EXHIBIT 1
FIRST AMENDMENT TO THE THIRD AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
HALLWOOD ENERGY PARTNERS, L.P.
This First Amendment (this "Amendment") to the Third Amended and Restated
Agreement of Limited Partnership of Hallwood Energy Partners, L.P. (the
"Partnership"), is executed by Hallwood Energy Corporation, a Texas corporation,
as General Partner of the Partnership (the "General Partner"), and by Hallwood
Energy Corporation, on behalf of the Limited Partners on the books and records
of the Partnership, pursuant to the powers of attorney executed by such Limited
Partners.
W I T N E S S E T H:
WHEREAS, the board of directors of the General Partner deems it to be in
the best interest of the Partnership to amend the Third Amended and Restated
Agreement of Limited Partnership (the "Partnership Agreement") to allow for the
creation and issuance of Class C Units (the "Class C Units") of the Partnership;
and
WHEREAS, a vote of the Limited Partners is not required to approve the
Amendment and the issuance of the Class C Units.
NOW, THEREFORE, in consideration of the foregoing the Partnership
Agreement is amended as follows:
1. Definitions. Capitalized terms used in this Amendment that are
defined in the Partnership Agreement shall have the same meaning as assigned
therein when used in this Amendment, unless otherwise provided herein.
2. Amendments to the Partnership Agreement.
A. Article I is hereby amended by adding the following
definitions, to be deemed placed in the appropriate alphabetical order:
(i) "Adjusted Capital Account: A Partner's Capital Account
balance (as determined after giving effect to all adjustments attributable to
allocations of items of profit and loss realized by the Partnership, and all
adjustments attributable to contributions and distributions of money and
property effected, on or before the effective date of such determination),
modified as follows:
(a) Decreased by the items (if any) of the
Partnership's loss that reasonably are expected to be allocated to such Partner
pursuant to section 704(e)(2) or 706(d) of the Code or Treasury Regulation
section 1.751-1(b)(2)(ii) (as determined under Treasury Regulation section
1.704-1(b)(2)(ii)(d));
(b) Decreased by adjustments that reasonably are
expected to be made to such Partner's Capital Account under Treasury Regulation
section 1.704-1(b)(2)(iv)(k);
(c) Increased by the amount (if any) of such Partner's
share of nonrecourse minimum gain determined in accordance with the provisions
of Treasury Regulation section 1.704-2(g)(1);
(d) Increased by the amount (if any) of such Partner's
share of partner nonrecourse debt minimum gain determined in accordance with the
provisions of Treasury Regulation section 1.704-2(i)(5); and
(e) Increased by the amount (if any) that such Partner
is obligated to contribute to the Partnership pursuant to any provision of this
Agreement or is treated as being obligated to contribute subsequently to the
capital of the Partnership as determined under Treasury Regulation section
1.704-1(b)(2)(ii)(c)."
(ii) "Class C Units: Defined in Article XX."
(iii) "Class C Partners: The Record Holders of the Class C
Units."
(iv) "Class A Units: The class of Partnership Units that
were the only class of Partnership Units to be traded on the American Stock
Exchange immediately prior to the date of this Amendment."
(v) "Excess Capital Account: The excess of a unit's
positive Capital Account balance over the Unpaid Preference Amount attributable
to such unit. The Excess Capital Account of each Class A Unit and Class B
Subordinated Unit shall be zero."
(vi) "Terminating Capital Transaction: Any sale or other
disposition of all or substantially all of the then remaining assets of the
Partnership which is entered into in connection with the dissolution,
termination and winding up of the Partnership or which will result in the
dissolution of the Partnership."
(vii) "Unpaid Preference Amount: The aggregate cumulative
amount required to be distributed with respect to the Class C Units for the
current and all prior years less any distributions previously made with respect
to the Class C Units for the current and all prior years pursuant to Section
20.3(a).
B. Article I is hereby amended by deleting the definition of the
terms "Riley Ridge Partner," "Riley Ridge Unit" and "Unit."
