid purchase price adjustment attributable to such
portion of the Interests. Seller
46
agrees to use its commercially reasonable efforts to cure any title defects
relating to the Interests identified in the title opinions and title reports
described in Schedules 5.03(i)(1) and 5.03(i)(2), and any defects noticed by
Buyer to Seller after the Closing.
(c) (i) If a third party elects to purchase any portion of the
Interests subject to a valid preferential right after the Closing Date, (ii) if
any portion of the Interests are reconveyed to CMS pursuant to the CMS
Agreement, (iii) if any required consent to the assignment of any portion of the
Interests from Terra to Seller, from CMS to Seller, or from Seller to Buyer is
not obtained within 120 days after the Closing and Buyer does not elect to waive
obtaining such consent, or (iv) if Buyer is required to reconvey any portion of
the Interests to Terra, CMS or Seller by court order, then Buyer shall be
obligated to convey such portion of the Interests to such third party or CMS,
Terra or Seller, as the case may be, and shall be entitled to receive all
amounts payable by such third party or by CMS, Terra or Seller, as the case may
be, in connection therewith up to an amount equal to the Allocated Value plus
the Lost Scheduled Amount attributable to the affected Interests. If the amount
so received by Buyer is less than the Allocated Value plus the Lost Scheduled
Amount attributable to each Well or interest therein included in such portion of
the Interests, Seller shall, within ten days after written notice from Buyer,
deliver to Buyer in immediately available funds an amount equal to the amount by
which (x) such Allocated Value and Lost Scheduled Amount exceeds (y) the amount
so received by Buyer.
(d) If any portion of the Interests is conveyed to CMS or
another third party pursuant to this Section 8.07, Seller shall cause the
Engineering Firm to rerun the Reserve Report and Buyer and Seller shall agree
upon appropriate adjustments to the Excess Credit Contribution Cap, the amount
of the Fixed Payment Note and the amortization thereof, the Full Production
Date, the Production Payment Termination Date, and the Scheduled Amount for each
Quarterly Period (collectively, the "Variables"), to adjust the Variables to
what they would have been had the portion of the Interests conveyed to CMS,
Terra, Seller or another third party not been included in the Interests, the
Reserve Report or the original determination of the Variables. The parties agree
to promptly execute and deliver such amendments to the Transaction Documents as
are necessary to reflect the changes in the Variables and Seller shall pay all
recording and filing fees associated with recording and filing such amendments.
Seller shall also pay all costs for the Engineering Firm to rerun the Reserve
Report to determine the changes in the Variables. The foregoing procedure in
this Section 8.07(d) shall also apply, where appropriate, to any portions of the
Interests as to which purchase price adjustments are made under the CMS
Agreement for title defects but which are not conveyed to CMS, Terra or another
third party under Section 8.07(c).
(e) It is the intent of the parties that the Units included in
the Interests include and be limited solely to the Units (which are described as
"projects" in the Reserve Report) described in the Reserve Report, including all
Qualified ▇▇▇▇▇ and Non-Qualified ▇▇▇▇▇ within such Units. Buyer agrees that in
the event any legal description attached to or included in the Assignment, the
PP Document, the Mariner Mortgage, the Quicksilver Mortgage or any of the other
Transaction Documents is determined to cover properties in
47
addition to those which are described in and the subject of the Reserve Report
(the "Non-Mariner Properties"), Buyer will execute and deliver such conveyances,
terminations, releases and other corrective or curative documents as Seller
requests to reconvey such Non-Mariner Properties to Quicksilver and otherwise
release and terminate any liens or encumbrances held by Buyer on such Non-
Mariner Properties. Seller agrees to execute and deliver, or cause Terra to
execute and deliver, such supplemental and corrective assignments as may be
necessary (i) to convey all of Terra's interest to Quicksilver and (ii) to
convey all of Quicksilver's interest to Buyer, in the Units and projects which
are described in and the subject of the Reserve Report.
(f) Seller shall cause the official forms for assignment of all
State of Michigan Leases to be completed and submitted to the Michigan
Department of Natural Resources within 10 days after Closing.
