PARTICIPATION AGREEMENT RELATING TO RMS/WARWINK
Exhibit
10.1
PARTICIPATION
AGREEMENT
RELATING
TO
RMS/WARWINK
This
PARTICIPATION AGREEMENT (this “Agreement”)
is
made and entered into as of December 5, 2006 (the “Effective
Date”),
by
and among the Parties (as defined below).
FOR
AND
IN CONSIDERATION OF the mutual covenants, rights, and obligations set forth
in
this Agreement, the benefits to be derived from them, and other good and
valuable consideration, the receipt and the sufficiency of which are hereby
acknowledged, the Parties agree as follows:
ARTICLE I
DEFINITIONS
1.01 Certain
Definitions.
As used
in this Agreement, the following terms have the following meanings:
“Acquisition
Costs”
means
(i) with respect to any Designated Property relating to a Lease that was
owned by CWEI prior to the date such property became subject to this Agreement,
the fair market value of the portion of such Lease that is attributable to
such
Designated Property as of the date it became subject to this Agreement, and
(ii)
with respect to any Designated Property relating to a Lease that was acquired
by
CWEI on or after the date such Designated Property became subject to this
Agreement, the portion of the costs of acquiring such Lease (including,
without limitation, direct costs of seismic data and interpretation, lease
broker services, title examinations, filing fees, and recording costs) that
is
attributable to the Designated Property.
“Affiliate”
means,
when used with reference to a specified Person, (a) any Person directly or
indirectly owning, controlling or holding power to vote 50% or more of the
outstanding voting securities of the specified Person, (b) any Person 50%
or
more of whose outstanding voting securities are directly or indirectly owned,
controlled or held with power to vote by the specified Person, (c) any Person
directly or indirectly controlling, controlled by or under common control
with
the specified Person, (d) if the specified Person is a corporation, any officer
or director of the specified Person or of any corporation directly or indirectly
controlling that specified Person, (e) if the specified Person is a partnership,
any general partner or if the general partner is a partnership, the general
partners of that partnership, and (f) if the specified Person is an individual,
such individual’s spouse and natural and adoptive lineal descendants and trusts
for the benefit of any such Persons. For purposes of this definition, the
ability through share ownership or contractual arrangement to elect or cause
the
election of a majority of the board of directors of a corporation shall
constitute “control.”
“Agreed
Rate”
means
4.45% per annum.
“Agreement”
means
this Participation Agreement, as amended or restated from time to
time.
“Area
of Interest”
means
the area described in Exhibit
B, as such may amended from time to time by CWEI.
“Capital
Account”
has the
meaning set forth in Section
5.03.
“Code”
means
the Internal Revenue Code of 1986, as amended.
“Contribution
Date”
has the
meaning set forth in Section
5.04(b).
“Contribution
Notice” has
the
meaning set forth in Section
5.04(b).
“CWEI”
means
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ Energy, Inc., a Delaware corporation.
“CWEI
Counsel”
has the
meaning set forth in Section
8.12.
“Designated
Property”
means an
undivided 5% of CWEI’s interests in the ▇▇▇▇▇.
“Event
of Forfeiture”
has the
meaning set forth in Section
4.04.
“Indemnified
Person”
has
the
meaning set forth in Section
8.11.
“Interest”
means an
interest in Designated Property under this Agreement. The number of Interests
owned by each Participant and the total number of Interests in this Agreement
are set forth on Exhibit
A,
as
amended from time to time.
“Lease”
means a
lease, mineral interest, royalty or overriding royalty, fee right, mineral
servitude, license, concession or other right covering oil, gas and related
hydrocarbons (or a contractual right to acquire such an interest) or an
undivided interest therein or portion thereof, together with all appurtenances,
easements, permits, licenses, servitudes and rights-of-way situated upon
or used
or held for future use in connection with such an interest or the exploration,
development or production thereof, in each case, in the Area of Interest.
A
“Lease” shall also mean and include all rights and interests in all lands and
interests unitized or pooled therewith pursuant to any law, rule, regulation
or
agreement.
“Majority
in Interest”
means
a
majority of the Interests held by all Participants.
“Non-Contributing
Party”
has the
meaning set forth in Section
5.04(c).
“Operating
Agreement”
means
an agreement between the operator and non-operating interest owners in a
Lease
for the testing, development and operation of a tract of land or Lease for
the
exploration and development of oil, gas, minerals or hydrocarbons.
“Party”
means
CWEI or any Participant.
“Participant”
means
each Person listed as such on Exhibit A.
“Payout”
means
the earliest calendar month during which CWEI shall have received cumulative
cash proceeds relating to all Designated Property (but only taking into account
proceeds received with respect to a Designated Property after such Designated
Property became subject to this Agreement) in an aggregate amount equal to
the
sum of (i) the fair market value of the Designated Property as of the date
hereof as agreed to and set forth on Exhibit
C
and (ii)
the aggregate amounts contributed after the date hereof by the Company, plus
the
Agreed Rate of return.
“Person”
means
an individual, corporation, partnership, limited partnership, limited liability
company, business trust or other legal entity.
“Regulations”
mean
the regulations promulgated by the United States Department of Treasury pursuant
to the Code. All references herein to sections of the Treasury Regulations
shall
include corresponding provision or provisions of succeeding, similar,
substitute, temporary or final Treasury Regulations.
“Tax
Partnership”
means
the relationship (constituting a tax partnership for federal and applicable
state law tax purposes) between the Parties existing pursuant to this
Agreement.
“Transfer”
means
any sale, transfer, assignment, pledge, encumbrance, hypothecation, gift
or
disposition of an Interest in whole or in part, or any rights or benefits
to
which a holder of an Interest may be entitled as provided in this Agreement,
including, without limitation, the right to receive distributions in cash
or in
kind.
“Well”
means
a
well in which CWEI holds
a
Working Interest derived from its ownership of one or more Leases in the
Area of
Interest, as determined in accordance with Section
8.16.
“Well
Costs”
means
CWEI’s share of costs pursuant to any Operating Agreement for the drilling,
completing, equipping, deepening or sidetracking a Well, including, without
limitation: (i) the costs of surveying and staking the Well, the costs of
any surface damages and the costs of clearing, coring, testing, logging and
evaluating the Well; (ii) the costs of casing, cement and cement services
for the Well; (iii) the cost of plugging and abandoning the Well (including
standard and customary remediation activities associated therewith), if it
is
determined that the Well would not produce in commercial quantities and should
be abandoned; (iv) all direct charges and overhead chargeable to CWEI with
respect to the Well under any applicable Operating Agreement until such time
as
all operations are carried out as required by applicable regulations and
sound
engineering practices to make such Well ready for production, including the
installation and testing of wellhead equipment, or to plug and abandon a
dry
hole; (v) all costs incurred by CWEI in recompleting or plugging back any
Well; (vi) all costs incurred by CWEI in reworking any Well if the rework
is covered by an authority for expenditure under the applicable Operating
Agreement; (vii) all costs incurred by CWEI in locating, drilling, completing,
equipping, deepening or sidetracking any enhanced recovery producer or injector
Well (including the costs of all necessary surface equipment such as steam
generators, compressors, water treating facilities, injection pumps, flow
lines
and steam lines); and (viii) the costs of constructing production facilities,
pipelines and other facilities necessary to develop property acquired pursuant
to the terms hereof and produce, collect, store, treat, deliver, market,
sell or
otherwise dispose of oil, gas and other hydrocarbons and minerals therefrom;
provided,
that
Well Costs shall not include any Acquisition Costs.