C. The Partnership Agreement is hereby amended by deleting the
term "Unit" (but not "Partnership Unit," "Class B Subordinated Unit" or "Class B
Subordinated Units") and replacing it with the term "Class A Unit" wherever it
appears.
D. The Partnership Agreement is hereby amended by deleting
references to the terms "Riley Ridge Partner" and "Riley Ridge Unit" wherever
they appear.
E. Section 4.7 is hereby amended by deleting clause (d) thereof
in its entirety and substituting the following in lieu thereof:
"(d) A Capital Account shall be separately maintained for each unit
and no Capital Account shall be attributable to any Class C Unit immediately
after its issuance. Generally, a transferee of a Partnership Interest shall
succeed to the Capital Account attributable to the transferred interest and
there shall be no adjustment to the Capital Accounts as a result of such
transfer. If a transfer causes a termination of the Partnership under Section
708(b)(1)(B) of the Code, the Partnership Assets shall be deemed to have been
distributed in liquidation of the Partnership to the Partners and Assignees
(including the transferee of the Partnership Interest) pursuant to Sections 15.3
and 15.4 and recontributed by such Partners and Assignees in reconstitution of
the Partnership. The Capital Accounts of such reconstituted Partnership shall
be maintained in accordance with the principles of this Section 4.7."
F. Section 5.1 is hereby amended by deleting it in its entirety
and substituting the following in lieu thereof:
"5.1 Income and Loss.
(a) For purposes of maintaining the Capital Accounts and in
determining the rights of the Partners and Assignees among themselves and except
as provided in Section 5.1(b) with respect to items of income, gain loss and
deduction attributable to Terminating Capital Transactions and the provisions of
Sections 5.1(c) through (i), 1% of each item of income, gain, loss and deduction
(computed in accordance with Section 4.7(b) but subject to adjustment for any
allocations required by Sections 5.1(c) through (i)) shall be allocated to the
General Partner with the remaining items of income, gain, loss and deduction
allocated among the Limited Partners and Assignees as follows:
(i) Each remaining item of income or gain shall be allocated
among the Limited Partners and Assignees as follows and in the following
order of priority:
(A) First, to the Class C Units pro rata in accordance
with their Percentage Interests until the aggregate amount of income and
gain allocated pursuant to this Section 5.1(a)(i)(A) is equal to the
aggregate amount of loss or deduction allocated pursuant to Section
5.1(a)(ii)(B);
(B) Second, to the Class C Units pro rata in
accordance with their Percentage Interests until the aggregate amount of
income and gain allocated during the current year and all prior years
pursuant to this Section 5.1(a)(i)(B) (including any gross income
allocations under Section 5.1(h)) is equal to the aggregate amount
required to be distributed with respect to the Class C Units during the
current year and all prior years pursuant to Section 20.3(a) (whether or
not actually distributed); and
(C) Thereafter, to the Class A Units and Class B
Subordinated Units pro rata in accordance with their Percentage Interests.
(ii) Each remaining item of loss or deduction shall be
allocated among the Limited Partners and Assignees as follows and in the
following order of priority:
(A) First, to the Class A Units and Class B
Subordinated Units pro rata in accordance with their Percentage Interests to the
least extent necessary so as to reduce the positive Adjusted Capital Account
balance of each such unit to zero;
(B) Second, to the Class C Units pro rata in
accordance with their Percentage Interests to the least extent necessary so as
to reduce the positive Adjusted Capital Account balance of each such unit to
zero; and
(C) Thereafter, to the Class A Units and Class B
Subordinated Units pro rata in accordance with their Percentage Interests.