8.08 Compression Arrangements. Seller has reserved certain
compressors used to compress gas produced from the Interests and the lateral
pipelines downstream from such compressors to the point such lateral pipelines
connect to a lateral pipeline or other pipeline owned by a third party. After
the Closing Buyer, as the successor in title to CMS, Terra and Seller, will be a
party to contracts with Gas Compression Services or other third parties pursuant
to which such third party purchases Gas produced from the Interests to fuel the
compressors retained by Seller and the other compressors used to compress the
Gas prior to its delivery to Cinnabar. Such contracts are set forth in Schedule
8.08 attached hereto. Seller shall furnish Buyer with copies of all such
contracts by May 30, 2000 in order that Buyer may review such contracts and
determine if such contracts are sufficient to permit the Gas sold to such third
party compression service providers to be treated as Qualified Production. If
Buyer is not satisfied that such Gas may be treated as Qualified Production, the
parties shall use their reasonable commercial efforts to cause such arrangements
to be amended, or enter into other arrangements, in order that such Gas may be
treated as Qualified Production. Such Gas shall not be included in Qualified
Production on any Quarterly Statement unless and until Buyer is satisfied that
it qualifies as Qualified Production. Seller agrees to lease or otherwise make
available the compressors retained by Seller to such third party compression
service providers in order to enable them to provide such services. Seller, its
successors and assigns, agrees to continue to deliver the Gas after compression
to the third party lateral or pipeline, and, after the termination of the above
described third party compression arrangements, to compress the Gas, on terms no
less favorable to Buyer, its successors and assigns, than arms' length terms for
similar services in the area provided by third parties.
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ARTICLE IX
SELLER'S OPTION TO PURCHASE OIL AND GAS INTERESTS
9.01 Grant of Seller's Option. For and in consideration of $10.00 and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Buyer hereby grants to Seller, its successors and assigns,
an exclusive and irrevocable option to purchase all (but not less than all) of
the Interests ((i) excluding equipment and other tangible Interests disposed of
in the ordinary course of business, and Leases and Units that have expired, been
terminated or defeased in the ordinary course of business, and (ii) including
any additions to the equipment and other tangible property owned by Buyer and
located on the Land, appurtenant thereto or used or obtained in connection
therewith or with the production, gathering, treatment, processing, sale or
disposal of Hydrocarbons or water produced therefrom or attributable thereto)
(the "Seller's Option"), such Seller's Option to be exercisable as set forth in
Sections 9.02 through 9.07 below. The Seller's Option is subject to any
restrictions, exceptions, reservations, conditions, limitations, burdens,
contracts, agreements and other matters applicable to the Interests other than
matters arising by, through or under Buyer. To the extent transferable, upon
Seller's exercise of the Seller's Option, Buyer will transfer to Seller the
benefit of and right to enforce all covenants and warranties, if any, which
Buyer is entitled to enforce against Buyer's predecessors in title to the
Interests.
9.02 Term of the Seller's Option.
(a) The Seller's Option is a presently vested interest in real
property exercisable by Seller on or after each of the following dates
(each being a "Trigger Date"):
(1) Subject to Section 9.07, September 1, 2002; and
(2) When the cumulative Excess Credit Capital
Contributions made by the members of Buyer to Buyer pursuant to
Section 3.2 of the LLC Agreement, equals or exceeds the Excess
Credit Contribution Cap.
(b) Each time the Seller's Option shall have become
exercisable, Seller's right to exercise the Seller's Option shall terminate
if not timely exercised in accordance with the terms hereof on or before
11:59 p.m. Eastern Time on the date which is 180 days following the
applicable Trigger Date (the "Seller's Exercise Termination Date"). Subject
to Section 9.07, but notwithstanding any other provision of this Article
IX, Seller's option to repurchase the Interests under this Article IX shall
terminate if Seller has not exercised such option by March 31, 2003.
9.03 Exercise of the Seller's Option. Seller shall exercise the
Seller's Option by providing written notice to Buyer on or before the Seller's
Exercise Termination Date (the "Seller's Option Exercise Date"). Subject to
Section 9.07, the parties agree that the date on
49
which the transaction contemplated by exercising the Seller's Option closes
(the "Seller's Option Closing Date") shall be on or before 60 days following the
Seller's Option Exercise Date, provided, however, the Seller's Option Closing
Date shall not occur before December 31, 2002.
9.04 The Seller's Option Purchase Price. The cash purchase price to
be paid by Seller to Buyer on the Seller's Option Closing Date for the Interests
(the "Seller's Option Purchase Price") shall be the fair market value of the
Interests as of the Seller's Option Exercise Date, subject to all encumbrances
thereon except encumbrances placed on the Interests by Buyer, including, without
limitation, the Production Payment and the Reversionary Interest, with
appropriate adjustments for Expense Loans (as defined in the Management
Agreement), costs and expenses paid, revenues received, gas imbalances and other
benefits and liabilities accruing with respect to the Interests prior to the
Seller's Option Closing Date. The parties shall attempt to agree upon the fair
market value of the Interests within 15 days after delivery of notice of the
exercise of the Seller's Option. If the parties are unable to so agree, then
the fair market value of the Interests shall be equal to (i) the net present
value of the remaining recoverable proved developed producing reserves, and all
proved developed nonproducing reserves attributable to any Rework Operations
that have not been conducted, as of the Seller's Option Exercise Date,
determined without deduction of the Production Payment, less (ii) the net
present value of the Production Payment as of the Seller's Option Exercise Date.
