UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of report (Date of earliest event reported):

August 11, 2009

 

 

EXCO RESOURCES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Texas   0-9204   74-1492779

(State or other jurisdiction

of incorporation)

  (Commission File Number)  

(IRS Employer

Identification No.)

 

12377 Merit Drive

Suite 1700, LB 82

Dallas, Texas

  75251
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (214) 368-2084

(Former name or former address, if changed since last report): Not applicable

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


Section 1 – Registrant’s Business and Operations

 

Item 1.01 Entry into a Material Definitive Agreement.

Joint Development Agreement

On August 14, 2009, EXCO Operating Company, LP (“EOC”) and EXCO Production Company, LP (“EPC”), each wholly-owned indirect subsidiaries of EXCO Resources, Inc. (“EXCO”), entered into a Joint Development Agreement (the “Joint Development Agreement”) with BG US Production Company, LP (“BG Production”), a wholly-owned indirect subsidiary of BG Group plc (“BG Group”). The Joint Development Agreement was executed in connection with the closing of that certain Purchase and Sale Agreement, dated June 29, 2009 (the “Upstream Purchase Agreement”), among EOC, EPC and BG Production. Under the Joint Development Agreement and pursuant to the terms thereof, EOC, EPC and BG Production will jointly fund, develop and operate certain oil and natural gas properties and related assets located in the counties of Cherokee, Gregg, Harrison, Marion, Nacogdoches, Panola, Rusk and Shelby in the state of Texas and the parishes of Bienville, Bossier, Caddo, DeSoto, Red River and Webster in the state of Louisiana (the “AMI”). A description of the material terms of the Joint Development Agreement can be found in item 1.01 of EXCO’s Form 8-K, dated June 29, 2009, filed with the Securities and Exchange Commission (the “Commission”) on July 6, 2009.

The foregoing description of the Joint Development Agreement is not complete and is qualified in its entirety by the Joint Development Agreement, a copy of which is filed herewith as Exhibit 10.1 and incorporated herein by reference.

LLC Agreement

On August 14, 2009, EOC and BG Gathering entered into an amended and restated limited liability company agreement (the “LLC Agreement”) of TGGT Holdings, LLC (the “TGGT”). The LLC Agreement was executed in connection with the closing of that certain Contribution Agreement, dated August 5, 2009 (the “Contribution Agreement”), among EOC, Vaughan Holding Company, LLC (“Vaughan”), a wholly-owned indirect subsidiary of EXCO, and BG US Gathering Company, LLC (“BG Gathering”), a wholly-owned indirect subsidiary of BG Group. The LLC Agreement sets forth the rights and obligations of EOC and BG Gathering with respect to their ownership of TGGT. A description of the material terms of the LLC Agreement can be found in item 1.01 of EXCO’s Form 8-K, dated August 5, 2009, filed with the Commission on August 11, 2009.

The foregoing description of the LLC Agreement is not complete and is qualified in its entirety by the LLC Agreement, a copy of which is filed herewith as Exhibit 10.2 and incorporated herein by reference.

Section 2 – Financial Information

 

Item 2.01. Completion of Acquisition or Disposition of Assets.

Closing of Upstream and Midstream Joint Development Transactions

On August 14, 2009, EOC, Vaughan and BG Production closed the transactions contemplated by the Upstream Purchase Agreement (the “BG Upstream Transaction”). Under the Upstream Purchase Agreement, EOC and EPC sold BG Production an undivided 50% interest in certain oil and natural gas properties and related assets located in the AMI (the “Subject Oil and Gas Assets”). BG Production paid EOC and EPC a purchase price of $727 million in cash, subject to customary post-closing adjustments, for the Subject Oil and Gas Assets. The sale of the Subject Oil and Gas Assets is effective as of January 1, 2009.

Simultaneously with the closing of the Upstream Purchase Agreement, on August 14, 2009, EOC, Vaughan and BG Gathering closed the transactions contemplated by the Contribution Agreement (the “BG Midstream Transaction”). Under the terms of the Contribution Agreement, (i) EOC contributed to TGGT all of its directly and indirectly held general and limited partnership interests in TGG Pipeline, Ltd. (“TGG”) and Talco Midstream Assets, Ltd. (together with TGG, the “Midstream Companies”) in exchange for a 50% member interest in TGGT, (ii) BG Gathering contributed to TGGT $269.2 million in cash, subject to customary post-closing adjustments (the “Cash Contribution Amount”) in exchange for a 50% member interest in TGGT, and (iii) TGGT made a special distribution to EOC in an amount equal to the Cash Contribution Amount. As a result of the contributions and special distribution, EOC and BG Gathering will each own a 50% member interest in TGGT, and TGGT will in turn directly and indirectly hold all of the partnership interests in the Midstream Companies.

 

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The foregoing descriptions of the Upstream Purchase Agreement and the Contribution Agreement are not complete and are qualified in their entirety by such agreements, copies of which were filed as Exhibit 2.3 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, filed with the Commission on August 6, 2009, with respect to the Upstream Purchase Agreement, and as Exhibit 10.1 to the Current Report on Form 8-K, dated August 5, 2009, filed with the Commission on August 11, 2009, with respect to the Contribution Agreement, each of which are incorporated herein by reference.

Closing of Gladewater and Midcontinent Asset Dispositions

On August 11, 2009, EOC and Encore Operating, LP (“Encore”) closed the transactions (the “Gladewater Transaction”) contemplated by the Purchase and Sale Agreement, dated June 28, 2009, by and between EOC and Encore (the “Gladewater Purchase Agreement”). Under the Gladewater Purchase Agreement, EOC sold to Encore its Gladewater Field and Overton Field assets in Gregg, Upshur and Smith Counties, Texas (the “Gladewater Assets”).

Also on August 11, 2009, EXCO closed the transactions (the “Midcontinent Transaction”) contemplated by the Purchase and Sale Agreement, dated June 28, 2009, by and between EXCO and Encore (the “Midcontinent Purchase Agreement”). Under the Midcontinent Purchase Agreement, EXCO sold to Encore its Norge Marchand Unit in Grady County, Oklahoma and other selected Oklahoma, Kansas and Texas Panhandle assets (the “Midcontinent Assets”).

Encore paid EXCO and EOC a purchase price of $356.5 million in cash, subject to customary post-closing adjustments, for the Gladewater Assets and Midcontinent Assets.

The foregoing descriptions of the Gladewater Purchase Agreement and the Midcontinent Purchase Agreements are not complete and are qualified in their entirety by such agreement, copies of which were filed as Exhibit 2.3 and 2.4, respectively, to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, filed with the Commission on August 6, 2009, and incorporated herein by reference.

Use of Proceeds

The proceeds from the Gladewater Transaction, the BG Upstream Transaction and the BG Midstream Transaction were used to pay down a portion of the borrowings under EOC’s revolving credit facility and pay off all of EOC’s senior term credit agreement and pay certain transaction expenses.

The proceeds from the Midcontinent Transaction were used to pay down a portion of the borrowings under EXCO’s revolving credit facility and pay certain transaction expenses.

Section 7 – Regulation FD

 

Item 7.01 Regulation FD Disclosure

On August 11, 2009, EXCO issued a press release announcing, among other things, the closing of the Gladewater Transaction and the Midcontinent Transaction, a copy of which is furnished as Exhibit 99.1.

On August 14, 2009, EXCO issued a press release announcing, among other things, the signing of the Joint Development Agreement and the LLC Agreement and the closing of the BG Upstream Transaction and the BG Midstream Transaction, a copy of which is furnished as Exhibit 99.2.

In accordance with general instruction B.2 to Form 8-K, information contained in Exhibit 99.1 is being “furnished” and not “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, and such information shall not be deemed incorporated by reference in any filing under the Securities Act of 1933.

 

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Section 9 – Financial Statements and Exhibits

 

Item 9.01 Financial Statements and Exhibits.

(b) Pro Forma Financial Information.

The unaudited pro forma financial information of EXCO Resources, Inc. with respect to the BG Upstream Transaction, the BG Midstream Transaction, the Gladewater Transaction and the Midcontinent Transaction for the year ended December 31, 2008 and six months ended June 30, 2009 are included as Exhibit 99.3 hereto.

(d) Exhibits.

 

10.1    Joint Development Agreement, dated as of August 14, 2009, by and among EXCO Operating Company, LP, EXCO Production Company, LP and BG US Production Company, LP.
10.2    Amended and Restated Limited Liability Company Agreement of TGGT Holdings, LLC, dated August 14, 2009, by and among TGGT Holdings, LLC, EXCO Operating Company, LP and BG US Gathering Company, LLC
99.1    Press Release dated August 11, 2009.
99.2    Press Release, dated August 14, 2009.
99.3    Unaudited pro forma financial information of EXCO Resources, Inc. for the year ended December 31, 2008 and six months ended June 30, 2009.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

  EXCO RESOURCES, INC.
Date: August 17, 2009   By:  

/s/ J. DOUGLAS RAMSEY

    J. Douglas Ramsey, Ph.D.
    Vice President - Finance


EXHIBIT INDEX

 

Exhibit
Number

  

Description

10.1    Joint Development Agreement, dated as of August 14, 2009, by and among EXCO Operating Company, LP, EXCO Production Company, LP and BG US Production Company, LP.
10.2    Amended and Restated Limited Liability Company Agreement of TGGT Holdings, LLC, dated August 14, 2009, by and among TGGT Holdings, LLC, EXCO Operating Company, LP and BG US Gathering Company, LLC.
99.1    Press Release, dated August 11, 2009.
99.2    Press Release, dated August 14, 2009.
99.3    Unaudited pro forma financial information of EXCO Resources, Inc. for the year ended December 31, 2008 and six months ended June 30, 2009.

Exhibit 10.1

JOINT DEVELOPMENT AGREEMENT

BY AND AMONG

BG US PRODUCTION COMPANY, LLC,

EXCO OPERATING COMPANY, LP

AND

EXCO PRODUCTION COMPANY, LP

DATED AUGUST 14, 2009


TABLE OF CONTENTS

 

ARTICLE 1    INTERPRETATION    1
ARTICLE 2    CERTAIN OBLIGATIONS    2
   Section 2.1    Carry of Eligible Costs    2
   Section 2.2    Payment Procedure    2
   Section 2.3    Development Costs    3
ARTICLE 3    SCOPE; PARTICIPATING INTERESTS; OPERATIONS    3
   Section 3.1    Scope    3
   Section 3.2    Participating Interests    3
   Section 3.3    Operations Subject to Laws, Leases and Operating Agreement    4
   Section 3.4    Operating Agreements    4
   Section 3.5    Appointment and Removal of Party Operator    5
   Section 3.6    Joint Development Operator    7
   Section 3.7    Liability of Operator    9
   Section 3.8    Secondees    10
   Section 3.9    Non-Solicitation of Joint Operator Employees    10
   Section 3.10    Certain Reports    11
   Section 3.11    Insurance    13
   Section 3.12    Reimbursement of Joint Development Operator and Party Operators for Technical Services; Overhead    14
ARTICLE 4    OPERATING COMMITTEE; DEVELOPMENT WORK PROGRAM; ANNUAL WORK PROGRAM AND BUDGETS    16
   Section 4.1    Operating Committee    16
   Section 4.2    Development Work Program    21
   Section 4.3    Initial Annual Work Plan and Budgets    22
   Section 4.4    Subsequent Annual Work Plan and Budgets    22
   Section 4.5    Statements of Estimated Expenditures    26
   Section 4.6    AFEs    26
   Section 4.7    Contract Awards    27
   Section 4.8    Area-Wide Operations    30
   Section 4.9    Third Party Operators    31
   Section 4.10    HSSE    31
   Section 4.11    Conflict of Interest Policy    32
ARTICLE 5    DEFAULT    32
   Section 5.1    Default    32
   Section 5.2    Certain Consequences of Default    33
   Section 5.3    Right to Costs of Enforcement    34
   Section 5.4    Cumulative and Additional Remedies    34
   Section 5.5    Reassignment Obligation    34

 

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ARTICLE 6 TRANSFERS    35
   Section 6.1    Maintenance of Uniform Interest; Minimum Participating Interest; Transfers by Defaulting Parties    35
   Section 6.2    Requirements for Transfer    36
   Section 6.3    Liability of Transferor/Transferee    36
   Section 6.4    Encumbrances by Parties    37
ARTICLE 7 CONSENT TO ASSIGNMENT    37
   Section 7.1    Certain Transfers during Initial Three Year Period    37
   Section 7.2    Other Transfers    38
   Section 7.3    Additional Consent Requirements    38
   Section 7.4    Consents for Transfer of Joint Development or Party Operatorship    38
ARTICLE 8 PREFERENTIAL RIGHT TO PURCHASE; CHANGES IN CONTROL    38
   Section 8.1    Preferential Right to Purchase    38
   Section 8.2    Changes in Control    41
ARTICLE 9 AREA OF MUTUAL INTEREST; CERTAIN RENTALS    43
   Section 9.1    Creation of Area of Mutual Interest    43
   Section 9.2    Area of Mutual Interest Procedures    43
   Section 9.3    Payment of Certain Rentals    46
ARTICLE 10 TAXES    47
   Section 10.1    Tax Partnership    47
   Section 10.2    Tax Information    48
   Section 10.3    Responsibility for Taxes    48
ARTICLE 11 TERM    48
ARTICLE 12 RELATIONSHIP OF THE PARTIES    48
ARTICLE 13 GOVERNING LAW; DISPUTE RESOLUTION; EXPERT PROCEEDINGS    49
   Section 13.1    Governing Law    49
   Section 13.2    Dispute Resolution    49
   Section 13.3    Expert Proceedings    51
ARTICLE 14 MISCELLANEOUS    51
   Section 14.1    Counterparts    51
   Section 14.2    Notices    51
   Section 14.3    Expenses    53
   Section 14.4    Waivers; Rights Cumulative    53
   Section 14.5    Entire Agreement; Conflicts    53
   Section 14.6    Amendment    54
   Section 14.7    Parties in Interest    54
   Section 14.8    Successors and Permitted Assigns    54
   Section 14.9    Confidentiality    54
   Section 14.10    Publicity    55
   Section 14.11    Preparation of Agreement    56

 

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   Section 14.12    Conduct of the Parties; Business Principles    56
   Section 14.13    Severability    56
   Section 14.14    Non-Compensatory Damages    56
   Section 14.15    Excluded Assets    57

APPENDICES AND EXHIBITS

 

Appendix I    Definitions
Exhibit “A”    East Texas/North Louisiana Area; Excluded Fields
Exhibit “B”    Form of Joint Development Operating Agreement
Exhibit “C”    Form of Secondment Agreement
Exhibit “D”    Development Work Program
Exhibit “E-1”    Calendar Year 2009 Annual Work Program and Budget
Exhibit “E-2”    Draft Calendar Year 2010 Annual Work Program and Budget
Exhibit “F”    Form of Assumption Agreement
Exhibit “G”    Tax Partnership Agreement
Exhibit “H”    Escrow Provisions
Exhibit “I”    Insurance

 

iii


JOINT DEVELOPMENT AGREEMENT

THIS JOINT DEVELOPMENT AGREEMENT is made this 14th day of August, 2009 (the “ Closing Date ”) by and among BG US Production Company, LLC, a limited liability company organized and existing under the Laws of Delaware (“ BG ”), EXCO Production Company, LP, a limited partnership organized and existing under the Laws of Texas (“ EPC ”), and EXCO Operating Company, LP, a limited partnership organized and existing under the Laws of the State of Delaware (“ EOC ” and together with EPC, “ EXCO ”). BG and EXCO shall sometimes be referred to herein together as the “ Parties ”, and individually as a “ Party ”. The Parties shall sometimes be referred to herein together in their capacities as working interest owners in the Subject Oil and Gas Assets as the “ Development Parties ”, and individually as a “ Development Party ”. Capitalized terms used herein and not otherwise defined shall have the meanings given such terms in Appendix I.

RECITALS

WHEREAS, on the Closing Date, BG and EXCO consummated certain transactions contemplated in the Purchase Agreement, which transactions included the purchase by BG and the sale by EXCO of undivided interests in certain Oil and Gas Assets; and

WHEREAS, the Development Parties desire to develop the Subject Oil and Gas Assets located in the East Texas/North Louisiana Area in a coordinated manner using EXCO Operator as operator; and

WHEREAS, the Parties now desire to set forth their respective rights and obligations with respect to all such arrangements.

NOW THEREFORE, IN CONSIDERATION OF THE MUTUAL AGREEMENTS HEREIN CONTAINED, THE PARTIES HEREBY AGREE AS FOLLOWS:

ARTICLE 1

INTERPRETATION

All references in this Agreement to Exhibits, Appendices, Articles, Sections, subsections and other subdivisions refer to the corresponding Exhibits, Appendices, Articles, Sections, subsections and other subdivisions of or to this Agreement unless expressly provided otherwise. Titles appearing at the beginning of any Articles, Sections, subsections and other subdivisions of this Agreement are for convenience only, do not constitute any part of this Agreement, and shall be disregarded in construing the language hereof. The words “this Agreement,” “herein,” “hereby,” “hereunder” and “hereof,” and words of similar import, refer to this Agreement as a whole and not to any particular Article, Section, subsection or other subdivision unless expressly so limited. The words “this Article,” “this Section,” and “this subsection,” and words of similar import, refer only to Article, Section or subsection hereof in which such words occur. The word “including” (in its various forms) means including without limitation. All references to “$” or “dollars” shall be deemed references to United States dollars. Each accounting term not defined herein will have the meaning given to it under GAAP as interpreted as of the date of this Agreement. Pronouns in masculine, feminine or neuter genders shall be construed to state and include any other gender, and words, terms and titles (including terms defined herein) in the

 

1


singular form shall be construed to include the plural and vice versa, unless the context otherwise requires. Appendices and Exhibits referred to herein are attached to and by this reference incorporated herein for all purposes. References to any Law or agreement shall mean such Law or agreement as it may be amended from time to time.

ARTICLE 2

CERTAIN OBLIGATIONS

Section 2.1 Carry of Eligible Costs .

 

  (a) From and after the Closing Date and until the Carry Termination Event, and notwithstanding the terms of any Applicable Operating Agreement to the contrary, BG shall pay seventy-five percent (75%) of EXCO’s share under each Applicable Operating Agreement of all Eligible Costs incurred in accordance with an approved Annual Work Program and Budget or pursuant to a Sole Risk Development Operation undertaken by EXCO with respect to the Deep Rights (all such Eligible Costs that BG is obligated to pay pursuant to this Section 2.1, “ Carried Costs ”). As used herein, “ Carry Termination Event ” means the time at which the aggregate amount of Carried Costs paid by BG equals the Carried Cost Obligation. Joint Development Operator shall maintain an accurate record of the Carried Costs paid by BG from time to time, and shall provide each Development Party with a monthly statement showing the Calendar Month and inception to date payments by BG.

 

  (b) Until the Carry Termination Event, all Carried Costs shall be paid by BG in the same manner and at the same time it pays its share of billings or requests for advances pursuant to Section 2.2. BG shall be entitled to exercise all rights available to the parties under the Applicable Operating Agreements to contest charges and audit the accounts of the operator thereunder with respect to such payments. Any reimbursements for any Carried Costs paid by BG shall be paid by EXCO or the applicable reimbursing party to BG promptly after the determination thereof (and, to the extent reimbursable by Person other than EXCO and paid to EXCO, receipt by EXCO of such amounts), provided that any amounts so reimbursed to BG shall be deducted from the calculation of the Carried Costs paid by BG for purposes of this Agreement, including the determination of the Carry Termination Event. In the event EXCO receives a credit in respect of Carried Costs paid by BG, at the request of BG, EXCO shall request that such credit be paid directly to BG (and any such credit actually paid to BG shall be deducted from the calculation of Carried Costs paid by BG pursuant to this Agreement).

Section 2.2 Payment Procedure .

 

  (a) In response to each statement or invoice issued by an operator to the Participating Parties in a Development Operation under this Agreement or an Applicable Operating Agreement, each Participating Party shall pay its share of expenditures for the conduct of such Development Operations in accordance with the escrow provisions set forth in Exhibit “H” attached hereto.

 

2


  (b) Each Participating Party shall have the right to audit the Joint Development Operator’s and its Affiliates’ accounts with respect to Development Operations in which it participates or is a non-consenting party on the same basis as is provided in Exhibit “C” to the Joint Development Operating Agreement. For the avoidance of doubt, this audit right shall extend to accounts maintained by the Joint Development Operator and its Affiliates with respect to the Escrow Deposit Account and the Operating Trust Account (as that term is defined in Exhibit “H”) and other accounts maintained by the Joint Development Operator and its Affiliates with respect to Development Operations.

Section 2.3 Development Costs . Except as set forth in Section 2.1 above, each Development Party shall bear and pay its proportionate share of all Development Costs incurred from and after the Closing Date in accordance with, and subject to, the terms and conditions of this Agreement and the Applicable Operating Agreements.

ARTICLE 3

SCOPE; PARTICIPATING INTERESTS; OPERATIONS

Section 3.1 Scope . This Agreement shall govern the respective rights and obligations of the Development Parties with respect to the funding, development and operation of the Subject Oil and Gas Assets. This Agreement does not govern: (a) the funding, development or operation of any equipment, fixtures or other assets located downstream of the outlet flange of the relevant custody transfer meter (or, in the case of Hydrocarbon liquids, downstream of the outlet flange in the tanks) located on or in the vicinity of the Leases in the Subject Oil and Gas Assets; or (b) the marketing or sale of oil and gas products from the Subject Oil and Gas Assets, all of which are outside the scope of this Agreement.

Section 3.2 Participating Interests .

 

  (a) As of the Closing Date, the Participating Interests of the Development Parties are as follows:

 

Development Party

   Participating
Interest (%)

BG

   50.0000

EXCO

   50.0000

 

  (b) If a Development Party Transfers all or any undivided percentage of its Joint Development Interest pursuant to the provisions of this Agreement, the Participating Interests of the Development Parties shall be revised accordingly.

 

3


Section 3.3 Operations Subject to Laws, Leases and Operating Agreement . All operations conducted pursuant to this Agreement by Joint Development Operator or any Applicable Operating Agreement by any Party Operator shall be conducted in compliance with the terms and conditions of: (a) all applicable Laws; (b) those Leases upon which such operations are conducted; (c) the Applicable Operating Agreements, to the extent applicable to such operations; and (d) once agreed in accordance with Section 4.10, appropriate HSSE guidelines and principles. Joint Development Operator, while conducting operations under this Agreement, and any Party Operator, while conducting operations under any Applicable Operating Agreement, shall conduct such activities as a reasonably prudent operator, in a good and workmanlike manner with due diligence and dispatch, in accordance with good oilfield practice and appropriate technical standards and guidelines issued by the American Petroleum Institute, the American Society of Mechanical Engineers and the American National Standards Institute, among others. Within twelve months of signing this Agreement, the Development Parties shall perform a gap analysis against a set of agreed technical standards for design, construction and operation of the wells and facilities within the East Texas/North Louisiana Area. These standards shall be submitted to the Operating Committee for its approval and shall include appropriate technical standards and guidelines (as mentioned above), including agreed exceptions, and shall adhere to HSSE guidelines and principles agreed upon pursuant to Section 4.10.

Section 3.4 Operating Agreements .

 

  (a) All Leases in the East Texas/North Louisiana Area: (i) in which only the Development Parties hold interests as of the Effective Date and which are not subject to a Third Party Operating Agreement; or (ii) in which the Development Parties hereafter acquire interests and which are not subject to a Third Party Operating Agreement at the time of acquisition shall be deemed to be subject to and governed by an operating agreement in the form attached hereto as Exhibit “B” (each a “ Joint Development Operating Agreement ”).

 

  (b) In addition, the Parties agree to use all commercially reasonable efforts to have the form attached hereto as Exhibit “B” adopted as the operative operating agreement by all working interest owners for any Leases in the East Texas/North Louisiana Area in which the Development Parties and other Persons hold working interests but which are not presently subject to a Third Party Operating Agreement.

 

  (c) A separate Joint Development Operating Agreement shall be deemed to cover each drilling and production unit now or hereafter designated by the Parties or by order or rule of a Governmental Authority having jurisdiction in the East Texas/North Louisiana Area for which the Development Parties hold the entirety of the working interest for such unit, provided that in the event any Person that is not a Development Party is to acquire a working interest in such unit or this Agreement terminates, the Development Parties shall execute a Joint Development Operating Agreement for such unit prior to such acquisition or termination.

 

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  (d) There shall be no retroactive adjustment of expenses incurred or revenues received with respect to any separate Joint Development Operating Agreement which is deemed to come into existence as a consequence of the designation of a new unit.

 

  (e) Each Joint Development Operating Agreement in which no third party participates and, as between the Parties only, each Joint Development Operating Agreement in which a third party participates and each Third Party Operating Agreement, shall be subject to the provisions of Exhibit G hereto unless and until the applicability of such provisions to the Subject Oil and Gas Assets subject to such operating agreement terminates in accordance with the terms of Exhibit G.

Section 3.5 Appointment and Removal of Party Operator .

 

  (a) EXCO Operator is hereby designated and agrees to serve as the initial operator under each Joint Development Operating Agreement and to operate the Subject Oil and Gas Assets covered by such Joint Development Operating Agreement in accordance with the terms and conditions thereof, subject (in each case) to the terms of this Agreement. To the extent EOC or EPC serves as operator under any Third Party Operating Agreement, such Person is hereby designated and agrees to serve as operator under such Third Party Operating Agreement and to operate the Subject Oil and Gas Assets covered by such Third Party Operating Agreement in accordance with the terms and conditions thereof, subject (in each case) to the terms of this Agreement. The designations set forth in this Section 3.5(a) are personal to the applicable EXCO Operator, as a consequence of the specific skills it holds with respect to shale operations, and operations in the Haynesville shale in particular. For the avoidance of doubt, a Party Operator shall conduct each Sole Risk Development Operation conducted pursuant to the Joint Development Operating Agreement for which it is operator on behalf of all of the parties participating in such operation, unless otherwise agreed by such participating parties in accordance with the terms of such Joint Development Operating Agreement.

 

  (b) A Party Operator may be removed as operator under any Joint Development Operating Agreement, or if any Person that is not a Development Party is party to such Joint Development Operating Agreement, then a Party Operator may be required to resign as operator under such Joint Development Operating Agreement, under the following circumstances:

 

  (i)

by the affirmative vote of the Development Parties that are parties to such Joint Development Operating Agreement, other than Party Operator and its Affiliates, holding a majority of the Participating Interest held by such Development Parties: (A) if there is a Change in Control of such Party Operator; or (B) for good cause, provided that in the case of removal or a required resignation for good cause, such vote shall not be deemed effective until a written notice has been delivered to such Party Operator by another Party that is a party to such Joint Development Operating

 

5


 

Agreement detailing the alleged default and such Party Operator has failed to cure the default within thirty (30) days from its receipt of the notice or, if the default concerns an operation then being conducted, within forty-eight (48) hours of its receipt of the notice;

 

  (ii) by the affirmative vote of the Development Parties that are parties to such Joint Development Operating Agreement holding a majority of the Participating Interest in the event that Party Operator’s and its Affiliates’ aggregate Participating Interest falls below twelve and a half percent (12.5%); or

 

  (iii) solely with respect to those After Acquired Units for which EXCO or any Affiliate of EXCO serves as Party Operator under the relevant Joint Development Operating Agreement, upon a change in Control of the ultimate parent company of EXCO.

For purposes hereof, “good cause” shall mean not only gross negligence and willful misconduct, but also the material breach of or inability to meet the standards of operation contained in Section 3.3, or a material failure or inability of a Party Operator to perform its obligations under the relevant Joint Development Operating Agreement. As used herein, “gross negligence” and “willful misconduct” shall include material unlawful acts committed by an operator of which such operator had actual knowledge at the time in question. Notwithstanding anything to the contrary herein, (I) if there is a dispute as to whether a condition resulting in good cause to remove a Party Operator has occurred, or whether such condition has been cured, such Party Operator shall continue to serve and discharge its duties in such capacity until the dispute has been resolved in accordance with Section 13.2, and (II) a change of a corporate name or structure of a Party Operator or Transfer of a Party Operator’s interest to another direct or indirect Wholly-Owned Affiliate of the same ultimate parent company shall not be the basis for removal of such Party Operator.

During the term of this Agreement, for avoidance of doubt, as between the Parties, the provisions of this Section 3.5(b) and Section 3.5(c) shall be in lieu of any provisions in any Joint Development Operating Agreement for the removal or resignation of the operator thereunder.

 

  (c) Upon the occurrence of a Material Event with respect to a Party Operator, it shall be deemed to have resigned as operator under each Joint Development Operating Agreement for which it serves as operator, or if any Person that is not a Development Party is party to such Joint Development Operating Agreement, then a Party Operator shall be required to resign as operator under such Joint Development Operating Agreement, without any action by the other Parties, except the selection of a successor pursuant to the terms and conditions of the relevant Joint Development Operating Agreement.

 

  (d) Following any resignation or removal of EXCO Operator as operator under any Applicable Operating Agreement, if BG or one of its Affiliates is still a Party to this Agreement, EXCO shall vote for BG or BG’s designee to serve as the successor operator under such Applicable Operating Agreement.

 

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  (e) Each Party Operator shall conduct all operations in accordance with and subject to the terms of Article 4, and Sections 3.3, 3.4, this 3.5, 3.7, 3.10 and 3.11, in addition to any terms set forth in the relevant Applicable Operating Agreements.

Section 3.6 Joint Development Operator .

 

  (a) EOC is hereby designated and agrees to serve as the initial Joint Development Operator in accordance with the terms and conditions of this Agreement. The designation set forth in this Section 3.6(a) is personal to EOC, as a consequence of the specific skills it holds with respect to shale operations, and operations in the Haynesville shale in particular.

 

  (b) Joint Development Operator may resign at any time by giving at least ninety (90) days’ prior written notice to the other Development Parties. Joint Development Operator shall be deemed to have resigned without any action by the other Development Parties, except for selection of a successor, under the following circumstances: (i) Joint Development Operator terminates its legal existence (other than as part of a reorganization that results in the Transfer of all of its rights and obligations in the East Texas/North Louisiana Area to a Wholly-Owned Affiliate of the same ultimate parent company of such Joint Development Operator); (ii) Joint Development Operator no longer possesses the corporate capability to serve as Joint Development Operator (provided that, for the avoidance of doubt, corporate capability is not a measure of Joint Development Operator’s knowledge and expertise regarding the performance of drilling operations, but instead concerns Joint Development Operator’s ability to function as a business generally); or (iii) any payment default or acceleration of debt (other than an acceleration of debt caused by a Change in Control of Joint Development Operator or any of its Affiliates) by Joint Development Operator or any of its Affiliates shall have occurred and be continuing under (in each case) any material (I) agreement for borrowed money of Joint Development Operator or any of its Affiliates or (II) guarantee by Joint Development Operator or its Affiliates of another Person’s payment or performance obligations.

 

  (c) Joint Development Operator may be removed under the following circumstances:

 

  (i) by the affirmative vote of the Development Parties other than Joint Development Operator and its Affiliates holding a majority of the Participating Interest held by such Development Parties: (A) if there is a Change in Control of Joint Development Operator; or (B) for good cause, provided that in the case of removal for good cause, such vote shall not be deemed effective until a written notice has been delivered to Joint Development Operator by another Party detailing the alleged default and Joint Development Operator has failed to cure the default within thirty (30) days from its receipt of the notice or, if the default concerns an operation then being conducted, within forty-eight (48) hours of its receipt of the notice; or

 

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  (ii) by the affirmative vote of the Development Parties holding a majority of the Participating Interest in the event that Joint Development Operator’s and its Affiliates’ aggregate Participating Interest falls below twelve and a half percent (12.5%).

For purposes hereof, “ good cause ” shall mean not only gross negligence or willful misconduct but also the material breach of or inability to meet the standards of operation contained in Section 3.3, or material failure or inability to perform its obligations under this Agreement. Notwithstanding anything to the contrary herein, (I) if there is a dispute as to whether a condition resulting in good cause to remove Joint Development Operator has occurred, or whether such condition has been cured, Joint Development Operator shall continue to serve and discharge its duties in such capacity until the dispute has been resolved in accordance with Section 13.2, and (II) a change of a corporate name or structure of Joint Development Operator or Transfer of Joint Development Operator’s interest to another direct or indirect Wholly-Owned Affiliate of the same ultimate parent company shall not be the basis for removal of Joint Development Operator.

 

  (d) Upon the occurrence of a Material Event with respect to Joint Development Operator, it shall be deemed to have resigned without any action by the other Parties, except the selection of a successor pursuant to Section 3.6(e). If a petition for relief under the federal bankruptcy laws is filed by or against Joint Development Operator, and the removal of Joint Development Operator is prevented by the terms of the Bankruptcy Code or actions of the federal bankruptcy court, then, to the extent allowed by Law, the Operating Committee shall serve as Joint Development Operator until Joint Development Operator has elected to reject or assume this Agreement pursuant to the Bankruptcy Code, and an election to reject this Agreement by Joint Development Operator as a debtor in possession, or by a trustee in bankruptcy, shall be deemed a resignation as Joint Development Operator without any action by the other Parties, except the selection of a successor.

 

  (e)

Following any resignation or removal of EOC as Joint Development Operator, if BG or one of its Affiliates is still a Party to this Agreement, BG or its designated Affiliate shall be entitled to become successor Joint Development Operator. Should BG and its Affiliates elect not to become successor Joint Development Operator, or should none of BG and its Affiliates be a Party to this Agreement, a successor Joint Development Operator shall be selected by the Parties by the affirmative vote of Parties holding collectively at least seventy-five percent (75%) of the Participating Interests eligible to vote. If Joint Development Operator has been removed for cause or is deemed to have resigned or votes only to succeed itself, it and its Affiliates shall not be entitled to vote for the successor Joint Development Operator (but any transferee of all or any part of the Joint Development Operator’s Participating Interest shall be entitled to vote for the successor Joint Development Operator). The Joint Development Operator’s resignation or removal shall not become effective until 7:00 o’clock am on the first day of the Calendar Month following the expiration of ninety (90) days after the giving of notice of resignation by the Joint Development Operator, the deemed resignation of the Joint Development Operator or action by BG or the

 

8


 

non-operators to remove Joint Development Operator, unless a successor Joint Development Operator has been selected and assumes the duties of Joint Development Operator at an earlier date.

 

  (f) Subject to the terms and conditions of this Agreement, in addition to those certain other duties and responsibilities expressly set forth herein, Joint Development Operator shall:

 

  (i) notwithstanding the terms of any Applicable Operating Agreement to the contrary, at the option of any Development Party, pay such Development Party’s share of: (A) rentals, shut-in well payments and minimum royalties required to be paid to lessees under the Leases included in the Subject Oil and Gas Assets; and (B) royalties, overriding royalties and other burdens required to be paid to lessees and holders of overriding royalties and other burdens on the Leases included in the Subject Oil and Gas Assets, provided that the Development Party’s share of the payments described in clauses (A) and (B) shall be billed to or advanced by, as the case may be, such Development Party in accordance with Section 2.2;

 

  (ii) at the option of any Development Party, pay such Development Party’s share of joint interest billings and cash calls (including, in the case of BG, Carried Costs) from third party operators relating to wells in the East Texas/North Louisiana Area not operated by a Party Operator, provided that the Development Party’s share of such payments shall be billed to or advanced by, as the case may be, such Development Party in accordance with Section 2.2; and

 

  (iii) notwithstanding the terms of any Applicable Operating Agreement to the contrary, at the option of any Development Party, at such Development Party’s expense, secure any title curative matters and pooling amendments or agreements required of such Development Party under the Applicable Operating Agreement in connection with Leases or other rights to oil and gas included in the Subject Oil and Gas Assets, provided that the Development Party’s expenses for such requested actions shall be billed to or advanced by, as the case may be, such Development Party in accordance with Section 2.2.

Section 3.7 Liability of Operator .

 

  (a)

Subject to the rights of a Development Party to remove any Party acting as Joint Development Operator under this Agreement or Party Operator under any Applicable Operating Agreement in accordance with the terms hereof, in no event shall any Party serving as Joint Development Operator or a Party Operator have any liability as Joint Development Operator under this Agreement or Party Operator under any Applicable Operating Agreement for any claim, damage, loss or liability sustained or incurred in connection with any Development Operation or any breach of Section 3.3 or any similar provision regarding the standard of

 

9


 

performance of a Party Operator in performing operations under any Applicable Operating Agreement, EVEN IF SUCH CLAIM, DAMAGE, LOSS OR LIABILITY AROSE IN WHOLE OR IN PART FROM THE ACTIVE, PASSIVE, SOLE OR CONCURRENT NEGLIGENCE, STRICT LIABILITY OR OTHER FAULT OF SUCH PARTY, ANY OF ITS AFFILIATES OR ANY OFFICER, PARTNER, MEMBER, DIRECTOR OR EMPLOYEE OF SUCH PARTY, OTHER THAN IF SUCH CLAIM, DAMAGE, LOSS OR LIABILITY AROSE FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH PARTY, ANY OF ITS AFFILIATES OR ANY OFFICER, PARTNER, MEMBER, DIRECTOR OR EMPLOYEE OF SUCH PARTY (WHICH CLAIM, DAMAGE, LOSS OR LIABILITY IS THE SUBJECT OF SECTION 3.7(B)) and provided further that neither Joint Development Operator nor any Party Operator shall be released from liability for a material breach of any financial, administrative or procedural (such as providing notices and voting) obligation of Joint Development Operator under this Agreement or a Party Operator under any Applicable Operating Agreement; it being understood by each Party that any such claim, damage, loss or liability (other than that caused by the gross negligence or willful misconduct of a Party, its Affiliates or any officer, partner, member, director or employee of a Party or any of its Affiliates, or the material breach of any financial, administrative or procedural (such as providing notices and voting) obligation of Joint Development Operator or a Party Operator), shall be borne severally by the Parties (including such operator) in proportion to their interests in the operations or activities giving rise to such claim, damage, loss or liability.

 

  (b) Any Party serving as Joint Development Operator or a Party Operator shall bear sole liability on behalf of the Parties for any claim, damage, loss or liability sustained or incurred in connection with Development Operations hereunder or under an Applicable Operating Agreement to the extent such claim, damage, loss or liability arose in whole or in part from the gross negligence or willful misconduct of such Party or any of its Affiliates or any officer, partner, member, director or employee of such Party or Affiliate of such Party.

 

  (c) Notwithstanding anything to the contrary herein or in any Applicable Operating Agreement, neither Joint Development Operator nor any Party Operator shall be liable for the gross negligence or willful misconduct of a Secondee, nor shall the gross negligence or willful misconduct of such a Secondee be grounds for removal of Joint Development Operator pursuant to Section 3.5(c) or such Party Operator in accordance with Section 3.5(b).

Section 3.8 Secondees . Notwithstanding the terms of any Applicable Operating Agreement to the contrary, BG shall have the right to place Secondees within the organization of EXCO Operator while it is serving as Joint Development Operator, all as set forth in Exhibit “C” attached hereto.

Section 3.9 Non-Solicitation of Joint Operator Employees . No Party may solicit any employee of Joint Development Operator for a period of twelve (12) Calendar Months after

 

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such employee’s employment with Joint Development Operator has ended without obtaining the prior written consent of Joint Development Operator, provided that this prohibition shall not apply to offers of employment made by a Party pursuant to a general solicitation of employment to the public or the industry, and no Party shall be prohibited from employing any such person who contacts such Party on his or her own initiative.

Section 3.10 Certain Reports .

 

  (a) Joint Development Operator and each Party Operator shall provide the following data and reports, as they are currently produced or compiled, for each Development Operation for which it serves as operator to the Participating Parties for such Development Operation:

 

  (i) copies of all logs or surveys, including in digitally recorded format if such exists;

 

  (ii) daily drilling and production reports;

 

  (iii) copies of all tests and core data and analysis reports;

 

  (iv) final well recap reports;

 

  (v) copies of all plugging reports;

 

  (vi) as requested by Participating Party from time to time and, except as prohibited by restrictions under third party contracts (which restrictions Joint Development Operator or Party Operator, as applicable, shall use its reasonable efforts to have waived), copies of current geological and geophysical maps, seismic sections and shot point location maps;

 

  (vii) subject to the following sentence, engineering studies, development schedules and annual progress reports on development projects;

 

  (viii) subject to the following sentence, field and well performance reports, including reservoir studies and reserve estimates;

 

  (ix) copies of written notices provided by any third Person regarding violations or potential violations of applicable Law;

 

  (x) copies of all material reports provided to any Governmental Authority;

 

  (xi) upon written request of a Participating Party, copies of any material correspondence between such operator and any Governmental Authority;

 

  (xii) copies of all title opinions, including drill site title opinions and division order title opinions;

 

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  (xiii) such other information as may be reasonably requested by a Participating Party; and

 

  (xiv) such other reports as may be directed by the Operating Committee.

Notwithstanding the foregoing, if any of the foregoing data or reports under clause (vii) or (viii) above is generated, assembled or prepared by a third party that is not an Affiliate of Joint Development Operator or the applicable Party Operator (“ Third Party Prepared Information ”), then unless the costs of such third party’s services with respect to such Third Party Prepared Information are chargeable to the joint account for such Participating Parties, Joint Development Operator or Party Operator (as applicable) shall not be required to furnish such Third Party Prepared Information to any Participating Party, other than any Participating Party that pays Joint Development Operator or the applicable Party Operator its Participating Interest share of the cost of such Third Party Prepared Information.

 

  (b) Joint Development Operator and each Party Operator shall, in the conduct of Development Operations:

 

  (i) report to the Participating Parties within 24 hours of the management of such Joint Development Operator or Party Operator (as applicable) receiving notice thereof, details of fatalities, lost time incidents, material environmental incidents and any other material incidents which (in each case) may present a reputational risk to such Participating Parties and also provide copies of any written notices received from Governmental Authorities or third parties with respect to such fatalities and incidents;

 

  (ii)

prepare an HSSE report to be submitted by such operator to the Participating Parties on the fifteenth (15 th ) day of April, July, October and January of each year in respect of the previous three months, and monthly with respect to item (ii)(c) only, with content to be agreed by the Operating Committee but containing at a minimum:

 

  (A) progress against the HSSE Plan applicable to such period;

 

  (B) status of HSSE actions relating to HSSE audits;

 

  (C) occupational safety indicators (fatalities and lost time incidents and frequency, recordable incidents and frequency and total man hours worked) of such operator (and as agreed to as part of the HSSE Plan in accordance with Section 4.10, its contractors and subcontractors);

 

  (D) known environmental incidents (e.g. leaks, spills, and cases of violations of environmental Laws and permits); and

 

  (E) HSSE related claims;

 

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  (iii) Contractually require its contractors, subcontractors and suppliers of services to comply with all applicable Laws and all safety rules of such Joint Development Operator or Party Operator binding on operator personnel, and provide to its contractors and subcontractors copies of the HSSE Principles and HSSE Management System generated pursuant to Section 4.10 that are then in effect and use its commercially reasonable efforts to enforce such Persons’ compliance with such principles and system; and

 

  (iv) with reasonable advance notice, permit the Participating Parties to have access during normal business hours (at their sole risk and expense, notwithstanding anything herein or in any Associated Agreement to the contrary) to operations, design phase activities, books and records, and representatives of such operator for the purpose of conducting HSSE and asset integrity audits (provided that such Participating Parties shall (A) minimize any disruption to the operations and business of such Joint Development Operator or such Party Operator caused by such audits, and (B) adhere to all safety rules of such operator and the HSSE Principles and HSSE Management System then in effect while conducting such audits).

 

  (c) to the extent that a Development Party is responsible for any portion of the liability associated therewith, Joint Development Operator and each Party Operator shall promptly notify the Development Parties of any third party written claim or suit arising from Development Operations of which such operator becomes aware that exceeds (or is reasonably expected to exceed) one hundred thousand dollars (US$100,000), and, upon request of a Development Party from time to time, shall further provide, in a timely manner, the then current information regarding the progress and status of any such claims or suits.

Section 3.11 Insurance .

 

  (a)

Joint Development Operator and each Party Operator shall also carry insurance for the benefit of the joint account of the Development Parties as outlined in Exhibit “I” attached hereto and made a part hereof (provided that no Party Operator shall be required to carry insurance for any Development Party that is not a party to the Applicable Operating Agreement for which it is operator). All such policies shall be carried with insurers maintaining a credit rating of at least “A-” by Standard & Poors or A.M. Best or “A3” by Moody’s. Joint Development Operator and each Party Operator shall provide copies of such policies to the Development Parties covered by such policies upon request, and shall notify all Development Parties to be covered by such policies if it has been unable to obtain or maintain any of such policies. Except for worker’s compensation policies, Joint Development Operator and each Party Operator shall arrange for the Development Parties, according to their respective interests, to be named as additional insureds on the relevant policies, with waivers of subrogation in favor of all parties with respect to their interests under this Agreement or such Applicable Operating Agreement, as applicable. Joint Development Operator and

 

13


 

each Party Operator shall duly file any relevant claims and use commercially reasonable efforts to collect for the account of the relevant Development Parties any proceeds under such policies. Joint Development Operator and each Party Operator shall require all contractors and subcontractors engaged in work for Development Operations to comply with the workers compensation Laws of the state where the Development Operations are being conducted and to maintain such other insurance as Joint Development Operator or such Party Operator may require.

 

  (b) Notwithstanding the foregoing, any Development Party may obtain such insurance as it deems advisable for its own account at its own expense. Such insurance shall, in so far as it relates to Development Operations, contain a waiver of subrogation by the insurers in favor of each of the other Parties. Joint Development Operator and each Party Operator shall reasonably cooperate and assist such insurers in the investigation of insurance claims made by a Development Party in connection with the operations performed hereunder.

 

  (c) Joint Development Operator and each Party Operator shall in respect of insurance obtained by contractors and subcontractors pursuant to Section 3.11(a): (i) if requested by any Development Party, supply such Development Party with evidence of the insurance that has been effected and is being maintained; and (ii) in connection with any Development Operations Contracts entered into on or after the Closing Date (excluding any written or oral confirmations, service orders or purchase orders entered into from or after the Closing Date under contracts existing as of the Closing Date), take all commercially reasonable steps to require that such contractors and subcontractors obtain from their insurers a waiver of subrogation in favor of Joint Development Operator or such Party Operator and each of the Development Parties.

Section 3.12 Reimbursement of Joint Development Operator and Party Operators for Technical Services; Overhead .

 

  (a) From and after the Closing Date and for so long as EOC serves as Joint Development Operator and does not undergo a change in Control of its ultimate parent company, Joint Development Operator shall be entitled to perform Technical Services required in connection with Development Operations conducted by Joint Development Operator or any Party Operator that is an Affiliate of EXCO, and to charge the Development Parties for Technical Services Costs incurred in connection therewith.

 

  (b)

All Technical Services Costs chargeable with respect to Development Operations shall be chargeable to the Development Parties on a Calendar Month basis by Joint Development Operator and each Development Party shall pay its Participating Interest share thereof in accordance with Section 2.2. With respect to any Development Operation, if any Technical Services Costs are billed under a Pre-Existing Operating Agreement or a Subsequent Operating Agreement, then such amount received by Joint Development Operator or Party Operator in

 

14


 

connection therewith will be shared by the Development Parties in accordance with their respective Participating Interests (and Joint Development Operator or Party Operator, as applicable, shall credit to each such other Development Party the proportionate share to which such Development Party is entitled with respect to such amount received by such Joint Development Operator or Party Operator).

 

  (c) All employees and Secondees of Joint Development Operator and its Affiliates providing Technical Services to Development Operations that do not work solely on Development Operations shall record their time, and the time sheets of such employees and Secondees shall identify the time spent providing Technical Services to Development Operations, and only that portion of their time spent providing Technical Services to Development Operations shall be chargeable to the Development Parties. All such time sheets and related work records shall be subject to audit by the Development Parties. Notwithstanding the foregoing, from time to time the Development Parties may agree upon an allocation of time for certain employees and Secondees in lieu of requiring such employees and Secondees to record their time.

 

  (d) To the extent that any Development Operations are subject to a Pre-Existing Operating Agreement and EXCO or an Affiliate of EXCO is the Party Operator thereunder, then each Development Party shall be responsible for and pay its Working Interest share of the overhead rates specified in such Pre-Existing Operating Agreement for such Development Operations conducted thereunder in accordance with Section 2.2.

 

  (e) Except for Development Operations that are subject to a Pre-Existing Operating Agreement or a Subsequent Operating Agreement, with respect to all Development Operations conducted by EXCO or an Affiliate of EXCO as Party Operator hereunder or under any Joint Development Operating Agreement, each Development Party shall be responsible for and pay its Working Interest share of the overhead rates specified in Schedule 3.12 (subject to Section 3.12(f) below) for such Development Operations in accordance with Section 2.2.

 

  (f) With respect to Development Operations conducted by EXCO or an Affiliate of EXCO as a Party Operator under a Subsequent Operating Agreement each Development Party shall pay its Working Interest share of the producing well and/or drilling well overhead rates for such Development Operations specified in such Subsequent Operating Agreement (the “ Other Overhead Rates ”) in accordance with Section 2.2; provided that, in the event that the Other Overhead Rates differ from the overhead rates specified in Section 3.12(e) (the “ Section 3.12 Overhead Rates ”), then:

 

  (i)

to the extent that a Development Party’s Working Interest share of such Other Overhead Rates in any Calendar Month paid by such Development Party exceeds such Development Party’s Working Interest share of the Section 3.12 Overhead Rates for such Development Party for such Calendar Month (such Development Party’s “ Actual Operating Agreement

 

15


 

Charges ”), then such Party Operator shall credit to such Development Party the difference between its Working Interest share of the Other Overhead Rates paid by such Development Party and its Actual Operating Agreement Charges for such Calendar Month; or

 

  (ii) to the extent that a Development Party’s Working Interest share of such Other Overhead Rates in any Calendar Month paid by such Development Party is less than the Actual Operating Agreement Charges for such Development Party for such Calendar Month, then (upon notice by such Party Operator) such Development Party shall pay such Party Operator the difference between its Actual Operating Agreement Charges and its Working Interest share of such Other Overhead Rates for such Calendar Month in accordance with Section 2.2.

 

  (g) Each Development Party shall bear its Participating Interest share of the Technical Services Costs and its Working Interest share of overhead rates chargeable to each Development Party pursuant to this Section 3.12; provided that, in the case of Sole Risk Operations, the costs and expenses of such overhead shall be chargeable solely to the Participating Parties with respect to such Sole Risk Development Operations in accordance with their respective Working Interests in such Sole Risk Development Operations.

ARTICLE 4

OPERATING COMMITTEE; DEVELOPMENT WORK PROGRAM;

ANNUAL WORK PROGRAM AND BUDGETS

Section 4.1 Operating Committee .

 

  (a) To facilitate the creation, approval and amendment of the Development Work Program and Annual Work Program and Budgets, and the approval of certain contracts entered into by Joint Development Operator in the course of performing Development Operations, and provide for the overall direction of Joint Development Operations, there is hereby established an Operating Committee composed of representatives of each Development Party. Each Development Party shall appoint one (1) representative and one (1) alternate representative to serve on the Operating Committee, and shall appoint its initial representative and alternate representative by notice to the others on or prior to the first to occur of the first meeting of the Operating Committee or the first vote of the Operating Committee pursuant to Section 4.1(n). All actions of a Development Party taken with respect to the Operating Committee shall be taken through its representative or alternate representative.

 

  (b) Each Development Party shall have the right to change its representative and alternate at any time by giving notice of such change to the other Parties.

 

  (c) The Operating Committee shall have the powers and duties expressly ascribed to it in this Agreement.

 

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  (d) The representative of a Development Party, or in his absence his alternate representative, shall be authorized to represent and bind such Development Party with respect to any matter which is within the powers of the Operating Committee and is properly brought before the Operating Committee. Each such representative shall have a vote equal to the Participating Interest of the Development Party that appointed such representative. Each alternate representative shall be entitled to attend all Operating Committee meetings but shall have no vote at such meetings except in the absence of the representative for whom he is the alternate. In addition to the representative and alternate representative, each Development Party may also bring to any Operating Committee meetings such advisors as it may deem appropriate.

 

  (e) Joint Development Operator may call a meeting of the Operating Committee by giving notice to the Development Parties at least fifteen (15) days in advance of such meeting. Any Development Party may request a meeting of the Operating Committee by giving notice to the other Development Parties and Joint Development Operator, which notice shall include any proposals being proposed by such Development Party for consideration at the meeting (including appropriate supporting information not previously distributed to the Development Parties). Upon receiving such request, Joint Development Operator shall call such meeting for a date not less than fifteen (15) days nor more than twenty (20) days after receipt of the request.