“Working
Interest”
means
an operating interest in a Lease that permits CWEI to explore, develop and
produce one or more properties in the Area of Interest and bear its percentage
of the costs and expenses relating to the maintenance and development of
and
operations relating to such properties.
1.02 Construction.
Whenever the context requires, the gender of all words used in this Agreement
includes the masculine, feminine and neuter. All references to Articles and
Sections refer to articles and sections of this Agreement, and all references
to
exhibits are to Exhibits attached to this Agreement, each of which is made
a
part of this Agreement for all purposes.
ARTICLE
II
RELATIONSHIP
OF THE PARTIES
2.01 Formation
of Tax Partnership; No Partnership for any Other
Purpose.
This
Agreement and its attachments are not intended and shall not be construed
to
create a joint venture or other partnership (general, limited, or otherwise)
or
association or to render the Parties hereto liable as partners. Each of the
Parties hereto hereby agrees that this Agreement creates a partnership for
United States federal and State income tax purposes only, which Tax Partnership
shall be deemed to own the Designated Property and shall function and exist
as
set forth in Exhibit
D
attached
hereto, which is hereby incorporated by reference for all purposes of this
Agreement. Furthermore, each of the Parties agrees that it shall not make
an
election for the Tax Partnership to be excluded from the application of the
provisions of Subchapter K of Chapter 1 of Subtitle A of the Code (“Subchapter
K”)
or any
similar provisions of applicable state law; provided,
however,
that
each Participant acknowledges that CWEI may currently be, or may become in
the
future, party to an Operating Agreement relating to one or more of the Leases
and/or ▇▇▇▇▇ that requires each party thereto to make an election to be excluded
from the application of the provisions of Subchapter K and authorizes CWEI
to
make such elections in the future on behalf of the Tax Partnership (as an
entity) if necessary to comply with the applicable Operating
Agreement.
2.02 Purpose.
The
purpose for which this Agreement is being entered is to further align the
interests of the Participants with those of CWEI by permitting the Participants
to participate with CWEI in the CWEI oil and gas production (if any) developed,
directly or indirectly, by CWEI and the Participants.
2.03 Term.
This
Agreement shall commence on the Effective Date and continue in effect until
terminated in accordance with Section
7.01.
ARTICLE
III
MANAGEMENT
OF LEASES AND ▇▇▇▇▇
3.01 Authority
of CWEI.
CWEI
shall have the full and exclusive power and authority to do any and all things
necessary, incidental, proper, advisable or convenient for the furtherance
of
developing the Leases and ▇▇▇▇▇ on behalf of the Tax Partnership, including
without limitation:
(a) to
determine whether to acquire, hold, develop or produce properties and other
assets and whether, when and on what terms to farm-out, sell, promote or
otherwise transfer any particular prospect, or any interest
therein;
(b) to
make
all decisions concerning the desirability of payment, and the payment or
supervision of payment, of all delay rentals, shut-in royalty payments, minimum
royalty payments and any other similar or related payments;
(c) to
drill,
complete, control, rework, side-track, redrill, recomplete, produce, plug
and/or
abandon any or all of the ▇▇▇▇▇;
(d) to
form
and participate in partnerships, joint ventures or other relationships that
it
deems desirable;
(e) to
make
any expenditures and incur any obligations it deems appropriate;
(f) to
acquire (including, without limitation, to purchase at premium prices when
deemed appropriate by CWEI), exchange, sell, lease, or dispose of any or
all
Designated Property;
(g)
to
negotiate, execute, deliver and perform any contracts, conveyances or other
instruments which it considers appropriate for the implementation of its
powers
under this Agreement, including, without limitation, Operating Agreements,
unit
Operating Agreements and joint development agreements, and the right to make
any
and all elections that are required or necessary under the terms of any
agreements;
(h) to
borrow
money, incur indebtedness or make guaranties and to secure the same by
mortgages, deeds of trust, security interests, pledges or other liens or
encumbrances on all or any part of the Designated Property;
(i) to
acquire and maintain such insurance, if any, for the benefit of the Parties
as
it deems appropriate; and
(j) to
construct pipelines, drilling and production platforms and facilities, gas
plants, processing plants and other facilities incidental to the development
of
the Area of Interest and the production and marketing of oil and gas
therefrom.
(k) to
execute and deliver division orders and transfer orders upon such terms and
conditions and containing such provisions as CWEI may consider appropriate;
and
(l) to
control any matters affecting the Designated Property including the conduct
of
litigation and other incurring of legal expenses and the settlement of claims
in
litigation; provided,
that,
CWEI shall not be authorized to settle any claims for which any Participant
has,
or may have, any individual liability without the Participant’s prior written
consent.
3.02 Duties
and Services of CWEI.
CWEI
shall devote such time and effort to the development of the Leases and ▇▇▇▇▇
as
it shall deem appropriate. The Parties acknowledge and agree that neither
CWEI
nor any Affiliate thereof nor any of their respective officers, directors,
employees or agents shall be required to devote full time to the development
of
the Leases and ▇▇▇▇▇ and may from time to time engage in and possess interests
in other business ventures of any and every type and description, independently
or with others, including without limitation, the ownership, acquisition,
exploration, development, operation and management of oil and gas properties
and
oil and gas drilling programs, and that no Participant shall by virtue of
this
Agreement have any right, title, interest or expectancy in or to such activities
or ventures.
3.03 Operating
Agreements.
CWEI
shall use its reasonable efforts to enter into, and act in accordance with
the
provisions of, all applicable Operating Agreements relating to any Lease
or
Well. Following termination of this Agreement, each Party agrees to become
a
party to all Operating Agreements in which CWEI serves as operator, and further
agrees to use its reasonable efforts to become a party to all other applicable
Operating Agreements. To the extent any Party for any reason does not become
a
party to an applicable Operating Agreement, such Party agrees to use its
reasonable efforts to act in accordance with the provisions of such Operating
Agreement as if it were a party to such Operating Agreement.
ARTICLE
IV
ACCESS
TO INFORMATION;
TRANSFER RESTRICTIONS
4.01 Access
to Information.
A
Participant, on written request to CWEI stating the purpose, may examine
and
copy, at any reasonable time, for any proper purpose, and at the expense
of the
Participant, any information regarding the business affairs and financial
condition of any Designated Property as is just and reasonable for the
Participant to examine and copy. Information provided to or obtained by a
Participant relating to Designated Property shall be used by such Participant
solely in furtherance of his or her interests hereunder and shall not be
used
for any other purpose. Participants shall maintain the confidentiality of
all
such information and shall not disclose such information to any other Person.
If
a Participant receives a request to disclose information relating to the
Designated Property or this Agreement under the terms of a subpoena,
investigative demand or order issued by a court or governmental agency, the
Participant shall promptly notify CWEI of the existence, terms and circumstances
surrounding such request, so that CWEI may seek a protective order or
confidential treatment of such information.
4.02 Transfer
Restrictions.
Except
as provided in Section
4.03,
no
Participant shall Transfer his or her Interests without the prior written
consent of CWEI. Any attempted Transfer in violation of this Section
4.02
shall be
null and void, and CWEI shall refuse to recognize any such
Transfer.
4.03 Permitted
Transfers; Status as Assignee.
A
Participant may Transfer all or any portion of his or her Interests to his
or
her spouse, parents or natural or adoptive lineal descendants, or to one
or more
trusts or partnerships established exclusively for the benefit of his or
her
spouse, parents or natural or adoptive lineal descendants; provided,
that
any such permitted assignee shall receive and hold such rights subject to
the
provisions of this Agreement, including, without limitation, the provisions
of
this ARTICLE
IV,
and
as a condition to such Transfer, shall execute and deliver a written agreement
with the Parties agreeing to be bound hereby.