The net present value of the remaining recoverable proved developed
producing reserves, and all proved developed nonproducing reserves attributable
to any Rework Operations that have not been conducted, shall be established in
the following manner and in accordance with the following agreed valuation
principles:
(a) the fair market value shall be net of the Reversionary
Interest;
(b) recoverable reserves, projected recovery rates, and
operating expense forecasts will be made by Schlumberger
Holditch - Reservoir Technologies Consulting Services, or
such other firm of independent petroleum engineers as the
parties shall agree (the "Engineering Firm");
(c) gas prices will be equal to the then volume-weighted
average price received by Buyer under the Cinnabar Gas
Sales Contract and existing arms' length gas contracts with
third parties or other arms' length spot sales to third
parties for gas produced from the Interests for the 12
months immediately preceding the Seller's Option Exercise
Date adjusted for any future price escalation or de-
escalation under any such arms' length third party
contracts (with such weighted average price otherwise
unescalated);
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(d) the resulting net revenue stream prepared by the
Engineering Firm will be discounted at the rate equal to
the Prime Rate plus 400 basis points;
(e) otherwise generally utilizing the same methodology used in
preparing the Reserve Report; and
51
(f) assuming that all of the representations and warranties
made by Seller in this Agreement as to the Interests were
true and correct as of the Closing notwithstanding that any
such representation or warranty may be discovered not to
have been true and correct, except that changes from the
state of facts so represented or warranted by Seller in the
case of (1) events occurring after Closing or (2) changes
necessary to reflect the state of facts giving rise to any
payment by Seller to Buyer pursuant to Section 8.02(c)
shall be given full effect and accounted for in the
valuation.
The net present value of the Production Payment shall be an amount equal to the
net present value of the projected payments to Seller under the Production
Payment determined in a similar manner for the remaining recoverable proved
developed producing reserves, and all proved developed nonproducing reserves
attributable to any Rework Operations that have not been conducted, burdened
thereby and after giving effect to all projected debits to the Net Profits
Account under the PP Document including, without limitation, projected debits
for payments of principal and interest under the Fixed Payment Note pursuant to
Section 3.3(n) of the PP Document, projected debits for any Unrecouped Scheduled
Amount & Interest Deficits pursuant to Section 3.3(o) of the PP Document, and
projected debits pursuant to Section 3.3(p) of the PP Document, in each case at
the times and in the amounts projected to be made prior to the Production
Payment Termination Date (as defined in the PP Document). For purposes of
calculating projected Quarterly Scheduled Amount Deficits, Cumulative Scheduled
Amount Deficits, Excess Tax Credits, and Unrecouped Scheduled Amount & Interest
Deficits (as such terms are defined in the PP Document), it shall be assumed
that the Aggregate Tax Credits from and after the Seller's Option Closing Date
will be zero.
Seller shall engage the Engineering Firm and be responsible for payment of the
fees and expenses of the Engineering Firm. If the parties cannot agree on the
Seller's Option Purchase Price, the parties agree to submit the issue to binding
arbitration in accordance with the arbitration procedures set forth in Article
XI. The determination of the Seller's Option Purchase Price by the arbitrators
shall be conclusive and binding upon the parties.
9.05 Seller's Option Closing Date. On the Seller's Option Closing
Date, the following shall occur:
(a) Seller shall pay to Buyer, by wire transfer in immediately
available funds, (i) the Seller's Option Purchase Price, less (ii) the
outstanding balance of principal and accrued interest under the Fixed
Payment Note as of the Seller's Option Exercise Date, but not to exceed the
Seller's Option Purchase Price. The amount in "(ii)" shall be applied
toward prepayment of the Fixed Payment Note and if such amount is
sufficient to pay the Fixed Payment Note in full, the Fixed Payment Note
shall be deemed discharged and canceled; if the amount in "(ii)" is
insufficient to discharge the Fixed Payment Note, the Fixed Payment Note
shall continue in full
52
force and effect, no further monthly payments shall be due or payable
thereunder, and the remaining outstanding balance, together with interest
thereon as provided in the Fixed Payment Note, shall be due and payable on
the Maturity Date (as defined therein);
(b) Buyer shall execute, acknowledge, and deliver to Seller
sufficient numbers of assignments of the Interests ((i) excluding equipment
and other tangible Interests disposed of in the ordinary course of
business, and Leases and Units that have expired, been terminated or
defeased in the ordinary course of business, and (ii) including any
additions to the equipment and other tangible property owned by Buyer and
located on the Land, appurtenant thereto or used or obtained in connection
therewith or with the production, gathering, treatment, processing, sale or
disposal of Hydrocarbons or water produced therefrom or attributable
thereto) to permit Seller to record said assignments of record, such
assignments to be in a form reasonably satisfactory to Buyer and Seller.
The assignments will contain legally sufficient property descriptions of
such Interests, comply with all recordation and governmental requirements,
be made effective as of the Seller's Option Exercise Date, and contain a
special warranty of title, subject to the Production Payment and the
Reversionary Interest.