 

  (f) The Operating Committee may establish such subcommittees as the Operating Committee may deem appropriate. The functions of such subcommittees shall be to serve in an advisory capacity only. Each Development Party shall have the right to appoint a representative to each subcommittee. The Operating Committee is hereby deemed to have established an implementation committee whose purpose shall be to brainstorm, develop and discuss strategies for the efficient development of the Subject Oil and Gas Assets, implementation of such strategies through the Development Work Program and Annual Work Program and Budgets, and potential acquisitions (whether by leasing, purchase, farm-in or otherwise) of other Oil and Gas Assets (provided that, for the avoidance of doubt, no Development Party or Affiliate of a Development Party shall have any obligation to offer another Development Party the opportunity to participate in acquisitions of Oil and Gas Assets except as provided in Article 9).

 

  (g)

Each notice of a meeting of the Operating Committee as provided by Joint Development Operator shall contain: (i) the date, time and location of the meeting; (ii) an agenda of the matters and proposals to be considered and/or voted upon; and (iii) copies of all proposals to be considered at the meeting (including appropriate supporting information not previously distributed to the Development Parties). A Development Party, by notice to the other Development Parties and Joint Development Operator, which notice shall include any additional proposals being proposed by such Development Party to be considered at the meeting (including appropriate supporting information not previously distributed to the Development Parties), given not less than five (5) Business Days prior to a

 

17


 

meeting, may add additional matters to the agenda for a meeting. On the request of a Development Party, and with the unanimous consent of all Development Parties, the Operating Committee may consider at a meeting a proposal not contained in such meeting agenda.

 

  (h) There shall be at least one (1) but not more than three (3) meetings of the Operating Committee per Calendar Quarter unless all Development Parties agree in writing to the contrary. The restriction on number of meetings contained in this Section shall not restrict the number of proposals that may be submitted without a meeting pursuant to Section 4.1(m). Meetings of each subcommittee shall take place as often as the Operating Committee shall determine. All meetings of the Operating Committee and each subcommittee shall be held in the offices of Joint Development Operator, or elsewhere as the Operating Committee or such subcommittee may mutually decide.

 

  (i) Except as provided otherwise in this Section 4.1(i) and in Section 5.2, all decisions, approvals and other actions of the Operating Committee on all proposals coming before it that are within its powers to approve or disapprove, shall be decided by the affirmative vote of Development Parties holding collectively at least seventy-five percent (75%) of the Participating Interests of the Development Parties entitled to vote on such proposals, provided that (i) any Development Operation proposed to the Operating Committee that is not approved by the Operating Committee and that may be proposed and conducted as a Sole Risk Development Operation under the terms of the Applicable Operating Agreement may be so proposed and conducted by the Development Parties desiring to participate in such Development Operation and (ii) any Area-Wide Operation proposed to the Operating Committee which is not approved by the Operating Committee may be conducted by those Development Parties desiring to participate in such Development Operation at their sole risk and expense. Notwithstanding the preceding, any proposal to reduce the quantity of work to be conducted under the Development Work Program or any Annual Work Program and Budget (to the extent relating to any Development Operations included in any Development Work Program) with respect to any period prior to the Carry Termination Event shall also require the affirmative vote of EXCO.

 

  (j) With respect to meetings of the Operating Committee and each subcommittee, Joint Development Operator’s duties shall include: (i) timely preparation and distribution of the agenda; (ii) organization and conduct of the meeting; and (iii) preparation of a written record or minutes of each meeting.

 

  (k) Joint Development Operator shall have the right to appoint the chairman of the Operating Committee and each subcommittee, provided that, for the avoidance of doubt, the chairman shall have no special casting or deciding vote on any matter presented to the Operating Committee. The chairman of the Operating Committee shall appoint a secretary who shall make a record of each proposal voted on and the results of such voting at each Operating Committee meeting. Each Development Party shall sign and be provided a copy of such record at the end of such meeting, and it shall be considered the final record of the decisions of the Operating Committee.

 

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  (l) The secretary shall provide each Development Party with a copy of the minutes of each Operating Committee meeting within fifteen (15) Business Days after the end of the meeting. Each Development Party shall have fifteen (15) days after receipt of such minutes to give notice to the secretary of any objections to the minutes. A failure to give notice specifying objection to such minutes within said fifteen (15) day period shall be deemed to be approval of such minutes. In any event, the votes recorded under Section 4.1(j) shall take precedence over the minutes described above.

 

  (m) In lieu of a meeting, any Development Party may submit any proposal that is within the Operating Committee’s powers to approve or disapprove to the Operating Committee for a vote by notice. The proposing Development Party or Development Parties shall notify Joint Development Operator with written materials describing the proposal and Joint Development Operator shall provide a copy of such proposal to each Development Party. Any such proposal by a proposing Development Party shall include with such proposal adequate documentation to enable the other Development Parties to make a decision. Each Development Party (including the proposing Development Party) shall communicate its vote on the proposal by notice to Joint Development Operator and the other Development Parties within fifteen (15) days after receipt of the proposal from the Joint Development Operator, unless such proposal, together with any other increases to an approved Annual Work Program and Budget for a Calendar Year, if accepted, would result in aggregate spending pursuant to such Annual Work Program and Budget of more than ten percent (10%) in excess of the original amount of the Annual Work Program and Budget approved pursuant to Section 4.4 (or, in the case of the Annual Work Program and Budget for Calendar Year 2009, attached hereto as Exhibit “E-1”) or, once amended to increase the amount of the Annual Work Program and Budget ten percent (10%) above the then existing amount in accordance with Section 4.4(e), the amended amount of the Annual Work Program and Budget, in which case each Development Party (including the proposing Development Party) shall communicate its vote on the proposal by notice to Joint Development Operator and the other Development Parties within sixty (60) days after receipt of the proposal from the Joint Development Operator. Any Development Party failing to communicate its vote in a timely manner shall be deemed to have voted against such proposal. Within five (5) Business Days following the expiration of the relevant time period, Joint Development Operator shall give each Development Party a confirmation notice stating the tabulation and results of the vote on such proposal.

 

  (n) From time to time, the Operating Committee may approve guidelines, standards or procedures regarding the implementation of Development Operations to be observed in the conduct of Development Operations by Joint Development Operator and each Party Operator.

 

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  (o) All decisions taken by the Operating Committee pursuant to this Section 4.1 shall be conclusive and binding on all Parties.

 

  (p) All notices and communications required or permitted to be given under Section 3.10 or Article 4 to the Development Parties or a Party Operator or the members of the Operating Committee shall be sufficient in all respects if given in writing and delivered personally, or sent by bonded overnight courier, or mailed by U.S. Express Mail or by certified or registered United States Mail with all postage fully prepaid, or sent by telex or facsimile transmission (provided any such telex or facsimile transmission is confirmed either orally or by written confirmation), or sent by pdf via e-mail, addressed to the appropriate Party at the address for such Party shown below or at such other address as such Party shall have theretofore designated by written notice delivered to the Party giving such notice:

 

If to EXCO:
 

EXCO Operating Company, LP

EXCO Production Company, LP

12377 Merit Drive, Suite 1700

Dallas, Texas 75251

Attention Michael R. Chambers

Telephone: (214) 368-2084

Fax: (214) 438-1347

E-mail: mchambers@excoresources.com

 

With copies to:

 

Attention Harold L. Hickey

Telephone: (214) 368-2084

Fax: (214) 368-8754

E-mail: hhickey@excoresources.com

 

Attention Stephen F. Smith

Telephone: (214) 368-2084

Fax: (214) 706-3409

Email: ssmith@excoresources.com

If to BG:  
 

BG US Production Company, LLC

5444 Westheimer, Suite 1200

Houston, Texas 77056

Attention: Jon Harris

Telephone: (713) 599-4000

Fax: (713) 599-4250

E-mail: Jon.Harris@bg-group.com

 

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BG US Production Company, LLC

5444 Westheimer, Suite 1200

Houston, Texas 77056

Attention: Bill Way

Telephone: (713) 599-4000

Fax: (713) 599-4250

E-mail: Bill.Way@bg-group.com

Any notice given in accordance herewith shall be deemed to have been given when delivered to the addressee in person, or by courier, or transmitted by facsimile transmission or email during normal business hours, or upon actual receipt by the addressee after such notice has either been delivered to an overnight courier or deposited in the United States Mail, as the case may be. The Parties may change the address, telephone numbers, facsimile numbers and email addresses to which such communications are to be addressed by giving written notice to the other Parties in the manner provided in this Section 4.1(p).

Section 4.2 Development Work Program .

 

  (a) The Operating Committee shall adopt, and modify from time to time, a multi-year work program for Development Operations (the “ Development Work Program ”) as follows:

 

  (i) The Operating Committee is hereby deemed to have approved the work program attached hereto as Exhibit “D” for Development Operations to be performed through Calendar Year 2012. Such work program shall constitute the Development Work Program applicable through Calendar Year 2012 except as otherwise revised, amended or modified by the Operating Committee.

 

  (ii) On or before August 15 of each Calendar Year, commencing in Calendar Year 2011, Joint Development Operator shall prepare and submit to the Operating Committee a revised Development Work Program setting forth the Development Operations to be carried out during the following two Calendar Years. Such proposed Development Work Program shall automatically include any Development Operations which were approved for such period as part of the prior Development Work Program unless the Operating Committee determines to the contrary. Within sixty (60) days after distribution of the proposed Development Work Program (or such later date as may agreed by the Operating Committee), the Operating Committee shall meet to consider, modify (if necessary) and approve or reject the proposed Development Work Program. If the Operating Committee does not approve any such Development Work Program on or prior to the first day of the following Calendar Year (for purposes of this Section 4.2(a)(ii), the “ current Calendar Year ”), then the Development Work Program for the then-current Calendar Year shall be the Development Work Program, if any, approved for the then-current Calendar Year in the preceding Calendar Year.

 

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  (b) Except as otherwise agreed in writing by the Operating Committee, the Annual Work Program and Budget for each Calendar Year shall contain not less than those Development Operations to be performed during such Calendar Year as set forth in the Development Work Program.

Section 4.3 Initial Annual Work Plan and Budgets . The Annual Work Program and Budget for the remainder of Calendar Year 2009 is hereby approved by the Operating Committee and is attached hereto as Exhibit “E-1”. The first draft of an Annual Work Program and Budget for Calendar Year 2010 attached hereto as Exhibit “E-2” is hereby deemed approved by the Operating Committee, provided that the Operating Committee shall approve such further details as would be required under the terms of Section 4.4 on or before October 15, 2009.

Section 4.4 Subsequent Annual Work Plan and Budgets . For each Calendar Year during the term of this Agreement commencing with Calendar Year 2010, each Annual Work Program and Budget shall be adopted as follows:

 

  (a) On or before August 15 in the Calendar Year immediately preceding the relevant Calendar Year, Joint Development Operator shall prepare and submit to the Operating Committee a proposed Annual Work Program and Budget for such applicable Calendar Year (provided that in the case of the proposed Annual Work Program and Budget for Calendar Year 2010, the draft Annual Work Program and Budget attached hereto as Exhibit “E-2” shall be basis for such proposed Annual Work Program and Budget). Each such proposed Annual Work Program and Budget shall contain at least the following:

 

  (i) all Development Operations that are to be conducted during such Calendar Year pursuant to the Development Work Program, except with the approval of the Operating Committee to the contrary;

 

  (ii) all lease maintenance costs and expenditures required under the terms of existing Leases or existing third party contracts held by Joint Development Operator for the benefit of Joint Development Operations (including each Development Party’s share thereof), except with the approval of the Operating Committee to the contrary;

 

  (iii) estimates of all Technical Services Costs associated with Technical Services to be provided by Joint Development Operator;

 

  (iv) itemized estimates of the Development Costs (including each Development Party’s share thereof) for Joint Development Operations covered by the proposed Annual Work Program and Budget by budget category and allocated between Shallow Rights and Deep Rights, and Area-Wide Operations, containing sufficient detail (to the extent available) to afford the ready identification of the nature, scope and duration of the activity in question;

 

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  (v) the number of wells to be drilled as part of the Joint Development Operations in each of the Shallow Rights and the Deep Rights during such Calendar Year, the proposed locations of such wells (to the extent reasonably ascertainable at the time such Annual Work Program and Budget is proposed), and the estimated Development Costs (including each Development Party’s share thereof) associated therewith;

 

  (vi) estimates of the schedule pursuant to which the Development Parties’ share of Development Costs for Joint Development Operations included in the Annual Work Program and Budget are anticipated to be incurred by the Development Parties; and

 

  (vii) any other information requested in writing by a Development Party that can reasonably be provided by the Joint Development Operator.

 

  (b) Itemized expenditures in an Annual Work Program and Budget may extend over more than one Calendar Year because such itemized expenditures represent activities or operations that require commitments in excess of one Calendar Year. Once itemized expenditures are approved, Joint Development Operator shall not be required to resubmit them for approval of the Operating Committee on an annual or other periodic basis, but instead all such items shall be automatically included in future Annual Work Program and Budgets as items which have already been approved.

 

  (c)

Joint Development Operator shall regularly consult with the Operating Committee and the implementation subcommittee during the preparation of each proposed Annual Work Program and Budget. Following receipt of Joint Development Operator’s proposed Annual Work Program and Budget, each Development Party shall furnish to Joint Development Operator and the other Development Parties any comments, suggestions or proposed amendments it may have respecting the proposed Annual Work Program and Budget as soon as may be reasonably practicable, and Joint Development Operator shall consider and discuss such comments, suggestions and proposed amendments with the Operating Committee. Unless otherwise extended by the Operating Committee, within sixty (60) days after distribution of the proposed Annual Work Program and Budget for a Calendar Year, the Operating Committee and Joint Development Operator shall meet to consider, modify (if necessary) and approve or reject the proposed Annual Work Program and Budget. Subject to Section 4.4(d), approval of an Annual Work Program and Budget shall require the approval of the Operating Committee. Inclusion of an operation in an approved Annual Work Program and Budget or an approved amendment thereof shall, subject to the terms of Section 4.6: (i) bind all Development Parties to participate in such operation, and no Development Party shall have the right to make any nonconsent election under an Applicable Operating Agreement with respect to such operation; and (ii) authorize Joint Development Operator to conduct such operation for the account of all of the Development Parties under the relevant Applicable Operating Agreement (provided that, to the extent any third parties are party to such Applicable

 

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Operating Agreement, Joint Development Operator shall propose such operation to such third parties in accordance with the terms of such Applicable Operating Agreement, though, for the avoidance of doubt, Joint Development Operator need not re-propose such operation to the Development Parties), and each Party Operator to conduct such operation, subject to the budgetary provisions of such Annual Work Program and Budget and Sections 4.4(i) and 4.7, without further authorization from the Operating Committee. Each Development Party agrees to provide such notices, make such elections and take such actions as may reasonably be required under any Applicable Operating Agreement to implement this provision. For the avoidance of doubt, no Development Party shall be obligated to participate in acquisitions of Leases included in an Annual Work Program and Budget, but instead shall have the right but not the obligation to participate in such acquisitions pursuant to Article 9.

 

  (d) In the event that an Annual Work Program and Budget is not approved on or prior to the first day of the Calendar Year to which such Annual Work Program and Budget pertains (for purposes of this Section 4.4(d), the “ relevant Calendar Year ”), the Operating Committee shall be deemed to have approved an Annual Work Program and Budget for such relevant Calendar Year that includes the following: (i) the Development Operations scheduled to be performed during the relevant Calendar Year as set forth in the Development Work Program, if any, and associated Development Costs reasonably required to implement such Development Operations; (ii) Operating Expenses equal to the product of the amount of Operating Expenses approved in the preceding Calendar Year’s Annual Work Program and Budget and the Operating Expense Multiplier for the relevant Calendar Year; (iii) Technical Services Costs equal to the amount of Technical Services Costs approved in the preceding Calendar Year’s Annual Work Program and Budget; (iv) those multi-year expenditures previously approved by the Development Parties pursuant to Section 4.4(b) that are attributable to the relevant Calendar Year; (v) existing payment commitments to third parties under Leases and contracts binding with respect to the Subject Oil and Gas Assets; and (vi) taxes payable with respect to the Subject Oil and Gas Assets by any operator under the terms of any Applicable Operating Agreement.

 

  (e) Any Development Party may propose to amend the Development Work Program or an Annual Work Program and Budget by notice to the Operating Committee and Joint Development Operator. Approval of any such amendment shall require the approval of the Operating Committee. Notwithstanding any provision of Section 4.1 to the contrary, each Development Party shall have sixty (60) days to consider any proposed amendment that would increase the estimated costs of the Development Work Program for any Calendar Year or any Annual Work Program and Budget by more than ten percent (10%). To the extent that such amendment is approved by the Operating Committee, the Development Work Program and relevant Annual Work Program and Budget shall, subject to any required approvals under any Applicable Operating Agreement, be deemed amended accordingly, provided that any such amendment shall not invalidate any commitment or expenditure already made by an operator under an Applicable Operating Agreement in accordance with any previous authorization given pursuant hereto.

 

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  (f) Notwithstanding anything to the contrary in this Section 4.4, any Development Party may propose Development Operations that are not included in the Development Work Program or a then-current approved Annual Work Program and Budget (a “ Non-Budgeted Operation ”). Any such Non-Budgeted Operation proposed by a Development Party in which all Development Parties agree to participate shall automatically be added to the Development Work Program and the applicable approved Annual Work Program and Budget(s) and shall cease to be a Non-Budgeted Operation. Any such Non-Budgeted Operation in which less than all of the Development Parties elect to participate (i) that may be undertaken as a Sole Risk Development Operation under the terms of the relevant Applicable Operating Agreement or (ii) that is an Area-Wide Operation may be proposed and conducted as a Sole Risk Development Operation. Notwithstanding the preceding, until December 31, 2012, no Non-Budgeted Operation may be performed as a Sole Risk Development Operation for the benefit of a Development Party if the sum of the estimated costs of conducting such Non-Budgeted Operation for the account of such Development Party, together with costs incurred or to be incurred by such Development Party with respect to other Sole Risk Development Operations performed or to be performed in such Calendar Year, together with all Joint Development Operations performed or to be performed in such Calendar Year, exceeds one hundred twenty percent (120%) of the total amount of the approved Annual Work Program and Budget for such Calendar Year.

 

  (g) Any Development Operation proposed by a third party pursuant to an Applicable Operating Agreement shall be subject to the terms and conditions of such Applicable Operating Agreement. Any such Development Operation proposed by a third party in which all Development Parties elect to participate shall automatically be added to the Development Work Program and the applicable approved Annual Work Program and Budget(s). Any such Development Operation in which less than all of the Development Parties elect to participate that may be undertaken as a Sole Risk Development Operation under the terms of the relevant Applicable Operating Agreement may be so proposed and conducted.

 

  (h)

Approval by the Operating Committee of an Annual Work Program and Budget shall constitute the Operating Committee’s deemed approval for any Party Operator to expend up to ten percent (10%) in excess of the authorized amount applicable to its operations within each Annual Work Program and Budget category, not to exceed in the aggregate ten percent (10%) of the aggregate amount applicable to its operations in such Annual Work Program and Budget, less, in each case, any amounts included as line items for contingencies and overruns with respect to such operations in such category or Annual Work Program and Budget. Each Party Operator shall promptly notify the Operating Committee of any expenditure made by it in the exercise of its rights pursuant to this Section 4.4(h). The ten percent (10%) deemed approval levels set forth in

 

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this Section 4.4(h) shall be calculated with respect to the original amount of an Annual Work Program and Budget or, once amended, the amended amount of the Annual Work Program and Budget, provided that no expenditures incurred pursuant to Section 4.4(i) shall be deemed to be included in an approved Annual Work Program and Budget for purposes of calculating the ten percent (10%) deemed approvals pursuant to this Section 4.4(h), nor shall any such expenditures be considered to be amounts expended in excess of the authorized amount of any Annual Work Program and Budget for purposes of calculating the ten percent (10%) deemed approval levels.

 

  (i) Notwithstanding anything to the contrary in this Agreement, any Party Operator is expressly authorized to make expenditures and incur liabilities without prior authorization or approval when necessary or advisable, in such Party Operator’s good faith judgment, to deal with emergencies, including well blowouts, fires, oil spills, or any other similar event, which may endanger property, lives, or the environment. Each Party Operator shall as soon as practicable report to the Development Parties the nature of any such emergency which arises, the measures it intends to take in respect of such emergency and the estimated related expenditures.

 

  (j) To the extent reasonably within the control of any Party Operator or the other Development Party or Development Parties conducting any Joint Development Operation, the Joint Development Operation shall be conducted at the time prescribed in the applicable Annual Work Program and Budget.

 

  (k) For the avoidance of doubt, any reference in this Agreement to an approved Annual Work Program and Budget shall include an Annual Work Program and Budget that is deemed to have been approved by the Operating Committee, and shall incorporate all approved amendments thereto and all modifications to Annual Work Program and Budgets described herein that require no action on the part of the Parties.

Section 4.5 Statements of Estimated Expenditures . Not later than twenty (20) days prior to the commencement of each Calendar Quarter during the term of this Agreement, Joint Development Operator shall provide the Development Parties a statement of the estimated Development Costs to be incurred in such Calendar Quarter pursuant to this Agreement, including Development Costs associated with Joint Development Operations. Such statement shall be for informational purposes only, and, except as otherwise provided in Section 4.6, no approval of the Operating Committee shall be required for any of the Development Costs identified therein to the extent such Development Costs are included in an approved Annual Work Program and Budget, or are covered by Section 4.4(h).

Section 4.6 AFEs .

 

  (a)

Prior to: (i) spudding any well as a Joint Development Operation, (ii) making any material expenditures or incurring any material commitments for work on any Wellbore Operation to be conducted as a Joint Development Operation that is

 

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estimated to cost in excess of five hundred thousand dollars (US$500,000), or (iii) making any material expenditures or incurring any material commitments for work on any Area-Wide Operation to be conducted as a Joint Development Operation that is estimated to cost in excess of one million dollars (US$1,000,000), the Party Operator or Joint Development Operator, as the case may be, shall submit for the approval of the Operating Committee an AFE. Where the necessary information is available, such AFE may be submitted and approved for designated wells and Wellbore Operations as part of the proposed Annual Work Program and Budget for a Calendar Year, in which case no separate subsequent AFE shall be required.

 

  (b) Each Development Party shall communicate an Operating Committee vote to approve or reject the AFE within fifteen (15) days following receipt of the AFE (or forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) in the event of a Wellbore Operation when a drilling rig is on location). Any Development Party failing to communicate its vote within the applicable time period shall be deemed to have voted against the AFE.

 

  (c) If the Operating Committee approves an AFE for the operation within the applicable period, the Party Operator or Joint Development Operator shall be authorized to conduct the operation under the terms of this Agreement. If the Operating Committee fails to approve an AFE for the operation within the applicable time period, the operation shall be deemed rejected. The Party Operator or Joint Development Operator shall promptly notify the Parties if the operation has been rejected, and, subject to Section 4.4(f), any Development Party may thereafter conduct the operation as a Sole Risk Development Operation under the terms of the Applicable Operating Agreement.

 

  (d) For purposes of any Applicable Operating Agreement that contains a casing point election, approval of an AFE that includes the costs associated with completing a well shall be deemed to be an election to participate in the completion of such well pursuant to the relevant provisions of such Applicable Operating Agreement.

 

  (e) When an operation is approved for greater amounts than those provided for in the applicable line items of the approved Annual Work Program and Budget, the Annual Work Program and Budget shall be deemed to be revised accordingly.

Section 4.7 Contract Awards . Notwithstanding the terms of any Applicable Operating Agreement to the contrary:

 

  (a)

Subject to Sections 4.7(b), (c) and (d), Joint Development Operator and each Party Operator shall award each Development Operations Contract to the best qualified contractor considering cost, ability, availability and HSSE performance considerations (in each case, in Joint Development Operator’s or Party Operator’s reasonable opinion), to perform the contract without the obligation to tender and without informing or seeking the approval of the Operating Committee. The procedures set forth in this Section 4.7 shall not apply to any contracts that have

 

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been awarded, or in respect of which invitations to tender have been issued, on or before the Closing Date, provided that the procedures set forth in this Section 4.7 shall apply to confirmations, service orders or purchase orders (whether written or oral) entered into on and after the Closing Date pursuant to existing master service agreements that were effective prior to the Closing Date.

 

  (b) Prior to Joint Development Operator or any Party Operator entering into a Development Operations Contract with a Development Party or an Affiliate of a Development Party for which one or more other Development Parties participating in such Development Operation that are not Affiliates of such Development Operations Contract counterparty will be responsible for all or a portion of the costs and expenses payable thereunder (“ Unaffiliated Participating Parties ”), Joint Development Operator or such Party Operator shall obtain the affirmative vote of the Operating Committee members appointed by Unaffiliated Participating Parties holding collectively at least seventy-five percent (75%) of the Participating Interests held by the Unaffiliated Participating Parties.

 

(c)       (i)            From and after January 1, 2010, prior to entering into a Development Operations Contract that can reasonably be expected to result in aggregate payments to the counterparty of more than one million dollars (US$1,000,000) during any twelve (12) consecutive Calendar Month period, commencing as of January 1 in any Calendar Year, except as provided in Section 4.7(c)(ii), Joint Development Operator and any Party Operator shall obtain proposals for such services from at least two (2) service providers. For the avoidance of doubt, a contract that automatically renews (is evergreen) on a month-to-month or other periodic basis that would meet the $1,000,000 threshold if it remained in effect for an entire twelve (12) consecutive Calendar Month period commencing as of January 1 in any Calendar Year shall be considered subject to the requirements of the preceding sentence.

 

  (ii)

If the Joint Development Operator or any Party Operator desires to award a Development Operations Contract that would otherwise be subject to Section 4.7(c)(i) without tender of proposals from more than one service provider, whether because only one competent service provider can provide the contracted-for-service or otherwise, the Joint Development Operator or such Party Operator may do so with the prior approval of the Operating Committee. Joint Development Operator and any Party Operator shall present a copy of the proposed Development Operations Contract to the Operating Committee. Each Development Party shall notify the Joint Development Operator or such Party Operator, and the rest of the Operator Committee, of its approval or rejection of such Development Operations Contract within fifteen (15) Business Days of its receipt of such Development Operations Contract. Failure of a Development Party to respond within such period shall be deemed an approval of the award of such Development Operations Contract. Joint Development Operator and a Party Operator may only enter into a

 

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proposed Development Operations Contract that would otherwise be subject to Section 4.7(c)(i) without tender of proposals from more than one service provider if the Operating Committee approves such Development Operations Contract.

 

  (iii) To the extent that Joint Development Operator or any Party Operator enters into a Development Operations Contract for which Joint Development Operator or any Party Operator is not required to obtain proposals from at least two (2) service providers pursuant to Section 4.7(c)(i) and such Development Operations Contract can reasonably be expected to result in aggregate payment to the counterparty of more than one hundred thousand dollars (US$100,000), Joint Development Operator or such Party Operator shall keep a written record in its files that are subject to the audit provisions of Section 2.2 of this Agreement and Exhibit “C” of the relevant Applicable Operating Agreement explaining why multiple bids were not obtained for such services

 

  (iv) In connection with the foregoing, Joint Development Operator and each Party Operator shall keep a written record in its files that are subject to the audit provisions of Section 2.2 of this Agreement and Exhibit “C” of each Joint Development Operating Agreement that (i) in the event that the Development Operations Contract is awarded pursuant to Section 4.7(c)(i), includes the proposals obtained from the prospective service providers; or (ii) in the event that the Development Operations Contract is awarded pursuant to Section 4.7(c)(ii), includes the notice to the Operating Committee and Operating Committee responses.

 

  (d) From and after the Closing Date, prior to entering into a Development Operations Contract not specifically and expressly approved as part of an approved Annual Work Program and Budget that can reasonably be expected to result in aggregate payments to the counterparty of more than five million dollars (US$5,000,000) during any twelve (12) consecutive Calendar Month period, Joint Development Operator and any Party Operator shall present a copy of the proposed Development Operations Contract to each Development Party, together with the tender list and tender evaluation criteria used to secure such proposed Development Operations Contract. Each Development Party shall notify the Joint Development Operator or such Party Operator and the Operating Committee, of its approval or rejection of such Development Operations Contract within fifteen (15) Business Days of its receipt of such materials. Failure of a Development Party to respond within such period shall be deemed an approval of such Development Operations Contract. Joint Development Operator and a Party Operator may only enter into such proposed Development Operations Contract to the extent that the Operating Committee approves such Development Operations Contract.

 

  (e)

Upon the reasonable written request of a Party, Joint Development Operator or a Party Operator shall provide such Party a copy of any written contract or contracts

 

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of a material nature that are utilized in connection with Joint Development Operations or Sole Risk Development Operations in which such Party is participating, as well as other information that can reasonably be provided by such operator regarding the use and performance of any such contract or contracts, except to the extent Joint Development Operator or such Party Operator may be prohibited from making any such disclosure under the terms and conditions of such contract and is unable through commercially reasonable efforts to obtain consent for such disclosure.

 

  (f) With respect to written contracts that are reasonably expected to be effective for a period of one (1) or more Calendar Years and that are entered into from and after the Closing Date, Joint Development Operator and each Party Operator shall include, in the case of Development Operations Contracts subject to Section 4.7(b), each of items (i) through (v) (inclusive) below, and shall use commercially reasonable efforts to include, in the case of Development Operations Contracts subject to Section 4.7(c) or (d), each of items (i) through (iv) (inclusive) below:

 

  (i) A right to assign such Development Operations Contract to a successor operator.

 

  (ii) A right for the operator to enforce the Development Operations Contract on behalf of all beneficiaries and to recover the full amount of damages suffered by all beneficiaries on their behalf.

 

  (iii) A statement that the Participating Parties are third party beneficiaries of the Development Operations Contract.

 

  (iv) A right for any Participating Party to hold, review and use any data and information, including seismic, geological, geophysical and other technical data and information that is the subject of such Development Operations Contract.

 

  (v) A right for any Participating Party to enforce the contract as a third party beneficiary without a requirement to join the operator.

Section 4.8 Area-Wide Operations .

 

  (a) Joint Development Operator shall conduct Area-Wide Operations on behalf of the Development Parties pursuant to the applicable approved Annual Work Program and Budget.

 

  (b) All costs and liabilities incurred in Area-Wide Operations shall be borne and paid, and all assets acquired in such operations owned, by the Participating Parties in proportion to their Participating Interests.

 

  (c) Each Development Party shall pay its share of estimated expenditures for Area-Wide Operations in which it participates, and such amounts shall be billed to or advanced by, as the case may be, such Development Party in accordance with Section 2.2.

 

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Section 4.9 Third Party Operators . For the avoidance of doubt, the Parties agree that (a) the Development Work Program, Annual Work Program and Budget and other terms of Sections 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.8, 4.9 and 4.10 shall, though binding as between the Parties, not be binding upon any operator or non-operator that is not a Party and (b) the terms of Section 4.7 shall not apply to any operations conducted by an operator that is not a Party.

Section 4.10 HSSE .

 

  (a) Within thirty (30) days following the Closing Date, the Development Parties shall use good faith efforts to develop HSSE principles to be observed in the conduct of Development Operations (the “ HSSE Principles ”) which at a minimum include: (i) the goals of preventing injuries and providing a healthy, safe and secure working environment; (ii) protection of the environment; (iii) the responsibility to seek continuous improvement in HSSE performance; and (iv) the principle that level of risk is the primary criterion for facilities design.

 

  (b) Within one hundred twenty (120) days following the Closing Date, the Development Parties shall use good faith efforts to develop an HSSE plan to be observed in the conduct of Development Operations (the “ HSSE Plan ”) relating to the conduct of activities under this Agreement which is consistent with the HSSE Principles and the relevant technical standards and codes of practice issued by American professional bodies, including the American Petroleum Institute, the American Society of Mechanical Engineers, the American National Standards Institute, and all applicable Laws.

 

  (c) Within two (2) years following the Closing Date, Joint Development Operator and each Party Operator shall have used good faith efforts to develop and implement an HSSE management system to be observed in the conduct of Development Operations (an “ HSSE Management System ”) which addresses the HSSE risks specific to its duties under this Agreement, and any Applicable Operating Agreement, and the management of controls to eliminate, reduce or mitigate HSSE risks.

 

  (d) From time to time, the Operating Committee may amend the HSSE Principles, HSSE Plan, and the HSSE Management System, as the case may be, subject to the voting thresholds and procedures set forth herein.

 

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Section 4.11 Conflict of Interest Policy . Within sixty (60) days following the Closing Date, the Operating Committee shall use good faith efforts to develop a policy for the Development Parties regarding required disclosure of conflicts of interest that any Development Party or Affiliate of a Development Party, or any officer, director or key employee of any Development Party or Affiliate of a Development Party, may have with the interests of any of the Development Parties in connection with the conduct of Development Operations.

ARTICLE 5

DEFAULT

Section 5.1 Default .

 

  (a) Any Development Party that fails to pay when due any amounts owed and undisputed under the terms of this Agreement or any Associated Agreement (including any amount included in an approved Annual Work Program and Budget) and such failure is not cured within fifteen (15) days of such Development Party’s receipt of a Default Notice shall be in default under this Agreement, and shall be referred to herein as a “ Defaulting Party ”. Joint Development Operator shall (or any Affected Party may) give notice of such default (a “ Default Notice ”) to the Defaulting Party and each of the other non-Defaulting Parties.

 

  (b) For purposes of this Article 5, “ Default Period ” means the period beginning fifteen (15) days from the date of a Development Party’s receipt of a Default Notice if such Development Party remains in default under Section 5.1(a), and ending when all of the Defaulting Party’s defaults have been remedied in full.

 

  (c) All amounts in default and not paid when due under this Agreement shall bear interest at the Default Interest Rate from the due date to the date of payment.

 

  (d) For the avoidance of doubt (i) EXCO shall not be in default with respect to the payment of its Participating Interest share of Development Costs to the extent that BG is responsible for such Development Costs as required by Section 2.1 and BG fails to pay its Carried Costs when due, and (ii) in the event BG fails to pay its Carried Costs when due and BG has not exercised its rights under Section 5.1(e) with respect to such Carried Costs (if applicable), then BG shall be in default under this Agreement upon its receipt of a Default Notice and its failure to so cure such default as provided in Section 5.1(a). Except as set forth in Section 5.1(e), no default by EXCO under this Agreement shall affect BG’s obligation to pay the Carried Costs when due as required by Section 2.1.

 

  (e) Notwithstanding anything to the contrary herein, at any time upon which EXCO is a Defaulting Party hereunder and prior to the Carry Termination Event, BG shall have the right but not the obligation to set off its obligation to pay Carried Costs against the Total Amount in Default of EXCO upon notice to EXCO and, upon such set off, such obligation to pay such Carried Costs (to the extent of the amount so set off) shall be deemed satisfied.

 

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Section 5.2 Certain Consequences of Default .

 

  (a) Notwithstanding any other provision in this Agreement or any Associated Agreement to the contrary, during the Default Period, the Defaulting Party shall be subject to all rights and remedies available to the Affected Parties under the relevant Applicable Operating Agreements, and in addition, shall have no right to:

 

  (i) make or elect to participate in any proposal under this Agreement or any Applicable Operating Agreement;

 

  (ii) vote on any matter with respect to which approval is required under the express terms of this Agreement or any Associated Agreement (excluding any amendment or waiver of the terms of any such agreement);

 

  (iii) call any Operating Committee or subcommittee meeting;

 

  (iv) vote on any matter coming before the Operating Committee or any subcommittee (except for any amendment to the Development Work Program pursuant to Section 4.1);

 

  (v) access any data or information relating to any operation conducted under this Agreement or any Associated Agreement (except to the extent that the Defaulting Party is Joint Development Operator or is a Party Operator, in which case such Defaulting Party shall be entitled to such data and information as may be necessary to perform its responsibilities in such capacity);

 

  (vi) Transfer all or any part of its interests in its Joint Development Interest or any other Subject Oil and Gas Asset, or Encumber all or any part of its interests in its Subject Oil and Gas Assets except in a case of (a) a Transfer of a Joint Development Interest to a Person or Encumbrance in favor of a Person who simultaneously with such Transfer or Encumbrance satisfies in full the Total Amount in Default, or (b) a Credit Facility Encumbrance granted pursuant to a borrowing for which all or a portion of the proceeds thereof are used to pay the entire amount of the Total Amount in Default;

 

  (vii) withhold consent to any Transfer of all or an undivided portion of the Joint Development Interest or a Material Interest of a non-defaulting Development Party pursuant to Article 7, or exercise its preferential purchase right provided for in Section 8.1 in the event of such a Transfer by a non-defaulting Development Party or in Section 8.2 in the event of a Change in Control of a non-defaulting Development Party; or

 

  (viii) elect to acquire any portion of an Acquired Interest pursuant to Article 9.

 

  (b)

In addition to the other remedies available to the Affected Parties under this Agreement and any other rights available to each Affected Party to recover its

 

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share of the Total Amount in Default from and after the later to occur of the thirtieth (30th) day of the Default Period or the time upon which the Defaulting Party’s Escrow Account Balance is equal to zero (0), a Defaulting Party shall have no right to receive its Entitlement from the Leases included in the Subject Oil and Gas Assets and the Affected Parties shall have the right to collect such Entitlement.

 

  (c) Furthermore, during the Default Period, the Defaulting Party shall be deemed to have approved, and shall join with the non-defaulting Development Party in taking, any actions approved by the non-defaulting Development Parties during the Default Period which cannot be conducted as Sole Risk Development Operations under the terms of any Applicable Operating Agreement.

 

  (d) Any Default Notice shall include a statement of the amount of money that the Defaulting Party has failed to pay.

 

  (e) Upon the commencement of the Default Period, except with respect to any Carried Costs, Joint Development Operator, or if Joint Development Operator or any Affiliate of Joint Development Operator is the Defaulting Party, any Affected Party or Affected Parties, shall send the non-defaulting Development Parties a statement of the sum of money that the Defaulting Party failed to pay, and the non-defaulting Development Parties shall pay such amount within fifteen (15) days following receipt of the statement. If any non-defaulting Development Party fails to timely satisfy such obligations, such non-defaulting Development Party shall thereupon be a Defaulting Party subject to the provisions of this Article 5. If all non-defaulting Development Parties fail to timely satisfy such obligations, the Development Parties shall be deemed to have unanimously determined not to make such expenditure and the Defaulting Party shall no longer be deemed to be in default with respect to such expenditure.

Section 5.3 Right to Costs of Enforcement . Each Affected Party shall be entitled to recover from the Defaulting Party all reasonable attorneys’ fees and other reasonable costs sustained in the collection of amounts owed by the Defaulting Party.

Section 5.4 Cumulative and Additional Remedies . The rights and remedies granted to an Affected Party in this Article 5 shall be cumulative, not exclusive, and shall be in addition to any other rights and remedies that may be available to the Affected Party, at law, in equity or otherwise. Each right and remedy available to an Affected Party may be exercised from time to time and so often and in such order as may be considered expedient by an Affected Party in its sole discretion.

Section 5.5 Reassignment Obligation .

 

  (a)

If BG becomes a Defaulting Party with respect to any Carried Costs, (a “ Carried Cost Default ”), then in addition to a Default Notice with respect thereto, EXCO will give notice of such Carried Cost Default (a “ Carried Cost Default Notice ”) to BG. If BG fails to pay such owed and undisputed Carried Costs within fifteen

 

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(15) days of BG’s receipt of a Carried Cost Default Notice, then EXCO (at the option of EXCO exercisable at any time prior to the cure of such Carried Cost Default, which option shall be exercised by notice to BG) may require BG to reassign to EXCO, effective as of the date of BG’s failure to pay such Carried Costs when due, with special warranty of title against, and free and clear of, all claims by, through or under BG or its Affiliates, but not otherwise, an undivided one-half (  1 / 2 ) of the Unpaid Carried Costs Percentage as of such time of all of BG’s and its Affiliates’ interests in the Deep Rights assigned by EXCO to BG pursuant to the Purchase Agreement and related Subject Oil and Gas Assets, including wells (including all wells drilled on such Deep Rights in which BG and/or its Affiliates have participated). For the avoidance of doubt, no Deep Rights acquired by BG pursuant to Article 9 shall be subject to the reassignment obligation. If EXCO elects to exercise its reassignment rights pursuant to this Section 5.5, BG shall be deemed to no longer be in default of its obligations to pay Carried Costs in accordance with the terms of Sections 2.1 and 2.2 of this Agreement, and such obligation to pay Carried Costs shall be deemed to be fully satisfied and this Agreement shall terminate. EXCO shall be entitled to exercise any and all rights and remedies that may be available to EXCO to enforce its rights under this Section 5.5, whether set forth in this Agreement, the Applicable Operating Agreement, at Law, in equity (including specific performance of this Agreement) or otherwise.

 

  (b) Notwithstanding anything to the contrary in this Section 5.5, for the avoidance of doubt, unless and until EXCO exercises its rights to require BG to reassign a portion of the Deep Rights under and in accordance with Section 5.5(a), BG shall have record title to the interests in the Deep Rights Transferred to BG pursuant to the Purchase Agreement and the conveyances executed in connection therewith and, except in the event of the exercise by EXCO of its rights under Section 5.2(b) or in the event that EXCO exercises its right to require BG to reassign a portion of the Deep Rights under and in accordance with Section 5.5(a) effective as of the date of BG’s failure to pay such Carried Costs when due, BG shall be entitled to all production from or attributable to such interests.

ARTICLE 6

TRANSFERS

Section 6.1 Maintenance of Uniform Interest; Minimum Participating Interest; Transfers by Defaulting Parties .

 

  (a)

For the purpose of maintaining uniformity of ownership in the East Texas/North Louisiana Area as among the Development Parties, from and after the Closing Date, no Development Party shall Transfer any portion of its Joint Development Interest unless such Transfer covers the entirety of such Development Party’s Joint Development Interest, or an undivided percentage of such Development Party’s Joint Development Interest. Any Transfer of a Joint Development Interest shall also transfer a proportionate share of the Transferring Development Party’s interest in this Agreement and all of the Associated Agreements other than the

 

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Secondment Agreement. For the avoidance of doubt, nothing in this Section 6.1(a) shall prevent a Development Party from Transferring a Material Interest or an Other Interest in accordance with the terms and conditions of this Agreement.

 

  (b) Except in the case of a Development Party transferring all of its Joint Development Interest, no Transfer of its Joint Development Interest shall be made by a Development Party which results in the transferor or transferee holding a Participating Interest of less than ten percent (10%).

 

  (c) No Defaulting Party may Transfer all or any part of its Joint Development Interest or any other Subject Oil and Gas Asset unless and until the Total Amount in Default is paid by such Defaulting Party or its transferee or any other Person on behalf of such Defaulting Party.

Section 6.2 Requirements for Transfer .

 

  (a) Any Transfer of all or any portion of a Joint Development Interest or any other interest of a Development Party in the Subject Oil and Gas Assets or Encumbrance of all or any portion of a Subject Oil and Gas Asset must expressly be made subject to this Agreement and the Associated Agreements. No Credit Facility Encumbrance shall be subject to the terms and conditions of this Agreement or any Associated Agreement, except that Credit Facility Encumbrances granted at or after the Closing Date (other than Credit Facility Encumbrances granted pursuant to the Existing EXCO Credit Facility) shall be subject to Section 3.5 (excluding Section 3.5(e)) and Article 8 of this Agreement and all Joint Development Operating Agreements.

 

  (b) A transferee of any Transfer of a Joint Development Interest shall have no rights in this Agreement or the Associated Agreements unless and until it provides the non-transferring Development Parties, and Joint Development Operator executed counterparts of the instrument or instruments providing for such Transfer; by execution and delivery of an instrument in substantially the form attached hereto as Exhibit “F” (the “ Assumption Agreement ”) expressly undertakes to be bound by the terms of this Agreement and the Associated Agreements.

Section 6.3 Liability of Transferor/Transferee . With respect to any Transfer of a Joint Development Interest, a transferring Development Party shall, notwithstanding such Transfer, be liable to the other Development Parties and Joint Development Operator for its obligation to fund its Participating Interest share (as of the time of the Transfer) of the Development Operations included in approved Annual Work Program and Budgets (including multi-year expenditures included in more than one Annual Work Program and Budget) and Sole Risk Development Operations in which such Development Party is participating, and for all other obligations, in each case, accrued under this Agreement or any Associated Agreement on or prior to such Transfer, but shall be released from any other obligations thereafter accruing under this Agreement or such Associated Agreement with respect to the Joint Development Interest being Transferred, except in the case where the Transfer at issue is made to an Affiliate or where the lender(s) with respect to a Credit Facility Foreclosure foreclose(s) on all or any part

 

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of a Development Party’s Joint Development Interest, in which cases the transferring Development Party or Development Party subject to the foreclosure, as applicable, shall remain primarily liable for all such obligations. For purposes of this Section 6.3, costs of plugging and abandoning wells and decommissioning facilities in which the transferring Development Party has participated (or has paid a share of the costs under the preceding sentence) shall be considered to accrue at the time when applicable operator cash calls such amounts or the Development Parties are required to provide security for such amounts under the terms of this Agreement or the Associated Agreements, whichever is earlier.

Section 6.4 Encumbrances by Parties .

 

  (a) Nothing contained in this Article 6 or in Articles 7 or 8 shall prevent a Development Party from Encumbering all or any undivided share of its Joint Development Interest or any other interest in the Subject Oil and Gas Interests to a third party after the Closing Date, provided that:

 

  (i) such Development Party shall remain liable for all obligations relating to such Joint Development Interest except as provided in Section 6.3; and

 

  (ii) other than with respect to a Credit Facility Encumbrance, such Encumbrance shall be expressly subordinated to the rights of the other Parties under this Agreement, including any mortgage or security interest provided for herein or in the Associated Agreements, which subordination shall be expressly for the benefit of the other Parties.

 

  (b) The liens and security interests created for the benefit of the Development Parties under this Agreement and any Applicable Operating Agreement (other than the Development Parties’ security interest in the Escrow Deposit Account) are and will be, in all respects, subordinate to the liens and security interests created pursuant to a Credit Facility Encumbrance regardless of the time of execution of the instruments creating such liens and/or security interests and/or the filing of such liens and security interests in the applicable county or parish or other governmental office. Each Development Party agrees to execute any instruments requested by any Credit Facility Encumbrance lender reasonably necessary to reflect the subordination of any liens or security interests created for the benefit of the Development Parties under this Agreement or any Associated Agreement (other than the Development Parties’ security interests in the Escrow Deposit Account) to the liens and security interests created pursuant to such Credit Facility Encumbrance.

ARTICLE 7

CONSENT TO ASSIGNMENT

Section 7.1 Certain Transfers during Initial Three Year Period . From and after the Closing Date and until the third anniversary of the Closing Date (such period, the “ Initial Three Year Period” ), no Development Party shall be permitted to Transfer all or any part of its Joint Development Interest or other Material Interest or undergo a Change in Control without the

 

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prior written consent of each other Development Party, which consent may be withheld for any reason in the sole discretion of such other Development Party, provided that no such consent shall be required for any Transfer of all or any part of a Development Party’s Joint Development Interest or other Material Interest to an Affiliate of such Development Party, provided that any subsequent Transfer of a Material Interest by such Affiliate of such Development Party to a Person that is not an Affiliate of such Development Party during the Initial Three Year Period shall require the prior written consent of the other Development Parties, which consent may be withheld for any reason in the sole discretion of such other Development Parties. Further, during the Initial Three Year Period, no Affiliate of a Development Party that has been Transferred a Material Interest may undergo a Change in Control without the prior written consent of each other Development Party, which consent may be withheld for any reason in the sole discretion of such other Development Party.

Section 7.2 Other Transfers . A Development Party shall be permitted to Transfer all or any part of its Joint Development Interest after the Initial Three Year Period, provided that a transferee must have the financial ability to perform its future payment obligations hereunder and under the Associated Agreements and the technical ability to participate in the planning of future operations.

Section 7.3 Additional Consent Requirements . For the avoidance of doubt, any Transfer of a Joint Development Interest or a Material Interest shall also be subject to any restrictions on Transfer set forth in the Associated Agreements in addition to those set forth in this Agreement, provided that to the extent any such Associated Agreement contains a right to withhold consent to Transfer or a preferential purchase right in favor of another Development Party, as between the transferring Development Party and the other Development Parties that are parties to such Associated Agreement, any such consent right or preferential purchase right in such Associated Agreement shall not apply.

Section 7.4 Consents for Transfer of Joint Development or Party Operatorship . Neither Joint Development Operator nor any Party Operator may transfer all or any part of its rights or obligations as Joint Development Operator hereunder or as Party Operator under any Applicable Operating Agreement without the prior written consent of each Development Party, which consent may be withheld for any reason in the sole discretion of such Development Party.

ARTICLE 8

PREFERENTIAL RIGHT TO PURCHASE; CHANGES IN CONTROL

Section 8.1 Preferential Right to Purchase . Any Transfer of all or a portion of a Development Party’s Joint Development Interest or a Material Interest, other than a Transfer thereof to a Wholly-Owned Affiliate shall be subject to the following procedure.

 

  (a)

Once the final terms and conditions of such Transfer have been fully negotiated and are binding upon the parties thereto, the transferring Development Party shall disclose all such final terms and conditions as are relevant to the acquisition of the Joint Development Interest or Material Interest, as applicable (and, if applicable, the determination of the Cash Value of the Joint Development Interest or Material Interest, as applicable) in a notice to the non-transferring Development Parties,

 

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which notice shall be accompanied by a copy of all instruments or relevant portions of instruments establishing such terms and conditions. Each non-transferring Development Party shall have the right to acquire the Joint Development Interest or any Material Interest, as applicable, subject to such proposed Transfer from the transferring Development Party on the terms and conditions described in Sections 8.1(c) and 8.1(d), as applicable, if, within sixty (60) days of the transferring Development Party’s notice, the non-transferring Development Party delivers to the transferring Development Party a counter-notification that it accepts such terms and conditions without reservations or conditions (subject to the other provisions of this Section 8.1, where applicable). If no non-transferring Development Party delivers such counter-notification within such time, such Transfer to the proposed transferee may proceed without further notice, subject to the other provisions of this Agreement, under terms and conditions no more favorable to the transferee than those set forth in the notice to the non-transferring Development Parties, provided that such Transfer shall be concluded within one hundred twenty (120) days from the date of the notice. If such Transfer fails to be concluded within such period and the parties thereto desire thereafter to proceed with such proposed Transfer, the transferring Development Party shall be required to re-offer the Joint Development Interest or Material Interest, as applicable, subject to the Transfer to the non-transferring Development Parties in accordance with the terms and conditions of this Section 8.1. No Development Party shall have a right under this Section 8.1 to acquire any asset other than a Joint Development Interest or Material Interest, as applicable, nor shall a Development Party be required to acquire any asset other than a Joint Development Interest or Material Interest, as applicable, regardless of whether other properties are included in the Transfer at issue.

 

  (b) If more than one non-transferring Development Party counter-notifies that it intends to acquire the transferring Development Party’s Joint Development Interest or Material Interest, as applicable, that is subject to the proposed Transfer, then each such Development Party shall acquire a proportion of the Joint Development Interest or Material Interest, as applicable, to be transferred equal to the ratio of its own Participating Interest to the total Participating Interests of all counter-notifying Development Parties, unless the counter-notifying Development Parties otherwise agree.

 

  (c) In the event of a Cash Transfer that does not involve other properties as part of a wider transaction, each non-transferring Development Party shall have a right to acquire the Joint Development Interest or Material Interest, as applicable, subject to the proposed Transfer on the same final terms and conditions as were negotiated with the proposed transferee.

 

  (d)

In the event of a Transfer of all or a portion of a Joint Development Interest or Material Interest, as applicable, that is not a Cash Transfer or involves other properties included in a wider transaction (package deal), the transferring Development Party shall include in its notification to the non-transferring Development Parties a statement of the proposed Cash Value of the Joint

 

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Development Interest or Material Interest, as applicable, subject to the proposed Transfer, and each non-transferring Development Party shall have a right to acquire such Joint Development Interest or Material Interest, as applicable, on the same final terms and conditions as were negotiated with the proposed transferee except that it shall pay the Cash Value in immediately available funds at the closing of the Transfer in lieu of the consideration payable in the third party offer, and the terms and conditions of the applicable instruments shall be modified as necessary to reflect the acquisition of a Joint Development Interest or Material Interest, as applicable, for cash. In the case of a package sale, the non-transferring Development Parties may not acquire the Joint Development Interest or Material Interest, as applicable, subject to the proposed package sale unless and until the completion of the wider transaction (as modified by the exclusion of properties subject to preemptive rights or excluded for other reasons) with the package sale transferee. If for any reason the package sale terminates without completion, the non-transferring Development Parties’ rights to acquire the Joint Development Interest or Material Interest, as applicable, subject to the proposed package sale shall also terminate.

