APPENDIX A FORM OF LIMITED PARTNERSHIP AGREEMENT OF ROCKIES REGION 2007 LIMITED PARTNERSHIP
APPENDIX
A
FORM
OF
OF
ROCKIES
REGION 2007 LIMITED PARTNERSHIP
TABLE
OF CONTENTS
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Page
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ARTICLE
I: The Partnership
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1
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1.01
Organization
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1
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1.02
Partnership Name
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1
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1.03
Character of Business
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1
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1.04
Principal Place of Business
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1
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1.05
Term of Partnership
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1
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1.06
Filings
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1
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1.07
Independent Activities
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2
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1.08
Definitions
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2
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ARTICLE
II: Capitalization
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9
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2.01
Capital Contributions of the Managing General Partner and Initial Limited
Partner
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9
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2.02
Capital Contributions of the Investor Partners
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10
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2.03
Additional Contributions
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11
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ARTICLE
III: Capital Accounts and Allocations
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11
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3.01
Capital Accounts
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11
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3.02
Allocation of Profits and Losses
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12
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3.03
Depletion
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17
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3.04
Apportionment Among Partners
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17
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ARTICLE
IV: Distributions
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18
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4.01
Time of Distribution
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18
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4.02
Distributions
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18
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4.03
Capital Account Deficits
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18
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4.04
Liability Upon Receipt of Distributions
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18
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ARTICLE
V: Activities
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19
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5.01
Management
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19
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5.02
Conduct of Operations
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19
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5.03
Acquisition and Sale of Leases
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21
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5.04
Title to Leases
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21
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5.05
Farmouts
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21
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5.06
Release, Abandonment, and Sale or Exchange of Properties
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22
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5.07
Certain Transactions
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22
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ARTICLE
VI: Managing General Partner
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25
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6.01
Managing General Partner
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25
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6.02
Authority of Managing General Partner
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26
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6.03
Certain Restrictions on Managing General Partner's Power and
Authority
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27
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6.04
Indemnification of Managing General Partner
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28
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6.05
Withdrawal
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29
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6.06
Management Fee
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29
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6.07
Tax Matters and Financial Reporting Partner
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29
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ARTICLE
VII: Investor Partners
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30
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7.01
Management
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30
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7.02
Indemnification of Additional General Partners
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30
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7.03
Assignment of Units
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31
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7.04
Prohibited Transfers
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32
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7.05
Withdrawal by Investor Partners
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32
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7.06
Removal of Managing General Partner
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32
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7.07
Calling of Meetings
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33
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7.08
Additional Voting Rights
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33
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7.09
Voting by Proxy
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34
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7.10
Conversion of Additional General Partner Interests into Limited Partner
Interests
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34
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7.11
Liability of Partners
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35
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ARTICLE
VIII: Books and Records
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35
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8.01
Books and Records
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35
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8.02
Reports
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36
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8.03
Bank Accounts
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38
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8.04
Federal Income Tax Elections
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38
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ARTICLE
IX: Dissolution; Winding-up
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38
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9.01
Dissolution
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38
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9.02
Liquidation
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39
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9.03
Winding-up
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39
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ARTICLE
X: Power of Attorney
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40
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10.01
Managing General Partner as Attorney-in-Fact
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40
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10.02
Nature of Special Power
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40
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ARTICLE
XI: Miscellaneous Provisions
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41
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11.01
Liability of Parties
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41
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11.02
Notices
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41
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11.03
Paragraph Headings
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41
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11.04
Severability
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41
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11.05
Sole Agreement
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41
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11.06
Applicable Law
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42
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11.07
Execution in Counterparts
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42
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11.08
Waiver of Action for Partition
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42
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11.09
Amendments
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42
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11.10
Consent to Allocations and Distributions
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42
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11.11
Ratification
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42
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11.12
Substitution of Signature Pages
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43
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11.13
Incorporation by Reference
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43
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Signature
Page
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57
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FORM
OF
OF
ROCKIES
REGION 2007 LIMITED PARTNERSHIP,
A WEST
VIRGINIA LIMITED PARTNERSHIP
This
LIMITED PARTNERSHIP AGREEMENT (the "Agreement") is made as of this ___ day of
____________, 2007 by and among Petroleum Development Corporation, a Nevada
corporation, as managing general partner (the "Managing General Partner"),
Xxxxxx X. Xxxxxxxx, a resident of West Virginia, as the Initial Limited Partner,
and the Persons whose names are set forth on Exhibit A attached hereto, as
additional general partners (the "Additional General Partners") or as limited
partners (the "Limited Partners" and, collectively with Additional General
Partners, the "Investor Partners"), pursuant to the provisions of the West
Virginia Uniform Limited Partnership Act (the "Act"), on the following terms and
conditions:
ARTICLE
I
The
Partnership
1.01 Organization. Subject
to the provisions of this Agreement, the parties hereto do hereby form a limited
partnership (the "Partnership") pursuant to the provisions of the
Act. The Partners hereby agree to continue the Partnership as a
limited partnership pursuant to the provisions of the Act and upon the terms and
conditions set forth in this Agreement.
1.02 Partnership
Name. The
name of the Partnership shall be Rockies Region 2007 Limited Partnership, a West
Virginia limited partnership, and all business of the Partnership shall be
conducted in such name. The Managing General Partner may change the
name of the Partnership upon ten days notice to the Investor
Partners. The Partnership shall hold all of its property in the name
of the Partnership and not in the name of any Partner.
1.03 Character of
Business. The
principal business of the Partnership shall be to acquire Leases, drill sites,
and other interests in oil and/or gas properties and to drill for oil, gas,
hydrocarbons, and other minerals located in, on, or under such properties, to
produce and sell oil, gas, hydrocarbons, and other minerals from such
properties, and to invest and generally engage in any and all phases of the oil
and gas business. Such business purpose shall include without
limitation the purchase, sale, acquisition, disposition, exploration,
development, operation, and production of oil and gas properties of any
character. The Partnership shall not acquire property in exchange for
Units. Without limiting the foregoing, Partnership activities may be
undertaken as principal, agent, general partner, syndicate member, joint
venturer, participant, or otherwise.
1.04 Principal Place of
Business. The
principal place of business of the Partnership shall be at 000 Xxxx Xxxx Xxxxxx,
Xxxxxxxxxx, Xxxx Xxxxxxxx, 00000. The Managing General Partner may
change the principal place of business of the Partnership to any other place
within the State of West Virginia upon ten days notice to the Investor
Partners.
1.05 Term of
Partnership. The
Partnership shall commence on the date the Partnership is organized, as set
forth in Section 1.01, and shall continue until terminated as provided in
Article IX hereof. Notwithstanding the foregoing, if Investor
Partners agreeing to purchase $11,000,000 in Units have not subscribed and paid
for their Units by the Offering Termination Date, then this Agreement shall be
void in all respects, and all investments of the Investor Partners shall be
promptly returned together with any interest earned thereon and without any
deduction therefrom. The Managing General Partner and its Affiliates
may purchase up to 10% (and no more) of the Units subscribed for by Investor
Partners in the Partnership; however, not more than $50,000 of the Units
purchased by the Managing General Partner and/or its Affiliates will be applied
to satisfying the minimum.
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1.06 Filings
(a) A
Certificate of Limited Partnership (the "Certificate") has been filed in the
office of the Secretary of State of West Virginia in accordance with the
provisions of the Act. The Managing General Partner shall take any
and all other actions reasonably necessary to perfect and maintain the status of
the Partnership as a limited partnership under the laws of West
Virginia. The Managing General Partner shall cause amendments to the
Certificate to be filed whenever required by the Act.
(b) The
Managing General Partner shall execute and cause to be filed original or amended
Certificates and shall take any and all other actions as may be reasonably
necessary to perfect and maintain the status of the Partnership as a limited
partnership or similar type of entity under the laws of any other states or
jurisdictions in which the Partnership engages in business.
(c) The
agent for service of process on the Partnership shall be Xxxxxx X. Xxxxxxxx or
any successor as appointed by the Managing General Partner.
(d) Upon
the dissolution of the Partnership, the Managing General Partner (or any
successor managing general partner) shall promptly execute and cause to be filed
certificates of dissolution in accordance with the Act and the laws of any other
states or jurisdictions in which the Partnership has filed
certificates.
1.07 Independent
Activities. Each
General Partner and each Limited Partner may, notwithstanding this Agreement,
engage in whatever activities they choose, whether the same are competitive with
the Partnership or otherwise, without having or incurring any obligation to
offer any interest in such activities to the Partnership or any
Partner. However, except as otherwise provided herein, the Managing
General Partner and any of its Affiliates may pursue business opportunities that
are consistent with the Partnership's investment objectives for their own
account only after they have determined that such opportunity either cannot be
pursued by the Partnership because of insufficient funds or because it is not
appropriate for the Partnership under the existing
circumstances. Neither this Agreement nor any activity undertaken
pursuant hereto shall prevent the Managing General Partner from engaging in such
activities, or require the Managing General Partner to permit the Partnership or
any Partner to participate in any such activities, and as a material part of the
consideration for the execution of this Agreement by the Managing General
Partner and the admission of each Investor Partner, each Investor Partner hereby
waives, relinquishes, and renounces any such right or claim of
participation. Notwithstanding the foregoing, the Managing General
Partner still has an overriding fiduciary obligation to the Investor
Partners.
1.08 Definitions. Capitalized
words and phrases used in this Agreement shall have the following
meanings:
(a) "Act"
shall mean the Uniform Limited Partnership Act of the State of West Virginia, as
set forth in §§ 47-9-1 through 47-9-63 thereof, as amended from time to time (or
any corresponding provisions of succeeding law).
(b) "Additional
General Partner" shall mean an Investor Partner who purchases Units as an
additional general partner, and such partner's transferees and
assigns. "Additional General Partners" shall mean all such Investor
Partners. "Additional General Partner" shall not include, after a
conversion, such Investor Partner who converts his interest into a Limited
Partnership interest pursuant to Section 7.10 herein.
(c) "Administrative
Costs" shall mean all customary and routine expenses incurred by the Managing
General Partner for the conduct of partnership administration, including legal,
finance, accounting, secretarial, travel, office rent, telephone, data
processing and other items of a similar nature.
(d) "Affiliate"
of a specified person shall mean (a) any person directly or indirectly owning,
controlling, or holding with power to vote 10 percent or more of the outstanding
voting securities of such specified person; (b) any person 10 percent or more of
whose outstanding voting securities are directly or indirectly owned,
controlled, or held with power to vote, by such specified person; (c) any person
directly or indirectly controlling, controlled by, or under common control with
such specified person; (d) any officer, director, trustee or partner of such
specified person, and (e) if such specified person is an officer, director,
trustee or partner, any person for which such person acts in any such
capacity.
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(e) "Agreement"
or "Partnership Agreement" shall mean this Limited Partnership Agreement, as
amended from time to time.
(f) "Capital
Account" shall mean, with respect to any Partner, the capital account maintained
for such Partner pursuant to Section 3.01 hereof.
(g) "Capital
Available for Investment" shall mean the sum of (a) Subscriptions, net of total
underwriting and brokerage discounts, commissions, and expenses, up to an
aggregate of 10½% of Subscriptions, and the Management Fee and (b) the Capital
Contribution of the Managing General Partner.
(h) "Capital
Contribution" shall mean the total investment, including the original
investment, assessments, and amounts reinvested, by such Investor Partner to the
capital of the Partnership pursuant to Section 2.02 herein, and, with respect to
the Managing General Partner and the Initial Limited Partner, the total
investment, including the original investment, assessments, and amounts
reinvested, to the capital of the Partnership pursuant to Section 2.01
herein.
(i) "Code"
shall mean the Internal Revenue Code of 1986, as amended from time to time (or
any corresponding provisions of succeeding law).
(j) "Cost,"
when used with respect to the sale of property to the Partnership, shall mean
(a) the sum of the prices paid by the seller to an unaffiliated person for such
property, including bonuses; (b) title insurance or examination costs, brokers'
commissions, filing fees, recording costs, transfer taxes, if any, and like
charges in connection with the acquisition of such property; (c) a pro rata
portion of the seller's actual necessary and reasonable expenses for seismic and
geophysical services; and (d) rentals and ad valorem taxes paid by the seller
with respect to such property to the date of its transfer to the buyer, interest
and points actually incurred on funds used to acquire or maintain such property,
and such portion of the seller's reasonable, necessary and actual expenses for
geological, engineering, drafting, accounting, legal and other like services
allocated to the property cost in conformity with generally accepted accounting
principles and industry standards, except for expenses in connection with the
past drilling of xxxxx which are not producers of sufficient quantities of oil
or gas to make commercially reasonable their continued operations, and provided
that the expenses enumerated in this subsection (d) hereof shall have been
incurred not more than 36 months prior to the purchase by the Partnership;
provided that such period may be extended, at the discretion of the state
securities administrator, upon proper justification. When used with
respect to services, "cost" means the reasonable, necessary and actual expense
incurred by the seller on behalf of the Partnership in providing such services,
determined in accordance with generally accepted accounting
principles. As used elsewhere, "cost" means the price paid by the
seller in an arm's-length transaction.
(k) "Depreciation"
shall mean, 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, 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 Managing General Partner.
(l) "Development
Well" shall mean a well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be
productive.
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(m) "Direct
Costs" shall mean all actual and necessary costs directly incurred for the
benefit of the Partnership and generally attributable to the goods and services
provided to the Partnership by parties other than the Managing General Partner
or its Affiliates. Direct costs shall not include any cost otherwise
classified as organization and offering expenses, administrative costs,
operating costs or property costs. Direct costs may include the cost
of services provided by the Managing General Partner or its Affiliates if such
services are provided pursuant to written contracts and in compliance with
Section 5.07(e) of the Partnership Agreement.
(n) "Drilling
and Completion Costs" shall mean all costs, excluding Operating Costs, of
drilling, completing, testing, equipping and bringing a well into production or
plugging and abandoning it, including all labor and other construction and
installation costs incident thereto, location and surface damages, cementing,
drilling mud and chemicals, drillstem tests and core analysis, engineering and
well site geological expenses, electric logs, costs of plugging back, deepening,
rework operations, repairing or performing remedial work of any type, costs of
plugging and abandoning any well participated in by the Partnership, and
reimbursements and compensation to well operators, including charges paid to the
Managing General Partner as unit operator during the drilling and completion
phase of a well, plus the cost of the gathering system and of acquiring
leasehold interests.
(o) "Dry
Hole" shall mean any well abandoned without having produced oil or gas in
commercial quantities.
(p) "Exploratory
Well" shall mean a well drilled to find commercially productive hydrocarbons in
an unproved area, to find a new commercially productive horizon in a field
previously found to be productive of hydrocarbons at another horizon, or to
significantly extend a known prospect.
(q) "Farmout"
shall mean an agreement whereby the owner of the leasehold or working interest
agrees to assign his interest in certain specific acreage to the assignees,
retaining some interest such as an overriding royalty interest, an oil and gas
payment, offset acreage or other type of interest, subject to the drilling of
one or more specific xxxxx or other performance as a condition of the
assignment.
(r) "General
Partners" shall mean the Additional General Partners and the Managing General
Partner.
(s) "Gross
Asset Value" shall mean, with respect to any asset, the asset's adjusted basis
for federal income tax purposes, except as follows:
(1) The
initial Gross Asset Value of any asset contributed by a Partner to the
Partnership shall be the gross fair market value of such asset, as determined by
the contributing Partner and the Partnership;
(2) The
Gross Asset Values of all Partnership assets shall be adjusted to equal their
respective gross fair market values, as determined by the Managing General
Partner, as of the following times: (a) the acquisition of an additional
interest in the Partnership by any new or existing Partner in exchange for more
than a de minimis Capital Contribution; (b) the distribution by the Partnership
Property as consideration for an interest in the Partnership; and (c) the
liquidation of the Partnership within the meaning of Treas. Reg. Section
1.704-1(b)(2)(ii)(g); provided, however, that the adjustments pursuant to
clauses (a) and (b) in this subsection (2) shall be made only if the Managing
General Partner reasonably determines that such adjustments are necessary or
appropriate to reflect the relative economic interests of the Partners in the
Partnership;
(3) The
Gross Asset Value of any Partnership asset distributed to any Partner shall be
the gross fair market value of such asset on the date of distribution;
and
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(4) The
Gross Asset Values of Partnership assets shall be increased (or decreased) to
reflect any adjustments to the adjusted basis of such assets pursuant to Code
Section 734(b) or Code Section 743(b), but only to the extent that such
adjustments are taken into account in determining Capital Accounts pursuant to
Treas. Reg. Section 1.704-1(b)(2)(iv)(m) and Section 3.02(g) hereof; provided,
however, that Gross Asset Values shall not be adjusted pursuant to this
subsection (4) to the extent the Managing General Partner determines that an
adjustment pursuant to subsection (2) hereof is necessary or appropriate in
connection with a transaction that would otherwise result in an adjustment
pursuant to this subsection (4).
If the
Gross Asset Value of an asset has been determined or adjusted pursuant to
subsections (1), (2), or (4) hereof, such Gross Asset value shall thereafter be
adjusted by the Depreciation taken into account with respect to such asset for
purposes of computing Profits and Losses.
(t) "IDC"
shall mean intangible drilling and development costs.