(c) Seller shall assume and release and indemnify, defend and
save and hold harmless Buyer from all liabilities and obligations relating
to the Interests, including but not limited to those arising under the
Production Payment and all liabilities and other Adverse Consequences,
including, without limitation, those arising under Environmental Laws that
are attributable to the Interests (whether arising before, during or after
Buyer's period of ownership and whether or not attributable to the actions
of Buyer); provided, however, that notwithstanding any other provision of
this Agreement or the other Transaction Documents, Seller shall have no
obligation in regard to liabilities and other Adverse Consequences to the
extent the same are attributable to the gross negligence or willful
misconduct of (1) Buyer or to the breach by Buyer of the Transaction
Documents; provided, however, that acts of Seller (its successors and
assigns) as Buyer's manager under the Management Agreement shall not be
deemed to be acts of Buyer or (2) any manager or operator of the Interests
other than Seller (its successors or assigns), under any agreement similar
to or in substitution for the Management Agreement following the
termination of the Management Agreement.
9.06 Refund of Unused Abandonment Reserve. Upon any such repurchase
by Seller, any funds remaining in the Quicksilver Abandonment Account-PP, and
any funds received by Buyer from such account but not applied to pay Abandonment
Costs (as defined in the PP Document), shall be paid to Seller.
9.07 Extension of Option Period. If, by reason of an amendment to or
affecting section 29(f) of the Code, the Capital Contribution Termination Date
is after December 31, 2002, the dates certain in Sections 9.02 and 9.03 shall be
deemed extended by that number
53
of days equal to the number of days between December 31, 2002 and the Capital
Contribution Termination Date.
ARTICLE X
BUYER'S OPTION TO PURCHASE OIL AND GAS INTERESTS
10.01 Grant of Buyer's Option. For and in consideration of $10.00 and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Seller hereby grants to Buyer, its successors and assigns,
an exclusive and irrevocable option (the "Buyer's Option") to purchase:
(a) If the Buyer's Option is exercised as to all of the ▇▇▇▇▇,
Leases and Units, the (i) Production Payment, and (ii) the Reversionary
Interest and all other right, title and interest of Seller in and to the
▇▇▇▇▇, Leases and Units (excluding equipment and other tangible Interests
disposed of in the ordinary course of business, and Leases and Units that
have expired, been terminated or defeased in the ordinary course of
business and including any additions to the equipment and other tangible
property owned by Seller and located on the Land, appurtenant thereto or
used or obtained in connection therewith or with the production, gathering,
treatment, processing, sale or disposal of Hydrocarbons or water produced
therefrom or attributable thereto) (the "Seller's Interests").
(b) If the Buyer's Option is exercised with respect to less
than all of the ▇▇▇▇▇, Leases and Units, Buyer, or its designee or
assignee, shall purchase the interests described in clause (a)(ii) above
insofar as they relate to the ▇▇▇▇▇, Leases and Units being purchased and,
instead of purchasing the Production Payment, that portion of the ▇▇▇▇▇,
Leases and Units with respect to which the Buyer's Option is exercised
shall be released from the Production Payment.
Buyer's Option shall be exercisable as set forth in Sections 10.02 through 10.07
below. The Buyer's Option is subject to any restrictions, exceptions,
reservations, conditions, limitations, burdens, contracts, agreements and other
matters applicable to the Seller's Interests other than matters arising by,
through or under Seller. To the extent transferable, upon Buyer's exercise of
the Buyer's Option, Seller will transfer to Buyer the benefit of and right to
enforce all covenants and warranties, if any, which Seller is entitled to
enforce against Seller's predecessors in title to the Seller's Interests.
10.02 Term of the Buyer's Option
(a) Buyer may exercise the Buyer's Option for all or any part
of Seller's Interests provided, however, any partial exercise of the
Buyer's Option shall not cover less than all of any Unit.
54
(b) Subject to Section 10.07, the Buyer's Option is exercisable
by Buyer from time to time with respect to any Unit for a period of three
years after June 1, 2003; provided, however, Buyer shall not have the right
to exercise Buyer's Option until Seller's Option has expired unexercised.
(c) Subject to Section 10.07, Buyer's right to exercise the
Buyer's Option shall terminate at 5:00 p.m. Central Time on June 1, 2006
(the "Buyer's Exercise Termination Date").
10.03 Exercise of the Buyer's Option. Buyer shall exercise the Buyer's
Option by providing written notice to Seller on or before the Buyer's Exercise
Termination Date (the "Buyer's Option Exercise Date"). The parties agree that
the date on which the transaction contemplated by exercising the Buyer's Option
closes (the "Buyer's Option Closing Date") shall be on or before 120 days
following the Buyer's Option Exercise Date.