 

  (e) For purposes of Section 8.1(d), the Cash Value proposed by the transferring Development Party in its notice shall be conclusively deemed correct unless any non-transferring Development Party gives notice to the transferring Development Party within thirty (30) days of receipt of the transferring Development Party’s notice stating that it does not agree with the statement of the Cash Value, stating the Cash Value it believes is correct, and providing any supporting information that it believes is helpful. In such event, the Development Parties shall have fifteen (15) days in which to attempt to negotiate an agreement on the applicable Cash Value. If no agreement has been reached by the end of such fifteen (15) day period, any affected Development Party shall be entitled to refer the matter to an independent expert as provided in Section 13.3 for determination of the Cash Value, provided that the transferring Development Party may elect to terminate the proposed Transfer, and any non-transferring Development Party may elect to revoke its notice of intention to purchase, in either case by notice to the other Development Parties at any time prior to the time that the independent expert is retained pursuant to such provision. The Cash Value to be submitted to the independent expert by the transferring Development Party shall be the Cash Value provided by such Development Party in the notice provided to the non-transferring Development Parties pursuant to Section 8.1(d), and the Cash Value to be submitted to the independent expert by each non-transferring Development Party shall be the Cash Value provided by such Development Party in the notice provided to the transferring Development Party pursuant to this Section 8.1(e).

 

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Section 8.2 Changes in Control .

 

  (a) Any Change in Control of a Development Party shall be subject to the terms and conditions of this Section 8.2. For purposes of this Section 8.2, the term “ Acquired Development Party ” shall refer to the Development Party that is subject to a Change in Control, “ Other Development Parties ” shall refer to all other Development Parties not subject to the Change in Control, and “ Acquiror ” shall refer to the third party proposing to acquire Control of the Acquired Development Party in the Change in Control.

 

  (b) Once the final terms and conditions of a Change in Control have been fully negotiated and are binding upon the parties thereto, the Acquired Development Party shall disclose all such final terms and conditions as are relevant to the acquisition of such Acquired Development Party’s Joint Development Interest and other interests in the Subject Oil and Gas Assets and the determination of the Cash Value of that Joint Development Interest and other interests in a notice to the Other Development Parties, which notice shall be accompanied by a copy of all instruments or relevant portions of instruments establishing such terms and conditions. Each Other Development Party shall have the right to acquire the Acquired Development Party’s Joint Development Interest and other interests in the Subject Oil and Gas Assets on the terms and conditions described in Section 8.2(d) if, within sixty (60) days of the Acquired Development Party’s notice, the Other Development Party delivers to the Acquired Development Party a counter-notification that it accepts such terms and conditions without reservations or conditions (subject to the other provisions of this Section 8.2, where applicable). If no Other Development Party delivers such counter-notification, the Change in Control may proceed without further notice, subject to the other provisions of this Article 8, under terms and conditions no more favorable to the Acquiror than those set forth in the notice to the Other Development Parties, provided that the Change in Control shall be concluded within one hundred twenty (120) days from the date of the notice. If the Change in Control fails to be concluded within such period and the direct or indirect owners, as the case may be, of the Acquired Development Party desire thereafter to proceed with such proposed Change in Control, the Acquired Development Party shall be required to re-offer the Joint Development Interest and other interests in the Subject Oil and Gas Assets subject to the Change in Control to the Other Development Parties in accordance with the terms and conditions of this Section 8.2. No Other Development Party shall have a right under this Section 8.2 to acquire any asset other than a Joint Development Interest, nor shall any Other Development Party be required to acquire any asset other than a Joint Development Interest and other interests in the Subject Oil and Gas Assets, regardless of whether other properties are subject to the Change in Control.

 

  (c)

If more than one Other Development Party counter-notifies that it intends to acquire the Acquired Development Party’s Joint Development Interest and other interests in the Subject Oil and Gas Assets that is subject to the proposed Change in Control, then each such Other Development Party shall acquire a proportion of

 

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the Joint Development Interest subject to the Change in Control equal to the ratio of its own Participating Interest to the total Participating Interests of all counter-notifying Other Development Parties, unless the counter-notifying Other Development Parties otherwise agree.

 

  (d) The Acquired Development Party shall include in its notification to the Other Development Parties a statement of the proposed Cash Value of the Joint Development Interest subject to the proposed Change in Control, and each Other Development Party shall have a right to acquire such Joint Development Interest and other interests in the Subject Oil and Gas Assets for the Cash Value, on the final terms and conditions negotiated with the Acquiror that are relevant to the acquisition of a Joint Development Interest and other interests in the Subject Oil and Gas Assets for cash. No Other Development Party may acquire the Acquired Development Party’s Joint Development Interest and other interests in the Subject Oil and Gas Assets pursuant to this Section 8.2 unless and until completion of the Change in Control. If for any reason the Change in Control agreement terminates without completion, the Other Development Parties’ rights to acquire the Joint Development Interest and other interests in the Subject Oil and Gas Assets subject to the proposed Change in Control shall also terminate.

 

  (e) For purposes of Section 8.2(d), the Cash Value proposed by the Acquired Development Party in its notice shall be conclusively deemed correct unless any Other Development Party gives notice to the Acquired Development Party within thirty (30) days of receipt of the Acquired Development Party’s notice stating that it does not agree with the Acquired Development Party’s statement of the Cash Value, stating the Cash Value it believes is correct, and providing any supporting information that it believes is helpful. In such event, the Development Parties shall have fifteen (15) days in which to attempt to negotiate an agreement on the applicable Cash Value. If no agreement has been reached by the end of such fifteen (15) day period, any affected Development Party shall be entitled to refer the matter to an independent expert as provided in Section 13.3 for determination of the Cash Value, provided that the Acquired Development Party may elect to terminate the proposed Change in Control, and any Other Development Party may elect to revoke its notice of intention to purchase, in either case by notice to the other Development Parties at any time prior to the time that the independent expert is retained pursuant to such provision. The Cash Value to be submitted to the independent expert by the Acquired Development Party shall be the Cash Value provided by such Acquired Development Party in the notice provided to the non-transferring Development Parties pursuant to Section 8.2(d), and the Cash Value to be submitted to the independent expert by each Other Development Party shall be the Cash Value provided by such Other Development Party in the notice provided to the acquired Development Party pursuant to this Section 8.2(e).

 

  (f)

Within thirty (30) days of receiving notice of a proposed Change in Control of EXCO, BG shall have the right but not the obligation to require EOC to resign as Joint Development Operator and to require EXCO Operator to resign as operator under each Applicable Operating Agreement in which it serves in such capacity,

 

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in each case, simultaneous with the consummation of such Change in Control. Such right shall be exercisable by BG by notice to EXCO. Upon any such election by BG, simultaneous with the consummation of the Change in Control, BG or BG’s designee shall automatically be deemed to be Joint Development Operator and the successor operator under each Joint Development Operating Agreement, and EXCO or its successor in interest shall vote for BG or BG’s designee to serve as the successor operator under each Applicable Operating Agreement where a successor operator is to be elected as a result of EXCO Operator’s resignation. If for any reason the Change in Control agreement terminates without completion, BG’s right to require EOC and EXCO Operator to resign as Joint Development Operator and operator, respectively, subject to the proposed Change in Control shall also terminate.

ARTICLE 9

AREA OF MUTUAL INTEREST; CERTAIN RENTALS

Section 9.1 Creation of Area of Mutual Interest . The Development Parties agree that the East Texas/North Louisiana Area shall be an area of mutual interest.

Section 9.2 Area of Mutual Interest Procedures .

 

  (a)

If, during the period commencing on June 29, 2009 and ending on the five (5) year anniversary of the Closing Date, a Development Party or any Affiliate thereof (such Development Party, whether it or its Affiliate is the acquiror, an “ Acquiring Development Party ”) directly or indirectly acquires any interest from a non-Affiliate (a “ Selling Party ”) in any Oil and Gas Asset (such Oil and Gas Asset, the “ Acquired Interest ”), whether by lease, sublease, purchase, farmout, acquisition of shares or other equity interests in an entity directly or indirectly owning the Acquired Interest or otherwise, the Acquiring Development Party shall provide written notice (an “ Offer Notice ”) to the other Development Parties (each, a “ Non-Acquiring Development Party ”), provided that no Acquiring Development Party shall be required to deliver any Offer Notices relating to the acquisition by such Acquiring Development Party or any of its Affiliates of any Acquired Interests acquired on or after June 29, 2009 but prior to the Closing Date until five (5) Business Days after the Closing Date. Subject to the rights of any third parties under any relevant Applicable Operating Agreement, each Non-Acquiring Development Party shall have the right (but not the obligation) to acquire its undivided Participating Interest share in the Acquired Interest (the “ Offered Interest ”) upon the same terms and conditions on which the Acquiring Development Party or its Affiliate acquired the Acquired Interest, subject to assuming its Participating Interest share of all duties and obligations with respect to the Acquired Interest and paying the Acquiring Development Party the Non-Acquiring Development Party’s Participating Interest share of any consideration paid by the Acquiring Development Party or its Affiliate (and, in the case of Acquired Interests including Leases, any lease broker costs incurred in acquiring such Leases). Notwithstanding anything to the contrary in the preceding sentence, in the event that one or more Non-Acquiring Development Parties elect

 

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not to acquire their Offered Interests, each Non-Acquiring Development Party’s Offered Interest shall be that portion of the Acquired Interest that such Non-Acquired Development Party’s Participating Interest bears to the aggregate Participating Interests of the Acquiring Development Party and the Non-Acquiring Parties electing to participate in the acquisition of the Acquired Interest. An Acquiring Development Party shall use commercially reasonable efforts to assign a share of its or its Affiliate’s rights and obligations under the acquisition documents to the Non-Acquiring Development Parties, provided that the Acquiring Development Party shall not be required pay cash or otherwise surrender value or incur any liability to the Selling Party to obtain such a right.

 

  (b) Each Non-Acquiring Development Party shall have a period of sixty (60) days after receipt of the Offer Notice to notify the Acquiring Development Party in writing whether it elects to acquire its Offered Interest. Failure to give timely notice of such election shall be deemed an election not to acquire its Offered Interest. If a Non-Acquiring Development Party timely elects to acquire its Offered Interest, then the Acquiring Development Party and such Non-Acquiring Development Party shall enter into agreements for the Transfer of the Non-Acquiring Development Party’s Participating Interest share of such rights and obligations on substantially the same terms as provided in the agreements between the Selling Party and the Acquiring Development Party or its Affiliate (with such changes as may be necessitated by the differences in parties, the transfer of only a Participating Interest share, the inclusion of lease broker costs to the extent required by Section 9.2(a), and, if applicable, the apportionment of rights from a package deal or the payment of Cash Value in lieu of other consideration), provided that the Acquiring Development Party shall in no event have liability to the Non-Acquiring Development Party for representations, warranties or indemnities with respect to the Acquired Interest in excess of the Non-Acquiring Party’s Participating Interest share of amounts that the Acquiring Development Party or its Affiliate actually recovers under the third party acquisition agreement and related documents for the same matters. The Parties shall execute and deliver the applicable documents and take such other actions as shall be reasonably required to accomplish the transfer promptly after the Non-Acquiring Development Party’s exercise of its option.

 

  (c) If the Acquired Interest arises out of a farmout agreement or similar agreement requiring the drilling of a well or the performance of other similar obligations, the election by a Non-Acquiring Development Party to acquire its Offered Interest shall also constitute an election by such Non-Acquiring Development Party to join the Acquiring Development Party in all operations and obligations required to earn such Offered Interest under such an agreement and to bear its proportion of the cost thereof (including, if applicable, any Carried Costs relating thereto and such operations shall automatically be added to the Development Work Program and the relevant Annual Work Program and Budget). However, nothing in this Section 9.2(c) shall be construed to prevent any Development Party from electing not to join in a completion attempt of an earning or obligation well drilled under the terms of a farmout agreement or similar agreement if such Development Party is not obligated to do so under the terms of such farmout agreement or similar agreement.

 

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  (d) In the event an Acquired Interest is not acquired pursuant to a Cash Transfer or is acquired with other properties included in a wider transaction (package deal), the Acquiring Development Party shall include in its notification to the Non-Acquiring Development Parties a statement of the Cash Value of the Acquired Interest (excluding the drilling of wells or performance of other obligations included as part of the consideration), and each Non-Acquiring Development Party shall have a right to acquire its Offered Interest on the same final terms and conditions as were negotiated with the proposed transferor except that it shall pay the Cash Value in immediately available funds to the Acquiring Development Party at the time of its acquisition of the Offered Interest in lieu of the consideration (excluding the drilling of wells or performance of other obligations included as part of the consideration) payable in the third party offer, and the terms and conditions of the applicable instruments shall be modified to reflect the acquisition of the Offered Interest for cash. In the case of a package sale, the Non-Acquiring Development Parties may not acquire an interest in the Acquired Interest subject to the proposed package sale unless and until the completion of the wider transaction (as modified by the exclusion of properties subject to preemptive rights or excluded for other reasons) with the package sale transferor. If for any reason the package sale terminates without completion, the Non-Acquiring Development Parties’ rights to acquire the Acquired Interest subject to the proposed package sale shall also terminate.

 

  (e)

For purposes of Section 9.2(d), the Cash Value proposed by the Acquiring Development Party in its notice shall be conclusively deemed correct unless any Non-Acquiring Development Party gives notice to the Acquiring Development Party within thirty (30) days of its receipt of the Offer Notice stating that it does not agree with the Acquiring Development Party’s statement of the Cash Value, stating the Cash Value (excluding the drilling of wells or performance of other obligations included as part of the consideration) it believes is correct, and providing any supporting information that it believes is helpful. In such event, the Development Parties shall have fifteen (15) days in which to attempt to negotiate an agreement on the applicable Cash Value. If no agreement has been reached by the end of such fifteen (15) day period, any affected Development Party shall be entitled to refer the matter to an independent expert as provided in Section 13.3 for determination of the Cash Value, provided that the Acquiring Development Party may elect to terminate the proposed acquisition of the Acquired Interest, and any Non-Acquiring Development Party may elect to revoke its notice of intention to purchase, in either case by notice to the other Development Parties at any time prior to the time that the independent expert is retained pursuant to such provision. The Cash Value to be submitted to the independent expert by the Acquiring Development Party shall be the Cash Value provided by such Acquiring Development Party in the notice provided to the Non-Acquiring Development Parties pursuant to Section 9.1(d), and the Cash Value to be submitted to the independent expert by each Non-Acquiring Development Party

 

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shall be the Cash Value provided by such Non-Acquiring Development Party in the notice provided to the Acquiring Development Party pursuant to this Section 9.1(e).

 

  (f) If a Non-Acquiring Development Party elects not to acquire or fails to make a timely election to acquire the Offered Interest, such Non-Acquiring Development Party shall have no further rights whatsoever with regard to the Acquired Interest and such Acquired Interest shall be excluded for all purposes from this Agreement and the Associated Agreements and the provisions thereof, except that, in the case that EXCO is a Non-Acquiring Development Party that elects not to acquire or fails to make a timely election to acquire the Offered Interest, BG shall nonetheless have the right but not the obligation to require EXCO to operate such Acquired Interest on its behalf pursuant to a Joint Development Operating Agreement.

 

  (g) Notwithstanding anything to the contrary herein, this Article 9 shall not be applicable to: (i) Transfers among a Development Party and its Affiliates; (ii) acquisitions of interests in any entity or entities directly or indirectly owning an Acquired Asset if the direct or indirect interest in the Acquired Assets makes up less than twenty-five percent (25%) of the total Cash Value of the interest acquired or to be acquired, or (iii) any Excluded Assets .

 

  (h) For the avoidance of doubt, the Additional Interests shall be Acquired Interests for purposes of this Agreement in accordance with the Purchase Agreement, and EXCO shall offer the Additional Interests to BG on the Closing Date in accordance with the terms of this Section 9.2.

 

  (i) The Development Parties shall use commercially reasonable efforts to cause a Development Party, and not a third party, to serve as operator of any Acquired Interest.

 

  (j) Each Development Party agrees to cause its Affiliates to comply with this Article 9.

Section 9.3 Payment of Certain Rentals . If, at any time within the period that is thirty (30) days prior to the expiration of any Lease included in the Subject Assets, no approved Annual Work Program and Budget contemplates commencement of drilling operations or payment of delay rentals as may be necessary to maintain such Lease in existence, a Development Party with an interest in such Lease shall have the right to pay such delay rental in order to maintain such Lease in existence (any Development Party paying such delay rental, a “ Maintaining Development Party ”), and within ten (10) days of the payment of any such delay rental, shall provide notice of such payment (a “ Delay Rental Notice ”) to the other Parties. Each other Development Party with an interest in such Lease shall have the right (but not the obligation) to reimburse the Maintaining Development Party that portion of such delay rental that its Participating Interest bears to the aggregate Participating Interests of those Development Parties with interests in such Lease (or, if there are Releasing Development Parties, that portion of such delay rental that its Participating Interest bears to the aggregate Participating Interests of

 

46


the Non-Releasing Development Parties) by notice to the other Parties and reimbursement of the Maintaining Development Party within ten (10) days of its receipt of the Delay Rental Notice. Failure of a Development Party to so reimburse the Maintaining Development Party (any such Development Party, a “ Releasing Development Party ”) shall result in such Releasing Development Party being deemed to have Transferred its interest in the applicable Lease to Maintaining Development Party and the Development Parties paying a portion of such delay rental (all such Development Parties, the “ Non-Releasing Development Parties ”) in the proportions that such Non-Releasing Development Parties’ Participating Interests in such Lease bear to the aggregate Participating Interests in such Lease of such Non-Releasing Development Parties, effective as of the first day of the Calendar Month in which such delay rental is paid. A Releasing Development Party shall, without delay following any request from any Non-Releasing Development Party, do any act required to be done by applicable Law or any applicable contract in order to render the Transfer of an affected Lease legally valid, including obtaining all necessary consents and approvals, and shall execute any document and take such other actions as may be necessary in order to effect a prompt and valid transfer. The Releasing Development Party shall be obligated to promptly remove any Encumbrances which may exist on the affected Lease. In the event required consents and approvals are not timely obtained, the Releasing Development Party shall hold the Transferred Lease in trust for the Non-Releasing Development Parties.

ARTICLE 10

TAXES

Section 10.1 Tax Partnership . The Development Parties intend and expect that the transactions contemplated by the Purchase Agreement, this Agreement and the Associated Agreements, taken together, will be treated, for purposes of federal income taxation and for purposes of certain state income tax laws that incorporate or follow federal income tax principles, as resulting in (a) the creation of a partnership (the “ Tax Partnership ”) in which BG and EXCO are treated as partners, with the Tax Partnership being treated for tax purposes as holding the Subject Oil and Gas Assets and engaging in all activities of the Development Parties with respect to the Subject Oil and Gas Assets, (b) a contribution by EXCO of all of the Subject Oil and Gas Assets to the Tax Partnership; (c) a contribution of the Adjusted Closing Cash Consideration (as defined in the Purchase Agreement) and a commitment to fund the Carried Costs allocable to it under this Agreement to the Tax Partnership by BG in exchange for a fifty percent (50%) interest therein, (d) a distribution to EXCO of the Adjusted Closing Cash Consideration (i) as a reimbursement of EXCO’s preformation expenditures with respect to the Subject Oil and Gas Assets within the meaning of Treasury Regulations Section 1.707-4(d) to the extent applicable and (ii) in a transaction subject to treatment under Section 707(a) of the Internal Revenue Code of 1986, as amended, and its implementing Treasury Regulations as in part a sale, and in part a contribution, of the Subject Oil and Gas Assets to the Tax Partnership to the extent that Treasure Regulations Section 1.707-4(d) is inapplicable, and (e) the realization by the Tax Partnership of all items of income or gain and the incurrence by the Tax Partnership of all items of costs or expenses attributable to the ownership, operation or disposition of the Subject Oil and Gas Assets, notwithstanding that such items are realized, paid or incurred by the Parties individually. The governing terms and conditions of the Tax Partnership are set forth in Exhibit “G” hereto.

 

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Section 10.2 Tax Information . Joint Development Operator and each Party Operator shall provide each Development Party, in a timely manner and at each Development Party’s sole expense, with information with respect to Development Operations as such Development Party may reasonably request for preparation of its tax returns or responding to any audit or tax proceeding with respect to Asset Taxes.

Section 10.3 Responsibility for Taxes . Each Party shall be responsible for reporting and discharging its own tax measured by the income of the Party and the satisfaction of such Party’s share of all contract obligations under this Agreement and the Associated Agreements. Each Party shall protect, defend, and indemnify each other Party from and against any and all losses, costs, and liabilities arising from the indemnifying Party’s failure or refusal to report and discharge such taxes or satisfy such obligations.

ARTICLE 11

TERM

This Agreement shall terminate on January 1, 2020, unless earlier terminated pursuant to Section 5.5 or by the written agreement of all of the Parties; provided that (a) except as provided in Section 5.5 (in the event that this Agreement is terminated pursuant to such Section), the termination of this Agreement or any provision thereof shall not relieve any Party from any expense, liability or other obligation or remedy therefor which has accrued or attached prior to the date of such termination, (b) except in connection with a termination of this Agreement pursuant to Section 5.5, as among BG and EXCO and any other Person who becomes a Development Party hereunder prior to the termination of this Agreement (but not as to any successor or assign or such Person following the termination of this Agreement), the provisions of each of (A) Sections 3.3, 3.10(b) and 4.10, and (B) Articles 8, 10, 12, 13 and 14 shall survive such termination and remain in full force and effect with respect to each of those Leases in which more than one of such Persons jointly holds an interest until only one such Person holds an interest in such Lease (unless earlier terminated by the written agreement of all of the Parties), and (c) the provisions of each of (x) Section 3.4 (other than Section 3.4(b)), (y) Exhibit G and (z) Section B of Schedule 3.12 shall survive such termination and remain in full force and effect with respect to each of those Leases in which more than one of such Persons jointly holds an interest until only one such Person holds an interest in such Lease (unless earlier terminated by the written agreement of all of the Parties).

ARTICLE 12

RELATIONSHIP OF THE PARTIES

The rights, duties, obligations and liabilities of the Parties under this Agreement shall be individual, not joint or collective. It is not the intention of the Parties to create, nor shall this Agreement be deemed or construed to create, a mining or other partnership (other than the Tax Partnership created pursuant to Section 10.1), joint venture or association or a trust. This Agreement shall not be deemed or construed to authorize any Party to act as an agent, servant or employee for any other Party for any purpose whatsoever except as explicitly set forth in this Agreement. In their relations with each other under this Agreement, the Parties shall not be considered fiduciaries except as expressly provided in the last sentence of Section 9.3.

 

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ARTICLE 13

GOVERNING LAW; DISPUTE RESOLUTION; EXPERT PROCEEDINGS

Section 13.1 Governing Law . THIS AGREEMENT AND THE LEGAL RELATIONS AMONG THE PARTIES SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICTS OF LAW RULE OR PRINCIPLE THAT MIGHT REFER CONSTRUCTION OF SUCH PROVISIONS TO THE LAWS OF ANOTHER JURISDICTION. ALL OF THE PARTIES HERETO CONSENT TO THE EXERCISE OF JURISDICTION IN PERSONAM BY THE COURTS OF THE STATE OF TEXAS FOR ANY DISPUTE. EACH PARTY HERETO WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY DISPUTE.

Section 13.2 Dispute Resolution .

 

  (a) Except for matters that are expressly made subject to the dispute resolution procedures set forth in Section 13.3, any Dispute among the Parties shall be resolved through final and binding arbitration.

 

  (b) The arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the “ AAA ”) in effect at the time the arbitration of the Dispute is initiated (the “ AAA Rules ”).

 

  (c) The arbitration shall be conducted by 3 arbitrators and conducted in Dallas, Texas. Within 30 days of any Party providing notice to the other Parties of a Dispute, if there are two Parties or two groups of Parties to a Dispute, each Party or group of Parties to such Dispute shall appoint one arbitrator, and the 2 arbitrators so appointed shall select the third and presiding arbitrator within 30 days following appointment of the second party-appointed arbitrator. If either Party or group of Parties fails to appoint an arbitrator within the permitted time period, then the missing arbitrator(s) shall be selected by the AAA as appointing authority in accordance with the AAA Rules. In the event that there are more than two Parties or groups of Parties to an arbitration, the Parties to the arbitration shall endeavor to agree on the appointment of the three arbitrators within thirty (30) days of the written request for arbitration. In the event the Parties cannot reach agreement on the selection of three arbitrators within the time permitted, all arbitrators not yet appointed shall be appointed by the AAA in accordance with the AAA Rules. Any arbitrator appointed by the Party-appointed arbitrators or the AAA shall be a member of the Large, Complex Commercial Case Panel of the AAA or a member of the Center of Public Resources Panel of Distinguished Neutrals. All arbitrators shall be and remain at all times independent and impartial, and, once appointed, no arbitrator shall have any ex parte communications with any of the Parties concerning the arbitration or the underlying Dispute other than communications directly concerning the selection of the presiding arbitrator, when applicable. All arbitrators shall be qualified by education, training, or experience to resolve the Dispute. No arbitrator shall have been an employee or consultant to any Party or any of its Affiliates within the five (5) year period preceding the arbitration, or have any financial interest in the Dispute.

 

49


  (d) All decisions of the arbitral tribunal shall be made by majority vote. The award of the arbitral tribunal shall be final and binding, subject only to grounds and procedures for vacating or modifying the award under the Federal Arbitration Act. Judgment on the award may be entered and enforced by any court of competent jurisdiction hereunder.

 

  (e) Notwithstanding the agreement to arbitrate Disputes in this Section 13.2, any Party may apply to a court for interim measures pending appointment of the arbitration tribunal, including injunction, attachment, and conservation orders. The Parties agree that seeking and obtaining such court-ordered interim measures shall not waive the right to arbitration. Additionally, the arbitrators (or in an emergency the presiding arbitrator acting alone in the event one or more of the other arbitrators is unable to be involved in a timely fashion) may grant interim measures including injunctions, attachments, and conservation orders in appropriate circumstances, which measures may be immediately enforced by court order. Hearings on requests for interim measures may be held in person, by telephone or video conference, or by other means that permit the Parties to present evidence and arguments. The arbitrators may require any Party to provide appropriate security in connection with such measures.

 

  (f) The arbitral tribunal is authorized to award costs, attorneys’ fees, and expert witness fees and to allocate them among the Parties. The award may include interest, at the Default Interest Rate, from the date of any default, breach, or other accrual of a claim until the arbitral award is paid in full. The arbitrators may not award indirect, consequential, special or punitive damages. Unless otherwise directed by the arbitral tribunal, each Party shall pay its own expenses in connection with the arbitration.

 

  (g) All negotiations, mediation, arbitration, and expert determinations relating to a Dispute (including a settlement resulting from negotiation or mediation, an arbitral award, documents exchanged or produced during a mediation or arbitration proceeding, and memorials, briefs or other documents prepared for the arbitration) are confidential and may not be disclosed by the Parties, their respective Affiliates and each of their respective employees, officers, directors, counsel, consultants, and expert witnesses, except to the extent necessary to enforce any settlement agreement, arbitration award, or expert determination, to enforce other rights of a Party, as required by law or regulation, or for a bona fide business purpose, such as disclosure to accountants, shareholders, or third-party purchasers, provided, however, that breach of this confidentiality provision shall not void any settlement, expert determination, or award.

 

  (h) Any papers, notices, or process necessary or proper for an arbitration hereunder, or any court action in connection with an arbitration or an award, may be served on a Party in the manner set forth in Section 14.2.

 

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Section 13.3 Expert Proceedings . For any decision referred to an expert under this Agreement, the Parties hereby agree that such decision shall be conducted expeditiously by an expert selected unanimously by the Development Parties. The expert is not an arbitrator of the dispute and shall not be deemed to be acting in an arbitral capacity. The expert shall not (without the written consent of the Development Parties) be appointed to act as an arbitrator or as adviser to any Development Party arbitrated pursuant to Section 13.2, provided that nothing in this sentence shall preclude any Development Party from using the expert as a witness regarding the proper conduct of the expert procedure. The Development Party desiring an expert determination shall give the other Development Party written notice of the request for such determination. If the Development Parties are unable to agree upon an expert within ten (10) days after receipt of the notice of request for an expert determination, then, upon the request of any of the Development Parties, the AAA shall appoint such expert. The expert, once appointed, shall have no ex parte communications with the Development Parties concerning the expert determination or the underlying dispute. All communications between any Development Party and the expert shall be conducted in writing, with copies sent simultaneously to the other Development Party in the same manner, or at a meeting to which all Development Parties have been invited and of which such Development Parties have been provided at least five (5) Business Days notice. Within thirty (30) days after the expert’s acceptance of its appointment, the Development Parties shall provide the expert with a report containing their proposal for the resolution of the matter and the reasons therefor, accompanied by all relevant supporting information and data. Within sixty (60) days of receipt of the above-described materials and after receipt of additional information or data as may be required by the expert, the expert shall select the proposal which it finds more consistent with the terms of this Agreement. The expert may not propose alternate positions or award damages, interest or penalties to any Party with respect to any matter. The expert’s decision shall be final and binding on the Development Parties. Any Party that fails or refuses to honor the decision of an expert shall be in default under this Agreement.

ARTICLE 14

MISCELLANEOUS

Section 14.1 Counterparts . This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all of such counterparts shall constitute for all purposes one agreement. Any signature hereto delivered by a Party by facsimile transmission shall be deemed an original signature hereto.

Section 14.2 Notices . All notices and communications required or permitted to be given hereunder, excluding any notices under Section 3.10 and Article 4 hereof (which notices shall be governed by the provisions of Section 4.1(p) hereof), shall be sufficient in all respects if given in writing and delivered personally, or sent by bonded overnight courier, or mailed by U.S. Express Mail or by certified or registered United States Mail with all postage fully prepaid, or sent by telex or facsimile transmission (provided any such telex or facsimile transmission is confirmed either orally or by written confirmation), addressed to the appropriate Party at the address for such Party shown below or at such other address as such Party shall have theretofore designated by written notice delivered to the Party giving such notice:

 

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If to EXCO:
  

EXCO Operating Company, LP

EXCO Production Company, LP

12377 Merit Drive, Suite 1700

Dallas, Texas 75251

Attention: Rick Hodges, Vice President of Land

Telephone: (214) 368-2084

Fax: (214) 706-3424

With a copy to:
  

EXCO Operating Company, LP

EXCO Production Company, LP

12377 Merit Drive, Suite 1700

Dallas, Texas 75251

  

Attention:

 

William L. Boeing, Vice President,

    

General Counsel, and Secretary

  

Telephone: (214) 368-2084

Fax: (214) 706-3409

With a copy to:
  

Vinson & Elkins L.L.P.

2500 First City Tower

1001 Fannin Street

Houston, Texas 77002-6760

Attention: Robin S. Fredrickson

Telephone: (713) 758-2450

Fax: (713) 615-5850

If to BG:
  

BG US Production Company, LLC

5444 Westheimer, Suite 1200

Houston, Texas 77056

Attention: Jon Harris

Telephone: (713) 599-4000

Fax: (713) 599-4250

 

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   with copies to:
  

BG US Production Company, LLC

5444 Westheimer, Suite 1200

Houston, Texas 77056

Attention: Bill Way

Telephone: (713) 599-4000

Fax: (713) 599-4250

   and
  

BG US Production Company, LLC

5444 Westheimer, Suite 1200

Houston, Texas 77056

Attention: Chris Migura, Principal Counsel

Telephone: (713) 599-4000

Fax: (713) 599-4250

Any notice given in accordance herewith shall be deemed to have been given when delivered to the addressee in person, or by courier, or transmitted by facsimile transmission during normal business hours, or upon actual receipt by the addressee after such notice has either been delivered to an overnight courier or deposited in the United States Mail, as the case may be. The Parties may change the address, telephone numbers, and facsimile numbers to which such communications are to be addressed by giving written notice to the other Parties in the manner provided in this Section 14.2.

Section 14.3 Expenses . Except as otherwise specifically provided, all fees, costs and expenses incurred by the Parties in negotiating this Agreement shall be paid by the Party incurring the same, including legal and accounting fees, costs and expenses.

Section 14.4 Waivers; Rights Cumulative . Any of the terms, covenants, or conditions hereof may be waived only by a written instrument executed by or on behalf of the Party waiving compliance. No course of dealing on the part of any Development Party, or their respective officers, employees, agents, or representatives, nor any failure by a Development Party to exercise any of its rights under this Agreement shall operate as a waiver thereof or affect in any way the right of such Party at a later time to enforce the performance of such provision. No waiver by any Party of any condition, or any breach of any term or covenant contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or of any breach of any other term or covenant. The rights of the Development Parties under this Agreement shall be cumulative, and the exercise or partial exercise of any such right shall not preclude the exercise of any other right.

Section 14.5 Entire Agreement; Conflicts . THIS AGREEMENT, THE EXHIBITS HERETO, THE PURCHASE AGREEMENT AND THE ASSOCIATED AGREEMENTS COLLECTIVELY CONSTITUTE THE ENTIRE AGREEMENT AMONG THE DEVELOPMENT PARTIES PERTAINING TO THE SUBJECT MATTER HEREOF AND

 

53


SUPERSEDE ALL PRIOR AGREEMENTS, UNDERSTANDINGS, NEGOTIATIONS, AND DISCUSSIONS, WHETHER ORAL OR WRITTEN, OF THE PARTIES PERTAINING TO THE SUBJECT MATTER OF THIS AGREEMENT. THERE ARE NO WARRANTIES, REPRESENTATIONS, OR OTHER AGREEMENTS AMONG THE PARTIES RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT EXCEPT AS SPECIFICALLY SET FORTH IN THIS AGREEMENT, AND NO DEVELOPMENT PARTY SHALL BE BOUND BY OR LIABLE FOR ANY ALLEGED REPRESENTATION, PROMISE, INDUCEMENT, OR STATEMENTS OF INTENTION NOT SO SET FORTH. IN THE EVENT OF A CONFLICT BETWEEN: (A) THE TERMS AND PROVISIONS OF THIS AGREEMENT AND THE TERMS AND PROVISIONS OF ANY EXHIBIT HERETO; OR (B) THE TERMS AND PROVISIONS OF THIS AGREEMENT AND THE TERMS AND PROVISIONS OF ANY ASSOCIATED AGREEMENT, THE TERMS AND PROVISIONS OF THIS AGREEMENT SHALL GOVERN AND CONTROL, PROVIDED, HOWEVER, THAT THE INCLUSION IN ANY OF THE EXHIBITS HERETO OR ANY ASSOCIATED AGREEMENT OF TERMS AND PROVISIONS NOT ADDRESSED IN THIS AGREEMENT SHALL NOT BE DEEMED A CONFLICT, AND ALL SUCH ADDITIONAL PROVISIONS SHALL BE GIVEN FULL FORCE AND EFFECT, SUBJECT TO THE PROVISIONS OF THIS SECTION 14.5.

Section 14.6 Amendment . This Agreement may be amended only by an instrument in writing executed by all of the Parties and expressly identified as an amendment or modification.

Section 14.7 Parties in Interest . Nothing in this Agreement shall entitle any Person other than the Parties to any claim, cause of action, remedy or right of any kind.

Section 14.8 Successors and Permitted Assigns . This Agreement shall be binding upon and inure to the benefit of the Parties and their successors and permitted assigns.

Section 14.9 Confidentiality .

 

  (a) The Parties agree that all information related to Development Operations in which any Development Party is participating shall be considered confidential, shall be kept confidential and shall not be disclosed during the term of this Agreement to any Person that is not a Party, except:

 

  (i) to an Affiliate of a Party;

 

  (ii) to the extent such information is required to be furnished in compliance with applicable Law, or pursuant to any legal proceedings or because of any order of any Governmental Authority binding upon a Party;

 

  (iii) to prospective or actual attorneys engaged by any Party where disclosure of such information is essential to such attorney’s work for such Party;

 

  (iv) to prospective or actual contractors and consultants engaged by any Party where disclosure of such information is essential to such contractor’s or consultant’s work for such Party;

 

54


  (v) to a bona fide prospective transferee of a Party’s Joint Development Interest, a Material Interest or an Other Interest to the extent appropriate in order to allow the assessment of such Joint Development Interest, Material Interest or Other Interest (including a Person with whom a Party and/or its Affiliates are conducting bona fide negotiations directed toward a merger, consolidation or the sale of a majority of its or an Affiliate’s shares);

 

  (vi) to a bank or other financial institution to the extent appropriate to a Party arranging for funding;

 

  (vii) to the extent such information must be disclosed pursuant to any rules or requirements of any stock exchange having jurisdiction over such Party or its Affiliates; provided that if any Party desires to disclose information in an annual or periodic report to its or its Affiliates’ shareholders and to the public and such disclosure is not required pursuant to any rules or requirements of any stock exchange, then such Party shall comply with Section 14.10;

 

  (viii) to its respective employees for the purpose of conducting Development Operations, subject to each Party taking customary precautions to ensure such information is kept confidential; and

 

  (ix) any information which, through no fault of a Party, becomes a part of the public domain.

 

  (b) Disclosure as pursuant to Sections 14.9(a)(iv), (v) and (vi) shall not be made unless prior to such disclosure the disclosing Party has obtained a written undertaking from the recipient to keep the information strictly confidential for the term of this Agreement and to use the information for the sole purpose described in Sections 14.9(a)(iv), (v) and (vi), whichever is applicable, with respect to the disclosing Party.

Section 14.10 Publicity .

 

  (a) Without reasonable prior notice to the other Parties, no Party will issue, or permit any agent or Affiliate of it to issue, any press releases or otherwise make, or cause any agent or Affiliate of it to make, any public statements with respect to this Agreement, the Associated Agreements or the activities contemplated hereby or thereby, except where such release or statement is deemed in good faith by the releasing Party to be required by Law or under the rules and regulations of a recognized stock exchange on which shares of such Party or any of its Affiliates are listed, and in any case, prior to making any such press release or public statement, the releasing Party shall provide a copy of the press release or public statement to the other Parties.

 

  (b)

Notwithstanding anything to the contrary in Section 14.9 or Section 14.10(a), any Party or Affiliate of a Party may disclose information regarding Development Operations in investor presentations, industry conference presentations or similar

 

55


 

disclosures, provided that not less than twenty four (24) hours prior to so disclosing any such information, the releasing Party shall provide a copy of the presentation or other disclosure document containing such information to the other Parties.

 

  (c) Notwithstanding anything to the contrary in Section 14.9 or Section 14.10(a), in the event of any emergency endangering property, lives or the environment, Joint Development Operator may issue such press releases or public announcements as it deems necessary in light of the circumstances and shall promptly provide each Party with a copy of any such press release or announcement.

Section 14.11 Preparation of Agreement . Both EXCO and BG and their respective counsel participated in the preparation of this Agreement. In the event of any ambiguity in this Agreement, no presumption shall arise based on the identity of the draftsman of this Agreement.

Section 14.12 Conduct of the Parties; Business Principles .

 

  (a) Each Party warrants that it and its Affiliates have not made, offered, or authorized and agrees that it will not make, offer, or authorize with respect to the matters which are the subject of this Agreement, any payment, gift, promise or other advantage, whether directly or through any other Person, to or for the use or benefit of any public official (being any person holding a legislative, administrative or judicial office, including any person employed by or acting on behalf of a public agency, a public enterprise or public international organization) or any political party or political party official or candidate for office, where such payment, gift, promise or advantage would violate any applicable Law.

 

  (b) Prior to the Closing Date, each Development Party provided the others with a copy of its business principles governing its general conduct of operations and business dealings, and each Development Party acknowledges receipt and awareness of the other Development Party’s business principles. Within one hundred twenty (120) days from the Closing Date, the Development Parties agree to use reasonable efforts to meet and agree a common set of general principles governing the conduct of operations under this Agreement.

Section 14.13 Severability . If any term or other provision of this Agreement is invalid, illegal, or incapable of being enforced by any rule of Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any adverse manner to any Party. Upon such determination that any term or other provision is invalid, illegal, or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible.

Section 14.14 Non-Compensatory Damages . None of the Parties shall be entitled to recover from any other Party, or such Parties respective Affiliates, any indirect, consequential,

 

56


punitive or exemplary damages or damages for lost profits of any kind arising under or in connection with this Agreement, the Associated Agreements or the transactions contemplated hereby or thereby, except to the extent any such Party suffers such damages (including costs of defense and reasonable attorney’s fees incurred in connection with defending of such damages) to a third party, which damages (including costs of defense and reasonable attorney’s fees incurred in connection with defending against such damages) shall not be excluded by this provision as to recovery hereunder. Subject to the preceding sentence, each Development Party, on behalf of itself and each of its Affiliates, waive any right to recover punitive, special, exemplary and consequential damages, including damages for lost profits, arising in connection with or with respect to this Agreement, the Associated Agreements or the transactions contemplated hereby and thereby.

Section 14.15 Excluded Assets . For the avoidance of doubt, no Excluded Asset shall be subject to the terms of this Agreement or any Joint Development Operating Agreement.

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the Parties have executed this Agreement by their duly authorized representatives on and as of the Closing Date.

 

BG US PRODUCTION COMPANY, LLC
By:  

/s/ ELIZABETH SPOMER

Name:   Elizabeth Spomer
Title:   Vice President
EXCO OPERATING COMPANY, LP
By:   EXCO PARTNERS OLP GP, LLC, its general partner
By:  

/s/ R.L. HODGES

Name:   R.L. Hodges
Title:   Vice President
EXCO PRODUCTION COMPANY, LP
By:   VAUGHN DE, LLC, its general partner
By:  

/s/ R.L. HODGES

Name:   R.L. Hodges
Title:   Vice President

[SIGNATURE PAGE TO JOINT DEVELOPMENT AGREEMENT]


A TTACHED TO AND MADE PART OF THE J OINT D EVELOPMENT A GREEMENT BY AND AMONG BG US

P RODUCTION C OMPANY , LLC, EXCO O PERATING C OMPANY , LP AND EXCO P RODUCTION C OMPANY , LP

APPENDIX I

DEFINITIONS

AAA ” has the meaning set forth in Section 11.2.

AAA Rules ” has the meaning set forth in Section 11.2.

Acquired Development Party ” has the meaning set forth in Section 8.2(a).

Acquired Interest ” has the meaning set forth in Section 9.2(a).

Acquiring Development Party ” has the meaning set forth in Section 8.2(a).

Acquiror ” has the meaning set forth in Section 8.2(a).

Actual Operating Agreement Charges ” has the meaning set forth in Section 3.12(e)(i).

Additional Interests ” has the meaning set forth in the Purchase Agreement.

AFE ” means an authorization for expenditure.

Affected Party ” means any non-defaulting Party who either operates or owns an interest in the Subject Oil and Gas Assets affected by a default by another Party and which is not itself in default (either under the terms of this Agreement or any Associated Agreement) at the time in question.

Affiliate ” means, with respect to any Party, a Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such Party.

After Acquired Units ” means those Subject Oil and Gas Assets acquired after the Closing Date that are not within the boundaries of any drilling, proration or production unit existing as of the Closing Date or hereinafter formed by the Parties or by order or rule of a Governmental Authority having jurisdiction that contains acreage covered by any Lease in which EXCO owns an interest as of the Closing Date.

Agreement ” means this Joint Development Agreement.

Annual Work Program and Budget ” means, for any Calendar Year, the work program and budget for Joint Development Operations during such Calendar Year.

Applicable Operating Agreements ” means, collectively, the Joint Development Operating Agreements and all Third Party Operating Agreements, and “ Applicable Operating Agreement ” means any of them.

 

Schedule 3.12-1


Area-Wide Operation ” means a seismic or other geophysical data acquisition operation, or other similar operation, including geophysical surveys, microseismic monitoring and core sampling and analysis conducted by the Development Parties in accordance with this Agreement with respect to the East Texas/North Louisiana Area and covering areas subject to more than one Applicable Operating Agreement, or areas subject presently to no Applicable Operating Agreement.

Asset Taxes ” means ad valorem, property, excise, severance, production or similar taxes (including any interest, fine, penalty or additions to tax imposed by Governmental Authorities in connection with such taxes) based upon operation or ownership of the Subject Oil and Gas Assets or the production of hydrocarbons therefrom, but excluding, for the avoidance of doubt, income, capital gains and franchise taxes.

Associated Agreements ” means, collectively, the Applicable Operating Agreements, the Secondment Agreement and any other agreements entered into by all Development Parties and any third parties in furtherance of the conduct of Joint Development Operations, and “ Associated Agreement ” means any of them.

Assumption Agreement ” has the meaning set forth in Section 6.2(b).

Bankruptcy Code ” means Title 11 of the United States Code.

BG ” has the meaning set forth in the Preamble.

Business Day ” means a day (other than a Saturday or Sunday) on which commercial banks in Texas are generally open for business, provided that if Business Days are used to calculate periods in which a Party must make a payment hereunder, “ Business Day ” shall mean a day (other than a Saturday or Sunday) on which commercial banks in Texas and London are generally open for business.

Calendar Month ” means any of the months of the Gregorian calendar.

Calendar Quarter ” means a period of three (3) consecutive Calendar Months commencing on the first day of January, the first day of April, the first day of July and the first day of October in any Calendar Year.

Calendar Year ” means a period of twelve (12) consecutive Calendar Months commencing on the first day of January and ending on the following 31st day of December, according to the Gregorian calendar.

Carried Costs ” has the meaning set forth in Section 2.1.

Carried Costs Balance ” means, as of any time, the difference between the Carried Costs Obligation and the aggregate Carried Costs paid by BG as of such time.

Carried Costs ” has the meaning set forth in Section 2.1.

 

Schedule 3.12-2


Carried Cost Obligation ” means four hundred million dollars (US$400,000,000), as such amount may be decreased from time to time pursuant to Article XI and/or Article XII of the Purchase Agreement.

Carried Cost Default ” has the meaning set forth in Section 5.5(a).

Carried Cost Default Notice ” has the meaning set forth in Section 5.5(a).

Carry Termination Event ” has the meaning set forth in Section 2.1.

Cash Transfer ” means any Transfer of any Joint Development Interest where the sole consideration (other than the assumption of obligations relating to the transferred Joint Development Interest) takes the form of cash, cash equivalents, promissory notes or retained interests (such as production payments) in the Joint Development Interest being transferred.

Cash Value ” means the market value (expressed in U.S. dollars) of all or a portion of a Joint Development Interest subject to the proposed Transfer or Change in Control, based upon the amount that a willing buyer would pay a willing seller in an arm’s length transaction.

Change in Control ” means any direct or indirect change in Control of a Development Party (whether through merger, sale of shares or other equity interests, or otherwise), through a single transaction or series of related transactions, from one or more transferors to one or more transferees; provided, however, that for purposes hereof, a “Change in Control” shall not include a change in Control of a Party (a) resulting from a management-lead buyout of the public share ownership of such Party and conversion of such Party to a privately-held company, (b) resulting in ongoing control by a Wholly-Owned Affiliate that is wholly-owned by the ultimate parent company of such Party, or (c) created by a change in Control of the ultimate parent company of such Party. For the avoidance of doubt, as of the Closing Date, the ultimate parent company of BG is BG Group plc, a public limited company organized and existing under the Laws of England and Wales, and the ultimate parent company of EXCO is EXCO Resources, Inc., a corporation organized and existing under the Laws of Texas.

Closing Date ” has the meaning set forth in the Preamble.

Control ” and its derivatives with respect to any Person means the possession, directly or indirectly, of the power to exercise or determine the voting of more than fifty percent (50%) of the voting rights in a corporation, and, in the case of any other type of entity, the right to exercise or determine the voting of more than fifty percent (50%) of the equity interests having voting rights, or otherwise to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.

Credit Facility Encumbrance ” means Encumbrances created pursuant to any material borrowing arrangement entered into by any Development Party and/or its Affiliates with a third party that is not an Affiliate of such Development Party or its Affiliates, as such arrangement may be amended, modified, supplemented or replaced from time to time.

 

Schedule 3.12-3


For the avoidance of doubt, as of the Closing Date, the only Credit Facility Encumbrances burdening the Subject Oil and Gas Assets are those Encumbrances created pursuant to the Existing EXCO Credit Facility (provided that such Encumbrances only burden EXCO’s interests in the Subject Oil and Gas Assets).

Credit Facility Foreclosure ” means any foreclosure upon the interests of a Development Party and its Affiliates in the Subject Oil and Gas Assets pursuant to a Credit Facility Encumbrance of such Development Party and any related security agreements.

Deep Rights ” means those subsurface depths within the East Texas/North Louisiana Area that are below the base of (but excluding) the Cotton Valley formation at a measured depth of 9,650’, as identified by the Jonesville North A-17 well, API No. 42203343000000, recognizing that actual depth will vary across the East Texas/North Louisiana Area.

Default Interest Rate ” means the three month London Inter-Bank Offer Rate (as published in the “Money Rates” table of the Wall Street Journal , eastern edition) plus an additional five percentage points (5%) applicable on the first Business Day prior to the due date of payment and thereafter on the first Business Day of each succeeding Calendar Month (or, if such rate is contrary to any applicable usury Law, the maximum rate permitted by such applicable Law).

Default Notice ” has the meaning set forth in Section 5.1(a).

Default Period ” has the meaning set forth in Section 5.1(b).

Defaulting Party ” has the meaning set forth in Section 5.1(a).

Development Costs ” means costs and expenses incurred in the conduct of Development Operations.

Development Operation ” means any operation conducted pursuant to any Applicable Operating Agreement or an Area-Wide Operation conducted pursuant to this Agreement.

Development Operations Contract ” means any contract (or confirm relating to any such contract) to which Joint Development Operator or any Party Operator is a party for which services thereunder are to be used primarily for the conduct of Development Operations.

Development Party ” and “ Development Parties ” have the meanings set forth in the Preamble, and following any Transfer in accordance with this Agreement, the successor or assign of such Transferring Party.

Development Work Program ” has the meaning set forth in Section 4.2.

Dispute ” means any dispute, controversy, or claim (of any and every kind or type, whether based on contract, tort, statute, regulation, or otherwise) arising out of, relating to, or connected with this Agreement or Associated Agreement, or the transactions contemplated hereby or thereby, including but not limited to any dispute, controversy or

 

Schedule 3.12-4


claim concerning the existence, validity, interpretation, performance, breach, or termination of this Agreement or any Associated Agreement or the relationship of the Parties arising out of this Agreement or the Associated Agreements or the transactions contemplated hereby or thereby; provided that the term “Dispute” shall not include any disagreement among the Operating Committee with respect to decisions to be made by the Operating Committee.

East Texas/North Louisiana Area ” means the lands (and subsurface) included in those Texas counties and Louisiana parishes identified in Exhibit “A” attached hereto, provided that the East Texas/North Louisiana Area shall not include (a) those areas included within the description of the excluded fields on Exhibit “A” attached hereto or (b) any Lease or other property that is an Excluded Asset.

Eligible Costs ” means all costs and expenses incurred in accordance with an Applicable Operating Agreement in conducting (i) Joint Development Operations with respect to the Deep Rights for the drilling, testing, completing, deepening, recompleting, sidetracking, reworking and plugging back of wells, the plugging and abandoning of dry holes or wells no longer capable of producing in paying quantities, and the equipping of wells for production, and (ii) Sole Risk Development Operations with respect to the Deep Rights conducted by EXCO pursuant to Section 4.6 for drilling and/or completing any well or conducting any Wellbore Operation, the plugging and abandoning of any dry hole resulting from such operation or any such well no longer capable of production in paying quantities, and the equipping of such wells for production, in each case including costs of mobilizing and demobilizing drilling and workover rigs to and from the wellsite if not charged to another operation, and overhead charged under the Applicable Operating Agreement with respect to the costs specifically described above, provided that “Eligible Costs” shall not include liabilities, losses, claims and damages associated with such activities or otherwise, and related costs of investigation, litigation, arbitration, administrative proceedings, judgment, award and settlement (including court and arbitration costs and reasonable attorneys’ fees), to the extent attributable to actual or claimed personal injury, illness or death, property damage (other than damage to structures, fences, irrigation systems and other fixtures, crops, livestock and other personal property in the ordinary course of business), environmental damage or contamination, other torts, breach of contract, violation of Law (or private rights of action under any Law), casualty or condemnation.

Encumbrance ” means a mortgage, lien, pledge, charge, or other encumbrance. “ Encumber ” and other derivatives shall be construed accordingly.