A
Participant intending to Transfer Interests pursuant to this Section
4.03
shall
provide at least 10 days prior written notice of such proposed transfer to
CWEI.
4.04 Forfeiture
of Interests.
A
Participant shall forfeit any and/or all of his or her Interests held by
such
Participant if such Participant admits or enters a plea of no contest to
or is
convicted of a felony or misdemeanor offense against CWEI or any of its
Affiliates (“Event
of Forfeiture”).
4.05 Specific
Performance.
The
parties agree that each Party would be irreparably damaged if any of the
provisions of this ARTICLE
IV are
not
performed in accordance with their specific terms and that monetary damages
would not provide an adequate remedy in such event. Accordingly, it is agreed
that, in addition to any other remedy to which they may be entitled, at law
or
in equity, CWEI and any nondefaulting Participant shall be entitled to
injunctive relief to prevent breaches of the provisions of this ARTICLE
IV and
specifically to enforce the terms and provisions hereof in any action instituted
in any court of competent jurisdiction.
ARTICLE
V
SHARING,
ALLOCATIONS AND DISTRIBUTIONS
5.01 Allocation
of Costs and Expenses.
All
costs and expenses, including Acquisition Costs and Well Costs, relating
to the
Designated Property shall be shared as follows: (i) 100% to CWEI before Payout
and (ii) 1% to CWEI and 99% to the Participants after Payout, apportioned
among
the Participants in proportion to the percentages listed on Exhibit
A
attached
hereto.
5.02 Allocation
of Revenues.
All
revenues relating to the Designated Property shall be allocated as follows:
(i)
100% to CWEI before Payout and (ii) 1% to CWEI and 99% to the Participants
after
Payout, apportioned among the Participants in proportion to the percentages
listed on Exhibit
A
attached
hereto.
5.03 Allocations
for Capital Account and Tax Purposes.
An
individual capital account (a “Capital
Account”)
shall
be established and maintained for each Participant as provided in Exhibit
D.
Subject
to Section
7.02(c),
all
items of income, gain, deduction, loss, credit and amount realized shall
be
allocated to the Parties in accordance with the provisions of Exhibit
D.
5.04 Funding
of Costs and Expenses.
(a) The
Parties agree to pay timely the costs and expenses allocated and charged
to them
pursuant to Section
5.01
and
elsewhere herein.
(b) To
the
extent that costs and expenses are allocated and charged to Participants
pursuant to Section
5.01
and
elsewhere in this Agreement, and not retained by CWEI from a distribution
to
Participants pursuant to Section
5.05,
CWEI
shall send written notice to the Participants (a “Contribution
Notice”)
setting forth (i) the date on which such additional funds shall be payable
(the
“Contribution
Date”),
which
date shall be not less than 10 days after the date of the Contribution Notice,
and (ii) the total amount of funds required to be paid by each Participant
pursuant to this Section
5.04.
The
funds required of each Participant shall be in proportion to the number of
Interests held by such Participant.
(c) If
a
Participant does not pay timely the costs and expenses allocated and charged
to
such Participant (a “Non-Contributing
Party”)
at the
time or in the manner provided in the Contribution Notice, CWEI, in its sole
discretion, may pay the costs and expenses that the Non-Contributing Party
failed to pay within 20 days after the Contribution Notice, in which case
the
Non-Contributing Party, without further action on his or her part, shall
be
deemed to have assigned to CWEI the economic rights to the Interests held
by the
Non-Contributing Party pursuant to this Agreement, and CWEI, as the assignee
of
the Non-Contributing Party and the holder of such Interests, shall be entitled
to receive all allocations of income, gain, loss, deduction, credit or similar
items, and all distributions, to which the Non-Contributing Party would
otherwise be entitled from and after the Contribution Date. CWEI shall hold
such
Interests attributable to the Non-Contributing Party until such time as CWEI,
as
the holder of such Interests, shall have received distributions pursuant
to
Section
5.05
in an
aggregate amount equal to 200% of the additional funds paid by CWEI pursuant
to
this Section
5.04(c),
whereupon CWEI, without further action on its part, shall be deemed to have
re-assigned the economic rights to such Interests to the Non-Contributing
Party.
CWEI may use the power of attorney set forth in Section
8.13
to
reflect any assignment pursuant to this Section
5.04(c).
Furthermore, a Non-Contributing Party shall indemnify and hold harmless each
other Party to the fullest extent permitted by law, from and against the
costs
and expenses that the Non-Contributing Party failed to pay, including any
losses, costs, liabilities, damages, and expenses (including, without
limitation, costs of suit and attorneys’ fees) paid or incurred in attempting to
collect the costs that the Non-Contributing Party failed to pay.
5.05 Distributions
of Revenues.
Subject
to Section
5.04(c),
all
revenues relating to the Designated Property shall be distributed to the
Party
to whom such revenues are allocated pursuant to Section
5.02;
provided,
however,
that
CWEI shall, in lieu of issuing Contribution Notices, be entitled to retain
from
any distribution to any Participant an amount necessary to discharge the
costs
and expenses allocated to such Participant pursuant to Section
5.01
that
remains unpaid; provided,
further,
that if
Payout would occur as a result of a distribution of cash funds to CWEI, such
distribution shall be deemed to constitute two distributions: (i) the first
distribution shall consist of the amount of cash funds necessary to cause
Payout
to occur, and (ii) the second distribution shall consist of the balance of
the
funds then distributed.
5.06 Withholding
Taxes.
CWEI
shall at all times be entitled (but not obligated) to make payments required
to
discharge any obligation of CWEI to withhold or make payments to any
governmental authority with respect to any federal, state or local tax liability
of any Participant for such taxes arising out of such Participant’s interest in
the Designated Property. The amount of each such payment made by CWEI with
respect to any Participant shall be deducted from any distributions otherwise
payable to such Participant pursuant to this Agreement. Notwithstanding anything
contained in this Agreement to the contrary, in the event CWEI fails to withhold
any federal, state or local taxes in respect of any Participant when required
to
do so (including as a result of any change in law or interpretation thereof
or
otherwise) any liability incurred by CWEI (including any interest and penalties)
as a result of such failure shall be borne by such Participant (and charged
to
such Participant’s Capital Account), and such Participant shall indemnify and
hold harmless CWEI from and against any and all claims, demands, liabilities,
costs, damages and causes of action of any nature whatsoever related to such
withholding obligation.
ARTICLE
VI
BOOKS
AND RECORDS
6.01 Maintenance
of Books
and Records.
The
books of account for the Tax Partnership shall be maintained on an accrual
basis
in accordance with the terms of this Agreement, except that the Capital Accounts
of the Parties shall be maintained in accordance with Exhibit D.
The
accounting year of the Tax Partnership shall be the calendar year.
ARTICLE VII
TERMINATION
7.01 Termination.
This
Agreement shall terminate on the first to occur of the following:
(a) the
third
anniversary of Payout;
(b) the
election of CWEI, in its sole discretion, to terminate this
Agreement.
7.02 Distributions
upon Termination.