(u) "Independent
Expert" shall mean a person with no material relationship with the Managing
General Partner or its Affiliates who is qualified and who is in the business of
rendering opinions regarding the value of oil and gas properties based upon the
evaluation of all pertinent economic, financial, geologic and engineering
information available to the Managing General Partner or its
Affiliates.
(v) "Initial
Limited Partner" shall mean Xxxxxx X. Xxxxxxxx or any successor to his
interest.
(w) "Investor
Partner" shall mean any Person other than the Managing General Partner (i) whose
name is set forth on Exhibit A, attached hereto, as an Additional General
Partner or as a Limited Partner, or who has been admitted as an additional or
Substituted Investor Partner pursuant to the terms of this Agreement, and (ii)
who is the owner of a Unit. "Investor Partners" means all such
Persons. All references in this Agreement to a majority in interest
or a specified percentage of the Investor Partners shall mean Investor Partners
holding more than 50% or such specified percentage, respectively, of the
outstanding Units then held.
(x) "Lease"
shall mean full or partial interests in: (i) undeveloped oil and gas
leases; (ii) spacing or drilling units; (iii) oil and gas mineral rights; (iv)
licenses; (v) concessions; (vi) contracts; (vii) fee rights; or (viii) other
rights authorizing the owner thereof to drill for, reduce to possession and
produce oil and gas.
(y) "Limited
Partner" shall mean an Investor Partner who purchases Units as a Limited
Partner, such partner's transferees or assignees, and an Additional General
Partner who converts his interest to a limited partnership interest pursuant to
the provisions of the Agreement. "Limited Partners" shall mean all
such Investor Partners.
(z) "Management
Fee" shall mean that fee to which the Managing General Partner is entitled
pursuant to Section 6.06 hereof.
(aa) "Managing
General Partner" shall mean Petroleum Development Corporation or its successors,
in their capacity as the Managing General Partner.
(bb) "Managing
General Partner's Drilling Compensation" shall mean the amount paid to the
Managing General Partner for its services as managing general partner and
operator during drilling and completion activities.
(cc) "Mcf"
shall mean one thousand cubic feet of natural gas.
(dd) "Memorandum"
shall mean that Confidential Private Placement Offering Memorandum of which this
Agreement is a part, pursuant to which the Units are being offered and
sold.
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(ee) "Net
Subscriptions" shall mean an amount equal to the total Subscriptions of the
Investor Partners less the amount of Organization and Offering Costs of the
Partnership.
(ff) "Nonrecourse
Deductions" shall have the meaning set forth in Treas. Reg. Section
1.704-2(b)(1). The amount of Nonrecourse Deductions for a Partnership
fiscal year shall equal the net increase in the amount of Partnership Minimum
Gain during that fiscal year reduced (but not below zero) by the aggregate
distributions during that fiscal year of proceeds of a Nonrecourse Liability
that are allocable to an increase in Partnership Minimum Gain, determined
according to the provisions of Treas. Reg. Section 1.704-2(c).
(gg) "Nonrecourse
Liability" shall have the meaning set forth in Treas. Reg. Section 1.704-2(b)(3)
and 1.752-1(a)(2).
(hh) "Offering
Termination Date" shall mean August 16, 2007, or such earlier or later date as
the Managing General Partner, in its sole and absolute discretion, shall
elect.
(ii) "Oil
and Gas Interest" shall mean any oil or gas royalty or lease, or fractional
interest therein, or certificate of interest or participation or investment
contract relative to such royalties, leases or fractional interests, or any
other interest or right which permits the exploration of, drilling for, or
production of oil and gas or other related hydrocarbons or the receipt of such
production or the proceeds thereof.
(jj) "Operating
Costs" shall mean expenditures made and costs incurred in producing and
marketing oil or gas from completed xxxxx, including, in addition to labor,
fuel, repairs, hauling, materials, supplies, utility charges and other costs
incident to or therefrom, ad valorem and severance taxes, insurance and casualty
loss expense, and compensation to well operators or others for services rendered
in conducting such operations.
(kk) "Organization
and Offering Costs" shall mean all costs of organizing and selling the offering
including, but not limited to, total underwriting and brokerage discounts and
commissions (including fees of the underwriters' attorneys), expenses for
printing, engraving, mailing, salaries of employees while engaged in sales
activity, charges of transfer agents, registrars, trustees, escrow holders,
depositaries, engineers and other experts, expenses of qualification of the sale
of the securities under Federal and State law, including taxes and fees,
accountants' and attorneys' fees and other front end fees.
(ll) "Overriding
Royalty Interest" shall mean an interest in the oil and gas produced pursuant to
a specified oil and gas lease or leases, or the proceeds from the sale thereof,
carved out of the working interest, to be received free and clear of all costs
of development, operation, or maintenance.
(mm) "Partner
Minimum Gain" shall mean an amount, with respect to each Partner Nonrecourse
Debt, equal to the Partnership Minimum Gain that would result if such Partner
Nonrecourse Debt were treated as a Nonrecourse Liability, determined in
accordance with Treas. Reg. Section 1.704-2(i).
(nn) "Partner
Nonrecourse Debt" shall have the meaning set forth in Treas. Reg. Section
1.704-2(b)(4).
(oo) "Partner
Nonrecourse Deductions" shall have the meaning set forth in Treas. Reg. Section
1.704-2(i)(2). The amount of Partner Nonrecourse Deductions with
respect to a Partner Nonrecourse Debt for a Partnership fiscal year shall equal
the net increase in the amount of Partner Minimum Gain attributable to such
Partner Nonrecourse Debt during that fiscal year reduced (but not below zero) by
proceeds of the liability distributed during that fiscal year to the Partner
bearing the economic risk of loss for such liability that are both attributable
to the liability and allocable to an increase in Partner Minimum Gain
attributable to such Partner Nonrecourse Debt, determined in accordance with
Treas. Reg. Section 1.704-2(i)(3).
(pp) "Partners"
shall mean the Managing General Partner, the Initial Limited Partner, and the
Investor Partners. "Partner" shall mean any one of the
Partners. All references in this Agreement to a majority in interest
or a specified percentage of the Partners shall mean Partners holding more than
50% or such specified percentage, respectively, of the outstanding Units then
held.
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(qq) "Partnership"
shall mean the partnership pursuant to this Agreement and the partnership
continuing the business of this Partnership in the event of dissolution as
herein provided.
(rr) "Partnership
Minimum Gain" shall have the meaning set forth in Treas. Reg. Section
1.704-2(b)(2) and 1.704-2(d)(1).
(ss) "Permitted
Transfer" shall mean any transfer of Units satisfying the provisions of Section
7.03 herein.
(tt) "Person"
shall mean any individual, partnership, corporation, trust, or other
entity.
(uu) "Profits"
and "Losses" shall mean, for each fiscal year or other period, an amount equal
to the Partnership's taxable income or loss for such year or period, determined
in accordance with Code Section 703(a) (for this purpose, all items of income,
gain, loss, or deduction required to be stated separately pursuant to Code
Section 703(a)(1) shall be included in taxable income or loss), with the
following adjustments:
(1) Any
income of the Partnership that is exempt from federal income tax and not
otherwise taken into account in computing Profits or Losses pursuant to this
Section 1.08(uu) shall be added to such taxable income or loss;
(2) Any
expenditures of the Partnership described in Code Section 705(a)(2)(B) or
treated as Code Section 705(a)(2)(B) expenditures pursuant to Treas. Reg.
Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing
Profits or Losses pursuant to this Section 1.08(uu) shall be subtracted from
such taxable income or loss;
(3) In
the event the Gross Asset Value of any Partnership asset is adjusted pursuant to
Section 1.08(s)(2) or Section 1.08(s)(3) hereof, the amount of such adjustment
shall be taken into account as gain or loss from the disposition of such asset
for purposes of computing Profits or Losses.
(4) Gain
or loss resulting from any disposition of Partnership Property with respect to
which gain or loss is recognized for federal income tax purposes shall be
computed by reference to the Gross Asset Value of the property disposed of,
notwithstanding that the adjusted tax basis of such property differs from its
Gross Asset Value;
(5) In
lieu of the 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 such fiscal year or other period, computed in
accordance with Section 1.08(k) hereof; and
(6) Notwithstanding
any other provisions of this Section 1.08(uu ), any items which are specially
allocated pursuant to this Agreement shall not be taken into account in
computing Profits or Losses.
(vv) "Prospect"
shall be deemed to consist of the drilling or spacing unit on which the well
will be drilled by the Partnership which is the minimum area permitted by state
law or local practice on which one well may be drilled.
(ww)
"Proved Developed Oil and Gas Reserves" shall mean the reserves that can be
expected to be recovered through existing xxxxx with existing equipment and
operating methods. Additional oil and gas expected to be obtained
through the application of fluid injection or other improved recovery techniques
for supplementing the natural forces and mechanisms of primary recovery should
be included as "proved developed reserves" only after testing by a pilot project
or after the operation of an installed program has confirmed through production
response that increased recovery will be achieved.
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(xx) "Proved
Oil and Gas Reserves" shall mean the estimated quantities of crude oil, natural
gas, and natural gas liquids which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions, i.e., prices and
costs as of the date the estimate is made. Prices include
consideration of changes in existing prices provided only by contractual
arrangements, but not on escalations based upon future conditions.
(1) Reservoirs
are considered proved if economic productibility is supported by either actual
production or conclusive formation test. The area of a reservoir
considered proved includes (A) that portion delineated by drilling and defined
by gas-oil and/or oil-water contacts, if any, and (B) the immediately adjoining
portions not yet drilled, but which can be reasonably judged as economically
productive on the basis of available geological and engineering
data. In the absence of information on fluid contacts, the lowest
known structural occurrence of hydrocarbons controls the lower proved limit of
the reservoir.
(2) Reserves
which can be produced economically through application of improved recovery
techniques (such as fluid injection) are included in the "proved" classification
when successful testing by a pilot project, or the operation of an installed
program in the reservoir, provides support for the engineering analysis on which
the project or program was based.
(3) Estimates
or proved reserves do not include the following: (A) oil that may become
available from known reservoirs but is classified separately as "indicated
additional reserves"; (B) crude oil, natural gas, and natural gas liquids, the
recovery of which is subject to reasonable doubt because of uncertainty as to
geology, reservoir characteristics, or economic factors; (C) crude oil, natural
gas, and natural gas liquids, that may occur in undrilled prospects; and (D)
crude oil, natural gas, and natural gas liquids, that may be recovered from oil
shales, coal, gilsonite and other such sources.
(yy) "Proved
Undeveloped Reserves" shall mean the reserves that are expected to be recovered
from new xxxxx on undrilled acreage, or from existing xxxxx where a relatively
major expenditure is required for recompletion. Reserves on undrilled
acreage shall be limited to those drilling units offsetting productive units
that are reasonably certain of production when drilled. Proved
reserves for other undrilled units can be claimed only where it can be
demonstrated with certainty that there is continuity of production from the
existing productive formation. Under no circumstances should
estimates for proved undeveloped reserves be attributable to any acreage for
which an application of fluid injection or other improved recovery technique is
contemplated, unless such techniques have been proved effective by actual tests
in the area and in the same reservoir.
(zz) "Reservoir"
shall mean a separate structural or stratigraphic trap containing an
accumulation of oil or gas.
(aaa) "Roll-Up"
shall mean a transaction involving the acquisition, merger, conversion, or
consolidation, either directly or indirectly, of the Partnership and the
issuance of securities of a roll-up entity. Such term does not
include:
(1) a
transaction involving securities of the Partnership that have been listed for at
least 12 months on a national exchange or traded through the National
Association of Securities Dealers Automated Quotation National Market System;
or
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(2) a
transaction involving the conversion to corporate, trust or association form of
only the Partnership if, as a consequence of the transaction, there will be no
significant adverse change in any of the following:
(i) voting
rights;
(ii) the
term of existence of the Partnership;
(iii) sponsor
compensation; or
(iv) the
Partnership's investment objectives.
(bbb) "Roll-Up
Entity" shall mean a partnership, trust, corporation or other entity that would
be created or survive after the successful completion of a proposed roll-up
transaction.
(ccc) "Sponsor"
shall mean any person directly or indirectly instrumental in organizing, wholly
or in part, a partnership or any person who will manage or is entitled to manage
or participate in the management or control of a
partnership. "Sponsor" includes the managing and controlling general
partner(s) and any other person who actually controls or selects the person who
controls 25% or more of the exploratory, developmental or producing activities
of the Partnership, or any segment thereof, even if that person has not entered
into a contract at the time of formation of the
Partnership. "Sponsor" does not include wholly independent third
parties such as attorneys, accountants, and underwriters whose only compensation
is for professional services rendered in connection with the offering of
units. Whenever the context of these guidelines so requires, the term
"sponsor" shall be deemed to include its affiliates.
(ddd) "Subscription"
shall mean the amount indicated on the Subscription Agreement that an Investor
Partner has agreed to pay to the Partnership as his Capital
Contribution.
(eee) "Subscription
Agreement" shall mean the Agreement, attached to the Memorandum as Appendix B,
pursuant to which an Investor subscribes to Units in the
Partnership.
(fff) "Substituted
Investor Partner" shall mean any Person admitted to the Partnership as an
Investor Partner pursuant to Section 7.03(c) hereof.
(ggg) "Treas.
Reg." or "Regulation" shall mean the income tax regulations promulgated under
the Code, as such regulations may be amended from time to time (including
corresponding provisions of succeeding regulations).
(hhh) "Unit"
shall mean an undivided interest of the Investor Partners in the aggregate
interest in the capital and profits of the Partnership. Each Unit
represents Capital Contributions of $20,000 to the Partnership.
(iii) "Working
Interest" shall mean an interest in an oil and gas leasehold which is subject to
some portion of the costs of development, operation, or
maintenance.
ARTICLE
II
Capitalization
2.01 Capital Contributions of the
Managing General Partner and Initial Limited Partner
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(a) On
or before the Offering Termination Date, the Managing General Partner shall make
a Capital Contribution in cash to the Partnership of an amount equal to not less
than 43.07% of the aggregate Capital Contributions of the Investor
Partners.
(b) The
Managing General Partner shall pay all Lease and tangible drilling costs as well
as all Intangible Drilling Costs in excess of such costs paid by the Investor
Partners with respect to the Partnership; to the extent that such costs are
greater than the Managing General Partner's Capital Contribution set forth in
the previous subsection, the Managing General Partner shall make such additional
contributions in cash to the Partnership equal to such additional Costs; in the
event of such additional Capital Contribution, the Managing General Partner's
share of profits and losses and distributions shall equal the percentage arrived
at by dividing the Managing General Partner's Capital Contribution by the total
well costs, excluding the Managing General Partner's Drilling Compensation,
except that such percentage may be revised by Sections 3.02.
(c) In
consideration of making its Capital Contribution as reflected in this Section
2.01(a), becoming a General Partner, subjecting its assets to the liabilities of
the Partnership, and undertaking other obligations as herein set forth, the
Managing General Partner shall receive the interest in the Partnership provided
in Section 2.01(a) and allocated in Article III hereof.
(d) The
Initial Limited Partner shall contribute $100 in cash to the capital of the
Partnership. Upon the earlier of the conversion of an Additional
General Partner's interest into a Limited Partner's interest or the admission of
a Limited Partner to the Partnership, the Partnership shall redeem in full,
without interest or deduction, the Initial Limited Partner's Capital
Contribution, and the Initial Limited Partner shall cease to be a
Partner.
2.02 Capital Contributions of the
Investor Partners.
(a) Upon
execution of this Agreement, each Investor Partner (whose names and addresses
and number of Units to which Subscribed are set forth in Exhibit A) shall
contribute to the capital of the Partnership the sum of $20,000 for each Unit
purchased. The minimum subscription by an Investor Partner is one
Unit ($20,000).
(b) The
contributions of the Investor Partners pursuant to subsection 2.02(a) hereof
shall be in cash or by check subject to collection.
(c) Until
the Offering Termination Date and until such subsequent time as the
contributions of the Investor Partners are invested in accordance with the
provisions of the Memorandum, all monies received from persons subscribing as
Investor Partners (i) shall continue to be the property of the investor making
such payment, (ii) shall be held in escrow for such investor in the manner and
to the extent provided in the Memorandum, and (iii) shall not be commingled with
the personal monies or become an asset of the Managing General Partner or the
Partnership.
(d) Upon
the original sale of Units by the Partnership, subscribers shall be admitted as
Partners no later than 15 days after the release from the escrow account of the
Capital Contributions to the Partnership, in accordance with the terms of the
Memorandum; subscriptions shall be accepted or rejected by the Partnership
within 30 days of their receipt; if rejected, all subscription monies shall be
returned to the subscriber forthwith.
(e) Except
as provided in Section 4.03 hereof, any proceeds of the offering of Units for
sale pursuant to the Memorandum not used, committed for use, or reserved as
operating capital in the Partnership's operations within one year after the
closing of such offering shall be distributed pro rata to the Investor Partners
as a return of capital and the Managing General Partner shall reimburse such
Investors for selling expenses, management fees, and offering expenses allocable
to the return of capital.
(f) Until
proceeds from the public offering are invested in the Partnership's operations,
such proceeds may be temporarily invested in income producing short-term, highly
liquid investments, where there is appropriate safety of principal, such as U.S.