Entitlement ” means that quantity of oil and gas from the Subject Oil and Gas Assets for which a Development Party has the right to take delivery pursuant to the terms of any Applicable Operating Agreement, any other applicable agreement or applicable Law.

EOC ” has the meaning set forth in the Preamble.

EPC ” has the meaning set forth in the Preamble.

 

Schedule 3.12-5


Escrow Account Balance ” has the meaning set forth in Exhibit H.

Escrow Deposit Account ” has the meaning set forth in Exhibit H.

Excluded Asset ” has the meaning set forth in the Purchase Agreement.

EXCO ” has the meaning set forth in the Preamble.

EXCO Operator ” means: (a) EOC, with respect to those Leases in the East Texas/North Louisiana Area in which EOC has an interest as of the Effective Date and is the operator thereof and that are governed by an Applicable Operating Agreement; (b) EPC, with respect to those Leases in the East Texas/North Louisiana Area in which EPC has an interest as of the Effective Date and is the operator thereof and that are governed by an Applicable Operating Agreement; and (c) EOC, with respect to those Leases in the East Texas/North Louisiana Area in which at least EOC or EPC and at least one other non-Affiliate Development Party acquires an interest from and after the Effective Date and that become subject to an Applicable Operating Agreement.

Existing EXCO Credit Facility ” means the arrangements contemplated in that certain Amended and Restated Credit Agreement dated March 30, 2007 between EXCO Partners Operating Company, LP (now EOC) and JPMorgan Chase Bank, N.A. and other lenders, as the same may be amended, modified or supplemented from time to time.

Governmental Authority ” shall mean any federal, state, local, municipal, tribal or other government; any governmental, regulatory or administrative agency, commission, body or other authority exercising or entitle to exercise any administrative, executive, judicial, legislative, regulatory or taxing authority or power; and any court or governmental tribunal, including any tribal authority having or asserting jurisdiction.

HSSE ” shall mean Health, Safety, Security and Environmental.

HSSE Management System ” has the meaning set forth in Section 4.10(c).

HSSE Plan ” has the meaning set forth in Section 4.10(b).

HSSE Principles ” has the meaning set forth in Section 4.10(a).

Initial Three Year Period ” has the meaning set forth in Section 7.1(a).

Joint Development Interest ” means, with respect to a Development Party, all of such Development Party’s leasehold, working or mineral fee interest and obligations with respect to Subject Oil and Gas Assets within the East Texas/North Louisiana Area.

Joint Development Operations ” means Development Operations in which all Development Parties participate.

Joint Development Operating Agreement ” has the meaning set forth in Section 3.4.

 

Schedule 3.12-6


Joint Development Operator ” means the operator appointed pursuant to Section 3.6.

Laws ” means any constitution, decree, resolution, law, statute, act, ordinance, rule, directive, order, treaty, code or regulation and any injunction or final non-appealable judgment or any interpretation of the foregoing, as enacted, issued or promulgated by any Governmental Authority.

Lease ” means any oil and gas lease, oil, gas and mineral lease or sublease, royalty, overriding royalty, production payment, net profits interest, mineral fee interest, carried interest, mineral servitude or other right to oil and gas in place.

Maintaining Development Party ” has the meaning set forth in Section 9.3.

Material Event ” means shall mean with respect to Joint Development Operator, that Joint Development Operator or any direct or indirect parent of Operator: (a) is dissolved (other than pursuant to an internal reorganization in the ordinary course of business which does not result in a change in Control of such entity); (b) becomes insolvent or is unable to pay its debts or fails to pay or admits in writing its inability generally to pay its debts as they become due; (c) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (d) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors’ rights, or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding or petition instituted or presented against it, such proceeding or petition (i) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or (ii) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof; (e) has a resolution passed for its winding up, official management pursuant to an applicable statutory remedy or liquidation (other than pursuant to an internal reorganization in the ordinary course of business which does not result in a change in Control of such entity); (f) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or a substantial portion of its assets; (g) has a secured party take possession of all or a substantial portion of its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or a substantial portion of its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 30 days thereafter; or (h) causes or is subject to any event with respect to it which, under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (a) through (g).

Material Interest ” means, with respect to any Development Party, any overriding royalty interest, production payment, net profits interest or similar interest that is carved out of such Development Party’s interests in the Subject Oil and Gas Assets, the Transfer of which interest would convey a material portion of the value of the Development Party’s interest in the Subject Oil and Gas Assets.

 

Schedule 3.12-7


Non-Acquiring Development Party ” has the meaning set forth in Section 9.2(a).

Non-Budgeted Operation ” has the meaning set forth in Section 4.4(f)

Non-Releasing Development Party ” has the meaning set forth in Section 9.3.

Offered Interest ” has the meaning set forth in Section 9.2(a).

Offer Notice ” has the meaning set forth in Section 9.2(a).

Oil and Gas Assets ” means all of the following, to the extent located within the East Texas/North Louisiana Area:

 

  (a) oil, gas and/or mineral leases, subleases, operating agreements granted by the Louisiana State Mineral Board, fee interests, fee mineral interests, mineral servitudes, royalties, overriding royalties, production payments, net profits interests, carried interests, reversionary interests and other interests in oil, gas and/or minerals in place (collectively, “ Oil and Gas Interests ”), the leasehold estates created by Oil and Gas Interests, lands covered by Oil and Gas Interests (“ Lands ”), and interests in any pooled acreage, communitized acreage or units arising on account of Oil and Gas Interests or Lands pooled, communitized or unitized into such units (“ Units ”);

 

  (b) oil and gas wells and injection wells that have not been permanently abandoned located on Oil and Gas Interests, Lands or Units (“ Wells ”), and all Hydrocarbons produced therefrom or allocated thereto (Oil and Gas Interests, Lands, Units and Wells being collectively referred to hereinafter as “ Properties ”);

 

  (c) equipment, machinery, fixtures, and other real, immovable, personal, movable and mixed property primarily used or held for use in connection with Properties, including saltwater disposal wells, well equipment, casing, rods, tanks, boilers, buildings, tubing, pumps, motors, fixtures, machinery, compression equipment, flow lines, and separation facilities, structures, materials, and other items used or held for use in the operation thereof and located upstream of the outlet flange of the relevant custody transfer meter (or, in the case of Hydrocarbon liquids, upstream of the outlet flange in the tanks);

 

  (d) surface fee interests, surface leases, easements, rights-of-way, permits, licenses, servitudes, and other surface rights;

 

  (e) water withdrawal and disposal and other permits, licenses, orders, approvals, variances, waivers, franchises, rights and other authorizations issued by any Governmental Authority;

 

Schedule 3.12-8


  (f) contracts primarily relating to any of the other items identified in this definition;

 

  (g) imbalances at wellheads;

 

  (h) files, records, maps, information, and data, whether written or electronically stored, relating to any of the other items identified in this definition, including: (i) land and title records (including abstracts of title, title opinions, and title curative documents); (ii) contract files; (iii) correspondence; (iv) operations, environmental, production, and accounting records and (v) production, facility and well records and data (including logs and cores);

 

  (i) geophysical and other seismic and related technical data and information;

 

  (j) liens and security interests securing payment for the sale or other disposition of Hydrocarbons produced from or allocated to Properties, including the security interests granted under Texas Uniform Commercial Code § 9.343; and

 

  (k) rights, claims and causes of action to the extent, and only to the extent, that such rights, claims or causes of action are associated with other items identified in this definition.

Operating Committee ” means the committee created pursuant to Section 4.1.

Operating Expense Multiplier ” means, in the case of any Calendar Year (for purposes of this definition, the “ relevant Calendar Year ”), the amount obtained by dividing: (i) the number of active wells included in Joint Development Operations as of the end of the preceding Calendar Year, plus the number of wells anticipated to be drilled as Joint Development Operations in the relevant Calendar Year, minus the number of wells anticipated to be plugged and abandoned pursuant to Joint Development Operations in the first half of the relevant Calendar Year; by (ii) the number of active wells included in Joint Development Operations as of the end of the preceding Calendar Year.

Operating Expenses ” means costs and expenses reasonably necessary to continue operating, maintaining and producing wells and related surface equipment included in the Subject Oil and Gas Assets in a manner consistent with past practices, industry standards and applicable Law.

Other Development Parties ” has the meaning set forth in Section 8.2(a).

Other Interest ” means, with respect to any Development Party, any overriding royalty interest, production payment, net profits interest or similar interest that is carved out of such Development Party’s interests in the Subject Oil and Gas Assets, the Transfer of which interest would not convey a material portion of the value of the Development Party’s interest in the Subject Oil and Gas Assets.

 

Schedule 3.12-9


Other Overhead Rates ” has the meaning set forth in Section 3.12(f).

Participating Interest ” means each Development Party’s undivided share of the aggregate rights and obligations of the Development Parties (other than with respect to Sole Risk Development Operations) under the terms of this Agreement and under the terms of each Applicable Operating Agreement.

Participating Party ” means with respect to any Development Operation, a Development Party that is participating in such Development Operation, and with respect to any Development Operations Contract, a Development Party that is responsible, whether directly or indirectly, for any amounts payable under such Development Operations Contract.

Party ” and “ Parties ” have the meanings set forth in the Preamble.

Party Operator” means any Party or any of its Affiliates or, in the case where BG exercises its rights pursuant to Section 3.5(d) or Section 3.6(e), BG’s designee, serving in the role of operator under any Applicable Operating Agreement. In the case of BG’s designee, BG shall cause such designee to abide by the provisions of this Agreement applicable to a Party Operator in all respects.

Person ” means any individual, corporation, company, partnership, limited partnership, limited liability company, trust, estate, Governmental Authority or any other entity.

Pre-Existing Operating Agreement ” means a Third Party Operating Agreement where EXCO or an Affiliate of EXCO is the Party Operator thereunder and that is (a) in place prior to the Closing Date, or (b) is in place prior to the acquisition of the Oil and Gas Assets covered thereby by EXCO or any other Development Party.

Purchase Agreement ” means that certain Purchase and Sale Agreement by and between EXCO and BG, dated June 29, 2009, as amended.

Releasing Development Party ” has the meaning set forth in Section 9.3.

Rental Notice ” has the meaning set forth in Section 9.3.

Secondee ” means any employee of a Party seconded into the organization of Joint Development Operator or any of its Affiliates.

Secondment Agreement ” means the Secondment Agreement entered into by BG and EXCO as of the Closing Date in the form of Exhibit C attached hereto.

Section 3.12 Rates ” has the meaning set forth in Section 3.12(f).

Shallow Rights ” means those subsurface depths within the East Texas/North Louisiana Area that are at and above the base of (and including) the Cotton Valley formation at a measured depth of 9,650’, as identified by the Jonesville North A-17 well, API No. 42203343000000, recognizing that actual depth will vary across the East Texas/North Louisiana Area.

 

Schedule 3.12-10


Sole Risk Development Operations ” means Development Operations in which not all Development Parties participate.

Subject Oil and Gas Assets ” means all right, title and interest of the Development Parties within the East Texas/North Louisiana Area in and to the Oil and Gas Assets in which both Development Parties hold an interest, whether held on, or acquired at or after the Closing Date.

Subsequent Operating Agreement ” means an operating agreement entered into after the Closing Date among one or more third parties that are not Affiliates of the Development Parties and the Development Parties and under which EXCO or any Affiliate of EXCO will serve as operator.

Tax Partnership ” has the meaning set forth in Section 10.1.

Technical Services ” means services providing specific engineering, geoscience, land, or other exploration, development and/or producing professional skills, such as those performed by engineers, geologists, geophysicists, landmen, and technicians, required to handle specific operating conditions and problems for the benefit of Development Operations; provided, however, Technical Services shall not include general corporate overhead costs or those functions specifically identified as overhead in the Exhibit “C” to the Joint Development Operating Agreement. Technical Services may be provided by the Joint Development Operator or its Affiliates.

Technical Services Costs ” means salaries and wages of employees and Secondees of Joint Development Operator and its Affiliates providing Technical Services, together with those additional amounts chargeable under Articles II.2.B., C., D., E., F., G., and H. of Exhibit “C” to the Joint Development Operating Agreement with respect such employees and Secondees as direct labor costs.

Third Party Operating Agreements ” means those operating agreements, other than the Joint Development Operating Agreement, to which Persons other than the Development Parties and Joint Development Operator are parties and which burden the Subject Oil and Gas Assets within the East Texas/North Louisiana Area.

Third Party Prepared Information ” has the meaning set forth in Section 3.10(a).

Total Amount in Default ” means, as of any time, the following amounts: (a) the amounts that the Defaulting Party has failed to pay under the terms of this Agreement and the Associated Agreements as of such time; and (b) any interest at the Default Interest Rate accrued on the amount under (a) from the date this amount is due by the Defaulting Party until paid in full by the Defaulting Party and on the amount under (b) from the time this amount is incurred by the Affected Party until paid in full by the Defaulting Party.

 

Schedule 3.12-11


Transfer ” means any sale, assignment, or other disposition by a Development Party of all or any part of its Joint Development Interest or any other interest in the Subject Oil and Gas Interests excluding (a) any disposition resulting from a direct or indirect Change in Control of a Party, or a change in Control created by a change in Control of the ultimate parent company of such Party, (b) any disposition resulting from a Credit Facility Foreclosure, and (c) any Encumbrance.

Treasury Regulations ” shall mean the regulations promulgated by the United States Department of the Treasury pursuant to and in respect of provisions of the Internal Revenue Code of 1986, as amended. All references herein to sections of the Treasury Regulations shall include any corresponding provision or provisions of succeeding, similar, substitute, proposed or final Treasury Regulations.

Unaffiliated Participating Party ” has the meaning set forth in Section 4.7(b).

Unpaid Carried Costs Percentage ” means, as of any time, the product of 100% times the amount obtained by dividing the Carried Costs Balance as of such time by the Carried Costs Obligation.

Wellbore Operation ” means, as such terms are defined or used in the Applicable Operating Agreement, the sidetracking, deepening, plugging back or recompleting of a wellbore.

Wholly-Owned Affiliate ” means, with respect to any Party, an Affiliate of such Party that is wholly owned, directly or indirectly by the ultimate parent of such Party.

Working Interest ” means with respect to any Development Party and any Development Operation in which such Development Party is participating, such Development Party’s working interest (to the 8/8ths) in such Development Operation.

 

Schedule 3.12-12

Exhibit 10.2

AMENDED AND RESTATED

LIMITED LIABILITY COMPANY AGREEMENT

OF

TGGT HOLDINGS, LLC

DATED AUGUST 14, 2009


TABLE OF CONTENTS

 

ARTICLE 1 ORGANIZATION; REPRESENTATIONS AND WARRANTIES    2

Section 1.1

  Formation    2

Section 1.2

  Name    2

Section 1.3

  Term    2

Section 1.4

  Registered Agent    2

Section 1.5

  Principal Office    2

Section 1.6

  Business and Purpose; Power    2

Section 1.7

  Qualifications in Other Jurisdictions    2

Section 1.8

  No State Law Partnership    3

Section 1.9

  Other Business Pursuits    3

Section 1.10

  Representations and Warranties of Members    3
ARTICLE 2 INTENTIONALLY OMITTED    5
ARTICLE 3 CAPITALIZATION    5

Section 3.1

  Initial Contributions    5

Section 3.2

  Additional Contributions    6

Section 3.3

  Additional Contributions Procedures    6

Section 3.4

  Member Loans    7

Section 3.5

  Failure to Fund Additional Contributions or Member Loans    8

Section 3.6

  Certain Consequences of Default    8

Section 3.7

  Extended Default    10

Section 3.8

  Capital Accounts    12

Section 3.9

  No Interest on or Return of Capital Contributions    13
ARTICLE 4 ALLOCATIONS AND DISTRIBUTIONS    13

Section 4.1

  Allocations of Net Profits and Net Losses    13

Section 4.2

  Special Allocations    13

Section 4.3

  Curative Allocations    15

Section 4.4

  Tax Allocations    15

Section 4.5

  Distributions    16

Section 4.6

  Limitations Upon Distributions    17
ARTICLE 5 MANAGEMENT OF THE COMPANY    18

Section 5.1

  Management under Direction of Management Board    18

Section 5.2

  Number, Tenure and Qualification    22

Section 5.3

  Voting Proxies; Quorum; Meetings of Management Board; No Fiduciary Duties    23

Section 5.4

  Resignation of Board Members    30

Section 5.5

  Removal of Board Members    30

Section 5.6

  Vacancies    30

Section 5.7

  Fees and Expenses of Board Members    30

Section 5.8

  No Power of Members to Bind Company    30

Section 5.9

  Delegation of Authority; Officers    30

 

i


Section 5.10

  Provision of Services by the Members    38

Section 5.11

  Standard of Conduct; Health, Safety, Security and the Environment    38

Section 5.12

  Certain Reports    40

Section 5.13

  Insurance Requirements    42
ARTICLE 6 ANNUAL WORK PROGRAM AND BUDGETS; CONTRACT AWARDS    42

Section 6.1

  Development Work Program; Initial Work Program and Budget    42

Section 6.2

  Subsequent Work Program and Budgets    43

Section 6.3

  Statement of Estimated Expenditures    46

Section 6.4

  Company Group O&M Contract Awards    46
ARTICLE 7 INDEMNIFICATION    48

Section 7.1

  No Liability of Members for Company Obligations    48

Section 7.2

  Exculpation    49

Section 7.3

  Indemnification    50

Section 7.4

  Expenses    50

Section 7.5

  Insurance    50

Section 7.6

  Primary Obligation    51
ARTICLE 8 BOOKS AND RECORDS; ACCOUNTS    51

Section 8.1

  Books and Records    51

Section 8.2

  Availability of Books and Records    51

Section 8.3

  Audits    52

Section 8.4

  Financial Statements and Reports    53

Section 8.5

  Accounting Method    54

Section 8.6

  Bank Accounts; Investments    54

Section 8.7

  Fiscal Year of the Company    55
ARTICLE 9 TAX MATTERS    55

Section 9.1

  Tax Treatment of the Company    55

Section 9.2

  Tax Treatment of the Contribution Agreement    55

Section 9.3

  Tax Matters Partner    55

Section 9.4

  Tax Returns and Elections    55

Section 9.5

  Tax Terminations    56
ARTICLE 10 TRANSFERS OF MEMBER INTERESTS; ADMISSION OF NEW MEMBERS    56

Section 10.1

  Transfer of Member Interests    56

Section 10.2

  Conditions Precedent to a Member Interest Transfer    57

Section 10.3

  Encumbrances by Members    58

Section 10.4

  Admission of Persons as New Members    59
ARTICLE 11 CONSENTS TO ASSIGNMENT    59

Section 11.1

  Certain Transfers during Initial Three Year Period    59

Section 11.2

  Other Transfers    59

 

ii


ARTICLE 12 PREFERENTIAL PURCHASE RIGHTS; CHANGES IN CONTROL    59

Section 12.1

  Preferential Purchase Rights    59

Section 12.2

  Changes in Control.    61
ARTICLE 13 ACQUIRED BUSINESS; NEW BUSINESS; ASSET UPGRADES    63

Section 13.1

  Acquired Business    63

Section 13.2

  Member Requested Services    67

Section 13.3

  New Business    68

Section 13.4

  Asset Upgrades    71

Section 13.5

  Contract Operating Agreements; Certain Gathering Agreements    71
ARTICLE 14 DISSOLUTION; WINDING UP AND TERMINATION    72

Section 14.1

  Causes of Dissolution, Winding Up and Termination    72

Section 14.2

  Notice of Dissolution    73

Section 14.3

  Liquidation    73

Section 14.4

  Termination    73

Section 14.5

  No Obligation to Restore Capital Accounts    73

Section 14.6

  Distributions in Kind    74
ARTICLE 15 GOVERNING LAW; DISPUTE RESOLUTION    74

Section 15.1

  Governing Law    74

Section 15.2

  Dispute Resolution    74

Section 15.3

  Expert Proceedings    76
ARTICLE 16 MISCELLANEOUS    77

Section 16.1

  Counterparts    77

Section 16.2

  Notices    77

Section 16.3

  Expenses    78

Section 16.4

  Waivers; Rights Cumulative    79

Section 16.5

  Entire Agreement; Conflicts    79

Section 16.6

  Amendment    79

Section 16.7

  Parties in Interest    79

Section 16.8

  Successors and Permitted Assigns    80

Section 16.9

  Confidentiality    80

Section 16.10

  Publicity    81

Section 16.11

  Preparation of Agreement    81

Section 16.12

  Conduct of the Parties; Business Principles    81

Section 16.13

  Severability    82

Section 16.14

  Non-Compensatory Damages    82

Section 16.15

  Waiver of Partition of Company Property    82

Section 16.16

  Interpretation    82

 

iii


APPENDICES
Appendix I   Definitions
EXHIBITS  
Exhibit “A”   Member Interests
Exhibit “B”   Certificate of Formation
Exhibit “C”   Form of Secondment Agreement
Exhibit “D-1”   Form of BG Services Agreement
Exhibit “D-2”   Form of EOC Services Agreement
Exhibit “E-1”   Development Work Program
Exhibit “E-2”   Calendar Year 2009 Annual Work Program and Budget
Exhibit “E-3”   Calendar Year 2010 Annual Work Program and Budget
Exhibit “F”   Form of Assumption Agreement
Exhibit “G”   Form of Services Agreement
Exhibit “H-1”   Form of Member Talco Gathering Agreement
Exhibit “H-2”   Form of Member TGG Gathering Agreement
Exhibit “I”   Form of Contract Operating Agreement
Exhibit “J-1”   Form of Third Party Talco Gathering Agreement
Exhibit “J-2”   Form of Third Party TGG Gathering Agreement
Exhibit “K”   Form of Interconnect Agreement
Exhibit “L”   East Texas/North Louisiana Area
SCHEDULES  
Schedule 5.13  

Company Group Members’ Insurance Requirements

 

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AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT

THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (this “ Agreement ”) of TGGT Holdings, LLC, a limited liability company organized and existing under the Laws of Delaware (the “ Company ”), is made this 14th day of August, 2009 (the “ Closing Date ”) by and among the Company and each of the Persons (as hereinafter defined) listed on Exhibit “A” attached hereto and made a part hereof. Capitalized terms used herein and not otherwise defined shall have the meanings given such terms in Appendix 1 attached hereto.

WITNESSETH:

RECITALS

 

1. On July 29, 2009, the Company was formed as a limited liability company organized and existing under the Laws of Delaware pursuant to the Certificate of Formation filed with the Delaware Secretary of State in accordance with the provisions of the Delaware Act (the “ Certificate ”).

 

2. EOC, as the sole member of the Company, adopted a limited liability company agreement of the Company effective as of such date (the “ Original Agreement ”).

 

3. On June 29, 2009, EOC, EXCO Production Company, LP and BG US Production Company, LLC entered into that certain Purchase and Sale Agreement (the “ Purchase Agreement ”), which contemplated, among other things, that EOC, Vaughan Holdings Company, LLC, and BG would enter into that certain Contribution Agreement dated August 14, 2009 (the “ Contribution Agreement ”).

 

4. Under the Contribution Agreement (a) in return for an undivided fifty percent (50%) of the Member Interest of the Company (i) EOC agreed to contribute or cause the contribution (directly or indirectly) of all of the equity interests of TGG Pipeline, Ltd., Talco Midstream Assets Ltd. and TGGT GP Holdings, LLC to the Company, and (ii) BG agreed to contribute the Final Cash Amount to the Company, and (b) the parties agreed that the Company would make special distributions to EOC pursuant to this Agreement in an aggregate amount equal to the Final Cash Amount.

 

5. The Contribution Agreement contemplates, among other things, that the Parties enter into this Agreement as an amendment and restatement of the Original Agreement in its entirety to reflect the agreement of the Company and the Members as set forth herein.

NOW THEREFORE, in consideration of the foregoing, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, effective as of the Closing Date, the Original Agreement is hereby amended and restated in its entirety to read as follows:

 

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ARTICLE 1

ORGANIZATION; REPRESENTATIONS AND WARRANTIES

Section 1.1 Formation . The Company was formed as a Delaware limited liability company by execution and delivery of the Certificate to the Secretary of State of the State of Delaware on July 29, 2009. A copy of the Certificate is attached hereto as Exhibit “B”.

Section 1.2 Name . The name of the Company is “TGGT Holdings, LLC” and all business of the Company shall be conducted under such name or under any other name approved by the Management Board pursuant to Section 5.1(b)(xi).

Section 1.3 Term . The Company shall continue until dissolved in accordance with the provisions of the Delaware Act and this Agreement.

Section 1.4 Registered Agent . The Company’s initial registered office in the State of Delaware shall be located at 1209 Orange Street, Wilmington, Delaware 19801. The registered agent at such address is The Corporation Trust Company. The Management Board may change the Company’s registered agent and registered office in the State of Delaware from time to time pursuant to Section 5.1(c)(xiv).

Section 1.5 Principal Office . The Company’s principal office shall be located at 12377 Merit Drive, Suite 1700, Dallas, Texas 75251. The Management Board may change the Company’s principal office from time to time pursuant to Section 5.1(b)(xi), which need not be in Delaware. The Company may have such other places of business as the Management Board may designate.

Section 1.6 Business and Purpose; Power . The business and purpose of the Company shall be to engage in Midstream Activities, and to engage in any other lawful act or activity that now or in the future may be necessary, convenient, incidental, or advisable to accomplish the foregoing purpose and that is not forbidden by Law in the jurisdictions in which the Company engages in such business or activities. The Company shall have all powers and privileges granted by the Delaware Act, any other Law, or by this Agreement, including incidental powers thereto, to the extent that such powers and privileges are necessary, customary, convenient or incidental to the attainment of the Company’s business and purpose as set forth in this Section 1.6.

Section 1.7 Qualifications in Other Jurisdictions . The Company’s officers shall cause the Company to be qualified, formed or registered under assumed or fictitious name or similar Laws in any jurisdiction in which the Company transacts business. The Company’s officers shall execute, deliver and file any certificates (and any amendments and/or restatements thereof) necessary or appropriate for the Company to qualify and continue to do business in a jurisdiction in which the Company may wish to conduct business. At the request of the Management Board, each Member shall execute, acknowledge, swear to and deliver all certificates and other instruments conforming with this Agreement that are necessary or appropriate to qualify, continue and terminate the Company as a foreign limited liability company in all such jurisdictions in which the

 

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Company may conduct business, provided that no Member shall be required to file any general consent to service of process or to qualify as a foreign corporation, limited liability company, partnership or other entity in any jurisdiction in which it is not already so qualified.

Section 1.8 No State Law Partnership . The Members intend that: (a) the Company not be a common law partnership or joint venture; and (b) the Company not create any agency or other relationship creating fiduciary or quasi-fiduciary duties of any Member to the Company or to any other Member, and this Agreement may not be construed to suggest otherwise. This Agreement shall not subject the Members to joint and several or vicarious liability or impose any duty, obligation or liability that would arise therefrom with respect to any or all of the Members or the Company.

Section 1.9 Other Business Pursuits . Each Member acknowledges and agrees that the other Members and the Affiliates of the other Members may from time to time be interested, directly or indirectly, in various other businesses and undertakings separate and apart from the Company, including businesses and undertakings in direct competition with the Company, and except as otherwise provided in Article 13, neither the Company nor any other Member shall be entitled to notice thereof, or a right to participate therein, or any right to any profits from any such other businesses or undertakings

Section 1.10 Representations and Warranties of Members .

(a) Each Member hereby represents and warrants to the Company and the other Members as follows:

(i) Independent Evaluation . It is sophisticated in the evaluation, purchase, ownership and operation of oil and gas properties and related facilities. In making its decision to enter into this Agreement and to consummate the transaction contemplated herein, it, except to the extent of the other Member’s express representations and warranties in this Section 1.10 and in the Contribution Agreement, (A) has relied or shall rely solely on its own independent investigation and evaluation of the Company and its assets and the advice of its own legal, tax, economic, environmental, engineering, geological and geophysical advisors and the express provisions of this Agreement and not on any comments, statements, projections or other materials made or given by any representatives or consultants or advisors engaged by any other Member, and (B) has satisfied or shall satisfy itself through its own due diligence as to the environmental and physical condition of and contractual arrangements and other matters affecting the Company or its assets.

(ii) Accredited Investor . It is an “accredited investor,” as such term is defined in Regulation D of the Securities Act of 1933, as amended, and is acquiring its Member Interest for its own account and not with a view to a sale or distribution thereof in violation of the Securities Act of 1933, as amended, and the rules and regulations thereunder, any applicable state blue sky Laws or any other applicable securities Laws.

 

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(iii) Unregistered Member Interest . It understands and acknowledges that its Member Interest has not been registered under the Securities Act or under any state securities Laws and further understands and acknowledges that its representations and warranties contained in this Section 1.10 are being relied upon by the Company and the other Members as the basis for the exemption from the registration requirements of the Securities Act and under all applicable state securities Laws. It further acknowledges that the Company will not and has no obligation to recognize any Transfer of a Member Interest to any Person unless and until the provisions of Articles 10, 11 and 12 have been fully satisfied.

(iv) Organization; Existence . Such Member is duly formed, validly existing and in good standing under the Laws of the state of its formation. Such Member has all requisite power and authority to own and operate its property and to carry on its business as now conducted. Such Member is duly licensed or qualified to do business as a foreign limited partnership or limited liability company or other legal entity, as applicable, and is in good standing in all jurisdictions in which such qualification is required by Law, except where the failure to qualify or be in good standing would not have a material adverse effect on such Member.

(v) Authorization . Such Member has full power and authority to enter into and perform this Agreement and the Associated Agreements to which it is a party and the transactions contemplated herein and therein. The execution, delivery, and performance by such Member of this Agreement have been and when executed and delivered the Associated Agreements to which it is a party will have been duly and validly authorized and approved by all necessary partnership or company action, as applicable, on the part of such Member. This Agreement is, and the Associated Agreements to which such Member is a party when executed and delivered by such Member will be, the valid and binding obligation of such Member and enforceable against such Member in accordance with their respective terms, subject to the effects of bankruptcy, insolvency, reorganization, moratorium, and similar Laws affecting the rights of creditors generally, as well as to principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at Law).

(vi) No Conflicts . The execution, delivery, and performance by such Member of this Agreement and the Associated Agreements to which it is a party and the consummation of the transactions contemplated herein and therein does not and will not (A) conflict with or result in a breach of any provisions of the organizational documents or other governing documents of such Member, (B) result in a default or the creation of any

 

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Encumbrance or give rise to any right of termination, cancellation, or acceleration under any of the terms, conditions, or provisions of any material contract, note, bond, mortgage, indenture, license, or other material agreement to which any such Member is a party or by which such Member may be bound or (C) violate any Law applicable to such Member, except in the case of clauses (B) and (C) where such default, Encumbrance, termination, cancellation, acceleration or violation would not, individually or in the aggregate, have a material adverse effect on such Member.

(vii) Claims and Litigation . There is no written claim for breach of contract, tort or violation of Law or investigation of which such Member has received written notice or any suit, action or litigation, by any Person, and no legal, administrative, or arbitration proceedings, (in each case) pending, or to such Member’s knowledge, threatened in writing against such Member, or to which such Member is a party, that would have a material adverse effect upon the ability of such Member to perform its obligations under this Agreement.

(viii) Bankruptcy . There are no bankruptcy, reorganization or receivership proceedings pending, being contemplated by or, to such Member’s knowledge, threatened against such Member or any of its Affiliates that have a direct or indirect ownership interest in such Member (including its ultimate parent company), and neither the Member nor any such Affiliate is insolvent or generally not paying its debts as they become due.

(ix) No FERC Regulation . Neither such Member nor its Affiliates are subject to the Standards of Conduct of the Federal Energy Regulatory Commission (“ FERC ”) contained in 18 C.F.R. Part 358, as such regulations may be amended from time to time (“ Standards of Conduct ”).

(b) Each Member agrees to indemnify and hold harmless the Company Group Members and the other Members, from any liability, loss, cost, damage and expense (including the costs of litigation, arbitration and reasonable attorneys’ fees) arising out of or resulting from the breach of any representation, warranty or covenant of such Member set forth in this Section 1.10.

ARTICLE 2

INTENTIONALLY OMITTED

ARTICLE 3

CAPITALIZATION

Section 3.1 Initial Contributions . On the Closing Date, each Member made those contributions to the Company that are provided for in Sections 2.1 and 3.2 of the

 

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Contribution Agreement and the amounts set forth in Exhibit “A” (the “ Initial Contributions ”). As a result of such Initial Contributions, each Member shall have the Member Interest set forth opposite such Member’s name on Exhibit “A”.

Section 3.2 Additional Contributions .

(a) Each Member shall be required to fund its Member Interest share of all costs and expenses included in each approved Annual Work Program and Budget and Emergency Expenditures.

(b) Notwithstanding anything to the contrary in this Section 3.2 or Section 3.3, unless otherwise decided by the Management Board, the Company shall pay expenditures authorized by this Agreement incurred by any Company Group Member out of gross receipts received by the Company Group Members.

(c) The Company shall use (and cause the Company Group Members to use) the proceeds of all additional contributions made by the Member pursuant to this Section 3.2 and Section 3.3 exclusively for the purposes contemplated by the Call Notice to which such additional contributions relate.

Section 3.3 Additional Contributions Procedures .

(a) To the extent that, at any time, the Company Group Members’ gross receipts are not anticipated to be sufficient to satisfy their estimated expenditures to be incurred in the succeeding Calendar Quarter pursuant to an approved Annual Work Program and Budget, the President and General Manager shall issue Call Notices to the Members for additional contributions in an amount equal to the difference between such estimated expenditures and anticipated gross receipts not more than thirty (30) days but not less than fifteen (15) days prior to the commencement of such Calendar Quarter.

(b) Further, the President and General Manager may issue Call Notices to the Members at any other time for other additional contributions to the extent that the Company Group Members’ anticipated gross receipts and other additional contributions made pursuant to Section 3.3(a) are not anticipated to be sufficient to satisfy the Company Group Members’ estimated expenditures to be incurred during the current Calendar Quarter in accordance with this Agreement, provided that Call Notices may not be issued pursuant to this Section 3.3(b) for any estimated expenditures more than thirty (30) days in advance of such estimated expenditures.

(c) Proper adjustment shall be made in each Calendar Month between advances made hereunder and actual expenditures, to the end that each Member bears and pays its allocable share of expenditures, and no more. All calls for capital contributions shall be expressed in U.S. dollars and shall state the date on which payment is due and the bank(s) and account(s) to which payment is to be made. Each Call Notice shall specify in reasonable detail the purpose(s) for which such additional contribution(s) are required, and the amount of the contribution(s) to be made by each Member pursuant to such Call Notice.

 

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(d) Each Member shall contribute any additional contribution within fifteen (15) Business Days of the date of delivery of the relevant Call Notice.

Section 3.4 Member Loans .

(a) At the election of Management Board pursuant to Section 5.1(b)(xvi), capital requirements for the Members may be funded with Member Loans.

(b) All Member Loans shall be made upon the terms approved by the Management Board pursuant to Section 5.1(b)(xvi), which terms shall include the amounts of such Member Loans, the schedule for advancing such Member Loans, the schedule of repayment of such Member Loans, rates of interest (if any) payable on such Member Loans and all other terms deemed necessary by such Management Board (provided that the terms set forth in this Agreement shall be included). The terms of the Member Loans made by each Member pursuant to the same decision of a Management Board shall be identical except as to the amount. All Member Loans shall be represented by written notes setting forth those terms.

(c) Each Member shall provide to the Company a percentage of each Member Loan equal to such Member’s Member Interest.

(d) All Member Loans shall rank pari passu in all respects without preference or priority over one another.

(e) Member Loans shall be repaid only out of Available Cash.

(f) Unless otherwise agreed by the Management Board, payment of all required Member Loans shall be made by wire transfer of immediately available funds in U.S. dollars without set-off or deduction for bank charges.

(g) Upon notice from the President and General Manager or any other Member, each Member shall be required to return any payment received with respect to any Member Loan to the extent: (i) such payment was made in error; (ii) the amount paid to the Member was greater than the amount to which the Member was actually entitled; or (iii) applicable Law requires the return of such payment. Each Member shall return any such payment to the Company not later than ten (10) days after receipt of such notice requiring such return.

(h) In the event that the Company is dissolved and wound up, all Member Loans shall be contributed to the capital of the Company upon the dissolution of the Company, and shall not be considered liabilities of the Company for purposes of winding up. This Section 3.4(h) shall not, however, affect any outstanding liabilities by any Member to make Member Loans to the Company.

 

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(i) Unless otherwise required by the Code, any Member Loan shall be treated as a loan by the Member to the Company for federal income tax purposes.

Section 3.5 Failure to Fund Additional Contributions or Member Loans .

(a) Any Member that fails to pay in full when due any amounts owed and undisputed under the terms of this Agreement (including failure to pay the full amount of such Member’s Member Interest share of any Member Loan when due) and such failure is not cured within fifteen (15) days of such Member’s receipt of a Default Notice shall be in default under this Agreement, and shall be referred to herein as a “ Defaulting Member ”. The Company shall (or any Affected Member may) give notice of such default (a “ Default Notice ”) to the Defaulting Member, and its Credit Facility Lender (if any) and each of the non-defaulting Members.

(b) “ Default Period ” means the period beginning fifteen (15) days from the date of a Member’s and its Credit Facility Lender’s (if any) receipt of a Default Notice if such Member remains in default under Section 3.5(a), and ending when all of the Defaulting Member’s defaults have been remedied in full.

(c) All amounts in default and not paid when due under this Agreement shall bear interest at the Default Interest Rate from the due date to the date of payment.

Section 3.6 Certain Consequences of Default .

(a) Notwithstanding any other provision in this Agreement to the contrary, during the Default Period, a Defaulting Member shall have no right to:

(i) except for Required Asset Upgrades, make or elect to participate in any proposal under this Agreement;

(ii) vote on any matter with respect to which Member approval is required under the express terms of this Agreement (excluding any amendment or waiver of the terms of this Agreement);

(iii) call any Management Board or subcommittee meeting;

(iv) except for votes by the Board Members of such Defaulting Member under Section 5.1(c)(i) that pertain to Development Work Programs, vote on any matter coming before the Management Board or any subcommittee;

(v) access any data or information relating to any operation conducted by the Company (except to the extent such Member or an

 

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Affiliate of such Member is providing Services to the Company Group Members pursuant to a Services Agreement, and such data or information is necessary for such Member or Affiliate to perform its responsibilities thereunder);

(vi) elect to participate in any proposed New Business (other than a Required Asset Upgrade) under Section 13.3;

(vii) Transfer or Encumber all or any part of its Member Interest except: (A) a Transfer to or Encumbrance of Member Interest in favor of a Person who simultaneously with such Transfer or Encumbrance satisfies in full the Total Amount in Default; or (B) a Credit Facility Encumbrance granted pursuant to a borrowing for which all of the proceeds thereof are used to pay the entire amount of the Total Amount in Default;

(viii) withhold consent to any Transfer of all or an undivided portion of the Member Interest of a non-defaulting Member pursuant to Article 11, or exercise its preferential purchase right provided for in Section 12.1 in the event of such a Transfer by a non-defaulting Member, or in Section 12.2 in the event of a Change in Control of a non-defaulting Member; or

(ix) elect to participate in the acquisition of any Acquired Business pursuant to Section 13.1.

(b) In addition to the other remedies available to the Company and the Affected Members under this Agreement and any other rights available to each Affected Member to recover its share of the Total Amount in Default, from and after the thirtieth (30th) day of the Default Period, a Defaulting Member shall have no right to receive distributions from the Company pursuant to Section 4.5 until the expiration of the Default Period, and such distributions shall instead (to the extent applicable) be made to the Affected Members for advances made by such Affected Members on behalf of the Defaulting Member pursuant to Section 3.6(e), plus interest thereon as provided in Section 3.5(c). Amounts received towards the Total Amount in Default shall be deemed paid towards the oldest of each applicable type of expense (costs, interest or principal) first. If there is more than one Affected Member, the distributions attributable to the Member Interests of the Defaulting Member shall be shared among the Affected Members in the proportions that such Affected Members’ Member Interests bear to the aggregate Member Interests of such Affected Members.

(c) Any Default Notice shall include a statement of the amount of money that the Defaulting Member has failed to pay.

(d) If the Defaulting Member remedies its default in full before the Default Period commences, the Company shall promptly notify each non-defaulting Member and such Defaulting Member’s Credit Facility Lender (if any) of such occurrence.

 

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(e) Upon the commencement of the Default Period, the Company shall send the non-defaulting Members a statement of the sum of money that the Defaulting Member failed to pay and such non-defaulting Members shall pay such amount within fifteen (15) days following receipt of the statement. Each such non-defaulting Member shall be required to pay that portion of the amount that the Defaulting Member failed to furnish that such non-defaulting Member’s Member Interest bears to the aggregate Member Interests of all non-defaulting Members. If any non-defaulting Member fails to timely satisfy such obligations, such non-defaulting Member shall thereupon be a Defaulting Member subject to the provisions of Sections 3.5, 3.6 and 3.7. If all non-defaulting Members fail to timely satisfy such obligations, the Members shall be deemed to have unanimously determined not to make such expenditure and the Defaulting Member shall no longer be deemed to be in default with respect to such expenditure.

(f) During the Default Period, the Company shall not be obligated or required to (i) except for Member Requested Services, Required Asset Upgrades and Article 13 Contracts, participate in any proposed New Business and each Defaulting Member shall be deemed to have elected not to participate in any such proposed New Business under Section 13.3 or (ii) acquire any Acquired Business and each Defaulting Member shall be deemed to have elected not to acquire any such proposed Acquired Business under Section 13.1.

Section 3.7 Extended Default .

(a) In addition to the other remedies available to the Affected Members under this Article 3 and any other rights available to each Affected Member to recover its share of the Total Amount in Default, in the event a Defaulting Member fails to completely remedy its default after the one hundred twentieth (120th) day of the Default Period, any Affected Member may elect to reduce the Member Interest of the Defaulting Member by written notice to the Company (an “ Interest Reduction Notice ”, and the date of delivery of the Interest Reduction Notice, the “ Interest Reduction Notice Delivery Date ”) and the other Members in accordance with the following formula:

 

AMI DM   =  

  CC DM   

  
    CC T   

 

where:     
AMI DM   =    the adjusted Member Interest of the Defaulting Member as of the Interest Reduction Notice Delivery Date (in percent)

 

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CC DM   =    the aggregate capital contributions made to the Company by the Defaulting Member as of the Interest Reduction Notice Delivery Date (in US dollars) (excluding capital contributions made to the Company pursuant to an Asset Upgrade in which less than all Members participate)
CC T   =    the aggregate capital contributions made to the Company by all Members as of the Interest Reduction Notice Delivery Date (in US dollars) (excluding capital contributions made to the Company pursuant to an Asset Upgrade in which less than all Members participate)

(b) The amount by which the Defaulting Member’s Member Interest is reduced pursuant to Section 3.7(a) shall be referred to as the “ Reduced Member Interest ”. Within ten (10) Business Days of the Interest Reduction Notice Delivery Date, each Affected Member shall provide written notice to the Company and the other Affected Members whether it elects to take a portion of the Reduced Member Interest (provided that the Affected Member that provided the Interest Reduction Notice shall be required to take a portion of the Reduced Member Interest, or if no other Affected Members elect to take a portion of the Reduced Member Interest, all of the Reduced Member Interest). Failure of an Affected Member other than the Affected Member that provided the Interest Reduction Notice to so notify the Company and the other Affected Members within such period shall be deemed an election by such Affected Member not to take a portion of the Reduced Member Interest. Unless otherwise agreed by the Affected Members taking a portion of the Reduced Member Interest, each such Affected Member shall be entitled to take that portion of the Reduced Member Interest that such Affected Member’s Member Interest bears to the total Member Interests of the Affected Members electing to take a portion of the Reduced Member Interest.

(c) Immediately following the elections of the Affected Members in Section 3.7(b), the Company shall cause the Member Interests to be revised to reflect the adjustments described in such Section, effective as of the Interest Reduction Notice Delivery Date. Each Member hereby pledges and assigns to the Company and grants to the Company a continuing security interest for the benefit of the other Members in and to all of such Member’s Member Interest for purposes of enforcement of the remedies described in this Section 3.7. Notwithstanding the foregoing, but subject to Section 10.3(b), the security interests created for the benefit of the Company under this Section 3.7(c) are and will be, in all respects, subordinate to the liens and security interests created pursuant to a Credit Facility Encumbrance regardless of the time of execution of the instruments creating such liens and/or security interests and/or the filing of such liens and security interests in the applicable county or parish or other governmental office. The Company and each Member shall execute any instruments requested by any Credit Facility Lender reasonably necessary to reflect the subordination of any liens or security interests created for the benefit of

 

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the Company under this Section 3.7(c) to the liens and security interests created pursuant to such Credit Facility Encumbrance (subject always to the rights of Company and the other Members set forth in Section 10.3(b)).

(d) The reduction of a Defaulting Member’s Member Interest pursuant to Section 3.7(a) shall be deemed to be full satisfaction to such Defaulting Member’s Total Amount in Default.

Section 3.8 Capital Accounts .

(a) “ Capital Account ” means, with respect to any Member, an account that is maintained for such Member and which, as of any given date, has a balance calculated as follows:

(i) the aggregate amount of cash that has been contributed to the capital of the Company as of such date by or on behalf of such Member; plus

(ii) the Gross Asset Value of any property other than cash that has been contributed to the capital of the Company as of such date by such Member and the amount of liabilities assumed by any such Member under Section 752 of the Code and the Treasury Regulations or which are secured by any Assets distributed to such Member; plus

(iii) the aggregate amount of the Net Profits that has been allocated to such Member as of such date pursuant to the provisions of Section 4.1 or Section 14.3 or any items of income or gain which are specially allocated to such Member pursuant to Section 4.2 or 4.3 or other positive adjustments required by the Treasury Regulations and which have not been previously taken into account in determining such Member’s Capital Account; minus

(iv) the aggregate amount of the Net Losses that have been allocated to such Member as of such date pursuant to Section 4.1 or Section 14.3 and the amount of any item of expense, deduction or loss which is specially allocated to such Member pursuant to Section 4.2 or Section 4.3 or other negative adjustments required by the Treasury Regulations and which have not been previously taken into account in determining such Member’s Capital Account; and minus

(v) the aggregate amount of cash and the Gross Asset Value of all Assets that has been distributed to or on behalf of such Member and the amount of any liabilities of such Member assumed by the Company under Section 752 of the Code and the Treasury Regulations or which are secured by any property contributed by such Member to the Company, and any other negative adjustments required by the Treasury Regulations and which have not been previously taken into account in determining such Member’s Capital Account.

 

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(b) Each Member’s initial Capital Account balance after the special distributions provided for in Section 4.5(e)(i) and (ii) shall be equal to the Final Cash Amount (as determined pursuant to Section 3.5 of the Contribution Agreement).

Section 3.9 No Interest on or Return of Capital Contributions .

No Member shall be entitled to interest on its contributions to the Company or to a return thereof, except as otherwise specifically provided for in this Agreement.

ARTICLE 4

ALLOCATIONS AND DISTRIBUTIONS

Section 4.1 Allocations of Net Profits and Net Losses .

(a) Except as provided in Section 14.3(b), after giving effect to the special allocations set forth in Sections 4.2 and 4.3, Net Profits and Net Losses for any Fiscal Year shall be allocated among the Members in accordance with their respective Member Interests.

(b) The Parties intend that: (i) to the extent possible, allocations of losses and deductions pursuant to this Agreement are intended to conform with Members’ capital contributions (including any disproportionate capital contributions); and (ii) the allocation provisions of this Agreement shall produce final Capital Account balances for each Member thereof to be as nearly as possible equal to the amount of the liquidating distributions to be made under Section 14.3. To the extent that the allocations required in this Agreement would fail to produce such final Capital Account balances, to the extent possible: (I) such allocation provisions shall be amended by the Tax Member with the consent of the other Members, if and to the extent necessary to produce such result; and (II) items of income, gain, loss, or deduction for prior open Fiscal Years shall be reallocated by the Tax Member among the Members to the extent it is not possible to achieve such result with allocations of income, gain, loss, or deduction for the current Fiscal Year and future Fiscal Years.

Section 4.2 Special Allocations . The following special allocations shall be made in the following order:

(a) Minimum Gain Chargeback . To the extent required by Section 1.704-2(f) of the Treasury Regulations, if there is a net decrease in “partnership minimum gain” (within the meaning of Section 1.704-2(b)(2) of the Treasury Regulations) in a Fiscal Year, then each Member shall be specially allocated items of income and gain (including gross income) arising during that Fiscal Year (and if necessary subsequent Fiscal Years), before any other allocation of Net Profits or Net Losses, equal to such Member’s share of the net decrease in partnership minimum gain. The items to be so allocated shall be determined in accordance with Sections 1.704-2(f)(6) and 1.704-2(j)(2) of the Treasury Regulations. If in any Fiscal Year that has such a net decrease, if the minimum

 

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gain chargeback requirement would cause a distortion in the economic arrangement among the Members and it is not expected that the Company will have sufficient other income to correct that distortion, the Tax Member may in its reasonable discretion seek to have the Internal Revenue Service waive the minimum gain chargeback requirement in accordance with Section 1.704-2(f)(4) of the Treasury Regulations. This Section 4.2(a) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f) of the Treasury Regulations and shall be interpreted consistently therewith.

(b) Member Nonrecourse Debt Minimum Gain Chargeback . If there is a net decrease in “partner nonrecourse debt minimum gain” (within the meaning of Section 1.704 2(i)(4) of the Treasury Regulations) in any Fiscal Year, then each Member who has a share of the “partner nonrecourse debt minimum gain” as of the beginning of the Fiscal Year shall be specially allocated items of income and gain arising during that Fiscal Year (and if necessary subsequent Fiscal Years) to the extent required by Section 1.704-2(i)(4) of the Treasury Regulations. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the Treasury Regulations. A Member shall not be subject to this provision to the extent that an exception is provided by Section 1.704-2(i)(4) of the Treasury Regulations and any administrative guidance issued by the Internal Revenue Service with respect thereto. Any “partner nonrecourse debt minimum gain” allocated pursuant to this provision shall consist of first, gains recognized from the disposition of Assets subject to “partner nonrecourse debt” (within the meaning of Section 1.704-2(b)(4) of the Treasury Regulations), and, second, if necessary, a pro rata portion of the Company’s other items of income or gain (including gross income) for that Fiscal Year (and if necessary subsequent Fiscal Years). This Section 4.2(b) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(i)(4) of the Treasury Regulations and shall be interpreted consistently therewith.

(c) Qualified Income Offset . In the event any Member unexpectedly receives any adjustments, allocations, or distributions described in Section 1.704-1(b)(2)(ii)(d)(4), Section 1.704-1(b)(2)(ii)(d)(5) or Section 1.704-1(b)(2)(ii)(d)(6) of the Treasury Regulations, which creates a negative Adjusted Capital Account Balance for its Capital Account, then items of Company income and gain (consisting of a pro rata portion of each item of Company income, including gross income, and gain for such year and, if necessary, for subsequent years) from Business conducted by the Company shall be specially allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations, the negative Adjusted Capital Account Balance so created as quickly as possible, provided that an allocation pursuant to this Section 4.2(c) shall be made if and only to the extent that such Member would have a negative Adjusted Capital Account Balance after all other allocations provided for in this Article 4 have been tentatively made as if this Section 4.2(c) were not in the Agreement. It is the intent that this Section 4.2(c) be interpreted to comply with the alternate test for economic effect set forth in Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations.

 

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(d) Nonrecourse Deductions . If there are any “nonrecourse deductions” (within the meaning of Sections 1.704-2(b)(1) and 1.704-2(c) of the Treasury Regulations) in a Fiscal Year, then each Member shall be allocated its Member Interest share of such nonrecourse deductions.

(e) Member Nonrecourse Deductions . If there are any “partner nonrecourse deductions” (within the meaning of Section 1.704-2(i)(1) of the Treasury Regulations) in a Fiscal Year, then such deductions will be allocated to the Member who bears the economic risk of loss for the “partner nonrecourse liability” (within the meaning of Section 1.704-2(b)(4) of the Treasury Regulations) to which the deductions are attributable.