10.04 The Buyer's Option Purchase Price.
(a) If Buyer exercises the Buyer's Option with respect to all
of Seller's Interests, the cash purchase price to be paid by Buyer to
Seller on the Buyer's Option Closing Date for the Seller's Interests (the
"Buyer's Option Purchase Price") shall be the fair market value of the
Seller's Interests, free and clear of all encumbrances arising by, through
and under Seller which will be released on the Buyer's Option Closing Date,
and other liabilities accruing with respect to the Seller's Interests prior
to the Buyer's Option Closing Date.
The fair market value of the Seller's Interests shall be equal to (i) the
net present value of the remaining recoverable proved reserves attributable
to the Reversionary Interest plus (ii) the net present value of the
projected payments to Seller under the Production Payment as of the Buyer's
Option Exercise Date (which shall be determined in the same manner as
described in Section 9.04).
The net present value of the remaining recoverable proved reserves
attributable to the Reversionary Interest shall be established in the
following manner and in accordance with the following agreed valuation
principles:
(i) recoverable reserves, projected recovery rates, and
operating expense forecasts will be made by the Engineering
Firm, or such other firm of independent petroleum engineers
as the parties shall agree;
(ii) gas prices will be equal to the then volume-weighted
average price received by Buyer under the Cinnabar Gas
Sales Contract and existing arms' length gas contracts with
third parties or other arms' length spot sales to third
parties for gas produced from the Interests for the 12
months immediately preceding the Buyer's Option Exercise
Date adjusted for any future price escalation or de-
escalation under
55
any such arms' length third party contracts (with such
weighted average price otherwise unescalated);
(iii) the resulting net revenue stream prepared by the
Engineering Firm will be discounted at the rate equal to
the Prime Rate plus 400 basis points; and
(iv) otherwise generally utilizing the same methodology used in
preparing the Reserve Report.
(b) If Buyer exercises its option with respect to less than all
of Seller's Interests, the purchase price to be paid to Seller on the
Buyer's Option Closing Date shall be (i) the fair market value of that
portion of the Reversionary Interest attributable to the ▇▇▇▇▇, Leases and
Units with respect to which the Buyer's Option is exercised, which shall be
determined as provided in Section 10.04(a), plus (ii) the PP Partial
Release Payment. The "PP Partial Release Payment" shall be an amount equal
to the excess, if any, of (x) the net present value of the Production
Payment calculated as provided in Section 10.04(a) over (y) the net present
value of the Production Payment calculated as provided in Section 10.04(a)
but assuming that the Production Payment did not burden the ▇▇▇▇▇, Leases
and Units with respect to which the Buyer's Option is exercised.
(c) Buyer shall engage the Engineering Firm and be responsible
for payment of the fees and expenses of the Engineering Firm. If the
parties cannot agree on the Buyer's Option Purchase Price, the parties
agree to submit the issue to binding arbitration in accordance with the
arbitration procedures set forth in Article XI. The determination of the
Buyer's Option Purchase Price by the arbitrators shall be conclusive and
binding upon the parties.
10.05 Buyer's Option Closing Date. On the Buyer's Option Closing Date,
the following shall occur:
(a) Buyer shall pay to the Senior Lenders and Sub-Debt Lenders
the amount, not to exceed the Buyer's Option Purchase Price, necessary to
obtain a release of the Bank Liens and TCW Liens (as such terms are defined
in the Intercreditor Agreement) as provided in Section 9 of the
Intercreditor Agreement and Buyer shall pay the balance, if any, of the
Buyer's Option Purchase Price to Seller by wire transfer in immediately
available funds.
(b) Seller shall execute, acknowledge, and deliver to Buyer
sufficient numbers of assignments of the Seller's Interests to permit Buyer
to record said assignments of record, such assignments to be in a form
reasonably satisfactory to Buyer and Seller. The assignments will contain
legally sufficient property descriptions of the Seller's Interests, comply
with all recordation and governmental
56
requirements, be made effective as of the Buyer's Option Exercise Date, and
contain a special warranty of title.
(c) Buyer shall assume and release and indemnify, defend and
save and hold harmless Seller from all liabilities and obligations relating
to the Seller's Interests, including but not limited to Adverse
Consequences, including, without limitation, those arising under
Environmental Laws that are attributable to the Seller's Interests arising
after the Buyer's Option Closing Date; provided, however, that
notwithstanding any other provision of this Agreement or the other
Transaction Documents, Buyer shall have no obligation in regard to
liabilities and other Adverse Consequences to the extent the same are
attributable to the gross negligence or willful misconduct of Seller or to
the breach by Seller of the Transaction Documents.