Treasury Bills. Any such income shall be allocated pro rata to the
Investor Partners providing such capital contributions.
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2.03 Additional
Contributions. Except
as otherwise provided in this Agreement, no Investor Partner shall be required
or obligated (a) to contribute any capital to the Partnership other than as
provided in Section 2.02 hereof, or (b) to lend any funds to the
Partnership. No interest shall be paid on any capital contributed to
the Partnership pursuant to this Article II and, except as otherwise provided
herein, no Partner, other than the Initial Limited Partner as authorized herein,
may withdraw his Capital Contribution. The Units are nonassessable;
however, General Partners are liable, in addition to their Capital
Contributions, for Partnership obligations and liabilities represented by their
ownership of interests as general partners, in accordance with West Virginia
law.
ARTICLE
III
Capital
Accounts and Allocations
3.01 Capital
Accounts.
(a) General. A
separate Capital Account shall be established and maintained for each Partner on
the books and records of the Partnership. Capital Accounts shall be
maintained in accordance with Treas. Reg. Section 1.704-1(b) and any
inconsistency between the provisions of this Section 3.01 and such regulation
shall be resolved in favor of the regulation. In the event the
Managing General Partner shall determine that it is prudent to modify the manner
in which the Capital Accounts, or any debits or credits thereto (including,
without limitation, debits or credits relating to liabilities that are secured
by contributed or distributed property or that are assumed by the Partnership of
the Partners), are computed in order to comply with such regulations, the
Managing General Partner may make such modification, provided that it is not
likely to have a material effect on the amounts distributable to any Partner
pursuant to Section 9.03 hereof upon the dissolution of the
Partnership. The Managing General Partner also shall (i) make any
adjustments that are necessary or appropriate to maintain equality between the
Capital Accounts of the Partners and the amount of Partnership capital reflected
on the Partnership's balance sheet, as computed for book purposes, in accordance
with Treas. Reg. Section 1.704-1(b)(2)(iv)(q), and (ii) make any appropriate
modifications in the event unanticipated events might otherwise cause this
Agreement not to comply with Treas. Reg. Section 1.704-1(b).
(b) Increases to Capital
Accounts. Each
Partner's Capital Account shall be credited with (i) the amount of money
contributed by him to the Partnership; (ii) the amount of any Partnership
liabilities that are assumed by him (within the meaning of Treas. Reg. Section
1.704-1(b)(2)(iv)(c)), but not by increases in his share of Partnership
liabilities within the meaning of Code Section 752(a); (iii) the Gross Asset
Value of property contributed by him to the Partnership (net of liabilities
securing such contributed property that the Partnership is considered to assume
or take subject to under Code Section 752); and (iv) allocations to him of
Partnership Profits (or items thereof), including income and gain exempt from
tax and Income and gain described in Treas. Reg. Section 1.704-1(b)(2)(iv)(g)
(relating to adjustments to reflect book value).
(c) Decreases to Capital
Accounts. Each
Partner's Capital Account shall be debited with (i) the amount of money
distributed to him by the Partnership; (ii) the amount of his individual
liabilities that are assumed by the Partnership (other than liabilities
described in Treas. Reg. Section 1.704-1(b)(2)(iv)(b)(2) that are assumed by the
Partnership and other than decreases in his share of Partnership liabilities
within the meaning of Code Section 752(b)); (iii) the Gross Asset Value of
property distributed to him by the Partnership (net of liabilities securing such
distributed property that he is considered to assume or take subject to under
Code Section 752); (iv) allocations to him of expenditures of the Partnership
not deductible in computing Partnership taxable income and not properly
chargeable to Capital Account (as described in Code Section 705(a)(2)(B)), and
(v) allocations to him of Partnership Losses (or item thereof), including loss
and deduction described in Treas. Reg. Section 1.704-1(b)(2)(iv)(g) (relating to
adjustments to reflect book value), but excluding items described in (iv) above
and excluding loss or deduction described in Treas. Reg. Section
1.704-1(b)(4)(iii) (relating to excess percentage depletion).
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(d) Adjustments to Capital
Accounts Related to Depletion.
(1) Solely
for purposes of maintaining the Capital Accounts, each year the Partnership
shall compute (in accordance with Treas. Reg. Section 1.704-1(b)(2)(iv)(k)) a
simulated depletion allowance for each oil and gas property using that method,
as between the cost depletion method and the percentage depletion method
(without regard to the limitations of Code Section 613A(c)(3) which
theoretically could apply to any Partner), which results in the greatest
simulated depletion allowance. The simulated depletion allowance with
respect to each oil and gas property shall reduce the Partners' Capital Accounts
in the same proportion as the Partners were allocated adjusted basis with
respect to such oil and gas property under Section 3.03(a) hereof. In
no event shall the Partnership's aggregate simulated depletion allowance with
respect to an oil and gas property exceed the Partnership's adjusted basis in
the oil and gas property (maintained solely for Capital Account
purposes).
(2) Upon
the taxable disposition of an oil and gas property by the Partnership, the
Partnership shall determine the simulated (hypothetical) gain or loss with
respect to such oil and gas property (solely for Capital Account purposes) by
subtracting the Partnership's simulated adjusted basis for the oil and gas
property (maintained solely for Capital Account purposes) from the amount
realized by the Partnership upon such disposition. Simulated adjusted
basis shall be determined by reducing the adjusted basis by the aggregate
simulated depletion charged to the Capital Accounts of all Partners in
accordance with Section 3.01(d)(1) hereof. The Capital Accounts of
the Partners shall be adjusted upward by the amount of any simulated gain on
such disposition in proportion to such Partners' allocable share of the portion
of total amount realized from the disposition of such property that exceeds the
Partnership's simulated adjusted basis in such property. The Capital
Accounts of the Partners shall be adjusted downward by the amount of any
simulated loss in proportion to such Partners' allocable shares of the total
amount realized from the disposition of such property that represents recovery
of the Partnership's simulated adjusted basis in such property.
(e) Restoration
of Negative Capital Accounts. Except
as otherwise provided in this Agreement, neither an Investor Partner nor the
Initial Limited Partner shall be obligated to the Partnership or to any other
Partner to restore any negative balance in his Capital Account. The
Managing General Partner shall be obligated to restore the deficit balance in
its Capital Account.
3.02 Allocation of Profits and
Losses.
(a) General. Except
as provided in this Section 3.02 or in Section 2.01(b) and Section 3.03 hereof,
Profits and Losses during the production phase of the Partnership shall be
allocated 63% to the Investor Partners and 37% to the Managing General
Partner. Notwithstanding the above allocations, the following special
allocations shall be employed:
(1) irrespective
of any revisions effected by Section 2.01(b), IDC and recapture of IDC shall be
allocated 100% to the Investor Partners and 0% to the Managing General Partner,
except as otherwise provided in the following clause; however, in the event that
a portion of the Capital Contribution of the Managing General Partner is
utilized for IDC, as provided by Section 2.01(b), then IDC and recapture of IDC
shall be allocated to the Investor Partners and the Managing General Partner in
a percentage equal to their respective contribution to IDC;
(2) irrespective
of any revisions effected by Section 2.01(b), the following provisions shall
apply: Organization and Offering Costs net of commissions, due diligence
expenses and wholesaling fees payable to the dealer-manager and the soliciting
dealers shall be paid by the Managing General Partner; such commissions, due
diligence expenses and wholesaling fees payable to the dealer manager and the
soliciting dealers shall be allocated 100% to the Investor Partners and 0% to
the Managing General Partner; except that Organization and Offering Costs in
excess of 10½% of Subscriptions shall be allocated 100% to the Managing General
Partner and 0% to the Investor Partners;
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(3) irrespective
of any revisions effected by Section 2.01(b), the Management Fee shall be
allocated 100% to the Investor Partners and 0% to the Managing General
Partner;
(4) irrespective
of any revisions effected by Section 2.01(b), Costs of Leases and Costs of
tangible equipment, including depreciation or cost recovery benefits, shall be
allocated 0% to the Investor Partners and 100% to the Managing General Partner
and revenues from the sale of equipment shall be allocated 63% to the Investor
Partners and 37% to the Managing General Partner;
(5) Drilling
and Completion Costs shall be allocated 63% to the Investor Partners and 37% to
the Managing General Partner;
(6) Direct
Costs and Operating Costs shall be allocated 63% to the Investor Partners and
37% to the Managing General Partner; and
(7) irrespective
of any revisions effected by Section 2.01(b), Administrative Costs shall be
borne 100% by and allocated 100% to the Managing General Partner.
(b) Capital Account
Deficits. Notwithstanding
anything to the contrary in Section 3.02(a), no Investor Partner shall be
allocated any item to the extent that such allocation would create or increase a
deficit in such Investor Partner's Capital Account.
(1) Obligations to
Restore. For
purposes of this Section 3.02(b), in determining whether an allocation would
create or increase a deficit in a Partner's Capital Account, such Capital
Account shall be reduced for those items described in Treas. Reg. Section
1.704-1(b)(2)(ii)(d)(4), (5), and (6) and shall be increased by any amounts
which such Partner is obligated to restore or is deemed obligated to restore
pursuant to the penultimate sentences of Treas. Reg. Sections 1.704-2(g)(1) and
1.704-2(i)(5). Further, such Capital Accounts shall otherwise meet
the requirements of Treas. Reg. Section 1.704-1(b)(2)(ii)(d).
(2) Reallocations. Any
loss or deduction of the Partnership, the allocation of which to any Partner is
prohibited by this Section 3.02(b), shall be reallocated to those Partners not
having a deficit in their Capital Accounts (as adjusted in Section 3.02(b)(1))
in the proportion that the positive balance of each such Partner's adjusted
Capital Account bears to the aggregate balance of all such Partners' adjusted
Capital Accounts, with any remaining losses or deductions being allocated to the
Managing General Partner.
(3) Qualified Income
Offset. In
the event any Investor Partner unexpectedly receives any adjustments,
allocations, or distributions described in Treas. Reg. Section
1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Partnership income and gain shall
be specifically allocated to such Partner in an amount and manner sufficient to
eliminate (to the extent required by the Regulations) the total of the deficit
balance in his Capital Account (as adjusted in Section 3.02(b)(1)) created by
such adjustments, allocations, or distributions, provided that an allocation
pursuant to this Section 3.02(b)(3) shall be made if and only to the extent that
such Partner would have a deficit in his Capital Account (as adjusted in Section
3.02(b)(1)) after all other allocations provided for in this Section 3 have been
tentatively made as if this Section 3.02(b)(3) were not in the
Agreement.
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(4) Gross Income
Allocations. In
the event an Investor Partner has a deficit Capital Account at the end of any
Partnership fiscal year which is in excess of the sum of (i) the amount such
Partner is obligated to restore pursuant to any provision of this Agreement and
(ii) the amount such Partner is deemed to be obligated to restore pursuant to
the penultimate sentences of Treas. Reg. Sections 1.704-2(g)(1) and
1.704-2(i)(5), such Partner shall be specially allocated items of Partnership
income and gain in the amount of such excess as quickly as possible, provided
that an allocation pursuant to this Section 3.02(b)(4) shall be made only if and
to the extent that such Partner would have a deficit Capital Account in excess
of such sum after all other allocations provided for in this Section 3 have been
made as if Section 3.02(b)(3) hereof and this Section 3.02(b)(4) were not in the
Agreement.
(c) Minimum Gain
Chargeback. Notwithstanding
any other provision of this Section 3.02, if there is a net decrease in
Partnership Minimum Gain during any taxable year, pursuant to Treas. Reg.
Section 1.704-2(f)(1), all Partners shall be allocated items of partnership
income and gain for that year equal to that partner's share of the net decrease
in Partnership Minimum Gain (within the meaning of Treas. Reg. Section
1.704-2(g)(2)). Notwithstanding the preceding sentence, no such
chargeback shall be made to the extent one or more of the exceptions and/or
waivers provided for in Treas. Reg. Section 1.704-2(f)(2)-(5)
applies. Allocations pursuant to the previous sentence shall be made
in proportion to the respective amounts required to be allocated to each Partner
pursuant thereto. The items to be so allocated shall be determined in
accordance with Treas. Reg. Section 1.704-2(f)(6). This Section
3.02(c) is intended to comply with the minimum gain chargeback requirement in
such Section of the Regulations and shall be interpreted consistently
therewith. To the extent permitted by such Section of the Regulations
and for purposes of this Section 3.02(c) only, each Partner's Capital Account
(as adjusted in Section 3.02(b)(1)) shall be determined prior to any other
allocations pursuant to this Section 3 with respect to such tax year and without
regard to any net decrease in Partner Minimum Gain during such fiscal
year.
(d) Partner Minimum Gain
Chargeback. Notwithstanding
any other provision of this Section 3 except Section 3.02(c), if there is a net
decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt
during any Partnership fiscal year, rules similar to those contained in Section
3.02(c) shall apply in a manner consistent with Treas. Reg. Section
1.704-2(i)(4). This Section 3.02(d) is intended to comply with the
minimum gain chargeback requirement in such Section of the Regulations and shall
be interpreted consistently therewith. Solely for purposes of this
Section 3.02(d), each Person's Capital Account deficit (as so adjusted) shall be
determined prior to any other allocations pursuant to this Section 3 with
respect to such fiscal year, other than allocations pursuant to Section 3.02(c)
hereof.
(e) Nonrecourse
Deductions. Nonrecourse
Deductions for any fiscal year or other period shall be specially allocated to
the Partners (in proportion to their Units), in accordance with Treas. Reg.
Section 1.704-2.
(f) Partner Nonrecourse
Deductions. Any
Partner Nonrecourse Deductions for any fiscal year or other period shall be
specially allocated to the Partner who bears the economic risk of loss with
respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse
Deductions are attributable in accordance with Treas. Reg. Section
1.704-2(i).
(g) Code Section 754
Adjustments. To
the extent an adjustment to the adjusted tax basis of any Partnership asset
pursuant to Code Section 734(b) or 743(b) is required, pursuant to Treas. Reg.
Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be treated
as an item of gain (if the adjustment increases the basis of the asset) or loss
(if the adjustment decreases such basis) and such gain or loss shall be
specially allocated to the Partners in a manner consistent with the manner in
which their Capital Accounts are required to be adjusted pursuant to such
Section of the Regulations.
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(h) Curative
Allocations.
(1) The
"Regulatory Allocations" consist of the "Basic Regulatory Allocations," as
defined in Section 3.02(h)(2) hereof, the "Nonrecourse Regulatory Allocations,"
as defined in Section 3.02(h)(3) hereof, and the "Partner Nonrecourse Regulatory
Allocations," as defined in Section 3.02(h)(4) hereof.
(2) The
"Basic Regulatory Allocations" consist of allocations pursuant to Section
3.02(b)(2), (3), and (4) hereof. Notwithstanding any other provision
of this Agreement, other than the Regulatory Allocations, the Basic Regulatory
Allocations shall be taken into account in allocating items of income, gain,
loss, and deduction among the Partners so that, to the extent possible, the net
amount of such allocations of other items and the Basic Regulatory Allocations
to each Partner shall be equal to the net amount that would have been allocated
to each such Partner if the Basic Regulatory Allocations had not
occurred. For purposes of applying the foregoing sentence,
allocations pursuant to this Section 3.02(h)(2) shall only be made with respect
to allocations pursuant to Section 3.02(g) hereof to the extent the Managing
General Partner reasonably determines that such allocations will otherwise be
inconsistent with the economic agreement among the parties to this
Agreement.
(3) The
"Nonrecourse Regulatory Allocations" consist of all allocations pursuant to
Section 3.02(c) and 3.02(e) hereof. Notwithstanding any other
provision of this Agreement, other than the Regulatory Allocations, the
Nonrecourse Regulatory Allocations shall be taken into account in allocating
items of income, gain, loss, and deduction among the Partners so that, to the
extent possible, the net amount of such allocations of other items and the
Nonrecourse Regulatory Allocations to each Partner shall be equal to the net
amount that would have been allocated to each Partner if the Nonrecourse
Regulatory Allocations had not occurred. For purposes of applying the
foregoing sentence (i) no allocations pursuant to this Section 3.02(h)(3) shall
be made prior to the Partnership fiscal year during which there is a net
decrease in Partnership Minimum Gain, and then only to the extent necessary to
avoid any potential economic distortions caused by such net decrease in
Partnership Minimum Gain, and (ii) allocations pursuant to this Section
3.02(h)(iii) shall be deferred with respect to allocations pursuant to Section
3.02(e) hereof to the extent the Managing General Partner reasonably determines
that such allocations are likely to be offset by subsequent allocations pursuant
to Section 3.02(c).
