Exhibit 10.1
Participation Agreement-WCEP, LP.DOC
PARTICIPATION AGREEMENT
RELATING TO
WEST COAST ENERGY PROPERTIES, L.P.
This PARTICIPATION AGREEMENT (this "Agreement") is made and
entered into as of October 1, 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:
"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.
"Capital Account" has the meaning set forth in Section
5.03.
"Code" means the Internal Revenue Code of 1986, as
amended.
"Company" means West Coast Energy Properties GP, LLC, a
Texas limited liability company.
"Company Counsel" has the meaning set forth in Section
8.12.
"Designated Property" means the economic right to 100%
of the proceeds derived by the Company from the general
partner interests in West Coast Partnership owned by the
Company, including any distributions to the Company in
respect of such general partner interests and any proceeds
of any disposition by the Company of such general partner
interests. The Designated Property shall not include any
voting, management, control or other rights other than the
rights to proceeds described above.
"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.
"Majority in Interest" means a majority of the
Interests held by all Participants.
"Monthly Net Investment" means, as to any calendar
month, the sum of all Partnership Contributions made during
such month, minus the sum of all proceeds received by the
Company with respect to the Designated Property during such
month, but in no event below zero.
"Monthly Net Proceeds" means, as to any calendar month,
the sum of all proceeds received by the Company with respect
to the Designated Property during such month, minus the sum
of all Partnership Contributions made during such month, but
in no event below zero.
"Party" means the Company or any Participant.
"Participant" means each Person listed as such on
Exhibit A.
"Partnership Contributions" means the sum of (i) the
fair market value of the Designated Property as of the date
hereof as agreed to by the Partners and set forth on Exhibit
C and (ii) the aggregate amounts contributed after the date
hereof by the Company to West Coast Partnership in respect
of the general partner interest therein in accordance with
the Agreement of Limited Partnership of West Coast
Partnership.
"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.
"Unreturned Investment" means the Company's net
unreturned investment in the Designated Property computed as
the present value of cumulative Monthly Net Investment
allocated to the Company pursuant to Section 5.01, minus the
present value of cumulative Monthly Net Proceeds allocated
to the Company pursuant to Section 5.02(a). For this
purpose, the present value of each Monthly Net Investment
and Monthly Net Proceeds shall be computed using the Agreed
Rate as the discount rate.
"West Coast Partnership" shall mean West Coast Energy
Properties, L.P., a Texas limited partnership.
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 B 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.
2.02 Purpose. The purpose for which this Agreement is being
entered is to further align the interests of the Participants
with those of the Company by permitting the Participants to
participate with the Company in the Company's share, through its
general partner interest in West Coast Partnership, in the
proceeds of oil and gas production (if any) developed, directly
or indirectly, by West Coast Partnership.
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
3.01 Authority of the Company. The Company 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 the business of the Company on behalf of the Tax
Partnership, including without limitation:
(a) to form and participate in partnerships, joint ventures or
other relationships that it deems desirable;
(b) to make any expenditures and incur any obligations it deems
appropriate;
(c) to acquire (including, without limitation, to purchase at
premium prices when deemed appropriate by the Company), exchange,
sell, lease, or dispose of any or all property owned by the
Company;
(d) 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;
(e) 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 property owned by the Company;
(f) to acquire and maintain such insurance, if any, for the
benefit of the Parties as it deems appropriate; and
(g) to control any matters affecting the Company including the
conduct of litigation and other incurring of legal expenses and
the settlement of claims in litigation; provided, that, the
Company 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 the Company. The Company shall
devote such time and effort to its duties as general partner of
West Coast Partnership as it shall deem appropriate. The Parties
acknowledge and agree that neither the Company nor any Affiliate
thereof nor any of their respective officers, directors,
employees or agents shall be required to devote full time to such
duties 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.
ARTICLE IV
ACCESS TO INFORMATION; TRANSFER RESTRICTIONS
4.01 Access to Information. A Participant, on written request to
the Company 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 West Coast Partnership as is just and
reasonable for the Participant to examine and copy. Information
provided to or obtained by a Participant relating to West Coast
Partnership 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 West Coast
Partnership 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 the Company of the
existence, terms and circumstances surrounding such request, so
that the Company 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 the Company. Any attempted Transfer in
violation of this Section 4.02 shall be null and void, and the
Company 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 the
Company.
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 the Company,
West Coast Partnership or any of their respective Affiliates.
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, the Company 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 Monthly Net Investment. Monthly Net
Investment for any calendar month and any other costs or expenses
related to the Designated Property shall be allocated 100% to the
Company.
5.02 Allocation of Monthly Net Proceeds. Monthly Net Proceeds
for any calendar month shall be allocated among the Parties as
follows:
(a) First, 100% of the Monthly Net Proceeds shall be allocated
to the Company in repayment of its Unreturned Investment, but
only to the extent needed to cause Unreturned Investment to equal
zero; and
(b) Second, any remaining Monthly Net Proceeds shall be
allocated according to the Interests set forth on Exhibit A.
5.03 Allocations for Capital Account and Tax Purposes. An
individual capital account (a "Capital Account") shall be
established and maintained for each Party as provided in Exhibit
B. All items of income, gain, deduction, loss, credit and amount
realized shall be allocated to the Parties in accordance with the
provisions of Exhibit B.
5.04 Payment of Costs and Expenses. The Company agrees to pay
timely any Monthly Net Investment or any other costs and expenses
allocated and charged to it pursuant to Section 5.01.