(d) If the Buyer's Option is exercised with respect to all of
the ▇▇▇▇▇, Leases and Units, Buyer shall pay to Seller the outstanding
balance of principal and interest under the Fixed Payment Note as of the
Buyer's Option Exercise Date, the Fixed Payment Note shall be canceled and
the Quicksilver Mortgage shall be completely released. If the Buyer's
Option is exercised with respect to less than all of the ▇▇▇▇▇, Leases and
Units, Buyer shall make a prepayment on the Fixed Payment Note in an amount
equal to the outstanding balance of principal and interest under the Fixed
Payment Note as of the Buyer's Option Exercise Date multiplied by a
fraction whose numerator is the Allocated Value of the ▇▇▇▇▇, Leases and
Units with respect to which the Buyer's Option is exercised and whose
denominator is $83,872,000, and the Quicksilver Mortgage shall be released
insofar as it covers the ▇▇▇▇▇, Leases and Units with respect to which the
Buyer's Option is exercised.
(e) If the Buyer's Option is exercised with respect to less
than all of the ▇▇▇▇▇, Leases and Units, (i) the volume that triggers the
Production Payment Termination Date shall be reduced by the Mcf of Gas
attributable to the Interests projected to be produced and sold from the
▇▇▇▇▇ with respect to which the Buyer's Option is exercised from the
Buyer's Option Exercise Date through the Production Payment Termination
Date (prior to this adjustment), as projected by the Engineering Firm, and
(ii) the parties shall execute an amendment in recordable form to the PP
Document reflecting such reduction and releasing from the Production
Payment the ▇▇▇▇▇, Leases and Units with respect to which Buyer's Option
was exercised.
10.06 Assignability. Buyer shall have the right to assign Buyer's
Option, insofar as it covers all or any number of the Units, to any third party
who purchases, or is purchasing on the Buyer's Option Closing Date, Buyer's
interests in such Unit(s). Buyer may assign all or any portion of Buyer's
Option to such third parties; provided, however, any partial assignment of
Buyer's Option shall be on a "Unit-by-Unit" basis.
57
10.07 Extension of Option Period. If, by reason or an amendment to or
affecting section 29(f) of the Code, Capital Contribution Termination Date is
after December 31, 2002, the dates certain in Sections 10.02(b) and 10.02(c)
shall be deemed extended by that number of days equal to the number of days
between December 31, 2002 and the Capital Contribution Termination Date.
ARTICLE XI
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ARBITRATION
11.01 Submission to Arbitration. The parties hereby submit all
controversies, claims and matters of difference to arbitration. Without
limiting the generality of the foregoing, the following shall be considered
controversies for this purpose: (a) all questions relating to the
interpretation or breach of this Agreement, and (b) all questions as to whether
the right to arbitrate any question exists. Buyer and Seller shall each have
the right but not the obligation to consolidate into one arbitration proceeding
any matters subject to arbitration under this Agreement or any other Transaction
Document.
11.02 Initiation of Arbitration and Selection of Arbitrators. The
party desiring arbitration shall so notify the other party identifying in
reasonable detail the matters to be arbitrated and the relief sought.
Arbitration hereunder shall be before a three-person panel of neutral
arbitrators, consisting of one person from each of the following categories: (1)
an attorney with at least ten year's experience in oil and gas tax law; (2) an
attorney with at least ten years' experience in general commercial law including
oil and gas matters; and (3) a person with at least ten years' experience in the
petroleum industry. The AAA shall submit a list of persons meeting the criteria
outlined above for each category of arbitrator, and the parties shall select one
person from each category in the manner established by the AAA. In the event
that any party fails to select arbitrators as required above, the AAA shall
select such arbitrators. The arbitrators shall be entitled to a fee
commensurate with their fees for professional services requiring similar time
and effort. If the arbitrators so desire they shall have the authority to
retain the services of a neutral judge or attorney (whose fees shall be treated
as an arbitrator's fees) to assist them in administering the arbitration and
conducting any hearings and taking evidence at such hearings or otherwise.
11.03 Arbitration Procedures. All matters arbitrated hereunder shall
be arbitrated in Detroit, Michigan, pursuant to Michigan law and shall be
conducted in accordance with the Commercial Arbitration Rules of the AAA. The
arbitrators shall conduct a hearing no later than 45 days after submission of
the matter to arbitration, and a decision shall be rendered by the arbitrators
within 10 days of the hearing. At the hearing, the parties shall present such
evidence and witnesses as they may choose, with or without counsel. Adherence to
formal rules of evidence shall not be required but the arbitration panel shall
consider any evidence and testimony that it determines to be relevant, in
accordance with procedures that it determines to be appropriate. Any award
entered in an arbitration shall be made by a written opinion stating the reasons
for the award made.
58
11.04 Enforcement. This submission and agreement to arbitrate shall be
specifically enforceable. Arbitration may proceed in the absence of any party
if notice of the proceedings has been given to such party. The parties agree to
abide by all awards rendered in such proceedings. Such awards shall be final
and binding on all parties to the extent and in the manner provided by Michigan
law. All awards may be filed with the clerk of one or more courts, state,
federal or foreign having jurisdiction over the party against whom such award is
rendered or its property, as a basis of judgment and of the issuance of
execution for its collection. The parties hereby irrevocably consent to, and
waive all objections with respect to, the jurisdiction and venue of the state
and federal district courts in Detroit, Michigan as to all matters arising out
of or related to this Agreement and the Transaction Documents. No party shall
be considered in default of an obligation hereunder during the pendency of
arbitration proceedings specifically relating to such obligation.