Upon
termination of this Agreement, CWEI shall distribute all Designated Property
(or
proceeds therefrom) to the Parties as follows:
(a) CWEI
may
sell any or all Designated Property and other assets, including to Parties,
and
any resulting gain or loss from each sale shall be computed and allocated
to the
Capital Accounts of the Parties in accordance with Section
7.02(c);
(b) With
respect to all Designated Property that has not been sold, the fair market
value
of such Designated Property shall be determined by CWEI and any unrealized
income, gain, loss, and deduction inherent in such property that has not
been
reflected in the Capital Accounts of the Parties previously shall be allocated
among the Parties in accordance with Section
7.02(c);
(c) All
items
of income, gain, loss and deduction referred to in Sections
7.02(a)
and (b)
shall be
allocated among the Parties in such a manner as to cause, to the maximum
extent
possible, the positive Capital Account balance of each Party to equal the
distribution such Party would receive if the distributions upon liquidation
of
the proceeds described in Section
7.02(a)
and
proceeds equal in amount to the fair market value of property described in
Section
7.02(d)
were
made in accordance with Section
5.05 of
this
Agreement;
(d) Designated
Property (and proceeds therefrom) shall then be distributed among the Parties
in
accordance with the positive Capital Account balances of the Parties, as
determined after taking into account all Capital Account adjustments for
the
taxable year of the Tax Partnership during which the termination of this
Agreement occurs (other than those made by reason of distributions pursuant
to
this clause (d)), and those distributions shall be made by the end of the
taxable year of the Tax Partnership during which the termination of this
Agreement occurs (or, if later, 90 days after the date of the
liquidation);
(e) It
is
intended that the distributions made to each Party pursuant to this Section
7.02
be equal
to the distributions to which such Party would be entitled if liquidating
distributions were made in accordance with Section
5.05 of
this
Agreement. To the extent the Parties’ positive Capital Account balances after
application of Section 7.02(c)
do not
correspond to the amounts of such intended distributions, the allocations
provided for in Exhibit
D
for the
taxable year in which the liquidation occurs shall be adjusted, to the maximum
extent possible, to produce Capital Account balances which correspond to
the
amount of such intended distributions.
All
distributions in kind to the Participants shall be made subject to the liability
of each distributee for his, her or its allocable share of costs, expenses
and
liabilities previously incurred or for which CWEI has committed prior to
the
date of termination and those costs, expenses and liabilities shall be allocated
to the distributee under this Section
7.02.
The
distribution of cash or property to a Participant in accordance with the
provisions of this Section
7.02 constitutes
a complete distribution to the Participant of his, her or its Interests and
all
the Designated Property and other assets and constitutes a compromise to
which
all Parties have consented. To the extent that a Participant returns funds
to
CWEI, it has no claim against any other Party for those funds.
7.03 Termination.
On
completion of the distribution of Partnership assets as provided in this
Agreement, the Tax Partnership shall be considered terminated.
ARTICLE
VIII
GENERAL
PROVISIONS
8.01 Offset.
Whenever CWEI is to pay any sum to any Participant, any amounts that Participant
owes CWEI or its Affiliates may be deducted from that sum before
payment.
8.02 Notices.
All
notices, requests or consents required or permitted to be given under this
Agreement must be in writing and shall be considered as properly given if
mailed
by first class United States mail, postage paid, and registered or certified
with return receipt requested, or if delivered to the recipient in person,
by
courier or by facsimile transmission. Notices, requests and consents shall
be
sent to a Participant at the address shown on its Signature Page for
Participants.
A
Participant
may
change its address by giving written notice to CWEI. Any notice, request
or
consent to CWEI shall be sent to CWEI at its principal place of business,
to the
attention of ▇▇▇▇▇ ▇▇▇▇▇▇▇.
8.03 Entire
Agreement.
This
Agreement constitutes the entire agreement of the Parties relating to the
Tax
Partnership and the Designated Property, and supersedes all prior contracts
or
agreements with respect thereto, whether oral or written.
8.04 Effect
of Waiver or Consent.
A
waiver or consent, express or implied, to or of any breach or default by
any
Person in the performance by that Person of its obligations with respect
to this
Agreement is not a consent or waiver to or of any other breach or default
in the
performance by that Person of the same or any other obligations of that Person
with respect to this Agreement. Failure on the part of a Person to complain
of
any act of any Person or to declare any Person in default with respect to
this
Agreement, irrespective of how long that failure continues, does not constitute
a waiver by that Person of its rights with respect to that default until
the
applicable statute of limitations period has run.
8.05 Amendment
or Modification.
(a) Except
as
otherwise provided in this Section
8.05,
any
amendment to this Agreement must be proposed by CWEI and approved in writing
by
CWEI and at least a Majority in Interest of the Participants within 90 days
of
its proposal to be effective.
(b) CWEI
may
amend this Agreement without the consent of any Participant (i) to remove
or correct any inconsistency, ambiguity or error contained herein, provided
that
such amendment does not materially and adversely affect the Participants,
(ii)
to reflect any Transfer or forfeiture of Interests pursuant to Sections
4.03
and
4.04
,
(iii) to amend Exhibit B
from
time to time to amend the Area of Interest.
(c) Upon
publication of final regulations in the Federal Register (or other official
pronouncement), CWEI shall have the authority, without any requirement for
consent by any Participant, to amend this Agreement to the extent CWEI
determines, in its sole discretion, is necessary (a) to provide for the making
and filing of any available election to obtain the benefits of a safe harbor
corresponding to that described under proposed U.S. Treasury Regulations
section
1.83-3(1) (or any similar provision) under which the fair market value of
an
interest that is transferred in connection with the performance of services
is
treated as being equal to the liquidation value of that interest, and (b)
to
reflect the agreement of, and the requirement that, the Tax Partnership and
all
of the Parties comply with all of the requirements set forth in such regulations
and Notice 2005-43 (and any other guidance to a substantially similar effect
provided by the IRS with respect to such election) with respect to all interests
transferred in connection with the performance of services while the election
remains effective.
8.06 Binding
Effect.
Subject
to the restrictions on Transfers set forth in this Agreement, this Agreement
is
binding on and inures to the benefit of the Parties and their respective
successors and assigns.
8.07 Governing
Law; Severability.
THIS
AGREEMENT IS GOVERNED BY AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAW
OF
THE STATE OF TEXAS, EXCLUDING ANY CONFLICT OF LAWS RULE OR PRINCIPLE THAT
MIGHT
REFER THE GOVERNANCE OR THE CONSTRUCTION OF THIS AGREEMENT TO THE LAW OF
ANOTHER
JURISDICTION. If any provision of this Agreement or its application to any
Person or circumstance is held invalid or unenforceable to any extent, the
remainder of this Agreement and the application of that provision to other
Persons or circumstances shall not be affected and that provision shall be
enforced to the fullest extent permitted by law.
8.08 Further
Assurances.
In
connection with this Agreement and the transactions contemplated by it, each
Party shall execute and deliver any additional documents and instruments
and
perform any additional acts that may be necessary or appropriate to effectuate
and perform the provisions of this Agreement and those
transactions.
8.09 Waiver
of Certain Rights.
Except
for CWEI, each Party irrevocably waives any right it may have to maintain
any
action for partition of the property of the Tax Partnership.
8.10 Insurance.
CWEI
may purchase and maintain insurance or enter into other arrangements on behalf
of a Participant against any liability asserted against the Participant and
incurred by the Participant in that capacity or arising out of this Agreement.
In the absence of actual fraud, the judgment of CWEI as to the terms and
conditions of the insurance or other arrangement and the identity of the
insurer
or other Person participating in an arrangement shall be conclusive, and
the
insurance or other arrangement shall not be voidable and shall not subject
CWEI
approving the insurance or other arrangement to liability, on any ground,
regardless of whether CWEI will be a beneficiary.