(f) Special Loss Allocation . The Net Losses allocated pursuant to Section 4.1(a) hereof shall not exceed the maximum amount of Net Losses, losses or deduction that can be so allocated without causing any Member to have a negative Adjusted Capital Account Balance at the end of any Fiscal Year. If some, but not all, of the Members would have negative Adjusted Capital Account Balance as a consequence of such allocations, the limitation set forth in the preceding sentence shall be applied on a Member-by-Member basis so as to allocate the maximum permissible Net Losses and items of loss and deduction to each Member under Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations. All Net Losses in excess of the limitation set forth in this Section 4.3(f) shall be allocated to the Members in proportion to their respective positive Adjusted Capital Account Balances, if any, and thereafter to the Members in accordance with their interests as determined by the Tax Member in its reasonable discretion. If any Member would have a negative Adjusted Capital Account Balance at the end of any Fiscal Year, the Capital Account of such Member shall be specially credited with items of Company income (including gross income) and gain from Business conducted by the Company in the amount of such excess as quickly as possible.

Section 4.3 Curative Allocations . The allocations (the “ Regulatory Allocations ”) set forth in Section 4.2 are intended to comply with certain requirements of Sections 1.704-1(b) and 1.704-2(b) of the Treasury Regulations. Notwithstanding any other provisions of this Agreement other than the Regulatory Allocations, the Regulatory Allocations shall be taken into account in allocating Net Profits or Net Losses or other items of income, gain, loss and deduction among the Members so that, to the extent possible, the net amount of such allocations of other items and the Regulatory Allocations to each Member shall be equal to the net amount that would have been allocated to such Member if the Regulatory Allocations had not been part of this Agreement. The Tax Member shall determine, with respect to each Fiscal Year, how to apply the provisions of this Section 4.3 in whatever manner is likely to minimize the economic distortions that might otherwise result from the Regulatory Allocations.

Section 4.4 Tax Allocations . Except as otherwise provided in this Section 4.4, for income tax purposes, the income, gain, loss, deduction or credit (or any item thereof) for each Fiscal Year shall be allocated to and among the Members, in order to reflect the

 

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allocations made pursuant to the provisions of Sections 4.1, 4.2 and 4.3 for such Fiscal Year. Notwithstanding any other provision of this Agreement to the contrary, any income, gain, loss or deduction recognized by the Company for income tax purposes in any Fiscal Year with respect to all or any part of an Asset that is required to be allocated among the Members in accordance with Section 704(c) of the Code and the Treasury Regulations so as to take into account the variation, if any, between the adjusted tax basis of such Asset and the initial Gross Asset Value of such Asset at the time of its contribution, or following the adjustment to the Gross Asset Value of an Asset pursuant to this Agreement, shall be allocated to the Members in the manner so required. Unless otherwise approved by the Management Board, the Company shall elect to use the remedial allocation method pursuant to Section 1.704-3(d) of the Treasury Regulations. The income tax allocations made pursuant to this Section 4.4 shall not be reflected in any Member’s Capital Account.

Section 4.5 Distributions .

(a) Available Cash . Available Cash shall be determined by the Management Board on a Calendar Quarter basis, effective at the end of each Calendar Quarter, within thirty (30) days after the end of each such Calendar Quarter. Subject to the remaining provisions of this Article 4 and any preferential or disproportionate distributions to the extent expressly provided for in this Agreement, and other than upon a liquidation of the Company pursuant to Section 14.3, the Company shall distribute the Available Cash for a Calendar Quarter to the Members within forty five (45) days following the end of each Calendar Quarter.

(b) Distributions . Subject to the other provisions of this Agreement, all Available Cash shall be distributed to the Members of record in proportion to their relative Member Interests.

(c) Withholding . All amounts withheld pursuant to the Code or any provision of any foreign, state or local tax law or treaty with respect to any payment, distribution or allocation to the Company or the Members shall be treated as amounts distributed to the Members pursuant to this Section 4.5 for all purposes of this Agreement. The Management Board is authorized to withhold from distributions, or with respect to allocations, to the Members and to pay over to any Governmental Authority any amounts required to be so withheld pursuant to the Code or any provision of any other federal, foreign, state or local Law and shall allocate such amounts to those Members with respect to which such amounts were withheld.

(d) Tax Distributions .

(i) Each Member shall be entitled to receive, on the date which is two (2) Business Days prior to each date on which estimated income tax payments are required to be made by a corporate calendar year taxpayer and each due date for the income tax return of a corporate calendar year

 

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taxpayer (each a “ Tax Distribution Date ”), cumulative cash distributions (each, a “ Tax Distribution ”) in an amount equal to such Member’s Assumed Tax Liability, if any. The “ Assumed Tax Liability ” of each Member means an amount equal to the excess, if any of: (A) the product of (i) forty percent (40%) and (ii) the cumulative amount of net taxable income allocated by the Company to such Member as of such Tax Distribution Date, over (B) all previous distributions made to such Member pursuant to this Section 4.5 other than Section 4.5(e).

(ii) Distributions under this Section shall be treated as an advance distribution under and shall offset future distributions that such Member would otherwise be entitled to receive pursuant to the other provisions of this Section 4.5 or, if not previously offset, Section 14.3.

(iii) If on a Tax Distribution Date there is not sufficient Available Cash for the Company to distribute to each Member the full amount of such Member’s Assumed Tax Liability, distributions pursuant to this Section 4.5(d) shall be made to the Members to the extent of the Available Cash in proportion to each Member’s Assumed Tax Liability.

(e) Special Distributions .

(i) All cash contributions made by any member of the BG Affiliate Group to the Company pursuant to the Contribution Agreement shall be promptly distributed to EOC.

(ii) If the aggregate amount of distributions made to EOC pursuant to Section 4.5(e)(i) is greater than the Final Cash Amount (as determined pursuant to Section 3.5 of the Contribution Agreement), within ten (10) days of such determination, EXCO shall make a special contribution to the Company in the amount of the difference between the aggregate amount of distributions made to EOC pursuant to Section 4.5(e)(i) and such Final Cash Amount, and the Company shall promptly make a distribution to BG in the amount of such difference. If the aggregate amount of distributions made to EOC pursuant to Section 4.5(e)(i) is less than the Final Cash Amount (as determined pursuant to Section 3.5 of the Contribution Agreement), within ten (10) days of such determination, BG shall make a special contribution to the Company in the amount of the difference between the aggregate amount of distributions made to EOC pursuant to Section 4.5(e)(i) and such Final Cash Amount, and the Company shall promptly make a distribution to EXCO in the amount of such difference.

Section 4.6 Limitations Upon Distributions . Notwithstanding anything to the contrary in Section 4.5, no distribution shall be made if such distribution would violate the Delaware Act.

 

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ARTICLE 5

MANAGEMENT OF THE COMPANY

Section 5.1 Management under Direction of Management Board .

(a) Except as otherwise expressly provided in this Agreement or required under the Delaware Act, the business and affairs of the Company shall be managed by a board of managers (the “ Management Board ” and each member of the Management Board, a “ Board Member ”). The Management Board shall have full and complete authority, power, and discretion to manage and control the business, affairs, and properties of the Company and to make all decisions regarding those matters and to perform any and all other acts or activities customary or incidental to the management of the Company and the Business. Without limiting the generality of the foregoing and subject to the provisions of Sections 5.1(b) and 5.1(c), Management Board approval shall be required for all matters not expressly delegated by the Management Board to the officers of the Company, or to other authorized persons in accordance with Section 5.9. All actions of a Member with respect to the Management Board shall be taken through its Board Members.

(b) All matters identified in this Section 5.1(b) shall require the affirmative vote of Board Members representing one hundred percent (100%) of the Total Votes:

(i) approval of voluntary reserves outside of the reserve levels provided in the definition of Available Cash for purposes of calculating Available Cash;

(ii) issuance of any guaranty by any Company Group Member;

(iii) the voluntary grant of any lien or encumbrance on any Asset other than under an approved Company Group O&M Contract or any Company Group Commercial Contract;

(iv) approval of any decision to distribute Available Cash less frequently than on a Calendar Quarter basis, or, except upon dissolution and winding up of the Company, to distribute any Assets other than cash, or to distribute less than all Available Cash pursuant to Section 4.5;

(v) approval of any decision to dispose of Assets that have a value in excess of five million dollars (US$5,000,000) in any transaction or series of related transactions;

(vi) any sale, merger, reorganization or consolidation of any Company Group Member;

(vii) any voluntary dissolution, liquidation or winding up of any Company Group Member;

 

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(viii) filing any documents to effect a Bankruptcy of any Company Group Member;

(ix) redeeming any Member Interest in a manner that is not proportional to all outstanding Member Interests;

(x) confessing a judgment against any Company Group Member in connection with any threatened or pending legal action or settling any litigation or other proceeding in which the amount involved could reasonably be expected to exceed five hundred thousand dollars (US$500,000), in either case, relating to Business;

(xi) the conversion of any Company Group Member to a different form of entity, changing the name of any Company Group Member or conducting Business under a name other than the current names of the Subsidiaries or, with respect to the Company, the name set forth in Section 1.2, or moving the Company’s principal office from the location set forth in Section 1.5;

(xii) any Company Group Member’s participation in any business or operations other than Midstream Activities;

(xiii) changing the method of accounting (other than in connection with a tax-related action or decision made by the Tax Member pursuant to the authority granted herein) or outside auditors of the Company;

(xiv) the voluntary amendment of the Certificate;

(xv) other than the Initial Contributions, allowing any contribution to the capital of the Company by any Member in any form other than cash;

(xvi) any decision that Member Loans be utilized to fund additional Member Interest capital requirements rather than cash contributions, and the terms of such Member Loans;

(xvii) the registration of any equity or debt securities of any Company Group Member under applicable United States federal or foreign securities Laws or any public offering of equity or debt securities of any Company Group Member;

(xviii) any agreement pursuant to which any Company Group Member would be prohibited or restricted from engaging in any lawful business or activity or competing with any Person in any geographic area;

(xix) any decision for the Company to hold any assets other than equity interests in the Subsidiaries;

 

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(xx) any action by any Company Group Member that would subject any Company Group Member to the Standards of Conduct;

(xxi) except with respect to a Defaulting Member or as provided in Section 4.5(e), distributing any cash or Assets of any Company Group Member in a manner that is not proportional to all outstanding Member Interests;

(xxii) issuing any additional Member Interests or other equity or debt securities of any Company Group Member or options to acquire any such securities;

(xxiii) causing any Company Group Member to acquire any Acquired Business or engage in any New Business (other than Asset Upgrades);

(xxiv) any incurrence, assumption or guaranty of any indebtedness for borrowed money by any Company Group Member;

(xxv) initiating any legal action or arbitration by or on behalf of the Company or any other Company Group Member; and

(xxvi) except for the rights and waivers set forth in Article 7, providing any indemnification rights to any Covered Person or waiving any claims against any Person.

(c) All matters identified in this Section 5.1(c) shall require the affirmative vote of Board Members representing seventy five percent (75%) of the Total Votes, except for those matters identified in Sections 5.1(c)(v) and (xix), which shall require the affirmative vote of Board Members appointed by Members that are not the counterparty or Affiliates of the counterparty under the relevant contract representing seventy five percent (75%) of the Total Votes held by such Members:

(i) approval of any Annual Work Program and Budget or Development Work Program, and any amendment thereto;

(ii) delegation of authority to the officers of the Company to enter into certain Company Group Commercial Contracts (the Management Board shall use commercially reasonable efforts to make such delegations within thirty (30) days of the Closing Date);

(iii) execution of any Other Material Company Group Contract to be entered into by any Company Group Member, and any material amendment of or voluntary termination of any such Other Material Company Group Contract;

 

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(iv) execution of any Company Group O&M Contract to be entered into by any Company Group Member that requires the approval of the Management Board pursuant to Section 6.4, and any material amendment of or voluntary termination of any such Company Group O&M Contract (provided that approval of any matters described in Section 6.4(b) shall require the approval specifically set forth therein);

(v) execution of any Affiliate Contract to be entered into by any Company Group Member, and any material amendment of or voluntary termination of any such Affiliate Contract;

(vi) approval of the final terms of any financing and security arrangements relating to the Business, including execution of any notes, bonds, indentures, loan agreements or other material agreements between any Company Group Member and lenders, and any amendment or voluntary termination of any such agreement;

(vii) creation of any new office, other than the officers specifically set forth in Section 5.9(b), determination of the rights, powers, privileges and duties of such new office, appointment of any Person to any such new office, and termination of any such new office;

(viii) approval of the final terms of any settlement by any Company Group Member in respect of the Business of any claim or suit or series of related claims or suits for an amount, or institution of litigation by any Company Group Member against any Person, for an amount in excess of two hundred and fifty thousand dollars (US$250,000) (exclusive of legal fees);

(ix) except as may be required by Law, altering, amending or waiving the insurance requirements for the Company Group Members set forth on Schedule 5.13;

(x) approval of any decision to distribute Available Cash more frequently than on a Calendar Quarter basis;

(xi) approval of any decision to dispose of Assets that have a value in excess of one million dollars (US$1,000,000) but not more than five million dollars (US$5,000,000) in any transaction or series of related transactions;

(xii) appointment of any officer of any Company Group Member in accordance with Section 5.9(a), removal of any officer of any Company Group Member (other than a seconded officer, which is addressed in Section 5.1(c)(xx) below), removal of the Tax Member and appointment of any successor Tax Member;

 

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(xiii) any election to use the remedial allocation method for any Assets pursuant to Section 4.4;

(xiv) replacement of the Company’s registered office or registered agent in Delaware;

(xv) decisions regarding the Assumed Tax liability of any Member pursuant to Section 4.5(d), or the amount of withholdings from distributions pursuant to Section 4.6;

(xvi) approval of a place of business of the Company in addition to the principal office of the Company designated pursuant to Section 1.5;

(xvii) any other matter primarily relating to the Business or the Assets not otherwise identified in Section 5.1(b) or this Section 5.1(c) which requires the approval of the Management Board pursuant to the terms of this Agreement;

(xviii) terminating, amending or altering any of the Services Agreements;

(xix) requests for services by the Company Group Members under any Services Agreement, and the terms and conditions for the provision of such services;

(xx) removal of a secondee pursuant to Section 6.2(A)(4) of any Secondment Agreement (provided that Management Board approval shall not be required to remove a secondee that is not an officer of the Company and such non-officer secondees may be removed pursuant to Section 5.9(f)); and

(xxi) approval of any decision to proceed with the development of the projects commonly referred to as the Waskom Expansion Project and the Logansport Expansion Project.

(d) Notwithstanding anything to the contrary herein, the Management Board shall be deemed to have approved any activities to be performed by the Company Group Members in connection with the performance of Member Requested Services or Asset Upgrades and execution and performance of Article 13 Contracts.

(e) All decisions taken by the Management Board pursuant to this Section 5.1 shall be conclusive and binding on all Members.

Section 5.2 Number, Tenure and Qualification .

(a) The Management Board shall consist of eight (8) Board Members. Each of BG Affiliate Group and EOC Affiliate Group shall be entitled to appoint

 

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four (4) Board Members and three (3) alternate Board Members. Each of (i) the Board Members of the BG Affiliate Group and (ii) the Board Members of the EOC Affiliate Group shall be referred to as a separate group (each a “ Group ”) such that the Management Board shall be comprised of at least two different Groups of Board Members. The Board Members appointed by a Member, or in any absence of such Board Member, any alternate appointed by such Member, shall be authorized to represent and bind such Member with respect to any matter which is within the powers of the Management Board and is properly brought before the Management Board. Each alternate Board Member shall be entitled to attend Management Board meetings. The Board Members and alternate Board Members may also bring to any Management Board meetings such advisors as they may deem appropriate. Each Affiliated Member Group shall appoint its initial Board Members and alternate Board Members by notice to the other Members on or prior to the first meeting of the Management Board or the first required vote of the Management Board. All actions of a Member with respect to a Management Board shall be taken through its Board Members or alternate Board Members.

(b) Each of BG Affiliate Group and EOC Affiliate Group shall have the right to change any of its Board Members and its alternate Board Members at any time by giving notice of such change to the Company and the other Members.

(c) Any Board Member designated in accordance with this section shall be immediately removed from the Management Board at any time that the Affiliated Member Group that designated such Board Member ceases to own any Member Interest.

(d) A Board Member need not be a resident of the State of Delaware. A Board Member shall hold office until the Board Member’s successor shall be duly elected and shall qualify or until the earlier of such Board Member’s withdrawal, death, removal or resignation.

(e) A Person that serves as a Board Member shall not be required to be a Board Member as his sole and exclusive occupation, and a Board Member may have other business interests and may engage in other investments, occupations and activities in addition to those relating to the Company.

Section 5.3 Voting Proxies; Quorum; Meetings of Management Board; No Fiduciary Duties .

(a) A Board Member may vote at a meeting by a written proxy executed by that Board Member and delivered to another Board Member. Except as provided in Section 5.3(b), attendance (either in person, by remote communication pursuant to Section 5.3(l), or by proxy) of Board Members representing Members holding more than fifty percent (50%)of the Total Votes shall constitute a quorum for the transaction of Business at a meeting of the Management Board. The Board Members, collectively, shall have a total of 100

 

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votes, as may be adjusted below (the “ Total Votes ”) to cast on any action of the Management Board, with (i) the Group of Board Members elected by the BG Affiliate Group being entitled to cast the number of votes equal to the product (rounded to the nearest tenth) of (x) a fraction the numerator of which is number of the aggregate Member Interests of the members of the BG Affiliate Group and the denominator which is the sum of all Members’ Member Interests and (y) 100, and (ii) the Group of Board Members elected by the EOC Affiliate Group being entitled to cast the number of votes equal to the product (rounded to the nearest tenth) of (x) a fraction the numerator of which is the number of the aggregate Member Interests of the members of the EOC Affiliate Group and the denominator which is the sum of all Members’ Member Interests and (y) 100. If the calculation does not yield exactly 100 votes, then each Group of Board Members’ votes shall be rounded to the nearest 0.01. Any Board Member of a Group of Board Members may cast any or all votes entitled to be cast by that Group of Board Members. Except as otherwise expressly provided in this Agreement, any action or event relating to Business conducted at a Management Board meeting shall be deemed approved if such action or event receives the required Management Board approval at a meeting at which a quorum is present.

(b) Notwithstanding anything to the contrary in this Agreement, any actions by any Company Group Member in connection with a breach, default or indemnity or other claims (or alleged breach, default, indemnity or other claims) by a Member or its Affiliate under an Affiliate Contract or other transaction with a Member or its Affiliate (such as a waiver of the breach or default, notice of breach or event of default or notice of termination for breach or default in accordance with the terms of the Affiliate Contract) or enforcement or exercise of any of the applicable Company Group Member’s rights or remedies in respect to such breach, default or indemnity or other claim (or alleged breach, default, indemnity or other claim) or otherwise under such Affiliate Contract or in connection with such transaction (collectively, “ Enforcement Activities ”) shall be conducted by or under the direction of the Management Board, provided that any Board Member designated by a Member (a “ Conflicted Member ”) that is, or has an Affiliate (other than the Company) that is the counterparty under such Affiliate Contract or to such transaction shall not participate in any vote regarding such Enforcement Activities at any meeting of such Management Board, shall not be required to be present to constitute a quorum of such Management Board and shall not be counted for purposes of determining whether such actions by the applicable Company Group Member receive the minimum vote necessary to take such action; provided, further, that no officer or other agent of the Company that is also a present officer, director, member, manager, stockholder, partner, employee or other agent or Affiliate of a Conflicted Member or one of its Affiliates shall have any obligation to take or refrain from taking any action on behalf of any Company Group Member or be requested or required by any Company Group Member or Management Board to take or refrain from taking any action with respect to any Enforcement Activities including such Conflicted Member, except to provide information, documents and other related items reasonably requested by any Company Group Member or any Member in

 

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connection with such Enforcement Activities. Except with respect to such Person’s failure to provide information, documents or other related items requested by such Company Group Member in connection with such Enforcement Action and to provide testimony, give evidence and otherwise participate in any suit, litigation, arbitration or other dispute resolution proceeding involving the Conflicted Member, any such Person’s failure or refusal to take or refrain from taking any such action shall not constitute: (i) a breach of any duty, fiduciary or otherwise, owed by such Person to the Company; or (ii) fraud, bad faith or willful misconduct on the part of such Person. Any officer, director, manager, member, stockholder, partner, employee or other agent of a Member, or an Affiliate of such Member, is authorized to take or refrain from taking any action on behalf of the Company associated with any Enforcement Activities described in the foregoing two sentences. For the avoidance of doubt, removal of a secondee under Section 6.2 (other than removal of a secondee pursuant to Section 6.2(A)(4)) of any Secondment Agreement shall be an Enforcement Activity.

(c) The Management Board may establish such subcommittees as it may deem appropriate. The functions of such subcommittees shall be to serve in an advisory capacity only. Each Member shall have the right to appoint a representative to each subcommittee.

(d) The President and General Manager may call a meeting of the Management Board by giving notice to the Members at least fifteen (15) days in advance of such meeting. Any Member may request a meeting of the Management Board by giving notice to the other Members and the President and General Manager, which notice shall include any proposals being proposed by such Member for consideration at the meeting (including appropriate supporting information not previously distributed to such Members). Upon receiving such request, the President and General Manager shall call such meeting for a date not less than fifteen (15) days nor more than twenty (20) days after receipt of the request.

(e) Each notice of a meeting of a Management Board as provided by the President and General Manager shall contain: (i) the date, time and location of the meeting; (ii) an agenda of the matters and proposals to be considered and/or voted upon; and (iii) copies of all proposals to be considered at the meeting (including appropriate supporting information not previously distributed to the Members). A Member, by notice to the other Members and the President and General Manager, which notice shall include any additional proposals being proposed by such Member to be considered at the meeting (including appropriate supporting information not previously distributed to the Members), given not less than five (5) Business Days prior to a meeting, may add additional matters to the agenda for a meeting. On the request of a Member, and with the unanimous consent of all other Members, the Management Board may consider at a meeting a proposal not contained in such meeting agenda.

 

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(f) There shall be at least one (1) meeting of the Management Board per Calendar Quarter unless all Members agree in writing to the contrary. Meetings of each subcommittee shall take place as often as the Management Board shall determine. All meetings of the Management Board and each subcommittee shall be held in the principal offices of the Company, or elsewhere as the Management Board or such subcommittee may mutually decide, which alternate location may be within or outside the State of Delaware.

(g) With respect to meetings of the Management Board and each subcommittee, the President and General Manager’s duties shall include timely preparation and distribution of the agenda.

(h) Until the first anniversary of the Closing Date, the chairman of the Management Board shall be a Board Member designated by EXCO. Thereafter, the right to appoint the chairman of the Management Board shall be rotated on an annual basis among the Affiliated Member Groups, with such rotation proceeding in order of highest aggregate Member Interests of such Affiliated Member Groups (and alphabetically among Affiliated Member Groups with identical aggregate Member Interests), and with the Member named in the preceding sentence being excluded from the first round of rotation; provided however that (i) any Affiliated Member Group holding less than twenty-five percent (25%) of the aggregate Member Interests of the Company shall not be included in the foregoing rotation and shall not have a right to appoint the chairman of the Management Board and (ii) any Affiliated Member Group that is created as the result of a Transfer of a Member Interest shall be added to the end of the rotation at the time of such Transfer. Any Affiliated Member Group may waive its right to appoint the chairman. For the avoidance of doubt, the chairman shall have no special casting or deciding vote on any matter presented to the Management Board. The chairman of the Management Board shall appoint a secretary who shall make a record of each proposal voted on and the results of such voting at such Management Board meeting. Each Board Member shall sign and be provided a copy of such record at the end of such meeting, and it shall be considered the final record of the decisions of such Management Board.

(i) The secretary of the Management Board shall provide each Member with a copy of the minutes of each Management Board meeting within fifteen (15) Business Days after the end of the meeting. Each such Member shall have fifteen (15) days after receipt of such minutes to give notice to the secretary of any objections to the minutes. A failure to give notice specifying objection to such minutes within said fifteen (15) day period shall be deemed to be approval of such minutes. In any event, the votes recorded under Section 5.3(h) shall take precedence over the minutes described above.

(j) In lieu of a meeting, any Member may submit any proposal that is within the powers of the Management Board to approve or disapprove to the Management Board for a vote by notice. The proposing Member shall notify the President and General Manager with written materials describing the proposal and

 

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the President and General Manager shall provide a copy of such proposal to each Member. Any such proposal by a proposing Member shall include with such proposal adequate documentation to enable the other Members to make a decision. Each Member (including the proposing Member) shall communicate its vote on the proposal by notice to the President and General Manager and the other Members within fifteen (15) days after receipt of the proposal from the President and General Manager, unless such proposal, together with any other increases to an approved Annual Work Program and Budget for a Calendar Year, if accepted, would result in aggregate spending pursuant to such Annual Work Program and Budget of more than ten percent (10%) in excess of the original amount of the Annual Work Program and Budget approved pursuant to Section 6.2 (or, in the case of the Annual Work Program and Budget for Calendar Year 2009, attached hereto as Exhibit “E-2”) or, once amended to increase the amount of the Annual Work Program and Budget ten percent (10%) above the then existing amount in accordance with Section 6.2(e), the amended amount of the Annual Work Program and Budget, in which case each Member (including the proposing Member) shall communicate its vote on the proposal by notice to the President and General Manager and the other Members within sixty (60) days after receipt of the proposal from the President and General Manager. Any Member failing to communicate its vote in a timely manner shall be deemed to have voted against such proposal. Within five (5) Business Days following the expiration of the relevant time period, the President and General Manager shall give each Member a confirmation notice stating the tabulation and results of the vote on such proposal.

(k) From time to time, the Management Board may approve guidelines, standards or procedures regarding the implementation of Business to be observed in the conduct of Business by the Company Group Members.

(l) Board Members may participate in any meeting by means of conference telephone or similar remote communications equipment by means of which all Persons participating in the meeting can hear each other and participation in such a meeting shall constitute presence in person at such meeting.

(m) Attendance of a Board Member at any meeting of the Management Board (including by telephone or similar remote communication equipment) shall constitute a waiver of notice of such meeting, except where such Board Member attends the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not properly called or convened and notifies the other Board Members at such meeting of such purpose.

(n) No Board Member, nor any Member appointing any such Board Member, shall owe any fiduciary duty to the Company, any other Member or Members as a group in connection with the activities of the Board Members or the Management Board, and no Board Member, nor any Member or Member(s) appointing any such Board Member, shall be obligated to act in the interests of

 

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the Company, any other Member or Members as a group. To the extent permitted by Law, the Board Members shall not be subject to any other or different standards (including fiduciary standards) imposed by this Agreement, any other agreement contemplated hereby or under the Delaware Act or any other Law or at equity.

(o) All notices and communications required or permitted to be given to the Board Members and the President and General Manager pursuant to this Article 5 shall be sufficient in all respects if given in writing and delivered personally, or sent by bonded overnight courier, or mailed by U.S. Express Mail or by certified or registered United States Mail with all postage fully prepaid, or sent by telex or facsimile transmission (provided any such telex or facsimile transmission is confirmed either orally or by written confirmation), or sent by pdf via e-mail, addressed to the appropriate Member at the address for such Member shown below or at such other address as such Member shall have theretofore designated by written notice delivered to the Member giving such notice:

If to the President and General Manager:

TGGT Holdings, LLC

12377 Merit Drive, Suite 1700

Dallas, Texas 75251

Attention: President and General Manager

Telephone:                                         

Fax:                                                     

E-mail:                                                

If to EOC:

EXCO Operating Company, LP

12377 Merit Drive, Suite 1700

Dallas, Texas 75251

Attention: Harold Hickey

Telephone: (214) 368-2084

Fax: (214) 368-8754

E-mail: hhickey@excoresources.com

 

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With copies to:

EXCO Operating Company, LP

12377 Merit Drive, Suite 1700

Dallas, Texas 75251

Attention: Stephen F. Smith

Telephone: (214) 368-2084

Fax: (214) 706-3409

E-mail: ssmith@excoresources.com

EXCO Operating Company, LP

12377 Merit Drive, Suite 1700

Dallas, Texas 75251

Attention: William L. Boeing

Telephone: (214) 368-2084

Fax: (214) 706-3409

E-mail: lboeing@excoresources.com

If to BG:

BG US Gathering Company, LLC

5444 Westheimer, Suite 1200

Houston, Texas 77056

Attention: Jon Harris

Telephone: (713) 599-4000

Fax: (713) 599-4250

E-mail: Jon.Harris@bg-group.com

With a copy to:

BG US Gathering Company, LLC

5444 Westheimer, Suite 1200

Houston, Texas 77056

Attention: Bill Way

Telephone: (713) 599-4000

Fax: (713) 599-4250

E-mail: Bill.Way@bg-group.com

 

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Any notice given in accordance herewith shall be deemed to have been given when delivered to the addressee in person, or by courier, or transmitted by facsimile transmission or email during normal business hours, or upon actual receipt by the addressee after such notice has either been delivered to an overnight courier or deposited in the United States Mail, as the case may be. The Members may change the address, telephone numbers, facsimile numbers and email addresses to which such communications are to be addressed by giving written notice to the other Parties in the manner provided in this Section 5.3(o).

Section 5.4 Resignation of Board Members . A Board Member may resign from the position of Board Member at any time by giving written notice to the other Board Members. The resignation of a Board Member shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

Section 5.5 Removal of Board Members . Subject to the automatic removal procedures set forth in Section 5.2(c), a Board Member may only be removed by the consent of the Affiliated Member Group then entitled to designate such Board Member in accordance with Section 5.2(a).

Section 5.6 Vacancies . Any vacancy in the position of a Board Member that is created by the death, resignation or removal of a Board Member shall be filled only by consent of the Affiliated Member Group then entitled to designate such Board Member in accordance with Section 5.2(a). A Board Member elected to fill a vacancy shall hold office until a successor shall be elected and shall qualify, or until the Board Member’s earlier death, resignation or removal.

Section 5.7 Fees and Expenses of Board Members . A Board Member shall not be entitled to any fees for serving as a Board Member. A Board Member shall be entitled to reimbursement for all reasonable out-of-pocket costs and expenses incurred by such Board Member in its capacity as a Board Member.

Section 5.8 No Power of Members to Bind Company . No Member shall have any power or authority to bind the Company in any way, to pledge the Company’s credit or to render it liable for any purpose.

Section 5.9 Delegation of Authority; Officers .

(a) The Management Board shall have the power to elect, delegate authority to, and remove such officers, employees, agents and representatives of the Company and the other Company Group Members as the Management Board may from time to time deem appropriate; provided, however, that each officer appointee of the Company shall serve a three (3) year term commencing as of the date of the appointment of such officer, and the Management Board shall elect a Person (which may or may not be the existing Person) to serve the subsequent three (3) year term for such office on or before the expiration of such three (3)

 

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year term. Unless otherwise agreed by the Management Board, each officer of the Company shall hold the same office for each other Company Group Member. The Management Board shall use commercially reasonable efforts to elect all officers identified in Section 5.9(b) within 120 days of the Closing Date. Any delegation of authority to take any action must be approved in the same manner as would be required for the Management Board to approve such action directly. Any salaries paid by the Company to employees and agents of the Company shall be fixed by the Management Board in accordance with an approved Annual Work Program and Budget. All amounts to be reimbursed to the employer of any person seconded to any Company Group Member shall be as set forth in the form of the Secondment Agreement and shall be included in the applicable Annual Work Program and Budgets.

(b) The Company’s officers as of the Closing Date shall be as follows:

(i) President and General Manager. The President and General Manager shall be the chief executive officer of the Company responsible for the day to day direction of the Company and shall see that all decisions and resolutions of the Management Board are implemented. The President and General Manager shall be based in the Company’s principal office. Each Affiliated Member Group shall have the right to nominate candidates for the position of President and General Manager to the Management Board for its approval; provided that until the fifth (5 th ) anniversary of the Closing Date, the BG Affiliated Member Group shall have the sole right to nominate candidates for the position of President and General Manager to the Management Board for its approval. Following the fifth (5 th ) anniversary of the Closing Date, each Affiliated Member Group shall have the right to nominate candidates for the position of President and General Manager to the Management Board for its approval; provided however, that in the event of a change in Control of the ultimate parent company of EOC while one or more members of the EOC Affiliate Group is a Member, then so long as BG or an Affiliate of BG is a Member, the BG Affiliated Member Group shall have the sole right to nominate candidates for the position of the President and General Manager to the Management Board for its approval. The President and General Manager’s rights, powers, privileges and duties shall include:

 

  (A) making calls for additional capital contributions and Member Loans pursuant to Sections 3.2 and 3.4;

 

  (B) preparing proposed Annual Work Program and Budgets, and implementing each approved Annual Work Program and Budget, subject to the other terms of this Agreement;

 

  (C)

as the representative of the Company, directing the Subsidiaries to take actions, or refrain from acting,

 

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in accordance with the determinations of the appropriate Member Interests in accordance with the terms of this Agreement;

 

  (D) those duties set forth in Section 5.3 with respect to Management Board and subcommittee meetings;

 

  (E) supervising and coordinating the activities of the other officers and managers of the Company Group Members;

 

  (F) administering the day-to-day corporate affairs of the Company, including coordinating with the Member service providers under the Services Agreements with respect to the day-to-day provision of services under such agreements; and

 

  (G) such other rights, powers, privileges and duties as may be determined by the Management Board from time to time.

(ii) Vice President of Commercial Operations and Business Development. The Vice President of Commercial Operations and Business Development shall be the officer of the Company responsible for the commercial and business development activities of the Company. The Vice President of Commercial Operations and Business Development shall be based in the Company’s Jonesville office or such other location as the Management Board may determine. Each Affiliated Member Group shall have the right to nominate candidates for the position of Vice President of Commercial Operations and Business Development to the Management Board for its approval. The Vice President of Commercial Operations and Business Development’ rights, powers, privileges and duties shall include:

 

  (A) supervising and coordinating all business development activities of the Company Group Members, including land department, gas control/SCADA and the balancing of all midstream systems, and negotiation of Company Group Commercial Contracts pertaining to gas transportation and gathering, as well as ensuring that all Company Group projects are completed in a timely manner;

 

  (B) managing the relationships of the Company Group Members with all Governmental Authorities;

 

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  (C) assisting the President and General Manager with the preparation of that portion of each proposed Annual Work Program and Budget relating to the commercial activities to be performed pursuant to such proposed Annual Work Program and Budget; and

 

  (D) such other rights, powers, privileges and duties as may be determined by the Management Board or delegated by the President and General Manager from time to time.

(iii) Vice President of Engineering and Construction. The Vice President of Engineering and Construction shall be the officer of the Company responsible for the engineering and construction activities of the Company. The Vice President of Engineering and Construction shall be based in the Company’s principal office. Each Affiliated Member Group shall have the right to nominate candidates for the position of Vice President of Engineering and Construction to the Management Board for its approval. The Vice President of Engineering and Construction’s rights, powers, privileges and duties shall include:

 

  (A) supervising and coordinating all project engineering activities of the Company;

 

  (B) overseeing all construction activities of the Company;

 

  (C) supervising and administering all document control functions associated with construction activities of the Company Group Members;

 

  (D) assisting the President and General Manager with the preparation of that portion of each proposed Annual Work Program and Budget relating to the engineering and construction activities to be performed pursuant to such proposed Annual Work Program and Budget;

 

  (E) upon the elimination of the office of Vice President of Asset Integrity pursuant to Section 5.9(b)(viii)(B), those rights, powers, privileges and duties of the Vice President of Asset Integrity as of such time; and

 

  (F) such other rights, powers, privileges and duties as may be determined by the Management Board or delegated by the President and General Manager from time to time.

 

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(iv) Vice President of Operations and Maintenance. The Vice President of Operations and Maintenance shall be the officer of the Company responsible for the operations and maintenance activities of the Company. The Vice President of Operations and Maintenance shall be based in the Company’s principal office. Each Affiliated Member Group shall have the right to nominate candidates for the position of Vice President of Operations and Maintenance to the Management Board for its approval. The Vice President of Operations and Maintenance’s rights, powers, privileges and duties shall include:

 

  (A) supervising and coordinating all operations and maintenance activities of the Company Group Members, including all associated field and control room activities;

 

  (B) supervising all procurement and contracting activities of the Company Group Members, in accordance with the policies and procedures of the Company approved by the Management Board and in the absence of such approved policies and procedures, in accordance with policies and procedures approved by the President and General Manager;

 

  (C) supervising all product quality and measurement activities of the Company Group Members;

 

  (D) assisting the President and General Manager with the preparation of that portion of each proposed Annual Work Program and Budget relating to the operations and maintenance activities to be performed pursuant to such proposed Annual Work Program and Budget; and

 

  (E) such other rights, powers, privileges and duties as may be determined by the Management Board or delegated by the President and General Manager from time to time.

(v) Vice President of HSSE. The Vice President of HSSE shall be the officer of the Company responsible for the HSSE activities of the Company. The Vice President of HSSE shall be based in the Company’s principal office. Each Affiliated Member Group shall have the right to nominate candidates for the position of Vice President of HSSE to the Management Board for its approval. The Vice President of HSSE’s rights, powers, privileges and duties shall include:

 

  (A) supervising and coordinating all regulatory compliance activities of the Company Group Members;

 

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  (B) managing compliance of each Company Group Members with the HSSE Principles, the HSSE Plan and the HSSE Management System;

 

  (C) establishing and managing a program to track greenhouse gas emissions from the Assets;

 

  (D) assisting the President and General Manager with the preparation of that portion of each proposed Annual Work Program and Budget relating to the HSSE activities to be performed pursuant to such proposed Annual Work Program and Budget; and

 

  (E) such other rights, powers, privileges and duties as may be determined by the Management Board or delegated by the President and General Manager from time to time.

(vi) Vice President of Finance and Business Services. The Vice President of Finance and Business Services shall be the officer of the Company responsible for the accounting, finance, human resources, legal, information technology and procurement activities of the Company. The Vice President of Finance and Business Services shall be based in the Company’s principal office. Any Affiliated Member Group shall have the right to nominate candidates for the position of Vice President of Finance and Business Services to the Management Board for its approval. The Vice President of Finance and Business Services’s rights, powers, privileges and duties shall include:

 

  (A) supervising and coordinating all accounting and finance activities of the Company Group Members;

 

  (B) establishing and maintaining internal controls for each Company Group Member;

 

  (C) creating the reports identified in Section 8.4 or, if applicable, working with the independent auditor of the Company to facilitate the creation of the reports identified in Section 8.4;

 

35


  (D) analyzing the credit risk of each counterparty with whom a Company Group Member does business;

 

  (E) supporting the Vice President of Operations and Maintenance in all procurement and contracting activities of the Company Group Members;

 

  (F) supervising and coordinating all human resources activities of the Company Group Members;

 

  (G) procurement of services from the Members in accordance with the Services Agreements, including legal and information technology services;

 

  (H) assisting the President and General Manager with the preparation of that portion of each proposed Annual Work Program and Budget relating to the accounting and finance activities to be performed pursuant to such proposed Annual Work Program and Budget;

 

  (I) maintaining the books and records of each Company Group Member, including those relating to commercial activities of each Company Group Member;

 

  (J) coordinating and overseeing the services provided under the Services Agreements; and

 

  (K) such other rights, powers, privileges and duties as may be determined by the Management Board or delegated by the President and General Manager from time to time.

(vii) Vice President of Asset Integrity.

 

  (A) The Vice President of Asset Integrity shall be the officer of the Company responsible for the development and ongoing monitoring of systems to manage the physical assets of the Company to ensure that their operational performance and profitability is as intended (with respect to selection, maintenance, inspection, modification and renewal). The Vice President of Asset Integrity shall be based in the Company’s principal office. Each Affiliated Member Group shall have the right to nominate candidates for the position of Vice President of Asset Integrity to the Management Board for its approval. The Vice President of Asset Integrity’s rights, powers, privileges and duties shall include:

 

  (1) conducting the gap analysis provided for in Section 5.11(a);

 

36


  (2) working with the Vice President of Engineering and Construction and the Vice President of Operations and Maintenance, develop and submit to the Management Board the appropriate technical standards for the design, construction and operation of Midstream Assets;

 

  (3) based upon the gap analysis and agreed technical standards, conducting a risk assessment to prioritize the actions and budgets necessary to close any gaps;

 

  (4) developing ongoing inspection, testing and condition monitoring plans with a system to capture all related data, records and reports;

 

  (5) providing auditing and compliance assurance; and

 

  (6) such other rights, powers, privileges and duties as may be determined by the Management Board or delegated by the President and General Manager from time to time.

 

  (B) Notwithstanding anything to the contrary herein, on the third (3rd) anniversary of the appointment of the first Vice President of Asset Integrity, the office of Vice President of Asset Integrity shall be eliminated, provided that all rights, powers, privileges and duties of the Vice President of Asset Integrity as of the time of the elimination of such office shall become the rights, powers, privileges and duties of the Vice President of Engineering and Construction (in addition to those rights, powers, privileges and duties then held by the Vice President of Engineering and Construction).

(c) Unless otherwise agreed by the Management Board, all officers of the Company shall be seconded to the Company by the Members pursuant to a secondment agreement substantially in the form of Exhibit “C” attached hereto.

 

37


Simultaneously with the execution of this Agreement, each initial Member and the Company shall enter into a secondment agreement substantially in the form of Exhibit “C”.

(d) Each Member shall use commercially reasonable efforts to cause its employees that are officers of any of the Company Group Members (including as secondees) to perform their respective duties in good faith, in accordance with this Agreement and in a manner such officers reasonably believe to be in or not opposed to the best interests of the Company Group Members, and with the care that an ordinarily prudent person in a similar position would use under similar circumstances. No Member shall be liable in damages to the Company Group Members or other Members for any action taken or not taken by such officer. The Company shall indemnify and hold harmless the officers and Board Members against liabilities to third parties in accordance with Section 7.2 below. Nothing in this Agreement is intended to alter, amend or waive each officer’s individual duty of loyalty to the Company Group Members.

(e) None of the officers of the Company shall be “managers” of the Company under Section 18-401 of the Delaware Act.

(f) Subject to the related expenditures being included in an approved Work Program and Budget (including any overruns permitted by Section 6.2(f)) and only with the written approval of the President and General Manager, any officer of the Company that directly or indirectly supervises or will supervise such employee or secondee may hire and terminate employees that are not officers of the Company or another Company Group Member and second and terminate the secondment of individuals that are not officers of the Company or another Company Group Member in accordance with the applicable Secondment Agreement.

Section 5.10 Provision of Services by the Members .

(a) On and effective as of the Closing Date, the Company shall enter into a Services Agreement with BG North America, LLC in substantially the form attached hereto as Exhibit “D-1”.

(b) On and effective as of the Closing Date, the Company shall enter into a Services Agreement with EOC in substantially the form attached hereto as Exhibit “D-2”.

Section 5.11 Standard of Conduct; Health, Safety, Security and the Environment .

(a) All Business shall be conducted in compliance with the terms and conditions of: (i) all applicable Laws; and (ii) once approved by the Management Board in accordance with Sections 5.11(b), (c) and (d), appropriate HSSE guidelines and principles. The Company shall conduct, and cause each other Company Group Member to conduct, the Business as a reasonably prudent

 

38


operator, in a good and workmanlike manner, with due diligence and dispatch, in accordance with good midstream industry practice and appropriate technical standards and guidelines issued by the American Petroleum Institute, the American Society of Mechanical Engineers, the United States Department of Transportation and the American National Standards Institute, among others. Within twelve (12) months of signing this Agreement, the Company shall perform a gap analysis against a set of agreed technical standards for design, construction and operation of Midstream Assets. These standards shall be submitted to the Management Board for its approval and shall include appropriate technical standards and guidelines (as mentioned above), including agreed exceptions, and shall adhere to HSSE guidelines and principles agreed upon pursuant to Sections 5.11(b), (c) and (d).

(b) Within thirty (30) days following the Closing Date, the Management Board shall use good faith efforts to develop HSSE principles to be observed in the conduct of all Business (the “ HSSE Principles ”) which at a minimum include: (i) the goals of preventing injuries and providing a healthy, safe and secure working environment; (ii) protection of the environment; (iii) the responsibility to seek continuous improvement in HSSE performance; and (iv) the principle that level of risk is the primary criterion for facilities design.

(c) Within one hundred twenty (120) days following the Closing Date, the Management Board shall use good faith efforts to develop an HSSE plan to be observed in the conduct of all Business (the “ HSSE Plan ”) which is consistent with the HSSE Principles and the relevant technical standards and codes of practice issued by American professional bodies, including the American Petroleum Institute, the American Society of Mechanical Engineers, the American National Standards Institute, and all applicable Laws.

(d) Within two (2) years following the Closing Date, the Management Board shall have used good faith efforts to develop and implement an HSSE management system to be observed in the conduct all Business (an “ HSSE Management System ”) which addresses the HSSE risks specific to the conduct of all Business, and the management of controls to eliminate, reduce or mitigate HSSE risks.

 

39


(e) Within sixty (60) days following the Closing Date, the Management Board shall use good faith efforts to develop a policy for the Company Group Members regarding required disclosure of conflicts of interest that any Member, Affiliate of a Member, Company Group Member, and any officer, director or key employee of any Member, Affiliate of a Member or Company Group Member may have with the interests of any of the Company Group Members.

Section 5.12 Certain Reports .

(a) The Company shall provide the following data and reports, as they are currently produced or compiled, to each Member:

(i) as requested by a Member from time to time, copies of current gathering system maps;

(ii) engineering studies, development schedules and annual progress reports on development projects;

(iii) field performance reports;

(iv) copies of written notices provided by any third Person regarding violations or potential violations of applicable Law;

(v) copies of all material reports provided to any Governmental Authority;

(vi) upon written request of a Member, copies of any material correspondence between any of the Company Group Members and any Governmental Authority;

(vii) annual asset integrity plans and progress against said plan;

(viii) infrastructure project plans and monthly project progress reports when in progress through completion;

(ix) such other information as may be reasonably requested by a Member; and

(x) such other reports as may be directed by the Management Board.

(b) The Company shall, in the conduct of Business:

(i) report to the Members within 24 hours of the Vice President of HSSE receiving notice thereof, details of fatalities, lost time incidents, material environmental incidents and any other material incidents which (in each case) may present a reputational risk to any

 

40


Company Group Member or Member and also provide copies of any written notices received from Governmental Authorities or third parties with respect to such fatalities and incidents;

(ii) prepare an HSSE report to be submitted to the Members on the fifteenth (15 th ) day of April, July, October and January of each year in respect of the previous three (3) months, and monthly with respect to item (ii)(C) only, with content to be agreed by the Management Board but containing at a minimum:

 

  (A) progress against the HSSE Plan applicable to such period;

 

  (B) status of HSSE actions relating to HSSE audits;

 

  (C) occupational safety indicators (fatalities and lost time incidents and frequency, recordable incidents and frequency and total man hours worked) of the Company Group Members (and as agreed to as part of the HSSE Plan in accordance with Section 5.11(c), its contractors and subcontractors);

 

  (D) known environmental incidents (e.g. leaks, spills, and cases of violations of environmental Laws and permits); and

 

  (E) HSSE related claims.

(iii) contractually require its contractors, subcontractors and suppliers of services to comply with all applicable Laws and all safety rules of the Company Group Members, and provide to its contractors and subcontractors copies of the HSSE Principles and HSSE Management System generated pursuant to Section 5.11(b) and (d) that are then in effect and use its commercially reasonable efforts to enforce such Persons’ compliance with such principles and system; and

(iv) with reasonable advance notice, permit the Members to have access during normal business hours (at their sole risk and expense, notwithstanding anything herein to the contrary) to operations, design phase activities, books and records, and representatives of the Company Group Members for the purpose of observing operations or conducting HSSE and asset integrity audits (provided that such Members shall (A) minimize any disruption to the operations and business of the Company Group Members caused by such observation or audits, and (B) adhere to all safety rules of such operator binding on Company Group Member personnel and the HSSE Principles and HSSE Management System then in effect while conducting such audits).

 

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(c) The Company shall promptly notify the Members of any third party written claim or suit arising from Business of which the Company becomes aware that exceeds (or is reasonably expected to exceed) one hundred thousand dollars ($100,000), and, upon request of any such Member from time to time, shall further provide, in a timely manner, the then current information regarding the progress and status of any such claims or suits.

Section 5.13 Insurance Requirements . Subject to the Management Board’s authority under Section 5.1(c)(ix), the Company Group Members shall maintain the insurance coverage set forth on Schedule 5.13. For the avoidance of doubt, a Member may obtain such additional insurance as it deems advisable for its own account at its own expense provided such insurance does not prejudice any insurance arranged by the Company Group Members.

ARTICLE 6

ANNUAL WORK PROGRAM AND BUDGETS; CONTRACT AWARDS

Section 6.1 Development Work Program; Initial Work Program and Budget .

(a) The Management Board shall adopt, and modify from time to time, a multi-year work program for Midstream Activities to be conducted by the Company Group Members (the “ Development Work Program ”) as follows:

(i) The proposed first draft of the work program for Midstream Activities to be performed by the Company Group Members for Calendar Years 2009 through 2012 is attached hereto as Exhibit “E-1”. The Management Board shall approve a Development Work Program for such period on or before October 15, 2009.

(ii) On or before August 15 of each Calendar Year, commencing in Calendar Year 2011, the President and General Manager shall prepare, or cause to be prepared, and submit to the Management Board a revised Development Work Program setting forth the Development Operations to be carried out during the following two Calendar Years. Such proposed Development Work Program shall automatically include any Midstream Activities which were approved for such period as part of the prior Development Work Program unless the Management Board determines to the contrary. Unless otherwise agreed by the Management Board, within sixty (60) days after distribution of the proposed Development Work Program (or such later date as may agreed by the Management Board), the Management Board shall meet to consider, modify (if necessary) and approve or reject the proposed Development Work Program. Approval of the Development Work Program shall require the approval of the Management Board in accordance with Section 5.1(c)(i). If the Management Board does not approve any such Development Work Program on or prior to the first day

 

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of the following Calendar Year (for purposes of this Section 6.1(a)(ii), the “ current Calendar Year ”), then that portion of Development Work Program for the previous Calendar Year pertaining to operating expenses and multi-year expenditures previously approved by the Management Board for the current Calendar Year shall be the Development Work Program, if any, approved for the current Calendar Year in the preceding Calendar Year.

(b) The Annual Work Program and Budget for the remainder of Calendar Year 2009 is attached hereto as Exhibit “E-2”. The Management Board is hereby deemed to have approved that portion of such Annual Work Program and Budget that pertains to the period between the Closing Date and October 15, 2009, and that portion of such Annual Work Program and Budget that pertains to the period between October 16, 2009 and December 31, 2009 (for purposes of this Section 6.1(b), the “ Final 2009 Period ”) is in draft form. The Management Board shall approve the Annual Work Program and Budget for such Final 2009 Period, including any further details as would be required under the terms of Section 6.2, on or before October 15, 2009. The proposed first draft of the Annual Work Program and Budget for Calendar Year 2010 is attached hereto as Exhibit “E-3”, and the Management Board shall approve such Annual Work Program and Budget, including any further details as would be required under the terms of Section 6.2, on or before October 15, 2009.

Section 6.2 Subsequent Work Program and Budgets . For each Calendar Year during the term of this Agreement commencing with Calendar Year 2010, an Annual Work Program and Budget shall be adopted as follows:

(a) On or before August 15 in the Calendar Year immediately preceding the relevant Calendar Year, the President and General Manager shall prepare, or cause to be prepared, and submit to the Management Board a proposed Annual Work Program and Budget for such applicable Calendar Year (provided that in the case of the proposed Annual Work Program and Budget for Calendar Year 2010, the draft Annual Work Program and Budget attached hereto as Exhibit “E-3” shall be the basis for such proposed Annual Work Program and Budget). Each such proposed Annual Work Program and Budget shall contain at least the following:

(i) inclusion of expenditures required by any Company Group Member under the terms of any Company Group Contract during such Calendar Year, except with the approval of such Management Board to the contrary;

(ii) itemized estimates of the expenditures covered by the proposed Annual Work Program and Budget (including each Member’s share thereof) by budget category, containing sufficient detail (to the extent available) to afford the ready identification of the nature, scope and duration of the activity in question;

 

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(iii) estimates of the schedule pursuant to which each Member’s share of expenses included in the Annual Work Program and Budget are anticipated to be incurred by the Company; and

(iv) any other information requested in writing by a Member that can reasonably be provided by the Company.

(b) Itemized expenditures in an Annual Work Program and Budget may extend over more than one Calendar Year because such itemized expenditures represent activities or operations that require commitments in excess of one Calendar Year. Once itemized expenditures are approved, the President and General Manager shall not be required to resubmit them for approval of the applicable Management Board on an annual or other periodic basis, but instead all such items shall be automatically included in future Annual Work Program and Budgets as items which have already been approved.