11.05 Fees and Costs. The arbitrator's fees and other costs of the
arbitration and the reasonable attorney fees, expert witness fees and costs of
the prevailing party shall be borne by the non-prevailing party. In its written
opinion, the arbitration panel shall, after comparing the respective positions
asserted in the arbitration claim and answer thereto, declare as the prevailing
party the party whose position was closest to the arbitration award (not
necessarily the party in favor of which the award on the arbitration claim is
rendered) and declare the other party to be the non-prevailing party. The
arbitration award shall include an award of the fees and costs provided by this
Section 11.05 against the non-prevailing party.
ARTICLE XII
-----------
MISCELLANEOUS
12.01 Exhibits and Schedules. The Exhibits and Schedules referred to
in this Agreement are hereby incorporated in this Agreement by reference and
constitute a part of this Agreement. Each party to this Agreement and its
counsel has received a complete set of Exhibits and Schedules prior to and as of
the execution of this Agreement.
12.02 Expenses. Except as otherwise specifically provided in this
Agreement, all fees, costs and expenses incurred by Buyer or Seller in
negotiating this Agreement or in consummating the transactions contemplated by
this Agreement shall be paid by the party incurring the same, including without
limitation, legal and accounting fees, costs and expenses.
12.03 Notices. All notices and communications required or permitted
under this Agreement shall be in writing and shall be delivered by hand, by
nationally recognized overnight delivery service, by facsimile transmission or
by registered or certified mail, postage prepaid, addressed as follows:
59
If to the Seller:
Quicksilver Resources Inc.
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
If to the Buyer:
Mariner Gas LLC
▇/▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇ and Trust Company
▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇-▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇ ▇. ▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
All notices and communications shall be effective upon actual receipt. Either
party may, by written notice so delivered to the other, change the address or
number to which delivery or facsimile shall thereafter be made.
12.04 Amendment. This Agreement may not be altered or amended, nor any
rights hereunder be waived, except by an instrument in writing executed by the
party or parties to be charged with such amendment or waiver. No waiver of any
term, provision or condition of this Agreement, in any one or more instances,
shall be deemed to be, or construed as, a further or continuing waiver of any
such term, provision or condition or as a waiver of any other term, provision or
condition of this Agreement.
12.05 Assignment.
(a) Seller may not assign any portion of its rights or delegate
any portion of its duties or obligations under this Agreement without the
prior written consent of Buyer; provided, however, that Seller may
mortgage, assign, pledge or hypothecate all or any portion of its rights
under the Transaction Documents including, without limitation, the
Production Payment, Reversionary Interest, Seller's Option, and Fixed
Payment Note (i) to the Senior Lenders and the Sub-Debt Lenders, without
the prior consent of Buyer, subject to the Intercreditor Agreement or (ii)
to another lender of Seller with Buyer's prior written consent, which
consent will not be unreasonably withheld but which may be conditioned upon
such other lenders entering into an agreement similar to the Intercreditor
Agreement with Buyer; provided however, that if Buyer exercises the Buyer's
Option, Buyer shall acquire Seller's interests free and clear of any such
mortgage, assignment, pledge or hypothecation and the provisions of such
documents provide for a release of the subject liens upon the closing of
Buyer's Option without any further payment from Buyer other than the
Buyer's Option Purchase Price. Notwithstanding the foregoing or any
provisions of
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any Transaction Document, Buyer's consent shall not be required for any
assignment or reassignment from time to time of Seller's rights and
interests under the Transaction Documents (other than the Management
Agreement), provided (1) Seller shall remain liable for all its obligations
hereunder, (2) each assignment or reassignment shall include all of
Seller's rights and interests under all of the Transaction Documents
excluding the Management Agreement, and (3) the assignee is an Affiliate of
Seller and remains an Affiliate of Seller through the expiration of Buyer's
Option.
(b) Buyer shall have the right to assign all or any part of its
rights under this Agreement without Seller's consent; provided that Buyer
shall remain liable for payment and performance of all of Buyer's
obligations under this Agreement unless expressly released therefrom by the
written consent of Seller.
12.06 Announcements. Seller and Buyer shall consult with each other
with regard to all press releases and other announcements concerning this
Agreement or the transactions contemplated hereby and, except as may be required
by applicable laws or the applicable rules and regulations of any governmental
agency or stock exchange, neither Buyer nor Seller shall issue any such press
release or make any other announcement without the prior written consent of the
other party. Each party shall furnish to the other party a copy of any such
release or announcement prior to its release.