(4) The
"Partner Nonrecourse Regulatory Allocations" consist of all allocations pursuant
to Sections 3.02(d) and 3.02(f) hereof. Notwithstanding any other
provision of this Agreement, other than the Regulatory Allocations, the Partner
Nonrecourse Regulatory Allocations shall be taken into account in allocating
items of income, gain, loss, and deduction among the Partners so that, to the
extent possible, the net amount of such allocations of other items and the
Partner Nonrecourse Regulatory Allocations to each Partner shall be equal to the
net amount that would have been allocated to each such Partner if the Partner
Nonrecourse Regulatory Allocations had not occurred. For purposes of
applying the foregoing sentence (i) no allocations pursuant to this Section
3.02(h)(4) shall be made with respect to allocations pursuant to Section 3.02(f)
relating to a particular Partner Nonrecourse Debt prior to the Partnership
fiscal year during which there is a net decrease in Partner Minimum Gain
attributable to such Partner Nonrecourse Debt, and then only to the extent
necessary to avoid any potential economic distortions caused by such net
decrease in Partner Minimum Gain, and (ii) allocations pursuant to this Section
3.02(h)(4) shall be deferred with respect to allocations pursuant to Section
3.02(f) hereof relating to a particular Partner Nonrecourse Debt to the extent
the Managing General Partner reasonably determines that such allocations are
likely to be offset by subsequent allocations pursuant to Section 3.02(d)
hereof.
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(5) The
Managing General Partner shall have reasonable discretion with respect to each
Partnership fiscal year, to apply the provisions of Sections 3.02(h)(2), (3),
and (4) hereof among the Partners in a manner that is likely to minimize such
economic distortions.
(i) Other
Allocations. Except
as otherwise provided in this Agreement, all items of Partnership income, loss,
deduction, and any other allocations not otherwise provided for shall be divided
among the Unit Holders in the same proportions as they share Profits or Losses,
as the case may be, for the year.
(j) Agreement to be
Bound. The
Partners are aware of the income tax consequences of the allocations made by
this Section 3.02 and hereby agree to be bound by the provisions of this Section
3.02 in reporting their shares of Partnership income and loss for income tax
purposes.
(k) Excess Nonrecourse
Liabilities. Solely
for purposes of determining a Partner's proportionate share of the "excess
nonrecourse liabilities" of the Partnership within the meaning of Treas. Reg.
Section 1.752-3(a)(3), the Partners' interests in Partnership profits are as
follows: Investor Partners, 63% (in proportion to their Units) and
the Managing General Partner, 37%.
(l) Allocation
Variations. The
Managing General Partner shall have the authority to vary allocations to
preserve and protect the intention of the Partners as follows:
(1) It
is the intention of the Partners that each Partner's distributive share of
income, gain, loss, deduction or credit (or any item thereof) shall be
determined and allocated in accordance with this Article 3 to the fullest extent
permitted by Code Section 704(b). In order to preserve and protect
the allocations provided for in this Article 3, the Managing General Partner
shall have the authority to allocate income, gain, loss, deduction or credit (or
any item thereof) arising in any year differently than that expressly provided
for in this Article 3, if and to the extent that determining and allocating
income, gain, loss, deduction or credit (or any item thereof) in the manner
expressly provided for in this Article 3 would cause the allocations of each
Partner's distributive share of income, gain, loss, deduction or credit (or any
item thereof) not to be permitted by Code Section 704(b) and the Regulations
promulgated thereunder. Any allocation made pursuant to this Section
3.02(l) shall be deemed to be a complete substitute for any allocation otherwise
expressly provided for in this Article 3, and no amendment of this Agreement or
further consent of any Partner shall be required therefor.
(2) In
making any such allocation (the "new allocation") under this Section 3.02(l) the
Managing General Partner shall be authorized to act only after having been
advised by the Partnership's accountants and/or counsel that, under Code Section
704(b) and the Regulations thereunder, (i) the new allocation is necessary, and
(ii) the new allocation is the minimum modification of the allocations otherwise
expressly provided for in this Article 3 which is necessary in order to assure
that, either in the then current year or in any preceding year, each Partner's
distributive share of income, gain, loss, deduction or credit (or any item
thereof) is determined and allocated in accordance with this Article 3 to the
fullest extent permitted by Code Section 704(b) and the Regulations
thereunder.
(3) If
the Managing General Partner is required by this Section 3.02(l) to make any new
allocation in a manner less favorable to the Investor Partners than is otherwise
expressly provided for in this Article 3, then the Managing General Partner
shall have the authority, only after having been advised by the Partnership's
accountants and/or counsel that they are permitted by Code Section 704(b), to
allocate income, gain, loss, deduction or credit (or any item thereof) arising
in later years in such a manner as will make the allocations of income, gain,
loss, deduction or credit (or any item thereof) to the Investor Partners as
comparable as possible to the allocations otherwise expressly provided for or
contemplated by this Article 3.
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(4) Any
new allocation made by the Managing General Partner under this Section 3.02(l)
in reliance upon the advice of the Partnership's accountants and/or counsel
shall be deemed to be made pursuant to the fiduciary obligation of the Managing
General Partner to the Partnership and the Investor Partners, and no such new
allocation shall give rise to any claim or cause of action by any Investor
Partner.
(m) Tax Allocations: Code
Section 704(c). In
accordance with Code Section 704(c) and the Regulations thereunder, income,
gain, loss, and deduction with respect to any property contributed to the
capital of the Partnership shall, solely for tax purposes, be allocated among
the Partners so as to take account of any variation between the adjusted basis
of such property to the Partnership for federal income tax purposes and its
initial Gross Asset Value (computed in accordance with Section
1.08(s)(1).
In the
event the Gross Asset Value of any Partnership asset is adjusted pursuant to
Section 1.08(s)(1) hereof, subsequent allocations of income, gain, loss, and
deduction with respect to such asset shall take account of any variation between
the adjusted basis of such asset for federal income tax purposes and its Gross
Asset Value in the same manner as under Code Section 704(c) and the Regulations
thereunder.
Any
elections or other decisions relating to such allocations shall be made by the
Managing General Partner in any manner that reasonably reflects the purpose and
intention of this Agreement. Allocations pursuant to this Section
3.02(m) are solely for purposes of federal, state, and local taxes and shall not
affect, or in any way be taken into account in computing, any Person's Capital
Account or share of Profits, Losses, other items, or distributions pursuant to
any provision of this Agreement.
3.03 Depletion.
(a) The
depletion deduction with respect to each oil and gas property of the Partnership
shall be computed separately for each Partner in accordance with Code Section
613A(c)(7)(D) for Federal income tax purposes. For purposes of such
computation, the adjusted basis of each oil and gas property shall be allocated
in accordance with the Partners' interests in the capital of the
Partnership. Among the Investor Partners, such adjusted basis shall
be apportioned among them in accordance with the number of Units
held.
(b) Upon
the taxable disposition of an oil or gas property by the Partnership, the amount
realized from and the adjusted basis of such property shall be allocated among
the Partners (for purposes of calculating their individual gain or loss on such
disposition for Federal income tax purposes) as follows:
(1) The
portion of the total amount realized upon the taxable disposition of such
property that represents recovery of its simulated adjusted tax basis therein
(as calculated pursuant to Section 3.01(d) hereof) shall be allocated to the
Partners in the same proportion as the aggregate adjusted basis of such property
was allocated to such Partners (or their predecessors in interest) pursuant to
Section 3.03(a) hereof; and
(2) The
portion of the total amount realized upon the taxable disposition of such
property that represents the excess over the simulated adjusted tax basis
therein shall be allocated in accordance with the provisions of Section 3.02
hereof as if such gain constituted an item of Profit.
3.04 Apportionment Among
Partners.
(a) Except
as otherwise provided in this Agreement, all allocations and distributions to
the Investor Partners shall be apportioned among them pro rata based on Units
held by the Partners.
(b) For
purposes of Section 3.04(a) hereof, an Investor Partner's pro rata share in
Units shall be calculated as of the end of the taxable year for which such
allocation has been made; provided, however, that if a transferee of a Unit is
admitted as an Investor Partner during the course of the taxable year, the
apportionment of allocations and distributions between the transferor and
transferee of such Unit shall be made in the manner provided in Section 3.04(c)
hereof.
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(c) If,
during any taxable year of the Partnership, there is a change in any Partner's
interest in the Partnership, each Partner's allocation of any item of income,
gain, loss, deduction, or credit of the Partnership for such taxable year, other
than "allocable cash basis items" shall be determined by taking into account the
varying interests of the Partners pursuant to such method as is permitted by
Code Section 706(d) and the regulations thereunder. Each Partner's
share of "allocable cash basis items" shall be determined in accordance with
Code Section 706(d)(2) by (i) assigning the appropriate portion of each item to
each day in the period to which it is attributable, and (ii) allocating the
portion assigned to any such day among the Partners in proportion to their
interests in the Partnership at the close of such day. "Allocable
cash basis item" shall have the meaning ascribed to it by Code Section
706(d)(2)(B) and the regulations thereunder.
ARTICLE
IV
Distributions
4.01 Time of
Distribution. Cash
available for distribution shall be determined by the Managing General
Partner. The Managing General Partner shall distribute, in its
discretion, such cash deemed available for distribution, but such distributions
shall be made not less frequently than quarterly.
4.02 Distributions.
(a) Except
as otherwise provided in Section 2.01(b), all distributions (other than those
made to wind up the Partnership in accordance with Section 9.03 hereof) shall be
made 63% to the Investor Partners and 37% to the Managing General
Partner.
(b) The
Partnership shall not require that Investor Partners reinvest their share of
cash available for distribution in the Partnership. In no event shall
funds be advanced or borrowed for purposes of distributions, if the amount of
such distributions would exceed the Partnership's accrued and received revenues
for the previous four quarters, less paid and accrued operating costs with
respect to such revenues. The determination of such revenues and
costs shall be made in accordance with generally accepted accounting principles,
consistently applied. Except for the repayment of loans made by the
Managing General Partner to the Partnership, cash distributions from the
Partnership to the Managing General Partner shall be made only in conjunction
with distributions to Investor Partners and only out of funds properly allocated
to the Managing General Partner's account.
4.03 Capital Account
Deficits. No
distributions shall be made to any Investor Partner to the extent such
distribution would create or increase a deficit in such Partner's Capital
Account (as adjusted in Section 3.02(b)(1)). Any distribution which
is hereby prohibited shall be made to those Partners not having a deficit in
their Capital Accounts (as adjusted in Section 3.02(b)(1)) in the proportion
that the positive balance of each such Partner's adjusted Capital Account bears
to the aggregate balance of all such Partners' adjusted Capital
Accounts. Any cash available for distribution remaining after
reduction of all adjusted Capital Accounts to zero shall be distributed to the
Managing General Partner.
4.04 Liability Upon Receipt of
Distributions.
(a) If
a Partner has received a return of any part of his Capital Contribution without
violation of the Partnership Agreement or the Act, he is liable to the
Partnership for a period of one year thereafter for the amount of such returned
contribution, but only to the extent necessary to discharge the Partnership's
liabilities to creditors who extended credit to the Partnership during the
period the Capital Contribution was held by the Partnership.
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(b) If
a Partner has received a return of any part of his Capital Contribution in
violation of either the Partnership Agreement or the Act, he is liable to the
Partnership for a period of six years thereafter for the amount of the Capital
Contribution wrongfully returned.
(c) A
Partner receives a return of his Capital Contribution to the extent that the
distribution to him reduces his share of the fair value of the net assets of the
Partnership below the value, as set forth in the records required to be kept by
West Virginia law, of his Capital Contribution which has not been distributed to
him.
ARTICLE
V
Activities
5.01 Management. The
Managing General Partner shall conduct, direct, and exercise full and exclusive
control over all activities of the Partnership. Investor Partners
shall have no power over the conduct of the affairs of the Partnership or
otherwise commit or bind the Partnership in any manner. The Managing
General Partner shall manage the affairs of the Partnership in a prudent and
businesslike fashion and shall use its best efforts to carry out the purposes
and character of the business of the Partnership.
5.02 Conduct of
Operations.
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(a)
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(1) The
Managing General Partner shall establish a program of operations for the
Partnership which shall be in conformance with the following policies: (x)
no less than 80% of the Capital Contributions net of Organization and
Offering Costs and the Management Fee shall be applied to drilling and
completing Development Xxxxx; and no more than 20% of the Capital
Contributions net of Organization and Offering Costs and the Management
Fee may be applied to drilling and completing one or more Exploratory
Xxxxx; (y) the Partnership shall drill all of its xxxxx in West Virginia,
Ohio, Pennsylvania, Colorado, New York, Kentucky, Michigan, Indiana,
Kansas, Montana, South Dakota, Tennessee, Utah, Wyoming, Nebraska, North
Dakota, Alabama, Texas and/or Oklahoma; and (z) the Partnership shall
acquire the Prospects pursuant to an arrangement whereby the Partnership
will acquire up to 100% of the Working Interest, subject to landowners'
royalty interests and the royalty interests payable to unaffiliated third
parties in varying amounts, provided that the average of the maximum
royalty interests for all Prospects of the Partnership shall not exceed
25%.
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(2) The
Investor Partners agree to participate in the Partnership's program of
operations as established by the Managing General Partner; provided, that no
well drilled to the point of setting casing need be completed if, in the
Managing General Partner's opinion, such well is unlikely to be productive of
oil or gas in quantities sufficient to justify the expenditures required for
well completion. The Partnership may participate with others in the
drilling of xxxxx and it may enter into joint ventures, partnerships, or other
such arrangements.
(3) The
Managing General Partner in its discretion may conduct recompletion and further
development services with respect to the Partnership's xxxxx in the Greater
Wattenberg Field Area that the Managing General Partner determines may enhance
the recovery of oil and natural gas from such xxxxx.
(b) All
transactions between the Partnership and the Managing General Partner or its
Affiliates shall be on terms no less favorable than those terms which could be
obtained between the Partnership and independent third parties dealing at
arm's-length, subject to the provisions of Section 5.07 hereof.
(c) The
Partnership shall not participate in any joint operations on any co-owned Lease
unless there has been acquired or reserved on behalf of the Partnership the
right to take in kind or separately dispose of its proportionate share of the
oil and gas produced from such Lease exclusive of production which may be used
in development and production operations on the Lease and production unavoidably
lost, and, if the Managing General Partner is the operator of such Lease, the
Managing General Partner has entered into written agreements with every other
person or entity owning any working or operating interest reserving to such
person or entity a similar right to take in-kind, unless, in the opinion of
counsel to the Partnership, the failure to reserve such right to take in-kind
will not result in the Partnership being treated as a member of an association
taxable as a corporation for Federal income tax purposes.
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(d) The
relationship of the Partnership and the Managing General Partner (or any
Affiliate retaining or acquiring an interest) as co-owners in Leases, except to
the extent superseded by an Operating Agreement consistent with the preceding
paragraph and except to the extent inconsistent with this Partnership Agreement,
shall be governed by the AAPL Form 610 Model Operating Agreement-1982, with a
provision reserving the right to take production in-kind, naming the Managing
General Partner as operator and the Partnership as a non-operator, and with the
accounting procedure to govern as the accounting procedures under such Operating
Agreements.
(e) The
Managing General Partner is generally expected to act as the operator of
Partnership xxxxx, and the Managing General Partner may designate such other
persons as it deems appropriate to conduct the actual drilling and producing
operations of the Partnership. If the Managing General Partner
retains another person as operator, the contract of retention shall provide that
the new operator will have capabilities that are comparable to those of the
Managing General Partner, including the availability of technical expertise and
adequate response time.
(f) As
operator of Partnership xxxxx, the Managing General Partner or its Affiliates
shall receive per-well charges for each producing well based on the Working
Interest acquired by the Partnership. These per-well charges shall be
subject to annual adjustment beginning January 1, 2009 as provided in the
accounting procedures of the operating agreements.
(g) The
Managing General Partner shall drill xxxxx pursuant to drilling contracts with
the Partnership at the lesser of cost or competitive prices and terms in the
geographic area of operations. The Managing General Partner's
Drilling Compensation shall be its compensation for serving as managing general
partner and operator and for contributing its leases at cost.
(h) The
Managing General Partner shall be reimbursed by the Partnership for Direct
Costs. The Managing General Partner shall not be reimbursed for any
Administrative Costs. All other expenses shall be borne by the
Partnership.
(i) The
Managing General Partner and its Affiliates may enter into other transactions
(embodied in a written contract) with the Partnership during production
operations, such as providing services, supplies, and equipment, and shall be
entitled to compensation for such services at prices and on terms that are
competitive in the geographic area of operations.
(j) The
Partnership shall make no loans to the Managing General Partner or any Affiliate
thereof.
(k) The
Partnership may borrow funds in furtherance of its operations from the Managing
General Partner and/or its Affiliates or from independent persons. If
the Managing General Partner or any Affiliate loans or advances funds to the
Partnership, the Managing General Partner or Affiliate shall not receive
interest on such loan or advancement in excess of its interest costs, nor shall
the Managing General Partner or Affiliate receive interest in excess of the
amounts which would be charged the Partnership (without reference to the
Managing General Partner's financial abilities or guarantees) by unrelated banks
on comparable loans for the same purpose, and the Managing General Partner or
Affiliate shall not receive points or other financial charges or fees,
regardless of the amount.
(l) The
funds of the Partnership shall not be commingled with the funds of any other
Person.
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(m) Notwithstanding
any provision herein to the contrary, no creditor shall receive, as a result of
making any loan, a direct or indirect interest in the profits, capital, or
property of the Partnership other than as a secured creditor.
(n) The
Managing General Partner shall have a fiduciary responsibility for the
safekeeping and use of all funds and assets of the Partnership, whether or not
in the Managing General Partner's possession or control, and shall not employ or
permit another to employ such funds or assets in any manner except for the
exclusive benefit of the Partnership.
5.03 Acquisition and Sale of
Leases.