(c) The President and General Manager shall regularly consult with the Management Board during the preparation of each proposed Annual Work Program and Budget. Following receipt of a proposed Annual Work Program and Budget, each Member shall furnish to the President and Management Board any comments, suggestions or proposed amendments it may have respecting such proposed Annual Work Program and Budget as soon as may be reasonably practicable, and the President and General Manager shall consider and discuss such comments, suggestions and proposed amendments with such Management Board. Unless otherwise agreed by the Management Board, within sixty (60) days after distribution of each proposed Annual Work Program and Budget for a Calendar Year, the Management Board and the President and General Manager shall meet to consider, modify (if necessary) and approve or reject such proposed Annual Work Program and Budget. Subject to Section 6.2(d), approval of an Annual Work Program and Budget shall require the approval of the Management Board in accordance with Section 5.1(c).

(d) In the event an Annual Work Program and Budget is not approved on or prior to the first day of the Calendar Year to which such Annual Work Program and Budget pertains (for purposes of this Section 6.2(d), the “ relevant Calendar Year ”), the Management Board shall be deemed to have approved an Annual Work Program and Budget for the relevant Calendar Year that includes the following: (i) the Midstream Activities scheduled to be performed during the relevant Calendar Year as set forth in the Development Work Program, if any, and associated costs reasonably required to implement such Midstream Activities; (ii) Operating Expenses equal to the amount of Operating Expenses actually expended in connection with the Business in the previous Calendar Year; (iii) those multi-year expenditures previously approved by the Management Board pursuant to Section 6.2(b), that are attributable to the relevant Calendar Year; (iv) existing payment commitments to any Person under Company Group Contracts (including the Services Agreements) in such Calendar Year and other costs and expenses necessary to allow the Company Group Members to comply with their

 

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obligations under all Company Group Contracts (including the Services Agreements); (v) taxes payable by the Company Group Members; and (vi) payroll and benefits of all employees and all charges to the Company under the Secondment Agreements in respect of any Person seconded to any Company Group Member.

(e) Any Member may propose to amend the Development Work Program or an Annual Work Program and Budget by notice to the Management Board and the President and General Manager. Approval of any such amendment shall require the approval of the Management Board in accordance with Section 5.1(c)(i). Notwithstanding any provision of Section 5.3 to the contrary, each Member shall have sixty (60) days to consider any proposed amendment that would increase the estimated costs of the Development Work Program for any Calendar Year or any Annual Work Program and Budget by more than ten percent (10%). To the extent that such amendment is approved by the Management Board, the Development Work Program and the relevant Annual Work Program and Budget shall be deemed amended accordingly, provided that any such amendment shall not invalidate any commitment or expenditure already made by any Company Group Member in accordance with any previous authorization given pursuant hereto.

(f) Approval by the Management Board of an Annual Work Program and Budget shall constitute the Management Board’s deemed approval for the Company Group Members to expend up to ten percent (10%) in excess of the authorized amount for any category of the Annual Work Program and Budget, not to exceed in the aggregate ten percent (10%) of the aggregate amount applicable to the Annual Work Program and Budget, and less, in each case, any amounts included as line items for contingencies and overruns with respect to such operations in such category of the Annual Work Program and Budget. The President and General Manager shall promptly notify the Management Board of any expenditure made by the Company Group Members in the exercise of the rights pursuant to this Section 6.2(f). The ten percent (10%) deemed approval level set forth in this Section 6.2(f) shall be calculated with respect to the original amount of the Annual Work Program and Budget or, once amended, the amended amount of the Annual Work Program and Budget, provided that no expenditures incurred pursuant to Section 6.2(g) shall be deemed to be included in an approved Annual Work Program and Budget for purposes of calculating the ten percent (10%) deemed approval levels pursuant to this Section 6.2(f), nor shall any such expenditures be considered to be amounts expended in excess of the authorized amount of any Annual Work Program and Budget for purposes of calculating the ten percent (10%) deemed approval levels.

(g) Notwithstanding anything to the contrary in this Agreement, the President and General Manager is expressly authorized to cause a Company Group Member to make Emergency Expenditures and incur liabilities without prior authorization or approval when necessary or advisable, in the President and General Manager’s good faith judgment, to deal with emergencies, including

 

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explosions, fires, spills, or any other similar event, which may endanger property, lives, or the environment and it is impractical to get the Management Board approval for such expenditures and incurrence of such liabilities. The President and General Manager shall as soon as practicable report to the Management Board the nature of any such emergency which arises, the measures it intends to take in respect of such emergency and the estimated related expenditures.

(h) To the extent reasonably within the control of the President and General Manager, operations described in an Annual Work Program and Budget shall be conducted at the time prescribed in such Annual Work Program and Budget.

(i) For the avoidance of doubt, any reference in this Agreement to an approved Annual Work Program and Budget or Development Work Program shall include an Annual Work Program and Budget or Development Work Program, as applicable, that is deemed to have been approved by the Management Board, and shall incorporate all approved amendments thereto and all modifications to the Annual Work Program and Budget or Development Work Program, as applicable, described herein that require no action on the part of the Management Board or the Members.

(j) Notwithstanding anything to the contrary in this Section 6.2, the Annual Work Program and Budget for each Calendar Year shall contain not less than the Business to be performed during such Calendar Year as set forth in the Development Work Program.

Section 6.3 Statement of Estimated Expenditures . Not later than twenty (20) days prior to the commencement of each Calendar Quarter during the term of this Agreement, the Company shall provide the Members a statement of the estimated costs to be incurred in such Calendar Quarter. Such statement shall be for informational purposes only, and, no approval of the Management Board shall be required for any of the costs identified therein to the extent such costs are included in an approved Annual Work Program and Budget.

Section 6.4 Company Group O&M Contract Awards .

(a) Subject to Sections 6.4(b), (c) and (d), the Company shall award each Company Group O&M Contract to the best qualified contractor considering cost, ability and HSSE performance considerations (in the Company’s reasonable opinion), to perform the contract without the obligation to tender, and without informing or seeking the approval of the Management Board. The procedures set forth in this Section 6.4 shall not apply to any contracts that have been awarded, or in respect of which invitations to tender have been issued, on or before the Closing Date, provided that the procedures set forth in this Section 6.4 shall apply to confirmations, service orders or purchase orders (whether written or oral) entered into on and after the Closing Date pursuant to existing master service agreements that were effective prior to the Closing Date.

 

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(b) Affiliate Contracts . Prior to entering into any Company Group O&M Contract between a Company Group Member and a Member or an Affiliate of a Member, the Company shall be required to obtain the affirmative vote of the applicable Board Members of the Management Board pursuant to Section 5.1(c)(v).

(c) Multiple Bids .

(i) From and after January 1, 2010, prior to entering into a Company Group O&M Contract that can reasonably be expected to result in aggregate payments to the counterparty of more than one million dollars (US$1,000,000) during any twelve (12) consecutive Calendar Month period, commencing as of January 1 in any Calendar Year, except as provided in Section 6.3(c)(ii), to the extent that more than one competent service provider can provide the contracted-for service, a Company Group Member shall obtain proposals for such services from at least two (2) service providers. For the avoidance of doubt, a contract that automatically renews (is evergreen) on a month-to-month or other periodic basis that would meet the one million dollars (US$1,000,000) threshold if it remained in effect for an entire twelve (12) consecutive Calendar Month period commencing as of January 1 in any Calendar Year shall be considered subject to the requirements of the preceding sentence.

(ii) If any Company Group Member desires to award a Company Group O&M Contract that would otherwise be subject to Section 6.4(c)(i) without tender of proposals from more than one service provider, whether because only one competent service provider can provide the contracted-for-service or otherwise, such Company Group Member may do so only with the prior approval of the Management Board pursuant to Section 5.1(c)(iv). Failure of a Member to notify the Company and the rest of the Management Board of its approval or rejection of such a Company Group O&M Contract within the time period specified in Section 5.3 shall be deemed an approval of the award of such Company Group O&M Contract.

(iii) To the extent that a Company Group Member enters into a Company Group O&M Contract for which the Company is not required to obtain proposals from at least two (2) service providers pursuant to Section 6.4(c)(i) and such Company Group O&M Contract can reasonably be expected to result in aggregate payment to the counterparty of more than one hundred thousand dollars ($100,000), the Company shall keep a written record in its files that are subject to the audit provisions of Section 8.3 explaining why multiple bids were not obtained for such services.

 

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(iv) In connection with the foregoing, the Company shall keep a written record in its files that are subject to the audit provisions of Section 8.3 that (A) in the event that the Company Group O&M Contract is awarded pursuant to Section 6.4(c)(i), includes the proposals obtained from the prospective service providers; or (B) in the event that the Company Group O&M Contract is awarded pursuant to Section 6.4(c)(ii), includes the notice to the Management Board and the Management Board responses.

(d) From and after the Closing Date, if any Company Group Member desires to enter into a Company Group O&M Contract not specifically and expressly approved as part of an approved Annual Work Program and Budget that can reasonably be expected to result in aggregate payments to the counterparty of more than five million dollars (US$5,000,000) during any twelve (12) consecutive Calendar Month period, such Company Group Member may do so only with the prior approval of the Management Board pursuant to Section 5.1(c)(iv). Prior to any Management Board vote regarding the award of such a proposed Company Group O&M Contract, the Company shall provide the Management Board with the tender list and tender evaluation criteria used to secure such proposed Company Group O&M Contract.

(e) Upon the reasonable written request of a Member, the Company shall provide such Member a copy of any Company Group O&M Contract of a material nature that is utilized in connection with Business of the Company, as well as other information that can reasonably be provided by the Company regarding the use and performance of such Company Group O&M Contract, except to the extent the Company may be prohibited from making any such disclosure under the terms and conditions of such contract and is unable through commercially reasonable efforts to obtain consent for such disclosure.

ARTICLE 7

INDEMNIFICATION

Section 7.1 No Liability of Members for Company Obligations .

(a) Except as otherwise provided by the Delaware Act, no Covered Person shall be obligated personally for any debt, obligation or liability of the Company or other Company Group Members solely by reason of being a Covered Person.

(b) Except as otherwise expressly required by Law, a Member, in its capacity as Member, shall have no liability in excess of: (i) the amount of its contributions to the Company; (ii) its share of any assets and undistributed profits

 

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of the Company; (iii) its obligation to make other payments expressly provided for in this Agreement; and (iv) the amount of any distributions wrongfully distributed to it. No Member shall have any responsibility to restore any negative balance in its Capital Account or to contribute to or in respect of the liabilities or obligations of the Company or any other Company Group Member or to return distributions made by the Company, except as expressly provided herein or required by any non-waivable provision of the Delaware Act. The agreement set forth in the immediately preceding sentence shall be deemed to be a compromise with the consent of all of the Members for purposes of §18-502(b) of the Delaware Act. However, if any court of competent jurisdiction or properly constituted arbitration panel orders, holds or determines that, notwithstanding the provisions of this Agreement, any Member is obligated to restore any such negative balance, make any such contribution or make any such return, such obligation shall be the obligation of such Member and not of any other Person.

Section 7.2 Exculpation .

(a) No Covered Person shall be liable to any Company Group Member or any other Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Covered Person on behalf of the Company Group Members and in a manner reasonably believed to be within the scope of authority conferred on such Covered Person by this Agreement or a delegation of authority in accordance with this Agreement, except that (i) a Covered Person shall be liable for any such loss, damage or claim incurred by reason of such Covered Person’s fraud, bad faith, willful misconduct or gross negligence, (ii) a Covered Person that is not an officer or employee of a Member, Affiliate of a Member, Company Group Member, or Affiliate of a Company Group Member, shall be liable for any such loss, damage, or claim incurred by reason of such Covered Person’s breach of this Agreement (other than Section 5.11) and (iii) a Covered Person that is an officer of a Company Group Member shall be liable for any such loss, damage, or claim incurred by reason of such Covered Person’s breach of his or her duty of loyalty to such Company Group Member, in each case, as established by a non-appealable court order, judgment, decree or decision or pursuant to a final and binding decision of an arbitration panel pursuant to Section 15.2.

(b) A Covered Person shall be fully protected in relying in good faith upon the records of the Company Group Members and upon such information, opinions, reports or statements presented to the Company Group Members by any Person as to matters the Covered Person reasonably believes are within such other Person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Company Group Members, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, Net Profits, Net Losses or Available Cash or any other facts pertinent to the existence and amount of Assets from which distributions to Members might properly be paid.

 

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Section 7.3 Indemnification . To the fullest extent permitted by applicable Law, the Company and the other Company Group Members shall indemnify and hold harmless each Covered Person from and against all Claims arising from or related to any act or omission performed or omitted by such Covered Person on behalf of the Company Group Members and in a manner reasonably believed to be within the scope of authority conferred on such Covered Person by this Agreement or a delegation of authority in accordance with this Agreement, except that: (a) no Covered Person shall be entitled to be indemnified in respect of any Claim by reason of such Covered Person’s fraud, bad faith, willful misconduct or gross negligence; (b) no Covered Person that is not an officer or employee of a Member, Affiliate of a Member, Company Group Member, or Affiliate of a Company Group Member shall be entitled to be indemnified in respect of any Claim by reason of such Covered Person’s breach of this Agreement (other than Section 5.11); and (c) no Covered Person that is an officer of a Company Group Member shall be entitled to be indemnified in respect of any Claim by reason of such Covered Person’s breach of his or her duty of loyalty to such Company Group Member, in each case, as established by a non-appealable court order, judgment, decree or decision or pursuant to a final and binding decision of an arbitration panel pursuant to Section 15.2. Any indemnity under this Section 7.3 shall be provided out of and to the extent of the Assets only (including the proceeds of any insurance policy obtained pursuant to Section 7.5), and no Covered Person shall have any personal liability on account thereof. Any amendment, modification or repeal of this Section 7.3 or any provision in this Section 7.3 shall be prospective only and shall not in any way affect the rights of any Covered Person under this Section 7.3 as in effect immediately prior to such amendment, modification or repeal with respect to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when claims relating to such matters may arise or be asserted.

Section 7.4 Expenses . To the fullest extent permitted by applicable Law, expenses (including legal fees) incurred by a Covered Person in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of the Covered Person to repay such amount if it shall be determined that the Covered Person is not entitled to be indemnified as authorized in Section 7.3.

Section 7.5 Insurance .

(a) Subject to Section 5.1(c)(ix), the Company Group Members may purchase and maintain insurance, to the extent and in such amounts as the Management Board shall, in its sole discretion, deem reasonable, on behalf of Covered Persons and such other Persons as the Management Board shall determine, against any liability that may be asserted against or expenses that may be incurred by any such Person in connection with the activities of the Company Group Members or such indemnities, regardless of whether the Company would have the power to indemnify such Person against such liability under the provisions of this Agreement. Subject to Section 5.1(b)(xxvi), the Management Board and the Company Group Members may enter into indemnity contracts with

 

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Covered Persons and such other Persons as the Management Board shall determine and adopt written procedures pursuant to which arrangements are made for the advancement of expenses and the funding of obligations under Section 7.4 and containing such other procedures regarding indemnification as are appropriate.

(b) Notwithstanding anything else in this Agreement, no Company Group Member shall be required to provide indemnification to any Covered Person for any Claim to the extent that such Claim is insured against by such Covered Person’s workers compensation insurance.

Section 7.6 Primary Obligation . The Company hereby acknowledges that the Covered Persons may have certain rights to indemnification, advancement of expenses and/or insurance provided by Members and certain of their Affiliates (collectively, the “ Member Indemnitors ”). The Company hereby agrees (i) that it is the indemnitor of first resort (i.e., its obligations to the Covered Persons under Sections 7.3 and 7.4 are primary and any obligation of the Member Indemnitors to advance expenses or to provide indemnification for the same expenses or liabilities incurred by the Covered Persons are secondary), (ii) that it shall be required to advance the full amount of expenses incurred by the Covered Persons and shall be liable for the full amount of all expenses, judgments, penalties, fines and amounts paid in settlement to the extent legally permitted and as required by the terms of Sections 7.3 and 7.4 of this Agreement (or any other agreement between the Company and the Covered Person), without regard to any rights the Covered Person may have against the Member Indemnitors, and (iii) that the Company irrevocably waives, relinquishes and releases the Member Indemnitors from any and all claims against the Member Indemnitors for contribution, subrogation or any other recovery of any kind in respect thereof. The Company further agrees that no advancement or payment by the Member Indemnitors on behalf of a Covered Person with respect to any claim for which the Covered Person has sought indemnification from the Company pursuant to Sections 7.3 and 7.4 shall affect the foregoing and the Member Indemnitors shall have a right of contribution and/or be subrogated to the extent of such advancement or payment to all of the rights of recovery of the Covered Person against the Company. The Company agrees that the Member Indemnitors who are not Members are express third party beneficiaries of the terms of this Section 7.6.

ARTICLE 8

BOOKS AND RECORDS; ACCOUNTS

Section 8.1 Books and Records . At all times during the term of this Agreement, the Management Board shall keep (or cause to be kept) true and complete books of account for the Company Group Members. Such books shall reflect all Company Group Members transactions in accordance with GAAP.

Section 8.2 Availability of Books and Records . All of the books of account referred to in Section 8.1, together with an executed copy of this Agreement and the Certificate, and any amendments thereto (and all such other books and records as may be required by the Delaware Act), shall at all times be maintained at the principal office of

 

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the Company as set forth in Section 1.5. Such books and records, and any other books and records maintained by the Company Group Members, upon reasonable notice to the Management Board, shall be open to the inspection and examination of the Members or their representatives during normal business hours at the principal office (or other applicable office) of the Company.

Section 8.3 Audits .

(a) The Members shall have the right to audit costs charged to any Company Group Member’s accounts and other accounting records maintained for any Company Group Member under this Agreement.

(b) Upon not less than sixty (60) days’ prior written notice to the Company, any Member shall have the right to audit each Company Group Member’s books and records for any Calendar Year within the twenty four (24) month period following the end of such Calendar Year. Each Member must provide the Company a written notice of any claims for all discrepancies disclosed by said audit within such twenty four (24) month period. The cost of each such audit shall be borne by the Member(s) requesting the audit. Any such audit shall be conducted in a manner designed to result in a minimum of inconvenience and disruption to the operations of the Company Group Members. Where there are two (2) or more Members requesting an audit covering the same Calendar Year, such Members shall make every reasonable effort to conduct joint or simultaneous audits. Unless otherwise mutually agreed, any audit shall be conducted at the principal office of the Company.

(c) The Member requesting an audit may request information prior to the commencement of the audit, and the Company shall, to the extent available, provide the information requested as soon as practical in order to facilitate the forthcoming audit. The Company will, to the extent practicable, provide the information in electronic format or hard copy within thirty (30) days after the written request. The information requested shall be limited to that normally used for pre-audit work.

(d) Any information obtained by a Member in connection with the conduct of an audit (whether related solely to the Company Group Members or otherwise) shall be subject to the confidentiality provisions of this Agreement.

(e) At the conclusion of each audit, the Members shall endeavor to settle outstanding matters expeditiously. To this end, the Member(s) requesting the audit will make a reasonable effort to prepare and distribute a written report to the Company and the other Members as soon as reasonably practicable and in any event within ninety (90) days after the conclusion of each audit. The report shall include all claims arising from such audit together with comments pertinent to the operation of the accounts and records. The Company shall make a reasonable effort to reply to the report in writing as soon as possible and in any event no later than ninety (90) days after delivery of the report.

 

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(f) All adjustments resulting from an audit agreed between the Company and the Member(s) requesting an audit shall be reflected promptly in the Company’s books and records and reported to the Members. If any dispute shall arise in connection with an audit, it shall be reported to and discussed by the Management Board within sixty (60) days. If no settlement can be reached by the parties to the dispute within one hundred twenty (120) days after report to the Management Board, and, unless otherwise agreed by the parties to the dispute, the provisions of Section 15.2 shall apply.

Section 8.4 Financial Statements and Reports . The Company shall prepare, and shall submit to the Members the following statements, reports and notices.

(a) Annual financial statements of the Company Group, consisting of a profit and loss statement, a balance sheet, a statement of cash flows and a statement of changes in the Members’ Capital Accounts, as of the end of and for the prior Fiscal Year, which shall be prepared in accordance with GAAP and audited by the Company’s independent certified public accountants, which shall be an internationally recognized accounting firm (the “ Annual Financial Statements ”). The Annual Financial Statements for a Fiscal Year shall be delivered to each Member within ninety (90) days after the end of such Fiscal Year.

(b) Unaudited quarterly financial statements of the Company Group Members, consisting of a profit and loss statement, a balance sheet, changes in membership capital, and a statement of cash flows, as of the end of and for the prior Calendar Quarter, which shall be prepared in accordance with GAAP, except for normal year end adjustments and the absence of footnotes (the “ Quarterly Financial Statements ”). The Quarterly Financial Statements for a Calendar Quarter shall be delivered to each Member within sixty (60) days after the end of such Calendar Quarter.

(c) Monthly financial reports, which shall consist of a profit and loss statement, a balance sheet, changes in membership capital, a statement of cash flows as of the end of and for the prior Calendar Month, and year-to-date setting forth the actual results for the periods presented together with a comparison to the respective amounts in the approved Annual Work Program and Budget. The financial statements shall be prepared in accordance with GAAP except for normal year end adjustments and the absence of footnotes and shall contain a narrative describing the variances to the approved Annual Work Program and Budget (the “ Monthly Financial Reports ”). The Monthly Financial Reports for a Calendar Month shall be delivered within fifteen (15) days after the end of such Calendar Month.

(d) A monthly operating report containing a description of the Company’s Business during each Calendar Month, including physical Asset operations and maintenance (the “ Monthly Operating Reports ”). Each Monthly Operating Report should contain information and narratives describing the

 

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applicable Assets’ performance during the relevant Calendar Month, including average throughput volumes, current makeup of shippers and their respective rates, HSSE incidents and such other information that may reasonably be required by any Member. The Monthly Operating Reports for a Calendar Month shall be delivered within fifteen (15) days after the end of such Calendar Month.

(e) A forecast of the Net Profits and cash distributions to the Members for the remainder of the Fiscal Year and, with respect to the fourth Calendar Quarter of the then current Fiscal Year, a forecast of the Net Profits and cash distributions to be made to the Members in the first Calendar Quarter of the following Fiscal Year (the “ Quarterly Forecasts ”). The Quarterly Forecasts shall be delivered within forty-five (45) days after the end of each Calendar Quarter.

(f) An estimate of taxable income for the Company and the amounts allocable to each Member for each Fiscal Year (the “ Tax Estimate Report ”). The Tax Estimate Report shall be delivered within forty-five (45) days after the end of the Fiscal Year.

(g) Copies of all material information related to any pending or material threatened litigation or insurance claim affecting the Company.

(h) Copies of: (i) the approved Annual Work Program and Budget in effect from time to time, within thirty (30) days after the approval thereof in accordance with Section 6.2(c); and (ii) any amended Annual Work Program and Budget within thirty (30) days of such Annual Work Program and Budget is amended.

(i) Copies of all material filings, disclosures, or reports submitted to any Governmental Authority affecting the Company.

(j) A quarterly report summarizing all outstanding claims related to any litigation, arbitration, administrative proceeding or other dispute and any settlement or result of any litigation, arbitration, administrative proceeding or other dispute entered into or relating to the Company that occurred during the prior Calendar Quarter affecting the Company.

(k) Such other information as a Member may reasonably request regarding the Company.

Section 8.5 Accounting Method . For both financial and tax reporting purposes and for purposes of determining Net Profits and Net Losses, subject to Section 8.1(b), the books and records of the Company shall be kept utilizing the accrual method of accounting in accordance with GAAP, shall reflect all Company transactions, and shall be appropriate and adequate for the Business.

Section 8.6 Bank Accounts; Investments . The Management Board shall establish one or more bank accounts in the name of the Company into which all Company funds shall be deposited.

 

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Section 8.7 Fiscal Year of the Company . The Company shall adopt the Calendar Year as its Fiscal Year.

ARTICLE 9

TAX MATTERS

Section 9.1 Tax Treatment of the Company . It is the intent of the Members that the Company be treated as a partnership for U.S. federal income tax purposes. Neither the Company nor any Member shall make an election to be excluded from the application of the provisions of subchapter K of chapter 1 of subtitle A of the Code or any similar provisions of applicable state Law or to be classified as an association pursuant to Treasury Regulation Section 301.7701-3.

Section 9.2 Tax Treatment of the Contribution Agreement . The Parties intend and expect that the transactions contemplated by the Contribution Agreement will be treated, for purposes of federal income taxation and for purposes of certain state income tax laws that incorporate or follow federal income tax principles, as resulting in (a) the creation of the Company, in which EOC and BG will be treated as partners, (b) subject to clause (d) below, a contribution by EOC of all of the Contributed Interests (as defined in the Contribution Agreement) to the Company in exchange for a 50% interest therein; (c) a contribution by BG of the Final Cash Amount to the Company in exchange for a 50% interest therein, and (d) a distribution by the Company to EOC of the Final Cash Amount (i) as a reimbursement of EOC’s preformation expenditures with respect to the Contributed Interests within the meaning of Treasury Regulations Section 1.707-4(d) to the extent applicable, and (ii) in a transaction subject to treatment under Section 707(a) of the Code, and its implementing Treasury Regulations, as in part a sale, and in part a contribution, by EOC of the Contributed Interests to the Company to the extent Treasury Regulations Section 1.707-4(d) is inapplicable.

Section 9.3 Tax Matters Partner . The Members hereby designate EOC as the initial “tax matters partner” as such term is defined in Section 6231(a)(7)(A) of the Code (the “ Tax Member ”). The Tax Member shall give prompt written notice to each other Member of any and all notices it receives from the Internal Revenue Service concerning the Company. The Company shall reimburse the Tax Member out of the Available Cash for any expenses that the Tax Member incurs in connection with its obligations as Tax Member. The Tax Member shall not agree to extend the statute of limitations with respect to partnership items of the Company without the consent of the other Members. No Member shall take any other action with respect to a partnership level audit item which would be binding on any other Member in computing its liability for taxes (or interest, penalties or additions to tax) without the consent of such other Member.

Section 9.4 Tax Returns and Elections .

(a) The Tax Member shall prepare, or cause to be prepared, at the expense of the Company, for each Fiscal Year (or part thereof), federal, state and local tax returns required to be filed with respect to the Company. Each Member

 

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shall furnish to the Company and the Tax Member all pertinent information in its possession relating to the Company’s operations that is necessary to enable the tax returns to be timely prepared and filed. Not less than sixty (60) days prior to the due date (as extended) of the federal income tax return or any state income tax return with respect to the Company, the return proposed by the Tax Member to be filed by the Company shall be furnished to the Members for review and approval. In addition, not more than ten (10) days after the date on which the Company files its federal income tax return or any state income tax return, a copy of the return so filed shall be furnished to the Members.

(b) The Company, at its expense, shall cause to be delivered to each Member within the time period provided by applicable Law an Internal Revenue Service Form K-1 or a good faith estimate of the amounts to be included on such Internal Revenue Service Form K-1 for such Member and such other information as shall be necessary (including a statement for that year of each Member’s share of Net Profits, Net Losses and other items allocated to such Member) for the preparation and timely filing by the Members of their federal, state and local income and other tax returns. The Tax Member shall deliver estimates of Net Profits and Net Losses of the Company at least 15 days prior to the due date for an estimated tax payment required under Section 6655 of the Code for a U.S. corporation whose taxable year ends December 31; provided that all Members taking their share of production in kind shall have provided to the Tax Member, at least seven (7) Business Days prior to such 15 day period, the relevant revenue information relating to such production in kind for the period.

(c) The Management Board may make or revoke an election in accordance with Section 754 of the Code, so as to adjust the basis of any Assets in the case of a distribution of property, within the meaning of Section 734 of the Code, and in the case of a Transfer of Member Interests, within the meaning of Section 743 of the Code.

Section 9.5 Tax Terminations . If a Member or any direct or indirect owner of a Member takes any action that causes the Company to be terminated within the meaning of Section 708(b)(1)(B) of the Code, such Member shall indemnify and hold harmless the other Members for any deferral of depreciation deductions allocable to the other Members as a result of the Code Section 708(b)(1)(B) termination, determined using an annual discount rate of ten percent (10%) and a deemed tax rate of forty percent (40%).

ARTICLE 10

TRANSFERS OF MEMBER INTERESTS; ADMISSION OF NEW MEMBERS

Section 10.1 Transfer of Member Interests .

(a) Any Member may, subject to the other provisions set forth in this Agreement, Transfer all or any undivided share of its Member Interest. Any attempted Transfer of all or a part of a Member Interest other than in compliance with this Agreement shall be null and void and of no force or effect. Any Member who Transfers any Member Interest shall promptly provide written notice thereof to the Company and all of the other Members.

 

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(b) No Transfer may be made to an individual, and except in the case of a Member transferring all of its Member Interest, no Transfer may be made which results in the transferor or the transferee holding a Member Interest of less than ten percent (10%).

(c) A transferring Member shall, notwithstanding the Transfer, be liable to the Company and the other Members for its obligation to fund its Member Interest share (as of the time of the Transfer) of Member Interests included in the Transfer of the activities included in each approved Annual Work Program and Budget (including multi-year expenditures included in more than one Annual Work Program and Budget), and for all other obligations, in each case, accrued under this Agreement or any Associated Agreement on or prior to the Transfer, but shall be released from any other obligations thereafter accruing under this Agreement or such Associated Agreement with respect to the Member Interest being Transferred, except in the case where the Transfer at issue is made to an Affiliate or where the lender(s) with respect to a Credit Facility Foreclosure foreclose(s) on all or any part of a Member’s Member Interest, in which cases the transferring Member or Member subject to the foreclosure, as applicable, shall remain primarily liable for all such obligations.

(d) In connection with any Transfer of a portion (but less than all) of its Member Interest by any member of the EOC Affiliate Group or BG Affiliate Group to a third party not affiliated with the EOC Affiliate Group or the BG Affiliate Group, respectively, the EOC Affiliate Group or the BG Affiliate Group, as applicable, shall assign such number of Total Votes equal to the product of (rounded to the nearest tenth) (x) a fraction the numerator of which is the number of aggregate Member Interests being assigned and the denominator of which is the sum of all Members’ Member Interests and (y) 100. The transferor’s number of Total Votes shall be reduced by the number of Total Votes so transferred. The transferor and transferee shall, amongst themselves, determine how to allocate the appointment of the Board Members allocated to such transferor’s Group, provided that such allocation shall be made in a manner so that all of the Total Votes may be represented at any meeting of the Management Board.

(e) Any transferee of all of the Member Interest of a Member shall be entitled to all of the Total Votes of its transferor, and shall be entitled to appoint all Board Member seats previously appointed by its transferor.

Section 10.2 Conditions Precedent to a Member Interest Transfer . Each transferee of any Member Interest or portion thereof shall continue to be subject to the terms hereof, and, as a condition precedent to the Company recognizing such Transfer, each transferor must satisfy all the requirements (including the proportionate Transfer of its funding obligations), and not violate any of the Transfer restrictions set forth in Section 10.1 above, and each Transfer shall meet the following conditions:

(a) Each transferee shall agree in writing to be subject to each of the terms of this Agreement by executing and delivering an assumption agreement substantially in the form attached hereto as Exhibit “F” (an “ Assumption Agreement ”).

 

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(b) Each transferee shall execute and deliver to the Company a services agreement in substantially the form attached hereto as Exhibit “G”.

(c) Except in the case of a Transfer involuntarily by operation of Law, the transferor and transferee shall execute and deliver to the Company such documents and instruments of conveyance as may be reasonably necessary or appropriate to effect such Transfer. In the case of a Transfer involuntarily by operation of law, the Transfer shall be confirmed by presentation to the Company of legal evidence of such Transfer, in form and substance reasonably satisfactory to counsel to the Company. In all cases, the Company shall be reimbursed by the transferor and/or transferee for all reasonable costs and expenses that it incurs in connection with such Transfer.

(d) The transferor and transferee shall furnish the Company with the transferee’s taxpayer identification number, sufficient information to determine the transferee’s initial tax basis in the Member Interest transferred, and any other information reasonably necessary to permit the Company to file all required federal and state tax returns and other legally required information statements or returns. Without limiting the generality of the foregoing, the Company shall not be required to make any distribution otherwise provided for in this Agreement with respect to any transferred Member Interest until it has received such information.

(e) Such Transfer shall be exempt from all applicable registration requirements and such Transfer may not violate any applicable Laws regulating the transfer of securities.

(f) Such Transfer will not cause the Company to be deemed to be an “investment company” under the Investment Company Act of 1940.

Section 10.3 Encumbrances by Members . Nothing contained in this Article 10 or in Article 11 or 12 shall prevent a Member from Encumbering all or any undivided share of its Member Interest to a third party after the Closing Date, provided that:

(a) such Member shall remain liable for all obligations relating to such Member Interest except as provided in Section 10.1(c); and

(b) such Encumbrance (including Credit Facility Encumbrances) shall be expressly subject to the rights of the Company and the Members to reduce a Member’s Member Interest pursuant to Section 3.7, and the Member granting such Encumbrance shall cause the beneficiaries of such Encumbrances to execute any instruments requested by Company or any Member necessary to reflect the rights of Company and such Members set forth in this Section 10.3(b).

 

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Section 10.4 Admission of Persons as New Members . Upon compliance with all of the provisions of this Agreement regarding Transfers, (a) a transferee shall be deemed to be a party hereto as if such transferee were the transferor and such transferee’s signature appeared on the signature pages of this Agreement, and shall be deemed to be a Member and (b) to the extent the transferor no longer holds a Member Interest, such transferor shall thereafter cease to be a Member.

ARTICLE 11

CONSENTS TO ASSIGNMENT

Section 11.1 Certain Transfers during Initial Three Year Period . From and after the Closing Date and until the third anniversary of the Closing Date (the “ Initial Three Year Period ”), no Member shall be permitted to Transfer all or any part of its Member Interest or undergo a Change in Control without the prior written consent of each other Member, which consent may be withheld for any reason in the sole discretion of such other Member, provided that no such consent shall be required for any Transfer of a Member Interest to any Affiliate of such Member.

Section 11.2 Other Transfers . A Member shall be permitted to Transfer all or any part of its Member Interest after the Initial Three Year Period, provided that a transferee must have the financial ability to perform its future payment obligations hereunder and the technical ability to participate in the planning of future operations.

ARTICLE 12

PREFERENTIAL PURCHASE RIGHTS; CHANGES IN CONTROL

Section 12.1 Preferential Purchase Rights . Any Transfer of all or a portion of a Member’s Member Interest, other than a Transfer to a Wholly-Owned Affiliate, shall be subject to the following procedure.

(a) Once the final terms and conditions of a Transfer have been fully negotiated and are binding on the parties thereto, the transferring Member shall disclose all such final terms and conditions as are relevant to the sale of the Member Interest (and, if applicable, the determination of the Cash Value of the Member Interest) in a notice to the non-transferring Members, which notice shall be accompanied by a copy of all instruments or relevant portions of instruments establishing such terms and conditions. Each non-transferring Member shall have the right to acquire the Member Interest subject to the proposed Transfer from the transferring Member on the terms and conditions described in Sections 12.1(c) and 12.1(d), as applicable, if, within sixty (60) days of the transferring Member’s notice, the non-transferring Member delivers to the transferring Member a counter-notification that it accepts such terms and conditions without reservations or conditions (subject to the other provisions of this Section 12.1, where applicable). If no non-transferring Member delivers such counter-notification within such time, such Transfer to the proposed transferee may proceed without further notice, subject to the other provisions of this Agreement, under terms and conditions no more favorable to the transferee than those set forth in the notice to

 

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the non-transferring Members, provided that such Transfer shall be concluded within one hundred twenty (120) days from the date of the notice. If such Transfer fails to be concluded within such period and the parties thereto desire thereafter to proceed with such proposed Transfer, the transferring Member shall be required to re-offer the Member Interest subject to the Transfer to the non-transferring Members in accordance with the terms and conditions of this Section 12.1. No Member shall have a right under this Section 12.1 to acquire any asset other than a Member Interest, nor shall a Member be required to acquire any asset other than a Member Interest, regardless of whether other properties are included in the Transfer at issue.

(b) If more than one non-transferring Member counter-notifies that it intends to acquire the transferring Member’s Member Interest that is subject to the proposed Transfer, then each such Member shall acquire a proportion of the Member Interest equal to the ratio of its own Member Interest to the total Member Interests of all counter-notifying Members, unless the counter-notifying Members otherwise agree.

(c) In the event of a Cash Transfer that does not involve other properties as part of a wider transaction, each non-transferring Member shall have a right to acquire the Member Interest subject to the proposed Transfer on the same final terms and conditions as were negotiated with the proposed transferee.

(d) In the event of a Transfer that is not a Cash Transfer or involves other properties included in a wider transaction (package deal), the transferring Member shall include in its notification to the non-transferring Members a statement of the proposed Cash Value of the Member Interest subject to the proposed Transfer, and each non-transferring Member shall have a right to acquire such Member Interest on the same final terms and conditions as were negotiated with the proposed transferee except that it shall pay the Cash Value in immediately available funds at the closing of the Transfer in lieu of the consideration payable in the third party offer, and the terms and conditions of the applicable instruments shall be modified as necessary to reflect the acquisition of a Member Interest for cash. In the case of a package sale, the non-transferring Members may not acquire the Member Interest subject to the proposed package sale unless and until the completion of the wider transaction (as modified by the exclusion of properties subject to preemptive rights or excluded for other reasons) with the package sale transferee. If for any reason the package sale terminates without completion, the non-transferring Members’ rights to acquire the Member Interest subject to the proposed package sale shall also terminate.

(e) For purposes of Section 12.1(d), the Cash Value proposed by the transferring Member in its notice shall be conclusively deemed correct unless any non-transferring Member gives notice to the transferring Member within thirty (30) days of receipt of the transferring Member’s notice stating that it does not agree with the statement of the Cash Value, stating the Cash Value it believes is correct, and providing any supporting information that it believes is helpful. In

 

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such event, the Members shall have fifteen (15) days in which to attempt to negotiate an agreement on the applicable Cash Value. If no agreement has been reached by the end of such fifteen (15) day period, any affected Member shall be entitled to refer the matter to an independent expert as provided in Section 15.3 for determination of the Cash Value, provided that the transferring Member may elect to terminate the proposed Transfer, and any non-transferring Member may elect to revoke its notice of intention to purchase, in either case by notice to the other Members at any time prior to the time that the independent expert is retained pursuant to such provision. The Cash Value to be submitted to the independent expert by the transferring Member shall be the Cash Value provided by such Member in the notice provided to the non-transferring Members pursuant to Section 12.1(d), and the Cash Value to be submitted to the independent expert by each non-transferring Member shall be the Cash Value provided by such Member in the notice provided to the transferring Member pursuant to this Section 12.1(e).

Section 12.2 Changes in Control .

(a) Any Change in Control of a Member shall be subject to the terms and conditions of this Section 12.2. For purposes of this Section 12.2, the term “ Acquired Member ” shall refer to the Member that is subject to a Change in Control, “ Other Members ” shall refer to all other Members not subject to the Change in Control, and “ Acquiror ” shall refer to the third party proposing to acquire Control of the Acquired Member in the Change in Control.

(b) Once the final terms and conditions of a Change in Control have been fully negotiated and are binding on the parties thereto, the Acquired Member shall disclose all such final terms and conditions as are relevant to the acquisition of such Acquired Member’s Member Interest and the determination of the Cash Value of that Member Interest in a notice to the Other Members, which notice shall be accompanied by a copy of all instruments or relevant portions of instruments establishing such terms and conditions. Each Other Member shall have the right to acquire the Acquired Member’s Member Interest, on the terms and conditions described in Section 12.2(d) if, within sixty (60) days of the Acquired Member’s notice, the Other Member delivers to the Acquired Member a counter-notification that it accepts such terms and conditions without reservations or conditions (subject to the other provisions of this Section 12.2, where applicable). If no Other Member delivers such counter-notification, the Change in Control may proceed without further notice, subject to the other provisions of this Agreement regarding Changes in Control, under terms and conditions no more favorable to the Acquiror than those set forth in the notice to the Other Members, provided that the Change in Control shall be concluded within one hundred twenty (120) days from the date of the notice. If the Change in Control fails to be concluded within such period and the direct or indirect owners, as the case may be, of the Acquired Member desire thereafter to proceed with such proposed Change in Control, the Acquired Member shall be required to re-offer the Member Interest subject to the Change in Control to the Other Members in accordance with the terms and conditions of this Section 12.2. No Other Member

 

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shall have a right under this Section 12.2 to acquire any asset other than a Member Interest, nor shall any Other Member be required to acquire any asset other than a Member Interest, regardless of whether other properties are subject to the Change in Control.

(c) If more than one Other Member counter-notifies that it intends to acquire the Acquired Member’s Member Interest that is subject to the proposed Change in Control, then each such Other Member shall acquire a proportion of the Acquired Member’s Member Interest equal to the ratio of its own Member Interest to the total Member Interests of all counter-notifying Other Members, unless the counter-notifying Other Members otherwise agree.

(d) The Acquired Member shall include in its notification to the Other Members a statement of the proposed Cash Value of the Member Interest subject to the proposed Change in Control, and each Other Member shall have a right to acquire such Member Interest for the Cash Value, on the final terms and conditions negotiated with the Acquiror that are relevant to the acquisition of a Member Interest for cash. No Other Member may acquire the Acquired Member’s Member Interest pursuant to this Section 12.2 unless and until completion of the Change in Control. If for any reason the Change in Control agreement terminates without completion, the Other Members’ rights to acquire the Member Interest subject to the proposed Change in Control shall also terminate.

(e) For purposes of Section 12.2(d), the Cash Value proposed by the Acquired Member in its notice shall be conclusively deemed correct unless any Other Member gives notice to the Acquired Member within thirty (30) days of receipt of the Acquired Member’s notice stating that it does not agree with the Acquired Member’s statement of the Cash Value, stating the Cash Value it believes is correct, and providing any supporting information that it believes is helpful. In such event, the Members shall have fifteen (15) days in which to attempt to negotiate an agreement on the applicable Cash Value. If no agreement has been reached by the end of such fifteen (15) day period, any affected Member shall be entitled to refer the matter to an independent expert as provided in Section 15.3 for determination of the Cash Value, provided that the Acquired Member may elect to terminate the proposed Change in Control, and any Other Member may elect to revoke its notice of intention to purchase, in either case by notice to the other Members at any time prior to the time that the independent expert is retained pursuant to such provision. The Cash Value to be submitted to the independent expert by the Acquired Member shall be the Cash Value provided by such Acquired Member in the notice provided to the Other Members pursuant to Section 12.2(d), and the Cash Value to be submitted to the independent expert by each Other Member shall be the Cash Value provided by such Other Member in the notice provided to the Acquired Member pursuant to this Section 12.2(e).

 

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ARTICLE 13

ACQUIRED BUSINESS; NEW BUSINESS; ASSET UPGRADES

Section 13.1 Acquired Business .

(a) Subject to Section 13.1(h), if, during the period commencing on the Closing Date and ending on January 1, 2020, a Member or any Affiliate thereof (such Member, whether it or its Affiliate is the acquiror, an “ Acquiring Member ”) directly or indirectly acquires or agrees to acquire any interest from a non-Affiliate (a “ Selling Party ”) in any Midstream Asset (such Midstream Asset, the “ Acquired Business ”), whether by lease or sublease, purchase, acquisition of shares or other equity interests in an entity directly or indirectly owning the Acquired Business or otherwise, the Acquiring Member shall provide written notice of such acquisition (an “ Offer Notice ”) to the Company and the other Members (each such other Member, a “ Non-Acquiring Member ”), which notice shall be accompanied by a copy of all instruments or relevant portions of instruments relating to such acquisition. Subject to this Section 13.1, each Non-Acquiring Member shall have the right (but not the obligation) to acquire its Member Interest share of the Acquired Business (such interest, as may be adjusted pursuant to the following sentence, the “ Offered Interest ”) upon the same terms and conditions on which the Acquiring Member or its Affiliate acquired the Acquired Business, subject to assuming its Member Interest share of all duties and obligations with respect to the Acquired Business and paying the Acquiring Member its Member Interest share of any consideration paid by the Acquiring Member or its Affiliate with respect to such Acquired Business. Each Non-Acquiring Member shall have a period of sixty (60) days after receipt of the Offer Notice to notify the Company and the Acquiring Member in writing whether it elects to acquire its Offered Interest (the “ Option Period ”) pursuant to this Section 13.1. Failure to give timely notice of such election shall be deemed an election not to acquire the Offered Interest.

(b) If all Non-Acquiring Members elect to acquire an interest in the Acquired Business, the Acquiring Member shall use commercially reasonable efforts to assign its or its Affiliate’s rights and obligations under the acquisition documents to the Company or other Company Group Member (as applicable), provided that the Acquiring Member shall not be required to pay cash or otherwise surrender value or incur any liability to the Selling Party to obtain such a right. If the Acquiring Member is unable to assign such rights and obligations under the acquisition documents to the Company or other Company Group Member (as applicable), then the Acquiring Member and the Company or other Company Group Member (as applicable) shall enter into agreements for the Transfer of the Acquired Business on substantially the same terms as provided in the agreements between the Selling Party and the Acquiring Member (with such changes as may be necessitated by the differences in parties, the Transfer of only an Offered Interest and, if applicable, the apportionment of rights from a package deal or the payment of Cash Value in lieu of other consideration), provided that the Acquiring Member shall in no event have liability to the Company or other

 

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Company Group Member (as applicable) for representations, warranties or indemnities with respect to the Acquired Business in excess of amounts that the Acquiring Member or its Affiliate actually recovers under the third party acquisition agreement and related documents for the same matters. The Company or other Company Group Member (as applicable) and the Acquiring Member shall execute and deliver the applicable documents and take such other actions as shall be reasonably required to accomplish the Transfer promptly after the Non-Acquiring Members’ exercise of their option. Additionally, in the case of a Cash Transfer, the consideration payable by the Company or other Company Group Member in respect of the Acquired Business, or in the case of an Acquired Business not acquired pursuant to a Cash Transfer or that is acquired with other properties included in a wider transaction (package deal), the Cash Value of the Acquired Business, shall be deemed to be added to the applicable Development Work Program and Annual Work Program and Budget, and the Members shall use commercially reasonable efforts to agree to an additional amendment to such Development Work Program and Annual Work Program and Budget to include those amounts necessary to operate and maintain such Acquired Business during the applicable Calendar Year within thirty (30) days of the acquisition of such Acquired Business by the Company.

(c) If all Non-Acquiring Members do not elect, or fail to make a timely election, to acquire an interest in the Acquired Business, the Acquiring Member shall be permitted to hold such Acquired Business at its sole risk, cost and expense outside of the Company and the Company Group Members and, except as provided in Section 13.3, the Non-Acquiring Members shall have no further rights whatsoever with regard to the Acquired Business.

(d) If less than all Non-Acquiring Members elect to acquire an interest in the Acquired Business, upon the termination of the Option Period, the Acquiring Member and the Non-Acquiring Members that elect to acquire an interest in the Acquired Business (the “ Electing Members ”) shall be permitted to hold such Acquired Business at their sole risk, cost and expense outside of the Company and the Non-Acquiring Members that do not elect, or fail to make a timely election, to acquire an interest in the Acquired Business and, except as provided in Section 13.3, the Company Group Members shall have no further rights whatsoever with regard to the Acquired Business. The Acquiring Member shall use commercially reasonable efforts to assign its or its Affiliate’s rights and obligations under the acquisition documents with respect to each Electing Member’s Offered Interest (which shall include such Electing Member’s proportionate share of the Offered Interest of any Non-Acquiring Member who did not elect, or failed to make a timely election, to acquire such Offered Interest) to each Electing Member, provided that the Acquiring Member shall not be required to pay cash or otherwise surrender value or incur any liability to the Selling Party to obtain such a right. If the Acquiring Member is unable to assign such rights and obligations under the acquisition documents to the Electing Members, then the Acquiring Member and the Electing Members shall enter into agreements for the Transfer of the Offered Interests on substantially the same

 

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terms as provided in the agreements between the Selling Party and the Acquiring Member (with such changes as may be necessitated by the differences in parties, the Transfer of only an Offered Interest and, if applicable, the apportionment of rights from a package deal or the payment of Cash Value in lieu of other consideration), provided that the Acquiring Member shall in no event have liability to any Electing Member for representations, warranties or indemnities with respect to each Electing Member’s Offered Interest in excess of amounts that the Acquiring Member or its Affiliate actually recovers under the third party acquisition agreement and related documents for the same matters. The Electing Members and the Acquiring Member shall execute and deliver the applicable documents and take such other actions as shall be reasonably required to accomplish the Transfer promptly after the Electing Members’ exercise of their option.

(e) In the event the Acquired Business is not acquired pursuant to a Cash Transfer or is acquired with other properties included in a wider transaction (package deal), the Acquiring Member shall include in its notification to the Company and the Non-Acquiring Members a statement of the Cash Value of the Acquired Business, and each Non-Acquiring Member (or the Company, as applicable) shall have a right to acquire its Offered Interest on the same final terms and conditions as were negotiated with the proposed transferor except that it shall pay the Cash Value in immediately available funds to the Acquiring Member at the time of its acquisition of the Offered Interest in lieu of the consideration payable in the third party offer, and the terms and conditions of the applicable instruments shall be modified to reflect the acquisition of the Offered Interest for cash. In the case of a package sale, the Non-Acquiring Members (or the Company, as applicable) may not acquire an interest in the Acquired Business subject to the proposed package sale unless and until the completion of the wider transaction (as modified by the exclusion of properties subject to preemptive rights or excluded for other reasons) with the package sale transferor. If for any reason the package sale terminates without completion, the Non-Acquiring Members’ (or the Company’s, as applicable) rights to acquire the Acquired Business subject to the proposed package sale shall also terminate.

(f) For purposes of Section 13.1(e), the Cash Value proposed by the Acquiring Member in its notice shall be conclusively deemed correct unless any Non-Acquiring Member gives notice to the Acquiring Member within thirty (30) days of its receipt of the Offer Notice stating that it does not agree with the Acquiring Member’s statement of the Cash Value, stating the Cash Value it believes is correct, and providing any supporting information that it believes is helpful. In such event, the Members shall have fifteen (15) days in which to attempt to negotiate an agreement on the applicable Cash Value. If no agreement has been reached by the end of such fifteen (15) day period, any affected Member shall be entitled to refer the matter to an independent expert as provided in Section 15.3 for determination of the Cash Value, provided that the Acquiring Member may elect to terminate the proposed acquisition of the Acquired Business, and any Non-Acquiring Member may elect to revoke its notice of

 

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election to acquire its Offered Interest, in either case by notice to the other Members at any time prior to the time that the independent expert is retained pursuant to such provision. The Cash Value to be submitted to the independent expert by the Acquiring Member shall be the Cash Value provided by such Acquiring Member in the notice provided to the Non-Acquiring Members pursuant to Section 13.1(a), and the Cash Value to be submitted to the independent expert by each Non-Acquiring Member shall be the Cash Value provided by such Non-Acquiring Member in the notice provided to the Acquiring Member pursuant to this Section 13.1(f).

(g) If for any reason any Acquired Business fails to be acquired within one hundred twenty (120) days after delivery of the Offer Notice or will be acquired on terms and conditions more favorable to the acquirors than was originally proposed to the Non-Acquiring Members, and any Member thereafter desires to acquire such Acquired Business, such Member shall be required to re-offer the Acquired Business in accordance with the terms and conditions of this Section 13.1.

(h) Notwithstanding anything to the contrary herein, this Section 13.1 shall not be applicable to any of the following:

(i) any Acquired Business to the extent consisting of a Transfer between a Member and its Affiliates;

(ii) any Acquired Business to the extent consisting of an acquisition of interests in any entity or entities directly or indirectly owning Midstream Assets if the direct or indirect interest in such Midstream Assets makes up less than twenty-five percent (25%) of the total Cash Value of the interest acquired or to be acquired; or

(iii) any Acquired Business to the extent consisting of acquisitions of Midstream Assets that are part of a package sale, which package includes upstream assets that are subject to Article 9 of the Joint Development Agreement, for which no party to the Joint Development Agreement that is either a Member or an Affiliate of a Member elects to participate in the acquisition of such upstream assets.

(i) Notwithstanding anything to the contrary herein, if any Acquired Business consists of an acquisition of Midstream Assets that are part of a package sale, which package includes upstream assets that are subject to Article 9 of the Joint Development Agreement, no Member that is (or with an Affiliate that is) party to the Joint Development Agreement that elected not to participate in the acquisition of such upstream assets associated with such Midstream Assets shall be a Non-Acquiring Member under this Article 13. If there are no Non-Acquiring Members with respect to such Acquired Business, such Acquired Business shall not be subject to this Section 13.1.