(b) Notwithstanding anything in the foregoing to the contrary, 1%
of each item of income, gain, loss or deduction attributable to a Terminating
Capital Transaction shall be allocated to the General Partner with the remaining
items of income, gain, loss or deduction attributable to such Terminating
Capital Transaction allocated among the Limited Partners and Assignees (as
determined after giving effect to all adjustments attributable to allocations of
items of income, gain and loss realized by the Partnership during the fiscal
year in question pursuant to the provisions Section 5.1(a) and any adjustments
attributable to contributions and distributions of money and property effected
prior to such Terminating Capital Transaction pursuant to this Agreement) as
follows:
(i) Each remaining item of income or gain attributable to a
Terminating Capital Transaction shall be allocated among the Limited Partners
and Assignees as follows and in the following order of priority:
(A) First, to the Class C Units pro rata in accordance
with their Percentage Interests until the positive Capital Account balance of
each Class C Unit is equal to the Unpaid Preference Amount attributable to that
unit;
(B) Second, to the least extent necessary to cause the
Excess Capital Account of the units to be in the same proportion to one another
as their Percentage Interests; and
(C) Thereafter, among the Class A Units, Class B
Subordinated Units and Class C Units pro rata in accordance with their
Percentage Interests.
(ii) Each remaining item of loss or deduction attributable to
a Terminating Capital Transaction shall be allocated among the Limited Partners
and Assignees as follows and in the following order of priority:
(A) First, to the least extent necessary to cause the
Excess Capital Account of the units to be in the same proportion to one another
as their Percentage Interests;
(B) Second, to the units pro rata in accordance with
their Percentage Interests to the least extent necessary to reduce the Excess
Capital Account of each unit to zero;
(C) Third, to the Class C Units pro rata in accordance
with their Percentage Interests to the least extent necessary to reduce the
positive Capital Account balance of each such unit to zero; and
(D) Thereafter, to the Class A Units and Class B
Subordinated Units pro rata in accordance with their Percentage Interests.
(c) The General Partner may, for any fiscal year of the
Partnership, make such other or additional allocations as it deems appropriate
to (i) cause the allocations of Partnership book income, gains, losses and
deductions to comply with the requirements of section 704 of the Code or (ii)
achieve and maintain the uniformity of the intrinsic tax characteristics of all
units, so long as such allocations do not adversely affect in any material way
the interests of the holders of the units in current or future distributions.
The General Partner may amend this Agreement to the extent necessary to
accomplish the purposes of this Section 5.1.
(d) Notwithstanding anything in the provisions of Section 5.1 to
the contrary, to the extent that a Partner's Adjusted Capital Account has a
deficit balance or would have a deficit balance as a result of any such
allocation while any other Partner has a positive balance in its Adjusted
Capital Account (as determined after giving effect to all adjustments
attributable to allocations of items of Partnership income, gain, expense and
loss made pursuant to the preceding provisions of this Section 5.1 for such
year), such item of expense or loss shall be allocated among the Partners whose
Adjusted Capital Account balances are positive (pro rata in accordance with such
positive balances) to the extent necessary first to reduce the balances of such
other Partners' Adjusted Capital Accounts to zero, it being the intention of the
Partners that no Partner's Adjusted Capital Account balance shall fall below
zero while any other Partner's Adjusted Capital Account has a positive balance.
In the event that all of the Partner's Adjusted Capital Account balances are
reduced to zero, all further expenses and losses shall be allocated solely to
the General Partner. Notwithstanding anything in this Agreement to the
contrary, each Partner who has been allocated an item of expense or loss
pursuant to this Section 5.1(d) shall be specially allocated items of
Partnership income and gain in an amount equal to such items of expense or loss
as quickly as possible.
(e) Pursuant to section 1.704-1(b)(2)(ii)(d) of the Treasury
Regulations (relating to "qualified income offsets"), Partnership income and
gain shall be allocated, before any other allocation is made pursuant to the
provisions of Section 5.1(a) for such year, among the Partners with deficit
balances in their Adjusted Capital Accounts in the amounts and the manner
sufficient to eliminate such deficit balances as quickly as possible.