(a) To
the extent the Partnership does not acquire a full interest in a Lease from the
Managing General Partner, the remainder of the interest in such Lease may be
held by the Managing General Partner which may either retain and exploit it for
its own account or sell or otherwise dispose of all or a part of such remaining
interest. Profits from such exploitation and/or disposition shall be
for the benefit of the Managing General Partner to the exclusion of the
Partnership. Any Leases acquired by the Partnership from the Managing
General Partner shall be acquired only at the Managing General Partner's Cost,
unless the Managing General Partner shall have reason to believe that Cost is in
excess of the fair market value of such property, in which case the price shall
not exceed the fair market value. The Managing General Partner shall
obtain an appraisal from a qualified independent expert with respect to sales of
properties of the Managing General Partner and its Affiliates to the
Partnership. Neither the Managing General Partner nor any Affiliate
shall acquire or retain any carried, reversionary, or Overriding Royalty
Interest on the Lease interests acquired by the Partnership.
(b) The
Partnership shall acquire only Leases reasonably expected to meet the stated
purposes of the Partnership. No Leases shall be acquired for the
purpose of a subsequent sale or farmout unless the acquisition is made after a
well has been drilled to a depth sufficient to indicate that such an acquisition
would be in the Partnership's best interest.
(c) Neither
the Managing General Partner nor its Affiliates, except other partnerships
sponsored by them, shall purchase any productive properties from the
Partnership.
5.04 Title to
Leases.
(a) Record
title to each Lease acquired by the Partnership may be temporarily held in the
name of the Managing General Partner, or in the name of any nominee designated
by the Managing General Partner, as agent for the Partnership until a productive
well is completed on a Lease. Thereafter, record title to Leases
shall be assigned to and placed in the name of the Partnership.
(b) The
Managing General Partner shall take the necessary steps in its best judgment to
render title to the Leases to be assigned to the Partnership acceptable for the
purposes of the Partnership. No operation shall be commenced on any
Prospect acquired by the Partnership unless the Managing General Partner is
satisfied that the undertaking of such operation would be in the best interest
of Investor Partners and the Partnership. The Managing General
Partner shall be free, however, to use its own best judgment in waiving title
requirements and shall not be liable to the Partnership or the Investor Partners
for any mistakes of judgment unless such mistakes were made in a manner not in
accordance with general industry standards in the geographic area and such
mistakes were not the result of negligence by the Managing General Partner; nor
shall the Managing General Partner or its Affiliates be deemed to be making any
warranties or representations, express or implied, as to the validity or
merchantability of the title to any Lease assigned to the Partnership or the
extent of the interest covered thereby.
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5.05 Farmouts.
(a) No
Partnership Lease shall be farmed out, sold, or otherwise disposed of unless the
Managing General Partner determines that (i) the Partnership lacks sufficient
funds to drill on such Lease and is unable to obtain suitable financing, (ii)
the Leases have been downgraded by events occurring after assignment to the
Partnership, (iii) drilling on the Leases would result in an excessive
concentration of Partnership funds creating, in the Managing General Partner's
opinion, undue risk to the Partnership, or (iv) the Managing General Partner,
exercising the standard of a prudent operator, determines that the farmout is in
the best interests of the Partnership.
(b) Farmouts
between the Partnership and the Managing General Partner or its Affiliates,
including any other affiliated limited partnership, shall be effected on terms
deemed fair by the Managing General Partner. The Managing General
Partner, exercising the standard of a prudent operator, shall determine that the
farmout is in the best interest of the Partnership and the terms of the farmout
are consistent with and, in any case, no less favorable to the Partnership than
those utilized in the geographic area of operations for similar
arrangements. The respective obligations and revenue sharing of all
affiliated parties to the transactions shall be substantially the same, and the
compensation arrangement or any other interest or right of either the Managing
General Partner or its Affiliates shall be substantially the same in each
participating partnership or, if different, shall be reduced to reflect the
lower compensation arrangement.
5.06 Release, Abandonment, and
Sale or Exchange of Properties. Except
as provided elsewhere in this Article V and in Section 6.03, the Managing
General Partner shall have full power to dispose of the production and other
assets of the Partnership, including the power to determine which Leases shall
be released or permitted to terminate, those xxxxx to be abandoned, whether any
Lease or well shall be sold or exchanged, and the terms therefor. In
the event the Managing General Partner sells, transfers, or otherwise disposes
of nonproducing property of the Partnership, the sale, transfer, or disposition
shall, to the extent possible, be made at a price which is the higher of the
fair market value of the property on the date of the sale, transfer, or
disposition or the Cost of such property to the Partnership.
5.07 Certain
Transactions.
(a) A
Prospect shall be deemed to consist of the drilling or spacing unit on which the
well will be drilled by the Partnership, which is the minimum area permitted by
state law or local practice on which one well may be drilled, for xxxxx drilled
on the Company's Xxxxxxx or Chevron leasehold in Garfield County, Colorado; on
the Company's Xxxxxx or Xxxxxx leasehold located in North Dakota or on
development prospects in the Greater Wattenberg Field Area in
Colorado.
(1) In
the event that an exploratory well is drilled on PDC's acreage located in the
above areas, and the well proves up reserves on the immediately adjacent spacing
units, to the extent that PDC owns an interest in the adjacent units, PDC will
assign the Partnership an interest equivalent to that owned in the exploratory
well, proportionately reduced if PDC owns less than a 100% interest in the
adjacent spacing unit.
(2) If
the area constituting the Partnership's Prospect is subsequently enlarged, by
the drilling of a successful exploratory well by the Partnership, to encompass
any area in which the Managing General Partner or an Affiliate (excluding
another program in which the interest of the Managing General Partner or its
Affiliates is substantially similar to or less than their interest in the
Partnership) owns a separate property interest and the activities of the
Partnership were material in establishing the existence of Proved Undeveloped
Reserves that are attributable to the separate property interest, then the
separate property interest or a portion thereof must be sold, transferred, or
conveyed to the Partnership as set forth in this section (a).
(3) Notwithstanding
the foregoing, Prospects shall not be enlarged or contracted if the Prospect was
limited to the drilling or spacing unit or portion thereof, as outlined
above.
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(b) The
Partnership shall not purchase properties from or sell properties to any other
affiliated partnership. This prohibition, however, shall not apply to
transactions among affiliated partnerships by which property is transferred from
one to another in exchange for the transferee's obligation to conduct drilling
activities on such property or to joint ventures among such affiliated
partnerships, provided that the respective obligations and revenue sharing of
all parties to the transaction are substantially the same and the compensation
arrangement or any other interest or right of either the Managing General
Partner or its Affiliates is the same in each affiliated partnership, or, if
different, the aggregate compensation of the Managing General Partner is reduced
to reflect the lower compensation arrangement.
(c) During
the existence of the Partnership, and before it has ceased operations, neither
the Managing General Partner nor any of its Affiliates (excluding another
partnership where the Managing General Partner's or its Affiliates' interest in
such partnership is identical to or less than their interest in the Partnership)
shall acquire, retain, or drill for their own account any oil and gas interest
in any Prospect in which the Partnership possesses an interest, except for
transactions whereby the Managing General Partner or such Affiliate acquires or
retains a proportionate Working Interest, the respective obligations of the
Managing General Partner or the Affiliate and the Partnership are substantially
the same after the sale of the interest to the Partnership, and the Managing
General Partner's or Affiliate's interest in revenues does not exceed the amount
proportionate to its Working Interest.
(d) Any
services, equipment, or supplies which the Managing General Partner or an
Affiliate furnishes to the Partnership shall be furnished at the lesser of the
Managing General Partner's or the Affiliate's Cost or a competitive rate which
could be obtained in the geographical area of operations unless the Managing
General Partner or any Affiliate is engaged to a substantial extent, as an
ordinary and ongoing business, in providing such services, equipment, or
supplies to others in the industry, in which event, the services, supplies, or
equipment may be provided by such person to the Partnership at prices
competitive with those charged by others in the geographical area of operations
which would be available to the Partnership. If such entity is not
engaged in the business as set forth above, then such compensation, price or
rental shall be the cost of such services, equipment or supplies to such entity,
or the competitive rate which could be obtained in the area, whichever is
less. No turnkey drilling contracts shall be made between the
Managing General Partner or its Affiliates and the
Partnership. Neither the Managing General Partner nor its Affiliates
shall profit by drilling in contravention of its fiduciary obligations to the
Partnership. Any such services for which the Managing General Partner
or an Affiliate is to receive compensation shall be embodied in a written
contract which precisely describes the services to be rendered and all
compensation to be paid.
(e) Advance
payments by the Partnership to the Managing General Partner are prohibited,
except where necessary to secure tax benefits of prepaid drilling
costs. These payments, if any, shall not include nonrefundable
payments for completion costs prior to the time that a decision is made that the
well or xxxxx warrant a completion attempt.
(f) Neither
the Managing General Partner nor its Affiliates shall make any future
commitments of the Partnership's production which do not primarily benefit the
Partnership, nor shall the Managing General Partner or any Affiliate utilize
Partnership funds as compensating balances for the benefit of the Managing
General Partner or the Affiliate.
(g) No
rebates or give-ups may be received by the Managing General Partner or any of
its Affiliates, nor may the Managing General Partner or any Affiliate
participate in any reciprocal business arrangements which would circumvent these
restrictions.
(h) If
the Partnership acquires property pursuant to a farmout or joint venture from an
affiliated program, the Managing General Partner's and/or its Affiliates'
aggregate compensation associated with the property and any direct and indirect
ownership interest in the property may not exceed the lower of the compensation
and ownership interest the Managing General Partner and/or its Affiliates could
receive if the property were separately owned or retained by either one of the
programs.
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(i) Neither
the Managing General Partner nor any Affiliate, including affiliated programs,
may purchase or acquire any property from the Partnership, directly or
indirectly, except pursuant to transactions that are fair and reasonable to the
Investor Partners of the Partnership and then subject to the following
conditions:
(1) A
sale, transfer or conveyance, including a farmout, of an undeveloped property
from the Partnership to the Managing General Partner or an Affiliate, other than
an affiliated program, must be made at the higher of cost or fair market
value.
(2) A
sale, transfer or conveyance of a developed property from the Partnership to the
Managing General Partner or an Affiliate, other than an affiliated program in
which the interest of the Managing General Partner is substantially similar to
or less than its interest in the subject Partnership, shall not be permitted
except in connection with the liquidation of the Partnership and then only at
fair market value.
(3) Except
in connection with farmouts or joint ventures made in compliance with Section
5.07(h) above, a transfer of an undeveloped property from the Partnership to an
affiliated drilling program must be made at fair market value if the property
has been held for more than two years. Otherwise, if the Managing
General Partner deems it to be in the best interest of the Partnership, the
transfer may be made at cost.
(4) Except
in connection with farmouts or joint ventures made in compliance with Section
5.07(h) above, a transfer of any type of property from the Partnership to an
affiliated production purchase or income program must be made at fair market
value if the property has been held for more than six months or there have been
significant expenditures made in connection with the
property. Otherwise, if the Managing General Partner deems it to be
in the best interest of the Partnership, the transfer may be made at cost as
adjusted for intervening operations.
(j) If
the Partnership participates in other partnerships or joint ventures (multi-tier
arrangements), the terms of any such arrangements shall not result in the
circumvention of any of the requirements or prohibitions contained in this
Partnership Agreement, including the following:
(1) there
will be no duplication or increase in organization and offering expenses, the
Managing General Partner's compensation, Partnership expenses or other fees and
costs;
(2) there
will be no substantive alteration in the fiduciary and contractual relationship
between the Managing General Partner and the Investor Partners; and
(3) there
will be no diminishment in the voting rights of the Investor
Partners.
(k) In
connection with a proposed Roll-Up, the following shall apply:
(1) An
appraisal of all Partnership assets shall be obtained from a competent
independent expert. If the appraisal will be included in a Memorandum
used to offer the securities of a Roll-Up Entity, the appraisal shall be filed
with the Securities and Exchange Commission and the Administrator as an exhibit
to the registration statement for the offering. The appraisal shall
be based on all relevant information, including current reserve estimates
prepared by an independent petroleum consultant, and shall indicate the value of
the Partnership's assets assuming an orderly liquidation as of a date
immediately prior to the announcement of the proposed Roll-Up
transaction. The appraisal shall assume an orderly liquidation of
Partnership assets over a 12-month period. The terms of the
engagement of the independent expert shall clearly state that the engagement is
for the benefit of the Partnership and the Investor Partners. A
summary of the independent appraisal, indicating all material assumptions
underlying the appraisal, shall be included in a report to the Investor Partners
in connection with a proposed Roll-Up.
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(2) In
connection with a proposed Roll-Up, Investor Partners who vote "no" on the
proposal shall be offered the choice of:
(i) accepting
the securities of the Roll-Up Entity offered in the proposed Roll-Up;
or
(ii) (a)
remaining as Investor Partners in the Partnership and preserving their interests
therein on the same terms and conditions as existed previously; or (b) receiving
cash in an amount equal to the Investor Partners' pro-rata share of the
appraised value of the net assets of the Partnership.
(3) The
Partnership shall not participate in any proposed Roll-Up which, if approved,
would result in the diminishment of any Investor Partner's voting rights under
the Roll-Up Entity's chartering agreement. In no event shall the
democracy rights of Investor Partners in the Roll-Up Entity be less than those
provided for under Sections 7.07 and 7.08 of this Agreement. If the
Roll-Up Entity is a corporation, the democracy rights of Investor Partners shall
correspond to the democracy rights provided for in this Agreement to the
greatest extent possible.
(4) The
Partnership shall not participate in any proposed Roll-Up transaction which
includes provisions which would operate to materially impede or frustrate the
accumulation of shares by any purchaser of the securities of the Roll-Up Entity
(except to the minimum extent necessary to preserve the tax status of the
Roll-Up Entity); nor shall the Partnership participate in any proposed Roll-Up
transaction which would limit the ability of an Investor Partner to exercise the
voting rights of its securities of the Roll-Up Entity on the basis of the number
of Partnership Units held by that Investor Partner.
(5) The
Partnership shall not participate in a Roll-Up in which Investor Partners'
rights of access to the records of the Roll-Up Entity will be less than those
provided for under Section 8.01 of this Agreement.
(6) The
Partnership shall not participate in any proposed Roll-Up transaction in which
any of the costs of the transaction would be borne by the Partnership if the
Roll-Up is not approved by the Investor Partners.
(7) The
Partnership shall not participate in a Roll-Up transaction unless the Roll-Up
transaction is approved by at least 66 2/3% in interest of the Investor
Partners.
ARTICLE
VI
Managing
General Partner
6.01 Managing General
Partner. The
Managing General Partner shall have the sole and exclusive right and power to
manage and control the affairs of and to operate the Partnership and to do all
things necessary to carry on the business of the Partnership for the purposes
described in Section 1.03 hereof and to conduct the activities of the
Partnership as set forth in Article V hereof. No financial
institution or any other person, firm, or corporation dealing with the Managing
General Partner shall be required to ascertain whether the Managing General
Partner is acting in accordance with this Agreement, but such financial
institution or such other person, firm, or corporation shall be protected in
relying solely upon the deed, transfer, or assurance of and the execution of
such instrument or instruments by the Managing General Partner. The
Managing General Partner shall devote so much of its time to the business of the
Partnership as in its judgment the conduct of the Partnership's business shall
reasonably require and shall not be obligated to do or perform any act or thing
in connection with the business of the Partnership not expressly set forth
herein. The Managing General Partner may engage in business ventures
of any nature and description independently or with others and neither the
Partnership nor any of its Investor Partners shall have any rights in and to
such independent ventures or the income or profits derived
therefrom. However, except as otherwise provided herein, the Managing
General Partner and any of its Affiliates may pursue business opportunities that
are consistent with the Partnership's investment objectives for their own
account only after they have determined that such opportunity either cannot be
pursued by the Partnership because of insufficient funds or because it is not
appropriate for the Partnership under the existing
circumstances.