12.07 Confidentiality.
(a) Buyer and Seller shall keep this Agreement and the other
Transaction Documents confidential (i) except Buyer may furnish copies of
the Transaction Documents to the IRS in connection with seeking the Private
Letter Ruling and each party may disclose the terms of the Transaction
Documents to the IRS as necessary, and (ii) except to the extent either
party may be required to disclose the contents of the Management Agreement
to third parties in carrying on the business of Buyer or filing the
official forms of conveyances covering the Interests with appropriate
governmental authorities, or to the extent required in the operation of the
Interests, pursuant to the Management Agreement, by law, regulation or
order, by stock exchange requirements, in connection with obtaining third
party consents and waivers of preferential purchase rights and other
matters, or in connection with any public announcement issued in accordance
with Section 11.06.
(b) Buyer will keep confidential the Confidential Information
furnished to Buyer or State Street Bank and Trust Company by Seller
concerning Seller and the Interests, except (1) to the extent that
disclosure to a third party is required by applicable law or regulation or
by stock exchange requirements; (2) information which, at the time of
disclosure, is generally available to the public (other than as a result of
a breach of this Agreement) as evidenced by a generally available document
or publication; (3) information that was in its possession prior to
disclosure and was not acquired directly or indirectly from Seller; (4) to
the extent disclosure is
61
necessary or advisable, to its employees, consultants or advisors for the
purpose of carrying out their obligations hereunder; (5) potential
purchasers of the Interests or membership interests in Buyer and their
financial institutions, accountants, consultants, legal counsel or
investment advisors; (6) to the extent necessary, disclosure to third
parties to enforce this Agreement, or (7) to a member or manager, or any
Affiliate of Buyer; provided, however, that in each case of disclosure
pursuant to (4), (5), or (7), the persons to whom disclosure is made agree
to be bound by this confidentiality provision. As used in this paragraph,
the term "Confidential Information" shall mean information concerning the
Interests, the operations thereof, business, trade secrets, technical know-
how and other non-public information relating to Seller.
12.08 Headings. The headings of the articles and sections of this
Agreement are for guidance and convenience of reference only and shall not limit
or otherwise affect any of the terms or provisions of this Agreement.
12.09 Counterparts. This Agreement may be executed by Buyer and Seller
in any number of counterparts, each of which shall be deemed an original
instrument, but all of which together shall constitute but one and the same
instrument. This Agreement shall become operative when each party has executed
at least one counterpart of this Agreement. Delivery of an executed counterpart
of this Agreement (or any other documents related to the transactions
contemplated by this Agreement) by facsimile shall be equally effective as
delivery of a manually executed counterpart of this Agreement or any such
document, and the failure to deliver a manually executed counterpart shall not
affect the validity, enforceability or binding effect of this Agreement or any
such document.
12.10 References. References made in this Agreement, including use of
a pronoun, shall be deemed to include where applicable, masculine, feminine,
singular or plural, individuals, partnerships or corporations.
12.11 Governing Law. This Agreement and the transactions contemplated
hereby shall be construed in accordance with, and governed by, the laws of the
State of Michigan, without application of such state's conflict of laws rules.
12.12 Entire Agreement. This Agreement and the other Transaction
Documents (including the Exhibits and Schedules hereto and thereto) constitute
the entire understanding between the parties with respect to the subject matter
hereof and supersedes all negotiations, prior discussions and prior agreements
and understandings relating to such subject matter.
12.13 Mutually Drafted. The parties stipulate and agree that the
Transaction Documents and the language used in the Transaction Documents are the
product of both parties' efforts in consultation with their attorneys and other
consultants and each party hereby irrevocably waives the benefit of any rule of
contract construction which disfavors the drafter of an agreement.
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12.14 Parties in Interest. This Agreement shall be binding upon, and
shall inure to the benefit of, the parties hereto and, except as otherwise
prohibited, their respective successors and assigns. Nothing contained in this
Agreement, express or implied, is intended to confer upon any other person or
entity any benefits, rights or remedies.
12.15 Late Payments. In the event that any amount owed by one party to
the other party under this Agreement is not paid when it becomes due and
payable, in addition to any other remedies at law or in equity, Buyer or Seller,
as the case may be, agrees to pay interest at the Late Payment Interest Rate,
compounded monthly, on such past due amount from the due date until paid.
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MARINER GAS LLC
By: Antrim Corporation
Manager
By: /s/ ▇▇▇▇▇ ▇. ▇▇▇▇
--------------------------------------
Name: ▇▇▇▇▇ ▇. ▇▇▇▇
Title: President
QUICKSILVER RESOURCES INC.
By: /s/ ▇▇▇▇▇ ▇▇▇▇▇▇
--------------------------------------
Name: ▇▇▇▇▇ ▇▇▇▇▇▇
Title: President and Chief Executive
Officer
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