An allocation under this Section 5.1(e) shall be made only if and to the extent
that a Partner or Assignee would have an Adjusted Capital Account deficit after
all other allocations provided for in this Section 5.1 have been tentatively
made as if this Section 5.1(e) were not in the Agreement.
(f) All nonrecourse deductions as determined under the Treasury
Regulations shall be allocated among the Partners pro rata in accordance with
their respective Percentage Interests (excluding any Percentage Interest
attributable to the Class C Units).
(g) The allocations set forth in Sections 5.1(d), (e) and (f) (the
"Regulatory Allocations") are intended to comply with certain requirements of
Treasury Regulation sections 1.701-1(b) and 1.704-2. The Regulatory Allocations
may effect results which would not be consistent with the manner in which the
Partners intend to divide Partnership distributions. Accordingly, the General
Partner is authorized to divide other allocations of income, gain, loss and
deduction among the Partners so as to prevent the Regulatory Allocations from
distorting the manner in which Partnership distributions would be divided among
the Partners under Article XV of this Agreement. In general, the reallocation
will be accomplished by specially allocating other items of income, gain, loss
and deduction, to the extent they exist, among the Partners so that the net
amount of the Regulatory Allocations and the special allocations to each Partner
is zero. The General Partner will have discretion to accomplish this result in
any reasonable manner that is consistent with section 704 of the Code and the
related Treasury Regulations.
(h) If at any time the allocation provisions of Section
5.1(a)(i)(B) do not result in the allocation of items of income or gain at least
equal to the aggregate distributions actually made with respect to the Class C
Units during the current year and all prior years pursuant to Section 20.3, the
Limited Partners and Assignees holding Class C Units shall be specially
allocated items of gross income or gain of the Partnership, pro rata in
accordance with their Percentage Interests attributable to their Class C Units,
such that the aggregate amount of income and gain allocated under Section
5.1(a)(i)(B) and this Section 5.1(h) is equal to the aggregate amount of
distributions actually made with respect to the Class C Units during the current
year and all prior years pursuant to Section 20.3. All allocations made under
this section 5.1(h) shall be considered as made pursuant to Section 5.1(a)(i)(B)
for all purposes of this Agreement.
(i) If at any time the allocation provisions of this Article V do
not result in the allocation to the General Partner of at least 1% of each of
the Partnership's material items of income, gain, loss, deduction, or credit,
the General Partner shall be allocated so much more of each of those items as
will cause the General Partner to be allocated at all times 1% of each of those
items. However, the 1% standard shall not take precedence over the allocations
required by section 704(c) of the Code or the provisions of Section 5.2(e).
(j) For purposes of allocating the excess nonrecourse liabilities
of the Partnership under Treasury Regulation section 1.752-3(a)(3), the Partners
agree that each Partner's Percentage Interest (excluding any Percentage Interest
attributable to the Class C Units) shall be treated as such Partner's "interest
in partnership profits" for purposes of Treasury Regulation section 1.752-
3(a)(3)."
G. Section 5.2 is hereby amended by deleting clause (a) thereof
in its entirety and substituting the following in lieu thereof:
"(a) For federal income tax purposes, except as otherwise provided
herein or required by section 704(c) of the Code or Treasury Regulation section
1.704-1(b)(2)(iv)(f), each item of amount realized, income, gain, loss,
deduction and credit of the Partnership shall be allocated among the Partners
and Assignees in the same manner as each correlative item of income, gain, loss
or deduction (computed in accordance with Section 4.7(b)) is allocated pursuant
to Section 5.1. The General Partner may use any method permitted under the Code
for purposes of making allocations required by section 704(c) of the Code or
Treasury Regulation section 1.704-1(b)(2)(iv)(f)."
H. Section 5.2(b) is hereby amended by adding clause (iv) as
follows:
"(iv) Notwithstanding anything in this Section 5.2(b) to the contrary, no
Adjusted Basis allocable under this Section 5.2(b) shall be allocated to any
Partner or Assignee with respect to the Class C Units held by such person,
unless the General Partner determines that another method of allocation is
required by the Code or applicable Treasury Regulations."