5.05 Distributions of Revenues. As soon as practicable after the
end of each calendar month, the Company shall compute Monthly Net
Investment and Monthly Net Proceeds for such calendar month. Any
Monthly Net Proceeds allocable to Participants in accordance with
Section 5.02(b) shall be paid to the Participants within ten
business days from the end of such calendar month.
5.06 Withholding Taxes. The Company shall at all times be
entitled (but not obligated) to make payments required to
discharge any obligation of the Company 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 the
Company 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 the Company 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 the Company (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 the
Company 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 B. The accounting year of the Tax Partnership shall
be the calendar year.
ARTICLE VII
TERMINATION
7.01 Termination. This Agreement, and the partnership created by
it for federal and state income tax purposes, shall terminate as
soon as practicable following (a) the earliest to occur of (i)
the termination and complete liquidation of the assets and
properties of West Coast Partnership and (ii) the disposition by
the Company of all of the general partner interests in West Coast
Partnership and (b) the distribution of applicable proceeds
therefrom pursuant to Section 5.05:
ARTICLE VIII
GENERAL PROVISIONS
8.01 Offset. Whenever the Company is to pay any sum to any
Participant, any amounts that Participant owes the Company 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
the Company. Any notice, request or consent to the Company shall
be sent to the Company at its principal place of business, to the
attention of the Director or Investor Relations.
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 the Company and
approved in writing by the Company and at least a Majority in
Interest of the Participants within 90 days of its proposal to be
effective.
(b) The Company 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 or (ii)
to reflect any Transfer or forfeiture of Interests pursuant to
Sections 4.03 and 4.04.
(c) Upon publication of final regulations in the Federal
Register (or other official pronouncement), the Company shall
have the authority, without any requirement for consent by any
Participant, to amend this Agreement to the extent the Company
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. Each Participant irrevocably
waives any right it may have to maintain any action for partition
of the property of the Tax Partnership.
8.10 Insurance. The Company 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
the Company 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 the Company approving the insurance or other
arrangement to liability, on any ground, regardless of whether
the Company will be a beneficiary.
8.11 Indemnification.
(a) The Company 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) The Company 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 the Company or one of its
affiliates; 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 Company Counsel. The Company has selected Vinson & Elkins
L.L.P. ("Company Counsel") as legal counsel to it with respect to
this Agreement. Each Participant acknowledges that Company
Counsel does not represent such Participant, and that Company
Counsel shall owe no duties directly to such Participant. Each
Participant further acknowledges that, whether or not Company
Counsel has in the past represented or is currently representing
such Participant with respect to other matters, Company 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 the Company,
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 the Company or any Affiliate of the
Company any right to continue in the employment of the Company or
any Affiliate of the Company for any period of time or interfere
with or restrict in any way the rights of the Company or any
Affiliate of the Company 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 the Company or any Affiliate of the Company shall not affect
any of such Participant's rights pursuant to this Agreement.
8.16 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 the Company 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 the Company determines is
appropriate under the circumstances in an effort to avoid any
adverse tax consequences for the Participants and/or the Company
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 the Company 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.
COMPANY:
WEST COAST ENERGY
PROPERTIES GP, LLC
By: /s/ L. Paul Latham
L. Paul Latham
Manager
SIGNATURE PAGE FOR PARTICIPANT
The undersigned does hereby agree to all the terms and
provisions of the Participation Agreement related to West Coast
Energy Properties, L.P., including, without limitation, the power
of attorney set forth in Section 8.13 thereof.
Date:_____________________ Name of
Participant:
Address:
Interest:
Signature:
Fax:
Taxpayer I.D. No.
EXHIBIT A
Schedule of Company and Participants Interests
Party: Interests:
WEST COAST ENERGY PROPERTIES
GP, LLC 92.5%
Participants:
L. Paul Latham 0.7875%
Mel G. Riggs 1.5000%
Mark Heinen 1.2749%
Mark Tisdale 1.2749%
Rox Edgar 0.3000%
Mike Senich 0.9188%
Ron Gasser 0.2250%
George Friesen 0.1875%
David Grafe 0.1125%
Matt Swierc 0.0750%
Rick Boring 0.0938%
John Kennedy 0.1500%
Mike Pollard 0.1875%
Bob Langford 0.0563%
Robert Thomas 0.0750%
Kim Jones 0.0375%
Danny Alford 0.1125%
Kent Oberle 0.0563%
Kathy Schwope 0.0375%
Janet Hamilton 0.0375%
Subtotal 7.5%
Total 100%
EXHIBIT B
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 West Coast Energy Properties, L.P., dated
October 1, 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 B, 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 B, 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 B, contributions to the
Tax Partnership ("Capital Contributions") shall include all
Partnership Contributions 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 B, 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 B, unless the Parties agree otherwise
and this Exhibit B 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 B, (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.
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 (including the distributive share of such items
allocated to the Tax Partnership by West Coast Partnership) 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 B, 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 proceeds 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 proceeds that resulted in such income or gain are
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) The Company 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 B 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 B,
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, the Company 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, the
Company 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. The Company 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 B,
(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 B, (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 B
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 B) 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 B) 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 B. 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, the Company is hereby authorized to make such
adjustment after notice to the Party.
[End of Exhibit B]
Exhibit C
Fair Market Value of Designated Property
Fair market value of Designated Property $6,581,000