8.11 Indemnification.
(a) CWEI
agrees to indemnify and hold harmless the Participants (each, an “Indemnified
Person”)
to the
fullest extent permitted by law, from and against all losses, costs,
liabilities, damages, and expenses (including, without limitation, costs
of suit
and attorneys’ fees) paid or incurred in connection with or resulting from any
and all claims, actions or demands against such Indemnified Person that arise
out of or in any way relate to or are incidental to the Tax Partnership,
the
Designated Property or the business or affairs of the Tax Partnership that
occurs prior to the termination of this Agreement; provided,
however,
that
this indemnity shall not extend to (i) any bad faith, willful misconduct,
or
gross negligence of such Indemnified Person, or (ii) the failure of such
Indemnified Person to perform any of its obligations under this Agreement,
including without limitation obligations set forth in Sections 5.01,
5.04,
and
5.06.
THE
PARTIES INTEND THAT THE INDEMNIFIED PERSONS BE INDEMNIFIED PURSUANT TO THIS
AGREEMENT FROM LIABILITY FOR THEIR OWN SOLE, PARTIAL OR CONCURRENT NEGLIGENCE.
(b) The
indemnification rights contained in this Section
8.11 shall
be
cumulative of and in addition to any and all other rights, remedies and
recourses to which any Indemnified Person or their respective heirs, personal
representatives, successors and assigns shall be entitled, whether pursuant
to
some other provisions of this Agreement, at law or in equity.
(c) CWEI
shall advance to any Indemnified Person all reasonable fees, costs and expenses
(including attorneys’ fees and related costs), of defending any claim, action or
demand that arises out of or in any way relates to or is incidental to the
Tax
Partnership, the Designated Property, business or affairs of the Tax Partnership
that occurs during any period in which such Indemnified Person is an employee
of
CWEI; provided,
that
such Indemnified Person agrees in writing to repay to the Tax Partnership
all
such advances in the event that it is finally determined that such Indemnified
Person is not entitled to indemnification hereunder with respect to such
claim,
action or demand.
8.12 CWEI
Counsel.
CWEI
has selected ▇▇▇▇▇▇ & ▇▇▇▇▇▇ L.L.P. (“CWEI
Counsel”)
as
legal counsel to it with respect to this Agreement. Each Participant
acknowledges that CWEI Counsel does not represent such Participant, and that
CWEI Counsel shall owe no duties directly to such Participant. Each Participant
further acknowledges that, whether or not CWEI Counsel has in the past
represented or is currently representing such Participant with respect to
other
matters, CWEI Counsel has not advised or represented the interests of any
Participant in the negotiation, preparation, execution, delivery and performance
of this Agreement.
8.13 Power
of Attorney.
By the
execution of this Agreement, each Participant does irrevocably constitute
and
appoint CWEI, with full power of substitution, as true and lawful
attorney-in-fact and agent with full power and authority to act in such
Participant's name, place and stead and to execute all documents which such
attorney-in-fact deems necessary or reasonably appropriate in furtherance
of
this Agreement.
8.14 Counterparts.
This
Agreement may be executed in any number of counterparts (including by facsimile
transmission) with the same effect as if all signing parties had signed the
same
document. All counterparts shall be construed together and constitute the
same
instrument.
8.15 No
Employment Contract.
Nothing
contained in this Agreement shall be construed as conferring upon any
Participant who is or may become an employee of CWEI or any Affiliate of
CWEI
any right to continue in the employment of CWEI or any Affiliate of CWEI
for any
period of time or interfere with or restrict in any way the rights of CWEI
or
any Affiliate of CWEI or such Participant to terminate the employment of
such
Participant at any time for any reason (or without any reason) whatsoever,
with
or without cause. For the avoidance of doubt, any termination of a Participant’s
employment with CWEI shall not affect any of such Participant’s rights pursuant
to this Agreement.
8.16 Designation
of ▇▇▇▇▇.
Each of
the Parties hereby agrees that all ▇▇▇▇▇ that are located within the Area
of
Interest that are commenced after the date hereof and prior to the Cut-Off
Date
shall be subject to this Agreement. For purposes of this Agreement, the
“Cut-Off
Date”
shall
be the date that CWEI identifies in a written notice delivered to each
Participant indicating that no ▇▇▇▇▇ within the Area of Interest commenced
after
the Cut-Off Date will be made subject to this Agreement. Additionally, each
Participant acknowledges that certain circumstances may make it appropriate
for
CWEI to deliver such a written notice to the Participants and to enter into
agreements similar to this Agreement with other parties (which may or may
not
include certain of the Participants) that relate to ▇▇▇▇▇ that are located
in
the Area of Interest but are not subject to this Agreement.
8.17 Acknowledgement
of 409A Issues.
Notwithstanding anything herein to the contrary, each Participant (i)
acknowledges that this Agreement and the underlying transactions, as currently
structured, may be considered to be a deferral of compensation under section
409A of the Internal Revenue Code (“section 409A”) and (ii) agrees that CWEI
may, in its own discretion and upon its own initiative and without any action
by
or consent of the Participants, if existing or future guidance from the Internal
Revenue Service or other interpretative authority indicates that such action
is
necessary or advisable, modify this Agreement and/or restructure the
transactions contemplated by this Agreement in any manner CWEI determines
is
appropriate under the circumstances in an effort to avoid any adverse tax
consequences for the Participants and/or CWEI that may otherwise be imposed
by
section 409A and the Treasury Regulations thereunder, and the Participants
hereby consent to any such action that may be taken by CWEI and expressly
ratify
this Agreement as it may be so amended.
[Signature
Pages Follow]
IN
WITNESS WHEREOF,
the
parties have executed this Participation Agreement as of the Effective
Date.
CWEI:
▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇ ENERGY, INC.
By:
/s/
L.
▇▇▇▇ ▇▇▇▇▇▇
L.
▇▇▇▇
▇▇▇▇▇▇
Executive
Vice President
SIGNATURE
PAGE FOR PARTICIPANT
The
undersigned does hereby agree to all the terms and provisions of the
Participation Agreement, including, without limitation, the power of attorney
set forth in Section
8.13
thereof.
Date:_____________________ ____________________________________
Name
of
Participant
Signature________________________
Address: ________________________
________________________
Fax: ________________________
Taxpayer
I.D. No.________________________
Exhibit
A
Participants
|
Participant
|
Interests
(%)
|
|
▇▇▇▇
▇▇▇▇▇▇
|
10.00
|
|
▇▇▇
▇▇▇▇▇
|
15.00
|
|
▇▇▇▇
▇▇▇▇▇▇
|
15.00
|
|
▇▇▇▇
▇▇▇▇▇▇▇
|
12.50
|
|
▇▇▇▇
▇▇▇▇▇▇
|
6.00
|
|
▇▇▇
▇▇▇▇▇
|
5.00
|
|
▇▇▇▇
▇▇▇▇▇▇
|
2.00
|
|
▇▇▇▇▇
▇▇▇▇▇▇
|
4.00
|
|
▇▇▇▇▇▇
▇▇▇▇▇
|
2.00
|
|
▇▇▇
▇▇▇▇▇▇
|
5.75
|
|
▇▇▇▇▇
▇▇▇▇▇
|
5.75
|
|
▇▇▇▇
▇▇▇▇▇▇
|
3.00
|
|
▇▇▇▇▇
▇▇▇▇▇▇
|
0.50
|
|
▇▇▇▇▇▇▇
▇▇▇▇▇▇
|
1.00
|
|
▇▇▇▇
▇▇▇▇▇▇▇
|
5.00
|
|
▇▇▇▇
▇▇▇▇▇▇▇
|
2.75
|
|
▇▇▇▇▇▇
▇▇▇▇▇▇
|
1.00
|
|
▇▇▇
▇▇▇▇▇
|
0.50
|
|
▇▇▇▇▇
▇▇▇▇▇▇
|
1.00
|
|
▇▇▇▇▇
▇▇▇▇▇▇▇▇
|
0.50
|
|
▇▇▇▇▇▇
▇▇▇▇▇▇
|
0.75
|
|
▇▇▇▇▇▇
▇▇▇▇▇▇
|
0.75
|
|
▇▇▇
▇▇▇▇▇
|
0.25
|
|
Total
|
100.00
|
EXHIBIT
B
AREA
OF INTEREST
The
Area
of Interest shall be the prospects and the producing ▇▇▇▇▇ from the RMS
acquisition and Southwest Royalties lands described below, all located in
▇▇▇▇
County, Texas.