I. Section 5.2 is hereby further amended by deleting clause (k)
thereof in its entirety.
J. Section 5.4 is hereby amended by deleting the fourth sentence
thereof in its entirety and substituting the following in lieu thereof:
"Except as provided in Article XVIII, Article XIX and Article XX,
all distributions shall be made concurrently to all Partners who are Record
Holders on the Record Date set for purposes of such distribution and to the
General Partner in accordance with the Percentage Interests of such Partners as
of the Record Date.
K. Section 16.1 is hereby amended by deleting clause (f)(iii)
thereof in its entirety and substituting the following in lieu thereof:
"(iii) necessary or desirable in order to facilitate the
trading of the Class A Units or Class C Units or comply with any rule,
regulation, guideline or requirement of any securities exchange on which the
Class A Units or Class C Units are or will be listed for trading, compliance
with any of which the General Partner deems to be in the best interests of the
Partnership and the Limited Partners."
L. The Partnership Agreement is hereby amended by deleting
Article XVIII in its entirety.
M. The Partnership Agreement is hereby amended by inserting a new
Article XX in the appropriate place to read in its entirety as follows and by
renumbering the remaining sections of the Partnership Agreement:
"ARTICLE XX
CLASS C UNITS
20.1 Definitions. "Class C Units" shall mean that class of Partnership
Units described in this Article XX.
20.2 Designation of Class. A class of Partnership Units is designated
the "Class C Units" of the Partnership. Such class shall be deemed for all
purposes to be issued pursuant to Section 4.2(a). Class C Units will be
transferable in accordance with the terms of this Agreement and will be subject
to redemption as provided in Section 11.6. The Class C Units will share in the
Partnership's allocations and distributions as set forth in Article V and
Section 20.3.
20.3 Distribution Rights.
(a) Notwithstanding anything in this Agreement to the contrary,
subject to the prior rights of the holders of senior securities, if any, the
holders of the Class C Units, in preference to the holders of the Class A Units
and Class B Subordinated Units, shall be entitled to receive, when, as and if
declared by the General Partner, cumulative cash distributions at, but not
exceeding, the rate of $1.00 per Class C Unit per annum, payable quarterly to
holders of record of the Class C Units on March 31, June 30, September 30 and
December 31 in each year, beginning March 31, 1996. Such distributions shall
accrue and be cumulative from March 31, 1996.
(b) So long as any Class C Units shall remain outstanding, the
Partnership may not declare or make any cash distributions on the Class A Units
or Class B Subordinated Units unless all accrued and unpaid distributions on the
Class C Units have been paid or declared and duly provided for. This section
shall not prohibit or restrict the purchase, acquisition or redemption of or
other transaction affecting the Class A Units and Class B Subordinated Units,
regardless whether accrued distributions have been paid on the Class C Units.
20.4 Voting Rights. The Class C Units shall vote as a separate class on
all matters required or otherwise brought for a vote of the Partnership.
20.5 Provisions Controlling. To the extent that the provisions of this
Article XX conflict with any other provisions of the Agreement, the provisions
of this Article XX shall control."
3. Ratification. Except as specified hereinabove, all other terms of
the Partnership Agreement shall remain unchanged and are hereby ratified and
confirmed. All references to "this Agreement" or "the Agreement" appearing in
the Partnership Agreement, and all references to the Partnership Agreement
appearing in any other document or instrument shall be deemed to refer to the
Partnership Agreement as amended by this Amendment.
IN WITNESS WHEREOF, this Amendment has been duly executed by the General
Partner on this the 7th day of December, 1995.
GENERAL PARTNER
HALLWOOD ENERGY CORPORATION
By:/s/Cathleen M. Osborn
------------------------------
Cathleen M. Osborn
Title: Vice President
Attest:/s/Diane M. Blieszner
-------------------------
Diane M. Blieszner
Title: Assistant Secretary