Exhibit 10.3
PARTICIPATION AGREEMENT
RELATING TO
CWEI NORTH LOUISIANA HOSSTON/COTTON VALLEY II
This PARTICIPATION AGREEMENT (this "Agreement") is made and
entered into as of October 2, 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 4.62 % 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 Clayton Williams 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 Wells.
"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 Acquisition Costs, Well Costs and other expenses
incurred by CWEI relating to the Designated Property, plus
(ii) an annual internal rate of return on such costs equal
to the Agreed Rate. For this purpose, each proceed and
expense shall be deemed to have been made on the last day of
the month during which it was received or made.
"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. The name and location of each "Well" is shown
on Exhibit C, as amended from time to time by CWEI.
"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 Wells 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 WELLS
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 Wells
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 Wells;
(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 Wells 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 Wells 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
Patti Hollums.
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, or (iv) to amend Exhibit C from time to
time to add additional Wells to become subject to this Agreement.
(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 Vinson & Elkins 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 Wells
. Each of the Parties hereby agrees that all Wells
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
Wells 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 Wells 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:
CLAYTON WILLIAMS ENERGY, INC.
By: /s/ L. Paul Latham
L. Paul Latham
Executive Vice President
Exhibit A
Participants
Participant Interests (%)
Pat Reesby 20.00
Kelly Beckham 16.83
Kenneth Lipstreuer 5.00
Phil Amy 6.00
George Matthews 2.50
Sam Sheets 2.50
Martha Reesby 2.00
Cheryl Strickland 1.17
Barbara Wynn 1.00
Terri Lengfeld 1.00
Tom Vinyard 1.00
Chris Hanson 2.50
Ron Reutzel 0.59
Paul Latham 4.00
Mel Riggs 5.00
Mark Tisdale 1.50
Sam Lyssy 2.00
Greg Wellborn 1.00
Ron Gasser 4.00
Clarence Wolfshohl 3.00
John Kennedy 3.00
Mike Pollard 3.00
Robert Thomas 1.50
Kim Jones 1.25
Danny Alford 1.50
Bob Langford 1.50
Janet Hamilton 1.00
Kathy Schwope 0.45
Mark Smith 0.25
Dennis Polson 1.50
Donnie Pruitt 1.32
Denise Kelly 0.89
Betsy Luna 0.25
Total 100.00
EXHIBIT B
AREA OF INTEREST
The Area of Interest shall be the prospects located in the
Louisiana Parishes of Caddo, Bossier, Webster, Claiborne,
Lincoln, Union and Quachita, in which the Hosston/Cotton
Valley/Gray Sand Trend is the primary objective.
CWEI NORTH LOUISIANA HOSSTON/COTTON VALLEY II
EXHIBIT C
Wells
Well Name County, State
[Such other wells as may be
added from time to time]
EXHIBIT D
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 CWEI NORTH LOUISIANA
HOSSTON/COTTON VALLEY II, dated October 2, 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]