Leases: Lease
Description Bk/Pg
University
Lands Leases
Lease
No. 73491 N/2,
Section 32, Block 18 407/513
Lease No. 73492 S/2,
Section 32, Block
18
407/517
Lease
No. 82679
S/2,
Section 29, Block 17
457/304
Lease No. 82686
S/2,
Section 27, Block 18
457/332
Lease No. 75366 N/2,
Section 20, Block 18
417/277
Lease No. 67241 E/2
of
▇▇▇▇▇▇▇ ▇▇, ▇▇▇▇▇ ▇▇ ▇▇▇/▇▇▇
▇▇▇▇▇ ▇▇. ▇▇▇▇▇ W/2
of
▇▇▇▇▇▇▇ ▇▇, ▇▇▇▇▇ ▇▇ ▇▇▇/▇▇▇
▇▇▇▇▇▇▇▇▇▇
▇▇▇▇▇ ▇▇
W/2
▇▇▇▇▇▇▇ ▇▇, ▇▇▇▇▇ ▇▇, ▇▇▇
▇▇▇▇
▇▇,
▇▇
(Surface
Down to 20,522 Feet)
RMS/WARWINK
EXHIBIT
C
Fair
Market Value of Designated Property
Fair
market value of Designated Property is $472, 050 (5% of $9,441,000)
Allocations
of Profits and Losses and Other Tax Matters
ARTICLE
I
TAX
DEFINITIONS
Section
1.01 Definitions.
All
capitalized terms used herein shall have the meanings assigned to them in
the
Participation Agreement relating to RMS/WARWINK, dated December 5, 2006 (the
“Agreement”), or as follows:
“Adjusted
Capital Account”
means
the Capital Account maintained for each Party, (a) increased by any amounts
that
such Party is obligated to restore or is treated as obligated to restore
under
Regulation Sections 1.704-1(b)(2)(ii)(c), 1.704-2(g)(1) and 1.704-2(i)(5)),
and
(b) decreased by any amounts described in Regulation Section
1.704-1(b)(2)(ii)(d)(4), (5) and (6) with respect to such Party.
“Minimum
Gain”
has the
meaning assigned to that term in Regulation Section 1.704-2(d).
“Partnership
Nonrecourse Liability”
has the
meaning assigned to that term in Regulation Section 1.752-1(a)(2).
“Partner
Nonrecourse Debt”
has the
meaning assigned to that term in Regulation Section 1.704-2(b)(4).
“Partner
Nonrecourse Deductions”
has the
meaning assigned to that term in Regulation Section 1.704-2(i)(1).
“Simulated
Basis”
has the
meaning set forth in Section 5.01(b) of this Exhibit.
“Simulated
Depletion”
has
the
meaning set forth in Section 5.01(b) of this Exhibit.
“Simulated
Gain”
has the
meaning set forth in Section 5.01(b) of this Exhibit.
“Simulated
Loss”
has the
meaning set forth in Section 5.01(b) of this Exhibit.
ARTICLE
II.
REFLECTION
OF ACTIVITIES FOR FEDERAL AND STATE TAX PURPOSES
Section
2.01 Entity
Level Reflection of Activities.
For
federal and state tax purposes, but for no other purpose, all transactions
effected by the Parties with respect to the Designated Property pursuant
to the
Agreement shall be deemed to have been effected through the Tax Partnership,
rather than by the Parties individually, as set out in this Article
II.
Section
2.02 Receipts,
Profits, Income and Gains.
For
purposes of applying the provisions of this Exhibit
D,
all
receipts by any Party in respect of the Designated Property pursuant to the
Agreement shall be deemed first to have been received by the Tax Partnership
and
then to have been distributed to such Party by the Tax Partnership in the
manner
specified in the Agreement. All such items shall be taken into account in
computing the Tax Partnership’s gross income and gain or loss, as appropriate,
and shall be allocated among the Parties in accordance with Article III
hereof.
Section
2.03 Costs,
Expenses, Deductions and Losses.
For
purposes of applying the provisions of this Exhibit
D,
all
costs incurred or payments made by any Party in respect of the Designated
Property pursuant to the Agreement shall be deemed first to have been received
by the Tax Partnership as a contribution by the Party incurring the cost
or
making the payment pursuant to the terms of the Agreement and then to have
been
paid, incurred or distributed by the Tax Partnership to the payee or obligee
of
the cost or the recipient of the payment. All such items shall be taken into
account in computing the Tax Partnership’s basis, depreciation, depletion, gross
income, deductible expenses, and/or gain or loss, as appropriate, and shall
be
allocated among the Parties in accordance with Article III hereof.
Section
2.04 Contributions
and Distributions.
For
purposes of applying the provisions of this Exhibit
D,
contributions to the Tax Partnership (“Capital Contributions”) shall include all
Acquisition Costs, Well Costs, and any other costs incurred or payments made
in
respect of the Designated Property pursuant to the Agreement. Similarly,
for
purposes of applying the provisions of this Exhibit
D,
distributions from the Tax Partnership shall include, in the case of any
Party,
all receipts by such Party in respect of the Designated Property pursuant
to the
Agreement.
Section
2.05 Debt
Financing. For
purposes of applying the provisions of this Exhibit
D,
unless
the Parties agree otherwise and this Exhibit
D
is
amended to reflect such agreement, (a) all debt financing incurred by a Party
shall be for the sole account of that Party and shall not be considered debt
financing of the Tax Partnership, and (b) no Tax Partnership asset shall
be
acquired by assumption of, or taking subject to, any debt
financing.
Section
2.06 Record
Title. For
purposes of applying the provisions of this Exhibit
D,
(a) all
legal title to Designated Property held by any Party shall be deemed to be
held
by such Party strictly as nominee for the Tax Partnership, (b) all assignments
made among the Parties with respect to Designated Property prior to termination
of the Tax Partnership shall be disregarded, and (c) upon termination of
the Tax
Partnership each Party holding record title to any Designated Property shall
make such assignments as are required to comply with the provisions of the
Agreement.
ARTICLE
III
ALLOCATIONS
OF PROFIT AND LOSS
Section
3.01 Allocations
for Capital Account and Tax Purposes.
Subject
to Section
7.02
of the
Agreement and except as otherwise provided herein, for purposes of any
applicable federal, state or local income tax law, rule or regulation items
of
income, gain, deduction, loss, credit and amount realized shall be allocated
to
the Parties as follows:
(a) Income
from the sale of oil or gas production and any credits allowed by
Section 29 of the Code relating thereto shall be allocated in the same
manner as proceeds therefrom are allocated and credited pursuant to Section 5.02
of the
Agreement.