 

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(j) Each Member agrees to cause its Affiliates to comply with this Section 13.1.

Section 13.2 Member Requested Services .

(a) If any Member with at least a twenty five percent (25%) Member Interest (a “ Requesting Member ”) requests transportation, gathering, treatment, processing or compression services from the Company Group Members for hydrocarbons produced from any well in the East Texas/North Louisiana Area in which such Requesting Member and its Affiliates, or if there is more than one Requesting Member with respect to such request, such Requesting Members and their Affiliates, hold, in the aggregate, at least a 20% working interest in such well or is the operator of such well (“ Member Requested Services ”), the Company shall cause the Company Group Members to provide such services in accordance with the terms of this Section 13.2. Any request for Member Requested Services by Requesting Members shall be made by notice to the Company and the other Members. Such notice shall identify the Requesting Members and shall provide reasonable detail regarding the Member Requested Services, including the services so requested, the date upon which such Member Requested Services are requested to commence, the location(s) at which such Member Requested Services are to be provided, the estimated volumes of hydrocarbons requiring such Member Requested Services, the estimated period of time for which such Member Requested Services will be necessary, and any other information reasonably relevant to such request. The Requesting Member shall provide any other information regarding the Member Requested Services reasonably requested by the Company or any other Member. A Requesting Member shall have the right but not the obligation to utilize Member Requested Services to service hydrocarbons produced by, attributable to or for the account of Third Parties to the extent that such hydrocarbons were produced from the same well as the hydrocarbons of such Requesting Member (or its applicable Affiliate) receiving such Member Requested Services.

(b) If a Requesting Member is party to a gathering agreement with the applicable Company Group Member at the time of the request for Member Requested Services, the Member Requested Services shall be provided under such gathering agreement. If a Requesting Member is not party to a gathering agreement with the applicable Company Group Member(s) addressing Member Requested Services, within thirty (30) days of the delivery of a request for Member Requested Services, the applicable Company Group Member(s) and the Requesting Members or the applicable Affiliates of such Members shall enter into a gathering agreement in substantially the form attached hereto as Exhibit “H-1” (in the event Talco is to provide some or all of the Member Requested Services) and/or Exhibit “H-2” (in the event TGG is to provide some or all of the Member Requested Services), regarding the provision of such Member Requested Services (a “ Member Gathering Agreement ”). To the extent that the Assets do not have the capacity available to provide the Member Requested Services, the Company shall cause the Company Group Members to undertake such Asset Upgrades or

 

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Asset Expansions as may be necessary to provide all of the Member Requested Services. All such necessary Asset Upgrades and Asset Expansions shall be undertaken by the Company Group Members as soon as reasonably practicable, and the costs and expenses of implementing such Asset Upgrades and Asset Expansions shall be deemed to be included in the applicable Annual Work Program and Budgets and Development Work Programs.

(c) Unless otherwise agreed to by all of the Members, Member Requested Services will be provided to a Requesting Member (i) at a rate not greater than that being charged by the Company Group Members to Members, Affiliates of Members or Third Parties for similar services in the East Texas/North Louisiana Area (taking into consideration the geographic proximity of the services to the existing Assets, the timing and nature of the services being provided and any other considerations normally used by the Company Group Members when determining such rates) at any time during the provision of such Member Requested Services or, (ii) in the event that no Company Group Member is providing similar services to Members, Affiliates of Members or Third Parties at such time, at a rate not greater than the market rate for such services in the East Texas/North Louisiana Area (taking into consideration the geographic proximity of the services to the assets of the service provider, the timing and nature of the services being provided and any other considerations normally used by the Company Group Members when determining such rates). If the Company and the Requesting Member cannot agree on a rate within forty five (45) days of the delivery of the request for such Member Requested Service, such Dispute may be referred by either the Company or the Requesting Member to an expert in accordance with Section 15.3, and the rate determined by the expert shall be the rate chargeable for such Member Requested Service.

(d) Members shall only be entitled to make requests for Member Requested Services until January 1, 2020, provided that the Company Group Members shall continue to provide all Member Requested Services requested prior to such date for so long as such Member Requested Services may be required, even after such date.

(e) Notwithstanding anything to the contrary in this Section 13.2, no Company Group Member shall be obligated to take any action under this Section 13.2 that would subject any Company Group Member to the Standards of Conduct.

Section 13.3 New Business .

(a) Subject to Section 13.3(f), during the period commencing on the Closing Date and ending on January 1, 2020, prior to commencing any New Business, a Member or any Affiliate thereof (such Member, whether it or its Affiliate is the proposer, a “ Proposing Member ”) must first propose such New Business by notice to the Company and the other Members (each such other Member, a “ Non-Proposing Member ”). For the avoidance of doubt: (i)

 

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acquisition of Acquired Business shall not be New Business subject to the terms and conditions of this Section 13.3, but shall instead be subject to the terms and conditions of Section 13.1; and (ii) Member Requested Services shall not be New Business subject to the terms and conditions of this Section 13.3, but shall instead be subject to the terms and conditions of Section 13.2. Each Non-Proposing Member shall have the right (but not the obligation) to participate in the New Business pursuant to this Section 13.3. Any such proposal shall contain a reasonably detailed explanation of the proposed New Business, including a good faith estimate of the costs and expenses of implementing, operating and maintaining such proposed New Business, the revenues to be derived therefrom, the timetable for implementing such proposed New Business (which shall include an estimated commencement date for such New Business that shall be not more than 12 months from the date such New Business is proposed), and the effect of such proposed New Business on the existing Business and Assets. The Non-Proposing Members shall have sixty (60) days from receipt of the proposal to decide whether they desire to participate in such proposed New Business (such sixty (60) day period, the “ Initial Election Period ”) pursuant to this Section 13.3. Failure of a Non-Proposing Member to give timely notice of its election within the Initial Election Period shall be deemed an election by such Non-Proposing Member not to participate in such proposed New Business.

(b) If all Non-Proposing Members elect to participate in any proposed New Business, such New Business shall be conducted by the Company or other Company Group Member (as applicable) in accordance with this Agreement and such New Business and the costs thereof set forth in the proposal of such New Business shall be deemed to be added to the applicable Development Work Program and Annual Work Program and Budget.

(c) If all Non-Proposing Members elect not to participate in or fail to make a timely election to participate in any proposed New Business (other than Asset Upgrades), the Proposing Member shall be permitted to conduct such New Business at its sole risk, cost and expense outside of the Company in a manner and on a timeline substantially as set forth in the Proposing Member’s notice to the Company and the Non-Proposing Members and the Company Group Members shall have no further rights whatsoever with regard to such New Business (other than Asset Upgrades (which are addressed in Section 13.4), and except any rights of the Company Group Members provided in any of the Article 13 Contracts entered into by the Company Group Members with respect to such New Business pursuant to Section 13.5).

(d) If less than all Non-Proposing Members elect to participate in any proposed New Business, upon the termination of the Initial Election Period, the Proposing Member and the Non-Proposing Members that elected to participate in such New Business (“ Interested Non-Proposing Members ”) shall be permitted to conduct such New Business (other than Asset Upgrades) at their sole risk, cost and expense outside of the Company in a manner and on a timeline substantially as set forth in the Proposing Member’s notice to the Company and the Non-Proposing

 

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Members and in accordance with the New Business Annual Work Program and Budget as provided below. The Proposing Member and the Interested Non-Proposing Members shall use reasonable efforts to agree on an annual work program and budget for the Calendar Year(s) in which such proposed New Business is to be commenced (such annual work program and budget, a “ New Business Annual Work Program and Budget ”), within sixty (60) days of the expiration of the Initial Election Period. If the Proposing Member and the Interested Non-Proposing Members have not agreed to the New Business Annual Work Program and Budget(s) within sixty (60) days of the expiration of the Initial Election Period, the Proposing Member shall prepare and distribute to the Interested Non-Proposing Members proposed final New Business Annual Work Program and Budget(s) for such proposed New Business within thirty (30) days of the expiration of such sixty (60) day period. Each Interested Non-Proposing Member shall then have sixty (60) days from receipt of the proposed final New Business Annual Work Program and Budget(s) to decide whether it elects to participate in such proposed New Business in the manner described in such New Business Annual Work Program and Budget(s). Failure of an Interested Non-Proposing Member to give timely notice of its election within such sixty (60) day period shall be deemed an election not to participate in such proposed New Business. The Proposing Member and each Interested Non-Proposing Member that agreed or approved the New Business Annual Work Program and Budget(s) for such New Business shall be referred to herein as “Participating Members” with respect to such New Business. Unless the Participating Members otherwise agree, each Participating Member’s interest in the New Business shall be that portion of the New Business that such Participating Member’s Member Interest bears to the Member Interests of all of the Participating Members.

(e) If for any reason (i) any New Business fails to be commenced on the later of (A) one hundred twenty (120) days after the day upon which the New Business was to be commenced as set forth in the proposal to the Non-Proposing Members or (B) sixty (60) days after the day upon which such New Business is to be commenced in accordance with the New Business Annual Work Program and Budget for such New Business agreed pursuant to Section 13.3(d) or (ii) the development or operation of such New Business will be materially different than that which was originally set forth in the proposal to the Non-Proposing Members, and any Member thereafter desires to proceed with such New Business, such Member shall be required to re-propose the New Business in accordance with the terms and conditions of this Section 13.2.

(f) Notwithstanding anything to the contrary herein, this Section 13.2 shall not be applicable to any New Business to the extent consisting of a Transfer between a Member and its Affiliates.

(g) Each Member agrees to cause its Affiliates to comply with this Section 13.3.

 

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(h) For the avoidance of doubt, buying and selling of gas and condensate by a Member or any Affiliate of a Member may be conducted by such Member or Affiliate of such Member without the obligation to offer the Company and other Members the opportunity to participate in such activity pursuant to this Section 13.3.

Section 13.4 Asset Upgrades . Notwithstanding anything to the contrary in Section 13.3, to the extent that any proposed New Business is a Required Asset Upgrade, the Company Group Members shall participate in such Required Asset Upgrade regardless of whether less than all of the Members elected to have the applicable Company Group Member participate in such New Business pursuant to Section 13.3. If a proposed New Business is an Asset Upgrade that is not a Required Asset Upgrade, then the Proposing Member with respect to such Asset Upgrade shall have the right to cause the applicable Company Group Member to conduct such Asset Upgrade (which Company Group Member shall own and be entitled to all benefits associated with such Asset Upgrade), even if less than all of the other Non-Proposing Members elect to have such Company Group Member participate in such Asset Upgrade, provided that the liabilities, costs and expenses of such Asset Upgrade and any ongoing or increased liabilities, costs and expenses associated therewith shall be solely borne by the Proposing Member and such Non-Proposing Members and the Company Group Members shall have no obligation to pay any of the liabilities, costs and expenses of such Asset Upgrade or any ongoing or increased liabilities, costs and expenses associated therewith, the Proposing Member and the Non-Proposing Members participating in any such Asset Upgrade responsible for the liabilities, costs and expenses of such Asset Upgrade shall have the exclusive right to use any increased capacity of the Assets created by such Asset Upgrade, and the Company shall have no right to commit the use of any such increased capacity without the prior written consent of such Members. In the event that there is any Dispute among the Members regarding whether an Asset Upgrade is or is not a Required Asset Upgrade, such Dispute may be referred by any Member to an expert in accordance with Section 15.3. Notwithstanding anything to the contrary in this Section 13.4, no Company Group Member shall be obligated to take any action under this Section 13.4 that would subject any Company Group Member to the Standards of Conduct.

Section 13.5 Contract Operating Agreements; Certain Gathering Agreements .

(a) In the event any Member with at least a twenty five percent (25%) Member Interest desires a Company Group Member to construct or operate any Midstream Asset or New Business held by such Member or its Affiliates outside of the Company Group Members pursuant to Section 13.3, such Member may make such a request to the Company in writing (which request shall identify the relevant assets to be operated, as well as the specific Midstream Activities, other than any marketing activities, to be provided by the applicable Company Group Member with respect to such assets), and within thirty (30) days of such request, the applicable Company Group Member(s) and such Member and its applicable Affiliates shall enter into a contract operating agreement regarding such construction or operations in substantially the form attached hereto as Exhibit “I”.

 

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(b) In the event a Member with at least a twenty five percent (25%) Member Interest or any of its Affiliates desires to tie-in any Midstream Asset (including Acquired Business or New Business in which it or its Affiliates hold an interest) held outside the Company to the Assets and to receive gathering, compression, treatment or processing services for hydrocarbons transported through such Midstream Assets or related to such New Business, such Member may make such a request to the Company in writing, describing the facilities to be tied in and the location of the tie-in, and within thirty (30) days of such request, the Company and such Member or the applicable Affiliate shall enter into an interconnect agreement in substantially the form attached hereto as Exhibit “K”, and such Member or the applicable Affiliate or any third party shipper proposed to receive the services, as applicable, shall enter into a gathering agreement or gathering agreements in substantially the form attached hereto as, if some or all of such services are to be provided to a Member or an Affiliate of Member by Talco, Exhibit “H-1”, if some or all of such services are to be provided to a Member or an Affiliate of Member by TGG, Exhibit “H-2”, if some or all of such services are to be provided to a Third Party by Talco, Exhibit “J-1”, and/or if some or all of such services are to be provided to a Third Party by TGG, Exhibit “J-2”,

(c) , provided that the Company Group Members shall only have the obligation to provide those services for which capacity exists at the time of the request, or to the extent the necessary capacity is added as part of the Member’s New Business proposal at or before the time the services are to commence.

(d) Notwithstanding anything to the contrary in this Section 13.5, no Company Group Member shall be obligated to take any action under this Section 13.5 that would subject any Company Group Member to the Standards of Conduct.

ARTICLE 14

DISSOLUTION; WINDING UP AND TERMINATION

Section 14.1 Causes of Dissolution, Winding Up and Termination .

(a) The Company shall be dissolved only upon the occurrence of one or more of the following events:

(i) a dissolution of the Company is unanimously approved by the Management Board pursuant to Section 5.1(b);

(ii) the sale or other final disposition by the Company of all or substantially all of the Assets and the collection of all amounts derived from such sale or disposition (including all amounts payable to the Company under any promissory notes or other evidences of indebtedness);

(iii) the entry of a decree of judicial dissolution under the Delaware Act; or

 

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(iv) any other event which must cause the dissolution under the Delaware Act.

(b) For the avoidance of doubt, the bankruptcy or dissolution of any Member or Affiliate of any Member or the occurrence of any other event that terminates the continued membership of any Member shall not cause the Company to be dissolved or its affairs to be wound up, and upon the occurrence of any such event, the Company shall be continued without dissolution.

Section 14.2 Notice of Dissolution . Upon the dissolution of the Company, the Management Board shall promptly notify the Members of such dissolution.

Section 14.3 Liquidation .

(a) Liquidating Trustee; Liquidating Distributions . Upon dissolution of the Company, the Management Board (in such capacity, the “ Liquidating Trustee ”) shall carry out the winding up of the Company and shall immediately commence to wind up such affairs; provided, however, that a reasonable time shall be allowed for the orderly liquidation of the Assets and the satisfaction of liabilities to creditors so as to enable the Members to minimize the normal losses attendant upon a liquidation. The proceeds of liquidation shall be applied first to payment of all expenses and debts of the Company and setting up of such reserves as the Management Board reasonably deems necessary to wind up the Company’s affairs and to provide for any contingent liabilities or obligations of the Company. Any remaining proceeds shall be distributed to the Members in accordance with their respective Capital Account balances after giving effect to the allocations required by Sections 4.2 and 4.3 and the allocations of Net Profits and Net Losses pursuant to Section 14.3(b).

(b) Profits and Losses . The Net Profits and Net Losses arising from liquidation of the Company shall be allocated among the Members so that, to the maximum extent possible, each Member’s Capital Account balance equals the amount of cash that would be distributed to such Member if liquidating distributions were made in accordance with Section 4.6.

Section 14.4 Termination . The Company shall terminate when all of the Assets, after payment of or due provision for all debts, liabilities and obligations of the Company, shall have been distributed to the Members in the manner provided for in this Article 14 and the Certificate shall have been canceled, or such other documents required under the Delaware Act to be executed and filed with the Secretary of State of the State of Delaware have been so executed and filed, in the manner required by the Delaware Act.

Section 14.5 No Obligation to Restore Capital Accounts . In the event any Member has a deficit balance in any of its Capital Accounts at the time of the Company’s dissolution, it shall not be required to restore such account to a positive balance or otherwise make any payments to the Company or its creditors or other third parties in respect of such deficiency.

 

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Section 14.6 Distributions in Kind . If any Assets are be distributed in kind, such Assets shall be distributed to the Member(s) as tenants-in-common in the same proportions as such Member(s) would have been entitled to cash distributions if: (a) such Assets had been sold for cash by the Company at the fair market value of such Assets (taking the Gross Asset Value definition herein and Code Section 7701(g) into account) on the date of distribution; (b) any unrealized income, gain, loss and deduction inherent in such property (that has not been reflected in the Capital Accounts previously) that would be realized by the Company from such sale were allocated among the Member(s) as Net Profits or Net Losses in accordance with this Agreement; and (c) the cash proceeds were distributed to such Member(s) in accordance with Section 4.6. The Capital Accounts of such Member(s) shall be increased by the amount of any unrealized income or gain inherent in such property or decreased by the amount of any loss or deduction inherent in such property that would be allocable to them, and shall be reduced by the fair market value of the assets distributed to them under the preceding sentence. Notwithstanding the foregoing, the Members shall have the right to assign their interest to such in-kind distribution to any Person.

ARTICLE 15

GOVERNING LAW; DISPUTE RESOLUTION

Section 15.1 Governing Law . THIS AGREEMENT AND THE LEGAL RELATIONS AMONG THE PARTIES SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, EXCLUDING ANY CONFLICTS OF LAW RULE OR PRINCIPLE THAT MIGHT REFER CONSTRUCTION OF SUCH PROVISIONS TO THE LAWS OF ANOTHER JURISDICTION. ALL OF THE PARTIES HERETO CONSENT TO THE EXERCISE OF JURISDICTION IN PERSONAM BY THE COURTS OF THE STATE OF TEXAS FOR ANY DISPUTE. EACH PARTY HERETO WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY DISPUTE.

Section 15.2 Dispute Resolution .

(a) Except for matters that are expressly made subject to the dispute resolution procedures set forth in Section 15.3, any Dispute among the Parties shall be resolved through final and binding arbitration.

(b) The arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the “ AAA ”) in effect at the time the arbitration of the Dispute is initiated (the “ AAA Rules ”).

 

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(c) The arbitration shall be conducted by 3 arbitrators and conducted in Dallas, Texas. Within 30 days of any Party providing notice to the other Parties of a Dispute, if there are two Parties or two groups of Parties to a Dispute, each Party or group of Parties to such Dispute shall appoint one arbitrator, and the 2 arbitrators so appointed shall select the third and presiding arbitrator within 30 days following appointment of the second party-appointed arbitrator. If either Party or group of Parties fails to appoint an arbitrator within the permitted time period, then the missing arbitrator(s) shall be selected by the AAA as appointing authority in accordance with the AAA Rules. In the event that there are more than two Parties or groups of Parties to an arbitration, the Parties to the arbitration shall endeavor to agree on the appointment of the three (3) arbitrators within thirty (30) days of the written request for arbitration. In the event the Parties cannot reach agreement on the selection of three (3) arbitrators within the time permitted, all arbitrators not yet appointed shall be appointed by the AAA in accordance with the AAA Rules. Any arbitrator appointed by the Party-appointed arbitrators or the AAA shall be a member of the Large, Complex Commercial Case Panel of the AAA or a member of the Center of Public Resources Panel of Distinguished Neutrals. All arbitrators shall be and remain at all times independent and impartial, and, once appointed, no arbitrator shall have any ex parte communications with any of the Parties concerning the arbitration or the underlying Dispute other than communications directly concerning the selection of the presiding arbitrator, when applicable. All arbitrators shall be qualified by education, training, or experience to resolve the Dispute. No arbitrator shall have been an employee or consultant to any Party or any of its Affiliates within the five (5) year period preceding the arbitration, or have any financial interest in the Dispute.

(d) All decisions of the arbitral tribunal shall be made by majority vote. The award of the arbitral tribunal shall be final and binding, subject only to grounds and procedures for vacating or modifying the award under the Federal Arbitration Act. Judgment on the award may be entered and enforced by any court of competent jurisdiction hereunder.

(e) Notwithstanding the agreement to arbitrate Disputes in this Section 15.2, any Party may apply to a court for interim measures pending appointment of the arbitration tribunal, including injunction, attachment, and conservation orders. The Parties agree that seeking and obtaining such court-ordered interim measures shall not waive the right to arbitration. Additionally, the arbitrators (or in an emergency the presiding arbitrator acting alone in the event one or more of the other arbitrators is unable to be involved in a timely fashion) may grant interim measures including injunctions, attachments, and conservation orders in appropriate circumstances, which measures may be immediately enforced by court order. Hearings on requests for interim measures may be held in person, by telephone or video conference, or by other means that permit the Parties to present evidence and arguments. The arbitrators may require any Party to provide appropriate security in connection with such measures.

 

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(f) The arbitral tribunal is authorized to award costs, attorneys’ fees, and expert witness fees and to allocate them among the Parties. The award may include interest, at the Default Interest Rate, from the date of any default, breach, or other accrual of a claim until the arbitral award is paid in full. The arbitrators may not award indirect, consequential, special or punitive damages. Unless otherwise directed by the arbitral tribunal, each Party shall pay its own expenses in connection with the arbitration.

(g) All negotiations, mediation, arbitration, and expert determinations relating to a Dispute (including a settlement resulting from negotiation or mediation, an arbitral award, documents exchanged or produced during a mediation or arbitration proceeding, and memorials, briefs or other documents prepared for the arbitration) are confidential and may not be disclosed by the Parties, their respective Affiliates and each of their respective employees, officers, directors, counsel, consultants, and expert witnesses, except to the extent necessary to enforce any settlement agreement, arbitration award, or expert determination, to enforce other rights of a Party, as required by law or regulation, or for a bona fide business purpose, such as disclosure to accountants, shareholders, or third-party purchasers, provided, however, that breach of this confidentiality provision shall not void any settlement, expert determination, or award.

(h) Any papers, notices, or process necessary or proper for an arbitration hereunder, or any court action in connection with an arbitration or an award, may be served on a Party in the manner set forth in Section 15.2.

Section 15.3 Expert Proceedings . For any decision referred to an expert under this Agreement, the Parties hereby agree that such decision shall be conducted expeditiously by an expert selected unanimously by the Members. The expert is not an arbitrator of the dispute and shall not be deemed to be acting in an arbitral capacity. The expert shall not (without the written consent of the Members) be appointed to act as an arbitrator or as adviser to any Member arbitrated pursuant to Section 15.2, provided that nothing in this sentence shall preclude any Member from using the expert as a witness regarding the proper conduct of the expert procedure. The Member desiring an expert determination shall give the other Members written notice of the request for such determination. If the Members are unable to agree upon an expert within ten (10) days after receipt of the written notice of request for an expert determination, then, upon the request of any of the Members, the AAA shall appoint such expert. The expert, once appointed, shall have no ex parte communications with the Members concerning the expert determination or the underlying dispute. All communications between any Member and the expert shall be conducted in writing, with copies sent simultaneously to

 

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the other Members participating in the expert proceeding in the same manner, or at a meeting to which representatives of all Members participating in the expert proceeding have been invited and of which such Members have been provided at least five (5) Business Days notice. Within thirty (30) days after the expert’s acceptance of its appointment, the Members shall provide the expert with a report containing their proposal for the resolution of the matter and the reasons therefor, accompanied by all relevant supporting information and data. Within sixty (60) days of receipt of the above-described materials and after receipt of additional information or data as may be required by the expert, the expert shall select the proposal which it finds more consistent with the terms of this Agreement. The expert may not propose alternate positions or award damages, interest or penalties to any Members with respect to any matter. The expert’s decision shall be final and binding on the Members. Any Member that fails or refuses to honor the decision of an expert shall be in default under this Agreement.

ARTICLE 16

MISCELLANEOUS

Section 16.1 Counterparts . This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all of such counterparts shall constitute for all purposes one agreement. Any signature hereto delivered by a Party by facsimile transmission shall be deemed an original signature hereto.

Section 16.2 Notices . All notices and communications required or permitted to be given hereunder (excluding notices sent to Board Members pursuant to Article 5, which notices shall be governed by Section 5.3(o) hereof) shall be sufficient in all respects if given in writing and delivered personally, or sent by bonded overnight courier, or mailed by U.S. Express Mail or by certified or registered United States Mail with all postage fully prepaid, or sent by telex or facsimile transmission (provided any such telex or facsimile transmission is confirmed either orally or by written confirmation), addressed to the appropriate Party at the address for such Party shown below or at such other address as such Party shall have theretofore designated by written notice delivered to the Party giving such notice:

 

  If to the Company:    TGGT Holdings, LLC   
     12377 Merit Drive, Suite 1700   
     Dallas, Texas 75251   
     Attention: President and General Manager   
     Telephone:                                                     
     Facsimile:                                                        
  If to BG:    BG US Gathering Company, LLC   
     5444 Westheimer, Suite 1200   
     Houston, Texas 77056   
     Attention: Jon Harris   
     Telephone: (713) 599-4000   
     Fax: (713) 599-4250   

 

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     with a copy to:   
     BG US Gathering Company, LLC   
     5444 Westheimer, Suite 1200   
     Houston, Texas 77056   
     Attention: Bill Way   
     Telephone: (713) 599-4000   
     Fax: (713) 599-4250   
     with a copy to:   
     BG US Gathering Company, LLC   
     5444 Westheimer, Suite 1200   
     Houston, Texas 77056   
     Attention: Chris Migura, Principal Counsel   
     Telephone: (713) 599-4000   
     Fax: (713) 599-4250   
  If to EOC:    EXCO Operating Company, LP   
     12377 Merit Drive, Suite 1700   
     Dallas, Texas 75251   
     Attention: Harold Hickey, Vice President and Chief   
     Operating Officer   
     Telephone: (214) 368-2084   
     Fax: (214) 368-8754   
     E-mail: hhickey@excoresources.com   
     with a copy to:   
     EXCO Operating Company, LP   
     12377 Merit Drive, Suite 1700   
     Dallas, Texas 75251   
     Attention: William L. Boeing, General Counsel   
     Telephone: (214) 368-2084   
     Facsimile: (214) 706-3409   

Any notice given in accordance herewith shall be deemed to have been given when delivered to the addressee in person, or by courier, or transmitted by facsimile transmission during normal business hours, or upon actual receipt by the addressee after such notice has either been delivered to an overnight courier or deposited in the United States Mail, as the case may be. The Parties may change the address, telephone numbers, and facsimile numbers to which such communications are to be addressed by giving written notice to the other Parties in the manner provided in this Section 16.2.

Section 16.3 Expenses . Except as otherwise specifically provided, all fees, costs and expenses incurred by the Parties in negotiating this Agreement shall be paid by the Party incurring the same, including legal and accounting fees, costs and expenses.

 

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Section 16.4 Waivers; Rights Cumulative . Any of the terms, covenants, or conditions hereof may be waived only by a written instrument executed by or on behalf of the Party waiving compliance. No course of dealing on the part of any Party, or its respective officers, employees, agents, or representatives, nor any failure by a Party to exercise any of its rights under this Agreement shall operate as a waiver thereof or affect in any way the right of such Party at a later time to enforce the performance of such provision. No waiver by any Party of any condition, or any breach of any term or covenant contained in this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or of any breach of any other term or covenant. The rights of the Parties under this Agreement shall be cumulative, and the exercise or partial exercise of any such right shall not preclude the exercise of any other right.

Section 16.5 Entire Agreement; Conflicts . THIS AGREEMENT, THE EXHIBITS HERETO, THE ASSOCIATED AGREEMENTS AND THE CONTRIBUTION AGREEMENT COLLECTIVELY CONSTITUTE THE ENTIRE AGREEMENT AMONG THE PARTIES PERTAINING TO THE SUBJECT MATTER HEREOF AND SUPERSEDE ALL PRIOR AGREEMENTS, UNDERSTANDINGS, NEGOTIATIONS, AND DISCUSSIONS, WHETHER ORAL OR WRITTEN, OF THE PARTIES PERTAINING TO THE SUBJECT MATTER OF THIS AGREEMENT. THERE ARE NO WARRANTIES, REPRESENTATIONS, OR OTHER AGREEMENTS AMONG THE PARTIES RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT EXCEPT AS SPECIFICALLY SET FORTH IN THIS AGREEMENT, AND NO PARTY SHALL BE BOUND BY OR LIABLE FOR ANY ALLEGED REPRESENTATION, PROMISE, INDUCEMENT, OR STATEMENTS OF INTENTION NOT SO SET FORTH. IN THE EVENT OF A CONFLICT BETWEEN: (A) THE TERMS AND PROVISIONS OF THIS AGREEMENT AND THE TERMS AND PROVISIONS OF ANY EXHIBIT HERETO; OR (B) THE TERMS AND PROVISIONS OF THIS AGREEMENT AND THE TERMS AND PROVISIONS OF ANY ASSOCIATED AGREEMENT, THE TERMS AND PROVISIONS OF THIS AGREEMENT SHALL GOVERN AND CONTROL, PROVIDED, HOWEVER, THAT THE INCLUSION IN ANY OF THE EXHIBITS HERETO OR ANY ASSOCIATED AGREEMENT OF TERMS AND PROVISIONS NOT ADDRESSED IN THIS AGREEMENT SHALL NOT BE DEEMED A CONFLICT, AND ALL SUCH ADDITIONAL PROVISIONS SHALL BE GIVEN FULL FORCE AND EFFECT, SUBJECT TO THE PROVISIONS OF THIS SECTION 16.5.

Section 16.6 Amendment . This Agreement may be amended only by an instrument in writing executed by all of the Parties and expressly identified as an amendment or modification.

Section 16.7 Parties in Interest . Except for Section 7.6, nothing in this Agreement shall entitle any Person other than the Parties to any claim, cause of action, remedy or right of any kind.

 

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Section 16.8 Successors and Permitted Assigns . This Agreement shall be binding upon and inure to the benefit of the Parties and their successors and permitted assigns.

Section 16.9 Confidentiality .

(a) The Parties agree that all information related to Business shall be considered confidential, shall be kept confidential and shall not be disclosed during the term of this Agreement to any Person that is not a Party, except:

(i) to an Affiliate of a Member;

(ii) to the extent such information is required to be furnished in compliance with applicable Law, or pursuant to any legal proceedings or because of any order of any Governmental Authority binding upon a Party;

(iii) to prospective or actual attorneys engaged by any Party where disclosure of such information is essential to such attorney’s work for such Party;

(iv) to prospective or actual contractors and consultants engaged by any Party where disclosure of such information is essential to such contractor’s or consultant’s work for such Party;

(v) to a bona fide prospective transferee of a Member’s Member Interest to the extent appropriate in order to allow the assessment of such Member Interest (including a Person with whom a Member and/or its Affiliates are conducting bona fide negotiations directed toward a merger, consolidation or the sale of a majority of its or an Affiliate’s shares);

(vi) to a bank or other financial institution to the extent appropriate to a Party arranging for funding;

(vii) to the extent such information must be disclosed pursuant to any rules or requirements of any stock exchange having jurisdiction over such Party or its Affiliates; provided that if any Party desires to disclose information in an annual or periodic report to its or its Affiliates’ shareholders and to the public and such disclosure is not required pursuant to any rules or requirements of any stock exchange, then such Party shall comply with Section 16.10;

(viii) to its respective employees, subject to each Party taking customary precautions to ensure such information is kept confidential; and

(ix) any information which, through no fault of a Party, becomes a part of the public domain.

 

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(b) Disclosure as pursuant to Sections 16.9(a)(iv), (v) and (vi) shall not be made unless prior to such disclosure the disclosing Party has obtained a written undertaking from the recipient to keep the information strictly confidential for the term of this Agreement and to use the information for the sole purpose described in Sections 16.9(a)(iv), (v) and (vi), whichever is applicable, with respect to the disclosing Party.

Section 16.10 Publicity .

(a) Without reasonable prior notice to the other Parties, no Party will issue, or permit any agent or Affiliate of it to issue, any press releases or otherwise make, or cause any agent or Affiliate of it to make, any public statements with respect to this Agreement, the Associated Agreements or the activities contemplated hereby or thereby, except where such release or statement is deemed in good faith by the releasing Party to be required by Law or under the rules and regulations of a recognized stock exchange on which shares of such Party or any of its Affiliates are listed, and in any case, prior to making any such press release or public statement, the releasing Party shall provide a copy of the press release or public statement to the other Parties.

(b) Notwithstanding anything to the contrary in Section 16.9 or Section 16.10(a), any Member or Affiliate of a Member may disclose information regarding Business in investor presentations, industry conference presentations or similar disclosures, provided that not less than twenty four (24) hours prior to so disclosing any such information, the releasing Member shall provide a copy of the presentation or other disclosure document containing such information to the other Parties.

(c) Notwithstanding anything to the contrary in Section 16.9 or Section 16.10(a), in the event of any emergency endangering property, lives or the environment, the Company may issue such press releases or public announcements as it deems necessary in light of the circumstances and shall promptly provide each Member with a copy of any such press release or announcement.

Section 16.11 Preparation of Agreement . All of the Company, the Members and their respective counsels participated in the preparation of this Agreement. In the event of any ambiguity in this Agreement, no presumption shall arise based on the identity of the draftsman of this Agreement.

Section 16.12 Conduct of the Parties; Business Principles .

(a) Each Party warrants that it and its Affiliates have not made, offered, or authorized and agrees that it will not make, offer, or authorize with respect to the matters which are the subject of this Agreement, any payment, gift, promise or other advantage, whether directly or through any other Person, to or for the use or benefit of any public official (being any person holding a

 

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legislative, administrative or judicial office, including any person employed by or acting on behalf of a public agency, a public enterprise or public international organization) or any political party or political party official or candidate for office, where such payment, gift, promise or advantage would violate any applicable Law.

(b) Prior to the Closing Date, each Member provided the others with a copy of its business principles governing its general conduct of operations and business dealings, and each Member acknowledges receipt and awareness of the other Members’ business principles. Within one hundred twenty (120) days from the Closing Date, the Members agree to use reasonable efforts to meet and agree a common set of general principles for the Company governing the conduct of the Business.

Section 16.13 Severability . If any term or other provision of this Agreement is invalid, illegal, or incapable of being enforced by any rule of Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any adverse manner to any Party. Upon such determination that any term or other provision is invalid, illegal, or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible.

Section 16.14 Non-Compensatory Damages . None of the Parties shall be entitled to recover from any other Party, or such Party’s respective Affiliates, any indirect, consequential, punitive or exemplary damages or damages for lost profits of any kind arising under or in connection with this Agreement, the Associated Agreements or the transactions contemplated hereby or thereby, except to the extent any such Party suffers such damages (including costs of defense and reasonable attorney’s fees incurred in connection with defending of such damages) to a third party, which damages (including costs of defense and reasonable attorney’s fees incurred in connection with defending against such damages) shall not be excluded by this provision as to recovery hereunder. Subject to the preceding sentence, each Party, on behalf of itself and each of its Affiliates, waives any right to recover punitive, special, exemplary and consequential damages, including damages for lost profits, arising in connection with or with respect to this Agreement, the Associated Agreements or the transactions contemplated hereby or thereby.

Section 16.15 Waiver of Partition of Company Property . Each Member hereby irrevocably waives during the term of the Company any right that it may have to maintain any action for partition with respect to any Assets.

Section 16.16 Interpretation . All references in this Agreement to Exhibits, Appendices, Articles, Sections, subsections and other subdivisions refer to the corresponding Exhibits, Appendices, Articles, Sections, subsections and other subdivisions of or to this Agreement unless expressly provided otherwise. Titles

 

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appearing at the beginning of any Articles, Sections, subsections and other subdivisions of this Agreement are for convenience only, do not constitute any part of this Agreement, and shall be disregarded in construing the language hereof. The words “this Agreement,” “herein,” “hereby,” “hereunder” and “hereof,” and words of similar import, refer to this Agreement as a whole and not to any particular Article, Section, subsection or other subdivision unless expressly so limited. The words “this Article,” “this Section,” and “this subsection,” and words of similar import, refer only to Article, Section or subsection hereof in which such words occur. The word “including” (in its various forms) means including without limitation. All references to “$” or “dollars” shall be deemed references to United States dollars. Each accounting term not defined herein will have the meaning given to it under GAAP as interpreted as of the date of this Agreement. Pronouns in masculine, feminine or neuter genders shall be construed to state and include any other gender, and words, terms and titles (including terms defined herein) in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires. Appendices and Exhibits referred to herein are attached to and by this reference incorporated herein for all purposes. References to any Law or agreement shall mean such Law or agreement as it may be amended from time to time.

Section 16.17 Intellectual Property . All intellectual property rights in all designs, models, drawings, prints, samples, transparencies, specifications, reports, manuscripts, working notes, documentation, manuals, photographs, negatives, tapes, discs, software, computer files or any other similar items and any inventions (collectively, “ IP ”) of the Company Group Members, including those created by or with the assistance of a secondee or which are wholly or in part based on or derived from information arising from the performance of services by a secondee, shall remain vested exclusively in the Company Group Members. The Company shall disclose to the Members any such IP upon request, and the Company for itself and on behalf of the other Company Group Members hereby grants a non-exclusive, irrevocable, royalty free license to the Members and their Affiliates to use, copy or modify such IP.

 

83


IN WITNESS WHEREOF, the Parties have executed this Agreement by their duly authorized representatives on and as of the Closing Date.

 

TGGT HOLDINGS, LLC
By:  

/s/ MARK HUTCHISON

Name:   Mark Hutchison
Title:   Vice President of Engineering and Construction
BG US GATHERING COMPANY, LLC
By:  

/s/ ELIZABETH SPOMER

Name:   Elizabeth Spomer
Title:   Vice President
EXCO OPERATING COMPANY, LP
By:  

/s/ R. L. HODGES

Name:   R. L. Hodges
Title:   Vice President

 

84


A TTACHED   TO   AND   MADE   PART   OF   THE  A MENDED   AND   R ESTATED  L IMITED  L IABILITY  C OMPANY

A GREEMENT   OF  TGGT H OLDINGS , LLC

APPENDIX I

DEFINITIONS

AAA ” has the meaning set forth in Section 15.2(b).

AAA Rules ” has the meaning set forth in Section 15.2(b).

Acquired Business ” has the meaning set forth in Section 13.1(a).

Acquired Member ” has the meaning set forth in Section 12.2(a).

Acquiring Member ” has the meaning set forth in Section 13.1(a).

Acquiror ” has the meaning set forth in Section 12.2(a).

Adjusted Capital Account Balance ” means with respect to any Member, the balance in such Member’s Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments:

(a) credit to such Capital Account any amounts which such Member is obligated to restore, because of a promissory note to the Company or otherwise pursuant to Section 1.704-1(b)(2)(ii)(c) of the Treasury Regulations, or is deemed to be obligated to restore pursuant to the penultimate sentence in each of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Treasury Regulations, after taking into account thereunder any changes during such year in “partnership minimum gain” (within the meaning of Section 1.704-2(b) of the Treasury Regulations) and in “partner nonrecourse debt minimum gain” (within the meaning of Section 1.704-2(i) of the Treasury Regulations); and

(b) debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4); 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6) of the Treasury Regulations.

This definition of Adjusted Capital Account Balance is intended to comply with the “alternative economic effect” test of Section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations and shall be interpreted consistently therewith.

Affected Member ” means any non-defaulting Member in connection with a situation where a Defaulting Member has failed to pay an amount owed under the terms of this Agreement at the time in question.

Affiliate ” means, with respect to any Person, a Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such Person.

Affiliate Contract ” means any contract between a Company Group Member and any Member or Affiliate of a Member.

 

Appendix I-1


Affiliated Member Group ” means any group of Members that are Affiliates of each other.

Agreement ” has the meaning set forth in the Preamble.

Annual Financial Statements ” has the meaning set forth in Section 8.4(a).

Annual Work Program and Budget ” means, for any Calendar Year, the work program and budget for Business during such Calendar Year.

Article 13 Contract ” means any contract entered into by any Company Group Member pursuant to Section 13.2(b), 13.5(a) or 13.5(b).

Asset Expansion ” means the construction, installation and commissioning of any new Asset.

Asset Upgrade ” means, with respect to any physical Asset, any physical enhancement or series of physical enhancements, including any such physical enhancements that would increase the throughput capacity (including by adding additional compression), of or to any existing portion of such Asset.

Assets ” means the Company Group Members’ right, title and interest from time to time in all items of economic value owned or leased by any of the Company Group Members, including real property, equipment and other tangible personal property, and contracts, data and records, and other intangible personal property.

Associated Agreements ” means, collectively all agreements entered into by all Members and any third parties in furtherance of the conduct of the Business, and “ Associated Agreement ” means any of them.

Assumed Tax Liability ” has the meaning set forth in Section 4.5(d)(i).

Assumption Agreement ” has the meaning set forth in Section 10.2(a).

Available Cash ” means, as of any time, all cash and cash equivalents of the Company on hand as of such time less the amount of cash reserves equal to the forthcoming three (3) full Calendar Months of expenditures as authorized in that portion of the then-current approved Annual Work Program and Budget, provided that, if as of any time, there is not an approved Annual Work Program and Budget, “ Available Cash ” means the amount of cash reserves equal to the expenditures authorized in the most recently approved Annual Work Program and Budget for the last three (3) full Calendar Months of such Annual Work Program and Budget.

Bankruptcy ” of a Person means: (a) the filing by a Person of a voluntary petition seeking liquidation, reorganization, arrangement or readjustment, in any form, of its debts under the U.S. Bankruptcy Code (or corresponding provisions of future Laws) or any other insolvency Law, or a Person’s filing an answer consenting to or acquiescing in any

 

Appendix I-2


such petition; (b) the making by a Person of any assignment for the benefit of its creditors or the admission by a Person of its inability to pay its debts as they mature; or (c) the expiration of sixty (60) days after the filing of an involuntary petition under the U.S. Bankruptcy Code (or corresponding provisions of future Laws) seeking an application for the appointment of a receiver for the assets of a Person, or an involuntary petition seeking liquidation, reorganization, arrangement or readjustment of its debts under any other insolvency Law, unless the same shall have been vacated, set aside or stayed within such sixty (60) day period.

BG ” means BG US Gathering Company, LLC, a limited liability company organized and existing under the Laws of Delaware.

BG Affiliate Group ” means the Affiliated Member Group that includes BG or any Affiliate of BG.

Board Member ” has the meaning set forth in Section 5.1(a).

Business ” means Midstream Activities conducted by any of the Company Group Members.

Business Day ” means a day (other than a Saturday or Sunday) on which commercial banks in Texas are generally open for business, provided that if Business Days are used to calculate periods in which a Member must make a payment hereunder, “ Business Day ” means a day (other than a Saturday or Sunday) on which commercial banks in Texas and London are generally open for business.

Calendar Month ” means any of the months of the Gregorian calendar.

Calendar Quarter ” means a period of three (3) consecutive Calendar Months commencing on the first day of January, the first day of April, the first day of July and the first day of October in any Calendar Year.

Calendar Year ” means a period of twelve (12) consecutive Calendar Months commencing on the first day of January and ending on the following 31st day of December, according to the Gregorian calendar.

Call Notice ” means any call notice issued by the President and General Manager to fund additional contributions required pursuant to Section 3.2.

Capital Account ” has the meaning set forth in Section 3.8(a).

Cash Transfer ” means any Transfer of Member Interest where the sole consideration (other than the assumption of obligations relating to the transferred Member Interest) takes the form of cash, cash equivalents, promissory notes or retained interests (such as production payments) in the Member Interest being transferred.

 

Appendix I-3


Cash Value ” means the market value (expressed in U.S. dollars) of all or a portion of a Member Interest subject to the proposed Transfer or Change in Control, based upon the amount that a willing buyer would pay a willing seller in an arm’s length transaction.

Certificate ” has the meaning set forth in the Recitals.

Change in Control ” means any direct or indirect change in Control of a Member (whether through merger, sale of shares or other equity interests, or otherwise), through a single transaction or series of related transactions, from one or more transferors to one or more transferees; provided, however, that for purposes hereof, a “ Change in Control ” shall not include a change in Control of a Member: (a) resulting from a management-lead buyout of the public share ownership of such Member and conversion of such Member to a privately-held company, (b) resulting in ongoing control by a Wholly-Owned Affiliate that is wholly-owned by the ultimate parent company of such Member, or (c) created by a change in Control of the ultimate parent company of such Member. For the avoidance of doubt, as of the Closing Date, the ultimate parent company of BG is BG Group plc, a public limited company organized and existing under the Laws of England and Wales, and the ultimate parent company of EOC is EXCO Resources, Inc., a corporation organized and existing under the Laws of Texas.

Claims ” mean any and all claims, causes of actions, payments, charges, judgments, assessments, liabilities, losses, damages, penalties, fines or costs and expenses, including any reasonable fees of attorneys, experts, consultants, accountants and other representatives and legal or other expenses incurred in connection therewith and including liabilities, costs, losses and damages for personal injury, illness or death, property damage, contract claims, torts or otherwise.

Closing Date ” has the meaning set forth in the Preamble.

Code ” means the Internal Revenue Code of 1986, as amended, and any successor statute.

Company ” has the meaning set forth in the Preamble.

Company Group Commercial Contract ” means any contract entered into by a Company Group Member pursuant to which a Company Group Member will provide transportation, gathering, treatment, processing or compression services to a Third Party, or any contract pursuant to which a Company Group Member will purchase or sell gas, liquids or other hydrocarbons. For the avoidance of doubt, no Article 13 Contract shall be a Company Group Commercial Contract.

Company Group Contract ” means any contract entered into by a Company Group Member or to which a Company Group Member is a party.

Company Group Members ” means, together, the Company and all Subsidiaries, and “ Company Group Member ” means any of them.

 

Appendix I-4


Company Group O&M Contract ” means any contract entered into by a Company Group Member pursuant to which services, supplies, materials or equipment will be provided to a Company Group Member by a contractor, supplier or other vendor, provided that the Services Agreements shall not be Company Group O&M Contracts.

Conflicted Member ” has the meaning set forth in Section 5.3(b).

Contribution Agreement ” has the meaning set forth in the Recitals.

Control ” and its derivatives with respect to any Person means the possession, directly or indirectly, of the power to exercise or determine the voting of more than fifty percent (50%) of the voting rights in a corporation, and, in the case of any other type of entity, the right to exercise or determine the voting of more than fifty percent (50%) of the equity interests having voting rights, or otherwise to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.

Covered Person ” means, in each case, whether or not a Person continues to have the applicable status referred to in the following list: a Member; any Affiliate of a Member; a Board Member; any officer of any Company Group Member, whether or not such officer is an employee of any Company Group Member; any officer, director, member, manager, stockholder, partner, employee, representative or agent of any Member, or of any of their respective Affiliates; any employee or agent of any Company Group Member or its Affiliates; and any Tax Member.

Credit Facility Encumbrance ” means Encumbrances created pursuant to any material borrowing arrangement entered into by any Member and/or its Affiliates with a Third Party that is not an Affiliate of such Member or its Affiliates, as such arrangement may be amended, modified, supplemented or replaced from time to time.

Credit Facility Foreclosure ” means any foreclosure upon the interests of a Member and its Affiliates in the Member Interests pursuant to a Credit Facility Encumbrance of such Member and any related security agreements.

Credit Facility Lender ” means any Third Party of which the Company and the other Members have been notified in writing by either a Member or such Third Party that such Third Party has rights with respect to a Member’s Member Interest under any Credit Facility Encumbrance.

Default Interest Rate ” means the three month London Inter-Bank Offer Rate (as published in the “Money Rates” table of the Wall Street Journal , eastern edition) plus an additional five percentage points (5.00%) applicable on the first Business Day prior to the due date of payment and thereafter on the first Business Day of each succeeding Calendar Month (or, if such rate is contrary to any applicable usury Law, the maximum rate permitted by such applicable Law).

Default Notice ” has the meaning set forth in Section 3.5(a).

 

Appendix I-5


Default Period ” has the meaning set forth in Section 3.5(b).

Defaulting Member ” has the meaning set forth in Section 3.5(a).

Delaware Act ” means the Delaware Limited Liability Company Act, Del. Code Ann. Tit. 6, §§18-101, et. seq .

Depreciation ” means, for each Fiscal Year or other period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an Asset for such year or other period, except that if the Gross Asset Value of an Asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, except as required by Section 1.704-3(d) of the Treasury Regulations, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Tax Member. Notwithstanding the foregoing, if the Company uses the remedial method pursuant to Section 1.704-3(d) of the Treasury Regulations with respect to one or more of the Company Group Member’s Assets, Depreciation with respect to such Assets shall not be determined in accordance with the preceding sentence of this definition, but shall instead be determined in a manner consistent with tax capital accounting principles and consistent with the treatment of such assets under the remedial method, as determined by the Tax Member in consultation with the Company’s tax advisors.

Development Work Program ” has the meaning set forth in Section 6.1(a).

Dispute ” means any dispute, controversy, or claim (of any and every kind or type, whether based on contract, tort, statute, regulation, or otherwise) arising out of, relating to, or connected with this Agreement, or the transactions contemplated hereby, including any dispute, controversy or claim concerning the existence, validity, interpretation, performance, breach, or termination of this Agreement or the relationship of the Parties arising out of this Agreement or the transactions contemplated hereby.

East Texas/North Louisiana Area ” means the lands (and subsurface) included in those Texas counties and Louisiana parishes identified in Exhibit “K” attached hereto, provided that the East Texas/North Louisiana Area shall not include those areas included within the description of the excluded fields on Exhibit “K” attached hereto.

Electing Members ” has the meaning set forth in Section 13.1(d).

Emergency Expenditures ” means expenditures which are reasonably necessary to be expended in order to mitigate or remedy the endangerment of the health or safety of any Person or the environment.

 

Appendix I-6


Encumbrance ” means a mortgage, lien, pledge, charge or other encumbrance.

Encumber ” and other derivatives shall be construed accordingly.

Enforcement Activities ” has the meaning set forth in Section 5.3(b).

EOC ” means EXCO Operating Company, LP, a limited partnership organized and existing under the Laws of Delaware.

EOC Affiliate Group ” means the Affiliated Member Group which includes EOC or any Affiliate of EOC.

FERC ” has the meaning set forth in Section 1.10(a)(ix).

Final Cash Amount ” has the meaning provided in the Contribution Agreement.

Fiscal Year ” means the Company’s taxable year.

GAAP ” means United States generally accepted accounting principles.

Governmental Authority ” means any federal, state, local, municipal, tribal or other government; any governmental, regulatory or administrative agency, commission, body or other authority exercising or entitle to exercise any administrative, executive, judicial, legislative, regulatory or taxing authority or power; and any court or governmental tribunal, including any tribal authority having or asserting jurisdiction.

Gross Asset Value ” means with respect to any Asset, the Asset’s adjusted basis for federal income tax purposes, except as follows:

(a) the initial Gross Asset Value of any non-cash Asset contributed by a Member to the Company shall be the gross fair market value of such Asset on the date of contribution, as mutually agreed by the Members;

(b) the Gross Asset Values of all Assets shall be adjusted to equal their respective gross fair market values (taking into account Section 7701(g) of the Code), as reasonably determined by the Tax Member at each of the following times:

(i) the acquisition of an additional Member Interest in the Company by any new or existing Member in connection with a contribution of cash or property other than a de minimis amount (within the meaning of Section 1.704-1(b)(2)(iv)(f) of the Treasury Regulations);

(ii) the distribution by the Company to a Member of more than a de minimis amount of Company Group Member property as consideration for a Member Interest in the Company (within the meaning of Section 1.704-1(b)(2)(iv)(f) of the Treasury Regulations);

 

Appendix I-7


(iii) the grant of a Member Interest in the Company (other than a de minimis Member Interest) as consideration for the provision of services to or for the benefit of the Company Group Members by any new or existing Member (within the meaning of Section 1.704-1(b)(2)(iv)(f) of the Treasury Regulations); and

(iv) the liquidation of the Company within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Treasury Regulations;

provided, however, that the adjustments pursuant to clauses (i), (ii) and (iii) above shall be made only if the Tax Member reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company;

(c) the Gross Asset Value of any non-cash Asset distributed to any Member shall be the gross fair market value of such non-cash Asset on the date of distribution as reasonably determined by the Tax Member;

(d) the Gross Asset Values of Assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such Assets pursuant to Sections 734(b) or 743(b) of the Code, but only to the extent that such adjustments are taken into account in determining the Capital Accounts pursuant to Section 1.704-1(b)(2)(iv)(m) of the Treasury Regulations, and subsection (g) under the definition of Net Profits and Net Losses below; provided, however, that Gross Asset Values shall not be adjusted pursuant to this subsection to the extent that the Tax Member reasonably determines that an adjustment pursuant to subsection (b) of this definition is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this subsection; and

(e) if the Gross Asset Value of an Asset has been determined or adjusted pursuant to clause (a), (b) or (d) of this definition, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Net Profits and Net Losses.