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6.02 Authority of Managing
General Partner. The
Managing General Partner is specifically authorized and empowered, on behalf of
the Partnership, and by consent of the Investor Partners herein given, to do any
act or execute any document or enter into any contract or any agreement of any
nature necessary or desirable, in the opinion of the Managing General Partner,
in pursuance of the purposes of the Partnership. Without limiting the
generality of the foregoing, in addition to any and all other powers conferred
upon the Managing General Partner pursuant to this Agreement and the Act, and
except as otherwise prohibited by law or hereunder, the Managing General Partner
shall have the power and authority to:
(a) Acquire
Leases and other interests in oil and/or gas properties in furtherance of the
Partnership's business;
(b) Enter
into and execute pooling agreements, farm out agreements, operating agreements,
unitization agreements, dry and bottom hole and acreage contribution letters,
construction contracts, joint venture or other arrangements with or on behalf of
the Partnership, loan and financing agreements as permitted by Section 5.02(k)
of this Agreement, and any and all documents or instruments customarily employed
in the oil and gas industry in connection with the acquisition, sale,
exploration, development, or operation of oil and gas properties, and all other
instruments deemed by the Managing General Partner to be necessary or
appropriate to the proper operation of oil or gas properties or to effectively
and properly perform its duties or exercise its powers hereunder;
(c) Make
expenditures and incur any obligations it deems necessary to implement the
purposes of the Partnership; employ and retain such personnel as it deems
desirable for the conduct of the Partnership's activities, including employees,
consultants, and attorneys; and exercise on behalf of the Partnership, in such
manner as the Managing General Partner in its sole judgment deems best, of all
rights, elections, and obligations granted to or imposed upon the
Partnership;
(d) Manage,
operate, and develop any Partnership property, and enter into operating
agreements with respect to properties acquired by the Partnership, including an
operating agreement with the Managing General Partner as described in the
Memorandum, which agreements may contain such terms, provisions, and conditions
as are usual and customary within the industry and as the Managing General
Partner shall approve;
(e) Compromise,
xxx, or defend any and all claims in favor of or against the
Partnership;
(f) Subject
to the provisions of Section 8.04 hereof, make or revoke any election permitted
the Partnership by any taxing authority;
(g) Perform
any and all acts it deems necessary or appropriate for the protection and
preservation of the Partnership assets;
(h) Maintain
at the expense of the Partnership such insurance coverage for public liability,
fire and casualty, and any and all other insurance necessary or appropriate to
the business of the Partnership in such amounts and of such types as it shall
determine from time to time;
(i) Buy,
sell, or lease property or assets on behalf of the Partnership;
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(j) Enter
into agreements to hire services of any kind or nature;
(k) Assign
interests in properties to the Partnership;
(l) Enter
into soliciting dealer agreements and perform all of the Partnership's
obligations thereunder, to issue and sell Units pursuant to the terms and
conditions of this Agreement, the Subscription Agreements, and the Memorandum,
to accept and execute on behalf of the Partnership Subscription Agreements, and
to admit original and substituted Partners; and
(m) Perform
any and all acts, and execute any and all documents it deems necessary or
appropriate to carry out the purposes of the Partnership.
6.03 Certain Restrictions on
Managing General Partner's Power and Authority. Notwithstanding
any other provisions of this Agreement to the contrary, neither the Managing
General Partner nor any Affiliate of the Managing General Partner shall have the
power or authority to, and shall not, do, perform, or authorize any of the
following:
(a) Use
any revenues from Partnership operations for the purposes of acquiring Leases in
new or unrelated Prospects or paying any Organization and Offering Expenses;
provided, however, that revenues from Partnership operations may be used for
other Partnership operations, including without limitation for the purposes of
drilling, completing, maintaining, recompleting, and operating xxxxx on existing
Partnership Prospects and acquiring and developing new Leases to the extent such
Leases are considered by the Managing General Partner in its sole discretion to
be a part of a Prospect in which the Partnership then owns a Lease;
(b) Without
having first received the prior consent of the holders of a majority of the then
outstanding Units entitled to vote,
(1) sell
all or substantially all of the assets of the Partnership (except upon
liquidation of the Partnership pursuant to Article IX hereof), unless cash funds
of the Partnership are insufficient to pay the obligations and other liabilities
of the Partnership;
(2) dispose
of the good will of the Partnership;
(3) do
any other act which would make it impossible to carry on the ordinary business
of the Partnership; or
(4) agree
to the termination or amendment of any operating agreement to which the
Partnership is a party, or waive any rights of the Partnership thereunder,
except for amendments to the operating agreement which the Managing General
Partner believes are necessary or advisable to ensure that the operating
agreement conforms to any changes in or modifications to the Code or that do not
adversely affect the Investor Partners in any material respect;
(c) Guarantee
in the name or on behalf of the Partnership the payment of money or the
performance of any contract or other obligation of any Person other than the
Partnership;
(d) Bind
or obligate the Partnership with respect to any matter outside the scope of the
Partnership business;
(e) Use
the Partnership name, credit, or property for other than Partnership
purposes;
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(f) Take
any action, or permit any other person to take any action, with respect to the
assets or property of the Partnership which does not benefit the Partnership,
including, among other things, utilization of funds of the Partnership as
compensating balances for its own benefit or the commitment of future
production;
(g) Benefit
from any arrangement for the marketing of oil and gas production or other
relationships affecting the property of the Managing General Partner and the
Partnership, unless such benefits are fairly and equitably apportioned among the
Managing General Partner, its Affiliates, and the Partnership;
(h) Utilize
Partnership funds to invest in the securities of another person except in the
following instances:
(1) investments
in working interests or undivided lease interests made in the ordinary course of
the Partnership's business;
(2) temporary
investments made in compliance with Section 2.02(f) of this
Agreement;
(3) investments
involving less than 5% of Partnership capital which are a necessary and
incidental part of a property acquisition transaction; and
(4) investments
in entities established solely to limit the Partnership's liabilities associated
with the ownership or operation of property or equipment, provided, in such
instances duplicative fees and expenses shall be prohibited; or
(i) Sell,
transfer, or assign its interest (except for a collateral assignment which may
be granted to a bank or other financial institution) in the Partnership, or any
part thereof, or otherwise to withdraw as Managing General Partner of the
Partnership without one hundred twenty (120) days prior written notice to and
the written consent of Investor Partners owning a majority of the then
outstanding Units.
6.04 Indemnification of Managing
General Partner. The
Managing General Partner shall have no liability to the Partnership or to any
Investor Partner for any loss suffered by the Partnership which arises out of
any action or inaction of the Managing General Partner if the Managing General
Partner, in good faith, determined that such course of conduct was in the best
interest of the Partnership, that the Managing General Partner was acting on
behalf of or performing services for the Partnership, and that such course of
conduct did not constitute negligence or misconduct of the Managing General
Partner. The Managing General Partner shall be indemnified by the
Partnership against any losses, judgments, liabilities, expenses, and amounts
paid in settlement of any claims sustained by it in connection with the
Partnership, provided that the Managing General Partner has determined in good
faith that the course of conduct which caused the loss or liability was in the
best interests of the Partnership, that the Managing General Partner was acting
on behalf of or performing services for the Partnership, and that the same were
not the result of negligence or misconduct on the part of the Managing General
Partner. Indemnification of the Managing General Partner is
recoverable only from the tangible net assets of the Partnership, including the
insurance proceeds from the Partnership's insurance policies and the insurance
and indemnification of the Partnership's subcontractors, and is not recoverable
from the Investor Partners.
Notwithstanding
the above, the Managing General Partner and any person acting as a broker-dealer
shall not be indemnified for liabilities arising under Federal and state
securities laws unless (a) there has been a successful adjudication on the
merits of each count involving securities law violations, (b) such claims have
been dismissed with prejudice on the merits by a court of competent
jurisdiction, or (c) a court of competent jurisdiction approves a settlement of
such claims against a particular indemnitee and finds that indemnification of
the settlement and the related costs should be made, and the court considering
the request for indemnification has been advised of the position of the
Securities and Exchange Commission and of any state securities regulatory
authority in which securities of the Partnership were offered or sold as to
indemnification for violations of securities laws; provided however, the court
need only be advised of the positions of the securities regulatory authorities
of those states (i) which are specifically set forth in the partnership
agreement and (ii) in which plaintiffs claim they were offered or sold
partnership units.
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In any
claim for indemnification for Federal or state securities laws violations, the
party seeking indemnification shall place before the court the position of the
Securities and Exchange Commission, the Massachusetts Securities Division, and
the Tennessee Securities Division or respective state securities division, as
the case may be, with respect to the issue of indemnification for securities law
violations.
The
advancement of Partnership funds to a sponsor or its affiliates for legal
expenses and other costs incurred as a result of any legal action for which
indemnification is being sought is permissible only if the Partnership has
adequate funds available and the following conditions are
satisfied:
(a) the
legal action relates to acts or omissions with respect to the performance of
duties or services on behalf of the Partnership, and
(b) the
legal action is initiated by a third party who is not a participant, or the
legal action is initiated by a participant and a court of competent jurisdiction
specifically approves such advancement, and
(c) the
sponsor or its affiliates undertake to repay the advanced funds to the
Partnership, together with the applicable legal rate of interest thereon, in
cases in which such party is found not to be entitled to
indemnification.
The
Partnership shall not incur the cost of the portion of any insurance which
insures the Managing General Partner against any liability as to which the
Managing General Partner is herein prohibited from being
indemnified.
6.05 Withdrawal.
(a) Notwithstanding
the limitations contained in Section 6.03(i) hereof, the Managing General
Partner shall have the right, by giving written notice to the other Partners, to
substitute in its stead as managing general partner any successor entity or any
entity controlled by the Managing General Partner, provided that the successor
Managing General Partner must have a tangible net worth of at least $5 million,
and the Investor Partners, by execution of this Agreement, expressly consent to
such a transfer, unless it would adversely affect the status of the Partnership
as a partnership for federal income tax purposes.
(b) The
Managing General Partner may not voluntarily withdraw from the Partnership prior
to the Partnership's completion of its primary drilling and/or acquisition
activities, and then only after giving 120 days written notice. The
Managing General Partner may not partially withdraw its property interests held
by the Partnership unless such withdrawal is necessary to satisfy the bona fide
request of its creditors or approved by a majority-in-interest vote of the
Investor Partners. The Managing General Partner shall fully indemnify
the Partnership against any additional expenses which may result from a partial
withdrawal of property interests and such withdrawal may not result in a greater
amount of direct costs or administrative costs being allocated to the Investor
Partners. The withdrawing Managing General Partner shall pay all
expenses incurred as a result of its withdrawal.
6.06 Management
Fee. The
Partnership shall pay the Managing General Partner, on the date the Partnership
is organized (as set forth in Section 1.01), a one-time management fee equal to
1½% of the total Subscriptions.
6.07 Tax Matters and Financial
Reporting Partner. The
Managing General Partner shall serve as the Tax Matters Partner for purposes of
Code Sections 6221 through 6233 and as the Financial Reporting
Partner. The Partnership may engage its accountants and/or attorneys
to assist the Tax Matters Partner in discharging its duties
hereunder.
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ARTICLE
VII
Investor
Partners
7.01 Management. No
Investor Partner shall take part in the control or management of the business or
transact any business for the Partnership, and no Investor Partner shall have
the power to sign for or bind the Partnership. Any action or conduct
of Investor Partners on behalf of the Partnership is hereby expressly
prohibited. Any Investor Partner who violates this Section 7.01 shall
be liable to the remaining Investor Partners, the Managing General Partner, and
the Partnership for any damages, costs, or expenses any of them may incur as a
result of such violation. The Investor Partners hereby grant to the
Managing General Partner or its successors or assignees the exclusive authority
to manage and control the Partnership business in its sole discretion and to
thereby bind the Partnership and all Partners in its conduct of the Partnership
business. Investor Partners shall have the right to vote only with
respect to those matters specifically provided for in these
Articles. No Investor Partner shall have the authority
to:
(a) Assign
the Partnership property in trust for creditors or on the assignee's promise to
pay the debts of the Partnership;
(b) Dispose
of the goodwill of the business;
(c) Do
any other act which would make it impossible to carry on the ordinary business
of the Partnership;
(d) Confess
a judgment;
(e) Submit
a Partnership claim or liability to arbitration or reference;
(f) Make
a contract or bind the Partnership to any agreement or document;
(g) Use
the Partnership's name, credit, or property for any purpose;
(h) Do
any act which is harmful to the Partnership's assets or business or by which the
interests of the Partnership shall be imperiled or prejudiced; or
(i) Perform
any act in violation of any applicable law or regulations thereunder, or perform
any act which is inconsistent with the terms of this Agreement.
7.02 Indemnification of
Additional General Partners. The
Managing General Partner agrees to indemnify each of the Additional General
Partners for the amounts of obligations, risks, losses, or judgments of the
Partnership or the Managing General Partner which exceed the amount of
applicable insurance coverage and amounts which would become available from the
sale of all Partnership assets. Such indemnification applies to
casualty losses and to business losses, such as losses incurred in connection
with the drilling of an unproductive well, to the extent such losses exceed the
Additional General Partners' interest in the undistributed net assets of the
Partnership. If, on the other hand, such excess obligations are the
result of the negligence or misconduct of an Additional General Partner, or the
contravention of the terms of the Partnership Agreement by the Additional
General Partner, then the foregoing indemnification by the Managing General
Partner shall be unenforceable as to such Additional General Partner and such
Additional General Partner shall be liable to all other Partners for damages and
obligations resulting there from.
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7.03 Assignment of
Units.
(a) An
Investor Partner may transfer all or any portion of his Units and the transferee
shall become a Substituted Investor Partner (subject to all duties and
obligations of an Investor Partner, including those contained in Section 4.04
herein, except to the extent excepted in the Act) subject to the following
conditions (any transfer of such Units satisfying such conditions being referred
to herein as a "Permitted Transfer"):
(1) Except
in the case of a transfer of Units at death or involuntarily by operation of
law, the transferor and transferee shall execute and deliver to the Partnership
such documents and instruments of conveyance as may be necessary or appropriate
in the opinion of counsel to the Partnership to effect such transfer and to
confirm the agreement of the transferee to be bound by the provisions of this
Article VII. In any case not described in the preceding sentence, the
transfer shall be confirmed by presentation to the Partnership of legal evidence
of such transfer, in form and substance satisfactory to counsel to the
Partnership. In all cases, the Partnership shall be reimbursed by the
transferor and/or transferee for all costs and expenses that it reasonably
incurs in connection with such transfer;
(2) The
transferor and transferee shall furnish the Partnership with the transferee's
taxpayer identification number and sufficient information to determine the
transferee's initial tax basis in the Units transferred;
(3) The
Transferee shall have satisfied the suitability standards that have been
established for an investment in the Partnership, including being an accredited
investor as defined by Regulation D under the Securities Act of 1933;
and
(4) The
written consent of the Managing General Partner to such transfer shall have been
obtained.
(b) A
Person who acquires one or more Units but who is not admitted as a Substituted
Investor Partner pursuant to Section 7.03(c) hereof shall be entitled only to
allocations and distributions with respect to such Units in accordance with this
Agreement, but shall have no right to any information or accounting of the
affairs of the Partnership, shall not be entitled to inspect the books or
records of the Partnership, and shall not have any of the rights of an
Additional General Partner or a Limited Partner under the Act or the
Agreement.
(c) Subject
to the other provisions of this Article VII, a transferee of Units may be
admitted to the Partnership as a Substituted Investor Partner only upon
satisfaction of the conditions set forth below in this Section
7.03(c):
(1) The
Managing General Partner consents to such admission;
(2) The
Units with respect to which the transferee is being admitted were acquired by
means of a Permitted Transfer;
(3) The
transferee becomes a party to this Agreement as a Partner and executes such
documents and instruments as the Managing General Partner may reasonably request
(including, without limitation, amendments to the Certificate of Limited
Partnership) as may be necessary or appropriate to confirm such transferee as a
Partner in the Partnership and such transferee's agreement to be bound by the
terms and conditions hereof;
(4) The
transferee pays or reimburses the Partnership for all reasonable legal, filing,
and publication costs that the Partnership incurs in connection with the
admission of the transferee as a Partner with respect to the transferred Units;
and
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(5) If
the transferee is not an individual of legal majority, the transferee provides
the Partnership with evidence satisfactory to counsel for the Partnership of the
authority of the transferee to become a Partner and to be bound by the terms and
conditions of this Agreement.
(6) In
any calendar quarter in which a Substituted Investor Partner is admitted to the
Partnership, the Managing General Partner shall amend the certificate of limited
partnership to effect the substitution of such Substituted Investor Partners,
although the Managing General Partner may do so more frequently. In
the case of assignments, where the assignee does not become a Substituted
Investor Partner, the Partnership shall recognize the assignment not later than
the last day of the calendar month following receipt of notice of assignment and
required documentation.
(d) Each
Investor Partner hereby covenants and agrees with the Partnership for the
benefit of the Partnership and all Partners that (i) he is not currently making
a market in Units and (ii) he will not transfer any Unit on an established
securities market or a secondary market (or the substantial equivalent thereof)
within the meaning of Code Section 7704(b) (and any regulations, proposed
regulations, revenue rulings, or other official pronouncements of the Service or
Treasury Department that may be promulgated or published
thereunder). Each Investor Partner further agrees that he will not
transfer any Unit to any Person unless such Person agrees to be bound by this
Section 7.03 and to transfer such Units only to Persons who agree to be
similarly bound.
(e) Restrictions
on assignment of Units or the substitution of Investor Partners shall be allowed
only to the extent necessary to preserve the tax status of the Partnership or
the classification of Partnership income for tax purposes or to satisfy the
suitability standards required by state or federal law and any restriction shall
be supported by an opinion of the Partnership's counsel as to its legal
necessity.
7.04 Prohibited
Transfers.
(a) Any
purported Transfer of Units that is not a Permitted Transfer shall be null and
void and of no effect whatever; provided, that, if the Partnership is required
to recognize a transfer that is not a Permitted Transfer (or if the Managing
General Partner, in its sole discretion, elects to recognize a transfer that is
not a Permitted Transfer), the interest transferred shall be strictly limited to
the transferor's rights to allocations and distributions as provided by this
Agreement with respect to the transferred Units, which allocations and
distributions may be applied (without limiting any other legal or equitable
rights of the Partnership) to satisfy the debts, obligations, or liabilities for
damages that the transferor or transferee of such Units may have to the
Partnership.