(b) Cost
and
percentage depletion deductions and the gain or loss on the sale or other
disposition of property the production from which is subject to depletion
(herein sometimes called “Depletable
Property”)
as
computed for tax purposes shall be taken into account separately by the Parties
rather than the Tax Partnership and, except to the extent and in the manner
provided in Section
5.01(b)
of this
Exhibit
D,
shall
not affect any Party’s Capital Account. For purposes of Section 613A(c)(7)(D)
of the
Code, the Tax Partnership’s adjusted basis in each Depletable Property shall be
allocated to the Parties in proportion to each Party’s respective share of the
costs and expenses which entered into the Tax Partnership’s adjusted basis for
each Depletable Property, and the amount realized on the sale or other
disposition of each Depletable Property shall be allocated to the Parties
in
proportion to each Party’s respective share of the proceeds from the sale or
other disposition of such property provided for in Section
5.02
of the
Agreement. For purposes of allocating amounts realized upon any such sale
or
disposition which are deemed to be received for federal or state income tax
purposes and are attributable to Tax Partnership indebtedness or indebtedness
to
which the Depletable Property is subject at the time of such sale or
disposition, such amounts shall be allocated in the same manner as Partnership
proceeds used for the repayment of such indebtedness would have been allocated
under Section
5.02 of
the
Agreement.
(c) Items
of
deduction, loss and credit not specifically provided for above (other than
loss
from the sale or other disposition of Designated Property), including
depreciation, cost recovery and amortization deductions, shall be allocated
to
the Parties in the same manner that the costs and expenses of the Tax
Partnership that gave rise to such items of deduction, loss and credit were
allocated pursuant to Section 5.01 of
the
Agreement.
(d) Gain
from
the sale or other disposition of Designated Property that is not specifically
provided for above shall be allocated to the Parties in a manner which reflects
each Party’s allocable share of the revenue from the sale of the Designated
Property provided for in Section 5.02 of
the
Agreement, and loss from the sale or other disposition of Designated Property
that is not specifically provided for above shall be allocated to the Parties
in
a manner which reflects each Party’s allocable share of the costs and expenses
of the Designated Property provided for in Section 5.01 of
the
Agreement.
(e) All
recapture of income tax deductions resulting from the sale or other disposition
of Designated Property shall be allocated to the Party to whom the deduction
that gave rise to such recapture was allocated hereunder to the extent that
such
Party is allocated any gain from the sale or other disposition of such
property.
(f) Any
other
items of Tax Partnership income or gain not specifically provided for above
shall be allocated in the same manner as the revenue that resulted in such
income or gain is allocated and credited pursuant to Section
5.02 of
the
Agreement.
(g) Notwithstanding
any of the foregoing provisions of this Section 3.01
to the
contrary:
(i) If
during
any fiscal year of the Tax Partnership there is a net increase in Minimum
Gain
attributable to a Partner Nonrecourse Debt that gives rise to Partner
Nonrecourse Deductions, each Party bearing the economic risk of loss for
such
Partner Nonrecourse Debt shall be allocated items of Partnership deductions
and
losses for such year (consisting first of cost recovery or depreciation
deductions with respect to property that is subject to such Partner Nonrecourse
Debt and then, if necessary, a pro rata portion of the Tax Partnership’s other
items of deductions and losses, with any remainder being treated as an increase
in Minimum Gain attributable to Partner Nonrecourse Debt in the subsequent
year)
equal to such Party’s share of Partner Nonrecourse Deductions, as determined in
accordance with applicable Regulations.
(ii) If
for
any fiscal year of the Tax Partnership there is a net decrease in Minimum
Gain
attributable to Partnership Nonrecourse Liabilities, each Party shall be
allocated items of Tax Partnership income and gain for such year (consisting
first of gain recognized, including Simulated Gain, from the disposition
of
Designated Property subject to one or more Partnership Nonrecourse Liabilities
and then, if necessary, a pro rata portion of the Tax Partnership’s other items
of income and gain, and if necessary, for subsequent years) equal to such
Party’s share of such net decrease (except to the extent such Party’s share of
such net decrease is caused by a change in debt structure with such Party
commencing to bear the economic risk of loss as to all or part of any
Partnership Nonrecourse Liability or by such Party contributing capital to
the
Tax Partnership that the Tax Partnership uses to repay a Partnership Nonrecourse
Liability), as determined in accordance with applicable
Regulations.
(iii) If
for
any fiscal year of the Tax Partnership there is a net decrease in Minimum
Gain
attributable to a Partner Nonrecourse Debt, each Party shall be allocated
items
of Tax Partnership income and gain for such year (consisting first of gain
recognized, including Simulated Gain, from the disposition of Designated
Property subject to Partner Nonrecourse Debt, and then, if necessary, a pro
rata
portion of the Tax Partnership’s other items of income and gain, and if
necessary, for subsequent years) equal to such Party’s share of such net
decrease (except to the extent such Party’s share of such net decrease is caused
by a change in debt structure or by the Tax Partnership’s use of capital
contributed by such Party to repay Partner Nonrecourse Debt) as determined
in
accordance with applicable Regulations.
(h) CWEI
shall use all reasonable efforts to prevent any allocation or distribution
from
causing a negative balance in a Party’s Adjusted Capital Account. Consistent
therewith, and notwithstanding any of the foregoing provisions of this
Section 3.01
of this
Exhibit
D
to the
contrary, if for any fiscal year of the Tax Partnership the allocation of
any
loss or deduction (net of any income or gain) to any Party would cause or
increase a negative balance in such Party’s Adjusted Capital Account as of the
end of such fiscal year (the “Deficit
Party”)
after
taking into account the provisions of Section 3.01(g)
of this
Exhibit
D,
only
the amount of such loss or deduction that reduces the balance to zero shall
be
allocated to such Deficit Party and the remaining loss or deduction shall
be
allocated to the Parties whose Adjusted Capital Accounts have a positive
balance
remaining at such time (each, a “Positive
Party”).
After
any such allocation, any Tax Partnership income or gain (including Simulated
Gain) that would otherwise be allocated to the Deficit Party shall be allocated
instead to the Positive Parties up to an amount equal to the Tax Partnership
loss or deduction allocated to each Positive Party under the preceding sentence;
provided,
however,
that no
allocation of income or gain realized shall be made under this sentence if
the
effect of such allocation would be to cause the Adjusted Capital Account
of the
Deficit Party to be less than zero. If, after taking into account the allocation
in the first sentence of this Section 3.01(h),
the
Adjusted Capital Account balance of the Deficit Party remains less than zero
at
the end of a fiscal year, a pro rata portion of each item of Tax Partnership
income or gain (including Simulated Gain) otherwise allocable to the Positive
Parties for such fiscal year (or if there is no such income or gain allocable
to
the Positive Parties for such fiscal year, all such income or gain (including
Simulated Gain) so allocable in the succeeding fiscal year or years) shall
be
allocated to the Deficit Party in an amount necessary to cause its Adjusted
Capital Account balance to equal zero; provided,
that no
allocation under this sentence shall have the effect of causing the Positive
Party’s Adjusted Capital Account to be less than zero. After any such
allocation, any Tax Partnership gain (including Simulated Gain) resulting
from
the sale or other disposition of Designated Property that would otherwise
be
allocated to the Deficit Party for any fiscal year under this Section 3.01
shall be
allocated instead to the Positive Parties until the amount of gain so allocated
equals the amount of gain (including Simulated Gain) previously allocated
to
such Deficit Party under the preceding sentence of this Section 3.01(h);
provided,
however,
that no
allocation of gain (including Simulated Gain) shall be made under this sentence
if the effect of such allocation would be to cause the Adjusted Capital Account
of a Deficit Party to be less than zero.