Group ” has the meaning set forth in Section 5.1(a).

HSSE ” means Health, Safety, Security and Environmental.

HSSE Management System ” has the meaning set forth in Section 5.11(d).

HSSE Plan ” has the meaning set forth in Section 5.11(c).

HSSE Principles ” has the meaning set forth in Section 5.11(b).

Interest Reduction Notice ” has the meaning set forth in Section 3.7(a).

 

Appendix I-8


Interest Reduction Notice Delivery Date ” has the meaning set forth in Section 3.7(a).

Interested Non-Proposing Members ” has the meaning set forth in Section 13.2(d).

Initial Contributions ” has the meaning set forth in Section 3.1.

Initial Election Period ” has the meaning set forth in Section 13.2(a).

Initial Three Year Period ” has the meaning set forth in Section 11.1.

IP ” has the meaning set forth in Section 16.17.

Joint Development Agreement ” means that certain Joint Development Agreement by and among BG US Production Company, LLC, EOC and EXCO Production Company, LP, dated as of the Closing Date.

Laws ” means any constitution, decree, resolution, law, statute, act, ordinance, rule, directive, order, treaty, code or regulation and any injunction or final non-appealable judgment or any interpretation of the foregoing, as enacted, issued or promulgated by any Governmental Authority.

Liquidating Trustee ” has the meaning set forth in Section 14.3(a).

Management Board ” means the board created pursuant to Section 5.1(a).

Member Indemnitor ” has the meaning set forth in Section 7.6.

Member Interest ” means the entire right, title and interest of a Member in the Company at any particular time to any and all voting rights, distributions, and other benefits to which such Member may be entitled as provided in this Agreement, together with the obligations of such Member to comply with all the terms and provisions of this Agreement. Such interest shall be expressed as a percentage.

Member Loan ” means a loan made by a Member to the Company pursuant to Section 3.4.

Member Gathering Agreement ” has the meaning set forth in Section 13.2(b).

Member Requested Services ” has the meaning set forth in Section 13.2(a).

Midstream Activities ” means the ownership, operation, maintenance, expansion, construction, commissioning and decommissioning of, and acquisition of, gathering systems, pipelines and treatment and processing facilities in the East Texas/North Louisiana Area, marketing of capacity on such gathering systems, buying and selling gas and condensate in connection therewith, and the provision of compression services in connection therewith.

 

Appendix I-9


Midstream Asset ” means any gathering system, pipeline, processing or treatment facility, or related asset located in the East Texas/North Louisiana Area.

Monthly Financial Reports ” has the meaning set forth in Section 8.4(c).

Monthly Operating Reports ” has the meaning set forth in Section 8.4(d).

Net Profits ” or “ Net Losses ” means, for any Fiscal Year, an amount equal to the Company’s taxable income or taxable loss for such Fiscal Year, as determined under Section 703(a) of the Code (including all items required to be separately stated under Section 703(a)(1) of the Code) and Section 1.703-1 of the Treasury Regulations, but with the following adjustments:

(a) any tax-exempt income, as described in Section 705(a)(1)(B) of the Code, realized by the Company and not otherwise taken into account in this subsection shall be added to such taxable income or taxable loss;

(b) any expenditures of the Company described in Section 705(a)(2)(B) of the Code for such Fiscal Year or treated as being so described in Section 1.704-1(b)(2)(iv)(i) of the Treasury Regulations and not otherwise taken into account in this subsection shall be subtracted from such taxable income or taxable loss;

(c) in the event the Gross Asset Value of any Asset is adjusted pursuant to clauses (b) or (c) of the definition of “Gross Asset Value,” the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Net Profit or Net Loss;

(d) any item of income, gain, loss or deduction that is required to be specially allocated to a Member under this Agreement, including Section 4.2, 4.3 or 4.4, shall not be taken into account in computing such taxable income or taxable loss;

(e) the amount of any gain or loss required to be recognized by the Company during such Fiscal Year by reason of a sale or other disposition of any Asset, shall be computed as if the Company’s adjusted basis in such Asset for income tax purposes were equal to the Gross Asset Value of the Asset disposed of, notwithstanding that the adjusted tax basis of such Asset differs from its Gross Asset Value;

(f) in lieu of depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for the Fiscal Year or other applicable period; and

(g) to the extent an adjustment to the adjusted tax basis of any Asset pursuant to Section 734(b) or Section 743(b) of the Code is required pursuant to

 

Appendix I-10


Section 1.704-1(b)(2)(iv)(m) of the Treasury Regulations in determining Capital Accounts, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the Asset and shall be taken into account for purposes of computing such taxable income or taxable loss.

If the Company’s taxable income or taxable loss for such Fiscal Year, as adjusted in the manner provided above in clauses (a) through (g) above, is (i) a positive amount, such amount shall be the Net Profits for such Fiscal Year or (ii) a negative amount, such amount shall be the Net Losses for such Fiscal Year.

New Business ” means any Midstream Activity that is not then included in any Annual Work Program and Budget, other than any Acquired Business, any Member Requested Services, any buying and selling of gas and condensate or any activity contemplated in any Article 13 Contract.

New Business Annual Work Program and Budget ” has the meaning set forth in Section 13.2(d).

Non-Acquiring Member ” has the meaning set forth in Section 13.1(a).

Non-Proposing Member ” has the meaning set forth in Section 13.2(a).

Offer Notice ” has the meaning set forth in Section 13.1(a).

Offered Interest ” has the meaning set forth in Section 13.1(a).

Operating Expenses ” means costs and expenses reasonably necessary to continue operating and maintaining the Assets in a manner consistent with past practices, industry standards, the standards set forth in Section 5.11 and applicable Law.

Option Period ” has the meaning set forth in Section 13.1(a).

Original Agreement ” has the meaning set forth in the Recitals.

Other Material Company Group Contract ” means (a) any Company Group Commercial Contract not authorized Section 5.1(c)(ii); and (b) any material Company Group Contract that is not a Company Group Commercial Contract, Company Group O&M Contract, an Affiliate Contract or an Article 13 Contract.

Other Members ” has the meaning set forth in Section 12.2(a).

Participating Member ” has the meaning set forth in Section 13.2(d).

Parties ” means, collectively, all of the Members and the Company, and “ Party ” means any of them.

 

Appendix I-11


Person ” means any individual, corporation, company, partnership, limited partnership, limited liability company, trust, estate, Governmental Authority or any other entity.

President and General Manager ” means the manager whose rights, obligations and duties are described in Section 5.9(b)(i).

Proposing Member ” has the meaning set forth in Section 13.2(a).

Purchase Agreement ” has the meaning set forth in the Recitals.

Quarterly Financial Statements ” has the meaning set forth in Section 8.4(b).

Quarterly Forecasts ” has the meaning set forth in Section 8.4(e).

Reduced Member Interest ” has the meaning set forth in Section 3.7(b).

Regulatory Allocations ” has the meaning set forth in Section 4.3.

Requesting Members ” has the meaning set forth in Section 13.2(a).

Required Asset Upgrade ” means any Asset Upgrade that is necessary: (i) in order for the conduct of Business to comply with applicable Laws; (ii) to ensure that the Company Group Members will be able to comply with the standards identified in Section 5.11, including the HSSE Principles, the HSSE Plan or the HSSE Management System; or (iii) in order for the Company Group Members to fulfill their required obligations under any material Company Group Commercial Contract.

Secondment Agreement ” means each Secondment Agreement entered into by the Members and the Company as of the Closing Date in the form of Exhibit “C” attached hereto.

Securities Act ” means the Securities Act of 1933 and the rules and regulations promulgated thereunder.

Selling Party ” has the meaning set forth in Section 13.1(a).

Services Agreements ” means the agreements entered into by the Company on the Closing Date pursuant to Section 5.10, and the agreements entered into by the Company pursuant to Section 10.2(b), and “ Services Agreement ” means any of them.

Standards of Conduct ” has the meaning set forth in Section 1.10(a)(ix).

Subsidiary ” means any Person that is wholly-owned, directly or indirectly, by the Company.

Talco ” means Talco Midstream Assets, Ltd., a limited partnership organized and existing under Texas Law.

 

Appendix I-12


Tax Distribution ” has the meaning set forth in Section 4.5(d)(i).

Tax Distribution Date ” has the meaning set forth in Section 4.5(d)(i).

Tax Estimate Report ” has the meaning set forth in Section 8.4(f).

Tax Member ” has the meaning set forth in Section 9.3.

TGG ” means TGG Pipeline, Ltd., a limited partnership organized and existing under Texas Law.

Third Party ” means any Person that is not a Member or an Affiliate of a Member.

Total Amount in Default ” means, as of any time, and with respect to any Defaulting Member, the following amounts: (a) the amounts that the Defaulting Member has failed to pay under the terms of this Agreement; and (b) any interest at the Default Interest Rate accrued on the amount under (a) from the date this amount is due by the Defaulting Member until paid in full by the Defaulting Member.

Total Votes ” has the meaning set forth in Section 5.3(a).

Transfer ” means any sale, assignment, or other disposition by a Member of all or any part of its Member Interest excluding (a) any disposition resulting from a direct or indirect Change in Control of a Member, or a change in Control created by a change in Control of the ultimate parent company of such Member, (b) any disposition resulting from a Credit Facility Foreclosure, and (c) any Encumbrance.

Treasury Regulations ” means the regulations promulgated by the United States Department of the Treasury pursuant to and in respect of provisions of the Internal Revenue Code of 1986, as amended. All references herein to sections of the Treasury Regulations shall include any corresponding provision or provisions of succeeding, similar, substitute, proposed or final Treasury Regulations.

Vice President of Finance and Business Services ” means the vice president whose rights, obligations and duties are described in Section 5.9(b)(vi).

Vice President of Asset Integrity ” means the manager whose rights, obligations and duties are described in Section 5.9(b)(vii).

Vice President of Commercial Operations and Business Development ” means the vice president whose rights, obligations and duties are described in Section 5.9(b)(ii).

Vice President of Engineering and Construction ” means the vice president whose rights, obligations and duties are described in Section 5.9(b)(iii).

Vice President of HSSE ” means the vice president whose rights, obligations and duties are described in Section 5.9(b)(v).

 

Appendix I-13


Vice President of Operations and Maintenance ” means the vice president whose rights, obligations and duties are described in Section 5.9(b)(iv).

Wholly-Owned Affiliate ” means, with respect to any Party, an Affiliate of such Party that is wholly owned, directly or indirectly by the ultimate parent of such Party.

 

Appendix I-14


A TTACHED TO AND MADE PART OF THE A MENDED AND R ESTATED L IMITED L IABILITY C OMPANY

A GREEMENT OF TGGT H OLDINGS , LLC

 

5.13-1

Exhibit 99.1

EXCO RESOURCES, INC. ANNOUNCES CLOSING OF SALE OF CERTAIN

MID-CONTINENT AND EAST TEXAS PRODUCING ASSETS

DALLAS, TEXAS, August 11, 2009…EXCO Resources, Inc. (NYSE: XCO) (“EXCO”) announced today it has closed the sale to an affiliate of Encore Acquisition Company (NYSE: EAC) (“Encore”) of its Norge Marchand Unit in Grady County, Oklahoma, other selected Oklahoma, Kansas and Texas Panhandle assets, and its Gladewater Field and Overton Field assets in Gregg, Upshur and Smith Counties, Texas for $356.1 million in cash which was received at closing. The effective date of the sale was April 1, 2009.

As of December 31, 2008, the properties included estimated proved reserves of 4.7 million barrels of oil (Mmbbls) and 148 billion cubic feet (Bcf) of natural gas, or 176 billion cubic feet of natural gas equivalent (Bcfe), based on year-end 2008 SEC pricing. Current net production includes 1,194 barrels of oil per day and 28.8 million cubic feet per day of natural gas, or 36.0 million cubic feet of natural gas equivalent per day. The sale includes approximately 66,700 net acres, of which approximately 7,000 acres are undeveloped, and also includes gathering systems and compression attributable to certain of the assets.

The proceeds from the sale were applied to repay a portion of EXCO’s credit facilities.

EXCO Resources, Inc. is an oil and natural gas exploration, exploitation, development and production company headquartered in Dallas, Texas with principal operations in East Texas, North Louisiana, Appalachia, West Texas and the Mid-Continent.

Additional information about EXCO Resources, Inc. may be obtained by contacting EXCO’s Chairman, Douglas H. Miller, or its President, Stephen F. Smith, at EXCO’s headquarters, 12377 Merit Drive, Suite 1700, Dallas, TX 75251, telephone number (214) 368-2084, or by visiting EXCO’s website at www.excoresources.com . EXCO’s SEC filings and press releases can be found under the Investor Relations tab.

###

This release may contain forward-looking statements relating to future financial results, business expectations and business transactions. Business plans may change as circumstances warrant. Actual results may differ materially from those predicted as a result of factors over which EXCO has no control. Such factors include, but are not limited to: acquisitions, recruiting and new business solicitation efforts, estimates of reserves, commodity price changes, the extent to which EXCO is successful in integrating recently acquired businesses, regulatory changes and general economic conditions. These risk factors and additional information are included in EXCO’s reports on file with the Securities and Exchange Commission. EXCO undertakes no obligation to publicly update or revise any forward-looking statements.

Exhibit 99.2

 

LOGO   

EXCO Resources, Inc.

12377 Merit Drive, Suite 1700, Dallas, Texas 75251

(214) 368-2084            FAX (214) 368-2087

 

  
  

EXCO RESOURCES, INC. ANNOUNCES CLOSING OF ITS JOINT

DEVELOPMENT TRANSACTIONS WITH BG GROUP plc

IN EAST TEXAS/NORTH LOUISIANA

DALLAS, TEXAS, August 14, 2009…EXCO Resources, Inc. (NYSE:XCO) (“EXCO”) today announced that it has closed its transactions with BG Group plc (LSE:BG.L) (“BG Group”) for the joint development and operation of EXCO’s Haynesville shale and certain other related natural gas assets located in East Texas/North Louisiana and the joint development and operation of EXCO’s midstream assets in the same area.

EXCO sold BG Group a 50% interest in its producing and nonproducing assets in a large area of mutual interest (“AMI”) which encompasses most of EXCO’s holdings in East Texas/North Louisiana, excluding the Vernon Field in Jackson Parish, Louisiana and the Redland Field in Bossier and Webster Parishes, Louisiana. The parties will jointly develop the Haynesville, Bossier and other deep horizons as well as the Cotton Valley, Hosston and other shallow horizons. EXCO will continue serving as operator of the joint development subject to oversight from a Joint Development Operating Committee.

EXCO and BG Group will each own 50% of the acreage, production and reserves within the AMI. The existing assets within the AMI include approximately 120,000 net acres with approximately 65,000 net acres in East Texas and 55,000 net acres in Louisiana. Approximately 84,000 net acres are prospective for Haynesville shale development, and most of this acreage is in the core Haynesville shale areas of DeSoto and Caddo Parishes in Louisiana and Harrison County, Texas. Also included is net production of approximately 93 Mmcfe/d from the Cotton Valley and other shallower horizons and approximately 88 Mmcf/d from the Haynesville shale. As of December 31, 2008, the Cotton Valley and other shallow rights included approximately 414 Bcfe of net proved reserves and approximately 445 Bcfe of net probable and possible reserves, based on year-end SEC pricing. The Haynesville/Bossier shale acreage is under development and EXCO estimates that its current acreage position, most of which is held by shallow production, includes over 1,600 undrilled Haynesville locations containing net potential reserves of 4 to 6 Tcfe, with significant additional potential in the Bossier shale. EXCO and BG Group plan an aggressive development program, particularly in the Haynesville shale, for the remainder of 2009 and in future years.

EXCO received $727.0 million in cash at closing pursuant to the upstream joint development transaction, including closing adjustments. In addition, BG Group has agreed to fund $400 million of capital development on EXCO’s behalf, with BG Group paying 75% of EXCO’s drilling and completion costs on the deep rights until the $400 million commitment is satisfied. The drilling and completion cost commitment is expected to be satisfied in 2011 or 2012. EXCO and BG Group will share equally in additional leasehold and asset acquisition opportunities within the AMI.


EXCO also closed the sale to BG Group of a 50% interest in a newly formed company that will hold the East Texas/North Louisiana midstream assets, exclusive of the Vernon Field midstream assets. EXCO received a special distribution of $269.2 million at closing, including closing adjustments. In concert with the planned Haynesville shale development, there will be an effort to develop and grow the midstream business. EXCO currently owns in excess of 700 miles of pipeline and gathering assets in the area and is constructing a 29 mile, 36” diameter header system to transport its Haynesville gas production. Throughput in the midstream business to be contributed to the joint venture is approximately 482 Mmcf/d of which 51% is EXCO gas and 49% is third party gas.

The total cash proceeds to EXCO of $996.2 million from the transactions are being applied to repay EXCO Operating Company, LP’s $300 million Senior Unsecured Term Loan with the remainder applied to the outstanding balances under EXCO’s credit facilities.

Douglas H. Miller, EXCO’s Chief Executive Officer, commented, “We are very pleased with our joint development transactions with BG Group and expect outstanding growth in our upstream and midstream businesses in the East Texas/North Louisiana area. BG Group will be an excellent partner and we look forward to a long and successful relationship.”

EXCO was advised by Goldman, Sachs & Co. in these transactions.

EXCO Resources, Inc. is an oil and natural gas exploration, exploitation, development and production company headquartered in Dallas, Texas with principal operations in East Texas, North Louisiana, Appalachia, West Texas and the Mid-Continent.

Additional information about EXCO Resources, Inc. may be obtained by contacting EXCO’s Chairman, Douglas H. Miller, or its President, Stephen F. Smith, at EXCO’s headquarters, 12377 Merit Drive, Suite 1700, Dallas, TX 75251, telephone number (214) 368-2084, or by visiting EXCO’s website at www.excoresources.com . EXCO’s SEC filings and press releases can be found under the Investor Relations tab.

###

This release may contain forward-looking statements relating to future financial results, business expectations and business transactions. Business plans may change as circumstances warrant. Actual results may differ materially from those predicted as a result of factors over which EXCO has no control. Such factors include, but are not limited to: estimates of reserves, commodity price changes, regulatory changes and general economic conditions. These risk factors and additional information are included in EXCO’s reports on file with the Securities and Exchange Commission. EXCO undertakes no obligation to publicly update or revise any forward-looking statements.

The SEC has generally permitted oil and natural gas companies, in filings made with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. We use the terms “probable,” “possible,” “unproved,” or “potential” to describe volumes of reserves potentially recoverable through additional drilling or recovery techniques that the SEC’s guidelines prohibit us from including in filings with the SEC. These estimates are by their nature more speculative than estimates of proved reserves and accordingly are subject to substantially greater risk of being actually realized by the company. While we believe our calculation of unproved drillsites and estimations of unproved reserves have been appropriately risked and are reasonable, such calculations and estimates have not been reviewed by third party engineers or appraisers. Investors are urged to consider closely the disclosure in our Annual Report on Form 10-K for the year ended December 31, 2008 available on our website at www.excoresources.com under the Investor Relations tab or calling us at 214-368-2084.

Exhibit 99.3

EXCO Resources, Inc.

Pro forma financial information and footnotes

as of and for the six months ended June 30, 2009

and the year ended December 31, 2008

EXCO Resources, Inc., or EXCO, a Texas corporation, is an independent oil and natural gas company engaged in the acquisition, development and exploitation of onshore properties located in the continental United States. In addition to our oil and natural gas producing operations, we own gathering systems and an intrastate pipeline (collectively, the Midstream Assets). Our assets in East Texas/North Louisiana are owned by our subsidiary, EXCO Operating Company, LP and its subsidiaries and together they are collectively referred to as EXCO Operating. Our operations are focused in key North American oil and natural gas areas including East Texas/North Louisiana, Appalachia, Mid-Continent and the Permian Basin.

Unless the context requires otherwise, references to “we”, “us”, and “our” are to EXCO.

On August 11, 2009, EXCO completed the sale of oil and natural gas properties and related assets to Encore Operating, L.P., or Encore, pursuant to two separate purchase and sale agreements for aggregate cash proceeds of approximately $356.5 million, including closing adjustments. The oil and natural gas properties sold include (a) all of EXCO’s interests in its Gladewater area and Overton field in Gregg, Upshur and Smith counties in East Texas, or the East Texas Properties, and (b) certain oil and natural gas properties in the Mid-Continent region of Oklahoma, Kansas and the Texas Panhandle, or the Mid-Continent Sale, collectively the Encore Transactions.

On August 14, 2009, EXCO also closed two separate transactions with BG Group, plc, or BG Group, involving the sale of an undivided 50% interest in certain oil and natural gas properties in East Texas/North Louisiana, or the BG Upstream Transaction, and a 50% interest in certain of its midstream operations, or the BG Midstream Transaction, for approximately $996.2 million, including closing adjustments, also located in East Texas/North Louisiana.

BG Upstream Transaction

Pursuant to the terms of the BG Upstream Transaction, EXCO sold an undivided 50% interest in its producing and non-producing assets in a large area of mutual interest, or AMI, which encompassed most of EXCO’s holdings in East Texas/North Louisiana, excluding the Vernon Field in Jackson Parish, Louisiana, the Redland Field in Bossier and Webster Parishes, Louisiana and the Gladewater area and Overton field in East Texas. Consideration for the sale included cash at closing of approximately $727.0 million, including closing adjustments. In conjunction with the sale of 50% of its interests in these assets, EXCO and BG Group entered into a Joint Development Agreement, or JDA, with respect to the Haynesville, Bossier and other deep horizons, as well as the Cotton Valley, Hosston and other shallow horizons. Under the terms of the JDA, EXCO will serve as operator of the joint development, subject to oversight from a Joint Development Operating Committee.

In addition to the cash received at closing, under provisions of the JDA, BG Group will fund $400.0 million of capital costs of the Haynesville/Bossier shale development attributable to EXCO’s 50% interest. Such funding will be based on payment by BG Group of 75% of EXCO’s share of drilling and completion costs of each qualified deep rights well, as defined in the JDA, until the $400.0 million commitment has been satisfied. EXCO will fund the remaining 25% of its share, representing 12.5% of total deep rights drilling and completion costs. EXCO and BG Group will each receive their 50% share of revenues and pay their 50% share of operating costs from production. In addition, EXCO and BG Group will share equally in future leasehold and asset acquisition opportunities within the AMI.

 

1


BG Midstream Transaction

In conjunction with the BG Midstream Transaction, EXCO contributed its TGG Pipeline, Ltd., or TGG, and Talco Midstream Assets, Ltd., or Talco, subsidiaries to TGGT Holdings, LLC, or TGGT, a newly formed entity, in exchange for membership units in TGGT. On August 14, 2009, EXCO sold 50% of its membership units in TGGT to BG US Gathering Company, LLC, or BG Gathering, for cash consideration of approximately $269.2 million, including closing adjustments. TGGT will operate as a 50/50 joint venture with neither EXCO nor BG Gathering having control over the management of, or a controlling beneficial economic interest in, the operations of TGGT. EXCO will use the equity method of accounting to account for its investment in TGGT.

In conjunction with the planned development of the Haynesville and Bossier shale resources in the AMI, EXCO and BG Gathering plan coordinated growth of the midstream operations within the AMI. TGGT is governed by a Limited Liability Company Agreement, or LLC Agreement, which specifies, among other things equal partnership in management of the entity, the operations of TGG and Talco, joint development plan of the entities and other governance matters. TGGT will have no employees and will be managed by a Management Board, as defined in the LLC Agreement consisting of eight members (four each from EXCO and BG Gathering) and officers which will be seconded to TGGT by EXCO and BG Gathering. Daily operations will be performed by a combination of seconded employees from EXCO and BG Gathering pursuant to service agreements between EXCO and TGGT as well as service agreements between BG Group and TGGT.

Unaudited pro forma financial information

The unaudited pro forma condensed consolidated financial statements are presented for illustrative purposes only and do not purport to be indicative of the combined results of operations that would have actually occurred had the above described transactions occurred on the indicated dates or that may be achieved in the future. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with EXCO’s Form 10-K for the year ended December 31, 2008, filed on February 26, 2009, and Form 10-Q for the six months ended June 30, 2009, filed on August 6, 2009. Management believes that the assumptions used in these unaudited pro forma financial statements provide a reasonable basis for presenting the effect of these transactions.

Pro forma balance sheet

The following unaudited pro forma condensed consolidated balance sheet as of June 30, 2009 is based on the historical unaudited condensed consolidated balance sheet of EXCO as of June 30, 2009. The pro forma condensed consolidated balance sheet gives effect to the Encore Transactions, the BG Upstream Transaction and the BG Midstream Transaction and related adjustments as if these transactions occurred on June 30, 2009. The pro forma condensed consolidated balance sheet as of June 30, 2009 does not give effect to BG Group’s commitment to fund $400.0 million in capital costs attributable to EXCO’s retained interest in certain deep rights as this commitment is earned only through drilling activities which commence after closing of the BG Upstream Transaction.

 

2


EXCO Resources, Inc.

Unaudited pro forma condensed consolidated balance sheet

As of June 30, 2009

 

(in thousands)

   EXCO Resources
consolidated
    Divestiture Transactions - Pro Forma Adjustments  
     Mid-Continent/East
Texas property
sales to Encore
    Sale of 50%
interest in oil
and natural gas
properties to
BG Group
    Other pro forma
adjustments - oil
and natural

gas divestitures
    Sale of 50%
interest in
Midstream
Assets to

BG Group
    Pro forma
EXCO Resources
consolidated
June 30, 2009
 

Assets

            

Current assets:

            

Cash and cash equivalents

   $ 131,358      $ 356,485  (a)    $ 727,107  (c)    $ (884,000 ) (f)    $ 4,052  (h)    $ 385,800   
         (59,440 ) (c)      —          269,238  (i)   
             (20,000 ) (i)   
             (139,000 ) (j)   

Restricted cash

     37,500        (37,500 ) (a)      59,440  (c)      —          —          59,440   

Accounts receivable

     132,138        —          —          —          (11,274 ) (h)      120,864   

Derivative financial instruments

     265,625        —          —          —          —          265,625   

Inventory

     62,804        —          —          —          (27,263 ) (h)      35,541   

Other current assets

     7,466        —          —          —          (233 ) (h)      7,233   
                                                

Total current assets

     636,891        318,985        727,107        (884,000     75,520      $ 874,503   
                                                

Oil and natural gas properties (full cost accounting method):

            

Unproved oil and natural gas properties

     458,541        (5,800 ) (a)      (221,500 ) (c)      —          —          231,241   

Proved oil and natural gas properties

     2,484,693        (151,106 ) (a)      (200,287 ) (c)      —          (9 ) (h)      2,117,831   
       (7,242 ) (b)      (8,218 ) (d)       

Accumulated depletion

     (1,059,165     —          —          —          —          (1,059,165
                                                

Oil and natural gas properties, net

     1,884,069        (164,148     (430,005     —          (9     1,289,907   
                                                

Gas gathering assets

     519,519        (25,258 ) (a)      —          —          (307,563 ) (h)      186,698   

Accumulated depreciation and amortization

     (41,540     4,369  (a)      —          —          17,545  (h)      (19,626
                                                

Gas gathering assets, net

     477,979        (20,889     —          —          (290,018     167,072   
                                                

Office and field equipment, net

     28,952        —          —          —          (46 ) (h)      28,906   

Derivative financial instruments

     120,858        —          —          —          —          120,858   

Deferred financing costs, net

     42,819        —          —          (28,595 ) (g)      (885 ) (k)      13,339   

Investments in TGG/Talco

     —          —          —          —          305,372  (h)      —     
             (305,372 ) (i)   

Investment in TGGT

     —          —          —          —          152,686  (i)      184,096   
             20,000  (i)   
             11,410  (i)   

Goodwill

     470,077        —          —          (120,000 ) (e)      (22,820 ) (i)      327,257   

Other assets

     2,653        —          —          —          —          2,653   
                                                

Total assets

   $ 3,664,298      $ 133,948      $ 297,102      $ (1,032,595   $ (54,162   $ 3,008,591   
                                                

Liabilities and shareholders’ equity

            

Current liabilities:

            

Accounts payable and accrued liabilities

   $ 213,406      $ —        $ —        $ —        $ (19,419 ) (h)    $ 193,987   

Current maturities of long-term debt

     300,000        —          —          (300,000 ) (f)      —          —     

Derivative financial instruments

     13,751        —          —          —          —          13,751   

Other current liabilities

     1,265        —          —          —          —          1,265   
                                                

Total current liabilities

     528,422        —          —          (300,000     (19,419     209,003   
                                                

Long-term debt, net of current maturities

     2,748,181        —          —          (584,000 ) (f)      (139,000 ) (j)      2,025,181   

Asset retirement obligations and other long-term liabilities

     183,464        (7,242 ) (b)      (8,218 ) (d)      (9,000 ) (g)      —          121,504   
       (37,500 ) (a)      —          —          —       

Derivative financial instruments

     22,508        —          —          —          —          22,508   

Deferred income taxes

     11,482        —          —          (3,210 ) (e)      —          8,272   

Shareholders’ equity:

            

Common stock

     211        —          —          —          —          211   

Paid-in capital

     3,080,109        —          —          —          —          3,080,109   

Accumulated earnings (deficit)

     (2,910,079     178,690  (a)      305,320  (c)      (120,000 ) (e)      105,142  (i)      (2,458,197
           3,210  (e)     
           (19,595 ) (g)      (885 ) (k)   
                                                

Total shareholders’ equity

     170,241        178,690        305,320        (136,385     104,257        622,123   
                                                

Total liabilities and shareholders’ equity

   $ 3,664,298      $ 133,948      $ 297,102      $ (1,032,595   $ (54,162   $ 3,008,591   
                                                

See accompanying notes.

 

3


EXCO Resources, Inc.

Notes to pro forma condensed consolidated balance sheet

As of June 30, 2009

(Unaudited)

 

(a) Pro forma adjustment to reflect closing of the Encore Transactions. As set forth in the table below, the pro forma transaction reflects receipt of aggregate proceeds of $356.5 million, including the release of escrowed deposits of $37.5 million, elimination of allocated costs attributable to unproved and proved properties sold, allocation of proceeds attributable to related gathering system assets and recognition of gain, before adjustment for exploration and production segment goodwill. Although full cost accounting rules generally do not provide for gain or loss recognition in connection with the sale, abandonment or disposition of oil and natural gas properties, such rules do provide for such recognition if failure to recognize gain or loss would result in a significant alteration in the post transaction depletion rate. EXCO has concluded that, absent gain recognition on the Encore Transactions and the BG Upstream Transaction, a significant alteration in its depletion rate would result and, accordingly, has recognized gain on these sale transactions.

 

(dollars in thousands)

      

Cash proceeds from oil and natural gas asset sale to Encore

   $ 356,485   

Allocation of proceeds to unproved properties

     (5,800

Carrying value of field gathering systems

     (20,889

Allocated full cost pool capitalized costs attributable to sold properties

     (151,106 ) (1) 
        

Gain on sale of proved properties (before elimination of goodwill)

   $ 178,690  (2) 
        
 
  (1) Allocation of capitalized costs attributable to the sold proved properties was computed using the estimated fair value of the divested proved properties in the Encore Transactions relative to the estimated fair value of EXCO’s total proved properties as of June 30, 2009.
  (2) There will be no income tax provision on the gain as any accrued income taxes will be applied to existing net operating losses and offset previously recognized deferred income tax valuation allowances.

 

(b) Pro forma adjustment to eliminate asset retirement obligations as of June 30, 2009 attributable to oil and natural gas properties sold in the Encore Transactions.

 

(c) Pro forma adjustment to reflect closing of the BG Upstream Transaction. The pro forma transactions reflect:

 

   

receipt of the BG Upstream Transaction proceeds;

 

   

funding of escrow deposits for joint development operations as provided for in the JDA;

 

   

elimination of allocated costs attributable to proved properties sold;

 

   

application of sales proceeds to eliminate unamortized cost attributable to unproved oil and natural gas properties included in the conveyance to BG Group to reduce EXCO’s carrying value to zero; and

 

   

recognition of a gain, before adjustment for segment goodwill, on the sale transactions.

 

4


(amounts in thousands)

      

Cash proceeds from BG Upstream Transaction

   $ 727,107   

Allocation of proceeds to unproved properties

     (221,500 ) (1) 

Allocated full cost pool capitalized costs attributable to 50% interest in proved properties in the AMI sold to BG Group

     (200,287 ) (2) 
        

Gain on sale of proved properties (before elimination of goodwill)

   $ 305,320  (3) 
        
 
  (1) Allocation to unproved properties represents elimination of 100% of unamortized unproved costs related to the BG Upstream Transaction.
  (2) Allocation of capitalized costs attributable to the sold proved properties was computed using the estimated fair value of the divested proved properties in the BG Upstream Transaction relative to the total estimated fair value of EXCO’s proved properties as of June 30, 2009.
  (3) There will be no income tax provision on the gain as any accrued income taxes will be applied to existing net operating losses and offset previously recognized deferred income tax valuation allowances.

 

(d) Pro forma adjustment to eliminate asset retirement obligations as of June 30, 2009 attributable to 50% interest in oil and natural gas properties sold in the BG Upstream Transaction.

 

(e) Pro forma adjustment to eliminate exploration and production segment goodwill attributable to the oil and natural gas assets sold in the Encore Transactions and the BG Upstream Transaction based on the relative fair values of the assets sold to total estimated fair value of EXCO’s oil and natural gas properties as of June 30, 2009. In addition, deferred income taxes attributable to the tax basis of temporary goodwill has been proportionately reduced.

 

(f) Pro forma adjustments to retire payoff of the $300.0 million senior unsecured term credit agreement, or Term Credit Agreement, and reduction in the outstanding balances under the EXCO credit agreement and the EXCO Operating credit agreement of $200.0 million and $384.0 million, respectively, with proceeds received in connection with closings of the Encore Transactions and the BG Upstream Transaction.

 

(g) Pro forma adjustments to write-off deferred financing costs associated with the pay off of the Term Credit Agreement and pay downs on revolving credit agreements.

 

(amounts in thousands)

    

EXCO credit agreement

   $ 1,720

EXCO Operating credit agreement

     2,449

Term Credit Agreement

     24,426
      

Total write-off of deferred financing costs

   $ 28,595
      

This pro forma adjustment includes accrued duration fees of $9.0 million related to the Term Credit Agreement which will not become due as a result of the payoff of the $300.0 million.

 

(h) Pro forma adjustment to reclassify consolidated assets and liabilities of TGG and Talco as of June 30, 2009 to investment in TGG/Talco to reflect contribution by EXCO to the equity method of accounting.

 

(i) Pro forma adjustments to reflect closing of BG Midstream Transaction as follows:

 

   

record receipt of cash proceeds from BG Group for the sale of 50% of membership interests in TGGT to BG Gathering;

 

   

record investment of 50% in TGGT;

 

   

record cash investment of $20.0 million in TGGT to fund working capital;

 

5


   

eliminate 50% of previously recorded goodwill allocable to assets sold to BG Gathering in the BG Midstream Transaction and reclassify the remaining 50% of midstream goodwill to our investment in TGGT; and

 

   

record gain on sale pursuant to the BG Midstream Transaction. The gain is computed using generally accepted accounting principles covering accounting for real estate transactions.

Computation of the gain on the BG Midstream Transaction is set forth in the following table:

 

(dollars in thousands)

      

Cash proceeds on consummation of BG Midstream Transaction

   $ 269,238   

Elimination of 50% of investment in EXCO/BG Group Midstream, LLC

     (152,686
        

Gain on sale of 50% of Midstream Assets before goodwill elimination

     116,552   

Elimination of 50% of Midstream segment goodwill allocated to Midstream Assets sold on the basis of relative fair value

     (11,410 ) (1) 
        

Gain on sale of oil and natural gas properties to BG Group

   $ 105,142  (2) 
        
 
  (1) Allocation of a proportionate amount of goodwill attributable to the BG Midstream Transaction was computed using the estimated fair value of the assets contributed to TGGT to EXCO’s consolidated fair value of total midstream assets.
  (2) There will be no income tax provision on the gain as any accrued income taxes will be applied to existing net operating losses and offset previously recognized deferred income tax valuation allowances.

 

(j) Pro forma adjustment to reflect payment on the outstanding balance under the EXCO Operating credit agreement in connection with the sale of 50% interest in certain Midstream Assets in the BG Midstream Transaction.

 

(k) Pro forma adjustment to write-off deferred financing costs associated with the EXCO Operating credit agreement resulting from the BG Midstream Transaction which resulted in reduced loan collateral and corresponding reduction in borrowing base.

Pro forma statements of operations

The following unaudited condensed consolidated pro forma financial information presents statements of operations for the year ended December 31, 2008 and the six months ended June 30, 2009 and is based on the audited consolidated financial statements for EXCO for the year ended December 31, 2008, the unaudited condensed consolidated financial statements for the six months ended June 30, 2009 and the unaudited internal revenues and direct operating costs with respect to the oil and natural gas properties and the midstream operations of TGG and Talco, included in the Encore Transactions, the BG Upstream Transaction and the BG Midstream Transaction for the year ended December 31, 2008 and for the six months ended June 30, 2009. The pro forma financial information gives effect to the Encore Transactions, the BG Upstream Transaction and the BG Midstream Transaction as if each had occurred on January 1, 2008.

 

6


Pro forma condensed consolidated statement of operations

For the year ended December 31, 2008

 

     EXCO Resources
consolidated
    Divestiture Transactions—Pro Forma Adjustments     Pro forma
EXCO Resources
consolidated
June 30, 2009
 

(in thousands, except per share data)

     Mid-Continent/ East
Texas property
sales to Encore
    Sale of 50%
interest in oil
and natural gas
properties to
BG Group
    Other pro forma
adjustments - oil
and natural
gas divestitures
    Sale of 50%
interest in
Midstream
Assets to
BG Group
   

Revenues:

            

Oil and natural gas

   $ 1,404,826      $ (161,499 ) (a)    $ (177,489 ) (c)    $ —        $ —        $ 1,065,838   

Midstream

     85,432        —          —          —          (85,432 )  (g)      —     

Other operating income (loss)

     —          —          —          —          (345 )  (g)      (345
                                                

Total revenues

     1,490,258        (161,499     (177,489     —          (85,777     1,065,493   
                                                

Costs and expenses:

            

Oil and natural gas production

     238,071        (29,882 ) (a)      (32,900 ) (c)      —          —          175,289   

Midstream operating expenses

     82,797        —          —          —          (82,797 ) (g)      —     

Gathering and transportation

     14,206        (1,188 ) (a)      (1,976 ) (c)      —          —          11,042   

Depreciation, depletion and amortization

     460,314        —          —          (85,574 ) (d)      (7,132 ) (g)      367,608   

Write-down of oil and natural gas properties

     2,815,835        —          —          (485,537 ) (e)      —          2,330,298   

Accretion of discount on asset retirement obligations

     6,703        (448 ) (b)      (470 ) (b)      —          —          5,785   

General and administrative

     87,568        —          —          —          —          87,568   
                                                

Total costs and expenses

     3,705,494        (31,518     (35,346     (571,111     (89,929     2,977,590   
                                                

Operating income (loss)

     (2,215,236     (129,981     (142,143     571,111        4,152        (1,912,097

Other income (expense):

               —     

Interest expense

     (161,638     —          —          54,197   (f)      6,569   (h)      (100,872

Gain on derivative financial instruments

     384,389        —          —          —          —          384,389   

Interest income and other

     3,981        —          —          —          4,922   (g)      8,903   

Equity in income of EXCO/BG Midstream, LLC

     —          —          —          —          6,529   (g)      6,529   
                                                

Total other income

     226,732        —          —          54,197        18,020        298,949   
                                                

Income (loss) before income taxes

     (1,988,504     (129,981     (142,143     625,308        22,172        (1,613,148

Income tax expense (benefit)

     (255,033     —          —          (1,180 ) (i)      —          (256,213
                                                

Net income (loss)

     (1,733,471     (129,981     (142,143     626,488        22,172        (1,356,935

Preferred stock dividends

     (76,997     —          —          —          —          (76,997
                                                

Net income (loss)

     (1,810,468     (129,981     (142,143     626,488        22,172        (1,433,932
                                                

Pro forma basic net loss per common share

   $ (11.81           $ (9.35
                        

Pro forma diluted net loss per common share

   $ (11.81           $ (9.35
                        

Weighted average shares outstanding (basic)

     153,346                153,346   
                        

Weighted average shares outstanding (diluted)

     153,346                153,346   
                        

See accompanying notes.

 

7


Pro forma condensed consolidated statement of operations

For the six months ended June 30, 2009

 

           Divestiture Transactions - Pro Forma Adjustments  

(in thousands, except per share data)

   EXCO Resources
consolidated
    Mid-Continent/East
Texas property
sales to Encore
    Sale of 50%
interest in oil
and natural gas
properties to
BG Group
    Other pro forma
adjustments - oil
and natural

gas divestitures
    Sale of 50%
interest in
Midstream
Assets to
BG Group
    Pro forma
EXCO Resources
consolidated
June 30, 2009
 

Revenues:

            

Oil and natural gas

   $ 318,460      $ (30,815 ) (j)    $ (51,502 ) (l)    $ —        $ —        $ 236,143   

Midstream

     29,955        —          —          —          (29,955 ) (p)      —     

Other operating income

     —          —          —          —          (3,173 ) (p)      (3,173
                                                

Total revenues

     348,415        (30,815     (51,502     —          (33,128     232,970   
                                                

Costs and expenses:

            

Oil and natural gas production

     101,512        (10,632 ) (j)      (16,137 ) (l)      —          —          74,743   

Midstream operating expenses

     30,169        —          —          —          (30,169 ) (p)      —     

Gathering and transportation

     7,952        (473 ) (j)      (1,262 ) (l)      —          —          6,217   

Depreciation, depletion and amortization

     136,974        —          —          (49,748 ) (m)      (4,307 ) (p)      82,919   

Write-down of oil and natural gas properties

     1,293,579        —          —          (302,431 ) (n)      —          991,148   

Accretion of discount on asset retirement obligations

     4,089        (241 ) (k)      (352 ) (k)      —          —          3,496   

General and administrative

     43,035        —          —          —          —          43,035   
                                                

Total costs and expenses

     1,617,310        (11,346     (17,751     (352,179     (34,476     1,201,558   
                                                

Operating income (loss)

     (1,268,895     (19,469     (33,751     352,179        1,348        (968,588

Other income (expense):

               —     

Interest expense

     (83,023     —          —          45,812  (o)      2,014  (q)      (35,197

Gain on derivative financial instruments

     190,367        —          —          —          —          190,367   

Equity in income of EXCO/BG Midstream, LLC

     —          —          —          —          3,194  (p)      3,194   

Interest and other income

     (7,942     —          —          —            (7,942
                                                

Total other income

     99,402        —          —          45,812        5,208        150,422   
                                                

Income (loss) before income taxes

     (1,169,493     (19,469     (33,751     397,991        6,556        (818,166

Income tax expense (benefit)

     2,110        —          —          (590 ) (r)      —          1,520   
                                                

Net income (loss)

   $ (1,171,603   $ (19,469   $ (33,751   $ 397,401      $ 6,556      $ (819,686
                                                

Pro forma basic net loss per common share

   $ (5.55           $ (3.88
                        

Pro forma diluted net loss per common share

   $ (5.55           $ (3.88
                        

Weighted average shares outstanding (basic)

     211,042                211,042   
                        

Weighted average shares outstanding (diluted)

     211,042                211,042   
                        

See accompanying notes.

 

8


EXCO Resources, Inc.

Notes to pro forma condensed consolidated statements of operations

Year ended December 31, 2008 and

Six Months Ended June 30, 2009

(Unaudited)

 

(a) Pro forma adjustments to eliminate oil and natural gas revenues and direct operating costs for the year ended December 31, 2008 with respect to the oil and natural gas properties sold in the Encore Transactions.

 

(b) Pro forma adjustment to accretion of discount on asset retirement obligations for the year ended December 31, 2008 attributable to oil and natural gas properties sold in the Encore Transactions and the BG Upstream Transaction.

 

(c) Pro forma adjustments to eliminate 50% of the oil and natural gas revenues and direct operating costs for the year ended December 31, 2008 with respect to the sale of a 50% undivided interest in EXCO’s properties conveyed in the BG Upstream Transaction.

 

(d) Pro forma entry to adjust depreciation, depletion and amortization for the year ended December 31, 2008 to reflect the sale of oil and natural gas properties included in the Encore Transactions and the BG Upstream Transaction as if such divestitures had occurred on January 1, 2008. Such pro forma amortization appropriately reflects the pro forma reduction in capitalized costs resulting from the transactions and the cumulative impact of full cost ceiling test write-downs in the write-down period, excluding the divested properties.

 

(amounts in thousands, except rate amounts)

   Nine months ended
September 30, 2008
    Three months ended
December 31, 2008
 

Pro forma amortizable pro forma full cost pool

   $ 5,579,494  (a)    $ 4,245,578  (a) 

Pro forma proved reserves as of January 1, 2008

     1,658,504  (c)      1,576,756  (b) 
                

Pro forma amortization rate per Mcfe

   $ 3.364      $ 2.693   

Pro forma production for applicable periods

     81,748  (c)      27,858  (c) 
                

Pro forma full cost period amortization for applicable periods

   $ 274,999      $ 75,022   
                

Total pro forma amortization for year 2008

     $ 350,021   

Amount of depletion historically recorded

       (435,595
          

Pro forma adjustment required for 2008 divestitures

     $ (85,574
          

 

(a)    Includes amortizable full cost pool for the periods specified plus proportionate increases to the full cost pool for ceiling test write-downs not attributable to sold properties and pro forma reductions to the full cost pool for sold properties.

(b)    Excludes proved reserves as of January 1, 2008 included in Encore Transactions and BG Transaction.

(c)    Excludes production attributable to properties sold in Encore Transactions and BG Transaction.

 

(e) Pro forma adjustment to reflect proportionate elimination of write-downs of oil and natural gas properties resulting from ceiling tests for the year ended December 31, 2008 attributable to properties sold in the Encore Transactions and the BG Upstream Transaction.

 

(f) Pro forma adjustment to reflect reduction in interest expense and amortization of deferred financing costs for the year ended December 31, 2008 as a result of reductions in outstanding balance under EXCO’s various credit agreements using cash proceeds received from the Encore Transactions and the BG Upstream Transaction.

 

9


(dollar amounts in thousands)

   EXCO Resources
credit agreement
    EXCO Operating
credit agreement
    Term Credit
Agreements
    Total

Pro forma reductions in outstanding debt balances in connection with Encore Transactions and BG Upstream Transaction

   $ 200,000      $ 384,000      $ 300,000      $ 884,000
            

Average interest rate during year

     4.38     4.50     10.00  
        

Interest expense reduction for year 2008

     8,760        17,280        13,337  (a)      39,377

Elimination of amortization of deferred financing costs attributable to pro forma debt reductions

     333        889        13,598        14,487
                              

Total interest credit adjustment

   $ 9,093      $ 18,169      $ 26,935  (a)    $ 54,197
                              

 

(a)    Represents total actual interest expense recorded during 2008 since Term Credit Agreement was not entered into until July 15, 2008.

 

(g) Pro forma adjustment to reclassify income and expenses associated with the BG Midstream Transaction and reclassify EXCO’s 50% share to the equity method of accounting. In addition, EXCO’s retained midstream revenues and expenses are being reclassified to other operating income to reflect elimination of EXCO’s midstream business segment.

 

(h) Pro forma adjustment to reflect reduction in interest expense and amortization of deferred financing costs for the year ended December 31, 2008 as a result of reduction in outstanding balance of $139.0 million of the EXCO Operating Credit Agreement based on an average annual interest rate of 4.5% and elimination of deferred financing costs amortization of $322 thousand, using proceeds from the BG Midstream Transaction.

 

(i) Pro forma adjustment to reflect reduction of deferred income taxes attributable to proportionate reduction of goodwill.

 

(j) Pro forma adjustments to eliminate oil and natural gas revenues and direct operating costs for the six months ended June 30, 2009 with respect to the oil and natural gas properties sold in the Encore Transactions.

 

(k) Pro forma adjustment to accretion of discount on asset retirement obligations for the six months ended June 30, 2009 attributable to oil and natural gas properties sold in the Encore Transactions and the BG Upstream Transaction.

 

(l) Pro forma adjustment to eliminate 50% of the oil and natural gas revenues, adjusted for intercompany eliminations with TGG and Talco, and direct operating costs for the six months ended June 30, 2009 with respect to the sale of a 50% undivided interest in EXCO’s properties conveyed in the BG Upstream Transaction.

 

(m) Pro forma entry to adjust depreciation, depletion and amortization for the six months ended June 30, 2009 to reflect the sale of oil and natural gas properties included in Encore Transactions and the BG Upstream Transaction as if such divestitures had occurred on January 1, 2008. Such pro forma amortization appropriately reflects the pro forma reduction in capitalized costs resulting from the transactions and the impact of full cost ceiling test write-downs in the write-down period, excluding the divested properties.

 

10


(amounts in thousands, except rate amounts)

   Three months ended
March 31, 2009
    Three months ended
June 30, 2009
 

Pro forma amortizable full cost pool

   $ 2,146,472  (a)    $ 1,599,301  (a) 

Pro forma proved reserves as of January 1, 2008

     1,411,666  (b)       1,384,342  (b) 
                

Pro forma amortization rate per Mcfe

   $ 1.521      $ 1.155   

Pro forma production for applicable periods

     27,324  (c)       27,506  (c) 
                

Pro forma full cost period amortization for applicable periods

   $ 41,560      $ 31,769   
                

Total pro forma amortization for the six months ended June 30, 2009

     $ 73,329   

Amount of depletion historically recorded

       (123,077
          

Pro forma adjustment required for divestitures

     $ (49,748
          

 

(a)    Includes amortizable full cost pool for the periods specified plus proportionate increases to the full cost pool for ceiling test write-downs not attributable to sold properties and pro forma reductions to the full cost pool for sold properties.

(b)    Excludes proved reserves as of January 1, 2008 attributable to divested oil and gas properties.

(c)    Excludes production attributable to properties sold in Encore Transactions and BG Upstream Transaction.

          

        

       

 

(n) Pro forma adjustment to reflect proportionate elimination of write-downs of oil and gas properties resulting from ceiling tests for the six months ended June 30, 2009 attributable to properties sold in the Encore Transactions and the BG Upstream Transaction.

 

(o) Pro forma adjustment to reflect reduction in interest expense and amortization of deferred financing costs for the six months ended June 30, 2009 as a result of reductions in outstanding balance under EXCO’s various credit agreements using cash proceeds received from the Encore Transactions and the BG Upstream Transaction.

 

(dollar amounts in thousands)

   EXCO Resources
credit agreement
    EXCO Operating
credit agreement
    Term Credit
Agreement
    Total

Pro forma payments on outstanding debt balances in connection with Encore Transactions and BG Upstream Transaction

   $ 200,000      $ 384,000      $ 300,000      $ 884,000
            

Average interest rate during year

     2.54     2.67     10.00  
        

Interest expense reduction for six months ended June 30, 2009

     2,540        5,126        15,083        22,749

Elimination of amortization of deferred financing costs attributable to pro forma debt reductions

     289        445        22,329        22,774
                              

Total interest credit adjustment

   $ 2,829      $ 5,571      $ 37,412      $ 45,812
                              

 

(p) Pro forma adjustment to reclassify income and expenses associated with the BG Midstream Transaction and reclassify EXCO’s 50% share to the equity method of accounting. In addition, EXCO’s retained midstream revenues and expenses are being reclassified to other operating income to reflect elimination of EXCO’s midstream business segment.

 

(q) Pro forma adjustment to reflect reduction in interest expense and amortization of deferred financing costs for the year ended December 31, 2008 as a result of reduction in outstanding balance of $139.0 million of the EXCO Operating Credit Agreement based on an average annual interest rate of 2.7% and elimination of deferred financing costs amortization of $161 thousand, using proceeds from the BG Midstream Transaction.

 

(r) Adjustment to reflect reduction of deferred income taxes attributable to proportionate reduction of goodwill.

 

11