(b) In
the case of a transfer or attempted transfer of Units that is not a Permitted
Transfer, the parties engaging or attempting to engage in such transfer shall be
liable to indemnify and hold harmless the Partnership and the other Partners
from all cost, liability, and damage that any of such indemnified Persons may
incur (including, without limitation, incremental tax liability and lawyers'
fees and expenses) as a result of such transfer or attempted transfer and
efforts to enforce the indemnity granted hereby.
7.05 Withdrawal by Investor
Partners. Neither
a Limited Partner nor an Additional General Partner may withdraw from the
Partnership, except as otherwise provided in this Agreement.
7.06 Removal of Managing General
Partner.
(a) The
Managing General Partner may be removed at any time with the consent of Investor
Partners owning a majority of the then outstanding Units, and upon the selection
of a successor managing general partner or partners by Investor Partners owning
a majority of the then outstanding Units.
(b) Any
successor Managing General Partner may be removed upon the terms and conditions
provided in this Section.
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(c) In
the event a managing general partner is removed, its respective interest in the
assets of the Partnership shall be determined by independent appraisal by a
qualified independent petroleum engineering consultant who shall be selected by
mutual agreement of the Managing General Partner and the incoming
sponsor. Such appraisal will take into account an appropriate
discount to reflect the risk of recovery of oil and gas reserves, and, at its
election, the removed managing general partner's interest in the Partnership
assets may be distributed to it or the interest of the managing general partner
in the Partnership may be retained by it as a Limited Partner in the successor
limited partnership; provided, however, that if immediate payment to the removed
managing general partner would impose financial or operational hardship upon the
Partnership, as determined by the successor managing general partner in the
exercise of its fiduciary duties to the Partnership, payment (plus reasonable
interest) to the removed managing general partner may be postponed to that time
when, in the determination of the successor managing general partner, payment
will not cause a hardship to the Partnership. The cost of such
appraisal shall be borne by the Partnership. The successor managing
general partner shall have the option to purchase at least 20% of the removed
managing general partner's interest for the value determined by the independent
appraisal. The removed managing general partner, at the time of its
removal shall cause, to the extent it is legally possible, its successor to be
transferred or assigned all its rights, obligations, and interests in contracts
entered into by it on behalf of the Partnership. In any event, the
removed managing general partner shall cause its rights, obligations, and
interests in any such contract to terminate at the time of its
removal.
(d) Upon
effectiveness of the removal of the managing general partner, the assets, books,
and records of the Partnership shall be surrendered to the successor managing
general partner, provided that the successor managing general partner shall have
first (i) agreed to accept the responsibilities of the managing general partner,
and (ii) made arrangements satisfactory to the original managing general partner
to remove such managing general partner from personal liability on any
Partnership borrowings or, if any Partnership creditor will not consent to such
removal, agreed to indemnify the original managing general partner for any
subsequent liabilities in respect to such borrowings. Immediately
after the removal of the managing general partner, the successor managing
general partner shall prepare, execute, file for recordation, and cause to be
published, such notices or certificates as may be required by the
Act.
7.07 Calling of
Meetings. Investor
Partners owning 10% or more of the then outstanding Units entitled to vote shall
have the right to request that the Managing General Partner call a meeting of
the Partners. The Managing General Partner shall call such a meeting
and shall deposit in the United States mails within fifteen days after receipt
of such request, written notice to all Investor Partners of the meeting and the
purpose of the meeting, which shall be held on a date not less than thirty nor
more than sixty days after the date of mailing of such notice, at a reasonable
time and place. Investor Partners shall have the right to submit
proposals to the Managing General Partner for inclusion in the voting materials
for the next meeting of Investor Partners for consideration and approval by the
Investor Partners. Investor Partners shall have the right to vote in
person or by proxy.
7.08 Additional Voting
Rights. Investor
Partners shall be entitled to all voting rights granted to them by and under
this Agreement and as specified by the Act. Each Unit is entitled to
one vote on all matters; each fractional Unit is entitled to that fraction of
one vote equal to the fractional interest in the Unit. Except as
otherwise provided herein or in the Memorandum, at any meeting of Investor
Partners, a vote of a majority in interest of Units represented at such meeting,
in person or by proxy, with respect to matters considered at the meeting at
which a quorum is present shall be required for approval of any such
matters. In addition, except as otherwise provided in this Section
and in Section 5.07(k), holders of a majority in interest of the then
outstanding Units may, without the concurrence of the Managing General Partner,
vote to (a) approve or disapprove the sale of all or substantially all of the
assets of the Partnership or the merger of the Partnership with another entity,
(b) dissolve the Partnership, (c) remove the Managing General Partner and elect
a new managing general partner, (d) amend the Agreement; but any such amendment
may not increase the duties or liabilities of any Investor Partner or the
Managing General Partner or increase or decrease the profit or loss sharing or
required capital contribution of any Investor Partner or the Managing General
Partner without the approval of such Investor Partner or Managing General
Partner; and any such amendment may not affect the classification of the
Partnership's income or loss for federal income tax purposes without the
unanimous approval of all Investor Partners, (e) elect a new managing general
partner if the managing general partner elects to withdraw from the Partnership,
and (f) cancel any contract for services with the Managing General Partner or
any Affiliates without penalty upon sixty days' notice. The
Partnership shall not participate in a Roll-Up unless the Roll-Up is approved by
at least 66 2/3% in
interest of the Investor Partners. A majority in interest of the then
outstanding Units entitled to vote shall constitute a quorum. In
determining the requisite percentage in interest of Units necessary to approve a
matter on which the Managing General Partner and its Affiliates may not vote or
consent, any Units owned by the Managing General Partner and its Affiliates
shall not be included.
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7.09 Voting by
Proxy. The
Investor Partners may vote either in person or by proxy.
7.10 Conversion of Additional
General Partner Interests into Limited Partner Interests.
(a) The
Managing General Partner shall convert the interests of all Additional General
Partners in the Partnership to interests of Limited Partners in the Partnership
upon completion of drilling of the Partnership.
(b) The
Managing General Partner shall notify all Additional General Partners at least
30 days prior to any material change in the amount of the Partnership's
insurance coverage. Within this 30-day period, and notwithstanding
Section 7.10(a), Additional General Partners shall have the right to immediately
convert their Units into Units of limited partnership interest by giving written
notice to the Managing General Partner.
(c) As
provided herein, Additional General Partners may elect to convert, transfer, and
exchange their interests for Limited Partner interests in the Partnership upon
receipt by the Managing General Partner of written notice of such
election. An Additional General Partner may request conversion of his
interests for Limited Partner interests at any time after one year following the
closing of the securities offering which relates to the Agreement and the
disbursement to the Partnership of the proceeds of such securities
offering.
(d) The
Managing General Partner shall cause the conversion to be effected as promptly
as possible as prudent business judgment dictates. Conversion of an
Additional General Partnership interest to a Limited Partnership interest in the
Partnership shall be conditioned upon a finding by the Managing General Partner
that such conversion will not cause a termination of the Partnership for federal
income tax purposes, and will be effective upon the Managing General Partner's
filing an amendment to its Certificate of Limited Partnership. The
Managing General Partner is obligated to file an amendment to its Certificate at
any time during the full calendar month after receipt of the required notice of
the Additional General Partner and a determination of the Managing General
Partner that the conversion will not constitute a termination of the Partnership
for tax purposes. Effecting conversion is subject to the satisfaction
of the condition that the electing Additional General Partner provide written
notice to the Managing General Partner of such intent to
convert. Upon such transfer and exchange, such Additional General
Partners shall be Limited Partners; however, they will remain liable to the
Partnership for any additional Capital Contribution(s) required for their
proportionate share of the Partnership obligation or liability arising prior to
the conversion.
(e) Limited
Partners may not convert and/or exchange their interests for Additional General
Partner interests.
7.11 Unit Repurchase
Program.
(a) Beginning
with the third anniversary after the date of the first cash distribution of the
Partnership, Investor Partners may request the Managing General Partner to
repurchase their Units, subject to the Managing General Partner's available
borrowing capacity under its loan agreements to repurchase. If the
Managing General Partner receives requests for repurchase of Units and subject
to such borrowing capacity, the Managing General Partner shall annually
repurchase for cash up to 10% of the Units originally subscribed to in the
Partnership.
(b) The
Unit Repurchase Program shall be subject to the following
conditions:
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(1) The
Managing General Partner must receive written notification from the particular
Investor Partner of such Partner's intention to exercise the repurchase right;
and
(2) The
Managing General Partner shall provide the Investor Partner a written notice of
a specified price for purchase of the particular Units within 30 days of the
Managing General Partner's receipt of written notification; and
(3) The
Managing General Partner's offer shall remain open for 30 days after the
Managing General Partner's mailing of the price notice to the Investor
Partner.
(c) The
Managing General Partner shall not favor one particular Partnership of which it
is a Managing General Partner over another in the repurchase of
Units. Each Partnership shall stand on equal footing before the
Managing General Partner. To the extent that the Managing General
Partner is unable, due to limitations imposed by the Code or insufficient
borrowing capacity under the Managing General Partner's loan agreement(s) with
banks, to repurchase all Units requested for repurchase, each Investor Partner
requesting repurchase shall be entitled to have his Units repurchased on a
"first come-first served" basis, regardless of Partnership, provided that the
Managing General Partner determines that the repurchase of a particular Investor
Partner's Units will not result in the termination of the Partnership for
federal income tax purposes and in the Partnership's being treated as a
"publicly traded partnership." If Investor Partners request the
repurchase of more than 10% of the Units of a particular Partnership during that
Partnership's taxable year, Units shall be purchased on a "first come-first
served" basis with respect to that Partnership. To the extent that
the Managing General Partner is unable to repurchase all Units requested for
repurchase at the same time by Partners of any Partnership, the Managing General
Partner shall repurchase those particular Units on a pro-rata
basis.
(d) The
offer price which the Managing General Partner shall make shall be a cash amount
equal to four times cash distributions attributable to the subject Unit from
production for the 12 months prior to the month in which the above-referenced
written notification is actually received by the Managing General Partner at its
corporate offices. The Managing General Partner may, in its sole and
absolute discretion, increase the repurchase price for Units requested for
repurchase.
(e) Upon
any repurchase, the Managing General Partner shall hold such purchased Units for
its own use and not for resale and it shall not create a market in the
Units.
7.12 Liability of
Partners. Except
as otherwise provided in this Agreement or as otherwise provided by the Act,
each General Partner shall be jointly and severally liable for the debts and
obligations of the Partnership. In addition, each Additional General
Partner shall be jointly and severally liable for any wrongful acts or omissions
of the Managing General Partner and/or the misapplication of money or property
of a third party by the Managing General Partner acting within the scope of its
apparent authority to the extent such acts or omissions are chargeable to the
Partnership.
ARTICLE
VIII
Books and
Records
8.01 Books and
Records.
(a) For
accounting and income tax purposes, the Partnership shall operate on a calendar
year.
(b) The
Managing General Partner shall keep just and true records and books of account
with respect to the operations of the Partnership and shall maintain and
preserve during the term of the Partnership and for four years thereafter all
such records, books of account, and other relevant Partnership
documents. The Managing General Partner shall maintain for at least
six years all records necessary to substantiate the fact that Units were sold
only to purchasers for whom such Units were suitable. Such books
shall be maintained at the principal place of business of the Partnership and
shall be kept on the accrual method of accounting.
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(c) The
Managing General Partner shall keep or cause to be kept complete and accurate
books and records with respect to the Partnership's business, which books and
records shall at all times be kept at the principal office of the
Partnership. Any records maintained by the Partnership in the regular
course of its business, including the names and addresses of Investor Partners,
books of account, and records of Partnership proceedings, may be kept on or be
in the form of RAM disks, magnetic tape, photographs, micrographics, or any
other information storage device, provided that the records so kept are
convertible into clearly legible written form within a reasonable period of
time. The books and records of the Partnership shall be made
available for review and copying by any Investor Partner or his representative
at any reasonable time.
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(d)
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(1) An
alphabetical list of the names, addresses and business telephone numbers
of the Investor Partners of the Partnership along with the number of Units
held by each of them (the "participant list") shall be maintained as a
part of the books and records of the Partnership and shall be available
for the inspection by any Investor Partner or its designated agent at the
home office of the Partnership upon the request of the Investor
Partner;
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(2) The
participant list shall be updated at least quarterly to reflect changes in the
information contained therein;
(3) A
copy of the participant list shall be mailed to any Investor Partner requesting
the participant list within ten days of the request. The copy of the
participant list shall be printed in alphabetical order, on white paper, and in
a readily readable type size (in no event smaller than 10-point
type). A reasonable charge for copy work may be charged by the
Partnership.
(4) The
purposes for which an Investor Partner may request a copy of the participant
list include, without limitation, matters relating to voting rights under the
Partnership Agreement and the exercise of Investor Partners' rights under
federal proxy laws; and
(5) If
the Managing General Partner of the Partnership neglects or refuses to exhibit,
produce, or mail a copy of the participant list as requested, the Managing
General Partner shall be liable to any Investor Partner requesting the list for
the costs, including attorneys' fees, incurred by that Investor Partner for
compelling the production of the participant list, and for actual damages
suffered by any Investor Partner by reason of such refusal or
neglect. It shall be a defense that the actual purpose and reason for
the requests for inspection or for a copy of the participant list is to secure
the list of Investor Partners or other information for the purpose of selling
such list or information or copies thereof, or of using the same for a
commercial purpose other than in the interest of the applicant as an Investor
Partner relative to the affairs of the Partnership. The Managing
General Partner may require the Investor Partner requesting the participant list
to represent that the list is not requested for a commercial purpose unrelated
to the Investor Partner's interest in the Partnership. The remedies
provided hereunder to Investor Partners requesting copies of the participant
list are in addition to, and shall not in any way limit, other remedies
available to Investor Partners under federal law, or the laws of any
state.
8.02 Reports. The
Managing General Partner shall deliver to each Investor Partner the following
financial statements and reports at the times indicated below:
(a) Within
75 days after the end of the first six months of each fiscal year (for such six
month period) and within 120 days after the end of each fiscal year (for such
year), financial statements, including a balance sheet and statements of income,
Partners' equity, and cash flows, all of which shall be prepared in accordance
with generally accepted accounting principles. The annual financial
statements shall be accompanied by (i) a report of an independent certified
public accountant designated by the Managing General Partner stating that an
audit of such financial statements has been made in accordance with generally
accepted auditing standards and that in its opinion such financial statements
present fairly the financial condition, results of operations, and cash flow of
the Partnership in accordance with generally accepted accounting principles and
(ii) a reconciliation of such financial statements with the information
furnished to the Investor Partners for federal income tax reporting
purposes.
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(b) Annually
by March 15 of each year, a report containing such information as may be deemed
to enable each Investor Partner to prepare and file his federal income tax
return and any required state income tax return.
(c) Annually
within 120 days after the end of each fiscal year, (i) a summary of the
computations of the total estimated proved oil and gas reserves of the
Partnership as of the end of such fiscal year and the dollar value thereof at
then existing prices and a computation of each Investor Partner's interest in
such value, such reserve computations to be based upon engineering reports
prepared by qualified independent petroleum engineers, (ii) an estimate of the
time required for the extraction of such proved reserves and the present worth
thereof (discounted at a rate generally accepted in the oil and gas industry and
undiscounted), and (iii) a statement that because of the time period required to
extract such reserves the present value of revenues to be obtained in the future
is less than if such revenues were immediately receivable. Each such
reported shall be prepared in accordance with customary and generally accepted
standards and practices for petroleum engineers and shall be prepared by a
recognized independent petroleum engineer selected from time to time by the
Managing General Partner. No later than 90 days following the
occurrence of an event resulting in a reduction in an amount of 10% or more of
the estimated value of the proved oil and gas reserves as last reported to the
Investor Partners, other than a reduction resulting from normal production,
sales of reserves, or product price changes, a new summary conforming to the
requirements set forth above in this Section 8.02(c) shall be delivered to the
Investor Partners.
(d) Within
75 days after the end of the first six months of each fiscal year and within 120
days after the end of each fiscal year, a schedule reflecting (A) the total
costs of the Partnership (and, where applicable, the costs pertaining to each
Lease) and the costs paid by the Managing General Partner and by the Investor
Partners and (B) the total revenues of the Partnership and the revenues received
by or credited to the accounts of the Managing General Partner and the Investing
Partners. Each semi-annual report delivered by the Managing General
Partner may contain summary estimates of the information described in
subdivision (i) of Section 8.02(c).
(e) Monthly
within 15 days after the end of each calendar month while the Partnership is
participating in the drilling and completion of xxxxx in which it has an
interest until the end of such activity, and thereafter for a period of three
years within 75 days after the end of the first six months of each fiscal year
and within 120 days after the end of each fiscal year, (i) a description of each
Prospect or field in which the Partnership owns Leases including the cost,
location, number of acres under lease, and the interest owned therein by the
Partnership (provided that after the initial description of each such Prospect
or field has been provided to the Investor Partners only material changes, if
any, with respect to such Prospect or field need be described), (ii) a
description of all farmins, farmouts and joint ventures of the Partnership made
since the date of the last such report, including the reason therefor, the
location and timing thereof, the person to whom made and the terms thereof, and
(iii) a summary of the xxxxx drilled by the Partnership, indicating whether each
of such xxxxx has been completed, a statement of the cost of each well completed
or abandoned and the reason for abandoning any well after commencement of
production. Each report delivered by the Managing General Partner may
contain summary estimates of the information described in subsection
(iii).