ARTICLE
IV
OTHER
TAX MATTERS
Section
4.01 Tax
Elections.
(a) For
tax
purposes, the Tax Partnership shall elect to use the calendar as its taxable
year, and to report income and loss under the accrual method of
accounting.
(b) In
connection with any Transfer or other assignment of an interest in the Tax
Partnership permitted by the terms and provisions of this Agreement, CWEI
shall,
at the written request of the transferor, transferee or other successor,
cause
the Tax Partnership to make an election to adjust the basis of the Tax
Partnership’s property in the manner provided in sections 734(b) and 743(b) of
the Code (or any like statute or regulation then in effect), and such
transferor, transferee or other successor shall pay all costs incurred by
the
Tax Partnership in connection therewith, including, without limitation,
reasonable attorneys’ and accountants’ fees.
(c) Unless
approved by the Participants, the Tax Partnership shall not file any election
pursuant to sections 761 or 7701 of the Code, section 301.7701-3 of the
Regulations or otherwise, the effect of which would cause the Tax Partnership
not to be treated as a partnership for Federal income tax purposes.
(d) Except
as
otherwise specifically provided herein, CWEI shall have the sole and absolute
discretion to make any other available election under the Code on behalf
of the
Tax Partnership without the prior approval by the Participants.
Section
4.02 Tax
Matters Partner.
CWEI is
hereby designated the “tax matters partner” of the Tax Partnership pursuant to
Section 6231(a)(7) of the Code.
ARTICLE
V
CAPITAL
ACCOUNT MAINTENANCE
Section
5.01 Maintenance
of Capital Accounts.
An
individual Capital Account (a “Capital
Account”)
shall
be maintained by the Tax Partnership for each Party as provided
below:
(a) The
Capital Account of each Party shall, except as otherwise provided herein,
be (A)
credited by such Party’s Capital Contributions when made (net of liabilities
secured by contributed property that the Tax Partnership is considered to
assume
or take subject to under Section 752 of the Code), (B) credited with the
amount
of any item of taxable income or gain and the amount of any item of income
or
gain exempt from tax allocated to such Party, (C) credited with the Party’s
share of Simulated Gain as provided in Section
5.01(b)
of this
Exhibit
D,
(D)
debited by the amount of any item of tax deduction or loss allocated to such
Party, (E) debited with the Party’s share of Simulated Loss and Simulated
Depletion as provided in Section 5.01(b)
of this
Exhibit
D,
(F)
debited by such Party’s allocable share of expenditures of the Tax Partnership
not deductible in computing the Tax Partnership’s taxable income and not
properly chargeable as capital expenditures, including any non-deductible
book
amortizations of capitalized costs, and (G) debited by the amount of cash
or the
fair market value of any property distributed to such Party (net of liabilities
secured by such distributed property that such Party is considered to assume
or
take subject to under Section 752 of the Code). Immediately prior to any
distribution of assets by the Tax Partnership that is not pursuant to a
liquidation of the Tax Partnership or all or any portion of a Party’s interest
therein, the Parties’ Capital Accounts shall be adjusted by (X) assuming that
the distributed assets were sold by the Tax Partnership for cash at their
respective fair market values as of the date of distribution by the Tax
Partnership and (Y) crediting or debiting each Party’s Capital Account with its
respective share of the hypothetical gains or losses, including Simulated
Gains
and Simulated Losses, resulting from such assumed sales in the same manner
as
each such Capital Account would be debited or credited for gains or losses
on
actual sales of such assets.
(b) The
allocation of basis prescribed by Section 613A(c)(7)(D) of the Code and provided
for in Section
3.01(b)
of this
Exhibit
D
and each
Party’s separately computed depletion deductions shall not reduce such Party’s
Capital Account, but such Party’s Capital Account shall be decreased by an
amount equal to the product of the depletion deductions that would otherwise
be
allocable to the Tax Partnership in the absence of Section 613A(c)(7)(D)
of the
Code (computed without regard to any limitations which theoretically could
apply
to any Party) times such Party’s percentage share of the adjusted basis of the
property (determined under Section
3.01(b) of this Exhibit D)
with
respect to which such depletion is claimed (“Simulated
Depletion”).
The
Tax Partnership’s basis in any Depletable Property as adjusted from time to time
for the Simulated Depletion allocable to all Parties (and where the context
requires, each Party’s allocable share thereof, which share shall be determined
in the same manner as the allocation of basis prescribed in Section
3.01(b) of this Exhibit D)
is
herein called “Simulated
Basis.”
No
Party’s Capital Account shall be decreased, however, by Simulated Depletion
deductions attributable to any Depletable Property to the extent such deductions
exceed such Party’s allocable share of the Tax Partnership’s remaining Simulated
Basis in such property. The Tax Partnership shall compute simulated gain
(“Simulated
Gain”)
or
simulated loss (“Simulated
Loss”)
attributable to the sale or other disposition of a Depletable Property based
on
the difference between the amount realized from such sale or other disposition
and the Simulated Basis of such property, as theretofore adjusted. Any Simulated
Gain shall be allocated to the Parties and shall increase their respective
Capital Accounts in the same manner as the amount realized from such sale
or
other disposition in excess of Simulated Basis shall have been allocated
pursuant to Section
3.01(b) of this Exhibit D.
Any
Simulated Loss shall be allocated to the Parties and shall reduce their
respective Capital Accounts in the same percentages as the costs of the property
sold were allocated up to an amount equal to each Party’s share of the Tax
Partnership’s Simulated Basis in such property at the time of such
sale.
(c) Any
adjustments of basis of Designated Property provided for under Sections 734
and
743 of the Internal Revenue Code and comparable provisions of state law
(resulting from an election under Section 754 of the Code or comparable
provisions of state law) and any election by an individual Party under Section
59(e)(4) of the Code to amortize such Party’s share of intangible drilling and
development costs shall not affect the Capital Accounts of the Parties (unless
otherwise required by applicable Treasury Regulations), and the Parties’ Capital
Accounts shall be debited or credited pursuant to the terms of this Section
5.01
as if no
such election had been made.
(d) Capital
Accounts shall be adjusted, in a manner consistent with this Section
5.01,
to
reflect any adjustments in items of Tax Partnership income, gain, loss or
deduction that result from amended returns filed by the Tax Partnership or
pursuant to an agreement by the Tax Partnership with the Internal Revenue
Service or a final court decision.
(e) In
the
case of property carried on the books of the Tax Partnership at an amount
which
differs from its adjusted basis, the Parties’ Capital Accounts shall be debited
or credited for items of depreciation, cost recovery, Simulated Depletion,
amortization and gain or loss (including Simulated Gain or Simulated Loss)
with
respect to such property computed in the same manner as such items would
be
computed if the adjusted tax basis of such property were equal to such book
value, in lieu of the capital account adjustments provided above for such
items,
all in accordance with Regulation Section 1.704-1(b)(2)(iv)(g).
(f) It
is the
intention of the Parties that the Capital Accounts of each Party be kept
in the
manner required under Regulation Section 1.704-1(b)(2)(iv). To the extent
any
additional adjustment to the Capital Accounts is required by such regulations,
CWEI is hereby authorized to make such adjustment after notice to the
Party.
[End
of Exhibit D]