(f) The
Managing General Partner shall cause the Partnership's independent auditors to
audit the financial statements of the Partnership in accordance with generally
accepted auditing standards. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, which would include an assessment as to whether or not the method
used to make the allocations of costs was consistent with the method described
in the Memorandum. If the Managing General Partner subsequently
decides to allocate expenses in a manner different from the manner described in
the Memorandum, such change shall be reported by the Managing General Partner to
the Investor Partners together with an explanation of why such change was made
and the basis for determining the reasonableness of the new allocation
method.
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(g) Such
other reports and financial statements as the Managing General Partner shall
determine from time to time.
(h) Concurrently
with their transmittal to Investor Partners and as required, the Managing
General Partner shall file a copy of each such report with the California
Commissioner of Corporations and with the securities divisions of other
states.
8.03 Bank
Accounts. All
funds of the Partnership shall be deposited in such separate bank account or
accounts, short term obligations of the U.S. Government or its agencies, or
other interest-bearing investments and money market or liquid asset mutual funds
as shall be determined by the Managing General Partner. All
withdrawals therefrom shall be made upon checks signed by the Managing General
Partner or any person authorized to do so by the Managing General
Partner.
8.04 Federal Income Tax
Elections.
(a) Except
as otherwise provided in this Section 8.04, all elections required or permitted
to be made by the Partnership under the Code shall be made by the Managing
General Partner in its sole discretion. Each Partner agrees to
provide the Partnership with all information necessary to give effect to any
election to be made by the Partnership.
(b) The
Partnership shall elect to currently deduct IDC as an expense for income tax
purposes and shall require any partnership, joint venture, or other arrangement
in which it is a party to make such an election.
ARTICLE
IX
Dissolution;
Winding-up
9.01 Dissolution.
(a) Except
as otherwise provided herein, the retirement, withdrawal, removal, death,
insanity, incapacity, dissolution, or bankruptcy of any Investor Partner shall
not dissolve the Partnership. The successor to the rights of such
Investor Partner shall have all the rights of an Investor Partner for the
purpose of settling or administering the estate or affairs of such Investor
Partner; provided, however, that no successor shall become a substituted
Investor Partner except in accordance with Article VII hereof; provided,
further, that upon the withdrawal of an Additional General Partner, the
Partnership shall be dissolved and wound up unless at that time there is at
least one other General Partner, in which event the business of the Partnership
shall continue to be carried on. Neither the expulsion of any
Investor Partner nor the admission or substitution of an Investor Partner shall
work a dissolution of the Partnership. The estate of a deceased,
insane, incompetent, or bankrupt Investor Partner shall be liable for all his
liabilities as an Investor Partner.
(b) The
Partnership shall be dissolved upon the earliest to occur of: (i) the written
consent of the Investor Partners owning a majority in interest of the
then-outstanding Units to dissolve and wind up the affairs of the Partnership;
(ii) subject to the provisions of Subsection (c) below, the retirement,
withdrawal, removal, death, adjudication of insanity or incapacity, or
bankruptcy (or, in the case of a corporate managing general partner, the
withdrawal, removal, filing of a certificate of dissolution, liquidation, or
bankruptcy) of the Managing General Partner; (iii) the sale, forfeiture, or
abandonment of all or substantially all of the Partnership's property; (iv)
December 31, 2057; (v) a dissolution event described in Subsection (a) above; or
(vi) any event causing dissolution of the Partnership under the
Act.
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(c) In
the case of any event described in Subsection (b)(ii) above, if a successor
Managing General Partner is selected by Partners owning a majority in interest
of the then outstanding Units within ninety (90) days after such Section
9.01(b)(ii) event, and if such Investor Partners agree, within such 90 day
period to continue the business of the Partnership, or if the remaining managing
general partner, if any, continues the business of the Partnership, then the
Partnership shall not be dissolved.
(d) If
the retirement, withdrawal, removal, death, insanity, incapacity, dissolution,
liquidation, or bankruptcy of any Partner, or the assignment of a Partner's
interest in the Partnership, or the substitution or admission of a new Partner,
shall be deemed under the Act to cause a dissolution of the Partnership, then,
except as provided in Section 9.01(c), the remaining Partners may, in accordance
with the Act, continue the Partnership business as a new partnership and all
such remaining Partners agree to be bound by the provisions of this
Agreement.
9.02 Liquidation. Upon
a dissolution and final termination of the Partnership, the Managing General
Partner, or in the event there is no Managing General Partner, any other person
or entity selected by the Investor Partners (hereinafter referred to as a
"Liquidator") shall cause the affairs of the Partnership to be wound up and
shall take account of the Partnership's assets (including contributions, if any,
of the Managing General Partner pursuant to Section 3.01(e) herein) and
liabilities, and the assets shall, subject to the provisions of Section 9.03(b)
herein, be liquidated as promptly as is consistent with obtaining the fair
market value thereof, and the proceeds therefrom (which dissolution and
liquidation may be accomplished over a period spanning one or more tax years in
the sole discretion of the Managing General Partner or Liquidator), to the
extent sufficient therefor, shall be applied and distributed in accordance with
Section 9.03.
9.03 Winding-up.
(a) Upon
the dissolution of the Partnership and winding up of its affairs, the assets of
the Partnership shall be distributed as follows:
(1) all
of the Partnership's debts and liabilities to persons other than the Managing
General Partner shall be paid and discharged;
(2) all
outstanding debts and liabilities to the Managing General Partner shall be paid
and discharged;
(3) assets
shall be distributed to the Partners to the extent of their positive Capital
Account balances, pro rata, in accordance with such positive Capital Account
balances; and
(4) any
assets remaining after the Partners' Capital Accounts have been reduced to zero
pursuant to Section 9.03(c) herein shall be distributed 63% to the Investor
Partners and 37% to the Managing General Partner, except as otherwise revised
pursuant to Section 2.01(a).
(b) Distributions
pursuant to this Section 9.03 shall be made in cash or in kind to the Partners,
at the election of the Partners. Notwithstanding the provision of
this Section 9.03(b), in no event shall the Partners reserve the right to take
in kind and separately dispose of their share of production.
(c) Any
in kind property distributions to the Investor Partners shall be made to a
liquidating trust or similar entity for the benefit of the Investor Partners,
unless at the time of the distribution:
(1) the
Managing General Partner shall offer the individual Investor Partners the
election of receiving in kind property distributions and the Investor Partners
accept such offer after being advised of the risks associated with such direct
ownership; or
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(2) there
are alternative arrangements in place which assure the Investor Partners that
they will not, at any time, be responsible for the operation or disposition of
Partnership properties.
The
winding up of the affairs of the Partnership and the distribution of its assets
shall be conducted exclusively by the Managing General Partner or the
Liquidator, who is hereby authorized to do any and all acts and things
authorized by law for these purposes.
ARTICLE
X
Power of
Attorney
10.01 Managing General Partner as
Attorney-in-Fact. The
undersigned makes, constitutes, and appoints the Managing General Partner the
true and lawful attorney for the undersigned, and in the name, place, and stead
of the undersigned from time to time to make, execute, sign, acknowledge, and
file:
(a) Any
notices or certificates as may be required under the Act and under the laws of
any other state or jurisdiction in which the Partnership shall engage, or seek
to engage, to do business and to do such other acts as are required to
constitute the Partnership as a limited partnership under such
laws.
(b) Any
amendment to the Agreement pursuant to and which complies with Section 11.09
herein.
(c) Such
certificates, instruments, and documents as may be required by, or may be
appropriate under the laws of any state or other jurisdiction in which the
Partnership is doing or intends to do business and with the use of the name of
the Partnership by the Partnership.
(d) Such
certificates, instruments, and documents as may be required by, or as may be
appropriate for the undersigned to comply with, the laws of any state or other
jurisdiction to reflect a change of name or address of the
undersigned.
(e) Such
certificates, instruments, and documents as may be required to be filed with the
Department of Interior (including any bureau, office or other unit thereof,
whether in Washington, D.C. or in the field, or any officer or employee
thereof), as well as with any other federal or state agencies, departments,
bureaus, offices, or authorities and pertaining to (i) any and all offers to
lease, leases (including amendments, modifications, supplements, renewals, and
exchanges thereof) of, or with respect to, any lands under the jurisdiction of
the United States or any state including without limitation lands within the
public domain, and acquired lands, and provides for the leasing thereof; (ii)
all statements of interest and holdings on behalf of the Partnership or the
undersigned; (iii) any other statements, notices, or communications required or
permitted to be filed or which may hereafter be required or permitted to be
filed under any law, rule, or regulation of the United States, or any state
relating to the leasing of lands for oil or gas exploration or development; (iv)
any request for approval of assignments or transfers of oil and gas leases, any
unitization or pooling agreements and any other documents relating to lands
under the jurisdiction of the United States or any state; and (v) any other
documents or instruments which said attorney-in-fact in its sole discretion
shall determine should be filed.
(f) Any
further document, including furnishing verified copies of the Agreement and/or
excerpts therefrom, which said attorney-in-fact shall consider necessary or
convenient in connection with any of the foregoing, hereby giving said
attorney-in-fact full power and authority to do and perform each and every act
and thing whatsoever requisite and necessary to be done in and about the
foregoing as fully as the undersigned might and could do if personally present,
and hereby ratifying and confirming all that said attorney-in-fact shall
lawfully do to cause to be done by virtue hereof.
10.02 Nature of Special
Power. The
foregoing grant of authority:
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(a) is
a special Power of Attorney coupled with an interest, is irrevocable, and shall
survive the death of the undersigned;
(b) shall
survive the delivery of any assignment by the undersigned of the whole or any
portion of his Units; except that where the assignee thereof has been approved
by the Managing General Partner for admission to the Partnership as a substitute
general or limited Partner as the case may be, the Power of Attorney shall
survive the delivery of such assignment for the sole purpose of enabling said
attorney-in-fact to execute, acknowledge, and file any instrument necessary to
effect such substitution; and
(c) may
be exercised by said attorney-in-fact with full power of substitution and
resubstitution and may be exercised by a listing of all of the Partners
executing any instrument with a single signature of said
attorney-in-fact.
ARTICLE
XI
Miscellaneous
Provisions
11.01 Liability of
Parties. By
entering into this Agreement, no party shall become liable for any other party's
obligations relating to any activities beyond the scope of this Agreement,
except as provided by the Act. If any party suffers, or is held
liable for, any loss or liability of the Partnership which is in excess of that
agreed upon herein, such party shall be indemnified by the other parties, to the
extent of their respective interests in the Partnership, as provided
herein.
11.02 Notices. Any
notice, payment, demand, or communication required or permitted to be given by
any provision of this Agreement shall be deemed to have been sufficiently given
or served for all purposes if delivered personally to the party or to an officer
of the party to whom the same is directed or sent by registered or certified
mail, postage and charges prepaid, addressed as follows (or to such other
address as the party shall have furnished in writing in accordance with the
provisions of this Section):
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If
to the Managing General Partner, 000 Xxxxxxx Xxxxxxxxx, Xxxxxxxxxx, Xxxx
Xxxxxxxx 00000;
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If
to an Investor Partner, at such Investor Partner's address for purposes of
notice which is set forth on Exhibit A attached
hereto.
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Unless
otherwise expressly set forth in this Agreement to the contrary, any such notice
shall be deemed to be given on the date on which the same was deposited in a
regularly maintained receptacle for the deposit of United States mail, addressed
and sent as aforesaid.
11.03 Paragraph
Headings. The
headings in this Agreement are inserted for convenience and identification only
and are in no way intended to describe, interpret, define, or limit the scope,
extent, or intent of this Agreement or any provision hereof.
11.04 Severability. Every
portion of this Agreement is intended to be severable. If any term or
provision hereof is illegal or invalid by any reason whatsoever, such illegality
or invalidity shall not affect the validity of the remainder of this
Agreement.
11.05 Sole
Agreement. This
Agreement constitutes the entire understanding of the parties hereto with
respect to the subject matter hereof and no amendment, modification, or
alteration of the terms hereof shall be binding unless the same be in writing,
dated subsequent to the date hereof and duly approved and executed by the
Managing General Partner and such percentage of Investor Partners as provided in
Section 11.09 of this Agreement.
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11.06 Applicable
Law. This
Agreement, which shall be governed exclusively by its terms, is intended to
comply with the Code and with the Act and shall be interpreted consistently
therewith.
11.07 Execution in
Counterparts. This
Agreement may be executed in any number of counterparts with the same effect as
if all parties hereto had all signed the same document. All
counterparts shall be construed together and shall constitute one
agreement.
11.08 Waiver of Action for
Partition. Each
of the parties irrevocably waives, during the term of the Partnership, any right
that it may have to maintain any action for partition with respect to the
Partnership and the property of the Partnership.
11.09 Amendments.
(a) Unless
otherwise specifically herein provided, this Agreement shall not be amended
without the consent of the Investor Partners owning a majority of the then
outstanding Units entitled to vote.
(b) The
Managing General Partner may, without notice to, or consent of, any Investor
Partner, amend any provisions of these Articles, or consent to and execute any
amendment to these Articles, to reflect:
(1) A
change in the name or location of the principal place of business of the
Partnership;
(2) The
admission of substituted or additional Investor Partners in accordance with
these Articles;
(3) A
reduction in, return of, or withdrawal of, all or a portion of any Investor
Partner's Capital Contribution;
(4) A
correction of any typographical error or omission;
(5) A
change which is necessary in order to qualify the Partnership as a limited
partnership under the laws of any other state or which is necessary or
advisable, in the opinion of the Managing General Partner, to ensure that the
Partnership will be treated as the partnership and not as an association taxable
as a corporation for federal income tax purposes;
(6) A
change in the allocation provisions, in accordance with the provisions of
Section 3.02(l) herein, in a manner that, in the sole opinion of the Managing
General Partner (which opinion shall be determinative), would result in the most
favorable aggregate consequences to the Investor Partners as nearly as possible
consistent with the allocations contained herein, for such allocations to be
recognized for federal income tax purposes due to developments in the federal
income tax laws or otherwise; or
(7) Any
other amendment similar to the foregoing;
provided,
however, that the Managing General Partner shall have no authority, right, or
power under this Section to amend the voting rights of the Investor
Partners.
11.10 Consent to Allocations and
Distributions. The
methods herein set forth by which allocations and distributions are made and
apportioned are hereby expressly consented to by each Partner as an express
condition to becoming a Partner.
11.11 Ratification. The
Investor Partner whose signature appears at the end of this Article hereby
specifically adopts and approves every provision of this Agreement to which the
signature page is attached.
A-42
11.12 Substitution of Signature
Pages. This
Agreement has been executed in duplicate by the undersigned Investor Partners
and one executed copy of the signature page is attached to the undersigned's
copy of this Agreement. It is agreed that the other executed copy of
such signature page may be attached to an identical copy of this Agreement
together with the signature pages from counterpart Agreements which may be
executed by other Investor Partners.
11.13 Incorporation by
Reference. Every
exhibit, schedule, and other appendix attached to this Agreement and referred to
herein is hereby incorporated in this Agreement by reference.
* * * * *
A-43
SIGNATURE
PAGE
IN
WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and
year first written above.
|
MANAGING GENERAL PARTNER
|
INITIAL LIMITED PARTNER
|
||
|
Petroleum
Development Corporation
|
Xxxxxx
X. Xxxxxxxx
|
||
|
000
Xxxxxxx Xxxxxxxxx
|
000
Xxxxxxx Xxxxxxxxx
|
||
|
Bridgeport,
West Virginia 26330
|
Bridgeport,
West Virginia 26330
|
||
|
By:
|
|||
|
Xxxxxx
X. Xxxxxxxx
|
Xxxxxx
X. Xxxxxxxx
|
||
|
Chief
Executive Officer
|
|||
INVESTOR
PARTNERS
COMPLETE
TO INVEST AS ADDITIONAL GENERAL PARTNER
|
ADDITIONAL
GENERAL PARTNER(S)
|
|||
|
NUMBER
OF UNITS PURCHASED
|
Name:
|
||
|
(Print
Name)
|
|||
|
(Signature)
|
|||
|
SUBSCRIPTION
PRICE
|
||||||
|
$
|
Address:
|
|||||
| By: Petroleum Development Corporation | ||||||
|
By:
|
||||||
|
Its
|
||||||
|
Attorney-in-Fact
|
||||||
|
COMPLETE
TO INVEST AS LIMITED PARTNER
|
|
LIMITED
PARTNER(S)
|
|||
|
NUMBER
OF UNITS PURCHASED
|
Name:
|
||
|
(Print
Name)
|
|||
|
(Signature)
|
|||
|
SUBSCRIPTION
PRICE
|
||||||
|
$
|
Address:
|
|||||
| By: Petroleum Development Corporation | ||||||
|
By:
|
||||||
|
Its
|
||||||
|
Attorney-in-Fact
|
||||||
A-44
EXHIBIT
A
TO
AGREEMENT
OF LIMITED PARTNERSHIP
OF
ROCKIES
REGION 2007 LIMITED PARTNERSHIP,
A WEST
VIRGINIA LIMITED PARTNERSHIP
|
Names and Addresses of
Investors
|
Nature of Interest
|
Number of
Units
|
A-45
